Tuesday, November 24, 2009

Stocks Are Moving Against The Dollar

Since March of this year, the stock market has moved markedly higher. This is despite rising unemployment and our struggling economy. The answer as to why the market is moving up actually lies in the weakening of the U.S. dollar and is not necessarily due to some anticipated economic recovery.

If you look at the above chart, you can easily see the correlation between the weakening dollar and the U.S. stock market.

After hitting rock bottom in March, the stock market has climbed steadily. At the same time, the U.S. index has fallen. The rationale behind this is that American made products will be cheaper and more competitive overseas. Consequently, multi-national American companies will be more profitable. At the same time, our stock market is a better deal for overseas investors because they can buy more bang for their Yen and Eurodollars than they could in their own markets. It is primarily because of all of this foreign investment that we are enjoying such a long and sustained rally in our stock markets in the midst of a recession.

We should be concerned that this is creating another bubble. As I have pointed out before (Click to see my October 11 blog entry: What Earnings Are Truly Saying About The Stock Market), the stock market is severely overbought and, stock prices have completely gone beyond the forward earnings capability of our companies.

If we have any signs of a double-dip recession, I can guarantee you that the stock market will tumble hard. At some point, it has to correct itself because, without that event, the bubble is only getting bigger with an increasing potential for a hard fall.

Yesterday, the market went up strongly by almost 180 points at one time. It went up because the dollar was, once again, weakened strongly. That weaker dollar was a direct result of the Health Care Bill being forwarded for debate in the Senate. The world's investment community is dumping dollars and weakening them because they keep seeing unsustainable spending in America. They see spending for a Stimulus Program, Cap and Trade, bailouts, and, now, the high likelihood that a mega-trillion dollar debt will be created by a health care reform package. Clearly, the U.S. dollar is the canary in the coal mine that every American should worry about. If it collapses, we will find ourselves with the debilitating effects of double digit inflation.

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