The dollar is now running a 10-week streak of strengthening (using the dollar index, which is a basket of currencies but mostly the euro and yen), and while that streak will end at some point, the overall trend does not look likely to abate in the near-term. That presents some interesting opportunities in markets, trends that have already been playing out but are likely too to persist as investors concentrate more on companies less exposed to areas like Europe and more exposed to the United States.
The weakness in the euro eventually is going to undermine sales there from U.S. companies – even though the euro is still on balance stronger than the greenback, it’s threatening to continue to slip against the dollar, with Goldman Sachs strategists believing that it will eventually hit parity as the tendencies of the major central banks pass like ships in the night. For the year so far, Goldman’s basket of S&P stocks that are mostly exposed to the U.S. economy is up 13 percent on the year, with a 3 percent gain in the last month; its basket of companies exposed most to Western Europe is up 6 percent on the year, and flat on the month. What’s concerning is that the domestically-oriented names are sporting overall higher price-to-earnings ratios at 19 compared with 16 for the Europe group, and so these companies – the likes of Intuit, UnitedHealth and a few other major health insurers, a few brokerages, AT&T, and a bunch of others – could be overvalued. It’s also possible that the dominance by the health companies in that growing area is overwhelming any weakness in any of the other sectors.
Don’t tell George Costanza, but double dipping is all the rage these days. The possibility of the U.S. slipping back into recession after a brief period of growth is a hot topic of late – and while such an occurrence is unlikely, pundits are feverishly declaring that it can’t and won’t happen.
Here are some of their reasons, some of which appear to strain credulity: Double-dips are “rare.” Simon Hobbs of CNBC is a vigorous promoter of this idea, but let’s face it, the last 15 years of financial-market history is a veritable compendium things that no one expected to happen – LTCM, the financial panic, Lehman Brothers. Rare means nothing. The stock market hasn’t dropped enough. Ah yes, the stock market, that stellar indicator of the economy’s future, such as in October 2007, when it hit an all-time high, two months before the onset of the worst recession since the Great Depression. Next. The yield curve hasn’t flattened enough. This indicator comes with a bit more in the way of history, as a flattened/inverted yield curve has been a reliable indicator of economic weakness ahead. But the Federal Reserve is anchoring the short end of the curve to the ground with its zero interest rate policy. It complicates the curve’s predictive value – something Goldman Sachs noted in a morning commentary. “External shocks” are responsible for the declines in economic activity, such as that in Europe. Similar shocks were enough to spark recessions in the 1930s, 1970s, and in 2008. Everything’s connected now, remember? Corporate profits are strong. As they were all the way through the beginning of 2007, once again, before the most recent eruption.
A recent Reuters poll put the odds of a double-dip recession at about 15 percent. Gluskin Sheff’s bearish strategist David Rosenberg puts it around 50-50, and Jim Bianco of Bianco Research also put that kind of odds on it. It may not happen – but when a lot of people are trying to convince you that something’s not going to happen, it can make you believe that it’s more likely than not.
How do those green shoots look now?The market got all a-giddy last week after Intel (INTC.O) and Goldman Sachs (GS.N) (a barometer of nothing other than its own ability to navigate turbulent markets) posted better than expected earnings, but the latest round of earnings reports points mostly to the ability of companies to tighten their belts to anorexic levels.
The Street celebrated when Caterpillar (CAT.N) reported earnings Tuesday, but the euphoria leaked out of the early market rally when investors got a second glance. Sales looked terrible as demand has plunged. They, along with Intel, Coca-Cola (KO.N), UTX (UTX.N) and others, are all using China as a crutch right now, thanks to that country’s massive stimulus package. But building earnings strength on hopes that governments will continue to spend money isn’t a winning strategy for years to come.
Sure, things look rosy for Goldman Sachs (GS.N), but the firm hardly represents the broad U.S. economic situation, as investors are looking over a mélange of lousy data, with dribs and drabs of mildly encouraging information in the mix. Goldman Sachs headquarters building in New York. REUTERS/Lucas Jackson
Tuesday’s retail sales figures weren’t all that great – the strength comes from auto sales and rising gasoline prices (and rising gas prices aren’t exactly great for consumers) – and Wednesday’s data on capacity utilization and energy inventories are likely to confirm the ongoing slack in the economy.