by Louis Navellier | May 3, 2011 3:00 am
Since early 2009 (when the U.S. stock bull market began), the U.S. dollar has collapsed. The Brazilian real is up 56%, from 41 cents to 64 cents. The Canadian dollar is up 35%, from 78 cents to $1.05. The Swiss franc has also risen 35%, from 85 cents to $1.15. The New Zealand dollar is up 60%, from 50 cents to 80 cents, while the Australian dollar has risen the most, 70%, from 64 cents to $1.09, reaching a 29-year high. Even the relatively weak euro and British pound have risen by 16% and 20%, respectively, since early 2009.
In his widely publicized press conference last Wednesday, Federal Reserve Chairman Ben Bernanke deflected questions about the dollar to Treasury Secretary Tim Geithner, saying the dollar was Treasury’s domain. Theoretically that’s true, but the Fed’s seemingly unconscious attack on the dollar over the last decade has caused more damage to our currency than all of Treasury’s policies combined, or all of the over-spending by Congress and the combined Bush-Obama administrations of the past decade. Consider these four entirely unprecedented actions and policy decisions by the Fed in the last 33 months alone:
1. The Fed doubled its balance sheet in three months during late 2008. Fed borrowing rose from $411 billion on Sept. 10, 2008, to $1.76 trillion on Dec.10. Since then, gold has doubled.
2. The Fed lowered the Fed funds rate to a “range of zero to 0.25%” at the Dec. 16, 2008 FOMC meeting. This “Zero Interest-Rate Policy” (ZIRP) has now been reiterated for 18 straight meetings. The lack of any positive return on the dollar has driven savers and investors to higher-yielding paper.
3. After flooding the system with liquidity and penalizing savers, the Fed began a series of quantitative easing (QE) plans: 1.0, 1.5 and 2.0, with perhaps 2.5 to come. QE2 was announced at Jackson Hole, Wyo., last August, fueling the latest collapse of the dollar. Silver has nearly tripled since then.
4. The Fed has also “enabled” the big spenders in Congress. Since Nov. 3, 2010, the Fed has purchased $550.6 billion in U.S Treasuries, financing about 70% of new deficit spending. No wonder the federal deficit is actually increasing during a recovery, another unprecedented fiscal development.
There is a bright side to this dismal series of Fed policies: The stock market has risen sharply, in a mirror image to the dollar’s fall. In general, stocks have risen at about twice the rate that the dollar has fallen.
Since the dollar’s peak in early 2009, the Nasdaq and the S&P 500 have both doubled. More recently, since QE2 was announced, the S&P 500 has risen 30%, from 1,047 to 1,360. Ed Yardeni reports that 127 of 129 industries have risen since then. There is a clear correlation between easy Fed policies and a rising stock market. This correlation may not last forever, but the first quarter shows a continuation of this trend.
With nearly half (247 of 500) of S&P companies reporting first quarter statistics so far, corporate earnings are 7.1% above analyst consensus forecasts and 18.4% higher than the already strong earnings figures of the same quarter in 2010. In addition, top-line revenues are up 8.9% year-over-year, 1.8% above already lofty expectations. Nearly three out of four (73%) companies delivered a “positive earnings surprise” in the last quarter, while 69.7% delivered a positive revenue surprise. This news pushed the market higher.
A soft U.S. dollar boosts the earnings of many multi-national companies. Since most of the S&P 500 companies have foreign operations, they are reporting a growing share of their profits in terms of stronger foreign currencies. And since the average technology company is multi-national in scope, the Nasdaq benefits even more from a weak U.S. dollar.
Bespoke Investment Group (BIG) puts more numbers on this correlation: They cite an inverse correlation between a company’s revenue surprises and the size of their U.S. revenue exposure. Among companies that generate 100% of their revenues within the United States, 53% exceeded sales forecasts, versus 74% overall. In other words, the earnings of an insular (U.S.-only) company will lag a multi-national firm’s revenue.
At some level, Mr. Bernanke must understand that he is the proud father of this bull market in stocks. In his press conference, he let a little of this fatherly pride show when he said, “We subscribe generally to what we call here the stock view of the effects of securities purchases, by which I mean that what matters primarily for interest rates, stock prices, and so on is not the pace of ongoing purchase, but rather the size of the portfolio that the Federal Reserve holds, so when we complete the [QE] program … monetary policy easing should essentially remain constant going forward from June.”
In other words, QE will continue.
Gold and silver responded to the Fed chairman’s words with sharp rises to $1,570 and $49.50 an ounce, respectively. The precious metals vetoed the chairman’s claim that price inflation is just “transitory.” The price of a gallon of gasoline was $1.83 when the dollar peaked in early 2009. Now, it’s over $4 a gallon.
If inflation is “transitory,” it has been transitioning higher for about 12 years now. In 1999, oil bottomed at $10 a barrel, gasoline was 88 cents a gallon, silver was under $5 and gold was $253. Over the next two years, despite a dot-com bubble, inflation stayed low, the dollar was king, and we had a federal budget surplus. Then, Fed chairman Alan Greenspan overreacted to 9/11 by keeping the Fed funds rate low (under 2%) for over three years (from October 2001 to November 2004) during an economic recovery. This long run of near-zero rates fueled the real estate bubble and all the painful unwinding of mortgage debt since 2007.
So, here we are in a new recovery, fueled by super-low interest rates and Herculean rounds of quantitative easing. No wonder the dollar is sinking, while gold and stocks are soaring. Industry analysts now expect S&P earnings to rise 15.6% in 2011, followed by another 14.3% gain in 2012 to $112.75. A modest P/E of 15 indicates a record S&P near 1,700 by early next year. This V-shaped recovery in corporate profits is driven by rising exports, made possible in part by a weaker dollar and a strong global recovery. (Since the dollar began falling a decade ago, exports have risen 66.5%.) A sinking dollar isn’t all good, of course, but it certainly has worked wonders for U.S. exporters and investors in U.S.-based multi-national stocks.
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