The stock market posted its best September in 71 years, ushering in the bullish fourth quarter of the midterm election year — the best quarter in the four-year presidential election cycle. In addition, the bullish “merger mania” trend remains rampant. I counted at least four major multibillion-dollar deals last week, including those engineered by China’s Sinopec (NYSE: SNP), as well as Southwest Airlines (NYSE: LUV), Unilever (NYSE: UN
) and Wal-Mart Stores (NYSE: WMT).
Even the “bad news” looks good for stocks: In September, the dollar collapsed in its worst decline since 2008, but a weaker dollar also tends to boost the earnings of many leading multinational companies.
Let’s look at the dollar’s woes now in context of the market surge:
In September, the U.S. dollar posted its biggest monthly loss (in euro terms) since 2008. The euro rose from $1.27 to $1.38 last month, while currencies from Brazil, Taiwan, South Korea and other emerging markets also posted major gains against the U.S. dollar. In fact, Brazil’s Finance Minister Guido Mantega declared last week that “we’re in the midst of an international currency war,” since many central banks around the world want to weaken their respective currencies in order to gain a competitive advantage.
Central banks all over the world are complaining about a weak U.S. dollar. The Brazilian real has risen over 10% to the U.S. dollar since last June. Whenever we read a story about a U.S. dollar rally, it is typically due to a central bank intervention like the Bank of Korea did last Monday in an attempt to stop the South Korean won’s appreciation. However, during the rest of the week, the U.S. dollar was on a slippery slope and sent gold to a record high and causing other commodity prices to rise accordingly.
The dollar isn’t alone in its trouble — it’s just getting most of the negative vibes right now. The euro’s dramatic rise to over $1.37 Friday came in the face of news that Ireland is scrambling to contain its financial crisis, in order to avoid an emergency bailout by the European Union (EU). On Thursday, the Irish government said that the total cost of fixing its battered banking industry could cost as much as $68 billion, which means that Ireland’s budget deficit could rise to as high as 32% of GDP! In addition to Ireland’s problems, Moody’s downgraded Spain’s credit rating to Aa1 last week. Spain also faced a massive general strike, the first in eight years, shutting down Spain’s transportation network. Across the euro-zone, there were strikes in Belgium, France, Greece, Lithuania, Portugal and Slovenia over austerity cuts. In face of those strikes, the European Central Bank (ECB) is holding the line against quantitative easing — as opposed to the central banks in Britain, Japan and the U.S. — so the euro rallied!
This “race to the bottom” in currencies will make the upcoming G20 meeting in November interesting, especially in the brewing trade war between the U.S. and China. Since the Chinese yuan tracks the U.S. dollar, China gets even more competitive compared to the rest of the world as the dollar decays. China has a vested interest in making the U.S. trade deficit bigger, since it weakens the U.S. dollar and the yuan.
The U.S. is apparently winning the global currency “race to the bottom” and that fact makes Wall Street happy, since a falling dollar gives the U.S. a competitive advantage vs. other currencies. The fact that U.S. exports surged recently to a 20-month high is no fluke. The downside is that most commodity prices are now soaring, since about 88% of the world’s commodities are priced in dollars.
Due to all the commodity inflation brewing — thanks to the declining dollar — the Fed’s recent deflation warning is largely being ignored. Instead, the world is looking for investments that behave best in an inflationary environment. Besides gold and other commodities, growth stocks have traditionally been a safe haven in an inflationary environment, which is another reason why September was so strong.
Top 5 Stocks for the Fourth-Quarter Surge. Louis Navellier details five stocks set to deliver record earnings this October and jump 30%-50% in the next 90 days as the big money piles in. Get their names online here, including Louis’ buy-below and target prices.
