July 30, 2017 Weak Dollar

Risk/Reward Vol. 359

THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN.

Good earnings reports and a "steady as she goes" Federal Reserve meeting combined to send stocks to new record highs.  All three major indices are up double digits year to date.  This week the stellar performer was the Dow Jones Industrial Average.  How come?  The DJIA is comprised of 30 big, international industrials like Exxon, Verizon, GE, Apple, Merck, etc.  Their domestic profits have been ok, but there foreign incomes have been superior.  This is for two reasons.  One, the European economy has been steadily improving.  And two, a weak dollar.  Year to date, the Euro is 12% higher versus the dollar.  The dollar has sunk in similar percentages against the peso, the Canadian dollar and the yen.  Since US companies report earnings in dollars, the exchange rate alone has provided a significant boost in profits even if foreign sales had remained stagnant---which they did not.

Why is the dollar tanking?  One, the dollar spiked in value with The Donald's election as the world believed that a business friendly President and a Republican Congress would do much to boost the economy including tax reform and infrastructure spending.  Such activity would strengthen the dollar.   Have you read the headlines recently?  The Donald can't steer his own ship let alone a Congress.  Second, the world is preparing for the European Central Bank to wean the Eurozone from quantitative easing (massive government bond buying.  Without the ECB backstopping Euro bonds, interest rates in Europe are sure to rise (many are negative now).  This is occurring at the same time the Federal Reserve has expressed a cautious approach to normalizing rates.  Thus with one central bank becoming more interest rate hawkish (ECB) while the other more dovish, a currency shift is occurring.  Dollars are being sold and Euros purchased.  This is just the opposite of what occurred last winter.

We know that passive index investors have done well.  So how have I done?   The total portfolio that I manage is up 5% year to date (much of it tax advantaged) even though I have maintained a 50% cash position at all times.  I am quite pleased given my aversion to risk. Recently, the positions I have taken in municipal bond funds have experienced capital appreciation.  As the likelihood of tax reform continues to lessen, the value of these holdings increases.  Moreover, they continue to pay on average above 5.5% tax free, amortized monthly.