Trader Mike

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Over the last week or so I’ve been shaking my head incredulously at most of the comments I’ve heard about the falling dollar. It seems that the talking heads have nothing negative to say about the weakening dollar. (I wonder why?) Well I was glad to hear what Don Harrold had to say in this video I just stumbled upon (I also like his comments about Goldman Sachs & trading):

I posted my thoughts on the dollar and theory that “everybody is richer” with the Dow being above 13,000 a few months ago. I guess I’m especially sensitive to the dollar weakness after …

I just saw some comments about “everybody” being richer these days with the Dow in all-time high territory. We can just look at all the mortgage defaults to know that’s not the case! And don’t even get me started on drawing conclusions based on the Dow. No doubt there are many who are richer now. But I also have no doubt that there are many more who feel and/or think they’re richer but may not actually be better off than before.

The first thing came to my mind was “richer compared to what or when?” Richer compared to spring 2000 or late 2002 / early 2003? That may make a huge difference depending on how and if you were invested at those points in time. I doubt that many people’s returns track any index exactly but here are some numbers for some indices (these numbers are approximations and not measured from exact tops or bottoms):

S&P 500 — down 1% from April 2000 and up 70% from March 2003
Dow — up 15% from April 2000 and up 57% from March 2003
Nasdaq — down 38% from April 2000 and up 81% from March 2003
Russell 2000 — up 62% from April 2000 and up 125% from March 2003

So assuming your investments tracked the Dow or Russell 2000 you probably do feel richer. If they tracked the Nasdaq since 2000… maybe not so much. But there are plenty of other scenarios where your answer will vary depending on how you manged your investments.

The other point that needs to be made is that while some may feel richer and actually own more dollars, what are those dollars worth? The dollar is down 23% since April 2003 (to use the same date as above) and down 31% from a peak in July 2001.

When you factor in the fluctuating dollar the answer to whether or not one is richer these days really comes into question. One might have more dollars (pieces of paper) than before but are they actually worth the dollars you had at some earlier point in time?

The monthly charts of the above-mentioned indices are below:

I’ve pretty much given up on trying to make any sense out of what the movement of the USD means to the stock market. All spring the dollar was getting crushed and everyone was saying that was a good thing for the stock market. Then once the stock rally started going, the dollar caught fire too. During that period many of the pundits cited a stronger dollar as fueling the stock rally. (go figure) Well over the last 3 days the dollar has broken its June - September uptrend. I won’t attempt to say what that means, but it may be worth watching.

I thought I’d post a chart of the dollar since I’d been mentioning the recent slide so much. The dollar actually had a nice bounce (+0.92%) on Friday, presumably due to the good Chicago PMI report. It looks like it may be stabilizing on the daily chart. But I think the long-term chart is more interesting. So I’m posting a monthly chart.