Forget the economic data such as jobless claims and durable goods today. Throw out the earnings season we just had where more than 70 percent of the S&P 500 companies exceeded analysts’ expectations.
If you’re not following the minute-by-minute ticks in the Euro vs. the Yen these days, you are lost as to where the direction of the U.S. stock market is headed.
After 11 months of a monster rally based on cyclical sector positioning and improving economic data, equities are now stuck in a range-bound situation, subject to the ebbs and flows of global currencies.
The Euro is down vs. the Yen today because of further concerns that Greek debt will be downgraded by the credit rating firms, jeopardizing a bailout of the country, putting the very existence of the Euro into question and triggering a series off losses European banks would face due to exposure to swaps and other securities tied to Greece and the Euro Zone.
That in turn puts the global economic recovery into question, boosts the dollar and weighs on the shares of the multinational corporations in the S&P 500 .
Dennis Gartman, author of the Gartman Letter and someone who has studied the relationships between stocks and currencies long before it became fashionable, puts it more simply.
“As we write, the Yen/EUR cross is trading down toward 120 having traded 125 only a day or so ago,” wrote Gartman, in his note to clients today. “ The implications to be drawn from this cross for the global stock market are rather obvious, for in the past when the cross weakens
(that is, when it moves in the Yen’s favour) equities prices tend to come under pressure for this cross marks the world’s propensity to take on or dispose of risk. When the cross weakens, the world appears to be disposing of risk, and clearly the cross is weakening.”
So if your average equity investor is not interested in taking an online course on trading currencies or even purchase Rosetta Stone to learn French and study the intonations of Jean-Claude Trichet, President of the European Central Bank, what are they supposed to do?
“One should trade,” said Laszlo Birinyi, founder of Birinyi Associates and legendary equity trader from the Salomon Brothers heyday in the 1980s. “Some years ago - okay, many years ago - the market was primarily a function of fundamentals such as earnings, book value, dividends and the like. As time has evolved, it has become more complex.”
Birinyi, in his monthly missive to clients, writes, “Today we track foreign markets, the Fed is more active, finance has globalized and has become more complex than even a few years back and already this year the market has been affected by the Chinese economy, the debt issues of both Dubai and Greece, Washington politics, oil, gold and other commodity prices, as well as the impact or alleged impact of the dollar and Euro.”
But Birinyi is optimistic that this misplaced focus on macro issues will create opportunity for stock pickers like himself, willing to watch their positions and trade accordingly this year. For example, he recommends buying US Steel now, but selling it when it gets to $55, as it’s likely to trade back as people question the state of the global economy once again.
“We want to focus on selecting stocks because it is one of the inefficiencies in a market where everyone is looking for short cuts and opportunities to avoid ‘heavy lifting’, wrote Brininyi.
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