Weak Dollar—The Stock Trade Now

Another day, another (weak) dollar. So what's the stock trade if the dollar continues weak...the usual long commodities and materials? Any new wrinkles?

Traders are getting more cynical by the day about the short dollar/long commodities/long material stocks trade — they do it, but they don't necessarily believe it.

Regardless. Two themes are emerging as we enter the tail end of earnings season:

1) traders are continuing to stay with global growth themes, despite worries that growth may be slower even in emerging markets...The Fed is keeping cost of capital low...internationally, that means stay with big industrial names, and stay long commodity currencies: Canada's loonie backed by conservative debt profile, freshwater reserves, lumber, oil...the Aussie dollar and Kiwi dollar backed by same...Swiss franc akin to buying gold.

And I would also note historic highs in the Dow Transportson strong railroad earnings off big increases in raw material shipments.

2) traders are looking for rotation...and they appear to have found it in health care. Ever since United Healthcare reported great earnings last week, traders have woke up to the undervalued, underappreciated healthcare group. And not just HMOs. Big pharma has also outperformed.

Don't pooh-pooh rotation...it is a very real and venerable trading strategy. Big pharma is definitely undervalued and pays a great dividend: Merck at 4.3%, Lilly at 5.25%, Abbott at 3.7%, Bristol Myers 4.7%.

What about defensive names like consumer staples? Traditionally, they would be a good choice at this stage in the cycle...but this is not a normal cycle. The big issue: much higher costs are starting to eat into margins...they are raising prices, but not all of them can raise enough to cover costs. That's a major reason they have not been breaking out.

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