the amazing shrinking dollar

So far this year, the US$ has fallen by about 14% against the €, and around 8% against the ¥ and £.

A substantial portion of this movement is giveback of the sharp dollar appreciation which happened last year after the surprise election of Donald Trump as president.  That was sparked by belief that a non-establishment chief executive would be able to get things done in Washington.  Reform of the income tax system and repair of aging infrastructure were supposed to be high on the agenda, with the resulting fiscal stimulus allowing the Fed to raise interest rates much more aggressively than the consensus had imagined.  Hence, continuing dollar strength on a booming economy and increasing interest rate differentials.

To date, none of that has happened.   So it makes sense that currency traders would begin to reverse their bets on.  However, last year’s move up in the dollar has been more than completely erased and the clear consensus is now on continuing dollar weakness.

 

Dollar weakness has caused stock market investors to shift their portfolios away from domestic-oriented firms toward multinationals and exporters.  This is the standard tactic.  It also makes sense:  a firm with costs in dollars and revenues in euros is in an ideal position at present.

It’s interesting to note, though, that over the weekend China lifted some restrictions imposed last year that limited the ability of its citizens to sell renminbi to buy dollars.

To my mind, this is the first sign that dollar weakness may have gone too far.

It’s too soon, in my view, to react to this possibility.  In particular, the appointment of a new head of the Federal Reserve could play a key role in the currency’s future path, given persistent Republican calls to curtail its independence.  Gary Cohn, the establishment choice, is rumored to have fallen out of favor with Mr. Trump after protesting the latter’s support of neo-Nazis in Charlottesville.

Still, it’s not too early to plot out a potential strategy to benefit from a dollar reversal.

 

 

why September is usually a bad month for US stocks

It has to do with taxes on mutual funds and ETFs, whose tax years normally end in October.

That wasn’t always true.  Up until the late 1980s, the tax year for mutual funds typically ended on December 31st.  That, however, gave the funds no time to close their books and send out the required taxable distributions (basically, all of the income plus realized gains) to shareholders before the end of the calendar year.  Often, preliminary distributions were made in December and supplementary ones in January.  This was expensive   …and the late distributions meant that part of the money owed to the IRS was pushed into the next tax year.

So the rules were changed in the Eighties.  Mutual funds were strongly encouraged to end their tax years in October, and virtually every existing fund made the change.  New ones followed suit.  That gave funds two months to get their accounts in order and send out distributions to shareholders before their customers’ tax year ends.

getting ready to distribute

How do funds–and now ETFs–prepare for yearend distributions?

Although it doesn’t make much economic sense, shareholders like to receive distributions.  They appear to view them as like dividends on stocks, a sign of good management.  They don’t, on the other hand, like distributions that are eitherminiscule or are larger than, say, 5% of the assets.

When September rolls around, management firms begin to look closely at the level of net gains/losses realized so far in the year (the best firms monitor this all the time).  In my experience, the early September figure is rarely at the desired target of 3% or so.  If the number is too high, funds will scour the portfolio to find stocks with losses to sell.  If the number is too low, funds will look for stocks with large gains that can be realized.

In either case, this means selling.

Some years, the selling begins right after Labor Day.  In others, it’s the middle of the month.  The one constant, however, is that the selling dries up in mid-October.  That’s because the funds’ accountants will ask that, if possible,  managers not trade in the last week or so of the year.  They point out that their job is simpler–and their fees smaller–if they do not have to carry unsettled trades into the new tax year.  Although the manager’s job is to make money for clients, not make the accountants happy, my experience is that there’s at least some institutional pressure to abide by their wishes.

Most often, the September-October selling pressure sets the market up for a bounceback rally in November-December.

 

 

 

new posting schedule

I’m going back to school!

Last week I started a full-time MFA program.  Given how long it has been since I’ve been in a classroom as a student, I anticipate I’ll need some of the ten hours or so a week I’m spending on Practical Stock Investing.  So I’m going to cut back to two posts a week–Monday and Thursday–and see how that goes.

Employment Situation, August 2017

The Bureau of Labor Statistics issued its monthly Employment Situation for August on schedule at 8:30 edt this morning.

For the first time in a while, the results were mildly disappointing, in that:

–new positions added came in at +156,000 jobs, lower than in the recent past–although more than enough to absorb new entrants into the workforce

–the past two months’ results were revised downward by a total of -41,000 jobs

–wage gains continued to show no signs of the acceleration that economic theory, and past experience, predict will happen in a tight labor market.   Wage growth remains at a +2.5% pace for the past year.

 

It will be interesting to see what Wall Street makes of the numbers.  Pre-market S&P 500 futures were trading a +5.75 points just before the release and seem to be showing almost no change as I’m writing this at about 8:40.

To my mind, that’s the right response.

However, the ho-hum attitude could easily be due to the fact that it’s the last Friday in August and all thoughts have already turned to Labor Day.  There’s also a distinct Fall feel in the air, which may be another distraction.  The Amazon-Whole Foods combination has focused a lot of stock market attention on forces of structural change that have been in motion for a decade or so but are only now coming fully into the public, and press, consciousness.  That puts them squarely (even if that’s mixing metaphors) in the wheelhouse of algorithmic traders.  Then, of course, there’s Houston and Harvey.

By the way, continuing to ramble, the way the market closes today–both overall and with individual stocks–may give some hints as to how Wall Street will react as powerful traders return to work from the Hamptons next week.