Dollar strong, Euro weak; what to do?
To no one’s surprise, stocks sagged below 10,000 on the Dow Industrial Average. Apathy seems to be replacing uncertainty in the mood of investors. After the strong market in the last nine months of 2009, some settling back could be expected. Still, the current mood is an improvement from the panic that prevailed not too so ago.
Panicked selling has never been a viable long-term investment strategy; patient selection of stocks in overachieving companies works rather well. As long as the current global economic recovery continues, the overall market will buoy stocks in these companies.
Short-term, markets fluctuate in response to alternating emotions of greed and fear. Despite a good round of earnings reports and a few other sparks of encouraging economic developments, most investors still seem to be pulling back, holding cash on the sidelines. This is understandable with news reports of Greece, Portugal and Spain possibly defaulting on their government (“sovereign”) debt.
The word “default” in a financial report is enough to scare anyone after the defaults by the late Lehman Brothers, Bear Sterns and their followers. Defaults on “sovereign” debt usually occur only after lost wars or revolutions and the situation in these Euro countries is unlikely to get that dire. Some from of aid may be needed, probably led by Germany, although use of the term “bailout,” much less “default“ will probably be avoided.
Although the extremes of these news reports will be avoided, their underlying bases provide useful guidelines. The entire global economy suffered under the recent financial shocks. The countries of the world then undertook stimulus spending and other recovery steps on a remarkably unified front. These are working but the pace varies among the economies.
The U.S. economy is recovering appreciably faster than that of the Euro area and Britain. As a result, its dollar has arrested its slide and is up more than 10% against the Euro in the last year. There are many factors affecting currency exchange ratios, but one is the perception of a stronger economy. The European Central Bank has its hands full with the deficit problems of its weaker members and the dollar should continue its gains.
That could lead to lower prices on dollar-denominated commodities like oil and gas. It already seems to be impacting gold prices; normally up in unsettled times, metals have been weak recently. Provided governments do not repeat the protectionist blunders of the Depression years through putting up trade barriers, currencies will fluctuate freely and their economies will continue their recoveries.
The multinational technology companies that I have been recommending deal with these currency concerns as normal business matters. Particularly for retirement accounts, dividends add an attraction to Intel (INTC-$20) and IBM (IBM-$132). Cisco (CSCO-$24) doesn’t pay dividends but its recent earnings report was a beauty and it’s a keeper.
Waste Management (WM-$32) is a well-run company in an extremely basic sector with a 3.6% dividend yield. United Technologies (UTX-$66) just raised its dividend and is a good stock to await recovery with its 2.6% yield. Agricultural demand continues to grow and global food company Bunge (BG-$58) is closing an acquisition in fast growing Brazil.
With the recovery still young, I think it premature to scavenge through surviving homebuilders. In the financial group, Goldman Sachs (GS-$152) stands out, in somewhat the same manner that the Vatican City is distinctly separate from all the rest of Italy. This has not gone unnoticed, as its stock price shows.
The word “default’ lowered the prices of global bond funds despite the absence of any real threat to their positions. Alliance Global (AWF-$12) and Credit Suisse Income (CIK-$3) are paying over 9% in monthly dividends.