One of our readers (and valued clients!) asked for more detailed charts regarding yesterday’s post about Europeans’ returns owning United States stocks versus those a US investor achieved.
The chart below shows both the Euro vs. Dollar relationship and the Dow Jones Industrial Average for the past 10 years. Euro vs Dollar is always quoted with Euro first, so that’s why the chart is going northeast rather than southeast.
The basic premise is that much of the rise in equities since the March 2003 lows — which occurred the day bullets started flying in Iraq — is attributable to the devalued purchasing power in the US Dollar rather than a true increase in value that can be exchanged 1-1 around the globe.
This same concept applies to the well-publicized moves in commodities, including the chart of crude oil below. If your currency is Euros, this long term chart does not climb nearly this steeply. Instead of being a 4-bagger since 2001, oil is only a double during that timeframe in Europe. That’s a tremendous difference. The same could be said for housing price increases earlier this decade — home prices rose, but against what? A US dollar ! They did not rise that much when priced in other currencies.
Here is a chart of the Dollar Index, which measures our greenback against a diversified basket of currencies including Euros (the biggest weighting), Japanese Yen, British Pound, Swiss Francs, etc. The dollar has of course faltered against all of its competitors since early this decade, and now sits at its lowest value ever since the index was created in 1971.
If you’re a European investor who’s owned the Dow Jones Industrial Average since 2001, you’ve taken a much bigger beating than us dollar-denominated locals. The greenback’s plunge is of course the culprit.
The “Euro-Dow” sits at the equivalent of only 7200 — versus the true 11,300 close on Friday.
There are occasions — sometimes years — when stock markets are so unrelentingly strong that a good active manager who was previously known to be “prudent” becomes viewed as a laggard. This most often happens near major tops in the stock market. Teresa Lo of PowerSwings.com discussed just such situations in a very interesting piece last year. I certainly felt similar pressures from clients and prospects while the indexes romped from mid-2006 to mid-2007.
At Teewinot, we’ve always contended that managers need to be judged for their performance over a reasonable period of time: encompassing up, down, and sideways markets.
True risk management is a definite hindrance to performance in persistent, strong bull runs. That is a fact. During those times — in hindsight — you do undoubtedly do best by just staying long (even better, adding leverage).
However, when the Bull is taken to its knees, legit risk management exactly what portfolios need. It’s not just what you make during the uptrend that counts. It’s what you keep.
We have been honoring some of my mentor RevShark’s words this week. Saved from a long-ago post on RealMoney.com, I break out this quote whenever the market gets dicey.
“Keep the Damage to a Minimum.
If you can avoid taking a large hit now, you will be much better positioned when things get better.”
Words to invest by. Especially with the S&P 500 down 8.7% so far in June, it’s biggest monthly drop since the Bear market in 2002.
Client accounts are roughly breakeven over the same period.
And this one dwarfs what’s going on in the Oil patch.
A Chinese hedge fund manager just paid $2.1 million for lunch with Warren Buffett. As the figures show (source: Bloomberg), the value of this “asset” has absolutely exploded.. more than a 100-bagger since the 2001 low !
2000 Anonymous $25,000
2001 Anonymous $18,000
2002 Edward Jones Co. and 2 Anonymous $25,000
2003 David Einhorn, Greenlight Capital $250,100
2004 Jason Choo, Singapore $202,100
2005 Anonymous $351,100
2006 Yongping Duan, California $620,100
2007 Mohnish Pabrai, Guy Spier, Harina Kapoor $650,100
$18k to dine with one’s favorite celeb is a bargain basement price ? Wow.
The latest Case/Shiller S&P data (for April — seems dated but whatever) showed home prices down an average of 15% from the year before. That’s huge. Vegas was the worst, losing 26.8% ! Interestingly, Charlotte fared the best, at breakeven.
Even NFL players’ homes aren’t selling well. Ousted Cincinnati Bengal Chris Henry’s house cleared the market at 2/3 of appraised value — and the bank itself was the only bidder ! Does that even count as a “sale” ?
Quint over at Tickerville.com has a comical post up called “You Know You’re a Trader When…” I can relate to several in the list.
While discussing my guilt, might as well note that while it’s simply over-the-top, there’s a little part of me that would enjoy owning this monster 24-screen trading setup:
I’m not sure I’d have enough eyepower to make it worthwhile. Also interesting to notice that the owner definitely has an Interactive Brokers order entry window up. Bottom row, 3rd from right.
Also, I wonder if the owner is profitable ? Don’t take that for granted just based on the insane screen count.
Ya think? Excessive credit card debt is not anything new. If it were, there wouldn’t be any big deal as we drew down the first portion of our credit lines. Unfortunately the newsclip continues..
The problem is exasperated by the fact that many Americans, as well as Europeans, are already delinquent on their credit card bills.
Consumers have seemingly always been encouraged to spend, spend, spend (in this decade as a way to show our “patriotism”). Events have been headed this direction for a long time — and it’s not the fault of Bear Stearns, subprime mortgages, Miami condo flippers, or Ben Bernanke. It’s simply the inevitable topping out of growth in a mature, credit-drenched economy. Nobody/nothing stays young forever.
As several notable traders have mentioned, MasterCard (MA) and Visa (V) don’t take on credit risk, but are paid for transaction processing. They are the only two financial stocks I’d consider pursuing in this environment.
Our friends at 1440 Wall Street posted some solid logic today from Pimco’s El-Erian today regarding when it’s smart to buy either the debt or equity of companies in an industry that’s recapitalizing rather than expanding. Umm, kind of like where the financial sector finds itself today.
We have been honoring some of my mentor RevShark’s words this week. Saved from a long-ago post on RealMoney.com, I break out this quote whenever the market gets dicey.
And this one dwarfs what’s going on in the Oil patch.
The 
Now I’m no proponent of tobacco consumption, but 
Consumers have seemingly always been encouraged to spend, spend, spend (in this decade as a way to show our “patriotism”). Events have been headed this direction for a long time — and it’s not the fault of Bear Stearns, subprime mortgages, Miami condo flippers, or Ben Bernanke. It’s simply the inevitable topping out of growth in a mature, credit-drenched economy. Nobody/nothing stays young forever.