One of my favorite themes has been the impact of quantitative easing on the stock market. The Federal Reserve’s manic money-printing efforts have made the dollar cheaper against the value of foreign currencies. Those cheaper dollars get printed to purchase Treasury securities from the “primary dealers” at the New York Fed’s POMO auctions. The proceeds collected from those sales find their way to the proprietary trading desks of the primary dealers, who leverage the money and go on a buying spree, scooping up mass quantities of high-beta stocks. Stock prices have been wildly inflated since quantitative easing began. Barry Ritholtz shared some charts with us, demonstrating how various sectors of the stock market have performed since the second phase of the quantitative easing program (QE 2) was initiated by the Fed.
On the other hand, the ongoing European debt crisis is now making the dollar stronger against foreign currencies — particularly the euro. On Monday, dollar strength depressed stock prices, consistent with the current pattern of an inverse relationship between dollar strength and stock prices. This relationship became the subject of an informative article by Jeff Cox, which appeared at the CNBC website on Monday. Here’s a taste:
The bad news for stock investors is that the dollar has been on a rally predicated in large part on the renewed fears that eurozone nations such as Greece and Portugal are on the cusp of defaults. Investors have sought the greenback as a safe haven against global tumult.
Consequently, many strategists are advising their clients to reposition their risk portfolios as the dollar rally continues.
The Dow Jones Industrial Average took a 130-point nosedive on Monday, closing at 12,381 for a loss of 1.05 percent. The S&P 500 dropped by 1.19 percent to finish at 1,317. The Nasdaq Composite lost 1.58 percent to end the day at 2,758.
Miami-based corporations had a bad day on Monday. Royal Caribbean (RCL) had the worst luck, sinking by 2.95% to close at 38.83. Carnival Cruise Lines (CCL) sank by 1.95% to finish at 38.79. Ryder System (R) lost 90 basis points (0.90%) to finish at 54.16. Lennar (LEN) escaped with the least damage, losing 61 basis points (0.61%) to end the day at 17.85.
The following companies will be playing “beat the number” on Tuesday, with the release of their quarterly earnings reports: Applied Materials (AMAT), Autozone (AZO), Collective Brands (PSS), Dycom Industries (DY), Express Inc (EXPR), Focus Media Holdings (FMCN), Heico (HEI), Medtronic (MDT), Pacific Sunwear of California (PSUN), Sanderson Farms (SAFM), Take Two Interactive Software (TTWO) and TiVo (TIVO). Good luck!