In this bear market when stocks should be falling, as they tend to do in a bear market, it seems Wall Street has been looking for any reason to move stocks higher. As a result, we’ve had quite a few impressive bear market rallies.

We recently saw stocks surge on a strengthening of the dollar, which has been rallying because Eurozone economies are now seen as weakening. The implications or more accurately, the interpretation of that data by Wall Street is that the Eurozone is weakening after the U.S., so the U.S. will come out of its economic malaise ahead of the Eurozone. Secondly, even though the reality is that the U.S. economy is also hurting, with the Eurozone “now” weakening, those who would be inclined to invest in European stock markets, might now look towards the U.S.

With a tendency to adopt a view like that Wall Street just got handed an incredible gift overnight, from the United Kingdom. The Office for National Statistics in the United Kingdom, said sequential economic growth for the second quarter was unchanged from the first. This was against a forecast of a growth of .02%

The lack of growth in the UK economy in the second quarter abruptly puts a stop to sixteen years of sequential quarterly growth. In the period, manufacturing in the UK fell by 0.8%, while services grew just 0.2% and household spending fell by 0.1%. As a whole, the economy grew 1.4% from Q2 2007, against a forecasted growth of 1.6%.

This should cause the dollar to rise against the British Pound and we could then see a further weakening of the Euro against the dollar as well. Should the dollar rally strongly, we will see a drop in crude oil prices, which in the absence of any major negative economic news, will then lead to a rise in equities. Considering the state of our economy and the worries over major financial companies, will a rise in stocks be warranted? Should we get such a rally, remember the mantra to buy the dips and sell the rallies.

tags: us contagion  oil prices  dollar

In recent years, the dollar has been in a free fall against other major world currencies. Against the Euro, when plotted on a chart, it has trended downward for nine years and since April 2006, it has been in a steep decline. Consequentially, there are those that have been screaming for government policies that would strengthen the dollar while sometimes referring to the dollar as the U.S. Peso.

Well while the dollar is still sitting at multi-year lows, it has staged a very impressive rally in the last three weeks and proponent of a strong U.S. dollar now get to see whether their theories hold true.

Of late, a weak dollar, especially when coupled with the weakening U.S. economy, has been a very good thing. A lot of U.S. multi-national companies that reported good earnings in the most recent reporting period, in a round about way, credited the weak dollar.

They reported that while domestic sales were slumping, exports and overseas sales by their foreign subsidiaries where strong as the weaker dollar made better quality U.S. goods cheaper. Besides helping exporting companies’ bottom line, increased U.S. exports also improves our economy by lowering our ever-growing trade deficit.

The positives of a strong dollar cannot however be overlooked. While technicals and too fast a climb does play a role in the recent weakening in oil prices, the strengthening dollar also plays a major part and this would probably be a point that would be underscored by advocates for a strong dollar.

Then again, lest we forget, there are all sorts of signs that shows that higher oil prices does in fact temper demand for oil derived products such as gasoline, which would cause and does cause the price of oil to fall.

Americans in the past three months, have been buying less and less gasoline, and recent reports out of China shows that imports of oil, dropped by about 7%. Considering that China which has played a part in the increase of oil prices due to their expanding economy and growing need for oil, imported 1.1 billion barrels last year, that is significant enough to have an effect on crude oil pricing.

While oil prices in regular trading today, might end up to the upside, they are currently falling in extended hours trading, on concerns that the U.S. economy is continuing to weaken, another proof that regardless of where the dollar trades, oil prices would at some point, weaken.

dollar oil us economy

Inbev, a Belgian brewing company currently has an offer on the table to take over Anheuser-Busch at $70 per share or $50 billion dollars. There probably aren’t that many more companies that are more “American” than Anheuser-Busch (BUD), the maker of Budweiser and it would be a shame to see it fall into foreign ownership.

As mind numbing as the $50 billion price tag sounds, if the deal goes through, Inbev will actually be getting Anheuser-Busch for cheap, relatively speaking.

Since August 1st of last year, the dollar has lost about twelve percent of its value to the Euro. If the economy continues to deteriorate, and we see a nationalization of Fannie Mae (FNM) and or Freddie Mac (FRE) or the government has to spend more on social programs to help offset a failing economy thereby  increasing its debt and budget deficit,  that may further weaken the dollar as foreign buyers of US government bonds start worrying about the safety of their money. A weaker dollar makes other currencies more valuable and investors in those countries might start looking for more American assets that can be had for cheap.

Additionally, if things get worse and the stock prices of American companies continue falling, lowering their market capitalization and valuation, that will only exacerbate the problem.

Their is  a third factor that may further serve to send American companies into the arms of foreign buyers. Investment banks in the US are all being faced with an assault on most if not all fronts of their businesses and their profit outlook is not so bright.

1) Their structured finance divisions, that packaged and securitized assets for sale to their clients have all but been decimated, thanks to the collapse of the mortgage market. 

2) As the market continues to decline, more retail investors will trade less and this will lower the commissions their brokerage divisions generate.

3) The current state of the market is not conducive to successful IPOs, so that very lucrative business has also lessened.

As a result, they will obviously be looking for ways to shore up their revenues. Faced with this situation, they would be remiss if they did not start soliciting foreign investors with proposals for the takeover of American companies that can be bought for very cheap because of the currency and low market cap advantage.

Other sales of very American companies/properties to foreign investors recently:

On Tuesday, July 8th, the Abu Dhabi government  bought a 90 percent stake in the iconic Chrysler Building in New York for $800 million. Admittedly, that stake was already in the hands of German owners.

In May of this year, the GM Building in NewYork and three other Macklowe/Equity Portfolio properties were sold for $3.95 billion to an investor group comprised of  the sovereign wealth funds of Kuwait and Qatar as well Boston Properties, an American company.

Originally posted by http://www.navivest.com/blog