The possibility of a shift in the leadership surrounding stock market indices is becoming more and more imminent. It appears the NASDAQ is losing traction while the Dow and the S&P500 are gaining momentum. The NASDAQ led the stock market for the past five years of the current bull market. Now, the table has turned in favor of the Dow and S&P500.
The primary reason for this shift can be attributed to the devaluing dollar and the valuing Yuan. In fact, the growing disparity in value between the two rival currencies makes Chinese imports more expensive, thus making it possible for U.S. corporations to raise prices. The market advantage held by the Chinese for the past ten years will gradually be handed over to U.S. corporations as the dollar moves lower in value. Needless to say, this means greater profits for U.S. corporations, thus higher stock prices.
This scenario depends on the perpetuation of two factors-a valuing Yuan and a devaluing dollar. If this trend continues, an increasing number of foreign investors will cut back on their dollar holdings. As investors begin relinquishing their dollar holdings, dollar value will quickly move to a position of support. Since consensus holds that the dollar is over-valued by at least 20 percent, we should expect it to plunge to a loss of 20 percent or more versus the euro and Swiss franc.
Many of my readers anticipated the upcoming weakness in the dollar. Consequently, many of them began making preparations by investing in Swiss annuities. If you are one of these people, keep the following comment in mind. A significant part of your profit from owning a Swiss annuity is the currency gain. Do not let the dollar plunge before you buy some type of hedge. Furthermore, those of you who took my advice and bought gold over the past several months have done well. Likewise, those of you who dumped your Treasury or corporate debt bonds and longer-term notes saved an incredible amount of money.
I believe interest rates will soar much higher (as a result of the valuing Yuan) before the end of the current business cycle. As Chinese imports in U.S. markets begin to dwindle, so will its trade surplus. This means China will not be required to buy as many U.S. Treasury Securities. The U.S. investor, or the holders of fixed-rate income portfolios, will be forced to make-up for the shortage. In order to insure this happens, the U.S. government will be forced to make Treasuries more attractive, which of course means higher interest rates. If this is not reason enough for higher interest rates, consider the fact that at some point the U.S. government will be compelled to slow the dollar's descent, thus forcing higher interest rates.
Prices will move higher because it will take more dollars to purchase goods. It is true that oil companies are taking advantage of U.S. consumers in every way possible. I warned my readers of this in 2003 when I stated that oil companies would use every trick in the book to push prices higher. I mentioned that their most dependable ploy was to shut down refineries during times when prices peaked.
Another danger you must be aware of is gouging by loan companies. Just like the oil companies, they too will use every trick in the book to maximize their earnings. For example, they will devise loans for those who have flex rates. The danger here is that creative loans such as these will seem like a solution to higher interest rates when in reality they will prove to be worse than the standard flex rate. Take care and do not forget to read the fine print. Most importantly, STAY TUNED!
