The good news? No more mindless dollar carry trade. The bad news? The fundamentals matter again.
I believe that last year’s overriding theme of the dollar carry trade along with the reverse correlation between the US Dollar and the S&P 500 ended the first week of December. This occurred exactly when the BLS released its first strong(ish) jobs number. That week, US stocks exploded higher and the US Dollar Index (USDX) was well in the green, too.
Some of this had to do with the fact that right around that time, Europe started to produce headlines uglier than Madonna’s bare arms. Keep in mind that the Euro makes up around 2/3rds of the US Dollar Index.
Now that the seesaw trade of up dollar/down stocks and vice versa has stopped working like a Swiss watch, you may feel a temporary relief from that monotony.
With the carry trade no longer in the driver’s seat, the market has begun to focus on actual fundamentals again…you know, those pesky numbers that describe the conditions of the corporations themselves.
Unfortunately, if fundamentals are back in focus, then so is the fact that we are still in the Costcut-covery. Top line sales are coming in relentlessly weak, even as profits are hitting the targets. These reports, even the beats, do not excite anyone who reads past the first line of the press releases.
I run a fairly sizable brokerage and advisory business. I could fire my staff and cut off the research products I subscribe to and only commute to work 4 days a week instead of 5 and stop wining and dining prospective clients and drop the amount of states I do business in to lower registration fees. And yes, my take home pay would look much improved at first. But then what? How can I grow my book of business if I’ve gutted it of the raw materials and resources it needs to get bigger?
The answer is I cannot, and as my revenues decline, my juicy margins from all that expense trimming are sure to fade along with them. And then no one is happy, especially not the wife or her salesgirl at Bloomingdales.
The meeting of temporary profitability targets may earn execs their bonuses and make for good headlines, but at some point, you aren’t aren’t just cutting fat – you’re chopping into the muscle itself that you need to walk the next mile.
So yes, the carry trade got too easy and had run its course, but now we have to actually examine the fundamentals again. In the Costcut-covery, that’s not necessarily such a good thing.
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