Archive for the ‘FX and Commodities’ Category

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The Real Value Of A Falling Dollar

Wednesday, October 13th, 2010

The value of U.S. currency has gone down nearly 10% against the euro in the past three months, but the impact on exports, tourism, the price of oil, and foreign investment may not necessarily be as bad as it seems…

  • When the value of the dollar falls, it means that $1 is worth less compared to one unit of another form of currency. So if $1 was once worth 1 euro, a fallen dollar might be worth only half a euro. That makes U.S. dollars cheap to euro-holders, and euros expensive to dollar-holders.
  • A cheaper dollar means that U.S. goods are more attractive to foreign buyers, so exports will likely rise. Since many American companies make a good portion of their profit outside the country, this could be a significant boost to the economy. A weak dollar is also an enticement for foreign tourist to visit the U.S. and spend lots of euros and yen!
  • The price of imported goods is going to increase. Of course, this could just encourage Americans to drive domestic industry by purchasing more affordable American-made goods. But not every product can be duplicated domestically.

Facts & Figures

  • In 2009, foreign tourists in the U.S. were responsible for $120 billion in revenue.
  • In July, an 8GB iPhone selling for $99 would have cost an Italian customer 78 euros. Today it would cost only 71 euros.
  • If they cashed out now, investors in the Euro Stoxx 50 index would be up 17% from 3 months ago simply because of the change in the dollar’s value.

Best Quote

“International finance isn’t pretty. If everyone focuses on exports, it’s a race to the bottom in exchange rates.” – Aroop Chatterjee, Currency Strategist at Barclay’s Capital

High-Speed Market Crash Blamed On Impatient Investors

Wednesday, September 29th, 2010

On May 6, 2010, the stock market crashed. For about 20 minutes.

  • No one is exactly sure how it happened, but it had a lot to do with the way electronic trading works (or doesn’t work). After the crash, people began to look carefully at the intended and unintended consequences of digitizing the trading process.
  • High-speed trading systems have made investing cheaper and faster. Wall Street traders demanded greater speed, and SEC and FTC regulators allowed technology upgrades to continue unchecked for a long time.
  • The SEC has been investigating the crash for months and is about to release its official report. As part of that process, the SEC is acknowledging its own role and failings in the regulations leading up to the brief financial meltdown.

Facts & Figures

  • During the crash, the DJIA dropped almost 700 points before rebounding.
  • In January, the SEC showed signs of questioning the new structure of the stock market.

Best Quote

“Who could argue that competition was a bad thing … and that faster trades would be a bad thing?” – Joseph Saluzzi, Co-Head of Trading at Themis Trading

Well That Didn’t Work; Japan Tries Something Else

Monday, August 30th, 2010

Japan’s been in an economic bind for years, but now they’re faced with an increasingly expensive currency as well. What’s a prime minister to do?

  • With the yen at a 15-year high and deflation ironically still going strong, Japanese Prime Minister Naoto Kan has proposed a stimulus plan designed to dig his country out of its economic hole. An expensive yen means it’s more expensive for foreign nations to purchase Japan’s exported goods.
  • Part of the plan involves lending more money to the banks at a very low rate. The idea is to keep the yen’s value low and to encourage more consumer lending – similar to recent U.S. stimulus efforts.
  • Some experts say Kan’s proposal doesn’t go far enough to address the country’s seriously messed up financial situation, and some are even saying this is a purely political move designed to make Kan look good.

Facts & Figures

  • Japan’s main interest rate is currently 0.1%
  • Part of the Japanese stimulus package includes a 900 billion yen government injection (just under $11 billion) into the economy
  • Stimulus money will be used to subsidize green appliances and homes, fund career counseling and internships, and keep domestic companies from outsourcing.

Best Quote

“There seems to be a sense of fatalism. The B.O.J. continues to play the same old game of making incremental, but ultimately meaningless, policy changes in response to political pressure. The government talks of the need for fiscal reconstruction, but then tries to construct an economic stimulus package with tiny fiscal measures and minor, uncoordinated structural reforms.” – Richard Jerram, Economist for Japan at Macquarie, a global investment bank

Gold Medals – How Much Are They Really Worth?

Friday, February 26th, 2010

The 2010 Winter Olympics started this past week in Vancouver, and when considering these prestigious games, one must ask oneself the question: if I were to take up curling, would winning a gold medal make up for all those years of chronic boredom and embarrassment, you know, money-wise? Well…

  • Gold and silver have appreciated in value over the past ten years—a result of the current credit explosion and financial crisis—which has shaken investor confidence in currencies, making gold and silver a safer, more desirable bet.
  • At the turn of the century, on the other hand, pawning off gold and silver medals would not have been as wise as it would today, since the value of both commodities was exponentially smaller then.
  • 1980 was the golden year (pun intended) for hocking gold medals, but one in possession of an Olympic medal in these modern times would probably be best served by selling said medal on eBay (unless, of course, it’s a bronze).

Facts & Figures

  • Gold is currently valued at $1,100 per ounce, but gold medals are primarily made of silver, with about 6 grams of gold plating on top.
  • The medals handed out in Vancouver are substantially larger than medals awarded in years past—this year’s medals are about 100 millimeters in diameter, 6 millimeters thick, and weigh between 500-576 grams (a little over a pound). The medals from the last two Winter Olympics (held in Turin, Italy and Salt Lake City, UT, respectively) weighed less than 500 grams.
  • Vancouver’s gold medals are worth approximately $500, while silver medals are valued at a little over half of that.
  • In 1980, after adjusting for inflation, gold medals were worth around $1,000.00
  • Silver medals on eBay have been known to sell for $7,000.00

Stop Crying, It’s Hurting Your Portfolio

Wednesday, November 25th, 2009
If investors just trusted classic investing strategies instead of getting so emotional, their portfolios would be much better off…
  • A new study found investors are making two big mistakes: 1) they get too emotional about their investments and make hasty decisions, and 2) they assume recent performance dictates future performance.
  • The study also explained that the most classic investment strategies – asset allocation and portfolio rebalancing – would help investors avoid these mistakes.

Facts & Figures

  • Over the past 2 years, a basic portfolio with conservative asset allocation and annual rebalancing dropped by only 3.5% compared to a 30% S&P drop during the same time.
  • During a boom, a basic portfolio with conservative asset allocation and annual rebalancing returned 8.3%, not so much less than 9.7% for the S&P.

Best Quote

“People spend all their time looking at the trees and not the forest. It’s the forest that’s important, and that’s asset allocation.” – Gary P. Brinson, Chicago-based Asset Manager

A Currency Market is…

Thursday, August 20th, 2009

A currency market is also known as a foreign exchange or FX market. It deals with the buying and selling of international currencies such as U.S. Dollars, Great British Pounds, Japanese Yen, etc.

A Commodity is…

Monday, May 18th, 2009

A commodity is a raw material that’s just like any other raw material. For example, tobacco, rice, petroleum, iron ore and cows are all commodities because they’re basically the same no matter what company “produces” them. iPods and breakfast cereals aren’t commodities because they’re processed and branded. Even though they may use commodities in their production (such as metal and wheat flour), the final product is tied to the success or failure of its particular company.

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