Signal Update

Market Update

Trend Timing School

As Trend Timers we believe that diversification generally makes a lot of sense and, as can be seen from our many writings on the subject, we are sold on the concept. It very wisely follows the common saying of "Do not put all your eggs in the same basket". For exactly the same reasons, we feel that it is always a healthy practice to have a diversified portfolio that includes international positions. Fairly frequently, foreign economies and stock markets perform better relative to U.S. domestic markets and a participating investor can benefit from lower risk and higher returns. This is during normal times.

Sadly we are not living in normal times and if, as many experts believe, the U.S. dollar resumes its long-term decline, international diversification is not a nice to have anymore, but a prerequisite for wealth preservation.

How the currency markets work and the reasons that cause a particular currency to weaken and lose its value are long stories we do not feel qualified to tell. The pundits mostly agree in saying that the combined U.S. Federal Budget, U.S. Trade Balance and U.S. Current Account deficits are a previously unmatched weight on the U.S. dollar and that there is no quick fix on the horizon to reduce either one of them. A currency is like a country's stock. If you have become the world's largest debtor nation and depend at an increased rate on continued financing by foreign investors for solvency, you know you are in a world of hurt. And so is the value of your shares.

Evidence abounds. Over the last 35 years or so, the dollar has lost about 70% of its value compared to major foreign currencies such as the Swiss franc (see the long-term rate chart below). Between 1995 and 2001 the dollar took a breather from its long-term downtrend and enjoyed substantial gains. Since 2001, the decline has resumed (down 35%), and lately, due to the unprecedented triple deficit, the fall appears to be accelerating. Just this week, the dollar hit an all-time low versus the Euro.

Everyone talks about the threats of high oil prices and rising interest rates, but very few are aware of the stealthy destructive power of currency devaluation. A weak dollar affects everything in our lives from our mortgage, to the prices we pay for goods, and of course the stock market. Even if the future is as tame as the last 3 years, a $100,000 account left sitting in cash will have a $65,000 buying power in 2007. But because they still have the $100,000 dollars most people do not realize they lost money, they just think everything has gotten more expensive!

There are various things one can do to protect against the possible decline of the U.S. dollar. You can invest in the foreign currencies you believe will gain, or you can invest in gold which generally trades the opposite of the dollar. Both currency and gold trading are highly specialized fields for which TimingCube does not currently offer a service. On the other hand, the stock market which is at the heart of our Trend Timing investment system is a full participant in the global currency struggle and, we believe, a perfect hedge for Trend Timers. In other words we believe that you can gain from applying our signals to the stock market of the country you believe has the strongest currency against the dollar.

We have repeatedly described the tight correlation that exists between our signals and most world markets (see for example "The Trend is contagious" in the June 11, 2004 Weekly Update). This means that in real terms (adjusted for currency fluctuations) most foreign markets are expected to perform in a manner comparable to the U.S.-based stock exchanges. Thanks to the gaining currency valuations any investments in such foreign stock markets could find themselves substantially ahead over the course of several years.

It is for each of us to decide if and how much we believe the dollar will drop and how much "dollar hedging" we should implement in our own portfolio. Then, we need to decide which countries/currencies offer the best prospect for appreciation. Some think that most European countries and the Euro will continue their historic gains. Others view Asia, and the Chinese Yuan in particular, as the big winners. Luckily there are many choices of investments to be found. We list a few countries and corresponding investment vehicles in the "What to trade?" section of the "Resources" page, but many more are available. Even some regional or simply broad international ETFs and mutual funds can do well. Better than a quasi guaranteed 10 to 15% a year penalty in dollar denominated markets. 

FAQ of the Week

Yes there is. This week the Nasdaq Stock Market and the American Stock Exchange have announced that the Nasdaq-100 Index Tracking Stock - better known as QQQ - will transfer its listing to Nasdaq from Amex, effective December 1, 2004. And because all Nasdaq ticker symbols have four letters it will trade on Nasdaq under the symbol QQQQ.

The bottom line is that this is no cause for concern. Not to worry, TimingCube is on the look-out. As the most actively traded ETF in the world, no one is going to endanger or disrupt our preferred investment vehicle. The name may change over time, your broker will start referring to your positions as QQQQ, some may even start calling it the "Quadruple Q's" or the "Four Q's", but your holdings remain unchanged and we do not really care where they trade.

Quiz: What do you call a cube with four dimensions?

Warm wishes and until next week.

The TimingCube Staff