dollars come home- implications?

[jk]

from another thread:

Poom is existing dollars coming home.

if the dollar is dropping and at some point dollar holders conclude it is in their interest to reduce their dollar holdings, where do those dollars go? the holders can buy physical assets - oil, commodities - or can buy companies or real estate or non-dollar financial assets - yen- or euro-denominated bonds. but if the sellers of these assets are not doing their accounting in dollars, they then have the same problem as the original dollar holders, i.e. now they are the dollar holders and the dollar is a wasting asset. they now have the old maid [or the hot potato if you prefer].

i can only think of one way for foreign dollar-holders to "retire" their dollar holdings and, as a group, all get out of [at least some of their] dollars completely: they must buy dollar-denominated assets from u.s., dollar-based, owners. so what are these assets that might be sold to foreign dollar holders? it can't be dollar-denominated bonds, because that's still a way of holding dollars. it can be stock or whole companies, or real estate or commodities or capital goods.

thus, imho, "poom" should be characterized by [nominally]:
1. a rising stock market, especially for commodity and capital-goods producing companies, with rising foreign ownership of u.s. equities
2. a rising commercial real estate market
3. rising commodity prices - including industrial and agricultural commodities
4. rising interest rates [falling bond prices] as the pool of bond-buyers shrinks
5. currency-confusion: there will be no assumed reserve currency. and therefore
6. rising precious metal prices

i have been assuming a declining u.s. stock market in the next 3-12 months. this analysis makes me think that although the market might sell off in the short-intermediate term [say in 2007], it will [nominally] rise substantially in the longer term. it also seems to imply that private equity may follow the same course: currently rising, falling in the intermediate term, but then [nominally] rising again.

investment implications would be to position in commodities, high-end real estate [are there any good reits in this sector? anyone care to make recommendations?], and companies associated with commodity production or capital goods. it would also imply buying foreign equities and foreign real estate. [anyone know good ways to participate in foreign real estate? i know there are a few mutual funds in this sector. anyone have insight into them?]

does this thinking make sense? i would appreciate some feedback, pro or con.

[Jim Nickerson]

Re: dollars come home- implications?

jk,

For what it is worth, I compliment you on your thinking about this. To me your thoughts are insightful and rational.

I have been trying to figure a method of following ishares, Vipers, Powershares, Holders, Spiders so that I can rank them with regard to where they are in their 52-week range from high to low, rank off highs and rank off lows. I wouldn't stake my life on it that I have it figured correctly, but I believe I do.

The 13 ETF's that are at the top or closest to the top of the ranges between high and low are the following in decreasing order and the gain off the 52-week low:

XLF Financial Spyders 16.66%
IDU DJ US Utilities 20.05%
VNQ Vanguard REIT 35.24%
EWM Malaysia 31.94%
VOE Vanguard Mid-Cap Value 11.89%
ICF Cohen and Steers Realty Majors 39.53%
VOT Vanguard Mid-Cap Growth 11.24%
JXI Global Utilities 9.19%
EKH Europe 2001 27.42%
VUG Vanguard Growth 16.76%
VPU Vanguard Utilities 19.78%
VGT Vanguard Information Tech 27.34%
VAW Vanguard Materials 21.59%

I think what this type of sorting is saying is these are the ETF's that are doing best right now--though someone may see that differently.

What prompted me to write this was noting in my sorting that VNQ and ICF (realty ETF's were bouncing right around the top of the ranking) and have the best gains, though in the rankings those gains are not the highest of all the ETF's off their 52-week lows. It now strikes me that 3 utilities are in the group and the materials fund VAW.

My thought about this is that perhaps others already are "hot" to be buying hard assets as alluded to by jk.

I write this with some trepidation that someone, Finster comes to mind, will tear into to this. If so, that is okay and anyone is welcome to tear into me.

It is worth noting that 102/192 ETF's in this database are less than 1% off their highs.

One other real estate ETF is IYR which is 34.22% off its 52-week low.

[jk]

Re: dollars come home- implications?

a couple more thoughts:

if stocks do indeed go up nominally, the winners are likely to be multinational firms - i.e. those that have non-dollar income streams.

commercial real estate in the u.s. generates dollar income, so is not the best solution for a foreign holder who wants to dump dollar exposure.

i'm wondering if there are any reits or reit funds which focus on foreign properties.

[Jim Nickerson]

Re: dollars come home- implications?

http://socialize.morningstar.com/New...mrr=1153350060

3. Foreign REITs - not yet
rickferri| 07-16-06 | 08:44 PM.
Foreign REITS are one asset class that the return looks great on paper, but that is not the whole story.

US REITS are special to US investors. The income is tax-free to the company as long as 90% of earnings are passed on to investors. Foreign REITs have completely different accounting and tax structures depending on the country. Even for those countries where the structure is similar to the US, the country may withhold up to 25% of the dividend as a tax. The only way you can get that back is by claiming a foreign tax credit on your Form 1040.

But that creates another problem. In order for you to claim the foreign tax credit, the foreign REIT dividend must be paid in a taxable account. You may not want to do that. REITS are not a good investment in a taxable account for people in high tax bracket because most of the income is treated as ordinary income, not qualified dividends.

So, there are many problems to overcome before a mutual fund company brings forward a viable, low-cost foreign REIT product that makes sense in an individual's portfolio.

http://www.thestreet.com/_cboe/newsa...FREE&cm_ite=NA Article written 11/16/06 discussing some coming international REITS.

[Jim Nickerson]

Re: dollars come home- implications?

commercial real estate in the u.s. generates dollar income, so is not the best solution for a foreign holder who wants to dump dollar exposure.

If the premise is that foreigners to get rid of dollars could do so by buying US realty through REITS, then why wouldn't they just reinvest the dividends into more shares of the REIT? That would accomplish the same thing as the initial investment.

[jk]

Re: dollars come home- implications?

If the premise is that foreigners to get rid of dollars could do so by buying US realty through REITS, then why wouldn't they just reinvest the dividends into more shares of the REIT? That would accomplish the same thing as the initial investment.

sorry for not being clearer. i meant that foreign folk would buy real estate outright. but that generates more dollar income, so won't be as attractive as other options. the reits i was looking for are for me to invest in real estate in other countries.

[jk]

Re: dollars come home- implications?

is the rush to get rid of cash a symptom already in progress?

Deal Deluge

Trash the Cash? Or Take the Money and Run? by Ritholtz Research & Analytics
230 Park Ave., New York, N.Y. 10169


Nov. 20: I am hard-pressed to recall the last time that: a) there was so much money sloshing around; and 2) people seemed so hell-bent on getting rid of it. [emphasis added]

According to Dealogic, the total dollar amount of deals announced from [Friday, Nov. 17, to the following Monday] was around $88.5 billion globally; half of that pile of dough were transactions in the U.S. The value of global mergers and acquisitions for 2006 had reached a record $3.368 trillion, beating the previous high set in 2000 of $3.332 trillion. Many of these transactions were for cash. It's as if these deal makers all decided they wanted to trash the cash.

The surge is being driven by companies which, after years of big stock buybacks and dividend increases, still have large amounts of cash. The flood of money into private-equity funds also needs to be put to work. Indeed, one of the reasons the short-sellers have been carried out on their shields is the ongoing bids caused by expectations of private-equity buyouts.

-- Barry Ritholtz

---

[spunky]

Re: dollars come home- implications?

Just a few of my thoughts



JK : Didnt this allready happen with the commodities bull run of the 1970's:confused: Nothing new here.


Your headed to a economic contraction and the best way to ensure profits is to gobble up your competition. No need to reinvest in captial goods; Hell some of the goods might be sat aside idled anyway. Personally ; this sign and Walmarts crappy same store sales are the saying to spunky Hello recession


Personally, I tried the equities gig, buying and selling online. I dont have the stomach, nor mentality for it. I am concentrating on learning the PM sector, mining, and commodities.


I think we all agree we are seeing a global shift away from the dollar, that will continue, we just dont know how fast, how long, or extactly what form it will take

regards

[Spartacus]

Re: dollars come home- implications?

The disposition 0f the US dollars surely Depends on who the holders are.

Central banks? I don't know offhand what asset they might want to move into. Surely nothing that requires active management (real estate, toll roads, maybe they'll even avoid equities)

Foreign persons and Foreign pension funds holding US bonds (corporate or otherwise) - these might go to "safe", dividend-yielding stocks. But if the stocks yield US $$$$, the stocks don't look so hot copared to the local currencies. That is to say, in this scenario, the US $ has tumbled in value relative to most other currencies, thus US $ denominated dividends are not worth that much to anyone other than US residents.

Foreign Hedge funds run by MBAs who really believe the anti-PM propaganda of the last 30 years - they'll never go into PMs. Maybe into Insurance products and derivatives.

where do those dollars go? the holders can buy physical assets - oil, commodities - or can buy companies or real estate or non-dollar financial

[jk]

Re: dollars come home- implications?

the rise of emerging market valuations may be in part people and institutions looking to get out of the dollar. i think our equities will be going down substantially at some point, and historically if the u.s. market tanks every other equity market does the same. i've been assuming that would be the case once again, but i am beginning to wonder whether other markets might actually hold up ok, at least in dollar terms.

[Finster]

Re: dollars come home- implications?

... Personally, I tried the equities gig, buying and selling online. I dont have the stomach, nor mentality for it. I am concentrating on learning the PM sector, mining, and commodities ...

How do you play the "PM sector, mining" without equities?

The "PM sector" of what? Bonds?

[spunky]

Re: dollars come home- implications?

How do you play the "PM sector, mining" without equities?

The "PM sector" of what? Bonds?

Let me be clearer Finster, sorry. Precious metals ( PM ) specfically Gold and Silver in the sense of holding physcial product yourself.


I think it is important to understand how the mining sector works, major, players, where they are located and such; to better understand the physcial supply of silver/ Gold, not to invest in the company thru their stocks. Mining stocks are unique and dont respond typically, or act like other stocks of the S&P or DJI .


I would dabble in mining stocks if I had the spare money but I want to learn more about Forex and commodities futures trading, and concentrate, what few extra bonars I have there.

Of course Helicopter Ben spoke and said nothing except he knows for sure there will be no major disruption in oil from war/ terror nor any hurricanes and a warm , short winter. Kinda reminds me of the ole Johhny Carson late night show and his Swamee routine

[jg1]

Re: dollars come home- implications?

jk, I think that if the Japanese and Chinese are looking to get out of dollars, it's because they have lost confidence in the U.S. economy (the Fed money printing game is fine as long as creditors have confidence that debtors have wherewithal to pay, even if it's in inflated dollars). Thus, they'd have no interest in buying U.S. stocks or real estate.

Once the Japanese and Chinese sell their U.S. Treasuries (or fail to roll them over), they'll sell their returned dollars for Euros, yen, or gold, then make stock and real estate investments in countries with sounder prospects.

Just my sense of what may happen.

[jk]

Re: dollars come home- implications?

Once the Japanese and Chinese sell their U.S. Treasuries (or fail to roll them over), they'll sell their returned dollars for Euros, yen, or gold, then make stock and real estate investments in countries with sounder prospects.

actually, to cause a crisis they don't even have to sell or fail to roll over current holdings- it's enough if they just stop adding to their current holdings.

if they buy euros or yen or gold, who is selling these items? and what do those people/institutions do with the dollars thus received? unless they are buying those things from dollar-based holders, the problem is just shifted, not resolved. that's what i was trying to get at.

[Jim Nickerson]

Re: dollars come home- implications?

I just put up a poll asking how long the bonar may drop using the US$ Index.

In 1985, when the bonar, which then with little doubt was a more reasonably valued dollar, topped out it seems that a bright thing to do was to have divested oneself of it into foreign markets, which if one looks at the Nikkei then as a sort of proxy was relatively dirt cheap. Right now, though there may be some cheap markets somewhere, I cannot think of one, it seems if when the dollar was high the right thing was to put it into cheap markets, how can the same rationale be applied for bonar holders to be investing in foreign markets now?

the rise of emerging market valuations may be in part people and institutions looking to get out of the dollar. i think our equities will be going down substantially at some point, and historically if the u.s. market tanks every other equity market does the same. i've been assuming that would be the case once again, but i am beginning to wonder whether other markets might actually hold up ok, at least in dollar terms.

Experience, as I remember it, makes me agree with jk that if the US equity markets drop, then most international equity markets will too. For foreign markets to hold up in dollar terms suggests to me that the dollar would have to appreciate greatly while those markets go down. That happening is hard for my small mind to fathom. What could make the bonar reverse significantly thus making a US'er's holdings in foreign markets profitable?

investment implications would be to position in commodities, high-end real estate [are there any good reits in this sector? anyone care to make recommendations?], and companies associated with commodity production or capital goods. it would also imply buying foreign equities and foreign real estate. [anyone know good ways to participate in foreign real estate? i know there are a few mutual funds in this sector. anyone have insight into them?

Again, the notion of buying foreign anything when the bonar is so lowly valued makes no sense to me.

In 1985 when the dollar was at a high, I do not remember feeling any "wealth effect," though I was in Oslo at the exact moment of its high. In 1992, when the bonar was at its low, I do not remember feeling any "poorness effect." In both instances, living here and spending dollar/bonars was not felt. This supports the notion that a person buying and selling stuff in his/her own country doesn't "feel" the changes of the home currrency as reflected in exchange rates. Perhaps only foreign people with lots of their own money who are investment-savvy individuals would be looking to sell their appreciated holdings that may be further influenced by the gain from their currency's appreciation. If one is a European invested in a US fund or stock, would you be selling it now?

John Mauldin, in this Friday's note http://www.investorsinsight.com/thoughts.aspx wrote, "This week, while staying at the Helmsley in New York (and sleeping on one of the most uncomfortable mattresses I have experienced in years), I walked into the bar on Sunday night to get a drink before going to bed. Looking around, I noted there were 34 mostly middle-aged ladies in the bar and no men. Thinking this was somewhat odd, I asked one of them if there was some sort of convention. The pleasant accent that came back was from Ireland. It turns out that much of the hotel was occupied by ladies from Great Britain and Ireland on a shopping holiday."

So what are foreigners doing with their appreciated currencies? Mauldin's note suggests a microcosm is buying US stuff.

If one is a foreigner looking at the US now, is not the US a cheap market? Even we who read iTulip are exposed rather continuously to the fact the US markets though at nominal highs, are certainly not at true highs. What happens if foreigner holders of their own currencies are looking to divest themselves of it into foreign markets. Which foreign markets to holders of yen, Euros, Swiss francs are cheap?

All questions, no answers.