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My Writing |
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From the Nov. 21, 2004 Break Out Report
The Death of the Dollar (Yankee that is!)
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Index Comparisons as of Nov. 12, 2004 |
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TSX |
Dow |
NASDAQ |
POG |
XAU |
CDN $ |
YTD |
8.22% |
0.81% |
4.09% |
5.34% |
-0.23% |
8.35% |
2 Years |
40.55% |
25.67% |
54.52% |
36.22% |
60.61% |
31.99% |
3 Years |
23.15% |
10.31% |
13.33% |
56.54% |
98.74% |
34.32% |
4 Years |
-3.29% |
-0.60% |
-31.15% |
65.49% |
151.37% |
29.58% |
5 Years |
18.21% |
-2.14% |
-35.26% |
50.49% |
55.26% |
22.56% |
What’s interesting here is that while the US markets are often considered by Canadian investors as the place to make substantial gains, the TSX Composite Index has outperformed both the Dow and the NASDAQ for the one year, three year and five year terms. In fact, over five years, the TSX is up 18.21% while the Dow and the NASDAQ are both still in the red with the NASDAQ down over 30% for both the four year and five year terms. And a recent report showed that if you strip out that dog named Nortel from the TSX Index, it is now hitting all-time new highs.
The big winner has been the XAU which, although still in losing territory for the year-to-date as of Nov. 12th, has outperformed every other metric in all other time frames noted above.
But wait!!! The above is misleading. Why? Because each is calculated on its own terms. The TSX is valued in Canadian dollars and its change is relative to itself. For US investors who put their money in the TSX, their gains are magnified by the gain in the Canadian dollar. For Canadian investors who put their money in the US market, their gains are diminished and their losses magnified by the currency differential.
And even the fantastic gains made by the price of gold and the XAU are diminished as a result of the currency differential as both are traded in US dollars. The implications for Canadian investors are significant as the US dollar continues to slide.
One of the important implications for Canadian stocks is that companies who export heavily to the US market will face a price squeeze. They’ll either have to lower prices or lose export business. This could significantly affect the bottom line and the stock price.
One of the huge factors in the booming Canadian economy are the resource industries. Oil companies and gold mining companies are obvious examples. Both commodities are priced in US dollars. And while the jump in oil and gold prices has been good for these companies, to the extent that their operations are in Canada or in countries whose currency is appreciating relative to the US dollar, these gains will be mitigated. For net gains to be made, the commodity prices must increase faster than the US dollar is sinking.
Since we publish in Canada, the table below shows our first table recalculated in Canadian dollars.
Index Comparisons in Canadian Dollar Terms as of Nov. 12, 2004 |
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TSX |
Dow |
NASDAQ |
POG |
XAU |
US $ |
YTD |
8.22% |
-6.98% |
-3.95% |
-2.81% |
-7.94% |
-7.73% |
2 Years |
40.55% |
-4.80% |
17.05% |
3.19% |
21.67% |
-24.25% |
3 Years |
23.15% |
-17.90% |
-15.65% |
16.52% |
47.93% |
-25.57% |
4 Years |
-3.29% |
-23.31% |
-46.88% |
27.69% |
93.95% |
-22.84% |
5 Years |
18.21% |
-20.16% |
-47.18% |
22.77% |
26.67% |
-18.42% |
To create the table we simply converted all US dollar figures to Canadian dollars before calculating changes. For example, the US dollar was worth $1.5742 Canadian on Nov. 12, 2002. The Dow was at 8386.00. In Canadian dollars it was at 8386.00 X 1.5742 = 13,201.24. On Nov. 12, 2004, the US dollar was at $1.1925 Canadian and the Dow at 10,539.01. That made the index 12,567.77 in Canadian dollar terms. Even though the Dow was up 25.67% in US dollars, in Canadian dollars it was down 4.80%. A Canadian investor who bought the Dow on Nov. 12, 2002 would be sorely mistaken if he believed he was ahead 25.67%. He was actually in the red! The Dow would have to be at 11,070.22 to just break even!
Now this is quite a difference from our first table. As far as stock exchange indexes goes, the TSX handily beat the Dow and the NASDAQ in all time frames. Over two years, the TSX has done twice as well as the NASDAQ. Even gold and the XAU have failed to beat the TSX for the year-to-date and two year periods when converted to Canadian dollars. Longer time frames for gold have fared better.
This doesn’t mean that investing in US stocks is a bad idea. If you are a short term trader and a good stock picker, there are certainly gains to be made. And if you’re an options trader, the US options market offers a much larger variety of optionable stocks with substantially more volume and liquidity.
The big question is, will the US dollar continue to slide? As long as the US government fails to come to grips with its massive debt and deficit, the US dollar will continue to sink. With Dubya back in the White House, that is likely to be the case.
Several prominent commentators have come out predicting a continuing decline in the US dollar. A headline in Friday’s Financial Post cited James Grant, founding editor of Grant’s Interest Rate Observer. “Grant calls US dollar to keep falling,” it read. Grant noted Thursday that Russia is facing a 12% inflation rate partly because of its policy of printing rubles to buy dollars to keep competitive. But like the Chinese man on the street, Russia may soon pull the plug on this policy. If Russia and other buyers of US debt paper call it quits, US inflation will rise even faster than it is now as imports become increasingly expensive.
In fact, currency analyst Jim Rogers, author of Investment Biker, thinks the Canadian dollar will continue to gain and will top out at around $1.06 US. That’s right! Rogers thinks the Canadian dollar some day will be more valuable than the greenback! Where would you prefer to be invested?
Update May 26, 2007: As an historical lookback, the above article remains interesting. And it remains relevant because the Canadian dollar has climbed to 30 year highs against the US dollar. Since November 2004, however, the Dow has soared 30% and the NASDAQ has done the same, albeit in a much more choppy fashion. The price of gold is up around 50% and the XAU up around 30%, lagging the price of gold. The TSX, meanwhile, has soared well over 55%. In US dollar terms, since Nov. 12, 2004, the date used for the data in the article above, the TSX has climbed 74.12%.
Update Jan. 21, 2013: The Canadian dollar climbed above par briefly towards the end of 2007. It dropped back to US$0.80 in the market crash of 2008, then climbed steadily back to par again towards the end of 2010. It has fluctuated within a few cents of par ever since. The US National Debt has continued to soar. The future remains uncertain. Chart at bank of Canada website
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