FOREIGN EXCHANGE (FOREX) - up to FOREX:132, 12/17/04
FOREX #board-2236
12/15: (FOREX: 128) (*COMMENT*)
I have a kindergarten question. It's a kindergarten question because I've studiously avoided learning to think like an accountant (to my detriment, of course). Thus, I'm ill-equipped to think in international terms.
If, on January 2nd: 1) I lived in Belgium, where my native currency was the Euro 2) the Euro/USDollar exchange rate were 1:1 3) I bought 100 shares of JUNK (a U.S. conglomerate with great prospects, trading on NASDAQ) at $20.00/share.
I would pay 2,000 Euros for my JUNK holding
If, on July 2nd:
1) I still lived in Belgium, using Euros
2) The Euro/USDollar exchange rate were .9 Euros to the dollar
3) JUNK had appreciated to $21.00/share
Wouldn't the value of my investment have fallen to 1,890 Euros. Wouldn't my "profit" of 100 dollars actually be a loss of 110 Euros?
If this is true, why would a Belgian invest in a stock in the U. S. market? Is it some kind of play on the idea that, if the U. S. dollar is weak European industry is going to suffer?
I guess, if you are sharp enough to buy U. S. securities when the dollar is weak you have the possibility of a great return, IF the company you invest in does well AND the dollar appreciates. Sounds like one of those circus feats, where someone rides two horses with one foot on each.
Whew. Tough.
(*END*)
it's actually not a question easy to answer. Of course, your calculations are right. The profit of 100 USD would be a loss of 110 Euros.
The bad thing here is, not only is your USD profit affected by the weakening USD, but also your inital investment looses value. That is really painfull when the USD weakens 40%.
The Belgian would only invest in a US stock market, when he expects that his profits on stocks will outweight the loss he suffers from the weaking USD. So if he expects the USD do fall 40%, his stocks need to make at least 67% profits for him/her to break even. That is already bad, but it can get even worse.
Of course when the USD appreciates and the Belgian holds a loss on the stock, he could get out with a profit in Euros.
And now comes the hard part, where it is impossible to give a straight out answer. A changing currency not only changes the value of your investment but also the perception of it!!!
For example, the USD dropped 40% and foreign investors become reluctant to actually put more money into the US stock market or even start to take their money out. Therefore, your stock is going to drop even more. A deadly spiral.
On the other hand, when the USD value isn't dropping too fast/much, a weaker USD might attract more capital into the stock market, since those stocks are cheaper to buy for foreigners.
Which one actually is stronger depends on many factors being all connected to each other. E.g. inflation, earnings, interest rates, etc.
The same goes for other securities. For example bonds or treasuries where the yield is important. Yesterday the FOMC highered the interest rate to 2.25% in the US, in Europe it stands at 2%. I also believe the yields on US bonds are at the moment higher than on EURO bonds. That means US bonds are cheaper than EURO bonds. Now, normally that yield differential would immediately vanish because of arbitrage. Traders would sell EURO bonds and buy US bonds until the yield is more or less the same. Because of this a lot of money would flow into the US and the USD would appreciate. But at the moment it simply doesn't. Why?, because everybody is just so afraid to go for this arbitrage play and loose a lot of money when the USD drops further.
That leads us the next point essential for the survival in the currency market. The big momentum. It is a strong force that overrides fundamentals many times. And because of this you are actually not a sharp person when you buy US securities when the USD is weak. It probably will be even weaker in the future. You are only a sharp person when at least the medium term trend, if not the longer term trend, of the USD is strenghtening. And only then.
I am myself not the sharpest person at the moment, since I keep a small portion of my portfolio in US stocks since years.
And to your last question. A weak dollar doesn't necessarily let the EU industry suffer. Some companies are affected negativly some positively. You also cannot say the export industry is only affected negativly. First they can hedge their contracts, second they can buy cheaper resources on the world market, and third if they have a contract to sell their product over a long time period with a fix price in Euros they have nothing to worry about.
So, I hope I answered your question a little, although I have to admit the topic is actually more complex...
FOREX #board-2236
12/15: (FOREX: 128) (*COMMENT*)
I have a kindergarten question. It's a kindergarten question because I've studiously avoided learning to think like an accountant (to my detriment, of course). Thus, I'm ill-equipped to think in international terms.
If, on January 2nd: 1) I lived in Belgium, where my native currency was the Euro 2) the Euro/USDollar exchange rate were 1:1 3) I bought 100 shares of JUNK (a U.S. conglomerate with great prospects, trading on NASDAQ) at $20.00/share.
I would pay 2,000 Euros for my JUNK holding
If, on July 2nd:
1) I still lived in Belgium, using Euros
2) The Euro/USDollar exchange rate were .9 Euros to the dollar
3) JUNK had appreciated to $21.00/share
Wouldn't the value of my investment have fallen to 1,890 Euros. Wouldn't my "profit" of 100 dollars actually be a loss of 110 Euros?
If this is true, why would a Belgian invest in a stock in the U. S. market? Is it some kind of play on the idea that, if the U. S. dollar is weak European industry is going to suffer?
I guess, if you are sharp enough to buy U. S. securities when the dollar is weak you have the possibility of a great return, IF the company you invest in does well AND the dollar appreciates. Sounds like one of those circus feats, where someone rides two horses with one foot on each.
Whew. Tough.
(*END*)
it's actually not a question easy to answer. Of course, your calculations are right. The profit of 100 USD would be a loss of 110 Euros.
The bad thing here is, not only is your USD profit affected by the weakening USD, but also your inital investment looses value. That is really painfull when the USD weakens 40%.
The Belgian would only invest in a US stock market, when he expects that his profits on stocks will outweight the loss he suffers from the weaking USD. So if he expects the USD do fall 40%, his stocks need to make at least 67% profits for him/her to break even. That is already bad, but it can get even worse.
Of course when the USD appreciates and the Belgian holds a loss on the stock, he could get out with a profit in Euros.
And now comes the hard part, where it is impossible to give a straight out answer. A changing currency not only changes the value of your investment but also the perception of it!!!
For example, the USD dropped 40% and foreign investors become reluctant to actually put more money into the US stock market or even start to take their money out. Therefore, your stock is going to drop even more. A deadly spiral.
On the other hand, when the USD value isn't dropping too fast/much, a weaker USD might attract more capital into the stock market, since those stocks are cheaper to buy for foreigners.
Which one actually is stronger depends on many factors being all connected to each other. E.g. inflation, earnings, interest rates, etc.
The same goes for other securities. For example bonds or treasuries where the yield is important. Yesterday the FOMC highered the interest rate to 2.25% in the US, in Europe it stands at 2%. I also believe the yields on US bonds are at the moment higher than on EURO bonds. That means US bonds are cheaper than EURO bonds. Now, normally that yield differential would immediately vanish because of arbitrage. Traders would sell EURO bonds and buy US bonds until the yield is more or less the same. Because of this a lot of money would flow into the US and the USD would appreciate. But at the moment it simply doesn't. Why?, because everybody is just so afraid to go for this arbitrage play and loose a lot of money when the USD drops further.
That leads us the next point essential for the survival in the currency market. The big momentum. It is a strong force that overrides fundamentals many times. And because of this you are actually not a sharp person when you buy US securities when the USD is weak. It probably will be even weaker in the future. You are only a sharp person when at least the medium term trend, if not the longer term trend, of the USD is strenghtening. And only then.
I am myself not the sharpest person at the moment, since I keep a small portion of my portfolio in US stocks since years.
And to your last question. A weak dollar doesn't necessarily let the EU industry suffer. Some companies are affected negativly some positively. You also cannot say the export industry is only affected negativly. First they can hedge their contracts, second they can buy cheaper resources on the world market, and third if they have a contract to sell their product over a long time period with a fix price in Euros they have nothing to worry about.
So, I hope I answered your question a little, although I have to admit the topic is actually more complex...
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