Uneven U.S. Recovery
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Even Bloomberg does it sometimes. Bloomberg is my favorite financial website. The global perspective is very helpful, and the writers tend to avoid hype and speculation.

But every now and then, even Bloomberg will pen one of those headlines that make my skin crawl. Today’s was: Dollar Trades Near 6-Week Low on Signs U.S. Recovery Is Uneven.

What’s wrong with that? Well mainly, there aren’t many surprises coming from the U.S. economy right now. I suppose you could call yesterday’s weak consumer confidence number a surprise. After all, spending has been very strong through the holiday season.

But consumer confidence is a notoriously fickle number, and it’s not like stocks took a nosedive after it was announced.

*****Currencies don’t trade in a vacuum. They trade based on relative value compared to other currencies. In other words, if you want to buy Japanese yen, you usually have to sell whatever currency you have to make the conversion.

So if the U.S. dollar is weak, it’s usually a good idea to see what else is going on in the world, rather than assume the dollar is trading on U.S. data alone.

The New Zealand and Australian dollars were stronger in overnight trading. Taiwan may raise interest rates, so its currency was higher. Even Sweden’s krona was up on positive trade balance news.

But the big catalyst for the U.S. dollar may still be the Chinese yuan. China raised interest rates on Christmas Day. Good. They needed to. China also needs to let the yuan revalue.

And while there is no force that can compel China to revalue the yuan, traders are speculating that another yuan revaluation will be part of China’s anti-inflation actions.

There’s no doubt that a stronger yuan would mean a weaker dollar. And for once, that dollar weakness would be the result of market forces instead of Fed policy.

*****Let’s also not forget that Fed policy is inflationary for China, due to the currency peg. Some have speculated that Fed policy is, in part, designed to pressure China on its currency.

*****Allstate (NYSE:ALL) has joined the ranks of those suing Bank of America/Countrywide for selling toxic mortgage backed securities. Goldman Sachs, Blackrock and even the New York Fed are also suing to get their money back.

To me, this is beyond absurd. These companies, and even Bank of America itself, went gaga to buy these securities because of the yield. To now attempt to claim fraud and get money back is nothing more than finger-pointing. We’ve all suffered from the real estate crash. And it follows that we must also accept the consequences and move on.

*****Yesterday, I discussed the possibility that a correction for stock prices may be looming as we head into 2011. But I want to emphasize that we have yet to see any signs that a reversal is coming.

Stock valuations remain reasonable, and economic data has been steadily improving.

Stocks must correct at some point. But if you’re focused on quality stocks with strong fundamentals, then any correction should be viewed as a buying opportunity.

Posted 12-30-2010 1:43 PM by Ian Wyatt