A Strong versus a Weak Dollar

A strong dollar makes imports cheaper. A strong dollar also leads to more purchases of imports versus products manufactured at home. This has led to a decline of US industry and a negative balance of payments. The decline of US industry has led to a decline in middle class jobs and the taxes that these jobs used to support. An overly strong dollar leads eventually to a weaker US economy. A weaker dollar will lead to a more competitive American economy and result in more jobs back home, more middle class jobs, and more taxes paid to the US treasury. But what does this have to do with investing for a devalued dollar? If the dollar goes down in value, the eventual result could well be a resurgence of American industry.

Where Things Are and Where They Are Headed

The US economy has been in a mess. The immediate cause is the Great Recession of 2008 and onwards. Reasons for the recession include excessive government spending. Reasons also include short sighted investing. The ever more common practice of reading the market to gain short term profits takes necessary capital out of play. In our article, Investing and the Continuing Fiscal Cliff Drama, we state that the main problem for investors today is that the investing future is hard to see due to continual infighting on Capitol Hill. However, the long term future may not be that hard to see. The central features of the US recovery have been the Bernanke Doctrine, the policies of the US Federal Reserve as outlined by its chairman, Ben Bernanke and continued spending by the federal government despite mounting deficits. It may well be that the point of all this is to devalue the American dollar. This would reduce the value of a trillion dollars in dollar reserves held by China. It would make the practice of buying dollars to prop it up artificially ever more costly. This pair of policies is likely to reduce the value of the dollar over time to a point at which American industry revives, imports fall, and more middle class jobs generate sufficient taxes to balance the federal budget. Investing for a devalued dollar may well have to do with investing in manufacturing stocks in the good old USA.

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Companies with Cash in the Bank

Investing in companies with cash is always a useful strategy. And, many US based large cap companies have lots of cash. They simply are unsure of how fast they want to invest that cash in new ventures. Companies with cash have a nice fat margin of safety. The fact that these companies have cash tells us that that they are making money. Provided that they continue to make money they have a good intrinsic stock value. Then the only issue is how much you have to pay for these stocks. Look for low to fairly priced stocks in companies with cash and do not fret over the short term news.

Find Bargains when the News is Bad

With our discussion about margin of safety and intrinsic stock value in mind even the long term investor can shop for bargains. Look at Germany, for example, in the midst of all of the dismal economic news on the continent Germany posted a positive balance of payments. Not every country and not every company is doing badly during the later days of the worst economic recession in three quarters of a century. Look for where sales are good. Look for new products. Look for stocks that are unfairly punished by bad economic news. Then, as weaker manufacturing in the US drives stocks down look for bargains in picking large caps, picking small caps, and picking penny stocks. The issue comes down to knowing what penny stocks to watch and which large cap stocks have hidden value. Do you homework and pick up some bargains as weaker manufacturing in the US drives stocks down.

Find Unique Stocks with Unique Products

As weaker manufacturing in the US drives stocks down one of the big Pharma companies saw it stock price rise. It turns out that Eli Lilly is encouraged by its research into a new drug to treat Alzheimer’s disease.  Find a viable treatment for a devastating disease that affects over twenty-five million people and people will beat a path to your door with money in hand. High cost of entry businesses, businesses with a captive clientele, and businesses with patents on profitable products prosper even when the economic news is bad such as when weaker manufacturing in the US drives stocks down. Learning how to invest in the stock market during hard economic times can be profitable over the long term.

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A closer look at the ISM report shows that new orders fell dramatically from an index of 60.1 to an index of 47.8. However, employment changed only slightly. Inventory was down a little (46 to 44). And, prices have been falling with an April index of 61 falling to a May index of 4.5 to a June index of 37. The first response to this news may well be that the manufacturing contraction threatens investments in new plants and equipment. Manufacturers tend to avoid long term investment when times are uncertain. That would mean longer factory hours, overtime, and fewer new employees. However, this approach often leads to more retained profits which can help the bottom line for stock prices. Regarding personally held stocks, the manufacturing contraction threatens investments in the long term only if the Euro Zone economic collapse continues followed by the breaking of the Chinese real estate bubble, and a continued fall in US manufacturing. We have commented before that the long term Euro Zone investment outlook may be good once the EU gets its economic act together. The same may be true of the USA. In each case the route out of trouble involves printing money to pay off debt and devaluing the currency. This will, in the long run, make both the EU and USA more economically competitive.

While the current manufacturing contraction threatens investments in the short term, investors will want to look at the long term, do repeated fundamental analysis of individual stocks and closely follow the ISM and other data for indications of a longer term recovery. The world may or may not be heading back into the second dip of the worst recession in three quarters of a century. If that is the case it could lead to social as well as economic chaos in Europe and even in China. Investors will be wise to go forward with balanced portfolios, an adequate amount of cash, and some investments in commodities as currencies weaken.

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