Currency Hedging Myth

Canadian ETF manufacturers reacted to the great Canadian dollar bull of 2004 through 2007 by attaching a currency hedge to most of their global and international offerings. One example is the iShares S&P 500 Index Fund (XSP) which seeks to replicate the performance of the S&P 500 Hedged to Canadian Dollars Index. According to iShares Canada “The S&P500 Hedged to Canadian Dollars Index is the S&P500 index with US dollar currency exposure removed, so that the returns of the S&P 500 stocks will not be impacted by changes in the US/Canadian dollar exchanges rates.

The ETF guys are responding to Canadian investor demand for currency hedging because of the great Canadian dollar bull of 2003 through to 2007. Basically a 4-year pop preceded and followed by years of flat price congestion which could drag of for several more years.

This is a clip from Nancy Woods (who used to be a GT letter subscriber), The Globe and Mail Published Friday, Aug. 19 2011, “If you invest in a gold ETF that is not hedged and the U.S. dollar strengthens (rises in value versus the Canadian dollar) you would lose some of your investment. If the US dollar weakens then your investment will gain simply from the currency change. Both these examples are irrespective of a change in the actual price of the ETF.”

This is a clip from Investoedia: “consider the performance of the S&P/TSX Composite during the second half of 2008. The index fell 38% during this period - one of the worst performances of equity markets worldwide - amid plunging commodity prices and a global sell off in all asset classes. The Canadian dollar fell almost 20% versus the U.S. dollar over this period. A U.S. investor who was invested in the Canadian market during this period would therefore have had total returns - excluding dividends for the sake of simplicity - of -58% over this six-month period.

Clearly since the Canadian dollar price peak of $1.10 in November 2007 there has been no benefit to owners of Canadian dollar hedged products over the past five years. Our chart is the monthly closes of US$ RIMM vs. the CDN$ RIM. Note in the period of 2003 through 2007 local U.S. investors in RIMM had better returns than did local Canadian investors in RIM due to the weaker US$. Note during the 2008 to date during a period of relatively flat CDN$ both CDN and US investors lost equally in terms of local currency. The lesson here is when we diversify by country was also need to diversify by currency

Saved by Elliott Wave

Once again I remind you that if you're ever lost and on a deserted road without a cell phone, grab paper and pen and begin an Elliott Wave count. Within seconds, a stranger will appear to correct your wave count. Ask this guy for a ride. The problem has always been where to begin the wave count.

Students of Elliott Wave will try to identify the bull phase of three advances (impulse waves) that are separated by two corrective waves to be a perfect five-wave Elliott bull market. The completed bull is then followed by a three wave A-B-C bear phase.

..

Our chart is a long term monthly plot of crude spanning about 15 years displaying the entire 1998 through 2011 secular crude bull. The first advance or wave (1) ran from the late 1998 low to peak at about mid year 2000. The first short corrective wave bottomed at (2) in early 2002. The second advance or wave (3) ran from the 2002 lows at (2) to the mid 2008 peak at (3). Note the 5-wave subdivision of the wave (3) advance.

The second corrective wave (3) to (4), while deeper than corrective wave at (1) to (2), never entered the space of the first impulse wave (!). The final advance or wave (5) ran from the 2008 lows to the final peak in early 2011 at (5).

The completion of the 1998 – 2011 crude secular bull is not likely the end of the world for the crude energy complex, but rather just a sign that the easy money has been made. Stock pickers will likely do better than sector indexing over the next few years. Next post we look at the precious metals complex.

The 100-Year Dow

The Dow Jones Industrial Average (DJII) is one of the oldest continual stock groups in the modern investing world. Actually the Dow Jones Transportation Average is the oldest (1984). The DJII was founded by Charles Dow in 1896 and represented the dollar average of 12 stocks from leading American industries. The original group of 12 stocks ultimately chosen to form the Dow Jones Industrial Average did not contain any railroad stocks, but purely industrial stocks. Of these, only General Electric currently remains part of that index.  Today the Dow is among the most closely watched U.S. benchmark indices tracking targeted stock market activity. Although Charles Dow initially compiled the index to gauge the performance of the industrial sector within the American economy the evolution of the modern multinational corporation has now made the Dow a global economic barometer.

Our chart is that of the yearly closes of the Dow Jones Industrial Average (DJII) spanning about 110-years. The lower histogram is a simple 10-year rate-of-change and the upper cycle overlaid on the Dow is the Coppock Curve which is a long-term price momentum or long cycle indicator used primarily to recognize major bottoms in the stock market. Very long term cyclic analysis displays important cyclic troughs in 1942 and 1982 along with a pending trough somewhere during the 2013–2014 time period.

These cyclic troughs tend to occur at the end of a secular bear of which we can identify the three as experienced by the Dow over the past 110 years. Most notable is the chirping of the professional bears that use the business media to preach their doom and gloom nonsense usually at the mid point of a secular bear. A doom and gloom message always attracts crowds.

The pending cyclic trough would effectively end the current 2000-2014 secular bear and introduce a long secular bull such as investors enjoyed during the 1942-1968 and 1982-2000 advances. Now is the time to be a long term investor and acquire quality growth companies and forget about that buy-and-hold is dead crap.