EURO IS IN DANGER OF DROPPING TO 14-YEAR LOW -- THE FALLING EURO, HOWEVER, IS PUSHING EUROZONE STOCKS HIGHER -- THE WISDOMTREE EUROPE HEDGED EQUITY ETF OFFERS A WAY TO BUY EUROZONE STOCKS WITHOUT LOSING MONEY ON THE EURO
EURO FALLS ON ECB... The ECB had some good and bad news for the Euro today. The ECB offered to extend its bond buying program for an additional nine months after next March. But it also announced that it was reducing the amount of bond purchases. The market interpreted the mixed message as somewhat dovish and sold the Euro. The 1% drop in the Euro is our main focus today. The daily bars in Chart 1 shows the Euro in a downtrend and nearing a retest of its November low. There's a lot riding on that retest of the 105 region. Chart 2 shows why. The monthly bars in Chart 2 show that the Euro is in danger of falling to the lowest level in 14 years. The US Dollar index (which trends in the opposite direction of the Euro) has already reached a 14-year high. Of the six currencies included in the Dollar Index, the Euro has the biggest influence (57%). The Japanese yen (which is also falling) is a distant second at 13%. More on that shortly. A falling Euro carries good and bad news for European stocks. First, it's good for stocks in that export-oriented region. But it's bad for foreign investors looking to invest in eurozone stocks. Which brings us back to the need for American investors to hedge against a falling foreign currency when buying foreign stocks.
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Chart 1
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Chart 2
WHY THE NEED TO HEDGE... My November 18 message explained why a falling Japanese yen would be good for Japanese stocks. But it also warned that a weak yen made it necessary to hedge out the risk of the falling currency. It further suggested that the best way to do that was through the Wisdom Tree Japan Hedge Equity ETF (DXJ). Since that day, the yen has lost -7% of its value against the dollar. At the same time, the DXJ has climbed 13% while Japan iShares (EWJ) have risen only 3%. The weaker performance for the EWJ is based on the fact that it's quoted in a stronger dollar. The green line in Chart 3 is a ratio of the DXJ divided by the EWJ. The stronger performance by the DXJ since the start of November coincides with a falling yen (red line). That's because the DXJ hedges out the negative impact of a falling yen, while the EWJ doesn't. That same principle holds true for American investors looking to invest in eurozone stocks.
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Chart 3
EUROPEAN STOCKS RALLY... Eurozone stocks continue to strengthen. The Stoxx Europe 600 Index is up more than 1% today and very close to a new high for the year. The eurozone's two biggest stock markets are already there. Chart 4 shows the German DAX Index trading at the highest level in a year after achieving a bullish breakout earlier in the week. Chart 5 shows the French CAC Index in a similar situation. Even Italian shares are rising. Chart 6 shows the Dow Jones Italy Stock index rebounding to a new eight-month high. It's the weakest of the three, but it's heading in the right direction. That's especially encouraging considering all of the nervousness over last weekend's Italian vote against constitutional reform. Which raises a big question for non-eurozone investors. How to buy eurozone stocks without the risk of being hurt by a falling Euro?
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Chart 4
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Chart 5
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Chart 6
WISDOM TREE EUROPE HEDGED EQUITY ETF... WisdomTree again offers a solution to the currency question. The blue line in Chart 7 shows the WisdomTree Europe Hedged Equity ETF (HEDJ) rising to the highest level since last December. That reflects higher stock prices in the eurozone. By contrast, the red line (which is much weaker) plots the MSCI Eurozone iShares (EZU). [The three biggest markets in the EZU are Germany (26%), France (25%), and 18% for Spain (which is up more than 2% today). Italy has a much smaller 1.5% weighting]. It's clear that the HEDJ (blue line) is doing much better than the EZU (red line). That can be seen more clearly by the rising HEDJ/EZU ratio (top of chart). The reason is simple. The HEDJ hedges out the negative impact of a weaker Euro. The EZU is quoted in U.S. dollars and lags behind when the Euro is weak. The WisdomTree ETF allows non-eurozone investors a way to profit from rising eurozone stocks (resulting from a weaker Euro) without being hurt by the falling local currency. Just like in Japan. The need for a currency hedge will become even greater if the Euro does fall to a 14-year low.
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Chart 7
DOW TRANSPORTS HIT NEW HIGHS ... The media has suddenly caught Dow Theory fever. The good folks on CNBC explained yesterday that a new record by the Dow Jones Transportation Average constituted a Dow Theory buy signal. In my view, that buy signal took place four weeks ago when the transportation index broke through a resistance line extending back to last October (see circle in Chart 8), which put both Dow averages in uptrends. A number of messages from early November pointed that out at the time, as well as noting that all transportation groups -- airlines, rails, and truckers -- were participating in the rally. I'm not quibbling with the view that a new record for the transports is a good sign for the economy and the stock market. I'm just quibbling on the timing of when the Dow Theory signal took place.
