The Dow Industrials in euros - 5-Jul-2008 - Generational Dynamics

Generational Dynamics Web Log for 5-Jul-2008

The Dow Industrials in euros

If Americans have it bad, pity the Europeans.

The following graph from the Alea blog shows the Dow Industrials from the point of view of somebody investing euros in Wall Street stocks:

DJIA in euros, 2001-Present

DJIA in euros, 2001-Present

A European investor in Wall Street prior to 9/11 would have lost almost 50% of his investment today, thanks to the falling value of the dollar against the euro.

Such an investor would have lost almost 30% just since last summer.

Things may get worse for foreign investors.

In its annual report, published last week, the Bank of International Settlements says that a disorderly decline in the value of the dollar cannot be ruled out:

"Beyond these global risks to the inflation outlook, the prospects for both growth and inflation in individual regions will also be affected by exchange rate movements. One source of concern is what might happen in the markets themselves. Against the background of a still wide US current account deficit and rising external debt levels, the decline in the effective value of the US dollar has to date been remarkably orderly. However, this need not be a guide to the future. Foreign investors in US dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely."

Such a disorderly plunge would have serious consequences.

Even for traders who invest in dollars, the stock market has plunged to 79% of its peak value in October. As we've written several times, this is related to the fall in corporate earnings since that time.

As regular readers know, every week or two I post the table of S&P 500 average corporate earnings estimates, based on figures from CNBC Earnings Central supplied by Thomson Reuters.

Here's the latest table for second quarter earnings:

  Date    2Q Earnings estimate as of that date
  ------- ------------------------------------
  Jan  1:              +4.7%
  Feb  6:              +3.5%
  Apr  1:              -2.0%
  Jun  6:              -7.3%
  Jun 13:              -8.1%
  Jun 20:              -9.0%
  Jun 27:             -11.3%
  Jul  3:             -12.4%

As you can see, the downward trend continues for another week. Each time earnings estimates fall, the price/earnings ratios (also called "valuations") go up. They've been pushed to stratospheric levels since mid-March, but they've started falling again in the last two weeks, accelerating the fall in the stock markets. (If earnings estimates are falling AND investors' target P/E ratios are falling, then the two factors multiply together to cause an accelerated fall in the market.)

Over the next 2-3 weeks, actual second quarter earnings for financial services firms will be announced. These will probably determine the short-range direction of the market.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (5-Jul-2008) Permanent Link
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Generational Dynamics Web Log for 5-Jul-2008 The Dow Industrials in euros

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Generational Dynamics Web Log for 5-Jul-2008
The Dow Industrials in euros