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High dollar rewrites rules of investing

Matein Khalid

The 20 year highs in King Dollar and 18% rise in its trade weighted index in the past year has rewritten the rules of investing in the international financial markets. King Dollar has wrecked havoc with emerging market currencies and Third World sovereign bonds as any poor unlucky investor in Pakistan, Turkey, Lebanon, Sri Lanka and Egypt government bonds will attest. The World Bank estimates that as many as 70 countries in the EM/frontier markets will be unable to repay almost $100 billion in sovereign debt. A grim replay of the Latin American debt crisis and lost decade of the 1980’s will be reenacted on a global scale and there is no financial statesmen like Nick Brady or Jim Baker to defuse this geopolitical time bomb.

King Dollar can also create compelling bargains abroad for a cash flow yield obsessed stock picker like me. The Empire of the Rising Sun is a classic example with the Japanese yen at 144 and the Nikkei Dow still 40% below its 1990 bubble highs even though Japan Inc. has restructured, recapitalised its banking system, embraced (sort of) the cult of shareholder value and almost doubled its ROE/share buybacks. The TOPIX index yield is now 2.8% relative to a 10 year JGB yield of 0.25% while the yen is at least 20% undervalued on most PPP models. My strategy in Dai Nippon is to seek global brands, with yen costs, dollar revenues and cheap vals. This leads me to Toyota Motors, Hitachi and Suzuki Motors. This is the time to go deal hunting in Marunouchi, as our very own Princess Meg did in Shinjuku last month.

There is no shortage of value traps in Japan and even a 26% plunge in the yen in 2022 does not convert a corporate dog in Tokyo into a fairytale unicorn. I have been bearish on Big Tech due to its index dominance in a bear market as well as its negative correlation with King Dollar and exposure to Europe/China. The two big ideas here were to short Apple at 158 and Microsoft at 320. Apple is now 140 and Mr. Softy is 234 – both are headed lower.

Samsung and AMD proved it is too early to bottom fish in the chip carnage on Nasdaq. King Dollar will amplify the margin/earnings shocks that will gut the indices next year. This is the reason I expect index EPS to fall to 200 by mid-2023 with a 5% Fed fund rate and a 5% PCE converge to compress index valuation to 13X. Hence my 2600 index target.

The only money making sector for me on Wall Street is energy as long as the tensions between the US, Russia and Saudi Arabia escalate. Note that Apache Corp., a wildcatter in Egypt, offshore Surinam and the Gulf of Mexico has risen a stellar 40% in the past seven trading sessions even while the index has been in a Kamikaze dive. Just plug APA in your smartphone and you will grasp what I mean. Shukran Apache!


Also published on Medium.



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