1. Dollar Index/Currency Exchange Fluctuations and The Value of International Bonds to a U.S. Investor: I mentioned in several earlier posts that I will try to manage the currency risk inherent in BWX, my foreign government bond ETF, by selling some when the dollar weakens and then buying those shares back after the dollar rallies. Morning Trades: Bought RJI, Sold DKQ, Bought Google/Pricing American General Finance bonds/OSM & Sallie Mae/Pared BWXThis is at best an imperfect process, but I do the best with the limited tools available to me as an individual investor. I mentioned that one chart that I will use to assist me in making decisions is the Dollar Index Chart.U.S. Dollar Index - Wikipedia, the free encyclopedia U.S $ INDEX (NYBOT:DX) Price Chart and Quote When the price on this chart moves up, the dollar is strengthening. I recently trimmed BWX after the dollar index fell to around 79 which is where it mounted a rally in mid December. I then sold 50 shares of BWX at $54.3. If the dollar continues to rally back to 86 to 88, I would expect BWX to have fallen in price, and I may then buy those 50 shares back . This trading process is based on a recognition that foreign government bonds are more risky to me than U.S. Treasuries, not due just to the credit risk and interest rate risk factors but to the sensitivity of those bonds to currency exchange fluctuations. The dollar index hit a low of around 78.5 on 6/3 and has rallied to around 80.6 near the NYSE close this afternoon. But if the dollar turns down again, and BWX rises to over 56, then I plan to eliminate my highest cost purchase by selling the remaining shares of the first lot purchased, so I am ready to swing either way.
In the past, most of my gains from owning foreign bonds has originated from currency exchange rates, with those gains caused by a fall in the value of the dollar, and some smaller gains have come from the long rise of the bond prices in local currencies due to the decline in interest rates in most developed nations over the years. At the present time, as with U.S. treasuries, the interest paid by major foreign governments is very low. If I am going to make any money by owning BWX other than a nominal dividend of 2 to 3%, I have to try and trade the exchange rate moves to some degree. I do not want to over do that however. BWX does have the benefit of being a non-correlated asset and does diversity my bond holdings.
Many financial gurus counsel against buying international bonds because of the currency risk. Since I am comfortable with that risk, I do not listen to their advice, but it may be appropriate for others.
2. Unemployment: On the front page of Yahoo Finance this afternoon, I saw a story claiming that treasuries sold off today because the jobs number was less bad than expected. Yahoo! Finance Another story claimed stocks were held back due to the bleak jobs numbers. Yahoo! Finance So I was a little confused. If the treasuries sold off because of a concern about an economic recovery leading to higher inflation or at least an end to the Fed's easing, then that conclusion drawn from today's jobs number should not be viewed as negative for stocks. After all, the reason that we are sitting in the 8000 range on the DJIA is due to a worldwide recession and the near collapse of the financial system. Maybe no conclusion can be drawn from the data today. A 1/2% leap in the unemployment rate to 9.4% is far from encouraging, no lipstick on that pig, and 345,000 job cuts in the month is still a very high number. The only positive spin is that job losses are a lagging indicator, and will continue generally even after a pick up in economic activity. The fact that the rate of loss is slowing down may indicate the worse is over. The bond market may have, therefore, gotten it right today, and the stock market was too timid. BND, the ETF from Vanguard for the Total Bond Market Index, fell 52 cents or .68%. TLT, the Ishares ETF for 20 year treasury, fell .76%. Interestingly, SHY, the ETF for the 1 to 3 Treasury, the one most sensitive to a change in the FED's easing policy, fell .66%, a large drop for that one. SHY Yahoo! Finance
One thing is for certain, however. Alan Abelson will not be confused by the unemployment number, and will find only confirmation for this perpetual negative feedback loop. I bet that he mentions it in his column tomorrow.
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