Sunday, July 06, 2008
The Dow Jones Index Priced In Euros
Came across this very interesting chart while surfing some financial websites. The chart is Dow Jones index but instead of being priced in USD, it was priced in Euro. This effectively reflect how the Dow looked to investors holding Euros. Some observations:
1) In the eyes of Euro holders, the Dow has lost 50% in value sonce 2002. That is a major valuation shakeout.
2) If euro holders were to be getting the funds flow like petrodollars gushing fountain, you can bet that the cross border M&A would have been very aggressive to buy US companies.
3) Still, American listed companies still look "cheap" in the eyes of euro investors. Once they perceive that the USD has finished falling, some rapid M&A activity will signal a possible bottom fishing for cash rich companies flushed in euros.
4) On the same note, the reverse can be true, i.e. American listed companies flushed with USD may find foreign companies a lot more expensive, and may be reluctant to venture abroad to grow their operations via international M&A.
5) The USD and Dow are paying big time for the excessive money supply growth plicies for the past 7-8 years, thanks largely to Greenspan. Bernanke is basically cleaning up the mess Greenspan left behind - not my favourite Fed chairman by a proverbial mile.
6) However, one final point, the chart also reveals that the Euro's strength has been a bit over the top. If you compare the Euro vs non-USD growth economies' currencies, the Euro has appreciated more than the latter group as well. The "expensive Euro" may have helped to deal with imported inflation, but international competitiveness has also been affected. The Eurozone could be in for a flattish period of growth, and pricing themselves out of many products and services.
7) What was most significant is that the "cheap value" now had been recorded back in early 2003 as well, where the market subsequently rebounded significantly, are we there yet? Looks mighty close.