Alternatives to the Sinking Dollar

The Fed’s latest stimulus program, QE3, has boosted risky assets like stocks and commodities at the expense of the dollar. The greenback dropped 6.5% between late July – when investors became more certain the Fed would take action – through mid-September, a more precipitous decline than following the prior two rounds of stimulus. During that same time, the S&P 500 rose nearly 10%.

Behind the dollar’s decline was investors’ growing sense in midsummer that central banks on both sides of the Atlantic would take action. European Central Bank President Mario Draghi vowed to save the euro at all costs, sparking a rally in the currency. In the U.S., currency investors saw further stimulus by the Federal Reserve as increasingly likely and began to price in a devaluing of the dollar. As expected, the Fed launched its third round of so-called quantitative easing earlier this month, a program that will increase the money supply as the Fed buys mortgage bonds with money it has created.

The Fed’s aggressive moves to stimulate the economy spell long-term weakness for the dollar, many pros say. For them, it’s not too late to tweak portfolios to account for this decline. While various factors could cause the dollar to temporarily strengthen against the euro and other currencies — for example, mounting concern over the European debt crisis or escalating tensions in the Middle East could send investors running to the dollar as a safe haven — the currency’s long-term downward trajectory will continue, according to these dollar bears.

Many have looked to gold as the dollar began its slide this summer. Drew Kanaly, a financial adviser at Kanaly Trust in Houston, increased his clients’ allocations to gold through the SPDR Gold Shares exchange-traded fund.

Some have looked to capitalize on other currencies’ appreciation relative to the dollar. Donald Dempsey, a financial adviser in Williston, Vt., shifted part of his clients’ international bond portfolios out of the iShares JPMorgan USD Emerging Markets Bond fund and into the WisdomTree Emerging Markets Local Debt fund. The former gives investors exposure to international bonds but not their currencies, whereas the latter does not hedge out, or erase, the currency risk. Many emerging-market currencies have rallied recently, and the WisdomTree fund allows investors to benefit from this appreciation along with any changes in the underlying bonds’ prices (in the opposite direction, investors get hurt if the currency declines).

Anthony Welch, manager of the $12.8 million Currency Strategies fund, increased his exposure in mid-July to the Canadian and Australian dollars, which have also recently outperformed the greenback. Both countries’ economies are heavily tied to commodities, many of which are priced in the U.S. dollar and tend to rally when the dollar declines. Over the past five years, the Canadian and Australian dollars have risen against both the euro and the U.S. dollar.

To be sure, not all pros favor adjusting portfolios based on market direction. “Typically, advisers tweak things at exactly the wrong time, like their clients,” said Rick Kahler, president of Kahler Financial Group in Rapid City, S.D. Kahler gives his clients exposure to foreign currencies but doesn’t change the mix based on currency moves.

Google Stock Rises
as Social Stocks Dive

Google marked its 14th birthday Thursday with its shares on pace to close at a new high mark — capping a run of 33% over the last three months.

Google was last trading up a fraction at $755.30. The stock closed at a high of $753.46 in the previous session, according to FactSet. Until mid-July, the shares were negative for the year, but began a sharp climb upwards following its July 19 second-quarter report.

That investors have gifted the Web search giant with such strong gains during a meltdown of social networking plays such as Facebook, Groupon, and Zynga is notable, given how Google was perceived last year as relatively stodgy compared to these upstarts — many of whom lured Google employees away with the promise of lucrative stock options that are now largely underwater.

There are other reasons for the improved performance as well, including improving search trends, easing worries on the impact of its Motorola Mobility acquisition, and Google’s growth potential in the mobile market.

But some analysts believe that part of the reason for Google’s recent run could be that it has come to be seen as a mature player and somewhat safe bet when it comes to Internet firms.

“It’s a flight to safety,” Susquehanna analyst Herman Leung told MarketWatch.

In the wake of souring sentiment on new players such as Facebook Inc., Zynga Inc., and Groupon Inc., investors focused on Web companies are shying away from new and unproven business models.

The most visible example is Facebook, once considered a highly-serious threat to Google, whose stock has plunged by 36% in the last three months — and is off more than 47% from its IPO price of $38 set during its controversial debut. Zynga’s shares have dropped 49% and Groupon has shed 52% in the last three months.

“There is a lower appetite for high-risk business models and a shift to business models that have proven themselves with a longer track record,” Leung added. “Appetite for untested business models has pulled back.”

Baird analyst Colin Sebastian also told MarketWatch that “in general, yes, in an uncertain time — whether it be the macro backdrop or sector specific issues — it is expected to see a flight of capital to the proven and more predictable companies, such as Google.”

BGC Partners analyst Colin Gillis also said investors are turning to “safer quality names,” mainly Google and Apple. Of the two, he told MarketWatch, Google has an advantage.

“You may not be buying an iPhone everyday,” he said, “but you’re probably searching every day.”

On top of that, there are signs that Google’s core business is improving. Analysts note indications of brightening trends in costs-per-click, the prices paid for Google’s online advertising. Investors had been worried about the opposite trend due to a shift to mobile searches and the growth of users in emerging markets — two trends that hurt Google’s ability to command higher ad prices.

One-Fifth of U.S. Households Posses Student Debt

A record number of American households carry student loan debt, while the average outstanding loan balance is the highest it's ever been, according to a new report from the Pew Research Center. The Pew analysis found that about one out of five (19%) households, or around 22.3 million, were burdened with student debt in 2010. That figure is more than double the 9% it was in 1989, and it marks a big jump from 15% in 2007.

Here are some of the more alarming figures from the report:

- The average outstanding student loan balance rose from $23,349 in 2007 to $26,682 in 2010.

- Most debtor households had less than $50,000 in outstanding student debt in 2010. But the share of households owing high amounts has climbed: In 2007, 10% of debtors owed more than $54,238. By 2010, 10% of them owed more than $61,894 (adjusted for inflation).

- Among households headed by someone younger than 35 years old, a record 40% owed student debt in 2010.

Student loan debt hit $904 billion in the first quarter of 2012, a $30 billion increase from the previous quarter, and up from $241 billion a decade ago, according to the Federal Reserve Bank of New York's quarterly report on household debt. The Consumer Financial Protection Bureau puts total student loan debt above $1 trillion.

One added twist in this report shows the groups impacted most by the debt increases are at opposite ends of the income spectrum — the poorest and wealthiest households. In 2010, the lowest fifth of households by income owed 13% of all outstanding student debt, up from 11% in 2007. For the richest fifth, that figure rose from 28% to 31% over the same period.

Another interesting item from the report is that student debt is rising while households are reducing their other debts. Student debt rose from 3% of outstanding total debt owed by households in 2007 to 5% of all debts in 2010. Meanwhile, average household debt fell from $105,297 in 2007 to $100,720 in 2010, a 4.3% drop.

Driving the rise in outstanding student debt, says Richard Fry, a senior economist at Pew who authored the report, are several factors, the first of which is the sharp growth in college enrollment during the Great Recession.

- There were 18.2 million students enrolled in college in the fall of 2007, and 21 million in 2010 — a 15% increase, the report says.

- College students are increasingly borrowing to finance their education, and borrowing in greater amounts. In 2009-10, 51.1% of full-time, first-time undergraduate students had a student loan, an increase from the 43.5% of such students in 2006-07.

- The average public, four-year college graduate had accumulated $22,000 (in 2010 dollars) in debt upon receiving a bachelor's degree in 2009-10, up from $20,500 (in 2010 dollars) in 2006-07.

U.S. Government: Job Growth was Underestimated

The U.S. labor department announced that it has likely underestimated job creation in the year ended March 2012.

In a press release, the department said it would likely raise total employment by about 386,000 or 0.3% in the year from April 2011 to March 2012.

“The recovery was not as disappointing as we thought. It was on much firmer footing,” said Justin Wolfers, an economics professor at the University of Michigan.

The revisions translate into a bit over an average of 32,000 additional jobs per month, which would bring the average monthly job growth during that span up to 194,000 from 162,000. By contrast, the economy has added an average of just 94,000 jobs in each of the five months since March. The revisions say nothing about the last six months.

U.S. stocks opened higher on the brighter-than-expected picture on the U.S. job market. The Dow Jones Industrial Average was recently up 47 points to 13,461.

Each year, the government recalibrates its employment survey to match actual employment data from quarterly tax reports filed by employers. The exercise captures the creation of new businesses and also when business shut down, economists said. The final benchmark revision will show up in the data when the January 2013 figures are reported in early February.

The initial estimates of private employment suggest an upward revision of 453,000. This includes an additional 85,000 jobs in construction, and 145,0000 to trade, transportation, and utilities.

“It shows the private sector is a little healthier and generated more jobs. We’ll take anything we can get,” said Diane Swonk, chief economist at Mesirow Financial.

There were some downward revisions as well, including 25,000 fewer manufacturing jobs and 67,000 fewer government jobs.

“We have found that annual benchmark revisions tend follow the business cycle, and an upward revision of 386,000 is in line with the solid but not spectacular GDP growth so far in 2012,” said Cooper Howes, an economist with Barclays Capital, in a note to clients.

But Ellen Zentner, economist at Nomura Securities, noted that the direction of the revision was positive news.

“It was not long ago that the preliminary estimate for the annual benchmark revision in 2009 was a loss of 902,000 jobs,” she noted.

In other reports, the government said orders for durable goods plunged 13.2% in August.

Jobless claims were reported to have dropped a larger-than-expected 26,000 to 359,000 in the latest week.

And the government cut second quarter U.S. growth to 1.3% from the prior estimate of 1.7%. This was a slowdown from the 2% growth rate in the first quarter.