What a strong dollar means for U.S. stocks...

What a strong dollar means for U.S. stocks... Selling Microsoft, buying Southwest... Doc Eifrig on today's economy... Large investors are buying Nigeria and Ghana... How to learn "The Eifrig Method" this week...
 

 Will the strong dollar destroy U.S. businesses?
 

If you've been reading the headlines today, you'd think so. Wall Street analysts are predicting S&P 500 firms will have the largest annual earnings decline since the third quarter of 2009, according to the Wall Street Journal.
 

In September, analysts expected S&P profits to grow 9.5% in the first quarter versus the same period a year prior and 11.6% for all of 2015, according to financial data firm FactSet as cited by the Journal. Today, analysts expect first-quarter profits to decrease by 4.9%... And they expect full-year 2015 profits to increase just 2.1%.

Mind you, we've never given analyst projections much weight. But it is important to consider whether a soaring dollar will hurt U.S. businesses.
 

 As a whole, these analysts are taking money out of multinational firms that derive a significant portion of their sales abroad (like Microsoft, which generates half of its sales from overseas). All else equal, overseas consumers can't buy as much U.S. product because of their weakened currencies. So U.S.-based firms that do a lot of international business, like Microsoft, suffer.
 

The analysts are putting that capital to work in small-cap stocks that derive the vast majority of sales domestically. Southwest Airlines, for example, generates less than 2% of its sales from overseas.
 

Overall, S&P 500 companies generated 46% of their sales overseas. Companies in the small-cap Russell 2000 Index generated just 19% of sales outside of the U.S.
 

 So analysts think U.S. firms will see the biggest profit drop since the third quarter of 2009. What has happened to the market since then?
 

 

 The other side of the argument is that a strong dollar means the U.S. economy is improving... and we'll see domestic growth.
 

Likewise, a strong dollar puts downward pressure on inflation. As the prices of imported goods fall, domestic producers are forced to cut prices to compete. That leads to lower prices and more purchasing power across the board for the U.S. consumer.

This scenario also means the Federal Reserve, which is fighting like mad for inflation, will stay accommodative longer.
 

 In the end, as True Wealth Systems editor Steve Sjuggerud pointed out, the direction of the dollar doesn't matter all that much for stocks...
 

The dollar is up 20% over the past 12 months. Based on history, the dollar has only increased 10%-plus over 12 months 14% of the time since 1971. On average, stocks did NOT fall over the next year, as the financial news would have you believe. Instead, the stock market increased by 10% a year after the dollar had those massive moves.   Since 1971, the typical one-year move in stocks was 7.2%. So stocks actually outperform a year after the dollar has soared.   S&P 500 Annual Return All Periods 7.2% Dollar Uptrend 6.4% Dollar Downtrend 7.9%

Since 1971, the direction of the dollar has only meant about a difference of about 80 basis points (0.8%) in the return of the S&P 500.
 

 I also asked Dr. David "Doc" Eifrig where he weighs in on the debate. He told me the following over the phone...
 

The U.S. economy is strong. And I think we'll see internal growth here. If you have a manufacturing business in the U.S., given the strong dollar, you can now buy parts and supplies dirt-cheap. That means margins expand.   Energy costs have also plummeted, giving both corporations and individuals a boost. The U.S. GDP is around 70% consumer-driven. And the consumer has a major tailwind with oil below $50 a barrel. Also, the strong dollar is one reason U.S. corporations are keeping so much cash overseas. If they don't repatriate the cash, they don't have to convert that money into dollars and take the currency hit.

 In general, Doc is a bull on U.S. stocks today.

For years, he has told his Retirement Trader subscribers that the economy is doing well. GDP is growing and unemployment is falling. But inflation remains low, so the Fed won't intervene. Those are all bullish factors for stocks.
 

 In the latest issue of Retirement Trader, Doc urged everyone to "buy the dips" – meaning buy stocks when they fall. The long-term trend is up...
 

The general market and individual stocks have broad uptrends and downtrends. During a broad uptrend, a stock will bounce up and down. At any of those little dips, you could try to predict whether this is a real downturn or just a little dip.   But just play the numbers game... a stock will have tens or dozens of little gyrations within each trend... but the odds of picking the right one simply aren't in your favor. So don't try.   Look at the chart below of the S&P 500 over the bull market.   We've marked 12 times where the market has dipped 3.2% or more. (You could add many more if you included smaller moves.)

As Doc explained, big market declines start off as small dips. These were 12 points where investors could have anticipated a pullback...
 

That's a one-in-12 (or 8.3%) chance over the past six years of picking the big downturn... And in reality, it turns out none of the dips in this time period turned out to be true pullbacks.   This just goes to show that panicking at the first slow day in the market simply doesn't pay. Constantly trying to call the precise market top doesn't get you anywhere either. So as long as our overarching thesis of a healthy economy and reasonable valuations stays intact, we're buyers on the dips.

 Changing gears for a minute...

Bloomberg recently published a piece explaining what large institutional investors are buying to achieve returns in today's zero-percent (or negative) interest-rate world.

At $870 billion, Norway's sovereign wealth fund is the world's largest. And it's buying Nigeria. It also has the highest allocation of low-rated debt since 2006. That includes bonds from Brazilian state-owned oil company Petrobras... the same Petrobras that is embroiled in a massive bribery and corruption scandal and whose shares have fallen more than 90% since 2008. Its bonds due in 2024 have also fallen about 10% since the scandal broke in November.

These investors are buying Ghana, Mauritius, and European junk bonds yielding 3.6%.

The JPMorgan Global Bond Opportunities Fund has around 75% of its assets in speculative-grade or unrated debt securities. According to Bloomberg, that includes Kazakhstan's KazMunayGas National Co. and long-term Indonesian and Brazilian bonds.
 

 In short, big investors are buying anything and everything today.
 

If these investors are putting their money into their money into 10-year Nigerian bonds yielding 14.2% and 10-year Mauritian bonds yielding 6.1%, do you think there's a chance some of that money will also find its way into U.S. stocks... even if earnings compress due to a strong dollar?
 

We bet that's the case. And we don't see the investment environment changing any time soon.
 

If that's the case, that means it's a great time to "buy the dips," as Doc suggested. It's also a great time to consider selling put options – the strategy Doc uses to make readers a fortune in Retirement Trader.
 

To date, Doc has closed out 208 winning positions out of 210. His average trade has returned 9.3% – or 49.7% on an annualized basis. And Doc has closed his last 67 positions for a win. Regular Digest readers know it's one of the most incredible track records in the history of our industry.
 

 I won't take time explaining the methods and trading strategies Doc uses in Retirement Trader because he's releasing three free training videos this week.
 

We released the first video on Monday, the second one today, and the third and final one tomorrow.
 

For his grand finale, Doc is hosting a live training session at 8 p.m. Eastern time on Thursday. Again, it will be free to watch. In addition to seeing Doc update you on his strategies and market thoughts today, you'll also have the opportunity to ask him any questions you might have.

You can access the free videos and sign up for Thursday's live training by clicking here.
 

 New 52-week highs (as of 3/23/15): American Financial Group (AFG), Deutsche X-trackers Harvest China A-Shares Fund (ASHR), CVS Health (CVS), WisdomTree Japan Small-Cap Dividend Fund (DFJ), Esperion Therapeutics (ESPR), Energy Transfer Equity (ETE), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares Core S&P 500 Small-Cap Fund (IJR), SPDR S&P International Health Care Sector Fund (IRY), Eli Lilly (LLY), and Two Harbors Investment (TWO).
 

 In today's mailbag, another happy lifetime member... and questions about Doc's training sessions. Have you used "The Eifrig Method" to sell puts? How has it worked for you? Let us know at feedback@stansberryresearch.com.
 

 "True, Lifetime membership is the single best investment I've ever made; besides the great investment advice over the year; the education has proven to be most invaluable. After being down sized in 09, I simply did what I wanted to do but never had the courage to do. I took a small portion of my savings and decided to day trade; Four years later I'm still at it, with an earlier retirement looking better every year.

"A short term product would be great; I'm betting there is a large number of your subscribers, who may not be as keen on holding ALL longer term investments, in these uncertain market environments, and would appreciate a product with a bit more shorter term speculative appeal.

"Of course Options does NOT work for all of us; Yes, that doesn't fall within the scope of your specialty, but unlike most services available, the integrity Porter has maintained in the industry over the year, would certainly lend itself to a guaranteed level of success." – Paid-up subscriber H.S.

Goldsmith comment: We have several services that advise readers on short-term trading, including trading options. In the Stansberry Short Report, Jeff Clark recommends both long-side and short-side trades using options to profit from short-term market swings.

And while it's not speculative, Doc's strategies in Retirement Trader involve selling put options to generate quick profits, hitting lots of "singles" and "doubles" rather than going for a "home run."

Regards,

Sean Goldsmith

March 24, 2015