SmallCapReview
Focus Stocks are Outperforming the Market
Below
find the status of our current Focus
Stocks, after you get past
the boasting there is an interesting article on the Foreign Exchange market
and how it relates to the dollar. You can read about these
companies and much more at our site here.
Five Focus Stocks are up an average of
28%. The Nasdaq is down
16% over the past three months.
IMAX Corporation (Nasdaq: IMAX)
is one of the world's leading digital entertainment and
technology companies. As of September 30, 2007, there were 296
IMAX theatres operating in 40 countries. Since being
introduced to SmallCapReview subscribers at $3.99, the stock
closed Tuesday at $6.70 up 67%.
Ultralife Batteries (Nasdaq:
ULBI) is a global provider of high-energy
power solutions, communications accessories, and engineering and
technical services for diverse applications. Since being
introduced to SmallCapReview subscribers at $14.01, the stock
closed Tuesday at $20.59. Up 47%.
PeopleSuport (Nasdaq: PSPT) is a
leading offshore business process outsourcing (BPO) provider
that offers customer management, transcription and captioning
and additional BPO services from its centers in the Philippines,
Costa Rica and the United States. Since being
introduced to SmallCapReview subscribers at $10.91, the stock
closed Tuesday at $14.44. Up 18%.
Dialysis Corporation of America
(Nasdaq: DCAI )through its subsidiaries, engages in the
development and operation of outpatient kidney dialysis centers
in the United States and internationally. Since being
introduced to SmallCapReview subscribers at $8.05, the stock
closed Tuesday at $8.90. Up 10%.
StealthGas (Nasdaq: GASS) is
an international shipping transportation company specializing in
the transportation of various petroleum and petrochemical gas
products in liquefied form. Since being
introduced to SmallCapReview subscribers at $13.75, the stock
closed Tuesday at $13.87. Up 1%.
THE
FOREIGN EXCHANGE MARKET
Even the casual stock market
observer is by now aware that many investors and traders believe
the foreign exchange market is playing a role in the current
unsettled conditions.
But what is the foreign exchange
market, and why should the value of the Yen or the Euro vis-?-vis
the Dollar have any influence on the price of a share of stock
on U.S. stock exchanges?
Although we usually think of
money in terms of what we can buy with it, money too is actually
a commodity. People who have extra money lend it to others who
need it. The price for this money is what we refer to as
interest rates. In the international arena there is an added
dimension, namely, What is the value of one currency relative to
that of another country. This relationship is what is referred
to as the exchange rate.
If the Toyota Motor Company can
produce a car for export in Japan at a cost of 2,000,000 Yen,
how much does that car cost in U.S. dollars? If the exchange
rate for Yen/U.S. Dollar is 200.00 yen to the dollar, the car
would have to cost $10,000 at the factory for the Toyota company
to realize its costs.
Assume the traders, bankers,
businessmen and speculators that comprise the foreign exchange
market, determine for some reason that they are uncomfortable
with the current Dollar/Yen exchange rate. They believe the Yen
is undervalued allowing the country to export vast quantities of
cars at very attractive prices. On the other hand, foreign goods
are unattractive to Japanese consumers because they seem rather
expensive in Yen terms. As a result, Japanese ownership of
dollars increases rapidly. But with few outlets for these
dollars an imbalance develops and supply exceeds demand.
Japanese become less willing holders of the U.S. currency.
In effect, the market place
should now operate to try and find a level at which equilibrium
returns. The value of the dollar should begin to decline in yen
terms, thereby providing the owner of dollars with less yen for
each unit of currency. If the rate now adjusts to 100 yen per
dollar, what in effect the market has accomplished is that the
price of the Toyota has suddenly doubled to $20,000 which should
reduce the number of cars exported to the U.S. At the same time,
the fact it now takes only 100 yen to buy a dollar should also
encourage the Japanese to import more, cheaper goods from the
U.S.
According to the textbook
examples, that is exactly what would be expected to happen.
Americans would cut down their purchases of suddenly expensive
Japanese cars and electronic equipment. For their part, Japanese
consumers would be greatly increasing their imports of cheaper
U.S. products. As a result, the currency will find a new
equilibrium point and a crisis is averted.
Of course nothing in life is that
simple, and there is also much human intervention in the process
which injects other considerations in the determination of
exchange rates. In actuality, one of the major forces for
smoothing imbalances in foreign exchange markets is investments.
Rather than seeking to balance exports with imports, in the case
of developed economies the surplus will almost immediately be
invested into securities of the debtor country. Japan, which
consistently enjoys major trade surpluses with the United
States, as a result sits on dollar reserves in the billions. To
realize some return on these funds and also to recycle them in
the international market, Japan is a major investor in U.S. bond
and equity markets.
As long as there is relative
stability in the exchange rate environment, Japan or any other
country in its position, is relatively comfortable with its
investments. They earn a reasonable rate of return and with
stable foreign exchange rates, there is limited currency risk.
However, in an unsettled
environment, such as currently exists, Japanese investors
suddenly have to fear losing not just capital gains potential,
but damage to their core investments resulting from
deteriorating foreign exchange values. Naturally, such large
shifts in currency valuations gives vent to anger, frustration
and of course the need to stem the losses and recoup.
This raises the specter of
Japanese selling of U.S. holdings or at least curbing any new
investments. For a market that has been enjoying a great bull
run, such as the U.S. equity market, the prospect a major source
of capital will be leaving the market and even possibly begin
selling, is a most unwelcome development. As the dollar
continued to wither in recent sessions, without any firm Bank of
Japan commitment to support the dollar, the equity market
reacted as if it were under direct attack and was running for
cover.
The system that presently governs
foreign exchange rate levels is known as a "floating
exchange rate system". In theory this means that the
relationships between different currencies is determined by the
interplay of the market place.
(It should be pointed out that
the currency market differs from the conventional investment
vehicles inasmuch as a currency rate can only exist in
relationship to another currency. An equity investment has a
self contained price based upon what its long-term value is
deemed to be. A bond carries a rate of interest that, depending
upon whether it is above or below current market levels, will
affect the value of the bond. However, a dollar in the foreign
market can only be valued in terms of how many Yen or how many
Euros it can buy.)
Today we take floating exchange
rates in stride. However, it was not always that simple. In fact
in historical terms, floating rates are a relatively new
phenomenon. Until the watershed changes in 1971 the world
operated with fixed-exchange rates. The world’s central
bankers would hold periodic meetings to review these
relationships and decide if any adjustments were needed. In
those days, gold ruled and in theory at least, nations that ran
trade deficits and were unable to support their currency by
buying them back, could be called upon by the creditor country
to cover the shortfall by a transfer of gold reserves.
Countries that wanted to improve
their international trade position or could not cover the
deficits with gold, would have to devalue their currency to make
it more attractive to prospective buyers. Of course those that
held the currency during devaluation, were the real losers.
With floating rates, such changes
in value can happen over a period of time and interested parties
have the opportunity to hedge against any expected or unexpected
changes in value. Convertibility into gold is now but a fond
memory.
Of course, as even a casual
perusal of financial news reports will quickly reveal, floating
exchange rates do not mean that countries do not exert, or at
least try to exert, some pressure on the movement of rates. In
fact central banks have an intricate web of swap agreements with
each other that is used when there is a need for a concerted,
coordinated effort to support a currency. So perhaps it is best
to classify the foreign market as a qualified free floating
system.
From a trading perspective, the
foreign exchange market is probably the largest international
trading arena, with daily activity in the hundreds of billions
of dollars. The heart of the market is the international
interbank network which consisted largely of worldwide telephone
trading between bankers and foreign exchange dealers. Through
vendors such as Reuters Ltd. much of this global dealing has
been automated and various position keeping systems allows
dealers to more efficiently monitor their positions and profit
and loss statements.
What adds to the complexity of
the market, but also to the efficiency of the global network, is
the arbitrage that is possible between currencies. As mentioned
earlier, a currency value can only be expressed in terms of its
relationship to another currency. Therefore, there is a rate for
dollar/yen and another rate for dollar/euro. Separately there is
a value for euro/yen. It is possible in active market conditions
for anomalies to occur that offers the opportunity for profit by
buying yen for euro, then trading the euro for dollars and then
covert the dollars into Yen. It is the efficient arbitrage
activity that is key to keeping the market in equilibrium.
The major use of the foreign
markets is to facilitate international trade. Companies that
produce goods in one country but sell to another, have their
expenses in one currency but may receive payments for their
merchandise in another currency. Through the foreign exchange
market, the company can lock in an exchange rate at a future
date, corresponding to the time he expects payment.
In addition to the mammoth
international inter-bank market, there are very active futures
markets in a host of currencies that enable companies and
individuals to engage in all forms of hedging strategies. There
are also well established option exchanges that lend even
greater flexibility to the eliminating risk in international
transactions.
It is the ability of those
engaged in international trade to buy all this protection
against adverse currency movement that has facilitated the
growth of trade and also limits the negative impact that could
affect a country with a trade deficit.
As with any investment vehicle,
its worth is dictated by the valuation the market places on it.
This is of course a very empirical exercise in the case of a
currency since there are an untold number of variables that one
would need to consider.
However, there is a theory for
rate setting or rate relationships that is called
"purchasing power parity". This valuation method says
that rate relationships for currencies should be based on the
ability to purchase equal amounts of goods and services for
fixed amounts of currency. In simple terms, if a loaf of bread
cost $1 in the U.S. and 200 Yen in Japan, then the exchange rate
should not be 106 Yen to the dollar but closer to 200. Whereas
this theory does play some role, there are so may political and
special factors at play in this highly sophisticated arena that
all intrude on the pricing models.
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