Avoid Bonds When Playing Strong Dollar

October 13, 2014

Macro thought leader discusses how he approaches today’s financial markets.

Neil Azous is the founder and managing member of Rareview Macro, an advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter “Sight Beyond Sight.” He has nearly two decades of experience across the financial markets, and is recognized as a thought leader in global macro investing. ETF.com Editor-in-Chief Drew Voros spoke with Azous about current conditions in the financial markets.

ETF.com: How does an investor approach this new era of a stronger dollar relative to most global currencies? I've read an argument where if you're long on, say, the SPDR S&P 500 (SPY | A-97), you're already long the dollar. Do you agree with that?

Neil Azous: I do on the margin. I would agree with that, that you don't have to do anything, and that if you are long U.S. equity markets by design, you are long U.S. on assets like the dollar. Going forward, though, there will be a greater segregation of how to play that.

For example, you mentioned equities. There will be a greater emphasis on owning equities or a benchmark or a custom basket that represents a segment of the market that receives the majority of their revenues onshore in the U.S.

If you were to look at onshore revenues versus offshore revenues in terms of various companies, you will see that the divergence has become quite wide, based on that migration—owning more companies that receive the majority of their revenues onshore.

ETF.com: Is there a simple play that exploits this trend of a strong dollar relative to global currencies?

Azous: You can be short the euro through the CurrencyShares Euro (FXE | A-98) ETF. That's one option. The other thing to consider is if you are long or have too much exposure to U.S. multinationals, that universe would be the Dow Jones industrial average.

That’s going to be more sensitive to dollar strength going forward, as opposed to an index that is predominantly U.S.-based in terms of revenue, or even small-caps, which have been absolutely destroyed or dismantled on the view. Those should perform on the margin better because they receive the majority of their revenues onshore.

ETF.com: Where do you think stocks are headed for the rest of the year? Are we going to be in this sort of choppy water for awhile? Or again, have we all underestimated the strength of this bull market?

Azous: I think certainly that's a fair statement: The majority of investors have underestimated the strength of the bull market. We're somewhat constructive on the U.S. economic trajectory. But I would say that on a day like today [Oct. 7, 2014], the day before the earnings season begins, it's a little bit difficult to make a call with high conviction of what the U.S. equity markets will do at the end of the year. Tomorrow we will hear from corporate management in their earnings calls how they view their forward guidance.

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