What Currently Drives the Market?

Given the way the market has looked, basically, since the shutdown resolution, it's now all about leverage, writes MoneyShow's Jim Jubak.

The market that we have now, the market that we have had, really, since the solution to the government shutdown and the debt ceiling crisis, is based on a falling dollar, lower US interest rates, a belief that the Fed will not act to tighten anything until March, and so the question is, the general market might be marching up as the S&P did on October 21 and October 22 by, oh, you know, five tenths of a percent or whatever. The question is, where do you get the most leverage? If this is what is going to drive the market, where do you get leverage?

One place to look for it this week has been in the ADRs, the New York traded ADRs, American Depository Receipts of GOL. One of the two big Brazilian airlines is the only one that is not owned by somebody else. The symbol is (GOL). It went up like 9.5% on October 21; it went up about 4.5% on October 22, pulled back a tiny little bit on October 23, but still a major, major move. This is basically on the effect of a weaker dollar versus the Brazilian real, since GOL is basically a domestic airline and almost all their revenue is denominated in real, which means that when the real gets cheap against the dollar, it hurts their revenue, especially because most of their costs, a lot of their costs, probably about 80% of their costs are denominated in dollars. A strong dollar means what they pay for oil, kerosene, jet fuel, what they pay for debt service, what they pay on airplane leases, all denominated in dollars, goes up, so GOL has been getting hammered on this. The reversal of this is a big deal for the stock.

A couple of other incidental things, which is that they have been cutting capacity to try to up their load, and the load factor, and that seems to be working, as well as it looks like they are going to sign big co-sharing agreements with European airlines, probably Air France and maybe Lufthansa, in time for the June 2014 World Cup, so that means they will be feeding more European tourists into the system for the big soccer tournament.

All those things have really been helping GOL. After this rise, this rally, the stock is still about 38% below its 52 week high. I think you could safely assume that if all this continues, if the dollar and real relationship continues, and we continue to get this good news on traffic, you could easily see another 20% in the stock, and that would be a good way to leverage a weak dollar and the current market.

This is Jim Jubak for the Money Show.com Video Network.