Falling Dollar Rising Profits

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Macroeconomics

We and many others have written about the falling dollar, about the concerns of foreign governments over the impact this will have on their own competitiveness, about the possibility rising import costs will stoke inflation, about fears that if the dollar becomes debased it will lead to a collapse of its role as the reserve currency. We have even talked about the benefit that a lower dollar should have on the competitiveness of US exporters but until now we have seen scant evidence of this filtering through onto profit sheets. Well an interesting article in Bloomberg explores a closely related topic that graphically illustrates the benefit the lower dollar is having. Bloomberg explains for the first time since the equity rally began in March, the biggest U.S. stocks are beating the smallest as the dollar’s descent sends investors to companies with the most business in international markets.

The Dow Jones Industrial Average of companies rose 6.2% this quarter, compared with the 2.6% loss by the Standard & Poor’s SmallCap 600 Index. The Dow had trailed by 26% following the stock market’s low on March 9. The reason for the current strength – the largest corporations are seen as getting more sales abroad, where revenue in foreign currencies is worth more in dollars regardless of achieving actual year on year growth in sales. So is investors enthusiasm for larger multinationals, who on average generate 33% of the sales from abroad as opposed to the smallest who generate on average just 20%, backed up by sound results?

Caterpillar which got 66% of its sales from outside the USA in 2008 has added 13% to its share price this quarter as growth in emerging markets and a lower currency have boosted dollar earnings. Likewise McDonald’s which also gets 66% of its revenues from abroad has risen 12% since Sept 30, as converting currencies into dollars is said to add 10-13 cents a share. Even Ford with large overseas sales has risen 20% in the fourth quarter as profitability has in part been boosted by overseas earnings.

The forecasts are for the dollar to continue to fall over next year and possibly the next several years according to David Kelly who helps oversee a JP Morgan Fund. A Bloomberg survey of top economists averaged out to a further devaluation of 7.1% vs. the Euro next year meaning opportunities for exporters or for firms with large overseas sources of revenue such as manufacturing bases should continue to improve next year. Smaller companies or those without export markets are seen to be at a disadvantage because the dollar has declined against all 16 of the most-active currencies this year while the Dollar Index has lost 15% from its three-year high on March 5, the steepest retreat since 1986.

In addition, most economists are expecting growth to be higher next year in emerging economies than in the west. Although the US is predicted to see a respectable 2.6% growth in 2010, Brazil is expected to manage 3.8% and China 9.5% according to Bloomberg’s poll of 63 leading economists.

The flip side of course is that anyone relying on imports for raw materials will see costs continue to go up. Increases have been partially mitigated by rapidly falling freight rates, a situation at least for container traffic is not likely to turn around rapidly but rationalization of fleets and slowly rising utilization will raise rates during next year, coupled with rising dollar costs due to a lower currency will squeeze firms relying on imports. Maybe time to start shopping closer to home.

–Stuart Burns

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