"Favorable" Foreign Exchange...
By Sam Ro - …is one way of saying that a weak U.S. dollar helps boost quarterly revenue and earnings. This observation is made by companies with significant international sales and who report financial results in U.S. dollars.
This is an important consideration for equity investors using the S&P500 as their benchmark. According to Standard & Poor’s research, around 48% of S&P 500 company revenues are generated outside of the U.S.
So, I'd argue that the weak U.S. dollar partially explains why the S&P 500 has done so well in the last six months. In March, the S&P hit its low of the year when the dollar hit its high. When you overlay a chart of the S&P500, which is now trading at a year-to-date high, with the U.S. Dollar Index (DXY), which is now trading at a year-to-date low, you will easily notice the inverse correlation.
The U.S. dollar was actually at lower levels for much of Q3 2008, which means it should have an unfavorable impact on year-over-year comparisons this year. However, most corporate managers assume stable foreign exchange rates when issuing guidance. As such, if the U.S. dollar weakened since the last time earnings guidance was issued, Q3 2009 sales and earnings will be better-than-expected…ceteris paribus.
But based on the persistent divergence in stocks and the dollar, this may already be priced in.
If you’re unwilling or unable to sell your internationally exposed equity positions and you’re concerned that a rising dollar could eat into earnings, then you may want to hedge your position by going long the dollar. You can do so with an ETF like PowerShares DB U.S. Dollar Bullish Fund (UUP).
This is an important consideration for equity investors using the S&P500 as their benchmark. According to Standard & Poor’s research, around 48% of S&P 500 company revenues are generated outside of the U.S.
So, I'd argue that the weak U.S. dollar partially explains why the S&P 500 has done so well in the last six months. In March, the S&P hit its low of the year when the dollar hit its high. When you overlay a chart of the S&P500, which is now trading at a year-to-date high, with the U.S. Dollar Index (DXY), which is now trading at a year-to-date low, you will easily notice the inverse correlation.
The U.S. dollar was actually at lower levels for much of Q3 2008, which means it should have an unfavorable impact on year-over-year comparisons this year. However, most corporate managers assume stable foreign exchange rates when issuing guidance. As such, if the U.S. dollar weakened since the last time earnings guidance was issued, Q3 2009 sales and earnings will be better-than-expected…ceteris paribus.
But based on the persistent divergence in stocks and the dollar, this may already be priced in.
If you’re unwilling or unable to sell your internationally exposed equity positions and you’re concerned that a rising dollar could eat into earnings, then you may want to hedge your position by going long the dollar. You can do so with an ETF like PowerShares DB U.S. Dollar Bullish Fund (UUP).
posted by Sam Ro | 11:35 PM
1 Comments:
I recently sold my GLD and gold mining stocks and bought a position in UUP. This is a huge turnaround for me. As the "great recession" drags on, the consumer delevers, and toxic debt continues to erode (i.e. default), then I think that the dollar will start to rise again much to the dismay of the Fed and the current stock market bulls. The true cancer in our economy today is massive amounts of debt - much of which will eventually default. We are past the point where it can be serviced especially in the current economic environment. This will prove deflationary and will eventually overtake the liquidity rally in the stock and commodity markets. At some point, the Fed will panic (I assume) and rev the printing presses yet again... Subsquent to that, things might get inflationary if the economy has finally bottomed. Then it will be time to dump USD, buy stocks, commodities, real estate, and, of course, run to gold (again)...
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