Strong Dollar Often Troubling for Earnings

[HenryTo]

Keep an eye on Nike, IBM, and KO:
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Strong Dollar Often Troubling for Earnings
Tuesday July 5, 2:01 pm ET
By Rachel Beck, AP Business Writer
ALL BUSINESS: a Stronger U.S. Dollar Is Often Troubling for Earnings

NEW YORK (AP) -- While investors obsess over how higher oil prices and rising interest rates could hurt corporate profits, they seem to be overlooking something else that could cause earnings growth to fizzle: this year's unexpected rise in the U.S. dollar.

While estimates on Wall Street had forecast the greenback to fall around 10 percent in 2005, just the opposite has happened, with the dollar gaining about 7 percent against other major currencies so far this year.

The U.S. currency's rally could crimp profits at companies with significant foreign operations. What a change from the not-so-distant past when a declining dollar jolted profits higher.

The dollar had been sliding in recent years, and fell into a significant sell-off during the second half of 2004. It lost about 13 percent of its value against a trade-weighted basket of other currencies, according to the Federal Reserve.

While expectations were for similar losses to continue in 2005, the dollar has rallied, instead. That move is attributed in large part to the Fed's course of tighter credit policy. The relatively higher U.S. interest rates have spurred a massive inflow of money to U.S. financial markets from foreign investors looking to take advantage of the healthier economic climate compared with other major developed nations.

But corporate America has largely been mum on what a stronger dollar could do to earnings, even though it could hurt U.S. companies with major operations abroad that need to convert their foreign earnings to dollars and make it more difficult for U.S. companies to compete in foreign markets.

With more than 30 percent of the non-bank sales from companies in the Standard & Poor's 500 derived from foreign operations, a 10 percent appreciation in the dollar would reduce the Standard & Poor's 500 operating profits by about 8 percentage points over the next two years, according to new research by Merrill Lynch.

Even if the U.S. currency stays where it is now, the gain in S&P 500 operating earnings would go from 10 percent to 7.6 percent in 2005 and from 10 percent to 3 percent next year, Merrill said.

Market-watchers think companies may start warning about the negative currency translations as soon as later this month when the second-quarter earnings season gets under way and they begin to discuss their outlooks for the coming year.

History shows that the impact of the dollar's rise can take time to trickle through to earnings. Over the last decade when the dollar has had an appreciation of 10 percent or more over 12 months, the decline in earnings was a trickle initially and then soared nine to 12 months later. For instance, during those dollar-rising periods, the information technology sector saw profits fall by 6.2 percent after one quarter but were down by 21.9 percent after four quarters, Merrill said.

Those investors who want to get a jump on where the problems could show up may want to keep an eye on companies that saw the falling dollar help boost the bottom line in the past, like Nike Inc., IBM Corp. and Coca-Cola Co.

The dollar pullback in 2003 and 2004 helped add about 12 percentage points per year to earnings growth of S&P 500 companies, according to Merrill.

There are, of course, sectors that thrive when the dollar gains ground, including retailing, health care, utilities and energy. One big benefit of a stronger dollar is that prices on foreign goods and services fall.

In addition, the stock market tends to be stronger when the dollar is up, according to research by Lehman Brothers chief U.S. market strategist Henry Chip Dickson. Looking at data back to March of 1985, Dickson found that the S&P 500 has appreciated at an average yearly pace of 14.6 percent when the dollar is rising and gained 10.7 percent on average per year when the dollar was falling.

So far, though, the rising dollar isn't getting much attention. Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors, said that might be because we are in a "theoretical sweet spot" now -- there are still benefits emerging because of the previous decline in the dollar and the troubles that could come because of the rise in the dollar haven't yet appeared.

That sweet spot probably won't last much longer, unless the dollar quickly changes its course.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

[Dubious]

I am in Bateman's Bay. Well be going to Singapore and Thailand for about six weeks and then back to Brisbane until October 20th and then go Kiwi/HI/Vegas (for a month) and then live in Panama until around April 10th. I float with the weather. I like Thailand during the raining season - no tourists and the prices drop like a rock and the rain is nice to hear. Hot and wet I can deal with. Cold and wet no.

The McDonald's at mall closed here and another one by the Casino closed down recently. I can not even remember the last time I have been in one now that I think about it.

The rage here is Ali Babi (Turkish) and Subway.
Those are PACKED. Went to Subway last Saturday 22 deep and this was at 3pm.

Do not even see McDonald commercials anymore now that I think about it too. Funny how that works.

28 out the DIA stocks are broken down. Only think acting half decent is INTC and HPQ. I am short the other 28 with about 300 more.

Largest short OIH.

[HenryTo]

Dubious,

Whereabouts in Australia are you in right now? I used to live in Sydney as a kid - and the MCD traffic is usually huge and very dependable. At that time, buying a MCD franchise was a sure thing. FWIW, I probably now go to a MCD once every six months.

Take care,

Henry

[Dubious]

I was going to post that.

Seemed like CYA stuff.

Add McDs to that list also. They are not doing to swell.

I am in Australia now...no one goes there anymore. Closed two down in the last month. That use to have huge traffic.

[HenryTo]

I see it, Bill. The guy's last name should be D-i-c-k-s-o-n. FWIW. I will talk to my partner/webmaster about this - not sure if we can set it so it will just allow specific words such as c-u-m-u-l-a-t-i-v-e, etc.

Thanks for pointing that out!

Henry

[nodoodahs]

I don't think the guy's name is "Henry Chip xxx".

I have noticed your profanity filter is pretty stout ... I have had to use "accumulated" because it didn't like "c_u_m_ulative." I assume it's because of the first three letters. Test ... cumulative. See?

FWIW.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.