Behind the obsession with the dollar and earnings

Getty Images Traders work on the floor of the New York Stock Exchange, Feb. 20, 2015.

Getty Images
Traders work on the floor of the New York Stock Exchange, Feb. 20, 2015.

The markets were obsessed with a stronger dollar Tuesday.

The source of the concern is fairly obvious: the Fed unwinding quantitative easing is a primary catalyst for the rally in the dollar and (to a certain extent) the collapse in commodities.

The fear is that stocks could be next.

In one sense, the obsession is not surprising. Roughly 46 percent of the sales of U.S. corporations come from outside the U.S. A strong dollar stifles overseas earnings growth, and with the dollar at a 12-year high against a basket of other currencies, that’s a problem.

Another problem is we don’t have good numbers on what the real impact of a strong dollar is on earnings, or sales. That’s because the companies don’t tell us, or rather don’t tell us with any consistency. There’s no requirement for companies to itemize their sales by region, or to indicate how much was lost due to a strong dollar.

With that said, the strong dollar has been a theme this season. About 20 percent of S&P 500 have specifically said the stronger dollar negatively impacted profits in the fourth quarter, according to Estimize.

Here are a few examples:

Abercrombie & Fitch: Foreign currency impacted earnings 3 percent

Brown Forman: Full-year earnings reduced by 20 cents a share due to currency impact

Fastenal: Strong dollar lowered daily sales growth by 1 percent

Gap: Currency effect took 6 percent off earnings.

And that’s just a few. There were many more.

Bottom line: We have enough evidence that foreign currency was a significant impact on earnings, even if many companies did not break out specific numbers.

This will likely continue. The Street remains very bullish on the dollar. Marc Chandler of Brown Brothers Harriman is one of many who thinks the rally will continue.

This bullishness is a bit surprising, since the euro, for example, has already gone from $1.40 against the dollar one year ago to $1.07, a drop of 24 percent.

Chandler thinks it could go to its historic lows, which was $0.82 to $0.85 way back in 2000.

Wow. And this is only the second day of the start of the ECB bond buying program!

He’s not the only one. Deutsche Bank thinks the euro could go to parity ($1.00) this year as well, and $0.85 by 2017!

But let’s not kid ourselves: this story that the dollar’s rise is a disaster for U.S. companies is being wildly exaggerated. There are plenty of offsets, which companies don’t often make clear.

Lower rates are great for U.S. corporations. Commodity costs are lower.

And there are ways U.S. corporations can offset the effect of a higher dollar. For example, they are issuing a flood of euro-denominated debt.

The Economist noted last week that U.S. companies have issued 18.6 billion in euro-denominated debt in January-February, a record for the first two months of the year and 160 percent higher than the same period last year. Big issuers have included AT&T, Kellogg, and Coca-Cola.

Coke, for example, recently raised 8.5 billion euros for a 12-year debt offering, and had to pay a measly 1.125 percent! That is much lower than the cost of issuing comparable debt in the U.S., which would probably be about 1.6 percent or higher for similar duration.

And it’s not just U.S. companies: I hear Indian and Chinese companies are also entering the European debt market.

Still, the obsession with the dollar is a bit surprising. After all, the dollar has been on an uptrend for three years now, and it’s been rocketing up for the last year. The U.S. is done with its QE program, Europe and Japan are just starting theirs, everyone else is debasing their currency, and we’re surprised the dollar is strong and getting stronger?

As for interest rates, the worry isn’t lower rates—which happened Tuesday—it’s higher rates. The Fed is meeting next week, and lots of traders believe the Fed is ready to drop the line that they can be “patient” before raising rates.

It may be—as many are contending—that the rise in our rates will be somewhat capped by the dramatic lowering of rates in Europe.

There may be something to that, but the trend in the U.S. does seem up for rates.

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