Siebert Financial Corporation
11/12/2024 | Press release | Distributed by Public on 11/12/2024 07:56
The Dollar's Surge: Hidden Risks for U.S. Companies You Didn’t See Coming
Stocks gained for another session on strong tailwinds from Trumps election triumph. Traders are happy for the profits, but none can deny the emerging feelings that some recent high-gainers are starting to have a meme-y kind-of feel to them.
Current see . To say that it has been an interesting couple of weeks would be a vast understatement. I told Bloomberg Radio host Tim Stenovec yesterday afternoon that we went from fixating over the Mag-7 to obsessing over the "MAGA-7" in just a week's time. As commercials were rolling, all of us in the studio, industry veterans (and a real veteran, Navy Seal, and fellow Siebert exec Kaj Larson @kajlarson), watched, jaws gaped, Bitcoin leave Earth atmosphere along with many other things that took flight in the wake of Trump's election win. There has been so much speculation amongst my colleagues on what comes next for stocks, bonds, and the economy, and the general consensus, I would say, is cautious optimism. I have been writing an awful lot about this in the run-up to the election and after. I could easily write another one today about Bitcoin or Tesla, both easy targets , but no, I am going to focus on something a little more mundane, if not a bit arcane. Strap in and let's get down to it.
When you are listening to the radio, you may hear Charlie Pellett from Bloomberg announce something like "the dollar is stronger," or the "Dollar Index is up." You may recall how, in my post-election night rundown, I showed you that I was monitoring the US Dollar, amongst other things, throughout the night. In truth, you probably just put what Charlie says or what I have said on the back burner, because what you really want to hear is how the Dow or the S&P500 are doing. Why? Because, unless you are a currency trader, or you are planning a wedding overseas, the US Dollar is not really your concern. In fact, if you are an American, and you heard that the dollar is stronger, you would probably be inclined to do a "woot-woot, 'Merica!" But there is something you need to know about that Dollar which has rocketed higher in recent weeks as Trump's prospects strengthened, and he took the 'W'.
The US is a net importer of goods, which means that a stronger dollar gets us more foreign "stuff." Hold on, don't get too excited. If you are planning to travel to Paris this spring, you may be hoping for a stronger dollar so you can have more Euros to spend at Ladurée.I know you are following me so far. Keep your mind off Hermès and pay close attention now. Let's say that you are, in fact, concerned about your stock portfolio. Of course, you are. In that case, a stronger US Dollar may not be so good for you. The following is a chart of the US Dollar Index. The index tracks the US Dollar versus a basket of major, US trade partner currencies. Check it out.
You can see by this chart how the Dollar has strengthened noticeably since mid-September through current. In fact, during the time shown on this chart, the Dollar Index rose by some 5.24%. Now, think about some of your favorite stocks in your portfolio. I am going to pick a random one. How about Apple. There is a good chance that you are reading this on an Apple iPhone. Sorry Samsung fanboys, you are only around 23% of the US market versus Apple's 51% dominance. Let's go over the pond now to Europe. Apple sells more smartphones, but only enjoys around a 5% advantage. That aside, Europe is an important market for Apple which is expected to earn $106.3 billion this year in Europe! Ya, that's billion with a 'B.' That's a lot of … wait for it… EUROS! Uh oh. If Apple wants to bring that money back to the US and use it to pay debt service, payrolls, or whatever here in the US, its treasury division will have to convert it back to US Dollars. That money would be worth 5% less today than it would have been in mid-September - only around $100 billion. That $6 billion just evaporated with the exchange rate!
You know what, why don't we just get more specific. On September 13th the Euro / USD exchange rate was 1.10, which means Apple's European revenue would convert to around $117 billion. This morning's spot rate is 1.06, which means that same revenue would be worth only $112.9 billion. That is $4.1 billion lost to the stronger dollar. Can you see it? A stronger Dollar hampers the repatriation of revenues earned abroad by US companies.
Now, let's be clear. I have grossly over-simplified how corporate treasuries operate. They actually hedge their foreign earnings if they expect major FX movements, and of course, they don't wait to convert everything in one shot after collecting a year's worth of earnings. They don't likely repatriate all revenues. Remember, they have expenses to pay in Europe. They also have taxes to consider, and that is a topic that can take up to several daily market notes. The main takeaway is that a stronger currency is not good for your domestic stocks that earn revenues abroad. Even if we ignore all what corporate treasurers do, we all track things like Earnings Per Share and Revenues Per Share. If you factor in a stronger US Dollar, those have been… um, decreasing in recent months, having nothing to do with actual sales.
A quick word on why the Dollar is strengthening. Many reasons, but the main ones are twofold. First, rising bond yields, which draw foreign investors, increasing demand for Dollars (they have to convert into $s to buy Treasury notes). Second, expected tightening of trade restrictions which would weaken foreign economies. I know I only teed up 2 reasons, but here is a bonus: maybe corporate treasurers who woke last Wednesday, saw the election results and decided to start converting foreign reserves back to US Dollars fearing more gains ahead. Finally, it is important to note that a stronger local currency hampers foreign sales, as foreign buyers are forced to pay more because of their weaker currency. Going back to our example, iPhones cost more money today than they did in September. So, next time Bloomberg's Charlie Pellett says that the dollar is going up… don't ignore him.
YESTERDAY'S MARKETS
NEXT UP
- New York Fed 1-year Inflation Expectations (October) is expected to have slipped to 2.97% from 3.00%. Good news if you are worried about inflation and the Fed.
- Fed speakers today: Waller, Barkin, Kashkari, and Harker.
- This morning's earnings: EVgo andHome Depot both beat on EPS and Revenues while Legend Biotech, Plug Power, Shift4 Payments, and Hertz Global came up short. After the closing bell earnings: Occidental Petroleum, Rocket Labs, ZoomInfo, Skyworks, SoundHound, MARA Holdings, and Cava Group.