Tuesday, May 01, 2007

The Short View By John Authers - May 1, 2007

The Short View By John Authers - May 1, 2007
Copyright The Financial Times Limited 2007
Published: May 1 2007 03:00 | Last updated: May 1 2007 03:00


The dollar is weakening. The US economy is slowing down. But US companies' earnings are growing faster than many expected, albeitmore slowly than in recent years. US stock indices are rising. Are all these phenomena related?

The first two are linked, as are the third and fourth. And a perception of a link between the weak dollar and earnings has helped the market. A slew of Wall Street brokers have cited the weak dollar as a "bull" point for US equities.

The idea makes sense. S&P 500 companies derive about 30 per cent of their sales overseas (compared with 15 per cent for smaller companies in the Russell 2000). When the dollar weakens, the value of those sales grows. Hence international "mega-cap" companies, laggards for years, have recently outperformed. A weak dollar im-proves the case for big US stocks.

But be careful. Globalisation moves costs, as well as revenues, overseas. A weaker dollar means Chinese labour is not as cheap as before. Corporate treasurers tend to regard forex as a source of risk and hedge exposures, limiting gains. Marc Chandler, foreign exchange strategist at Brown Brothers Harriman, shows the stock market is not consistently rewarding global companies.

Caterpillar makes more than half its sales outside the US. For John Deere, the figure is less than a quarter. But the stocks have matched each other so far this year, and Deere has outperformed significantly over 12 months. McDonald's sells more in Europe alone than it does in the US, while only about 10 per cent of sales for Wendy's come from outside the US. Yet Wendy's has outperformed McDonald's so far this year.

Europe suggests deeper inconsistencies. If the weak dollar makes a case for buying large US companies, there is an equal case to sell large eurozone companies. They are even more internationalised than US groups and should be harmed by a strong euro. But the FTSE Eurofirst 300 is up slightly more than the S&P 500 this year.

0 Comments:

Post a Comment

<< Home