Saturday, March 14, 2009

Dollar Rally Hurting U.S. Corporate Profits

I warned about this already last year, and now Marketwatch also reports that the overvalued U.S. dollar is inflicting great damage to U.S. corporate profits.

This negative effect occurs because this will force U.S. exporters to lose market share or reduce their margins (or a combination of the two) and also because the dollar value of the profits of foreign subsidiaries of U.S. companies will go down if the value of foreign currencies go down versus the U.S. dollar. Some of this negative effect will be counteracted by lower cost of input for U.S.-based firms, but the overall net effect is still clearly negative.

The negative effect on the dollar value of profits of foreign subsidiaries was also confirmed in the flow of funds report that I discussed in the previous report. There it was reported that net profit from abroad fell from $421 billion to $287 billion (though some of that decline likely reflected economic weakness in other countries). As the dollar has strengthened further since then and as there is always a time lag due to the use of futures contracts, this effect will be even greater in the coming quarters.

This factor is yet another reason for believing that this week's rally is simply another bear market rally (or suckers rally), not the beginning of a new bull market.


Blogger HellKaiserRyo said...

I do not think we are near the final bottom... there is still too much greed, not enough fear. Many "greedy" people are the ones concerned about getting a huge return on their investment which was achieved in 2003 by correctly timing the bottom. Of course, some of those "greedy" people do not believe this is the final bottom and merely want to profit from technical market trends by thinking like a trader. So their technical and fundamental views do not match.

The bottom will be reached when stocks are deemed as yield instruments, not growth instruments, and they would be valued on a cash flow basis a la the Gordon model with a risk premium. More people should adopt the style of Graham's Security Analysis.

When do you think the dollar rally will end? I am still bearish on the yen (overvalued and the country is messed up), euro (I do think there is strong chance for one country to leave the EU), pound (due to QE as I expect some of that the leave the UK), and franc. Maybe the currencies that would surge after the dollar bear market resumes would be commodity currencies such as AUD/CAD and others such as BRL, NOK, and SEK.

7:43 PM  
Blogger stefankarlsson said...

I believe the USD is fundamentally overvalued against most currencies, and therefore thinks it will be weaker in the long-term, but I think that in the short to medium term it is likely to stay strong because of how global interest rates are converging to zero. Only after this convergence end will there be a new USD bear market.

11:33 PM  
Blogger Kapitalist said...

The downturn of the USD will likely be a great event.

Please tell the world when you sense that one coming!

6:06 AM  

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