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Dollar rises, profits fall...?
Old 06-14-2005, 08:23 AM   #1
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Dollar rises, profits fall...?

Found the following on line but don't quite know what to make of it... anybody wiser than me on currency issues who would care to comment?


Now that the greenback has defied conventional wisdom and rallied sharply, there's something new for investors to worry about: the bite a stronger dollar will take from S&P 500 profits.

Defying Wall Street's consensus forecasts for the dollar to decline by 10% this year, the buck has so far rallied about 3% against major currencies...

"We are amazed that no one else on the Street has begun to at least tinker with their EPS estimates since very, very few were carrying $1.22 on dollar-euro or 108 dollar-yen in their top-line numbers at the start of the year," says David Rosenberg, chief North American economist at Merrill Lynch. Should the dollar fail to weaken significantly again, current earnings expectations would have to come down.

...That's because more than 30% of S&P 500 companies' revenue comes from their overseas operations.

...our research shows ... that investors may be lulled into a false sense of security thinking this market is attractive with an estimated 2006 P/E of 14.6 times when in fact the dollar's move actually means that investors are likely paying for a more neutral multiple of 16 times," the economist commented.


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Re: Dollar rises, profits fall...?
Old 06-14-2005, 11:28 AM   #2
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Re: Dollar rises, profits fall...?

The paragraph refers to the S&P multi's. The big cats earnings can be hurt or helped by the dollar. Many of the multi's make a ton of money overseas so if the dollar is weak it increases the overseas profits, i.e. when foreign currency is converted back to the dollar for financial reporting. So the guy is saying the estimates are based on a weak dollar which would boost the profits in the overseas markets and instead the dollar has rallied as of late (much to the suprise of many). Investors are not accounting for the anticipated downward EPS revisions thus making the S&P companies less attractive.

Caroline just remember currencies can move short-term. Just as this guy wrote about the strong dollar things can change. Warren the Great has a rather large short position on the dollar as do many sharp investors.


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Re: Dollar rises, profits fall...?
Old 06-14-2005, 04:57 PM   #3
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Re: Dollar rises, profits fall...?

I would not be surprised to see a couple of the large caps revise their earnings based on the strong dollar. Of course that could be a convienent excuse for any earnings problem. That said, I also doubt if the strong dollar will last too much longer. It not so much a strong dollar as a weak euro.
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