House Kills the Bailout Plan and the US Dollar

The rejection of the $700B bailout plan by the House of Representatives came completely out of the left field, driving a knife through both US equities and the US dollar. For the Bush Administration, it certainly feels like they are moving one step forward and taking two steps back but the severity of the financial crisis makes it absolutely necessary for Washington to put economics ahead of politics. Although traders were initially dissatisfied with Congress’ approval of Paulson’s plan, they were counting on a bailout. The combination of a huge liquidity injection by the Federal Reserve today and the hope that the bailout plan would move forward kept stocks from falling further. However those efforts and the sleepless weekend of debates turned out to be futile after the House rejected the bailout bill. For fairness, there was no was guarantee that Paulson’s plan would have helped average Americans, but at least it could have brought some stability to the financial markets. Unfortunately it is now back to the drawing board for Paulson who has to meet with Bush, Bernanke and Congress to discuss their next steps. Volatility in the financial markets benefits no one especially as more than $1 Trillion in market value has been wiped out from US stocks today. The VIX, which measures equity market volatility shot to the highest level in 6 years while gold prices jumped 3.8 percent. LIBOR rates have also skyrocketed while the TED spread continued to widen indicating that as a result of the House’s rejection of the bill, investors both domestically and internationally have become more risk averse. For those that are willing to part with their cash, they are demanding a high premium.

Dow 10,000 Could Mean 100 USD/JPY

dow092908 The Dow Jones Industrial Average closed down more than 770 points while the S&P500 dropped more than 8 percent. This is the largest single day drop in the Dow ever and the largest percentage decline in the S&P500 in 20 years. We have long argued that if the Dow hit 10,000, USD/JPY could fall to 100. That correlation remains intact today as the plunge in US equities drags USD/JPY towards 104.00. In the September 19th edition of the Daily Currency Focus, we argued that the US dollar could fall by another 5 percent. At that time, USD/JPY was trading at 107.40 and to many people a 5 percent move lower, which is the equivalent of 530 pips seemed like a farfetched possibility. However since then the dollar has already fallen close more than 300 pips, making a move towards 102 within reach. With the US stock market plunging and the US government looking to raise the national debt, in addition to hammering out the bailout plan, the Bush Administration will have to work extra hard to reassure foreign investors.

Gold Becomes a Hedge for Inflation and the US Economy

Now more than ever, the US needs to rely on foreign funding. If Central Banks and Sovereign Wealth Funds around the world start to lose confidence in the US financial markets or the US government, we could be looking at a complete freeze in lending that expands beyond the banking sector. According to an article in the Wall Street Journal, central banks are already loading up on gold as European central banks cut their sales to the lowest level in almost 10 years. Gold prices are up more than $35 an ounce today as a hedge for inflation and a hedge for the US economy. Everyone is starting to realize that commodities are the only assets that have no counterparty or credit risk. Gold prices first jumped on inflation fears after the Federal Reserve’s liquidity injections this morning. Having more than doubled their swap limits from $290B to $620B, the Fed is trying to tell the market that they are serious about providing liquidity and given today’s sharp volatility, they will continue to do aggressively in the coming days.

TARP Drama Gets More Dramatic – Time to Play Defensive

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Dollar Hits New Record Low, Which is Good for Earnings

The dollar’s impact on US corporate earnings continue! Last night, IBM blew away Wall Street when it reported that its 2008 profit will top its previous projections. Interestingly enough more than half of their 11 percent revenue was due to currency fluctuations!

The dollar matters.

The companies that will do the best this earnings season are the ones that are diversified geographically and have more than one line of business. Take Pfizer for example, they spend approximately 1 billion dollars on the launch of any new drug. Their earnings missed expectations, driving the stock down significantly at the open. In contrast, Johnson & Johnson beat the street due to higher sales in the consumer division and on our currency fluctuations (Revenues increased 7.7 percent in the first quarter with currency moves contributing a whopping 5.1 percent to growth). Pfizer would benefit to take a page out of Johnson & Johnson’s book since they were the ones that sold their consumer spending division to J&J in 2006.

The further the dollar drops, the more that it will help corporate earnings. The only way for the US economy to recover, is through exports. Yesterday, six companies reported earnings that were either directly or indirectly tied to currency movements.

According to Lisa Twaronite of Marketwatch, “Weak dollar is often-overlooked key to earnings.” And she quotes, your’s truly.

Next up is Google!
comScore expects a drop in ad clicks. But if Google has gone global, earnings may not be that bad.

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The US Dollar’s Positive Impact on Earnings

With earning season upon us, everyone from investment banking analysts to longer term investors are scouring data on existing and new product lines for any information on this quarter’s potential sales and profits. Most likely, unless they have inside information, everyone in the market is looking at the same news releases. However, there is one consideration that rarely pops into the mind of the American investor but can mean the difference between a good quarter and a bad one – the impact of Currency fluctuations on a company’s bottom line. Too many times, companies that are expected to report good earnings for the quarter, disappoint due to either a currency’s depreciation or appreciation during those three months as good sales are offset by adverse conversion rates. We have already seen countless examples of this and with many earnings reports still due for release, smart investors may find it advantageous to start looking at recent currency movements in addition to recent sales reports. The companies that will benefit the most are the ones that are heavily reliant on international sales.

In fact, we are already seeing the dollar’s weakness boost revenue for many multinational corporations.

This week alone, we have had at least SIX major US companies reporting earnings that were directly or indirectly impacted by currencies:

1) Coca-Cola’s profits were up 19 percent in Q1 and even though sales were strong, they would not be as strong had it not been for the 9 percent contribution from currency fluctuations.

2) Intel’s CEO said this morning that they are not hurt by the US slowdown because 75 percent of their sales are outside of the US. Once again foreign demand is boosting growth.

3) IBM reported a 11 percent increase in revenue with more than half of that gain coming from currency translations

4) Abbott Laboratories, a health care conglomerate reported a 14 percent rise in revenue, with currency accounting for 5.5 percentage points of this growth.

5) St. Jude Medical Inc, the second largest manufacturer of electronic heart devices said profit rose 27 percent with gains from exchanging foreign currency into U.S. dollars boosting sales by $45 million from a year ago.

6) Yesterday, Johnson and Johnson reported good earnings but even though sales have increased in all 3 of its units, without the increased revenue due to currency fluctuations, drug sales would have actually declined. Revenues increased 7.7 percent in the first quarter with currency moves contributing a whopping 5.1 percent to growth.

This is not the first time that US companies to have benefited from exchange rate fluctuations. Last month, Nike Inc said that strong overseas sales and beneficial currency rates pushed its profits up 30 percent. Earlier this year, IBM reported an 8 percent increase in sales in 2007 but acknowledged that the increase would have been only 4 percent if exchange rates were excluded.

Foreign exchange is here to stay and will continue to effect companies and their bottom lines in quarters to come. The importance is even more evident nowadays as companies continue to look over the horizon at global markets and competitors and continue to expand their businesses into countries like Europe and Asia. The result leaves sales and product lines exposed to foreign exchange risk. With everyone in the stock market looking at the same thing, it may very well pay to look outside the box and turn to the currency market as harbinger of current and future earnings.

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In the Financial Papers: Today’s Top Forex News 04.09.08

kathysmallHere is the “In the Financial Papers Radio Broadcast” (Length: 10:11 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy

In the Financial Papers:


Podcast Covers:
US Mall Owners Feel the Chill in Retail
Dimming Job Outlook in US Slows Migrant Crossings
NYSE Volume Drops to Lowest This Years as Investors Wait and See Earnings
Real Estate Problems Hit Japan
Dividing Growth Within Europe
Fed’s Alternate Options
Foreclosure Bus
Oil to Average 101 Barrel This Year
Focus of G7 Meeting
Money Market Funds Have Cash Parked on the Sidelines

In the Financial Papers: Today’s Top Forex News 03.24.08

kathysmallHere is the “In the Financial Papers Radio Broadcast” (Length: 06:04 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy

In the Financial Papers:


Podcast Covers:
Dollar Fluctuations Make Traders Whisper `I’ Word as Group of Seven Frets
Federal Home Loan Banks May Buy $100 Billion of Mortgage-Backed Securities
Wall Street Firms Eliminate 34,000 Jobs, Most Since Dot-Com Bust of 2001
Commodities Reverse Course on Hedge Fund Profit Taking
Traders Look for Signs of Market Stability
Euro Could Replace the USD as Reserve Currency in 10 to 15 Years
Weakening Dollar Boosts Exports
Inflation in Saudi Arabia Hits 27 Year High