I couldn’t help but notice today that Pfizer started the trend we’ll see from every multinational today blaming lower 2012 forecasts on a stronger dollar (CNBC). Pfizer has lowered their revenue projections by a full $200 Million. Two Hundred Million Dollars! … due to a stronger dollar. And that’s just one company. A strengthening dollar is about to sap Billions of dollars out of US corporate profits this year.
Why Is a Weak Dollar Good for Stocks?
To break it down, companies that sell within the US only are largely unaffected (directly). However, it’s a global economy. So, large cap stocks benefit from a weakening dollar in two ways. Primarily, there’s the direct conversion from foreign currency to US Dollars. So, if a Euro was worth $1.30 in 2008 ago and was worth $1.43 a year later, someone in Europe is still paying 1 Euro for that good or service – but translated back into US dollars, the corporation is receiving a 10% increase in revenue on the same service or good sold. It’s a total freebie! This “weak dollar trend across much of the past decade is what helped drive corporate profits, and hence, stock market returns.
Aside from that straight conversion back to USD, a weak currency also helps the VOLUME of exports, so net unit sales increase as well. Why? Well, because for a given good or service, with a weak currency, the purchase is cheaper in an overseas market (or corporations are willing to slightly discount their goods and services to drive more volume, capturing market-share from overseas competitors and so-on). So, on both volume and revenue, a weak dollar is really good for stocks. And as you just saw in the Pfizer announcement and many more to come, a strong dollar will hurt profits.
Presidents All Claim They Support a Strong Dollar…They LIE
This isn’t an Obama knock; every president has always claimed they support a strong dollar (Obama, Bush, etc.). But their actions rarely live up to the hype. So, why do politicians lie and pretend they support a strong dollar? After all, a benefit of a strong dollar is lower inflation (since OUR dollars buy more imports and we don’t see inflated prices on food, clothes and all the cheap crap we buy from China). But politicians don’t really care about inflation. They care about elections.
What Would You Choose – slow inflation growth or stock market crash? If you were a politician and your sole goal in life was re-election, would you care more about a slow insidious degradation of the buying power of your constituents OR the obvious panic and decline in 401(k) accounts, tax revenues, pension valuations, home prices and all the other economic factors that suffer when the stock market declines? Of course, you’d choose inflation (hence, a weak dollar).
How the US Government Weakens Our Dollar Further
The only reason the dollar is strengthening these days is because the Euro is the only other stable, legitimate major currency and Europe is crumbling under the weight of decades of deficit spending, record high unemployment and slow economic growth. So, in comparison, the US looks rather acceptable. That’s causing the dollar to rally. It won’t last forever, but for now, the safe money is flocking to US Treasuries, driving up the exchange rate. To keep the dollar weak by destroying the monetary base, the Fed and the administration (and yes, the prior administration) have continued to print, print, print. Quantitative easing, utterly stupid stimulus spending, bailouts and all sorts, and negative ROI tinkering is helping to stave off a dollar that would been even stronger were it not for this incompetent tinkering.
Why Does It Matter?
Well, it’s important that you understand how various policies impact our currency, how a strong or weak dollar may impact your personal situation and if you cast your vote on the issues that matter – you know, national security, fiscal/monetary policy, tax policy and such… rather than social issues alone, then you’re informed.
Do You Care About the Strength or Weakness of the US Dollar?