Tuesday, June 05, 2007

$ Impact on Corporate Profits / Berner

this report from Richard Berner gives a good estimate how us profits benefit from the weaker greenback. it also shows that the big multinationals are almost the only big profiteers. in the meantime import prices are driving inflation ..... and unfortunately the theory that a weaker us$ should boost exports hasn´t worked out yet. and that despite a quite significant decline in the currency over the past years...... the opposite is true for germany. despite a very strong € exports are soaring to new records......maybe it´s related to the product mix ........click on the headline to read the entire good report.

dieser bericht von Richard Berner zeigt eindrucksvoll wie sehr sich der verfall des greenback auf die gewinne der unternehmen auswirken. es zeigt auch das hier im wesentlichen die großen multis den rahm abschöpfen. dummerweiwse hat die therorie das eine schwächere währung zu höheren exporten führen wird sich für die usa nicht bewahrheitet. und das bei einem wahern rutsch der währung....da es deutschland trotz starkem € gelungen ist neue exportrekorde aufzustellen liegt es evtl aber an so unwichtigen sachen wie den zu exportierenden produkten...... klickt bitte auf die überschrift um den ganzen bericht zu lesen.

But globalization means that global factors now matter relatively more than in the past. Indeed, according to our US equity strategy team, the top 25 companies in the S&P 500 derive more than half of their sales from overseas operations, and S&P 500 companies as a whole obtain 27% or more of their sales from abroad. Thus, a weaker dollar and stronger growth abroad could be powerful offsets to fading domestic support for margins.
A weaker dollar, if sustained, could support earnings through three channels. First, it is already translating US companies’ overseas results in euros or yen into more dollars. On a trade-weighted basis, the dollar has declined by 3.4% from a year ago, and our empirical work suggests that a 10% decline would boost US earnings from abroad by at least 3% and as much as 6%, boosting overall earnings by 150 bp. So the 3.4% decline in the dollar may have boosted overall earnings by 50 bp. But the effect could be larger, because the fixed weights in the trade-weighted dollar may mask regional shifts in the currency’s impact.

Notably, half of US foreign affiliate income originates in Europe, and the dollar has declined by 10.4% against the euro over the past year. It’s reasonable to expect those effects to continue over the remainder of 2007.

A weaker dollar is also helping the top and bottom lines by combining with domestic factors to promote stronger pricing power for US companies (see for example, “The Dollar and Inflation,” Global Economic Forum, May 5, 2006). The effect of a weaker dollar has begun to show up in US import prices; excluding fuels, such prices rose by 2.7% in the year ended in April.

The effect on domestic prices is less visible. But because there is comparatively little slack in the economy, I’m confident that, while it likely will be modest, it is on the way. Finally, a weaker dollar at the margin will help US companies recapture market share. The recent deceleration in real US exports, which rose by 5.2% in the year ending in March, is not encouraging in that regard, but I think that improvement in market share will come soon.

Of course, stronger global growth is also a factor lifting both US exports and US earnings; in fact, in my judgment, global growth is more important for both than the slide in the dollar. Empirical work has long supported the idea that improving growth is several times more powerful for exports than a similar-sized percentage-point change in relative prices. And earnings are increasingly leveraged to global growth as US direct investment spreads abroad. Our work suggests that the leverage factor could be 5 to 1 or more; that is, a percentage point improvement in global growth would yield an extra 5 percentage points of US earnings growth.

The outcome of this tug of war between domestic factors restraining earnings and global factors boosting them is obviously critical for financial markets. Yet many investors aren’t worried about the earnings slowdown. They believe that a slower US economy will ultimately bring about declines in longer-term yields, which would permit earnings multiples to expand. But they seem to forget that the same global factors that are a cushion for earnings are also driving up global, and to a lesser extent, US yields (see “The Conundrum Unwinds,” Investment Perspectives, May 24, 2007). For US equity markets, the global boom is thus a mixed blessing.

To be sure, equity-market valuations aren’t stretched, but my colleague Henry McVey’s COV analysis underscores that stocks aren’t as cheap as they were in February. And what about the risks to growth? It’s certainly possible that non-US growth could remain healthy even if the pace of US economic activity slowed significantly. But what are the risks to earnings if it does not? That would expose the downside of operating leverage: Simultaneously slower growth in both the US and overseas economies would promote a significant deceleration in US earnings.

Some of the risks associated with this scenario have to do with the character of these global factors. The combination of a rebound in US growth and still-strong global business conditions implies clear-cut upside risks to earnings growth. In that context, however, there are also upside risks to both inflation and interest rates, both of which could pressure risky assets. A benign decline in the dollar will likely be a boost to earnings and a plus for US equities. But a decline in the currency associated with escalating inflation expectations, a loss of confidence in US policies, or protectionism would make US assets less attractive to global investors. And of course, threats to growth, such as supply-induced energy shocks, would promote concern over future earnings gains.

>lets hope that the us gains the long promised export momentum very soon. i doubt it...

>bleibt zu hoffen das die usa bald die seit jahren versprochene exportdynamik entwickeln. ich habe da meine leichten zweifel....

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