Strong Dollar, Weak Profits

Oil prices are getting all the blame for the recent U.S. stock market downturn, but it’s
hard to see the connection when so many companies and consumers benefit from low
energy costs. A better culprit is the strong dollar.

Provided by Clark A. Kendall, CFA, AEP®, CFP®

Oil prices are getting all the blame for the recent U.S. stock market downturn, but it’s
hard to see the connection when so many companies and consumers benefit from low
energy costs. A better culprit is the strong dollar.

The accompanying chart shows how strong the dollar has become compared with a
basket of international currencies; it shows roughly a 15% appreciation since mid-2014.
Economists will tell you that this represents a vote of confidence from the international
community in our economy, which should probably be a point of pride. However,
when the dollar is strong internationally it also means that when American companies
sell their products outside of the U.S., the products are either priced higher or the
company has to discount the price to maintain pricing parity. At the same time, the
strong dollar reduces the conversion of profits abroad from foreign currencies into
dollars.

Either you lose sales because of uncompetitive pricing or you reduce margins. Both
options reduce profits. Heads, large American companies with significant business
overseas, lose, and tails—well, you get the idea, and the lower conversion rate adds to
the short-term pain. Those large American companies most affected happen to make
up much of the Dow Jones Industrial Average and the Standard & Poors 500 index.

When you buy a stock, fundamentally, what you’re buying is a claim on the company’s
current and future earnings and profits, which can be returned to you in the form of
dividends or returned indirectly as the company invests in plant, equipment or other
expansion which can drive future profits higher and make the company (and its stock)
more valuable. When earnings and profits decline temporarily, people regard those
companies as temporarily less valuable than they had been with higher earnings and
profits. This is why short-term traders pay so much attention to “earnings season,” as
it’s called, when companies disclose their balance sheets.

The key word in all this is “temporary.” While oil prices seem to be stuck in the middle
of a glut, the value of a dollar on the world markets may be peaking, and have nowhere
to go but down. That, in turn, could reverse the earnings and profits slide, companies
could snap back to their former values, and stocks could do what they always seem to
do after declines: reverse course and eventually test new highs.

KCMChart

About Clark A. Kendall, CFA, AEP®, CFP® Clark Kendall has more than 30 years of
experience in investment management and wealth management strategies. He is among
a select few wealth managers worldwide who have earned the triple designations of
Chartered Financial Analyst (CFA), CERTIFIED FINANCIAL PLANNER™ (CFP®) and
Accredited Estate Planner® (AEP®). He has been named one of the Washington
metropolitan area’s top wealth managers by the National Association of Board Certified
Advisory Practices (NABCAP) and the Washington Business Journal.

As a founder of Kendall Capital Management, Clark provides intelligent, independent
financial direction to high-net-worth individuals and families in and around
Montgomery County, Maryland – particularly Montgomery County’s “Middle Class
Millionaires.” His financial planning analysis, strategies and approach to client service
are designed with these clients in mind. As a fee-only, independent financial advisor,
Clark is a fiduciary who is held to the highest standard of any professional advisor in
the industry. He sits on the same side of the table as the client and utilizes his skills and
talents to serve clients with these common goals and concerns.

Clark’s approach is to actively manage portfolios that meet his clients’ goals in a costeffective
manner. As a fee-only, independent advisor, Clark has no allegiance or
conflicts with other financial organizations for trading or product selection.

Source:
http://www.mauldineconomics.com/connecting-the-dots/the-dollar-dog-atecorporate-
americas-homework-6-casualties-of-the-strong-u