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Will Other Companies Follow?
It’s right there in Intel’s (INTC, Weiss Ratings: B) press release pre-announcing weaker-than-expected first-quarter sales. Paragraph two, last sentence:
“The company believes the changes to demand and inventory patterns are caused by lower than expected Windows XP refresh in small and medium business and increasingly challenging macroeconomic and currency conditions, particularly in Europe.”
There’s still another few weeks to go in the first quarter. But given the dollar’s ongoing surge so far in 2015, that begs an obvious question: Will other companies follow Intel’s lead?
We know many multinationals were already losing sleep over the buck. When discussing fourth-quarter 2014 results …
|Intel is the latest multinational to face challenging currency conditions.|
==> Chemicals giant DuPont (DD, Weiss Ratings: B+) warned that it would earn between $4 and $4.20 a share in 2015. That was far below the $4.46 a share analysts were looking for at the time. A key reason for the miss? The dollar’s rise, which it said would reduce profit by a whopping 60 cents a share!
==> Consumer products giant Procter & Gamble (PG, Weiss Ratings: B) also took a major currency hit. Profit plunged 31 percent in the fiscal second quarter to $2.37 billion, or 82 cents a share, from $3.43 billion, or $1.18 a share, in the year-ago period.
The firm blamed an “unprecedented” dollar rise for slashing five percentage points off of its sales, and said it saw no end in sight to the pain. After all, it said the currency move would lop $1.4 billion off of earnings in 2015 — and that was before the even more severe dollar rise in the past few weeks!
==> Caterpillar (CAT, Weiss Ratings: C+) fell off its own currency-related cliff, too! The mining and industrial equipment maker said fourth-quarter profit tanked 25 percent in part because of currency problems.
==> The jet engine, elevator, and helicopter company United Technologies (UTX, Weiss Ratings: A-)? It blamed the dollar for a reduced 2015 earnings outlook, too. Diaper and toilet paper firm Kimberly-Clark (KMB, Weiss Ratings: C+)? Same story.
All told, Thomson Reuters data suggests S&P 500 earnings will fall 2.7 percent year-over-year in the first quarter. A key cause of that decline? The soaring dollar.
|“Thomson Reuters data suggests S&P 500 earnings will fall 2.7 percent year-over-year in the first quarter.”|
Heck, the currency market developments drew enough attention to make the front page of today’s Washington Post. The story cited companies as diverse as Avon Products (AVP, Weiss Ratings: D+) and Staples (SPLS, Weiss Ratings: C) as examples of who is suffering from our currency’s climb. And of course, I explained on Tuesday which other kinds of assets are suffering from the buck’s blowout rally.
You’d like to believe that investors have mostly priced in the dollar’s impact by now. But the share price action in Intel today suggests otherwise, considering the stock dropped almost 5 percent on a day when the Dow soared 260 points.
So does that mean this will be an uglier than expected earnings season? Will the surging dollar prove a major headwind for equities? Or are there enough winners from a rising dollar to offset the losers like Intel? How are you changing your investment strategy in the wake of the tech bellwether’s warning, if at all? Let me know over at the Money and Markets website!
|Our Readers Speak|
There’s a lively conversation going on over there, by the way, about the absurdity of negative interest rates and banks paying interest to mortgage borrowers.
Reader Thomas S. said: “If the banks paid me interest on a mortgage, it would be easier to pay back the principal using the interest they paid me. I will live the lifestyle of the rich and famous, without being rich or famous. Count me in on buying a mansion if this occurs.”
Reader Nohomehere added: “Did you say one can borrow money at a negative rate? If so, let’s go and get one hundred million from them, invest it in the bond market, and pocket the difference. They will pay us to do it!”
Reader Bill S. also weighed in, saying: “I am calling Chase and will tell them that I have been a long time customer and it is time for them to start paying me for keeping my mortgage with them. That 2.875 percent interest rate is now going to be -.015 percent, and I will come in and pick up the cash every month.”
Haha! I think these are all great ideas. But sadly, I’m guessing Chase would laugh you out of the office if you actually suggested it. Then again, we’ll see what they say in a year if current trends continue!
Still, Reader Fred1 warned that behind the ridiculousness of it all, there’s an ominous message the market is trying to send out. His view:
“You have to step back and think about what you are seeing. It is a rare event. The situation you describe with the banks paying for mortgages and charging depositors can only be explained by one word: DEFLATION. Some of this has been exaggerated by years and years of central bank meddling in the natural course of financial affairs, but the worst is still far down the road yet.
“Deflation is a disease that cannot be contained in a worldwide economy. Once it begins to rage in Europe, it will spread rapidly. It happened exactly that way in the 30s. And deflation is very, very hard to treat and cure.”
Finally, I feel like I have to respond to a post from Reader Dr. Redburn, who said: “Why did you have us shorting the euro with the inverse ETF EUO and hold it for months, then just as the euro began to tank, and EUO started paying off, you got us out of it?”
My comment: Seriously? I first suggested buying EUO in my Safe Money Report when the euro was trading for around 1.40 to the dollar. I suggested that subscribers bag the last of their profits when it was trading for around 1.12-1.13.
If you want to complain about missing the last five or six cents … after catching the first 30 … you’re certainly welcome to do so. But I think you’re playing with fire shorting the euro here — after the biggest decline against the dollar in history, and with sentiment almost 100 percent euro bearish.
Anyone else want to weigh in here? Is this still a good time to make money from a falling euro? Or is the lion’s share of the move over? What else are you thinking about negative interest rates? The website is your best outlet, so feel free to use it when you have time.
|Other Developments of the Day|
Retail sales fell 0.6 percent in February, after slumping 0.8 percent a month earlier. That disappointed investors who were expecting stronger results. But initial jobless claims fell 36,000 to 289,000 in the most recent week, a sharper decline than economists expected.
The Dollar Index (DXY) surged to 100 overnight, from just under 79 last May. That makes this the fastest, largest move in the history of the index.
That said, the buck appears to have reached an exhaustion point in the overnight hours. The euro bounced by almost a cent and a half against the greenback after briefly violating the 1.05 level.
Both Thailand and South Korea cut interest rates in unexpected moves overnight in the last 48 hours. Korea’s new rate of 1.75 percent is now the lowest in history. Those kinds of moves have exacerbated the currency wars, wherein many foreign banks are cutting rates even as our Federal Reserve is close to raising rates for the first time in almost nine years.
Just to signal how things are getting much more disjointed, however, the Reserve Bank of New Zealand took an opposite tack. It stopped signaling its preference for a weaker currency overnight, sending the “kiwi” sharply higher against the buck.
The Federal Reserve’s stress tests are now complete for 2015, and several banks that passed are raising dividend payouts or buying back stock. Still, some of the biggest banks like Bank of America (BAC, Weiss Ratings: B-) are still under tough Fed scrutiny and therefore unable to reward shareholders as much as executives would like. That’s fueling tension between regulators and bankers, especially now that the credit crisis is behind us by seven years and counting.
So what do you think of the latest economic data? Or this countertrend rally in the euro? And how about the Fed — is it being too tough on the banks, or meddling too much in their business? Let me know at the website.
Until next time,