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Politics : Sioux Nation -- Ignore unavailable to you. Want to Upgrade?

To: stockman_scott who wrote (22708)	6/17/2005 12:52:21 PM
From: manalagi	Respond to of 362397

The economy is in a big dilemma. Damned if you have weak dollar and damned if you have strong dollar: The Impact Of The Rising Dollar On S&P Earnings Estimates As recently as Friday, we noted how the strengthening of the dollar in recent months could crimp corporate earnings. Today, the chief North American economist for Merrill Lynch published a note that helps quantify the impact of the recently rising dollar. According to Merrill economist David Rosenberg, many analysts had expected the dollar to fall another 10% this year. Instead, the dollar has gained roughly 11% against the euro and 6.6% against the yen year-to-date, thanks to favorable interest rate comparisons (Greenspan's continued rate hikes) and the slowing EU and Japanese economies against modest, but solid U.S. growth. There is now talk of EU interest rate cuts later in the year. The yen dropped to an eight-month low against the dollar today, while the euro fell to a nine-month low earlier in the session. The euro declined to slightly above $1.20 at one point today. As recently as early January, the euro was trading at over $1.36. Rosenberg estimates that if the dollar should merely stabilize at current levels and not rise further, the S&P 500 earnings consensus would drop from $74.50 to $72.80 this year and from $82 to $75 next year. Using Rosenberg's revised estimates, this would suggest year-over-year earnings growth of just 3% in 2006 compared to the current consensus of 10%. It goes without saying that this would mark a significant slowdown in earnings growth if this recent trend holds. The consensus still calls for the dollar to weakness -7% this year. "We are amazed that no one else on the street has begun to at least tinker with their EPS estimates since very, very few were carrying $1.22 on dollar-euro or 108 dollar-yen in their top-line numbers at the start of the year," said Rosenberg. "More to the point - if the dollar doesn't begin to falter again, we are at risk of a downward adjustment to earnings and what our research shows is that investors may be lulled into a false sense of security," Rosenberg explained, adding that the recent move in the dollar suggests that the market is trading at 16x 2006 earnings as opposed to what looks like 14.6x. In our Friday market wrap post, we said that we felt "a more cautious stance going forward was wise at this juncture" and the recently rising dollar was one emerging headwind. "While the market has trended higher in recent weeks, the dollar has continued to strengthen (the weak dollar had been a nice tailwind in recent years for corporate America) and the yield curve has continued to flatten (don't underestimate the amount of corporate profits tied to spreads)," we said. This note by Rosenberg is the first time we've seen a major house start talking about what the quietly rising dollar could mean for corporate profits and earnings growth this year and next. We've been surprised that there hasn't been more discussion on this topic. So far, though, we haven't seen any U.S.-based multinationals, which have done very well the past few years booking their sales overseas in stronger currencies, come out and warn about the impact of the recent reversal of this trend. It will be interesting to see if these comments start popping up on Q2 calls. The dollar has really made its move against the euro just since the second half of April after trying to rally to open the year, but breaking down soon thereafter. This move has accelerated in recent weeks with the French non vote on a new European constitution. "The strengthening/more stabilized dollar is the most significant development for U.S. investors, as much of the bull run since 2003 has been marked by a weakening dollar. The Fed has already crushed the short U.S. dollar/long commodities trade with its higher rates, and a rising or more stabilized dollar could provide another headwind for the market. On the flip side, global capital inflows could be bullish for U.S. assets - particularly in the near term," we explained a few weeks ago. In related news, Goldman Sachs revised its three-month forecasts for the dollar against the euro and the yen for the second time in two weeks. Goldman now expects the dollar to rise to $1.15 per euro compared to its previous forecast of $1.20. In another sign of how the herd has changed its prior bearish tune towards the dollar (bye-bye short dollar/long commodities trade), a new Bloomberg survey showed that 80% of respondents said to sell the euro against the dollar, up from 47% last week. We'll have to wait and see if this is a contrarian signal for a euro bounce. This "stabilizing dollar" work by Rosenberg shouldn't be a cause for alarm, but should serve as a meaningful reminder of why we are looking to become more defensively positioned and more cautious on the long side. We've already discussed the dollar impact on our commodity holdings.