Multinationals: A Safe Way to Play the Coming Drop in the U.S. Dollar 12 comments
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If you talk to most economists, there is a general agreement that the US dollar is due for a big drop in the somewhat near future. Many have been predicting this for a while now, but there seems to be more and more momentum towards this feeling.
The reasons aren’t new:
Federal Debt
I was checking out the Federal Debt clock. What is truly scary when you watch it is just how fast it moves! It moved the value of the average home in seconds! While I am looking at it at this moment, it shows a debt that is north of $11.6T. This doesn’t factor in other items such as Medicare debt, state debt, etc. So, no matter what the true number is, it is staggering. You simply don’t have that much debt to the rest of the world before your currency gets deflated.
Trade Imbalance
As I look at the numbers, they are improving. That is good……What is not good is that the imbalance is still over $36B for January 2009. This number was as high as $62B in the summer of 2008, and may very well go back up towards that point as energy Imports from Canada/Middle East/Latin America start to pick up again with a strengthening economy.
Bernanke's Printing Press
Similar to adding water to your Dad's Scotch bottle to cover what you and your friends drank (not that I am condoning that!), you can get into problems when you dilute things! When you print that much money, to support all of the economic relief efforts, it doesn't take an MBA to see how you devalue your currency.
Some may argue (somewhat correctly) that a lower dollar will help the trade imbalance, as US exports become cheaper abroad (and foreign Imports become more expensive domestically, when prices in US dollars). I see the logic here, but it isn’t totally accurate.
Check out the US Government’s trade balance with Canada from 2003 until now. In 2003, the joke was that Canada’s “loonie” was almost becoming a "Peso". In January 2002, the average exchange rate was 0.62 US dollars for each CDN dollar. In October 2007, the rate changed so that a Canadian Dollar was worth 1.025 US dollars, or above parity. This is a jump of well over 50% in 5 years.
Logic would say that the trade imbalance between the US and Canada should have improved dramatically for the US. However, the trade imbalance for January 2002 was $4.273B, in Canada’s favour. For October 2007, it had actually grown to $5.414B. I haven’t researched it, but I have heard that there are similar numbers with other countries.
So, if the US dollar is likely to be falling, are there easy ways to play it?
I’m not a Currency expert, so I will leave any foreign exchange trades to those who follow this stuff closely (my advice would be for the average investor to do the same). The ways that I like to play it is to look for US companies who derive a large part of their sales outside of the US, foreign companies listed as ADRs in the US or Domestic companies who attract overseas customers to the US.
Here’s how you can play it:
Good become cheaper overseas
This is obvious, but it does require mentioning. If the US dollar falls 10% versus a particular currency, their buying power for locals on American-priced goods increases by 10%. This means that companies who sell a large part of their goods abroad should see increased Sales/Margin.
Companies that I like for this are:
ADRs can also look good
This one only applies to those buying foreign-listed companies as ADR in the US. Don’t use this strategy if you are buying the stocks on the LSE directly, as an example. For companies that do the majority of their work outside of US, and are based in a non-US company, these ADRs generally see an increase with a decline in the US dollar. This also makes sense, as the earnings per ADR share will go up with any corresponding drop in the US Dollar, as the ADR is prices in US dollars. As an added bonus, you also can get easy access to many emerging markets without having to trade overseas (that is for a different article!).
Companies that I like for this are:
Companies that are US based, but attract foreign buyers
This one is not as correlated as the first two, and won’t necessarily have an extremely high relation to a US dollar drop. There was a news story on CNN a while back, where it showed that many of the customers at the high-end New York boutiques/stores were in fact from overseas, and they were lining up to buy US dollar based items, as they were now much cheaper than when priced in Euros. This trend died off for two reasons. First, a global recession tends to reduce non-discretionary spending, even on the Paris Hilton crowd! Next, the US dollar staged a strong recovery, namely because it re-emerged as the safe haven for many investors worldwide.
Both of those obstacles should be cleared over the next little while. With the uptick in the economy (and likely, the net worth of many of the elite, with the uptick in the stock markets), they may be more willing to spend than in the past few months. As well, as the economy begins to show signs of life, risk tolerance will return to the market, and people may start to unload some of their positions in the US dollar.
Again, I must reiterate, there won’t necessarily be a HUGE correlation between the US dollar and many of these company’s sales. If the US consumer (who makes up the majority of their base) is still hurting, the companies may not see a dramatic uptick.
Those who I like in this space:
Disclosure – Long BHP, KO, MSFT, PG
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This article has 12 comments:
On Aug 20 03:49 PM Larry House wrote:
> If the last many months have taught us nothing, they have taught
> us that all ships can be sunk. I wouldn't call these stocks a "safe"
> way to play a weakening dollar, but they do make sense. The dollar
> can sink so far that there is no where to hide.
Do you like multinational agri-based companies at all? Companies like ADM, Bungee, Sygenta and even Monsanto will arguably outperform other multinationals in a hyper inflationary environment because they are still price-setters.
On Aug 20 05:33 PM PVizzle wrote:
> Why not add multinationals to a diversified portfolio of resource
> stocks, commodities, dividend paying foreign stocks and emerging
> market currencies (the dong, yuan, won, etc...)? I don't think multinationals
> solely guard you against a dollar collapse.
>
> Do you like multinational agri-based companies at all? Companies
> like ADM, Bungee, Sygenta and even Monsanto will arguably outperform
> other multinationals in a hyper inflationary environment because
> they are still price-setters.
I think you could speculate on a few asian currencies like the Won, Yen, or Yuan. There's an asian currency fund run by Axel Merk ticker: MEAFX that is supposed to guard against a dollar decline. I don't know if I would put all my eggs in one basket though.
Dave - The dollar has held up better than I would have ever expected in the past little while. All of the points in the article have been in place for at least months (if not, in the case of trade deficits/debt, years), but the market often flocks to what it knows in times of distress, I guess....
PVizzle -- I definitely wouldn't use these stocks as the ONLY way to play a falling US dollar. I wouldn't even use only stocks in general....gold, Energy Producers, Energy Services companies, REITs, TIPS and other instruments are all going to be necessary for every investors portfolio. I agree that Resource stocks can be a great hedge against a falling greenback. However, they do carry a fairly high level of volatility, and not all investors can stomach that. I wrote an article about Dr. Stephen Leeb a while back, and posted some recommended long-term resource plays in there, including Ag stocks.
To add to your other point, I hate to speculate too much in articles, although, one has to wonder just how long the rest of the world will continue to use the Greenback as both the Main world currency and as a way to price Global Commodities. If either one of those positions were to slip, look out below!
As for companies such as Monsanto, ADM, Syngenta, they do have a good future, and would be good choices to balance off US dollar exposure. You could arguably add in Mosaic, Potash and Agrium......only recently did they ever get down to an evaluation that even remotely made sense to me, however. I have owned Potash in the past, but flipped it out at close to $190 before (didn't reach the top, but didn't lose my shirt on the way down).
Disclosure - No position in any of the Ag stocks, long on a bunch of Energy producers/services, REITs, Gold and TIPS. So, you can see that I think inflation is going to kick in soon!
Cheers to all
Larry
Right now there seems to be some more wage deflation so it will help balance things out and the Fed has pledged to slow down QE. Then act II of Obama stimulus takes place. Then the dollar drops again. Then if a recovery doesn't take hold the middle class becomes impoverished and consumption drops leading to a tendancy for deflation. Then the Fed etc print more money. then the dollar drops. This type of process has been going on since the beginning of the recession.
If you get sick of it, I suggest you take Larry Bellehumeur's keen advice and buy ADRs. Betting on foreign currency or other things overxposes most people to the wild arbitrary swings of US Treasury rates and the dollar's value caused by the government trying to dissuade people from betting against the dollar as they deflate the dollar. Betting pure commodities tends to overly exposes you too much to a total lack of real demand by US consumers, thus makes you essentially bet on Chinese hoarding of metal (once again betting on another arbitrary government).
Anyway, this is my 2 cents on the issue. Thanks for the article.
William -- It is a good point. The main reason that I was focusing on ADRs is the for the simple availability for everyone. As an example, being a Canadian, it isn't as easy for me to buy Foreign-listed stocks in London. Ultimately, the same effect would happen, just in a slightly different way (ADRs would appreciate because a depreciating dollar would boost the earnings per share, where as buying a Foreign listed equity in US dollars wouldn't help the earnings, but you would see the same benefit directly from the currency). Good point....
TheFounder - Also a valid point. My main goal for this article was more to bring up the likelihood of a US dollar drop (which is happening today, ironically), and to give some ideas on how to play it (aside from the usual Gold and other plays). There is no perfect balance, and I would recommend that investors of all ranks hold a large selection of them. Many of them, such as Gold and Oil Stocks, also offer an Inflation hedge, in case that happens too.
Thanks for reading!
Larry
If the dollar is suppose to drop further....all you have to do is to buy tangible assets such as a House, Gold, Silver, Car, S&P500 and DOW, NASDQ-stay away from cash in the saving account......the marketis already telling you S&P500 gone up over 50%, banks over 500%, becasue they are buying the S&P500, and DOW
Americans......with our nat't debt having "leaped ' to almost 12 Trillion$$$ the dollar is fated to drop like a rock...no doubt...
I think a good American currency hedge is LINE(Linn Energy)
with a PE of 2! EPS in double figures and payout of about 25%
still yields double figures in cash dividends...check it out...the reason "oil" prices are rising is that the US Dollar relative currency valuation in the world is DROPPING>>>&g... than sparing demand(yet)...so a great hedge against same. IF the world decides to peg oil aginst some "composite currency unit or using the EURO....LOOK out below for the UD Dollar drop....................