Seeking Alpha
Small-cap, long/short equity, special situations
Profile| Send Message|
( followers)  

Jenna Bush was married May 10th. Grandchildren are just around the corner for George Walker Bush. When they ask him about his presidency most likely his response will be “Honey, I shrunk the dollar.” Indeed, the dollar has been in a free-fall ever since the younger George Bush took office.

Unless you are planning an exotic foreign vacation, why should you care about the U.S. dollar relative to foreign currencies? Actually, it matters here at home too. The declining value of the U.S. dollar relative to foreign currencies is at the heart of rising prices for everything from gas, to food to clothes.

Step back for a moment and look at why the U.S. dollar is so weak. First, U.S. consumers have flooded the world with “greenbacks” by buying so many goods from foreign producers - cars made in Japan, clothes sewn in China, wine from France, and - lets not forget the biggest purchase - oil from the Middle East. All the buying in foreign markets has put pressure on the U.S. trade deficit, which hit a peak $61.7 billion in February 2008. Second, other economies are growing faster than ours, which means capital is being sent to economic hotspots like India, China and Eastern Europe, driving up demand for those currencies.

A falling U.S. dollar is supposed to fix the trade deficit problem. Why is the trade deficit still so large even after such a steep discount of the U.S. dollar? We are in hock up to our ears, that is why! George W. Bush and his administration have been on a spending binge - mostly to pay for the wars in Iraq and Afghanistan. The total U.S. federal debt was approximately $9.5 trillion - about $31,100 per capita at the end of April 2008. U.S. consumers are right behind him, running up household debt to almost $10 trillion.

Household debt is at a record 134% of disposable income. Add in each person’s share of the government debt - whew! Everyone knows what happens when you go too far in debt and it does not look like you have the capacity to pay it off. Your credit score goes down! In the world scheme of things a country’s currency is a proxy for a credit score.

George shrunk the dollar, but that does not mean investors cannot hedge against it. Equity investors can look among U.S. producers of export products or companies with operations in growing economies. These companies are attractive because they are able to sell to customers with strong currencies. Carrying our personal credit score analogy one step further - it is something like changing jobs to work for a more stable employer. All of sudden you look like a better credit risk.

Aerospace/defense companies like Boeing (NYSE:BA) and Caterpillar (NYSE:CAT) are two big winners in terms of exports. Some stocks in these sectors are trading at good values. BA shares have been beaten down by Boeing’s difficulties in getting its new 787 Dreamliner out the door. Likewise CAT shares are trading at 14 times forward earnings and offers a 1.7% dividend yield to boot.

In the Crystal Equity Research coverage universe, Phase Forward (PFWD) and Dynamic Materials (NASDAQ:BOOM) have considerable demand from customers outside the U.S. Phase Forward provides software applications and support to drug developers conducting clinical trials and Dynamic Materials produces sophisticated metalworking components for a variety of manufacturing and process industries such as aerospace, pharmaceutical, oil and gas, and alternative energy. Both stocks are trading off 52-week highs, giving new investors a chance to get on board when the time is right.

In the CER Report series, Reed’s, Inc. (NYSEMKT:REED) started putting its new age beverages - Reed’s Ginger Brew and Virgil’s Root Beer Brew - on the shelves of natural food stores in the U.K., Ireland, and the Netherlands. A French distributor is targeting the trendy café market in France.

Disclosure: Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. As of the date of this article, Crystal Equity Research has a Buy recommendation on PFWD, a Hold rating on BOOM shares, and a Speculative Buy rating on REED.

Source: 5 Stocks to Hedge Against the Falling Dollar