Larry Bellehumeur's  Instablog

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:

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.

 

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,

 

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:
 

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:

-          Intel (INTC)

-          Microsoft (MSFT)

-          Coca-Cola (KO)

-          Proctor and Gamble (PG)

 

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:

-          Telefonica (TEF)

-          BHP Billiton (BHP)

-          Nestle (NESN)

-          America Movil (AMX)

 

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:

-          Wynn Resorts (WYNN)

-          Coach (COH)

-          Sotheby’s (BID)