AP: Dollar's Plunge Becoming Lynchpin in Q1 Earnings

I see someone has been reading my blog...

I have 2 comments to add to my spiel about how the weak dollar is masking domestic weakness. (i.e. almost all of IBM's revenue growth was "currency exchange" 7 of the 11% "growth")

#1 Earnings season is top heavy (front loaded) with the large multinationals - after this week and next week, we'll be through many of the S&P 500 type of names who are large enough to benefit from this situation. Then we'll be left with a lot of smaller companies who are stuck with only US exposure.

#2 The dollar looks prone for at least some sort of bounce. It has been beaten to death... now in the long run our dollar faces many systematic issues due to our structural imbalances, and many short term issues (mostly the massive inflating of our money supply by Gentle Ben), but just like with homebuilders, retailers, restaurants, financials - nothing goes in a straight line up or down. The weakness in the dollar has been SO pervasive we'd expect at least a modicum of recovery at some point soon. What could be a catalyst? The next Fed meeting - odds are for a 25 basis point cut but at this point the "real returns" (adjusted for inflation) are negative, so I don't see the point of any more cutting. In English? The Fed has basically said we want you out of savings - we are going to punish savers so badly that we are going to make them lose money every day their cash sits in a money market account. Take that prudent people! I'd argue that real rates have been negative for a long time because inflation is WAY understated, but even with the governments fictitious representation of inflation, we are now "negative".

So they will be stopping soon enough, if not this meeting than in the next meeting in mid June. In "theory" that should be a boon to the dollar. But they have created so many other new instruments to flood the system with US pesos, I am not sure if it really matters. [Mar 22: A Historic 9 Days for the Federal Reserve] However, for perception purposes at least, it should create an illusion - and we'll hear CNBC tout how "the Fed is now fighting inflation!" No, that's lies. Just like last time around they "only" cut 75 basis points instead of 100 points and CNBC told us this means they care about inflation. Laughable. 75 basis points is tied with the most they have ever cut in 1 meeting - so somehow by putting language into their statement that inflation *might* be a concern after all that is "fighting" inflation. If I see them raise rates by 75 basis points, then I'll agree they are fighting inflation. Words mean nothing - except to CNBC cheerleaders.

Again, the problem with a "stronger" dollar is it will hurt the 2 areas that have been the only market salvation - US multinationals and commodity based stocks. So it will be an interesting situation if the dollar can actually put on a rally that lasts more than 72 hours. And I'll like to re-emphasize most job creation and economic activity in this country is in smaller businesses - so all this focus on the large US multinationals is a focus on earnings, not economy. What is good for US multinationals (weak dollar so their goods become dirt cheap to foreigners) is net net not very healthy for the average American sifting through his/her average life on Main Street. Or the 1000s of private and public companies who solely rely on the US - the type of companies CNBC glosses over. Last point - if/when the dollar bounces in any meaningful way AND holds it - all these corporate profits by multinationals based on weak dollar - reverse - *poof* gone. That said, I'd rather be investing in these type of companies than those that rely on subprime nation.

• The dollar's plunge might be preventing Americans from taking that European vacation this summer, but it could be the very thing saving their 401(k)s from buckling. Some of the nation's biggest corporate powerhouses -- across all industries -- have used the greenback's retrenchment to shield themselves from slumping profit margins. Declines against world currencies make U.S. products look cheap overseas, and translate into big returns when sales are converted back into dollars.
• Take Coca-Cola Inc. for example. Buying a can of Coke cost $1 in the United States, but the equivalent of about $2 in the U.K. -- one reason the beverage giant was able to sail past Wall Street profit projections earlier this week.
• "If you look at some of the companies that had good quarters, they're doing half or more business abroad," said Phil Orlando, chief equity market strategist at Federated Investors. "The weakness in the dollar is a significant benefit in currency translation, and for those companies that are developing products that will create a boost for export activity."
• The dollar is down about 8 percent against the 15-nation euro, and has touched lows against the yen and Great British Pound. One reason for the slide is that the Federal Reserve continues to lower interest rates -- and that makes the dollar less valuable.
• Atlanta-based Coca-Cola reported said revenue jumped 21 percent to $7.38 billion during the first quarter. It attributed 9 percent of the increase coming from the dollar's decline against other currencies.
• Meanwhile, Caterpillar said strong international sales of the company's bulldozers and other heavy construction equipment overcame weakness in North America. Sales grew by 30 percent outside of the U.S., and represented 58 percent of total revenue.