Thursday, April 26, 2007

Weaker Dollar Boosting Earnings

From CNBC:

Of those 19 Dow components--about two-thirds of the Dow--one company, Alcoa, had a negative impact on revenue from currency changes.

Two companies--AT&T and Intel--told us that there was no effect. But 14 companies had a positive impact, ranging from a low of 7% to a high of 51%.

The average company had a 27% positive currency earnings impact.

Revenues from these 19 companies are up $21.5 billion for the quarter. Of that amount, $3.4 billion, or 16% has come from positive currency gains.

So far, revenues are running about $9 billion ahead of analyst estimates. So the currency factor explains about 40% of the surprise.

US companies are benefiting from the same situation that has benefited Asian companies for some time. If the value of a currency is lower, goods sold in that currency are cheaper. Hence, the boost in international earnings.

It's going to be interesting to see how this impacts the international trade deficit. This increase in domestic profits from international sales is what is supposed to happen in a free-trading currency trading situation. As the trade deficit increases, the home country's currency is supposed to drop in value which in turn makes its products more competitive internationally. The question now becomes, is the dollar at a point of inflection -- where it's decreased value now has a long-lasting positive impact on the trade balance?

Here's a chart of the deficit form Martin Capital.

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