The Double-Edged Sword of a Weak Dollar

By Atlantic Capital Management Markets are once again in their habitual 45-degree ascent mode. Buoyed by recent earnings growth and corporate score cards, stock investors are rushing to buy for fear of missing out. The unbridled optimism in the face of more pressing macro concerns really does highlight an ongoing disharmony between economy and finance. US corporations reach into every corner of the globe, so multinational firms, in particular, can still do well despite a sagging domestic situation. The biggest companies routinely register greater proportions of sales volume from overseas ventures than from domestic divisions. Are we on the cusp of another “new normal," one which will see the domestic stock market represent the global economy rather than just the US?

(To see Henry Lachman's piece on how global demand for aluminum is taking off, click here.)

That might be the case, if the idea of decoupling is true. If emerging economies -- particularly Brazil, Russia, India and China -- continue to benefit from the demographic and financial shift from the developed world, US included, then we may see a more permanent disassociation of larger stocks and their home economy. There are certainly many different elements to this story, from overseas cash hoarding and potential repatriation tax holidays to corporate tax rates and the desire to use these sterling results to help resolve debt issues. As significant as each of those are in their own right, the primary angle to all of this has to be the US dollar.

(To read Damian Thompson's article on enterprise wars as Dell and Intel move into new markets, click here.)

While the profitability story is undeniable, there is some luster lost when viewed through the lens of dollar devaluation. IBM (IBM) kicked off earnings season with a bang, posting robust results in nearly every market except the US. Overall revenue growth blew away consensus, coming in at 12%. Profits, showing some strain on margins from cost pressures, were a little less exceptional, but still a solid 8% growth. Driving each of those numbers were strong sales in overseas markets. For IBM's Europe, Middle East and Africa segment, sales were up 16%. In Asia, revenues grew 14%. Clearly the company's success is attesting to the idea of decoupling.

(To see Russ Winter's story on why the recent wave of earnings is disturbing, click here.)

Ex-currency translations, however, sales in both of those regions grew only 3% -- not exactly a robust pace. Overall, total revenue in the quarter for the company as a whole saw a 7% boost from favorable currency translations. That 12% revenue growth gets pared back to 5%, taking a lot of the luster and excitement out of the results. And while it is not a straight comparison, net income growth without the currency gains was significantly less than 8%. Unfortunately IBM is not atypical. Intel (INTC) reported fabulous gains, but more than half of its revenue came from Asia (ex-Japan) alone. In the US and Europe, the story continues to center on concerns about PC market growth. Without some kind of domestic growth, corporate profits are completely reliant on overseas markets. At what point does over-reliance on a weak dollar for earnings boosts become problematic?

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