I find it fascinating that the stock market is still so fixated on stimulus (more quantitative easing), which says a lot about the nature of the global economy. Stocks posted a pretty strong rally yesterday after the European Central Bank (ECB) hinted at increasing their QE program. Then, this morning, the futures were driven even higher after China cut some key interest rates. This issue I see with this is that easing in other countries is not the same as easing in the US by the Federal Reserve.
The primary goal of the ECB’s QE program is to weaken the Euro. They’ll throw out all sorts of other reasons why it’s a great idea but it’s all about a weaker Euro. A weaker Euro means a stronger US dollar which is very, very bad for all US-based multinationals as well as anyone, both governments and companies, in foreign countries that have borrowed in US dollars. Make no mistake about it – the rising US dollar will be the cause of the next recession… which means that ECB easing is not good for the US economy or US companies.
The real 800 pound gorilla in the room is still China though. Remember the deflationary shock they created when they ended their currency peg to the US dollar in August? Well the renminbi has been following their Reserve Ratio (RR) requirement for banks…which they just lowered this morning by another 0.5%. This means it will be worth keeping an eye on the renminbi to see if there’s further downward pressure. Again, not good.
Here’s a perfect example of how a rising US dollar hurts US-based companies with international sales:
VF Corporation (VFC) reported earnings this morning that were somewhat disappointing. You probably haven’t heard of VF Corporation but you definitely know the company. They own about 30 different clothing brands like Wrangler, Lee, The North Face, Timberland, JanSport, Reef, Vans, etc. They’re a company I’ve admired and followed for a while now, but we do not own the stock as I’ve been waiting for a good opportunity to buy (meaning at a proper, uninflated valuation). Here are the bullet points from their press release today:
- Third quarter revenue up 3 percent (up 8 percent currency neutral)
- Outdoor & Action Sports revenue up 5 percent (up 13 percent currency neutral)
- International revenue down 5 percent (up 9 percent currency neutral)
- Direct-to-consumer revenue up 3 percent (up 8 percent currency neutral)
- Earnings per share down 1 percent (up 14 percent currency neutral)
Notice all those (currency neutral) additions? Earnings per share would have been up 14% if it wasn’t for a rising US dollar. Instead, they were down 1% and the stock is trading down 13.5% as of this writing! That’s great execution (14% growth on a constant-dollar basis) but a poor job by the CFO to understand the macro environment (reported EPS down 1%). Now I understand that not every company will hedge their foreign currency exposure, which is fine, but as an investor it’s important to understand whether the companies you own do or don’t hedge. Hopefully this finally provides us with that opportunity to buy some stock in VF along with potentially any other good companies that fail to make it through earnings season unscathed. Good opportunities have certainly been hard to come by lately but we may find some soon.
VF Corporation (VFC) – 1 year
Thanks for following and have a great weekend!
-Nick