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Published: August 18, 2010
In times of crisis, investors invariably seek shelter in the
almighty dollar. The perceived resilience of the U.S.
economy has given the impression that we are simply too
large a ship to sink. And although we are well past the scary
times of 18 months ago, the global economy still feels dicey,
and the dollar, which rallied sharply as the global economy
crumbled, still remains fairly strong against the euro and the
Chinese Yuan.
Yet as the global economy sputters back to life during the next
year or two, the dollar is likely to resume its downward drift
that had begun back in 2007 and 2008. If it weakens in a slow
and steady fashion, it could help pave the way for a
long-awaited export boom that finally reverses stubborn trade
deficits and spurs a badly-needed employment surge in our
nation's heartland.
Why the long-term bearishness on the dollar? Here are three
reasons why…
1. For starters, our budget deficits for fiscal 2010 and 2011
are at record levels (on a non-inflation-adjusted basis). The
amount of debt held by the public (that is, excluding
intergovernmental debt), which stood at 35% of
GDP in 2001, now exceeds 50% and looks headed toward the 60%
mark by 2011. At some point, our creditors will either demand
higher interest rates on our bonds or simply stop buying them
altogether. Either way, reduced demand would lead to higher
rates and a devalued
currency.
2. In addition, pressure continues to build as unemployment
rates remain stubbornly high. So the political pressure will
build to move away from a "strong dollar" policy, which has been
the stated goal of virtually every presidential administration.
Nobody wants to see a sharp plunge in the dollar, but an orderly
devaluation is crucial to our nation's long-term
competiveness.
3. Lastly, pressure on the dollar will come simply from relative
growth rates. Countries such as China, India and Brazil are
poised to grow at robust rates over the long term on the heels
of fast rising middle classes in those countries. Global
investors will likely chase higher returns in those markets,
exiting their over-weighted positions in dollar-denominated
assets.
So what are the implications?
If I am correct that the dollar could strengthen more in the
near term and materially weaken over the long term, then
investors can look to several investable themes.
First, multinational consumer goods companies such as Procter
& Gamble (NYSE: PG) and Coca-Cola (NYSE: KO) will
materially benefit from increased export
earnings as those profits are repatriated into dollars. And
a weaker dollar will give real relief to domestic manufacturers
that have been undercut on price by foreign rivals. For example,
steel makers have long lamented that foreign rivals must be
dumping processed steel on our shores at a loss. A weaker dollar
would make such a dumping move even more costly for foreign
firms and would directly translate into higher
market share for domestic players.
In addition, the U.S. stock market would get a boost from an
increase in the perceived value of many major companies as
foreign firms look to start seizing on the weak dollar to go on
a spending spree. Cross-border M&A activity always spikes in
times of dollar weakness as well. Rising volumes of deal-making
would surely benefit merger advisory firm Greenhill & Co.
(NYSE: GHL).
U.S. tourism firms would also get a solid boost as domestic
consumers are increasingly priced out of foreign vacations, and
foreign consumers eye bargains on our shores. Firms like
Disney (NYSE: DIS) and Six Flags Entertainment (NYSE:
SIX), along with hotel chains such as Marriot
International (NYSE: MAR) and Starwood Hotels (NYSE: HOT)
would see a nice spike in customers.
Action to Take --> Keep an
eye on the dollar in coming months. If signs emerge that it is
about to resume its downward move that began before the 2008
economic crisis, then investors will start to flock to names
that are perceived plays on the weaker dollar. The names above
are nice cheat sheet to work with.
-- David Sterman
Staff Writer
StreetAuthority |
