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 MARKET INSIGHT
SP500, US Dollar and Foreign Profits : A Concern ?
September 21  ​( From FRED, Business Insider, TradingView )
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The Situation


The US economy​ has received tremendous benefits since the beginning of the crisis when the US Dollar hits in 2008 a multi-decade lows.

It did help on the export side of their product ( in terms of competitiveness )​​ and especially in terms of boosting earnings made abroad because of that exchange rate.

But since mid-2011, the US Dollar Index has started a tremendous rally, particularly since July 2014 with a shift of +17.0%.

While the SP500 ​​hits highest levle in May 2015, two main factor should be considered going forward : the level of the US Dollar ( DXY reached level not
​seen since September2003 ) and its impact on US exports and foreign profits
​on US Corporations.


Louis Pateur
"Chance favors the prepared mind."

SP500, US Dollar and Foreign Profits : A Concern ? $SPY #Trading #investing #spy #SP500 #macrotrend

US Dollar Fundamentals

​​I will just list the main factors why I was bullish the US Dollar;

1) ​US Economy Relatively Stronger than Europe and Asia
2) ​FED vs Other Central Banks : FED done on QE as other Central Banks still well into it : Currency Devaluation Process is not Over
​3) US Dollar as Flight to Quality
​4) Wider Bond Spreads
​5) Getting more Energy Self -Sufficient
6) ​US deficit shrinking fast
​7) The Big Mac Index and Purchasing Power Parity : Other Main Currencies like the Euro and the Cdn$ Slightly Undervalued



​Even if most of the participants follow the US Dollar by the US Dollar Index ( DXY ), a better economic picture is obtained by the Trade Weighted US Dollar Index. The difference is that the first is a weighted geometric mean of the dollar's value compared only with "basket" of 6 other major currencies. And the Trade Weighted contains more currencies and is rebalance according to the real economic trade partners. See the chart below...




















Observe the break out of the US Dollar at the end of 2013; reaching levels above not seen since the crisis in 2009 and prior to that ( in a normal situation ) ​​​​​​​​​​​​​​​​​​​​​​​​​in 2003.

​​
US Exports and the US Dollar

​​A weak dollar makes US export products more attractive to buyers in foreign countries, which helps U.S. companies sell more stuff.
And a strong US Dollar make exports products less competitive...

On the graph below, we can see the very good relationship since 2003 between the ​​​Total US Exports and the US Trade Weighted
​Index ( Inverted ). So the US Dollar has been on a macro weakening phase since 2002 that did help tremendously the export side of
​the economy. But note that since mid-2011, the US Dollar started to strenghten ; exports are just starting to get lower; a post-crisis normalization...


                                                              ​​​​​​​​US Exports of Goods and Services ( Blue / Left Scale )
                                                        US Trade Weighted Dollar Index Inverted ( Red / Right Scale)
























And the US Exports makes 11.2% of the US Gross Domestic Product in 2014, compare to only 7.5% in 2003 as shown by the graph below... So US economy more sensitive to the Export Sector than ever as shown by the chart below...


​​​
                                                                                                        RATIO
                                                                               US Exports of Goods and Services
                                                                                    US Gross Domestic Product























​​​​​​​​​​​​​​​​​​​

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Foreign Profits and the US Dollar

​​​​A weak dollar makes US Foreign Profits more valuable to US Corporations, which helps U.S. Companies shows better financial results.
And a strong US Dollar make foreign profits less valuable...

​​We can see on the chart below the very good relationship since 2000 between the US Foreign Corporate Profits Before Tax​​​ and the US Trade Weighted Index ( Inverted ). So the US Dollar has been on a macro weakening phase since 2002 that did help tremendously the profits for US Corporations. But note that since mid-2011, the US Dollar started to strenghten tremendously ; we should then expect US Foreign Corporate Profits to weaken...



​​​​                                                            US Foreign Corporate Profits Before Tax ( Blue / Left Scale )
                                                            US Trade Weighted Dollar Index Inverted ( Red / Right Scale)
























And it is very crucial to know that US Foreign Corporate Profits at their peak made 37.9% of the US Total Corporate profits in 2008, compare to only 22.9% in 2003 as shown by the graph below... In 2014, it was 24.7%

​​So US Corporations still quite sensitive to the Profits Generated from Abroad even if we had the US economy performing very well compare to their competitor. That do explain the 2008 peak ( US more impacted by the crisis ) and the the decline since.

​​
                                                                                                         RATIO
                                                                                  ​US Foreign Corporate Profits Before Tax
                                                                                      US Total Corporate profits after tax
























And in terms of revenues of the SP500 : Foreign sales accounted for 33% of aggregate revenue for the S&P 500 in 2014
( From Busibess Insider )



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​​​​​​​​​​​​​​​​
SP500 and the US Dollar

​​And now, the killer graph : We can see the very good relationship since 2003 between the ​​​SP500 Index and the US Trade Weighted
​Index ( Inverted ). So the US Dollar has been on a macro weakening phase since 2002 that did help tremendously making the SP500 looks cheap. But note that since mid-2011, the US Dollar started to strenghten ; and SP500 hits new highs ever lately.


​​​
                                                                                     SP500 Index ( Blue / Left Scale )
                                                               US Trade Weighted Dollar Index Inverted ( Red / Right Scale)










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US Dollar and SP500 Correlation

But​​ the most striking chart is the relatioship ( correlation ) between the UD Dollar Index ( DXY ) and the Mighty SP500 Index on a weekly basis as shown by the chart below.

So we can observe that​​ when correlation is getting near or over 0.65, then most of the time, we started a correction in the SP500 Index as it happened in July 2005, January 2008, March 2013 and recently in July 2014 and February 2015 ( White Vertical Line - Chart below )

We are in the same pattern as correlation is grinding up quickly and especially the US Dollar Index ( DXY ) reached a level last seen in April 2010.​​



                                                                            US Dollar Index ( DXY - Top Panel )
                                                              Correlation ​DXY/SP500 ( Middle Panel - Blue Area )
                                                                              SP500 Index ( Bottom Panel )​


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Conclusion


​​ ​​So for me, things are obvious. We are in the process of having the US Dollar impacting the exports of US Corporations ( 11.2% of domestic economy ) as they become less competitive on a currency war battle that only the US is not involve now.

And more importantly, the major impact will be felt on the foreign profits of US Corporations ( which is a huge 24% of all US Corporations profits )..

And finally, market participants will start to realize sooner than later that a new valuation process is needed for the SP500 and we need to lower our expectations accordingly...​​


​Also good to read:


​​​Market Briefing: S&P 500 Revenues & the Economy

Will S&P 500 Companies With Higher Global Exposure See Lower Earnings Growth in Q3?
​​

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