01/28/15   The Dollar Vortex

Editor’s Corner

Ron Rowland

The theme for the current earnings season is clear – blame it on the dollar. It sure is nice to be able to point your finger somewhere else when things don’t go your way, and corporate earnings reports are notorious in this respect. It’s always something. Rare is the case a company comes out and says “we messed up” when earnings fall short of expectations.

Calendar year 2014 offered up two convenient excuses for companies choosing to use them. You probably recall the severe winter storms taking place a year ago. When it came time to report first quarter earnings, nearly every shortfall was accompanied by a reference to the polar vortex. Now, fourth quarter earnings are being reported, and fingers are being pointed at the strength of the U.S. dollar whenever there is disappointment. The dollar vortex is here.

Don’t get us wrong, we are not saying these companies are being dishonest when placing the blame elsewhere. In fact, for large multinational firms, currency fluctuations play a big role in their earnings calculations when converted back to U.S. dollars. However, unlike the Swiss franc, where the majority of its valuation change for the past year took place on a single day, the increasing value of the dollar is a trend that has been firmly in place for six months. Half a year is ample time for large corporations to either hedge their currency exposure or to guide analysts’ expectations lower.

Make no mistake about it. The 13% or so increase in the value of the U.S. dollar over the euro in the last six months of 2014 was very real. It meant the profits generated in European countries were reduced about 13% when converted back to dollars. Furthermore, it means U.S. manufactured goods are now selling at 13% higher prices to a euro-based consumer. A dollar increasing in strength may sound nice, but it is very harmful to U.S. exporters. However, as we stated previously, the train was moving this direction for the last six months of the year. Although companies may be telling the truth when blaming the dollar for their earnings shortfalls, the timing of those announcements leaves a lot to be desired. The currency trend has accelerated in early 2015, setting the stage for further disappointments next quarter.

As expected, the Fed did not make any significant changes to its policy statement at the conclusion of its first FOMC meeting of 2015 today. The Fed will remain patient and the timing of interest rate increases will be dependent on the data. Durable goods orders declined sharply in December and were revised lower for November. Oil prices are below $45 a barrel, and gasoline averages about $2 per gallon nationwide. Therefore, the data points say the economy is not overheating and inflation is not a concern.

Investor Heat Map: 1/28/15


Dividend producing sectors are the current leaders.  Real Estate is on top for a fourth week, and Utilities has a strong hold on second.  There is an element of defensiveness in the lineup with Health Care and Consumer Staples ranked just below Utilities.  Consumer Discretionary posted a good week and climbed a spot to fifth thanks to strong rebounds in homebuilders and retailers.  The top five sectors exhibit a near-linear drop in momentum between each category, but the pattern changes below that.  The next four categories of Industrials, Technology, Telecom, and Financials appear rather flat and bunched together.  Industrials and Financials both moved from red to green this week.  Momentum falls off again for the bottom two categories with both still in negative trends.  Materials lands in tenth, and Energy comes in last.  Many segments of the Energy sector posted strong rebounds for the week, although not strong enough to change the trend.


In contrast to the defensive posture of the sector rankings, the style rankings are suggesting an aggressive environment with Small Cap Growth on top and Mega Cap on the bottom.  The style rankings were quite compressed a week ago, which is conducive to dramatic changes in the ranking order.  There are indeed some changes this week, but nothing we would classify as dramatic.  Small Cap Growth added the most momentum and climbed a spot to grab top honors.  The four-way tie for second place is a glaring example of what we mean by compression in the rankings.  Micro Cap, Mid Cap Value, Mid Cap Blend, and Mid Cap Value all have identical momentum scores of 14. The rising Mid Caps pushed Small Cap Blend and Large Cap Growth lower.  Large Cap Blend held steady in eighth place.  Last week, the bottom three categories were all slightly in the red, and today they all show a small amount of green.  Mega Cap remains in last place for a sixth week.


The complexion of the global rankings changed drastically since our last update.  A week ago, only China could boast being in the green.  This week, eight categories can make that claim.  China held the top spot and slightly increased its lead over the pack.  Emerging Markets jumped three spots to grab second thanks to gains in China and Latin America.  The rise of Emerging Markets pushed the U.S., Japan, and World Equity lower.  Their only consolation is that all three are now sporting positive momentum scores.  EAFE, U.K., and Europe also moved to the green side, and the U.K. jumped two spots higher in the process.  Pacific ex-Japan fell two spots lower.  Latin America posted a great week, allowing it to climb out of the basement for the first time in two months.  Large exposure to the Energy sector and a weak currency combined to push Canada down to last place.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“Today’s numbers are stunningly soft, which should pour a hefty pitcher of cold water on those optimistic sentiments regarding business investment in 2015.”

Stephen Stanley, economist with Amherst Pierpont Securities, commenting on durable goods data for December 2014


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