This page has been archived and commenting is disabled.

Barclays Warns "King Dollar" Could Crush Earnings

Tyler Durden's picture




 

The US Dollar has risen for 12 straight weeks - gaining over 8% against major worlde currencies since June - and while talking heads proclaim the cleanest-dirty-shirt belief in "king dollar," as Reuters notes, it could pose a triple threat to US companies' earnings: driving up the costs of doing business overseas, suppressing the value of non-US sales and, perhaps most worryingly, signaling weak international demand. While the historical relationship between the dollar and the S&P 500 has been inconsistent (though some sectors are highly correlated), Barclays fears translation effects could reduce revenues and cause estimates for Q3 to be missed (even as they are marked down dramatically). Crucially, Barclays warns dollar strength is important because it is a symptom of decelerating international economic growth and they reiterate their unchanged 1975 year-end target for the S&P.

 

As a group the S&P generates around half its revenue from international markets, and as Reuters notes, the forward impact of this potential USD strength (foreign weakness) is anything but priced in...

...while investors and analysts have begun to figure in the negative effects of a fast-strengthening dollar with regard to the approaching third-quarter reporting period, the risk to the fourth quarter and 2015 remains largely unaccounted for.

For instance, third-quarter profit-growth expectations for S&P 500 companies have fallen back to 6.4 percent from about 11 percent two months ago, Thomson Reuters data showed.

By contrast, the fourth-quarter growth forecast is down just slightly, to 11.1 percent from a July 1 forecast of 12.0 percent. And profit-growth estimates for 2015 have actually increased in that time from 11.5 percent to 12.4 percent.

 

"If you try and extrapolate out to the fourth quarter and how much that currency effect is going to be, your guidance is probably going to come down for a good slug of the multinationals on the S&P," said Art Hogan, chief market strategist at Wunderlich Securities in New York.

But as Barclays notes,

The historical relationship between the dollar and the S&P 500 has not been consistent. A constant relationship between the direction of the U.S. dollar and the S&P 500 cannot be established. In fact, over the last 20 years they have moved together, moved in opposite directions, and have been unrelated.

 

This is confirmed by correlation data.

Still, translation effects could reduce revenue growth and cause estimates to be missed. Companies in the S&P 500 have become more internationally exposed, with foreign sales now exceeding 30% of sales. This amplifies the implications of translation, which is the accounting process of converting foreign sales back to U.S. dollars. Translation can give the appearance of weaker revenue growth when the dollar is appreciating and often leads to revenue and even EPS misses against consensus estimates. Translation could curtail revenue growth by 150bp in 2015 if our FX team’s forecasts are realized. Estimates have not yet been adjusted.

While the S&P 500 is not correlated to the dollar, some sectors are. The sectors that have the highest proportion of sales coming from outside the U.S. are information technology, materials, energy, and industrials. Among these, only the energy and materials sectors have statistically significant negative correlation to the USD. We attribute this to the dollar’s link to commodity prices.

By our calculations, a 5% increase in the USD will lead to a revenue headwind of 3% for the technology sector and 2.5% for the materials sector. Most other sectors would experience a headwind of 1-2% while telecom and utilities would be largely unaffected.

Conclusion – it is the root cause of dollar strength that is most important
While the S&P 500 may not be correlated to the dollar and translation may be dismissed as accounting, dollar strength is important, in our opinion, because it is a symptom of decelerating international economic growth. This is particularly true for Europe, which is the second largest market for S&P 500 companies. European growth has continued to slow and our 2014 GDP estimate is now just 0.7%. In addition, deflation remains a concern, with recent inflation readings of just 0.5% and long-term expectations falling below 2%. Outside of Europe, China has slowed, Japan is growing at just 1.1%, and Brazil is grappling with recession.

For the S&P 500, which derives upwards of 30% of sales from outside the U.S., decelerating international growth is surely a risk. We are reiterating our 2014 price target of 1975.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 10/06/2014 - 08:58 | 5293782 outamyeffinway
outamyeffinway's picture

This is the same headline all over the world when their currency is appreciating.

Mon, 10/06/2014 - 09:08 | 5293807 Ghordius
Ghordius's picture

note the second-last square: "the cause for dollar strenght" being... "Euroarea inflation is just 0,5%". wow, just wow

Mon, 10/06/2014 - 09:08 | 5293811 fonzannoon
fonzannoon's picture

what is so "wow" about it?

Mon, 10/06/2014 - 09:12 | 5293823 Latina Lover
Latina Lover's picture

The USSA dollar is the least ugly girl at the ball.

Mon, 10/06/2014 - 09:25 | 5293852 NidStyles
NidStyles's picture

Love how they are starting to say the same things we have been saying for years now...

Mon, 10/06/2014 - 09:16 | 5293826 Ghordius
Ghordius's picture

the sheer logic of it, the same that leads to Barclay's target of EURUSD 1.1

because it's all about the financial world. forget trade. forget balances. forget imports or exports, or even production. in fact forget the real economy

Barclays, by this, says that a currency is as strong as the leverage it's financial system can achieve. Total financialization

Mon, 10/06/2014 - 09:17 | 5293837 fonzannoon
fonzannoon's picture

Sounds about right, also depends on how closely tied they are to the dollar and the CB money spigot.

 

Mon, 10/06/2014 - 09:50 | 5293931 TeethVillage88s
TeethVillage88s's picture

Stealth Currency War?

Notice how the narrative doesn't say that Europe may win more Tourists and Exports.

The smart guys always provide a narrative that is a smoke screen.

I can't see how this is a long term event(strong US Dollar). Except if USA is committed to exercising its self as a military, financial, economic, political Super Power. But this pisses off your Allies since it is directed at Europe & a war with Russia.

But yeah, here is another thing we were afraid of, higher Import Prices... since the guy on main street lost his wealth, his real estate, his wages & benefits, his local factor economy... along with his influence on Federal Government... and his kids face a future with more wars & Higher Taxes & Cost of Living.

Mon, 10/06/2014 - 08:59 | 5293788 NoDebt
NoDebt's picture

But.... share buy-backs.

Mon, 10/06/2014 - 09:02 | 5293796 NoDebt
NoDebt's picture

We're losing the race to debase, dammit!  I'm not feeling very exceptional about this.

Mon, 10/06/2014 - 09:05 | 5293801 Unknown Poster
Unknown Poster's picture

Barclays wants moar QE.

Mon, 10/06/2014 - 09:07 | 5293808 LULZBank
LULZBank's picture

Strong dollar is good for the economy.

Weak dollar is good for the economy.

You cant go wrong, really.

Mon, 10/06/2014 - 09:13 | 5293821 yrbmegr
yrbmegr's picture

Or, if you read ZeroHedge, strong dollar and weak dollar (in fact ANY dollar) is bad for the economy, and rubles are wonderful.

Mon, 10/06/2014 - 09:15 | 5293832 LULZBank
LULZBank's picture

That will be bull Vs bear markets.

In a bull market, everything is good.

In a bear market everythng is bad.

Where "everything" does not have to be mutually exclusive.

Mon, 10/06/2014 - 13:46 | 5295043 bid the soldier...
bid the soldiers shoot's picture

I think you meant to say

"In a bear market everything is bad."

while you are climbing the Wall of Worry

Mon, 10/06/2014 - 13:43 | 5295028 bid the soldier...
bid the soldiers shoot's picture

Those very words are carved in the stone lintel over the entrance to the Fed.

Mon, 10/06/2014 - 09:07 | 5293809 pods
pods's picture

Anyone else just tired of this? Tired of waking up each day and trudging off to work in return for some bank-owned debt coupons that get smaller and smaller each time you get them?

All the while hearing about how fan-freaking-tastic everything is?

Hell with it, I am going to start a rumor that all the primary dealers are in fact actually a front for ISIS and all are making ebola in every bank building.

pods

Mon, 10/06/2014 - 09:09 | 5293815 fonzannoon
fonzannoon's picture

Pods the economic collapse blog already exists, sorry.

Mon, 10/06/2014 - 09:18 | 5293824 LULZBank
LULZBank's picture

There's always a market for "new and improved" doomier one.

P.S. The main purpose of any blog or financial media is to keep you involved in the game, as without participants the game ceases.

Go long, short, buy, sell. Do something, do anything.

Mon, 10/06/2014 - 09:25 | 5293841 NoDebt
NoDebt's picture

Here, try this one on for size.  The General board is like every ZH article ever posted, but you can yell to yourself all day long and nobody will hear you.  Check out the Conspiracy board where things really get jumping:

www.gunsgrubandgold.com

Mon, 10/06/2014 - 09:19 | 5293838 A82EBA
A82EBA's picture

most people i know would say 'what's a primary dealer?'

Mon, 10/06/2014 - 09:55 | 5293949 Al Huxley
Al Huxley's picture

Maybe you'd feel better if you bought some government debt, or ipod stock, or go out and buy a new smartphone, and supersize a nice fast-food meal of your choice!  Oh, and don't forget to check with your doctor, the pharmacos have been staying up late making drugs you can take for your condition, and other ones you can take to treat the side effects.

Mon, 10/06/2014 - 09:14 | 5293830 eddiebe
eddiebe's picture

The problem really is floating currencies. There is no true measure of the value of the dollar. Imagine the chaos if a meter measured 1.1 meters a week from now. Building bridges or houses would be next to impossible and get that building high enough it would surely topple. It's a modern Babylon. 

What is holding the show together is a confidence game and US. military might. What's there to like about any of it?

Mon, 10/06/2014 - 09:27 | 5293851 LULZBank
LULZBank's picture

Thats the question that pops up in my head everytime I see a chart or a graph of Dollar and US economical strength: where does it show the blood and plunder backing it all up?

Its all bullshit, folks _ George Carlin RIP

Mon, 10/06/2014 - 09:32 | 5293849 eclectic syncretist
eclectic syncretist's picture

Nothing is being done about the exponential spread of Ebola in Africa, and it is already too late to stop the virus, beyond quarantining entire countries, which governments evidently do not have the moral courage to do.  Given that it's going to continue to grow exponentially in Africa, and that one case in the US has been a disaster, with the individual turned away, allowing him to infect several others (story soon - current tests can't even detect the virus until ~ a week after infection), including numerous health care workers, and require mobilization of resources on a scale that would be impossible if multiplied even a hundred-fold, we're already pretty much fucked by the lack of foresight of our leaders.  When the head of the CDC is saying that we can't ban flights to/from west Africa because then VOLUNTARY aid workers would have a hard time getting there, he might as well be saying "the government is not doing anything, nor does it have any plans to do anything, to stop the virus at its source".

That means that soon enough everyone in west Africa is going to start a mass exodus that will quickly become an international disaster of historical proportions. Furthermore, given that dogs and other animals that feed on ebola dead become asymptomatic carriers, and that these animals might in turn become food for or otherwise infect humans, and things rapidly become uncontrollable at any level and it becomes a simple case of "every man for himself", as the governments do not have the capacity to deal with the situation.

All this means that within another six months or so economic activity in the US (an many other countries) will be severely affected.  Who is going to want to go to crowded places like Disney, sporting events, restaurants, ect., when a pall of death is hanging over them.  Call me alarmist if you like, but there is no cure, there is no vaccine, and with so many haz-matted up healthcare providers getting infected it clearly spreads more easily than the CDC or TPTB are telling us.  Laws of Physics clock is ticking louder now. But the economic costs will by that time not be what many here are most worried about.  All IMHO, of course.

Mon, 10/06/2014 - 09:38 | 5293884 fonzannoon
fonzannoon's picture

funny how we all (especially me) sit here and scream about ebola while kids are actually dying over here from this entivirus or whatever it's called.

Mon, 10/06/2014 - 09:52 | 5293937 Dr. Engali
Dr. Engali's picture

It's another third world disease imported by our crazed come on come all open border policies. The health of the nation comes at the expense of cheap labor and moar votes.

Mon, 10/06/2014 - 10:24 | 5294073 eclectic syncretist
eclectic syncretist's picture

With a doubling time of 20 days and no coherent international plan for stopping the virus in Africa we will not have long to wait until American children are dying of Ebola.  Maybe a month or two or three. Enterovirus will seem like a walk in the park once they realize what Ebola is like.

Mon, 10/06/2014 - 09:28 | 5293858 gwar5
gwar5's picture

I'm buying a house in the Philippines in 4-6 weeks so I'm enjoying the exchange rate.

 

Mon, 10/06/2014 - 09:38 | 5293887 orangegeek
orangegeek's picture

USD is rocketing after a prolonged stall.

 

check out the monthly USD overlay with the SPX

 

http://bullandbearmash.com/spx-inverted-relationship-usd-usd-sharply-spx...

 

tick tock tick tock tick tock....

Mon, 10/06/2014 - 09:45 | 5293913 sidiji
sidiji's picture

..not for european companies it wont..in fact the reverse there

Mon, 10/06/2014 - 09:56 | 5293955 nightshiftsucks
nightshiftsucks's picture

Yeah but who is going to buy all of thei shit ? The problem is the world is broke.

Mon, 10/06/2014 - 09:46 | 5293914 sidiji
sidiji's picture

..not for european companies it wont..in fact the reverse there

Mon, 10/06/2014 - 13:59 | 5295135 bid the soldier...
bid the soldiers shoot's picture

A strong dollar is the bell that was rung when exports were no longer the ticket to the improvement of an individual Nation's GDP in the post-sub-prime-housing-bubble-End-of-the-World scenario.

You will be notified of the next ticket to ride in an email from the Fed.

Mon, 10/06/2014 - 14:15 | 5295212 bid the soldier...
bid the soldiers shoot's picture

(holds envelope to forehead)

Carnac the Magnificent predicts that the American Banks will soon take hundreds of trillions of recently printed dollars on a shopping spree to the Global Mall and buy everything in sight.

"What's good for revenues is occasionally good for profits." Kenneth Lay

Do NOT follow this link or you will be banned from the site!