1st Quarter 2015 Commentary


Since late last year, the U.S. “greenback” has been on a bit of a “streak”.  The pace of appreciation has picked up in 2015.  Articles and advertisements are being published on a daily basis about the dollar vs. the Euro.  Travel agents are broadly advertising the vacation bargains to be had for U.S. travelers to Europe.  Hotel room rates, restaurant meals, excursions to exotic sights are all on sale for a converted dollar price not seen for years.  On the other hand, American corporate executives with significant international sales are groaning about the negative effects on their upcoming quarterly earnings that a strong dollar is having.  So let’s put some perspective on this tale.  Treasury Secretary Lew, like so many of his predecessors, when asked about the dollar, simply declares that a strong dollar is good for America.  Philosophically and in the long term, he is correct because a strong currency is usually associated with a strong underlying economy and represents a place where foreign investors would want to invest their money, thereby buying the currency and bidding up its value in the marketplace.  In the short term, the transition stage from weak to strong, life can become uncomfortable until the “transition” is complete.


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In the short term, international product sales are hurt because product prices go up when translated into weak currency terms.  Selling becomes more difficult – buying slows.  Using appreciating dollars to buy a fabulous European vacation becomes relatively easier, but selling an increasingly expensive U.S. manufactured product becomes relatively more difficult.


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As can be seen in Chart #2, the Euro has fallen sharply vs. the dollar.  Why?  The central cause for the divergence between the dollar and Euro is the different place in which American and European finance ministers find themselves along the “monetary policy continuum”.  In Europe, European Central Bank (ECB) President Draghi has recently announced the beginning of the Eurozone quantitative easing (QE) program.  This is the program under which the ECB will buy billions of Euros worth of bonds each month – a policy to stimulate economic growth in the Eurozone.  Oppositely, in America, Federal Reserve Bank Chair Janet Yellen has recently declared the end of our QE program and the Fed is now looking to return U.S. monetary policy to “normal”.  As a result, the dollar has soared vs. the Euro.  This is exactly what the ECB wanted. The ECB wanted a cheaper Euro to bolster the Eurozone economy, to help Europeans sell cheaper priced Euro goods and services to an international clientele.  This is terrific for European exporters, terrific for U.S. importers – not so good for American exporters.

As can also be seen in Chart #2, “we’ve been here before”.  So far the dollar has not scaled new heights.  Look back to 1980 and the reader will note that the dollar has been higher against the Euro.  At its zenith, the dollar purchased 1.22 euros vs. .91 today.  So there is still room before we breach the old record – but some pundits would have you believe otherwise.  Also, while the dollar has appreciated against the Euro, it has not vs. the Chinese yuan.


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Yes, the U.S. dollar is stronger than some, but it is not stronger today than it was against all currencies in the past.

Tactically, over the next couple of quarters, U.S. companies with significant European sales have been warning that their international earnings will be hurt when they report in U.S. dollars.  Already, we are seeing earnings estimates for the S&P 500 companies come down in 2015 because of this very issue.  So earnings, which we thought would be strong in 2015 due to lower energy prices, are being buffeted by more volatile exchange rates than we had anticipated.  Currency translation depreciation could make the market appear more expensive on a P/E basis because earnings (the denominator in the aforementioned formula) may go down in the “headline” number.  This could give the “traders” amongst us an excuse to sell during the upcoming earnings season.  We, however, think that it may be an opportune time to buy equities if we are presented with the opportunity to purchase securities “on sale.”  In the “long run”, strategically speaking, volatile currency fluctuations do not mean much.  Managements adjust.  They change their investment focus.  They manage the situation.  But the transition is uncomfortable. It is more important in the “long run” that companies sell product into attractive, growing markets than worry about currency fluctuation.  From a foreign perspective (think Adidas, Danone, Bayer) sales to the U.S. will be helped as the Euro has depreciated.  U.S. sales and earnings for these and similar companies will be reported higher also because of the higher U.S. dollar.  Unfortunately, the stock price when translated back into dollars may not reflect all the benefit of the lower Euro on corporate operations, because the currency may have depreciated more than the company benefited.  In short, there are lots of cross currents in the currency world.  It is always best to keep one’s eye on the prize – great companies in attractive markets.  The currencies will sort themselves out over time.




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In 2012, Greece was a major concern for European banks, the ECB and the markets as evidenced by the high bond yields demanded by the market.  In 2015, the markets are visibly more relaxed about Greece and the possibility of the country leaving the Euro (a so-called Grexit).  Yields have declined precipitously, especially in the more “fragile” economies like Portugal, Ireland, Italy and Spain. Why?  The foreign banks have dramatically reduced their exposure to Greek debt.


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Obviously, it would be better for the world if Greece and its creditors came to an amicable solution and Greece stayed within the Euro. But the “deal”, if there is one, cannot be seen as “special” for Greece.  Otherwise there will be clamoring from Portugal, Spain, Ireland and Italy for the same deal and this would spell trouble for the Eurozone.  We too would prefer not to see a “Grexit”.  But if one were to happen, we are not concerned that it would have any long lasting effect on world economies or markets – because Greece is just too small an economy to have much effect.


We are sticking with our outlook that oil production in the U.S. will “rollover” in the second half of 2015.  Already it has been noted that production in North Dakota, home of the Bakken shale, is down vs. last year.  The Energy Information Administration recently projected that production would turn down in the Bakken, the Eagle Ford and in the Rockies in April of 2015.  “Mr. Market” is correcting the imbalance.


Recently the Fed met and published its thoughts.  Removed from the meeting’s minutes was the word “patience” – which was the signal to the pundits that the Fed planned on raising interest rates probably in June.  However, Chair Yellen, during the post meeting news conference, made clear to all who would listen that the removal of the word “patience” did not mean that the Fed would become impatient.  In fact the Fed members lowered their outlook for future inflation and economic growth, which more than clearly signaled that pressure to increase interest rates had decreased.  Again, Chair Yellen pointed out that the decision to raise rates would be data dependent.  We continue to think that the Fed will raise interest rates later than people had earlier supposed and that the slope of rate increase will be “gentler” than many project.


  • Housing should expand & support the economy.  – Yes – Glimmers of hope
  • Employment will improve throughout the year. – Yes
  • Companies will raise dividends & buyback stock. – Yes
  • The Fed will keep interest rates lower for longer & raise them slowly & not sharply later in 2015. – Yes
  • The US, India, Japan, Brazil & Indonesia will accelerate their economic growth. China will not. Europe will try but not succeed. – Yes in the U.S., India & Indonesia. Japan is trying. Brazil is slowing as is China. Europe is hoping for better & may win.
  • Politics in the Eurozone will spark some “fireworks” which will add volatility to markets. – Greek worries and German recriminations lend volatility
  • The dollar will be strong. – Yes
  • The Euro & Yen will be weak vs the dollar. – Yes
  • A political solution to the Ukraine issue will be found. – Still hope for – but little sign so far
  • The price of oil will start its rally in late 2015. – Still believe



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