Smart Profits Issue #509
By Martin Denholm
Managing Editor The Fed is making a big mistake by prioritizing the fight against weakening GDP growth over a severe problem with the dollar's exchange rate. While cutting interest rates might help ease debt burdens and make more American dollars available, it's this policy that has contributed to Americans' enormous debt in the first place. And pumping credit into the system is good, except it's somewhat negated if it sends the dollar's exchange rate into a spiral and causes consumers to pay more for goods. One thing is certain: If the Fed continues down its merry rate-cutting path, consumer price inflation is likely to rise in crucial areas like energy and food, along with commodity prices. And as overall inflation, oil, and gold go up, the dollar will continue to blaze a downward trail. Heck, even if Ben Bernanke & Co. kick back for six months and leave the situation alone, the dollar will probably still decline. But the drastic moves we've seen the Fed make recently give the impression that while the bankers are at least proactive, they're in panic mode and that it's all or nothing. So how do you battle back? "National Lampoon's Green Bay Vacation" doesn't quite have the same ring to it... but that's the reality facing many American households. With the dollar's exchange rate buying a mere 0.63 euros and 50 pence in Britain, it's not a good time to plan a trip to Europe (I'm dreading the paltry return I'm going to get when I head back home in July for my brother's wedding). Story Continues Below...
Many Americans are swapping Deutschland for Disneyland and Britain for Bar Harbor, which could be good news for popular U.S. holiday destinations, resorts, and theme parks like Disney (NYSE: DIS) and Six Flags (NYSE: SIX), as well as hotel chains and rental car companies. And that's not just from Americans. With the dollar so low against many other currencies, the U.S. is dirt-cheap for foreigners these days and this summer could see a big influx of tourists. You'll notice that airlines are conspicuously absent from that list. With oil prices squashing their profit margins, it's a risky bet. Just the other day, for example, AMR Corp. (NYSE: AMR), the parent company of American Airlines, said it will spend $9.3 billion on jet fuel this year - a 38% spike from 2007 and more than $1 billion higher than its January estimate. Airlines aside, though, the low dollar could help America's under-pressure manufacturers... Remember when the euro was floundering against the dollar a few years ago? Europe's new currency, only in circulation since 1999, quickly became something of a laughing stock. Each day seemed to bring a new low. While the many negatives were well-publicized, there was one big positive - one that holds true for the dollar and America now as it did for Europe back then. At the time, the Eurozone economy was in a pretty pitiful state, struggling for any kind of growth amid manufacturing sector woes in the "Big 3" - Germany, Britain and France. Each month brought more stagnant growth and job losses. But the low euro did at least help European manufacturers gain some traction by being able to export and sell more goods abroad. It took a while, but European manufacturing gradually recovered. In the U.S., the manufacturing sector's problems are also well-documented. As the dollar has slumped over the past year, around 270,000 manufacturing workers have lost their jobs in hubs like Michigan and Ohio, as the sector struggles to compete with the production behemoth that is China, with its bevy of cheap labor. But with a low dollar, U.S. manufacturers will be hoping that it gives them the same lift as the low euro did for their European counterparts (of course, a weak dollar and strong euro is now adversely affecting European manufacturers' profits and threatening jobs - particularly those firms that pay salaries in euros, but sell their goods in dollars). But there are certain companies that are well-placed to prosper, regardless of the falling dollar - those who are strongly diversified abroad. Top of the tree are firms like Boeing (NYSE: BA), America's largest exporter. And if you're looking for a smile, grab a Coke - shares in Coca-Cola (NYSE: KO), that is. In addition, well-diversified European companies are trying to offset the high euro by amping up their U.S. production and investing more heavily in their U.S. operations. This not only bodes well for U.S. companies, but also boosts the U.S. economy and helps to reduce the current account deficit. For example, BMW is firing up auto production at its South Carolina plant by 60% to 240,000 vehicles - a move that could create 500 new jobs by 2012, according to BusinessWeek. Right now, one euro will buy you $1.58. That's a whopping rise of about 80% since October 2000. However, Goldman Sachs (NYSE: GS) believes "fair value" for the dollar exchange rate of about $1.21. But while the Fed remains focused on GDP growth, the European Central Bank (ECB) is more concerned with inflation right now. President Jean-Claude Trichet all-but scotched the prospect of a Eurozone rate cut recently and we might not see one until May at the earliest. He must be mindful, though, that while a higher euro will attract more investment, it will cripple manufacturers if it remains too top-heavy against the dollar for too long. I could go on and on. But the weekend is almost here and you probably want a few profit ideas, so here you go... There's little doubt that while the status quo remains in place and the dollar keeps declining, the topic will continue to receive a lot of attention. Rather than just listen to it all, though, here are some actionable steps you can take (in addition to the couple of ideas and company names I gave you above): Currency ETFs: Rydex Investments was the first to introduce currency-specific ETFs and boasts a very strong group in the CurrencyShares family. These allow you to profit from the moves in other currencies, as the dollar goes down. For example, the CurrencyShares Euro Trust (NYSE: FXE) is up 7.6% this year, as the ECB has held interest rates steady at 4%, while the Fed has sliced and diced its way to 2.25% in the U.S. The CurrencyShares Japanese Yen Trust is up over 12% this year, while the CurrencyShares Swiss Franc Trust has gained 13.6% in 2008. By contrast, the CurrencyShares British Pound Trust has only returned about 1% this year, as the Bank of England has cut interest rates and the fears grow that the economy will slip into recession this year. You could also look at a trio of other dollars - Canada, Australia and New Zealand - all of whom have performed well against the greenback recently, largely thanks to their strong natural resources and the commodities boom. Foreign Commodities Stocks: Speaking of natural resources, you could invest directly in the biggest and best foreign commodities stocks. A couple of examples: British mining firm, Rio Tinto (NYSE: RTP), which has operations all over the world, but with a heavy bias in Australia. You could hit Canada and invest in oil sands company, Suncor Energy (NYSE: SU) or ex-Xcelerated Profits Report pick and uranium mining heavyweight, Cameco Corp (NYSE: CCJ), which we took profits on in January. Gold: As always, the shiny failsafe continues to be an excellent hedge against a falling dollar. Good investments here are the streetTracks Gold Shares (NYSE: GLD) and the Market Vectors Gold Miners Index (NYSE: GDX). There are plenty of other ways to capitalize on the dollar's swoon, but this should put you on the road. I'll wrap it up here before I find myself marooned at the office over the weekend. I'll need my energy to root on my college basketball bracket pick, Louisville, as well as English soccer team Everton in a crucial and heated local rivalry game against Liverpool. Hope you enjoy the weekend, too... Martin Today's Smart Profits Notes: - A conundrum for Jean-Claude? While ECB chief Jean-Claude Trichet remains stout in his defiance against a near-term Eurozone interest rate cut, latest figures show he could face a Bernanke-esque dilemma: Falling GDP growth, but rising inflation. ECB forecasts project GDP growth to roll in at 1.7% this year, down from the 2% prediction in December. Next year's number was also revised down from 2.1% to 1.8%. Not disastrous, but a downward trend is not what the region will want, coupled with a high euro. In addition, the inflation forecast also presents cause for concern, with the current rate of 2.9% significantly higher than the 2.5% forecast in December.
- Speaking of inflation, there was more evidence today that it's exerting a tighter grip on consumers' wallets in the U.S. The Commerce Department said consumer spending barely budged in February, rising a meager 0.1% - the weakest since September 2006 and the third straight poor month. Strip out the inflationary effects and the number wouldn't have moved at all. Interest rates cuts might be intended to put more money in Joe Sixpack's wallet... but they take time to kick in. Meantime, the danger is that they trigger higher inflation, which negates the move.
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