You hear the news in the industry that you should buy global companies! Global companies with a weak dollar means more earnings! Folks, wrong, wrong, wrong! If you do the numbers quickly sure this argument sticks, but if you look a bit deeper then you will see the problems. The canary in the mine is Canada.
“Shopping is so much better here,” said Sam Theriault of Hartland, N.B., as she headed into the Wal-Mart in Houlton, Maine – just across the border from Woodstock, N.B.
The conventional wisdom is a falling dollar means higher earnings for global American companies. True, but it ignores the canary in the mine. Let me illustrate by introducing a new measure of worth. Let me call it the Stephen King currency. Stephen King is an author that is known world wide and thus his worth across currencies should be about the same.
To start the discussion let’s go back in time. Let’s go back to September 12, 2007, to before the Bernanke decision.
In the table the bolded and underling prices are the prices that somebody would pay for Stephen King’s Blaze book in the local currency. Going down the column is the price somebody in a specific country would pay when buying that book on the Internet and getting it shipped to them. For example for somebody in the US to buy King’s book from the EU would cost the person 30.51 USD.
The yellow bolded illustrates where it is cheapest to buy Stephen Kings book. And you see that it is cheapest to buy the book from the US.
On the left hand side of the grid are the currency exchange rates on September 12, and to the bottom of the grid is what I call earnings. Since Stephen King and its main publishers are American I am calculating the total earnings in USD. The decimal numbers are the distribution of sales. These numbers I know from being in the publishing industry.
Look at the bottom number, and you will see 21.53. Remember that number, and now look what the earnings would be on October 12, 2007.
See the new number. Its 21.94. And wow, I am wrong, right? After all the earnings for Stephen King just increased. No, and now I want to introduce the canary in the mine.
Canadians are not happy paying more for something that is cheaper across the border. In fact many in this world are not happy overpaying. People are taking their wallets and shopping elsewhere. In the case of books its Amazon.com, and in the case of shopping in Canada its the US. Imagine now the situation where 5% of the people in Canada, and the EU decide to buy in the US. Look at the earnings.
See the earnings, its now 21.00. Even though the sales count is identical the earnings has dropped by several factors in comparison to the weaker dollar. What this means is that a weak dollar is bad for corporate earnings.
The only way companies can get people in Canada, and the EU to shop at home is to drop prices. Dropping prices will not increase earnings, and will in fact drop them again.
So the reality is that global corporations might see a nice bump right now in earnings (eg Walmart). Though because there is a shift in currency valuations earnings will suffer. You will the results of that in the medium term.
Who suffers? Companies that can have their products bought across the border. This includes companies like Intel, AMD, Nike, Walmart, etc. For example when I was in Boston buying my running shoes (I live in Switzerland), the sales lady asked, “Are shoes expensive in Europe?” I asked, “Why do you ask?” She said, “I have had in the past few days plenty of Germans, Austrians, and other Europeans buying three or four pairs of running shoes saying that the shoes are like half the price as in Europe.”
Who benefits? Companies that are border independent or completely dependent on on the border. I see companies like McDonalds, Amazon, and EBay benefiting from this. People will not go across the border to eat a burger. And in the case of Amazon people are already buying their books from where it is cheapest and Amazon’s revenue will increase regardless.