Friday, May 09, 2008

Honey, I shrunk the dollar!

Jenna Bush is getting married May 10th. Grandchildren are just around the corner for George Walker Bush. When they ask him about his presidency most likely his response will be “Honey, I shrunk the dollar.” Indeed, the dollar has been in a free-fall ever since the younger George Bush took office.

Unless you are planning an exotic foreign vacation, why should you care about the U.S. dollar relative to foreign currencies? Actually, it matters here at home too. The declining value of the U.S. dollar relative to foreign currencies is at the heart of rising prices for everything from gas, to food to clothes.

Step back for a moment and look at why the U.S. dollar is so weak. First, U.S. consumers have flooded the world with “greenbacks” by buying so many goods from foreign producers - cars made in Japan, clothes sewn in China, wine from France, and - lets not forget the biggest purchase - oil from the Middle East. All that buying in foreign markets has put pressure on the U.S. trade deficit, which hit a peak $61.7 billion in February 2008. Second, other economies are growing faster than ours, which means capital is being sent to economic hotspots like India, China and Eastern Europe, driving up demand for those currencies.

A falling U.S. dollar is supposed to fix the trade deficit problem. Can you image what the trade deficit would be if the dollar remained at higher levels? If it is any consolation, oil is traded in the U.S. dollar. So when the dollar falls, the profits of oil producers drop also.

Why is the trade deficit still so large even after such a steep discount of the U.S. dollar? We are in hock up to our ears, that is why! George W. Bush and his administration have been on a spending binge - mostly to pay for the wars in Iraq and Afghanistan. The total U.S. federal debt was approximately $9.5 trillion - about $31,100 per capita at the end of April 2008. U.S. consumers are right behind him, running up household debt to almost $10 trillion.

Household debt is at a record 134% of disposable income. Add in each persons share of the government debt - whew! Everyone knows what happens when you go too far in debt and it does not look like you have the capacity to pay it off. Your credit score goes down! In the world scheme of things a country’s currency is a proxy for a credit score.

Investors looking for a hedge against the weak dollar can look among U.S. producers of export products. These companies are attractive because they are able to sell to customers with strong currencies. Carrying our personal credit score analogy one step further - it is something like changing jobs to work for a more stable employer. All of sudden you look like a better credit risk.

Aerospace/defense companies like Boeing (BA: NYSE) and Caterpillar (CAT: NYSE) are two big winners in terms of exports. In the Crystal Equity Research coverage universe, Phase Forward (PFWD: Nasdaq) and Radyne (RADN: Nasdaq) have considerable demand from customers outside the U.S. Phase Forward provides software applications and support to drug developers conducting clinical trials and Radyne produces equipment used in the ground segment of satellite communications networks.

In the CER Report series, Reed’s, Inc. (REED: Nasdaq) started putting its new age beverages - Reed’s Ginger Brew and Virgil’s Root Beer Brew - on the shelves of natural food stores in the U.K. and Ireland.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a buy recommendation on PFWD and RADN shares and a Speculative Buy rating on REED.

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