Dollar Gains Hurt Overseas Profits

Happy start of the Olympics! The Shanghai Composite Index hit a new low this morning.

The big story this morning is not Fannie Mae, it's the dollar--and if "going parabolic" is an overstatement, it's not too far a stretch. Dollar having best day against the Euro since 2004. What's up? No specific news today, but clearly concerns over a global economic slowdown is what's driving the move.

This has important implications for multinational companies--the majority of the S&P 500. Dollar strength for U.S. based corporations implies profits will be smaller when profits made overseas are repatriated back to the U.S.; does it mean the biggest multinationals are now partly for sale?

If so, what do you buy? Sherwin Williams? Housing stocks?

On the strong dollar, commodities are down, as are gold stocks.


1) Fannie Mae down 13 percent pre-open; like Freddie Mac, reported a loss far in excess of expectations: $2.3 b (following a loss of $2.51 b in the previous quarter), loss of $2.54 a share (loss of $0.69 is the estimate), as well as an 86% cut in dividend (to $0.20).

--while 2008 will be the peak year for credit-related expenses, the total amount for credit-related expenses will still be "significant" in 2009;

--due to volatile market conditions, they have less visibility into their capital position in 2009;

--credit performance continued to deteriorate into July, and charge-offs were higher than expected.

Bottom line: deterioration in the mortgage book is spreading into Alt-A loans (no or low-documentation loans), and it will take well into 2009 before the awful 2006-2007 mortgage vintages fully play out.

2) Hertz beat but guided below expectations, they complained about higher costs, but noted they had raised prices TWICE this summer.

3) Food manufacturer Hormelalso guided below expectations, noting that "while we hae continued to implement price increases in this segment, they have not been adequate to offset the higher input costs."

4) An IPO: Web hosting company Rackspace priced 15 m shares at $12.50 a share, at the low end of the range expectation of $12-$16.

Questions? Comments?