The Effects of FX

I hesitate to write this post, as I'm never one to go Cassandra on ya. But the fact is I think the exuberance over the demand overseas is out of whack with reality.

Much of the strength from 3M (MMM - commentary - Cramer's Take), Pepsi (PEP - commentary - Cramer's Take) and even Apple (AAPL - commentary - Cramer's Take), which got 42% of its sales from overseas this quarter, is directly attributable to the decline in the dollar relative to most other fiat currencies during the last quarter.

First off, look at how far the U.S. dollar has fallen against the euro:

Picture this scenario: You're Pepsi (PEP - commentary - Cramer's Take), and you're selling Doritos to Europeans. Those Europeans go to the store and pay, let's say, 1 euro per bag. You happen to have a great quarter, and you sell 100 bags of those MSG-laden Doritos to Europe's citizens.

At the end of the quarter, you have to take that 100 euros and convert it to U.S. dollars before you report it on your earnings report. Every dollar in that conversion at the end of last quarter cost you 0.78 euros, but today it'll only cost you 0.73 euros. If the euro hadn't appreciated against the dollar, you would have reported $125 in revenue. But with the dollar having collapsed against the euro since the end of the quarter, you report $137 in revenue.

Now, obviously there are more moving parts to this when it comes down to the reports from these companies. Some hedge currency risks, others don't. A few managements will even point out this FX impact to investors.

But to take the remarkable revenue growth that most of the S&P 500 is showing in Europe and elsewhere overseas and to conclude that the world away from the U.S. is in outright boom mode is not the right analysis. Things overseas are steady and better than here in the U.S. (that's partly why the dollar has been so weak), but they're not exploding to the upside in the same way that these companies reporting such great overseas results are showing.

On a related note, by the way, I'm starting a boycott on Frito Lay products because I can't stand that they put propaganda on the packaging of their products like the Sun Chip bag that says, "Made with Whole Grains to Support Heart Health." I'm sorry, but eating a bag of whey protein concentrate, disodium phosphate, artificial colors and plenty of other chemicals is notgoing to support my heart's health. How about keeping it real Frito-Lay, with a classic "Flip it"? Use this instead, "Sun Chips -- Not entirely made up of reconstituted food and chemicals. How bad can it be for your heart?"

At the time of publication, the firm in which Willard is a partner was net long Apple, although positions can change at any time and without notice.

ALL CODY WILLARD BLOG ENTRIES | POST A COMMENT | READ COMMENTS  

---

Cody Willard is the manager of CL Willard Capital Management, LLC. He is a regular guest on Fox News, CNBC and other networks, and he writes a monthly column for the Financial Times. He is also an adjunct professor at Seton Hall University and the author of TheCodyReport.net, a monthly stock market newsletter. Willard appreciates your feedback -- click here to send him an email.