With one quarter of the companies in the S&P 500 already reporting, third quarter earnings have been a positive surprise. Eighty-six percent have exceeded earnings estimates and 67% have posted higher revenue numbers. What the numbers don’t say is that most of those gains have come from overseas.
The revenue number is where we should focus our attention. Higher earnings can be achieved by simply continuing to cut costs (by firing workers, for example). However, looking at the revenue numbers gives us a clear understanding of where the growth is coming from. Not much of it is coming from the home front. A lot of that growth is coming from higher sales in Asia and other emerging markets.
Since the bottom of the recent recession here in America, the majority of firms in the S & P 500 have been exporting their way into profitability. This quarter was no different. Take United Parcel Services; it is one of the companies that investors consider a good barometer of the global economy because it delivers products everywhere. UPS showed a 3.5% increase in growth versus last year here at home while their international growth was 13.7%. Many other companies are experiencing the same phenomenon.
Clearly, the falling dollar has helped exports as has the increasing strength in emerging market economies, particularly in Asia. And this weekend all eyes will be focused on the latest round of G20 talks in Seoul, where the on-going battle to “beggar they neighbor” will continue. We can expect currencies to be one of the main topics of conversation since our own U.S. Treasury Secretary Tim Geithner has already fired the first broadside. In an open letter he has asked members to “refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of undervalued currency.”
In last weeks column “The Coming Currency War” I explained how the world’s governments are using their currencies to increase exports at the expense of their neighbors. Clearly, U.S. third quarter earnings underscore how our own policies have aided and abetted U.S. companies in exporting more. This makes Secretary Geithner’s request look a bit suspect in my opinion. It will be interesting to see the response of other governments.
I mentioned last week that I was waiting for commodities, specifically gold and silver, to pull back. I expected that pull back to be sharp, and it has been. After hitting a high of $1,380/ounce, gold dropped as low as $1,317/ounce in what felt like a blink of the eye. Silver also had a commensurate move downward. As expected, a rise in the dollar was the catalyst for that pullback. Traders will wait until they see the results of this weekend’s G20 meet before going back into precious metals or other commodities.
There is always the risk that some new policy initiative could strengthen the dollar and thus continue the commodity sell-off. It could happen, but I wouldn’t hold my breath. There are few new policy alternatives on the table in Washington to revive the economy so my bet is that after a brief period of strength, the dollar will resume its decline, gold and other commodities will continue higher and so will the stock market. Under that scenario, we are back to buying the dips. Invest accordingly.