January 8, 2015 Comments

On Thursday, the S&P 500 was up 1.8%, and Toronto was up 1.2%.

That makes a gain of 3.0% for the S&P 500 in two days and certainly makes for a different feel to the market than Tuesday.

The reason for the gain int he U.S. was apparently in anticipation of a good jobs report on Friday morning. If that is not the case then presumably the market would fall on Friday. And if it is the case the market may not rise because it already anticipated the news.

Some of the more notable gainers today were CN, up 3.0%. First Service up 3.1%, and Bombardier up 3.5%.

Stantec bucked the trend and was down 1.0%.

There was news that Bombardier’s chief vive president for aircraft sales was leaving the company effective immediately. That’s a bit surprising as he was only in the job for one year and the year’s sales were, I believe, quite a bit better than the prior year.

I notice the Euor is now worth U.S. $1.18, A year ago it was $1.36. That means if a year ago a U.S. company exported goods into Europe and received say one million euors, that translated back to U.S. $1.36 million. This year the same sale of one million euros is worth just U.S. $1.18 million. That could easily mean the difference between a profitable sale and a loss. And the U.S. company can’t simply raise its prices in Europe because it may be competing with companies that face costs in euros so the market price of the goods in Europe may be unchanged in euros. The point of this is that I would expect a lot of U.S. multi national companies to report profits and sales have been hurt by the lower value of Export sales due to the higher U.S. dollars. Canadian investors in U.S. companies may be somewhat protected fromt that because we have benefited from our lower dollar when it comes to the Canadian dollar value of our U.S. stocks. But the problem is we have already seen that benefit and if the U.S. companies not report lower profits then their U.S. dollar stock prices could fall and Canadian investors would effectively give back some of the exchange rate gains they have received to date. Some of these U.S. multi-nationals may be proteted by currency hedges, but such hedges tend to be for a limited period of time.

Some of the U.S. stocks on my list have no earnings outside the U.S (Toll Brothers) or very little outside (Wells Fargo). But certainly Walmart, eBay and Fedex and Costco would be exposed to this.

Couche-Tard and FirstService are a bit complicated. Their earnings in U.S. dollars would be weaker but when translated back into Canadian dollars the Toronto stock trading price could rise – except that the rise part has already happened. A lower Canadian dollar results in an immediate rise in the Toronto share price of these two, all else equal. But the negative aspect on the U.S. dollar reported earnings (due to their outside of teh U.S operations) shows up only later.

The earnings of Stantec and Canadian National should rise simply due to the lower Canadian dollar. They report in Canadian dollars.

It is not easy to predict how the currency changes will affect earnings or the extent to which this is already reflected in the stock prices. However, with the really large currency swings that have happened, the impacts could take the market by surprise to some extent. I suspect it will be a noticeable drag on the overall S&P 500 earnings growth rate in 2015.

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