Wednesday, April 29, 2009

Strong Dollar is a Double-Edged Sword

One of the big worries within the financial community is that foreign investors, particularly China, might begin selling some of their large holdings of U.S. Treasury securities, potentially creating a nasty decline in the U.S. dollar. However, a look at the dollar’s chart (below) reveals that it’s been rising since last summer. There are many reasons attributed to the recent strength in the dollar: its role as the world’s reserve currency at a time of global deleveraging; investors who were “short” the dollar are now buying it back to close their positions; the U.S. economy may recover quicker than Europe thanks to much larger fiscal and monetary stimulus efforts, etc.

Forgetting for a minute why the dollar has shown such resilience, maybe I should just focus on the fact that a strong dollar has got to be great news for dollar-denominated securities, right? Well actually it hasn’t been great news for many of the multinational companies that have large offshore operations, because they’re more vulnerable to large swings in reported revenue and earnings if there are sharp movements in currency markets. A great example of this is Pfizer, which yesterday reported disappointing earnings and highlighted a $640 million loss of revenue due to adverse currency exchange movements. (Pfizer is 8.7% of the Health Care ETF owned in Pinnacle portfolios.)

When analyzing currency fluctuations in context of our portfolios we’re always torn by the double-edged sword that a rising or falling dollar creates on current and future portfolio performance. On one hand portfolio securities are affected by the real time total return gains or losses from a rising or falling dollar (including the Health Care ETF). But on the other hand future gains or losses may be offset or trumped by the dollar’s impact on earnings for the companies that are held inside of those securities.

The investment world has many quirks, oddities, and vagaries that will test the patience and intellect of even the most seasoned and even-keeled investors. So if it sounds confusing or perplexing that recent strength in the U.S. dollar can be both good and bad for dollar-denominated investments at the same time, I guess that should be considered par for the course!

Trade-weighted dollar with 50 (pink) and 200 day (blue) moving averages (Source: Bloomberg)

Tuesday, April 28, 2009

Perils of Blogging

Welcome to our blog, Echoes from the Pit. The name “Echoes from the Pit” is a fond reference to the space where Pinnacle’s three analysts ply their trade, which happens to be right next to my office. The Pit, as we call it, is actually a relatively small space that is stuffed with multiple computer screens and TV monitors that are constantly blinking with different colored charts and graphs that our analysts use to better understand the investment world. I suppose that even though three guys spend their days working there it is anything but a “Pit.” Nevertheless, “The Pit” it has been and I believe the “The Pit” it will stay.

This is our blog, and to be honest I don’t read blogs. I’m uncomfortable in not knowing who the writer is and more importantly, what are his or her qualifications to pontificate on the subject at hand. Why should I spend my time reading the blog of someone who turns out to be a high-school dropout? For a 52 year-old technologically challenged guy like me, blogging must be like email was to my parents…a nuisance that will surely go away soon. I am assured by the younger and smarter people here at Pinnacle that blogging is actually a terrific way to communicate what goes on in the investment team, and since communicating what we do here for our current and prospective clients is a big part of my job, I figure we will give it a shot.

Rick, Carl, Sean, and I will faithfully be writing about the investment news of the day in this space and time will tell if it helps to achieve our goal of helping our readers to better understand how we do what we do. I hope it makes for intelligent and insightful reading. However, let me say this right now….don’t even talk to me about Twitter!