The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) failed to jolt the job market, and the Fed has announced a fourth jumbo interest rate increase. If you dig deep into the jobs report, you see the biggest job openings are in the leisure, hospitality and health care sectors, whereas finance and insurance sector openings are declining, which is likely a good indication of a near-term interest rate moderation.
What was significant about the recent earnings season was the U.S. dollar's value and its impact on companies’ earnings. The U.S. dollar’s value increased 14% against the euro and 19% against the yen, with similar rates against many other currencies. Although this is good news for those who are traveling overseas. Companies with significant international exposure are under added pressure from the appreciation of the U.S. dollar. Among the reported earnings thus far, international companies —notably Microsoft, Nike and ServiceNow — are particularly under pressure from increased input costs and translation of foreign currency to U.S. dollars.
This could be a short-term hit on revenue, but it depends on how long the U.S. dollar continues to appreciate, and how well companies manage currency fluctuation. Companies will look to match foreign revenues and costs in the same currency. They may also issue debt in a foreign currency or hedge out their currency risks over the short-term using derivative products. Some opportunities from the foreign exchange impacts are listed below.
Opportunities
Profits among the major oil companies totaled nearly $60B last quarter, with the year-over-year increase more than 100% for Exxon Mobil, Chevron, BP, Shell, Eni and TotalEnergies. These kinds of earnings are drawing talks about imposing a "windfall" tax on major oil companies, which was previously enacted back in 1980. Even if any of these taxes materialize, European-based Shell (SHEL) and TotalEnergies (TTE) are still good investments. From a renewable energy perspective, U.S. lithium manufacturers Albemarle Corp (ALB) and Lithium Americas Corp (LAC) are expecting lithium prices to remain at $70,000 per metric ton for 2023.
Companies i n the travel, transportation and entertainment sectors, as mentioned in previous
newsletters, have reported higher earnings and an improved outlook. This is particularly true for Uber (UBER), Delta (DAL) and Caesars (CZR). In a similar vein, Walt Disney (DIS) has an improved outlook, as a result of its content transformation, especially sports programming with ESPN and FX, as well as its park re-openings.
With a strong U.S. dollar, opportunities may exist in companies that have a currency mismatch between their revenue and their operating costs. For example, if their operating revenue is in U.S. dollars but their costs are in a foreign currency, you could see an expansion in their margins. Anheuser-Busch InBev (BUD) and GSK PLC (GSK) are two companies bound to benefit from this currency mismatch. BUD is also poised to benefit from the return of in-person events and GSK from an expected outcome of the Zantac drug litigation.
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