Friday, February 8, 2008

Currency Hedge – A Defense for a U.S Recession

Many economists now believe that the U.S will be entering (or is in) a recession. This slow down in the economy coupled with the aggressive rate cuts by the Federal Reserve have been putting downward pressure on the U.S dollar. The devaluing of the dollar is certainly beneficial for our exporters (as it makes them more competitive on a global scale). Although, the slowdown in our domestic economy is obviously a negative for most of our large corporations the resulting depreciation of the dollar does have some resulting positive effects on our large U.S multinationals. For example, 60% of 3M’s revenue comes from outside the U.S. Those earnings are then inflated when they are repatriated back into U.S currency for accounting purposes. The result of this is even if sales remain flat internationally the year over year revenue statements would show an increase in earnings. Another great dividend paying option in this environment is Johnson & Johnson (JNJ) who generate 44% of their sales outside of North America. Stay tuned as I’ll be analyzing JNJ next week.

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