Professor Elam

Wed Sept 30 2014

Ford issued a profit pullback wrarning. Rather than $7-8 billion pre tax profit, now Ford sees $6 billion. Hmm, profits affect stock prices after all!  That explains why there are so many rules on how we report profits, and earnings per share,

Observers are remarking that global companies are just starting to feel the impact of a higher dollar. If the US Dollar rises, companies buy fewer dollars with their francs or bolivars when they bring money back here.  Let's take a look.

Ford

Ford has been trading in a  15-18 range on this weekly chart. The reaction to their profit pullback is rather obvious, it is huge. And Ford is probably going to fall out of its trading range. Now let's look at the US Dollar.

U S Dollar

This is the same time period with teh same 13 and 34 exponential moving averages shown.

I am showing the individual charts realizing that examing them is new to most of you. The Dollar is soaring above its trading range of the last two years.

There are a couple of ways to examine the relationship more closely. One way is to super impose the dollar on the Ford chart.

This makes the causation much more obvious. As the greenback has risen, shown in green, Ford held up, until it did not any more this week.

A second method is a ratio chart. If we construct a ratio of Ford to the Dollar, the chart will rise when Ford is outperforming the dollar. It will fall when  the Dollar begins to gain on Ford.

Ford versus the US Dollar

While this at first glance appears to be the first chart, and after all Ford is charted in US Dollars, look closely. Here the drop is more severe and completely below both moving averages. In this chart the index has fallen out of the trading range for the last year and a half. 

In computing Other Comprehensive Income we consider four parameters. One is the change in currency transactions. This is the result of bringing profits from another currency to US Dollars. The result here is that US Companies will be pressed to perform just as Japanese companies were when the yen was strong in the 1980s and  1990s.

Questions for Study

What is OCI/

Where is it reported?  Why is it reported on the balance sheet and not the income statement?

How does a company hedge aginst an adverse currency event?

On the chart we used tow moving averages. What is a moving averag?  How can the action of moving averages of different time lengths act as early indicators of a change in trend?  What is the difference between a moving average and shown here, an exponential moving average?

Here is an explanation of moving averages.