Volume 24, No. 4: S&P 500: The Silent Havoc From The Almighty Dollar
To paraphrase nearly every GEICO commercial: “The strong dollar sank earnings in the last half of 2014.” “Well, everybody knows that.”
But did you know that weak earnings aren’t the only financial reporting effect of the strong dollar – and did you know that the translation effect of consolidating subsidiaries’ financial statements into dollars are greater than at any time since the 2008 financial crisis? The strong dollar hasn’t whacked only earnings – it’s also depressed the value of cash and equivalents on corporate balance sheets, and raised financial leverage for a host of companies in the S&P 500. Perversely, the strong dollar effect can raise a firm’s return on equity (ROE), and give managers a windfall for achieving ROE performance targets contained in their incentive plans.
Did you know the strong dollar has also been shrinking equity without any cash being used? Did you know the strong dollar has decreased equity more than some firm’s buyback programs? (That should cause chief financial officers to wonder if share buybacks are a good use of cash, or if they’re just plain frivolous.) Did you know that the strong dollar leaves a footprint in a statement that you’ve probably never before seen? And finally – did you know that as strong as the dollar was in 2014, it’s stronger again in 2015 – and the first quarter hasn’t even finished yet.
If you didn’t know these facts, read on – because you may be hearing a lot about the effects of the strong dollar in 2015. Prepare yourself to peek into the parts of the financial statements where the dollar wreaks havoc, unnoticed.