8/9/2019 InternationalTreasurer1997Apr28 Dollar Strength

1/2

nternational

Treasurer

The Journal

of

Global Treasury and Financial Risk Management

Apr i l

28, 1997

http ://www.intltreasurer.com

Corporate earnings

Time

to

lame

FX

By joseph Neu

With the dollar s steady rise over

the

last

two

years,

US

MNCs can now use currency losses as

a plausible excuse for lower earnings.

What

does

this say about hedging?

We'

ve

come to another point in the cycle where

a prolong

ed

period of dolla1 strength might be

expected to cut into US MNC's earnings . W e

know

that some companies are h

ed

ging thi s

impact, but we don't rea lly know for su re how,

a

nd

ma y never come to, even with pr

ess

ures for

more disclosure.

Simple/effective vs. complex/revealing. Given

the simplicity of the

arg

ument that the

same

fm

eign sa les trans l

ate

into lower dollar eamings as

the dollar rises, citing c

un

ency effects is a con

venient card to play

in

the game of W all Stree t

ea rnings expectations. Blaming the dollar, for

example, looks to be currently in vogue w ith

pharmaceutical f irm s

(h

ighly dol lar sensitive).

See for example, th

ese

recent eamings re leases:

Pharmacia

&

Upjohn:

the Swed ish -U.S.

ph

a

r-

maceutical company

1eported

that sa les for the

continued on back page

1.

80.-----------------

USD/DEM 4/1/94

to

4/23/97)

1.70

1.60

1.50

1..10

1.30

1.20

.._

_

.J

130 --------

- ------

125

120 USD/)PY

4

/1/94

to

4/23/97) l

5

0

105

100

95

:)0

f

V?

(.I

85

~ ~

Euro watch

Keeping

Tabs

on

EMU

Scenarios

Scenario planning for

EMU:

keeping an eye on

the big picture during the rocky May/June period.

Re cent vo lat i

li t

y in EMU pwgnost icat ion s is

unlikely to

sub

side. Be

twe

en

now

and jun

e,

we

ha

ve

the French ge neral el

ec

tions, German fi sca l

repo1is

,

th

e UK elections, Italian municipal elec

tions, and a potent ial US interest rate hike to

conte

nd

w ith. St ill , some of the optim ism lost in

recent months

is

beginning to return.

Sources of optimism

News of German Chancellm Kohl ' s standing for

reel ect ion and the bo ld dec ision by French

Pre

s

id

ent Chi1ac to ca ll for elect ions 11 months

ah e

ad

of schedul e have boosted sev

e

al prog

noses.

Based on these items,

SBC

Warburg, for

example, has changed its view on the probability

of EMU

sta

1

in

g on t ime back up to 70:30. It had

dmpped to 60:40 from 80:20 in March on word

of dissatisfac tion in Germany with the extent of

the Eurostat

s

(the EU statistical body) allowances

of accounting trickery.

Th e French election announcement is particu

la

rl

y good news for I

ta

ly, notes Marc Hendriks,

man

ag

ing direc tor of ec onom ic research for SBC

W arbu1g in London , and wi ll br ing va lue to

Itali an

ass

ets. France has be

en

a champion for

ea rl y EMU e

ntr

y fo1 It al y and t he ot her

Mediterranea n countries as a counterbalance to

German EMU dom

in

ance. I

ta

ly's participation

is

see n as cru c ial to th e

su

cce ss

of

EMU on a

broader

sc

ale (

see IT,

10/28/96).

Itali an

Pr

ime M in i ster Romano Prod i, like

man y ot her Europe

an

leaders , has staked his

political reputation on EMU. The

sc

enario eve ry

one is look in g at is whether I

ta

ly wi ll (1

)

make

the cut for first round entry on 1/1/99 or 2) that a

face saving dea l c

an

be struck (for Germany's

benefit) to have Italy jo

in

slightly later.

An

election w

in

by

Ch

irac's pro-EMU coalition

of moderate right w ing parties and the Socialist

continued on page 2

Time

to Blame FX?

By

Jose ph Neu

Long

-t

erm dollar

s ength has given

ri

se

to quali fying statemen

regarding foreign earn

ings but nothing ge ts

said about hedging.

page 7

Keeping Tabs

on

EMU Scenarios

Recent events have

buoyed opt imi sm, but

th

e next two months

w ill be rocky. Best to

s

ti

ck w ith the maj

or

long-run outcome sce-

narios rather

th

an

th

e

interim

w

hat-

if

s.

p

age 7

Understanding FX

Settlement

Risk

Wh

y bank r

eg

ulators

are

so

conce

rn

ed abou

FX settlement

ri

sk, and

h

ow

to determine if yo

should be.

page2

Cerg

Finance

Eyes America

Thi s

Fr

ench

ca sh

man-

age ment and elec troni

banking sys tem vendo

is one of many foreign

ers with eyes for

America.

p

age

4

China After

Hong Kong s Return

By He

nr

y l ee Chan

Asse

ssing

th

e situation

of

Grea

te

r Hong Kong

and

th

e

Hon

g

Kon

g/

China Symbi

os

is

w ith two months to go

page6

8/9/2019 InternationalTreasurer1997Apr28 Dollar Strength

2/2

Accounting & Disclosure

Time to

Blame FX? continued from front page

f ir

st

quarter ended March 31, 199 7 were 6%

below the same period in 1996. A sign ificant

portion

of

th e shortfall was attributed to contin

u

ed

negative exchange -r

ate

developments.

Bristol-Myers Squibb: Sa l

es

for the quarter

grew 10%

(12%

exc

ludin

g the unfavorable

effect of foreign exchange)

....

Domestic

sales

increased 11%,

and international sales

in

creased 9% (14% excluding the unfavorable

effect of foreign exchan

ge)

.

Eli

Lilly: Internation al pharmaceutical

sa

l

es

decreased 5% with volume growth

of

6% being

offset by

an

8% unfavorable exchange rate com

parison and a

io

reduction in se lling prices.

These

statements are not n

ecessar

ily false. But

they may not

r

epresent the

rea l

eco

nomi

c

impact on ea rnin gs for the given quarter.

Fer ret in g this

out wou

ld eq

ui r

e a car

ef

ul

ana

l

ys

is

of

eac h company's currency exposure,

in

cluding the indirect impact

of

FX moves on

no

n-FX

exposures a

nd

compet itors. This analy

sis

is mu ch more co mplicated than mo

st

equity

ana l

ysts

would care to ge t into, and much too

r

evea

ling for most companies to disclose. And

this assumes they have a good notion

of

these

r

ea

l imp

ac ts in

the first place.

Another

way

around this,

as we

noted last

issue, is seen in the technology sector.

In

IBM

's

1Q

ea

rnings r

e

lease, we

see

this linguistic tool

at work:

On an as

-reported basis, first-quarter

revenues in North America were $7.9 billion,

an in crease

of

14% from the

sa

me period a

year

ago . Asia-Pacific revenues increased by 3% to

$3.4 billion while revenu es from Lat in America

were up 2 pe rce nt to $701

million.

Revenues

from Europe/Middle East/Af

ri ca

declined by 7%

to $5.3 billion.

On

a constant currency basis,

nternational Treasurer

he Journal of Global Treasury and Financial Risk Management

Asia-Pac ific revenues grew by 14% and Europe/

Middle

East

/Afr i

ca

revenues grew by 1%.

What is

treasury hedging for?

Si

nce currency

effects are useful in explaining earnings short

fa lls, there seems to be li

tt

le incentive to put cur

rency manageme nt

pr

a

ctices

and earnings

reporting on more

rea

l

s

tic econom ic terms.

Thi s begs the question

of

how

much

va lu e

hedgi ng adds

if

shareho lders are unaware

of

i

t i.

e., if a

tree

falls in th e forest a

nd

no one's

there to hea r it, does it make a sound?

A lso, implic it in statements

about

c

urr

ency

impacts

is

the not ion that currency

ri sk

is uncon

trollable .

Thi

s

co

n

cept fits the

US

Private

Securities

Li

t igation Reform

Act

of

1995 con

ce

rning

fo

rward- looki ng

information.

Many

comp

an

ies' 10-Ks now include currency fluctua

tions in a li

st of

items said to be beyond their

control and w hi

ch

could materially affect future

results. This is a kind

of

discla imer to avoid liti

gation when

results

indicated by forward-look

ing statements made by

company

agents,

or

forecast information released to the public, are

not realized (see Compaq, IT,

5/

16/94).

Such disclaimers al

so

wo rk to impl y that hedg

ing

is

less than a positive sum game.

Co mp ani

es that

engage their treasuries

to

hedge presumably believe

ot

herw i

se.

Some way,

some how, the value

of

hedging must show up

in

f

in

ancial reporting. To say

t

he company is

act ive in va rious fo rei

gn

exchange mark

ets

to

hedge its economic and transaction fo reign cur

rency exposur

es (as

recommended by the FEI,

see IT,

11

/ 12/94) is nowhere near enou gh to

imply to shareholders that value is being added.

This is yet another reason to

view

t reas ury

activities as costs to be cut

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