I wrote a new piece, for those interested you can read here:

http://financial-alchemist.blogspot.com/2009/11/apple-inc-aapl-weaker-dollar-will.html

I believe the weaker dollar is overlooked, Apple faced headwinds when the dollar rose temporarily and it’s return to long-term weakening trend will benefit Apple and turn into a tailwind.

Here’s a spreadsheet.
http://spreadsheets.google.com/ccc?key=0Asg3zR2otVsOdEhOMzhyd0ZEek1RU0RCQVlSZHRQNmc&hl=en

Great article and assessment as usual.

I am curious, even though you laid out your reasons, how confident are you that the US won’t start defending the dollar next year leading to a reversal, and perhaps a strong reversal once all the shorts get out of the US dollar carry trade. It seems inevitable that at some point .gov is going to have to try to reel in some of the spending and start defending against inflation. What do you know about what Apple does to hedge against currency fluctuations, and how much might that mute the effect in both directions?

VTBoy - 04 November 2009 08:44 AM

Great article and assessment as usual.

I am curious, even though you laid out your reasons, how confident are you that the US won’t start defending the dollar next year leading to a reversal, and perhaps a strong reversal once all the shorts get out of the US dollar carry trade. It seems inevitable that at some point .gov is going to have to try to reel in some of the spending and start defending against inflation. What do you know about what Apple does to hedge against currency fluctuations, and how much might that mute the effect in both directions?

I don’t think the government wants a strong dollar because it’s effect on the current account deficit. Import more goods, hence less domestic production and export less. The U.S. has always had a huge capital account surplus, which has led to a relatively strong dollar. We may import goods (current account) thus dollars flow out weakening the currency, yet those dollars are turned around and invested in U.S. assets, such as Treasuries.

The dollar hasn’t even weakened to the levels pre-crisis, when it was $1.65 to the Euro and $2 to the GBP. So, I think the dollar will weaken further, at least it won’t return to the levels of strength seen last fall when money poured into Treasuries, as well as other currencies weakened more relative to the USD.

Apple does hedge currency exchange, but hedges usually only go out 3-6 months, maybe occasionally longer. Therefore, Apple’s recent quarters Q3/Q4 were likely hedged at forex rates in effect during Q1/Q2. Thus, Apple’s hedges have expired, or will be expiring, therefore it will re-enter hedges at more favorable rate since the dollar has declined. Because of hedging, the effect, or rathe benefit of the weak dollar is delayed.

US policymakers don’t have the appetite to defend the dollar at this point in time due to the desired low interest rate environment and a general perception inflation remains in check. That policy will change eventually, but not right now.

This affords Apple greater pricing control in foreign markets. I see the EU as the next region for torrid unit sales growth and the dollar’s position only helps Apple.

For now Apple has margin to burn and that’s evidenced by the attractive pricing on the new line of iMacs and Mac laptops. The dollar’s status will aid Apple during a time of new product rollouts overseas (the iPhone) and during a new product introduction (the forthcoming Apple tablet). Further, the dollar will not rebound overnight allowing Apple a profit benefit this quarter and at least next quarter.

Eventually Apple’s gross margins will moderate. But for now the low dollar will assist the company during a period of overseas expansion, providing a fiscal benefit at a time higher costs for new product introductions and the associated expansion of the growing overseas presence is being realized.

USA, China and some Asian nations prefer weak dollar.  Europe and oil exporting nations prefer strong dollar.

The dollar’s rise will be fueled in part by a rise in interest rates. For now, as rates remain historically low, demand for dollars will be subdued. However, as interest rates eventually rise so will Apple’s return on its massive cash positions. Either way (low dollar or rising rates) Apple will benefit.

For now the low dollar can only help Apple’s product rollouts (iPhone and soon-to-be-released tablet) in foreign markets.