sales and cost of goods

Publicly-traded companies in the US market are required to make extensive disclosure in their 10-K filing with the SEC. One of those requirements is disclosure of the breakout of sales between foreign and domestic. My experience, however, is that companies want to muddy the waters on this topic, and that the numbers in the 10-K are, let’s say, imprecise. In addition–shame on me–I’ve never paid much attention to any company hedging activities. That’s because I think that in almost all cases hedging makes no difference to overall results–and that firms will always call out hedging losses (less so gains).

AI tells me that in the aggregate about 40% of sales of the S&P 500 come from abroad (my go-to number has been 50%)–and, more important for us now, the industries with the highest percentage of domestic sales are: Consumer discretionary, Staples and Real estate.

If we look at cost of goods, there are no reliable figures for the S&P 500. For the US overall, about a third of manufacturing inputs come from abroad. Imports overall make up about 15% of GDP.

currency effects are key

Take Japan in the weak yen 1970s vs. Japan in the strong yen 1980s. In the former period, the strongest stocks were the exporters (weak currency costs and strong currency revenues) were the stock market stars. In the latter, it was Consumer discretionary and Real estate–Staples less so because of import restrictions on food to protect local farmers.

If we take it as granted that the $US is going to remain a weak currency (more on this later), then even without tariffs importing anything–raw materials, intermediate goods or finished products–from abroad to sell domestically is going to mean lower unit profits. Yes, there may be exceptions and companies will gradually adjust their offerings, but overall this is not a good situation to be in.

Conversely, US firms that use domestic inputs to sell products to stronger currency countries (basically everybody) will see margins expand.

my guess is the dollar will remain weak

Four reasons, any of which I think would be compelling on its own:

–the economic consensus seems to be that the Big Beautiful Bill confirms that Washington has no intention of limiting deficit spending. Foreign central banks–and presumably the big global commercial banks, which are always ahead of the game on currency–are beginning to hedge their exposure to Treasuries by selling the dollar. This is the main reason, I think, that the dollar is down by 12% ytd against the euro and gold is up by 30% so far this year.

–the threat of higher interest rates. Trump’s view on rates, as I see it, comes straight out of the 1970s political playbook: lower rates to give the economy a little extra short-term boost and placate worried citizens. The ultimate result was runaway inflation, a deep recession with Treasuries yielding 20%, short rates at 26% and a sharp stock market decline. We’re safe from this as long as Powell is still Fed chair.

–ICE (1). Taking off our hats as human beings and put on our stock market thinking caps, I see the main economic effect of ICE as being to shrink the domestic labor force (the domestic birth rate is more or less enough to keep the workforce stable, but not much more than that). Fewer people working, all other things being equal, means lower GDP. The other way GDP grows is by workers being more productive–a product of education and/or capital investment. The attack on research universities isn’t a plus here.

–ICE (2). Imagine a place where heavily armed, masked bands of men (/women?) roam around grabbing people off the streets and holding them in domestic detention for a while before shipping them off to foreign prisons. A great place to take a vacation, go to school or work? Not so much. We know that foreign tourism is already down by 10% yoy in recent months. Hard to know how much is protest, how much fear. Probably better to go to Eurodisney or Disneyland in Japan or China instead. Yes, the odds of being caught up in an ICE sweep are likely very small, but the penalty of being wrong is so severe why would anyone take a chance. Absent a change of heart by Washington, my guess is we’re closer to the beginning than to probing the bottom on this issue.

–the threat of higher interest rates. Trump’s view on rates, as I see it, is straight out of the 1970s political playbook: lower rates to give the economy a little extra short-term boost and placate worried citizens.

what I’m doing

Exporters, especially tech, and import-competing are the order of the day for me. Special situations and value stocks as well. The biggest risk I see is investors shifting emphasis away from selling the currency to selling the S&P. More on Monday.