The Float

Friday Reading

A few interesting items to ease us into the weekend...

• U.S. Economy: Growth Slows to Least in Four Years
• Home vacancy rate rises to record 2.8%
• Could the big U.S. engine be nearing stall speed?
• Spend, spend, spend: There's no stopping the U.S. consumer
• Yellen Says Flexibility Needed to Confront Risks

Revenue Strength Through Dollar Weakness

Here's an interesting tidbit from CNBC's Steve Liesman: For the 19 Dow components that have reported in this earnings season, currency exchange rates have added roughly 27 percent to top-line revenues.

By selling goods and services overseas, then repatriating those revenues to the U.S. and converting from stronger world currencies to weakened dollars, multinational firms can get a meaingful top-line boost from the weak dollar. As Liesman notes, however, companies that have to source materials and labor in foreign countries get less bottom-line (i.e., earnings) bang from the weak buck.

What's the status of the U.S. dollar these days? For those who haven't shopped in London or Paries lately, check out the five-year chart to the right. The U.S. Dollar Index* has now sagged back to late-2004 levels. At that point, the weaker dollar made the cover at Newsweek ("The Incredible Shrinking Dollar"), which roughly coincided with a steady move up through 2005 for the dollar index. With dollar weakness again making headlines, the greenback could be approaching a critical juncture: Re-test and bounce off its 2004 lows...or blow right through those levels to the downside.

*The Dollar Index ($USD) calculates the weighted average strength of the dollar against six currencies: the Euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc.

Sources

Steve Liesman, "How Weaker Dollar is Boosting Companies' Results," CNBC.com, April 26, 2007

Robert Samuelson, "Bottom Dollar," Newsweek, March 21, 2005

Mark Arbeter, "Have We Reached a Dollar Bottom?" BusinessWeek Online, April 24, 2007

Change Afoot in the 401(k) Marketplace

As we wrote back on April 3rd, change is coming to a 401(k) plan near you--and not a moment too soon. In today's Wall Street Journal, Eleanor Laise notes several important developments in the world of defined-contribution plans. Here's a key passage:

Traditionally, saving in a 401(k) retirement plan was a decision for employees to make. But recent regulatory changes and a growing awareness that many Americans aren't saving enough for retirement are prompting more employers to call the shots. As a result, employers increasingly are signing up more workers automatically, moving employees' assets to make sure their 401(k) investments are diversified, and boosting how much some employees contribute.

The title of the piece (see source information below) indicates those changes, all of which we applaud in general. Even in the context of these positive steps, unfortunately, there's still plenty of room for poor execution--and thus poor outcomes for millions of American workers.

Several major problems remain in the vast majority of 401(k) plans: Excessive fees, inadequate disclosure of those fees and how they add up across multiple layers, poor investment options, too many investment options, &c. All plan sponsors (i.e., all employers offering a defined contribution retirement plan) are going to have to get very serious about mitigating these problems for their employees. Otherwise, you'll see plenty more news like this.

We'll be writing much more on this important topic in the weeks to come.

Sources

Eleanor Laise, "Employers Grab Reins of Workers' 401(k)s: To Spur Savings, Companies Adopt Automatic Enrollment, Steer Investments, Boost Employee Contributions; the Opt-Out Option," Wall Street Journal, April 25, 2007 (subscription required)

Gregory L. Ash, "401(k) Plans in the Cross-Hairs," Spencer Fane Britt & Browne LLP, March 1, 2007

As Always, A Matter of Supply and Demand

The National Association of Realtors released more weak housing news today: Existing-home sales down 8 percent in March (biggest monthly drop in 18 years), existing-home prices down for the 8th consecutive month (down 0.3% from March 2006), and the supply of homes up from 6.8 to 7.3 months (highest since October 2006).

We've written here and here on the basics of supply and demand in the housing market. Both are functions of several other factors: buyers' and sellers' expectations, speculators' desperation, lenders' credit standards, &c.

At this point, it all adds up to a housing market in which supply outstrips demand. It'll take a while to work our way through this, and there are still plenty of sellers who will have to accept lower prices--or pull their homes off the market, which will be one mechanism through which inventory shrinks.

Fortunately, interest rates remain low by historical standards. If rates had spiked, we'd probably be looking at something much uglier here. But interest rates don't exist in a vacuum. They matter in the context of lending standards or, to put in another way, in the context of credit availability. With credit tightening, even low rates can only do so much to prop up U.S. housing demand.

Source

Patrick Rucker, "U.S. existing home sales drop biggest since 1989," Reuters, April 24, 2007

Mutual Fund Tax Bite and Other News

Busy day here. But we found a few worthwhile items to recommend amid the flurry. More tomorrow...

• Mutual fund tax hit bigger than ever
• Big bank (probably) gets much bigger
• Stop the presses: Equity withdrawal supported consumer spending
• Trust funds: Social Security mixed, Medicare horrific