Forget the New iPhone. For Apple, It’s All About the Dollar.

Posted in iPhone News by admin. Published March 28th, 2016

Forget the New iPhone. For Apple, It’s All About the Dollar.

Don’t obsess about the svelte new iPhone or the price cut for the Apple Watch.

Don’t worry too much about Apple’s courtroom battles over privacy and national security, at least not now. Those issues moved to the back burner on Monday when the Justice Department said that it might not need Apple’s help to break into an iPhone connected to a mass shooting.

Instead, if you’re interested in Apple as the world’s most valuable company, and not just in Apple as a maker of cool gadgets, the biggest news affecting it lately has arguably come from another quarter: the foreign currency markets.

For a reading on where Apple’s share price may be heading, look to the dollar.

The underlying reason is this: The dollar’s rise and fall have a direct effect on Apple’s earnings, which ultimately drive share prices. When the dollar strengthens, sales of iPhones abroad are worth less in American currency, hurting profits and, sooner or later, knocking down share prices. When the dollar weakens, on the other hand, those overseas profits become more valuable.

Despite a partial recovery over the last few days, the greenback has been weakening and Apple’s shares have been rising. Apple has been getting a dollar bonus.

And what’s true for Apple is true for many of the multinationals in the Standard & Poor’s 500-stock index, which declined last year and fell sharply for much of the start of this one. Corporate profits fell 5.1 percent in 2015, the largest drop since 2008, the Commerce Department said on Friday. Profit margins continue to be pressured, but the turn in the value of the dollar gave earnings a nudge upward, helping American multinationals prosper. It is no accident that the S.&P. 500 began to recover in late January, as the dollar began to weaken.

Apple is a case in point. When it reported earnings on Jan. 26, the dollar had been rising for months, and Timothy D. Cook, its chief executive, discussed the repercussions during an earnings call with Wall Street analysts. Two-thirds of “Apple’s revenue is now generated outside the United States,” he said, “so foreign currency fluctuations have a very meaningful impact on our results.”

He illustrated that impact this way: Between the last three months of 2014 and the same stretch in 2015, every dollar’s worth of sales that Apple earned outside the United States lost 15 cents when translated into dollars. In its latest quarter alone, he added, Apple lost six percentage points of sales growth to the rising dollar.

The iPhone is the company’s profit engine, but the strong dollar chipped away at its power. The average sales price for the iPhone globally at the end of 2015 was $691, according to Luca Maestri, Apple’s chief financial officer. But he said the strong dollar reduced the effective sales price by $49, or roughly 7 percent.

Apple’s share price, which buoyed the overall stock market in past years, fell 4.6 percent in 2015 and dropped more than 11 percent through Jan. 27. Since, then, though, Apple shares have risen more than 13 percent.

The dollar’s direction has been changing recently as well. On a trade-weighted basis, after gaining more than 9 percent in 2015, it has weakened by nearly 2.5 percent this year. That has helped American companies with significant international earnings, especially technology companies. Within the S.&P. 500 index, half of that sector’s earnings come from outside the United States.

Compare that with the utility companies in the index: They obtain only 4.4 percent of their earnings abroad. Over the last 12 months, utilities, which pay hefty dividends and have been insulated from the dollar’s fluctuations, have returned 15.5 percent, compared with 6.6 percent for information technology shares. Since late January, tech shares have nearly kept pace with utilities. The decline in the dollar has helped account for that.

Where the dollar heads now is a matter for pure speculation. Clearly, the Federal Reserve’s shifting monetary policy is important. As John Higgins, chief markets economist for Capital Economics, put it, the Fed “appears to have turned more dovish, which has undermined the dollar.” In an election year in which the trade deficit is a major issue, you wouldn’t be sticking your neck out very far in assuming that the Fed might retain a dovish bias and that the dollar might remain fairly weak.

That said, the Fed couldn’t entirely control the dollar’s value, even if it wanted to do so. Foreign exchange rates are determined by traders who compare currencies, many of which have been weakened by their own sputtering local economies and by central banks that have adopted near-zero or negative short-term interest rates. In comparison, the United States may be a bastion of stability, and the dollar could rise.

It is quite possible, in short, that the dollar’s ebb has given companies like Apple only a temporary reprieve. And the dollar is only one ingredient in Apple’s corporate mix. Other transient factors — the iPhone’s shape and power, the Apple Watch’s price and appearance, and the security of Apple’s devices — may play a more dominant role in determining Apple’s fortunes.

Obsess about that if you must, but don’t underestimate the dollar.

[Thanks: http://www.nytimes.com]

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