Tuesday, April 22, 2008

Trading Strategy for a Weak Dollar

Over the past three years, a good trading strategy has been buying US companies with highest revenues outside the US and shorting ones with highest inside the US. Given all the talk about a strong EUR hurting exports, I did a test to find out which companies would hurt from a strong EUR in the UK (given EURGBP has performed very well since markets started dropping in Sep 07).

Since September 2007, sterling has fallen roughly 15% against the EUR. Given the comments by the MPC members on Wednesday to the House of Commons Treasury Select Committee, sterling could come under further downward pressure, even though some technical indicators are pointing to a short-term top (fundamentally because UK is the EURozone's 2nd-largest trade partner, so a weaker GBP and a slowing UK economy pose another threat to European corporates).

For companies with a high exposure to the euro area, the benefits that would normally flow from this have been difficult to detect, largely because it has occurred during a period in which market conditions have deteriorated significantly. Any share price support that might have been implied by the weak sterling has been mostly overridden by market volatility.

Utilizing Thomson Datastream, I screened the FTSE 350 (a more comprehensive screen vs. just FTSE 100 or 200) for companies with exposure to Europe that exceeds their exposure to the UK, US, and RoW and recorded their relative performance since the 10th September (please see images below).

As the image above depicts, we can see that most of this group have underperformed during this period of GBP weakness with an average performance of -6.1% relative to the FTSE 350. Market developments have been central to this and prevented these companies from deriving any benefit from the weakness of GBP.

While there are, of course, many other factors at work, if the market were to now stabilize (doubtful), there is perhaps greatest room for ‘catch-up’ across these companies if they are to reflect the benefit that sterling weakness may give to their earnings.

The German Pay-TV Market

As the April auction for the Bundesliga rights approaches, News Corp will have an increasing incentive to raise its stake and maximise its 'capture' of the value it brings to the table. News Corp's existing stake already confers some influence at the AGM. On Friday evening (4 Apr) it raised its stake to 22.7% from 19.9% on 21 Feb having announced the purchase of Unity Media's 14.8% stake at EUR17.5/share (38% premium) on 8 January.

NWS will want to maximise the benefits of the opportunity it perceives in the German pay-TV market where its sees "enormous potential for growth" (even CNN's parent, Turner Broadcasting, took an 8% stake in it). The German pay-TV market is the most underpenetrated in Europe. Penetration is 13% vs 40% in the UK and more than 20% in Spain, France and Italy. Premiere's positioning as the only premium content provider in Germany makes it best placed to benefit from pay-TV market growth.

The market appears to be discounting a high probability of Premiere failing to win the rights and some deep concern around serious operating performance issues: weak ARPU momentum, strong competitive offerings, subsidies on hardware and costs of the Bundesliga rights and/or the loss of exclusivity.

Contributor Yaser Anwar does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Fu

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