Low Interest Rates & the U.S. Dollar Are Behind This Booming Industry

I want to stay on the topic of third-quarter corporate earnings for the simple reason that it is earnings season and the stock market is reacting positively to the numbers. Stock market investors are still reticent to go long the market in a meaningful manner, because of the investment risk inherent in the European debt crisis. With the main stock market averages’ breakout from their recent ranges, the technical perspective is improving. We’re not out of the woods yet, but stock market trading action is getting much better.

In the Industrial Goods stock market sector, there have been some real standouts on the earnings front. This is a sector that can be heavily influenced by interest rates and trends in the U.S. dollar. The Farm and Construction Machinery sub sector in particular is benefitting tremendously from the lower U.S. dollar trend and is harboring some serious moneymaking large-cap companies, the brands of which you most certainly are familiar with.

AGCO Inc. (NYSE/AGCO) has been a stock market darling since the March 2009 low, posting a gain of approximately 200% up until the stock market’s recent correction. The Duluth, GA-based agriculture equipment manufacturer (selling brands like “Challenger,” “Fendt,” “Massey Ferguson” and “Valtra”) is booming right now, posting third-quarter earnings that beat consensus by $0.12 per share. Revenues came in above Street analyst expectations and the company guided 2011 earnings per share and revenues above current visibility. The company is saying that higher grain prices are going to drive farm equipment sales higher through to the end of the year and that higher profit margins are expected across the board.

Another well-known equipment maker, which is one of my stock market benchmark companies, is Caterpillar (NYSE/CAT). In the previous quarter, stock market investors sold the stock all the way down to $70.00 a share from $110.00 after the company reported results that were just shy of consensus (see Stock Market Leaders Under Pressure—Dividends to Become the Market’s New Best Friend). The stock wasn’t helped either by terrible stock market conditions due to weak sentiment.

In its latest quarter, however, Caterpillar’s business picked up considerably and the company reported outstanding earnings growth of 44% to $1.14 billion. Third-quarter revenues grew 41% to $15.72 billion and the company increased its full-year view.

Caterpillar is one of the few large manufacturing companies that’s hiring (5,000 alone between June and September) and the company’s business is booming in developing economies that need construction equipment. Mature economies are now going through a replacement cycle, which is also helping the bottom line.

AGCO and Caterpillar are but two large equipment manufacturers that no doubt contributed to the surprise gain in the non-auto/aircraft portion of durable goods orders in September. The latest data showed a marked demand increase for computers, primary metals, fabricated metals, heavy machinery, and electrical equipment. All these industries are benefitting from interest rates that are low and a weaker U.S. dollar.

Both these companies make great products that are benefiting from a strong business cycle in agriculture, construction and mining on a global basis. A weaker U.S. dollar against a basket of world currencies is certainly helping the bottom line, but, on balance, I view these businesses as doing very well on their own.

Since June of last year, the U.S. dollar index (a measure of the value of the U.S. dollar versus a basket of foreign currencies) has been in a marked downtrend, fostered by a monetary policy of reduced interest rates and rising money supply. This is helping U.S. large-caps that have major international businesses and it’s contributing to the earnings outperformance with many of these companies. It’s pretty clear in my mind that a weaker U.S. dollar as a policy is helping corporations and that stock market investors should see some significant dividend increases in 2012. The primary U.S. dollar trend has been recently put on hold by the debt crisis in Europe, but once this is dealt with (hopefully sooner rather than later). I expect the U.S. dollar to resume its weakness, which will help domestic gross domestic product (GDP).

The stock market now has some positive momentum, which I think can produce a decent gain before the end of the year. In my view, monetary stimulus is beginning to work and a generally weaker U.S. dollar is being very helpful. I have no problem with the U.S. dollar continuing in a downward trend, as this will go a long way towards helping the manufacturing and export sectors, as well as stock market investors who have been sitting on the sidelines in an otherwise lackluster market.

It’s great to see big, brand-name U.S. corporations reporting great numbers. It’s a trend that I think will continue going into 2012, as long as interest rates and the U.S. dollar stay low. I hate to admit it, but Federal Reserve policy on the U.S. dollar seems to be working.