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The Other Side of the Dollar Slide: Infosys


Many multi-nationals are pointed to by almost every analyst now as benefiting from the weak dollar...

Warm Pizza and Hot Rupees

I saw a snippet of an ad campaign yesterday where Yankee Stadium turns into pepperoni pizza, hot dog blimps fly by, and buildings are topped with whipped cream. New York City's tourism organization aiming to attract 50 million tourists annually launched a $30 million global marketing push.

Not-so-ironically the agency hired is British and partly owned by a French Holding company. Perhaps it offers a clue to what Europeans and likely many others think about buying space in the U.S. I'd guess they'll very likely be successful, and I'd imagine plenty of trips to the U.S. are being planned with big smiles based on what the currency exchange window is telling them pre-flight. I would keep this in mind for U.S. leisure industries, hotels, and online ticketing solutions because business should boom when most of us in the U.S. are tightening our belts, foreigners are fastening their seat belts. And they'll buy a lot of stuff when they arrive. There are some jewels inside a sector that a lot of investors are writing off based on weakness in the U.S. consumer. Look for those sending invoices outside the U.S.

In a perhaps even less crowded trade I'd note the same day as this campaign was launched, Infosys (INFY) reminded us of the other side of the dollar slide. Many multi-nationals are pointed to by almost every analyst now as benefiting from the weak dollar, often extending to predictions for the market as a whole now that foreign sales account for so much of the "U.S." companies' revenues. I want to reverse that logic and find out who is getting hurt. At the top of that list, as a good example, is a company that I owned for many years from the long side, INFY, so if anything I'd be biased by its remarkable run. I am not. I still believe the company is among the best in the world. However, its best customer, the U.S., is paying with dollars worth less and less against the Indian rupee - an exchange rate that has changed by 16% in the last 12 months alone.

I buzzed in July that Infosys, the outsourcer, was in the process of outsourcing itself. It was hiring workers in Guadalajara, Mexico because of fierce wage pressures that became concerning. Being a low cost provider is a great sales pitch until the salesman is late because he's asking for a raise at the home office. The pressure will likely grow, as well it should, since the standards of living will marvelously march higher, taking desires along with them. The added headwind for these outsourcers is that they are selling into the U.S. and getting paid with dollars worth a lot less while pricing pressure and competition heats up – a wicked brew. More than two-thirds of Infosys' revenues comes from North America.

I think there may be a terrific opportunity nearby to balance extreme optimism (my own included) about technology and long positions, with carefully selected paired trades by shorting technology companies selling into the U.S. next to longs selling from the U.S. Infosys, until proven otherwise, is a horse you may not want to bet against, but some of its cousins have peaked my curiosity. INFY's numbers this week offer several clues from my perch. The shares are down (5%) year-to-date against an 18% rally in the S&P Technology Sector, offering a more reliable clue.

Trade of the Week

This week I had my worst day of trading in a long time. I was miserable. They say it is good to find someone who can separate his emotions from trading in this business. They would never hire me. On the contrary, I believe if you show me a good loser, I'll show you… a good loser. I don't want to get good at that. I work in my firm's trading lab with every ounce of my energy and focus. I enjoy getting out of bed around 5 am with no alarm clock for a reason – I love coming to work. I love hating some moments of that work. I love being driven to the point where I physically feel my poor decisions in my back (a good sign I need to change my position). I love the fact that I get to rap all day long with some of the brightest minds on the planet – many of whom you read on this site – and disagree, agree, debate, and challenge. To do any of that without emotion would be on the day before I should not do it at all.

So, when I have an awful day, I feel awful. One of my trading rules is to do the exact opposite of what I used to do (the reason to keep a trading diary) and leave the office early. I got a lucky reminder why this week. A rainout forced my little girl's soccer game to be rescheduled to that same afternoon. I walked onto the field and that day was over, instantly. The weather was perfect. The grass was actually cool (you may not understand how rare that is in Houston) which I knew because I kicked off my shoes and started kicking the ball with the Red Dragon's #1 fan, my littler son, Big Jack. I had to ignore his pleas for a thumb-war once his sister went into the game as goalie. She had never played, she cared mostly about her pink shoes and purple fingernails, but I convinced myself she also might be interested in stopping the ball if it came near her. Moments later she faced a break-away. I was more nervous than being naked a call on a stock that hits one of the Najarian's screens. The next thing I know "BOOM" the hardest kick I've heard in this league ricochet's off her shin-guard out of bounds. The crowd roars, by church league standards anyhow, and I'm like a Red Wings fan against the glass. I couldn't believe how excited I was. She went on to pitch a shut-out. All her friends were hugging her. Jack was pleased too, because it left the orange slices unattended and he took advantage and took them down in size.

Walking with her to the car, my worst day became my best day. I suggest caring about something that strongly, both parts of that day, is a blessing not a curse. I recommend each. I ask her what it felt like to make that save. In a bout of sports honesty that I'll have to work on later, she looked up at me and said, "Dad, she just kicked it right into my foot." Lucky break? Maybe. The next day I got back every penny I had lost. Lucky breaks? Maybe. But, I'd like to think they were born from a trading rule I took very seriously, had a blast doing it, and one that I recommend to anybody else. After a terrible day, leave early and make it two different days.
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