Multinationals look up as the dollar slips down

George Washington still smiles placidly from that crumpled greenback nestled in your wallet or purse. But around the world last week, ol' George W. was losing face -- that is, face value. For instance, an American in Paris saw the cost of mousse au chocolat edge up a bit. And in dollar terms, British scones got pricier.

Blame it on a change, or at least an expected change, in the supply of dollars. In the last few months, currency traders have been eyeballing the sluggish United States economy. And selling the dollar.

To stimulate the economy, the Federal Reserve System has increased the supply of dollars and allowed interest rates to fall. This has made dollar-denominated assets less attractive, and traders are apparently shifting to better returns elsewhere.

Since March, the dollar has fallen about 15 percent against a basket of foreign currencies. Last week, the pace of buck-passing quickened as traders speculated that US interest rates might go yet lower. The dollar, still at historically high levels, dropped to its lowest level since last September.

So French pudding and British muffins cost more. Big deal. What has that to do with US stocks?

Plenty, if you own shares in a US-based multinational company. Over the last three years you've seen the company's overseas profits go as soft as overripe Camembert.

A high dollar makes US products less price competitive. And sales in foreign currencies, when translated into dollars, contribute less to the bottom line of a US company. Thus, a weak-kneed dollar is a boon to multinationals: first, providing a currency exchange boost, then later, generating more sales as products become more competitively priced.

Which companies benefit the most from a feebler dollar?

Pharmaceutical producers have a large exposure abroad, and Wall Street was quick to bid up drug stocks last week. Also, soft drink companies, such as Pepsi and Coca-Cola, market to guzzlers worldwide. Both stocks rose in heavy trading, but most of Coca-Cola's six-point gain was probably due to the carbonated euphoria over ``Classic Coke.''

When the Dow Jones industrial average rallied above its record top Thursday, some traders wondered if this was ``the real thing.'' But by Friday's close, the Dow had fizzled to 1,3xx.xx. In five trading sessions, the index posted a xx.xx-point gain.

Among other benefactors of the dollar's dip are cosmetic, food, and computer companies, says Arnold Kaufman, editor of Standard & Poor's Outlook newsletter. He mentions IBM, Digital Equipment, Data General, and Hewlett-Packard.

But he says that ``the changes in currencies are factored into their stock prices almost immediately.'' So unless you already own these stocks, or expect further significant dollar declines, this advice may not yield much for investors.

Mr. Kaufman suggests that a longer-term play would include purchases of stock in the capital goods sector. Here, companies that have lost sales to foreign competitors, both domestically and abroad, might improve their sales and earnings picture over the next six months to a year.

Heavy-machinery makers, metals processors (``Aluminums are hurting badly because the dollar is still relatively high''), and chemical companies should improve, Kaufman says.

First vice-president John Connolly at Dean Witter Reynolds agrees. He cites Caterpillar Tractor along with ``a slew of companies in metals, paper, and chemical industries that will fare better as international competitors raise their prices'' to maintain profit margins.

This past week Caterpillar reported second-quarter earnings of $51 million -- its first profits in two years. But the gains were attributed to cost cutting, and the Peoria construction-equipment maker said the overvalued dollar was still cutting into sales abroad.

Considering a greenback-keyed investment?

David M. Polen, who heads a namesake money management firm in New York, warns that investors ``look before they leap.'' A falling dollar ``may not stimulate the kind of profitability you'd expect at first blush.''

For instance, US textile companies are an obvious victim of cheap imports, Mr. Polen says. A weaker dollar might narrow the price gap between domestic- and foreign- produced clothing. But he doubts it would amount to a significant change. ``You would have to investigate the industry and each firm very closely'' to dig up an investment advantage.

But the shoe industry looks interesting to Mr. Polen. The International Trade Commission recently voted unanimously that this US industry needed protection from imports. A decision by President Reagan is expected by Sept. 1. ``If they get restrictions and quotas on imports, plus a decline in the dollar, it might be an interesting area,'' Polen says.

If you're a trader, the dollar's decline alone offers a valid short-term strategy. But he says that ``on a real investment basis, I wouldn't buy stock on such a superficial strategy. You need to dig deeper to see if the stock is fundamentally sound.''

Standard & Poor's Kaufman agrees: ``You buy stocks for fundamental reasons.'' But by year-end, Kaufman expects ol' George W. will gradually lose some of his international standing. ``We're looking for another 5 to 10 percent decline. And that's enough to help some companies significantly.''

Graph: Producer Prices. Source: Bureau of Labor Statistics

Lower energy and food prices kept wholesale prices level in June, the Commerce Department reported Friday. That put the producer price inflation rate at 1.4 percent for the first half of 1985. The flat figure for June came after four consecutive months of slight increases in the overall index, fueled mostly by higher energy costs.

Meanwhile, retail sales fell 0.8 percent in June, the biggest decline in 11 months. Chart: Interest Rates. *Yields; Source: Bank of Boston.

Percent Prime rate 9.50 Discount rate 7.50 Federal funds 7.63 3-mo. Treasury bills 7.08 6-mo. Treasury bills 7.20 7-yr. Treasury notes 10.09* 30-yr. Treasury bonds 10.40*