Tiffany (TIF) vs. Nike (NKE)–US multinationals in a strong dollar world

TIF and NKE are two iconic US retail names.  Both have large international exposure.  As a result, results of both have been dented by the fall in the US$ value of their foreign sales.

Both stock charts also look virtually identical   …until the euro started falling in mid-2104.  Since then, NKE has continued to motor ahead, while TIF has fallen by the wayside.  From last June until now, NKE is up about 35%, while TIF has fallen by around 15%.  The S&P 500 has risen by  7% over the same span.

Both reported overnight.  As I’m writing this, NKE is up strongly, in a market that’s up; TIF is down.

Yes, I know the two brands stand for much different things, the products are very different and the business structures are, too.

Still,  NKE shows that foreign currency exposure in a rising dollar world need not be lethal if the underlying business is growing fast enough.

I’ve also been thinking a lot lately about the possibility that relative currency values can’t continue to diverge at the current rate forever.  More important, at some point–far ahead of the facts–Wall Street will have fully discounted likely potential changes in currency values.  At that point, even though weak foreign currencies may still be carving a chunk out of corporate results the stocks will no longer react badly when the ugly earnings are announced.

To my mind, that’s when it will be safe to de-emphasize domestic-oriented firms and pick through bombed out multinationals.

We’re apparently not there yet.

But TIF may well be a good indicator to gauge when investors have fully played out their desire to sell foreign currency earners.




yesterday’s Fed meeting announcement

My experience with Fed meetings is that the stock market usually heads off in the wrong direction on the release of the Fed statement and accompanying documents, but then quickly reverses course and moves in the way one might reasonably have predicted by actually reading the Fed materials.  This is not just computers trading.  The US market has operated this way for as long as I can remember.

Not this time, though.  Instead, the S&P made an immediate strong upward move   …and never looked back.

What’s different this time?

I think it’s the PDF where the Fed shows, among other things, where its voting members believe the Fed Funds rate will be at the end of this year, next year and in the longer term.

The previous release, in December 2014, showed the median estimate for 2015 at 1.0%.  For 2016, the figure was 2.5%.

Yesterday’s, in contrast, suggests the rate will be between 0.5% and 0.75% this December, and at 1.75% as we enter 2017.

That’s a big haircut for just three months.

The factors involved in the change are:

–the rise in the US$,

–moderation in domestic economic growth over the first quarter, and

–the lack of any sign of inflation.

Stocks and bonds spiked on the news.  The US$ came off its highs.

my take

Investors continue to be fixated on the numbers the Fed releases, and to be distrustful of any qualitative statement by the Fed saying it has taken the tragic 1990s example of Japan seriously and will err on the side of caution in raising rates.  Doesn’t make a whole lot of sense to me that the market doesn’t believe this, but it’s the way it is.

My stocks were having an unusually strong day yesterday before the Fed announcement.  They lost a bit of their relative strength afterward, though.  Arguably, this shows I was preparing for faster rate increases than the market now thinks will occur. I have no desire to become more aggressive, but I will be interested in how my stocks fare today.

I’ve been mulling over whether to try to play a potential rally in domestic-oriented EU stocks.  My experience is that this isn’t safe until the domestic currency in question has stopped falling.  I wonder if yesterday was a turning point?  Again, more data today.

uncorrelated returns: hedge funds as the new gold

Every stock market person knows what beta is.

It comes from a regression analysis, y = α + βx, where y is the return on a stock and x the return on the market).  It shows how a given stock’s past tendency to rise and fall is linked to fluctuations in the market in general.  A stock with a beta of 1.4, for example, has tended to rise and fall in the some direction as the market, but move 40% more in either direction; a stock with a beta of 0.8 has tended to exhibit only 80% of the market’s ups and downs.

The professor in a financial theory course I took in business school asked one day what it meant that gold stocks had, at the time, a beta of zero.

The thoughtless answer is that it means they aren’t risky, or that they don’t go up and down.

A consequence of this thinking is that you can lower the beta, and therefore the risk, of your investment portfolio by mixing in some gold stocks.What’s interesting is that in the early days of beta analysis that’s what some institutional portfolio managers actually did with their clients’ money.

That didn’t work out well at all.

What should have been obvious, but wasn’t, is that the zero beta didn’t mean no risk–or that gold stocks are/were a good investment.  It meant what the regression literally indicates–that none of the movement in gold stocks could be explained by movements in the stock market in general.

The riskiness of gold stocks is there, but it came/comes in other dimensions, like:  how mines develop new supply, the ruminations of the gnomes of Zürich (in today’s world, Mumbai and Shanghai), the potential for emerging country craziness, the propensity of the industry to fraud.

Why write about this now?

I heard a Bloomberg report that institutional investors as a whole are upping their exposure to hedge funds, despite the wretched performance of the asset class.  Their rationale?   …uncorrelated returns.

It sounds sooo familiar.

Admittedly, there may be a deeper game in progress.  It’s impossible to say your plan is fully funded by projecting a gazillion percent return on stocks or bonds.  But who’s to say that a hedge fund can’t do that?



a dollar shortage?

response to a reader’s question

A reader asked me to comment on this post on the Zero Hedge website about a potential US$ funding shortage.  The post was sparked by (is a rehash of) this recent commentary by JP Morgan’s currency strategist.

Let’s be clear that this is not my area of expertise.

Nevertheless, here goes:

the blogger

The Zero Hedge post, following the JP Morgan piece, observes that it has become unusually expensive to buy large amounts of US dollars.  The last time this happened was just as Lehman was failing, signalling serious problems with the world financial system.

The post author concludes that because dollars are again pricy we’re warming up for another round of severe banking problems.

JP Morgan

I don’t think the blogger is correct.  It seems to me he’s mixing up cause and effect.  Also, this is not what JP Morgan is saying.


Back in 2008-09, the main issue  was counterparty risk.

Bear Stearns, whose financial statements showed assets–mainly bonds, loan participations…worth about $80 ended up bankrupt, with those “assets” really worth close to nothing.  Lehman’s value was coming under similar questioning.

The conclusion the financial markets drew was that maybe all the banks’ financials were similarly not worth the paper they were written on–and that therefore anyone you lent money to, even for a few days or weeks, might go under before you were repaid.  So the wisest–and only–course was to lend to no one.   The world financial system froze up.

An important leading indicator of this mess was the increasing cost of borrowing dollars to finance trade.


Today’s situation is very different.  Two factors are involved in the current high cost of finding dollars:

–it’s cheaper to borrow in euros, hedge currency exposure and convert the loan proceeds into dollars than it is to borrow directly in dollars. (Similarly, in recent years it’s been cheaper for a Mets fan to fly to San Francisco to see the Mets play there than buy a premium seat at Citi Field.) Enough American corporations are doing so to dramaically up the cost of obtaining dollars.  They will presumably continue to do so until do so until this arbitrage makes no sense.

–today’s carry trade is sell euros (or just about any other currency)/buy dollars.

my conclusion

Today’s situation, unusual as it is in post-WWII history, doesn’t signal the onset of a new banking crisis.  Rather, it’s a function of differences in central bank monetary policy between the US and EU caused by differences in the relative economic health of  the two areas.

an aside

JP Morgan mentions one thing for which it has no hard information but that may prove important.

The corporate borrowing situation described a few lines above makes no net impact (in theory, anyway) on the fx value of the euro.  The currency hedging contract exactly offsets the effect of the purchase of dollars.

Suppose, though, US companies aren’t hedging.    After all, multinationals have tons of money in overseas banks and lots of physical assets in foreign countries.  Currency losses on both are currently ripping gaping holes in firms’ income statements.  Companies might consider that having, say, euro-denominated liabilities would neutralize some of the damage (I feel confident that the JPM strategist has either made, sat in on, or at least heard about, financing pitches arguing US companies should do precisely this).

If so, their dollar-buying isn’t  being offest by hedging contracts and  is putting upward pressure on the US$.

equity implications

If so, once converting euros into dollars becomes expensive enough, US companies will presumably stop doing it.  This could cause a significant bounce in the euro.  This would likely switch European stock market preferences away from dollar earners toward (beaten down) domestic issues.



want index underperformance …try an actively managed bond fund


‘For a while I’ve been following the Indexology blog written by S&P.

As the name and source suggest, the blog extolls the virtues of indexing–after all, S&P makes them and sells information about them.  I find the posts to be generally interesting.  My only quibble is that the Indexology people seem to be true believers in a strong version of the efficient markets hypothesis.  They’ve all drunk the Kool-aid and don’t stop to question how it can be that basically every professional active manager underperforms   …nor do they try to imagine what circumstances could create even a temporary burst of outperformance.

I’m well aware of all the figures about equity manager underperformance.  However, I’d never thought much about bond funds, the subject of the Indexology post of March 12th.

The numbers are stunning.

bond fund (under)performance vs. benchmarks

Here they are:

–in 2014, 97% of the government bond funds underperformed, as did 98% of the investment-grade corporate bond funds

–in both categories, over 95% underperformed over the past five- and ten-year periods

73% of the junk bond fund managers underperformed in 2014; over the past five years, 88% underperformed; over the past ten, the number is 92%.

Bright spots?:

–among actively managed senior loan funds (which don’t contain bonds;  they hold pieces of syndicated bank loans to non-investment grade corporate borrowers), 70% outperformed last year.  Over the past decade, though, underperformers and outperformers are just about equal in number.

–61% of municipal bond managers outperformed in 2014.  55% did so over the past fie years.  However, over the past ten, 70% underperformed.

reasons for this woeful showing?

Indexology offers none.  Personally, I have no firm ideas.

Looking only casually at the results of Bill Gross over his years at Pimco left me with two impressions of the former Bond King:

— he continually bet very aggressively (and correctly) that interest rates would fall–sort of like an intelligent version of Jon Corzine, and

–a large chunk of his outperformance disappeared through the high fees Pimco charged for his services.

Indexology doesn’t talk about fees, which can’t have improved the situation for bond managers generally–and I presume the Indexoogy numbers are after them.

The better areas for relative performance are smaller and contain less liquid securities.  I wonder what role pricing–which I presume is not based on daily trading but on the theoretical models of third-party experts–plays?


downward revision of 1Q15 revenue by Intel (INTC)

Yesterday INTC issued a press release revising downward the 1Q15 guidance it gave when announcing 4Q14 results on January 15th.

The company now expects 1Q15 revenue to be $12.8 billion vs $13.7 billion previously–a drop of about 6%.

What does this mean?

–My impression is that, like most publicly traded companies, INTC provides guidance that gives itself a margin of safety against having a negative surprise.  That is, the guidance is a reasonable figure, given the data at hand, but a little on the low side.  So the downward revision means INTC has used up all its wiggle room and then some.

–The reporting convention is to list the factors behind the revision in the order of their importance, with the most significant first.  For INTC, these factors are:

—–weaker demand for business desktops, and

—–a resulting runoff in the number of INTC chips that wholesalers’ are willing to keep in inventory.  This is magnifying the effect of the retail shortfall on INTC’s sales. (Think:  instead of selling 10 chips and reordering 10, the wholesaler has sold, say, 9 and reordered 8.)


–The reasons behind weaker sales–again, most important first–are:

—-slowdown in the rate at which small and medium-sized businesses are replacing their outmoded Windows XP machines

—-economic weakness, especially in Europe

—-currency weakness, especially in Europe.

Operating margins remain unaffected, despite the revenue drop.  That’s because higher selling prices are offsetting the negative effect of lower unit volumes (which would seem to imply that unit volumes are off by 6%).

my take

My guess would be that sales to end users are off by 4% vs. forecast and the other 2% is from reduction in wholesale inventories.  I suspect that these are sales deferred rather than lost, so I’m not too concerned.  This probably does signal, however, that the vast majority of the current corporate upgrade cycle is over.

I’m more interested in currency/volume effects in the EU.  It’s less to figure out what’s happening with INTC than to to get advance warning about how other firms with European exposure may fare as they report results.

I’m guessing, based on their order in the INTC press release, that businesses clinging to XP are 60% of INTC’s problem, 40% is Europe.

If so, Europe accounts for a 2.5% falloff in sales.  Let’s assume that the decline of the euro accounts for half of this, or 1.25% of $13.7 billion, which equals $170 million.  The euro has fallen by 8% since January 15th.  $170 billion/.08 = $2.1 billion, implying that European end users now make up only about 15% of INTC’s sales.

This strikes me as low, although in a quick look through the company’s 2013 10-K (the 2014 one isn’t out yet) the geographical breakout  of operations that I found listed the location of INTC’s computer-building customers, not where the end users are.

Two conclusions, then:

more currency losses than expected for multinationals with European exposure in 1Q15, and

weaker than expected (I think) economic performance in Europe, as well.  Not a disaster, but worse than companies thought two months ago.





dealing with a rising currency

As far as the stock market is concerned, there are two main strategies for dealing with a rising currency:

1.  try to make currency work to your advantage

Profit growth will be highest for a company in a changing currency environment if it has its costs in weak currencies and its revenues in strong ones. In today’s world, this means having costs in, say, yen or euros and sales in the US.

The “good” stocks in weak currency countries gain in two ways:   from stronger profit gains and from domestic portfolio managers rotating their holdings toward the “good” industries.

The obvious candidates are export-oriented firms with high labor content in weak currency countries.  In these areas, firms with high strong-currency import content that sell finished products into the domestic market are the worst ones to hold.


In strong currency countries, in contrast, purely domestic stocks are the best bet.  They benefit only from portfolio manager rotation, though.  But they avoid currency induced weakness.


2. ignore currency and look for secular growth names whose expansion prospects outweigh possible currency losses 

As a growth investor, this is my preferred strategy.  Historically, the majority of such stocks have been in the US.  In today’s world, however, the ideal investment would be in a hot EU tech company with exposure to the US.

Any ideas?