Category Archives: EU financial crisis

downward revision of 1Q15 revenue by Intel (INTC)

March 13, 2015 By in earnings conference calls, economics, EU financial crisis, Portfolio management, Recent Market Action, Stock ideas Tags: , , , , , , , , Leave a comment

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.

 

 

 

 

the US dollar and commodities

March 11, 2015 By in Current Market Thoughts, economics, EU financial crisis, oil and natural gas, Strategy Tags: , , , , , Leave a comment

dollar strength is unusual

Over my working career, the US government has maintained a policy of encouraging gentle US dollar weakness, while keeping up a rhetoric (for domestic consumption) of wanting dollar strength.

From a practical point of view, what’s important for investors is that the current situation of considerable actual dollar strength is unusual.

$ ↑ means S&P earnings ↓

I’ve already written about the negative effects of the greenback’s strength against the euro on reported earnings for the S&P 500.  The EU currency has lost about a quarter of its value against the dollar over the past nine months or so.  Put another way, the 25% of S&P profits derived from the EU are worth 25% less in dollars than a year ago.  In back-of-the-envelope terms, this means overall S&P profits are now running about 6% lower than  they would be were the exchange rate back at €1 = US$1.38.

effects in weak currancy countries

Today’s post is a look at the other side of the coin–the effects of the dollar rise on sales of dollar-denominated products.

These fall into two classes:

—products made in the US.  Here the situation is easy to understand.  The higher local currency price of US products decreases demand for them in weak currency areas like the EU, and increases demand for locally produced substitutes.

—global commodities, which–from metals to energy to agricultural products–are priced in dollars in international trade.

commodities

the first round

For a producer in a weak currency country, the dollar rise initially means a jump in local currency profits.

For a weak currency consumer, the dollar increase means an immediate rise in local currency costs.

responses

The consumer responds to higher prices either by:

–consuming less, finding substitutes (like an extra blanket, or switching from coffee to tea, or riding the bus instead of driving) or

–cutting back on other things.

The producer waits to see the consumer response.  If there’s a dramatic falloff in demand, he can counter this by lowering prices.

the net effect…

…is a loss of purchasing power for the weak currency earner–and a consequent weakening of overall GDP growth.  The main question is how well substitution can cushion the blow.

a saving grace…

The collapse in the oil price, which began at about the same time as the dollar rise, has offset much of the currency damage to GDP in oil consuming countries.

…for most

The currency gains that oil producing countries may have made from lower  costs have been far outweighed by the plunge in unit revenues they’ve suffered.

the bottom line

The US is not a particularly export oriented country. And it’s a large net oil importer.

For most, the rise in the dollar has had  no negative effects–plus the mild positive of lower cost of  imported goods.

On the other hand, for citizens of, say, Japan, which imports large amounts of food and fuel, the fall of the dollar has been a disaster for ordinary consumers–mitigated only by the plunge in the oil price.  Europe is somewhere in the middle, consumers squeezed by a rise in the cost of commodities but buoyed by the large decline in the price of imported oil and gas.

 

 

 

investment wildcard: Grexit

February 17, 2015 By in EU financial crisis, Greece Tags: , , , , , Leave a comment

My first employer on Wall Street had an unusually aggressive negotiating style.  At one time, a big brokerage firm wanted to buy the company he founded.  They agreed on a price after lengthy negotiations.  Two weeks later, my boss reopened the negotiations and successfully raised the bid.  Then he did it again.

On the day the contracts were going to be signed, he asked for another 5%, figuring, I think, that the buyer would have no choice but to acquiesce rather than see all the time and effort it had put into the deal go up in smoke.

The buyer walked out the door instead.

According to the Japanese companies I’ve talked to over the years, Chinese government officials use the same psychological ploy–agree, let the other side relax and celebrate  …and then ask for more.  The one difference with China is that twenty years ago manufacturing there gave you both a labor cost and a capital cost advantage over making things elsewhere (the only instance of this I’ve seen in thirty years as an analyst).  So there was no question of going elsewhere.

From my casual observation, Greece has been using this same negotiating style with the rest of the EU over the past few years.  I suspect, however, that Greece’s position is closer to that of my old employer rather than China’s.

How so?

–Greece is small, representing only about 3% of the EU’s GDP.  Arguably, the most important thing it brings to the union is the cachet of once having been the cradle of democracy.

–EU financial institutions are much better able to withstand the shock of a Greek exit from the union than they were in the depths of the financial crisis.

–Greece has complied with virtually none of the dozen-plus structural reform mandates required by the current bailout, which expires at the end of this month.  This gives the EU no reason to believe that Greece will follow through on any terms it agrees to now

–allowing an unrepentant Greece to remain in the EU under far more relaxed standards than afforded to, say, Spain, could easily prove more destabilizing to the EU than cutting ties

–the negative economic consequences for Greece of Grexit could be enormous–enough to provide a cautionary example for other states, or regions within states to reconsider separatist movements.

my take

I think Greece is holding a much weaker hand than is commonly perceived.  I think that the chances Greek government negotiators will take the one step too far that will cause the other side to leave the room are significant–although I have no idea how to quantify that.  Finally, I think any negative reaction to an actual Grexit, ex Greek stocks, which I imagine would do very poorly, would be shorter and milder than the consensus thinks.

the Greek election

January 26, 2015 By in Current Market Thoughts, EU financial crisis, Greece Tags: , , , , , Leave a comment

Yesterday Greece held a parliamentary election.  Its result was that the sitting government was replaced by a coalition whose main platform is renegotiation of the terms of that country’s bailout agreement with its EU creditors.

The Greek argument for further restructuring is that the country has suffered enough by not having grown for a half-decade, that it has made significant structural reforms and that, at 175% of GDP, its euro-denominated sovereign debt is impossible to repay no matter what Greece does.

The other side is, more or less, that Greece deliberately deceived lenders for years by issuing falsified national accounts, so it doesn’t deserve better treatment.  (There’s a fuller discussion in my posts  about Greece from 2010.)

When I saw the election news last night, the euro had declined by about a percent from Friday’s close and S&P 500 futures were down by about 12 points.  As I’m writing this, the euro is up by more than a percent against the USD, stocks indices across Europe are rising and the S&P is down by about half what the futures in Asia were showing.

How so?

I think the markets are coming around to the view–which I think is probably correct–that the EU knows deep down that the current austerity regime is unsustainable, particularly in the current no-growth situation for the union as a whole.  Greek may well be the trigger for a more general rethink of a restrictive fiscal policy that simply hasn’t worked.

If so, this would be another reason for a harder look at beaten up EU stocks.

 

 

what just happened to the Swiss franc (CHF)

January 15, 2015 By in Recent Market Action, Switzerland and the euro Tags: , , , , , 5 Comments

background

Pre-financial crisis one euro bought close to 1.7 chf.

As progressive waves of bad news about the EU financial system broke–that, for example, its banks were stuffed to the gills with worthless US mortgage derivatives, or that Greece had faked its national financial statements for years and was unable to pay its (euro-denominated) national debt–EU investors began to sell their currency and buy the chf, whose value began to rise.

In mid-2011 a sudden spike upward in demand brought the Swiss currency to the point that a euro bought less than a single chf.

the cap

That forced the Swiss National Bank to step in to stabilize its currency, fearing that continuing gains in the chf would have terrible negative effects on tourism and on exporters.  The SNB set a cap on the value of the chf at 1.2 per euro.  The chf could trade cheaper than 1.2 per euro, but the central bank would always be there to buy euros at the 1.2 rate if needed to prevent the chf from appreciating further.

problems

This action fixed the immediate problem of appreciation of the dhf against a key trading partner.  But it did two bad things at the same time:

–it effectively tied the currency to a now-nosediving euro, and

–it expanded the Swiss money supply in a potentially unhealthy way.

today

This morning the SCB made the surprise announcement that it was going to let the chf float against the euro again, effective immediately.  The currency spiked to 1.0 euro before settling in at around 1.1 euro.

Why the surprise?  

I can think of several reasons:  the Swiss government didn’t want to buy any more euros.  I imagine it anticipated it would be swamped with buy orders for the chf during any phase-out period.  Currency traders may have anticipated this move and been buying boatloads of euros from the Swiss government in recent days, effectively forcing the SCB action.

Why do this at all? 

That’s the interesting part.

Switzerland apparently anticipates that when the ECB embarks on quantitative easing, the result will be some pretty ugly currency action for the euro.