I’ve just updated my Keeping Score page for Janaury.
Category Archives: Recent Market Action
the current earnings season
Two things strike me about the current earnings reporting season for US publicly traded companies:
–the market reaction to reported results, both weak and strong–and to forward guidance as well–has been unusually sharp. Rises/drops of 10% on news haven’t been uncommon
–much of the data that the market is reacting to has already been in the public domain before the company earnings announcement made it “official.” This lack of discounting in advance is very unusual.
Qualcomm (QCOM–I’ve owned it in the past but not now) is a good example. The stock dropped by 9% after the company said that two developments would damage future results: Samsung will not include a QCOM Snapgragon chip in its next generation smartphone; and QCOM is having trouble collecting royalties in China. But who didn’t know this already? The former news has been circulating on the internet for weeks, and the latter was the subject of a full-page in-depth article in the Financial Times three days before the earnings report.
As I was thinking about this last night, it struck me that the last time I can remember similar behavior in the US stock market was in 1991. Even though economic circumstances are far different then, the 1991 stock market might turn out to be a good template for 2015.
In mid-1990, world markets slumped as Saddam Hussein invaded Kuwait. Markets rallied back to their prior levels when the US invaded Iraq in January 1991–but went sideways for most of the rest of the year.
During the sideways time, stocks with their own growth story–that didn’t depend on general economic trends–could do no wrong (fledgling biotechs were rock stars). Commodity stocks, in contrast, were repeatedly pummelled. Industrial, or other relatively economically sensitive areas, were trashed as well, though, as I recall, not so badly as raw materials names.
This uncomfortable period came to an abrupt end in late 1991, as signs of a general economic upturn began to be seen. Biotechs promptly crashed. Economically sensitive stocks surged. And the market went from ignoring the future and rehashing current earnings reports to discounting into prices anticipated earnings for 1992 and beyond.
If the 1991 analogy holds true, domestic US companies seem to me to be the current safe haven, while those with EU exposure are in trouble. Niche companies or special situations will be in their own special nirvana, and economically sensitive ones simmer in purgatory.
Nothing much new there.
The point is that in a 1991-like market the same news gets discounted over and over again for an extended period. There is no countertrend rally that gives relief to out of favor sectors, no reversal of form for underperforming names.
If I’m correct, the cost of deciding to ride out poor portfolio positioning with the idea of maybe repositioning during a countertrend move will prove more costly than the experience of the past half-decade would lead anyone to expect.
what just happened to the Swiss franc (CHF)
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.
I’ve dusted off my Current Market Tactics page
Current Market Tactics: why stocks are selling off, and what to do now
St. Gobain and Sika: are there implications for the US?
The French building materials company St Gobain recently agreed to acquire control of a Swiss adhesive and sealant firm, Sika, for SF2.8 billion (US$2.8 billion). The move has caused quite an uproar in Switzerland.
The issue isn’t the purchase itself. It’s that Sika has two classes of stock: shares (Namenaktien) held by descendants of the firm’s founder represent 16% of those outstanding, but 52% of the voting rights. St. Gobain is buying out the family at a very large premium. But it has no intention of buying in the publicly held shares (Inhaberaktien) …which have lost about a quarter of their stock market value since the acquisition was announced.
Another day in the life of holders of an inferior security in Europe.
What’s most interesting to me about this transaction is that it’s being offered as a cautionary tale for holders of shares in US internet companies like Google, Facebook…which also have a number of classes of stock, with voting control held by the founders.
While a repeat of the Sika experience might in theory occur in US social media, I can see three factors that argue against this:
1. St. Gobain/Sika is a case of a large company swallowing a smaller one. The US internet companies with voting control by insiders are by and large already whales. Who’s big enough to be the buyer?
2. In my experience, obtaining operational control either through a large minority interest or a small majority–and without the possibility of tax consolidation–is a particularly European phenomenon. US firms typically strive for at least 80% ownership, which allows funds to pass between parent and subsidiary without triggering a tax bill.
3. This is an especially nasty sellout of minority shareholders in Sika by the controlling Berkard family. Perfectly legal perhaps, and a possibility minority shareholders should have contemplated before buying, but nasty nonetheless. For a firm that makes industrial forms of glue, there’s not likely to be significant negative fallout for the business. In the case of GOOG or FB, treating loyal user/shareholders this poorly would be bound to have severe negative business consequences.