the euro, the US$ and the Swiss franc

With the beginning of quantitative easing by the European Central Bank, the euro has slipped against the USD by about another 3% today to a value of 1 € = US$1.12.  That’s a decline in the euro of about 7.5% just since January 1st.  The EU currency has tumbled by more than 14% vs. the greenback over the past year, and by almost 20% since its high of $1.39+ last May.

This is an astounding fall for the world’s second most important currency.  It’s an enormous boost for EU-based enterprise overall and for exporters in particular–as well as a huge burden for their hard currency-based rivals. It would also be a mind-boggling loss of national wealth for EU citizens, were it not that Japan has depreciated the yen by a third over the past few years in a bid to regain global relevance for its manufacturing base.

Enough of this.   Down to brass tacks:

the euro/dollar

The income statements of US companies with EU exposure will be savaged by the currency decline.  Yes, in theory they may be able to raise prices to recover some of their depreciation-created losses.  But the general rule in this situation is that prices can only go up in line with overall inflation–which is non-existent in the EU at the moment.

My strong feeling is that Wall Street hasn’t fully worked this out yet.  So combing through our holdings to find euro victims should be a high priority for each of us.

the euro/Swiss franc (CHF)

The CHF has gained almost 25% against the euro since the Swiss central bank depegged its currency from the euro a little more than a week ago.  The speed of the move clearly shows what should have been apparent over the past year of euro depreciation–that the Swiss government was trying to maintain a peg that was miles away from where the cross rate would be without constant economy-distorting intervention.

We know this sort of thing can’t last.  If the forty-year history of floating exchange rates shows anything it’s that trying to maintain an artificial exchange rate always ends in disaster.  Yet what continues to come out in the press post-depegging is that:

–lots of EU property owners had decided it was a great idea to take out a CHF-denominated mortgage on their homes.  Short-term rates were negative, after all.  Ouch!

–a number of commodities brokers are in serious financial trouble because they allowed individual clients to build up short-CHF positions on margin that were so big there’s no chance they’ll ever be able to repay the losses they’ve incurred.

–there’s been a parade of currency trader departures from hedge funds caught out by the same short-CHF bet.

I guess this just shows that P T Barnum was right–that despite the examples of the collapse of the pre-euro Exchange Rate Mechanism in the early 1990s, the Asian debt crisis later in that decade and all of the problems with one-size-fits-all Eurobonds, there are still tons of people willing to take what history shows is the losing side of a wager.



thinking about Consumer Staples stocks

Consumer Staples

I had lunch yesterday on eastern Long Island with my friend Richard, who is an astute investor despite being handicapped by being a physician.  Among other things, we talked about Consumer Staples.  He’s a big fan.  …me, not so much.  Anyway, I decided to write about this sector today.

starting with the nuts and bolts:

–the S&P 500 Consumer Staples sector makes up 10.3% of the total capitalization of the S&P 500 index.  That puts it about in the middle as far as size goes.  (IT, at an 18.1% weighting, is the biggest sector;  Telecom, at 2.5%, is the smallest.)

–the Consumer Staples sector has 40 constituents.  Procter and Gamble, Coca-Cola and Philip Morris are the biggest three.  Of them, only P&G cracks the top ten for the S&P as a whole.

–as the sector name suggests, members provide everyday necessities, like groceries, whose purchase isn’t easy to postpone.  It contrasts with Consumer Discretionary, which deals in items like entertainment or restaurant meals, that people can go without for a while.

steady growth → defensive industry

True, every sector has some sensitivity to economic conditions, even Utilities and Staples.  But in these two cases, the sensitivity is small.

In bad times, people may buy one bar of soap instead of a three-pack, or a store brand rather than a deluxe offering.  But they continue to buy something.  That’s not the case with big-ticket items, like refrigerators, autos, houses, industrial machinery, hotels…

As a result, earnings for Staples companies hold up better than for most other sectors in recession.   Knowing this, investors flock to the sector in bad times–and away from it toward more cyclically-sensitive areas when recovery is underway.

a global, but mature, industry…

…except for in emerging markets.  Staples companies tend to grow by taking market share away from their rivals, rather than by finding new customers who have, say, never used shampoo before.  Yes, these firms can raise prices under most conditions (not so much currently) but generally by no more than overall inflation.  So eye-popping profit growth is rare.

sensitive to currency and to input costs

That’s because they can’t raise prices quickly.

a play on the €?

The sector tends to have large EU exposure.

And that’s a potential reason to be interested in the sector today.  If the € beings to rise against the $, which I think is likely, EU-oriented Staples companies should start to show surprisingly strong earnings gains.  That will come both from better unit volume growth as the EU recovers from recession and–more importantly–from the higher value in $ of their € profits.

I haven’t acted on this though yet.  But I’m considering it.