Last week was a very significant in the capital markets as we saw an event take place which was unexpected and nearly unprecedented in it's nature. Yesterday, the Swiss National Bank, with no indication at all to participants, decided it had enough of the dollar's rise against the Euro and unwound the Swiss Franc's peg to the Euro. You see, the financial leadership in Switzerland decided, uh no, we are done with tying our mast to what they see as a sinking ship (currency). The reason why this was important is the Swiss Franc strengthened by nearly 30% in one day versus the EUR (25% against the dollar) Currency markets typically might move 5-8% in a year, and in most cases, 1-5%. 30% in a day for a major currency like theCHF is a massive move and it shows you what kind of implications the strong dollar has on different markets. Dollar strength has also been reverberating through the oil markets, uh, just a tad.
Unless you pay no attention to the world at large, clearly you are aware of what has transpired in the energy markets as the price of oil has fallen nearly 60% from its summer highs. Yesterday, we saw Schlumberger, the world's largest oil servicing enterprise and an excellent organization, announce write downs and decide to lay off 9,000 workers because of the weak environment for their services. They also raised their dividend 25%, for those who didn't see that either. It does show you the big fellas in the oil patch are hunkering down and getting ready for a long slog. Likewise, BP said they expected oil prices to remain in the $50-$60 range for the next three years. We will see as rig shutdowns and capital expenditure reductions have been announced throughout the industry. Still, dollar strength clearly has not benefited our lovely lasses and fellows in the oil world.
The ramifications of the Swiss National Bank decision were felt quickly in the financial world as two foreign exchange brokers announced they would have to close shop. Another one, FXCMInc., lost, now, gulp hard, and breathe slowly first, before you read on, 90% of it's value because of the lack of liquidity in the entity. When you allow customers to leverage their assets 50-1, at maximum borrowing capacity, a 2% move against your positions leaves your equity worthless. What many investors were doing was borrowing the Swiss Franc and then investing it in other areas of the world, essentially what is called the carry trade. It is where you borrow capital in a low yielding currency, and invest in a market with a much higher yield to capture difference in interest rates, or, 'the spread.' In this case, the only carry which was taking place was investors, and the firm, being carried out on a stretcher. There is a famous saying in the markets, 'He who sells what isn't his'n, must buy it back or go to prison.' The quote is probably more applicable to short sellers, but in nearly any market, a good rule is to only invest money you absolutely know you will not need. Yeah, I got it, really profound with that one.
Elsewhere in the corporate world, Target announced they would leave Canada after tossing nearly 7 billion dollars of shareholder capital in the furnace. Certainly, that was not their objective, but you know what they say about the best of intentions. Still, it does provide a good lesson for investors about companies which are expanding and these grand pronouncements about potential growth rates. It is important to remember all babies crawl before they walk, and walk before they run. As Mr. Munger says, 'Easy Does It.' It is important to grow, but to grow profitably. Target entered Canada by buying 130 stores from a second tier competitor and tried to use that as a platform to build on. Clearly, more time should have been spent analyzing the market, and specifically those locations. In speaking to Canadians, their perspective was Target was offloading all the junk from the 'States' into their country. Not good, to say the least. Of course, this week's result reflected the Canadian's perspective about Target's 'Global Expansion.' Still, Target is a heck of a company and has been for a long time. The CEO made a tough decision and by putting the kabosh on their Canadian losses, will help the big red dot's profitability.
In other areas of the financial world, the major money center banks reported their results this week with Citigroup Inc (NYSE:C), JPMorgan Chase & Co (NYSE:JPM), Wells Fargo & Company (NYSE:WFC), and Goldman Sachs Group Inc (NYSE:GS) all being hurt by low interest rates, legal costs, and weakness in fixed income, among the various issues. So, instead of making $5.2 billion in the quarter, they make $5.18999 billion. I know, you were really worried, weren't you. Still, until the market starts to get 'lift off' in interest rates, it is hard to see investors getting excited about rewarding the largest entities of the banking universe.
In technology, Intel reported a solid number on Thursday but played possum about what 2015 might bring. Etsy is in talks to go public and add to the war chest of noted VC firm Union Square Ventures. Earnings season will really heat up next week with the vast majority of large companies reporting their results over the fortnight. You can be certain the world will be watching, and certainly I am included.
Thank you for reading the blog this week, and if you have any comments, questions, or thoughts about what was written or investing, please email me at information@y-hc.com
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