Weekend Reads for Investors: Greece, Currencies, and Earnings
It’s been an eventful week for most investors, if not a profitable one. In Greece, the leftist Syriza party, which pledged to end austerity, won national elections, and Greek stocks responded by falling 15% over the next three days. Greece’s bailout program expires at the end of February, and their anti-austerity stance and ongoing need for cash set the stage for a showdown with the so-called “Troika,” made up of the European Union, the European Central Bank (ECB), and the International Monetary Fund (IMF). If you think a Greece exit from the eurozone is now more likely, 59% of those surveyed in a recent CFA Institute poll agree. Expect plenty of political posturing in the coming weeks.
The drama in Greece comes on the heels of the ECB’s well-telegraphed announcement of quantitative easing, fulfilling ECB president Mario Draghi’s 2012 pledge to do “whatever it takes” to support the euro and stave off deflation. Count DoubleLine Capital’s Jeff Gundlach among the disbelievers. He thinks ECB QE will “have very little success.” Indeed, the risk of a deflationary spiral in Europe became more real with news that consumer prices in Germany probably fell in January.
In the United States, earnings season is well underway and the results so far have been less than inspiring. The strong dollar is proving to be a drag for many US multinationals. Caterpillar (CAT), Dupont (DD), Microsoft (MSFT), Procter & Gamble (PG), and United Technologies (UTX) were just some of the companies guiding 2015 earnings estimates lower, in part due to the strong dollar. With roughly half of revenues at S&P 500 Index companies coming from abroad, it’s noteworthy that since 1985, the negative earnings revisions for these firms over the past 12 months have been lower only during recessions. Optimists can at least still point to Apple (AAPL), which reported the largest quarterly profit ever made by a public company. The company also finished the year with a cash hoard of $178 billion, which exceeds the market capitalization of all but 17 of the companies that comprise the S&P 500 Index.
As the outlook for profits has been pinched, stock valuations have crept higher, and according to FactSet, the forward P/E on the S&P 500 Index is hovering near a 10-year high. Signs of slowing global growth, negative earnings guidance, and extended valuations remain obvious headwinds for stocks. This time, more QE may not be the answer.
Below are some other stories that caught my eye in recent weeks.
Strategic Thinking
- AQR’s Cliff Asness says “The Small-Firm Effect Is Real, and It’s Spectacular.” (AQR Capital Management)
- Caroline Baum warns that “Ignoring the Yield Curve May Be Dangerous to Your Health.” (e21)
- The sustainability of record high profit margins. (Philosophical Economics)
- “What Happens after Shock and Awe of QE Subsides?” (The Telegraph)
- Richard Bernstein on the relative riskiness of Greece and oil. (Richard Bernstein Advisors)
- Share buybacks under scrutiny. (Institutional Investor)
- What if activist investors changed their playbook? (Wall Street Journal)
Governance Matters
- Where corporate boards fail. (Harvard Business Review)
Overheard in Davos
'Deflation is like cholesterol. There's the good kind and the bad kind'- Spanish Fin Min De Guindos on @CNBC @Davos panel
— Louisa Bojesen (@louisabojesen) January 23, 2015
Big Business
- “The Aging of Abercrombie & Fitch” (Businessweek)
Bitcoin
- The ruthlessly competitive business of bitcoin mining. (The Economist)
- Warren Buffett is wrong on bitcoin. (Enterprising Investor)
Artificial Intelligence
- “Human Investment Managers Risk Obsolescence” (Financial Times)
- The world’s brightest minds fret over an AI apocalypse. (Wired)
Career Moves
- Confessions of a failed hedge fund manager. (The Wall Street Journal)
- “CFO Picks Doughnuts over Steaks” (footnoted*)
The Super Bowl
- “Would You Base Your Market Bets on the Super Bowl?” (CNBC)
- “Tom Brady Cannot Stop” (The New York Times Magazine)
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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