You've almost certainly read about the recent drop in the global (and U.S.) stock markets, as a result of the "shocking"announcement
by the Swiss central banking authority that it would not force the
Swiss franc to trade at 1.2 euros. Be prepared to be shocked: you can
now buy a Swiss franc with a euro.
If you're like most of us, you've
probably wondered why this shocking development would have anything to
do with the enterprise value of the individual companies that make up
the various global indices. What's the story here?
The story is actually pretty simple-and surprisingly, isn't
being told very clearly in the press. The Swiss National Bank had been
artificially holding the Swiss franc at 1.2 euros for the past three
years. Why? Because the value of the euro has been sinking on global
markets. A lower euro means everything manufactured in the Eurozone is
less expensive for outside buyers, which is great for exports. By
keeping the franc at a steady cost vs. the euro, the Swiss National Bank
was protecting Swiss watches, chocolate products and high-end medical
diagnostic equipment from becoming more expensive in the countries where
Switzerland does most of its export business.
This policy
suddenly became more difficult, in part because the European Central
Bank is expected to announce, on January 22, what economists delicately
call "monetary easing"-buying
government bonds, lowering interest rates, and giving banks and
corporations more access to more euros. The inevitable result would be a
lower euro compared to other currencies. Every time the Swiss Central
Bank buys euros and sells francs, it is putting money in the pockets of
global currency traders and a variety of hot money speculators who have
bet that the Swiss will continue their policy. These traders would have
reaped a huge windfall if the euro dropped and the bank continued to
fight an increasingly expensive battle to maintain parity. The effect
would have been a transfer of billions of dollars from Swiss taxpayers
to shady speculators.
But why does any
of this affect the value of U.S. stocks, or stocks in Europe, for that
matter? Why were floor traders on the New York Stock Exchange
experiencing what one described as 'once-in-a-career'market turbulence, and others described as a 'massive flight to safety?'Certain
exporting companies in Switzerland will be negatively affected and have
to adjust their profit margins downward to stay competitive. But U.S.
companies aren't selling their goods and
services abroad in Swiss francs, and European companies will be slightly
more competitive, globally, after the expected monetary easing
announcement.
The only answer that makes any sense is that hot money traders dislike any kind of surprises, and they hit the "sell"button whenever they're startled by news that they didn't anticipate. Then they wait until they have a better understanding of what's
going on. And, since these short-term traders make up a majority of all
the actual buys and sells, the markets to trade lower even though no
fundamental economic reason exists for them to.
This provides a
great opportunity for all of us to see the difference between short-term
headline moves in the market and long-term fundamental shifts. Make a
note to, a month from now, see if you still remember the fact that the
Swiss Central Bank is no longer supporting the franc against the euro.
At the same time, look to see if any major shift has occurred in the
business operations or profitability of U.S. companies due to this
adjustment in currency values overseas.
There will be
consequences. Over the coming months, you might have to pay a little
more for a Swiss watch, and chocolate manufactured in Switzerland might
be pricier as well. You will want to steer clear of parking your money
in the Swiss central banking system, which is now paying an interest
rate of negative three quarters of a percent. If you're
a global options trader who took the wrong side of the bet, this was
terrible news for your returns this year. But the underlying value of
the stocks in a diversified investment portfolio aren't likely to become less valuable based on the latest trading price of options denominated in Swiss francs.
|
Sources:
|
|
Sincerely,
Bill Morrissey, CFP® and Tammy Prouty, CFP®
Sound Financial Planning, Inc.
|
|
PLEASE READ THIS WARNING:
All e-mail sent to or from this address will be received or otherwise
recorded by the Sound Financial Planning, Inc. corporate e-mail system
and is subject to archival, monitoring and/or review, by and/or
disclosure to, someone other than the recipient. This message is
intended only for the use of the person(s) ("intended recipient") to
whom it is addressed. It may contain information that is privileged and
confidential. If you are not the intended recipient, please contact
the sender as soon as possible and delete the message without reading it
or making a copy. Any dissemination, distribution, copying, or other
use of this message or any of its content by any person other than the
intended recipient is strictly prohibited. Sound Financial Planning,
Inc. has taken precautions to screen this message for viruses, but we
cannot guarantee that it is virus free nor are we responsible for any
damage that may be caused by this message. Sound Financial Planning,
Inc. only transacts business in states where it is properly registered
or notice filed, or excluded or exempted from registration requirements.
Follow-up and individualized responses that involve either the
effecting or attempting to effect transactions in securities or the
rendering of personalized investment advice for compensation, as the
case may be, will not be made absent compliance with state investment
adviser and investment adviser representative registration requirements,
or an applicable exemption or exclusion. This information should not
be construed as investment advice. All information is believed to be
from reliable sources; however, we make no representation as to its
completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT
TO BOB VERES.
