U.S. Winning (Losing) Currency Wars

With anemic global growth, most central banks are in a race to the bottom in an attempt to devalue the country's domestic currency. Over the past year, the U.S. dollar has gained 16 percent versus a basket of 26 major trading partners. And U.S. exporters are beginning to feel the crunch. For example, Proctor & Gamble blamed a 31 percent drop in second quarter profits on the stronger U.S. dollar. The stronger dollar expanded the U.S. trade deficit to $46.6 billion, the highest level in two years.

Russell 2000 Facts And Figures

A recent article about the Russell 2000 has some interesting facts and figures about the index. In case you don't know, the Russell 3000 index consists of the largest 3,000 stocks by market capitalization in the U.S. The Russell 2000 consists of the smallest 2,000 stocks in the Russell 3000 index. So, the Russell 2000 is a small cap index. The largest company in the index has a market cap of $5 billion and the median market cap is about $528 million. What we found interesting in the article was several ratios. For example, the current PE ratio for the Russell 2000 index is 22.7, higher than the historical average of 16.2. And, the current price-sales ratio is 1.6, 67 percent higher than its historical average. As for sales, while only 64.3 percent of the sales for all S&P 500 companies comes from within the U.S., 81.3 percent of the total sales for Russell 2000 companies come from within the U.S.

Amazon's Leasing Cash Flow

In the textbook, we argue that cash flows are most often a better measure of company performance than net income. Amazon fully exploits this concept. In most recent quarters, the company has shown an operating loss, but has touted its positive operating cash flow as the measure that investors should examine. Now, it appears that Amazon may have been glossing over a more negative reality for the company. In the company's most recent earnings announcement, it disclosed another cash flow, which is the operating cash flow minus the capital leases. Amazon has a large number of capital leases. Ignoring the cash flows necessary to pay these leases ignores a significant outflow each year to which Amazon has committed to paying. 

Pfizer Buys Hospira

Pfizer announced that it was buying Hospira for $15.2 billion. The cost savings from the acquisition are expected to be $800 million, with a present value of $1 billion more than the acquisition premium of $4 billion. On the announcement, Pfizer's market capitalization shot up $6 billion, implying that investors believe the acquisition of Hospira is a positive NPV acquisition. After Pfizer's other recent acquisitions, this would be a welcome note. In 2000, Pfizer acquired Warner-Lambert for about $90 billion, Pharmacia in 2003 for about $60 billion, and Wyeth in 2009 for $68 billion. So, in total, Pfizer spend about $218 billion for these three acquisitions. Since Pfizer is currently worth about $200 billion, Pfizer grossly overpaid for all these acquisitions.   

Staples-Office Depot Merger

Twenty years ago, a potential merger between Staples and Office Depot was halted on concerns the combined company would be a monopoly. Today, the companies announced that they would try again. In the merger, Office Depot shareholders would receive $7.25 in cash and .2188 shares in the new company for each share currently owned. Synergies from the merger are an expected annual cost savings of $1 billion by the third year of the merger.

Saving In Denmark

For the past several years, most central banks have been engaged in currency wars in an effort to devalue that country's currency. The race to the bottom is an effort to increase exports and jump start domestic growth. Denmark is making an effort to avoid becoming the next victim of the currency wars. Recently, the country spent 100 billion kroner ($15 billion) in an attempt to weaken its currency. Now, Denmark has lowered its interest rate. You will pay .5 percent for deposits at the bank!

Citigroup's Swiss Franc Loss

In 2011, the Swiss National Bank pegged the Swiss franc to the euro, at a rate of 1.2 francs per euro. As recently as December, Swiss officials stood by the peg. Then, on January 15th, the Swiss National Bank unexpectedly removed the peg, sending the Swiss franc up up by 30 percent on the day. Unfortunately for Citigroup, the company had let it's Swiss franc hedge expire the previous week. As a result, Citigroup lost more than $200 million in the hours following the announcement. Of course, not everyone lost: It was reported that JPMorgan Chase & Co. had gained $300 million on the removal of the franc peg. The cost of the hedge was likely a reason that Citigroup allowed the position to expire. During the previous year, Citigroup lost $100 million on a hedge tied to unrest in the Ukraine.