Hounded by Evil Dollar & Collapsed Commodity Prices, Corporate America Clamors for Total Currency War
by Wolf Richter, Wolf Street Consumers are feeling practically euphoric. The Conference Board index jumped almost ten points to 102.9, the highest since August 2007, just before the whole construct came apart. Not that reality has suddenly improved that much. But hey, we’re born survivors. Sooner or later, we adjust to lower real incomes and reduced standards of living and start feeling good again. This exuberance came just as our largest corporate citizens were hit by a tornado of problems that sank the stock market for the day: currency volatility, crashing commodities prices, disappearing XP computers, farmers switching from corn to wheat…. It was all there. Freeport-McMoRan, one of the largest copper producers in the world, reported an 11% drop in revenues for the fourth quarter and a salty $2.85 billion loss, which included $3.4 billion in losses for its oil and gas business that it got into via two impeccably-timed acquisitions in 2013. The depressed price of copper isn’t helping. It cut its 2015 budget by $2 billion and might cut it some more. Shares dropped 6%. Long-suffering Peabody Energy, the largest coal producer in the US, reported a net loss for the quarter of $566 million on revenues that declined 3.3%. It projected a much wider loss than expected for the first quarter and cut its dividends to nearly nothing. It’s all about preserving cash and hanging on in a desperately tough pricing environment for coal producers. Shares dropped 6.5% to $6.24, down from $72 during the glory days in early 2011. The plunge in commodity prices is spreading far and wide. Caterpillar, the world’s largest maker of construction and mining equipment, saw net profits in the fourth quarter plunge nearly 25%, on a slight decline in revenue. It slashed its earnings-per-share outlook for 2015 to $4.60. Wall Street had been set on $6.67. The lower prices for copper, coal, and iron ore have been hitting orders for mining equipment. Now the plunge in oil prices! And to top it off, the strong dollar would eat into its overseas revenues and profits! CAT is “without a doubt, facing a tough year in 2015,” explained CEO Doug Oberhelman.
DuPont will use that special dividend to buy back its own shares. It already bought back $2 billion worth in 2014, out of a $5 billion repurchase plan. A “source close to DuPont” told Reuters that the company hasn’t decided yet whether the $4 billion will be in addition to or in lieu of the remaining $3 billion in buybacks. Financial engineering, instead of chemical engineering.
Procter & Gamble, the world’s largest household products maker, reported a 4.4% drop in revenues. Particularly hit was its beauty and personal care business. Net profit plunged 31%. It projected that revenues would decline another 3% to 4% this year. About two-thirds of its revenues originate outside the US, and business is crummy overseas. It too blamed the strong dollar, which would eat up 5% of its sales and 12% of its profits this year. Its shares dropped 3.4%
Then there’s Microsoft, the world’s largest software maker. Revenue rose 8% from a year earlier. But stripping out the Nokia purchase, they fell 1%. Net income for the quarter fell 10.7%. To crank up business, it had cut prices in its Xbox and Windows businesses. The temporary boost it had obtained when businesses were dumping their XP-based computers for Windows 7 computers, well, that party was over.
Microsoft offered other plans that didn’t sit well: its new operating system Windows 10 would be a free upgrade from Windows 7 or 8. Windows tablet makers would also get it for free. And it’s trying to switch enterprises to its cloud version of Office which, like everything that happens in the cloud, costs companies less up front but more down the line. So upfront revenues would take a hit. Sales are struggling in China and in Japan. And it too blamed the strong dollar, which would knock 4% out of its revenues.
After so much good news, its shares had their “most active 1st minute since at least 2007,” reported Eric Scott Hunsader (chart) of Nanex. By the end of the day, shares had dropped 9.25%. It’s been a great first year on the job for CEO Satya Nadella. Until today.
These aren’t small companies that are exposed to whims and vagaries of minor events. They’re the largest elephants in their sectors. Suddenly they’re seeing trouble. It was that kind of day. So everyone was praying for a blockbuster report by Apple. A bad surprise would cause such a swoon in the markets on Wednesday that a member of the FOMC would have to be trotted out and evoke QE-4 on TV, to get things to rally again.
But suddenly Yahoo made positive headlines. Not with revenues, which dropped 1%, or profits which plunged by over half, or its guidance that it slashed across the board, which would normally have crushed its shares.
But with its financial engineering. It would spin off its 384 million Alibaba shares, valued at $40 billion, into a separate company to dodge a $16-billion tax liability. These shares will be distributed to Yahoo shareholders. “SpinCo” – and Yahoo’s Alibaba shares – would thus become a separate publicly traded company. Go figure. But its shares jumped 6.7% after hours.
Then Apple rode to the rescue. Revenues in the quarter jumped 30% to $74.6 billion. Sales of iPhones made up 69% of that. They were hot in China too. Gross margins rose to 39.9%. Net income soared 37% to $18 billion. Mac sales rose, iPad sales plunged. But no one cared. The iPhone is all that matters. The results crushed expectations. Shares, which had dropped 3.5% during the day, jumped 5.7% after hours.
But Apple also complained about “growing foreign exchange headwinds from the continued strengthening of the U.S. dollar” and “unprecedented movements in currencies.” The biggest culprits during the quarter were the yen and the ruble, said CFO Luca Maestri, followed by the euro, the Australian dollar, and the Canadian dollar. On a constant currency basis, revenue growth would have been four percentage points higher. She went on:
On a profitability standpoint, our hedging program partially mitigated the impact from the volatility in currencies. As we look forward, and we look into particularly the March quarter, the foreign exchange headwinds will be stronger in Q2 than they were in Q1 for two main reasons. The first one is the fact that the US dollar has continued to appreciate against foreign currencies during the last few weeks. And the other one is the fact that our existing hedges expire.
Apple’s glorious numbers allowed everyone to relax: Wednesday morning would not turn into a predetermined stock-market fiasco. Consumers around the world were buying lots of iPhones, and that’s what mattered. But our corporate heroes, with one eye firmly planted on the Fed, are whining about collapsed commodity prices and/or the suddenly evil dollar. Their message is clear: regardless of what it would do to consumers and how it would clean out their wallets, they want the Fed to jump with both feet back into total currency war.
A sense of unwelcome reality has hit energy junk bonds months ago. But now it’s spreading.