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Flight of the Euro

The Days Ahead:
Earnings winding down. Quiet with some inflation numbers.

The biggest news last week was the Euro. It climbed again and is now up 13% against the dollar this year. Some of that is because investors expected rate increases in the U.S. to be quicker than they do now. All the infrastructure and tax cuts look pretty distant at this point. And some is because the Euro is a favored reserve currency and will almost always catch a bid, if only because central banks and sovereign funds do not want to overweight the dollar.

Other than that, it was another week of not-great economic numbers (ISM down, Loan Officers Survey and personal income growth weak), but good reporting from S&P 500 companies. Earnings are up 10%, much better than the 6% expected at the beginning of Q2. Revenues are up 5%, with only Telecom Services, in the midst of a price war, down. And the political front? Well, only 44 companies mentioned the President in their earnings calls, compared to 181 in January.

1. Jobs Numbers:
Came in at 209,000 on Friday. You can take this two ways.

  1. Yay, strong results from participation rate at 62.9% (vs. 62.8% prior) and the unemployment rate at 4.3% (unchanged). Revisions from the last two months were up. It’s quite typical for the headline number to change up to 30,000 in either direction in later months but we tend to forget that.
  2. Really? Average hourly earnings were unchanged at 2.5%. Over half the jobs were in food and health services and temporary work and all of those work 25 to 33 hours, compared to goods producing jobs at 41 hours. Only 35% of workers are full-time salaried. More than half are paid hourly. And the level of hourly work was unchanged.

The Amazon effect is showing too. Courier and messenger jobs (the guys who deliver the boxes) increased 24,000 in the last year. Retail service jobs (the guys who used to sell the stuff in those boxes) fell 40,000 (h/t John Authers at the FT).

Here it all is.

Let me know if you can see a recent trend. Anyway, the jobs recovery continues to be very uneven, in lower paid and temporary positions, with a lot of insecurity. And we’d add that there is not the remotest chance of wage pressure, and therefore cost-driven inflation around. The Fed won't quite own to this, except for James Bullard at St Louis and Neel Kashkari, but they're in the minority.  Meanwhile, even the Fed has given up trying to understand the labor market and on Friday discontinued the Labor Markets Conditions Index.

2. Let’s stop talking about the Dow:
Apple is the biggest stock in the S&P 500 at a 3.8% weighting and worth $805bn. It’s 25% bigger than the next company. Last week’s results, (basically more Ipad shipments) helped the stock climb 7%, which alone would increase the S&P 500 by 0.2%. Good stuff, and it's probably headed to be the word’s first $1 trillion dollar company until Aramco arrives next year.

Over at the Dow, which crossed another 1,000 threshold last week, it’s still the most valuable company. But because of the weird way the Dow is calculated (basically all the stock prices added up and divided by 0.146), it weights high priced stocks more than valuable stocks. So Apple is the eighth largest company in the Dow (with Goldman and Boeing the top two), even though it's 50% bigger than all the companies ahead of it.

Anyway, as one who remembers when the Dow hit 1,000 for the third time in 1982 (it had done it in gods the 70s were a bad time) and 2,000 in 1987, it is worth remembering that at current levels, it only takes a 4% move to hit another “thousand” mark. The Dow is a horrible index but it’s the only one we have going back to the 19th century. Meanwhile, Apple is a reasonable bellwether stock and it seems to pay off if you can buy below 12 times earnings.

3. S&P Announcement:
Perhaps the biggest news last week for investors was that S&P will no longer allow companies with multiple share classes to be part of the S&P 500. Companies already in, like Facebook, Alphabet, Viacom, UPS and about 20 others, are grandfathered. This is designed to keep Snap out, whose price has halved in the last four months. The announcement is a big deal.


  1. It means new IPOs will have to think carefully about what control they're willing to give up. If they're not in the index, they will lose about 35% of all potential shareholders. That's a good thing given what companies like Twitter and GoPro have done to investors.
  2. It’s a level of good corporate governance coming, not from activist investors, but index providers. The very same who control the indices used by passive investors. So let’s check that again. The biggest change in market governance in years has come from a company that does not manage money. Not the stock exchanges, who used to do it, not the SEC and not activists working for shareholders.
  3. It’s a good reminder that indexes are not all the same and that the choice of index matters in investing. Some indexes will put in any company. Some will carfully pick and vet the components. S&P are one of the best and have become an active managers of indexes. And that’s a good thing.

Bottom Line:
We're at the end of the earnings season. Only companies with something to bury report in mid-August, so we’re not expecting much. Volatility is unbelievably low but corrections do not disrupt trends. The trend is good.

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Jim Cramer in full rant 10 years ago (he was right though).

How Boeing drew a picture over the entire U.S.


--Christian Thwaites, Brouwer & Janachowski, LLC

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