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What's New
The currency hits keep coming
Amid healthcare reform, employees worry about cost of company coverage Editor's Corner: From government uncertainty to economic uncertainty Also Noted: News scan: Economy; shale; Herbalife; more and much more... News From the Fierce Network:
1. Google shift raises Digital Wallet expectations
2. Wells Fargo plans social media command center
3. CFTC accidentally shares informant details
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From government uncertainty to economic uncertainty
Goodbye government shutdown, hello currency war. At least that's the shift in focus we expect CFOs of multinationals to perform as last week's political crisis gives way to economic realities facing the rest of the world as well as the U.S.
As thorny an issue as currency volatility may be, however, it is hardly an unpredictable phenomenon in today's environment, given the challenges governments face in promoting sustainable growth. The problem for globally minded finance executives is that sub-par growth is no longer just a reality in developed markets, but is also increasingly seen in the developing ones to which they have shifted much of their investment in recent years. But as our main story today illustrates, CFOs face a difficult choice when it comes to currency (not to mention interest-rate) risk. Do you manage it, or let it ride? The first involves cost (and a bet on where things are headed), whereas the second requires Herculean or perhaps even Sisyphean investor-relations efforts. Better efforts to find natural hedges would help, as we point out in today's story. But we're betting we'll also see more derivatives' use, though if history is any guide, that won't be without its blowups. The alternative, in effect, is to stop managing the business so as to take account of macroeconomic fundamentals. True, a CFO can try telling the market that that isn't the main part of his or her job. Still, its hard to see how its not when you've made big bets on being able to take advantage of global macro trends. Yes, currency fluctuations may not reflect how your operations are performing. But they do reflect how your investment strategy is performing. So multinationals' CFOs better get used to fielding tough questions about whether betting on emerging markets to best the developed worlds still makes sense, and how they can handle the increasing ups and downs involved there. - Ron Read more about: hedging
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Today's Top News The currency hits keep coming
Following SAP and Coca-Cola, DuPont, Kimberly Clark and skin-care company Nu Skin Enterprises have taken significant hits from currency swings or warned of those to come. We confess to some confusion as to their direction, however. It seems as if these companies overestimated the weakness of the dollar, as its surprising strength in emerging markets and elsewhere in Asia is what has taken a bite out of revenue and earnings. We had assumed in our analysis the other day that their results were suffering from a decline in the dollar's value against those currencies. Instead, the dollar has rallied against the currencies of Brazil, Japan and India even while displaying continued weakness against the euro. Still, our mea culpa may need go only so far, as the dollar's recent volatility seems to be what has companies on edge here, and that's not entirely out of line with what everyone was predicting a few months ago as the U.S. and other countries engaged in competitive devaluations, or at least were accused of doing so. In other words, currencies rarely go only in one direction in the short term even as a long-term trend remains in place. But no question, that can be trouble for CFOs trying to manage investor expectations. According to FireApps, a currency risk-management consulting firm based in Scottsdale, Ariz., pressure is building on finance executives to manage currency risk instead of steering investors away from focusing on the exposures. "We see a general trend towards boards, analysts and investors being less tolerant of currency losses," Andy Gage, vice president for strategic market development for FireApps, wrote in an email to us. Added Gage: "The legacy approach of trying to use constant currency analysis to shift investor focus to organic operating results is falling out of favor." Yet a quarterly survey by FireApps found that the 800 publicly traded companies among the Fortune 2000 which operate in at least two currencies experienced currency losses of an average of $.03 per share in the second quarter LINK of the year, primarily because of their exposure to the Brazilian real, Japanese yen and the Venezuelan bolivar. FireApps says the industry standard for currency losses is $.01. All told, those U.S.-based multinationals lost $4.04 billion to currencies during the quarter, or 1.03 percent of earnings. The number of companies that reported negative currency impacts totaled 233, a 9 percent increase over the first quarter and a 10 percent increase over the second quarter of 2012, according to FireApps. Gage said that more companies are being whipsawed by currency volatility because of insufficient information gathering on the part of CFOs and treasurers, which he attributed to enterprise-reporting processes that produce "incomplete, inaccurate and stale data." The net result, he said, is that companies often "hedge their hedges" because the executives are afraid they will create more risk by trying to mitigate their exposures. To avoid that, Gage recommended that companies evaluate to what extent they can improve their information systems to see how well their operations are "naturally" hedged by, for example, selling in one currency and buying in another. While doing that involves cost, it may be less expensive than using derivatives to offset exposures, he insisted, noting that "external hedging is only one of many methods that savvy treasurers and CFOs can utilize to manage currency risk." For more:
- see this Wall Street Journal blog post
- see this Fireapps study Related articles:
Multinationals' FX challenge
Dearth of derivatives? Read more about: currency, Coca-Cola
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Amid healthcare reform, employees worry about cost of company coverage
Health care reform aims to provide coverage to people who don't have it, but the Affordable Care Act is also likely to mean changes for those who get health insurance through their employers. For example, various ACA requirements are expected to boost what it costs companies to provide health care coverage, and those costs are likely to be passed on, at least in part, to employees. And as private health insurance exchanges, which are operated by companies and offer an array of coverage options, have sprung up, some companies have started to provide employees with a set amount of money for health coverage and send them to a private exchange to purchase insurance. A recent survey of 1,520 workers who receive health benefits from their company or union suggests employees are coming to grips with the changes that are occurring. According to the survey, conducted by the National Business Group on Health (NBGH), an organization that represents large employers on health benefit issues, 40 percent of employees expect health care reform to have a negative effect, while 17 percent foresee a positive effect. "They're worried about the Affordable Care Act and its impact on them," said Helen Darling, NBGH's CEO. The biggest concern is cost: 56 percent of employees surveyed expect the cost of their health insurance to rise in the next three to five years. That's in line with predictions that the cost of providing health benefits will continue to march higher. A survey of NBGH's corporate members found they expected their costs to increase 7 percent in 2014 and attributed a portion of that increase to healthcare reform; Aon Hewitt recently projected health care premiums will rise between 6 and 7 percent next year, though that's the lowest projected increase in over a decade.
Almost a third of workers (32 percent) expect the quality of their health benefits to decline, but just 10 percent think their company or union will stop offering them coverage. And amid the rise of exchanges, more employees say they would be able to negotiate the purchase of their own coverage. Seventy-two percent said they're somewhat or very confident about their ability to purchase health insurance on their own, up from 63 percent in a 2012 survey. While less than a quarter of employees knew about private exchanges, once they learned about them, 52 percent said they would have some interest in using one. When it comes to the public exchanges, 27 percent said they would definitely shop on a public exchange if it meant getting a better price and another 39 percent said they would probably shop on a public exchange to get a better price. "There's clearly an inclination to shop in an exchange if it saves them more money," Darling said. On the other hand, when employees were asked for their back-up plan should their employer stop offering coverage, the most popular option was to deal directly with an insurance company (21 percent), while just 17 percent opted for the public and private exchange options. For more:
- see this NBGH release
- see this Bloomberg story
- see this Businessweek story
- see this Treasury & Risk story Read more about: premiums, health insurance
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Also Noted >> Management: Another weak jobs report will keep the Fed at the pump Four years into a recovery and all it can create is 148,000 jobs in three months? (Exactly 206,070 new jobs would be needed each month for the next two years to bring the unemployment rate down to 6 percent from its current level of 7.2 percent, according to the jobs calculator provided by the Federal Reserve Bank of Atlanta.) The most recent quarterly number was down significantly from the previous two periods, as former Obama economic advisor Jared Bernstein pointed out. And Bernstein and other analysts think the results could be worse once the effects of the recent government shutdown are figured into the usual revision. Yet Wall Street cheered the news, as it probably means the Federal Reserve will not start taking away the QE punch bowl as soon as once feared. True, durable goods manufacturers say things aren't all that bad. But unless companies can find sufficient growth elsewhere, it seems to us that the bull market will soon look a bit long in the tooth. While the fact that growth seems to be reviving in China might provide a bit more sustenance, questions remain as to whether it's sustainable. Read more >> Management: Shale may not be as promising as many expect Stanford has put out a big report on the impact of shale exploration and development. The report uses more conservative assumptions than industry promoters do. And that's refreshing in light of the recent write-offs that Shell and BHP Billiton have taken on their investments, as I wrote about at Global Finance a few weeks ago. In a nutshell, the problem is diminishing returns on their development efforts. And that calls into question the many rosy predictions we've heard for U.S. energy independence. Outgoing Shell CEO Peter Voser has since said he regrets the company's North American shale investments, noting that prospects for shale were "hyped." The Stanford report acknowledges that the impact of shale on the U.S. economy is small, as the industry, including some support services, represented only 0.23 percent of total U.S. employment and 1.44 percent of total U.S. value added in 2011. Read more >> Compliance: Is Herbalife a Ponzi scheme? That question is back in the news, as protests over the company's business model have spilled over into the streets of Los Angeles. Financially speaking, the issue boils down to whether a multi-level marketing company sells significantly more product to distributors than to consumers. And that's a difficult question to answer, because numbers are hard to come by. In this case, it seems as if hedge-fund manager and Herbalife short seller Bill Ackman has failed to prove his long-running and vociferous contention. Certainly Ackman is no longer fighting the tape, as the stock is up 97 percent so far this year. As blogger and money manager John Hempton pointed out last summer, there's no evidence that Herbalife products are piling up among distributors, though Hempton seems to think that alone proves that Ackman was wrong. Of course, none of that seems to matter to the protestors in L.A. Read more >> Management: Refashioning Coach Coach is a study in the challenges facing a market mainstay that must fend off competition from trendier upstarts. The question is whether the iconic handbag designer can develop new products and markets without killing its profits, because that takes time and money as well as people. Former CEO Lew Frankfort made significant moves in this direction before he retired recently. But while the jury will be out for quite a while on the question of if and when they can sufficiently pay off, investors aren't waiting for a verdict. Read more >> Compliance: JPMorgan faces more private litigation In the told-you-so-department, the news that JPMorgan is being sued by mortgage investors is in line with our prediction that the coming mortgage settlement with the Justice Department would not be the end of matters. In fact, the plaintiffs in the latest case are exactly what we expected: With more at stake, financial institutions are increasingly willing to sue each other these days instead of simply seeking better terms in the next deal. In this environment, there may not be another deal anytime soon. And of course with JPM likely to admit to wrongdoing in the DoJ settlement, plaintiffs will find litigation an easier course. Read more Briefly noted: > Banks are using a footnote in a CFTC policy paper as proof that some swaps need not be traded on electronic trading platforms. Article > Can states tax online purchases? Last week, an Illinois court rejected a state law that allowed taxing some Internet sales, which may land the issue in the Supreme Court's lap. Article > More women are making their way onto the boards of big companies. A study shows women holding 16.6 percent of board positions at Fortune 1000 companies, up from 14.6 percent in 2011. Report > U.S. Treasury seeks chief risk officer. Article > Glaxo pays steep price for Chinese bribery allegations. Article > Lenovo isn't the only acquisition-minded Chinese company, and the others aren't in natural resources. Article > SAC scales back operations as it grapples with impact of insider trading case. Article > Companies with so-called "Cadillac" health care plans should start worrying, experts say. Article > Reckitt Benckiser may sell pharma biz, or it may keep it. "All options means all options," says CFO Adrian Hennah. Article > Companies continue to clamp down on legal costs. Article > CIOs see tablets as platforms for corporate innovation. Article > Caterpillar's results reflect cuts in capital spending by mining companies. Article > Eli Lilly beat estimates on the strength of cost cuts, though it also had some pricing power. Article And finally... Can former Communists learn to love debt as much as current capitalists do? > Get Subscriptions to the Leading Finance Magazines for FREE Mercury Magazines offers top Finance titles for Free to professionals. No Credit Card Required. Stay Ahead in your Industry. Sign up now. > Whitepaper: Smarter Service: The Contact Center of the Future This eBook explores the challenges facing traditional contact centers and the benefits of deploying the contact center of the future. You'll find links to further resources on the final page. 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