The world without Uber or Mercedes?

The world without Uber or Mercedes?

China stock market has gone through an earthquake in June and July.  The Shanghai Composite Index started the year of 2015 at 3237 points after going up 53% in 2014. The China bull market was in its 5^th gear in March and rally 54% in three months and reached 5166 points on 12^th June.  Now looking back, the turbo charged bull was fueled by gearing inside and outside the system.  Inside the system means margin financing provided by Securities houses at a regulated level, say, loan to market value ratio of 30-60%.  Outside the system means borrowing money through P2P platform or financing company with loan to value ratio at 75%.  When an investor only has GBP 100 to own GBP 400 worth of stocks in a market that has gone up more than double in 12 months, the “STOP” sign was written on the ground.  But just like most drunk drivers, investors believe they can all drive like Lewis Hamilton until it is too late to brake.  The Shanghai Composite Index dropped off a cliff from the peak in June to 3,687 points on 3^rd July as hundreds of thousands of investors stumbled over each other in the midst of margin call and cutting losses.  What should have been a normal correction in an overheated stock market turned into a liquidity crunch as at one point, 50% of all listed companies in China were suspended from trading.  This became a national crisis and the Chinese government stepped in to intervene.  Poured hundreds of billions of yuans to support the stock market.  The market rebounded back to 4,000 points level and closed at 4,071 points as of 24^th July.  There are some noises from the International Monetary Fund about China should respect a free market.  Well, maybe the IMF should remember the Russian economy collapsed in 2014 and Russian Ruble went down 50% in value.

Change of topic to something closer.  Everyone can sense there is a revolution happening in the transport industry.  The expansion of Uber, the launch of the beautiful Tesla electric car and the Google driverless cars are the key ingredients. Imagine most of us taking Uber driverless electric cars.  Who is going to lose out?  Mercedes, BMW, Audi, Volkswagen.  The fact that German brands dominate the passenger-vehicle industry, may have also made them the future Nokia, Ericsson and Blackberry.  Addison Lee is a car company operating in a few cities to provide an alternative service to cabs.  Uber is absorbing the taxi markets in many more cities than Addison Lee and even in remote villages where taxi does not reach.  Uber connects passengers and drivers whether the driver has a taxi driver license or not.  Uber is positioning itself as a personal logistics service at your fingertip.  Pick up flowers, laundry, parents, kids, husbands from a pub in Shoreditch.  Uber does not own any car and it is helping you not to own a car.  While Uber has not mentioned any timing about listing itself in the stock exchange, it is already valued at USD 50 billion after raising USD 1.2 billion in June.  Fidelity, Blackrock, Goldman Sachs, Qatar Investment Authority, Google, Baidu are some of the big names in Uber’s shareholder list.  Travis Kalanick founded Uber with USD 200,000 in August 2009.  

Google has been testing driverless cars in California and Texas.  They have done over 1 million miles already.  The Google designed prototype is like an old mini cooper zooming down the street.  Google is a USD 427 billion company at 28 times Price to Earnings Ratio.  It has 55% market share of search ad revenue globally.  That is estimated to be USD 44.5 billion.  Perhaps one day, one can google a restaurant, a single click will send you a driverless car organized by Uber and give you a ride to the restaurant.

Tesla is USD 34 billion market capitalization and does not make a profit yet.  Tesla’s 2010 IPO price was USD 17.  On 24^th July, Tesla closed at USD 265.41.  Tesla has done well with its sedan model launch and is going to launch a SUV model.  If the investors start to view Tesla as a car maker rather than a revolutionist, Tesla would need to sell a lot of cars and show good profit.  Volkswagen is EUR 90 billion market capitalization at 8.2 times Price to Earnings Ratio. 

What will happen to German economy if global demand on passenger vehicle growth slows down?  China is the biggest car market and it is expected passenger-vehicle sales in 2015 to reach 21.3 million vehicles, growing 8%.  With the stock market crisis in June, the future might not be as bright.  Also, competition is fierce with Japanese, Korean and local car makers all fighting for market share.  Volkswagen Group’s China sales fell nearly 17% year on year to 250,000 vehicles in June.  Germany may have managed to keep Greece within Euro zone but there is a price tag.  Its auto, engineering and manufacturing industries are facing game changing moments due to new technology.  European stock markets have had 3 good years already.  Time to keep an eye on the ground for the “STOP” sign.

Long Sterling and long Europe have been a safe journey.

Long Sterling and long Europe have been a safe journey.

With all the drama about Greece, UK election and FIFA, long GBP and long UK or Europe stock markets turned out to be a good trade in first half of 2015.

Eurostoxx 50 is up 14.3% in 2015 as of 22 June.  Performers are banks and exporters in general.  Top 10 performers are all up over 20% year to date.  Banks like ING, Intesa Sanpaolo, SocGen, Unicredit are in the top 10 while Banco Santander, number 4 from the bottom, is down three percent in price year to date.  ING is up 41% year to date as of 22 June.  Inditex (Zara fashion chain), LVMH, Daimler are also in top 10 to reflect the better business activities in the consumer and luxury segments.  Airbus tops the leader board with 46.7% return year to date as of 22 June as everyone seems to be flying more these days.  Among the top 10 losers, there are some household names like Siemens which is up 3.1% and Nokia is down 0.9% year to date.  Another interesting contrast is Deutsche Telekom up 22.0% while Deutsche Post is down 0.2% year to date as of 22 June.  More texting than writing is the norm.  Postal service needs to tie up with eCommerce giants like Amazon to be part of the supply chain.

FTSE 100 is up 4% year to date.  Property developers have done well.  Long Property Developers stay away from miners has been the winning theme.  Taylor Wimpey, Barratt Developments, Persimmon are all among top 5 performers this year.  Mondi that does paper packaging ranks second with 36% return in 2015 as of 22 June.  Schroders, a fund manager, and Hargreaves Lansdown, the Independent Financial Advisory Group also give over 22% return to their shareholders.  The resources sector is a struggle in general.  Miners like Rio Tinto, Glencore and Fresnillo are down 8%.  Anglo American is the worst performing stock in FTSE with 17% negative return and we still have 6 months to go in 2015.  In the oil and gas sector, BG Group is getting bid from Royal Dutch Shell.  BG Group is up 26.4% and Royal Dutch Shell ‘A’ is down 13%.

In US, there is no simple pattern scanning across the household names.  Netflix, the online TV/Movie content provider who also produced House of Cards, provided 98% return and top the chart in Nasdaq 100 stock index.  Electronic Arts, a game provider, Amazon and Starbucks were up 42%, 41% and 31% year to date respectively.  Walt Disney, Apple, Boeing, Goldman, Nike, JP Morgan, Pfizer are up 10-21% year to date.  Coca-cola, Johnson & Johnson, Du pont, Travelers, Exxon Mobil, Chevron, Intel, Procter & Gamble, American Express, and Wal-Mart are the bottom performers among the 30 stocks in Dow Jones and they are down 4% to 15%.  The worst performing stocks in Nasdaq 100 stock index include Whole Foods Market, Yahoo, Wynn Resorts are down 18%, 19% and 32% respectively.

Currency wise, Sterling holders have had a steady and safe ride.  GBP against EUR has gone up from 1.29 to 1.40 as of 19 June, 2015. The high print was 1.42 on 11 March.  Since March, GBP versus EUR has been range bounded between 1.34 and 1.41.  GBP against USD started the year at 1.56, weakened to 1.47 in April, rebounded to 1.59 on 19 June.  GBP against AUD started 1.91, dipped to 1.84 in January and reached to 2.04.  GBP against JPY started at 186.51 and at 175.87 in April, reached 195.26

Gold started 2015 at USD 1184 per onze, peaked on 22 Jan at USD 1302 and zigzagged to USD 1202 on 18 June.  Gold prices came off in 2012 from USD 1780 level and have been depressed since then.  2014 rebounded to test USD 1400 level.  One may expect institutional investors may switch to hold gold on the back of Euro zone crisis and the potential Grexit.  Maybe institutional investors rather hold USD, CHF and GBP then gold.  If Grexit happens, “Cash is King” could be the right strategy.

Crude Oil began the year at USD 53.27 a barrel, slid to USD 43.66 on 16 March, bounced gradually to USD 60.45 on 18 June.  Crude Oil is at USD 60 level now and it is probably equal chance to see Crude Oil price back to USD 80 before year end or test USD 40 again.  We could see both.  Last June, Crude Oil is above USD 100 a barrel.  Who could have guessed Crude Oil could slide so much.

First half of 2015 should have been a good six month for UK investors.  GBP as a currency has appreciated against EUR, USD, AUD and JPY since the end of last year.  Stock markets across the world have performed.  Gold is small up couple of percentage point year to date and oil prices have rebounded more than 10% in 6 months.   This is excellent results in the midst of potential Greece default.

Grexit and Brexit

Grexit and Brexit

Greece has to pay the International Monetary Fund (IMF) its next loan installment in June.  This is bad news for the country's coffer that is squeezing blood to pay government staff and pensions.  Greek Prime Minister Alexis Tsipras knew he had a difficult job since day one but it seems to be getting harder as time goes by.  He promised his voters a new start for Greece and reverses the austerity measures.  However, I do not know many people manage to ask their credit cards to waive the bills and Tsipras is no exception.  Tsipras certainly struggles to convince the German and the French leaders that whatever happened has happened and Greece can erase the past.  The imaginable positive results maybe the continuation of EU drip feeding minimal nutrition to avoid Grexit.  Time is against the Greek leader as its country fell back into recession.  There are more local businesses going bust than popping up.  Tourism is suffering according to the Association of Hellenic Tourism Enterprises.  Arrivals fell in top tourism destinations in April by 31 percent in Mykonos to 7 percent in Crete.  Depositors are leaving the Greek banks which discourage the banks to grant loans to individuals or small businesses.  The Greek economy is again in a downward spiral.  In April, Moody’s downgraded Greece’s government bond rating to Caa2 from Caa1 with a negative outlook.  Caa2 is many notches below Germany Aaa rating.

The voters supported the new government as they were tired of the austerity measures.  Policy changes that create pain would almost be contradictive to what Tsipras promised.  Pension reform, value added tax, staff cut in government or ideas that reduce government spending and people income are likely to cause public uproar.  Privatization of ports or other state owned business could lead to job losses and pension reform.  This is because new owners are likely to prioritize returns for shareholders over local employment and welfare.  Remember during Thatcher era, privatization of Cable & Wireless, British Aerospace, British Telecom and British Gas.  Can Tsipras’ government manage the same?  Realistically speaking, the way to recovery for Greece is painful and long but doable.  EU does not want a Grexit.  EU cannot set the case of waiving the debt as it could be a bottomless pit.

Grexit has an impact on Euro and many analysts have mentioned parity to the US Dollar.  Both in March and April, we saw EUR 1 to USD 1.05.  Just when everyone was holding their breath to watch USD 1 to EUR 1, a rebound in May clicked USD 1.115 to EUR 1.  Parity between USD and EUR is possible with the uncertainty ahead.  Even Swiss Francs had to let go of the falling Euro and the US Dollar has no affection against Euro.  There are other catalysts for Euro to go lower and let’s look at a couple.  First is Brexit and second is Chinese Yuan joining the SDR.

The Conservative Party has won the election and David Cameron is putting EU membership to a vote by 2017.  British citizens will vote for whether the Great Britain should leave the EU.  “Brexit” if EU does not give GB some flexibility in EU policies.  While Cameron has not detailed his “shopping list”, the Conservative Party’s election manifesto and Cameron’s speeches have mentioned fewer barriers to trade inside EU, having the power to block EU laws, stricter control over EU migrants.  It is hard to imagine a Brexit and UK may not be better off outside EU.  However, similar to the Scottish Independence Referendum, this gives a fair arena for voters to express their views and there are possibilities to either outcome.  If Grexit happens before this Brexit vote, the odds could tilt.  GBP has gathered strength against the USD after Cameron’s victory and rebounded back to 1.55 to 1.58 level (USD 1.58 to GBP 1) in May.  This is similar level to November and December 2014.  GBP against EUR has been zigzagging between 1.35 to 1.41 in March, April and May.  Brexit has complicated GBP EUR relationship and it could end up being a lose lose situation.

International Monetary Fund’s Special Drawing Rights (SDR) is an exclusive collection of global currencies that form a special reserve asset.  Currently, the asset consists of USD, EUR, JPY and GBP.  IMF reviews the composition of the basket every five years and China is hoping the Chinese Yuan can join the club.  If this happens, Central Bankers are likely to add CNY to their reserve which means reducing the weighting of the four currencies that are currently in the basket.  Many people said CNY should not be included as it is not an open currency that could be bought and sold freely in the market.  One could also argue that China’s huge size of economy and trading activities with the rest of the world could justify CNY to be a special breed.

When the American bull meets the Chinese dragon

When the American bull meets the Chinese dragon

The British Pound was sliding down in March against US Dollar.  After a rebound in February from USD 1.506 : GBP 1 to 1.544, Sterling against the Dollar dropped to 1.482 at the end of March.  On 10 April, a low was reached at USD 1.463 : GBP 1.  9 months ago on 10 July 2014, the GBP USD exchange rate was 1.713.  The British Pound has weakened by 14.6% against USD in 9 months.  Why?  It is easy to blame it on Greece and the money printing policy by European Central Bank.  Also need to give US a round of applause as the mighty Dollar is gaining across the board as FED tighten up their monetary policy and looking at increasing interest rate.  Will GBP keep falling against the USD?  There are some fund managers starting to take profit on the long Dollar story.  So perhaps there will be technical rebound in GBP against the Dollar.  With the UK election poll looking indecisive between the Conservative and the Labour, GBP should be choppy and could have more downside.

Chinese stock market daily turnover reached GBP 193 billion (CNY 1800 billion) on 20th April.  The Shanghai Shenzhen 300 index has gone up 120% in one year.  Yes, it is not a typo, 120%.  Over 30% gain since the beginning of this year.  Most of the stock names will sound very foreign to the western world.  Ping An Insurance, China Merchants Bank, China Vanke (property developer), Kwei Chow Moutai and Wu Liang Ye (these two are Chinese vodka makers).  Maybe easier to buy ETFs or funds that track the Chinese stock market.  Let’s learn more about the Chinese dragon.

Every netizen in China knows about BAT.  BAT stands for Baidu, Alibaba and Tencent.  Baidu is the Chinese Google.  Alibaba is the Chinese Amazon.  Tencent is Chinese Whatsapp and an online game giant.  Funny enough, BAT are not listed in China.  Baidu and Alibaba are listed in US.  Tencent is listed in Hong Kong.  Baidu is up 33% in a year but the share price actually came off from USD 250 level to USD 210 since last November. Baidu is a USD 74 billion company versus Google USD 377 billion as of 24^th April 2015.  Alibaba (stock code is BABA) was listed last year at USD 68 in September last year and reached USD 120 in November.  Similar to Baidu, BABA share price has gone south and now to USD 80 level.  BABA is a USD 203 billion company versus Amazon USD 181 billion.  Tencent share price is up 51% in 1 year and it is currently 20% higher than its November peak.  It is a USD 194 billion company versus Facebook USD 233 billion.  Looking at these numbers, the Chinese BAT can put up a good fight against the American FAG (Facebook Amazon Google).

“One Belt, One Road” means China President Xi Jinping’s plan to develop the Silk Road Economic Belt.  Building roads, railways, ports and other infrastructure projects to develop a modern version of the Silk Road.  To come up with the investment, China led the formation of Asian Infrastructure Investment Bank.  It is kind of a World Bank with an Asian spice.  The market expects a lot of money will be poured into this plan and this is one of the trigger points of the China stock market rally. 

The Chinese dragon sent a fire ball to Hong Kong after Easter and Hong Kong stock market recorded HKD 252 billion (GBP 22 billion) on 8 April breaking all turnover record in the last bull run in 2007.  The Hong Kong Exchange and Shanghai Stock Exchange launched HongKong Shanghai Connect last year which allow investors from either exchange to access the other.  Mainland China investors can buy Hong Kong shares through Shanghai Stock Exchange and the flow spiked up after Easter as hot money spilled over to Hong Kong.  Hang Seng Index is the benchmark index for the Hong Kong stock market and it is up 27% in a year, 18% year to date as of 24 April.  Considering Hong Kong went through Occupy Central last year, such performance in the stock market does not quite fit the picture of thousands of protestors camping on the main road.

15 years later, Nasdaq testing new high

15 years later, Nasdaq testing new high

 

Time is the best cure.  Some investors may remember the burst of the tech bubble in 2000.  At the time, people were talking about Microsoft, Intel, Oracle, IBM and bunch of drugs companies with a biotech kick like Amgen.  eBay, Priceline.com and Amazon.com are the few survivors while many dot com companies have been forgotten.  Nasdaq Composite Index crashed from 5,132.5 to in March 2000 to 3,042.6 in May 2000 and the Index drifted even lower to 1108.5 in October 2002.  No one had the mood to predict when the index could see 5,000 level again.  15 years passed and the US market has been going up for 6 straight years from 2009 to 2014.  Many analysts have tried to make the bear call and got run over by the bulls.  Nasdaq Composite Index has more than doubled in 5 years from 2,400 level to above 5,000 in March 2015.  While the index approached its peak, the troop is now very different.  The new kids on the block are Facebook, Tesla, Baidu and the newer and bigger Apple.  If one simply sat on their Nasdaq index fund since February 2000, they may have made 13.7% in 15 years including cash dividend which translates to 0.86% return per year.  The total return of QQQ, the most popular Nasdaq ETF listed in US is 204% since February 2005 and 156% since February 2010.  Investors could have learnt two lessons from the Nasdaq drama.  Buy and hold could mean a very long wait for very little if the entry point was badly timed.  Average buying or monthly installment could be a better strategy for long term investment.

 

Media have taken off the spotlight from Greece for a while and people have been focusing on the US Fed FOMC meeting.  The market generally expects US rate hike in June.  This is probably the milestone for the end of a 6 years rescue plan from the 2008 Global Financial Crisis.  With the USD going strong across the board and US stock market at historical high level, US have managed a perfect landing from the turbulence.

 

Many Wall Street experts are saying EUR is heading to parity with USD.  Chanel has cut prices of their handbags in markets outside Europe.  Chanel shops in Hong Kong and China were swept as price tags of the classic Chanel handbags were slashed by as much 20% in the local currency.  EUR 2000 black leather bags were sold out in a day and there were constant queuing outside the shop.  It was headline news.  Before Chanel, Patek Philippe also reduced prices in Asia by 15-20% in the local currency.  This is odd as the public was expecting a price hike from the Swiss maker due to Swiss Franc appreciation.  These are classic examples of the advantage of how exporters could be benefited from a weakening currency.  Bordeaux wine prices have been weakening in UK for couple of years already and they were probably the leading indicators of luxury market trend.  Euro zone would probably need to export their way out of this Euro crisis as domestic economy remains fragile.  Tourism will definitely help and one can notice there are more and more high-end retail shops and department stores with mandarin speaking sales staff to serve the 4 million Chinese tourists visited Europe in 2014.  This is similar to 20 years ago when shop keepers in Beijing learn English to greet the American and European tourists.  Will it take European stock markets 15 years to get back to its peak?  Eurostoxx at 3,700 and 5 years and 3 years performance are 63% and 62% respectively.  The historical high of 5,522.4 in March 2000 seems so far away.

 

China stock market was turbo charged in 2014 with a 52% rally after years of bear market.  The popular MSCI A50 index was up 1.8% and 30.7% in 5 years and 3 years in their local currency or 9.4% and 35.5% in GBP.  The Chinese government accepts a slower economic growth and target 7% GDP growth rate.  The government has changed its gesture since last year to a more accommodating monetary policy to cushion the struggling property and commodities sectors.  Please note that it is just a cushion to soften the impact to the overall economy due to the hard fall of these sectors.  Property developers, steel, iron, copper and coal business are still hanging dry and struggle to get loans from banks.  Their funding rates are generally over 10% per year while the underlying asset prices are also falling.  India stock market is a star performer among the BRIC countries and its stock market has gone up 33.4%, 35.9% and 41.8% in a 5, 3, 1 years horizon in GBP terms.  One efficient way to capture these markets is through mutual funds or ETFs.

The world is all about Greece again.

The world is all about Greece again. 

These days, there is more media coverage on Greece than the Oscar.  No one has the crystal ball and the outcome could be as surprising as Southampton’s performance in Premier League this year.  Stock market seems to be the winner so far with Eurostoxx 50 Index up 11.8%. Mainly thanks to the weak EUR.

FTSE100 is also performing and it is up 5.3% for the year as of 23 February.  Not bad in the mist of another Grexit episode.  Tesco is the best performing stock in the index.  The stock is up 27.8% so far this year.  This is a rebound story as Tesco share price was halved last year from 340p level to as low as 155.4p on 9 December 2014.  The correction in share price was mainly reflecting the expectation of poor earnings in 2015 which earnings per share is expected to be a third of 2014 according to Bloomberg data.  No one wants to invest in a future loser.  Somehow, the market believes the business is going to turn the corner in the future and Tesco share price started to rebound to 240p level.  If you look at Tesco share price past 12 months return including dividend payout, it is still down 24.8%.  It is a GBP 20 billion market capitalization company and a lot of wealth is created or destroyed as the share price goes up or down.

Mondi Plc, a packaging and paper company, also rallied 21.1% this year.  Building materials giant CRH Plc, publisher Pearson, fashionable Burberry Group are up 17.4-19.4% to occupy the top 5 spots of the ladder.  The worst performer is energy expert Centrica plc and even that is only down 10.2% year to date.  This reflects there was no big loser in the index in 2015, so far.

The currency world is probably easier to understand for a change.  The GBP has taken a leap against the EUR.  At the beginning of 2015, GBP 1 was EUR 1.27 and in February, GBP 1 can get EUR 1.36.  It was only March 2014 when a pound could only get EUR 1.19.  The Euro zone problem really has not been resolved despite the billions being printed.  The fundamental issues just got sweetened like an espresso with 2 sugars.  Could GBP EUR get back to 1.50 level as in 2006 before the global financial crisis?

EUR against the US Dollar is even more dramatic.  In May 2014, it was EUR 1 to USD 1.40 and on 23 February, it was EUR 1 to USD 1.13 which is a 19% depreciation in EUR in 10 months.  This is the steepest drop since the beginning of 2010 which was against due to Euro zone crisis.  Could EUR USD get back to 0.823 level as in October 2000? Or when will we see EUR 1 to USD 1.60 as in July 2008?  The latter seems like mission impossible at the moment but what if the weaker members have a peaceful exit and EUR becomes more like the good old Deutsch Mark?

Let’s look back at the 2000 era when Euro in coins and notes were first circulated in 2002.  At that time, there were a lot of unknown about the Euro.  If there is a Grexit, Euro zone could be back in time before Greece started using EUR.  The market would speculate who would be the next to give up using EUR.　Such uncertainty would be a big shock to the world and EUR could be first sold off due to the uncertainty.  However, EUR could rebound afterward as the stronger countries like Germany would weight more in the currency.  The swing might even reach the high and low of the past decade.  What does it mean for GBP?  GBP 1 was good for EUR 1.65 in 2001.  Back in 2001, it was GBP 1 to USD 1.40 which we actually saw again in January 2009 (GBP 1 to USD 1.35) after Lehman Brothers went under.  History could repeat although under totally different situations and circumstances.

The falling oil prices have found support around USD 50 a barrel.  In terms of magnitude of this massive drop from USD 100, this is the biggest since the USD 147 to USD 40 drop in 2008.  Oil prices were between USD 20-40 from 2000 to 2003.  Oil prices are volatile by nature and oil producing countries like Russia and Venezuela are selling oil to stay alive no matter at what price.  The fundamentals are so different now than ever with green energy development and human behavior such as the acceptance of electric cars.  If Apple really launches electric car in 2020 as rumor said, it will be a landscape change in the energy eco-system.

Gold prices have been hovering around USD 1,200 and USD 1,400 per onze in the past 12 months and to be fair, spending more time defending USD 1,200 level than challenging USD 1,400 resistance.  Gold, if you view it as an alternative currency, does not pay interest.  Swiss Franc now charges interest.  For institutional money that needs to get out of EUR and already max out on how much USD and CHF they could hold, gold was a good parking space.   JPY is not a trendy currency to own and GBP is not really as globalized as USD or EUR as a trade currency.  If US Fed increases interest rate in September 2015 or the commodities currency like Canadian Dollars and Australia Dollars reach bottom, money may leave gold again.

Swiss watches, Swiss holiday, Swiss banks

Swiss watches, Swiss holiday, Swiss banks

New Year surprise from the Swiss Central Bank caused an earthquake in the financial market.  It did the reverse of the Russian Ruble and Swiss Francs was up 20% then 40% against the Euro.  Currency brokers were right in the middle of it and some could not withstand the shock.  Alpari went under and FXCM needed a white knight.  Most banks were hurt with a scratch but the Swiss banks have a bigger problem which I will explain later.  The Swiss stock market dropped thru a crack and was down 14% at one point on 15 January.  It was not funny at all.

Most people think a currency from a developed country like Swiss Franc moved by 20% is a very very big Black Swan with tabby pattern.  It really is beyond imagination and certainly falls into the same category of rare events like England Soccer team winning World Cup.  Agree.  Looking at historical data, CHF last big move was in 2011.  It was EUR 1 to CHF 1.23 in July 2011, then CHF strengthened to EUR 1 to CHF 1.03.  Then the Swiss Central Bank declared brotherhood with the Euro and told the world they would sell CHF for EUR at 1.20.  People stopped going long CHF and short EUR.  That was a small Black Swan move.  So, looking back, we should have known it.  It is simple physics.  You can have a very strong container, like the will power of the Swiss Central Bank to be on the same boat as Euro.  But if you keep pumping gas into the container, eventually, this very strong container will explore in a very powerful way.  The weak Euro against USD had been a trend in second half of 2014 but this may not be the trigger of the event.  If I were a Swiss Central Banker, I probably could live with a weakening CHF which is just dragged down by EUR.  EUR, in any case, is still a very big currency backed by the European Union.  My biggest fear would be what if my assumptions were wrong which is not unheard for Central Bankers.  For example, the concept of EUR being the currency for European Union or the concept of European Union.  The recent political movement in Greece that revived the thought of Greece leaving EU or the EUR currency might have caused Butterfly Effect to Swiss Central Bank decision.  (Just to kill the speculation, I was not, am not and mostly likely will not be a Swiss Central Banker). 

Bang!  Everyone woke up with CHF rocketed against other currency.  Selfishly, first thing came to my mind was to change my ski trip from Davos to St Anton in Austria.  Then I thought maybe I should buy a Rolex before they increase the price in GBP due to labor cost in CHF.  Then I heard about Currency Brokers suffering from potential bad debt from client’s trading losses.  Logically, those Swiss companies who report earnings in CHF but make money in EUR or USD are in tears as their revenue is now taking a 20% discount when it converts to CHF.  Swiss banks, exporters like drug makers, engineering companies, luxury sectors are all making money offshore and reporting earnings in CHF.  Unlucky.  Swiss companies who borrow in EUR or USD are laughing.  I wish I had taken a EUR or GBP loan to buy Rolex.  As Swiss Franc deposit was not paying any interest, it is almost illogical to be investing in Swiss deposit or Swiss government bonds except for the big money manager who manages billions and need to diversify their currency exposure.  Or the hedge funds or traders who have patiently waiting for the container to explore.  A bit like Soros winning in the GBP in the 80’s.  History does repeat.

CHF will eventually clam down but there are casualties already.  Swiss Central Bank has said they would step into the currency market again if they think CHF is too strong.  Of course they would, they just did it.  But they have already set negative interest rate for CHF and perhaps they could make it even more negative.  This would be very interesting if one day Swiss Banks pay borrowers interest to borrow Swiss Francs.  One could earn credit from swiping their Swiss credit card.  Hard to imagine right?  That very big Black Swan in tabby pattern may have a friend around the corner.