On Wednesday, the euro fell to a near 12-year low against the dollar. That makes foreign vacations cheaper, but selling things to foreigners harder.
The U.S. dollar has strengthened against pretty much every major currency over the past year. That feels like good news—and in some ways it is. It means that investors worldwide are betting that the U.S. economy is strong; it’s also nice if you’ve been planning a get-away to the French countryside.
And intuitively it just feels like a strong U.S. currency is a good thing, and a weak one is bad. Last year, the plot of the action flick Jack Ryan: Shadow Recruit turned on a (mild spoiler alert) Dr. Evil-like plot to tank the greenback’s value.
But at this moment a too-strong dollar may be the bigger worry.
That is the context behind all the headlines you may be seeing these days about so-called “currency wars.” In a currency war, countries don’t try to take down other nations’ currencies. Instead, they cut the value of their own currencies, in order to make their products cheaper and stoke demand. When one currency falls, that means somebody else’s currency has to go up. Lately, the U.S. has been that somebody else.
Why is the dollar going up? Central banks around the world, from Europe to Japan to Mexico, have been doing what our own Federal Reserve did following the financial crisis, buying up bonds and aggressively seeking to hold down their interest rates. They’re not only doing this to lower the relative value of their currencies—nobody has actually declared a currency war—but it has had that side effect. With yields on 10-year German bonds at just 0.3%, U.S. Treasuries that are paying almost 2% look like a better deal.
When investors seek to hold U.S. assets, that pushes up the buck too.
And there’s reason to think the dollar will keep getting stronger for a while, says Wells Fargo Securities senior economist Sam Bullard. The U.S. economy looks pretty good right now compared with the rest of the world. The American gross domestic product, for instance, grew by 4.6%, 5%, and 2.6% over the past three quarters, while the eurozone muddled through with growth rates at 0.3% or lower. Our unemployment rate is down to 5.7%, while in the eurozone it is stubbornly stuck over 11%.
As a result, the Federal Reserve has begun to put out hints that it will raise short-term interest rates sometime in 2015, the first increase since the Great Recession. Again, that should make dollar-denominated assets relatively more attractive. And a strong dollar trend could feed on itself—the more stable the dollar looks, the more people will want to to invest in the U.S. “Investing over here if you’re foreign company committing capital is more attractive since returns will get translated into your home currency at a more favorable rate,” says Bob Landry, a portfolio manager at USAA Investments.
Still, whenever there are winners, there are also losers.
Who’s losing out? For a start, multinational corporations with significant businesses overseas. Procter & Gamble and its shareholders, for instance, endured disappointing earnings last year and announced that the consumer goods behemoth doesn’t expect to enjoy sales growth this year due to the dollar’s strength.
A strong dollar generally makes U.S. exports less attractive—consumers with euros and yen are finding our products more expensive. The ISM manufacturing new export orders index fell in January to its lowest level since the fall of 2012. That’s bad news for anyone who works in manufacturing, or any other business that hopes to sell to global markets.
Overall, Bullard says, a strong dollar should be “a net drag on overall GDP in 2015.” Perhaps Jack Ryan could have saved himself the trouble.
The economic picture continues to mend, but workers still looking for better wages.
The U.S. economy added 257,000 jobs in January, the 12th consecutive month employers hired more than 200,000 workers. Meanwhile, the unemployment rate rose slightly to 5.7%.
Employers also added more employees in the end of 2014 than originally thought. The Labor Department revised November’s employment change to 423,000, compared to 353,000, and December’s to 329,000, from 252,000.
The positive monthly employment report is another sign of a building economic recovery. The four-week moving average initial jobless claims recently fell by 6,500 to 292,750 The employment cost index, which measures salary and benefits, increased by 2.3% in the last three months of 2014. And the gross domestic product grew by 2.6% in the last quarter of 2014 after climbing by 5%. This good news, along with cheap energy prices, has also pushed up economic confidence.
The economy still is not back to a pre-2008 definition of normal, however. The headline unemployment rate measures only people who are looking for work. Since the post-crisis recession, however, many people dropped out of the work force, and they have been slow to come back in. Today’s report shows the labor-force participation rate at 62.9%, a marginal increase from a month ago, but still in line with a long-term decline. The rate is five points lower than it was at the turn of the century.
Another sign that the job market recovery remains soft: Average hourly wages in January were only up 2.2% compared to a year earlier. (While that’s an improvement over last month, wages grew around 4% per year prior to the Great Recession.) Long-term unemployment is also still at elevated levels.
Modest wage growth helps to explain why inflation has remained low, even after stripping out the effect of falling prices at the gas pump. Core inflation, which strips away volatile energy and food prices, was up 1.6% year-over-year in December. That’s well below the 2% the Federal Reserve says it is targeting in deciding whether or not to raise key interest rates.
The Fed has been holding short-term rates near zero since the crisis, and is widely expected to begin raising rates this year as the economy improves. But they’ll have to weigh the encouraging signs from the new unemployment numbers against continued low inflation and wage growth, as well as the mounting economic troubles in Europe.
Sam Bullard, a senior economist at Wells Fargo Securities, shares the Fed’s belief that the labor market and economy are repairing, and thinks more hiring will push down the unemployment rate in the months to come, which will result in more money in worker’s paychecks. Eventually.
“Overall, we’re looking at an economy that’s improving,” says Bullard. “The one missing piece is a pickup in wage growth.”
MONEY's Jake Davidson and Taylor Tepper debate whether paying for cable television is still worthwhile in a world of Amazon, Hulu, and Netflix.
What investors need to know about the recent struggles of the petro-behemoths
The price of oil dropped dramatically in the second half of last year, resulting in less-than-stellar earnings for some of the world’s biggest energy companies. Exxon Mobil, BP, and Royal Dutch Shell all recently produced underwhelming fourth-quarter results thanks to lower demand for, and excess supply of, oil.
Despite recent struggles, investors have not jumped ship, and the petro-behemoths have outpaced the broader stock market over the past week. What’s going on, and what does this mean for you?
Oil Companies Have Lots of Money
The last three months of 2014 were not pretty for oil producers. The value of a barrel of oil hit around $115 in June, fell to $55 by the end of the year, and recently dropped to $45 before rebounding in the last couple of days. Exxon’s revenue dropped 21%, BP posted a replacement-cost loss (which is akin to net income) of $969 million, and Shell only saw gains thanks to ancillary businesses.
Despite the recent price uptick, oil’s outlook isn’t much better. The U.S. Energy Information Administration expects the price of oil to average $58 a barrel in 2015, compared to $109 just a few years ago. Lower oil prices simply makes it harder for major energy conglomerates to make money.
Fortunately for executives in Irving, Texas, London, and The Hague, however, large integrated oil and gas companies tend to have a lot of capital to soften these blows. Even after enduring a rough quarter, Exxon has nearly $5 billion in cash on hand, BP earned more than $12 billion for all of 2014, and Shell took in about $45 billion in cash flow last year.
Oil Companies Have Other Businesses
While cheaper oil makes the act of getting the black stuff out of the ground less profitable, other businesses in these large oil companies actually stand to benefit from lower oil prices. Exxon’s chemical operations, for example, actually saw a 35% increase in earnings over the same period in 2013.
“Our chemical business is very well positioned to take advantage of the lower commodity prices,” says Exxon’s head of investor relations Jeff Woodbury in the most recent earnings call. “Particularly in the U.S. our manufacturing sites are highly flexible and can run across a wide range of feedstocks, from ethane all the way to gas oil.”
It’s About Expectations
Falling energy prices was one of the biggest stories at the end of last year. Americans are feeling better about their own financial situation; cheaper prices at the pump feel to them like a pay raise or a tax cut. Which is to say, the market was not shocked that large oil companies had muted earnings during the last three months of 2014. In fact over the past six months shares of Exxon, BP, and Shell have fallen 6.7%, 16.2% and 17.6%, respectively. (The S&P 500, over the same period of time, has actually jumped 6.5%.)
And oil executives are doing all they can to lower costs and expectations for the near future. BP announced that it will be spending $4 to $6 billion less in capital expenditures in 2015 than it originally thought, and about $3 billion less than the company spent last year.“We have now entered a new and challenging phase of low oil prices through the near and medium term,” BP chief executive Bob Dudley said in a press release. Shell has also announced that it will reduce costs next year, and expects to spend $15 billion less through 2017.
What Does This Mean for You
Investors still pay a premium to own big oil stocks. Forward-looking price-to-earnings ratio for Exxon, BP, and Shell all exceed that of the S&P 500.
But they still look relatively attractive to USAA fund manager Bob Landry. Oil prices may not rebound this year, he says, but they’ve probably hit a floor at around $40 a barrel. “If you’re a long-term investor you can hold some of these companies that pay a solid dividend, and pick up shares for cheaper than what they were four-to-six months ago,” Landry says. “These companies can survive this turmoil thanks to a fortress balance sheet and the ability to generate significant cash flow.”
Despite another blowout quarter, Apple shares are still trading at less than 15 times earnings, which is a bargain for a top-flight tech company.
It’s hard to catch people by surprise when you’re already the center of attention. But with the help of strong holiday sales and another hit iPhone, that’s just what Apple did on Tuesday.
The Cupertino, Calif., gadget maker said sales jumped nearly 30% in its fiscal first quarter to a whopping $75 billion. Wall Street Analysts polled by Fortune had expected an increase of only 20%.
The heart of the business: More than 90% of Apple’s revenue last quarter came from hardware sales—69% from iPhone sales alone. But if hardware is what Apple sells, it’s not what the company markets. “Apple’s main product is an experience,” tech analyst Neil Cybart told Money magazine last month. “They look at all of their products as taking away the complicated part of technology so the users can feel like they have more control over their lives.”
Apple aims to build a world in which you’ll own Beats by Dr. Dre headphones, wear an Apple Watch, buy coffee with the Apple Pay payments system, and make hands-free phone calls via Apple CarPlay. With all those products interlinked and running on Apple’s iOS software, you’ll rely on the ecosystem for daily tasks, making it a hassle for you to buy your next phone or tablet from anyone other than Apple.
So what’s the risk? Apple has a hit with the iPhone 6 and 6 Plus, in all selling 74 million smartphones last quarter. Indeed, as TIME recently reported, the iPhone 6’s success has cut into Android’s smartphone market share in the U.S. for the first time since September 2013.
But the company isn’t particularly good at enticing the owner of one Apple product to purchase another, says Consumer Intelligence Research Partners’ Michael Levin.
For instance, only 28% of iPhone owners have an Apple computer, and less than half of them own a tablet, says CIRP. Sales for the iPad have fallen 22% over the past year, acknowledges Apple. But CEO Tim Cook, noting that the company has sold more than 250 million iPads over the past four years, told investors in October that he’s “very bullish on where we can take the iPad over time.”
Why it’s still a value: Apple enjoyed a banner year in 2014. Spurred by sales of the latest iterations of the iPhone and anticipation of the Apple Watch’s release in April, the company’s stock has risen nearly 50% since the start of 2014.
Despite that gain, Apple’s price/earnings ratio, based on projected profits, is just 14. That means the stock trades at an 11% discount to the S&P 500 technology index, even though the company’s earnings are growing 32% faster than the average big tech stock’s.
Apple’s low valuation stems from factors such as investors’ doubts that a company its size can grow as fast as smaller tech firms, along with uncertainty that Apple will keep making products that are both popular and profitable.
That said, Apple is still the best company by far at creating exciting technology that people want to buy. Plus, signs point to an ever-increasing dividend from the stock, which now yields 1.6%; a larger payout can be easily covered by Apple’s $178 billion cash reserves.
This story is adapted from Apple, Amazon, or Google: Who Will Win the Battle of the Tech Titans? in the 2015 Investor’s Guide in the January-Feburary issue of MONEY
Whether or not kids are on your radar right now, you'd be wise to understand any potential employer's family leave policy, says first-time dad Taylor Tepper.
Just a few weeks after our son was born, my wife was already dreading the prospect of returning to work.
A teacher, Mrs. Tepper received around two months of paid leave from her employer. Her original plan had been to extend that leave for another four weeks unpaid, then return to the classroom for the last couple of months of the school year. But that was before Luke came along.
When he arrived, she couldn’t bear leaving him so soon. Thankfully, her school allowed her to stay a home those extra few months and held her position for the following year. Mrs. Tepper could then nurture our son without fearing for her job.
Most families don’t have this choice.
When Mrs. Tepper accepted her position, neither she nor I considered how much time she would be given if she became pregnant. We weren’t planning on starting a family (best laid plans), and so were more concerned with wages. While we were fortunate to land in companies that support families—I happened to receive two weeks of paid paternity leave—we could have just as easily ended up working for ones that didn’t.
Just 12% of businesses offer paid maternity or paternity leave, according to the Society for Human Resource Management. Another study found that the average maternity leave among U.S. companies that offer it is less than one month and pays the worker 31% of her original salary, as MONEY’s Kara Brandeisky recently noted. Comparatively, mothers in France are guaranteed 16 weeks of fully paid leave.
Millennials may not be overly concerned with President Obama’s recent announcement that he will extend six weeks of paid parental leave to federal workers, but they should be. Let me tell you why…
Why You Should Care
It’s understandable if those who graduated into the Great Recession with a ton of debt care more about salary than anything else, especially considering that this generation has generally been postponing bourgeois life events like marriage and procreation. But with the top end of Gen Y approaching 35 this year, more will likely start building families soon. And if you stay at your job a few years in this crucial span of settling-down time, who knows? You could be making babies.
Heck, some of them—ahem, Luke—arrive unexpectedly.
As Mrs. Tepper and I realized, the option of paid parental leave takes on a lot more importance when you are responsible for the care of an infant.
Without paid leave, you end up with two not-so-great options after giving birth. One: Squirrel up all your vacation time to use and then go back to work when your kid is a mere three or four weeks old. Or two: Add on unpaid time (most Americans, moms and dads alike, are guaranteed 12 weeks through the Family Medical Leave Act) and find other means (savings? credit cards? spouse’s income and living lean?) to replace the income lost that you need to pay the bills.
While taking unpaid time has some big financial implications for you, going back to work too soon has serious drawbacks too. “That initial time to bond with your child, you don’t get that back,” says St. Pete mayor Rick Kriseman, who recently expanded paid leave to city employees. Plus, he notes, “In those first few weeks, you are so sleep deprived. How do you function at work? Do your job normally? Give it your attention and not make mistakes? That’s asking a lot of new parents.”
Paid leave helps families avoid this kind of tough decision. It also has other benefits, illuminated here by the Center for American Progress. For instance, one study by two Cornell University professors demonstrates that paid maternity leave is an important factor in keeping women in the labor market “since it reduces the likelihood that women will quit their jobs in order to take time off from from work.”
Working parents also tend to be happier, more productive, and more loyal at companies that have paid leave policies. Also, paid leave is also associated with better health results for both mothers and newborns—reducing depressive symptoms in moms, increasing the odds that children are immunized, and making it more likely that moms are better able to breastfeed their child for an extended period of time.
What You Should Do
Figuring out a company’s leave policy isn’t always easy. Ask the hiring manager and you risk looking like you’re one foot out the door before you’re one foot in.
Lenny Sanicola, senior practice leader at HR association WorldatWork, says it’s not wrong to pose the question, “but wait until at least the second interview.”
Other options if you’re not comfortable with the straightforward route: Go to the careers section of the company’s website to see if its leave policy is detailed there, suggests Sara Sutton Fell, chief executive of FlexJobs. Check out the company’s review on sites like Glassdoor.com (but keep in mind that what people post there is not necessarily gospel). Better yet, try to find someone in your network on LinkedIn who already works at the company and can do some detective work for you.
As for what’s a generous leave policy, obviously the more paid time you can spend with your kid, the better. But the range varies.
“Because paid leave isn’t required by law in the U.S., any amount offered by an employer is generally a good thing because the bar is so low,” says Fell. “In general the most common range for paid maternity or paternity leave that I’ve heard is anywhere from one week to 16.” Sanicola says six to eight weeks is likely.
Dads are lucky to get any paid time leave at all.
As much as Mrs. Tepper and I like our jobs, chances are we won’t be in them forever. And Luke likely won’t be an only child forever.
That means when it comes time to take on a new challenge, how our new bosses treat expecting and new parents will carry as much weight as the biweekly paycheck. While it might be hard for young childless professionals to appreciate that mindset, they’d be well advised to do so.
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MONEY's Taylor Tepper tries to convince his colleague Jake Davidson that credit cards will benefit him, not put him on the road to financial doom.
Chaos in the currency market is a sign of deep problems for Europe—and the whole global economy.
The global economy got a lot more interesting today, and maybe a little more scary, when the Swiss National Bank ended its commitment to a fixed exchange rate between the Swiss Franc and the euro.
Currency markets went into a frenzy. The Swiss franc immediately rose 30% in value against the euro, mirrored by a spike in its U.S. dollar value. Some of those gains have pulled back, with the currency up about 15% at midday. That’s still a huge move.
Okay, so it’s been a big day for currency traders—and anyone planning on a ski trip to the Alps. But what’s this mean for me?
The wildness in the market underscores the big economic story of the moment: Europe’s slide toward a recession. In a globally connected economy, weak demand in Europe could weigh on the recovery in the U.S.
So what exactly happened?
Swiss francs rose because the Swiss central bank removed an artificial cap on the price of an asset people really, really want right now. The import of the story is less about the sudden price change today than about why people want to trade their euros for francs in the first place.
Switzerland isn’t a part of the eurozone, the group of countries that share the euro as a currency. Swiss assets denominated in Swiss francs have long been considered a safe haven—a parking spot for investors around the globe when they are feeling jittery.
The eurozone has given people a lot be jittery about. In the wake of the Greek debt crisis at the beginning of the decade, investors jumped into francs, strengthening the currency against others. The problem with that for the Swiss is that it makes the goods produced by Swiss companies more expensive to export. So the Swiss National Bank (that’s like their Federal Reserve) capped the value of a franc at 1.20 per euro.
It also decided to start charging negative interest rates, meaning investors in effect have to pay a fee to park their money in a Swiss bank. That’s another way of fighting currency overvaluation. Today, at the same time as it cut the currency peg, the Swiss bank lowered the short-term interest rate from -0.25% to -0.75%. That is, they raised the penalty for stashing money there. Even so, the rally in francs shows there remains a lot of demand for doing just that.
Why did the Swiss cut the exchange rate peg?
The surprise move comes as Mario Draghi, president of the European Central Bank, is considering new measures to stimulate the eurozone economy. Many investors expect the ECB will take a page from the U.S. Federal Reserve and start buying long-term debt to push down long-term interest rates, a strategy known as quantitative easing.
A euro QE is broadly expected to bring down the value of the euro compared to the U.S. dollar. The Swiss, it seems, didn’t want to tie the value of its own currency so closely to the policy makers at the ECB.
“Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced,” the Swiss central bank said in a statement. “The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.”
Pity Swiss watchmakers, though. Their timepieces just became more expensive for foreigners to buy.
After hurting the employment picture for so long, local, state and federal governments are finally adding to payrolls.
The U.S. economy continued its winning streak by adding 252,000 jobs in December, the 11th consecutive month employers hired more than 200,000 workers. The unemployment rate fell to 5.6%, a post-recession low, as various sectors (from business services to health care to construction) added to payrolls.
Boosting hiring isn’t exactly new when it comes to private businesses, which have been bolstering their staffing for every month for almost five years.
What’s different about the recent pickup in employment is the positive effect of governments (state, local and federal). While jobs aren’t being added at rapid pace, they have grown steadily over the past year, and are no longer subtracting from the labor market like they were not too long ago.
Government employment increased by 12,000 in December, compared to a reduction of 2,000 employees in the last month of 2013. Compared to a year ago, state and local governments throughout the country have added a combined 108,000 jobs.
As recently as last January the government shed 22,000 positions. Sustained, incremental growth beats much of the sector’s post-recession record, which saw employment drop off thanks to lower tax revenue and austerity measures.
Government payrolls increased by about 0.5% over the last year — which doesn’t look terribly good compared to the private sector’s 2.1% gain. But when you look at the recent gains against the 0.05% decrease in the twelve months before January 2014, you start to appreciate the recent uptick.
What’s going on?
Well, state and local government finances have stabilized and marginally improved over the past couple of years, giving statehouses and municipalities a chance to improve its fiscal situation.
Take this note from a recent National Association of State Budget Officers report which says, “In contrast to the period immediately following the Great Recession, consistent year-over-year growth has helped states steadily increase spending, reduce taxes and fees, close budget gaps and minimize mid-year budget cuts.”
The nation’s economy grew at an annualized 5% rate in the third quarter, after jumping 4.6% in the three months before. The trade deficit fell in November to an 11-month low, thanks in part to lower energy costs, which will help fourth quarter growth.
NASBO expects states’s revenues to increase by 3.1% in the next fiscal year, compared to an estimated 1.3% gain in 2014, with much of that spending dedicated to education and Medicaid.
With a more solid financial position, governments across the country are able to spend more on basic items, like construction. Public construction, for instance, increased by 3.2% last November compared to the same time last year, according to the Census Bureau.
Overall government spending has stopped following dramatically and actually picked up in the third quarter on a year-over-year basis.
Of course, government employment still has a ways to go before returning to normal. In the five years after the dot-com inspired recession, public sector employment gained by 4.5%. (It’s fallen by 2.8% since the recession ended in June 2009.) And while state budgets have normalized, Governors aren’t exactly flush with cash.
Says NASBO: “More and more states are moving beyond recession induced declines, but spending growth is below average in fiscal 2015, as it has been throughout the economic recovery.”
Not to mention hourly earnings fell by five cents, to $24.57, a decline of 0.2%.
Still, some employment growth is better than none at all.
Updated with earnings data.