Dollars and Sense: Earnings season, oil, and a Swiss surprise

Earnings season underway. A week ago, Alcoa’s report kicked off the quarterly earnings season, and while it was good, the news has been mostly downhill since then. A lot of companies, especially banks, missed expectations. Both Bank of America and CitiGroup fell short, and they’re not alone. JP Morgan Chase also missed projections—not by a little but by quite a lot.

Banking sector issues. Of course, it’s important to note banks have some industry-specific issues. Government regulation and the costs of compliance have gone up in the past decade, and the banks we just mentioned are behemoths. A couple of years ago, we talked about some banks being “too big to fail.” That phrase summarized the belief that some banks can’t be allowed to fail because of the impact of those failures on the overall economy. But we’re now hearing a lot of talk about the big banks being too big to manage. They are too large and too complicated for their managers to manage and analysts and traders to appropriately value. The markets may be re-pricing their shares as a way of telling the big banks they need to break up and become multiple, smaller entities.

Oil still an issue. But it wasn’t just the banking sector that led the market to its third straight week of losses (despite an uptick on Friday). U.S. markets continue to be fixated on oil prices, which continued to fall last week. West Texas Intermediate Crude fell into the mid-$40s per barrel last week. A statement issued by Goldman Sachs warning $2 trillion of future investments in the oil and gas industry are at risk at current prices also caused jitters.

Retail sales. We also got a report last week that December retail sales contracted 0.9 percent from a year ago, falling below the 0.1 percent gain expected. Also adding to the gloom was a downward revision of global growth from the World Bank, which said global growth for 2015 would be 3 percent, down from an initial estimate of 3.4 percent. The downgrade is due mainly to a contraction in some eurozone countries and slowing growth in emerging markets, such as China.

Swiss surprise. Switzerland’s central bank gave the markets a jolt last week when it lifted a cap on the Swiss franc. Three years ago, Switzerland capped the value of the franc at 1.2 francs to the euro, but the euro has gotten so weak the cap is no longer tenable. In the long run, removing the cap likely will be a good thing, since it allows the currencies to float more freely on world markets. But it will make Swiss francs much more expensive and could discourage foreign investment in Switzerland. The immediate impact was a huge decline in the Swiss stock markets and a rise of 30 percent in the Swiss franc, which makes Swiss goods and services more expensive to foreigners. So, for example, when all the billionaires meet in Davos Switzerland at the World Economic Forum later this week, the average price of a hotel room for the conference is now more than $1,100 per night.

The week ahead. It’s a pretty light week for government reports, though we will get some news about housing starts. If we don’t get any aberrant reports, such as the one we got from Switzerland last week, earnings reports will continue to be the market drivers. More than 300 companies will report this week, including a significant number of Dow components. Analyzing and reacting to those reports should keep traders hopping this week.