Alibaba filed an amended statement this morning ahead of its IPO, but investors are still waiting to see the terms.» Read More
Slowing economy? Not in San Francisco!
I just returned from a week in the Bay Area, including a visit to Sonoma in wine country Thursday (where I missed the earthquake by a mere two days). The impact of the weekend earthquake has yet to be fully absorbed; nonetheless, during my visit I noted some interesting trends and observations.
With all the tech startups and the kids coming back into the city, you'd expect formerly desolate areas like the Mission to be hot. The activity I saw, however, went far beyond that.
Two things stick in my memory about the Google IPO: The Dutch auction was a disaster, and a lot people weren't sure what it did or how it would fly as a listed company. I know it sounds ridiculous, but explaining the concept of a search engine in 2004 was a stretch, even though it had been out for a few years. Even if you could explain it, no one could figure out how you could make a multibillion industry out of it.
Google went public on Aug. 19, 2004. It was not an auspicious start. It ended up pricing 19.6 million shares at $85, the low end of its revised price expectation of $85-$95.
Even that was a disappointment. Google had initially hoped to sell 25.9 million shares somewhere between $108 and $135. It closed the first day at $100.34, a price gain of 18 percent, respectable but certainly no blowout for what many considered to be the hottest tech offering since the dot-com blowup of 2000.
Read MoreA soundtrack to Google Street
Part of the problem was the way it went public, insisting on using the controversial Dutch auction method. In a Dutch auction, investors enter their bids for the number of shares they want to purchase as well as the price they are willing to pay. The allotment is given to the highest bidders on down until all the stock is sold.
Obviously, what the founders thought the company was worth didn't exactly match what the public was willing to pay.
(Scroll through an interactive timeline of Google's post-IPO history, below)
Official data show inflation only gradually rising for the economy as a whole with the personal consumption index gaining 1.6 percent in June; however, a dozen food companies in the past few weeks have warned steeper price hikes hurt results last quarter.
Prices are rising for several restaurant staples like beef, seafood and cheese. But costs aren't up everywhere: Grain and vegetable prices, for example, have been declining.
This morning Red Robin said lower margins, which fell 1.3 percent from the same period a year ago, were mainly due to higher food and beverage costs.
Noodles & Company, which reported last night, posted a two percent drop in margins due to increased costs. During the company's conference call, CFO Dave Boennighausen said the cost of goods sold rose 70 basis points last quarter as a result of modestly higher pork, dairy and shrimp ingredient costs, as well as more promotional activity.
Wholesale food inflation rose 4.2 percent in the first six months of the year, its biggest rise since 2011; however, menu and grocery prices - what consumers are paying - were only up 2.2 percent and 1.6 percent, respectively, in the same period, according to the National Restaurant Association.
"Inflation remains a key concern for management," Goldman Sachs strategist David Kostin said last week in a research note. "Companies [have] noted the potential long-term impact of rising costs on margins despite hedges that reduce the near-term impact on profits."
Northeast-based grocery store Fairway Group highlighted upward price pressures too. "Approximately 140 basis points of the [190 basis points year-over-year] gross margin decline was attributable to lower merchandise margins primarily due to cost inflation in certain perishable departments, which for competitive reasons we were not able to fully pass on," the company said in its earnings release.
In the past couple weeks, Hillshire Brands, Pinnacle Foods, Sysco, Sprouts Farmers Market, Bloomin' Brands, Fiesta Restaurant Group, Texas Roadhouse and Jack In The Box all referenced increasing commodity costs in general.
At Red Robin and Wendy's it was heftier beef prices.
Annie's noted greater organic wheat costs.
What's this mean for investors? Is this cause for concern?
The bad news is it is starting to affect margins, so the answer is yes if you are investing in food and restaurant companies. Red Robin, for one, is down as much as 21 percent today.
For consumers, it is not yet a concern, but it bears careful watching.
First, not everything has seen prices rise: Cereal prices, for example, have been dropping. And for those commodities that have seen higher prices, the rise is still comparatively modest; for the most part in the mid-single digits.
Second, food prices can be very volatile. That's one reason they are stripped out of certain overall inflation gauges. Some recent price hikes have been circumstantial given ongoing droughts in parts of the U.S. that have sent beef prices soaring upwards of 10 percent and the deadly Porcine Epidemic Diarrhea (PED) pig virus, which has led to a nearly 30 percent surge in your pork patty.
Finally, for the time being, these companies are absorbing the inflationary pressures rather than passing them on to consumers.
If that changes, this story will get much more attention.
Retail earnings are a mixed bag yet again. Wal-Mart reported earnings in line with expectations, but it wasn't a great report. Traffic was down 1.1 percent, though higher average ticket helped. Full year guidance got cut by 25 cents, or about 5 percent, with management citing higher U.S. healthcare costs and more investment in Web assets.
Just imagine running a retail business right now. There's a decent amount of good news on the economic front—particularly on jobs—but a number of companies are still not getting much traction.
Macys second quarter earnings miss is a good example of this. Comparable store sales were up 3.4 percent, about in-line with expectations. Same-store sales for the year are now projected up 1.5 to 2.0 percent, below previous guidance of 2.5 to 3.0 percent.
Macy's has only missed expectations one quarter in the last 28 (7 years), according to RetailMetrics. That's quite a string! With today's miss, they have now missed twice in the last five quarters.
Biotech firm Vascular Biogenics started trading on the Nasdaq on July 31st, pricing 5.4 million shares at $12, and attracted little attention. The Nasdaq abruptly halted trading Friday morning, asking for "additional information" from the company.
That, however, isn't the strange part. Shortly after the Nasdaq intervened, the company announced that its initial public offering (IPO) had been cancelled "due to an unexpected situation in which a substantial existing U.S. shareholder did not fund payment for shares it previously agreed to purchase in the offering."
Kinder Morgan put together a massive $44 billion deal on Monday, an exclamation point on how hot the energy sector is nowadays. The pipeline operator will pull together its parts, including Kinder Morgan Energy Partners, Kinder Morgan Management, and El Paso Pipeline Partners while abandoning its Master Limited Partnership (MLP) structure that combines all its parts into a classic corporation.
As CEO Rich Kinder told CNBC, by shedding the MLP structure and going to a straight corporation they get lower capital costs that make them more competitive in their quest to keep buying assets.
Is this a trend? Not likely. This is a bit of an anomaly, because Kinder Morgan had so many different companies that were less than the sum of their parts.
There was quite a stir overnight when it was revealed that high-yield funds saw $7.07 billion in outflows, a record for one week. That includes mutual funds and ETFs and is the fourth straight weeks of redemptions.
The two largest high-yield ETFs, SPDR Barclays High Yield (JNK) and iShares US High Yield (HYG), had combined outflows of about $2.4 billion in the last month, according to ETF.com. Given that the two have a present combined market cap of about $21 billion, that would be an outflow of about 10 percent.
That seems high, no? Like, a lot? Is this an earthquake of some sort?
Well, yes and no. First, as Dave Nadig at ETF.com has pointed out to me, the daily flow in and out of these high-yield funds is incredibly noisy. It is fairly typical, for example, to see flows of $100 to $250 million a day in HYG, for example, which has an $11 billion market cap. That's a one to two percent ebb and flow everyday.
In other words, given that a one to two percent flow in and out is typical on a daily basis, a 10 percent outflow in a month is certainly high, but not unbelievable.
Second, there is the issue of relative return, and here is where a lot of people make a mistake. They just look at prices. True, prices are down roughly two to three percent in the past month in these ETFs, but they appear to have stabilized. Since bottoming at the end of July, the HYG is up every day this week.
And remember, these bond funds are high yield: They are currently paying out roughly 5.7 percent interest, about three percentage points above the 1.9 percent yield from the S&P 500, and they make monthly distributions. So you can't just look at a price chart.
Is the high-yield bond market overvalued? I think so. It's certainly no fun to get a five percent return on what are supposed to be much higher-risk instruments. But this is what happens when everyone reaches for yield.
But is this the start of a SIGNIFICANT, long-term correction in high yield? I'm not sure. The most important factor is the state of the economy and the likelihood of default on any of these bonds. But the economy is improving; credit risk seems fairly low at the moment.
Remember, although they are bond funds, in times of high volatility they can act like stock funds: they go down, not up. The S&P dropped about three percent in the past few weeks. So there is a lot of noise that is impacting these funds now that could go away (or increase) very quickly.
But if cheap money isn't cheap any more...well, that's a different story. If the 10-year yield starts moving...if, for example, it goes north of three percent from 2.4 percent now...high-yield funds should move up in yield, down in price. How much? Not entirely clear, but I wouldn't be surprised to see another three ercent drop in prices.
In the face of turmoil in Ukraine, sputtering growth in Europe and now U.S. involvement in Iraq, it's safe to say the macro front is fairly chaotic.
On Thursday, U.S. officials confirmed that military aircraft are conducting limited strikes on the artillery of anti-government insurgents (on top of airdropping humanitarian aid). Add that to the widening Ebola emergency, the resumption of the Israel/Hamas war, and Russia banning food imports—and considering banning overflights.
We know that the global uncertainty is affecting European stocks, but that is now spilling over into U.S. stocks.
Thursday's U.S. jobless claims report showed a strengthening labor market. At 289,000, the jobless queue was at the lowest levels since July 19, when it was 279,000; prior to that, you have to go back to 2006. The four-week moving average is also at its lowest levels since 2006.
Over across the Atlantic, however, the picture is different. With everyone distracted by Ukraine and Russia, Europe is becoming a dicier proposition by the day.
European Central Bank (ECB) head Mario Draghi left interest rates unchanged. This is a delicate time for Draghi: Europe is clearly being influenced by events in Ukraine; the German economy —the euro zone's largest—appears to be slowing; and Italy has slipped into a technical recession (defined as two consecutive quarters of economic contraction).
During the press conference, he acknowledged that that geopolitical risks could hurt the economy.
The lack of volume in this market might make it hard for the rally to continue, says veteran trader Art Cashin.
The mid-term election will be a disappointment—but that's a good thing for Wall Street, says hedge-fund manager Todd Schoenberger.
Charles Schwab has lost a case against Morgan Stanley, accusing it of improperly recruiting brokers from a Schwab San Francisco branch.