Chinese manufacturing data was better than expected, but that's not helping equities.» Read More
OK, Alibaba doesn't cure cancer, but you'd think so with some of the theories going around.
I noted during my 9:35 a.m. ET hit that the stock market open was unusually strong: All major indices opened up, all 10 S&P sectors opened up, and both the Dow Industrials and Dow Transports were at new highs (Dow Theorists rejoice).
The most logical reason we would have this mild lift is that traders are unwinding hedges that were put on ahead of the Federal Reserve meeting that ended yesterday.
What can markets expect when Alibaba starts trading?
This is the biggest question on trading desks for the past several days. I don't make predictions on where stocks will trade, but there are several reasons I am optimistic that Alibaba—at whatever price—will open to the upside and stay there on its first day. Here are a few reasons why, put simply:
1. It's almost impossible to get the kind of numbers Alibaba has, anywhere. On all levels that matter: scale, growth, and margins, Alibaba is off the charts. It owns 80 percent of the Chinese e-commerce market, has seen 46 percent revenue growth in the most recent quarter, and has meaty margins of 54 percent.
Alibaba's long-awaited IPO is finally around the corner, making this a good time to take a look at just how an IPO works.
In an initial public offering (IPO) a company issues stock to the public for the first time. Why would a company want to go public in the first place?
What's next? The easiest way to visualize this is using a timeline.
Will Lennar finally turn around the negative sentiment dogging the home building sector?
The company reported a strong beat 78 cents per share on Wednesday, well above consensus of 67 cents per share. Orders were up 23 percent year over year, also above expectations. Average sales price, at $330,000, was up 14 percent from a year ago.
We will get a modest test of whether there is an "Alibaba effect" on initial public offerings (IPO) late Thursday when ReWalk Robotics prices its IPO. I say "modest" because it is a small offering: 3.4 million shares at $14–$16. ReWalk develops exoskeletons for wheelchair-bound individuals that allow them to stand and walk again.
The theory, still much debated, is whether Alibaba is such a gigantic offering that it is reducing interest in other IPOs anywhere on or near the horizon.
Energy: Lower demand and plentiful supply a perfect nightmare for energy bulls.
Today's weekly oil inventory numbers showed a huge build in oil inventories. Oil promptly dropped. Brent crude dropped below $100 and is now at a 17-month low.
We have a perfect nightmare for energy bulls: Lower demand and plentiful supply. This, despite the fact that we are only one day away from some potentially crazy development in the Mideast.
Watch shale plays. Companies like Whiting Petroleum (WLL) or Diamondback Energy (FANG) are getting hit hard this month...WLL down 10 percent, FANG down 12 percent. Why? Because oil prices matter. West Texas Intermediate is at $92, the lowest in eight months. As you start getting into the $80 range some of these shale plays don't work. These shale plays involve deep drilling, they're complicated, and they're still very expensive to drill, though less expensive than they used to be.
In addition, refiners are getting hit hard...yesterday the Brookings Institute yesterday came out in favor of removing the ban on export of oil. They noted the refiners will get hurt because West Texas Crude (WTI), currently at $91 and change, will then rise to the price of the global benchmark Brent Crude, currently at $98. Long-term, U.S. refiners will lose their cost advantages...they can buy oil at a lower price right now than, say, their European counterparts. That advantage will shrink if exports are allowed.
There's a larger problem for energy: There is not a lot of visibility on demand growth. If you can project how much economic growth there will be...if you have some certainty on what you think global GDP will be...you can create a model that will project oil demand. But without a clear viewpoint on global growth, you are a bit lost trying to figure out where oil should be.
And most investors are completely clueless about what global growth will look like.
Is there any good news? Sure. Lower oil prices is hugely supportive for an improving economy.
And it may not be such bad news for energy investors if prices stabilize. They are drilling like mad everywhere in the U.S., and I doubt that will stop any time soon. If oil prices stabilize, traders will quickly start sniffing around some of these shale plays that have dropped. Diamondback, for example, trades at a relatively reasonable 4.5 times EBITDA, according to traders. Same with Whiting Petroleum.
Reports indicate Alibaba has received enough orders to cover its entire IPO after just two days of its roadshow in New York and Boston. Given there are several more days left and other cities to visit, this would indicate enthusiasm is very high.
However, there are a few reasons to be very cautious about this. First off, with all high-demand IPOs, institutions routinely put in much more than they expect to get. And underwriters only give clients a part of the shares they ask for.
Second, covering the "book" only one time means very little. It is routine to hear about a book that is five, six, seven times oversubscribed.
Finally, there is still additional stock available. Alibaba is seeking to sell 320 million shares at $60-$66. At the high end, that would be $21.3 billion. However, as with most IPOs, there is an option to sell an additional 15 percent, known as the "greenshoe" which would boost the total sales to roughly $24.5 billion, which would be the biggest IPO of all time, outpacing the former record holder, Agricultural Bank of China, which raised $22.1 billion in 2010.
Will Alibaba increase the price or deal size? Still not clear.
Bottom line: It's a good start, but there's a long way to go.
1) Bonds are weaker, yields higher. Yesterday our Steve Liesman noted worry about the possibility the Fed may change the language promising to keep rates low for an extended period; this has again created what Greg Valliere at Potomac Research called "stock market paranoia over Fed tightening."
The same in Europe, where bond yields are up again today on concerns that the Scottish independence referendum might loosen ties in the EU and encourage similar secession movements.
We have not had a double-digit correction in the stock market since April-June of 2012. On the other hand, we are not seeing particularly robust advances. Jeff Saut at Raymond James notes that a screen of Raymond James's research universe of 1,025 stocks shows the average stock has declined by roughly 23 percent from its respective 52-week high. Many stocks which the firm rates Underperform have declined by over 40 percent.
2) RadioShack (RSH): Sinking ship? RSH will report earning tomorrow...Wedbush says bankruptcy is "imminent". They believe earnings will disappoint big time: They have a EPS loss of $0.66, versus consensus of a loss of $0.36.
"[B]rick and mortar electronics retailers will see persistent structural decline as Internet sales continue to take share," the analysts at Wedbush say.
Everyone is waiting to see what Apple will unveil at its media event on Tuesday. I say it's more about the rumored iWatch and mobile payments application than about iPhone 6. Here are a few reasons why:
a) Mobile payments are key to Apple's future. What can you do to get consumers to part with their credit cards? Digital wallet seem to have been a disappointment, but the merchant processor market is a $10 billion business.
Apple could take a big chunk of this, not directly eliminating card companies but acting as the merchant processor. That's the heart of the mobile payment process.
Scottish independence: The new worry for equities. It always amazes me that equity traders tend not to pay attention to events until they are staring them in the face.
We have known about the Scottish independence referendum for over a year, but no one has paid any attention to it.
Until now. With 10 days to the vote on independence in Scotland, my email has filled up over the weekend about the new worry over Scottish independence.
What's the problem? To be fair, traders didn't pay attention because it looked like Scottish voters would vote to stay with the UK. But over the weekend, a respected poll (YouGov) showed a slim 51 to 49 percent "Yes" vote, with those saying they were undecided excluded.
This has driven the pound down against the dollar, with UK stocks weaker.
Why the worry? There is a lot of uncertainty here:
See what I mean? Uncertainty.