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Trader Talk with Bob Pisani

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  Tuesday, 8 Jul 2014 | 3:27 PM ET

Cupcakes and other momentum stocks gone bad

Posted By: Bob Pisani
JB Reed | Bloomberg | Getty Images

I awoke this morning to emails alerting me to a BIG STORY. This is one of those stories that is a METAPHOR for the broader stock market, so pay attention, you morons who don't understand metaphors.

Which would be me.

The story: Crumbs Bake Shop (CRMB)--supposedly the world's largest cupcake company--closed its doors last night after being delisted from the NASDAQ on July 1. It went public with a bang in 2010, charging $4.50 a cupcake. It rapidly expanded to 65 stores, and then discovered...anyone can make a cupcake! And sell it for less than $4.50 a pop.

Read MoreCrumbs shows dangers of focusing on single product

The stock went from $14...to $0.04.

This, I am told, is a metaphor for the rest of the market. If not that, then it's a metaphor for momentum stocks.

Beware, I am told, of getting too ga-ga about businesses that can be easily disrupted.

What? My beloved Pandora (P) is kind of like...a really expensive cupcake?

I normally laugh at these kind of mindless analogies, but really, think about it.

Biotech down. Solar stocks down! Oh my god, the market is correcting!

Calm down. Biotech and solar stocks do not represent the stock market. They represent a tiny sliver of the market: Small-cap momentum stocks. And they are not even the most important part of that market.

More important are the internet/social media stocks that are again showing signs of stress. This is the second time this has happened, after a decline in March and April.

Good. Someone is finally starting to ask some reasonable questions. Like, exactly how much are we paying for this stuff?

Pandora (P) is trading for roughly 155 times forward earnings--this when the S&P is trading at roughly 15 times forward earnings. Ten times the S&P multiple!

YELP (YELP) is at 70 times. Groupon (GRPN) is 66 times.

These are small-cap names (all $4-$6 billion in market cap) that occupy far more attention than their size would dictate is reasonable.

But even bigger cap internet/social media can have silly valuations. Netflix (NFLX) is 109 times forward earnings. Facebook (FB) is at 43 times. LinkedIn (LNKD) is at 95 times earnings.

Get the point?

We all know that much of the growth in the last year--probably half--is due to multiple expansion rather than earnings growth.

You get multiple expansion when investors believe additional value has been created in a company.

But with momentum stocks, at some point, multiples almost invariably get stupid.

And investors start to question whether they are getting this right. And that's what's happening now with a lot of the internet/social media names.

Good for them! Good for all the people who are saying, "Pandora at 155 times forward earnings? Really? Is there some way we can continue to justify this?" Maybe. Maybe not.

That's what they should be asking!

This is why I hate momentum stocks: Because most of the trading is done by guys who don't give a rat's butt about multiples, or multiple expansion...they only follow trends. And if they can make money on a stock that moves a lot, particularly in one direction, well that's what we're here for!

Until one guy in a hundred says, uh, Pandora at 155 times earnings? Really, fellas?

Then the other 99 get that deer-in-the-headlight look. Uh-oh. Are we doing something stupid?

Momentum stocks have unique problems. These stocks have a large percentage of their float held by "weak hands," traders who will cut bait and run at the first sign of trouble.

The Facebook lovers will scream at me and say, "Pisani, you idiot, we are not buying Facebook on a one-year forward multiple! We are much smarter than that! We are buying it on earnings of 2017, and even 2019!"

"Really? You believe you know what Facebook's earnings will be three years from now?"

"Yes! We have estimates! They are, uh, right here, on our Excel spreadsheet..."

Whenever I hear this, I am astonished. Because I have been a financial reporter for 24 years, and I am at least humble enough to admit I am not very certain about what will be happening in the next QUARTER, let alone what will be happening in 2017 or 2019.

No matter. There are, obviously, far more intelligent people than I who are willing to throw a lot of money at...a spreadsheet from the future. A miraculous piece of paper from 2017.

Good for them. That's what makes a market.

As for the rest of the market, we have seen a MODEST move up in earnings from a year ago and a MODEST multiple expansion. I will worry about the broader market when names and sectors that do not have stupid multiples begin to break down on heavier volume.

Until then, pass the cupcake.

»Read more
  Tuesday, 8 Jul 2014 | 10:12 AM ET

Earnings freight train may be derailed by revenue

Posted By: Bob Pisani
Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

The second quarter earnings season starts today, with Alcoa checking in after the close. According to S&P Capital IQ, we are expecting an improvement in Q2 earnings for S&P 500 components over the first quarter:

Quarter percentage

Q1: 3.4 percent

Q2 (est).: 6.6 percent

Q3 (est): 8.8 percent

The Q2 projection is a pretty hefty number. It's typical for the final number to beat by two or three percentage points, so it's possible we could see earnings growth of 8 percent or more.


»Read more
  Monday, 7 Jul 2014 | 2:48 PM ET

Deutsche Bank: ETF flows have a predictive value

Posted By: Bob Pisani
rvlsoft | iStock | Getty Images

Watching ETF flow trends as an indicator of demand for stocks and bonds.

It's an ugly truth about the stock market that past performance is not an indicator of future trends. June was up, but it doesn't say anything about July.

There's been attempts for years to look at other indicators. In the last few years, a mini-industry has grown up around mining data on ETF flows.

Recently, Deutsche Bank (DB) began publishing reports around a new methodology it calls a Tactical Asset Allocation Relative Strength Signal (TAARSS--a mouthful, I know) that is based on an analysis of ETF flow trends.

The point: Fund flows may have some predictive value, but you need to look at more than just the magnitude of the flows; you need to look at what Sebastian Mercado, DB's VP and ETF Strategist, calls flow trend formation.

What's the difference? It's one thing to say that, for example, ETFs attracted $25 billion in inflows in June.

That's interesting, but it's not clear how predictive that is of anything.

DB says it's more important to see a pattern of, say, $1 billion in inflows every day in a particular asset class, on a regular basis, than to see a choppy pattern of big inflows, followed by outflows.

When you get consistent inflows, that's a sign there is an investment demand shift for that asset class.

The key, Mercado says, is to be able to look for activity that is related to asset allocation. You want to see real investors putting money to work in a specific asset class on a regular basis. That's commitment.

That seems obvious, but a lot of flow activity has nothing to do with asset allocation. Many times, flow activity is being driven by short positions or hedging positions.

So while you might see inflows in the S&P 500 (SPY), the largest ETF, it may be because market makers are lending out the stock to short.

That's a false signal. DB's methodology eliminates some of the largest ETFs because they are often used for non-asset allocation activities.

A report published by DB last week saw the following ETF patterns in the last few weeks:

  1. Strong equity flow across all regions, but particular strength in Europe and North America;
  2. in Europe, peripheral countries like Italy and Spain have attracted stronger flows;
  3. emerging markets have seen stronger flows overall (as a percentage of assets under management) than developed markets;
  4. U.S. treasury and corporate bond inflows were negative;
  5. gold: Despite a rally in gold prices, flows remained flat.

The point of the research is that trends tend to go for multiple periods.

Has any of this been back-tested? Mercado says following this kind of flow data generates larger and more stable returns than, for example, a straight 60/40 stock allocation, or price/momentum strategies.

I'm personally somewhat skeptical about this, but I find it intriguing because it represents an additional level of sophistication over simply watching fund flows on a dollar basis.

»Read more
  Monday, 7 Jul 2014 | 9:44 AM ET

What me worry? Investors ignore hand wringing

Posted By: Bob Pisani

Last week, I noted that the best thing about the Dow Jones Industrial Average passing 17,000 was that it occurred on a day when the U.S. jobs report showed significant growth.

This would be a big help to the stock market, since the headlines would begin linking job growth with a strong market.

That's exactly what happened in the media. The Friday lead headline in the Philadelphia Inquirer screamed—in ultra-bold letters—"Jobs Soar in June; Dow Jumps." The Associated Press, which wrote the story for many smaller papers around the country, led with "Economy showing signs of vigor" and prominently noted the "Roaring Stock Market."

»Read more
  Thursday, 3 Jul 2014 | 9:51 AM ET

Paging Goldilocks: June payrolls data just right

Posted By: Bob Pisani

Goldilocks, please call your office. June's jobs report was not too strong, but as the famous porridge stealing squatter herself would say: just right.

The economy added 288,000 jobs, above expectations of 215,000 and the fifth month in a row over 200,000. The 5-month average is now 248,000 jobs. In 2013, that figure was 194,000.

Now that classifies as real jobs growth!

»Read more
  Wednesday, 2 Jul 2014 | 1:28 PM ET

Can the Fed and Janet Yellen control bubbles?

Posted By: Bob Pisani
Janet Yellen, chair of the U.S. Federal Reserve.
Getty Images
Janet Yellen, chair of the U.S. Federal Reserve.

Fed Chair Janet Yellen, in a speech at the International Monetary Fund, gave a defense of the Fed's policies and tried to answer critics who say the Fed's policies of low rates have increased the risk of financial market instability and may be leading to the creation of asset bubbles.

She made it clear she doesn't want to use interest rates to control perceived bubbles that may have or will develop. Yellen's concerned that just raising rates would be too blunt an instrument, that it would increase the volatility of inflation and employment.

She's likely right, but it's not clear her alternative will work.

Read MoreMonetary policy not best financial stability tool - Yellen

To deal with bubbles that may develop, she would rather use "macroprudential regulation."

What does that mean? It means the Fed believes it can control bubbles by regulating financial institutions and financial instruments.

How do you do that? Well, let's look at stocks. You think stocks are too high? You think a bubble maybe developing? The answer, the Fed might say, is not to raise interest rates. Instead, let's raise margin requirements!

You think exotic derivatives like collateralized loan obligations (CLO) are a problem? Don't raise rates, raise capital requirements on them. Or raise capital requirements on the banks that enable them!

On the surface, this sounds sensible. The idea is you create specific targeted actions instead of just raising rates on everyone.

The problem is, there is a certain amount of hubris in this assumption, because it is not at all clear that the Fed can control bubbles via regulation.

There's a bigger problem: It doesn't really address the root problem. Why do bubbles develop? In the case of real estate and stocks, there is certainly evidence that low rates for abnormally long periods of times are a factor in the creation of those bubbles.

»Read more
  Wednesday, 2 Jul 2014 | 9:52 AM ET

Data mixed, but US economy shows signs of life

Posted By: Bob Pisani
Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

Evidence is accumulating that the U.S. economy is improving, and that may be the biggest ally the stock market rally has.

The ADP report released on Wednesday showed the biggest jump in private payrolls since November 2012. Meanwhile, the June ISM report yesterday showed an increase in new orders, and new and existing home sales figures has been stronger as well.

Auto sales are robust. This morning ISI noted that its truckers survey, which they say has the highest correlation with GDP, ticked up to its highest level since December 2005.

Yet consumer spending is still modest, underscoring the need for more hiring. Companies are waiting for hard evidence that the economy really is improving before they will start.

»Read more
  Tuesday, 1 Jul 2014 | 11:01 AM ET

Goldman Sachs fined for dark pool violations

Posted By: Bob Pisani
Adam Jeffery | CNBC

The Financial Industry Regulatory Authority (FINRA) just announced it fined Goldman Sachs Execution & Clearing, a division of Goldman Sachs, $800,000 for failing to have policies and procedures to ensure certain clients received the best possible prices when trading in its SIGMA-X dark pool.

FINRA specifically noted that in an eight-day trading period from July 29, 2011 to August 9, 2011 there were more than 395,000 transactions executed in SIGMA-X that violated the "trade-through" rule, which requires brokers execute trades at the best possible prices, regardless of what exchange it is on. The rule requires if there's a better price quote somewhere else, it has to be routed there for execution.

Goldman, FINRA says, was unaware that it was violating the trade-through rule (also known as the Order Protection Rule) during that period, but FINRA also notes the violations were not detected "in a timely manner."

Goldman returned $1.67 million to customers it had disadvantaged in those 395,000 trade-throughs.

FINRA also said Goldman failed to maintain written policies that were designed to prevent trade-throughs and didn't do regularly surveillance to determine if its policies were effective.

Goldman, as is typical in these types of cases, did not admit nor deny the charges, but consented to the entry of FINRA's findings.

What's all this mean? 395,000 trade-throughs is not a small number; assuming 100 shares a trade, that's 40 million trades, but let's assume an average of 200 shares a trade, that's 80 million shares. While the amount returned was not huge ($1.67 million), and this occurred several years ago, it's likely to get some attention because the orders were executed through Goldman's SIGMA-X dark pool.

Is this a system-wide problem? Are there similar issues with other dark pools? Will FINRA conduct a system-wide review looking for trade-through violations?

These dark pools (there are about 45 out there) have come under scrutiny recently, particularly after NY AG Eric Schneiderman asserted that Barclays misled users of its dark pool about who was trading in the pool.

Read MoreNY AG levels serious allegations at Barclays

No such allegations are made here, but any instances where dark pools are disadvantaging clients will attract attention.

One final point: Assuming those 395,000 trade-throughs were roughly 80 million shares, it would assume that Goldman was making about two cents a share on the deal. That seems to be about average these days. Surprised Goldman isn't doing better!

»Read more
  Tuesday, 1 Jul 2014 | 9:52 AM ET

Why markets could see Santa Claus...in July!

Posted By: Bob Pisani
Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

Starting the second half of the year, there is the equivalent of a "Santa Claus rally." The market has delivered positive returns 72 percent of the time during the last two days of June and the first five days of July, according to Brooke Thackray, author of "Thackray's Seasonal Investment Guide."

Longer term, it's pretty clear what we need in the second half: more growth. Equities are pricing in a robust second half of gross domestic product (GDP) growth. Estimates are all over the place, but most traders seem to be counting on at least 3.5 percent growth for the next two quarters.

Meanwhile, U.S. economic data is still mixed. There's a gap between manufacturing numbers (which are very healthy) and other metrics (GDP, durable goods), but for the moment that market is believing the good news.

Speaking of manufacturing, China's June PMI was in line with expectations, but definitely showing improvement at 50.7, up from 49.4 in May, but the new orders components was the strongest in 15 months. Copper is at a 3-month high, as China consumes about 40 percent of the world's supply.


»Read more
  Monday, 30 Jun 2014 | 9:45 AM ET

2014 at halftime: The year of the rally

Posted By: Bob Pisani
Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

The state of play for the first half of 2014? Everything rallies!

Admittedly, it's a bit of a surprise. Look at how much major asset classes have risen since the year got underway:

Asset Percent gain

Gold 9 percent

S&P 500 6 percent

MSCI World 4 percent

Commodity ETF 4 percent

Total bond ETF 2 percent

»Read more

About Trader Talk with Bob Pisani

  • Direct from the floor of the NYSE, Trader Talk with Bob Pisani provides a dynamic look at the reasons for the day’s actions on Wall Street. If you want to go beyond the latest numbers— Bob will tell you why the market does what it does and what it means for the next day’s trading.

 

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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