Ten years after Google's IPO, CNBC's Bob Pisani says the auction was a disaster and many weren't sure what it did or how Google would fly as a listed company.» Read More
Meanwhile, U.S. markets were modestly supported by MMM, which reported in-line earnings. Operating income rose across all divisions, with sales climbing 4.9 percent. MMM is a truly global company: only 36 percent of revenues are in the U.S., while 29 percent are from Asia/Pacific and 23 percent from EMEA. Additionally, 12 percent in Latin America/Canada.
They are far more than just Post It Notes and Scotch tape—they make literally thousands of products and work in automotive, marine and aircraft. They make coated materials, filtration products, and adhesives, among other things.
The company also boasts a Health Care division that services hospitals and dental offices, and a Safety, Security and Protection Services division makes locks and other security products.
The earnings reports of Microsoft and Apple were not big market movers, but most of the large companies beat expectations, including big industrial and material names like Boeing , Dow Chemical, General Dynamics, Norfolk Southern, and Ryder.
But what about Whirlpool? They not only missed profit and revenue expectations by a wide margin, they also cut their full year forecast (they said it was partly due to customer inventory transitions in China) to levels below Wall Street's current estimates. Gross margins were also below expectations.
Why? Because they are multi-industry companies: they operate across dozens of countries (40 percent of revenues outside the U.S.) and provide products that sell to many different customers.
This week, a mother lode of second quarter earnings are due. Early results are giving Wall Street reasons to be encouraged.
Thus far, 89 companies have reported for the quarter, according to S&P Capital IQ. Earnings growth stands at 6.9 percent, an increase since the beginning of the season. Revenues have come down one-tenth of a percent since last week, now at 3.8 percent for the quarter.
Who says old school technology is dead? Has anyone notice the top performers in the Dow Jones Industrial Average in July?
Take a look:
Intel up 12.1 percent
IBM up 6.1 percent
MSFT up 5.7 percent
Cisco up 4.6 percent
Visa is also having a strong month, up over 5 percent. But you get the point: old school tech is back.
Bank results are on a roll, and it's picking up speed. On Wednesday, Bank of America's earnings were a bit light, yet they still managed to vault over Wall Street's bar. On a related note, PNC Bank, US Bancorp, and even Northern Trust were all better than expected.
With PNC and USB, we are now getting results from big regional banks. Unlike Wells Fargo, which is largely a consumer banking company, or Comerica, which is largely a commercial bank, many of the regional names are mixes of retail and corporate banking.
Federal Reserve Chair Janet Yellen's statement about "stretched valuations" is getting some play this morning, but it should come as no surprise. She is right to raise the issue.
In a report provided to Congress in conjunction with her testimony, Yellen noted that "valuation measures for the overall market in early July were generally at levels not far above their historical averages," but then made this comment: "Nevertheless, valuation metrics in some sectors do appear substantially stretched-particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year."
What smaller firms in social media and biotechnology could she be talking about? Heck, that's not hard to figure out.
I wrote about this in my Trader Talk last week.
There are several obvious culprits.
Pandora (P) at $5.5 billion market cap, is trading at 156 times forward earnings.
Groupon (GRPN), at $4.4 billion market cap, is trading at 67 times forward earnings.
Zynga (ZNGA), at a $2.8 billion market cap, is trading at 150 times forward earnings.
In biotech, most trade at multiples well north of 20. Many make no money at all.
Among smaller firms, Cubist Pharmaceuticals (CBST), with a market cap of $5.1 billion, trades at 129 times forward earnings
Alkermes (ALKS), with a $6.9 billion market cap, is trading at 96 times forward earnings.
Akorn (AKRX), with a $3.6 billion market cap, is trading at 40 times forward earnings.
It is no surprise that a couple sectors have stretched valuations. They have stretched valuations because investors believe these groups will see explosive revenue and (eventually) earnings growth, if all the potential is realized.
Of course, that usually does not happen. There will be many failures.
And, often, investors will simply run out of patience, en masse, with an entire sector.
Which is exactly what happened with the dot.com bust in 2000.
It is in the nature of all momentum stocks to have stretched valuations. At some point, they come down to earth as they stop periods of explosive earnings growth.
That's exactly what happened with famous momentum names like Microsoft (MSFT), which was the Mother of All Momentum Stocks during its period of explosive earnings growth in the mid-1990s. MSFT went from $1.4 billion in net income in its fiscal year ending in June 1995 to $9.4 billion in the period ending in June 2000.
Of course, many other names in that period never had a chance to mature. They simply ran out of capital, many without making anymoney at all.
Markets were treated to a plateful of U.S. economic data on Tuesday. As usual, the offerings were mixed: the New York Empire survey beat expectations, but June retail sales disappointed—but there was an upward revision to the prior month.
Bank of America/Merrill Lynch reportedly raised its second quarter gross domestic product (GDP) forecast to 3.2 percent to 3.6 percent on the retail sales figure.
Meanwhile, people were expecting a moderately hawkish tone from Fed Chairman Janet Yellen in her Congressional appearance.
Yellen hawkish? Forget about it! Yellen has never indicated that she would be more hawkish, and seems to have re-iterated this in a New Yorker interview. "And so even when the headwinds have diminished to the point where the economy is finally back on track and it's where we want it to be, it's still going to require an unusually accommodative monetary policy," the magazine quoted her as saying.
Weighing in on the recent battle over how stocks trade, Wall Street's major trade group is proposing changes in how exchanges pay participants and other stock trading rules.
SIFMA (Securities Industry and Financial Marketing Association) is essentially the representative for all the brokerage firms in the U.S.--everyone from Goldman Sachs to Morgan Stanley on down to the smaller firms. Its membership also includes asset managers, like Vanguard and Fidelity.
In a statement released today, SIFMA proposed:
First: Access fees charged by exchanges should be "dramatically reduced or eliminated." There's been a lot of discussion about rebates--fees exchanges pay and charge to customers to trade on their venues.
Exchanges charge an access fee when traders want to "remove" liquidity (market orders to buy or sell a stock) and provide a rebate when they "add" liquidity (post offers to buy or sell that are not immediately executable).
The complaint: A) High fees drive some traders to other trading venues (mostly dark pools) that charge lower fees or none at all, and b) the high fees have led to an explosion of order types that have made the system too complex and encouraged excessive trading.
SIFMA recommends the SEC should reduce the current maximum fee (now roughly 30 cents per hundred shares) the exchanges can charge to "remove" liquidity to no more than five cents per hundred shares.
What would this do? It would make it cheaper to trade on exchanges, and this--presumably--would drive more trading to exchanges.
This may not seem to be in the best interests of all brokerage firms, since many own dark pools that are alternative trading vehicles to the exchanges.
But on balance, I think most participants would rather see lower costs of trading trump any economic interest in a dark pool. And most of the 300 or so members of SIFMA do not own dark pools.
IntercontinentalExchange (ICE) CEO Jeff Sprecher (the owner of the NYSE) has already voiced support for reducing or eliminating rebates.
SIFMA is also recommending the SEC look into the large number of order types. Some order types may be encouraging excessive message traffic, for example.
Second: Broker-dealers should not be required to connect to trading venues that do not add substantial liquidity to the market. There are now 11 different exchanges. Several have very little volume; yet, under Reg NMS--the major SEC rule governing market structure--all brokers are required to connect to them.
This is expensive and adds a lot of complexity to the markets. SIFMA is proposing broker-dealers should not be required to connect to a trading venue with less than one percent of average daily volume in all stock trading.
Since dark pools do not publish prices, this would not include them.
What's the practical effect of this? It's likely that three or four exchanges would drop off from the requirement that all participants connect to them.
Third: Improving SIPs. All users of market data should have access to data at the same time. There has been much debate over the fact that the market data feed provided by the NYSE and NASDAQ, the SIP (Securities Information Processor), is slower than so-called "direct" feeds exchanges offer for a higher price.
SIFMA says: "Market data feeds provided by the SIPs and the direct feeds provided by the exchanges must be distributed to all users at the same time."
However, SIFMA also said it would ultimately like to see multiple processors competing on performance.
Everyone agrees the SIPs should be upgraded and made faster, yet it's not clear what the effect of perfect parity between the SIP and the "direct" fees would be.
Exchanges, for example, charge fees for participants to be near their servers, a process known as "colocation."
Would parity lower or eliminate the value of colocation? What is the value of colocation if the speeds are provided at parity?
Fourth: Regulators should require brokers to provide public reports of order routing statistics. Much debate over whether brokers--particularly discount brokers like Charles Schwab or TD Ameritrade--should be collecting payments for directing their orders to specific venues.
SIFMA is only asking for more disclosure to demonstrate payment for order flow is not violating a directive for brokers to provide the best prices available.
These recommendations may seem modest, and there are still many differences of opinion, but there is a subtle change in the market debate occurring.
For the past fifteen years, we have seen a market structure that encourages "financial innovation:" more exchanges, more dark pools and more order types.
The result: More trading, but also more spread-out trading. A more complicated market.
But we may now be moving toward a somewhat different model. The other model could be called the "utility model," where regulators, exchanges and market participants agree to limit the amount of exchanges and dark pools and order types, either because they are not as financially viable or because of complexity issues.
What happens from here? SIFMA will be meeting with policy makers--Congress and the SEC--to discuss the recommendations.
Most of these recommendations are roughly in line with comments made by SEC Chief Mary Jo White at her June 5 speech at the Sandler O'Neill conference.
Which means there will likely be some changes made some time in the near future.
Global markets are rallying, having been given a boost by a surprisingly strong earnings report from Citigroup. Overseas, Shanghai stock exchange is near a one month high, joining the market surge around the globe.
Part of the rally may be the proliferation of deals—Shire upping the bid for ABBV, Lindt's tie-up with Russell Stover, Whiting Petroleum buying Kodiak Oil & Gas, and Mylan buying assets from Abbot for over $5 billion.
The most interesting deal is Whiting offering to buy Kodiak in an all stock-transaction worth $3.8 billion, plus the assumption of $2.2 billion in debt. The marriage creates a new top producer in North Dakota's massive Bakken shale formation.
Robert Shiller's recent warning on U.S. stocks sent ripples through global markets, but one analyst says he is "dead wrong."
Stocks, bonds and housing might all be getting too expensive, Yale economist says.
Wednesday brings FOMC minutes, but Wall Street downplays the release and looks to the Jackson Hole symposium on monetary policy.