No, Alibaba doesn't actually cure cancer; however, you would think so as some traders say it's lifting stocks ahead of its IPO tomorrow.» Read More
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.
Message to markets: It's not just Ukraine.
Although Portugal's issues have been well publicized, this morning Italy said its second quarter growth contracted by 0.2 percent year-over-year, on top of an 0.1 percent decline in the first quarter —indicating the country slipped back into recession and ending the new prime minister's honeymoon.
In other words, things are a real mess again in Europe. Both Portuguese and Greek markets have swooned by more than 3 percent, and the other countries are down about one percent. The euro is languishing near a nine-month low against the dollar, in the wake of data showing German industrial orders tumbled at their steepest rate in almost three years.
It's just the continuation of an ugly trend in the past four weeks since the Ukraine crisis heated up:
With Target (TGT) down almost three percent on its lowered outlook, it's interesting none of its competitors are suffering any collateral damage. Seems like everyone believes this is a Target-specific problem, with the issue being the damage from the data breach.
But, as I pointed out this morning, there is a lot more going on here.
Consumers are still shopping, they're just finding other ways to shop. And a lot of it is online. And companies like Target are not the company people think of when they think, "online shopping."
A lot of analysts believe that is the core of the problem. David Schick, retail analyst at Stifel, believes that HALF of all retail spending growth is now occurring online. In other words, spending is happening, it's just that a lot of it is not happening in stores.
So what do retailers do? For years, they were used to three to four percent comparable-store sales growth; a lot of them aren't seeing that any more, they're seeing one percent growth.
So they have conference calls and they complain about the consumer.
But that's not completely the case...statistics indicate consumer spending growth is close to three percent...they're still spending, they're just spending elsewhere.
That's not to say that there aren't consumers hurting, or that there isn't structural employment. We know many are hurting. That's definitely a factor.
But look at Target. Look what it sells. Everything from paper towels to cleaners to sundries and fans. A lot of this falls into categories consumers can easily buy online. You can have paper towels delivered every eight weeks regularly, if you want.
Then there's the change in the way consumers buy things. Ten years ago, the consumer said, "I want to feel the sheets before I buy them." A lot of consumers (myself included) still want to feel the sheets, but a lot of consumers who grew up on the internet (millennials) want to read 10 REVIEWS that say these are the best sheets. That's a big change.
This dovetails nicely with David Berman's (of Berman Capital) argument that much of the growth in consumer spending is going to Amazon, Apple and Samsung. That may be a bit narrow, but it's directionally correct.
Portugal bailed out Banco Espirito Santo (BES), its biggest bank. Get used to seeing this.
The stock market, after dropping more than 10 percent in July, is up 1.8 percent today, leading all European bourses higher.
Over the weekend, Espirito Santo was saved by the Central Bank of Portugal, to the tune of roughly $6.5 billion, using the old "bad bank/good bank" model. BES's activity and assets will be transferred to a "good bank," called Novo Banco. Depositors and senior bondholders will not lose any money.
Another strange day, but it's becoming clearer that weakness in Europe and the Ukraine crisis is having a ripple effect.
In theory, it should have been an up day: The Jobs report was weaker than expected but not too weak and helped calm fears the Federal Reserve might raise rates sooner rather than later. The July ISM manufacturing report was quite strong.
We tried to rally right after both of those reports, but the markets went straight down late morning. Straight down into the European close, and only began to climb back after that.
A lot of people think Europe is a major problem. Companies like Adidas are now openly saying sanctions are starting to bite. If that starts to show up in earnings and profits to a great extent, it will certainly impact global growth.
The problems with Banco Espirito Santo in Portugal only add to the problems.
There are other issues, of course. You can argue no one was willing to ride to the rescue of the market on a Friday, and that may be part of it.
And then there is the endless waiting for the market correction. Plenty of people have had their finger on the trigger if they sense the possibility of the market heading in that direction. They see it everywhere: Small caps underperform! Multinationals weak today!
So far, they have been wrong. Volume is heavier today, but not as heavy as yesterday.
But there has been some damage done this week. The S&P 500 is down 2.7 percent, the worst week in two years. Dow Industrials: Also down 2.7 percent, worst week since January. Nasdaq down 2.1 percent, worst week since April.
Don't let Mobileye's (MBLY) big debut fool you--there has been a deterioration in IPO pricing recently.
True, it is a great day for the Israeli company, which priced 35.5 million shares at $25 and opened at $36. Wow.
If you just look at the basic numbers, it doesn't look bad for IPOs. Of the 176 IPOs that have priced as of yesterday, 105 (60 percent) are trading above their IPO prices, according to Renaissance Capital.
But that masks a significant deterioration.
Since July, there have been 34 IPOs priced. Of those, 12 have been biotechs (35 percent).
Only 20 percent of those biotechs are above their initial price, compared to 44 percent for non-biotech IPOs.
That is a bad trend all-around.
On top of that, several biotech IPOs have been postponed: Lantheus Holdings (LNTH) and Mapi-Pharma (MAPI) were postponed, Micro Balin (MAPI) was put on day-to-day status, and Tobira Therapeutics (TBRA), Zosano Pharma (ZSAN) and Atara Bio (ATRA) were pushed into next week.
So why are so many biotech IPOs still coming? According to Renaissance, many biotechs are getting done because the venture owners are putting new money in at the IPO price to get the company public (and mark up their portfolio investment?) and pharmaceutical acquisitions are keeping up the odds up of a potential winner.
Even after the Dow and the S&P 500 closed at new all-time highs, closely followed contrarian Marc Faber keeps sounding the alarm.
Eugene Fama, the University of Chicago investing researcher, once again warned investors against the lure of active management.
Fares Noujaim, an executive vice chairman at Bank of America has left the company abruptly.