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
Is the housing remodeling boom over? A fairly grim report from Lumber Liquidator is acting as a possible canary in the coal mine.
After the bell yesterday, Lumber, which specializes in flooring and has been a mainstay of the remodeling boom, cut second quarter guidance practically in half: to 59—61 cents versus consensus of 90 cents. Estimated revenue of $263.1 million was also well below expectations of $302.8 million. Same store sales are now expected to be down 7.1 percent, against expectations of a gain of 6.7 percent.
Wow. Those are big misses. What happened?
Here's a hint: this time, the weather wasn't to blame. In management's own words: "The improvement in customer demand we experienced beginning in mid-March did not carry into May, and June weakened further."
June same store sales tomorrow. The Container Store disaster notwithstanding, we should get strong numbers from the handful of retailers that sill report monthly sales.
Employment, housing and consumer confidence have all improved. Traffic levels appear to have improved. Weather has been good. Discounting is still strong, which will lure shoppers to stores, but could hurt margins.
RetailMetrics estimates same-store sales could jump 4.9 percent, which would be the biggest, non-Easter impacted gain since January 2013.
That would be nice! Despite all this talk about an improving economy, the retailers haven't seen any signs of it.
Wal-mart CEO Bill Simon came on our air yesterday and implied the lack of wage growth is the main problem. He's likely right; though, WMT is apparently having trouble fending off the likes of Family Dollar (FDO), which has been aggressively cutting prices. Wal-Mart has been out-Wal-Marted!
Which brings me to The Container Store (TCS), down 10 percent today to a new low on volume nearly 10 times normal.
What happened to this darling of retail analysts? Same-store sales down 0.8 percent? Traffic DOWN 2.3 percent?
CEO Kip Tindell's now famous comment, "Consistent with so many of our fellow retailers, we are experiencing a retail 'funk'" has analysts scratching their heads.
This stock was a favorite of analysts for several reasons: 1) We all have too much stuff and TCS was going to show us how to organize it, and 2) the demographic appeal is similar to Restoration Hardware (RH), i.e. on the higher end.
Morgan Stanley's analyst, Simeon Gutman, had it right: "...the 0.8% comp decline and negative traffic are disappointing for a business with such an under-penetrated growth opportunity."
So what is going on? It's unlikely that TCS' upper-end client is in a genuine funk.
Second, there is some evidence that a slower pace of household formations is hurting sales.
Third, these container products--we're talking everything from storage boxes to full closets--aren't bought very often. They are durables, not consumables, and a lot of analysts seem to have made that mistake, assuming there would be more repeat-traffic than has actually materialized.
But the big factor is TCS is being affected by the same trend to e-commerce sales all retailers are facing: Amazon is eating into everyone's business.
One thing's for sure: The company seems to be recognizing that its future lies in the upper-end consumer. TCS is planning to unveil a new line of luxury installed closets in the fall of 2014.
One thing that bugs me: Of seven analysts who cover TCS, six have a "Hold" rating, only one has a Buy rating, and NONE have changed their ratings today, even though ALL of them lowered their full-year earnings estimates, most of them by roughly 15 percent.
This, despite the fact the stock is now at a historic low of $24 and change, after going public in November at $18 a share, and OPENING at $35.
It's been a tough week for small caps stocks (not to mention the broader market), but both that sector and financials should be watched closely.
Small caps have suffered the most in the last couple days:
Russell 2000 down 3.0 percent
S&P Midcap down 1.7 percent
S&P 500 down 1.1 percent
Utilities up 0.9 percent
I would be more worried if we have continued deterioration in some large-cap banks, including regional names:
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!
These are small-cap names (all $4-$6 billion in market cap) that occupy far more attention than their size would dictate is reasonable.
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.
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:
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.
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:
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.
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."
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!
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.
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.
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.
Wall Street banks may appear to be offering higher salaries to junior employees, but the increase may not be as generous as it looks.
Investors may be warming up to the stock market, but they're taking the safe way in.
Here are the five best Wall Street movie villains of all time—and what they'd say about Yellen and the Fed if they were at Jackson Hole this week.