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This morning, on CNBC...
CNBC's Carl Quintanilla: "Ramifications for unicorns?"
Square CEO Jack Dorsey: "I don't know."
Quintanilla: "You'll admit that you're a test, yes?"
Dorsey: "I don't know; I am not an economist. We have an economist on our board, Larry Summers, you should ask him."
Square's CEO did not want to answer my colleague's question about whether Square was a canary in the coal mine for all those "unicorns" like Snapchat, Dropbox, Pinterest, Airbnb and even Uber that may be preparing to go public in 2016.
But I'll answer the question: hell, yes!
The midpoint of the price talk for Square was $12. It priced at $9, a 25 percent discount.
If it would have opened at $8, you would have heard bodies dropping and cranes halted all across Silicon Valley. Valuations have already been cut and would have had to be slashed even more for future IPO candidates.
But it didn't. It opened at $11.20, briefly went over $14, and midday has settled between $12 and $13, up roughly 40 percent.
Talk about a sigh of relief.
So, now the inevitable question whenever there is an IPO pop: did they price it too low?
No. Pricing IPOs is an art, not a science.
In the case of Square, there were three big problems.
First, it doesn't make money, yet. No one is sure what the future earnings are going to be like. It needed an extra discount to address that uncertainty.
Second, the entire IPO market has been pressured by investors to lower prices. Square was not an exception.
Third, the bookrunners likely faced additional pressure because it was a bellweather for other unicorns. Every IPO is under pressure to launch, to go public. Square faced that pressure, but in addition, the bookrunners likely felt it was important to get some kind of pop, because if they didn't get one at the open — if it would have opened at $9, for example, right where it was priced — it's possible the stock could have quickly sold off. It then would have been a broken IPO, and the repercussions would have been enormous.
Remember, the hard part is done: going public. If they need to raise more money, they will sell more stock.
Finally, while this is good news for IPO investors, one day does not an IPO success make. Remember, Twitter closed its first day up 72%, and has since broken its IPO price many times.
Payment provider Square priced 27 million shares at $9, below the price talk of $11 to $13.
Square is far and away the more important IPO today because it is being watched as a leading indicator for other "unicorns," tech companies with heavy rounds of private fundraising that are now seeking to go public.
The company raised $243 million, 25 percent less than what they had aimed for. It had been valued at $6 billion in private financing last year, but is now worth half that: $2.9 billion.
The NYSE has become the latest exchange to announce plans to no longer accept stop orders and good-till-canceled orders, beginning Feb. 26.
A stop order is an order to buy or sell a stock when it passes a certain price. It then becomes a market order, but it may or may not execute at exactly the stop price.
If the order is "good till canceled" it remains open until an investor cancels it or a trade is executed.
It's been a surprisingly quiet trading day. After opening down 1 percent, all the European bourses recovered, with most ending in positive territory.
U.S. stocks were split at the open, with defensive names like utilities and telecom and consumer staples leading, but as oil rallied mid-morning the entire market lifted, with energy stocks taking the lead.
The CBOE Volatility Index is experiencing one of its biggest declines in a month, down about 9 percent.
I've been asked repeatedly why the markets were so quiet in light of the attack. There are several likely reasons the market did not go into panic mode:
1) Stocks were very oversold. Global markets had a terrible week, with much of Europe and the U.S. down about 3 percent, with particularly large declines in energy and retail stocks.
This morning, when the European markets opened down 1 percent but then immediately began recovering, it likely forced some participants who were short going into the weekend to cover their positions.
2) The economic impact of terrorist attacks is more muted than many expect. Prior attacks indicate that consumption is usually "postponed" rather than abandoned, so the long-term economic impact has been small.
3) The ECB is likely to be even more accommodative. Indeed, the day before the Paris attacks, ECB head Mario Draghi hinted that he may continue to buy bonds beyond autumn of 2016, when the current $1.1 trillion euro QE program is slated to end. He also said he could up the number of bond purchases per month and expand the list of bonds the ECB could buy.
4) The final possible contributor to today's muted market reaction makes me uncomfortable to even acknowledge, but it is on the minds of a good part of the trading community today: as the frequency of terrorist attacks has increased, the emotional impact is diminishing as well. We are just getting inured to these events. Look how fast even Paris is trying to get back to normal, re-opening the Eiffel Tower.
Regardless: a good argument could be made that this event is different. This is not a one-off event, this is the third event in a short period of time (following on the downing of the Russian airliner in Egypt, and the bombing of Hezollah neighborhoods in Lebanon), all claimed by ISIS.
The market's reaction to the Paris attacks have been modest, even at the open, which surprised many observers.
The pattern in the past from these events is that the market sees a short selloff. We saw this with the Russian plane that was downed and following the assault on the offices of satirical magazine Charlie Hebdo.
But then things go back to normal.
France's CAC-40, the broadest measure of the French market, gapped down one percent at the open but mid-session is down about half that. The same goes for Germany, which is down only 0.2 percent.
Luxury stocks like Hermes and LVMH are down only 1 to 2 percent. These were the subject of great speculation over the weekend because they depend partly on Asian tourists coming to Europe. CNBC's Eunice Yoon in Asia said travel agencies in the big Chinese cities have been reporting massive cancellations — in the 50 percent range — of trips to Europe for November and December since the weekend.
Still, the phrase — "This time is different" — was widely cited over the weekend. How is it different?
New 52-week lows popped up everywhere in retailers today, from department stores like Nordstrom, Kohl's and Macy's to the discounters like Wal-Mart and Dollar General to apparel chains like Urban Outfitters and Gap.
Retailers are getting clobbered today, but don't miss the key story: consumers are buying, they're just not buying at department stores and some apparel places.
This was glaringly obvious in the October retail sales report. Sales were up 1.7%, year-over-year. But there was a wide difference in where people put their money:
October retail sales (YOY)
Online up 7.1%
Auto dealers up 6.7%
Restaurants/bars up 5.5%
Furniture up 5.2%
Health/personal care up 4.6%
Building materials up 4.3%
Department stores up 0.5%
So, people are shopping more online. They're buying more cars. They're drinking and eating out more. They're buying furniture. They're buying makeup and beauty products (look at Ulta Salon, up 22% this year). They're buying stuff at Home Depot and Lowe's to improve their homes.
And department stores? Up 0.5%. Nothing.
One problem is that some of the hottest retailers — fast fashion — are not represented in the U.S. stock market. Forever 21 is private. Zara, part of Inditex, trades in Europe. Uniqlo trades in Tokyo. And the hottest fast fashion store of all — Primark — is only open in Boston and Philadelphia, with many more coming next year. Their parent, Associated British Foods, trades in London.
How bad is retail? The Street is essentially throwing in the towel on the department stores.
Look at JC Penney. By any standard, its earnings report was good: A smaller loss than expected, and it is regaining market share.
And its reward? Down 15 percent on titanic volume. I'm talking eight times normal volume.
THAT is throwing in the towel.
Why throw in the towel on a good report? Because no one cares. No one believes the department store story any more. The whole paradigm is breaking down. They've had no profits since the fourth quarter of 2011, maybe they will this quarter, maybe not, but who cares?
The initial public offering market is fizzling as 2015 comes to a close. LoanDepot became the latest company to pull its IPO, citing the dreaded "market conditions."
There is nothing wrong with the consumer loan business LoanDepot represents, but there was some debate about its valuation. The company is essentially a mortgage lender, but it trades at multiples closer to peer-to-peer lending platforms. Why was LoanDepot?
But don't kid yourself. LoanDepot was a victim of the fragile market and an IPO after-market that has lost investors money for most of this year.
And now those IPO investors are demanding lower prices to buy. LoanDepot was hoping to float 30 million shares at $16 to $18, but talk on desks yesterday was it could price at $12 and lower.
Rather than take the price, management walked.
And others have, too. Albertsons dropped its IPO, and it's unlikely Nieman Marcus or Univision — two high-profile names that have filed but not announced terms — will debut now.
It's understandable that Macy's stock is getting hit hard, down roughly 13 percent on its poor guidance, but a lot of traders are scratching their heads over the big declines in luxury names: Kate Spade, Ralph Lauren, Fossil, Michael Kors, and Coach all down 4 to 5 percent.
The simple answer is, they all sell to Macy's and other big-box retailers, and Macy's isn't the only problem.
Macy's keeps its margins up by pushing back on the vendors they buy from—they say, "We can't sell your stuff, we want a discount on the stuff we bought from you." And that's what happens: the vendors have to take a hit on the money they are going to get.
There's a double whammy: not only does Macy's get a discount on the stuff they already have, they also adjust future orders lower.
The key numbers to look at for Macy's is the spread between inventories and sales. It's getting wider, and that's not good.
It was good a year ago, but it's been deteriorating since then:
Q4 2014: Inventory down 1%, Sales up 2% (good!)
Q1: Inventory up 2.7% Sales down 0.7% (bad)
Q2: Inventory up 3.8% Sales down 2.6% (getting worse!)
Q3: Inventory up 4.6% Sales down 5% (yikes! panic!)
So now we hit Q4, and guess what's going to happen? Macy's has a huge pile of inventory it has to clear.
That's why CEO Terry Lundgren came on CNBC Wednesday morning and said, "Consumers are going to have a field day," because of the markdowns they will have to take.
And they are not alone. We may get equally bad news from Kohl's, reporting tomorrow. Sales have been sluggish as well, and inventories are also rising. They have other issues: they are losing share to JC Penney, they have no strong internet presence, and not much in the way of aspirational brands.
We all know, of course, that the consumer is not completely falling apart. They are buying stuff, they are just not buying Macy's stuff, or other retailers. They're buying homes, cars, travel and experiences (theme parks, plays, movies, sporting events), and electronic goods.
And much of what they are buying, they are buying online. Two years ago, David Berman of Durban Capital introduced the concept of "SAA" (Samsung, Apple and Amazon), that consumers are spending on devices and using those devices to buy rather than go to the mall.
It's a concept that has clearly caught on. He was on our air yesterday and noted that inventories were indeed building at traditional retailers and that internet shopping was accelerating. He noted that traditional retail sales were up about 3.1 percent in Q3, while sales of Samsung, Apple, and Amazon were up 20.8%, with total sales up about 5.2 percent. In other words, much of the incremental growth is coming from online.
"There is a complete structural change in retail," Berman noted. Another point: because people are spending less time in malls, there is less impulse buying, which was a major help to retailers.
It's not all bad news. Fast retailers like H&M, Zara's, and Forever 21 are taking market share away from the old-school retailers.
Still, Berman was not optimistic on most of the names he covers: "Earnings are going to come down more than people expect."
Stocks are experiencing their weakest day in over a month, with 6 stocks declining for every 1 advancing. The CBOE Volatility Index, up 15 to 16 percent and change, is experiencing its first double-digit gain since the end of September.
Several factors have come into play:
1) Much of the decline is attributable to continuing fallout from the strong jobs report and the increasing likelihood the Fed will raise rates in December. Interest rate sensitive groups like REITs, emerging markets and home construction are down roughly 2 percent, though utilities which were hit hard last week, are down only fractionally.
The head of the San Francisco Fed, John Williams, said over the weekend there were good reasons for the Fed to begin raising rates, though he said the data would dictate "when."
2) Stocks are relatively expensive after a six-week rally. Forward P/Es are relatively high: at current estimates of $118.62 for earnings for the S&P 500, the full-year P/E is 17.5, well above the 10-year average of 14.2, according to Factset.
For the fourth quarter, earnings expectations are also declining at a rate greater than Q3.
3) Commodity prices—particularly oil and copper—are continuing to indicate oversupply and slower global growth. Copper remains near the lowest level since 2009; oil is near the bottom of its 2-month range. Speaking of slower growth, overnight China reported that exports in October fell for the fourth consecutive month.
4) Department stores are notably weak, with many off 4 to 5 percent. They will all begin reporting this week: Macy's Wednesday, Kohl's and Nordstrom Thursday, and JC Penney Friday. Earnings estimates are coming down for the group. Citigroup lowered forecasts for Macy's and Kohl's Monday.
Where's the action? Traders on the NYSE floor—and those on sell-side desks around the city—are disappointed at the market's reaction.
The biggest jobs report surprise in years, by their reckoning, should have resulted in titanic volume—and a big pop in volatility.
Not happening. Volumes are borderline heavy, but not overwhelmingly so. The CBOE Volatility Index—the simplest measure of market volatility, is down midday, below 15.
And banks are all up 2%-4% on heavier volume.
Still, given that many were still in the "Fed will not hike this year" camp, there is some surprise there is not more money moving around.
Traders I've spoken with explain this by offering two explanations:
1) long-term investors don't act like macro hedge fund guys and shift their portfolio on a dime. Investment committees—the ones who run the pension funds and the mutual funds--do not make snap decisions on asset re-allocation in the course of a morning. Many will be meeting over the following days--and weeks--to decide if they need to make changes.
But even then, a surprising number are arguing that many will simply decide on a stay-the-course-with-equities approach:
2) The Fed is trying to project a sense of optimism about the economy from the Fed, and what's wrong with optimism about the economy?
The Fed is not changing much; global rates are going to remain low for a long time, particularly in Japan and Europe.
In the context of still-low rates today and in the near future, this is still an investable climate because a modest economic expansion is ongoing. Stock multiples-—lightly on the high side right now—should not be threatened by the Fed hiking rates. Capital flows are still moving into the U.S.
Oh sure, there could be a period of stress and turbulence when the hike occurs, but this has been so well telegraphed it's hard to envisage it would last very long.
Mostly, though, it's good to shift the focus away from liquidity and towards earnings and growth.
And that's the key point: growth continues, and there is no sign of recession. That is the ultimate killer.
Labor force growth, with GDP growth of 2% is good enough to keep the jobless rate moving down.
Most importantly, the key missing ingredient—wage growth—may be starting to move as well. Average hourly earnings up 0.4% month-over-month, 2.5% year-over-year. Don Strazheim at ISI noted this morning that once average hourly earnings start to accelerate, they typically go from 2% to 4% in roughly three years.
These numbers should at least give the FOMC some hope that their 2% inflation growth target may happen sooner rather than some time in the distant future.
Get it? That's the argument for the stay-the-course-in-stocks crowd. Oh sure, you can play around the edges—buy some more banks, sell some utilities, stay away from commodity names, but the central argument—keep owning the S&P 500—isn't changing.
It's certainly a plausible explanation for why the world isn't moving on the jobs number.
Still it's hard to believe there won't be some turbulence. One serious headwind for stocks: the continuing strength of the dollar, which is a major problem for foreign company earnings. There had been hope over the summer that the dollar strength was moderating, but that has not panned out.
The dollar index today is at its highest level since April.
This will continue to put pressure on commodities like copper and oil, and the earnings of companies in those businesses.
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