The Dow went up 2 percent in the last 45 minutes Thursday. THAT is ridiculous.» Read More
Another heartbreaker for energy stock traders.
It had been a very promising week: for the first time since April, energy stocks were in a modest uptrend, though oil itself sat at the lows, with no sign of a bounce.
OK, the uptrend was only for about four days, but it was the first uptrend of ANY kind since April. Since then the Energy Select ETF, a basket of all the large energy names, has gone straight down almost every day, dropping about 20 percent in three months.
What happened today? Investors made the same mistake they made several times this year: they tried to buy oil stocks ahead of a recovery in oil.
It is, unfortunately, the wrong trade: oil leads oil stocks, not the other way around.
And so, when oil hit another new low at the open today, you could just about hear a giant "whoosh" of sell orders sweep the floor as investors once again threw in the towel on energy.
Not surprisingly, there are more "capitulation" notes out. Oppenheimer's Fadel Gheit said in a note to clients this morning that the "new normal" in oil would be $65-$75 in the recovery. When will that weak recovery happen? Everyone has already given up on the "V" recovery, and most are now throwing in the towel on the "U" recovery.
Instead, Gheit said, there will be a "bathtub" recovery: lower for longer. Like, into 2016.
And, he added, expect layoffs. Lots of them. The energy industry added about 500,000 jobs in the last seven or eight years; a good chunk of them are in jeopardy.
Where does this leave energy stocks? The big guys can weather a downturn, the smaller guys cannot, so now it is a war of attrition.
Look what happened today: driller Hercules Offshore filed a prepackaged bankruptcy plan prior to the open, though the stock was already in freefall for two months.
The bulls point out that the oil majors have juicy dividend yields (4 to 6 percent) and they have all pledged not to cut the dividends.
Bears say, oh sure. They're safe for 2015, but if oil stays down here into 2016, forget about it. Remember the banks said they would never cut their dividends back in early 2008?
How'd that work out for everyone? Same thing here.
And remember, it's one thing for Conoco and ExxonMobil to say their dividend is safe, but the smaller exploration and production guys, and the drillers, don't have the cash flow to keep those dividends going. Ensco, Transocean, and Seadrill have already cut the dividend. Chesapeake eliminated the dividend completely.
Kohl's is emblematic of the problem with retailers: shifting consumer tastes with no clear path to revenue growth.
The company missed earnings expectations, and said full-year earnings would be at the low range of the previous guidance of $4.40 to $4.60.
This, after a disappointing report from Macy's.
It's not looking great for department stores.
This problem did not appear in the second quarter, however. The simple fact is that retailers cannot get any revenue growth. Look at Kohl's revenue for the last few years.
Kohl's Annual Revenue (billions)
That's $19 billion a year. For five years. Zero revenue growth. Nada.
Modest growth in earnings is coming from buybacks and constant cost-cutting.
Two large retailers reported in the last 24 hours, and the only good news is you can't blame much of the bad news on China or Brazil.
But they tried.
In the case of Macy's, in theory, you can't blame it at all on China. It is one of the very few U.S. companies that gets 100 percent of their sales in the United States.
I said 100 percent in the U.S.A. Not China. Not Canada. Not Europe. Not Brazil. That's 100 percent in the U.S.A.
Still, Macy's tried to blame much of its disappointing results on China, though indirectly. Second-quarter results were expected to be poor, but they were even worse than expected. Comparable-store sales were down 1.5 percent.
CEO Terry Lundgren said "the strong U.S. dollar has led to significantly lower international tourist spending."
That's right. Even with 100 percent of the sales in the U.S., the retailer got hit because the Chinese and Brazilians weren't coming to New York to shop.
Seriously. Macy's blames it on Chinese and Brazilian tourists, and the port strike, and weak spending in apparel in general.
Macy's held full-year guidance flat at $4.70 to $4.80 a share. Consensus is $4.63 a share, though there is a gain on the sale of a Brooklyn store. Excluding that sale, guidance is lower, some estimate by $0.45 a share.
A lot of people are fond of asking, "What does China have to do with us? We should be fine if we just invest in U.S. companies."
Today's action is a very clear lesson on how intertwined the global economy—and global investing—has become.
It's not just that commodities are down, and the commodity stocks are down with them.
It's a lot more complicated than that.
China is a significant part of the revenue for many global companies.
And for a few, such as casino owner Wynn Resorts, fast-food restaurateur Yum Brands, and several big semiconductor companies like Broadcom, Qualcom, and Micron, the revenues from China are half or more of their businesses:
China revenue exposure:
Wynn Resorts 70%
Yum Brands 52%
Many auto companies get significant revenue from China, particularly German automakers like BMW (which already spoke of weak German demand) and Daimler and Volkswagen, which is why the German market is weak today. U.S. car makers have smaller exposure.
China auto exposure
Finally, one of my favorite sectors—globally diversified industrials—also have some of the larger names with significant exposure to China:
Industrials China exposure
Dow Chemical 11%
Johnson Controls 6%
Ingersoll Rand 6%
Finally, Apple gets 16% of its revenues from China. While this is small compared to the 38% in revenues it gets from the U.S., China is a fast-growing market: revenues from China are up nearly 11% year-over-year, while they are down 2.7% in the U.S.
And that's an important point: for many companies, China was an expected revenue growth driver. Dow Chemical's China revenues were up almost 8% year over year, same with 3M.
But now the bubble is bursting, and China is not going to be a revenue growth driver. That puts even more pressure on the U.S. and Europe to make up the difference.
China has devalued its currency by 1.9 percent in a clear effort to help out exports. You can't blame them. Exports were down more than 8 percent in the most recently released (July) figures compared to the same period a year ago.
But wait a minute. Wasn't China supposed to be moving away from an emphasis on exports, and concentrating on developing the consumer market? This seems to be an acknowledgement that strategy is not working so well.
It's not even clear that devaluing the yuan 1.9 percent will make much of a difference in exports. Marc Chandler at Brown Brothers Harriman summed up the feelings of many, "[T]oday's depreciation is unlikely to have a perceptible impact on the competitiveness of China's exports."
So what are the Chinese trying to do? The purpose seems to be to introduce more market liberalization measures. This would be in line with one of the Chinese government's main objectives: to make the yuan a reserve currency. Does this help them achieve that goal? Making the yuan more market-based probably does help that cause.
There has been a clear impact on commodities, with U.S. benchmark West Texas Intermediate crude down 2.5 percent, copper down 3.3 percent, aluminum down 2.5 percent and most emerging market bourses down 1 to 2 percent.
Export-led economies like Germany are also weak Tuesday. Carmakers there are down.
The final issue: Will this ignite a currency war? There's no agreement on this, but it's hard to believe that other central banks—particularly in Asia—will not take some action to offset the impact. However, the currencies of most emerging markets are already weak against the dollar. You could argue this is China catching up.
One thing is for sure. This is not over. This will almost certainly be the start of a series of additional measures to stimulate the economy in China, including cutting interest rates.
Will this have any impact on the timing of the Fed's expected rate hike? Given that the U.S. central bank's mandate is job creation and watching inflation, it would seem not to be a major factor in its thinking. However, Treasury yields are down Tuesday morning.
What's with this sudden surge of interest in marketing health and fitness to millennials?
I know, it's been around for a while, but it seems to be picking up steam. Last week, we had Amplify and Planet Fitness, but there's a lot more likely IPOs likely on the way for the fall that want to get in on this trend.
This trend has not peaked yet.
When you are marketing these products to millennials, there are a few principles that these companies have in common, whether you are selling popcorn...or gym memberships...or high-end food for your dog...or diapers:
1) Establish an emotional connection with the brand; what the customers want is a relationship to the product. There's a lot that goes into the name of the product, and how you are supposed to feel about it.
2) Emphasize the products are "Better For You" (BFY) or at least "less bad"
3) Digital first: it's cooler, cheaper, easier
4) The company is on your side, doing the right thing, socially engaged and responsible.
Let's look at this by category. In fitness technology, Fitbit has taken off since its June IPO, but rival Jawbone is a strong IPO candidate for the fall. Millennials love tracking their health data.
Even the crowded gym business is seeing action. Planet Fitness, after a slow start on its IPO Thursday, has been strong for the past two days. It better not rest on its laurels: uber-cycling firm SoulCycle is likely to go public in early September. This is another company with a cult following around the instructors--a "rave on bikes" as one participant described it—and prices to match: $40 or so per session, roughly $1 per minute. Cycle that!
The whole "better-for-you" (BFY) category is also exploding. I wrote last week about the appeal of popcorn maker Amplify, which created a company with a roughly $1 billion market cap, largely around a catchy name (SkinnyPop) and the perception that their product was "less bad" for you.
Blue Buffalo, which sells natural pet care food, has also mined this same space successfully. They went public July 20 at $20, well above the price talk of $16 to $18, and is currently in the $27 range, with a $5.4 billion market capitalization.
Coming next: a possible IPO of Chobani, the Greek yogurt company.
Greek yogurt? Do we really need another yogurt company? Isn't there enough yogurt in the world, with Danone and General Mill's Yoplait dominating the market?
But that's the whole point of these businesses...they find a small niche and then move in. In this case, it's "Greek" yogurt, which is more difficult to make than the usual yogurt, and is being cleverly marketed as "better-for-you." That is enough to give Chobani an estimated $1 billion in sales last year.
Millennials also are looking for new approaches to health care.. Teladoc, which also went public in July at $19, well above the price talk of $15-$17, and is trading around $30, provides phone and online medical consultation services in an effort to reduce doctor visits.
There you go again. Millennials have no problem doing business over the Internet.
Speaking of the internet, another likely IPO candidate is uber-hip eyeglass maker Warby Parker.
But wait, isn't the eyeglass business dominated by giants like Luxottica, which owns Rayban, LensCrafter, and Pearle Vision?
Yes, but once again they found the right niche, in this case with a series of vintage-style frames, mostly sold online to millennials, for $95, with free shipping and free returns. And they donate one pair of glasses for every one they sell!
There have already been several rounds of funding, with investments from American Express and Mickey Drexler, among others. The market cap is already roughly $1.2 billion.
This touchy-feely stuff, essentially an exercise in consumer branding, might be merely amusing if it hasn't been so successful recently.
In the case of Amplify, it's about selling the "natural" food trend. SkinnyPop is about a cute name and the claim they are taking out stuff that is not good for you like GMO ingredients and allergens.
Likely coming soon is Honest Company, Jessica Alba's non-toxic baby and cleaning products company, which like Warby Parker has already gone through multiple rounds of funding and likely has a market cap north of $1 billion, despite recent controversy about the effectiveness of the company's sunscreen product.
In restaurant, there's a whole new sub-category: "fresh" fast casual. Shake Shack was the groundbreaker, claiming to make a "better for you" (there's that word again) burger that is antibiotic-free.
On the horizon are several other competitors, like Smashburger, and Pret A Manger, a British company that claims to make a "better" sandwich, with all-natural ingredients, made on the same day. Any food leftover is collected by charities (naturally).
These companies have already proven that it is possible to break into previously closed ecosystems. What is harder is fending off the competition.
Amplify's biggest competitor, for example, is Frito-Lay (gads), which already has a competing popcorn product (SmartFood) that they are aggressively marketing and which already has a larger market share than SkinnyPop.
And Danone is not sitting still waiting for Chobani to eat their, er, yogurt. They also now have a "Greek" yogurt line.
Which begs the question: will any of these hip companies, those that have IPO'd and those still waiting, survive, or will they just be gobbled up?
It will probably be a little bit of both. There will be managerial missteps, some companies will break their trust with their customers and fade away, some will simply be displaced themselves by even more nimble competitors.
It's difficult to pick the winners. One thing is clear: first movers often have the advantage. Which is why you are seeing this big move.
The mainland Chinese stock market rallied Monday, clocking its best gains in five months, despite dismal economic news.
It's pretty simple. The Hong Kong market reacts to economic news. The mainland China market reacts to news and rumors of additional stimulus.
The economic news was uniformly disappointing. The producer price Index, an indicator of inflation—and demand for goods at the wholesale level—hit a better than five-year low.
On trade, exports were down 8.3 percent in July compared to the same period a year ago, while imports were down 8.1 percent, now down nine months in a row.
But the Shanghai and Shenzhen markets rallied, largely on speculation even more stimulus would be coming.
They're probably right. A number of reports have suggested the government would be getting even more involved in owning stocks. Apparently the government will be creating at least two additional sovereign wealth funds that will buy state-owned enterprises (SOEs) and use their ownership to improve their financials.
Amplify and the better-for-you business: it's not about the popcorn.
As a middle-aged guy I was a bit mystified by Amplify, which went public today with a market cap of almost $1.1 billion.
This is a popcorn company. They have a hugely popular brand called SkinnyPop, which apparently every millennial woman in America is familiar with.
But $1.1 billion? For a popcorn company? Not bad, considering the company bought SkinnyPop only a year ago for $320 million.
But then I looked a little more carefully at the product, and spent a few minutes with Amplify's CEO, Tom Ennis, on the NYSE floor today while waiting for the stock to begin trading. He was on our air as well.
And I started to get it.
It's not really about the popcorn. Of course, the popcorn matters, but it's really more about the branding and the relationship of the customer to the product.
It's a lot about the name of the product, and how you feel about it.
Sound touchy-feely? It sure is, but it works.
Simply put, it's about consumer branding. It's not about what you have, it's about how you deliver it.
It's about upselling the "natural" trend, or, as it is now known, the "better for you" market.
In the case of SkinnyPop, it's about a cute name and the claim they are taking out the stuff that is not good for you (GMO ingredients, allergens).
Ennis was VP of Marketing at Maggiano's, a Brinker restaurant chain, from 2005 to 2007, but got noticed when he became VP of Marketing and then CEO of Oberto Brands in 2007. There, he made his mark transitioning a beef jerky product to a BFY brand.
Beef jerky that's good for you, or at least, less bad? That's what I mean. Perception. Marketing. Less bad.
Like many modern companies, Amplify doesn't own any manufacturing facilities: they outsource 100% of the manufacturing to third parties.
Ennis isn't the only one working the BFY space. Blue Buffalo, for example, is already working the BFY pet food space. Hain Celestial has been in the organic and natural space for years and has been a strong performer.
And it's been working, so far. The U.S. salty snack segment is expected to grow 2 to 4 percent annually through 2019, according to Renaissance Capital, the IPO specialists who run the Renaissance Capital IPO ETF. But the BFY-segment grew 10% just in 2014.
That kind of growth gets noticed.
And that's the big problem: this is a highly competitive space that can easily be penetrated by larger competitors. SkinnyPop, for example, has 18 percent of the market share in the ready-to-eat (read: it comes in a bag) popcorn segment, but that is second to SmartFood, which has 20 percent share and is owned by...Frito-Lay. Gads.
Ennis isn't stopping with popcorn. He recently acquired Paqui, a tortilla chip brand, for $12 million in April. They expect to re-launch it nationally as a BFY in the beginning of next year.
Expect more of the same from other products, like pretzels.
Get it? Use the SkinnyPop infrastructure and marketing savvy to launch other products.
But that's another problem: it's not at all clear that their brand expansion strategy will succeed with other products. For the moment, they are almost completely reliant on SkinnyPop. Year-over-year growth decelerated to about 33 percent (preliminary) in the second quarter from 72 percent in the first quarter, according to Renaissance.
Still, you've got to admire how far they have come, given the giants they have to compete against. Anyone who thinks there is no room for innovation in the slow-growing food business should pay attention to the approach of a company like this one.
Apple is in rare territory, now almost 10 percent below its 50-day moving average, a 3.5 standard deviation (SD) move.
That is very rare territory. It has only been in this range seven times, or 0.1 percent of all trading days since 1990, according to our partners at Kensho.
In each of the seven times the next move has been higher, reverting to its mean. The average time before moving higher over those seven times was 1.9 days.
Read MoreApple stock implosion shreds $113.4B
Here are the times it was trading in a range of 3.25 to 3.50 SD's below the 50-day moving average:
Bank of America's downgrade of Apple today (on deceleration of iPhone) may put even more pressure on the stock, but the point is, it is due for a bounce.
For those looking for a statistics primer: One standard deviation means there is a 68.2 percent chance it will stay within a given range from the mean, in this case the 50-day moving average.
Two standard deviations means there is a 95 percent chance it will be within a given range; three standard deviations means it is 99.7 percent within a given range, and when you get toward four standard deviations...well, it doesn't happen very often, and that's what gets quants and other statistical types to sit up and take notice.
You knew this was going to happen. The world's most well-known tech name—Apple, is in a short-term downtrend. No one knows if it will be the start of a long-term downtrend.
But someone writes a story, "How a deeper dive by Apple could crush this market," implying that as goes Apple, so goes the stock market, and it gets a lot of attention.
Apple is an important stock because, well, because it gets a lot of attention.
But it is not a bell weather of the overall market.
Chatter about what the Fed's next steps will be has shifted from when it will hike to when it will offer stimulus.
For years, Piper Jaffray has been one of the biggest bulls on Wall Street, and with good reason.
Mohamed El-Erian said Monday stocks must fall much further before investors can be coaxed back into the market.