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Beyond Blue Apron, Amazon could pose a threat to future IPOs and bring down retail valuations in a big way. » Read More
Tomorrow afternoon MSCI, one of the world's largest index providers, will decide whether to include a selection of China's mainland stock market into its MSCI Indexes, which underpin some of the largest ETFs in the world, including the iShares MSCI Emerging Market ETF (EEM) and the MSCI ACWI Index ETF (ACWI).
It's a big decision: As I've said many times, indexers now rule the world. MSCI has more than $10 trillion of active and passive assets benchmarked against it, with emerging markets alone accounting for $2 trillion. Hong Kong stocks are already included, but including mainland China would increase the weighting of China stocks in the Emerging Market index from roughly 26 percent to over 40 percent with full inclusion. Acceptance of mainland China would mark a major move forward for China's domestic markets and oblige funds all over the world to invest billions in mainland China.
For free? Well, if you consider the increase in market capitalization that Amazon is seeing midday, the answer is yes.
Here's the math:
Amazon is paying $13.7 billion in cash for Whole Foods.
Amazon's stock was up $32 and change mid-morning. There are 478 million shares outstanding, so Amazon's market cap has appreciated by about $15.6 billion today.
So, you could argue, they are getting Whole Foods for free, and pocketing $1.9 billion as well.
By the way, here's the joke going around trading desks on Wall Street: "Jeff Bezos said to Alexa, 'Buy me something from Whole Foods,' and Alexa bought Whole Foods."
Instant messaging and video app Snap fell to its IPO price of $17 in what may be a warning sign for future IPOs.
Snap went public at the NYSE with great fanfare on March 2 at $17 and hit a high of $29.44 the day after. It gapped down when it reported slowing revenue growth and slowing user growth in its first earnings report as a publicly traded company on May 10.
Dropping to its IPO price is "not a good sign for future IPO activity," according to Kathleen Smith, who runs Renaissance Capital, which provides research on IPOs and runs the Renaissance Capital IPO ETF, a basket of the last 60 publicly traded IPOs.
"IPO investors are already cautious about valuations. Now they are going to be even more cautious," she told me.
Should Snap drop below its IPO price, it would not be unprecedented. Smith noted that Facebook had a chilling effect on the IPO market when it dropped below its IPO price right after it went public in 2012, though it turned around a year later.
After a promising start this year, IPO activity has again slowed. Smith said this is despite the fact that "we are in a perfect storm for IPO activity," noting that IPO after-pricing has been strong and the markets are at new highs.
Should Snap trade below its IPO price, it will be an issue for future IPOs. "It's not a good advertisement for tech unicorns" that are waiting to go public, one trader noted to me.
Next week, Altice, one of the largest broadband communications and video services providers in the United States, is set to go public by raising 46.6 million shares priced between $27 and $31, a $1.35 billion offering at the midpoint.
Others, include meal delivery service Blue Apron, are also expected to go public soon.
Stocks are poised to open to the downside, with notable weakness in technology stocks, which had been the market leader.
Two events are weighing on the markets today. First, overnight the Washington Post reported that Robert Mueller, the special counsel overseeing the investigation into Russia's role in the 2016 election, is expanding the probe to investigate whether President Trump attempted to obstruct justice.
The last time the markets had a notable drop—May 17, when the Dow dropped 373 points—came on reports that former FBI Director James Comey had written a memo implying Trump asked him to stop the investigation of former national security adviser Michael Flynn.
While the markets have learned to ignore many of President Donald Trump's tweets, it is clearly sensitive to any suggestion that the president may have engaged in behavior that could trigger a sustained investigation. Traders have allowed the Trump agenda to be pushed out, but they certainly do not believe it is dead.
The second issue for markets is the ongoing fallout from the Fed's very aggressive position on interest rates. The Fed raised rates yesterday and indicated they still expected to raise rates one more time and begin reducing its balance sheet. But inflation has been below the Fed's targets recently and other weak economic data—like retail sales—led many to believe that the Fed would acknowledge the weakness and reiterate that more rate cuts were "data dependent," as they have said many times.
But it didn't happen. The Fed pushed ahead with rate cut plans with nary a nod to the recent weakness. That hawkishness caught some by surprise.
While the markets do not appear to be reacting to the terrible attack in Alexandria, it does appear to be reacting modestly to this morning's disappointing May retail sales and Consumer Price Index (CPI) report. In addition, a smaller drawdown than expected in crude oil inventories is dropping oil stocks 1-4 percent.
Bond yields dropped to their lows for the year on the CPI report and have been weighing on banks all morning, which are down 1-2 percent.
Most retail names are down roughly 1 percent on the weaker-than-expected retail sales.
May's CPI fell 0.1 percent, with year-over-year gains now down to 1.9 percent. Core CPI — which excludes food and energy...was up 0.1 percent, also below expectations.
What happened? It appears that a number of factors were involved: rents were lower than expected, along with consumer goods prices. Gasoline prices also dropped 6.4 percent.
Not surprisingly, that drop in gasoline prices weighed on May retail sales, which fell 0.3 percent compared to April, below expectations that sales would be flat. Gas station sales were down 2.4 percent month-over-month, but electronics/appliances were also down 2.8 percent after rising 2.2 percent in April.
While this weakness is bound to raise some questions, it doesn't warrant an all-out alarm, at least not yet. In retail sales, broader trends are still clearly intact — home improvement and e-commerce is continuing to gain at the expense of department stores. Other aspects are explainable — consumer electronics sales, for example, are notoriously volatile. And April retail sales were revised upward to a 0.4 percent gain, from 0.3 percent initially reported.
The markets took another turn lower at 10:30 am ET, when the weekly oil inventory report showed a smaller than expected drawdown in crude inventories. Oil, which had been trading around $46, promptly dropped below $45. the lowest level since the end of November.
Here's the good news: After two down days on Friday and Monday, the tech sell-off has abated. As a result, the odds of a broader market correction also appear to have abated.
The bad news: The choppy economic data — and the stubborn refusal of inflation to rise toward the Fed's target...is making the Fed's job much more difficult. No one is changing opinion that the Fed will likely raise at today's meeting, but it's not clear how it will affect its future outlook.
Here's a key point to keep in mind: One of the main reasons the inflation and retail sales report were lower than expected is because oil has been dropping, and that has been affecting the inflation and sales outlook. Lower oil is good for the consumer, so we shouldn't be rooting for higher oil just to satisfy an inflation target.
Finally! We got a little volatility as someone came forward to act like the adult in the room and say, "Uh, fellahs, exactly why are all these tech stocks going parabolic on us?"
But — for the moment — it does not appear to be the start of an overall market correction.
Goldman Sachs, in a note this morning, made a simple but important point: the big tech movers recently — Facebook, Amazon, Apple, Microsoft, and Alphabet — are cyclical growth stocks. That implies they usually are more volatile than the rest of the market. But traders have treated these stocks as if they were Consumer Staples, which are traditionally low volatility stocks. That's not a good way to look at them, and Goldman cautions that looking at these stocks as stable, boring Consumer Staple-type stocks "could draw incremental flow into the stocks but can just as easily reverse."
And they are right: that's exactly what happened today. It's an important reminder, and I think the note was a factor in today's weakness. I mean, Amazon was up 30% this year, practically in a straight line. Apple was up more than 30% this year. Microsoft was up 12%, also in a straight line. Huh?
What's it mean? It means what it always means on Wall Street: when you have stocks that go parabolic it attracts a huge amount of leverage from momentum players. That begets a further rally, though much of it is unrelated to fundamentals. It's just guys piling in. Then something fundamental happens--the mildest of earnings or guidance disappointments, or someone with influence writes something that says this doesn't make much sense (thank you, Goldman), and you get a selloff that accelerates.
Why? Because the momentum guys just want to protect their short-term profits. Look at NVIDIA: up 16% for the week going into the open, it shoots up again, then suddenly around 11 AM it drops below the close yesterday. What happens? Volume suddenly accelerates and the stock goes into a free fall. It's momentum guys protecting the profits they have made in the last few days.
Is this cause for concern? For the moment, no. It's a relief. There are some signs traders are taking the money from selling these select tech names and buying less-loved sectors. You can see this in banks, where the Bank ETF (KBE) is up 2.5% on three times normal volume, and in energy, where energy ETFs (like XOP and XLE) are also seeing heavy volume.
That would be a healthy rotation. Using overbought tech stocks as a source of funds to buy under-owned bank and energy names. What a concept.
My take on today's action: This is not yet the start of an overall market correction.
The S&P is moving in a narrow 6-point range, volume is average, and the CBOE Volatility Index is once again below 10. This indicates that neither the Comey testimony, nor the British election, nor the ECB meeting (where rates were left unchanged) are rattling the markets.
However, there is notably heavy volume in Treasury ETFs across the yield curve (SHY, IEI, IEF) as yields have moved higher. This has sparked heavy volume in bank ETFs (KBE, KRE), with many regional banks up two percent or more. This may indicate some traders are abandoning using Treasuries as a hedge against a stock portfolio.
Of special note is Citigroup, which alone among the big banks has broken through to a 9-year high.
Finally, there is no rally at all in oil despite the terrible drubbing the commodity took yesterday, when it was down five percent. We are again seeing many high-profile energy stocks at 52-week lows, including Anadarko, Transocean, Devon, Marathon, and Hess.
UBS says Goldman Sachs will report earnings next year below Wall Street expectations due to its faltering trading business.
Blue Apron's stock jumps after three of its underwriters initiated coverage of the company with strong ratings.
The S&P shows a very strong and stable uptrend with no end-of-trend patterns. Daryl Guppy writes.