Market circuit breakers and electronic trading are the result of efforts to prevent another 1987-style crash. » Read More
A surging IPO from China caused a buzz on the floor of the New York Stock Exchange Wednesday. » Read More
The S&P 500 has not had a drawdown greater than 3 percent this year. Nothing at all seems to move the needle. Why is that? » Read More
Once again we wonder whether overall earnings have peaked and will decline or even go negative in the next quarter or two. » Read More
Wal-Mart trading volume was huge today, more than three times normal as investors love the emphasis on e-commerce and another massive $20 billion buyback.
You can buy a lot of Wal-Mart stock for $20 billion. It's about 8 percent of the shares outstanding at the current price, but it doesn't even come close to the biggest buybacks ever announced:
Biggest buybacks ever
Still, what's important is that Wal-Mart is part of an elite group of large-cap companies I call "buyback monsters" that have bought back huge amounts of their stock in the last decade or so. Their ranks include IBM, Microsoft, Kohl's, Target, and Boeing:
(% of shares bought back)
What does it mean? It means that these companies have dramatically boosted their earnings, not by selling more stuff, but by buying back stock. It means that all other things being equal, Wal-Mart, for example, has improved its earnings by 30 percent since 2002 just by buying back stock.
How much more can we pack on to the markets? That's the question the trading community is asking Thursday as we hit new highs in the S&P 500 for the sixth straight day ... the longest streak of record closes since 1997.
Here's the witch's brew that has been powering stocks forward:
As these elements have combined, the rally has become broader and more powerful. Thursday, the entire market was up: large caps, mid caps, small caps. Value as well as growth. High beta and low volatility. Only transports lagged. The one missing element is volume.
The main risks to the market are well known: North Korea, the appointment of a more hawkish Federal Reserve Chair (Kevin Warsh, etc.) and tax cuts failing.
But for the moment, the market is not afraid of any of these issues.
Regardless, what's clear is stocks are very overbought. How overbought? The relative strength indicator (RSI), a widely watched momentum indicator of stock movements in the last several weeks, has the Russell 2000, industrials, financials and energy sectors all with an RSI over 90. That is WAY overbought. Readings below 40 are considered oversold, anything over 70 is overbought, and over 90? Well, you are in rare territory, and it indicates the market will likely slow down.
There are other gnawing worries, like, is the reflation trade a head fake? It happened earlier this year, when the markets moved down to sideways for several months, unsure which way growth was heading. It could happen again if global growth metrics falter.
As the stock market has moved to new highs in all the major indexes, investors have turned their interest to some strange, underperforming parts of the market. The latest example: micro-cap stocks.
The iShares Micro-Cap ETF (IWC) has been around for more than a decade but has attracted little interest — until recently. And with good reason: it owns the smallest of publicly traded companies, the bottom 1,000 of the small-cap benchmark Russell 2000 index and the remaining 1,000 or so stocks that are even smaller than those in the Russell 2000.
Not pink sheets, but the very bottom of publicly traded companies. We're talking companies with typical market caps between $50 million and $300 million.
In the last one month, these micro-caps have notably outperformed the broader market, and are again at a historic high Thursday:
What's going on?
"You have a confluence of the reflation trade, rising rates and the tax cut trade," said Martin Small, U.S. head of iShares at BlackRock. "All these things are positive for small- and micro-cap stocks."
All true, particularly the rotation from large caps to small caps, but there may be other factors helping out:
Putting it into an ETF wrapper — and allowing it to be traded on platforms provided by brokerage firms — is one of the only relatively safe ways to get into these darker corners of the market.
It also makes it easier for investment advisors to get exposure, Small tells me: "If you want micro-cap exposure, it's irresponsible to do it other than through the index."
NYU Professor Scott Galloway says despite the awesome power of what he calls the Four Horsemen — Amazon, Apple, Facebook and Google — their survival isn't assured, especially given the competition they face with one another.
Galloway's new book, "The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google," out today, is no fawning tribute, criticizing the Four Horseman on taxes, privacy and jobs.
I called Galloway to ask what will happen with these four companies.
His answer: it will be a battle of the giants, with all four pitted against each other. "At least two or three now compete in each other's markets, whether it's advertising, music, books, movies, social networks, cell phones — or lately, autonomous vehicles," he said.
Will they all survive? Given the awesome power of these companies, Galloway is surprisingly reticent to say yes. The one exception may be Apple, which stands alone as a luxury brand and which presents the advantage of fatter margins and a competitive edge. Here he feels comfortable making a prediction: "Only Apple has the potential to cheat death."
Galloway says if he were advising Amazon (he's not) he would tell them they should spin off Amazon Web Services. "It would increase value and keep regulators at bay for another couple of years," he says.
Some companies might be able to challenge the internet giants. Galloway goes through the usual suspects — Alibaba, Tesla, Uber, Airbnb, even Wal-Mart — and concludes that of the big guys, Airbnb has the best shot.
He believes Airbnb's market capitalization (now $31 billion) will surpass Uber's (now $70 billion) by the end of 2018. (For the record, Amazon and Facebook are each around $500 billion in market value, while Google's parent Alphabet is around $660 billion and Apple is inching toward $800 billion.)
Still, he concludes it's going to be tough to beat the Four Horsemen. They have the advantages in products, markets, stock valuation, recruiting, and management. "That makes it unlikely they will lose their current dominance for a (human) generation or more (famous last words)," he says.
That sarcastic close is warranted: Galloway is too smart to say never: "[A]t some kitchen table or a booth at Starbucks, a start-up team,led by the next Steve Jobs, is plotting a new enterprise that could streak past the horsemen to become the first 1-T [$1 trillion] corporation," he says.
Time will tell whether the public will grow weary of the dominance of these companies, much as we admire them. Galloway thinks the recent investigation into Russian meddling in the election, with Facebook at the center, could be a turning point for the public's endless admiration.
"[W]e are barreling toward regulation," he said on our air last week. "If you notice, a lot of senators and elected officials - their backbone is stiffening around these very serious issues that some of these platforms have been weaponized to undermine our democracy...This could be a huge shift in the public and government's perception and treatment of these companies."
What's coming could at the very least be "the mother of all fines" for any or all of these companies. He thinks the big battle will be fought in the European Union, which this year fined Facebook $129 million over its takeover of WhatsApp and Google $2.7 billion over anti-trust rules.
"These countries register all of the down side, and a fraction of the upside benefits," from these companies, he told me, adding he thinks it is just the beginning. "You will see a $10 billion-plus fine come out of Europe."
Scott Galloway is one angry guy.
He's a professor at the NYU Stern School of Business, where he teaches brand strategy and digital marketing, and he's the founder of consulting firm L2. Galloway has become a bit of a media star recently on his (accurate) prediction that Amazon should consider buying Whole Foods.
You might think his new book, "The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google," out Tuesday, would be an admiring examination of how these companies came to dominate the world.
On one level, it is. He explains how the tech giants have succeeded in exerting influence over our attention, our loyalty and our personal information.
"Facebook and Google own media; Apple owns the phone; and Amazon is about to molest the entire retail ecosystem," he says.
Fair enough, but that's not really what Galloway has set out to do. Galloway is upset, really upset, at what he says these companies are getting away with: "These companies avoid taxes, invade privacy and destroy jobs to increase profits because ... they can."
He's angry that the "Four Horsemen" — as he calls them — employ only 418,000 employees, about the population of Minneapolis, but they have a combined stock market value ($2.3 trillion) that is roughly the GDP of France, a developed nation of 67 million citizens.
He's angry that these companies create growth without prosperity. He knows that many people tend to blame global trade and immigrants for our problems, but he insists the tech economy and its "fetishization" is equally to blame: "It's dangerous for our society, and it shows no signs of slowing down. It hollows out the middle class, which leads to bankrupt towns, feeds the angry politics of those who feel cheated, and underpins the rise of demagogues."
It's not just that he doesn't like what these companies are doing. He also doesn't particularly like a lot of the people who run these companies. Doubt me? Here's a sample:
On the obsession with Apple founder Steve Jobs: "Steve Jobs, in my view, spat on the universe. ... The world needs more homes with engaged parents, not a better ... phone."
On Apple's tax history: "Apple is the largest tax avoider in the history of U.S. business."
On the parallels between Google and Microsoft: "Microsoft at its peak was notorious for having the most insufferable a------ employees in American business."
On why rich people are easier to sell to because they're all basically alike: "Rich people are more homogenous than any other cohort on Earth. ... The global elite, by contrast, is a rainbow of the same damn color."
On what Amazon CEO Jeff Bezos should really be doing with his company: "What's clear is that we need business leaders who envision, and enact, a future with more jobs — not billionaires who want the government to fund, with taxes they avoid, social programs for people to sit on their couches and watch Netflix all day."
Gee, thanks Scott. What is this? New Progressive? Intellectual Populism? Old-fashioned trust busting? Trump-era name calling?
Amazon declined comment on Galloway's book. Apple did not immediately return a call for comment.
In a phone interview, Galloway describes himself as an "irreverent progressive," telling me, "I'm a capitalist, but I'm smart enough to realize that idolatry of these firms are not going to take care of us when we are old. They are just here to make a profit. "
And what's wrong with that? Nothing, he insists, but then goes on: "We reward them with characteristics associated with kindness and generosity," none of which is true, he says. "They are being given the mother of all hall passes. We think these companies are progressive, when their behavior is more like Darth Vader crossed with Ayn Rand."
Galloway is seizing on a new zeitgeist that is starting to emerge, a new narrative about these companies, one that switches from gushing admiration to a more critical viewpoint of their impact on the rest of the world, what exactly we have all given up to them, and what we have really received in return.
Do they deserve such criticism? Galloway argues that their sheer size and influence demands that we be more critical toward them. Let's just focus on Amazon for the moment. He is amazed at:
1) The trust Amazon's consumer shows toward Amazon: "Amazon's customers trust it so much that they're allowing the company to listen in on their conversations and harvest their consumption data. This will give Amazon deeper penetration into the private lives and desires of consumers than any other company."
2) The way Wall Street gives a pass to Amazon: "Amazon has trained the Street to hold them to a different standard — to expect higher growth but lower profits."
3) The stunning success of Amazon Prime: "Prime members represent recurring revenue, loyalty and annual purchases that are 40 percent greater than non-Prime members."
4) How Amazon has made shipping the pillar of its success: "In 2015, Amazon spent $7 billion on shipping fees, a net shipping loss of $5 billion, and overall profits of $2.4 billion. Crazy, no?"
Not crazy, of course. A critical key to Amazon's success was the development of the world's most efficient physical distribution network. Lower costs, greater selection, faster delivery. Get to more and more households in less and less time.
Galloway's conclusion: Amazon is on a path to a trillion-dollar market cap (currently at $460 billion), through a combination of acquisitions, a further push into the last-mile delivery chain and opening more stores. Galloway spends considerable time explaining this oddity, why Amazon, the store killer, will expand into bricks and mortar: "Because e-commerce doesn't work, isn't economically viable, and no pure e-commerce firm will survive long term."
What's Amazon's next move? Galloway got considerable buzz a short while ago when he suggested that Nordstrom would be a logical acquisition (they are in talks to go private). But he suggests they are so big they could buy almost anything: "My bet is Amazon buys the rights to broadcast March Madness or the Super Bowl to juice their Prime membership ... as they can."
The real move to get them to a $1 trillion market cap, Galloway predicts, will be in artificial intelligence: "If Amazon tests an AI-like offering anticipating all your retail needs — sending stuff automatically and calibrating based on what you send back or edit via voice ... the stock will become antigravity matter and triple to a trillion dollars in value."
What about the competition? Is it all over for retail? No, Galloway says. He cites a small group of innovators — Sephora, Home Depot, Best Buy — that are investing in people and a strong in-store experience.
September saw the reflation trade come roaring back, and it's likely to have legs in the fourth quarter.
By "reflation" I mean expansion, as in expanding economies, not necessarily inflation.
Bulls are betting that the combination of slow but persistent global growth and prospects for tax cuts in the U.S. will keep the markets at or near record highs in the fourth quarter.
In September, we saw firmer global inflation readings, higher bond yields, higher oil, a turnaround in the dollar, central bankers talking more hawkishly, and -- the cherry on top -- prospects for tax cuts in the U.S.
U.S. stock indexes hit record highs; stock markets in Japan and China hit 52-week highs. Hong Kong's market hit two-year highs.
What's driving the turnaround, and will it continue into the fourth quarter?
First and foremost, the global economy is continuing to expand. This has been a good year, and growth will continue into 2018, even if it is not quite as strong in every part of the world.
The OECD, in its quarterly assessment of the global economy last week, noted that industrial production and trade was picking up, and there was a further acceleration in the rebound of tech spending. In the U.S., they expect growth to be supported by stronger consumer spending and business investment.
The OECD raised global growth projections for 2018 to 3.7 percent (from a prior 3.6 percent estimate in June). They kept current estimates the same for the U.S. and slightly lowered it for India, while raising them for Japan, China, and the Euro area.
2018 Growth Projections
Global: up 3.7 percent
U.S. up 2.4 percent
Euro area: up 1.9 percent
China: up 6.6 percent
India: up 7.2 percent
Japan: up 1.2 percent
These stronger economic numbers are showing up in the U.S. stock market, as sectors associated with growth outperformed the S&P 500 in September:
Reflation trade: sectors (Sept.)
Energy up 9.8 percent
Banks up 7.5 percent
Materials up 3.3 percent
Industrials up 3.6 percent
S&P 500 up 1.5 percent
That reflation trade is expected to continue into the fourth quarter, with double-digit earnings growth expected in industrials and materials, and energy expected to continue to rally as well.
Hurricanes Harvey, Irma and Maria had a modestly negative impact on earnings for several companies in the third quarter (airlines and retailers in particular), but the reconstruction efforts may bring a boost to some sectors (materials, autos) in the fourth quarter. More on that here.
Aside from the global growth story, two other issues will determine the fate of stocks in the fourth quarter.
1. The prospects for tax cuts have been a notable influence on stocks in the second half of the month, with the Russell 2000 notably outperforming, since small caps would greatly benefit from tax cuts. More on tax cuts and stocks here.
2. Technology has far and away led the market this year, with gains of roughly 25 percent. However, not all tech is created equal. The Street is continuing to bet on the massive expansion of the semiconductor business, so analysts are expecting the semiconductors & semiconductor equipment subsector earnings to be up 25.7 percent in the fourth quarter, according to Thomson Reuters, with big growth from Micron, and strong growth from Nvidia, Analog Devices, Applied Materials, Lam Research, Broadcomm, and AMD.
There are also very large bets on IT Services companies with strong growth expected from Mastercard, Visa, and Paypal, for example. That subsector is expected to see earnings growth of 11.9 percent.
One big wildcard: Apple, whose earnings are expected to grow 12 percent in the fourth quarter, but the stock slid 6 percent in September as doubts grew about how many people would be buying the new Apple iPhone 8 and X
Speaking of wildcards, the two major risks to the market are North Korea and the Fed. The market has fluttered — and recovered — every time there has been some kind of ratcheting up in tensions between North Korea and the U.S. And the market reacts to the Fed's handling of its own balance sheet reduction and decisions on rate hikes.
It will be the end of a 17-year run at the helm of Amex, and a 37-year career with the company.
Investment newsletter author Paul Brodsky said he will help a major digital assets fund open its New York office at the beginning of November.
Wells Fargo CEO Tim Sloan predicted the scandal-ridden bank will achieve the growth it had lost during its fake-accounts scandal.