NYSE's 'The Chief' James Maguire Sr. has died at age 86. Warren Buffett called him "the world's greatest specialist." » Read More
Some troubling signs are emerging for the stock market, including a succession of selloffs. » Read More
Retailers are facing "revenue cliffs" and margin compression this year, and it's not clear to investors where the bottom is. » Read More
The call is based partly on complacency, partly on the time of year, and partly on what he sees are disturbing trends in other asset classes:
"While global equity trends remain strong and prices near record highs; volatility is at the lows; the put/call hit its lowest level of the year; and crude, the dollar, yields and inflation expectations continue to collapse as we enter a period of thinner trade, heightened volatility and typically weaker equity returns," wrote the analyst.
What's most shocking in his new report is the analysis about the sector Ross believes will lead the downturn.
The analyst notes an eerie similarity between trading on the main Philadelphia Semiconductor Sector index (known as "the SOX") and Bitcoin, and indeed the charts do show a remarkable similarity this year, rising modestly from mid-January to mid-March, and taking off in mid-April.
"I reiterate my sell call on Semi's and continue to see a test of 1,000 on the SOX (-8 percent) as the group continues to display the textbook signs of a reversal in trend and a technical symmetry with Bitcoin, which is down -9% overnight and poised for another -17% to 2,044," Ross wrote.
SOX index (black line) vs. Bitcoin (bar chart)
Source: Evercore ISI
He's not completely negative on the whole market. He has an aggressive call to buy biotech and sell semiconductors against them.
It's summer, and trading is light, but here's something that might perk your interest: Friday is usually the heaviest volume day of the year.
It's the annual Russell Reconstitution, the day when the Russell indexes are rebalanced. There's $8.5 trillion in asset benchmarked to or invested in products based on the Russell U.S. indexes.
Why is this important? Indexes rule the world because passive investing rules the world, and these indexes determine what go into many mutual funds and many ETFs.
The main interest is to look at stocks that are going into or out of the large-cap Russell 1000, and into or out of the small-cap Russell 2000. Both are market-cap weighted indexes. Passive investors tied to these indexes will have to buy or sell these stocks depending on how the stocks have performed in the last year.
The largest 1,000 by market cap go into the Russell 1000. The remaining roughly 2,000 go into the Russell 2000. The breakpoint — the dividing line between the Russell 1000 and the Russell 2000 — is about $3.4 billion.
How the mighty have fallen. This is where it gets a little fun — traders get to see who gets kicked out of the Russell 1000, and who has risen into the Russell 1000 from the Russell 2000.
Let's start with the losers, because, well, there's a morbid sport in looking at once-mighty companies that have seen better days.
No surprise, there's some big retail names that are being given the boot: JC Penney, which is down to a mere $1.4 billion market cap, and Dillard's, which is down to $1.5 billion, are both getting kicked out of the Russell 1000. Some former internet/tech darlings are also getting the boot: Groupon, Yelp and Fitbit.
Finally, it's been a mess for oil companies, and plenty of names are getting tossed: Diamond Offshore, Noble, Ensco, Rown, Penn Virginia.
Steve DeSanctis, SMID-Cap Strategist for Jefferies, notes that the Russell 2000 has traditionally hosted companies on the way up, and then on the way down: "That's one of the problems with the Russell 2000: You do get a heavy dose of companies that are well past their prime, companies that have to reinvent themselves after being a great company."
Then there's the other way around: small companies that are knocking the cover off the ball, and graduating to the Russell 1000.
The best example is AMD, which has had quite a year, going from roughly $5 to $14 in the last 12 months, and adding more shares to boot. "AMD was an also-ran years ago, but reinvented themselves and now they compete with companies like NVIDIA," DeSanctis told me.
So will there be any price action? DeSanctis notes that stocks going from the Russell 1000 to the Russell 2000 often outperform short-term. Why? Because those stocks are going from being a small fish (a small market cap) in a big pond (the Russell 1000) to a bigger fish in a smaller pond (the Russell 2000). They will gain a larger market weight in the Russell 2000, which will force indexers to buy them, often resulting in a bump up in price.
But DeSanctis cautions that this is not an infallible rule. It hasn't happened this year in Energy stocks getting demoted, for an obvious reason: Energy stocks are so out of favor with investors that it is overwhelming any indexer that would buy them. "It doesn't matter what passive guy has to buy these stocks," DeSanctis said. "With oil down so much, these stocks are going to be down even more."
Regardless, one big winner tomorrow will be traders. NYSE volume last year was 6.9 billion shares, more than twice normal volume. That was also the day of Brexit!
Oil took another tumble midday Wednesday, below $43 a barrel, and regardless of the reason we are finally starting to see analysts on the Street throw in the towel and begin to take down 2017 earnings estimates.
The problem is simple: many analysts and strategists are still forecasting average oil prices of $60 this year. It is now abundantly clear that is not going to happen.
So it's about time estimates started coming down. Today a raft of companies dropped ratings on oil companies:
The big issue is, when will supply come in line with demand? More specifically, when will the U.S. shale producers blink? The prices at which companies break even on oil production varies greatly. Guys in the Permian basin can certainly make money at $45. Below that, the air gets more rarefied. Below $40, a lot of these guys are not going to make money.
Will this finally be the event that causes the shale producers to cut production? Maybe, but don't bet on it, at least not yet. One thing that has amazed me about the shale guys: If they have the money, they're going to spend it. They are not particularly good stewards of capital.
Piper Jaffray said they see no signs of a shutdown yet: "Overall, the mood from our E&P contacts was somewhat more reassuring, although not uniform, while our oil service contacts are nervous, though none have experienced any pullback in activity and none have been notified of potential equipment releases."
Stifel notes that we can expect significant reduction in the rig count (currently 747 rigs) once oil gets to $40 and below: at $40 a barrel, they estimate the industry would need to reduce rig counts by 200 to balance cash flows.
Seems like below $40 might be the magic shake-out level.
It's a big move: MSCI controls the indexes behind some of the biggest exchange-traded funds (ETFs) in the world, including the MSCI Emerging Markets ETF. Since the whole world is moving toward ETFs and passive investing, what goes in these indexes is what investors will be owning in the future.
The company is smartly holding out a carrot to the Chinese regulators: Do more to open up your markets, and we will include more of your stocks. That's a big carrot: Chinese authorities desperately want their markets to be more widely owned outside the country.
Here's the key points:
1) MSCI will take 222 of the biggest names in their MSCI China A International Index (out of 448), and include them in their relevant global indexes in the middle of next year. These are the largest and most liquid names in the China mainland market.
2) Rather than giving a 100 percent market capitalization weighting to each stock, they are giving each stock an initial weighting of only 5 percent of its market cap. That will greatly reduce the initial weighting of the China mainland stocks.
Why is that? Because MSCI wants the Chinese authorities to keep opening up their markets. There's three particular things they want to see:
1) Fewer companies halting their stocks;
2) current limits on how much money can enter or leave the country for stock trades on a single day to be removed or greatly expanded; and
3) to make sure that the crucial Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect works effectively. Those two connections are the primary path that enables investors to trade shares listed on each other's markets using local brokers and clearinghouses.
Essentially, they are holding out a carrot to the Chinese regulators. MSCI wants the market to open up more.
"This is a small step in the right direction. For everyone to get experience — so everyone gets to know everyone — we will start small," Henry Fernandez, chairman and CEO of MSCI, told CNBC.
Should the Chinese continue to open up their markets, MSCI will consider increasing the market cap of the existing 222 companies all the way to 100 percent. It will also consider including the remaining 226 or so companies in the future.
It's a measured move that will build confidence in the international community and encourage even more cooperation from the Chinese.
Apparel stocks dive as the Amazon juggernaut rolls on.
First, it was Amazon buying Whole Foods and threatening to disrupt the grocery business.
Never mind Whole Foods has less than 3 percent of that business, the mere fact that Amazon was involved has been enough to send grocery chains into a tailspin.
Tuesday brought Amazon Prime Wardrobe, where the online retailer tackles the biggest problems of buying clothes: 1) the time it takes to shop, 2) the hassle of finding the size that's right for you, and 3) returning stuff you don't want.
Judging by the market's reaction, it looks like the Street believes Amazon has advanced the ball considerably: Nordstrom closed down nearly 4 percent, JC Penney more than 5 percent, and Ascena Group and Chico's more than 4 percent. Even discounters like TJX and Ross Stores fell 3 percent and nearly 5 percent, respectively.
It's a simple idea: try before you buy, and only pay for what you keep. Pick out three items or more, and you get shipping for free (if you're a Prime member of course). You have seven days to try the stuff on and decide what you keep.
The good news on IPOs for the first half of 2017: There are a lot more of them than last year. The bad news: It's still not great.
Halfway through the year, 66 companies have gone public so far, according to Renaissance Capital. The good news is that 11 more companies are going to try to go public this week and next in a valiant effort to beat the traditional July 4 slowdown. Five companies alone announced terms on Monday, including meal-kit services firm Blue Apron, which will seek to go public next week.
If all 11 make it to market, the total will be 77 companies for the year so far. That's better than last year's miserable showing of 42 but far fewer than the 104 that went public in the first half of 2015, which capped three strong years for IPOs.
This is a mild disappointment, considering the markets are at historic highs and the after-market performance of recent IPOs has been strong. The Renaissance Capital IPO ETF, a basket of roughly 60 of the largest IPOs of the last two years, is up 22 percent this year, far outperforming the 9 percent performance of the S&P 500.
Most of the largest deals of the year have had healthy gains since their IPOs:
Recent IPOs (after-market performance)
Why the outperformance? "Because IPOs are being priced more reasonably, so they have more room to move up," Kathleen Smith from Renaissance Capital told me. "Investors in the IPO market have become hyper-sensitive to valuations."
That's good news: Investors in IPOs this year have been a happy bunch. Issuers, however — who want to get as much product as possible to market — are facing a much more challenging environment.
Still, all it takes is for a big name like Snap, which on Friday approached its IPO price of $17, for investors to get cold feet about other tech unicorns sitting out there.
It doesn't bother Smith, who is interested in investing in companies at the best possible price: Snap going to its IPO price "shakes the market and creates fear. That makes valuations more reasonable."
And that's exactly the big issue for the second half: valuations. Scores of companies still are reluctant to go public because of a valuation gap between their private valuations and what the public is willing to pay for them.
As a case in point, Smith points to Tintri, a cloud platform company that is seeking go public next week. At the midpoint the company would be valued at $389 million, less than half the $785 million valuation during the last round of fundraising in July 2015.
Will we see more like Tintri in the second half? Smith says we will, because some will have to get out the door. She notes that while some companies can afford to wait to grow into a higher valuation, others may not be so lucky. And the haircuts will come, for those that have to get out the door.
She insists that funds that have millions locked up in expensive tech unicorns aren't going to sit on that money forever: "Some of these companies have had investments in these companies for ten years. They have to provide returns to their investors. That means they have to find a way out. There is going to be pressure from the limited partners. And pension companies have a boatload of money in private ventures. They have obligations they have to pay out as well. They can't stay private forever. That is not the business model for the private equity or venture people."
Another issue for the IPO market: out-of-favor sectors. There are dozens of energy IPOs that are waiting to go public, but cannot imagine doing it with oil below $45. And there are plenty of retail companies that also are reluctant to go public in a brutal retail market.
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."
Technical analysts see warning signs that the much anticipated correction could be on its way, possibly in September.
It seems the more turmoil and dysfunction there is in Washington, the higher odds Wall Street gives tax legislation.
Copper prices zoomed 1.7 percent higher to reach levels not seen in nearly three years.