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Are you feeling lucky, punk?

“Gun to my head, I think we go down. But I wouldn’t want to be short.”

That’s how a friend and professional trader responded Saturday when I asked “What’s going to happen on Monday?”

My friend, a former prop trader for a big European bank and now at a (relatively) small hedge fund, said Friday “felt like capitulation” and there’s too much risk the Chinese government steps in to prop up the market. That’s the risk of being short in a government-sponsored market. (I know what you’re thinking: have the central banks fired six shots, or only five?)

“Of course, if you’re relying on the Chinese, how strong a market is it?,” he said, adding he feels badly for people – namely retirees – who “have to be in stocks because they feel they don’t have any other choice.” (Personally he’s gone mostly to cash and worries he may regret it, at least in the short term.)

The trader shall remain anonymous but you wouldn’t recognize the name anyway. He said the key to any near-term rally effort will be the internals, noting they’ve been “horrible” since June. A lot of traders have been talking about the weakness under the surface – more stocks making new 52-week lows vs. highs, the divergence between the DJIA and the Transports, etc. But the average retail investor doesn’t care about or notice until the Dow has its worst back-to-back days since 2008 and the market its worst week since 2011.

As I said on John Batchelor’s podcast on Friday, it “feels” like we’re setting up for a classic selloff in September and a low in October. Maybe it’s too obvious but the Fed’s Sept. 16-17 meeting could end being some sort of important inflection point no matter what they do (or don’t). I also happen to think there’s some parallels here to the 1997-98 “Asian Flu” which was pretty scary at the time - especially in ‘98 - but wasn’t 2008, to be sure.

Need to do more work on that 97-98 analogy but in the meantime: Gun to your head, what do you think happens?

#$SPY #$GSPC #$DJI

The Bull Case: Supply & Demand Edition

Barring a dramatic development today, the S&P 500 is going to end Q1 with a modest gain, and notch its ninth-straight quarterly rise.

Given all the headwinds of a strong dollar, downward earnings revisions, fear of a Fed rate hike (which come and go), oil volatility/MidEast unrest, the U.S. market has held up relatively well.

One explanation: The supply of stock is down as M&A heats up and the IPO market cools.

“Dealmaking is off to a running start this year,” The FT reports. “The value of mergers and acquisitions struck in the first three months is up 21 per cent on a year ago making this the fastest start to a year since 2007.”

Healthcare is driving the action with three more deals announced Monday: UNH buying Catamaran (CTRX) for $12.8B in cash, Horizon (HZNP) buying Hyperion Therapeutics (HPTX) for $1.1B and Teva Pharmaceuticals acquiring Auspex Pharmaceuticals (ASPX) for $3.2B.

“But it was US ketchup maker Heinz that provided the highlight of thefirst quarter, with the biggest deal of 2015 so far. Its takeover of US consumer foods group Kraft,” the FT adds, noting US dealmaking was up 30% in Q1 to $399B -- almost halfof all global M&A.

Meanwhile, "just 27 firms have priced IPO deals and raised $4.9 billion in the first quarter, down from 65 companies which raised $12 billion a year ago, according to Ipreo,” Yahoo Finance’s Aaron Pressman reports. “That would make the current quarter the slowest since 2010.”

Pressman’s post came out ahead of today’s Go Daddy IPO but the Internet domain registrant is looking to raise $418 million. That pales in comparison to the $104.3 BILLION of buybacks announced just in February, almost double year-ago levels.

In sum, the big picture story remains the same: Dealmaking and buybacks are removing more stock from the market than is being replaced by IPOs and secondaries. Assuming demand remains constant (and fund flows show no big changes to date), the drop in supply of stock helps explain the bullish resistance to “bad news” so far in 2015.

A few more data points to consider:

The last time buybacks reached a monthly record of $99.8 billion in July 2006, the S&P 500 advanced 23 percent in the next 14 months before hitting an all-time high, Bloomberg reports.

“Only three other times since WWII has the S&P 500 witnessed nine straight quarters of price gains. Each of these prior times recorded price increases in their 10th quarter averaging 8.1%.” - Sam Stovall, S&P Capital IQ

Photo credit: yooperann

#$UNH #$CTRX #$KFT #$GDDY #$HZNP #$HPTX #$ASPX #$XLV

The perfect formula for runaway CEO pay

Photo courtesy: Jack MNZ

I recently wrote about 1993 legislation that capped corporate deduction of executive pay at $1 million, per executive. Section 162(m) of the IRS code was Bill Clinton's effort to both cap CEO pay and more closely link it to company performance; laudable goals. But the law of unintended consequences prevailed. Since 1993, executive pay has skyrocketed, thanks largely to a dramatic increase in "performance-based" stock options and bonuses, which aren't subject to the $1 million cap.

Oddly, I came across this gaping loophole in the tax code because it was referenced on House of Cards, where a presidential candidate takes a swing at Walmart for giving “almost $300 million in tax-deductible performance pay over the last six years."

The term "tax-deductible performance pay" caught my attention as it's not a term that's widely used by presidential candidates -- or financial journalists for that matter.

Separately, I came across a reference to SEC Rule 10b-18 by The Globe and Mail’s Eric Reguly, who writes the 1982 legislation “essentially legalized stock manipulation by allowing companies to repurchase shares amounting to 25% of their average daily trading volume over the previous four weeks.”

In sum, it seems SEC 10b-18 + IRS 162(m) = a perfect formula for runaway executive compensation.

Keep this formula in mind the next time you hear someone talking about how CEOs are paid so much because a) they deserve it or b) the intense ‘competition for top talent’ or c) other such malarky.

Which brings us to today’s “outrageous CEO compensation news”: The WSJ reports accounting and actuarial changes have resulted in a big boost for many CEO pensions. In fact, 176 executives at large companies saw pension gains of $1M or more in 2014, including:

GE’s Jeffrey Immelt, whose compensation rose 88% to $37.3M last year thanks largely to $18.4M in pension gains. “In all, Mr. Immelt’s pension is valued at about $4.8M a year FOR LIFE” the WSJ reports.

Lockheed Martin’s Marillyn Hewson, whose total pay rose 34% to $33.7M last year, with about 47% of the total coming from her pension.

LMT did have a banner year in 2014 but GE stock badly lagged the S&P 500, as it has for much of Immelt’s tenure -- so these pensions aren’t about ‘pay for performance’ either.

In 1975, 88% of private sector workers and 98% of state and local sector workers were covered by defined benefit plans, CNBC reports citing a 2007 report by the Center for Retirement Research at Boston College. By 2011, fewer than 1 in 5 private industry employees was covered by a pension, according to the Labor Department.

And according to the Pension Rights Center, the median benefit for private sector pensions was a mere $8,612 in 2013.

In sum, the game is rigged to benefit the wealthiest among us and ‘income inequality’ only accelerates in retirement, proving once again that Mel Brooks was right: It’s good to be the king.

#$LMT #$WMT #$GE

philpearlman-blog

In his latest blog post, Why This Tech Bubble is Worse Than the Tech Bubble of 2000, Mark Cuban argues that angel investing is the new bubble and that it is worse than the original tech bubble at the turn of the millennium.

Specifically, Cuban’s argument focuses on the illiquidity of...

The 'blessings' of cheap oil: Sunday PM Reading

Looking to get a jumpstart on Monday morning? Me too. Here's a few stories that caught my attention but it's pretty quiet out there. Too quiet? We shall see in the morning...

Japan's 3Q GDP revised even lower

Easy money will keep flowing in 2015 (Central Bankers have no choice)

YouTube offering bonuses to its stars

Gas prices hit 4-year low +

James Stewart on the "blessings" of cheap oil

The Incredible Shrinking Incomes of Young Americans

What are you seeing?

#$EWJ $XLE

thealephblog-deactivated2019091

Photo Credit: Penn State

Like my friend Josh Brown does, I often don’t know where I will end when I start writing… I know I have something to say, given my own time writing for RealMoney.com, and now having publicly written on financial matters for over eleven years, with thanks…

theeconomist

aarontask-blog

Amazing chart of mega-cos revenue + profits via The Economist

theeconomist:

Our most popular charts of 2014

#23 Race to a million: How big companies compare

#$wmt #$XOM

davidnelsoncfa

By David Nelson, CFA

Wall Street’s love affair with stock buybacks grows deeper with each record high. Who can blame them? The S&P 500 Stock Buyback Index which measures the performance of the top 100 stocks with the highest buyback ratio has massively outperformed its index sister over…

I, for one, welcome our humanoid robot overlords...and other Tues morning reads

Here's some stories of interest to get your morning started

Hedge Funds Shut as Managers Struggle in Year of Two Percent Returns

Lower Oil Prices Will Help Boost Global Economy, IMF’s Lagarde Says

On other other hand: Good, Bad and Ugly of Lower Oil Prices

Dodgy Home Appraisals Are Making a Comeback

Will Alibaba kill 'Main Street' USA? Big box retailers want you to think so. (Disclosure: My employer Yahoo owns ~16% of BABA)

Pepper, the humanoid robot, wants to sell you a Nescafe coffee machine

#$BABA $XLE

"The drama is just beginning": Post-holiday linkfest

For those who were knee-deep in family, turkey and football this weekend, here's a list of stories traders are chattering about Monday (in no particular order):

"The drama is just beginning": Daniel Yergin on the shakeout from lower oil prices.

Oil prices crashing after OPEC left production unchanged

Moody's downgrades Japan credit ratings, market shrugs

Swiss vote on gold holdings fails (gold falls)

EU 'attacks' US tech giants (Google, Apple, AMZN, FB)

France-Germany pledge to avoid 'lost decade'

Black Friday letdown for retailers

Mortgage lenders ease standards (reax to new FNM/FRE guidelines)

China PMI slips + EU manufacturing weakens further

China plans deposit insurance for banks

NYT wants you to see irony of NFLX original "Marco Polo" and the company's international expansion plans

#$xle #NFLX

Prepare for Liftoff: Alibaba is the anti-Facebook IPO

The Alibaba IPO is going to be huge in case you hadn't already heard. But for all the focus on how this is likely to be the biggest public offering in history, there's very little chatter about the first day of trading -- and the opportunity for this to be an old-fashioned, 1990s-dot.com style blowout first day.

Assuming the IPO prices near its expected range of $66 to $68 per share, it's not hard to imagine the stock trading well above $100 on its first day. The type of deal that gets trader's hearts pounding and reminds investors why the stock market is also a place where you can win big, not just lose your shirt. Expect terms like "blowout" and "spectacular" and "bubble-like" to be heard. (As a reminder and in the spirit of full disclosure, my employer, Yahoo Inc., owns about 22.5% of Alibaba and plans to sell about 25% its stake, or 140 million shares at the offering. I personally own Yahoo shares.)

In many ways, Alibaba is the anti-Facebook IPO. Facebook, of course, struggled mightily on its first day of trading amid technical glitches and an avalanche of insider selling, closing up a mere 23 cents from its offered price of $38.

The Chinese e-commerce giant is virtually unknown to Americans. A Reuters poll this week showed 88% of people hadn't even heard of Alibaba, much less were clamoring for a piece of the offering. Facebook, by contrast, was set up to be the first big "retail" IPO of the decade -- and retail investors were scrambling to get allocation before the company's ill-fated debut on May 18, 2012, according to press reports at the time.

For Alibaba, however, there's no such retail interest. Alibaba Frenzy Escapes Small Investor: Lack of Familiarity with Alibaba in U.S. Limits Interest Ahead of IPO, The WSJ reports.

Meanwhile, institutional demand for Alibaba's offering has reportedly been intense. Within two days of its global roadshow, underwriters attracted enough demand to cover the entire deal. Shortly thereafter, Alibaba upped the expected price range of the offering to $66 to $68 from $60 to $66, originally.

In the run-up to Facebook's IPO, institutions were already choking on stock that had been purchased in the secondary market. On the first day of trading, lead underwriter Morgan Stanley reportedly got stuck holding more than $6 billion of Facebook stock, with JPMorgan and Goldman sitting on a combined $5.6 billion worth of shares. Days before its IPO, Facebook upped the size of its IPO by 25%, or about 100 million shares; 57% of the shares sold in the IPO came from Facebook insiders.

To date, Alibaba hasn't announced plans to up the size of its offering, although it wouldn't surprise me if they did.

Perhaps Alibaba's six (six!) lead underwriters -- Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley and Citigroup -- will suffer a similar fate as Facebook's, but there does not seem to be a frenzy of pre-IPO buying and selling of Alibaba shares, at least not in any formal (legal) way.

Most importantly, perhaps, Alibaba is the anti-Facebook IPO because at about 24 times expected 2015 earnings, it's valuation is cheap relative to peers and certainly conservative on an absolute basis. Even at $100 per share, Alibaba would "only" trade with a P/E of 40, roughly equal to Facebook's and vs. 168 for Amazon.

According to Bloomberg:

Alibaba trades at 29 times analyst earnings estimates for the fiscal year ending March 31 vs. 34 times for Bidu, 37 times for Tencent Holdings and 135 times for Amazon.com.

Alibaba’s EBIDTA equals 59% percent of revenue, more than Google, Facebook, Amazon.com, Baidu and Tencent, according Wedbush Securities. (By contrast, Twitter Inc. and Chinese e-retailer JD.com Inc. have negative Ebitda margins.)

What Alibaba and Facebook do have in common is a complex management structure designed to maximum the power of its respective founders, Jack Ma and Mark Zuckerberg. Maybe I missed it -- and maybe it's because the Alibaba structure really is byzantine -- but I don't recall nearly as many warnings about Zuck's ownership ahead of the Facebook IPO as I'm hearing now about Ma's. Of course, there's a risk if Alibaba really is the "anti-Facebook". After falling as much as 50% from its IPO price, Facebook shares have since quadrupled. It's not how you start the race, it's how you finish. Still, expect Alibaba to come out of the gates at a full gallop.

#$BABA #$FB #$YHOO #$BIDU

Help Wanted: Managing Editor for Yahoo Finance

Yahoo Finance is looking for a managing editor. Below is 'formal' description. The bottom line is I'm looking for someone who can run day-to-day editorial operations for the Web's largest financial news site. If you think you've got the chops, please email me a CV: [email protected]

Description: Job Opening: Managing Editor, Yahoo Finance

Description:

Yahoo Finance, the leading online source for financial news and information, is looking for a Managing Editor to oversee daily coverage of breaking news and manage our staff of in-house reporters. Candidates must have excellent communication skills, impeccable news judgment, a commitment to the highest journalistic standards, and the ability to make high-stakes decisions quickly and clearly in real time. Ideal candidates will have a proven track record of leading teams in a fast-paced digital newsroom. The Managing Editor works across multiple teams within Yahoo and may coordinate with strategic partners so an ability to multi-task is essential.

Responsibilities:

· Oversee breaking news programming of Yahoo! Finance homepage; responsible for story selection and monitoring breaking

* Edits and manages team of in-house reporters.

· Participates in discussions over Yahoo Finance Home redesign and module effectiveness

· Support efforts to build native Yahoo Finance audience and grow traffic to the site

· Works with Front Page, managing the pitch process and coordinating coverage of major news with FP

· Supports efforts to identify gaps in coverage/ensures we are on top of 24/7 news cycle, and contributes ideas and stories to enhance our timeliness

Requirements:

• A track record of leadership in real-time news environment

* A minimum of 5 years experience in financial journalism and a deep understanding of which stories matter most to investors

• Excellent news judgment combined with a fine-tuned sensibility of when and where to take risks

• Excellent communication skills and an ability to lead while working collaboratively with multiple teams

• A comprehensive understanding of editorial best practices, including SEO and SMO

• B.A. required, preferably in journalism or media

The position is based in New York.

msantoli

Market weather vane is balky. ‘Global warming’ for stocks?

The stock market’s seasonal patterns have never been so broadly discussed as they’ve become in the past couple of years. The “blogification” of financial coverage - the need for catchy headlines and simple plot points to make the market’s inscrutable story more coherent - is largely behind this.

The “January indicator,” “Sell in May and go away” and the status of September as the month with the worst historical performance have all gone from the coded murmurings of Wall Street’s archivists and obsessive speculators to mainstream maxims shared on Twitter and golf courses everywhere.

Of course, as soon as these seasonal cues are aired, commentators rush to point out - correctly - that they should not be relied upon. The sample sets of the data are too meager (a century of market data still gives us merely 100 Septembers). The exceptions large and frequent. The patterns to some unknowable degree are random.

I like to say that these patterns represent climate, not weather. Broad directional tendencies, not reliable forecasts, with more variation than one would want, if trading on them.

And yet still, the veteran data crunchers at Ned Davis Research have long monitored a blended indicator of multiple seasonal and multi-year historical patterns that has acted as a decent beacon for market direction over longer spans than, say, a month.

The composite combines the seasonal patterns that define a “typical” calendar year; the four-year presidential election cycle; and the decennial cycle that plots market historical results in decade blocks.

As the above chart shows, the current bull market (plotted in red) has tracked, in a broad way, the path that this composite pattern (the blue line) would have set out for it. Sure, these lines diverged sharply in 2011 and 2012, but they haven’t stayed out of synch for too long.

Until this year, that is. The Standard & Poor’s 500 in 2014 has run well ahead of what the historical record of market oscillations augured. Mid-term election years tend to be weak, stocks are up since the often-toppy month of May and years ending in 4 have generally been merely OK.

Chalk it up to the inherent limits of observed cyclical patterns, or to the Fed’s high-liquidity regime causing equity market “global warming” or to nothing at all.

Whatever the explanation, this chart offers another picture of how stocks have stubbornly declined numerous perfectly reasonable opportunities to pull back hard over nearly two years - and how they no longer owe much at all to market bulls in the near term.

Pride cometh before the fall: Indexing edition

Was 'owning the index' a good idea in 2000, when ~50% of the S&P 500 was in tech?

Was 'owning the index' a good idea in 2008, when 40% of the S&P 500 was in financials?

No, of course it wasn't.

I'm not here to defend active fund managers, who notoriously and consistently have underperformed the S&P 500.

And I"m not here to say that active fund managers are about to go on a big winning streak vs. the index (as the math just doesn't work, unless active fund management fees suddenly go to ZERO).

What I am here to say is that when "everybody" knows something, it's usually a good time to head in the opposite direction. And what "everybody" knows now is that the very best, smartest investment you can make is an index fund.

The conventional wisdom around indexing explains why Vanguard now has nearly $3 trillion in assets and the Vanguard Total Return Stock Market Index (VTI) is now the world's largest mutual fund, tipping the scales at over $343 billion.

In sum, "active fund management is outmoded, and a lot of stock pickers are going to have to find something else to do for a living," as WSJ columnist Jason Zweig recently declared.

Zweig also said the debate over active vs. passing investing is "over", which (again) should make you stop and think about the questions posed at the top of this piece.

It should also make you think again about what happened to Fidelity Contrafund and Pimco Total's Return fund after they became the largest mutual funds. If VTI suffers the same fate, that would of course mean "the market" will have a rough go ahead, which is exactly what Shiller's CAPE and other valuation metrics suggest (although CAPE has its flaws and is much better at forecasting long- vs. short-term returns).

I stand behind what I said during a debate on this issue last December: “The pendulum has swung way too far where everyone thinks all you have to do is index and you’re going to do better. When everyone is on the same side as the boat there is a reversion to the mean.”

And what that would mean is a revival of the idea that there's a place for old-fashioned stock picking vs. passive indexing.

A parting thought: In the past few weeks, stories have been written about what a $10,000 investment in Apple 10 years ago is worth today ($456,000) or buying Google's IPO ($139,500)- and those aren't even the best-performers of the past decade.

For another POV on active vs passive, check out this NYT interview with Bob Olstein, whose namesake fund has outperformed over long period, He says 'the rise of index funds is part of a trend toward sloppy investing — a willingness to follow the herd'

#$VTI #$SPY

Don't be surprised

A weak July retail sales number surprised economists, who were looking for an 0.2% gain (vs. 0% actually). Ex-autos, sales rose 0.1% but that was vs. an expected gain of 0.4%.

Meanwhile, Macy's stock slumped after the company's earnings missed and it cut is sales outlook for 2H.

“Many customers still are not feeling comfortable about spending more in an uncertain economic environment,” -- Macy's CEO Terry Lundgren.

It's surprising any of this comes as a surprise: Earlier this week the US Conference of Mayors released a report showing the jobs gained during the past six years pay about 23% less, on average, than the jobs lost during the Great Recession. As my colleague Rick Newman reports, that 23% shortfall adds up to about $93 billion in lost wages per year — i.e. money not being spent at Macy's or other retailers (or anywhere else).

Economists are trained to look at the macro data, which shows the US economy on a steady (if unspectacular) growth path since June 2009; notably, overall U.S, employment and GDP have surpassed their pre-recession levels and, of course, the stock market has been on a tear amid record-setting corporate profits and earnings growth.

But the economists are too focused on analyzing those macro data and are missing the simple story: Until WAGES rebound, the "real" economy is going to remain stuck in this subpar range.

The only saving grace here, at least for the financial markets (aka "the paper economy"), is that Fed Chair Janet Yellen knows this too well, which is why she'll be very reluctant to tighten monetary policy despite all the "hawks" circling above.

#rlx

Payday lenders have been in the national spotlight lately. National People’s Action, a network of activist organizations, launched a SharkWeek campaign (to coincide with the Discovery Channel’s weeklong shark week coverage) to stop predatory lending to low-income and minority groups. Even comedian and HBO host John Oliver criticized the industry’s practices in a 16-minute segment last week.

ISIS is one of the world’s richest terrorist organizations, if not the richest. That’s according to the Washington Institute’s Michael Knights who has been studying Iraq since the 1990s.

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