iBankCoin
Joined Dec 1, 2015
135 Blog Posts
@JeffMacke

“Everyone Loses”: 3 Bear Market Rules

 

 

Everyone Loses

In the poker game of investing Bear Markets are the rake*. Everyone loses.

Bears are different than crashes. When stocks crash a small but vocal minority of investors get the timing right and make a fortune. The winners in bear markets are the investors who don’t die.

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Yesterday the ursine claws of doom targeted the smug with particular relish. The FANGS got killed just because screw that stupid acronym. They were down 10% for the week. GoPro on the other hand was up 1.8% Friday (though it’s still down 45% YTD). And gold was strong. Pathetic holdings up and past winners trounced. The resulting sound of battle was a mash-up of gloating lepers still holding the GLD and robust cries of agony from freshly-killed champions.

It was horrifying.

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McDonald’s fell 4.4% on Friday. Seriously… Screw you, bear market.

There are no winners here. It is a level playing field of misery.

 

 

“Air-Pockets” Lurk Everywhere

True students of the stock market tend not to believe in any one “system”. The game is fluid. Fundamentals are never as objective as devotees claim. Charts are only voodoo to people who don’t understand them.

Prices are ultimately set by humans. Humans are idiots. Imagine how boring life would be if we weren’t. Which is a nice way of spinning the fact that every morning when you turn on your computer there’s a reasonable chance a stock you own will have imploded.

Forget LNKD. Too Obvious. Here’s a 3 mo chart of Kohl’s:

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Kohl’s is a dump. I find the stores maddening and I’ve never owned the stock. But right up until a couple days ago KSS was a very sexy looking chart. Going into earnings the stock was over $50 and looked to have support at about $46.50.

The stock lost $10 overnight on a warning. If you had a stop-loss it was hit $5 below support. Puts may have saved you but you had to be very good. For most KSS holders it was simply an instantaneous 20% loss.

Mr. Market is a Bad Mutha. He can smell hubris and fear. Seek to exude neither.

Bear Markets Are An Emotional Process

Investor moods aren’t binary. We don’t just feel Euphoria or Despair. Investing is deeply personal and entirely emotional. People grieve losses much like they grieve loved ones. Denial, anger, bargaining (eg “Please God, get me back to even”) etc.

Right now investors are starting to get a little pissed off. They’re looking to blame people for the sell-off and no one makes an easier target than the media and punditocracy.

I’ve got some experience with this. I don’t like to talk much about it but I’m kind of a big deal. By any objective measure I’m the 3rd or 4th Greatest Television Financial Pundit of the Modern Era. Really. That’s not a boast. It simply is.

The point is I know what it’s like to be on TV every night when the public starts looking for scapegoats. It’s ugly. People are mean.

Here’s some tough love: No one on financial television is running your portfolio. They didn’t make you buy a stock. They didn’t force you to sell. Some television pundits are good. Some are bad. None of them is paid to do anything other than share their opinion.

If you disagree with anyone in particular do the opposite of what they suggest. Don’t troll them. It’s mean and it makes you look like a whiner.

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Simple Rule of Thumb: Above is the Wong-Baker FACES Pain Rating Scale. It’s used by doctors world-wide to asses a patient’s level of suffering. If your portfolio makes you feel worse than 6 don’t Tweet anything directed at a television personality. I promise you, they are all trying their very best.

And if you make money short keep it to yourself. To paraphrase Brad Pitt in the Big Short, “You’re betting against America. Don’t dance”.

No one actually knows what’s going to happen next. The best you can do is get the odds slightly in your favor. For some perspective on the difficulty of predicting markets, here’s a Tweet from Neil deGrasse Tyson yesterday:

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Economics is the bastard love-child of Calculus and Sociology. It’s Physics for people who couldn’t quite hack the math. Economics is bullshit, is what I’m saying. Do you really think mass psychology can be broken down into a formula? Please.

No one is keeping the answer to this market a secret. We’re all just trying to figure out the same puzzle, some are just doing it in public.

 

The Week Ahead

In the 220-odd years of formal stock trading in the US  meaningful pullbacks have hit their lows during Friday twice (that I know of). Once in 2001 and again in 2004.

I’d expect the S&P at least retest the lows near 1800 in the next couple weeks. That’s not a trading suggestion. The most likely outcome is I’m right but there’s some sort of brutal, ironic twist that prevents it from being a useful observation. Like we go to 2000 then drop 200 overnight.

I can’t tell you what do. I can only help you learn how to think for yourself. There is a huge difference.

 

* Rounders reference. The Rake is the house take in poker tournaments. It’s the money that disappears, from the gamblers’ perspective. In Wall Street terms, The Rake = the money lost by longs but not made by offsetting shorts. Plenty of people were short LinkedIn but not nearly as much money was gained short as was lost long. The spread goes to money heaven. Because Bear markets maul everyone.

Specifically:

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Mourning LinkedIn And The Bull Market

LinkedIn picked the wrong night to take down estimates. Shares are off 40% after the spam-mailing job site apparently beat estimates and lowered guidance to negative one trillion dollars for current year.

Or something like that. I owned shares of LinkedIn for years. Finally sold it after the second Q of last year. In 10 weeks LNKD managed to crush shares by lowering guidance, rise after posting earnings in-line with the original number then plummet after slashing estimates yet again.

Which sounds like gibberish but it really happened.  That’s how LinkedIn rolls.  Here’s LNKD chart since it went public. Everyone of those islands was created by LNKD missing or beating estimates dramatically:

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LinkedIn was a trainwreck but if you were truly shocked you just haven’t been paying attention. If Amazon shares can lose 15% on weak guidance taking 40% out of LNKD makes sense, in bear market terms. Being long LNKD was a preventable tragedy. That’s what makes it so sad.

Not even good earnings save stocks in a bear tape. Facebook has gone from the low $90s to $118 and back to $104 since they reported. Google has gone from the highest market cap in America to a house of misery in the last 5 days. Some people traded it but most investors are just getting pistol whipped.

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There’s no hiding from the pain. The S&P 500 is holding up relatively well considering the beating going on under the surface. That doesn’t feel like it’s going to last. This market feels like it needs a flush.

This is how bear markets work. No one gets out totally unscathed. At the bottom investors are strewn across a barren landscape. When the living envy the Nationwide kid it’ll be time to buy in size. We’re not there yet.

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GoPro CEO Gets A Pass

GoPro is so bad it’s now apparently impolite to discuss management candidly. Nick Woodman, proud legacy member of the SV CEO High School took home $284 million in 2014. He cashed out  in the IPO and took out more when he and his wife, Jill, exploited a loophole in the GoPro IPO terms to dump over $300 million in shares via a foundation to fund causes TBD.

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90% of the shares sold in GoPro’s secondary offering came from insiders. They got $72.38 a share, about 9x higher than where the shares are 14 months later.

Woodman is the affable face of executive incompetence. If you aren’t going to be critical of him you should simply not do financial commentary. Martin Shkreli didn’t cost you any money but he’s an easy target. GoPro and Yahoo are investment death pits run by a Ty Webb and Regina George. Guess which exec is getting pounded today?

On Christmas Eve I did a piece on why CEO behavior matters. I focused on GoPro and Yahoo.

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I’m not sure if the piece is rude. I’m certain it was correct. Yahoo and GoPro have dropped 18% and 50%, respectively since I recorded it. I work for you. I take it very personally but criticisms aren’t necessarily personal. It’s business. I think executives matter to your investments so I talk about them, good and bad.

Being CEO of a public company means answering to the public. That’s why they get the big money. If execs can’t take the heat they should take different jobs. I’m going to keep doing mine.

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GoPro Needs To Apologize

Mistakes were made. Promises were broken. It happens, GoPro. We’re all just people, doing our best and trying not to lose $9b in shareholder money.

We all want to move forward, GoPro. But you need to help us… Help me… Help you.

It’s time to say you’re sorry, GoPro. You don’t even have to mean it. Follow this exact script, right down to the accent. Don’t be selfish with the foppish. Give it out, even as you stammer.

Sell it hard and a PE firm will scoop you up for $6.

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Super-Blow: $BWLD Looks Hazardous

Buffalo Wild Wings shares are down 7% ahead of earnings. As seen below, the chart is forming a dreaded Hazmat Head and Shoulders.

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The company is suspected of causing unbelievably nasty illnesses detailed here by Fly.

I don’t really know Buffalo management but so far their reaction isn’t encouraging (via CNBC.com):

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I get that it’s one unit in a large chain. But read those code violations again. Now think about enjoying a nice Super Bowl afternoon dipping your wings in BWLD’s Sauce of Disgruntled Teen Worker. This is potentially a very serious problem for Buffalo Wild Wings. Customers get super freaked out about food making them violently ill. Take my word for it on this; I was a Psych Major.

Even if the illness is contained a Vomit / Diarrhea / Booger (VDB) troika of nasty is a big enough issue to change the entire risk/ reward ahead of earnings. Honestly, flat out poisoning people would be easier to forgive. They better be taking this more seriously by the conference call.

Nothing BWLD reports tonight in terms of financials matters anymore. Guidance is pointless. This is a binary outcome stock. If VDB is chain wide BWLD is going lower by 50%. Chipotle lost 60% of its best customers. Buffalo can’t afford that kind of hit. Super Sunday is already at risk. But an actual outbreak would kill business during the NCAA Tournament.

You might as well cancel a retailer’s Christmas. March Madness is everything to these guys.

Do what you want with the stock ahead of the bell. I wouldn’t touch it with a hazmat suit and salad tongs.

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Buyback-Lash: Investors Calling BS on Wall Street

Buyback-Lash(TM) is picking up steam as investors sell-off shares of companies with monster buyback programs. Apple, IBM, Chipotle, Gilead… the list is growing.

The story is also picking up steam. Perhaps inspired by the Weekend Buyback Primer I created with links to pieces on AutoNation, Apple, WholeFoods Markets, Macy’s and IBM) Fortune went through Apple’s hypothetical P&L on repurchased shares yesterday:

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It’s a decent read but misses the main points. Allow me to elaborate:

Repurchased Shares Go to $0 Immediately

I went over exactly why in the nuanced piece “Wall Street Street Screwed You Again! Buyback Mailbag“. It’s a nice exercise to point out that Apple is down 21% on buybacks but it misses the point.

If shares move higher after a repurchase the company has no direct benefit. Apple doesn’t trade its shares. If AAPL were trading at $200 the company itself wouldn’t be able to flip stock for a profit. Unlike literally every other potential investor corporations can’t just flip shares in the open market. The stock is instead retired to reduce share count.

In part this offsets dilution from stock option programs. That means buybacks are a good pay to hide pay and help push EPS higher all things being equal. Most executive pay packages are based at least in part on earnings per share. Buying back stock is easier than coming up with new business ideas and can lead directly to an executive team getting paid more, regardless of what the stock itself does.

Buybacks Don’t Work

On their call last night Gilead announced it had spent an insane $10 billion repurchasing shares at an average cost of $95. As a result EPS in the fourth grew faster than net income! Ya! Everyone got a bigger chunk of the earnings pie! Gilead added another $12 billion to its $15 billion repurchase program last night. $27 billion and the company is openly accelerating buybacks right this second.

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The problem isn’t that Gilead is down $10 on its investment. Gilead is down $10b but that’s not even the problem. The real issues are a) shares are going lower anyway b) that money might come in handy some day c) Gilead is competing for stock with its own investors even though Gilead has no real use for the stock.

That’s not returning cash to shareholders. It’s screwing them in the short term so your monster options package is less visible.

Yes, Gilead generates a ton of cash. So did IBM at one point. $75b in buybacks later IBM, a company once so powerful it was considered a monopoly, has missed every trend of the last decade. IBM shareholders are left with net profits of $0 since 2010.

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Parade of Dunces

Financial media is like a game of telephone. Somehow has an insight then everyone passes it alone in some slightly different form. I’m not complaining or bragging about other folks picking up on this story without attribution. I expect that to happen. I just want to make sure they get it right. It’s important because investors should be insanely outraged right now and it’s not quite happening.

Among the inanity…

Chipotle spent 30 minutes detailing every margin-crushing hell that can befall a company on last night’s call. -36% comp sales, loyal customers abandoning them, promotions of unknown expense and higher costs in general. I was on the call. Shares held up fine right up until the CFO said this:

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This was after the company guided to breakeven for Q1 and pulled guidance for the rest of the year because he openly has no idea how much the company will have to spend to buyback shares. How about settling the NoroVirus investigation before getting long CMG, guys? Because the stock really isn’t a buy as long as we’re synonymous with both bacterial and viral ways of contracting explosive diarrhea.

Comcast hiked buyback by $10 billion. Because the best way to fight cord cutting and ad drops is investing in your own stock.

Buybacks Need to Die Before Walmart Does

They never make sense. “Opportunistically buying back shares” is the 2016 version of Citi’s Chuck Prince blithely telling the New York Times that his bank was taking on more debt because “as long as the music is playing you’ve got to get up and dance“.

Citi still has risk to $0.

Walmart has $20b in repurchases in place. Target is buying its own stock. Amazon is not. Amazon is going into bookstores. Those are Trojan Horse distribution systems. Target and Walmart have a combined growth rate of 0%. Both chains get less than 5% of its sales from online. By Christmas Amazon will be killing them ecommerce and brick and mortar stores.

Walmart is spending under $1b developing its internet business this year. How much cash do you think there will be to return to shareholders in 10 years if Walmart doesn’t create a viable online presence?

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Yahoo To Shareholders: Drop Dead (Update) $YHOO

Busy, busy, busy! Earnings everywhere so I’ve taken the liberty of translating Yahoo’s pretend turnaround plan.

The plan is to fire 15% of the staff and do more of the same. And Board Member Chuck Schwab is resigning effective today. Because he doesn’t need this bullshit in his life.

Additional notes below. The financial details don’t matter. Yahoo is not an earnings story.

Wednesday AM update: Had a chance to pour over the transcript and talk to some investors. To say there’s a lack of confidence in management is a wild understatement. Marissa Mayer is connected like Kaiser Souzia in Silicon Valley. No one wants to say anything negative about her for publication. Smart, connected and vindictive is a terrifying combination.

Which is too bad because she’s a demonstrably terrible CEO and it’s not clear she understands why. Last night she complained that the press had been unfair about Yahoo’s holiday party, claiming it cost a third of the published $7 million rumors.

"Mingling": Yahoo style
“Mingling”: Yahoo style

It’s not the expense of the party, Marissa. It’s the optics. You sat like a Mall Santa while employees waited for a brief photo opp. I don’t begrudge tremendously successful people the chance to act like Marie Antoinette or Nero. I just don’t want anyone that tone-deaf running my consumer-media-search-whatever company.

Yahoo spent 2015 trying to spin-off Alibaba tax-free through a ridiculous loophole. It didn’t work. As was made apparent last night, there wasn’t an actual back-up plan. Calling this a turnaround nearly 4 years into the gig is just weird.

The party, the insulting gibberish passing for strategy, a lack of basic human empathy. It’s all standard. Marissa isn’t royalty. She’s just paid like it. The board which agreed to her 9-figure severance package is left to defend their terrible decision or, like Schwab, simply resign with old school discretion and I assume tremendous relief to have this mess behind him. Investors should consider doing the same.

 

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Stocks Test Support. Feel The Churn $SPX $SPY $KORS $CMG

Janus is a Roman god of two faces; one looking forward and one back to the past. Like all gods of human creation, it’s not about divinity but the earthly inventors. The problem with Janus is he’s giving you a false choice. Janus is a god for dreamers and whiners.

Living in the now is how you get all the money and have all the fun. Doing anything else is a sucker’s game. Here’s our field position this year, now, and a few things I’m watching today:

 

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On January 20 the S&P 500 fell to 1812 intraday, just 8 points below the Ebola Low of October 2014. From there we rallied more than 3% intraday, closing down only 1% (see: “Stocks Rally -1%!“). The ensuing 8 trading days saw 5 higher, 3 lower and each painful in its own way. The S&P is 9% off the highs, 7% off the lows and beating the hell out of just about everyone.

This is healthy. It’s good. Markets are supposed to be hard. That’s why it pays so well to be good at them.

Investors are chasing good news higher. Google (never, ever Alphabet) drove it to the highest market cap in American history. Specialty retailer Michael Kors is killing shorts pre-market, up 17% and pushing $48. The 1 year range on KORS is ~$74 to $35. Long-term investors have gotten killed. Newbie shorts mowed down big.

Watching Chipotle today. The shares have been ripping off a $399 low and are sitting at $475. Fly loves the stock into earnings tonight. I think it has bounce room to $540 but the estimates are still too high. If you want to gauge investor appetite for risk Chipotle is your tell of the day.

More in a bit…

 

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Showtime! $CMG $YHOO $TWTR $DIS

When I awoke this morning from unsettling dreams I found myself transformed into a lost toy in Disney’s attic.

Which is what happens when you binge watch the Toy Story trilogy on one rainy Sunday. How did Pixar become the dilapidated corner of Disney no one wants to talk about anymore so fast? Iger paid $7.4b for Pixar in 2006. It was widely thought Disney had paid too much.

It had not. Pixar box office:

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In 2010 Toy Story 3 made more than a billion dollars world-wide. It’s a Holocaust allegory the entire family can love. I feel safe in predicting there will never again be a creative force capable of doing $1b in global box office with a heart-warming cartoon about a death camp.

Dinsey rode Pixar into the Avengers then murder-hugged it to death with Frozen, which revealed the depths to which Pixar’s soul had been assimilated by Disney. Frozen also displaced Toys 3 as the biggest animated film ever.

Weep not for Disney. Star Wars will nurse the Avengers into the oven at Disney creative much as the Avengers torched Woody. It’s the circle of Toy life.

Big week. Yahoo and CMG tomorrow. Morning notes in Woody form:

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Bat-Damned: A Portent of Doom Is Confirmed

Yesterday I said Amazon’s chart was forming a “Brooding Affleck Batman; the worst kind!“.

Because this is the Internet someone had to take this the wrong way and start whining. In this case that was awesome because what the person was upset about had nothing to do with Amazon or stocks at all. @Hero_Spin on Twitter was upset at me for besmirching the reputation of the upcoming Batman vs. Superman: Dawn of Justice movie.

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This gave me the rare opportunity to mix film and stocks while using my basso profondo “I’m Batman” hiss for the voice of my inner monologue. I was an accidental film studies and Psych dual major in college. I unwittingly took all the required electives required for a degree, just because I love movies.

I also happen to already have a theory about the length of Batman’s ears and the economy.

@Hero_Spin tugged on the wrong guy’s cape, is what I’m saying.

First I’ll pre-review the film then I”ll share single most important scientific discovery since Calculus: the Batman Ear Indicator.

The Movie

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Screw Superman. Just as a blanket statement. No one likes him. And enough with the Nazi Propaganda visuals. This is a comic book movie. It shouldn’t have the same score as Schindler’s List. Based on the trailers, DC’s twist on the Avengers was to take out the jokes but keep the training staff and pharmacists.

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No judgements. He looks great. Affleck’s real Batman body looks like the suit they made George Clooney wear. Ben looks like a professional wrestler delivering a promo in the cuts of him as Bruce Wayne. I’m good with that but let us be clear:  The only way a guy in his 40s can replace 30lbs of dad body with muscle is through both insanely hard work and a wife suffering from human growth hormone deficiency. Finding a Low-T friendly doctor would help as well.

I love Affleck’s movies, for the most part. He’s somehow underrated despite a monster career. But this isn’t his movie. He shares it with Superman and Wonder Woman and the guy who played Zuckerberg and who knows what else. This thing has train-wreck written all over it.

Oh, I’ll go see Ben Affleck as Batman in this ponderous, overwrought piece of garbage, @Hero_Spin. I’ll probably even enjoy it. But don’t tell me it’s good.

Which brings me to the theory:

The Length of Batman’s Ears is Correlated to Future Stock Market Returns

Art reflects the values of the generation that produces it. Just as we build the most garish buildings during times of peak mania, the super heroes which resonate with an era express the values and desires of their day. Batman’s ears are the mercury in phallic thermometers measuring the heat of our national ambition. They are economic indicators.

Which broadly fits if you work backwards from the 1960’s being the nadir of recent existence for both America and Batman. Vietnam. Race riots. Assassinations. And, starting in 1966 just in time for a bear market, the world was introduced to this:

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Stocks fell 22% over 8 wrenching months.

This morning my son and I watched Keaton Batman while I calculated the length of every major television and cinematic Batman’s ears, relative to his skull. I then ran stock market returns during each of the 5-distinct Batman reigns.

As it turns out, the Batman Ear Length Indicator is a balls-on stock market tell for 80 years. The longer Batman’s ears are the better the stock market during the period. Note I’m not talking art. Just size. The most bullish Batman was Joel Schumacher’s nipped Clooney / Kilmer outfits, with their ears like stout Viking horns. Perfect for a run of 30% CAGR in Bill Clinton’s America.

That’s not a trading call. Trading based on Batman’s ears would be insane. Yet it is fact. It’s also fact that Batman vs. Superman hits theaters March 25th. Do with that information what you will.

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