I wonder if Walmart realizes how screwed it is.

I don’t mean that smugly. I want Walmart to win. I think it’s run by smart, generally good people. But even smart people can lose perspective if they don’t have outsiders getting in their face occasionally. Corporate cultures are like royal bloodlines; if you don’t freshen the breeding pool up every so often you start to go a little “Windsor”.

I love Walmart, though. It makes me sad to sincerely wonder if the company has any grip on the degree to which it’s getting murdered in what it still calls “the e-commerce space”. Because there’s a growing chasm between how Walmart should be viewing its online efforts and the spin the company is offering in public. Such disconnects are the calling card of a company losing it’s grip on reality.

Corporate dementia is usually bearish. In this case it’s a matter of life and death.

This morning Walmart reported .6% comp store gains in the US for the 4th quarter. That includes 25-basis points of boost from e-commerce which sort of counts as one big store*. Walmart says online sales grew globally by 8% in Q4 and 12% for the full year, rising to $13.7b. Walmart is crowing about serving 20 US markets with online grocery already.

Some problems:

• Walmart’s growth online is lagging the growth rate of cyber-retail as a whole, which grew 14% last year according to the government.
• Amazon grew US sales by more than 24% to $21.7b in Q4.
• This morning Amazon is leaking reports that it plans to hire more “Uber like” delivery employees. That’s not really “news” (as I’ve reported Amazon is already doing same day delivery in many markets… they’ll be same day, nationwide by next Christmas). It’s just a reminder of how far ahead of Walmart Amazon is. In fact, I’m pretty sure Amazon is hyping this just to screw with Walmart. I have no proof of that but I really want to believe it.
• Walmart should not be at all pleased about a below-average growth rate online. It has more resources than any other retailer on earth. Online is still up-for-grabs and Walmart is losing share to the field. Walmart is getting its ass kicked by Etsy. Saw Walton would not be pleased.
• Look at the growth rate of E-commerce as a percent of total US sales in the graph below. If there was a country with a market that was 10% the size of the US and growing in the teens Walmart would be throwing every available penny at the opportunity:

• I can forgive Walmart not growing abroad. Retail concepts seldom travel well. Merchants should assume every foreign country is Vietnam. I wouldn’t expect Walmart to grow any faster than US GDP at physical stores**. But Walmart has to grow online. Walmart can’t afford to be 1/8th the size of Amazon and fading fast.
• That being the case, the execs should actually be sheepish about these stats. Instead they are marveling at the shopping habits of online grocery buyers. That’s either an awesome job of spinning or evidence of a disturbing lack of urgency.
• Walmart is run by very smart people. It’s a legendarily tough company. That makes me wonder if they have any real friends in-house. A friend is someone who isn’t afraid to tell you when you’re screwing up. They tell you uncomfortable truths, over and over again. That’s how you can tell they’re you’re friend. I’m not sure Walmart execs have anyone with the wontons to tell them they’re 10 years from becoming Sears.
• I’ll be your friend, Walmart. Call me.

 

*Walmart doesn’t make it easy to put this data together, for obvious reasons.

** NOT the Law of Large Numbers.

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I know you want to chase the rally. In less than a week all your fears of a market crash have pulled a 180 and become a pit in your stomach that grows larger and more painful every time you see Netflix slide across the screen up $4. Good lord you missed the entire correction of 2016!

It feels like the only way to assuage the pain is getting long. Sure, you missed the lows but you can still catch the meat of this move if you hurry up and buy. You really want to wait?! You waited yesterday and all that did was cause you to miss the gap higher this morning.

Every time I look at Amazon it’s a dollar higher and openly mocking me for not buying it below $500. Shares of AMZN are a Siren Mermaid, becoming more irresistible as they get more expensive. They aren’t just going higher. They are naughty.

 

Amazon is supposedly up today on news the former bookseller is going to start selling private label clothing.

I’m picturing lots of khaki. Suffice it to say Amazon has a ways to go before it catches up to Nike. The point is, Amazon news is being driven by the fact the stock is higher, not the other way around.

Market timing isn’t magic. It’s not science. It’s art and probabilities. Right now the most likely scenario is this rally carries just a little higher than anyone thinks then dies a miserable death. All the stocks being squeezed a lot (GoPro) and a little (TWTR) today will most likely take out old lows, if past is prelude (which it never is precisely but often enough to pay attention).

We could go back to old highs but a full bull market from here is the lower probability bet. So the smart money says take gains but, wow, chasing would feel so much better.

For my personal siren, about $580 for Amazon is the level at which I plan to have my son bolt my hands down so I can’t get long just a little bit. Rallies tend to be the most dangerous time of bear markets. Control your emotions by paying attention to little things like the way I notice Amazon is flirting with me.

Again, your fetish may vary.

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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.

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.

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:

 

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.

 

 

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:

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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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:

 

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.

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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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:

 

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.

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.

 

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:

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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As I suspected might happen, Amazon shares are being clubbed mercilessly after the company missed Q4 estimates and issued laughably broad guidance.

Amazon stock is down about 10% early and the chart is frankly sort of ugly. There’s a combination head and shoulders / Brooding Affleck Batman (the worst kind) forming. Yesterday’s rally was a cruel trap, driving shares into weak hands. There’s some support on Batman’s shoulder but the current shareholder base most likely gets scared out lower.

Is it a buy? If you’re patient but you have to understand what that means with Amazon. Yesterday I showed a chart of Amazon stock pullbacks over the last 10 years. Her’s what the long-term looks like (hide the women and children):

To capture Amazon’s gains you’ve have to ride it out periods like the 95% spelunking after the dot-com bubble burst. Doing so is all but impossible for most investors. Investors with stomachs made of iron (or who were lucky enough to forget about owning the stock entirely) have been insanely well rewarded for their faith:

 

Amazon Has One Job

In many ways last night was quintessential Amazon. The company demonstrated total disregard for short-term planning in favor of growing the business. They don’t care about anything except customers. They never have. This tunnel vision often creates a cultural divide between execs and analysts during conference calls.

Here for instance is CFO Brian Olsavsky on what’s happening in China:

To me that’s a perfect response. Every retail CFO should have exactly the same answer. As for estimates, Olsavsky cautioned that nuanced predictions of even the ongoing quarter are “impossible” then said Amazon will earn somewhere between $100 million and $700 million in Q1 versus $255 million last year. That puts the earnings growth rate for this quarter at somewhere between -60% and 155%. Best of luck plugging that into a spread sheet.

Amazon’s indifferent approach to guidance should have been exactly in line with expectations. Amazon has done precisely the same thing literally every quarter since its IPO. Here’s a clip from the Amazon S-1 in 1997:

20 years ago Amazon set the goals of “(i) Extending its brand position (ii) Provide its customers with outstanding value and a superior shopping experience” then says achieving those goals will incur “substantial operating losses for the foreseeable future”.

Amazon has spent 20 years living up to that vision. Anyone who was surprised by the quarter or that Amazon is going to spend billions killing the shipping industry because same day shipping is the future (and Amazon is already doing it in 25 markets) simply hasn’t been paying attention.

Amazon is like the Grateful Dead or Opera. You either get it or you don’t. Even if you love it, and I freaking Love Amazon, you don’t need to be there all the time. I’ve been out of Amazon for a while but I’m looking to start to nibble. In other words, I’m following the plan I laid out at at the beginning of the year (from Jan 4):

If not I’ll wait. They’ll be back.

Value-Trap?

The quarter was fantastic as far as I was concerned. North America revenue grew 24% to $21.5b in the fourth quarter. For the sake of comparison, Amazon started this year with about the same top-line as Target. Target is expected to do $21.9b total in Q4 which represents a growth rate of ~0% (zero percent).

Amazon gets a lot of abuse for being over-valued. Some of that is deserved and some is because Amazon is often covered by tech analysts who typically don’t know (or care to know) much about retail. Let me put Amazon’s US growth into context. The NRF says holiday retail sales grew a meh 3% in 2015. Online grew about 9%. Again, Amazon grew 24% year over year just in North America. Of the top-10 mass merchants in the country CostCo has the next fastest top line expansion. For the Holiday quarter Cost might grow 5%.

Amazon is playing a different game than the rest of the industry. There is no “correct” valuation for Amazon because nothing like this has ever existed. No retailer has ever been this big relative to the industry and still growing anywhere near this fast. Amazon’s numbers look like young Gretzky getting 200 points in one NHL season or Barry Bond’s “Big Head Era” stats. That’s just as a retailer. No one on earth knows what AWS could be worth but it’s a lot.

Amazon makes money. Not much but remember even really good US retailers are only netting 6 or 7 cents of profit on every dollar. Between breaking even while sucking up billions of dollars in market share a year or grinding out 5% growth and net margins I’ll take the former. Any valuation work beyond that is just doodling.

If you get a 50% pullback back up the truck. Anything less than that is almost noise as far as Amazon sees the world.

 

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Amazon is up 8% today because FANG. I’m serious. No one wants to miss the dip the way they did on Facebook so they’re buying Amazon ahead of earnings this afternoon.

Amazon is less than 10% off record highs from about a month ago. I love this company so much I could write adult fan fiction novels about Amazon’s business model. Not even I would buy Amazon here.

The stock could do anything tonight. Expectations are huge and Bezos literally does not care about earnings estimates at all. Throw in this rally and it’s a rough combination into news.

In January of 2014 Amazon missed by 20-cents and the stock fell 10%. That was 2 months after Amazon’s absurd 60 Minutes drone segment. (Note: Amazon will never have drones.) Shares fell more than 25%, total, and it barely counted as a blip by Amazon standards. You don’t need to chase this stock. It comes to you.

 

Excerpt from my coming book, “So you wanna buy Amazon up 8% ahead of earnings”…

 

 

 

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Stocks are down hard this morning because that’s how bear markets work.

For those of you who started trading after 2009, welcome to hell. You’ll find the heat a bit… stifling at first. I’m not going to lie, most of you are really going to hate the next few weeks. But, if I do my job and we all try to learn as we go along there’s no reason anyone needs to get wiped out like some house-flipping day-trader.

Stocks are set to erase all of Thursday’s gains right at the open. Blame China. Blame the GOP debate. Blame nothing at all. Price is reality. Here’s where we closed last night:

 

Here’s where we’re set to open this morning:

 

 

Digging deeper into the madness it looks like all the popular stocks (Either heavily-owned or those few with gains YTD) are down across the board:

 

 

Today is a day when technicals are both very basic and important. Watch Wednesday’s lows. If we take them out every single person who “bought the dip” over the last two days will be underwater. Disciplined traders take profits before winners turn into losers. Newbies tend to wait until they’re down before conceding defeat. Either way, there will be sellers. This isn’t chartist jargon speak. It’s no more complicated than training a dog with a shock collar. When something hurts sentient beings seek to stop the hurt.

I can tell you from personal experience getting suckered into a headfake rally hurts. A lot. That means selling. The Trillion Dollar Question is this: Will there be buyers?

You don’t need a lot of new material this morning. All the charts from yesterday still apply (since, you know, Thursday basically never happened at this point). I covered the emotions and basic strategy in my morning write-up and the closing video.

Here’s one chart. It’s the S&P500 over the last two years:

 

Counting from October 2014’s Ebola Lows (we hit 1820 intraday but closed in the mid-1800s) a reversal on the S&P500 anywhere between 1865 and 1850 would constitute a quadruple bottom.

Traders don’t believe in triple bottoms so you can imagine the suspicion with which they view the prospects of a knee-jerk bounce off ancient support. This is especially true in light of the freshness of yesterday’s pain.

Futures aren’t everything, as this week as proven. We could bounce but Friday’s are a matter of time. If we’re down hard at noon NYC time (with its fancy “NY Time Values”) there’s a decent chance today ends in tears.

Very few good decisions are made under pressure. Your instincts will probably betray you. Be afraid but not scared. Don’t make any trades without thinking about the risk-reward first.

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On the opening trading day of 2016 I suggested making some charts to take the emotion out of the then-looming crash.

For those of you who’ve been understandably avoiding your portfolio, the crash is here. At least it for some stocks it is (RIP: GoPro).

As I type futures are higher but yesterday started strong and ended in tears. Bear markets, and we are in a bear market, don’t so much have “trends” as thrashing convulsions. Deal with these things as one would an enormous living fish in the bottom of a canoe. It’s caught you as much as you’ve caught it. Caution is advised.

Here are some charts from earlier this year, updated to represent the ongoing nightmare. Back later. Try not to rock the boat…

S&P500: Support at 1860 is too obvious… Headed for 1,700?

1708 is an official Bear Market. If you wait for someone on TV to tell you when a bear market has started you’re going to end up in the Bear’s stomach. I’m telling you it’s a Bear. I’m as qualified as anyone.

 

Amazon: Filling gaps, as it does…

“Peak Amazon” was pretty good, as graph titles go. Shares are off 16%. History suggests about $525 is a decent spot to start building positions.

 

 

Apple: Honk if you’ve lowered your Q4 iPhone estimates!

 

 

Rough Day for Facebook

 

Twitter is like GoPro without the cool cameras… (Yes, I’m still long)

The Red Menace at Summer Lows

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No need to update this morning’s chart. It’ll be out of date by the time you see it, anyway, given that stocks are falling about 1pt every 20-seconds.

As of this instant the S&P500 is 60pts off the highs of the day at around 1890. I would expect (but am not betting on) stocks regaining 1900 by the close.

At 1870 I am a buyer in some size of equities across the board. Sell-offs are about emotion. If bear markets went down in a straight line they wouldn’t be at all scary. You could just short everything. There is going to be a hellaciously vigorous rally very soon. The question is whether it’s from here or 10% lower.

Today is the first day I’ve heard (felt) real concern from the bulls. That’s the start of a bottom.

Earlier this week I said the time to buy would be when getting long felt completely insane. Being a contrarian is overrated but there’s a 20-minute wait to buy a PowerBall ticket but it would take a nanosecond to get filled on $250,000 worth of Amazon $100 lower than where it was 2 weeks ago.

It’s time to start getting constructive on stocks.

 

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