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

 

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):

 

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(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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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:

 

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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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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McDonald’s is under attack in Europe. An Italian-based labor group is accusing the chain is abusing market power to charge excessive rents to franchisees. The group claims these higher costs are passed along to the consumer.

Via BBC: “‘McDonald’s abuse of its dominant market position hurts everyone: franchisees, consumers, and workers. We strongly urge the European Commission to investigate the charges and to use all of its powers to hold McDonald’s accountable,’ said SEIU organising director, Scott Courtney.”

Since I’m long MCD my inclination is to dismiss the issue as fascist whining. To double check I ran a quick search. An Italian combo meal costs roughly half as much as a meal at an “inexpensive restaurant” and 1/8th as much as dinner for 2 at a mid-range eatery.

 

It comes down to wages. Labor groups want to attack McDonald’s corporate for the same reason Willy Sutton robbed banks, “because that’s where the money is”. Unfortunately for those who prefer their solutions to societal inequality super simple, McDonald’s doesn’t set wages at a store level. Franchisees set wages at the going market rate in each location.

McDonald’s has a wage problem. That’s one of the reasons McDonald’s plans to “refranchise” (read: sell) 3,500 units. By 2018 the company will be 90% franchised in the US. Currently 3/4 of the chain is franchised in Europe, which is MCD largest market because the world loves us. McDonald’s charges franchisees a lot because running a McDonald’s is much more profitable than operating a generic pizza stand. Franchising isn’t as lucrative as it once was but it’s still a hell of a deal.

McDonald’s is much bigger than its rivals but suggesting it has monopoly powers is a reach, even by European standards.

 

In Easterbrook We Trust

I’ve been long MCD since Steve Easterbrook became CEO on March 1st. It was a bumpy start but slowly the ship has turned. Last quarter MCD reported its first comp unit sales increase in the US in 2 years. For Q4 estimates are as high as 3.5%.

I love investing in new CEOs. If they’re good they get about a year where they can report just about anything they want in terms of earnings and still get a pass from Wall St. If they’re great the pass can get extended. It took a while for the Street to warm to Easterbrook but when SSS went positive the laggards got on board.

A little turnaround goes a very long way when you’re operating on the scale of Micky D’s. Over the last 12 months MCD is up 25%. The rest of the group has been charbroiled. Buffett and Ackman’s tax-dodging Canadian Burger King/ Tim Horton QSR has lost 20%. Wendy’s gets included just for being nearly flat. Dunkin’, included because it presumably competes for roadside “gas savings” is down 11%:

 

The European Commission has time to review the complaints and suggest remedies. The EU is also reviewing charges MCD is dodging taxes. If sales were falling I’d be worried. With comps expected to rise in all regions in the current period none of these protests matter.

To things keep me bullish even up 25%. First is the new CEO factor. Second, and more importantly, McDonald’s sells the best consumer product of all time. The salty perfection of the McDonald’s french fry is universal and unique. It can’t be knocked off and it is fully optimized in terms of quality. You can go anywhere in the world and recognize a MCD french fry blindfolded. It’s the same value proposition Starbucks offers, discounted for the lack of addictive caffeine.

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