Today, the market was pulled in all kinds of directions. It seems investors are really looking for clarity, trying to determine whether last week’s vicious selloff or this week’s sharp bounce are indicative of the real underlying trend.
Take the latest news out of the Initial Public Offering (IPO) market. The mobile payment technology company Square (SQ) proved to be a disappointment for company officials, who managed to sell 27 million shares at only $9 each. That was well below the projected range of $11 and $13.
|A crush of events worldwide is affecting global markets.|
It also valued the company at just $2.9 billion overall, less than half the $6 billion valuation it snagged in a round of private funding in 2014. The stock bounced in the aftermarket … but we’ve seen those kinds of early gains fade in the past, so the stock bears watching.
Separately, the online dating company Match Group (MTCH) sold 33.3 million shares at $12 each. That was at the bottom of its proposed $12 to $14 range, though it too bounced in the aftermarket. The reduced amount of money companies are raising is a clear manifestation of waning demand for IPOs. Total IPO volume has now plunged 62% year-over-year, according to Dealogic.
In another development, we just learned that the Treasury Department is planning to clamp down more aggressively on so-called “inversions.” Those are merger transactions in which American corporations buy foreign companies and shift their domicile overseas to avoid a significant amount of U.S. taxes.
The move is often in name and mail location only. Companies usually keep their operations and executives stateside. So Treasury is planning to more aggressively target “skinny down distributions,” “earnings stripping,” and other strategies. They help companies shift profits overseas, shrink their balance sheets artificially, and otherwise get around previous restrictions on relocating.
|“Many on Wall Street didn’t know where to turn today.”|
That move could put further pressure on M&A activity, including a reported deal by Pfizer (PFE) to acquire Allergan PLC (AGN). The drug giant has been trying to put together a $150 billion deal for AGN, at a price of as much as $380 a share. But Allergan shares are trading well below that level — suggesting investors believe the deal could fall through or the offer price could be cut.
Then there’s crude oil. Prices dipped below $40 for the second time in early trading today. That put oil at its lowest level since a couple of days after the August stock market mini-crash. Other key commodities like copper continued to plumb multi-year lows.
To add to today’s confusion and mixed market signals, Treasury bond prices rallied yet again and yields fell. That happened despite a slight improvement in the Philadelphia Fed index for November, and a 5,000-worker drop in initial jobless claims … not to mention yesterday’s somewhat hawkish Fed meeting minutes.
Bottom line: Many on Wall Street didn’t know where to turn today. And it’s worth pointing out that despite all the daily sturm and drang, the S&P 500 is basically trading at the exact same level as it did a year ago. You know I believe it’s vulnerable up here, but it remains to be seen if and when the big money will wake up to that.
So where do you think we head next? Will the valuation deflation we’re seeing in IPOs hurt the broader averages? What about crude’s flirtation with sub-$40 prices? And how about the Treasury Department’s anti-inversion policies? Will that affect a wide swath of deals, or just a handful? Add your comments to these important discussions below.
I’ve offered my take on market risks here in recent columns. In the past 24 hours, many of you took to the website to share your thoughts about whether I’m on target or not.
Reader Howard said: “Returning confidence can also come from obscure places. To see visions of both Russian and other world leaders sitting down calmly together and looking for a combined solution was refreshing. Although I have concerns with our current administration on other matters, to decide to not put boots on the ground is a good thing. Remember these terrorists have no borders and a strategy that keeps them contained as a target is helpful.”
Reader $1,000 Gold also sounded a more optimistic tone, saying: “We have dirt-cheap oil, rock-bottom interest rates, the Fed is printing M2 money full tilt, plus we’re in a correction. Call me a contrarian, but this looks to me like a buying opportunity handed to us on a silver platter.”
Reader Andrew P. offered this take: “The markets don’t have to make financial sense. With rates at zero, flows alone can drive the markets. That means the markets can do absolutely anything. People with money need a place to put it, and that is what has been driving the stock market higher.
“History suggests that the market will go higher until the general public (the suckers) are all-in and the Big Boyz are selling. Then it will crash. So far, the public has largely stayed away and let the Big Boyz trade with each other.”
Finally, Reader Hank said: “Turbulent times indeed. We are teetering between deflationary forces and some inflationary forces. But alas, the deflationary forces are most active in the real world economy and the inflationary forces are mostly in the form of investment bubbles.
“We all know what bubbles do eventually. I am betting on a sharp downturn followed by real ‘helicopter’ money to create the inflation the Fed system needs to keep it from imploding.”
Thanks for sharing, everyone. It should be clear that I remain concerned about all the non-confirmations and divergences between markets, even as stocks bounce back in the past few days. That doesn’t mean a handful of select, higher-yielding, higher-rated, less cyclical stocks can’t make money for you.
But broad, aggressive bets on equities? That’s not my cup of tea here. Moreover, many vulnerable stocks with weak ratings, lousy business prospects, and economic risk are dramatically underperforming. So I’ve been zeroing in on them in my more aggressive Interest Rate Speculator service.
Any ground I didn’t cover here yet? Then let me hear about it below.
Police raids continued overnight, with Belgian forces raiding seven separate locations around Brussels. French officials also confirmed that the lead plotter in the Paris attacks, Abdelhamid Abaaoud, was killed in the raid that country conducted yesterday in the suburb of Saint-Denis. One other person was killed and eight were arrested when police stormed an apartment complex following a tip.
Japan’s central bank refused to boost that country’s QE program at a policy meeting this week. The nation slipped into yet another recession recently, but the Bank of Japan opted to keep its asset buying program at current levels. Some analysts have warned that the BOJ has bought so many bonds, exchange traded funds and other assets that it’s destroying market liquidity.
Best Buy (BBY) disappointed investors with weak fiscal third-quarter sales, and a lackluster outlook for the holiday shopping season. The largest health insurer in the U.S., UnitedHealth Group (UNH), also cut its earnings outlook. It further warned it may be forced to exit the Obamacare insurance marketplace because it isn’t profitable enough given current rules and competition.
On the flip side, cloud computing company Salesforce.com (CRM) delivered solid results that helped send its shares higher. L Brands (LB), the company that operates Victoria’s Secret and Bath & Body Works, also managed to beat earnings targets despite slightly weaker-than-expected revenue.
Does the Best Buy outlook spell trouble for retail spending this holiday season? Or should we take solace in the results from L Brands? What do you think is next in the war on terror? And what kind of action should we expect from foreign central banks in coming weeks and months? Use the website as your commenting outlet.
Until next time,
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