Stocks end first half with down week. Nasdaq lost ~2% on tech weakness, Dow -0.2%, S&P 500 Index -0.6%; Russell 2000 ended flat. Market weakness partly attributed to hawkish global central bank comments, which pushed yield on 10-year Treasuries up 15 basis points (0.15% to 2.30%), pressured the dollar. Favorable bank stress test results boosted financials, renewed focus on reflation trade into banks, energy.
Oil bounce continued, WTI crude oil +7%, bringing session winning streak to seven and price back above $46/bbl. Friday brought first weekly drop in rig count since January.
Strong first half despite recent choppiness. Nasdaq rallied 14%, its best first half since 2009, S&P 500 (+8%) produced its best first half since 2013 (Dow matched S&P’s first half gain).
Overnight & This Morning
S&P 500 higher by ~0.3%, following gains in Europe. Quiet session likely with early holiday close (1 p.m. ET).
Solid gains in Europe overnight– Euro Stoxx 50 +0.9%, German DAX 0.6%, France CAC 40 +1.0%. Solid purchasing managers’ survey data (June Markit PMI 57.4).
Asian markets closed mostly higher, but with minimal gains.
Crude oil up 0.4%, poised for eighth straight gain.
Treasuries little changed. 10-year yield at 2.29%. Early bond market close at 2 p.m. ET.
Japanese Tankan survey of business conditions suggested Japanese economy may have increased in the second quarter, manufacturing activity is at multi-year highs.
China’s Caixin manufacturing PMI, generally considered more reliable than official Chinese PMI, exceeded expectations with a 50.4 reading in June, up from 49.6 in May.
Today’s economic calendar includes key ISM manufacturing index, construction spending.
Several key data points this week, despite the holiday-shortened week. Today brings the important Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI), followed by minutes from the June 13-14 Federal Reserve (Fed) policy meeting on Wednesday and Friday’s employment report. Key overseas data includes services PMI surveys in Europe, China’s manufacturing PMI, and the Japanese Tankan sentiment survey (see below). Market participants will scrutinize this week’s data for clues as to the path of the Fed’s rate hike and balance sheet normalization timetables. Views are diverging again, though not as dramatically as in late 2015/early 2016.
The first six months in the books. It was a solid start to the year, with the S&P 500 up 8.2%, the best start to a year since 2013. Yet, this year is going down in history as one of the least volatile starts to a year ever. For instance, the largest pullback has been only 2.8%–which is the second smallest first-half of the year pullback ever. Also, only four days have closed up or down 1% or more–the last time that happened was in 1972. Today, we will take a closer look at the first half of the year and what it could mean for the second half of the year.
Markit Mfg. PMI (Jun)
ISM Mfg. (Jun)
Construction Spending (May)
Italy: Markit Italy Mfg. PMI (Jun)
France: Markit France Mfg. PMI (Jun)
Germany: Markit Germany Mfg. PMI (Jun)
Eurozone: Markit Eurozone Mfg. PMI (Jun)
UK: Markit UK Mfg. PMI (Jun)
Eurozone: Unemployment Rate (May)
Russia: GDP (Q1)
Japan: Vehicle Sales (Jun)
Happy July 4th Holiday!
Japan: Nikkei Japan Services PMI (Jun)
China: Caixin China Services PMI (Jun)
Factory Orders (May)
Durable Goods Orders (May)
Capital Goods Shipments and Orders (May)
FOMC Meeting Minutes for Jun 14
Italy: Markit Italy Services PMI (Jun)
France: Markit France Services PMI (Jun)
Germany: Markit Germany Services PMI (Jun)
Eurozone: Markit Eurozone Services PMI (Jun)
UK: Markit UK Services PMI (Jun)
Eurozone: Retail Sales (May)
ADP Employment (Jun)
Initial Jobless Claims (Jul 1)
Trade Balance (May)
Germany: Factory Orders (May)
ECB: Account of the Monetary Policy Meeting
Mexico: Central Bank Monetary Policy Minutes
Japan: Labor Cash Earnings (May)
Change in Nonfarm, Private & Mfg. Payrolls (Jun)
Unemployment Rate (Jun)
Average Hourly Earnings (Jun)
Average Weekly Hours (Jun)
Labor Force Participation & Underemployment Rates(Jun)
Germany: Industrial Production (May)
France: Industrial Production (May)
Italy: Retail Sales (May)
UK: Industrial Production (May)
UK: Trade Balance (May)
Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.
LOS ANGELES—Despite the star power of Leonardo DiCaprio and director Martin Scorsese, the 2013 hit movie “The Wolf of Wall Street” took more than six years to get made because studios weren’t willing to invest in a risky R-rated project.
Help arrived from a virtually unknown production company called Red Granite Pictures. Though it had made just one movie, Red Granite came up with the more than $100 million needed to film the sex- and drug-fueled story of a penny-stock swindler.
Global investigators now believe much of the money to make the movie about a stock scam was diverted from a state fund 9,000 miles away in Malaysia, a fund that had been established to spur local economic development.
The investigators, said people familiar with their work, believe this financing was part of a wider scandal at the Malaysian fund, which has been detailed in Wall Street Journal articles over the past year.
The fund, 1Malaysia Development Bhd., or 1MDB, was set up seven years ago by the prime minister of Malaysia, Najib Razak. His stepson, Riza Aziz, is the chairman of Red Granite Pictures.
The 1MDB fund is now the focus of numerous investigations at home and abroad, which grew out of $11 billion of debt it ran up and questions raised in Malaysia about how some of its money was used.
Investigators in two countries believe that $155 million originating with 1MDB moved into Red Granite in 2012 through a circuitous route involving offshore shell companies, said people familiar with the probes. This same money trail also is described by a person familiar with 1MDB’s dealings and supported by documents reviewed by the Journal.
The story of how “The Wolf of Wall Street” was financed brings together Hollywood celebrities with a cast of characters mostly known for their connections to the Malaysian prime minister. It detours through parties in Cannes and aboard a yacht, and spending on such embellishments as a rare, million-dollar movie poster and an original 1955 Academy Award statuette.
The U.S. Federal Bureau of Investigation has issued subpoenas to several current and former employees of Red Granite and to a bank and an accounting firm the company used, according to people familiar with the subpoenas.
“Red Granite is responding to all inquiries and cooperating fully,” said a spokesman for the company, based in West Hollywood, Calif. He said it had no reason to believe the source of its financing was irregular.
The 1MDB fund and Mr. Najib’s office didn’t respond to questions about Red Granite. In the past, both have denied any wrongdoing. Representatives of Messrs. DiCaprio and Scorsese didn’t respond to numerous requests for comment.
The film grossed about $400 million and was nominated for five Academy Awards, including best picture. There is no indication any profits from it flowed to 1MDB or Malaysia.
The movie, heavy on depictions of Wall Street debauchery, wasn’t distributed in Malaysia after authorities there demanded more than 90 cuts to comply with local morality laws, a Malaysian official said.
Red Granite Pictures was set up in 2010 by Mr. Aziz, the Malaysian prime minister’s stepson, now 39 years old, and Christopher McFarland, a Kentucky businessman who is 43.
Mr. Aziz had worked in finance in London, left to travel and ended up in the U.S., he once told the Hollywood Reporter. Mr. McFarland, called Joey, invested in various ventures and moved to Hollywood to try to make movies, people who know him say.
The two were introduced by a mutual friend: a peripatetic Malaysian businessman named Jho Low, who became a fixture on the party circuit in Los Angeles, Las Vegas and New York starting in 2009. Mr. Low gained media attention for a lavish lifestyle that brought him into the orbit of celebrities such as Paris Hilton and Lindsay Lohan.
Mr. Low knew Mr. Aziz from the U.K., where both had studied, and forged ties to Mr. Aziz’s family, including Prime Minister Najib. In Malaysia, Mr. Low, whose full name is Low Taek Jho and who is 34, played a role in setting up the fund that became 1MDB.
Messrs. Aziz and McFarland worked for a time out of L’Ermitage Beverly Hills, a luxury hotel owned by a company Mr. Low founded. The aspiring movie moguls later set up an office on Sunset Boulevard that they filled with Hollywood memorabilia.
These included a poster for the 1927 Fritz Lang science-fiction film “Metropolis,” a rare original that cost $1 million, said people familiar with it.
Red Granite burst on the scene in 2011 by throwing a million-dollar beach extravaganza at the Cannes film festival with fireworks and performances by Kanye West, dressed all in white, and Pharrell Williams. A few months later its first movie was released, “Friends With Kids,” starring Adam Scott and Kristen Wiig.
“They definitely came off as high rollers when they started,” said Howard Cohen, co-president of Roadside Attractions, the distributor of Red Granite’s first film.
In the insular movie business, many were surprised to find the high-energy but inexperienced Mr. McFarland overseeing dealings with filmmakers. “Joey is their mouthpiece, and Riza—he said maybe 20 words to me,” said Charles Wessler, a producer of a later Red Granite-backed film.
Messrs. Aziz and McFarland next turned their attention to “The Wolf of Wall Street.” Mr. Low, the Malaysian financier, made a key connection: He knew Mr. DiCaprio and introduced him to Red Granite, according to people familiar with the introduction.
Mr. DiCaprio had long been interested in a movie based on the memoirs of a penny-stock operator who went to prison for fraud, Jordan Belfort. But the actor and other boosters couldn’t find a studio that believed a film so expensive and potentially offensive would find a big enough audience.
Red Granite was willing to take the risk.
Shooting began in August 2012. Three months later, when Mr. DiCaprio had a birthday, the Red Granite principals forged a closer tie to him with an unusual gift: the Oscar statuette presented to Marlon Brando in 1955 for best actor in “On the Waterfront.” People who described the gift said the statuette had been acquired for around $600,000 through a New Jersey memorabilia dealer.
Mr. Aziz, asked about Red Granite’s financing in a 2014 New York Times interview, identified the main investor as a businessman in Abu Dhabi named Mohamed Ahmed Badawy Al-Husseiny. “There was no Malaysian money,” he said.
Mr. Al-Husseiny is an American who then headed Aabar Investments PJS, which is an arm of an Abu Dhabi sovereign-wealth fund known as IPIC. The state-owned firms did business with 1MDB. For instance, IPIC guaranteed some of the Malaysian fund’s bonds.
In connection with the IPIC guarantees, 1MDB reported in corporate filings that in 2012, it sent $1.4 billion to Aabar as collateral.
Investigators believe this money never got to Aabar in Abu Dhabi but went instead to a separate, almost identically named company that Mr. Al-Husseiny had helped set up in the British Virgin Islands, called Aabar Investments PJS Ltd., said people familiar with the probes.
The investigators believe about $155 million of this money then flowed to Red Granite Capital, a firm Mr. Aziz had formed to fund the film company.
Documents reviewed by the Journal show three transfers to Red Granite Capital: of $60 million, $45 million and $50 million in 2012.
The $60 million and $45 million transfers were booked by Red Granite Capital as a loan from the British Virgin Islands company that had a name almost identical to Aabar Investments.
Most of the $50 million moved to Red Granite from that same British Virgin Islands company, via intermediaries, the investigators believe.
Among the intermediaries, according to people familiar with investigations and the person familiar with 1MDB: Telina Holdings Inc., a company that had been set up in the British Virgin Islands by Mr. Al-Husseiny and his boss, Khadem Al Qubaisi.
Representatives of the two men, who have been removed from their posts in Abu Dhabi, declined to comment.
A November 2012 loan agreement from Telina Holdings, reviewed by the Journal, shows the $50 million was to fund “The Wolf of Wall Street.” This loan has been repaid, said people familiar with it.
The spokesman for Red Granite said it “has been repaying and will continue to repay all of its loans in accordance with their terms.”
It isn’t clear to whom Red Granite could repay the $105 million loan. The British Virgin Islands firm that extended it was liquidated last June.
“Red Granite had no reason to believe at the time that the source of Aabar’s funds was in any way irregular and still believes the loan to be legitimate,” said the film company’s spokesman.
Once “The Wolf of Wall Street” was in production, Messrs. Aziz and McFarland were sometimes on the set and involved.
On Dec. 31, 2012, around the end of filming, many of those involved celebrated New Year’s festivities in Australia and then flew to Las Vegas on a rented jetliner in time to celebrate it again, according to people familiar with the trip, who said the celebrants included Messrs. Aziz and Low, “Wolf of Wall Street” stars Mr. DiCaprio and Jonah Hill, along with singer and actor Jamie Foxx, an acquaintance of Mr. Aziz. A representative of Mr. Foxx declined to comment. A spokeswoman for Mr. Hill didn’t respond to a request for comment.
Six months after the movie’s debut, Messrs. DiCaprio, Aziz and Low attended the Brazilian World Cup and spent time on the Topaz, a 482-foot yacht owned by Sheikh Mansour Bin Zayed Al Nahyan, chairman of the Abu Dhabi sovereign-wealth fund IPIC, according to people familiar with the excursion. Sheikh Mansour, who is also deputy prime minister of the United Arab Emirates, didn’t attend, they said.
The success of “The Wolf of Wall Street” established Red Granite as a player in Hollywood. It went on to produce “Dumb and Dumber To,” a sequel to the 1994 Jim Carrey and Jeff Daniels comedy, and another comedy, “Daddy’s Home,” with Will Ferrell and Mark Wahlberg. It is planning to bring out a film about George Washington.
Investigations of 1MDB “will not affect our ability to move forward with the exciting projects Red Granite is developing,” the firm’s spokesman said.
Written by Bradley Hope, John R. Emshwiller, Ben Fritz of The Wall Street Journal
When Daniel Nadler woke on Nov. 6, he had just enough time to pour himself a glass of orange juice and open his laptop before the Bureau of Labor Statistics released its monthly employment report at 8:30 a.m. He sat at the kitchen table in his one-bedroom apartment in Chelsea, nervously refreshing his web browser — Command-R, Command-R, Command-R — as the software of his company, Kensho, scraped the data from the bureau’s website. Within two minutes, an automated Kensho analysis popped up on his screen: a brief overview, followed by 13 exhibits predicting the performance of investments based on their past response to similar employment reports.
Nadler couldn’t have double-checked all this analysis if he wanted to. It was based on thousands of numbers drawn from dozens of databases. He just wanted to make sure that Kensho had pulled the right number — the overall growth in American payrolls — from the employment report. It was the least he could do, given that within minutes, at 8:35 a.m., Kensho’s analysis would be made available to employees at Goldman Sachs.
In addition to being a customer, Goldman is also Kensho’s largest investor. Nadler, who is 32, spent the rest of the morning checking in with some of the bank’s most regular Kensho users — a top executive on the options-and-derivatives-trading desks, a fund manager — then took an Uber down for a lunch meeting at Goldman’s glass tower just off the West Side Highway in Manhattan. While almost everyone in the building dresses in neatly pressed work attire, Nadler rarely deviates from his standard outfit: Louis Vuitton leather sandals and a casual but well-cut T-shirt and pants, both by the designer Alexander Wang. Nadler owns 10 sets of these. His austere aesthetic is informed by the summer vacations he spent in Japan while pursuing a doctoral degree in economics from Harvard, mostly visiting temples and meditating. (‘‘Kensho’’ is the Japanese term for one of the first states of awareness in the Zen Buddhist progression.) He also wrote a volume of poetry — imagined ancient love poems — that Farrar Straus & Giroux will publish later this year.
I met with Nadler later that day in his own office, across the street from the Goldman building, on the 45th floor of 1 World Trade Center. His dozen or so employees shared a large room decked out in typical start-up style, including an aquarium and large speakers playing electronic music. Nadler has an office off to the side with little more than a large desk, made out of reclaimed telephone poles, and a large upholstered leather chair with matching ottoman. After closing the door, Nadler, who has curly dark hair and pale skin, sat on the ottoman, folded his bare feet under him and told me about the day’s feedback from Goldman. This included some tips on what they wanted in the next report, and a good dose of amazement at Kensho’s speed. ‘‘People always tell me, ‘I used to spend two out of five days a week doing this sort of thing,’ or ‘I used to have a guy whose job it was to do nothing other than this one thing,’ ’’ Nadler said.
This might sound like bragging. But Nadler was primarily recounting those reactions as a way of explaining his concern about the impact that start-ups like his are likely to have on the financial industry. Within a decade, he said, between a third and a half of the current employees in finance will lose their jobs to Kensho and other automation software. It began with the lower-paid clerks, many of whom became unnecessary when stock tickers and trading tickets went electronic. It has moved on to research and analysis, as software like Kensho has become capable of parsing enormous data sets far more quickly and reliably than humans ever could. The next ‘‘tranche,’’ as Nadler puts it, will come from the employees who deal with clients: Soon, sophisticated interfaces will mean that clients no longer feel they need or even want to work through a human being.
‘‘I’m assuming that the majority of those people over a five-to-10-year horizon are not going to be replaced by other people,’’ he said, getting into the flow of his thoughts, which, for Nadler, meant closing his eyes and gesticulating as though he were preaching or playing the piano. ‘‘In 10 years Goldman Sachs will be significantly smaller by head count than it is today.’’
Goldman executives are reluctant to discuss the plight of their displaced financial analysts. Several managers I spoke to insisted that Kensho has not yet caused any layoffs, nor is it likely to soon. Nadler had warned me that I would hear something like that. ‘‘When you start talking about automating jobs,’’ he said, ‘‘everybody all of a sudden gets really quiet.’’
Goldman employees who lose their jobs to machines are not likely to evoke much pity. But it is exactly Goldman’s privileged status that makes the threat to its workers so interesting. If jobs can be displaced at Goldman, they can probably be displaced even more quickly at other, less sophisticated companies, within the financial industry as well as without.
In late 2013, two Oxford academics released a paper claiming that 47 percent of current American jobs are at ‘‘high risk’’ of being automated within the next 20 years. The findings provoked lots of worried news reports about robots stealing jobs. The study looked at 702 occupations, using data from the Department of Labor, and assigned a probability of automation to each one, according to nine variables. The conclusions made it clear that this was no longer just the familiar (and ongoing) story of robots replacing factory and warehouse employees. Now software is increasingly doing the work that has been the province of educated people sitting in desk chairs. The vulnerability of these jobs is due, in large part, to the easy availability and rapidly declining price of computing power, as well as the rise of ‘‘machine learning’’ software, like Kensho, that gathers and assimilates new information on its own.
According to the Oxford paper and subsequent research, employment prospects vary significantly by industry. In health care, for example, where human interaction is vital, automation threatens fewer jobs than it does in the labor market as a whole. Taxi and truck drivers, though, face a bleak future given recent advances in self-driving cars. Among better-compensated professions, the Oxford researchers took into account software that can analyze and sort legal documents, doing the work that even well-paid lawyers often spend hours on. Journalists face start-ups like Automated Insights, which is already writing up summaries of basketball games. Finance stood out in particular: Because of the degree to which the industry is built on processing information — the stuff of digitization — the research suggested that it has more jobs at high risk of automation than any skilled industry, about 54 percent.
The Oxford study received plenty of criticism — understandably, given the patina of exactness that it tried to apply to a speculative exercise. Nevertheless, the financial industry is taking automation very seriously, both as an opportunity and as a threat. It is one thing to make a few analysts redundant, but automation could put whole business models in peril. Investments in what is known as fintech, or financial technology, tripled between 2013 and 2014 to $12.2 billion, and start-ups are now taking aim at nearly every line of financial business. Decisions about loans are now being made by software that can take into account a variety of finely parsed data about a borrower, rather than just a credit score and a background check. So-called robo-advisers create personalized investment portfolios, obviating the need for stockbrokers and financial advisers. Nearly every Wall Street firm has put out research reports on the tens of billions of dollars of revenue that might be lost to these upstarts in the coming years. Banks are trying to fend off the newcomers by making their own investments in start-ups like Kensho, which has raised more than $25 million so far.
The skilled industries that form the bedrock of New York City’s economy have so far largely avoided this sort of transformation, because the work of financial analysts, publishers and designers hasn’t been easy to automate. But to look at a company like Kensho, and the sort of conversation it generates across the financial industry, is to see the degree to which these trends are now confronting industries that used to be thought exempt from this sort of disruption. Last fall, Antony Jenkins, who was dismissed a few months earlier as chief executive of Barclays, the giant British bank, gave a speech in which he said a coming series of ‘‘Uber moments’’ would hit the financial industry.
‘‘I predict that the number of branches and people employed in the financial-services sector may decline by as much as 50 percent,’’ Jenkins told the audience. ‘‘Even in a less-harsh scenario, I expect a decline of at least 20 percent.’’ This process could, in at least some cases, help do away with some of the expensive bloat in the financial system, providing more transparent services with fewer hidden fees. It could also be seen as a satisfying blow against the titans of an industry that only recently almost crashed the world economy. But so far the burden of job losses is stopping just short of the executive suites, even as the gains in efficiency are worsening already troubling levels of income inequality.
Some of the venture capitalists backing Kensho have told Nadler that he would be wise to stop talking about the potential job losses at the same banks he is trying to secure as customers. Nadler has told them that he needs to carry on, partly to maintain his intellectual integrity. He often connects his discussion of jobs to his political fund-raising on behalf of candidates who call for a more robust social-safety net. But he also says that his awareness of what his business is both creating and taking away sets him apart as an entrepreneur: It’s his ‘‘edge’’ in a business that is all about competing to predict the future more accurately.
Kensho’s maincustomers at Goldman so far have been the salespeople who work on the bank’s high-ceiling trading floors. In recent months, they have used the software to respond to incoming phone calls from investors who buy and sell energy stocks and commodities, wondering how they should position their portfolios in response to, for instance, flare-ups in the Syrian civil war. In the old days, the salespeople could draw on their own knowledge of recent events and how markets responded, with all the limitations of human memory. For a particularly valuable client, the sales representative might have called a research analyst within Goldman to run a more complete study, digging up old news events and looking at how markets responded in each case. The problem with this approach was that by the time the results came back, the original trading opportunity was often gone.
Now a sales representative can simply click an icon and access the Kensho interface, which consists of a simple black search bar. Nadler walked me through the process on his own laptop. Type in the word ‘‘Syria,’’ and several groups of events related to Syria’s civil war appear, in much the same way that Google recommends queries based on past searches. Here, among the top event groups, are ‘‘Advances Against ISIS,’’ which includes 25 past events, and ‘‘Major ISIS Advances and Brutal Atrocities,’’ with 105 events.
Kensho’s software is constantly tweaking and broadening these suggested search terms, all with little human intervention. In some ways, this is the most sophisticated part of the program. In the past, a trader or analyst would have to search Wikipedia or a news database using whatever keywords came to mind. Kensho’s search engine automatically categorizes events according to abstract features. It has figured out, for instance, that ISIS’s seizure of Palmyra and France’s first airstrike in Syria were both escalations in the civil war there but also that in one of those cases, ISIS was the aggressor while in the other case, it was on the defense. The software also looks for new and unexpected relationships between events and asset prices, allowing it to recommend searches that a user might not have considered. For this feature, Nadler said, he hired one of the machine-learning whizzes who worked on Google’s megacatalog of the world’s libraries.
Back on the trading desk, after picking out one group of events — the 27 incidents of ‘‘Escalations in the Syrian civil war,’’ say — a sales trader can pick from a series of drop-down menus that narrow the search to a specific time period and a specific set of investments. The broadest set includes the world’s 40 or so major assets, including German stocks, the Australian dollar and a few varieties of crude oil. They can then click on the green Generate Study button, and a few minutes later they’ll have a new page full of charts. Nadler clicked to demonstrate. The top chart showed that the prices of natural gas and crude oil have underperformed in the weeks after past escalations in the war, while Asian stocks and the United States and Canadian dollar pair has outperformed. Scrolling down, we could also see how each event in Syria played out and begin to structure an optimal set of trades based on that history.
Nadler closed his laptop. The whole process had taken just a few minutes. Generating a similar query without automation, he said, ‘‘would have taken days, probably 40 man-hours, from people who were making an average of $350,000 to $500,000 a year.’’
This is all quite something for a company that was first dreamed up less than three years ago. In 2013, while in graduate school, Nadler was working as a visiting scholar at the Federal Reserve Bank in Boston. At the time, the Greek elections and instability across Europe were buffeting the financial markets. When Nadler asked how he could find out what impact similar events had on financial markets, he learned that neither the regulators nor the bankers had any good method for doing so beyond digging up old news clips. In his free time, Nadler began talking with a former Google programmer he befriended at a student club for Japan enthusiasts. Nadler was supposed to be finishing up his doctoral dissertation on the influence of politics on the 2008 financial crisis. Instead, within weeks, he had put together a small team and received early funding for his idea from Google’s venture-capital arm. They later received investments from many other sources, including the C.I.A.’s venture-capital arm, according to Forbes.
Kensho’s main office is still in Cambridge, Mass., two floors above an old barbershop, with windows looking out onto Harvard Yard. The 30 or so employees in the large main room look like the kind of bright-eyed kids who in years past might have gone to work for Goldman Sachs. Here, though, they work at standup desks, wear jeans and enjoy the benefits of a Zen room, with pillows and tatami mats for meditation, as well as a game room with chessboards and a poker table.
I visited the Cambridge office in December, shortly before Christmas. When I arrived, most of the employees were doing their Secret Santa gift exchange; their laughter frequently trickled back to the conference room where I sat with Nadler and a few of his top deputies. Curious to know how much they all talked about the larger implications of their work, I asked the deputies how quickly the topic of automation and job loss had come up in their relationship with Nadler.
‘‘Pretty much the second sentence,’’ said Matt Taylor, the chief technology officer, who, at 38, is one of the senior citizens of the company.
‘‘This was Day 1,’’ said Martin Camacho, Kensho’s 20-year-old chief architect, who entered Harvard as a freshman when he was 15.
Camacho remembered going home one night to Nadler’s apartment during their first summer working on Kensho. They watched the science-fiction film ‘‘Oblivion,’’ about a world populated by alien-generated human clones, and stayed up talking about the socioeconomic implications of the story. More recently, Nadler invited his engineering team to a dinner at one of Cambridge’s nicest restaurants, Henrietta’s Table, for a group conversation about the more distant implications of automation. Nadler said he anticipated some form of strong artificial intelligence, whereby computers in the far future would be smart enough to anticipate our needs and usher in an era of abundance. For the next few decades, though, he predicted a more complicated time — an interregnum in which the computers are not as smart as people but smart enough to do many of the tasks that make us money.
Camacho was less pessimistic than his boss. When computer-assisted math proofs were invented a few years back, he said, it didn’t lead to any decline in the number of math-research jobs. ‘‘I think there will be plenty for everyone to do,’’ Taylor said, agreeing.
When I raised the topic of automation with executives at Goldman and beyond, I often heard a similarly optimistic belief that all the new software will free up employees in the financial industry to do other, more valuable things; that it would also create new types of jobs that don’t exist right now. Several executives I spoke with argued that when A.T.M.s were widely deployed, you didn’t suddenly see bank branches disappearing.
This is a common criticism of the Oxford report on automation: Even if 47 percent of all current jobs end up being automated, that does not mean that 47 percent of the working population will not have jobs, as many newspaper articles on the report concluded. Cars once displaced lots of coachmen and stable boys but created many more new jobs laying out highways and attending service stations. Nowadays, software that provides financial advice has automated the work of some stockbrokers, but it is also expanding the number of people getting financial advice and the demand for cheap investment products.
The lead author on the Oxford paper, Carl Benedikt Frey, told me that he was aware that new technologies created jobs even as they destroyed them. But, Frey was quick to add, just because the total number of jobs stays the same doesn’t mean there are no disruptions along the way. The automation of textile work may not have driven up the national unemployment rate, but vast swathes of the American South suffered all the same. When it comes to those A.T.M.s, there has, in fact, been a recent steady decline in both the number of bank branches and the number of bank tellers, even as the number of low-paid workers in remote call centers has grown.
This points to a disconcerting possibility: Perhaps this time the machines reallyare reducing overall employment levels. In a recent survey of futurists and technologists, the Pew Research Institute found that about half foresee a future in which jobs continue to disappear at a faster rate than they are created.
Martin Chavez, a boisterous, bearded man who runs all of Goldman’s technological operations, is unrestrained in his enthusiasm for Kensho. ‘‘This thing that we would have done in a very bespoke, almost artisanal way is now something that Kensho has industrialized,’’ he told me.
Chavez said Kensho itself was unlikely to displace many employees. The software, he said, was doing something that was previously so time-consuming that it was seldom attempted. (Some users also told me that there were still significant limitations on the sort of events the software could search.) But whatever the impact of Kensho, Chavez’s larger efforts to digitize more of Goldman’s operations are already changing the number and the type of employees at the firm. Over the last few years, the number of campus recruits coming to Goldman from science-and-technology majors has gone up 5 percent each year, while the total head count has barely budged. (Goldman is one of the few companies on Wall Street at which the total number of employees hasn’t dropped significantly.) ‘‘I’m pretty sure there are going to be new jobs 10 or 20 years from now that none of us could even imagine today,’’ Chavez said.
Stock trading, one of the earliest areas to go electronic, provides an interesting precedent for how automation can play out in an institution like Goldman. On the company’s trading desks, stocks are now bought and sold by computers instead of people. Chavez says that the advent of computerized trading over the last two decades has reduced the number of Goldman employees who buy and sell American stocks the old-fashioned way — over the phone — to four from around 600, but the change in the number of traders tells only part of the story. Some of the traditional traders were replaced by programmers who design and monitor the new trading algorithms. Beyond that, there are now new jobs in the data centers where the high-speed trading takes place.
Goldman doesn’t provide numbers on any of this. But Paul Chou, who worked on Goldman’s electronic-trading desks from 2006 to 2010, told me that he would guess that the company probably needed one programmer for every 10 of the old-school traders who lost their jobs. In one sign of the shrinking work force, Goldman moved the last trader out of one of its four Manhattan trading floors last year.
The progression of Goldman’s stock-trading operations also illustrates that automation is not an on-off switch. When Chou first joined Goldman, after graduating from M.I.T., part of his job involved logging onto dozens of trading systems and checking on what the algorithms were spitting out to make sure they weren’t making any mistakes before the trades were executed. Chou sat near a woman who had been doing phone-based trading for years. She helped Chou and his young colleagues learn what to look for in a good trade. Over time, though, the programs proved themselves more error-proof than the humans. The woman left Goldman. And then Chou himself created a new program that logged into all the trading systems and pulled everything into a single screen. When he first got it going, he remembers his boss, a programmer himself, turning to Chou and saying, ‘‘I don’t even know why I show up to work anymore.’’
The software Chou designed made it possible for him to dedicate himself to higher-level work, researching new trading strategies for the computers. This was more satisfying than all the monitoring he had been doing, but eventually it became too repetitive as well. Chou left Goldman in 2010 for Silicon Valley and now runs LedgerX, an options exchange that he founded with his wife and two others. The team he left at Goldman was smaller than it was when he arrived.
Over the course of my conversations with Nadler, he backed away from the notion that Kensho will destroy jobs at Goldman itself. But he said he had no doubt that Kensho and other financial start-ups would eliminate jobs as they expanded across the industry and that the pace of the losses would be much faster outside Goldman than inside. After the end of Goldman’s period of exclusivity with Kensho last summer, Nadler signed contracts to roll out the software at JPMorgan Chase and Bank of America.
The number of jobs that these banks will support in the future will be influenced by much more than just software. Banks are currently cutting back in response to slower-than-expected economic growth and new regulations since the financial crisis. But these factors are also encouraging all the banks to look for any place where they can find a cheaper and more transparent way to do jobs that are currently being done by expensive and unreliable humans.
When I asked Chavez whether the job losses were likely to continue to outpace the gains, he reacted with what seemed like genuine uncertainty. ‘‘That is one of the most interesting questions of our time,’’ he said.
Carl Benedikt Frey, the lead author of the 2013 study on automation, has done more recent research indicating that innovations are no longer providing as big a boost to the economy and the labor force as they did in the past. In a paper he published last year with Thor Berger, a Swedish academic, he found that in the 1980s, a large portion of the American work force was going into job categories that did not exist a decade before; IBM, in other words, was hiring. That movement, though, slowed down in the ’90s and went practically to zero between 2000 and 2010. To the degree that there are new jobs, Frey’s data suggests that they are often lower-paying ones that serve the wealthy elite, in roles like personal trainer or barista.
‘‘Technology is becoming more labor-saving and less job-creating,’’ Frey said.
One theory for why this might be happening is that many of the recent technological advances have been in software rather than hardware. While a company like IBM or Dell needed employees to build each new computer for every new customer, software like Facebook and Kensho can be replicated endlessly, at near-zero marginal cost. When Chou came up with the software that automatically logged onto dozens of trading systems, it could essentially have been rolled out across all of Goldman’s trading desks around the world the next day. This is very different from the 1970s, when Detroit would need to retrofit its car-manufacturing plants one at a time, after the robots themselves were actually built. The difference is what convinced Chou, after his time at Goldman Sachs and in Silicon Valley, that this phase of automation would play out differently from past ones.
‘‘We are not coming up with new jobs as fast as we are replacing them,’’ Chou told me.
This observation appears to be borne out by Kensho. In less than three years, Nadler’s company has expanded to serve three of the world’s largest banks and has needed only around 50 employees to do so, just enough to fill two relatively small offices. Recently, Nadler’s New York staff moved to a bigger office in 1 World Trade Center. It has more room for desks so that Kensho can expand. But most of the additional space is taken up by a kitchen, a pool table and a putting green.
The growth has made Kensho worth hundreds of millions of dollars and turned Nadler into a millionaire many times over, at least when his stake in the company is taken into account. But it’s not clear how beneficial his company will be to the American labor market as a whole. Back when I first met Nadler, for a lunch last summer, he wasn’t too proud to admit this. ‘‘The cynical answer that another tech entrepreneur would give you is that we’re creating new jobs, we’re creating technology jobs,’’ he told me. ‘‘We’ve created, on paper at least, more than a dozen millionaires.
‘‘That might help people sleep better at night,’’ he continued, ‘‘but we are creating a very small number of high-paying jobs in return for destroying a very large number of fairly high-paying jobs, and the net-net to society, absent some sort of policy intervention or new industry that no one’s thought of yet to employ all those people, is a net loss.’’
Bernie Sanders has built his campaign on vilifying Wall Street and any politician who tries to court its support.
Needless to say, the powers that be on Wall Street have not taken kindly to the Vermont Senator’s characterization of their industry. The most recent evidence for this dismay is a client letter penned by J.P. Morgan Chase’s Michael Cembalest, who is the chairman of investment strategy at the bank’s asset management division. In the letter, Cembalest says Sanders’ tax plans are so far out of the mainstream of U.S. history they are “in a league of their own.”
Cembalest studied the major tax increases of the past seventy-five years, and produced this chart, obtained by Zero Hedge.
Here’s how Cembalest explains the chart:
The revenue raised by each bill is shown on the Y axis, alongside prevailing Federal tax receipts (individual taxes, corporate taxes and excise taxes) before passage of each bill on the X axis . . . Sanders’ proposals are in a league of their own. The only bill that comes close was passed in 1942, except there were two big differences: the US was in the middle of WWII, and at the time, total Federal tax receipts were much lower. Even tax increases in the 1.5%-2.0% of GDP range have not been seen since the Korean War, when tax receipts were also lower than they are today . . .
Democratic socialism has a high cost, and in all likelihood, it would probably not just be borne by billionaires and millionaires, campaign rhetoric notwithstanding.
This criticism is a preview of what Sanders can expect if he were to secure the Democratic nomination. But the above chart is not a helpful way to understand the radical nature of Sanders’ proposals.
As I have written before, the one truly transformative idea of the Sanders’ campaign is his plan to nationalize healthcare by providing Medicare for all. This is his only proposal which requires raising direct taxes on anyone making less than $250,000, and it would require putting a lot of money that used to go to health insurance companies in the coffers of the federal government.
What makes Sanders proposal stand out the most on this chart, and push his bubble way to the right, is that he is calling for increases in tax receipts when government receipts are already historically high. But there is no agreement from economists on whether high government receipts, at least as a percentage of GDP, is necessarily a bad thing.
What’s more, nationalizing healthcare is not the same thing as taxing people to subsidize the military or the poor. The traditional economic argument against moving an industry from private hands to a public one is that the private sector is more efficient than the government. But in the realm of healthcare, this is simply not true. The United States spends more on healthcare as share of GDP, with worse outcomes, than any other industrialized country. It’s also the country where private industry has the most power.
Take away the massive tax increases needed to fund Medicare for all, and the Sanders agenda looks a lot like a traditionally left-wing Democratic party platform. He wants to create a modest insurance program so that workers can take off for medical emergencies and to care for newborn babies. He wants to tax financial transactions to subsidize public education. And he wants to expand Social Security benefits $65 per month on average by raising payroll taxes on wealthy earners.
What will likely unsettle actual voters about the Sanders platform is not that Sanders wants a more active government, but that the 49% of Americans who get their health insurance through their employer will have to instead go onto Medicare. This may ultimately be a better deal for these folks, but it’s a big change nonetheless, and human beings are naturally inclined to prefer protecting what they already have over getting something new.
Of course, if Sanders does win the nomination, none of these facts will matter. Industries like Wall Street, for which Sanders has shown nothing but disdain, will pull out all the stops arguing that the Sanders agenda is far out of the mainstream. And if history serves as guide, they’ll probably be pretty effective at getting this message to stick.
Morgan Stanley’s Adam Parker still isn’t sure what is going on in the markets.
Parker has some of the most blunt and honest writing we read from Wall Street.
Coming into 2016, he basically told clients that he was not sure what was going to happen to the stock market, which is probably something a lot of people who have to forecast think but won’t say.
Specifically, Parker said nobody can forecast the price-to-forward earning ratio for the S&P 500 more than a few years out.
And in a note on Tuesday, Parker writes that in 2016, his clients would have been better off doing the opposite of some of his team’s recommendations.
He channels Bizarro World, the comic-book planet known as htraE — “Earth” spelled backward — where everything turns out the opposite of what’s expected.
From the note:
Are we on a cube-shaped planet? Should “Us do opposite of all Earthly things?” Everything seems backwards. Sell winners, buy losers, own staples in both up and down markets. Just do the opposite of what makes sense. Bizzaro World.
One trade that Parker says could have turned out differently was his team’s bet on financials.
According to Barron’s, Parker and his team went “Overweight” on financials for the first time in seven years last April.
Parker wrote then that successful bank stress tests and a historically positive relationship between the dollar and bank stocks were catalysts for financials.
We would imagine that Parker is not the only strategist making this sort of admission about his market calls.
Over the weekend, we highlighted S&P 500 year-end forecasts from top strategists on Wall Street, with the takeaway being that many cut their estimates just six weeks into the year.
Here’s Parker again (emphasis added):
Our portfolio advice has been pretty horrendous lately … For those who follow our portfolio, we did quite well over the five years from 2011-2015. But, our portfolio just had its worst month in 61 months in January, and things have not improved in February. The market is down more than we thought it would be. Our biggest sector bet has been financials (particularly credit cards). As an investor recently said to us at a conference, “I am doing a lot of things, just nothing with confidence.” Doing the opposite of what we recommended would have been better. Bizarro World. Or at least hopefully not the real world.
On Thursday, the Financial Times published an op-ed written by hedge fund billionaire Bill Ackman.
It was an endorsement of Michael Bloomberg for president, and it was the talk of the industry.
It’s not that people on Wall Street didn’t like what Ackman said. As a former Wall Streeter himself, Michael Bloomberg is respected in the community, and his centrist policies sit well with the generally fiscally conservative, socially liberal ethos.
But Ackman’s timing couldn’t be worse.
At this point in 2016, Ackman’s fund, Pershing Square, is getting slammed. Its publicly traded vehicle has fallen 18.6% year to date. Last year, his fund was down 20.5%.
To the people on the Street I spoke with that means he shouldn’t have time to be writing op-eds about politics. They think it looks bad to investors who want him to be thinking about dollar returns, not election returns.
A spokesman for Ackman declined to comment.
To these executives, who are at hedge funds of their own, politics are a hobby. Hobbies are something investors have when they have time. Investors do not have time when they are losing money. That means when investors are losing money, they don’t have hobbies — not charity, not dodgeball, not poker, not collecting stamps.
At least not in public.
Ackman’s focus ought to be on turning his ship around, not Mike Bloomberg’s potential campaign. In times like these, investors want to see action, they want to see change. They want to see contrition.
For example, when Larry Robbins of Glenview Capital lost 13% in 2015, he basically wrote an ‘I’m sorry letter’ to his clients and peers.
“The last 90 days have been exceedingly disappointing and frustrating,” Robbins wrote. ” I’ve failed to protect your capital, and mine, from a significant drawdown, despite a flat market.”
Ackman, however, has shown no signs of changing his strategy. He said as much in his letter to investors at the end of the year.
“Ackman is failing on the number one rule,” one executive at a New York based hedge fund said. “He’s getting attached to his book like he’s a child with a lost toy. Be a man, let the teddy bear go, this is people’s money. This is real life.”
Starting with a gut-wrenching plunge on the first trading day of the year, stocks have given investors one frightening day after another in recent weeks. It’s enough to shake the confidence of even the most cool-headed buy-and-hold investor.
If only you could buy an insurance policy that would pay off if stocks go over a cliff.
Actually, you can. By purchasing a type of stock option called a put, you can lock in the right to sell your shares at today’s price no matter how far prices fall. That’s just one of a number of ways to protect against losses, or to minimize them – and investors are wiseto know how each works.
“While weathering the storm is likely the best strategy, ongoing liquidity needs and inability to stomach paper losses make this a difficult strategy to implement,” says Karan Sood, CEO of Vest Financial in McLean, Virginia. “What is required is a consistent risk management strategy that contains the volatility at all times.”
Weathering the storm is the most common risk-control strategy, since the broad market always eventually recovers from downturns. That’s why experts typically say investors should plan on holding their stocks and stock funds for at least five years.
But although the broad market has a great record of recoveries, individual stocks and funds can be wiped out. That’s where the second-most common strategy comes in – diversification.
“For those panicky clients, and anyone we meet with for that matter, the message is always the same – diversification among key asset classes and rebalancing are the ways to minimize market volatility,” says Betsy Vallone, partner in Essential Asset Management of Norwell, Massachusetts. Rebalancing means restoring the intended mix of assets after the price changes get the portfolio off target.
Stocks tend to be among the riskiest of holdings, but tend to provide the biggest returns over time. Bonds are less risky and generally less generous, though not always. Cash is safe, but earns almost nothing.
The basic idea is to have uncorrelated holdings, so that when some go down, others go up. Stocks in energy-producing companies, for example, are likely to fall when oil prices drop, as they have recently. But low fuel prices can be good for companies that use lots of energy.
Professional traders constantly bet on these shifting factors, but that takes a lot of knowledge, effort and stomach for risk. Small investors are usually told to own a wide variety of stocks, so that some will do well while others are in trouble. This can be done quite easily by holding mutual funds that contain many stocks of different types.
Other loss-control techniques are more complex, and although useful in times of high risk, they are often too expensive to employ all the time. Most work best with individual stocks, or with exchange-traded funds and index-style mutual funds such as those that track the Standard & Poor’s 500 index. Your broker can walk you through the steps.
Purchasing puts. As mentioned, these are stock options that allow their owner to sell a set number of shares at a given price anytime over a period of days, weeks or months. If you bought a put to sell 100 shares of XYZ Corp. at $10 a share, you could sell for $10 anytime until the option expired, even if the price fell to $5, $2 or zero. You could then buy the shares back at a cheaper price, or sit on the cash until the smoke cleared. Your stocks would be bought by the person who sold you the put.
Unfortunately, the “premium” you’d pay for this option could be sizable, and if you don’t exercise your option by the deadline you lose all you spent on the premium. Earlier this week, it cost nearly $650 to buy a single put contract, good until mid-March, on $18,500 worth of S&P 500 stocks, using an exchange-traded fund called SPDR S&P 500 Trust (ticker: SPY).
While an option’s price changes with market conditions, it’s too expensive to insure an entire portfolio all the time. It would be cheaper, however, to buy partial insurance. If your stock were trading at $10, it would cost much less to buy a put with the right to sell at $8 than at $10. You could still lose $2 a share, but would be protected against an even deeper sell-off.
“This is like very expensive insurance to cover the downside risk of your assets,” says Chase Hinderstein, wealth management specialist at The Wise Investor Group, a unit of Baird.
Selling covered calls. The opposite of a put, a call is an option giving its owner the right to buy a block of shares at a set price for a given period. The person who sells a covered call owns the shares involved – is covered – and agrees to sell them if the owner of the call exercises his right to buy. The buyer pays the seller a premium.
This technique doesn’t protect the call seller from loss if the share price falls. But the premium received helps offset some of that loss. It’s critical to be willing to sell at the strike price specified in the call, as you most likely will have to sell if the price rises above that level.
“Covered calls are so simple that anyone can do them. They are proven to have better returns with less risk and volatility than the buy-and-hold strategy,” says Mike Scanlin, CEO of Born to Sell, a software firm specializing in covered calls.
Use a stop-loss order. With this, you tell your broker to automatically sell certain shares if they fall to a set price, thus protecting you from deeper losses. The risk: if there is no buyer at that price you might end up selling even lower. You can add a limit, so the shares are sold only at a given price or higher, but then you risk not selling at all if prices plunge.
“For our clients with significant positions in a public company, we may set a stop order 5 percent to 10 percent below the current market price to reduce further declines,” Vallone says.
Saving some “dry powder.” This refers to cash kept available for a good investing opportunity. If stocks fall, your cash can be used to buy some bargains, offering gains in a subsequent rebound. But because cash does not earn much, having too much can undermine returns when the market is going up.
“We look at market drops as buying opportunities,” says P. Jeffrey Christakos, an investment expert at Westfield Wealth Management in Westfield, New Jersey, explaining that downturns are welcome if they are temporary.
Dollar-cost averaging. Buying stocks or funds with a set amount of money every month or quarter helps you avoid the temptation to try to spot the market’s peaks and valleys, says Andrew R. Avellan, founder of Philadelphia Wealth Management Co. Also, a given sum, such as $500 a quarter, will buy more shares when prices are down, reducing your average cost per share in a holding accumulated over time. That will maximize your gains and minimize your losses.
“When considering this strategy, investors should consider their ability to continue investing in times of market downturns,” Avellan says. That can be done by setting up automatic investments with a broker, a fund company or a workplace plan, such as a 401(k).
Anyone looking at U.S. stock market performance last week might assume it was a pretty quiet week. They would be wrong. It was a very bouncy week. U.S. stock markets moved lower on Monday, rebounded on Tuesday, and then appeared to suffer a one-two punch mid-week that knocked indices lower.
On Wednesday, the benchmark U.S. oil price sank below $40 a barrel as supply continued to exceed demand, according to The Wall Street Journal (WSJ). Analysts had expected stockpiles of crude oil, gasoline, and other fuels to decline. Instead, stores increased to more than 1.3 billion barrels. The glut of fuel drove energy stock values down and energy stocks led the broader market lower, according to WSJ.
Performance did not improve on Thursday. In part, this was because the European Central Bank (ECB) underwhelmed markets when it delivered economic measures that were less stimulative than many had expected. The Financial Times reported the ECB reduced rates and pledged to extend quantitative easing for six additional months, but it did not increase the amount of its bond purchases, which disappointed investors. Stock markets in Europe and the United States lost value on the news.
On Friday, a strong jobs report restored investors’ enthusiasm and markets regained losses suffered earlier in the week, according to ABC News. The Department of Labor announced 211,000 jobs were added in November, which was more than analysts had expected. Strong employment numbers made the possibility of a Federal Reserve rate hike seem more certain and investors welcomed certainty. The ECB jumped into the good-news pool on Friday, too, announcing it would expand stimulus measures, if necessary.
The Standard & Poor’s 500, Dow Jones Industrial, and NASDAQ indices were all up for the week.
Data as of 12/4/15
Standard & Poor’s 500 (Domestic Stocks)
Dow Jones Global ex-U.S.
10-year Treasury Note (Yield Only)
Gold (per ounce)
Bloomberg Commodity Index
DJ Equity All REIT Total Return Index
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Shares in Yahoo jumped 5.6 percent in after-hours trading on the back of a Wall Street Journal report that the troubled company’s board was mulling the sale of its core Internet business.
The WSJ reported that Yahoo’s board would hold a series of meetings from Wednesday to Friday, where it would discuss whether to proceed with the spin-off of more than $30 billion in Alibaba shares, hoist a for-sale sign over Yahoo’s core online businesses or both.
Shortly after the report, more than 300,000 Yahoo shares changed hands, pushing the stock up 5.6 percent to $35.60. The shares had closed near flat at $33.71.
Yahoo chief executive Marissa Mayer is now in the fourth year of her turnaround effort, which faces headwinds ranging from the departure of key executives to uncertainty over the taxation of the massive Alibaba spin-off.
Chipotle Mexican Grill Inc. (CMG) has been one super-sized success story over the last few years. But after CMG stock posted unappetizing earnings two weeks ago, investors may want to find a new favorite restaurant.
Sure, Chipotle has a powerful brand with some consumers. But Wall Street doesn’t care about the touchy-feely vibe or how good a product is; it cares about whether your stock trades for a fair price and whether the growth will continue as expected.
Both of those factors are working against Chipotle stock now.
Just take a look at the last month or so and you’ll see a waterfall drop for CMG stock. Shares are firmly beneath the 50- and 200-day moving averages, and that kind of technical downtrend is hard to reverse.
Throw in a possible E. coli outbreak and general market uncertainty, and it’s hard to think that new money should be chasing CMG stock now.
But just in case you’re thinking of taking the plunge into Chipotle stock on hopes of a rebound, here are three big reasons to avoid the burrito biz right now:
Slowing Sales: On the surface, Chipotle’s Q3 report looked good. Same-store sales were up 2.6%, and revenue grew 12.2% overall. However, those numbers are down dramatically from the recent past. Consider that in the third quarter of 2014, same-store sales were up a mind-blowing 19.8% on revenue growth of 31.1%. CMG stock is simply failing to live up to expectations it had created over the past few years.
Sinking Margins: As InvestorPlace assistant editor John Divine put it right after earnings, an equally important story besides slowing revenue are sinking margins. Earnings of $4.59 per share fell short of forecasts of $4.62 in large part because operating margins fell 50 basis points on increased costs. “This sort of thing could be a lingering problem for CMG stock — and others in the retail and restaurant industries — as a push for higher minimum wages gains national traction,” Divine wrote.
Price Problems: Building on that last thought, Chipotle has little ability to juice results by simply doing more from existing operations. At another company, if margins were a concern, management could just raise prices, but prices have already jumped 10% this year in some markets. According to FastFoodMenuPrices.com, a steak burrito or bowl at Chipotle goes for an average of $9.83 in New York, $9.60 in California and $10.05 in Washington, D.C. How much does this chain think it can boost prices before it starts to lose customers, particularly given its issues with ingredients lately?
No Upside Left for Chipotle Stock
There are plenty of other reasons to be bearish — the E. coli buzz that I mentioned, the continued problems with carnitas thanks to supply chain issues, questions of whether the Chipotle menu is indeed any healthier than McDonald’s (MCD) when steak burritos with cheese and sour cream can easily top 1,000 calories….
But the biggest reason to be a bear is history. Because momentum in stocks like these always ends, and ends badly.
Sure, Chipotle stock soared 200% in the past five years (at least up until the earnings debacle) to outperform the S&P 500 two-fold. But I challenge you to find a fast-growing chain that hasn’t seen this kind of flame-out.
Some can and do come back, with Starbucks (SBUX) the prime example of the past decade or so. But others, like Krispy Kreme (KKD,) struggle mightily to make it back in Wall Street’s good graces.
I do believe Chipotle is more a Starbucks than a Krispy Kreme, but that doesn’t mean you should buy and hold through what could be an ugly downturn.
Don’t mess around with Chipotle stock in 2016 given the brutal earnings, technical breakdown and history of stocks like these wandering in the wilderness.
If you have a nice profit in CMG stock, take that money in run. And if you’re a new investor, don’t consider this battered burrito play a bargain.