Alibaba is finally a public company for the second time and the hype surrounding the IPO was extreme.
Alibaba (BABA) shares opened about 2 hours late at $92.70 per share compared to the IPO price of $68. The 15% greenshoe option was executed meaning Alibaba sold 368,122,000 shares. That the Alibaba IPO was worth just over $25 billion making it the biggest IPO ever and beating out the Agricultural Bank of China for that title.
Alibaba's market cap at the close was $242 billion putting it just below Walmart at $245 billion and the 11th largest company based on S&P weightings. Of course BABA is not in the S&P because it is a foreign company. The graphic below shows how BABA ranks with the top 20 S&P-500 companies.
Shares spiked in early trading to $99.70 and then declined to 89.95 about 1:30 before rebounding to close at $93.31. When shares briefly dipped below $90 more than 5.7 million shares traded in just one minute. This was probably the underwriters and Goldman Sachs, the stabilization agent, making sure the price did not decline under $90 to spoil the IPO. It was a successful IPO for the NYSE and showed that their pricing and order matching process was superior to the Nasdaq process. More than 400,000 orders traded at the open and more than 100 million shares traded in the first ten minutes.
It was pointed out that Jack Ma and his team was intimately engaged in actually picking out who would get Alibaba shares on Thursday. The team spent 9.5 hours with the underwriters deciding who would get shares out of the more than 1,800 orders from institutions and funds. We were told that the process was weighted towards those institutions the underwriters thought would keep the shares and not trade them on the first day. The IPO was ten times oversubscribed resulting in allocations of around 10% of the requested quantity. A few entities received up to 25% of their request and hundreds got no shares at all. One hedge fund that had requested $200 million in shares received less than $1 million or one-half of 1% of their request. Another fund that requested several million dollars worth received only 1,000 shares worth $68,000. The Alibaba friends and family allotment was $1.5 billion and retail investors received only $1 billion worth of shares. This was purely an institutional IPO.
With 368 million shares sold the volume traded on Friday was more than 271 million. Apparently quite a few institutions could not pass up the lure of a $25 first day profit and sold their shares.
Jack Ma was a rock star for the day appearing on various interview programs including CNBC. More than 130 Chinese reporters were at the NYSE to record the process for the folks at home. As one of his goals for the day Jack Ma asked to have his picture taken with Art Cashin. Congratulations to Arthur. Arthur has only been working there for 50 years.
Plenty of analysts are already questioning Alibaba's valuations with a forward 2015 PE of 34 based on Friday's share price. They have 279 million active buyers. They have 8.5 million active sellers. They processed 14.5 billion transactions in the last 12 months and had $2.4 billion in revenue last quarter. Since inception they have sold more than four times as much as EBay. They have 27,000 employees compared to Amazon's 88,400. Amazon is the world's 9th most visited website and TaoBao, a shopping portal owned by Alibaba is the 10th most visited.
Alibaba has an 85% market share in China and a growth rate of 45%. That should make you think twice. If they already have 85% of the market how are they going to keep growing at a 45% rate? Ma says he is going after the world market but I suspect that will not be as easy to conquer as China.
After selling the 368 million shares on Friday the remaining company ownership looks like this. Softbank 34%, Yahoo 23%, Jack Ma 8.8%, Joseph Tsai 3.6% and everyone else 31%.
Jack Ma was making $20 a month when he started the business in his apartment. He and 16 friends pooled their resources and raised $60,000 and that is what funded the startup. Not a bad investment although most of those friends exited a long time ago.
Investors buying shares on Friday did not actually buy a piece of Alibaba. They bought a holding company that has contracted with multiple Variable Interest Entities (VIE) and that holding company is incorporated in the Cayman Islands. The holding company has a contractual claim on Alibaba's earnings. This structure is necessary because China does not allow the majority ownership of a company by foreigners. Inside Alibaba Group Holdings Ltd (BABA) there are contracts with multiple VIEs that hold the licenses to operate various websites and businesses in China. These VIEs are 100% owned by Chinese citizens. Those licenses give the Alibaba the authority to operate in China. Alibaba contracts with the VIEs and the VIEs are contractually liable to the holding company.
China has not ruled on the legality of VIEs. The SEC warns that the actual business like Alibaba in this case could decide to sever relations with the VIEs and the holding company would be left with no assets. This has happened in the past in 2011, 2012 and 2014. However, other Chinese companies including SINA, SOHU, BIDU, CTRP and CNET also use the VIE structure to get around the Chinese restriction on foreign ownership.
Yahoo (YHOO) shares declined -3% on a sell the news event. I warned about this last week. Yahoo got $8.3 billion from the sale and will net about $6 billion after taxes. Meyer has said she will return $3 billion to shareholders and use the other $3 billion on acquisitions. Reportedly funds that did receive some Alibaba shares were shorting Yahoo to hedge the BABA shares. Yahoo still has more than 400 million Alibaba shares but they can't sell them for at least a year. That is roughly another $37 billion at Friday's closing price. Yahoo received $8 billion in cash from the IPO and has another $37 billion in future income but Yahoo's market cap is only $41 billion. This is a serious lack of confidence vote by Yahoo investors. One analyst said this would be a prime opportunity for an activist investor to appear and force Yahoo to make some changes.
Yahoo shares hit a 14 year high earlier in the week but expectations are for a continued decline in the days ahead. Volume was 10 times normal.
The story is similar at Softbank except that they did not sell any shares in the IPO. They own 34% of Alibaba, now worth about $82 billion. The CEO has said he has confidence BABA shares will continue to move higher and they are willing to wait for the future. Shares of Softbank sold off on Friday as well.
There was no economic news of note on Friday and it would have been ignored with all the Alibabble in progress.
Next week the biggest economic report is the GDP revision for Q2 on Friday. The numbers are off the wall crazy. The official consensus is for a 4.3% revision but there are numerous whisper numbers in the 4.8% to 5.0% range. While I realize there will be some bounce back from the -2.9% number in Q1 I have a hard time rationalizing a 4.8% print. I suppose it is possible but it would definitely be a surprise. The rough guess on the Q3 number is in the 3.5% to 3.8% range.
Second in importance is the Richmond Fed Manufacturing Survey on Tuesday followed by the Kansas Fed report on Thursday. We also get new and existing home sales and after the Lennar (LEN) earnings last week I would expect some positive numbers.
There is a flurry of Fed speakers next week and I am sure they will all be trying to paint a different picture of the future for Fed policy. With the market so jittery over the Fed's future direction any of these could be market movers.
We are very close to the start of the Q3 earnings cycle. The number of reporters is increasing even though we are still three weeks away from the official start when Alcoa (AA) reports.
Oracle (ORCL) reported an earnings miss on Thursday night and Larry Ellison said he was stepping down from the CEO role and would remain the Executive Chairman and Chief Technology Officer. Ellison is a 70 year old college dropout who founded Oracle and has powered it since 1977. He has accumulated a personal wealth of $46 billion along the way. The CEO position will be shared by Mark Hurd and Safra Catz.
Oracle posted earnings of 62 cents compared to estimates of 64 cents. Shares fell -4% on the dual news items.
Red Hat (RHT) declined -4.5% after beating earnings and revenue Thursday evening. Adjusted earnings of 41 cents beat estimates of 38 cents. Revenue of $446 million beat estimates of $435 million thanks to a 19% increase in subscription revenue. Shares hit a historic high in mid August and moved sideways into this report.
Dresser Rand (DRC) rallied +9% after the company said it was getting competing acquisition offers. The agreed bid by Sulzer AG may be in trouble if Siemens AG votes to submit a formal bid of $85 according to the rumors. Siemens has coveted Dresser for several years but could never agree on a merger. If the board votes to offer $85 it may have to go hostile to get around Sulzer. Prior to the Siemens rumor DRC was trading at $68 and it spiked to $82.50 ON Friday before pulling back slightly. That is going to give Sulzer management a sleepless weekend. The buyout talks began back in July when DRC spiked to $70.
Concur Technologies (CNQR) agreed to be acquired by German software company SAP in a deal valued at $8.3 billion. This equates to $129 per share and the largest in SAP history. Shares of CNQR rallied to $127.50 on Friday.
CAT said dealer sales fell -10% in 3 months ending in August due to weaker results outside North America. The company said dealer sales of construction equipment declined -1% in August and resource-industry equipment declined -33%. Energy and transportation equipment sales rose +4%. In North America overall sales rose +8%, down from 11% in July and 14% in June, but fell in other regions. Sales in Asia declined -24%. Mining equipment declined -40% in Europe. This is a clear indication that the global economy is weakening. You need heavy equipment to build stuff so a decline in demand suggests slowing economies.
Apple's initial release of the iPhone 6 was somewhat overshadowed in the headlines by the Alibaba IPO but for the Apple faithful it was the only thing on their minds. In New York more than 1,880 people were in line to buy an iPhone when the doors opened at the Apple store Friday morning. That was 33% more than he 5s and 5c and 240% higher than the iPhone 5. Some had been in line for days. Lines in the Midwest were up 39%. The iPhone 6 Plus was feeling the love with line surveys showing that 67% were going to buy the plus. Also, the big memory models were clearly the hot skews with 33% planning on getting the 128gb model. That is up from 22% and 17% in the prior two models. Of those surveyed 47% were also interested in buying the Apple Watch when it comes out next year. The carrier breakdown was 39% AT&T, 16% Verizon, 10% T-Mobile and 4% Sprint. The rest were planning on buying unlocked phones or use an international carrier. Apple price targets are moving higher with $120 to $135 the new levels being quoted.
Apple is now rumored to announce two new iPads on Oct 20th according to the Daily Dot.
The Nonfarm Payroll numbers are likely to take a significant jump in the coming months as various companies announce their hiring plans for the holidays. UPS is adding 95,000. Fedex (FDX) is adding 50,000. Walmart (WMT) is hiring 60,000, up +10% from last year. The retail sector has not really begun to advertise their hiring plans but sales are expected to rise sharply this year. Ecommerce sales are now expected to rise +17% this season and the highest growth since 2011. Holiday ecommerce spending is expected to account for 8.4% of all retail sales. That is the most growth since 2008.
Fedex posted earnings of $2.10 compares to estimates of $1.96 earlier in the week.
Remember last week when Ebay spiked higher on a rumored deal with Google? No deal ever appeared but on Friday somebody bought 29,000 November $55 calls at $1.40 with Ebay at $52. That equates to a $4 million position. Open interest was only 3,721. Nearly 20,000 October $52.50 calls traded against an open interest of 36,852. The Google rumor may not have been true but somebody expects Ebay to soar very soon. That could be somebody like Carl Icahn preparing to announce a new activist agenda and taking a position before they announce the move.
The Dow closed at a new high near 17,300 and the S&P rallied intraday to 2,019 and a new high. In theory that should be bullish and be the result of traders not allocated any BABA shares putting their money back into the market. However, the S&P slid back into negative territory along with the Nasdaq.
The worst chart is the Russell 2000. I mentioned on Tuesday that the price action on the Russell was bearish and then it rallied the next two days. However, it gapped higher to 1164 at Friday's open and then collapsed to lose -12 points for the day and close at 1146. This is very bearish.
James and I independently look through hundreds of charts every Friday and he and I both remarked at the number of bearish candles on Friday. In the past there have been numerous occasions where a major market event caused a market spike that immediately turned into a reversal point for the market. The hype leading up to the event works traders into a frenzy and the event becomes climactic. It becomes a reason to sell the news rather than continue pushing the market to new highs.
Obviously nobody knows what caused the end of day sell off on the major averages and the all day sell off on the Russell but selling happened. The death cross on the Russell is going to happen on Monday regardless of how the market opens next week.
The Russell 2000 tends to lead the market up and down. At this point it is leading down. The RSI is negative. The MACD is negative and moving average cross is negative. The trend of lower highs is negative.
Everyone wants to seize the gains from Wednesday and Thursday and proclaim a rebound in progress. Unfortunately Friday's decline completely erased those gains and the index is on the verge of setting a new five-week closing low if it moves under 1146.51. Intraday it was 1141.54 on the 16th.
Nobody knows why fund managers were selling the Russell. While it came on the same day as the Alibaba IPO there may have been some correlation but nobody knows. What we do know is that any continued selling next week suggests we are moving back into correction mode.
I could not find an advance-decline chart on the Russell so I used the S&P Small Cap as the closest alternative. The Small Cap A-D line is about to make a six-week low. The midcaps are also in decline mode.
S&P Small Cap A/D Line
S&P Mid Cap A/D Line
It is hard to talk correction in one paragraph and new highs in the next but that is what we have this weekend. The S&P is in breakout mode despite the fractional loss at the close on Friday. The S&P is less than one point from new high territory and it is hard to call that bearish.
With 368 million BABA shares selling on Friday that means $25 billion left the market. Add in the 272 million shares that traded intraday and that is another $20 billion that did not flow into anything else. I believe the cash from those BABA shares that were sold intraday will come back into the market next week. Funds that were allocated shares had to have the cash on hand and when they flipped them they freed up that cash again and will be investing it elsewhere next week. It is possible the selling on Friday was just another cash raise process related to the IPO but there is no way to confirm it.
Any cash flow speculation surrounding the IPO is just educated speculation and we can't count on it for next week. We can hope it comes back into the market but we can't bet on it. Hopefully the Alibaba headlines will fade over the weekend and we can get back to business as usual next week.
Support on the S&P is now 2000 followed by 1980. I would not mind retesting 2000 but I sure don't want to test 1980 again. The bottom chart shows the advance-decline has stopped rising and could be about to decline as evidenced by the MACD.
The Dow punched through the various levels of converging resistance on Thursday and added to those gains on Friday despite closing -71 points off its high of 17,350. The good news is that prior resistance should now be support at 17,150-17,125. The Dow candle for the last four days looks very unsupported. The long wick on Friday's shooting-star candle is typically associated with market tops when it comes on top of a strong gain. This means we need to be especially vigilant next week in watching the market action before jumping into new positions.
The advance-decline line on the Dow is where it should be with the Dow making new highs.
The Nasdaq also gapped higher and then sold off hard but it did rebound slightly at the end of the day. However, support at 4550 was never in danger with the low at 4563. While I wish the Nasdaq had confirmed the Dow gains instead of the Russell decline we don't always get our wishes. The -13 point drop was minimal and the Nasdaq is still holding at the highs. If this was the only chart you looked at you would probably be bullish. The resistance at 4600 is still solid and that was probably a factor in the morning decline. The gap higher was immediately sold and the index fell back into neutral territory -21 points under resistance.
Sellers were 2:1 over advancers on the Nasdaq but the average share only declined -0.3%. You can hardly call that a rout. Unfortunately in the bottom chart of the advance-decline line for the Nasdaq the trend is down with decliners growing.
The Dow Transports broke out to a new intraday high but for the second time this week they recoiled from long term uptrend resistance. Support is 8500 and resistance is 8715 and exactly where I had my resistance line from three weeks ago.
The NYSE Composite is made up of about 2,000 stocks on the NYSE. About 1,600 of them are U.S. stocks and 350 are foreign stocks listed through ADRs. Note that the NYSE posted a lower high and then rolled over to close under 11,000. The A/D line suggests the index is going lower.
Big caps are still showing relative strength and small caps are weak. Normally small caps lead so we need to watch this development very closely next week. Volume on the quadruple witching expiration was high at 9.24 billion shares. That was obviously helped by the 272 million BABA shares but it was still high even if you ignore BABA.
This was an option expiration Friday and that could have had a lot to do with the gap and cr@p we saw on the indexes. Monday is a key day. Option settlement day is normally neutral to slightly weak and then we are off into a new option month and investors begin adding new positions. Let's hope those new positions are not all puts.
As you can tell from the small and midcap A/D charts there is considerable weakness is everything but the biggest of the large caps. This is a warning that the market internals are worsening. It does not mean a market crash is imminent but it does deserve some caution until the internals either improve or worsen.
Two U.S. F-22 fighters intercepted six Russian planes off the coast of Alaska and two Canadian CF-18 fighters intercepted two Russian Bear bombers that approached Canadian airspace on Wednesday.
The American fighters intercepted two Bear bombers, two Mig-31 fighters and two IL-78 refueling tankers. Two weeks ago fighters intercepted 2 Bear bombers making a cruise missile attack practice run just outside Canadian waters. Russian bomber launched cruise missiles have a range of 1,800 miles. More than 16 U.S. interceptions of Russian planes were made in a ten day period in August.
Dutch fighter jets intercepted 2 Russian Bear bombers in their airspace on Wednesday. On Thursday two RAF fighter jets out of Scotland intercepted 2 Russian Bear bombers nearing UK airspace.
Sweden summoned the Russian ambassador to complain after 2 Russian SU24 fighter-bombers violated Swedish airspace on Wednesday.
Clearly Putin is sending the world a message that he is not afraid of anyone. Over the last month he has repeatedly bragged that Russia was upgrading their nuclear arsenal to be ready for all future options. On September 10th Russia tested a new submarine launched ballistic missile. Russia is also expanding its fleet of attack submarines and will soon field a new long range bomber.
British Typhoon fighter shadowing Russian Bear bomber off the coast of Scotland.
Putin is also making plans to turn off the Internet for Russian citizens in the event of an emergency. What is an emergency in Russia? That could be a big anti-government protest or a military confrontation that Russia lost. Part of the proposal is to bring all .RU domains under state control in order to "strengthen Russia's sovereignty in cyberspace." The next step would be to force all .RU domains to be hosted in Russia. The majority are now hosted outside Russia for security purposes. Newspapers, TV and radio are already under Russian state control. The Internet has been relatively unfettered but content has been largely dominated by state sponsored bloggers and Putin fans. He currently has an 86% approval rating thanks to all of the bloggers touting his praises.
Russian channels have portrayed the events in Ukraine as Russia's heroic fight against the "fascists in Kiev." Russia continues to deny any involvement by Russian soldiers or Russian military equipment. Russia claims it is only providing humanitarian supplies to the pro Russian separatists battling the fascists.
Putin has warned that Internet communications are vulnerable to U.S. spying and he has suggested building a "Russian Internet" which would be basically a "Russian Intranet" with no access to international websites. If Putin does decide to enact these changes it would be spun as an effort to rescue the Internet from U.S. sanctions.
Putin was quoted as having said to the Ukrainian president, "Russia could be in Kiev in two days and also in Riga, Vilnius, Tallinn, Warsaw and Bucarest." All are former USSR or Soviet Union countries and are now NATO and EU members.
OPEC is preparing to take action to halt the decline in oil prices. The secretary-general of OPEC said the group may cut production targets for 2015 because of an abundance of supply. OPEC produces about 40% of the world's oil supply and even though U.S. shale production has disrupted global export patterns OPEC can still impact prices. They currently produce about 30 million barrels per day. El-Badri said 2015 production could be 29.5 million barrels per day, and 500,000 barrels below their current quotas.
Analysts believe the price of gasoline is going to fall to the lowest level in four years this fall thanks to the low oil prices. Average prices are expected to be in the $3.15 range but more than 30 states are expecting prices under $3.00. Brent crude prices are now $15 lower than they were in June. U.S. crude prices range from $2 to $17 under Brent prices. Oil from shale fields like the Bakken is sometimes $12 to $15 under WTI prices because of transportation discounts.
The Fed is one month away from ending QE. Their balance sheet is now over $4 trillion as a result. Instead of buying trillions of dollars in treasuries they could have given every family in America $56,000. This would have sent the U.S. economy into a super growth mode as consumers spent their new found wealth. Unfortunately, the Fed would never have gotten the money back. In the case of buying treasuries they will eventually mature and the Fed will get all its money back including interest.
The price of ground beef hit an all time high of $4.013 per pound in August. Prices in July hit $3.884 per pound and that was also a new record. Just five years ago in August 2009 it was $2.134 per pound. I can remember when it used to be 59 cents a pound and whole chickens were 29 cents a pound and bananas were 10 cents a pound and a loaf of bread was 29 cents. (1965) Of course the Fed keeps telling us that there is no inflation because they don't count food and energy prices in the official number because they are so volatile. Beef prices rose +4.2% in August and the largest increase since November 2003.
The IMF warned that equity prices in "virtually all major asset classes" look stretched. Those elevated prices along with extremely low implied volatility has elevated leverage in the markets. A build-up of "excessive leverage" could be "abruptly corrected" according to the IMF. This came a week after the OECD warned that current bullishness in markets appeared "at odds" with the "intensification of several significant risks." Apparently everybody is a market expert now.
Forty-six percent of doctors now give Obamacare a "D" or an "F" rating according to a new survey from the Physicians Foundation. Only 25% gave the new law an "A" or "B." This survey was mailed to "virtually every doctor in the American Medical Association." They received more than 20,000 responses.
Janet Yellen is becoming Allan Greenspan, who was known for his confusing Fedspeak. Take this rambling comment from Yellen in her recent press conference. "Well, you know, we stayed low for a very long time. We have been at zero for a very long time and below the levels that some common policy rules would now be suggesting, given the level of unemployment and inflation. So the recovery has been very slow. We've also been doing unconventional policies, of course, buying assets. And in the general sense, I think we have been lower for longer thanâ€“if you complete that sentenceâ€“then many standard policy rules would suggest. So in a sense, that is a policy that we have had." Clearly trying to qualify every statement you make in every way possible has ruined her command of the English language. At least she did not use Greenspan's big words that required a dictionary to decipher.
The UN said the Ebola virus has infected nearly 6,000 people and the infection rate is doubling every three weeks. The CDC warned that as many as "half a million" may be infected by the end of January. The UN said the chances of Ebola coming to America by the end of 2014 are now over 18%. Because of the long incubation period many people can be infected without knowing it. The potential for these infected persons boarding an airline and spreading the disease around the world is growing every day. People in the infected areas in Guinea, Liberia and Sierra Leone are no longer going to the doctor when they get sick because they are afraid of the outcome. Many believe they can just fight it at home. This causes the family to become infected and spread it to their contacts. The CDC said an "uncontrolled cross-border transmission could fuel a major epidemic to take off in new geographical areas."
Sierra Leone citizens were told to stay indoors for three days in an effort to slow the progression of the disease. The lockdown program was accompanied by a door to door effort by 30,000 health workers to try and locate those homes with infected people. The six million residents are supposed to stay indoors through Sunday night.
In southern Guinea an Ebola education team of two administrators, two medical officers, a preacher and three journalists was attacked while trying to educate people on the risks of Ebola. All 8 were killed. Despite the deaths from the disease the population continues to not believe it will happen to them. Fears, misinformation and stigmas among residents are complicating efforts to contain the disease.
The Wall street Journal said the air campaign against ISIS in Iraq and Syria is being designed to allow President Obama to exert a high degree of personal control over the individual air strikes. The plan would require presidential approval for individual strikes. With the president picking individual targets from the Oval Office this would be unprecedented control. Clearly he does not trust the military to make tactical decisions. Since they don't trust him to make tactical decisions either the outcome of this war is in serious doubt. Officials have warned that half hearted pin-prick air strikes are going to only embolden ISIS and aid in their recruitment efforts. Former defense secretary Robert Gates warned that the "absolutely no boots on the ground" promise by the president was likely to have the same effect as "If you like your medical plan you can keep it."
Apple's long iPhone lines have spawned a new business opportunity. Professional line sitters are growing in number and they are having no trouble getting clients. One individual in New York started a new company called S.O.L.D Inc and advertises his line sitters. They get $25 for the first hour and $10 for each additional hour. He now has 25 people working for him and they also sit in lines not related to iPhones. A sitter typically earns $125-$185 waiting in line for Saturday Night Live tickets. Reality TV competitions create super long lines and his sitters are front and center. They also wait in line for sample sales at places like Gucci and Escada. Independent line sitters wait in lines and buy the products themselves and then resell them online. Premiums for iPhones typically run $300 over cost. iPhone 6s are going for double their cost.
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"But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"
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