Stock Market Is Getting Close To Being Washed Out: Maley

They are whipping around. Uh, they were down, then they were up as much as a percent on the Nasdaq, which has been leading the losses and the gains, and now they're up solidly but way off that NAZAC up to tents of two tenths of a percent joining us now. Matt Malee, equity strategist for Miller, ty Back and Company, joining us, Mad, how do you interpret the whippy action that we've seen, Uh, that really has marked every day over the past few weeks. After the past few weeks,

excuse me, it feels like a Friday. Yeah, it's it's well, yesterday's it was. It was particularly worrisome because a lot of these big swings we've seen have been kind of one directional. We do in other words, well, say two directional. In other words, the first direction is in the morning we either open up very strongly or open down very strongly, and then uh, and then we move in the other direction, So that's kind of a second move. Yesterday we actually

had three moves and uh. I think that you know, that does nothing but making people more uncertain. And as we all know, I mean, it's an old cliche, but it's very very true. There's nothing worse for the markets. The markets hate nothing more than uncertainty. And I think this has got people stepping back from this rally this morning. I mean, it's still holding up a little bit, but

we're well off our highs on the day. Matt Malie, in your experience, is it possible to know how many shares of a particular stock need to be traded in order to move that said stock in one d direction or another. I'm sure there's been many studies on it, but for exact numbers that I'm not aware of it. Okay. The reason I bring that up is because hardly anyone

has that information. I've never met anybody who can tell precisely what kind of volume is necessary in order to move his stock, and the reason I posed this to you is because the prices are determined not by long term shareholders who may not ever touch their positions. But I'm wondering who determines the price that we see on a daily basis, not on a long term basis, but on this volatile trading basis. Well, I'm afraid nowadays, of course, and more than more than ever, it's these uh you know,

it's the mechanics trading. And we all talk about algalis and high frequency traders and such. We've been talking about it for years, but there's no questions they play a big role. And and the thing is in in in former days when you didn't have such a you know, there was been recognized trading around for a while. But

with these algorithms that they're just kicking immediately. But not only do they add by orders when the when the market's going up, but they cancel sell orders and they cancel offerings in the same one in the opposite direction,

when they add sell orders, they cancel their bids. And this exacerbates the big swings that we have in the marketplace, and it makes it for much harder for for us to regain our you know, kind of the UH investor confidence that we need to get, you know, to form an exactly a kind of the bottom for this h this sell off. So given that confusion, can you read anything into this? I know that you have a lot of specialty looking at technical analysis and sort of watching

the markets and the patterns. Me are you gleaning anything or is it sort of all over the place because of this of the noise? Well? No, actually, you know we are seeing some things now, I mean the showing that we I think we're getting somewhat close to a bottom the problem whenever we have in terms of time, I think that we you know, we're starting to see

a big pickup in volume. We're seeing some of the major groups I'm sorry, the major average is being oversold, maybe not yet to the quite the big extremes we usually see, but still getting very close to that. We're also seeing um sentiment. I mean, I look at the daily Sentiment index which measures futures traders. It's only ten percent bulls right now, that's quite a quite extremely sometimes you usually seem to need to see it fall into the single digits, but we're getting very close to that.

So the problem is with these mechanized tradings going on, you could see a big another down, draft, another down five percent or more over a couple of days before we get that bottom um. But the thing I like the most right now is what we're seeing in some of the really beaten down groups, like the housing stocks and the um bank stocks. They've gotten so oversold that they're really getting to a level they should be bought.

I believe number one and number two this week they've outperformed the rest of the market, so they're holding up much better than the rest of the market. Shows that at least they're getting washed out. So I think the rest of the market is getting very close to being

washed out as well. Matt. Maybe I just want you to offer a little bit more detail into the technical aspects of trading, in the sense that sell orders can be canceled because you might put out a bid there to sell a large block of stock, and by the time you get back any information about what's available at a particular price, you can then cancel that order, which is,

as you say, would accentuate changes in volatility exactly. They they again these these uh the way these things are set up in in in fractions of a section, so and I mean real fraction tiny when millions of it, well one thousands of of a second. Uh, these orders can be canceled. You think you've got a bid to hit, in other words, that you can sell it at a certain price. When you go down to sell it, it's not there. Uh. And then suddenly you're selling at a

lower price. And if you put a market order in and then suddenly you're you're hitting. Instead of sending a lot of one price, you sold just very little there, and then you sell the stock down, so it's it gets overdone. I'll tell you though, if we get another downdraft, I believe the best way to play it is not trying to pick the bottom. But while I call align

the book. In other words, if you want to buy a foul dollars with a stock by two at one level, then by another two hundred down half of a dollar below that, and below that, blow that line it all the way down. You're never gonna be able to pick the bottom. But that way your average price will be actually quite good and you won't be sitting there trying to chase things around when all this mechanized trading is going on. Matt, what do you think is driving the

sell off. Well, I think you know, it's threefold. Number one is the the Federal Reserve u uh sticking by their guns and saying that they're going to continue to tighten. Um. And the one thing is that they've been tightening for two years now, almost two years anyway, and and that's what happens. That usually takes usually a big lad between when they start tightening when it has an impact on the stock market. Now. The same thing as is true uh on the these um things with trade issues with China.

I mean, it was a lot of talk, but once these trade I'm sorry, these terrorists were actually imposed, that's when it's starting having the impact. And it is having an impact as we're seeing on at least not earnings right now, but on earnings guidance, and that's a big concern. And the last thing, of course, I think is Europe with this thing is Italy. The people. You know, we've seen the European banks fall well into the bear market

territory before and our markets started to decline. It's something people were ignoring and not paying enough attention to. So it's kind of three three pronged thing here. Um. But uh, you know, it's it's the economy is still fine. I think, Well, this correction is healthy and normal. It could be a little bit deeper, actually, could be even go down another you know, like I said, five or six or seven percent more, But uh, we don't want things to go

up on a straight line. This is actually healthy and h I wouldn't um, I wouldn't get overly concerned. It's scary, but that's that's the way it works. Thanks very much for being with us. Matt Malee is the chief equity strategist for Miller, tay Back and Company, and it sounds as though he's bullish, at least on the price action. I mean, this price action is mind boggling. Now we're back down to barely any gain at all on the NASDAC.

I mean, things have absolutely been swinging all over the place h today, and they have been over the past few days. That certainly undermines confidence in and of itself. Yeah, and you've got this sell off well. I mean, even though the SMP fire is higher by a little bit more than six and a half points, it is off its highs of the day, and we are almost doing

a round turn to where the market opened. General Electric has been a source SPoD for equity markets for a long time, and today it almost looked like they were ripping the band aid off. And then regulator, as it turns out, are looking into the company Brooks Otherland Bloomberg opinion columnists covering all things industrials choices. Now, so what's going on here and why can't she just catch a break?

There are a couple of different things going on here. Um, so you know you reference regulators what they said on the conference callege the SEC is expanding its investigation into the companies that counting practices to include this twenty two billion good will charge that they booked in their power unit. Now, the SEC started this investigation after g E said in January that it was going to have a fifteen billion

reserve shortfall related to a legacy insurance business. So to me, it's not terribly surprising that the SEC is going to look at this good will charge because it's basically the same issue. So the insurance business GE reviewed that every single year. So then all of a sudden come out with a fifteen billion dollar shortfall. I think raised a lot of questions about the credibility of their internal controls.

It's the same issue with the good will I mean G reviewed that as recently as the second quarter and said that the you know, caring value exceeded the fair value and so too. Then all of a sudden do a complete all of a sudden, have this twenty two billion dollar charge. I think those are the same questions. Now.

The difference, I think, and the bigger point is that G also said the d o J is now investigating the same things the SEC was looking into, including this good will charge the Department of Justice, meaning it could be potentially criminal. Yes, and so I think that obviously adds another element of risk here. The other factor is now that you're bringing this good will charge into the

SEC and based investigation. There's a number of shareholder fraud lawsuits out there against GE related to that insurance reserve shortfall. This just sort of adds more fuel to their claims. I wonder if you could tell us what the effect or potential effect this might have on the credit rating of g E. Yes, so um SMP has cut its credit rating on GE earlier this month or now at B B B plus, down from A, and Moody's and

Fish put their ratings on review for downgrade Um. Personally, I have to say that's long overdue, and they were about the last people to wake up to the fact that gees earnings and debt prospects for the foreseeable future are nowhere near that realm of credit worthiness. Um, you know, in terms of the numbers from today changing their outlook.

I don't know if there's anything that would necessarily, you know, dilute that more other than just sort of the ongoing challenges that the power unit, which g says is going to cause it to significantly miss its cash flow targets

for the year. So why were the shares up ahead of the market open when the company said that it was going to cut its dividend, which was widely expected, but still it means that shareholders are getting less money and missed estimates, and still their shares were rallying until I mean, it almost makes you feel like they shouldn't have conference calls, right, But no, I I think you

know why you saw the shares railing. The divon and cut was expected, but I think it's the kind of aggressive action people are really looking for out of Larry colpe Um. And I think I talked with you at the time when John Flannery cut the divon in last year about how it probably wasn't going to be enough and that the payout was still going to soak up way too higher percentage of their free cash flow. Um.

And that was with their you know, old target. Now obviously with the new target, it becomes even more untenable. And so I think this was a bold step and it was also a necessary step when you look at all of these potential capital calls, the g E and the ongoing struggles in G Power. I mean, he needed to do something to shore up the balance sheet, and

I think this was what investors were looking for. Um. You know, and there's some debate about GE has long been sort of a retail investor attraction, but you know, you probably lost some of that base when they cut the dividend the first time around. So that maybe why you're not saying quite as painful of a reaction. Is the power unit at GE salvage herble? Yeah, Uh, that is the question. Um, you know, there's a lot of debate about this. I do think it's interesting what they're doing.

So they said they're going to split the power unit into two, and so one will be primarily focused on the gas, turbines, equipment, and services, and then the other will be sort of all of these other assets that are in power, so that's steam, that's nuclear, that's power convergent. Not all of those other assets are bad and they're not necessarily as exposed to this sort of structural transition where you know, the preference is really shifting to renewable

energy technologies because they're cheaper. But some of these assets, like industrial focus generation equipment or the grid's business, those still have a relatively viable outlook. I mean, you think about a b b is trying to sell its grids business and it is getting pretty high valuations for it. And so the idea here is to sort of create i mean almost a bad bank of power assets and then you know, an okayish bank of these other assets.

So that should help. The other big thing is cost cuts, um, but you know, there's a big debate on how much those cost cuts are actually going to translate to the bottom line. G has done a lot of restructuring over the years, and we haven't really seen that playoff, and there's issues in Europe to given the agreements that they made as part of the Alstom deal around jobs numbers as to how deep they can cut their many Thanks always Brooks Otherland, a Bloomberg opinion columnist all about deals

and industrial companies. After the close of trading today, we will get quarterly results from Facebook. And here to tell us about Facebook and other technology stocks is none other than Colin Gillis, the director of research for Chatham Road Partners. Colin Gillis, is Facebook as big as it's going to ever get him? It's always a wonderful pleasure to speak

with you. And let's put this into perspective. Right, we've gotten three names out of the five letter fang tech stocks that have reported, right, Facebook, Apple, Amazon, Netflix, and Google. And then we know that of the Amazon, Netflix and Google reports that we've seen, the stocks have all traded down today. Is Facebook's turned The stock has declined over from a tie in July. I do not think it's peaked. You don't think it's peaked. In other words, I do

not you think that it's going to rally. I do, right, And so I understand the concerns that they're running out of users, right, the concerns literally you know they've got around two point two billion users are about three point five billion humans on the Internet, So that's going to be a constraint factor. I definitely understand that they're putting in more and more expenses around privacy and contact control, right, but they're going to be able to extract over time

more value per user. And while you may see margins come down, they've told us that quite clearly, Right, this is still a company that's going to grow its revenue this quarter, somewhere along the lines of you know, on a year of a year basis, it's a real bit nous, if it's a real business, then those billions of users are potentially at risk if something goes wrong with the platform, and something has gone wrong previously correct, correct, Yeah, And

this is you know, this is the risk reward equation, right, and this is why some people have decided to exit their investments and rotate their money into other names. Right. But given the magnitude of the pullback, and also you said hasn't gotten as large as E were going to get. It's market cap is four billion dollars, well, still well below you know where Google is at it, you know,

with seven seventeen Amazon, right, much larger than Netflix. Well, Colin, I'm wondering heading into what was your outlook on Facebook shares. So we were uh concerned for four pull back. We were concerned that the market was not factoring in the costs related to the obviously efforts that they were that they had to implement. Right, and some of that did bear out to be true, But now I think the

pendulum has swung too far the other way. Well, hold on a second, because you were talking about how it's a real business and how it's you know, it's not as big as Google, for example. But at the end of the day, Facebook essentially is an advertising platform. Is essentially a place where they have a lot of eyeballs and they can distribute content to them. But if they're algorithms and if their privacy standards are questioned, that undermines

their business model, albeit real or not. Well, it only undermines that business model if we see users leaving the platform, and if we see advertisers leaving the platform. Right, and

so we're gonna see that. We're gonna get that data literally literally, you know, in a few hours, right, and we'll see the particularly the most valuable component are the North American right monthly active users, and we'll see if that number moves, right, it's kind of stalled out right, you know they were it's around two one million, right, you know, any lift from that number last quarter would be would be a positive. So you know it's not

going to grow much. But if you can extract more revenue from those people, right, and that number that are two the average revenue per user is people are expecting a nice hefty lift on that. The estimate is that each user in the United States or Canada generates about twenty six dollars in revenue for the company. Right, all right, Now you talk about the potential for Facebook, do they have a plan for how to monetize What's App? Well,

you know, what's app is a wonderful messaging service. Messaging in and of itself has not been very well monetized, and so I wouldn't be focused as much on the one. I wouldn't be an investor based on the what's that part of the story. I wouldn't be an investor based on uh oculus part of the story. Right, Instagram is

obviously also a growing, flourishing business. It's going to have the same monetization opportunities as Facebook, right, But you want to make sure that the core business itself is is that they're able to stabilize it. They're able to do so in a way where they can retain their users, where they can retain their advertisers, and that they can can quell both public perception as well as investor concerned that the management team has a privacy issue that they

can't contain. Let's shift our focus a little bit to Thursday. That's when Apple is going to report their third quarter earnings. Shares of that company up almost year to date. What are you expecting to hear from them, right, you know? And so the thing with Apple is, while everyone you know will dissect the numbers that the report, the most important piece of information they'll give will be the guidance for the December quarter because they're still very stacked to

the holiday season. And right, if you focus on the iPhone itself, right, the concern that the thesis is one of two things. Right, it's a stable platform on which they can build a successful services business on top of right, and that's a positive thesis. Or you look at the units of iPhones and you say they've done a good

job of driving more revenue per phone. But if you're concerned that the unit base you know, is either growing and you know, small single digit numbers, or possibly even shrinking, but the revenue is being made up because they're getting

more revenue per phone. Then that may impact the services business and its ability to grow, because a big part of the of the story and the thesis is that the services business will become a major margin driver and will add a higher multiple business onto the lower multiple hardware, onto the hardware side, thinner, lighter and has written a display that's the description of the new MacBook Air that's

just been released and is on sale from Apple. Do you believe that the desktop or the laptop or the computer and PC business for Apple is important? It's you know, it's it's it's really just icing on the cake, right and depending on how the phones move and and the r poos, right, the rest of it is, you know, just kind of consider ampler information. Thank you so much for being with us. Colin Gillis, a director of research.

Chatham wrote partners talking about what to expect with Facebook coming out after the bell with their earnings, as well as Apple under armour has been a stock that has been hard to get right. Today it is surging at twenty six per scent after demonstrating that it's turnaround is taking hold. That is the biggest one day pop in the share since two thousand and eight. Joining us to break it all down, give us a sense of what's ahead.

Is Channa cartuitis He's apparel and footwear analyst for Bloomberg Intelligence. So Chenn, what's your take? What exactly drove there better than expected results? Yeah? High, I think this is today we actually see the first phase of the turnaround UM actually benefiting the company UM. And I think it's mainly on the margin side, and and they took a few steps that are necessary for the business, but they were

very hard to do UM. So, first of all, the inventory inventory was done one percent versus last year, and that was a surprise because we were expecting it to be a lot higher. And when you have less inventory is when you have to do a less discounting. So in Bloomber Intelligence, we track, for example, the promotional emails year of year. So last year in the third quarter we had about thirty three emails we got from them. This year's only twenty, so there's a thirty percent decrease

in discounting. So gross margin the higher and that's what drove most of the benefit this quarter. Just say that again, you tracked the number of promotional emails that are sent out by like every company, for the companies we cover, yes, and it gives us some indication year of a year

how promotions look like. Clearly, because I noted that the retailers cited under Armour in several cases as being the cause for why their numbers were not better because they were flushing out the inventory that I guess under Armour had shipped to them, right, So under Arma would have different channels to clear their inventories. So you know, while the retailers have elevated inventory under Arma, we're not promoting their own in their own channels, so they're able to

get their margins on that side. Is this is this a story about international growth versus growth in the United States for under Armour. So under Armory is still mostly US a lot more than you know, their competitors like Nike and Adidas. So yeah, they're still let's say they're still seeing you know, double digit growth in international markets,

but it's a much much lower base. UM we saw a pause and then in the the third quarter it was only about UM they think they're gonna see the re acceleration of that in the fourth quarter, so going back to a growth. So it's it's for the most part, it's an international story. For undrum. The interesting thing to me is how under armour certainly is an idiosyncratic story.

But I'm looking right now at the SMP five hundred sub index of retailers, which is actually outperforming the broader SMP index year to date, which is a surprise because this industry had been left for dead. What does that tell you? So you know what I gotta I gotta say when we're going into I had a you know, feeling and looking at the data, that is going to be the year that retailers actually fight back the five back Amazon, the fight back the shift to e commerce.

They're trying to um. You know, they are in a mode of surviving survival, so closing stores, we're just in the inventory. But now they're trying to figure that out. So now they they're starting to at tools to actually help them compete with their online competitors, so, you know, getting better insights from data online on you know, which inventory they should put in which stores. UM, that helps them to again avoid discounting so less inventory in stores

that are not doing well. Um, cutting the cycles of getting merchandise into the stores. Instead of the nine to twelve months, now you can go three to six months. So you're better, you know, you have a better idea and the trends out there in the market. Then you're not bringing in merchandise. It's not going to sell fast. So its retailers are getting smarter about what they're selling the store. Um. I think people are feeling compelled to go and visit the stores because they look better and

they have more you know, on trend stuff. Um. Therefore the seals are beratter, margins are better. Can you speak to any product that they've introduced that is a big winner for them right now, specifically und armor? Yeah. I think actually that's part of the problem, um, because what we're seeing is the turnaround is mainly about the margin. I'm still waiting to see in the product pipeline what's

going to be the next hit. Now next month in December, they're gonna have an investor day, and I think over there we're going to see some of the new products are going to come out next year in to reignite the growth rather than just the margins. They're going to be using technology to make these textiles and these products. I mean they got hoodies, joggers, polos, underwear, I mean

everything you know, cold gear, hot gear, compression gear. I think they want to be known as as the company that actually brings into science into their apparel and footwear. And I think that's the message they want to send to the consumers and they're going to continue to do so going forward. So is under Armour grabbing share from other retailers or is this just sort of a general increase in demand across the boarders the economy expands. So

that's not happening yet. So I don't think they're taking share away from Nike audit does. It's just that the sales that they are getting, they're getting in a much better margin than they did before, so they don't have to clear as much inventory. So we're not seeing that grabbing share yet, but we might next year. And it is a competitive business, very competitive business, and very hard

to get into. If you're not easy to make shoes, no, and not to make them in the volume that Adidas or Audi Das as well as Nike makes, and make you and make it the design compelling enough of people to buy. Maybe Elon Musk will get into it. Oh there you go from your lips. All right, No that's I'm not sorry, sorry, not sorry, sorry not I see footwear in your future. Thanks very much for being with us. And Grass is a apparel and footwear analyst for Bloomberg Intelligence.

You can follow him on Twitter at se Gratis. Now spell it c g R A z U t I s. We all follow him because we want to know what's going on in the world of apparel and footwear. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at Pam Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.