The Stock Market Plunge Is Great News for Walmart
The market carnage of the past week has been indiscriminate—big stocks, small stocks, tech stocks, old economy stocks. You name it. The sell-off is happening in part because China is weak. And that’s bad news for U.S. investors. And they’re getting poorer, that eventually could be awful for the American economy at large. All this weakness—in China, in the U.S., everywhere—is in turn bad for commodities and stocks. That logic is especially germane for companies that get a lot of their sales from China’s aspiring consumers—like, say, Apple, or BMW, or Tesla—and for rich stock-holding people in the U.S.
But what if you’re on the other side of this trade. What if you’re a company that benefits when economic conditions in China weaken and whose core U.S. customers don’t have wealth in stocks and experience the commodities slump chiefly as a tax cut.
Well, you’d be Walmart.
Walmart, the largest U.S. retailer and the largest private-sector U.S. employer, sure doesn’t seem like it’s benefited from recent developments. For the past few months, it has been underperforming the S&P 500, in part because of a disappointing profits report. And in the past few days, it has swooned along with the rest of the market. (Here’s the six-month chart of Walmart vs. the S&P 500.) It’s lost about a quarter of its value since February.
There’s a case to be made, however, that the events of the past week are actually good for Walmart. One of the events that precipitated the recent round of selling was China’s move effectively to devalue the yuan. But Walmart’s big box stores are effectively conduits for goods—kitchen utensils, toys, diapers, clothing—made in China and other emerging markets, some of whose currencies have also fallen lately. The devaluation of the yuan and other currencies means Walmart, which purchases goods in dollars, will be paying significantly less for a lot of the products it sells going forward. In an industry that runs on thin margins (in the most recent quarter, Walmart’s net income was about 3 percent of sales), that’s a significant boost.
At the same time that it’ll be paying less for goods, the capacity of its core customer to spend is actually rising. The decline in the stock market will put a halt on some high-end spending. (Something tells me it is going to be a quiet weekend at the newly opened Maserati of Westport, Connecticut.) In 2010, the top 10 percent of Americans held about 80 percent of stock wealth. (The proportion is surely higher now.) About half of Americans don’t own any shares. In 2012, Reuters reported, Walmart core customers were Americans with incomes between $30,000 and $60,000. The typical Walmart consumer depends on wages—not dividends and capital gains—for consuming power. That customer is much more sensitive to changes in gas prices than to changes in the price of oil stocks.
And with oil having fallen to less than $40 a barrel as part of the China-led market rout, the cost of gasoline is plummeting. According to AAA, gas costs about $2.60 per gallon now, down about 25 percent from a year ago. The falling price of gasoline is putting extra spending money in the pockets of all Americans. But the falling price in this fixed cost is a particular boon to people on the lower end of the income scale, for whom an extra $10 or $20 to spend weekly is real money.
Walmart has been getting some sales momentum, in part because of the underlying factors that support its business model—persistent job gains, a slowly rising floor under wages. In the most recent quarter, same-store sales, the key metric for retailers, actually rose 1.5 percent for Walmart’s U.S. stores.
So for now—at least until the stock market weakness starts to spill over into the real economy—the carnage contains some good news for Walmart. The cost of its goods will fall, and its core customers will show up at its stores with more cash.
Which U.S. Stocks Got Hit Hardest in Monday’s Global Sell-Off?
Now that Monday’s closing bell has tolled, let’s assess the damage. The S&P 500 plunged 77.7 points or 3.94 percent. The Dow lost 588 points or 3.58 percent. The Nasdaq shed 180 points or 3.82 percent. It was the fifth straight day that U.S. stocks fell amid a broader sell-off around the globe. The S&P headed into a correction for the first time since 2011 and is on track for its worst August performance in 17 years.
Hardest hit were commodity and energy shares. Six of the S&P 500’s Top 10 worst performers on Monday were oil and gas companies, while copper and gold producer Freeport-McMoran was seventh. In the tech-heavy Nasdaq, Citrix Systems led the bloodbath with an 8.7 percent drop, closely followed by Baidu (down 7.1 percent), and Netflix (down 6.5 percent). Over at the Dow, the downturn was less severe—the worst drop was Cisco’s 4.2 percent, which looks practically rosy compared with the numbers being posted by stocks in the other two major indices.
Overall, though, pretty much everyone was in the red. On bigger-name tech companies, Amazon tanked 5.3 percent, Tesla 4.3 percent, and Yahoo 4.2 percent. In blue chips, McDonald’s lost 3.7 percent and Goldman 3.5 percent. General Motors toppled 5.5 percent, Ford fell 4.9 percent, American Airlines Group slid 4.6 percent—you get the picture. I’ll stop before I run out of verbs.
Why is this all happening? People are worried about China. People are worried about the Fed. People are less worried about Apple, but Apple might need to be worried about the note its chief executive sent to reassure investors earlier in the day. Don’t believe anyone screaming to buy cheap shares. Also, don’t liquidate your equity holdings for canned goods. No one really knows what’s going on. Tune in tomorrow.
Tim Cook to Investors: Don’t Panic. Apple Is Doing Just Fine in China.
As global markets convulsed Monday morning, Apple chief executive Tim Cook took a moment to reassure investors. “I can tell you that we have continued to experience strong growth for our business in China through July and August,” he wrote in a letter to Jim Cramer, the host of CNBC’s Mad Money. “Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last two weeks.”
For the moment, Cook’s note seems to have been effective in soothing investors. Apple’s stock slid 10 percent at the opening bell but has since recouped those losses, and was trading up about 2 percent to $108 as of early Monday afternoon. His update also aligned with a report released by tech research firm Gartner last week, which said that total iPhone sales in China ballooned 68 percent to 11.9 million units in the second quarter, even as overall smartphone sales in China declined year over year for the first time ever. Apple has had tremendous success with the iPhone in China. Earlier this year, the company snagged the title of best-selling smartphone, buoyed by demand for the iPhone 6 and iPhone 6 Plus.
But Cook’s email could turn into a legal headache for Apple. Lawyers contacted by MarketWatch say Cook may have violated the Securities and Exchange Commission’s Fair Disclosure regulation. “The SEC will undoubtedly want to take a look at this,” Thomas Gorman, a partner at Dorsey & Whitney, told MarketWatch.
Cook’s full email, as tweeted this morning by CNBC’s Carl Quintanilla, is below:
The Only Investment Lesson You Should Take From the Global Stock Market Meltdown
Stocks are down again Monday after getting hammered last week. Investors are afraid that China is stumbling, and could drag down a big chunk of the world's economy with it. They're worried about the Federal Reserve raising interest rates, which is typically bad for share prices, but also could deepen all the trouble we're seeing in Asia by pushing up the value of the dollar (which would hurt profits for, say, Chinese companies that export TVs or T-shirts to America). There's lots of uncertainty, lots of known unknowns.
Which is why, if you happen to hear somebody claim that now is definitely a good time to buy up cheap shares in, say, Apple, you should ignore them. Likewise, if someone suggests it is absolutely urgent that you liquidate all your worldly possessions (or just your equities portfolio) and invest, in, like, canned goods, you can also safely move on with your day. Nobody really knows how to time the stock market. Don't believe anybody who claims otherwise.
Here's an example of what we do know. As this chart from Bespoke Investment Group (via Bloomberg) shows, the S&P 500 has fallen 5 percent or more in a week on 28 other occasions since 1980. In the three months following those falls, stocks have risen about 70 percent of the time. So, one could maybe argue that bargain hunting right after a big weekly drop has typically paid off.
But, it doesn't always. In big downturns like 1987 and 2008, stocks kept falling after large weekly drops, sometimes as much as about 20 percent further. You can also see that something similar happened in 2002, when the world wasn't evidently coming apart at the seams. I personally feel like Monday probably isn't leading into Great Recession Part II, but that's just it—figuring out if right now is the moment to jump in and buy or to get the heck out of dodge is guesswork (unless you have a really specific schedule for rebalancing your portfolio, but that's sort of a different issue).
Now here's the one point on investing that today should illustrate for you: If you think you're going to need your money in the near future, don't keep it in stocks. Simple as that. The phrase "invest for the long term" is a cliche, but for a good reason. You need to be able to ride out dips like we're seeing today, possibly for quite a while. And it's a lot harder to do that if you need to cash out your portfolio to put a down payment on a house or pay your kid's college tuition. Likewise, trying to make a quick buck on what looks like a temporary dip can backfire pretty badly if you need that money to pay a mortgage in three months.
In other words, invest so you never have to find yourself trying to figure out whether the Federal Reserve is about to deal another blow to China's troubled economy, because who the heck knows?
Why Donald Trump Is Suddenly Bashing Hedge Funds
As of late, logorrheic reality television star Donald Trump has managed to find a new target on which to hock gobs of populist resentment, and for once, it's a pretty reasonable one. “The hedge fund guys are getting away with murder,” he said on CBS's Face the Nation on Sunday, reiterating comments he had made to Time magazine. Of course, the issue was taxes. "They're paying nothing and it's ridiculous. I want to save the middle class," Trump said. "The hedge fund guys didn't build this country. These are guys that shift paper around and they get lucky."
Per usual with Trump, it's a bit of an exaggeration to say hedge funders are paying "nothing" to the IRS. But as Slate's Daniel Politi noted over the weekend, Trump was likely talking about the carried interest rule, the loophole that hands private equity, venture capital, and a some hedge fund managers a huge tax break by treating most of their earnings as capital gains rather than normal income. Long controversial, the rule was the subject of a lot of discussion during the 2012 presidential election thanks to Mitt Romney, who as a former private equity baron benefited from it mightily.
A quick review of how carried interest works: Private equity and hedge fund big shots are compensated based on what's known as a "two and twenty" rule. First, they earn a management fee equal to 2 percent of the investments under their watch. That money is guaranteed no matter how their portfolio fares, and is taxed like ordinary income, at a top rate of 39.6 percent. But on top of that, managers also get a 20 percent cut of their fund's profits. That's called carried interest, and today it's taxed as investment income, with a top long-term capital gains rate of 23.8 percent (once you include Obamacare's surcharge on investment earnings). That break is, obviously, worth quite a bit of money to many a financier (though, contra Trump, hedge funds don't benefit from it quite so much as commonly assumed, because they frequently don't hold assets long enough to qualify for the long-term capital gains rate in the first place).
You can find some very involved justifications for this quirk of the tax code. But most reasonable people, including some conservative economists like Harvard's Greg Mankiw, admit it's pretty obviously unfair. Hedge fund and private equity founders do often put a bit of their own capital on the line. But mostly, they're being paid for their labor as managers. So, it makes sense to hit them with the same tax rate that would apply to any other kind labor, not a lower rate meant to encourage more investment. Some estimates have suggested that doing so could raise as much as $17.7 billion over a decade, which, while perhaps not a boatload of money, isn't nothing.
In the end, the policy is probably less interesting here than the politics. Republicans have a somewhat torn relationship with the carried interest rule: Some defend it thanks to their sympathy for Wall Street or out of an aversion to raising any kind of taxes while others would be happy to see it go, because they feel the break primarily benefits wealthy Democratic donors (there's a reason New York Sen. Chuck Schumer supports it). Given that he's basically completely unencumbered by the need to raise funds or adhere to strict conservative ideology, Donald Trump is free to make pretty much whatever gestures he thinks will rev up the GOP base. And those voters, it's worth remembering, are not especially sympathetic to the desires of Wall Street financiers (during the financial crisis, Republicans loathed the bank bailouts even more than Democrats did). If nothing else, the Donald is yet again giving us a little peek at what populist conservatism might look like if neither money nor party dogma mattered at all in elections.
China’s Stock Market Is Melting Down—and It’s Taking Markets Everywhere With It
Friday was a rout in the stock markets; Monday is already looking worse. The Shanghai Composite index tumbled 8.5 percent—erasing the last of its gains for the year in its biggest single-day loss since 2007. European stocks have plunged nearly 5 percent. U.S. stocks nosedived at the opening bell: The S&P 500 fell 99.1 points or 5.03 percent, the Dow sank 991 points or 6.02 percent, and the Nasdaq pitched 335 points or 7.12 percent. There is only one word for all of this, and it is yikes. Brent crude, the benchmark for oil prices worldwide, is trading below $45 a barrel for the first time in six years. Even gold, so often a “safe haven” commodity that investors pour money into during periods of economic uncertainty, is being weighed down.
What’s behind the apparent panic in the global economy? Mostly China. Over the past two weeks, China’s currency fell in value more than it did in the previous two decades. On top of that, all the recent economic data coming out of China seems to fundamentally contradict official reports of the country being on track for 7 percent growth. Investors and analysts have long questioned the accuracy of economic statistics produced by the Chinese government, so seeing those figures can’t have been entirely surprising. But it’s only recently become clear how big the gap between official reports and China’s economic reality might be. And the bigger that gap, the greater the ramifications could be worldwide. In recent years, China has accounted for up to half of global growth, though it makes up just 15 percent of global output.
Per the Wall Street Journal, China is looking into stimulus measures:
The expected move to free up more funds for lending—by reducing the deposits banks must hold in reserve—is directly aimed at countering the effects of a weaker currency, which could send more funds away from Beijing’s shores. The moves reflect an economy increasingly failing to cooperate with Chinese leaders’ playbook to control the world’s No. 2 economy.
The Journal says this could happen by the end of August or in early September, most likely via a half-percentage-point reduction in reserve-requirement ratios for banks. Another possibility is to just loosen the reserve requirements for banks that lend primarily to small and private businesses. China’s entrepreneurs have been stifled by the risk-averse tactics of many banks, which prefer to lend to state-owned companies than private, potentially higher-growth enterprises. Theoretically, stimulating that kind of private-sector growth would be better for China in the long run than falling back on exports, its traditional economic mainstay. (The leading theory for why China’s central bank devalued the yuan is that it was trying to prop up exports.) At the same time, as the Journal notes, these new “would-be drivers of the economy—high technology and entrepreneurship—aren’t filling the gap quickly enough.” In the meantime, expect a lot of turbulence in the global markets.
The Stock Market Just Fell Off a Cliff
Friday’s stock market tumble could only be described as a rout. The S&P 500 plunged 64 points or 3.19 percent. The Dow Jones Industrial Average slid 531 points or 3.12 percent. And the Nasdaq toppled 171 points or 3.52 percent. That built off downward momentum from Thursday, when the three major indices each fell by more than 2 percent. Altogether, it was the worst week for U.S. stocks since 2011. What’s the deal? As with most sudden disturbances in the stock market, it’s hard to know for sure, but there are a bunch of things that could be worrying investors right now.
First, China. The global economy has shuddered recently on a string of troubling economic updates from the Middle Kingdom. Last week, after two decades of keeping a firm grip on the currency, China’s central bank allowed the yuan to fall a striking 4.4 percent. The move was widely interpreted as a bid to prop up exports, which plummeted a significantly worse-than-expected 8.3 percent in July—the biggest drop in four months. The yuan stabilized this week as the People’s Bank of China resumed setting the daily reference rate in a tight band, but the bad news kept coming. On Friday, U.S. markets awoke to data showing China’s factory sector shrank faster than it had in six years in August, with decreases in both domestic and export demand. While China’s official figures have touted 7 percent growth, the great investor fear is that the country’s economy is actually growing much more slowly—and in some provinces and regions perhaps even slipping into outright recession.
Second, the Federal Reserve. On Wednesday, the Federal Open Market Committee released minutes from its July meeting. Essentially, the Fed said that the U.S. economy is on the upswing, but that inflation isn’t quite there yet, and “almost all members” of the FOMC felt “they would need to see more evidence that economic growth was sufficiently strong” before it would commence with the long-awaited raising of rates. For the markets, the question is always how to read these statements, and right now people are split over whether the rate-raising will come in September or a bit later. Most investors seemed to be leaning away from a September hike, but the team at Citi felt differently, writing in a note that the tone of the minutes was “hawkish” and September remained the more likely option. Honestly, we’ve been waiting for the Fed to raise rates for so long by now that you’d expect markets to have priced it in, but apparently that’s just not the case. Call it summer 2013 all over again, because this feels a lot like a “taper tantrum.”
Over at the Upshot, Neil Irwin makes a good case for why the frantic drops of this week might not be such a bad thing. As he puts it, “if you step back just a bit, what has happened in financial markets this week looks less like a catastrophe in the making and more like a much-needed breather when various markets had been starting to look a little bubbly.” But with stocks in correction territory, the real question will be whether they continue that way or reverse course. And that’s not something we’ll know until next week.
Uniqlo Wants to Give Its Japanese Workers a Four-Day Week. They Might Not Take It.
When we talk about four-day workweeks, it’s usually discussed as a fantasy or thought experiment, but soon it will be real for much of Uniqlo’s workforce. Starting in October, the clothing brand’s parent company Fast Retailing will offer the option of a four-day workweek to roughly 10,000 full-time employees in Japan, Bloomberg reports. Those who accept the schedule will gain three days off by working 10-hour shifts the other four days. (I hesitate to use the phrase “three-day weekend” because, per Bloomberg, employees will have to work Saturdays and Sunday to keep stores staffed.) If the trial goes well, the company will consider phasing in a shorter workweek at its corporate headquarters as well as in more retail stores.
Sitting at a computer monitor on this lovely summer Friday, three days off in exchange for 10-hour days sounds rather nice. But will Uniqlo’s employees in Japan actually want it? Bloomberg says Fast Retailing “is offering the perk to its in-store employees with the hope of retaining full-time talent, who often cut down to part time to be with their families or care for elderly parents.” Still, consider the well-documented portrait of the Japanese workaholic. Long, often unpaid overtime hours are expected as a matter of course. Working to death is so common that Japanese courts have recognized it as a legitimate cause of action in wrongful death suits and it’s literally been enshrined in the lexicon—the term is karoshi. To get the nation to ease up, the Japanese government is thinking about legally requiring workers to take their PTO. Uniqlo might have to drag its employees off the clock.
On the other hand, if Uniqlo can get a four-day workweek to take off, that could be very positive for Japan’s corporate culture. Beyond taking a physical and psychological toll on employees, the long hours that are so standard have contributed to social problems, like forcing women to choose between a career and a family. Here Japan seems to be losing on all counts: The female labor force participation rate is low, and the birth rate has also dipped precipitously, for reasons some believe may be related to poor working conditions for women. Changing that would be beneficial pretty much all around. And maybe Uniqlo can do it. The brand’s clothes are already trendy. Maybe its workplace can be, too.
This Proposed Change to the Student Loan Program Might Mess With Some Married Couples
It looks like the marriage penalty, or a version of it, might be coming to the student lending program.
At the moment, the Department of Education is in the process of creating an expanded version of Pay As You Earn, the repayment plan that caps what student-loan borrowers owe each month at 10 percent of their discretionary income, and forgives the balance after 20 years. As I wrote Wednesday, this program has become more popular in recent years, especially among graduate students, thanks to the Obama administration's efforts to promote it. The new edition will be open to anybody who has taken out loans directly from the government, including older debtors who previously didn't qualify, and includes a few reforms meant to better aim the benefits at needier borrowers.
One of those tweaks is designed to make sure married couples pay their fair share by requiring them to hand over 10 percent of their combined discretionary income, which the government defines as any earnings over 150 percent of the poverty line. As the Center for American Progress explains, it's meant to close a bit of a “loophole” in the current system:
Under other plans, married borrowers can file individually, thus capturing only one income while claiming their spouse when reporting their household size. This substantially reduces the monthly payment amount on the individual’s loan. REPAYE would eliminate this loophole by basing monthly payments on combined income and household size—a more accurate measure of an individual’s ability to repay their loans.
Sound policy? Absolutely. It also probably won't cause too much havoc: According to the government's data, only 8 percent of married borrowers on income-driven repayment plans file separately today (though that might in part be because of caps, which the new version of PAYE would remove, that limit payments to what one would owe on a standard 10-year plan). But it does mean at least a few households are going to be forced to hand over a significant additional chunk of change to the government each month. So mark my words: In six to seven years, there will be a New York Times trend piece about three couples in New York who decided not to get married because of their student loan math.
Should We Stop Making Companies Report Quarterly Earnings?
What would Wall Street be without earnings? Those quarterly reports are a ritual—companies push out their numbers; investors react in knee-jerk fashion; reporters blog the catchiest bits; execs join after-hours calls to tout their success or mitigate the damage. This intense three-month cycle and the kind of company behavior it drives is sometimes called “quarterly capitalism.” In some ways, quarterly capitalism is funny to observe—the corporate equivalent of watching someone sprint the first lap of a 1,600-meter race, either oblivious of or willingly ignorant to the fact that three more will follow. But to many it’s emblematic of the problems with our financial system, and as the 2016 election ramps up you should expect to start hearing a lot more about it.
In mid-July, Hillary Clinton highlighted the drawbacks of quarterly capitalism in a speech outlining her economic platform. The result of a private sector obsessed with satisfying investors every three months, she said, “is too little attention on the sources of long-term growth: research and development, physical capital, and talent.”
On Tuesday, another voice took up that cry when Wall Street law firm Wachtell, Lipton, Rosen & Katz called for the Securities and Exchange Commission to consider eliminating most quarterly reporting obligations for U.S. companies. Headlining this effort is Martin Lipton, a Wachtell founding partner. In a recent memo, Lipton pointed to new research from Legal & General Investment Management, a European firm with more than £700 billion in assets under its management, which found that short-term reporting “is not necessarily conducive to building a sustainable business” and “adds little value for companies that are operating in long-term business cycles.” In the U.S., the SEC “should keep the observations in mind,” Lipton wrote, “in pursuing disclosure reform initiatives and otherwise acting to promote, rather than undermine, the ability of companies to pursue long-term strategies.”
Clinton’s proposed remedy for quarterly capitalism includes reforming capital gains taxes to reward investors who hold onto stocks for longer, and thereby encourage investing with longer-term results in mind. She’d also like to see regulators require U.S. companies to disclose stock buybacks more quickly, perhaps on the within-one-day timeline used in the U.K. and Hong Kong. It’s hard to say how these policies would pan out. As Bloomberg View’s Matt Levine noted last month, forcing companies to disclose buybacks every day might just create more pressure for those companies to do buybacks every day.
Reducing the frequency of quarterly reporting, on the other hand, is a more straightforward fix. You might loosely compare it to McDonald’s recent decision to do away with its monthly same-store sales reporting practice—“to focus our activities and conversations around the strategic, longer-term actions we are taking,” as chief executive Steve Easterbrook explained. McDonald’s, you might recall, has been struggling for the better part of a year to turn around its business. By the time the company finally decided to give up on reporting same-store sales every 30 days, they’d declined globally for 11 months straight. That seems like a telling example here because, if you’re willing to take Easterbrook at his word, McDonald’s really does want a chance to focus on longer-term turnaround efforts. But its hands have in a sense been tied by the obligation to publish financial data on a monthly basis, which makes doing anything that helps in the long run but hurts up front that much more difficult to slide past investors.
In this way, quarterly reports are similar. Yes, transparency is good. When the pressure to put up big numbers every couple of months inhibits investments in the future, though, that’s a problem. Amazon is famous for having convinced Wall Street to accept its virtually nonexistent margins in the name of long-term growth; it’s the exception, not the norm. Eliminating quarterly reporting requirements wouldn’t necessarily be the magic bullet that turns every company into the prophet of no profit. But as ideas go, it’s certainly one worth considering.