Tuesday, April 23, 2913 - A Tweet Day

A Tweet Day

by Sinclair Noe

DOW + 152 = 14719
SPX + 16 = 1578
NAS + 35 = 3269
10 YR YLD un 1.70%
OIL + .38 = 89.57
GOLD – 12.70 = 1414.60
SILV - .47 = 23.04

Some days you hear a bit of news and it's bad, really bad. And then some days, hackers hack into the Associated Press Twitter account and tweet that there are bombs at the White House, and the stock market goes into a freefall, and it's bad, but not really bad.

Yes, a false tweet sent stocks plummeting. The 143-point fall in the Dow industrial average came after hackers sent a message from the Twitter feed of the Associated Press saying the White House had been hit by two explosions and that Barack Obama was injured. The fake tweet, which was immediately corrected by Associated Press employees, caused a sensation on Twitter and in the stock market.

White House officials were unimpressed. An AP reporter apologized for the Twitter hacking at the start of the daily White House press briefing, saying the tweet had been deleted as soon as it was discovered. A stoney-faced Jay Carney, Obama's personal spokesman, thanked the reporter but did not look amused. "The president is fine. I was just with him," added Carney.

The market recovered within a few minutes of the misunderstanding, but the incident raised many questions. We still have a problem with high frequency trading algorithms that scan the news and trade quickly, causing flash crashes. And then there are people who set stop losses, who may be kicked out of a trade because someone's computer over-reacts. There's a substantial business by high-frequency trading hedge funds reading machine-readable news sold to them for big bucks by brand-name news organizations.

Fans of flash-trading robots say they make the market more "liquid," meaning stocks trade more easily. But they can also make liquidity vanish in an instant, making it harder for the few remaining human beings in the stock market to keep order when things go haywire. Remember the Flash Crash of May 2010? Remember the Facebook IPO? Remember yesterday?

Yep, yesterday. Google had a mini flash crash yesterday. And then it passed and nobody noticed much. It's actually happening all the time. And if you lose a little confidence in the markets, well you should. Now the market has almost become complacent of these errors.

And today's flash crash was a fairly simple prank hack; a one-hit wonder. Imagine if someone really wanted to be malicious. Imagine wave after wave of false news stories hitting the high frequency machines. We could one day be looking at not just a 150 point drop, but a thousand points, or maybe 10-thousand.

And if you still have some confidence in the markets, you'll love this next story. Standard & Poors, the credit rating agency is defending itself in a $5 billion civil fraud lawsuit. The government claims that S&P defrauded investors by telling them that its ratings on collateralized debt obligations were based on stuff like research and objective analysis. The government claims that, instead of objectively analyzing the CDOs, S&P analysts gave these CDOs the best possible ratings, in order to win more CDO-rating business from the banks that pay their salaries. 

The government seems to have a good case; many of the S&P analysts sent emails to each other and to their bosses explaining how bad the CDOs were and how the whole thing would end badly, and some referred to the ratings as “burning down the house”, and the whole email problem seems to indicate that the folks at S&P knew they were cheating; they really, really knew that what they were doing was wrong.

But S&P says that we should ignore those emails, that they were just part of the company's "robust internal debate." It says its ratings were just dumb and unreliable, not fraudulent. But then it also says we should go ahead and ignore its claims of objectivity and integrity, while we're at it. S&P is claiming that it's objectivity was mere puffery, which is a bit of a stretch for a legal defense, and even worse as a business model. It shouldn't come as a surprise. It has been painfully obvious that the credit rating agencies have a conflict of interests. They are paid by the banks whose products they rate.

This conflict was a problem before the crisis, and it remains a problem now. And though regulators have made loud noises about doing something about this problem, they have not done much in the way of solving it.

Which means that we could once again be in a situation in which a rating agency's ratings turn out to be woefully wrong. By that point, nobody will have any excuse for being surprised. S&P has all but told us to expect it. It is now part of the court records; their ratings are nothing more than puffery.

Speaking of puffery, it's earnings reporting season.

Apple reported fiscal second-quarter earnings of $10.09 a share on revenue of $43.60 billion versus $12.30 a share on $39.19 billion a year earlier. Better than expected. Apple is opening the doors to its bank vault, saying it will distribute $100 billion in cash to its shareholders over two years. Apple increased its dividend 15 percent to $3.05 a share and said it will expand its share repurchase program to $60 billion from the $10 billion level announced last year. 

KFC parent Yum Brands reported that quarterly profit fell less than Wall Street expected, despite a sharp drop in sales in its top market of China, and the company's shares jumped 6.5 percent. The fast-food operator reaps more than half of its overall sales in China. I did not know.

Some of the crown jewels of corporate America have reported declining revenues and earnings, and have lowered their forecasts, and in doing so, have unleashed a flood of obfuscation and excuses – from Easter falling on the wrong date to lazy sales reps. So when Caterpillar reported on Monday, it was almost refreshing in its unvarnished ugliness.

Sales plunged 17.7%, profits 44.6%. “A challenging first quarter,” Corporate Controller Mike DeWalt called it. Dealer sales had been less than expected, inventories had piled up on their lots, and they’d cut back their orders to bring down their inventories. End-user demand was down, along with sales of aftermarket parts. Everything was down. But manufacturing costs jumped, and profits sagged. The rest of 2013 would be tough, and revenue guidance was lowered by a chunk. Not a single excuse.

Then there’s IBM. Because it’s the world’s largest supplier of information technology, its earnings report is a harbinger of things to come… namely excuses. A technique it had picked up from Oracle last month. Oracle’s earnings call was a mess. Revenue dropped 1%, instead of being up. Revenues from new software licenses and cloud subscriptions dropped 2%, after the company had forecast an increase of 3% to 13%. Hardware sales were a disaster. Who did they blame? First, the government – the quarter “ended on the same day as the sequester deadline,” explained President and CFO Safra Catz – then the sales reps. Oracle had just hired 4,000 new reps around the world; that was the problem Catz and President Mark Hurd said in unison. They hadn’t been trained yet. It was just “sales execution.” Nothing else. Certainly not the economy, Catz pointed out.

“What we really saw was the lack of urgency we sometimes see in the sales force as Q3 deals fall into Q4,” Catz said. Those “new reps,” she said, “ran out of runway in Q3.” They just couldn’t close their deals. “The issue for us is simply conversion,” Hurd added. “Clearly we have work to do in training new reps on managing the sales processes,” Catz chimed in. What about the old reps? Where they all on vacation? They didn’t say. Not a good omen.

Thursday evening, it was IBM’s turn to report a first-quarter earnings shortfall and revenues that, instead of growing, had skidded 5% from a year ago. To get back on track, IBM would swing the axe, at a cost of $1 billion in the second quarter – “workforce rebalancing” was its newfangled term, “to better align our resources to opportunity.” There’d be a lot of “rebalancing.” The term was used 14 times during the call. And it would dump some businesses.  A few moments later he added that revenues in the Americas were down 3%

A scary thought that the three largest markets in the world could weaken simultaneously – despite the prodigious amounts of money that central banks have printed and handed out. That phenomenon must be hidden under layers of lazy sales reps, sequester deadlines, and badly timed holidays. Yet, at the very end, something did slip out: “We are clearly not immune from changes in the global economy,” Loughridge said during his wrap-up, the most revealing sentence of the entire earnings call.