THE BOTTOM LINE: Chipotle's earnings disaster, Amazon's new headquarters, and the unstoppable stock market

This week:

  • Business Insider CEO Henry Blodget and executive editor Sara Silverstein look at Chipotle, which is down more than 60% from its peak just two years ago. Silverstein recaps the company’s disappointing third-quarter earnings report, which saw it miss on sales, profit and cut its forward guidance. She mentions that the big debate amongst investors revolves around Chipotle’s new queso, and notes that one Wall Street analyst cut his price target after seeing the negative social media reaction to the queso offering. Blodget points out that BAML downgraded the company’s stock because it pays employees too much, which he thinks is a good problem to have, while also professing his continued affection for their food. He doesn’t think it’s the end of the world if Chipotle doesn’t trade at the valuation it once did, and notes that it’s followed the trend of many momentum stocks before it.
  • Blodget discusses Amazon‘s public announcement that it will open a new headquarters, and its subsequent invitation to companies who want to make a pitch, which he says puts it in the running for “smartest company in the world.” This is because it eliminated any sort of potential backlash that could’ve stemmed from the company deciding without external input. Silverstein goes through some of the more entertaining proposals, and breaks down the potential economic incentives Amazon could end up getting from the winning city. Blodget then reiterates what good salesmanship the HQ contest is, and says it offers a ton of free advertising.
  • The Fidelity Viewpoints Chart of the Week highlights US exports, which are still near all-time highs as a percentage of GDP. The firm says that means global economics may have a more meaningful impact upon US stocks.
  • Silverstein sits down with Brian Levitt, the senior investment strategist at OppenheimerFunds, who says that he doesn’t think the stock market is particularly overvalued. He points out that US equities are still trading cheap when compared to bonds, and argues that people are still fearful of a bubble similar to the one seen in the late 1990s. He brushes off those concerns, saying that conditions are different this time around. Levitt notes that the market has been favouring growth stocks like the FANG group, rather than their value counterparts, because we’ve been in a slow economic growth environment. He then goes on to say that he favours looking at a measure like price-sales ratio when assessing companies like Amazon, because they’re a better predictor of future returns. Using that, a lot of stocks that look expensive are actually reasonably priced.
  • Levitt breaks down the economic growth picture, which he says has been a prolonged de-leveraging environment for consumers, marked by low-trend growth. He argues that’s good for corporate earnings, and it doesn’t accelerate the type of inflation that would bring about policy tightening. Levitt says the combination of all these conditions means the cycle will continue far longer than people expect, barring a major policy mistake.
  • Levitt highlights uncertainty around the Federal Reserve as the biggest risk to markets right now. He says the yield curve is currently steep, which is reasonable for supporting credit growth and the economy. He does note that if the Fed attempts to get too tight, we could see long rates come down. In terms of market price swings, he says that they normal accelerate when you have policy volatility. Levitt says that if there is a stock correction around the naming of a new Fed chair, he views that as a buying opportunity.
  • Silverstein asks Levitt about tax reform, which he says is still a very dicey proposition. He says that if it does pass, growth will increase in the quarters ahead, pushing Treasury rates higher and giving the Fed room to hike. He notes that it also means market leadership will switch from growth stocks to value, while also favouring small-cap companies, which pay higher effective tax rates. Levitt highlights the financial and industrial sectors as potentially benefiting from this, and stresses that investors should keep seeking out growth, perhaps in emerging markets, Japan and European companies.
  • He then notes that people can be overly pessimistic about the market when they look at political volatility and weak growth, thinking that it’s too good to be true. He argues that hating the government is not an investment strategy, and says that his number one concern remains the Fed.

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