STOCKS DO NOTHING, VALEANT CRASHES: Here's what you need to know

The major stock averages finished the day little-changed while shares of Valeant Pharmaceuticals, the most high-profile holding of high-profile hedge fund manager Bill Ackman, fell 50% after a run of very disappointing earnings news.

First, the scoreboard:

  • Dow: 17,237.5, +8, (+0.05%)
  • S&P 500: 2,014, -5, (-0.3%)
  • Nasdaq: 4,726, -23, (-0.5%)
  • WTI crude oil: $36.45, -2%

Bill Ackman’s Terrible, Horrible, No, Good Very Bad Day

The header sort of says it all.

Bill Ackman, by our maths, lost about $1 billion on Tuesday as shares of Valeant Pharmaceuticals were cut in half after the company gave a disappointing earnings outlook and basically did nothing to reassure investors that the very messy last six months are close to being anything like fixed.

Here are some of the gory details from Linette Lopez (emphasis mine):

The way analysts talked to Pearson on Tuesday morning was the same way a parent talks to a teenager who just had the police called on his or her house party. It was the same way you talk to a dog that just chewed up the furniture. One analyst, David Maris of Wells Fargo, even asked Pearson if he would forgo his golden parachute if the board asked him to leave.

Pearson sounded clueless. He said he didn’t even know he had a golden parachute totaling about $200 million. He also said he didn’t know when the company would release its annual report, giving April as his best guess. Valeant will be penalised if it isn’t released by March 16.

It was just one of many missteps on the call led by a man who once could do no wrong on Wall Street. Fudged numbers, estimate changes, issues with the company’s new business model and partners — the analysts, usually so lenient with Valeant — caught it all.

So this went badly!

And it is almost unbelievable that a company worth roughly $20 billion in the morning would be worth half that at the close. But it happened. The stock chart is real.

The amazing thing, though, is that this is not a new problem. Certainly the stock falling 50% today is new, but consider that shares of Valeant fell as much as 40% in one day back in October. In the last six months, the stock is off 80%.

There is so much to say here: on the hubris on management, on the company’s major shareholders, on the pharmaceutical-industrial complex that more or less enabled the roll-up strategy the company propagated in the last several years.

With Tuesday’s collapse Valeant shares are now basically flat over the last five years.

And while this is certainly a convenient time for value-based investors to look at Valeant and related parties and have the last laugh, we’ll give The Motley Fool’s Morgan Housel credit where credit is due on nailing what seems to have really gone wrong here/

Housel tweeted Tuesday that Facebook CEO Mark Zuckerberg has made clear he doesn’t really care about the money. And now he has tens of billions.

Valeant CEO Mike Pearson, in contrast, has made clear he measures success by value returned to and created for shareholders. And the project has gone up in flames.

In entirely unrelated pharmaceutical news, shares of Celator Pharmaceuticals gained more than 300%.

US Economy

It’s a busy week for US economic data and Tuesday saw the week’s largest data-dump.

At 8:30 a.m. ET we got a manufacturing reading from the New York Fed that came in better-than-expected, retail sales fell less than expected, while the latest reading on producer prices fell 0.2%, in-line with expectations.

Homebuilder confidence came in slightly lower than expected, though this measure’s March reading matched the level seen in February.

On balance, well, it was all fine. Nothing major happening in the economy that we didn’t know about already, basically. Retail sales were a slight disappointment but, again, this is a series that uses nominal dollars and so the 0.1% headline decline in February’s sales was impacted by a decline in the price of oil. The biggest jump in sales seen during the month came from building materials retailers. So that’s good!

In the producer price index the cost of medical services rose more than the prior month, indicating potential upside for the next PCE inflation reading. This measure, which is preferred by the Fed over the consumer price index (which we’ll get on Wednesday morning), rose to 1.7% in January and is quickly closing in on the Fed’s 2% goal.

Federal Reserve

The Federal Reserve kicked off its two-day meeting on Tuesday which will culminate in Wednesday afternoon’s policy announcement at 2:00 p.m. ET and a press conference from Fed Chair Janet Yellen at 2:30 p.m. ET.

Expectations are for the Fed to keep interest rates pegged at 0.25%-0.50%. The more interesting part of the release will be the updated “dot plot” — which gives a “House view” of sorts on where Fed officials think interest rates will be at various points in the future — as well as new economic projections for GDP, unemployment, and inflation.

Chair Yellen’s press conference will also, of course, be closely tracked, particularly for any indications that the Chair sees inflation pressures building in way that the Fed will not choose to look past. For years inflation has run below the Fed’s 2% target, but as we noted ticked higher in January and signs point to growing price increase in the economy.

But will the Fed, as it did in 2014, view this increase as temporary? Or will the Fed begin, for the first time in the post-crisis era, see durable, robust price pressures make their way into the economy. And, if they believe “this time is different” on the inflation front, how will this shape the path of future policy?

We’ll have full coverage tomorrow.

To hold yourself over, read Akin Oyedele’s full preview here.


Regular readers of this space know we love Amazon.

And on Tuesday, analysts at RBC Capital Markets covering freight transportation stocks wrote about how firms and investors in their coverage area have taken notice of Amazon’s move into the more boring logistics space.

Not unlike the shockwaves seen through media stocks in recent months, the worries here are that investors in companies like, say FedEx or UPS, will start to get nervous about how Amazon will eventually impact operations even if the clear endgame isn’t known.

In fact, it will likely be even worse until the endgame is clear, regardless of who wins.

Here’s RBC (all emphasis mine):

Amazon has been making waves across our coverage universe over the past few months by taking what appears to be a targeted and methodical approach to procuring and managing freight transportation capacity internally rather than outsourcing. These actions coupled with several peak shipping seasons of underwhelming service performance by FDX and UPS led to a great deal of concern among investors that Amazon is in the process of actively developing its own internally controlled supply chain capable of moving product across the globe all the way to a customer’s doorstep.

Our view is that this is partially true: Amazon is trying to build a global supply chain to reduce costs and create deeper customer relationships. Similarly, we believe Amazon is working to create a limited pickup and delivery operation to meet niche customer requirements and to keep the traditional parcel carriers “honest” with regards to pricing and service commitments. However, we do not think the company can yet build a full-scale pickup and delivery business capable of supplanting the likes of UPS, FDX and the USPS.

At the core, we think the decisions Amazon is making today parallel those made by Walmart during the 1980s, as the company began to integrate itself more fully with its suppliers to aggressively reduce costs across all aspects of its business, especially the supply chain. This can accomplish two things: reduce costs in any way possible and ensure that customers receive goods in a timely manner year round.

So, a lot to unpack here (you can read my full thoughts on the matter here), but the basic point is that more and more industries no longer look at Amazon at arm’s length: they are knock at the door. Loudly.

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