foxex: Q3 was better than it seemed...Now what?

Insight after the bell

By Caleb Silver, Editor in Chief

Four for Friday:

Q3 was better than it seemed
We are all Facebook's data breach
Tesla's troubles
Sears risks delisting

Q3 was better than it seemed...Now what?

With all the political noise and tariff troubles swirling about, it is hard to believe that the US markets continue to charge higher. That's exactly what they have been doing as the third quarter comes to a close. It was the best quarter since 2013, by the way.

This is a pretty good Q3 report card:

DJIA: +9.4%

S&P500: +7.3%

Nasdaq: +7.1%

Why it Matters: It's hard to shut out the noise and just focus on our investments and our strategy, but that's what we need to do - at all times. There are times when politics impact investing and those require our attention. Major policy decisions, tariff wars and geopolitical unrest can impact returns, but we've seen a lot of that so far in 2018 and the market keeps grinding higher. Experts point to strong economic growth, robust corporate profits and a favorable tax legislation as the engines that have keep this market humming. There are signs that those corporate profits won't be as robust going forward, however. Earnings season for U.S. listed companies kicks off in the coming weeks, so we should pay particular attention to their results and their forecasts for the future.

What's Next: The obvious question is whether this can continue. We all wish we knew, but we don't. That said, the fourth quarter is usually the best performing quarter of the year, according to research from Sam Stovall at CFRA. The average Q4 return for the S&P 500 since World War II is 4.1%. In years with a midterm election, the broader market rises more than 7% on average, according to Stovall. Does this mean we can bank on a repeat? Absolutely not. Past performance is no guarantee… You know the rest.

Stay diversified. Keep your risk management steadfast and don't think you can time the market. No one can.

#2 Facebook's data problem is our problem

This is not the kind of message anyone wants to hear from a social media platform with 2 billion users and a lot of our personal information running through it. From a Sept. 28 Facebook Newsroom post entitled "Security Update":

On the afternoon of Tuesday, September 25, our engineering team discovered a security issue affecting almost 50 million accounts. We're taking this incredibly seriously and wanted to let everyone know what's happened and the immediate action we've taken to protect people's security.

Why it Matters: We don't know the extent of the data leak, but this is becoming a recurring theme with Facebook. It is facing constant regulatory scrutiny in U.S. and Europe, users are bailing and investors are losing patience. To be sure, Facebook is still wildly popular and makes obscene amounts of money, but it makes it off of its users' data. If it can't safeguard its most precious asset, those users and its profits will continue to evaporate.

What's Next: Facebook shares are down 6.8% YTD, but more than 23% since July 25th, when the company reported slowing growth in its user base. It lost more than $120 billion in market cap in one day - the most of any company, ever. Facebook will report earnings in early November and we'll see if the original social network has been able to stem the declines, but it will most assuredly be facing more regulatory scrutiny that just became more intense with this latest disclosure.

#3 Tesla's troubles
The SEC lawsuit against Elon Musk, announced late yesterday, was just the latest crisis facing the automaker. Analysts are slashing their forecasts, unhappy customers are raging on Twitter and Musk can't seem to get out of his, and the shareholders' way.

Why it Matters: There is not a lot of doubt that Tesla developed revolutionary technology and pretty cool automobiles that forever changed the industry. The stock showed a lot of promise in the early days when that seemed to be the sole focus of CEO Elon Musk. He has clearly proven unable to focus on that noble goal allowing personal and professional distractions to harm shareholders. It's what we call 'Key Man Risk', in the business, and he has embodied it.

What's Next: Tesla is continually one of the most shorted stocks in the market, according to S3 Partners, which tracks such things. Musk revels in the doubters and loves to prove them wrong… but his track record belies his efforts. The SEC lawsuit against him is a civil lawsuit (for now), but it does ask that he be removed as CEO and Chairman of the company and that he never be allowed to run a public company again. Tesla and Musk are one and the same. His vision is why it has come so far, so fast. His personality, however, is why the company and its shareholders are facing the crisis today.
Read more:
5 Takeaways From the SEC's Complaint Against Musk
The Top Tesla Shareholders
Tesla Is Too Risky to Own: Citi

Chart of the day: Sears dips below $1, risks delisting

It's hard to believe that shares of Sears, the fabled retailer, have declined so dramatically to hit nearly rock-bottom, below Nasdaq's well-known line-in-the-sand at $1. Owner of iconic retail brand names, including both Sears and Kmart, Sears Holdings saw its stock fall nearly 18% to a new all-time low of 82 cents early on Friday before paring some of its losses in the afternoon.

SHLD had already dropped to penny stock levels (defined by the SEC as a stock trading below $5) in November of last year, but its continued decline in the face of ongoing challenges has pushed the company past the threshold for a potential involuntary delisting from the Nasdaq exchange. Nasdaq has a $1 bid price requirement – if a company's stock trades below $1 for 30 consecutive days, the shares risk delisting.

This critical moment for the company's stock price couldn't have come at a worse time, as massive debt maturities and the threat of bankruptcy loom. In recent years, retail sales for the company have continued to decline and its stores have continued to close.

While Friday's dip below $1 may not yet signal the end of the world for Sears, the company's continued business decline and debt troubles clearly do not bode well for SHLD investors.