Janet Yellen left the Federal Reserve last Friday, but not before dropping a bombshell of penalties on Wells Fargo (NYSE: WFC) -- which might make this the perfect time to buy. The Dow dropped 600 points last week, and bearish harbingers of doom are reeling, but long-term investors probably shouldn't be too worried. Meanwhile, struggling retailer Bon-Ton (NASDAQ: BONT) is filing for Chapter 11 bankruptcy protection, but only closing a tiny fraction of its stores.
In this episode of the Market Foolery podcast, host Chris Hill talks with Million Dollar Portfolio's contributor Jason Moser and Stock Advisor Canada's contributor Taylor Muckerman about the news in the market this weekend. Tune in and find out more about these stories.
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A full transcript follows the video.
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This video was recorded on Feb. 5, 2018.
Chris Hill: It's Monday, Feb. 5. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio: from Stock Advisor Canada, Taylor Muckerman, and from Million Dollar Portfolio, Jason Moser. Happy Monday, gents!
Jason Moser: Hey, hey!
Hill: Shout out to our listeners in Philadelphia. Hopefully you survived the night. Based on some of the reports -- here's one thing I learned this morning. Apparently, if you're at a nice hotel like the Ritz-Carlton and you get out of the car and there's an awning outside, apparently the tensile strength of those awnings maxes out at 11 people.
Moser: We now know this.
Hill: We now know this. It's been tested in Philadelphia, because in celebration of the Eagles winning the Super Bowl, a 12th person got on top of the awning.
Taylor Muckerman: The 12th man.
Hill: And that's when it collapsed. So now we know.
Muckerman: They were swan-diving off of it.
Moser: I can't understand that, for the life of me. It's like, you're so proud of everything that your city has accomplished, let's just go ransack it and leave it in shambles. It just couldn't be more at odds with one another.
Muckerman: My favorite was the guy doing the trust fall off that awning.
Hill: That's a lot of trust.
Muckerman: Right onto the ground.
Hill: Meanwhile, the business world continues to grind its wheels. We have some retail news. We have some pretty interesting banking news. Let's start with the market itself. In the past week, the Dow has fallen almost 5%. We taped Motley Fool Money on Friday afternoon. It was all earnings, it was an all-earnings show, and we got out of the studio Friday afternoon and looked at what was happening with the market, and if you're searching for business news in the U.S. on Friday afternoon, overwhelmingly the dominant story is, "Oh, my gosh, the Dow is falling."
Muckerman: 666 points!
Hill: 600 points, and it's down another 150 points. First, I'll kick it to you, Jason, can we all just at least agree that, as the Dow continues to go higher, the fact that it's falling or rising X number of points means less and less?
Hill: That the percentage is what matters, not the points. So, I get that the Dow falling 600 points sounds like a big deal. It's a much smaller deal in 2018 than if this was 1987 and the Dow was falling 600 points.
Moser: And with the Dow, that's 30 companies, versus something like the S&P, which is 500. So, there's a big difference there, too. If just one of the components of the Dow has a bad day, that has an outweighted effect vs. something like the S&P. I think, generally speaking, we all agree that the S&P is a better proxy, a nicer cross-section of the overall economy. But, to your point, we got out of taping on Friday, and I had gone home a little bit early that day. I was dumbfounded at the level of panic that was on the news. I was switching channels at home, and I guess they're looking for something to talk about and this was something to talk about, I suppose. It's a good reminder that the markets don't always just go up. By the same token, let's take this in context and understand that the world is not coming to an end.
I think it's also very telling when you see days like this, a lot of people will talk about, "Man, I can't wait for a dip. I want to buy on the dip. I just need a buying opportunity. Stocks are too expensive." And then when the you-know-what hits the fan, everybody goes running for cover and they all of the sudden become very scared to pull that trigger, thinking there may be more. So, it's always just a good reminder that stocks do go down. It's going to be OK. Try to understand what the nature of the pullback is, and when you look at things from a longer-term perspective, I think it puts everything in context and you learn not to panic.
Muckerman: You mean the fact that they're up 300% since March 9, 2009? And one of the reasons why people were selling, the market was selling off, was because wages rose too quickly, so now the Fed might raise interest rates, the economy is strong, and then the market sells off as a result. So, kind of an interesting twist there. Strong economy, market says, "Oh, we might want to sell off a little bit here." Kind of counterintuitive. But, yeah, 2.5% in one day. Not too terrible. Still haven't gone down 5% in a record number of days.
Moser: I think what's more noteworthy nowadays is how much variation we see in the matter of just one trading day. Before technology, before we were all connected via our mobile devices and you actually had to look up stock prices in the newspaper the next day, information was out there, it was tougher to come by, but you would generally see, the market would do one thing or the other on any given day, and you didn't see any intra-day swings, because the information just wasn't traveling as fast. It travels so quickly now, and there are so many other instruments out there to trade and invest in that things move all sorts of different directions just in the matter of one day. I mean, I guess that's good. I kind of feel like the market should just be open 24-7. But it does really lend itself to a lot more volatility.
Hill: To go back to something you touched on earlier, this is just one more reason why I, at The Motley Fool, we focus on individual businesses. There are always going to be moments where there's a general tide. Sometimes strong, stable, growing businesses that you want to be a part owner of for the next 10, 20, 30 years, they sell off just because they're swept up in the tide, but those are the moments to look at your portfolio and almost go company by company and say, "This is down a little bit, why is this down? Did anything materially change, or is this just part of the tide?" Because, if something has materially changed -- and we'll talk about a company in a second where there absolutely has been material change and not in a good way -- then that's one thing. But it's another thing altogether if -- and I have to say this, because I'm someone, in part because of what I do for a living, I'm looking at financial media every day, never underestimate the bears out there. And I mean, the people who are in the business of being bearish. The people who are out there saying, "It's coming, the crash is coming." They're only going to get louder. Any time we see this one- or two-day sell-off, they're going to bang that drum even harder, because they're desperately aching to be correct.
Muckerman: It happens so infrequently compared to up days. So, yeah, you're right, they just want the limelight. Who knows when it comes back?
Moser: You get out there and predict it's going to happen. At some point, it does. It's like, "I keep telling you!" They may suck at the timing part of it, but eventually a crash is going to happen.
Hill: "Like I've said every three months for the last six years!"
Moser: [laughs] And it's OK. But, to your point, and I really think this is a very important one that we ought to hammer home for listeners and new investors, and I think a lot of people will eschew this philosophy as being laissez-faire, you just stick your head in the sand and it's not really effective in today's investing world. It really does speak a lot to our philosophy of business-focused investing. When you see these moves up and down, there's a lot to be said for being able to look at the stocks that you own and understanding the businesses that are behind them. If you own shares of Google, if you own shares of Amazon, if you own shares of Starbucks, any of those businesses, you can look at them and say, "These are relevant businesses that are still going to be here tomorrow. They have a lot of different ways they can succeed, and they have great track records of success." That can help take the ease off of days like Friday. You can say, "Listen, I don't have to get mixed up in that minutiae, because I know I own these stocks because I like the businesses that are behind the stocks." The stock is just the instrument. We're really talking about the underlying business. And really, over time, it makes a big difference.
Muckerman: It's paper lost on Friday, unless you were forced into selling.
Hill: Bon-Ton has become the latest retailer to file for chapter 11 bankruptcy protection. Here's the part that I don't get: Bon-Ton also announced that they are closing 40 locations. They have a number of brands under the Bon-Ton umbrella. They're closing 40 stores. They have 260 stores. And I'm just wondering if they need to ...
Moser: Close more of them? [laughs]
Hill: Yeah. [laughs] If they're serious about, "We think this is the way for us to survive, to file for bankruptcy protection. We're going to come out on the other side." It really seems like closing more than ... what's the math here, 16%? Do I have that right, roughly?
Muckerman: We'll give it to you. [laughs]
Hill: I'm close to the pin. Shouldn't they be closing more of these locations?
Moser: I know there are other brands underneath the Bon-Ton umbrella, but the name itself, I think they kind of failed at the beginning of the brand. When I see that name, I immediately start thinking candy. It's bonbon. But it's not, it's retail.
Hill: Or, if you're a Star Wars nut, then Tauntauns.
Muckerman: I thought BonChon Chicken.
Moser: There you go, everybody's got their association. But it sounds like we were all off the mark with what these guys really do. I think this is just another great example of the shifting space in retail, and the world looking at a concept like this and thinking, "Hey, do we really need this?" And chances are, probably, no. But, this business chalks up around $3 billion annually in sales. Now, the flip side of that is, profitability has fallen to an all-time low. And much like Toys R Us, this is a business that has been overwhelmed with debt, something in the neighborhood of $1 billion or so in debt. And typically, when we're looking at businesses to try to ascertain how financially fit they are, how fiscally fit they are, we look at how much they bring in operating income vs. their net interest expense that goes out. And typically, we like to see that operating income cover, multiple of times over, what the interest expense is. And in this case, it's actually the reverse. Trailing 12-month net interest expense is around 15 times what this company made in operating profits, so they just don't have enough money to pay the bills. That's why the chapter 11 is happening.
Hill: Also, when you look at the way that they have built their overall business, and how heavily this is a retailer that is tied to malls. And it's not that there aren't bricks-and-mortar retailers that won't grow over the next decade. But, I think if you're an investor who's serious about that space, you'd better take a long, hard look, not just at how heavily tied to malls is a given retailer that I'm thinking about buying shares of, but also, what kind of malls? Because the so-called tier one malls are definitely in better shape than your tier three malls.
Moser: This concept, I would say, is probably more of a regional brand as opposed to a national, and I think that makes it really difficult for them to make that leap into the 21st century e-commerce internet retail world. If you don't have a brand that's nationally recognized, you're already behind the 8-ball with the nationally recognized retailers that have already made that leap to growing out that internet side of the business.
Hill: Friday was Janet Yellen's last official day on the job, and holy cow, did she go out with one heck of a mic drop. I'll just read directly from one news source. "Janet Yellen wrapped up her final day on the job leading the central bank by dropping a bombshell. She smacked down Wells Fargo, issuing an order that bars the scandal-plagued, abuse-prone bank from growing until it cleans up its act. The penalty will cost Wells Fargo $300 [million]-$400 million this year in after-tax profits by its own reckoning." That's on a percentage basis, that's not much, that's less than 2%. "It has to submit a plan for overhauling its corporate governance within 60 days, and will replace four of its 16 board members by the end of the year." You know, off the top of my head, I'm sure I heard Janet Yellen's voice at one point or another, I can't really recall what it sounds like. And I like this in my Fed chairpeople. I like the calm, steady, unflappable. Man, she just lit them on fire as she walked out the door.
Muckerman: Yeah. That's not something you typically see from the Federal Reserve, going after individual companies like this. You think the SEC, the FTC, those kinds of organizations. But, wow, yeah, to basically cap growth for a company until they get their act together. Reasonable or not, coming from the Federal Reserve, I was caught off guard by that.
Hill: This was the other story from Friday. To me, I was like, "Forget the Dow being down 600 points. Let's talk about this."
Moser: Yeah, I had heard Miss Yellen speak a few times. She seems to be soft-spoken. It wasn't like she was Mariann from Brooklyn. I think that with Wells Fargo, I have two takes on this. First and foremost, I think this is likely one of those instances where we look back a couple of years from now, and this probably marks a good time to have bought Wells Fargo stock. I don't really like saying that. I'm not the biggest fan right now with Wells Fargo.
Hill: It's certainly cheaper today than it was last Friday.
Moser: It most definitely is. One of the ways we value banks is by return on assets, that's a very common way to do it. And if you look at a very big bank like Wells Fargo, they're basically putting a ceiling on their assets at this point. They can't grow that assets line on the balance sheet. Then, you're saying that materially is going to affect their earnings power, at least in the short run. I think they're right to have done this. I think Wells Fargo has done a number of different things where, either it was just bad behavior, or they flat out where just not paying attention to what was going on. But, I think consumers have a number of different reasons to complain. And I'll just give you one personal anecdote. We sold a house in Georgia a year and a half ago or so, and we felt like we really got shafted on the appraisal for that house. And it was a Wells Fargo lender that was representing the buyer. And we tried to go back and forth with Wells Fargo saying, "This just didn't make sense, based on the comps they were doing," and Wells Fargo just turned the other way didn't even entertain anything. I actually filed a complaint to the FTC.
Moser: Nothing ever happened, of course. I mean, I didn't expect it to, but at least we went on record. So, yeah, I don't mind seeing Wells Fargo get their hand slapped a little bit here.
Hill: Again, the phrase used to describe the bank in today's Washington Post, "the scandal-plagued, abuse-prone bank."
Muckerman: And to rub salt in the wound, Quicken Loans overtook them has the No. 1 mortgage provider in the country in 2017.
Moser: I guess I haven't read if Uncle Warren has any sort of opinion on this. Obviously, Berkshire Hathaway is still a big owner of the bank, and he's come to their defense a number of times.
Hill: That's a great point. And just to be specific, shares of Wells Fargo down 8% today.
Moser: That's a big deal for a company like this.
Hill: I was just going to say, please, by all means, point me to the last time that stock moved higher or lower, 8% or more in a single day. That's not a stock that generally does that type of thing.
Muckerman: And put other banks on notice, too.
Moser: Yeah, it definitely will. If you go back to October of 2016, when a lot of this stuff started coming to light, and the stock was obviously having its issues, we were talking about this back then, that probably, we were making a big deal of it today but a year from now the market will have forgotten it. And the stock has done very well since that point. Even with today's sell-off, it's still up nicely from back in October 2016. So, it leads me back to this idea that, at some point or another, the market is going to forget about this, they're going to have this ceiling lifted, and it's going to be back to business as usual. But that doesn't mean they don't have some culture and/or leadership issues they need to address.
Hill: I think you're absolutely right with reference to Warren Buffett. And I think at the Berkshire Hathaway annual meeting later this spring, that's going to be probably No. 1 in terms of questions asked, in terms of their holdings. Really quick, before we wrap up, Super Bowl last night, give me one ad, one commercial. There were some good commercials, I thought, last night. Anything stand out to you, either funny or, "I think this may actually move the needle for this business?"
Muckerman: I thought the ongoing joke of the Tide commercial was pretty funny. Claiming every commercial was a Tide commercial, because everybody's clothes are so crisp and clean.
Hill: Yeah, it was a smart move by P&G.
Moser: Yeah, the Tide commercial was clever. My initial instinct is, I feel like we jumped the shark on the commercials. I think the overwhelming number of them are just not good. They're not compelling. I feel like we've maybe moved on beyond that. But I like the Amazon Echo losing its voice commercial. That to me was really clever. And to have Bezos in there -- Bezos really showed off some acting chops there.
Hill: That, to me, is the one that stands out. I look at that ad, and I watched it a couple of times, and I thought to myself, I don't know if this is necessarily the best commercial for this product. It's funny, I don't know if it's the best commercial for the product. Google had a commercial, maybe at last year's Super Bowl, for their home assistant that I thought did a great job of showing off the product, because it was essentially, here are all the different ways you can use it. To me, the biggest benefit to that commercial was Bezos.
Hill: It was almost like -- I know this wasn't their intention, or maybe this is an icing on the cake thing, but to me, it was like, hey, Bezos has a little bit of a sense of humor. He's taking over the world, he's the wealthiest person on the planet, and there are people who would love to see him taken down a peg, and there were some comedic chops there. I liked it.
Moser: I think they approached this from the perspective, if you have gone through the earnings report that Amazon just released, one of the highlights in there was that 2017 was a huge year for Echo and Alexa. And it even took them by surprise --
Hill: Don't use the A-word.
Moser: Sorry. I apologize, folks. My bad.
Hill: For those who don't know, I haven't mentioned this in a while, you can listen to any Motley Fool podcast or our daily news briefing, on the Echo or the Google Home Assistant. If you have one of those personal home assistants, we're on all of those.
Moser: I do it all the time in the kitchen when I'm making dinner. It's wonderful. But, after 2017, I think the success of the device, really the franchise, I think you could call it at this point, has had, I think the commercial was really geared more toward having some fun with that success, as opposed to really trying to create awareness. Because, I think the awareness is really already there, given the success. And to reel in all those different celebrity names, to have their voices kicking out, it was just really funny. I thought it was well done.
Hill: Alright. Jason Moser, Taylor Muckerman, thanks for being here!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon and Starbucks. Jason Moser owns shares of Berkshire Hathaway (B shares) and Starbucks. Taylor Muckerman owns shares of Amazon and Starbucks. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), and Starbucks. The Motley Fool has a disclosure policy.
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