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What I think I learned last week #48

The week started with IBM buying software maker Red Hat for $34 billion, which is more than ten times Red Hat’s trailing 12 months revenue. The market did not care for this as IBM stock dropped 5% on the news, largely because IBM is paying in cash 29% of its market cap for a company that will add just 4% to its revenues.

Monday trading was volatile: After an initial climb, the Dow fell more than 900 points before recovering in the final 15 minutes—with no obvious catalyst—to finish down 1% for the day.

On Monday, the Nasdaq 100 Index gave up big early gains to fall by 2.0%. It was the first time in more than three years it erased an intraday gain of at least 1.8%.

Experts, like long-time stock data and market watcher Ed Yardeni, argue that Monday’s move, where the S&P 500 racked up an intraday loss of 3.8%, was so violent that it could only have been caused by algorithms.

The S&P 500 has fallen in 16 sessions this month, the most in a single month since October 2008. The S&P 500 lost 6.9% for October, its worst performance in seven years and the Nasdaq, by dropping 9.2%, had its biggest monthly loss since the height of the financial crisis in November 2008.

However, the Nasdaq did manage to jump 3.6% in the last two days of the month, its biggest two-day percentage gain since June 2016.

The forward price/earnings ratio of the MSCI All Country World Index, which tracks performance across 23 developed and 24 emerging markets, has fallen to around 18, its lowest level since early 2016.

Despite optimistic talk and policy support over the last few weeks, China’s stock market continued to drop, falling 10% in October and 24% in 2018.

Hong Kong’s stock market fell 10% in October, its biggest loss since January 2016. It has been down for six straight months, its longest downward streak in 36 years. It was not even that bad during the Asian currency crisis in 1997.

Bonds did not escape October unscathed either. Bond funds had their biggest monthly withdrawals in almost three years with $36 billion worth of redemptions.

More disappointment: the Eurozone economy grew far slower than expected in the third quarter, hitting its slowest rate since the second quarter of 2014.

China’s manufacturing Purchasing Managers Index continued to fall, dropping to 50.2 for October, down from September’s 50.8, as trade war fears seem to start hitting the Chinese economy. This led to the Chinese yuan hitting its weakest level in a decade.

Not disappointing: the US jobs report. With the economy adding 250,000 jobs, well above the 190,000 expected, and average hourly earnings hitting a 3.1% year-on-year gain, the highest since April 2009 when the economy started recovering from the financial crisis, bonds sold off as investors fear more Fed rate hikes.

Packaged food and beverage seller Mondelez beat quarterly profit targets and unwrapped a good forecast as it has good momentum in emerging markets.

Kellogg, however, provided no snap, crackle or pop with its earnings report, saying higher advertising and distribution costs will hurt earnings.

bad Apple can spoil the whole bunch. While earnings were good, the outlook provided by Apple disappointed and the stock dropped 7%, bringing the whole market down with it on Friday.

Clorox failed to clean up on better-than-expected earnings when it cuts its outlook on cost pressures.

GE generated a triple dose of bad energy as it cut its dividend for the second time this year, warned it would not hit its profit targets this year, and disclosed a criminal accounting probe. It has been a long fall for the company that was America’s most valuable company in 2001.

Semiconductor equipment maker KLA-Tencor measured up with earnings that and sales that beat Wall Street estimates.

Earnings drove General Motors’ stock price up 5% as sales of trucks and SUVs led to better-than-expected results.

The stock price of pharmaceutical giant Pfizer had a bad reaction as the company missed revenue estimates and lowered its forecasts for the year, blaming lower than expected revenues from its legacy brands like Lipitor and Viagra.

L’Oreal posted beautiful results thanks to Chinese consumers and the stock jumped more than 6%.

BP provided blowout earningsmore than doubling its profit from a year ago.

The much-anticipated earnings from Facebook connected with investors and made some friends. By not being a disaster, it was good enough for investors to like it and help give the markets a treat for Halloween.

Finally, there is the case of the burrito bond. A British chain of Mexican restaurants, Chilango, issued a debt offering on its website. If you pay £500 to buy a bond, you receive two free burritos. Pay £10,000 and you will get weekly free burritos.

And that’s what I think I learned last week.