Wolf Richter: What the Heck is Going on in the Stock Market?

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

A sea change.

Even Moody’s which is always late to the party with its warnings – but when it does warn, it’s a good idea to pay attention – finally warned: “Don’t fall into the trap of believing all is well outside of oil & gas.”

What happened on Friday was the culmination of another dreary week in the stock markets, with the Dow down 1.3% for the day and 1.6% for the week, the S&P 500 down 1.8% and 3.1% respectively, and the Nasdaq down 3.2% and 5.4%. The S&P 500 is now nearly 12% off its record close in May, 2015; the Nasdaq nearly 17%. So on the surface, given that the Nasdaq likes to plunge over 70% before crying uncle, not much has happened yet.

But beneath the surface, there have been some spectacular fireworks.

Not too long ago, during the bull market many folks still fondly remember and some think is still with us, a company could announce an earnings or revenue debacle but throw in a big share-buyback announcement, and its shares might not drop that much as dip buyers would jump in along with the company that was buying back its own shares, and they’d pump up the price again.

Those were the good times, the times of “consensual hallucination,” as we’ve come to call it, because all players tried so hard to be deluded. It was the big strategy that worked. But not anymore.

And that’s the sea change. Reality is returning, often suddenly, and in the most painful manner. Some standouts:

LinkedIn plunged 43.6% on Friday after the company had reported the fourth quarterly loss in a row, which brought its loss for the year to $166 million, its worst year ever. In the past, losses were a badge of honor. But as consensual hallucination fades, it’s time to make a profit, which LinkedIn hasn’t figured out yet. It also forecast slower growth this year. That’s a toxic mix. At $107.13, shares hit the lowest price since December 2012, down 61% from their 52-week high.

The vaunted FANGs, the mega-caps that have been holding up the overall indexes by their sheer weight, got clobbered too on Friday — Facebook down 5.8%, Amazon 6.4%, Netflix 7.7%, and Google parent Alphabet 3.6% — not because they reported anything in particular but because suddenly, valuations seemed high and risky.

Apparel company HanesBrands plunged 15.1% after disappointing quarterly earnings and guidance. Overall sales declined 7.4%, international sales plummeted 17%.

Lions Gate Entertainment, the studio behind “The Hunger Games,” plunged 28% after CEO Jon Feltheimer told analysts Friday morning that the company was “tracking below” its prior guidance but refused to provide new numbers. Shares have plunged 54% in three months, which will make merger discussions with cable channel Starz somewhat complex.

Tableau Software plunged 49% on Friday, wiping out $3 billion in market cap, after reporting a quarterly loss of $0.57 a share, vs a profit of $0.27 a year earlier. Its outlook was gloomy; it talked about a spending slowdown by its customers. Corporate cost cutting bites!

Thus inspired, investors dumped its peers. Salesforce.com plunged 13% (down 28% in two months) and Splunk plunged 23% (down 62% from its peak two years ago).

Guidewire Software plunged 11.8% during regular trading and another 1.6% in late trading, to $47.95, a price it had first seen in September 2013. Its product, software for insurance companies, is somehow considered “recession-proof.” It’s down 26% from its 52-week high.

Enterprise software company Atlassian plunged 15.0% to $20.19. The Sydney-based company, which is traded on the Nasdaq, released its first earnings report since its IPO in December and gave what was considered a “bullish” forecast, including a loss of around $0.10 a share for the year.

Atlassian went public at an IPO price of $22. Shares came out of the gate with a 32% gain, giving the company a market valuation of $8 billion, then climbed to over $31 by the end of December. In the six weeks since, they’ve plunged 30%.

Even after the rout, the company has a market valuation of $4.6 billion, or about 10 times annual sales, reminiscent of the 1999 Nasdaq days. It might take a lot more pain in a sour market before sales and market cap are properly aligned. Earnings per share won’t help; they’re expected to be a loss.

Ralph Lauren plunged 22.2% on Thursday, another 3% on Friday, for a two-day loss of 24.5%, to $87.25, after it reported earnings. Holiday sales had dropped 4.3%. A “year of transition,” CEO Ralph Lauren called it. But he was “greatly encouraged by…” yada-yada-yada, as sales are expected to remain flat or fall 2% for the year. Shares are down 53% from December 30, 2014.

Outerwall plunged 17.3% to $27.04, now down 68% from its 52-week high. The movie-and-game-rental kiosk company reported Thursday evening that revenues plunged nearly 12% and net income 61%. “Solid 2015 results,” it called the phenomenon, “despite challenging headwinds that continued to impact Redbox,” whose movie rentals plunged 24.3%.

Sierra Wireless plunged 25.6% to $10.93 after it had reported earnings Thursday evening, with revenues down 2.8%. Despite a big income tax “recovery,” its “comprehensive loss” nearly doubled. It lowered its guidance and talked about “softer demand at select OEM customers.” Shares have plunged 78% since the beginning of 2015.

There were plenty of energy companies in the toxic stew. So just a couple of standouts:

Linn Energy plunged 58.3% to $0.50 cents a share on Friday, down 99% from June 2014. It has $11 billion in debt. So it said it would “explore strategic alternatives to strengthen its balance sheet and maximize the value of the company.” It said it has maxed out its credit line. So it has hired Lazard to help out with a big restructuring, either in or outside of bankruptcy court, a death knell for stockholders. And some classes of bondholders are going to get skinned.

Cheniere Energy plunged 9% to $25.10, down 70% from September 2014. Potential LNG importer and then exporter, and epic “story stock,” spent its entire existence borrowing money and blowing it. It has amassed $19 billion in liabilities, including $15.8 billion in long term debt. It lost $842 million over the past four quarters on $268 million in revenues. Carl Icahn is ruing the day he bought their hype, starting in August last year, when shares ranged between $60 and $70. As of December 7, his hedge fund owned 13.8%.

These are just examples. There are many more companies in similar conditions.

If the word “plunged” shows up a lot, it’s because that’s what has been going on in the stock market, on a company by company basis, not just on Friday, or this year, but for months, papered over by some mega-cap stocks that are now also letting go.

And as dip buyers and bottom fishers are figuring out: just because a stock has plunged doesn’t mean it can’t plunge a whole lot more. But they will keep trying, and there will be sharp rallies. Nothing goes to heck in a straight line.