The market has been having a bad week -- bad enough that it's seeping into non-financial news. That's pretty darn bad.
In today's episode of MarketFoolery, host Chris Hill talks with Bill Mann, The Motley Fool's director of small-cap strategy, about what happened, why we're seeing more nervousness about an impending crash, and advice for staying calm now and when more wobbling and downturns inevitably happen in the future. Also, why lululemon athletica (NASDAQ:LULU) chose perhaps the best time to announce that its CEO has been asked to leave the company without pending suspension, how Tapestry (NYSE:TPR) put up another quarter of solid turnaround numbers, and more.
A full transcript follows the video.
This video was recorded on Feb. 6, 2018.
Chris Hill: It's Tuesday, February 6th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, the director of small-cap strategy here at The Motley Fool, Bill Mann. Thank goodness you're here! Thank goodness we're all still here! We're here for the moment, but God only knows what's going to happen by the time we leave this studio.
Bill Mann: People may not realize that this is a recorded -- they probably realize that.
Hill: They do.
Mann: We're recording three today, because we really have no idea how it's going to end. Whichever one you get ... you know what I was thinking earlier? How great, in an alternate reality, if today was the day of the State of the Union Address? Could you imagine, in the White House right now, going, "Well, the stock market is up ... no." What would they write about? This would be the greatest television ever.
Hill: Our colleague, Mark Brooks here at The Motley Fool, is one of the people I follow on Twitter.
Mann: Very funny.
Hill: Very funny, and also very smart. Mark did a screencap of three tweets from CNBC, all done within a 60-minute window of time. The first one was, "The market is going to tank at the open." The second one was, "The market's down at the open, but not as bad as feared." And then 20 minutes later, it was --
Mann: "It's fine."
Hill: "We're fine."
Mann: We're going to crush this open the next time we record this, by the way. [laughs]
Hill: Exactly. Here's the thing. We'll get to what's happening in the market in general. But, we're also going to get to -- because, Earningspalooza rolls on--
Mann: Actually, things are happening, yeah.
Hill: -- we're going to get some retail earnings, we're going to get to some CEO news, and we have a hot take, one more hot take, on the Super Bowl ads, because we feel like partial credit is warranted. But, let's start with the market. For a lot of people who are new to investing, and that's anyone who's just started investing in the last eight years, this is a new experience. So, I don't want to belittle that. For people who are only eight years or less into investing, it's shocking when you see the market drop in part because of -- I mean, we were talking right before we started taping. Our man behind the glass, Dan Boyd, made the comment that, you know the market is big news when it filters into other news. It's not just on financial news, but when the stock market --
Mann: All Things Considered, talking about the stock market.
Hill: Right, All Things Considered, which never talks about the stock market.
Mann: Rarely good news.
Hill: Yeah. So, I don't want to belittle anyone's experience of fear, because that's real. And yet, as you mentioned right before we started taping, there are some macro-effects going on here, but what happened yesterday appears to have a very specific source.
Mann: Yeah. There's about $22 trillion, which I'm told is kind of a lot, pointed toward volatility dampening products, volatility dampening strategies. One of the ones that you can look at, or you could look up until yesterday, because it blew up, was one called the XIV, which is the inverse of the VIX, which is basically --
Hill: The Volatility Index.
Mann: The Volatility Index. The inverse of that, yesterday, blew up. It started the day at $115 per note. And this morning, it doesn't exist anymore, because it traded down so hard, so fast, yesterday, at the end of the day, Credit Suisse, which is who is sponsoring it, said, "No more!" They tapped out, Roberto Durán style, "No más!" So, it's just, when you have that much money that's pointed toward trying to keep portfolios from being volatile, at some point, something's got to give. We don't even know what gave yesterday. It was probably technical. Earnings have been great. The economic statistics that have come out have been great. If you really want to point to something, you could almost say it's too great. We're at a point now where, perhaps, the Fed and the government are going to stop propping up the market every time it gets nervous.
Hill: Yeah. I was going to say, there were probably some technical things, but to the extent that there were some macro events there, there's a bunch of people looking at a new chair of the Federal Reserve, looking at 4% unemployment --
Mann: What a day he had, by the way. [laughs]
Hill: Welcome to the job! Looking at years and years of free money forever, and saying, "You know what's reasonable to expect? It's reasonable to expect that in the next four years, interest rates are going to rise." And for individuals who are looking for a safe place to park their cash, that could be a really good thing, the prospect that four years from now, you could put your money in a bank and get paid 2% interest, whereas for years, you've been paid next to nothing. On the flip side, if you're a public company that's gotten very comfortable with the idea that you could borrow tens of millions, if not hundreds of millions of dollars --
Mann: "Just take it, here."
Hill: -- any time you want at virtually no cost, that's ...
Mann: I have a very smart investing friend who talks about the market in terms of games. For the last couple of years, low interest rates have driven the game. I would suggest that what we're seeing right now is that the game is changing. We're seeing the end of the type of market that we've had in the last 10 years, where the government has stepped in whenever there's been a problem. And transitions are hard. But, please, everyone, relax.
Hill: Yes. And, again, for anyone who listened to yesterday's episode and thought maybe we were making light of the situation --
Hill: -- in 2008, 2009, when we were seeing the market tank, along with that was the series of conversations that went something like this: "It's entirely possible that the housing market has been propped up in big and scary ways." Go back even further to the year 2000 and the conversation is, "It's entirely possible that some of these internet companies don't have sustainable business models." But, to the point you made, the underlying fundamentals of the U.S. economy are strong. The results that are being reported by companies are, certainly for the biggest companies, solid, if not great. So, that's why we all need to take a deep breath.
Mann: Right. But, it has been the case. And Hyman Minsky, who's a genius economist, was the first person who I know of who said that there's nothing more destabilizing than stability. And what we know about the stock market over the last, really since January of 2016, is that it's been nothing but stable. It's moved upwards like it was an arrow shot out of a bow. And that can't last. And the longer it lasts, the harder it gets shaken on the other side. So, I think that's where we are. We're getting shaken right now. But, it's really OK. We're not talking about Bitcoin.
Hill: No we're not.
Mann: That's hard. We're not talking about a bunch of people who own the XIV, who yesterday, had $115 per note, and today they have nothing. You have assets, you have companies that you own, that are making money.
Hill: Let's move on to the drama at Lululemon Athletica. If you missed it, late yesterday, the company announced that CEO Laurent Potdevin is out.
Mann: Is it Potdevin?
Hill: That's how I'm going with it, but I often mispronounce --
Mann: I'm going to say Laurent Potdevin.
Hill: Go for it.
Mann: I'm not going to keep saying that, because that was hard, but that's where I'm going with it to correct you.
Hill: Here's the official statement from the company. They said he had "fallen short of the company's standards of conduct." That sounds pretty bad.
Mann: Too many free pens, you think?
Hill: This seems sudden, and maybe a week from now, we'll find out that he's been under internal investigation for months at a time. But he's been CEO for just a little over four years, and that stock has pretty solidly beaten the market's performance over that time. So, my assumption is that the board felt like they had, essentially, an airtight case to say, "You need to go immediately."
Mann: Right. They didn't even suspend him pending, which is what you tend to see. By the way, can we go back for just a second?
Mann: Let's just pay attention to the fact that Lululemon may have done the best job ever of putting bad news out at a period of time in which nobody is paying attention. Right? Like, Lululemon comes out with ... [laughs]
Hill: This is true.
Mann: This is the Mount Rushmore of hiding bad news in plain view. Nobody's paying attention to this. Except for us, as it turns out.
Hill: Yeah. This isn't going to be on All Things Considered.
Mann: No! It might have been last week, but this week? No. They're talking about the markets.
Hill: And just to be specific about stock, we have a CEO who has --
Hill: -- delivered. And during his tenure, the stock has handily beaten the market. And basically, shares of Lululemon are flat right now. If all of these other external machinations weren't going on, maybe the stock would be down 5% or 10%.
Mann: Yeah. I think that's possibly true. And if it is truly flat -- I haven't looked at the quotes in the last 45 seconds, so it's hard to tell -- they've done OK. But yes, the fact that they have just asked him to leave, he has resigned, they're not making a case, they haven't suspended him, suggests that something really pretty revolting has happened. And it's sad. It really is. But Lululemon will probably be OK beyond this.
Hill: That's what I wanted to get to. It seems like there was a point in time, maybe five or so years ago, where you could look at the success Lululemon had had to that point, and look at, among others, Nike and Under Armour getting into the higher-end yoga wear space, and thinking to yourself --
Mann: "Here it comes."
Hill: -- or saying out loud, as we did in this podcast, "They might be in trouble, because they're charging $100 a pop for these yoga pants. Nike and Under Armour are respected brands, they can sell them still at a premium, but maybe at a third less." And Lululemon has really held up, and that brand has held up. They've expanded the brand in ways that previously were not thought possible.
Mann: Yes, but they've done it in a way that's very intelligent. They have not devalued the brand at all, the classic, "We're going to put our brand on everything that we can." They've been very thoughtful about keeping themselves a premium brand, and that matters. Brands are very, very fickle things. You could blow one up in no time. Chipotle learned about this in the last two years. But if you really treat it well, it's worth so much money to you. And I think that's where we are with Lululemon. That why I say they will survive this just fine.
Hill: I should have been specific and said, as confident as Bill Mann is when he's recommending restaurants. Because nobody --
Mann: [laughs] That's my thing.
Hill: -- has the acumen for restaurant recommendations like you do.
Mann: In everything else, I'm a wreck.
Hill: Eh, not a wreck.
Mann: I don't know what time it is.
Hill: But, you deliver on the restaurant recommendations. Tapestry, second quarter profits, solidly ahead of expectations. This is the company formerly known as Coach, and I think all the reports about Tapestry for the next, I would say, two years or so, will continue to make that qualifier, just to remind everyone, "Do you remember Coach? They changed their name." Kind of like with Google and Alphabet.
Mann: "They brought in some more guys," yeah.
Hill: Good quarter. It really seems like the Coach brand and the Stuart Weitzman brand are doing the heavy lifting this quarter.
Mann: Yeah, the Kate Spade didn't do quite so much. But Stuart Weitzman -- just to go back to what we were talking about earlier, Coach is really a company that we looked at a couple of years ago and thought, "They're not doing good things to their brand at all." And it didn't matter until it did. They've pulled back, their founder CEO Lew Frankfort retired, brought in new management, started buying additional brands and ones that were probably slightly similarly mismanaged, and they're doing really good things with them. I'm deeply impressed. It is funny, they earn $0.22 a share vs. $0.71 a share for the same quarter last year, and somehow this is good news. But it all points to how the market, in a lot of times, it's all about expectations.
Hill: And to your point about the way they've managed their brands, it makes sense, in hindsight, why they changed the name of the parent company to Tapestry, because it was really hard for investors to focus on the other brands when the name of the company is right there.
Mann: I always forget that Clorox, for example, owns Hidden Valley Ranch. Right? [laughs]
Hill: Right, because those are two things that don't go together.
Mann: Ideally no, not even in a Tide Pod-eating world would you want Clorox and Hidden Valley to be in the same conversation. But, no, Tapestry, good quarter. It's a turnaround. Legitimately, this is a turnaround. But it seems like they're doing so.
Hill: The Super Bowl, one of the ads that maybe didn't get as much attention as others --
Mann: Should I be angry or excited?
Hill: I think you should be excited. Let's err on the side of positivity. It didn't get as much attention as others, but certainly caught your attention and my attention, because the last time you were in the studio, we were talking about Pringles and the thrillist.com article ranking Pringles flavors, and you made the point, "If you want to have fun with Pringles, combine them. Take two flavors."
Mann: What was the one we talked about? It was the cheddar cheese and caramel Pringles? That was the one, and you didn't believe me.
Hill: I didn't believe you. But you were like, "No, trust me, it's a little sweet, a little savory." And sure enough, Pringles comes out with their $1 million -- probably more than that -- Super Bowl commercial, and it's Bill Hader --
Mann: Who's awesome.
Hill: -- of Saturday Night Live fame, and the whole ad is about combining flavors.
Mann: It's building your Pringle experience through stacking.
Hill: Yes. Pizza flavored plus jalapeno flavored, all this sort of thing. I remember watching it and going, "Wait a second. Wait a second." Commercials don't have end credits, but I feel like if there were end credits to a commercial, there would be, at a minimum, "Special thanks to Bill Mann."
Mann: I'm not saying I really need those thanks, but it's very, very uplifting to know that they're fans of the show. [laughs]
Hill: [laughs] Gratified, that's how we feel. Gratified.
Mann: It's people like that who we do this for.
Hill: Exactly. Alright, Bill Mann, director of Small Cap Strategy, thanks for being here!
Mann: Thanks for being here, Chris!
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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!