Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
U.S. stocks faltered today, with the S&P 500 (^GSPC +0.84%) and the Dow Jones Industrial Average (^DJI +0.02%) declining 0.4% and 0.5%, respectively. Both indexes were down on the week, too, putting an end to a three-week winning streak. Explaining daily and weekly index movements is a mostly cockamamy idea, but if you need to find a reason for the losses, you don't need to look much beyond the fact that we are now one trading day away from the deadline for Congress to come up with a "continuing resolution" to continue funding government operations. Nothing but that.
In truth, the government can keep functioning for some period without a resolution, minus some "non-essential" functions (not that this would be an ideal state of affairs.) The "biggie," in terms of crisis potential, is the debt ceiling, which the Treasury department expects to hit on or around Oct. 17. If you'd like to know more, my Foolish colleague Morgan Housel answers 8 questions you might have about the debt ceiling.
Investor concern started to seep into the options market, with the CBOE Volatility Index (^VIX +0.64%) rising 10% today, to close at 15.46. Under the present circumstances, that price still seems remarkably low; consider, for example, that it represents a 24% discount to the historical average closing price going back to the inception of the index in Jan. 1990. The VIX, Wall Street's "fear index," is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.
Struggling retailer J.C. Penney (JCP +0.00%) isn't having a good year (was it the "struggling" that gave it away?), but the plight of shareholders accelerated this week, and not in the right direction. Allow me to illustrate with the stock's five-day graph:
What exactly happened?
On Wednesday, a Goldman Sachs report raised concerns about the firm's liquidity position, suggesting it would be too tight for comfort in the current quarter. Equity shareholders didn't like the sound of that, and they sold the stock down by 15% (which turned out to be the right thing to do).
The following day -- after the market close -- J.C. Penney responded by announcing a highly dilutive share offering to raise up to $932 million; keep in mind that this is a company with a current market value of less than $3 billion. The offering of 84 million shares was priced at $9.65 apiece, a 7.4% discount to the previous day's closing price.
Investors, understandably, did not look kindly on the offering, and they expressed their displeasure by selling the shares down by another 13%. It didn't help that the company offered an end-of-year liquidity estimate of $1.3 billion (excluding the proceeds from the share sale) -- $200 million less than the previous forecast on Aug. 20, which, alas, assumed no offering would be necessary.
There are still two forks in the road ahead of J.C. Penney: One leads to a death spiral, the other to some sort of turnaround. This week's cash raise buys the retailer a little bit of time, but buying J.C. Penney shares today can in no sense be termed an investment; it's a speculation, pure and simple (and not a good one, in my opinion.) My advice to investors: Steer clear.
