Chipotle, petrobras, and ensco_ big losers on a wild wednesday – bezek's daily briefing _ seeking alpha

Disclosure: I am/we are short VXX, UVXY, EWZ, FCG. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Stocks continue to sink. Fed minutes were a positive, but China news flow continues to be depressing.

Chipotle sales were down big, stock is heading lower. Petrobras and Ensco are in a spat relating to bribery claims, we discuss the wider fallout. We had three pieces of information reconfirmed on Wednesday. First, the Fed has no idea what it’s doing. Second, the turn of the calendar was not a magic elixir for oil (see my 2016 Energy Outlook).

And third, some dedicated buyers step in to save an otherwise crashing market every day in the final hour. SPY Price data by YCharts On Monday, the market rallied 20 points on the S&P 500 (NYSEARCA: SPY) in the final half hour. Tuesday, markets bounced at the close of the day. And on Wednesday, markets again abruptly turned right at 3 p. m., heading sharply higher, a 15 point rally, to avoid an utter wipeout on the day. That’s about the only real hope the bulls can cling to, as sentiment and other indicators are pointing decidedly to the negative. The Dow (NYSEARCA: DIA) is down almost a thousand points from the recent highs, and techs are doing even worse. At fault Wednesday was, it would appear, yet another devaluation of the Chinese currency, along with a nuclear test from North Korea.

The nuclear test is irrelevant to long-term investments; it’s no reason for a market to sell off. And the Chinese news is nothing new. Most investors would have identified China as one of the big weak points of the global market going into 2016. It’s rather surprising the market is this shook up by a continuation of an already understood trend. I’m aggressively short volatility (NYSEARCA: VXX) (NYSEARCA: UVXY), and expect that trade to pay richly over the coming week or two. Speaking of continuing trends, oil has celebrated the turning of the calendar by accelerating its downward spiral. Wednesday brought an odd flood-driven oil inventories report, showing a huge build in gasoline and distillates and a big draw on oil. The market digested it as bearish, sending oil down another 6% on the day falling into the $33s – a new bear market low. Some of the energy stocks, such as the natural gas producers ETF (NYSEARCA: FCG) got hit even worse. FCG dropped 9% on the day. Even the big caps, with the notable exception of Exxon (NYSE: XOM) got smacked.

Chevron (NYSE: CVX) was down 4%, for example. In other news, the Fed minutes showed a very confused Federal Reserve that appears to be rudderless. As it would turn out, the December hike was a “close call,” with numerous points of opposition raised to the hike. On the one side, there is the hawkish side of the Fed that wants up to four hikes this year. On the other side are the doves, who showed great resistance to raising in December.

They are concerned that inflation is muted and appears unlikely to reach the desired 2% target in the near term. Their concern is warranted, the fall in oil, imminent loss of tens of thousands of US energy and mining jobs, and surging US dollar will act as economic agents to lower US prices. Outside of a few specific areas such as health care, there is no significant inflation in the US, and imported goods are rapidly getting cheaper due to the ever-strengthening dollar.

Historically, low agriculture prices will be another driver of deflation this year. Just take a look at Corn (NYSEARCA: CORN) over the past 5 years. 2015 brought another 25% drop in the nation’s most important foodstuff after huge declines in 2013 and 2014. CORN data by YCharts If any significant contingent of the Fed members won’t hike until inflation picks up, then there will be no more Fed hikes. It’s that simple. Any investment plans that hinge on a long string of Fed hikes should be immediately discarded.

We learned Wednesday that the Fed isn’t nearly as committed to a counterproductive series of rate hikes as had been previously thought. With Q4 GDP growth estimates now under 1%, that’s a relief. The Fed minutes were a significant positive out of Wednesday’s session. Another was the rise of 2015-discarded value stocks such as Wal-Mart (NYSE: WMT) which is stealthily heading higher despite the wider market troubles.

WMT Price data by YCharts We appear to not be seeing outright market panic, but rather unrestrained dumping of unwanted stocks. There’s a big difference. The rather muted move in volatility supports this idea. The VXX ETF was up just 2.5% on the day, a laughably small amount for a day when fear hung like a clammy haze above the trading floor. Chipotle: The Call Remains To Avoid I’m starting to get miffed I didn’t short Chipotle (NYSE: CMG) instead of just saying to avoid it repeatedly a hundred points ago. Chipotle shares upchucked another five percent of their value Wednesday, following a rather dour business update. Sales were off roughly 30% in December, and the company sees sales down 15% for Q4. Based on that, EPS will be under $2 share for Q4; annualized, Chipotle would see its PE ratio head from the high 20s now into the 60s. Q1 is unlikely to be much better.

November sales were only down in the teens, the 30% December drop is far worse – the damage is accelerating. And with the source of the E. coli unidentified and new cases sprouting up as recently as a couple weeks ago, you can expect similar fireworks for January. As I mentioned in a previous article, recent surveys have shown between a third and half of Chipotle customers have stopped eating there for the time being. In a painful round of short-term thinking, Chipotle is ramping up its share buyback program, which is almost the dictionary definition of throwing good money after bad. The company is facing an existential crisis and is buying back shares that get cheaper with each and every day. Once the crisis finally winds down and the stock hits its trough, which could still be way down from here, that money would have come in handy. If no more E. coli cases appear, you can make an argument for the stock bottoming in the high $300s. But with earnings set to fall by more than half for at least the next two quarters, what’s the rush to buy stock here? Every day, you risk headline news of new E. coli cases.

Plus California is investigating the company, and lawsuits may start piling up. Collapsing earnings, a damaged brand, a still expensive PE ratio, and headline risk – everything screams stay away. Petrobras Ends Ensco Contract Under Questionable Circumstances Anyone who reads this column with regularity knows I’m no fan of Brazil (NYSEARCA: EWZ) or its state-run oil behemoth Petrobras (NYSE: PBR). Wednesday’s news shows a perfect example of why. On Wednesday, Ensco (NYSE: ESV), an operator of drilling rigs, revealed that Petrobras had cancelled one of its contracts on claims that Ensco had committed bribery. Petrobras had chartered the rig from Ensco’s predecessor company since 2008, but with oil prices low and Petrobras looking to cut costs and sell off assets, it appears to have conveniently decided now was a good time to allege corruption against Ensco to wriggle out of a contract.

It was said back in August that there would be a presentation of evidence regarding corruption relating to Ensco’s rig, but many months have passed and nothing has emerged that would incriminate Ensco. Ensco, for its part, said that it had performed an investigation and found no evidence of wrongdoing by any of its employees relating to the drilling vessel. Ensco also noted that no Brazilian regulatory bodies had questioned it regarding the alleged wrongdoing.

Ensco states that it will fight for its contractual rights vigorously. Ensco shares dumped 10% on the day regardless, since a seemingly secure stream of income has now turned into a possible claim that may well end up disappearing if and when Petrobras goes into bankruptcy. Petrobras shares for their part thudded 5.5% lower on the day and lost the $4 level. Even if Petrobras survives, they’ll be a hollow shell of what they were previously. What serious supplier will ever work with a company that uses seemingly spurious bribery charges to duck out of valid contracts it no longer wants to honor?

Brazil as a whole was formerly seen as an investable rising economic power. Now their anti-competitive, corrupt, and unreliable economic nature is being revealed to all. Even when emerging markets turn, many foreign companies and investors will have sworn off any further business with Brazil and its corrupt companies like Petrobras.

Once bitten, twice shy. As for Ensco, I’d stay away from that as well. Oil has to bounce, meaningfully, before the offshore drillers can stabilize. That hasn’t come close to happening yet. Additional disclosure: Long WMT, XOM.