TIME Markets

U.S. Stocks Close Higher Following Chinese Market Gains

Market
Andrew Burton—Getty Images Traders work on the floor of the New York Stock Exchange during the morning of Aug. 27, 2015 .

The Dow climbed close to 370 points on Thursday

U.S. stocks are closing sharply higher after China’s main stock index logged its biggest gain in eight weeks. A report also showed that the U.S. economy expanded at a much faster pace than previously estimated.

The Dow Jones industrial average climbed 369.26 points, or 2. 3 percent, to 16,654.77 on Thursday. That took the two-day gain for the index to almost 1,000 points.

The Standard & Poor’s 500 index gained 47.15 points, or 2.4 percent, to 1,987.66. The Nasdaq composite gained 115.17 points, or 2.5 percent, to 4,812.71.

Energy stocks surged as the price of oil jumped 10 percent.

Bond prices were little changed from Wednesday, keeping the yield on the benchmark 10-year Treasury note at 2.18 percent.

MONEY stocks

Amazon Is No Cash Cow

Inside New Amazon.com Inc.'s Fulfilment Center
Bloomberg via Getty Images An employee selects goods from bays of merchandise as she processes customer orders at the Amazon.com Inc. fulfillment center in Poznan, Poland, on Friday, June 12, 2015.

The company's free cash flow is greatly exaggerated, and a big chunk of it is unsustainable.

Retail giant Amazon AMAZON.COM INC. AMZN 3.5% seems to be on a roll. The stock surged following a better-than-expected earnings report last month, and the company’s cash flow figures are exploding. Over the past 12 months, Amazon has produced a staggering $8.98 billion of operating cash flow and $4.37 billion of free cash flow. Both dwarf the $188 million net loss the company posted over the same period.

Earlier this year, I argued that Amazon’s free cash flow figures are deceptive. The company finances billions of dollars of additional capital spending using capital leases, and this greatly inflates Amazon’s free cash flow. Including the $4.7 billion of assets Amazon acquired under capital leases over the past year, its adjusted free cash flow is actually negative.

I also argued separately that the nature of Amazon Web Services, where servers and computing equipment get depreciated over just a few years, is largely responsible for the vast increases in Amazon’s operating cash flow. Even a structurally unprofitable cloud infrastructure business can produce rapidly growing operating cash flow as long as cash keeps getting poured into it.

Today, I want to ask a simple question. If Amazon decided it was big enough and stopped investing for growth, how much cash could be sustainably pulled out of the business each year, after all necessary expenses are paid? This is similar to Warren Buffett’s concept of “owner earnings,” which he first introduced in his 1986 letter to shareholders of Berkshire Hathaway.

The cash flow numbers that Amazon reports suggests that the answer to this question is measured in the billions of dollars. But a big chunk of Amazon’s cash flow is unsustainable, and a deeper look at Amazon’s cash flow is required.

The search for sustainable cash flow
Amazon’s $8.98 billion of operating cash flow over the past 12 months can be separated into a few different sources:

Source Amount
Net income ($188)
Depreciation and amortization $5,557
Change in working capital $541
Change in deferred revenue $1,065
Stock-based compensation $1,755

ALL VALUES IN MILLIONS. “OTHER OPERATING EXPENSES” AND “OTHER EXPENSES” AREN’T INCLUDED.

Buffett defines owner earnings as net income plus depreciation, amortization, and certain non-cash items, minus the average amount of capital expenditures necessary to maintain long-term competitiveness. Amazon spent a total of $9.32 billion, both directly and through capital leases, on capital expenditures over the past 12 months, but only a portion of that is required to maintain the business.

Estimating maintenance capex is difficult, and there are very few companies that explicitly break down capital spending into maintenance spending and growth spending. The annual depreciation charge is typically in the ballpark of the maintenance capex required to maintain a business, although that’s an imperfect estimate. It’s possible that Amazon could end up spending less than depreciation on maintenance capex, which would create a source of cash flow, although likely not a very big one. It’s also possible that Amazon would need to spend more, particularly for AWS, in order to maintain its competitive position.

What we can safely say is that whatever sustainable cash flow that can be generated through the difference between deprecation and maintenance capex will be a fraction of the total depreciation charge. Most of that cash flow will be balanced out by capital expenditures necessary to keep Amazon competitive in the long run.

Working capital is typically a drain on cash flow as a company grows, but Amazon operates with a negative cash conversion cycle: It collects payments from customers before it pays suppliers. As Amazon grows, this creates a source of cash flow each year.

Ultimately, this extra cash flow is a good thing, but it’s not sustainable. It exists only as long as Amazon keeps growing. The moment Amazon stops growing, the $541 million of cash flow derived from changes in working capital over the past 12 months goes away. This cash flow is just the result of the timing of payments and thus can’t be sustainably pulled out of the company.

Amazon Prime, which charges customers $99 per year for free shipping and other perks, is another source of cash flow for Amazon. When Amazon receives a Prime subscription payment, it books it as deferred revenue, which is then recognized as revenue over the course of the year. As the Prime membership grows, the increasing deferred revenue balance creates cash flow for the company.

Deferred revenue rose by $1.065 billion over the past 12 months, mostly because of the growth of Prime, which is billed annually, but also in part because of the growth of AWS, which is billed monthly. It should be obvious that this isn’t a sustainable source of cash flow; the moment the Prime membership base stops growing, most of this operating cash flow disappears. Prime, in fact, doesn’t even need to be profitable for it to produce cash flow. It only needs to grow.

The last item is stock-based compensation. This $1.755 billion of operating cash flow is sustainable as long as employees continue to accept stock as compensation, but it dilutes existing shareholders.

This isn’t the kind of non-cash charge that Buffett was talking about. Amazon would need to pay employees more cash if it stopped handing out stock as compensation, or it would need to spend cash on buybacks if it wanted to keep the share count constant. For the same reason that selling additional shares and treating the proceeds as sustainable cash flow doesn’t make sense, stock-based compensation shouldn’t be treated as a source of sustainable cash flow.

Not exactly a cash cow
Amazon’s trailing-12-month net income is currently negative, but if the company stopped investing in growth, presumably its utilization of its existing fulfillment centers would rise, since the company is likely adding them ahead of actual demand. In a no-growth scenario, Amazon’s net income would likely rise as well, producing a source of sustainable cash flow for the company. Exactly how much cash flow this would generate is hard to say; I doubt that Amazon would be able to raise its prices by very much, since that would allow a competitor to undercut it on price.

A big chunk of Amazon’s operating cash flow, coming from changes in working capital, changes in deferred revenue, and stock-based compensation, is unsustainable in the long run. This amounts to about $3.36 billion over the past 12 months. Improvements in net income and the difference between deprecation and maintenance capex would act as sources of cash flow in a no-growth situation, but I think it’s safe to say that the amount of cash that can be sustainably pulled out of Amazon if the company stopped investing for growth is very likely less than the free cash flow Amazon reported for the past 12 months.

Free cash flow is supposed to represent the cash flow left over after investments in growth. In light of this, it shouldn’t be surprising that Amazon’s debt, including outstanding capital leases, has ballooned over the past few years as it’s invested in growing the business:

End of 2010 End of 2014
Debt $184 million $9.6 billion
Outstanding capital and finance leases $457 million $4.2 billion
Total $641 million $13.8 billion

SOURCE: AMAZON 10-KS.

Amazon’s cash flow numbers certainly look impressive, so much so that operating cash flow and free cash flow are the first two figures mentioned in a typical Amazon earnings press release. But Amazon isn’t the cash flow machine it claims to be. Cash flow numbers are certainly useful to investors, but they shouldn’t be blindly accepted. Buffett had something to say about this in his 1986 letter to shareholders:

Why, then, are “cash flow” numbers so popular today? In answer, we confess our cynicism: we believe these numbers are frequently used by marketers of businesses and securities in attempts to justify the unjustifiable (and thereby to sell what should be the unsalable).

Amazon has a great sales pitch, but its cash flow numbers aren’t quite what they seem.

More From Motley Fool:

MONEY mutual funds

Millennials in Target Date Funds Got Hit Hardest by Stock Selloff

Market
Andrew Burton—Getty Images A trader works on the floor of the New York Stock Exchange during the morning of August 27, 2015 in New York City. Dow Jones Industrial Average stocks continued their rally, opening approximately 200 points higher today.

Young investors with 2060 target date funds lost 10% of their savings between July 17 and August 24.

As the stock market has whipsawed over the past two weeks, young workers who have all their retirement funds tied up in long-range target-date funds may have been the hardest hit.

The average 25-year-old fully invested in a 2060 target-date fund series saw a 10% decline in account value from the market’s recent peak on July 17 through Monday’s close, according to Morningstar – close to the 10.96% decline of the S&P 500 over that period.

Meanwhile, the average 65-year-old set to retire this year and invested in a 2015 TDF series saw just a 5% decline.

Even if stocks continue to rebound in the days ahead, the experience of watching value shrink may be an eye-opener to new investors who might not have thought about their risk tolerance before.

Target-date funds are designed to adjust an investor’s risk as retirement age approaches, through what is called a glide path. The farther out the fund’s end date, the higher the stock allocation. Investors in 2060 funds have equity exposure ranging from 83% to 94%, says Janet Yang, director of multi-asset-class manager research at Morningstar. In the 2015 funds, aimed at workers who will be retiring very soon, average equity exposure is just 42%.

The popularity of these funds in retirement plans is surging. Vanguard reports that 88% of the 401(k) plans it serves offered TDFs last year, up 17% from 2009. Four out of 10 plan participants are wholly invested in a single TDF, Vanguard says, and 64% of participants use them to some extent.

Many young workers are now automatically enrolled in 401(k) plans and put into a default allocation that typically is a target-date fund.

On the plus side, especially for young and inexperienced investors, these funds seem to have handcuffed the worst investor behaviors, like frequent trading. Asset-weighted average investor returns in TDFs are 1.1 percentage points higher than the funds’ average total returns, according to a Morningstar study published earlier this year.

“Sometimes, ignoring your investments can be a good thing. You’re less likely to pull your money out after it loses 10%, and then you’re still invested when the rebound comes,” Yang says.

But how will younger auto-piloted investors – now experiencing their first wild market swings – handle the volatility?

“We’re defaulting millennials 90% into stocks without ever finding out what their tolerance for risk might be,” says Michael Kitces, founder of the XY Planning Network, a network of fee-only advisers specializing in serving Gen X and Gen Y clients. (Kitces also is a partner and director of research for Maryland-based Pinnacle Advisory Group, a wealth management firm).

Kitces worries that the current volatility will lead to adverse outcomes for young investors. “We’re taking people who don’t need to be that aggressive and given them more risk than they can tolerate. What we’re going to do is turn them into lifelong bond investors – and that will cause them problems 30 years from now,” he says.

There has been plenty of selling out of target-date funds this week. Aon Hewitt, which administers more than 500 defined-contribution plans covering more than 5.7 million workers in the United States, reports that trading activity on Monday was seven times the normal level, and it was one of the highest trading days on record. 30% of Monday’s selling came from TDFs – equal to the share that came out of large U.S. equity funds.

“That tells us that people are looking at TDFs the same as any other investment,” says Rob Austin, Aon Hewitt’s director of retirement research.

More Options

Default investor options for 401(k) plans, which are regulated by the U.S. Department of Labor under the Employee Retirement Income Security Act, are not limited to target date funds. The Labor Department also allows balanced funds and managed funds, which give workers professional one-on-one portfolio guidance.

Managed accounts also give workers a human being to talk with when things get scary – but just 3% of plan sponsors pick managed account services as a default option, according to a Towers Watson survey.

“When the market gets volatile, you don’t have someone to talk to if you’re in a TDF,” says Wei-Yin Hu, vice president of financial research at Financial Engines, one of the leading firms providing managed account services. “You can’t call your TDF and ask if your allocation is still right for you, or what you should do now that you’ve lost 10% in a downturn.”

Kitces urges target-date investors to assess their comfort with risk by taking a well-designed risk questionnaire like the one offered for $45 by Finametrica. If you are not comfortable with the level of risk in your TDF, consider shifting to a closer-date target series with less equity exposure.

“It’s not too late for young people to dial down their exposure to a level they can tolerate,” he says. “Make a change when things are down 10% instead of 40%. Things can get worse, and then you’ll make really non-rational, emotional decisions.”

MONEY stocks

Wall Street Is for Sale, But It’s Still Not Cheap

Market
Andrew Burton—Getty Images Traders work on the floor of the New York Stock Exchange during the morning of August 27, 2015 in New York City. Dow Jones Industrial Average stocks continued their rally, opening approximately 200 points higher today.

The selloff lowered asking prices, but most U.S. stocks are still no bargain.

During more than a week of stock market sell-offs, investors have been exhorted to use declines to pick up bargains – and with a 7.7% drop on the S&P 500 since August 17, stocks have certainly gotten less expensive.

To determine how cheap they are, investment pros look at yields, earnings and more. By several of those metrics, the bottom line is this: U.S. stocks are not wildly expensive, but they are not the screaming bargains that might pull value-minded investors back into the market.

“We are not getting to a point where it’s attractive, it’s just not as expensive,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

That is because investors are willing to pay more for companies that are expecting strong earnings growth. But with Chinese demand weakening, oil prices slipping and the dollar remaining strong even after slipping a bit in the last few days, analyst expectations now are that S&P 500 earnings will fall 3.3% from a year ago in the third quarter, according to Thomson Reuters data.

And that makes even less-expensive stocks still pricey.

Here are a few ways to look at stock prices now.

Earnings – Even after Wednesday’s buying spree, the S&P 500 stock index was selling at roughly 15.8 times its expected earnings for the next 12 months. That is lower than this year’s peak of 17.8 but not far from the average of about 16 since January 2000, and well above the 10.5% hit during the last market correction in August 2011.

“Low interest rates have juiced equity valuations to levels more consistent with a rapidly growing global economy than one still stuck in first gear,” Nicholas Colas, chief market strategist at Convergex in New York, wrote in an overnight note to clients.

On a 14-times earnings scenario, a multiple more in line with slow earnings growth, the S&P 500 should be closer to 1,700 – more than 10% lower than Wednesday’s close – a level that would drag the index into a bear market.

Dividend yields – For some, the argument that there is no other asset besides stocks to invest in due to rock bottom yields in U.S. government debt continues to hold. The S&P 500’s dividend yield of 2.57% recently ticked above the 10-year yield according to data from Thomson Reuters Datastream and Fathom Consulting.

This was the case on and off since the start of 2015 until April, and the norm between late 2011 and mid 2013 – a period of strong gains for the stock index. But it has only happened one other time in the last 20 years, between December 2008 and April 2009.

Earnings yield – At above 6%, the earnings yield on the S&P 500 compares favorably with the 10-year Treasury note yield, now just under 2.2%. Analysts say that when the earnings yield is more than twice the yield of the Treasury benchmark it historically augurs gains for stocks.

MONEY stocks

What to Make of the Market Madness

A man explains the stock market's recent fluxuations on the floor of the New York Stock Exchange during the afternoon of August 26, 2015 in New York City.
Andrew Burton—Getty Images

Will the real market please stand up?

Finally. After six straight down days on Wall Street, stocks surged on Wednesday, with the Dow Jones industrial average gaining a stunning 619 points.

What was behind Wednesday’s rally?

Several things. First, the Chinese government cut interest rates again in an effort to reinvigorate economic growth and restore confidence to that nation’s sinking stock market.

That was followed by remarks from New York Federal Reserve Bank President William Dudley, who argued that in light of recent developments, the case for raising interest rates in September “seems less compelling…than it did several weeks ago.”

Finally, the Commerce Department delivered some good economic news: Last month, factory orders for durable goods rose a better-than-expected 2%.

Why was this last bit of data so important?

The stock market often foreshadows the health of the economy six to nine months down the road. If equities were to slip into a bear market — they came close on Monday — investors would naturally begin to wonder if the U.S. economy is on the verge of another recession.

The fact that orders for expensive, big-ticket items are growing offers some reassurance that the economy is still on solid footing.

Why has the market been bouncing up and down so much in recent days?

Blame it on all the mixed signals investors are getting about the economy.

“You have the leading economic evidence pointing to the positive side,” says James Stack, president of InvesTech Research, noting that consumer confidence, initial claims for unemployment, and growth in the consumer sector are all reflecting a rather rosy picture.

But from a technical stock market view, he says, “things are very negative.” For example, market breadth—the number of stocks posting gains as a percentage of the overall market—has been deteriorating for some time, hinting that the bull market may be over.

As new bits of data or clues about the global economy come to light, investors are overreacting in both directions, which explains the volatility.

Does Wednesday’s rally mark the end of this sell-off?

That’s difficult to say, but many strategists think this downturn will fall short of becoming a full-blown bear market, defined as a 20% drop or more in stock prices.

“We think this is likely to end up being a correction,” not a bear, says Liz Ann Sonders, chief investment strategist for Charles Schwab.

What will the bulls be looking for Thursday?

Follow-through. One day does not a rally make. If yesterday’s 600-point gain is followed by a triple-digit loss, Wednesday’s rally becomes almost meaningless.

What will the bears be watching Thursday?

China. For the past two days, policymakers in Beijing have announced stimulative moves including rate cuts to reassure investors. On both days, Wall Street responded with big moves higher in the morning, though on Tuesday the market’s early gains were wiped out by late-day selling.

For years, Wall Street observers have been noting that investors have grown addicted to low interest rates engineered by the Federal Reserve. As far back as 2012, then Dallas Fed president Richard Fisher described artificially low rates as “monetary morphine.”

The fear is that investors are now getting hooked on yet another set of low rates—this time China’s.

TIME Markets

U.S. Stock Market Closes Sharply Higher After 6-Day Slump

The Dow climbed 619 points on Wednesday

An afternoon surge Wednesday gave the stock market its best day in close to four years, as stocks rebounded from a six-day slump.

The three major U.S. indexes dropped six days in a row heading into Wednesday on concern that China’s economy is weaker than investors had previously thought. That was the longest market slide in more than three years.

The Dow fell about 1,900 points over that period, while the slump wiped more than $2 trillion off the value of S&P 500 companies.

The Dow Jones industrial average rose 619.07 points, or 4 percent, to 16,285. The Standard & Poor’s 500 index gained 72.9 points, or 3.9 percent, to 1,940, giving the index its best day since November 2011. The Nasdaq composite gained 191 points, or 4.2 percent, to 4,697.

Markets have been volatile since China decided to weaken its currency earlier this month. Investors interpreted the move as an attempt to bolster a sagging economy.

Traders are also jittery about the outlook for interest rates. The Federal Reserve has signaled it could raise its key interest rate for the first time in nearly a decade later this year.

New York Fed President Bill Dudley said Wednesday that the case for a rate increase next month had become “less compelling,” in recent weeks, which may have added fuel to the market gains. However, he also stated that the situation could still change before the Fed’s next policy meeting scheduled for mid-September.

Investors were also following the latest corporate deal and earnings news. Technology stocks were among the biggest gainers.

THE QUOTE: “There’s a lot of cash on the sidelines waiting to get in, so to the extent that there’s any sort of bottom seen, that will increase people’s confidence and boldness,” said Erik Davidson, chief investment officer for Wells Fargo Private Bank.

ECONOMIC BELLWETHER: The Commerce Department said orders for durable goods, or items expected to last at least three years, rose 2 percent last month after a 4.1 percent gain in June.

Despite the increase, U.S. manufacturers still face a host of problems from a stronger dollar to falling oil prices and turbulence in China, the world’s second-biggest economy.

OIL DEAL: Cameron International, a maker of equipment for the oil industry, jumped 41 percent after Schlumberger said it was buying the company in a cash-and-stock deal. Cameron rose $17.46 to $59.93.

NEVER MIND: Monsanto shares climbed 8.6 percent on news that the agricultural products maker has decided to abandon its takeover bid for rival Syngenta. The stock gained $7.66 to $97.08.

EUROPEAN ACTION: Germany’s DAX was down 1.3 percent, while France’s CAC 40 fell 1.4 percent. Britain’s FTSE 100 fell 1.7 percent.

ASIA’S DAY: Markets in Asia were mixed. Japan’s Nikkei 225 stock index rose 3.2 percent. But Hong Kong’s Hang Seng index fell 0.5 percent to 21,305.17, and mainland China’s smaller Shenzhen Composite lost 3.1 percent.

ENERGY: The price of oil fell back below $39 a barrel after a U.S. government report showed an unexpected decline in demand for gasoline last week. U.S. oil fell 71 cents, or 1.8 percent, to $38.60.

BONDS AND CURRENCIES: U.S. government bond prices fell. The yield on the 10-year Treasury note rose to 2.17 percent from 2.07 percent late Tuesday. The dollar rose 0.6 percent against the yen to 119.37. The euro dropped 1.3 percent to $1.1380.

METALS: Gold fell $13.70 to $1,124.60 an ounce. Silver dropped 56.9 cents to $14.04 an ounce. Copper fell 6.6 cents to $2.25 a pound.

MONEY stocks

Wall Street Has Biggest Gain in 4 Years

Markets Open Sharply Higher After Days Of Tumult
Andrew Burton—Getty Images A trader prepares to work on the floor of the New York Stock Exchange on the morning of August 26, 2015 in New York City.

Tech stocks lead market rally.

Wall Street racked up its biggest one-day gain in four years on Wednesday as fears about China’s economy gave way to bargain hunters emboldened by expectations the U.S. Federal Reserve might not raise interest rates next month.

Led by Silicon Valley stalwarts Apple, Amazon and Google, the surge put the brakes on a six-day losing streak that saw the S&P 500 surrender 11%.

In a sign that a faltering Chinese economy and slumping global financial markets could affect U.S. monetary policy, New York Fed President William Dudley said the prospect of a September rate hike seemed “less compelling” than it was just weeks ago.

All 10 major S&P 500 sectors jumped, led by a dizzying 5.3% jump in the technology index, its largest one-day rise since 2009.

Some of the late-day rally was driven by short-term traders, including many who had bet the market would fall and rushed to cut their losses, said Michael Matousek, head trader at U.S. Global Investors Inc in San Antonio.

A strong rally on Tuesday had evaporated in the final minutes of trading and turned negative.

“A lot of people were anticipating the last half of the day would roll over and fall off and that hasn’t happened,” Matousek said. “You could see the buying accelerating at mid-day and people saying ‘I’m wrong’, and starting to cover their shorts.”

The Dow Jones industrial average finished 3.95% higher at 16,285.51.

The S&P 500 gained 3.9 % to 1,940.51 and the Nasdaq Composite added 4.24% to end at 4,697.54.

Data earlier on Wednesday appeared to strengthen the case for a rise in interest rates at a Fed policy meeting on Sept 16-17.

Durable goods orders rose 2% in July, compared with analysts’ average forecast of a 4% fall. Orders for core capital goods, a proxy for business investment, rose 2.2% in the biggest gain in 13 months.

Following weeks of concerns about demand in China for iPhones, Apple APPLE INC. AAPL 2.79% shares provided the biggest boost to the S&P 500 and Nasdaq composite index, jumping 5.73% to $109.69.

Up to Tuesday’s close, the Dow had lost 10.71% in the past six trading days and the Nasdaq composite had shed 11.5%.

The S&P is now down 5.8% in 2015.

“We’re still in a period of searching,” said Kurt Brunner, a portfolio manager at Swarthmore Group in Philadelphia, Pennsylvania. “You have more people taking advantage of upside. But we’re in for some sloppy trading and I don’t think it’s over today. I don’t think it’s a straight shot up.”

The recent pummeling in U.S. shares reduced valuations some investors had seen as pricey. The S&P 500’s valuation was down to about 14.8 times expected earnings, compared to around 17 for much of 2015 and below a 15-year average of 15.7, according to Thomson Reuters StarMine data for Tuesday, the most recent available.

Google GOOGLE INC. GOOG 1.43% surged 7.72% after Goldman Sachs raised its rating to “buy” from “neutral”. Amazon AMAZON.COM INC. AMZN 3.5% jumped 7.38%.

NYSE advancing issues outnumbered decliners 2,474 to 646. On the Nasdaq, 2,136 issues rose and 713 fell.

Underscoring the market’s frailty, the S&P 500 index showed no new 52-week highs and 28 new lows, while the Nasdaq recorded five new highs and 142 new lows.

Volume was heavy, with about 10.5 billion shares traded on U.S. exchanges, far above the 7.6 billion average this month, according to BATS Global Markets.

Aditional reporting by Tanya Agrawal, Sweta Singh

–Additional reporting by Tanya Agrawal, Sweta Singh

TIME Markets

U.S. Stocks Surge in Rebound From 6-day Slump

New York Stock Exchange
Lucas Jackson—Reuters A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York City on Aug. 26, 2015.

Markets have been volatile since China decided to weaken its currency earlier this month

(NEW YORK)—U.S. stocks surged Wednesday in a broad rally, rebounding from a big slump that was driven by worries about the health of the Chinese economy.

The three major U.S. indexes dropped six days in a row heading into Wednesday. That’s the longest market slide in more than three years. The Dow had fallen about 1,900 points over that period, while the slump wiped more than $2 trillion off the value of S&P 500 companies.

Wednesday was the second day that stocks had staged a rally. A strong rebound on Tuesday evaporated in the final minutes of trading and the Dow ended more than 200 points lower after having been up more than 400 earlier in the day.

The Dow Jones industrial average rose 454 points, or 2.9 percent, to 16,123 as of 3:08 p.m. Eastern time. The Standard & Poor’s 500 index gained 54 points, or 2.9 percent, to 1,922. The Nasdaq composite added 95 points, or 2.2 percent, to 4,601.

Markets have been volatile since China decided to weaken its currency earlier this month. Investors interpreted the move as an attempt to bolster a sagging economy.

Traders are also jittery about the outlook for interest rates. The Federal Reserve has signaled it could raise its key interest rate for the first time in nearly a decade later this year. The Fed isn’t expected to deliver a policy update until it wraps up a meeting of policymakers in mid-September.

Investors were also following the latest corporate deal and earnings news. Technology stocks were among the biggest gainers.

THE QUOTE: “There’s a lot of cash on the sidelines waiting to get in, so to the extent that there’s any sort of bottom seen, that will increase people’s confidence and boldness,” said Erik Davidson, chief investment officer for Wells Fargo Private Bank.

ECONOMIC BELLWETHER: The Commerce Department said orders for durable goods, or items expected to last at least three years, rose 2 percent last month after a 4.1 percent gain in June.

Despite the increase, U.S. manufacturers still face a host of problems from a stronger dollar to falling oil prices and turbulence in China, the world’s second-biggest economy.

OIL DEAL: Cameron International, a maker of equipment for the oil industry, jumped 41 percent after Schlumberger said it was buying the company in a cash-and-stock deal. Cameron rose $17.27 to $59.75.

NEVER MIND: Monsanto shares climbed 7.5 percent on news that the agricultural products maker has decided to abandon its takeover bid for rival Syngenta. The stock gained $6.76 to $96.18.

EUROPEAN ACTION: Germany’s DAX was down 1.3 percent, while France’s CAC 40 fell 1.4 percent. Britain’s FTSE 100 fell 1.7 percent.

ASIA’S DAY: Markets in Asia were mixed. Japan’s Nikkei 225 stock index rose 3.2 percent. But Hong Kong’s Hang Seng index fell 0.5 percent to 21,305.17, and mainland China’s smaller Shenzhen Composite lost 3.1 percent.

ENERGY: Benchmark U.S. crude fell 71 cents to $39.10 a barrel in New York. Brent crude, a benchmark for international oils used by many U.S. refineries, fell 70 cents to $43.14.

BONDS AND CURRENCIES: U.S. government bond prices fell. The yield on the 10-year Treasury note rose to 2.17 percent from 2.07 percent late Tuesday. The dollar rose 0.6 percent against the yen to 119.37. The euro dropped 1.3 percent to $1.1380.

METALS: Gold fell $13.70 to $1,124.60 an ounce. Silver dropped 56.9 cents to $14.04 an ounce. Copper fell 6.6 cents to $2.25 a pound.

MONEY stocks

Forget Tuesday’s 400-Point Jump in the Dow. It’s Wednesday That Really Matters

Wednesday will determine if this is a "dead-cat bounce."

After dropping 1,700 points over the past five trading days, the Dow Jones Industrial Average finally gave investors a breather Tuesday morning, rallying more than 400 points in early trading.

But as good as it feels to see stocks headed higher again, it’s unclear if this is the end of the worst or merely a “dead cat” bounce, Wall Street’s inartful term for a false rally.

There are plenty of reasons why stocks might rebound in the midst of a sell-off.

Some investors may feel like the market overreacted. Others may see real value for equities at these prices. And still others may be reacting to new developments.

This morning, for instance, Wall Street seemed to cheer the fact that Chinese policy makers slashed interest rates and eased banking regulations to stimulate the economy and restore confidence in Chinese equities, which have lost nearly half their value in two months.

Short-term speculators who were betting against equities probably contributed to Tuesday morning’s rise, because they had to rush back in to buy stocks to cover their bad positions—adding to the strength of the rally.

Read next: 3 Key Numbers That Will Show Where the Stock Market Is Headed

Regardless of the reason, what’s important going forward is how regular investors react at the end of today and tomorrow morning.

A rally in the midst of a sell-off offers investors an out. For instance, some investors may be regretting that they didn’t sell stocks at the end of last week, when the downturn really began to accelerate. Then when Monday came around and stocks fell even more, they lost their opportunity to sell, because now they’d have to lock in even bigger losses.

But Tuesday’s rebound means stocks that investors wanted to sell on Monday are trading at better prices, so they can now recoup more of their losses if they choose to bail.

Does that give you motivation to sell to take advantage of this new window that’s opened up? Or do you feel confident enough that stocks will keep rebounding—and that the bull market will get back on track—to hang on for the long haul?

In a nutshell, that will determine if the six-year old bull market still lives on, or if the selling that began in recent days is the start of a real bear market.

And you will instantly know which option investors have chosen by the start of Wednesday’s trading day.

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5 Things Chipotle Wants You to Know About Its Future

Chipotle Becomes First Non-GMO US Restaurant Chain
Joe Raedle—Getty Images Chipotle restaurant workers fill orders for customers on the day that the company announced it will only use non-GMO ingredients in its food on April 27, 2015 in Miami, Florida.

The burrito king is laser-focused on quality ingredients and attracting top talent.

Shares of Chipotle CHIPOTLE MEXICAN GRILL INC. CMG 2.76% didn’t enjoy a propitious first half of the year, breaking into a double-digit decline from February through June. Yet leading up to the company’s second-quarter earnings report on July 21, and for a few weeks afterward, the CMG ticker recovered sharply:

CMG Chart

CMG DATA BY YCHARTS

The rebound is a nice example of what a strong second-quarter report can do for a company whose shares have languished in the year’s first few months. In this case, Chipotle’s revenue expansion of 14.1%, along with an affirmation of a brisk store-opening schedule, seemed to allay investor fears that the company’s growth story was beginning to fade.

Today we review five key points company management made during its second-quarter earnings call with analysts last month. These themes provide some insight into investors’ recent comfort with Chipotle and also inform the outlook for the rest of the year.

1. Price increases aren’t the only growth weapon in our arsenal
“Our sales increased 14.1% in the quarter to $1.2 billion driven by new restaurant openings and a sales comp of 4.3%. … [T]he comp was driven mainly by our price increase from last year, which contributed 4% to the comp.”
— John Hartung, CFO

Chipotle’s comparable-store sales have slowed considerably recently, a result of tough comparisons to former growth. For example, this time last year, the company’s Q2 comparable sales expanded a sizzling 17.3% versus the prior year’s quarter. Against a comparison like this, the current quarter’s 4.3% increase doesn’t appear so weak.

As explained in the quote, the comparable-sales gain was made up almost entirely of price increases. These were instituted last year to counter the rising price of beef, and with Q2 2015, the increases are now “lapped,” so Chipotle won’t get any further comparable-sales lift going forward.

Some room for strategic price lifting still exists for the remainder of the year, however. During the call, management confirmed that its much publicized carnitas (pork) shortage would be fixed by year-end, as it’s engaged a British supplier, Karro Food Group, to supply its pork shortfall.

Hartung stated that Chipotle hasn’t raised steak and barbacoa prices in the roughly 40% of restaurants that are still awaiting carnitas replenishment. This is to avoid punishing customers who trade up to steak because of the non-availability of pork. An opportunity to normalize beef pricing will arise as Chipotle gradually reintroduces carnitas to its under-served markets.

Even with a more constrained pricing program for the rest of the year, Chipotle can rely on its aggressive store opening schedule, as Hartug mentioned, for top-line growth. The company confirmed that it’s on target to hit or exceed the high end of its 2015 goal of opening between 190 and 205 restaurants by year end.

2. We’re maintaining focus on one of our biggest competitive advantages: our ingredients
“Simply because something is deemed safe doesn’t mean that it’s necessary, or that it makes our food better in any way.”
–Steve Ells, co-CEO

In his prepared remarks, Ells said Chipotle had completed its transition to using only non-GMO ingredients in all its restaurants during Q2 2015. In his simple yet forceful statement above, Ells explicitly counters the argument that GMOs haven’t been proved to pose long-term health risks to consumers, by pointing out that even if that’s so, the company finds no persuasive reason to use such ingredients.

Ells also revealed that Chipotle is researching and developing a fresh tortilla that can be manufactured at commercial scale, in conjunction with Washington State University’s Bread Lab. The tortilla will be made without any additives, preservatives, or artificial ingredients, and from just four ingredients: flour, water, vegetable oil, and salt.

These actions serve to remind Chipotle’s health-conscious, not to mention socially conscious, customers, that they can trust the chain to keep improving ingredients, as they purchase food that aligns with their values. Management believes that cultivation of its brand perception, despite economic risks posed by events such as the self-imposed carnitas shortage, is a future growth driver.

3. Throughput remains core to our success
“During the quarter, we held a national throughput competition to emphasize the importance of the four pillars [of throughput] in our restaurants.”
— Montgomery Moran, co-CEO

Throughput, the rate of sales in a given time period, is one of Chipotle’s management team’s most cherished metrics. That’s because so many of the company’s locations have long lines at key dayparts such as lunch and dinner. The faster CMG can serve its customers, the higher the sales, as fewer potential purchasers will turn away if they have a sense that lines are moving quickly. Bucking recent trends, though, Moran noted that Chipotle didn’t see an increase in throughput during the quarter.

Because management focuses so intensely on throughput, shareholders should be sensitive to any signs of a slowdown. After all, by channeling customers at ever faster rates through its assembly-line service model, Chipotle has been able to avoid the significant marketing budgets that some of its peers undertake as a way to improve sales. Moran signaled that he would like to see improvement again, even if on an incremental basis, in Q3, so investors should make a mental note to check in on this next quarter.

4. We’re increasing benefits and raising wages to retain the best talent
“We expect the incremental costs of these [labor] investments to be about $2.5 million on a quarterly basis, beginning in the third quarter.”
— Hartung

During the quarter, Chipotle initiated a one-time compensation adjustment for kitchen managers and service managers. It also increased paid vacation and added paid sick days and tuition benefits for hourly workers. The impact of these adjustments will be $2.5 million per quarter in additional costs, beginning in the third quarter.

These changes come on top of hourly wage inflation of 4.2% during the quarter, which Hartung called the “fastest [rate] we have seen in many years.” Chipotle doesn’t mind the compensation expansion, however, as management is convinced that paying well and selecting the best job candidates possible will drive value for the company in terms of customer experience and throughput.

As if to emphasize the point, Chipotle made news this week with an announcement that it will attempt to hire 4,000 workers, a number equal to roughly 7% of its work force, in a single day on Sept. 9. This “National Career Day” might be seen as glossy PR, but Chipotle’s logic on investing in capable employees always seems to be borne out in its financial results.

5. We won’t jump on the loyalty-card bandwagon anytime soon
“With regard to loyalty, that’s a tricky subject. We’ve studied this in-depth, and we don’t believe the general supposition that loyalty will make less frequent customers more frequent.”
— Mark Crumpacker, chief creative and development officer

Answering an analyst’s question on whether the company’s recent success in engaging customers through its mobile app will be followed by a loyalty component, Crumpacker gave a thoughtful response. First, he made it clear that a loyalty program won’t necessarily increase revenue through giving occasional customers more incentive to visit.

Crumpacker went on to state that companies implement loyalty programs in part to collect useful analytical data on customer spending patterns. Chipotle believes the same or similar data can be garnered through targeted offerings, such as gift cards or special promotions, through its mobile app, and perhaps from third-party applications.

These comments reveal the extent to which Chipotle is protective of its margins and cautious about a tweaking a business model that doesn’t necessarily need fixing. To paraphrase Ells’ sentiments regarding ingredients, just because Chipotle has the ability to offer an incentive program and mine data doesn’t mean that it’s necessary or even beneficial to the company’s gross margin to do so.

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