The market was mixed yesterday, there was some good earnings, more concern about the global currency issue, and uncertainty as the Fed meeting began. Apple’s earnings were after the close and can certainly set the tone for the day, however the Fed meeting is bringing forth more speculation about the taper and if the Fed will change their stance. Additionally, the world central banks and IMF are watching closely as to how some of these emerging market nations are dealing with their respective currencies that are tittering on collapse.
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Apple’s (AAPL) earnings came out after the close and yesterday I pointed out that there were some troubling concerns going forward, despite the recent rally in the stock. After the close the company reported what would seem fairly good earnings, but it is not the earnings – but expectations of sales and revenue that is driving the forward concerns. As I pointed out yesterday, there are 3 core business units that analyst will be measuring; iPhones (50% of their business), iPads, and MAC/PC. While the business has service oriented sales as well, such as iTunes, the analyst like to measure units sold as a measure of how their service units will grow. iPhones are their biggest sales and revenue unit, expectations for the quarter was 55 million units. This expectation had been lowered after concerns with holiday sales and also growth in China, that being said, 55 million is still a record sales number. Apple reported 51 million iPhone units, which is significantly disappointing as the forecast was already conservative. Apple sold 26 million iPads and 4.8 million Macs. The iPads sales certainly looked stronger, that was in part from an increase in sales in China. According to IDC data, Apple’s smartphones market share continues to fall, most recently from 18.7% to 15.3%. While Apple did cut a deal with China Mobile, the concern remains that Apple’s premium prices are going to struggle against similar smartphones are considerable discounted prices. No doubt that deal could be a watershed moment to break into the world’s largest cell phone market, the real question is will China have the same love affair with Apple and pay the 20-40% premiums for the logo? The concern is that to increase competition they must continue to cut prices or settle with losing market share and focus only on the premium top-end of the market line. So far Tim Cook (CEO) has shown that he is interested in broader market penetration and has already released a cheaper unit. That means margins are going to continue to get squeezed.
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The news is not all that bad actually; they set records on sales, better than expected earnings, and generally good growth. In fact I would argue that any company out there would love to have Apple’s sales and growth metrics, but this isn’t any company, this is Apple. There is an expectation for Apple and its growth, which is important to justify the stock price and future growth.
The bad news is that sales missed expectation, market share is decreasing, margins are decreasing with price competition, Apple’s innovation is stalled, and the company lowered revenue expectations between $42 – $44 billion, down from the expected $46.05 billion.
Apple is in a little bit of a marketing and spin fight with analyst at this point. Apple is just reporting the earnings and NOT talking to expectations or growth, which they set and helped drive those expectations. On the other side, analysts are saying we are basing our buy recommendations on expectations which the company helps set. The analyst don’t really care about beating the previous quarter, they care about the growth trajectory. For in order to set buy recommendations, price targets, and yield expectations, one must also set levels of expectations for the future. It will be a testy debate and discussion between the company and analysts.
The stock is down sharply in the pre-market, over 7% and the stock looks to open in the $500 – $520 range. I would look at short-term support at $500.
The big question going forward is growth of sales (market share) and top line revenue. At the end of the day that is all that matters for any company. Additionally, Apple is considered an innovator and many are concern that Tim Cook is not willing to push the risk curve on innovation and the only thing scheduled in the pipe-line is an iPhone with a slightly bigger screen, big whoop! Where is the NEW THING, the next iPod, iPad, iPhone, or something that will be an actual innovation, disrupter, and new technology standard? Is Apple turning into a commodity technology company, just pushing out new generations of existing product lines? That is what many are starting to believe and the days of heady Apple innovation are over. That means that going forward, one can only measure growth and revenue, as no NEW vertical markets will be created in the future.
Think about how much the percentage of revenue has shrunk for their MAC/PC sales, it is the smallest unit. What drove Apple’s billions in revenue was innovation of new product lines, not next generation PCs. Now Apple is competing on the world stage and losing market share in iPhones and iPads there two biggest sales units.
I hate to admit, but I believe that Carl Icahn is right to some extent. Unless Apple is going to reward shareholders with new innovation that will add new vertical markets and new growth, then the company is turning into a commodity driven company. Commodity companies are not growth companies, that means they are not going to see heady growth from new vertical product lines and thus the stock price growth (P/E) ratio will flatten. Commodity type companies reward shareholders with dividends based on their ability to compete in an existing market and manage costs to help boost the bottom line. Should Apple become a dividend company, raising dividends based on market share competition and bottom lines? I think so, as does Carl Icahn, IF and only IF Apple has ended their era of innovation. They currently pay about 2% yield in dividend, but with the current profits per share, perhaps they could boost that? At 14 P/E, I think the company is fairly priced in the $450+ range with a nice boring steady growth curve.
Support & Resistance
It looks like we are trying to put in a bottom in this range. A lot will be based on the Fed this week going forward. Apple’s disappointment is not putting any broad pressure on the market this morning.
The NDX is going to open lower, solely because of Apple opening lower and being an over-weight in this index. However, the rest of the stocks in the index are green. It is Apple and frankly Apple’s earnings by themselves are actually good when measuring vs. a quarter a year ago, the problem is strictly expectations and future growth that is driving the stock lower. I would look at 3450 as a support in the index.
We are at a critical level of support, we need to hold here and bounce or at least consolidate. The VIX is still fairly high in the mid-17 range. I don’t expect it to fall too much.
I think we could see a short-term support in the 1125 range, but broader support is not until 1100. The 10-year yield is declining and now down to 2.75%. What happens next will depend on the Fed.
Fed sets the tone!
Apple’s earnings have passed, that leaves two events on the table. One is a known, the Fed’s meeting and any announcement in the change of monetary policy. It is Bernanke’s last meeting and with all that has happened in the last couple of weeks; weaker earnings, weaker economic data (just this morning the Durable Goods declined over 4%), and now a possible global currency crisis; I seriously don’t think he will taper again. While it is Bernanke’s last meeting, it is really Yellen that is pulling the strings and setting the tone. We might be hearing Bernanke’s voice, but I think it will be Yellen that we will be actually listening too.
The unknown is the possible currency crisis. Right now it seems slightly contained to a couple of emerging market countries. The central banks of these nations are making as many latitudes as they can, but at the end of the day they are in massive debt, little revenue, and the order flow is selling. The countries have been trying to inflate their currency, much like Europe, US, and Japan – however they have also been borrowing from the cheap money nations and losing completion in the global trade game. The IMF and the Western Central Banks are watching closely, this thing can blow at any time or can be calmly deflated and the debt kicked down the road. I don’t see any real resolution, unless these nations can deleverage painfully and also see their debt cut. There is no real increase in revenue at this point and that is a concern.
The Fed’s decision will IMPACT and AFFECT this global currency problem, because many of these countries are borrowing from the WEST (IMF) and are impacted by interest rates. A taper, is considered a tightening, and will raise interest rates, but worse, could trigger some nations to call in extended debt obligations or limit lending and extensions.
My expectations are that we don’t taper again, that will give the market and currency crisis a reprieve. A further taper will send this market lower and also heighten the currency problem. Not to mention, Yellen (soon to be in charge) never supported the taper to begin with. She still thinks we need MORE stimuli.