Earnings: AAPL MSFT

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The top-line CPI-U at 2.1% (“Core” at 1.9%) was for the most part ignored yesterday, as some big name earnings reflected some disappointment on top-line revenue/sales on the domestic front. Companies like Comcast and Verizon are in a game fighting over slices of the same pie as their market penetration is already hitting maximum potential. The market has also ignored the Ukraine and Israel situation almost entirely as we see the Dow Jones and S&P 500 in those critical breakout areas. The Dow Jones is already over 17,000 and the S&P 500 looks to break 2,000 soon. What about the broader based Russell? That index has been dragging in comparison. Interesting, you have the narrowest index (Dow Jones) leading the rally, the middle index (S&P 500) paused just ready to break-out and hit 2,000, while the broadest index (Russell) is lagging. Is the narrow Dow Jones the most accurate market reflection and we will see the Russell rally to play catch up, or has the Dow Jones over-shot it, stall, and revert back to towards the Russell? No doubt the Dow Jones is the world’s most widely watched index and has a significant psychological impact on the market.

Earnings AAPL NSFT

Earnings have been a mixed bag, with some disappointments in big names. The story remains the same; the West (US, Japan, Europe) continues to either see weak growth and even contractions in some areas. The emerging markets continue to show stronger growth, mainly in the BRICS. This rotation into becoming more globally reliant is slow and in some cases, like McDonald’s for instance, the growth in the global market can’t make up for the contractions in the West. This story seems to be the long-term transition story that I see continuing well into 2015. This means one has to be particular in their investments, making sure that investments have stronger growth potential and not domestically reliant on the stagnation in the West.

Two big names reported yesterday, which both typically have a big impact on the market; Apple and Microsoft.

Apple (AAPL)

The quarter was mixed at best. The company beat on the bottom line with $1.29 per share vs. $1.23 estimates. This was helped by increasing margins and not top-line revenue growth. Expectations were for $38 billion, which fell short coming in at $37.43 billion. The iPhone sales with their 5 model remain strong across the board, as iPad sales demand continues to trend lower. Part of the decline in iPad sales is the move to the larger form-factor smart-phones (getting too big to fit in the pocket).

The big question on everyone’s mind is what is the next big new thing? Another generation of iPhone, while exciting and will certainly keep them trucking along, is not going to create a new channel of revenue for the company. The Apple TV has not really taken off like many predicted as the space is already crowded with low cost solutions and some even better than Apple TV. Many hope that rumored iWatch will be the next big thing and wearable computers are a growing business, expected to be $10 billion by 2015. If we look at Samsung’s smart watch growth, it has been good – but not a market changing event. Apple’s marketing might should never be under-rated, but can it get the masses to adapt to an iWatch? Apple has hired a VP from Tag Heuer (Swiss watch maker), whom will most likely be heading the iWatch release. Apple is also facing some stiff iPhone competition in China from Xiaomi, which is the fastest growing smart-phone in the region. They call Xiaomi the Apple of China and their latest phone has seen strong growth. They are neck-n-neck in market share, but Xiaomi’s growth is certainly strong. Xiaomi has undercut iPhone prices and that could be the difference. Keep an eye on Xiaomi.

Apple stock is fairly unchanged in the pre-market, down a little, up a little. I saw nothing impressive in the quarterly results, top-line weak, and promised iPhone 6 as well as the iWatch is wait and see at this point. I would look at $90 as short-term support on any pull-back in the near-term.

Microsoft (MSFT)

MSFT has been seeing some momentum lately and broke out above $42 recently. Many seem to be happy with the change in management; Nadella has been moving forward and bringing fresh changes to the company. That is seen in the revenues, up 17.5% compared to a year ago and sales came in better than estimated. While bottom line earnings were down slightly based on GAAP earnings, a chunk of that came from share-repurchases, bringing bottom-line per share earnings to .55 below the .61 per share estimates.

It looked like the company was pumping strongly on all cylinders; Gaming up 23.5%, Commercial sales up 43.7%, Device sales up 20.3%, consumer licensing up 9.5%. The one weak spot is their Nokia acquisition; however sales posted were up over last year.

The stock has been certainly stagnant over the last decade, as it seemed that it missed all the big innovations and big vertical market growth in the technology and internet sector, relying on their existing legacy product lines. Is the future of this company bright? Well we are seeing strong growth in their cloud services, they are moving solidly into mobile (which is a crowded space), and their “Surface” is gaining in popularity, and expanding more into SAAS. No doubt in many cases they are late to the party, time will tell if Nadella will bring this company back to being an innovative leader.

The stock is up in the pre-market and they like the news and what Nadella has to say.

Support & Resistance

INDU 17,000
This remains a pivotal point, earnings so far have not been a decisive factor. The market has also shrugged off any geopolitical concerns. Perhaps it is waiting for Yellen’s FOMC meeting next week.

NDX 4000?
Apple was not a big mover today after earnings, so we are not seeing any big moves in the NDX. MSFT had good revenue and a better story, looking strong. I think a visit to 4000 is in the cards, but the tech sector does remain mixed.

SPX 2000?
We look like we want to break-out. Earnings are not coming out strong enough initially to get this market pumped and Apple’s earnings were flat. It still seems there is some resistance up at 1990 at this point. The VIX is falling and getting below 12, and in the 10-11 range it is orange alert time. The SKEW is getting steeper as well. However, I do think that 2000 is possible before any short-term corrections.

RUT 1200?
Unlike the Dow Jones and S&P 500, the broad index is lagging and rather significantly compared to the Dow Jones. Getting to 1200 seems a difficult task as it hovers in the 1140-1160 range. I would expect to see some resistance at 1170 if we continue to see the SPX hold below 1990. If this index takes off and we breach 1200, expect the rest of the market to continue to rally strongly. However, if the RUT falls below 1130, I think it could be marketing a short-term top in the Dow Jones and S&P 500.

Future Growth?

Earnings haven’t been that great, the trending story since the crisis has been the reliance on top-line growth and sales from the emerging markets. Certainly the US and West rebounded back from the full economic stall of 2008-2009, but from all measures of sales/consumption based on pre-crisis levels we are back to where we should be (give or take).

The rapid growth we have seen in the last few years is about getting back to pre-crisis norms, so to expect that growth to continue is not reasonable. We must also consider that much of that rebound-growth to normal was built on a rather large increase of margin; in fact the NYSE Margin Index is well above the pre-crisis 2006-2007 levels, which clearly shows that much of this has been built on borrowed money.

The growth in the emerging markets remains strong, primarily in the BRICs. In some essence the BRIC were our savor during the 2008-2011 crisis period as their top-line revenue/sale growth made up for a massive decline in the West.

The future is bright, if we continue to focus on the BRICs and I would include Africa as a low-cost producer. The big question about this bright future is whether the BRIC consumption growth can continue to off-set the weaker Western consumer.

This shift from the debt ridden West (US, Japan, Europe) to a growing East (BRICs, emerging markets, and Africa) could be painful if the West falters or stalls. There also remains Western inflation risk and currency risk, which we need to be aware of.

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