Earnings CAT and pending Apple!

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Much of the weekend was focused on whether or not any nation would try to quickly announce a devaluation on Sunday, much like in the beginning of the “Asian Flu” in 1997. This is done to help reduce the inflationary pressure and stop outflows of capital. While there was talk and speculation that we could see something as early as this weekend, nothing has transpired. Perhaps I am too cautious and the memory of the 1997 currency crisis is still too vivid. We can certainly avert it and a big part of that will come from the ability of the people in these nations to remain calm. Additionally, the massive debt in the balance of payments needs to be given some latitude. I have a feeling that the US, ECB, and the IMF will be far more willing to allow them to kick their debt can down the road, for no other reason than to prevent this currency crisis from getting out of hand.

Earnings: CAT and pending Apple after the close.

The news over the last several days has shifted attention away from both earnings and what is next for the Fed. However, we should continue to watch the earnings closely, not just for how they did the last quarter, but also if they offer any glimpse going forward. Additionally, as I suspect between weak economic data, mixed earnings, and now volatility in some of the emerging market currencies, the Fed will NOT taper at all or will significantly limit their taper. I believe the recent news has raised the possibility of increasing the asset purchases.

Courtesy of wikipedia

Caterpillar (CAT) has always been one of my favorite companies and I have fond memories of playing with those big yellow trucks and bulldozers as a kid. Caterpillar is a dominant player in the heavy equipment world, focusing on mining and construction. The last decade has been a boom for this company as it expanded in to China; however, there is recent concern that China is slowing down. What I think many fail to realize that while the double digit growth rate has certainly slowed in China, the nation is still seeing strong growth and should be expected to do so. Unlike the other nations experiencing a currency crisis in the emerging markets (primarily due to massive national debt and deficit spending); China is not in the same boat. Caterpillar has been very good on knowing when to invest and expand their business and when to cut and manage costs, this has helped continue to keep the bottom line strong. The company reported a big surprise in a huge jump in bottom-line profits from $697 million to $1 billion, or $1.54 a share. The company has prepped the market that their growth in the heavy mining equipment has slowed significantly in 2013 and that is seen in the revenue, down from $16 billion to $14.4 billion. However, the market was prepared for this and I think what is really shocking investors and driving up the stock is that the company had done exceedingly well with managing costs. Perhaps expectations were very low from the warnings the company has issued. The stock is up considerably in the premarket, up over 6%. Yet the company continues to warn about topline revenue and sales in mining equipment, the boom in their recent growth is fading. The company will be strong in the long run and I expect to see them as a dominant player in Africa over the next decade,but  for now they will be managing costs.

Courtesy of wikipedia

Apple (AAPL) reports after the close and the stock has certainly rallied off the low last year after being pummeled from $700 to $400. Yet the company has faced significant hurdles going forward; no big launch of Apple TV or some new technology which was expected, the new iPhone 5 design was lackluster and the cheap model didn’t make the huge impact in sales as expected, their primarily China technology company and equipment maker (Foxconn) has had a host of problems, and there remain concerns about competition with Android and other smartphone devices. Despite these concerns the company continues to see some decent growth in their primary revenue business, the iPhone. iPhone sales saw a 9% increase last year, which is 50% of Apple’s revenue. There second biggest revenue driver, the iPad unit has also seen net sales increase and hope their new iPad Air will be a big driver in growth. Their smaller unit, the PC market, is what some analysts are interested in monitoring. While the PC/MAC sales don’t get the lime light as much the iPhone and iPad do, it does remain an important unit. There are expectations that their MAC unit will increase 3%. As noted, the stock has made a solid rally from $400 to $550 and finished $50 higher in 2013. Apple always sets conservative expectations, but those expectations have always been one of growth in ALL units. So what will disappoint investors? Well, one ting is if any unit sees flat or negative growth and another is if the company falls short of sales numbers. If the earnings come out fairly as expected or just a small miss, I would look at $520 area as support. Great earnings, beating sales expectations and growth in all units, I would look at Apple to break-out above $570. Broader support if we do get bad news will be down at $500. I am not sure what to expect, I know they will hype up the China Mobile partnership, but that has already seen some bumps. I just expect volatility and the options are pricing for a move either way at this point. It will certainly drive after-market volatility in the futures and will also set the tone for tomorrow morning’s opening.

Support & Resistance

INDU 15,800 – 16,000
We broke down through 16,000 quickly as concerns about the currency situation heated up. I would look at 15,800 as support. CAT earnings are good, giving the market a boost in the pre-market, but that could turn quickly. Apple will set the tone in the after-market.

NDX 3500 – 3600
The index will be poised to make a big move after the close when Apple releases its earnings. Remember, Apple is an over-weight in this index so a quick move down or up 50 points after the close in the futures market is NOT out of the question.

SPX 1775 – 1825
The broader S&P 500 is waiting and wondering. The CAT earnings are giving the market a boost this morning, however that is ONE stock that beat on cutting costs. Things could change quickly after the opening. The VIX is at 18 after Friday’s sell-off, I wouldn’t look for it to fall too far today or this week. Apple’s earnings and/or the possible currency crisis could change everything.

RUT 1130 – 1170
The RUT just saw a collapse in confidence on Friday and we closed on a low. That doesn’t give me much optimism for this morning, even with a better opening. I think a drop to 1130 or even 1100 is in the cards in the near-term.

Three BIIGp[[[= Events!

There are three big events that can either send this market down sharply or rally the market. Let’s review each.

Apple’s Earnings – while it is only ONE stock, it is a stock the world watches and if it offers optimism and hope, it can calm the market and help put a floor (support) and help drive the market higher. Of course, this needs to be accompanied by decent earnings for the rest of the week. Apple is certainly a one-day volatile event, but can it be a sustainable event for the rest of the quarter?

Currency Crisis – we are right on the cliff of a currency crisis in some of the emerging markets. Some in the media are painting it with a broad brush, but we can’t. The actual problem of the balance of payments and debt  is very nation specific. The problem is that it can quickly spread to healthy nations as well. This is what exactly happened in 1997, by the time the Thai Baht seemed to find a bottom, the panic had taken root and spread around the world. We saw several huge hyperinflation moves in currencies and double digit percent drops in major world indices. So these is a balancing act between the IMF and loaning nations/banks extending some credit to the debtor nations, while at the same time selling confidence to the people. There is no real backing or intrinsic value to their currencies, this is a challenge and test of faith at this point.

The Fed – the Fed starts their first FOMC meeting and the last with Bernanke and the hand-over to Yellen. The market is expecting that they will continue to Taper, what Bernanke started in December. However, in spite of the weaker economic data, mixed earnings, and now a pending currency crisis any taper could be a the death knell of the equity markets in which there becomes a general feeling of “each to their own devices”. However, if Yellen rules the day we could see a halt in the Taper and she could use the excuse of the global currency rising problem, mixed earnings, and also weaker jobs data. In fact, if she reverses Bernanke’s December taper and decides to ramp up the asset purchase again it could inject a huge boost of confidence to the equity markets and we could see a power rally that could be fueled by some short-covering.

It is these three big events, starting today after the close that will drive the volatility and near-term trends.

Courtesy of CNN Money

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