The market remains in the support holding pattern from yesterday, but it did show some strength going into the close. Earnings are starting to set the tone for the 2nd quarter and the repeated theme is a weak and stagnant domestic environment and reliance on the emerging markets, which are still growing, but at a slower pace. The heavy equipment industry had previously lowered expectations, so when Caterpillar (CAT) and Halliburton (HAL) reported on very lower expectations, the stocks actually rallied. However, we must realize that some of these companies have been heading lower in the first quarter (even with the S&P and Dow Jones rallying strongly). The banking/financial industry has so far been a disappointment. Bank of America (BAC) has announced shedding another 10,000 jobs to manage costs. However, I still believe the biggest problems with this “too big to fail” bank will not be resolved with more layoffs, but rather with breaking up the company into separate units. Remember, Bank of America gobbled up Merrill Lynch and Country Wide, with their massive balance sheets chock full of liabilities. Think of how much the parent company could raise by splitting off their brokerage unit and mortgage/credit unit; not to mention a cleaner balance sheet that is not beholden to any one unit’s liabilities. Yet, Bank of America and Citigroup (C) have remained as zombie banks ever more reliant on the Fed discount window and cheap money to stay afloat, all the while shedding jobs to keep the margins in the black.
Earnings NETFLIX and APPLE
Courtesy of wikipedia
Apple (AAPL) will announce after the close and there are some rather large concerns about the world’s darling technology company. The list is pretty long.
- First, the issuance of the cheaper iPhone model has cannibalized sales of their more expensive units. This has many analysts concerned that it will squeeze margins in the iPhone unit.
- Second, problems in China with the warrantee coverage, initial release, and uncompetitive cost structure actually created a consumer backlash against the company in the world’s largest cell phone market. Apple’s CEO flew to China, openly apologized, and hopefully mended the relationship.
- Third, the mini-iPad has not only cannibalized sales of the regular iPad sales, but the price point is uncompetitive and initial sales expectations are down over 20%.
- Fourth, and probably the biggest concern, is that Apple’s innovative pipe-line is quiet. Apple’s future growth is not based on the iPad, iPhone, iPod, or even iMac sales. It is based on an innovative release cycle that creates new vertical markets. When a new product makes its initial release it sees an unbelievable growth rate that drives up revenue and within a year becomes the largest revenue source for the company, as the product has still not reached full market segment penetration. If we look historically over Apple’s product cycle and earnings we see that iPods, at their initial release, and iTunes quickly became the growth and major source of revenue, then that was replaced by the iPhone, then a few years later the iPad. The question everyone is asking is WHAT’S NEXT? Another version of the iPhone or iPad is NOT going to drive growth and that is a BIG concern if Apple is to get back to their earnings and revenue growth we have come to expect.
There are more negatives than positives in the Apple story. I haven’t even touched on the management struggles and loss of faith in Tim Cook. There is certainly some mending to do to draw back in the investing community and I don’t think apologizes are going to do it.
While earnings will certainly be very impressive relative to other companies, it may not be up to the hype and expectations we have become accustomed to from Apple. So how does Apple drive the hype back in to the stock for investors? That is simple, a big fat DIVIDEND (either one-time or continual) and a share buy-back to boost future earnings. However, both of these are “one trick” ponies that may appease investors, but certainly not the fan-boy community that drive the core revenue of the company.
I am not sure what to expect, but it can certainly drive massive volatility into the market at the close – driving the entire futures market up or down radically in the after-market trading session and set the tone for the week.
While the market is waiting on pins and needles for Apple’s earnings at the close, there are other earnings to pay attention to.
This company had an amazing growth story and then completely fell on its face with some convoluted payment structure that sent investors fleeing for the door in a mass loss of confidence. The company regained its reputation and had a second coming (unusual for any company to do) with a massive and huge push into online content. When the CEO released the amount of streaming hours on Facebook (which he was reprimanded for and then later the SEC approved company news release in social media), the shock of the amount of online streaming hours had analysts scrambling to up their company expectations and we saw this company rocket off the lows from the $90 range to $140 in a blink of an eye. But Netflix did NOT stop there, they decided to steal a page from HBO and Showtime and push out quality content of their own to the online subscriber base (“House of Cards”) that sucked in a HUGE amount of new subscribers. NETFLIX had crushed Blockbuster in the beginning, then they became the largest online content provider, which soon saw copy cats like Hulu, and now they are going after premium cable channels like HBO and Showtime. The model worked and the company quickly swung back into the black with 31 cents per share, from a loss a year-ago. The CEO stated that “House of Cards” is just the first of premium online content ONLY found at NETFLIX. Could we be seeing the birth of new on-demand TV premium content that will eventually rival traditional ad-network TV? Perhaps the future will be ad driven cheap content of News and Reality TV, with dramas and comedies coming from premium cable and the growing on-demand content. HBO is trying to follow NETFLIX’s lead with HBO-GO, but has a long way to go. NETFLIX is certainly successful with this initial push into premium on-demand content, but the question is can they continue to drive this success bus forward? The stock is up a huge 24% this morning to $215 per share. Note, I had previous wrote an article about Cloud Computing, this is the next big thing and it plays right into NETFLIX’s wheelhouse. It also means the hardware and media delivery needs to be faster – look to Verizon (V) and companies like CISCO (CSCO) to continue to strive forward to make the hardware and data to provide more on-demand music and movies.
Pre-market futures are up, now it will be Apple at the close to set the tone for tomorrow and perhaps the week.
Support & Resistance
This looks like it could be a new support area, we look to open higher based on the pre-market futures.
We finally were able to get back above 2800, which could be support. NETFLIX is helping drive the NDX futures up sharply with its amazing comeback story. However, is 2800 support? That will depend on Apple’s earnings at the close. 2800 could still be a straddle strike and I suspect to see this market rally hard on Apple’s earnings or break back down below 2800 if Apple fully disappoints.
A good move higher helped elevate 1550 as a support level with a higher level of confidence. However, we still face some volatility with Apple. Apple can certainly shift general market psychology, like the old saying “As goes IBM, so goes the market”, well just replace IBM with Apple and that very well maybe the case. The VIX is back down to the mid 14 level which is not too low, but if it falls back below 12 or even touches 11 – it shows me that the investors are still not worried and this week was nothing more than a hiccup. That’s concerning.
We are holding this area very well and got a good move higher. The consensus is turning that Fed easy money is here to stay through the year, which can possibly push MORE people into equities as the only game in town. The dollar index is back above 83, which is driving down gold prices, but is NOT making Bernanke and the Fed happy – so we could see them INCREASE QE3 from 85 billion a month to 100 billion.
While the market will be focused on Apple, two stories that will be on the back-burner but have wider and longer market repercussions are Japan’s monetary policy and the highly probable move by our Fed to follow suit as the Currency War ramps up. The ECB is also struggling to keep their Club Med Socialist nations from failing and we still don’t know the fate of Cyprus, which could hit the front page news in the next couple of weeks as the probability rises they may be forced to leave the EU.
Additionally, the underhanded GDP changes that will significantly boost results will go unnoticed by the general public and President Obama will announce the new GDP results with huge fanfare that our nation is on the successful road to recovery as inflation is very low or non-existent (thanks to the new CPI), that unemployment is falling rapidly (with changes to the U3 seasonal adjustment) and the nation is growing faster than 3% (with the recent changes to the GDP).
I want this nation to recover and President Obama is the only president we have. I really wish him success, because it is success for our nation and people. However, I find it not only disingenuous, but appalling, that our government will resort to changing the model and math to tell its citizens that the economy is recovering, jobs are coming back, and the nation is growing at robust levels. If that is all true, WHY is the Fed continuing to print billions per month and will most likely RAMP up the money printing to buy bonds, mortgages, and lend to banks via Discount Window? I hate KNOWING what I know, because sometimes it is easier just to believe the headlines and what we are told. My hats off the revisionist and government math, soon we will be at full employment growing faster than China – well, at least on paper anyway.
BTW: I will be at the OIC trade show in Las Vegas this week. Please come and visit Silexx at both 215. I would love to talk economics, markets, and option strategies with you. OIC Conference VEGAS
The Market Preview will return next Monday. Have a great rest of the week!