Monday, April 30, 2012


Five days ago, the bears seemed to have everything going their way. After one of the best first quarter performances in years, the stock market was overbought, sentiment had become too upbeat (or at the very least, traders had become more than a little complacent), and hedge fund managers were falling all over themselves trying to play catch up with their benchmarks (aka the S&P 500). Thus, as I wrote on March 28th, it was time to prepare for some sort of a correction, pullback, or sloppy period. In that column, we talked about some simple ways to prepare for what appeared to be an inevitable corrective phase by raising some cash, adding some volatility to portfolios via the VXX (iPath VIX Short-Term), VXZ (iPath VIX Mid-Term), or TVIX (VelocityShares 2X VIX), as well as hedging a bit of long exposure via the SH (ProShares Short S&P 500) or SDS (ProShares UltraShort S&P 500). Although predictions really and truly aren't my thing, this one was spot on as the market peaked three days later and the SPX managed to lose about -4.5% in just five sessions. On April 10th, with the indices diving in earnest, it felt like the bad-old days of 2011 were back. Intraday volatility had returned. The European Sovereign Debt Crisis was making a comeback thanks to spiking yields in Italy and Spain as well as fears that France would be the next problem (there were rumors daily that a downgrade of France's sovereign debt was imminent). There was the obvious slowdown that was occurring in China. There was the falling expectations for earnings in the U.S. (analyst downgrades to earnings forecasts far exceeded upgrades during the pre-announcement period). There was the fact that the economic data around the globe (specifically the global PMI and ISM readings) were faltering. And it had become clear that the momentum in the jobs market that had been building in the U.S. was fading fast. Oh, and lest we forget, the technical picture was becoming worrisome at that time as the DJIA and S&P looked like they were falling off of a cliff. And then the bears even got Apple (AAPL) and Google (GOOG) on their side as these tech heavyweights had held up beautifully during the initial phases of the decline. Heck, while the S&P appeared to be breaking down on April 10th, AAPL was hitting another all-time high. But as every seasoned manager knows, the bears get to EVERYTHING eventually, so it was unnerving to see AAPL finally start to succumb to the sellers on April 11th. In short, things didn't look good. But then Apple's earnings and hope for additional stimulus from Bernanke & Co. (aka "another QE fix") intervened. And just like that, the indices rebounded, aided in no small part by Apple's $50-point pop on 4/25. My apologies for the replay of history here this morning. However, as I've said a time or twenty, it is important to understand how and why things unfold in this game. And the bottom line is that although the bear camp had just about everything in their favor from April 3rd through April 25th, they weren't able to get anything more than a garden variety pullback going. Thus, it appears that we may have seen the worst of the corrective phase. But... (You knew that was coming, right?) While the correction may have ended, this does not mean that the consolidation phase that I've been yammering on about for weeks has. So, unless and until the bulls can push the Dow above 13,300, the S&P above 1420, and/or the NASDAQ above 3125, we should probably continue to play the game using consolidation-phase rules. However, if the bulls do manage to break on through to the other side for more than a day, then feel free to break out the champagne.

Friday, April 6, 2012


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Tuesday, April 3, 2012


Foxconn’s Chinese labor issues? Hot-running iPads? Global 4G issues?

Not a problem Monday as AAPL once again took off like a rocket, +19.08 or + 3.2%, closing at $618.63.

And it looks like a higher open again today, trading over $630 area as we write this.

Now, how much of this increase has to do with any real news is debatable, despite a little known analyst coming out with the highest target we have seen yet, $1,001. (FactSet has the average AAPL target of 39 covering analysts at $678).

It might not have hurt that Consumer Reports came out with a story defusing their prior comments on “hot-running” iPads, saying, “Consumers other than serious gamers should find little of concern in our extended tests, on either the heat or recharging issues." The iPad was given essentially rave reviews, and according to eNews: “Consumer Reports has put the new Apple iPad at the top of its latest tablet list. The magazine's editors liked the new iPad enough to recalibrate their ratings system.”

But we think AAPL’s move has more to do with last week’s end-of quarter games and some positioning in front of the earnings season, but that is just our opinion.

Which brings up the AAPL story we really want to talk about.

We have seen variations of this story from about six different financial news sources and just heard it again on Bloomberg Radio, so we thought it might be worth just a quick mention:

“NEWSFLASH: Apple’s strong stock performance has helped lift the S&P and tech indices!”

The real point being made in these pieces is just how outsized AAPL’s performance has become and its impact (and risk) to the indices.

Five different major investment houses are now putting out quarterly S&P earnings estimates (and therefore SPX projections) based on the S&P with and without AAPL earnings. Not that they expect Apple to mysteriously disappear, but rather to get another take on the health, or lack thereof, of earnings seasons in a broader market context.

According to BusinessInsider:

“Analyzing the market sans-Apple is becoming a more and more popular sport on Wall Street. A new report from Barclays' Barry Knap adds to the body of literature, looking at S&P earnings sans-Apple: As we head into 1Q12 earnings season, much like last quarter, AAPL is expected to have another sizable effect on index earnings and margins, masking otherwise less-than-stellar trends. Earnings growth is estimated at just 1.4% year over year, and about zero excluding AAPL.” (note that is one specific analyst’s take on the upcoming earnings season).
Ned Davis Research is quoted in Fortune and Barron’s with a different take, but making basically the same point:

“Last week, Dan Sanborn of Ned Davis Research took another look at the S&P 500 Q4 2011 earnings prism and saw an even wider spread. Now, according to Sanborn, the S&P index's total earnings growth drops from 7.8% year over year with Apple to just 2.7% without. Sanborn writes that within the tech sector, Q4 2011 earnings growth was 19.6% with Apple included, but just 3.3% without Apple. Sanborn notes, however, that Apple’s earnings as a percentage of total Standard & Poor’s 500 index companies earnings is 4.8%, which he writes is about in line with the 4.7% average represented by the top earner in the S&P 500 going back to 1980.”
All right, so Apple is having a huge impact, but perhaps no more than other mega-caps have had in the past. What are we supposed to take away from that information and implications for the upcoming earnings season?

Perhaps a few things:

If AAPL outperforms again in its usual fashion, the upcoming earnings season lift to the S&P could be higher than many expect. A relatively mediocre earnings season, which is being widely predicted, could turn out significantly better than expected.
Barclays Capital‘s equity strategists Barry Knapp and Eric Slover seem to support this thesis, writing that Apple gains make up 15% of the Standard & Poor’s 500 Index’s 12% rise this year, which they characterize as the stock “contributing over four times its weight in the index.” However, they do see some “concentration risk” in Apple’s large effect.
Other analysts have contended that if AAPL grows to over 5% of the S&P market cap, that could have a negative contradictory effect, with some number of actively managed funds being forced to sell AAPL due to charter provisions limiting percent of the fund in any one issue. We are not sure how impactful that really could be, but it is floating out there as a theory.
Other analysts take the exact opposite POV, saying that AAPL’s status now as a dividend-payer opens up a whole new category of funds being “permitted” to buy the stock.
But in the final analysis, all that really matters is whether or not AAPL will continue its “almost unbroken” streak of massive upside surprises on April 24th (date not confirmed).
For the past four quarters, AAPL has “surprised”as follows: +19.2%, +33.6%, -4.6%, +36.5%
According to most sources, the consensus for the March quarter is for Apple to earn $9.78 per share on revenues approaching $35.9 billion, annual increases year over year of +52.8% and +45.5% respectively.
With a five-year history of annual growth of +65.9%, these numbers look like they could be achievable in theory without much of a stretch, although growth for the next five years is estimated to “slow” to a mere +19.8%.
So, in the words of Doug Kass, will it remain an NBA market this year or not—Nothing But Apple?