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Terrible Start to Tuesday – Will Apple Save the Day?

The Futures have given back all of yesterday's last-minute gains and then some.  

After hours last night, Moody's downgraded 5 Spanish regions "driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves … and their significant reliance on short-term credit lines."

While Asia shrugged it off and finished more or less flat, Europe is freaking out – about that and the continued terrible earnings reports that are hammering the point home that the economy is certainly worse than it was last year.  Why then, are the markets up over 10% from last year – well, since there's no easy answer to that – down they go!  

The Euro fell down to the $1.30 line (where we went long in early morning Member Chat) and oil futures fell to $87.28 (and make a good buy over $87.50 on /CL) and gold took a pounding to $1,710 while gasoline fell below the $2.60 line, where it's also a good long play on /RB as it's unlikely the Euro fails $1.30 for very long or the Yen goes above (weaker) 80 to the Dollar (now at $79.85) and it's also not likely the Dollar breaks 80 today (now 79.93) – so, overall, this is a nice spot to go long in the Futures. 

It's over an hour to the open but let's call it Dow 13,200, S&P 1,416, Nasdaq 2,980, NYSE 8,250 and Russell 810 and, as you can see from our Big Chart – we're barely holding our Must Hold levels with the Nasdaq crashing us below and we can't even blame AAPL today, which is holding up pretty well so far at $630 – after putting up a $15 gain yesterday (2%).  

As we expected yesterday morning, the Nasdaq held 3,000 like a champ and rallied 20 points off that line into the close before dropping back a few but today will be harder with the Nas gapping well below 3K – painting a terrible technical picture before most people have a chance to make their first trade.  

Has anything changed since yesterday?  Not really – we knew Spain was a mess, we knew Q3 earnings would suck but, apparently, seeing the actual numbers is really spooking investors.  In reality, only 10 of 40 companies missed yesterday but 5 of those guided down and only two companies (HSTM and LII) guided up all day.  As CNBC put it: "Earnings conference calls are beginning to resemble crisis hotlines as corporate executives slash profit forecasts because of fears of higher taxes, a recession in Europe and slowing economy in China."

This morning is worse with 13 out of 52 reporting companies missing earnings (not all in yet) and a whopping 11 giving negative guidance (ARG, CPLA, CNC, DD, GNTX, IIVI, ITW, LRY, ST, XRS, MMM and TECH).    

Guiding up were PLD, R and WHR.  This is not encouraging – it means that, for the average person owning stocks and listening to conference calls – there's an 11:3 chance they are hearing bad news with a bad outlook. 

This is the backdrop for today's Fed meeting, which goes on tomorrow as well and ends in a statement to be released at 2:15.  Even as I write this – the Euro failed to hold $1.30 and the Dollar punched over 80 and oil failed to hold $87 and gasoline is dropping to $2.58 so no fun in the Futures this morning.  Europe is finally together, dropping 1.6% across the board – just as our futures are down 1.2% across the board now as the Euro tests $1.296 and the Dollar hits 80.10, which is up from 79.50 yesterday, accounting for 0.75 of the drop (2/3).  

We don't like to react too quickly to currency-based market moves as they have a tendency to snap back fast.  It it, however a good time to review the suggested Disaster Hedges from the weekend (5 Plays that Make 500% if the Market Falls) or our DIA hedge from yesterday's post.  

We're still looking at the sell-off as a buying opportunity until/unless we fail those Must Hold lines and I will point out that UPS's domestic package business is up 1.2%, which offset most of the decline in Europe – underlining what we expect this earnings season – that the companies that do International business are hurting across the board and, unfortunately, these are the guys who tend to report early.

Not to worry though, as the rich continue to get richer.  COH reports an 8% jump in US sales but that's nothing compared to International, which is up 15% and led by China.  Going the other way is ordinary electronics at RSH, which is down 15% on release of their earnings and XRX underscores the weakness in the office spaces with a 12% decline in net profit that is sending their stock down another 5%. back to the year's low's around $6.50.  

Before we get too bearish today, we'll have to wait for a possible decision from the EU Court of Justice, where they are hearing a suit today brought by a member of the Irish Parliament on whether or not the ESM is constitutionally valid.  Silly as it seems, could be a nice relief rally if the court hands down a quick decision in the ESM's favor.  We hear from the Richmond Fed at 10am but the best chance for a market save today rests with AAPL, who roll out the IPad Mini at 1pm – we need to see AAPL pop over $640 to get the Nasdaq back on track and we'll be watching that 3,000 line closely.

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iPad screens / Phil – The Apple presentation was very misleading. The screen in the iPad mini is 35% bigger than the Nexus, but the Nexus has 35% more pixels and ultimately it's what you see… The screen on the iPhone5 has a better resolution for cryin' out loud. I guess the retina display would have been a deal breaker! The Galaxy Note might make a better Mini after all – fits in your pocket and had also a better resolution.

Savi – I can't add just yet.  Holding, waiting.

AAPL….hey hey hey…good bye! 

Phil / AAPL — I have a hard time swallowing that someone that just wants to read on a tablet will drop the extra money for an iPad.  I think they'd rather buy 10 books.  If AMZN is selling at cost, there isn't anything to make up for (they're not selling at a loss).  If they get a single book download, they've succeeded.  Game consoles sell at a loss and still make up for it with razorblades.

Good Afternoon.     AAPL observations:   Earning report could create a significant move  in either direction, up or down.  Sure, they are on a tear with products, but that doesn't mean investors will reward them on Thursday evening.   If investors sense anything they can construe as weakness, then punishment could follow.  If they hit on all cylinders, then rocket time.  I just don't know which way it will go.  I've left the Jan 620 calls bare in the MoMo portfolio.  That's a virtual account, as you know.   Interestingly, it's not the way I'm investing in AAPL in real dollars.   I'm actually in April bull call spreads, 625/725, and I've sold a bunch of  Jan 2014 600 puts.    The spreads are presently about $35 and will yield a triple by April if AAPL over 725.  I think it will be.  So in real life I've chosen to sell puts over a year out to finance the spread purchase, the spread going through 3 earnings periods to get us over 725. 

AAPL/Phil
So no cover on the 10 Nov 640s tonight but probably roll to the spread you outlined tomorrow? Right?
TIA

Dow only about 140 points from the 200 DMA. Might not post the Big Chart tonight and wait until morning. Don't want anybody having nightmares.

/ES 1406 looking for this to hold

25KP / Phil – Don't know that we can have 9 short AAPL calls in the 25 KPM. That's $70K of regular margin. I think that margin is already stretched with the 14 AMZN short puts which consum $48K of margin. We want to keep margin requirements lower in the KPM. The KPA is a different setup as it uses PM margin.

  AAPL// last 3 days down -23., +24, -21 for largest company in world…so dumb
  
spain sov cds +15%, italy +10% today
 i think the real problem is the ipad 3q miss
 the price is just a mild negative i think

APPL/Phil
Managed the rolls but couldn't sell the shorts because it was over margin.

Both RUT and NASDAQ bounced off their 200 DMA! I think we need to hold that line because it seems that people are looking for a reason to sell. And who has been blamed for bailing out at the 200 DMA especially fund managers!

AAPL reolution, to see a serious difference the 30 inch is minumum full HD. My laptop 15" has full HD but mt line speed is marginal so HD stops to buffer, I kick that off and the problem goes away and the picture is still good without the stops, also think about the cost for data you can't see and get out of town be ready for buffering that sucks. Spec freaks made CD perfect sound forever but it wasn't natural. 7" screen? Are you guys kidding?

NFLX beats on earnings (big) and revenues (not much) but guides lower and gets taken out to the woodshed AH. I guess rolling out to all these countries is expensive!

Grant Williams presentation re bubbles. "It's NEVER different."

Netflix analysis:

http://www.engadget.com/2012/10/23/netflix-announces-q3-2012-earnings-two-million-more-subscribers/

 

Netflix saw a return to profitability and more than half a million new US subscribers in the second quarter of this year, and it's now announced that it's added a full two million more streaming members worldwide for the third quarter. That brings the company's global base of streaming subscribers to 29 million, 25.1 million of which are in the US. It's also announced another bump in profits to $8 million in net income, with global revenue of $905 million. It's unsurprisingly a different story when it comes to DVD subscriptions in the US, however, with the company reporting a drop from 9.24 million total subscribers in Q2 to 8.61 million in Q3.

In terms of usage, Netflix says that its streaming members have now consumed over three billion hours of content, and that TV shows now account for about two thirds of that viewing activity. The company has also reiterated its commitment to original programming in its letter to shareholders, although it notes that commitment comes with some front-loaded expenses that will result in negative free cash flow for the next "several quarters" beginning with Q4. The company further adds that it believes "investment in originals is wise, and we will evaluate the performance of the slate next year to determine at what level we should fund additional original." You can find the full letter and all the numbers at the source link below.

I love these Fast Money guys going around talking about Romney being more pro-business than Obama. Like GW Bush for example:

http://www.bespokeinvest.com/thinkbig/2012/10/22/equity-markets-under-obama.html

At that would be such an improvement over that Socialist Obama!

AAPL Market / Phil – Looking at this chart, it looks like we will achieve saturation soon on the high ticket items:

I can see the top 10% in the first quarter, but then top 1% in the next and then top 0.1% in the one below gives us about 137 million possible customers! Obviously some products like the phone will spread wider because they are "subsidized" when you buy them. That still a big market but there are limits I think. In my neighborhood, all the somewhat techie people have an iPad already but they are not the Apple fanboy types looking to upgrade with every new model. I still use the original iPad and it works well for what I do. 

Not saying that Apple is doomed (I am sure they will still make a ton of money), but like VCR, DVD players, etc… eventually you reach "possible" market saturation and growth has to slow down as well as margin.

AAPL/Phil
Woulda, shouda.

I had been moving into the April spreads you've mentioned to me before during the morning but waited to see if I could get a good price on the 640s which were about 24 at one point. I thought they would pop a little more with the news announcement and I would get a better price. And as you pointed out I let the chance slide twice.

As it is, this is where my AAPL adventure has left me as I am all in spreads now. I will have some margin to sell some calls along the way to April but have to be careful not to exceed margin limits.
This is what they are and I've put in what I believe would be the profit it all goes well. Does this look OK?
            5             Jan 19 2013 630/650 for $10.28 — possible gain $20 ($10,000)
            2             Apr 20 2013 635/685 for $26.18 — possible gain $23 ($4,600)
            2             Apr 20 2013 630/685 for $23.07 —  possible gain $32 ($6,400)
            4             Apr 20 2013 630/700 for $22 — possible gain $18 ($7,200)
The April sets were bought as I sold the 640s and obviously lost money on that transaction.
Even without selling calls it looks like I the spreads should bring in $28.2k. Not going to make me rich but should pull me our of the fire somewhat. If I can sell calls I will and, you mentioned about doing things to widen the spread, which on the Jan one I will do if I can.
So that's the story right now. Any comments/advice?
TIA

Global economic calendar
http://www.worldeconomiccalendar.com/

 

Stj:   With all due respect,  I don't know what you can conclude from that chart on each president's "stock market performance," other than that the stock market has risen during the tenure of 16 out of 19 presidents.  Clinton was arguably one of the better Presidents, and it dropped. A more serious criticism is that, since it is not inflation-adjusted, those percentages are utterly meaningless.  One thousand dollars in 1900 — the beginning date of your chart — is now worth, in commodities or income, @ $27,000.  A perception of future inflation will tend to push buyers into stocks, so all your bar chart may prove is which Presidents scared the crap out of investors with their inflationary policies.  That would tend to explain why Clinton suffered a stock market drop — he actually reduced the deficit.  Just saying.

Stj II:  Looking at your "income categories" chart led me to look in world population growth in general.  One of the more surprising conclusions I reached is that it's very difficult to project, because it is [unsurprisingly] very sensitive to fertility rates, which is turn is very sensitive to urbanization. The moment more children picking corn in a rural context  [good] turns into more money for education [good] in an urban context, fertility rates fall off a cliff.  Yet predicting the rate of urbanization is a can of worms, because it varies greatly by region, and once urbanization reaches a certain threshold, the population density in rural areas will tend to stabilize.   Of course all this is moot if global warming creates famine or touches off a nuke.  My takeaway — population growth cannot be accurately predicted.

Guys- Do you know of any website that would allow me to build an excel sheet with values of technical indicators for my chosen symbols. I just want to set up a sheet with a view of tech indicators for my holdings and watch-lists. Thanks in advance.

Phil / COST – any interest in the 2015 Costco Short Puts?  9% off the recent high, Currently 16% to the 80 strike, 23% discount if put to you at 73.30.  Premium collected for the 80 strike is 6.70.

Presidents / Zero – That was somewhat humorous given what we hear these days about the fact that a Romney presidency would be so beneficial to businesses… The fact of the matter is, presidents are also victims of the macro environment. So even a "free market" guy like Bush saw a stock market decline in his first 4 years and a "socialist" like Obama got some of the better results. Look back at idiots like Kudlow trying to time the market based on who wins elections – short when Clinton took office, long with Bush and short with Obama. But I do believe that Dems have shown themselves to be better steward of the economy of the last 20 years. And maybe the market results are not completely an accident!

Population / Zero – Let's hope this chart doesn't come true:

http://www.economist.com/blogs/dailychart/2011/05/world_population_projections

Well except for China, we would be truly screwed! And China doesn't have a choice, it won't have enough food or water!

Nothing like a couple 200 points drops to cure an overbought condition:

http://www.bespokeinvest.com/thinkbig/2012/10/23/overbought-to-oversold-in-5-trading-days.html

While five sectors were overbought last week at this time, no sectors remain overbought after today's big market decline.  Just three sectors remain above their 50-day moving averages — Health Care, Utilities and (surprisingly) Financials.

Who could have predicted that the high flying NASDAQ would be the first index to fail it's Must Hold line (the Dow never made it). It's also the closest to its 200 DMA. 

At the same time, no reason to panic yet, we tested the 200 DMA back in June and bounced back. We went up 400 points after that in the NASDAQ. So a correction was not unexpected. But gotta be careful now!

Heard an interview with Charles Nenner. He feels cycles, are a President's greatest ecomomic allies….
 
The interview is audio only – click the "weekend market wrap" and go to the -24:00 mark where the interview begins….
http://marketwrapwithmoe.com/

….For the interview, the "published date" was 10/20/2012….

….and so was my anniversary….  ­čÖé

Donald Trump is now basically just a clown. No an inch of credibility left… And yet they have him on CNBC almost on a daily basis:

http://www.rawstory.com/rs/2012/10/22/trump-fox-friends-deserves-as-much-credit-as-obama-for-killing-bin-laden/

“This is the worst foreign policy in history,” the reality star opined. “I got a kick before when he was saying, he’s the more experienced person, meaning Obama. It’s the worst foreign policy in history. The Middle East is crumbling down and they hate us. We’ve spent trillions of dollars — we spent 1.5 trillion in Iraq and Iraq is going to hell. They all hate us, not to mention the lives that we lost. The lives that we lost in the Middle East, it is the greatest disaster.”

So now the Iraq war was Obama's war! They are revising history rather quickly these days. It was so much fun when Obama skewered him at the correspondent dinner in DC last year.

Oil lines for the nigh owl and the members down under:

R3 – 92
R2 – 90.45
R1 – 88.76
PP – 87.22
S1 – 85.53
S2 – 84
S3 – 82.30 (Wow and 82 handle)

Yesterday high and low – 88.92 / 85.69

Good night and good luck!

Thanks, StJean!  

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