Monday, July 27, 2009

7/22/09 (Apple rallies, Morgan Stanley misses!)


The market made another spurt to the upside into the close to close positive across the board, except the RUT which again closed down. The rush into the close was helped by speculation that Apple’s earnings would beat and they did sending the stock higher in the aftermarket. However, we continue to see some over weights driving the market higher and good gapping moves – which until yesterday was pulling up the broader market. The SPX closed just above that resistance of 950, but is looking lower in the pre-market (futures lower) – but the RUT continues to lose traction. This morning Morgan Stanley made announcement to “Sell into the rally!” - stating that while the economy may be recovering we are not out of the woods yet. An Economist article also looked into the Goldman earnings vs. the rest of the banking sector and they concluded that the Goldman record breaking earnings are driven by trading, which even in the boom years wasn’t that big of a profit center, was it a one trick pony. The bigger concern was that without the trading revenue the big stain on Goldman’s leger is the $1.4 billion mark-to-market losses, which doesn’t bode well for other banks.

Apple – the love affair

Apple as measured strictly as a retailer is awesome – the amount of product they move vs. retail square footage is incredible. Looking at them from a technology company, they are not creating anything new – but bringing existing technology together to create innovative technology. Their design, marketing, and innovation is legendary.

Even in a struggling company Apple blew out (as expected) earnings. Sure they are conservative in their forecast – which gives them room to surprise. However, they too are having to adjust to economic conditions – they have cut prices, which has helped moved inventory (iPhone 3g was cut to $99 as the new iPhone 3gs came out – same with the Mac) – this helped accelerate sales and even with a tighter margin, if they can move more products to make up for the cost cutting that means more revenue. They sold 2.6 million Macs (well above the 2.4 million expected).
So things are looking good – but Apple did indicate a struggle domestically as price cutting can only move so many products. It is the domestic side of the business that doesn’t reflect a forecast of the continued expected growth the Apple is use to. But there is a SERIOUS bright spot, Apple has been working to sell the iPhone in China - there are some issues that need to be worked through. However, if Apple can have the kind of success in China we could expect to see Apple continue higher. The China Apple invasion looks to happen in 2010 – which might not help the 3rd and 4th quarter.

Several firms have upgraded Apple to “buy” and raised their price targets – however we may see a slight pull back in the 3rd and 4th quarter if domestic sales continue to slog, until the China pipeline comes on line. Expect a little volatility in here, the news is out, Apple is up in the pre-market. Apple could retrace down to the 145 level before heading higher, while stock is up in the pre-market we could see some profit taking.

Over-all, I am a believer in Apple and if they invade China that could be their “Ace in the hole” as domestic revenue continues to struggle. China will be a formula of margins – sure they can move lots of inventory, but it is finding the sweet spot in price to move the product to generate the best margins. I am sure the bean counters are figuring that out now. For now, Apple’s current formula is cut prices enough to ramp sales to keep margins moving higher – but with anything else that is a fine balancing act.

Bullish Apple long-term, but expect near-term volatility. A lot is riding on expanding into China.

Apple up $5 in the pre-market.

Morgan Stanley Reports a loss (worse than expected)

While Goldman was a rock star, JP Morgan did ok, the rest of the banking sector is really not looking that great. It really comes down to the story we have been hearing over the last year – the debt ratio and mark-to-mark losses. Even Goldman had a whopper of $1.4 billion (but traded massively to make up for that) – unfortunately other banks are not heavy into trading or didn’t do nearly as well as Goldman.

Interesting that all the firms are selling their own stocks after the rally to raise money, Morgan sold enough shares to raise $6.9 billion (that helped to pay back the government TARP loan and dividends) as well as taking control of Citigroups’s Smith Barney brokerage unit.

Morgan also came out with a call to “sell into the rally” – maybe after reviewing their own balance sheet and seeing other banks balance sheets they realize the banking sector is not out of the woods yet.

Wells also came out with earnings – better than expected but with debt exposure and write-offs.

Both stocks are down in the pre-market.

Futures Pre-market

After seeing one of the largest weekly rallies (over 7 straight days) and after the most anticipated earnings (Apple) the market seems to be giving up a little in the pre-market. Morgan Stanley recommending to “sell into the rally as cyclical growth risks have diminished but not disappeared” is sending the futures lower. Europe was also lower. The spread is in and Apple is doing a good job keeping the narrower based indices from falling too much. Expect a lower opening.

Support / Resistance

Break-out are retracement? While the INDU and NDX seem to have broken-out, the SPX and RUT still struggle.

INDU 8500 / 9000 (We are just shy of 9000 is that the turning point? Futures are down about 50 points this morning – but that could change.)

NDX 1500 / 1550 (We closed just above the 1550 mark and futures are pointing to a lower opening. Apple is up 5 points which is about 10 points in the NDX, so take Apple out of the NDX and the futures would be down even further. Apple could keep the index from falling too much and even bring it back to even. But can one company hold up the entire index?)

SPX 950 (We closed just above it as we rallied into the close, but futures a lower opening. 950 seems to be a resistance level, can we head higher or is that the near-term high?)

RUT 500 / 540 (The RUT closed lower on the day and while it has made a decent run from the lows – it is not seeing the breakout that we are seeing with the narrow based indices. The broader market is just not heading higher like Apple!)


We have made a rapid move up (between 7 to 10% depending on the index) in just over a week – a couple of indices have appeared to break out (INDU and NDX), but the broader indices (while getting back to resistance levels) are struggling. Is this a short-term top, Morgan Stanley seems to think so. The earnings reports are mixed, CAT, Apple, Coke, and a few others have a great story to tell – while banks and retailers continue to struggle. The stronger companies are not relying on domestic sales alone – but are looking to make significant inroads into the emerging markets. Apple also came out with another round of great earnings (no big surprise I guess) – but has rallied into earnings rather strongly. It looks like we are getting into a near-term top, unless the broader market can move higher and break out – supporting the overweight’s.

The economic outlook – as far as jobs, debt, and financing has not turned around. Job losses continue, banks continue to write down losses, and credit is not available. CIT story is typical of the economic wows and is looking like the short-term loan may not be enough to save it.

3rd and 4th quarter – as far as domestic retailers is probably not going to be great. Granted that expectations are low. Yahoo reported earnings – but their story was like others in the Advertising sector- the first cost cutting is marketing dollars and Yahoo, Google, and others are suffering. That clearly tells me that companies are not fat with cash and are focusing on beating estimates via cost cutting methods as the revenues being reported continue to come in lower (for the most part). How much more can companies cut costs to meet projections?

Be skeptical about the 3rd and 4th quarter, look for companies with overseas sales (international), hedge those long deltas when stocks gap up, and keep a watchful eye on those companies that have rallied significantly without the earnings to back them up.

It will probably be more sector driven going into the 3rd quarter – rather than broad market rallies.

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