MorningWord 1/24/12: AAPL Edition

by Dan January 24, 2012 9:09 am • Commentary

MorningWord 1/24/12: Some of you may have some things on your mind today, like a Greek debt deal, or the start of the FOMC’s 2 dayer, or maybe some of you are still mourning the loss of your Niners or Ravens, well I for one care about one thing today, and that’s AAPL‘s fiscal Q1 to be reported after the close.  Not to sound like and alarmist, but tonight’s report and the guidance given, and any subtle changes from the way things used to be done under Jobs, will likely set the tone for investor relations in the post-Jobs era for AAPL. There are a few things that are on the tips of large investors tongues that sooner or later will need to be addressed by new CEO Tim Cook, tops on the list, and something that Jobs wasn’t partial too, articulating a plan for their massive and growing cash of hoard.   That won’t likely be answered anytime soon, as most past investor concerns that Jobs shunned won’t be changed for the time being, but what is pressing is to see if AAPL can re-capture the 2 million “lost” units of iPhone in their Q4 that, to be fair, came in lower than aggressive Street consensus and iPads that just seemed to plateau a bit.

AAPL as a stock has become a behemoth of the highest order. With the stock at $427 it has a market cap of about $398 Billion. To put that in perspective, that is double GOOG‘s $189billion and more than 30% higher than MSFT‘s and IBM‘s market cap of about $250billion & $224billion.

To be a bit of a contrarian, when a company can do no wrong and is trading at all time highs, despite their pristine balance sheet, off the chart growth expectations and rock bottom valuation, I CAN THINK OF NOTHING ELSE THAN SHORTING IT AT ALL TIME HIGHS HEADING INTO A MUCH ANTICIPATED EVENT.  Now I would obviously not bet the farm on this, and if the stock was sitting at all time highs as it was in OCT I would be hard pressed not to do this in a defined risk manner.

The chart below shows the previous 3 all time highs made in July, Sept and then Oct of 2011, all followed by double digit drops in the stock that average about 14% per sell off.  Are we setting up for a similar move where obviously a ton of good news is in the stock and expectations are running fairly hot??

[caption id="attachment_8220" align="aligncenter" width="300" caption="1 YR AAPL chart showing 3 Previous All Time Highs from Bloomberg LP"][/caption]


Many readers know that I feel strongly that the next couple of years for the company and thus the stock are likely to be far more difficult than the last couple……competition is coming from everywhere in the smartphone and tablet space, and while I am still of the mindset that their products are generally superior to most android offerings, and certainly all MSFT and RIMM offerings, at some point these inferior competitors will just try to compete on price and eventually erode AAPL’s margins……

The problem with a structural short in the name is the amazingly bullish factors I listed 2 paragraphs higher, they will soon have $100 billion in cash on their balance sheet with no debt, almost ONE HUNDRED DOLLARS IN CASH IN THE COMING MONTHS, and what appears to be fairly healthy leads in the most rapidly growing segments in all of consumer tech, so timing will be everything.

The implied move in the options market has ticked up a bit to about 4.8% and I feel all the risk is to the downside as we head into the print.  If AAPL blows the doors off iPhone and iPad as many expect in what was a healthy holiday selling season, then the stock goes up. But at some point investors are going to need to take profits as the stock is just now capping a 2 month almost 18% rally from the December lows……throw in a gap opening tomorrow morning in line with the implied move and this stock has gone parabolic.  But if the company disappoints consensus estimates for the second quarter in a row, which would be the first time this has happened since 2003 or 2004.  If that happens you will see a sell off far exceeding the implied move.   Tim Cook will not be able to spin a disappointment the way Jobs would have and this is why while I think there is a higher probability that the qtr is inline to better (coupled with their usual conservative guidance), I think the trade where you get the most bang for your buck is leaning short into the print.

Once we get through tonight’s report the next catalyst will be a March/April iPad3 launch which I expect to be a bit evolutionary and possibly somewhat conciliatory if they introduce a smaller form factor to do battle with the Kindle Fire and other lower priced models.   After that we have a bit of a wait until a dramatically redesigned 4G iPhone in October and what will likely be some Mac refreshes here and there, with a likely really expensive multi-touch iMac on the way.  So there will be a lot of waiting (and hoping for those long the stock) this year to see if the company can continue to make “revolutionary” products rather than the “evolutionary” iPad2, iPhone5 and recent MacAir refreshes.

In the last few weeks I have suggested a couple collars in AAPL to protect longs, on short dated in Feb, and one looking out to July.


MorningWord 1/23/12:  All is really right in the world, the Euro is back above 1.30 vs US dollar, wow who would have thunk it?  I guess it really had become a fairly crowded trade.  European equity markets are up across the board this am, as EU finance heads are meeting today in Brussels for what seems like the 100th summit in so many days to make a plan to deal with Euroland’s debt issues.  The markets are very calm ahead of today’s festivities, as expectations aren’t exactly high, and any results are only likely to kick the can down the road when they finally reach a plan agreed apon by everyone else and then by Z-Germans.  European Sovereign debt seems to be the tell here with the Italian 10 year yield down about 1% from this year’s highs.

Earnings for the most part on this side of the pond, coupled with economic data all seem “less bad” in the new year, and are driving most of the positive sentiment and the talk of re-testing last May’s highs that sit about 4% from current levels…..I am of the mindset that once we get through the bulk of this week’s earnings and we have the FOMC policy update and Bernanke conf call (Wednesday afternoon) in the rear-view mirror that the rally may start to peter-out when investors consider that much of their enthusiasm as it relates to the stock market and the economy are coming from upside to estimates that had been dramatically decreased over the last couple quarters.  Company’s are beating estimates that were raised a year ago and then have been coming down for the last 4 months, same goes for our economic data that swung from overly optimistic in Q2 last year to possibly overly pessimistic over the last couple months.  I often say this about markets, but this pertains to most sentiment related inputs we collectively use to analyse the markets, ” price action tends to overshoot on the upside, just as it does on the downside and vice versa”.  This is exactly what we appear to be doing right now and why many bulls squarely have 1370 in their scopes.   There are plenty of names that appear not to be letting up like INTC, MSFT, BAC and CAT but action from a market leader like GOOG on Friday could be a sign of things to come as investors re-set their expectations for 2012 with almost 5% gains already in the tank.

I read something on Bloomberg this morning that I thought was kind of interesting and helps make this point…..

Divergence between S&P 500 making new high while the number of stocks in the index making new 52- wk highs shrinks may be “early sign that the market is tired,” says Strategas technical analyst Chris Verrone.

• Number of stocks making new 52-wk highs Friday was 126 vs. 215 on Dec. 27, 2011: Verrone

• Sees “lots” or resistance at 1320, 1347, 1357, 1371; sees “healthy” support at 1278, 1257, 1247, 1230; says 150pt trading range “will continue to define trading in the months ahead”: Verrone

Verrone added the following early last week in a Bloomberg story dated Jan 17th;

The stock-market rally has driven short interest to a nine-month low and bearish sentiment close to a six-year low, a sign that few investors may be left to propel further gains.

As for today I think it is important to watch names like MSFT, INTC, IBM, GOOG and of course the banks as they were all big movers on Friday.  AAPL to me will be the main event this week, not because it will be a big mover for the broad market, we know that their market share has little to do with competitive pressures, but much like GOOG a break-down on volume could signal a change in leadership for the market and cause investors to question so of the very crowded trades in the market.