MorningWord 3/18/13: Treacherous Set Up For Bears, $SPX = Flight To Quality

by Dan March 18, 2013 9:19 am • Commentary

MorningWord 3/18/13:  Since Super Euro Banker “Extraordinaire” Mario Draghi said the now infamous words back in late July, the Euro Stoxx 50 is up about 25%, but understandingly under-performing the SPX since the European Sovereign Debt Crisis has gripped the region since early 2011.

Euro Stoxx 50 (SX5E) vs SPX 5 year chart from Bloomberg
Euro Stoxx 50 (SX5E) vs SPX 5 year chart from Bloomberg

As Enis so aptly put it this morning in his MacroWrap:

The European debt crisis is a crisis because it’s the culmination of 20 years of unproductive, ill-advised, debt-financed investment and consumption.  It’s the culmination of 20 years of structural imbalances caused by a misleading convergence in interest rates in a poorly-conceived common currency community.  It’s the culmination of 20 years of meager banking oversight by more than a dozen national banking regulators, allowing European banks to amass leverage ratios of 30 and 40 to 1.  It’s the CULMINATION.

This is fairly clear – all parties involved had to choose from a lot of pretty bad options as it relates to a bailout for Cyprus, and if Draghi thought he took systemic risk off of the table with his “What Ever it Takes” comment, he was likely mistaken.  This crisis has keep a lot of journalists and bloggers in business, and I assume that we will be talking about Cyprus for at least the balance of the week as it appears we are in a slow news cycle.

Last week in this space I had some choice words of the usefulness of Twitter for those of us info-crazed financial soles, but man I got to tell you, Twitter ruined my Sunday as my stream lit up like a Christmas tree on the Cyprus thingy.  The use of CAPS and superlatives relating to the proposed bailout was like nothing I have seen in the stream in a while, and suddenly everyone who has an account and traded a stock in the last year has a view.  So maybe I’ll be the first to tell you, I have no opinion on the goings on in Cyprus, and while I have been eagerly awaiting a pull back in the SPX, the chart above worries me that we will continue to see SPX out-performance as investors will continue to view the U.S. as a flight to quality.

SO then the next obvious question is with the $ rallying against the Euro, can this relationship continue to stand in both the equity and currency world??? Crude is down this morning I assume on slowing global growth concerns, which could be a positive right??   You get my point, just when we thought we could focus again on corporate earning growth for the next leg of the bull run, for the third year in a row, for the third spring in a row, we have the Euro Sovereign Debt Crisis rearing its ugly head and the micro guys like me are stuck trying to sift through all the noise and figure it out.

As we approach Q1 earnings in April and start to meander into pre-announcement season, have U.S. multinationals just received their latest excuse for poor earnings viability?  Hurricane Sandy was soooo Q4 2012.  If the overnight action in the S&P Futures is any indication (up 11 handles off of the lows) this will not be an easy ride for those of us who are short, and the most disappointing aspect of the overnight session is that we are right smack dab in the middle of the range.   I would have preferred a down 20 opening and shorted the first rally to down 10, or a I would prefer a down 3-5 opening so you could just lay into them.  But here, down 12, this is a tough call, and you kind of just have to sit on your hands and see what happens.  In many ways I could see U.S. investors flipping Cyprus and the Euro the Bird, but we are extended and it seems like everyone and the mother, both bulls and bears would like to see a little short term pain.


MorningWord 3/15/13:  I’ll start this post as I have on many occasions over the last few weeks. AAPL is desperately attempting to put in an intermediate term bottom.  Since gapping below $440 on March 1st, the stock has spent most of the first half of the month banging around in a very tight approximate 2.5% range btwn $435 and $425, despite the Nasdaq and the SPX gaining ~3% in that time period.

AAPL 20 day Chart from Bloomberg
AAPL 20 day Chart from Bloomberg

This morning AAPL is trading near $439, up about 1.2% in the pre-market, despite some earnings and price target reductions:

(Bloomberg) — Apple estimates cut at UBS, Sterne Agee ahead of 2H iPhone refresh.
* Apple estimates cut as supplier checks show evidence of iPhone 5s, lower cost iPhone using composite material casing are likely, Sterne Agee analyst Shaw Wu said in note
* AAPL will likely “hit” lower end of its guidance, bigger iPhone refresh not likely until 2014, Wu said
* AAPL PT cut to $630 vs $715, rated buy
* 2Q iPhone unit est. cut to 32.5m from 35m
* 2Q EPS cut to $10.00 from $10.25, est. $10.17, rev. cut to $41.3b from $42.9b vs est. $42.86b
* FY13 EPS cut to $44.50 from $47.05 vs est. $44.33, rev. cut to $180.5b from $187.4b vs est. $181.5b
* FY14 EPS cut to $52 from $55 vs est. $50.07, rev. cut to $206.8b from $213.6b vs est. $204.59b
* More cautious on near-term demand ahead of new AAPL devices, increased high-end competition, UBS analyst Steven Milunovich said in note
* AAPL PT cut to $560 vs $600, rated buy
* 2Q iPhone unit est. cut to 35.5m from 37m
* 2Q EPS cut to $9.66 from $10.05, est. $10.17, rev. cut
to $42.16b from $43.1b vs est. $42.86b
* FY13 EPS cut to $42.14 from $42.75 vs est. $44.33, rev. cut to $177.4b from $178.9b vs est. $181.5b
* AAPL 51 buys, 10 holds, 3 sells, avg. PT $604: Bloomberg data

And then there was Samsung’s much anticipated Galaxy S4 Launch came and went yesterday, and given some of the early feedback in the tech press and in the Blogosphere, the new smartphone will likely help them maintain their momentum, but it does not appear to be a game-changer, and an outright iPhone “killer”.

As we head into the quarter end is the sentiment on AAPL set to improve?? Maybe for a short period as investors look forward to an enhanced cash distribution from the company, while  many traders expect some announcement possibly as early as the first half of next week.    On the day of AAPL’s Shareholder meeting, I wrote up a little “primer” on expectations (yes weak, but read below) because it seemed for some reason the market was convinced the company would announce some new initiatives that day.  It was my correct understanding then, that there would not be any new plans announced for cash distribution, but we could see a very similar pattern to last year where the company issued a press release for a same day conference call (March 19, 2012) to introduce their dividend plans/buyback plans.

Expectations are all over the place, from a modestly increased dividend and buyback, a large special dividend, a massive tender offer (much like MSFT did in mid 2006), Einhorn’s preferred stock proposal to any combination of the above.   Make no mistake, expectations are high, and in many ways this could set up for some disappointment in the near term if the stock rallies ahead of any announcement.

Once the distribution plans are out of the way, the street will once again get focused on what can only be described as their quickly decelerating earnings and revenue growth.   AAPL will likely report their fiscal Q2 earnings in the last week of April, and I would expect little optimism from analysts in front of the print, which could set up for what I expect to be a swoosh below $400 at some point in the near future.

So In sum, stock is clearly trying to bottom, many traders are expecting a cash distribution announcement early next week which is better than expected could see a pop above $450 resistance , maybe gets it to its 50 day moving average at ~$468 (which it has not touched since early Oct), but a squeeze to the Feb high of ~$490 seems fairly unlikely in my mind.   I have been suggesting the stock has a 3 handle at some point in the first half of 2013, and I stick by that, but sooner than expected and better than expected news in cash distribution could clearly help what has been horrible sentiment and even worse relative performance in AAPL’s shares.  I also stand by inclination that AAPL is a great long term buy and hold if the stock is back towards the support level from late 2011 at ~$375.


Original Post Feb 27th, 2013:  $AAPL Shareholder Meeting Primer, Really???

Last year AAPL’s price action from Jan 1 to Sept 21 resembled a mania despite the first full year that the company was lead by new CEO Tim Cook.  Cook set out quickly to establish that he was the CEO, and not playing by some script left to him from Jobs or Jobs’ Board of Directors.


Last year as AAPL’s cash on their balance sheet had just topped $100 billion, distribution to shareholders became a hot topic and where Jobs had previously dismissed calls for dividends and buybacks, Cook made the following comments at Goldman Sach’s Technology Conference on February 15th, 2012 (from

Now, in terms of our approach on cash, I’ve said since becoming CEO, I’m not religious about this. I’m not religious about holding it or not holding it. And we’re in very active discussions at the board level on what we should do

It’s not new that we’re discussing it. It is being discussed more, now, and in greater detail, and that’s because the balance has risen to the point that you’ve already made. And I think it’s clear to everyone, and I’d be the first to admit, we have more cash than we need to run the business on a daily basis.



So similar to this year, Cook addressed their cash distribution plans at Goldman’s conference on Feb 12th, 2013, but offered little detail other than that they will continue to do so and that they were considering activist investor David Einhorn’s preferred share plan.  By all accounts it is very unlikely the company will do such a thing.


After much excitement regarding Cook’s comments at GS in Feb 2012, AAPL continued to march forward into their Feb 23rd, 2012 Shareholder Meeting, and at that meeting , Tim Cook ‘s comments on cash were summarized here by

Cook addressed questions about the company’s almost $100 billion in cash, and said Apple isn’t convinced of the value of a stock split. Repeating comments he’s made in recent weeks that he and the board are “thinking about cash very deeply,” Cook told the packed auditorium that Apple has invested billions in its supply chain, in its retail stores, on expanding its operations and on acquisitions. “We’ve actually spent a lot but we still have a lot,” he said. “And frankly speaking, that is more than we need to run the company.”

On stock splits, he said that the company is constantly evaluating actions that would be in the best interests of shareholders and that the value of a stock split “isn’t so clear.”

Here is the kicker, it wasn’t until AAPL released a press release on March 19th, stating that there were going to hold a conference call that day to discuss their plans for cash distribution which included a $2.65 a share quarterly regular dividend (or 1.8% at the time) and a $10 billion share buyback.


SO with the stock having already split by a third from the Sept 2012 highs, whats likely to happen today?? Nothing in my opinion, or nothing that will catalyze the stock higher.  Any major announcement will come after the meeting as last year, aside from some possibly unexciting prposals and annoying questions by shareholders, we are not likely to get anything meaningful.

Could the board already have voted for a stock split, of course and would that announcement return any of the $137 billion cash to holders? NO.  SO other than making more shares available to retail holders there is absolutely not economic impact on the company or the stock and therefore if the stock rallied on that as a trader I would think it is a sale.   If the stock rallies hard in the next hour, and the news that everyone expects is not forthcoming, I would expect a quick sell off and the stock to likely close at new 52 week lows below $435 at some point this week.