MorningWord 2/7/14: $AAPL Bought Your Fear and They Know A Lot More Than You

by Dan February 7, 2014 9:25 am • Commentary

Last night it was revealed by AAPL CEO Tim Cook in an interview with the WSJ that the company had been engaged in an Accelerated Stock Repurchase (ASR) program, buying back a total of $14 billion shares ($2 bln in the open market) since the company’s disappointing fiscal Q1 report on Jan 28th, a report that saw the stock plunge 8%.  On Wednesday in this space (here and below) we flagged AAPL’s recent relative out-performance (since the earnings decline) and some unusual options activity earlier in the week that likely suggested some aggressive accumulation of shares.

In the WSJ interview, Cook states that he:

“wanted to be “aggressive” and “opportunistic”, and “It means that we are betting on Apple. It means that we are really confident on what we are doing and what we plan to do,” “We’re not just saying that. We’re showing that with our actions.”

The last thing shareholders of the largest public company on the planet want is for the C-level suite residents to start thinking they are the second coming of Stevie Cohen as far as trading their stock’s shares.  But let’s be clear about what just happened – the company only bought $5 billion of shares in the quarter just ended in December with the stock higher and then basically tripled the rate of that purchase buying the stock 5% lower this past week.  So they did see the sell-off as an opportunity.

But why the new found confidence?   Likely because they know things.  Cook has promised new product categories this year, and April would be the 4 year anniversary of the last new product category of the iPad.

As for the stock in the near term, $500 is going to continue to be important from a psychological standpoint as it was the level the company said enough is enough.  I suspect the stock should remain well bid above that level as shareholders debate Carl Icahn’s plan for the company to increase their share repurchase by $50 billion, which is to be voted on at their Feb 28th shareholder meeting.  The company might be making it easier for Icahn’s plan to go through, as it appears they have eaten through a good bit of their existing buyback allotment of $60 billion, buying $40 billion in the last 12 months.

The implications for implied volatility are clear – options in AAPL are likely a sale, especially out a few months.  If approved, the company’s aggressive buyback will temper realized volatility, since management will be buying the stock on pullbacks.  Meanwhile, moves higher are likely to be less volatile, as is the nature of market psychology when stocks are moving higher vs. when they are moving lower.

However, in our view, the implications for AAPL stock in 2014 hinge more on the company’s innovation and new product announcements than on the buyback news.  The buyback reduces volatile moves lower, but genuine investor interest in the company is much better stoked by product innovation, especially for a stock the size of AAPL. We have some thoughts on the potential significance of one rumored new product and we’ll write about that soon.




Original Post Feb 5th, 2014:  MorningWord 2/5/14: Bobbing for $AAPL?

Last Tuesday’s 8% plunge in AAPL shares, following their disappointing fiscal Q1 results and Q2 guidance, was the worst one day decline in more than a year.  But since the close on January 28th, the stock has found its footing, and has outperformed the SPX by almost 2%.

While many technicians have highlighted the apparent double bottom in the chart last spring/summer (red circled below), the stock in the near term appears to be in a bit of a holding pattern as investors look for any news regarding increased share buybacks and/or dividends as suggested by some large shareholders. That theme could come into increased focus as we get closer to AAPL’s February 28th shareholder meeting.  Specifically we are likely to see a war of words (or Tweets) as investors digest and consider Carl Icahn’s proposal for the company to increase their share buyback by $50 billion (read here).

(Quick point about upcoming meeting, while it will grab headlines, in the last two years any news about increased buyback and dividends has come in the weeks following the event. In 2012, on March 19th the company introduced capital return plan (here) and in 2013, on April 23rd the company announced their decision to increase the existing plan (here), almost 2 months after the shareholder meeting.)

The one year chart of AAPL below shows the stock’s stabilization over the last week, at what is likely to be a fairly important near term technical support level as there is no real support in the stock until $475 and then $450:

AAPL 1yr chart from Bloomberg
AAPL 1yr chart from Bloomberg

So why the stabilization as the broader market appears to be floundering?? One could argue that the stock may be one of the safest risk assets on the planet, with a current dividend yield of 2.4% and existing $60 billion share repurchase and one third of their $450 billion market cap in cash.  Or maybe the 4 year lapse in a new product category could cause some to speculate that something “big” is coming in the next few quarters as CEO Tim Cook suggested to employees in a memo in December.

The reasons above are well known, and not likely to be the reason for this past few days of relative out-performance.  Rather, it could have more to do with some unusual options activity that we have noticed in the days following AAPL’s “black-out” period for share-buybacks post earnings.

Yesterday the following trade caught our eye:

AAPL delta one trade Feb 4th, from Bloomberg
AAPL delta one trade Feb 4th, from Bloomberg

To break it down, the trader bought 9800 March 580 puts for 75.90, sold 9800 March 580 calls at 1.12, and bought 980,000 shares for $508.12

So what happened here?  The buyer created what appears to be a riskless transaction as the long stock is covered by long in-the-money puts and short out-of-the-money calls, matching up the deltas.  A long put position and a short call position of the same strike and maturity is essentially a short forward contract on that stock (read here for more on Forward Contracts).  What could be the rationale for this offsetting transaction of long stock/short forward?  It could be a bank locking in funding for the long stock position at a cheaper rate than the bank charged a client for funding a similar position.  And the client?  That might just be AAPL itself.

The point here is that this activity likely suggests that a large bank has entered into “Accelerated Share Repurchase” program with AAPL whereby the bank(s) have committed to delivering a specified amount of shares to the company in a certain amount of time at a sort of average price during the period.  So why is the options activity the tell that AAPL is conducting an ASR? Well, if you were a large bank out there buying AAPL’s stock, you have very little risk and you are getting paid handsomely to do this business, but there are also potential little tricks that can make the activity more profitable for the bank.

So what does it mean for AAPL? They are likely buying a chunk of stock right here, which is better than the average price over the last quarter from October to December 31st. But maybe, just maybe AAPL is front running Carl Icahn’s request for increased capital return.  In the quarter ended June 31, 2013, AAPL purchased a total of $16 billion worth of shares, $12 billion of which was in the form of an ASR (read here).  In the quarter just completed the company only bought $5 billion worth, and maybe they are keeping their powder dry to buy on pullbacks, like the one we just got!


Disclosure: I am long a Bullish March 525 /550 /575 call butterfly – read here