Thursday Freak Out – Apple (AAPL) Profit Warning Wrecks the Recovery

Only $84Bn?

That's right folks, Apple (AAPL) issued a rare warning last night as CEO, Tim Cook said trade wars (including a Chinese boycott of Apple) have hurt even the World's Greatest Company and they would "only" sell $84Bn in their Q1 (normal people's Q4) which is $9Bn (10%) less than the high end of guidance.  AAPL also guided gross margin lower, to 38% so we can now whip out our iPad Calculator and say $84Bn x 0.38 = $31.92Bn in gross profit which is – GASP!!! – almost $2Bn less than they earned last year in Q1.  OMG – SELLSELLSELL!!!!

That was sarcasm, of course – we're buying.  $84Bn is $4Bn less sales (5%) than last year and $2Bn less profit is 6% lower and of course we don't like to see our companies taking steps backwards but this is another one of those self-inflicted wounds Trump is causing to our economy and Apple is the biggest company in our economy – so of course they are going to feel some pain. 

We already took a long position on the Nasdaq Futures (/NQ) at 6,200 in our Live Member Chat Room as I put out a note at 4:55 am.  Clearly the sell-off is an over-reaction that has no basis in reality, but that won't stop AAPL from going lower as idiot analysts jump on the bandwagon and downgrade it – we will just have to be patient.  The Nasdaq drifted along around 6,200 until just about 7am, when it blasted higher, to 6,250 for a quick $1,000 per contract gain – a nice way to start our day!  

I'm not going to make a case for AAPL as it's boring, I was bored back in May when AAPL droped from $181 to $158 on "disappointing" earnings – which did a good job of flushing out the retail suckers before they blasted to $232 on the July earnings report.  You really can fool some of the people all of the time and all of the people some of the time – especially when they are Apple traders!  Of course when hedge funds need a boost, they like to load up on big stocks like AAPL but how do they get them to be cheaper?  We…
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What Now Wednesday – Bad China Data Gets 2019 off to a Bad Start

2,480.

That's the weak bounce line we've been talking about on the S&P all quarter and that's the line we're playing with this morning as the markets digest China's Caixin Manufacturing Index, which fell to a declining 49.7 in December, the first time China has shown contraction since May of 2017.  

Still, the theme follows through from last quarter that we are all suffering from self-inflicted wounds as the ongoing trade war has sent New Export Orders plunging to their lowest levels since Q4 of 2011, when we didn't have a trade war and things turned around sharply from there so it's hard to say what happens next – but it is certain this negativity can all be unwound very quickly, IF our President pursues a rational course of action (see, now you are worried again!).  

That is a theme I notice when pundits are discussing US policy these days – noithing is off the table – we are an insane super-power that could nuke North Korea or strike a trade deal with North Korea or annex North Korea or Sanction North Korea or push North and South Korea together – it's all on the table because no one knows what the F our foreign policy is – even from minute to minute.  

Image result for trump insane cartoonThat kind of madness internally means the markets can be moved on any sort of insane rumor because ANYTHING is possible.  "Trump Declares War on Apple" is not a headline you would ignore because it MIGHT be true and, unfortunately, modern trading algorithms are trained to respond to headline news – on the assumption that thing that make the headlines of mainstream media are likely to be true.  This is no longer the case as the MSM also doesn't know if something is too insane for Donald Trump or not.

 

IN PROGRESS

 

 

 

 

 

Monday Market Movement – Trade Progress Keeps Things Positive

2,500!

The S&P 500 took back a critical level this morning in the Futures as we're back over the 2,500 line and holding that would be a good sign to close out 2019 – despite the epic disaster that we've already endured in Q4 as we fell from 2,950 to 2,360 so 600 (ish) points down invives 120-point bounces (20% of the drop) and 2,489 was the weak bounce line we expected last week but we're not going to be very impressed until we're back over the strong bounce line at 2,600, along with the other strong bounce lines on the other indexes:

  • Dow 27,000 to 21,600 is 5,400 points so 1,080-point bounces to 22,680 (weak) and 23,760 (strong) 
  • S&P 2,950 to 2,360 is 590 points so 120-point bounces to 2,480 (weak) and 2,600 (strong) 
  • Nasdaq 7,700 to 6,160 is 1,540 points so 300-point bounces to 6,460 (weak) and 6,760 (strong) 
  • NYSE 13,200 to 10,560 is 2,640 points so 528-point bounces to 11,058 (weak) and 11,586 (strong) 
  • Russell 1,750 to 1,400 is 350 points so 70-point bounces to 1,470 (weak) and 1,540 (strong)

Despite the surge in the Futures, we haven't gained a single green box since Friday morning's Report and today is going to be a light trading day and tomorow the markets are closed so we can't take…
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TGIF! Have the Markets Found a Bottom or are we Waiting for the Big One?

Nice bounce.

It should, I suppose, be pointed out that, in our Wednesday Morning Report, we predicted the Dow would bounce to 1,080 points to 22,680 but that would be a Weak Bounce and that we were not going to be impressed until we saw the Strong Bounce Line holding at 23,760.  Though it was an all-time record move, the Dow finished up EXACTLY 1,080 points that day.  Most pundits, if they made a call like that, would be interviewed for the rest of their lives about it and put on the President's Advisory Committee but my response to questions about it is "TA is for morons" so it doesn't make for a good interview.  

The 5% Rule™ is not TA, it is simply math that is based on our understanding of how computer algorithms tend to trade and, since 90% of all trading is done by algorithms – it's pretty darned accurate!  In addition to our 5% Rule™, we have our Tugboat Theory™, which we went over in this morning's Live Member Chat Room.  While we did flip much more bullish in our Options Opportunity Portfolio on Wednesday, we're still waiting to confirm the strong bounce lines before getting more aggressive in our Long-Term Portfolio.  The lines we are looking for remain:

  • Dow 27,000 to 21,600 is 5,400 points so 1,080-point bounces to 22,680 (weak) and 23,760 (strong) 
  • S&P 2,950 to 2,360 is 590 points so 120-point bounces to 2,480 (weak) and 2,600 (strong) 
  • Nasdaq 7,700 to 6,160 is 1,540 points so 300-point bounces to 6,460 (weak) and 6,760 (strong) 
  • NYSE 13,200 to 10,560 is 2,640 points so 528-point bounces to 11,058 (weak) and 11,586 (strong) 
  • Russell 1,750 to 1,400 is 350 points so 70-point bounces to 1,470 (weak) and 1,540 (strong)

We've made some progress but, as you can see from all the red, nothing very exciting so far and, if those green boxes don't hold up – it will be time to add more hedges.

Have a great weekend, 

- Phil

 

Follow-Through Thursday – After a Record Day, A Pause or More of the Same?

Wheeeee – what fun!  

That was the first time EVER that the Dow gained 1,000 points in a day so – you were there.  So far, in the Futures, we're only giving back 300 but that's because the BuyBots are sleeping and it sure didn't look like they were done into the close so we'll see what happens once the volume comes back with just three shopping days remaining in 2018 – and good riddance to it after that crappy quarter.

Not even another 10% gain can save this from being a TERRIBLE quarter for stocks but it can save the indexes from breaking down so we'll take what we can get and, in REALLY GOOD news, assuming The Donald can keep away from twitter for a few days, this is the 13th most oversold level the markets have ever been at with just 1.2% of the stocks over the 50-day moving averages and there has not been a year this century in which we haven't had a very nice gain following such an event.

That bodes well for 2019 and we were scrambling to adjust our portfolios yesterday in our Live Member Chat Room as we expected the bounce (see yesterday's Morning Report) but we hadn't wanted to commit on Monday as it was too scary with the markets closed on Tuesday.  Our results were not scary though as our Options Opportunity Portfolio, which opened the day down 6% finished the day up 32% for a 38% swing on the day and we're now positioned fairly bullish going forward and, as noted in our Dec 11th review, that $132,000 portfolio is on track to make another $126,256 (95%) over the next two years – on just the trades that are in there already!  

When the market sold off, rather than panicking, we looked at our perfectly good positions that we down 38% from our last review (12/11) and decided to improve them – mostly by buying back the short callers and rolling our long calls lower where it was appropriate.  We also doubled down on Frontier Communications at $2 as that seemed a bit silly and, by the end of…
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Which Way Wednesday – Can Confidence Return to the Markets?

Now that is one UGLY quarter!  

As you can see from the small image of the Big Chart (click to enlarge) the marekts have been in free-fall for the month of December with the indexes giving up about 20% of their gains (not 20% from the top) in just over 20 days with almost no up days the whole month.

This Government shut-down is different and the conservative, Financial News Media as well as many of the Top 1%-owned Media Outlets tend to ignore the fact that the previous shut-downs (1995 Newt Gingrich, 2013 Obmacare and 2018 Dreamer) were acts by the opposing party house against the President so there was confidence that our LEADER would work to resolve the temper-tantrum the House leaders were having.  

This time is different as it's our "leader" having a temper-tantrum and his party controls both the House and the Senate so how are people going to be confident that this will be resolved when you have an incoming Democratic House in just two more weeks?  400,000 Government employees are already out of work and millions of contractors aren't going to get paid and projects won't get done and things won't get ordered…  The US Government is the largest part of the US economy, spending over $4Tn a year, call it $350Bn/month and that's money the economy can't actually live without – 20% of our entire GDP is Government Spending.

Each month the Government is closed knocks 2% off our GDP and the slowing economy will contract wages and Corporate Profits and, guess what?  That will make the deficit explode as it lowers the rate of tax collections.  That's why the market had such a harsh reaction to this shut-down but it's still been an over-reaction nonetheless and we are certainly now looking for at least a weak-bounce correction, which would be a 4% gain on the indexes from these levels.  Let's call it from the 20% correction lines:

  • Dow 27,000 to 21,600 is 5,400 points so 1,080-point bounces to 22,680 (weak) and 23,760 (strong) 


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Shutdown Friday – Government Closes for Christmas

Image result for trump grinchMerry F'ing Christmas!  

Not only is Donald Trump stealing the paychecks up to 800,000 Federal Workers just in time for Christmas (which saves him budget money so he can give his oligarch buddies even bigger tax breaks) but one of his despicable todies, GOP Representative Mark Meadows of North Carolina, says "It is just part of the risk of working in public service."

I ask you America, is this really you?  Do these people represent your ideals and your values?  Do you approve of their actions?  If not, it is your DUTY to remember this and VOTE them out of office whenever you can.  These are TERRIBLE people, they are making America TERRIBLE, not "great."  Even Mad Dog Mattis, our Secretary of Defense, decided Trump is too crazy to work for and has handed in his resignation.  This leaves our President surrounded by nothing but yes-men, who tell him things like this are OK.  It's up to YOU to tell him it's not OK.

Meadows still gets paid, 6,200 Federal Employees who work in his district will not.  Even his fellow Republican Rep, Ryan Costello blasted Meadows for being a total ass.  Unfortunately, Costello is a good man and has chosen not to seek re-election as he's an actual person trying to do what's best for the country and not some partisan hack who sucks up to the richest monster he can latch onto.  

 

IN PROGRESS

 

 

Thursday Thoughts – Powell Gives the Markets a lot to Digest

Image result for fed rate hikes 2018Wheeeee – such fun!  

As we expected, the Fed raised rates because they had to (because they didn't listen to me and raise rates at the November meeting, when it would have had less impact) and the market freaked out and plowed lower but we decided to remain bullish because all that really happened is SOME people decided to sell and, since we have a very low-volume market – some people is all it takes to jam the market much lower.  Once the rate-sensitive funds are done selling – the bargain-shoppers can step back in.  

And what bargains there are!  While I noted yesterday that the indexes are probably fairly valued as they are still propped up by the ridculous headline valuations of AMZN, TSLA, NFLX, any marijuana company…  there are now hundreds of companies trading at ridiculous discounts to their fair valuation including Apple (AAPL) who made $60 BILLION in the last 4 quarters and has $240Bn in CASH!!! (including long-term investments) yet you can buy the whole company for $760Bn at $160 so $760Bn – CASH!!! is $520Bn/$60Bn = a price/earnings ratio of 8.666.  That's pretty low!  

Of course there has been a lot of rumors that IPhones aren't selling well etc and maybe they are down a bit but I was just at a dinner yesterday with a lot of people and someone gave the waiter a phone to take a group picture with and the waiter didn't know how to use it because it wasn't an IPhone and about 8 people shouted at the same time to the guy who's phone it was "Get an IPhone, for God's sake!" and then we started talking about how Andriods suck and how annoying it is to try to send things to people with Androids, etc….  

Image result for iphone teens chart18 out of 22 people at dinner had IPhones and that's in a wealthy part of Florida but my ordinary town in NJ (middle to upper-middle class) is probably 80% IPhones as well.  Now, I'm sure it's different somewhere in America because, nationally, IOS (Apple's operating system) is only on 50% of the phones in the country but, as of April, 82% of the teens
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Which Way Wednesday – FOMC Edition

Image result for economy cliff cartoonWill the Fed save us or doom us? 

Forget the Fed, actually, let's talk about FedEx (FDX) and Micron (MU) both of whom are down 7.5% this morning as they are being shorted by the same algos and both of which are widely-held stocks that have their fingers on the pulse of the economy and both of which are warning us that the Global Economy is in arrest!  

Micron actually hit on earnings ($2.97 vs $2.95 expected) but missed on sales ($7.91Bn vs $8.01Bn expected) as tariffs have indeed weakened demand and the company warned that an escalation in tariffs from 10% to 25% would significantly impact them going forward.

FedEx, on the other hand, also beat on earnings ($4.03 vs $3.94 expected) and beat on revenues ($17.8Bn vs $17.69Bn expected) but issued a dire warning as they issued weak guidance and warned of the grim impact trade wars are having on the global economy, saying: "Global trade has slowed in recent months and leading indicators point to ongoing deceleration in global trade near-term."  Despite beating on both the top and bottom lines, shares fell after FedEx announced a cost-cutting initiative and lowered its full-year forecast on trade and tariff-related issues. The company now expects to earn between $15.50 and $16.50 per share in fiscal 2019, which is far below consensus estimates of $17.73 per share.

“While the U.S. economy remains solid, our international business weakened during the quarter, especially in Europe. We are taking action to mitigate the impact of this trend through new cost-reduction initiatives,” Frederick W. Smith, FedEx chairman and CEO said in a statement.

I just said yesterday morning that we should look for a lot of Corporate cost-cutting into 2019 that would indicate we are slowing down and usually it takes more than 24 hours for me to be proven right – but I'll take the "win", I guess…

Related imageI'm not happy about it, this means the damage is worse than expected already and the Fed really shouldn't be tightening this afternoon but they kind of have to tighten as rates are still
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Trumpless Tuesday – Small Cap Stocks Erase ALL the Gains of the Trump Error

A World without Trump!

That was the subject of the opening sketch on Saturday Night Live this weekend which, like "It's a Wonderful Life" showed Donald Trump how much better off the World would have been if only he had not been President.  The chart on the right shows that small caps (IWM) have already given up ALL of the Trump error gains and the other indexes are not too far behind.  As Trump (Baldwin) says in the sketch "It's terrible, everything is falling apart" and that's certainly true of the stock market, which isn't waiting for Trump to be handcuffed and forcibly removed from the White House to roll back the rally that's put the country $2.5Tn further into debt in just two years.  

Maybe the markets are worried about the debt, maybe they are worried about President Pelosi (Pence is looking like he'll be out as well) or the looming Government Shutdown or maybe the economy isn't quite as good as Team Trump has been claiming or maybe investors are finally realizing what I've been saying all year:  That earnings have been the result of a massive tax-cut sugar-high that cannot be repeated (and shouldn't have happened in the first place) and that there is no way that most companies will live up to the valuations that have been wrongfully extrapolated based on a one-time event.  

Image result for extrapolating cartoon

tax reformAccording to FactSet, almost 50% of the S&P 500s earnings growth has been from Trump Tax Breaks and no, they have not used that money to create more jobs (Trump has created far less jobs than any two Obama years) nor have they used the money to open new factories but they have bought back over $1Tn of their own stock – at record-high prices – isn't that clever?  

While $1Tn may seem like a lot of money, it's "only" about 2.5% of the US Market's $40Tn market cap though it does account for more than 1/2 of all inflows into the market in 2018 so, whenever you sell a stock, there's a 50/50 chance you are selling it back to the company!

Lowering the share count by 2.5%
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