Apple, Markets Flat into Election
Apple and the markets stall before the elections, as volume sinks. Credit markets are easing as the LIBOR dropped for the 16th consecutive day, and the manufacturing index, the ISM, dropped to a 26 year low, but that didn’t seem to phase investors as much as it might have under normal market conditions, probably because volatility is pouring out of the market. And we have some near-term bullish news as there are head and shoulders forming on the 60s.
It was only a week ago that we were getting 500 point swings in 15 minutes, it was a virtual roller coaster ride. And now, for the first time in a long while, we get a flat day in the market. It’s kind of refreshing, yet unnerving at the same time. I’m sure a lot of this posturing has to do with investors simply taking a breather before the elections.
So, the big news today for Wilderness Investors was that Apple may cut iPhone production by 40 percent this quarter as consumer spending slows. This according to Friedman, Billings, Ramsey analyst Craig Berger. That’s a big change, as previous checks showed just a 10% drop in production. In a note to clients, Berger said:
“Apple is a good proxy for broader consumer demand given that it has the hottest, sleekest, most desirable products. That the firm’s iPhone production plans are being revised lower suggests that the global macroeconomic weakness is impacting even high-end consumers,those that are more likely to buy Apple’s expensive gadgets,” and that “no market segment will be spared in this global downturn.”
If Berger is correct, then this could translate into nearly $2 billion in lost revenue. The speculation for lowered production was made after checks on the iPhone supply chain, with companies like Broadcom, which supplies the iPhone’s global-positioning system chip and touch-screen controller; Marvell who makes the wireless-fidelity chip; and Linear producing the battery charger. Other suppliers include Infineon Technologies, TriQuint Semiconductor, and Skyworks Solutions.
So, the thing I don’t understand from this report is what percentage of these suppliers business is for Apple, and what percentage is for other customers. Because if you were to look at the relative growth of Apple products compared to competing companies, they are trouncing them all. For example, Apple’s notebook and desktop business is growing exponentially, while manufacturers like Dell are not growing at all. And Apple is eclipsing not only the smart phone market, but now has the top three spot among ALL cell phone makers in terms of revenue. Perhaps everyone else is cutting back 50 to 80 percent, while Apple is on course to meet the guidance they provided at the last earnings call.
On the credit front things are loosening up for banks as the LIBOR has dropped another 17 basis points to 2.86%. That’s the lowest rate since the Lehman Brothers failing in mid September. The LIBOR is an acronym for the London Inter Bank Offered Rate, that’s the rate that banks charge for three month loans to one another. So, that’s 16 straight days that the LIBOR has dropped! The reason this is significant is that this causes the LIBOR-OIS spread to narrow, which is a gauge of the availability of cash among banks. This means that banks have more liquidity, and are in a better position to grease the skids of the economy.
The markets are benefitting from the huge weight of volatility dropping like a lead balloon. The Volatility Index, or VIX, is falling under the weight of negative divergences, and for the second straight day it has remained below its 20 Day moving average. Every day it stays below that mark, the more investors will build their confidence in the market.
One of the things I talked about in yesterdays podcast, was that the indexes are trying to break through their respective 20 Day moving Averages. And things haven’t changed much since then. We’re pretty much right where we left things yesterday. But the big difference is in the change of character in the Bulls. In previous weeks, if the Bulls tried to capture a level like the 20s, they’d be soundly defeated immediately, running away with their tail between their legs. But this time, they’ve hung tough, keeping the turf they’ve gained. Now if they can just break out, the next obstacle will be the recent gap-downs and the 50 Day EMAs. The Bulls continue to be supported by the rising MACDs, thwarting any attempts to short the markets.
But keep in mind that this is the case for the near-term. The medium to long term still look pretty dismal. And speaking of the near-term, the 60 minute charts are showing an Inverse Head and Shoulders forming. This is a Bullish bottoming pattern. We need just one more push down to form the right shoulder, and then we’re off to the races. So long as the S&P can maintain support at the 925 level, there’s a very good chance that this pattern will play out and we’ll break through its neckline.
