"Don't swear off all the fruits just because you ate one bad apple."
- Tiffanie DeBartolo
April Showers
April ended rather ugly. Did that really surprise you? The US dollar continues to strengthen against the greenback's peers. Morgan Stanley had told us days ago that they expected to see outflows of as much as $14B out of equities, and inflows of something like $12B into fixed income as the month came to an end. Still, the financial media acts shocked that the equity market flops like a fish out of water, and yields compressed a bit, sending the 10 year back from where it had come from.
A new month frees the markets from the shackles of pension fund mandate. That said, the domestic economic growth coupled with what looks to be slowing growth elsewhere will reinforce dollar strength for now. Too many were short the dollar, and should there be any sign of continued wage growth this Friday, traders will likely see the probability of that fourth rate hike in December rise above 50%. That will squeeze some of those traders into taking unwanted action by their very own risk managers. By the way, (yes, it's ridiculous this early), the Atlanta Fed's initial snapshot of Q2 GDP for the US is running at 4.1%. For Q1, Atlanta's final print hit the tape at 2.0%, while the advance estimate from the BEA printed at 2.3% (seasonally adjusted and annualized).
Still... Headwinds
Bottom line... headwinds persist. Even without forced trade, monetary policy is not your friend at this point. More on that tomorrow. Fiscal policy might just be your friend, but that likely reinforces those higher rates, and comes with an expiration date. Oh, and trade conflict... yeah, that's still out there... after last night... maybe a little further out there.
Late Monday, President Trump's administration decided to postpone making decisions impacting those tariffs of 25% on steel imports and 10% on aluminum imports on several key US allies including the European Union. This really came as no surprise, given that as far as Mexico and Canada are concerned, NAFTA talks continue. Outside of North America and Europe, Brazil, Argentina, and Australia were all granted extensions as well. China, Russia and Japan continue to play the role of the Cheese. They virtually stand alone.
Rotten Apple
Are Action Alerts PLUS holding Apple's (AAPL) best days in the past? The very idea seemed silly just a few months ago. Now, it seems to be the question so many retail investors are asking. The name reports it's Q2 numbers tonight. Industry expectations are for EPS of $2.68, with whispers running about a dime higher than that. That's good, right? Well, it does increase the investor potential for disappointment. Revenue projections are for roughly $61.3B. That would be year over year growth of a touch more than 15.9%. Huzzah !! Now for the bad news. That number would also represent more than a 30% decline sequentially. On top of that, AAPL has disappointed on revenue projections for the last two Q2s in a row.
The name appears to be trading at 12.6 times forward looking earnings. Undervalued, no? Unless, those forward looking earnings are wrong. BMO Capital Markets expects AAPL to guide lower for Q3. Oppenheimer analyst Andrew Uerkwitz lowered both his sales and earnings estimates for the firm going forward, while downplaying the broad penetration of the Apple ecosystem, which is where many investors, by the way had placed their hopes in this name. There's more, Broadcom (AVGO) on Monday used weak demand for smartphones as an excuse to narrow it's own range for revenue expectations for this current quarter. They are not the first chip maker to do so while citing this reason.
Golden Delicious
Apple investors... you do have an ally. As you might recall - how could you forget? - the firm stands on a mountain of cash. You likely saw the story on Zero Hedge yesterday that put a little pop in the stock. If you did not, the story basically prepped the market for the one weapon that CEO Tim Cook still has in his pocket, even if this quarter paints the firm in a disappointing light.
This story did not begin yesterday. As iPhone X sales have been, if not sluggish, then at least below what the firm had hoped for, (Amazing that a nation of people that just suffered through a very tough economy for a decade wouldn't pay a grand for a smart phone... file under "what were they thinking?") sell side analysts have been talking up the idea of a beefed up share repurchase program that could very well be coupled with an increased dividend.
The scuttlebutt is that Tim Cook may announce a payout in the ballpark of $400B over a three year period, at least this was the number posted in the article's headline. Many analyst have opined on this, and their numbers are truly all over the place.
My Thoughts
As you may know if you are a regular reader, I had a 176 target on this name, and I actually stuck to it. That means that I sold my shares, and exited that position in mid-April. Apple has seen three year trends for both EPS growth (4%), and sales growth (2%) that fail to impress. This is not their fault. The firm has been incredibly successful, and has become very large, but the markets for much of what the firm offers have either become mature (smartphones), or have been reached by competitors in a more timely, and more significant fashion (cloud computing, home assistants).
The dividend yield is currently a paltry 1.5%, and the new tax laws allow the firm to unlock that already mentioned mountain of cash. I also feel that as long as the potential for continued trade conflict with China persists, that there will be a "hopefully artificial" drag upon the firm's equity performance. Still, that return of years worth of profits to shareholders though... is enticing.
How I Am Playing AAPL This Quarter
Carefully. I know, I know, every talking head tells you to be careful. Well, this guy is going to tell you how to be careful. Why? Because you are my people. I expect that whatever tonight's outcome, that both the algorithmic nature the financial markets in 2018, and the broad exposure of this name to the retail investor (no offense), will cause an overreaction. Should the reaction be awful, I like this name on a retest of the February lows that approached 150. Not enough to sell puts there, however.
That all said, I think it very possible that there will be a positive reaction tonight, more likely based on what Tim Cook says than on the actual digits. For this reason, late yesterday, I put on what is known to options traders as a "Bull Call Spread" with an expiration date of this Friday.
Sarge, Help Me... What is a Bull Call Spread?
You pros can get lost. This is for the peeps. No problem, gang. This is one easy way to bet on direction in a way that controls risk when you have an idea, but lack real conviction. Conversely, this strategy limits potential profit as well as risk. Hey, there's no such thing as a free lunch, right? Basically, one gets long a call with a lower strike price, and short a call with a higher strike price in order to offset the initial cost of the long. The difference is your net debit. That is your maximum loss on this position. The maximum gain would be if the shares reach prices above the higher strike price by expiration. In that case, your profit would be the difference between the two less the original net debit. Easy peasy?
My Trade (minimal Lots)
-Long one 165 AAPL May 4 Call at $4.12
-Short one 170 AAPL May 4 Call at $1.86
Net Debit: $2.26
Max Profit: $2.74
No equity exposure. Rock and Roll.
Economics (All Times Eastern)
All Day - Total Vehicle Sales (April): Expecting 17.2M, Last 17.48M annualized.
08:55 - Redbook (Weekly): Last 2.6% y/y.
09:45 - Markit Manufacturing PMI (April-f): Flashed 56.5.
10:00 - ISM Manufacturing Index (April): Expecting 58.6, Last 59.3.
10:00 - Construction Spending (March): Expecting 0.5% m./m, Last 0.1% m/m.
16:30 - API Oil Inventories (Weekly): Last +1.099M.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AET) (3.01), (AMT) (1.60), (ADM) (.52), (AN) (1.00), (BP) (.11), (CMI) (2.93), (LLL) (2.01), (MRK) (1.00), (PFE) (.74), (SMG) (3.31), (STX) (1.33), (UAA) (-.05)
After the Close: (ALL) (2.59), AAPL (2.68), (GILD) (1.67), (MDLZ) (.61), (OLN) (.19), (PLT) (.81)
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