You would think there was no other market news with all the headlines about Apple.

Market Statistics

Apple officially announced the iPhone 6 with two screen sizes at 4.7 and 5.5 inches. The phones come with rounded edges, a thinner frame, longer battery life and higher resolution displays. The iPhone 6 will cost $199 (16gb), $299 (64gb) or $399 (128gb). They can be preordered starting on the 12th for availability on the 19th. The iPhone 6 Plus starts at $299 with the same feature progression.


Apple is replacing the Apple Wallet with a new payment process called Apple Pay. This could be a challenge for Ebay and PayPal but they have overcome competitors before. Apple Pay is primarily mobile payments where PayPal is online, mobile and in person payments. The Apple Pay app is already built into the iPhone 6 and uses the Nearfield Communications (NFC) chip.

You use a camera to add credit card numbers to your iTunes Passbook. Apple does not give the card number to the vendors. When you pay for something the vendor only gets a one-time payment number and a dynamic security code from Apple to complete the transaction. American Express, Visa and MasterCard are all onboard with the program. Vendors currently signed up include Bloomingdales, Macy's, Walgreens, Subway, McDonalds and Whole Foods. While that is a big list there are millions of individual stores that may take a long time to understand the program and decide to sign up. This will not be an immediate process. New technology, especially technology that deals with a new payment process, tends to be adopted slowly. It took PayPal 10 years to go from an Ebay only payment process to mobile, commercial websites, debit cards and vendor payments.

The theory is the same for shopping online. Apple Pay is scheduled to be available as a free update to iOS 8 in October. There will be a one-touch button whenever credit card info is requested by a vendor. No card info is shared with online vendors.

Apple also announced a new Apple Watch. Tim Cook said it was the most personal device Apple has ever created. It is not an iWatch, they dropped the "i" and just called it the Apple Watch. The watch comes with Siri onboard and you can text from your watch. It comes with multiple band options from leather, sports or stainless steel. The picture below shows the home screen on the Apple Watch. It costs $349 and will be available "early next year." It will require an iPhone 5 or newer to function. Apple produced an interesting video describing the watch. View it Here


Apple shares declined to $98 on the initial announcement but then rallied to $103.08 after they announced Apple Pay and the Apple Watch. The spike quickly faded as the qualifications were discussed on Apple Pay and the limitations became obvious on the watch. Shares declined to $99 where they stabilized in the early afternoon but dipped to close at $98.


Ebay (EBAY) shares declined to -2% to $53 on worries over the potential disruption of PayPal by Apple Pay. I think this is a long term worry not something PayPal has to worry about over the next year or so. PayPal has a very big head start and does not require a major change in technology to be used. I am sure Apple Pay will catch on with the Apple faithful but Samsung and the other Smartphone vendors are selling far more phones than Apple.


Samsung has a new phone almost every month compared to Apple's once a year upgrade. Apple's market share in the U.S. has fallen to 17.3% as of the end of 2013 with phones running the Android OS having a 74.7% share. Android's market share rose +5.2% for the quarter and Apple declined -3.8%.

Why is the Apple product announcement such a big deal when Samsung and Android are killing them in the market? Clearly it is because Apple is the biggest tech company in the U.S. and they are riding on the coattails of their previous product wins. It will be interesting to see where Apple is this time next year.

They did not announce the 12.9 inch iPad that is already being fabricated in Asia.

Economics

Back in the real world the NFIB Small Business Optimism Index rose slightly from 95.7 to 96.1 but has still not returned to the 96.6 high from May. The May number was the highest level since October 2007. Respondents did say they felt less threatened from geopolitical impacts to the U.S. economy.

The internal components were mixed. Those respondents expecting the economy to improve rose from -6% to -3% and hardly a stunning endorsement by business owners. Those expecting to see an increase in sales fell from 10% to 6%. Those planning on increasing employment fell from 13% to 10%. However, those with current "hard to fill" job openings rose from 24% to 26%. Earnings trends remain quite dismal with only a 1% improvement to -17%. That means 17% more respondents fell negative about earnings trends than those who feel positive. For example 50% could feel negative and only 33% felt positive. The report was ignored.

The Job Openings and Labor Turnover Survey (JOLTS) for July showed the job market was little changed from June. There were 4.673 million openings compared to 4.675 million in June. The job openings rate was unchanged from June at 3.3%. Hires rose from 4.791 million to 4.872 million. Separations rose from 4.520 million to 4.559 million and quits rose from 2.484 million to 2.517 million. The rise in the quit rate suggests that workers feel more confident about finding another job. Layoffs rose slightly from 1.657 million to 1.659 million. That is probably a seasonal factor. The report was ignored.

The report that was not ignored was the data out overnight from the San Francisco Fed. The research puzzled over the fact that the average rate increase expected by the 17 FOMC members in 2014 was 120 basis points. That compared to only 75 basis points expected by the bond market.

Wrightson ICAP's Lou Crandall felt the market's benign outlook for Fed policy could prompt the Fed to act sooner rather than later in order to wake up the bond market. The term commonly used is to "kick the bond market" to wake it up to the coming changes.

The difference between the Fed's rate expectations and the market could lead to a statement change at next week's FOMC meeting. JPM believes there is a 50% chance they will remove the "considerable period" language from the statement. The considerable period is six months according to Janet Yellen. This has led rate watchers to believe there will not be any rate hikes for at least six months from the end of QE, which is expected to be announced at the October 29th FOMC meeting.

If they remove the considerable period language at the meeting next week it could be the equivalent of kicking the bond market. It changes the Fed from "forward guidance" mode to "data dependent" mode and suggests that rate hikes can come at any time. If we suddenly got a big jobs number like 275k to 325K accompanied by a jump in a manufacturing report they could hike rates at the next meeting. They would no longer be hindered by the six-month "considerable period."

Fed doves and hawks appear to be favorable to removing the considerable period language and moving to a data dependent stance. That scares bond traders because the doves are seen as an anchor to low rates. If the doves are agreeable to modifying the stance then their anchor is disappearing.


The market did not like the new revelation. The Dow started off the day down -100 points and after a minor rebound on the Apple news it sold off hard again to trade under 17,000 late in the day. Just when it appeared the markets were poised to trade up into October the fear of the Fed came back to haunt us. I was expecting this in the last half of October rather than in September. Apparently investors fear the Fed more than Putin or ISIS.

The calendar for the rest of the week is light on important reports. However, I would not discount the 9/11 cloud over the market. There are so many rumors flying about planned ISIS and Al-Qaeda anniversary attacks that we could see continued weakness ahead of Thursday.

We could also see continued weakness ahead of next week's FOMC meeting. Now that the rumors of a statement change are flying the investing public may begin moving to the sidelines. I believe that is stupid this far in advance but nobody ever accused the retail investing public of being overly intelligent.


Amazon (AMZN) took aim at Apple by slashing the price of the Android Fire phone to 99 cents from $199. There are rumors the Fire phone had not been selling well but that may have been due to only being available on the AT&T network. Amazon does not need to make any money on the phone because in Amazon's mind it is simply a remote cash register for shopping on Amazon. Amazon shares declined -3.7% on the Apple announcement.


Apple supplier GT Advanced (GTAT) fell -13% after Apple said the new iPhone screens would not be "ion strengthened" which is code for not having the super strong sapphire glass screens. The Apple Watch will have the sapphire screens but production will not be until 2015. Most analysts expected the new phone to have the stronger, scratch proof screens since current iPhones are prone to cracked and scratched screens.


McDonald's (MCD) shares declined -1.5% to a new 52-week low at $91.09. McDonald's said same store sales declined -3.7% in August with U.S. sales down -2.8%. That was bad but it gets worse. In Asia Pacific/Middle East and Africa sales declined -14.5%. This was due in part to the meat scandal in China where a supplier relabeled out of date meat and shipped it to McDonalds and YUM Brands stores. The company said it would negatively impact Q3 profits by 15-20 cents per share. Yum Brands reported last week that China sales declined -13%. For McDonalds the decline in August sales was the fourth consecutive month of declines.


Annie's Inc (BNNY) soared +38% to $46 after General Mills (GIS) announced an agreement to acquire the company for $820 million in cash. That was a 51% premium over Annie's 30-day average closing price. General Mills feels Annie's foods will be a great addition to the GM organic and natural foods portfolio. Annie's strongly recommended shareholders take advantage of this offer. Given the sharp decline in the stock price over the last year I doubt anyone is going to complain.


The fear of the Fed plus a little Alibaba hangover knocked the S&P back to support at 1985 after punching through initial support at 1992 at the open. The selling was strong despite the lack of any material headlines. The banking sector led the declines. The Apple announcement probably distracted traders from the market performance or the selling could have been worse. The close at 1988 was a three week low. Fund managers will have to sell $20 billion in stock to raise cash for the Alibaba IPO but after today I think that particular market drag is behind us. Now the Fed is front and center.

The 1985 level is a clear line in the sand and a breakdown below that level would suggest a significantly lower decline. We never really took profits from the August rebound even though we traded sideways in a consolidation pattern for three weeks. The lack of forward progress may have soured sentiment and once the Fed headlines began to break it produced additional indigestion.

Support 1985, resistance 2007-2007.


The Dow chart illustrates the critical nature of the close. The index closed just over critical round number support at 17,000 and a breakdown here could be dramatic. McDonalds and the banks were the biggest factor in the Dow's decline. We have a lower low and a lower high so the Dow needs to rebound strongly at the open on Wednesday or the bears are going to pile on to any weakness.

The Dow and S&P are at a pivotal point for September. A breakdown here could poison performance for the rest of the month.



The Nasdaq Composite also closed right on critical support at 4,550 and Apple shares could see further weakness in the coming days. Apple typically declines in the days following a product announcement and that could weigh on the Nasdaq.

Like the Dow and S&P a break below 4,550 could be dramatic and poison sentiment for the rest of September.



Not to be outdone the Russell 2000 also declined to critical support at 1160 and actually closed -2 points under that level. The Russell followed the big cap indexes almost perfectly so at least we don't have the case of the small caps leading us down. The Russell is neutral today.


The Russell 3000, the largest stocks in the U.S., closed right on support as well. This was a broad based bout of selling that impacted the entire market not just certain sectors.


Historically the month of September is negative. Dating back to 1950 the average September loss is -0.5%. Dating back to 1990 it is -1.1%. However, four of the last five Septembers have been positive with an average +2% gain. While history is a guide and not a guarantee this is encouraging. Historically when August is positive September is normally positive.

I was expecting a positive market in September but I was not expecting a sudden burst of Fed fear ahead of the September FOMC meeting. I thought we had another month before the Fed reared its ugly head. Now we have six days for the market to digest and feed on the rumors and analyst projections before next Wednesday's Fed announcement. That is plenty of time for unpleasant things to happen.

Enter passively, exit aggressively!

Jim Brown

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