The long awaited iPhone announcement for the Verizon network was met with selling in both stocks. Verizon was hit hardest on pricing for the phone.
Be careful what you wish for. Verizon may be wondering if they did the right thing by taking on the iPhone. The market has punished Verizon for this marketing win. A Bloomberg analyst said after four years of waiting Verizon's win could be very expensive. They estimate Verizon could be out $3 billion to $5 billion in subsidies for customer purchases this year alone. This will cut into profits and significantly increase the load on the network.
A UBS analyst projected Verizon to sell as many as 13 million of the devices in 2011 and every customer gets the equivalent of a $400 check from Verizon because the company pays Apple that $400 for you. Barclay's projects 9 million phones because most AT&T iPhone customers are locked into a two-year agreement. Barclay's believes the subsidy would be in the $350 range because Apple needed Verizon's volume to combat the onslaught of Android products and probably discounted the phone to Verizon.
Obviously Verizon will be a winner in the long run or they would not commit to that kind of initial outlay. Barclay's believes it will add 2.1 million new subscribers to Verizon's base in 2011. AT&T is only expected to add 650,000. AT&T is expected to sell 6 million iPhones in 2011, down from 15 million in 2010. That is quite a hit for AT&T. Data plans are turning into a cash cow for the network providers. The cost for a data plan at AT&T rose by 20% in Q3 and +19% at Verizon. It takes about six months for AT&T to recover its subsidy from the customer in the form of monthly access charges. Verizon's data plan for the iPhone will be unlimited and free from the caps imposed by AT&T. That is another negative for new AT&T iPhone sales.
Apple spiked +$6 to a new high on Monday but failed to add to those gains on Tuesday. Apple has gained $20 in January. Apple will report earnings on the 18th and at least one analyst is predicting they will announce a stock split. Jefferies analyst, Peter Misek, raised his price target on Apple to $450. He sees Apple earnings at $22.06 per share in 2011 with the consensus well back at $19.27. That consensus estimate was only $17.89 three months ago. That shows how rapidly the targets are changing. Apple has a card yet to play in the CDMA iPhone. They did not do an exclusive agreement with Verizon. That means Apple can also sell the phones to China Telecom and SK Telecom for use in Asia and that is a much larger market. Also, every new iPhone customer becomes a prime candidate for an iPad. Lastly Apple is expected to launch iPhone 5 later this summer for another complete refresh cycle. JP Morgan believes Apple will ship 67.3 million iPhones in 2011. That number truly boggles the mind for a product that did not exist in any form four years ago.
The big loser here is AT&T and the company's stock is dropping like a rock. AT&T is down -10% since the mystery press conference was announced. Potential iPhone purchaser are no longer forced to endure a network with capacity limitations and now have a choice. The choice will most likely be Verizon.
On the economic front the news was mixed. The weekly Chain Store Sales dropped sharply by a whopping -3.2% compared to a +0.4% gain in the prior week. The first week of January has been posting declines for several years. The after effects of the blizzard just accentuated the decline this year. Sales should pick up in next week's report before they dive again as a result of the new blizzard moving towards the Northeast. Sales for all of January are expected to be in the 2.5% range.
The Job Openings and Labor Turnover Survey for November showed an increase in positions but only a slight increase. The headline number rose from 32.1 to 32.2 in what could only be considered growth at a snail's pace. Because this is a lagging report with no material change the market ignored it.
In another November report the Wholesale inventories declined -0.2% compared to a gain of +1.7% in October. Analysts had expected a rise of +1%. The decline suggests inventories will not contribute to a gain in GDP in Q4. The smaller rate of inventory growth could mean a stronger manufacturing sector in 2011. The inventory to sales ratio fell to 1.15 and the lowest level since June.
The reports today were just filler as we wait for the Beige Book on Wednesday and the inflation reports on Thr/Fri and Intel's earnings on Thursday. Everything else is just noise.
With all the activity in the tech sector you would think Intel would have good earnings. Unfortunately most of the new products don't have Intel chips. Intel's sales gains will come from an increased number of servers to handle those smart devices.
Qualcomm (QCOM) should benefit from the Verizon iPhone deal. That opens up an entirely new consumer product Qualcomm. They are assumed to be the supplier for the CDMA phone and will also benefit when Apple offers the phones in Asia.
Despite the expectations for a decent earnings cycle analysts are downplaying the hopes for big gains in the stock prices. Alcoa reported earnings on Monday, beat the street by 3-cents and raised guidance saying aluminum demand could rise +12% in 2011 on top of 13% growth in 2010. Prices received rose +17% per ton. Shares were up +7% for 2011 ahead of the announcement so it is no surprise the stock has been flat this week. Buy the rumor, sell the news.
That may be what we see from the majority of earnings reports. Intel may be the exception since their stock has been flat for the last two months. Any good news could revive interest but less than stellar guidance could just as easily send it lower.
Intel agreed to settle a patent suit with Nvidia by paying $1.5 billion over the next five years and cross license certain products. The deal was seen as a major win for Nvidia. It is a major win for some readers as well. I pounded the table in this column for Nvidia many months ago because of their new GPU product. That is a slide in card with 240 processors that fits into a desktop PC and elevates it to the level of supercomputer status. Most desktops that accommodate the cards can accept up to four of them for 960 processors in one PC. The technology is gradually catching on as a way for engineers to have the equivalent of a supercomputer on their desk for under $10K. I believe Nvidia will continue to rise but I would wait for some profit taking before jumping on board.
On the positive side Sears Holding (SHLD) and Tiffany (TIF) both upgraded their forecast for earnings. Sears said earnings could be twice what analysts were expecting and their shares rose +6%. Tiffany said holiday sales were brisk. On the downside Talbots said it expected a larger Q4 loss as sales trends declined. Talbots caters to women over 50 and operates 584 stores in North America. Stiff price competition and cold weather were blamed. Talbots has been trying to attract younger women without success. Talbot shares fell -17%.
The Alaska Pipeline shutdown helped push oil prices back to $91.13 at the close for a gain of $1.88. The shutdown was caused by a minor leak in a booster pump station. Only 18 barrels have been leaked so far but it is in the basement of the pump station. That is about 750 gallons of oil and I am sure that is making a significant mess plus create a fire danger.
The TAPS operator Alyeska is installing a 157-foot section of pipe to bypass the leak so the line can be restarted. Winter is the worst time for an outage because once the oil in the pipe cools it begins to turn to wax and clog the pipes and pumps. They want to get the flow restarted ASAP to lessen the danger of a larger stoppage from freezing. They estimate it will be restarted before Friday.
The pipeline carries about 600,000 bpd over the 800-mile length. In addition to the pipeline stoppage an upgrader at the Horizon oil sands project in Alberta has been offline since Thursday due to a fire and that knocked out 115,000 bpd that flows to Midwest refineries. The fire was in a coker unit where two of the four drums were damaged. Canadian Natural Resources (CNQ) said they were going to try to restart the unit at half of capacity using the two drums that were undamaged. They will try to repair the other two while the unit is in operation. This is a major expense for CNQ and it will not be a quick fix. The company said they would have to lower its production estimates for 2011 and cut back on some planned capital spending.
Brent Crude has been on a rampage lately with Brent closing at $97.54 today, +6 over the price of U.S. WTI. The problem with Brent is falling output in the North Sea due to maintenance, a new inspection program to prevent a Gulf spill type accident and accelerated depletion. The output from the North Sea has declined nearly 25% in the last three years.
Crude Oil Chart
The markets started off in positive territory but struggled to stay there until the close. The Nasdaq traded briefly in negative territory at 2:PM as the result of a sell program in the S&P futures. All the indexes took a substantial dive on the sell program and all recovered pretty quickly.
The S&P rallied once again to resistance at 1278 and that is where the futures sell program triggered. I don't want to make a big deal out of describing technicals today because nothing happened. Volume was light at a hair over 7.0 billion shares. Traders are waiting on the Beige Book report and Intel's earnings. Actually they are just waiting on Intel.
This is the week before expiration and we had a couple days of minor declines. This was just a minor snapback rally after overnight gains in Asia tickled the shorts in the U.S. and forced a cover.
Support at 1258 has not been tested in over a week and resistance at 1278-1280 is solid as a rock. Be patient, the current trend is sideways and range bound. Intel's earnings should change the trend.
The Dow rallied to exactly 11,700 and strong resistance on the strength in Hewlett Packard, American Express and Chevron. Most of the gains occurred on the short covering at the open but Hewlett received an upgrade that helped keep the index in the green. Chevron was up on the spike in oil prices and positive guidance and American Express on the sudden resurgence of interest in financials. Just slightly over half the Dow components were positive so there was definitely no sudden burst of bullish sentiment.
The Dow has round number resistance at 11,700 but we did move over that level for one day on the 5th and test the stronger resistance from August 2008 at 11,725. When that level held the Dow began to decline to touch support at 10,600 on Monday. Today was a pressure equalization day. Shorts were lightly squeezed and a few bulls prevented a loss by jumping on the 2:PM dip. It was a nothing day.
The Nasdaq benefited from a +9 gain in ISRG and HTWR plus strong gains in APOL, SHLD, GOOG, ININ and SINA. Those are not your normal Nasdaq leaders with the exception of Google. Apple's minor decline did not help or hurt and the target upgrade to $450 will eventually be a benefit.
The Nasdaq added +9 points to 2,716 and closed at a new high. It is hard to say anything bad about a new high. The volatility is increasing as we near expiration and Intel's earnings. The Nasdaq's gains moved it out of the range for the last three days so that is mildly bullish. However, it was still a passing time day ahead if Intel. I would not read too much into today's action.
Nasdaq Chart - 15 Min
Nasdaq Chart - 90 Min
The Russell showed a little more strength and has recovered from the dip to 780 support and even closed over initial resistance. The stronger resistance at 800 is still waiting but I liked the gains today even on low volume. The A/D on the Russell was 1145 advancers, 710 decliners with 152 new highs and only 4 new lows. That is pretty favorable statistics given the earnings risk ahead.
If we did not have the Intel earnings on Thursday I would probably be more bullish because of the Russell but I am probably just seeing the glass half full.
Russell 2000 Chart - 90 min
In summary I would be careful with longs AND shorts ahead of Intel's earnings on Thursday evening. That is by far the most important event of the week. Intel could give us a blow off top or that sudden sinking feeling with poor guidance. The market is pried to perfection today and the risk level is high.
We did not hear much about the European debt sales today but those are still a worry for the days ahead. The move by the ECB and the mystery investor (China, Federal Reserve?) into Portugal's debt over the weekend has calmed those fears but they can erupt at any time.
Don't apply too much credibility to the market action today. We were just passing time ahead of Intel.
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