Apple's earnings report was as pleasing as a warm slice of mom's apple pie complete with ice cream.

Market Statistics

After a diet of mediocre earnings the desert was large slice of Apple pie complete with ice cream and a promise of more to come. Apple blew away already bullish estimates on every metric available.

Earnings were $13.87 ($13.06 billion) compared to consensus of $10.16 and whisper numbers of $12.18. Revenue was $46.3 billion compared to estimates of $38.9 billion. That is a monster beat of more than $7 billion and a +73% increase in revenue. More than 37 million iPhones sold compared to estimates of only 32 million. iPad sold 15.4 million units, vs estimates of 13.8 million and iMac 5.2 million. The company also guided for Q1 for earnings of $8.50 and revenue of $32.5 billion. They currently have more than $97 billion in cash. According to Bespoke Investments that cash on hand is more than the market cap of 474 S&P 500 companies. Only 25 companies have market caps of more than $97 billion.

Apple shares rallied from the $420 close to nearly $470 before cooling to end at $453. At $449 per share that will make Apple the largest market cap company at $419 billion with Exxon dropping to second place. Apple reported $1.7 billion in revenue in iTunes alone. That is $503 million more than Yahoo's total revenue from all sources of $1.17 billion.

Where do they go from here? How do they beat those numbers going forward? Is this the quarter they top out for years to come? They will open at a new all time high on Wednesday. Is that the end of the road? Google is hot on their tail with Android. Samsung is winning tablet wars in various overseas markets. Over 100 new tablets were announced at CES earlier this month. Can Apple continue to expand sales in the iPhones and iPads? It is entirely possible with the iPad 3 expected to be announced in March and the next iPhone 5 shortly thereafter and that is rumored to be a very significant upgrade. The new Apple TV is also rumored to be out this summer. The Apple CEO said the demand of the iPhone 4S in China was "staggering" and "off the charts." Obviously China has enough people to keep the sales wave rolling. China Mobile with 600 million subscribers is six times the size of Verizon and they are not yet a major customer of Apple.

Of the 60 analysts covering Apple there is only one sell rating. It will be interesting to see if any of those buy ratings change given the explosive results not likely to be equaled in the quarters to come.

Apple Chart

The Apple earnings were also good news for those in the Apple food chain. Suppliers to Apple including Nuance (NUAN), Broadcom (BRCM), Cirrus Logic (CRUS) and Qualcomm (QCOM) also say major gains in afterhours trading. Some of those companies in the food chain may be acquisition targets for Apple given the cash on the balance sheet. The Apple earnings and spikes in the food chain companies will have a positive impact on the S&P at the open on Wednesday. Nasdaq futures are up +24 late Tuesday.

Other earnings included Western Digital (WDC), which posted $1.51 per share compared to estimates of 65-cents. Those results excluded the impact of the Thailand floods. The CEO said progress on restoring capacity damaged in the floods is significantly ahead of original expectations. Vastly higher prices for the lowered quantity of drives that made it to market helped to overcome the loss of capacity. WDC said drive prices rose +72% and greatly increased margins.

WDC Chart

Johnson & Johnson (JNJ) reported earnings of $1.13 that was slightly better than estimates of $1.09. However, shares closed flat after a volatile day because of $2.9 billion in charges for product recalls. The company recalled more than two dozen products in 2011. The company said a slump in elective surgeries due to unemployment and/or uninsured people delaying the procedures cost them sales. This impacted their artificial joint segment as well as surgical implements and supplies. However, the CEO said he felt better about the business now than at any time in the last five years. Shares ended the day flat.

DuPont (DD) reported earnings of 35-cents compared to estimates of 33-cents. Revenue rose +20% to $38 billion. The CEO said after a challenging Q4 they anticipate conditions will improve in many of their industrial businesses for the rest of this year. The beat was against lower estimates after DuPont guided lower last month. The company said weaker consumer sales of electronics using materials produced by DuPont caused that division to see a 33% decline in volume and 18% decline in revenue. The agriculture unit was the only area where revenues increased. DuPont shares also closed flat on the day.

Dow component McDonalds (MCD) shares fell -$2.20 after reporting earnings of $1.33 compared to estimates of $1.30. That was +15% higher than the comparison quarter. Sales rose +9.8%. More than 50% of their profits are now earned overseas compared to 40% just five years ago. The shares declined on the better results because MCD guided analysts higher to the +9% sales a couple weeks ago and expectations were already priced into the stock.

McDonald's Chart

Travelers (TRV), also a Dow component, reported earnings of $1.51 compared to estimates of $1.54. This was a decline from $1.89 in the year ago quarter. The earnings miss was even more disturbing because Travelers bought back 10.5% of its shares during the quarter and reduced the outstanding shares. That increased earnings per share but they still could not meet the estimates. Investment income for the quarter declined -19% and claims due to storms increased significantly. TRV shares declined -4% on the news.

Travelers Chart

Coach (COH) shares rallied after the company posted earnings of $1.18 and beat estimates of $1.15. Revenue rose +15% and there was no weakness for sales of their luxury products.

Peabody Energy (BTU) reported earnings that rose +6% on increased demand from China and other Asian countries. Peabody received higher prices for that coal sold overseas. U.S. coal producers increased exports by 29% in 2011. This easily made up for the -5% decline in coal used by U.S. utility companies. China consumed 14% more and India imported 9% more. Peabody supplies coal that produces 10% of electricity in the USA and they predicted demand between 245 to 265 million tons in 2012. That compares to 250 million in 2011. Earnings or 98-cents missed street estimates of $1.33. They also guided lower for Q1 due to lower demand from the warmer than normal winter.

Peabody Chart

Yahoo (YHOO) reported earnings of 31-cents compared to estimates of 24-cents. However, the decline in revenue to $1.17 billion was a weight on the stock price. The new CEO said the company was "actively involved" in restructuring its Asian assets in a way to benefit shareholders. He also said there would be no further details until the final plan was announced. CEO Thompson also said the company "had to do better" in its performance. That would be an understatement. This was the 13th consecutive quarter Yahoo has missed its revenue number. Shares were down fractionally after the report.

Yahoo Chart

Research in Motion (RIMM) dropped sharply for the third day after the co-CEOs left and a new single CEO was installed. The market is expressing its displeasure with the choice. Some analysts are even dropping coverage on RIMM due to lack of visibility, direction and management competence. The new CEO was on CNBC and it was the most uninspiring performance I can remember. Was there a complete lack of quality candidates applying for the job?

RIMM Chart

VMWare (VMW) rallied strongly after reporting earnings on Monday evening of 62-cents, a +35% increase and beating estimates by 9-cents. They also guided analysts higher for the current quarter.

VMWare Chart

Earnings for tomorrow include BA, COP, NFLX, UTX, SNDK and WLP.

Earnings Calendar

On the economic front there was only one report of note. The Richmond Fed Manufacturing Survey rose significantly for January to 12.0 from 3.0. That is a +22 point gain since the -10.0 in August. The new orders component rose to 14 from 7 and inventories, an indicator of future activity, fell to 9.0 from 23.0. That suggests activity will increase in future months to replace that inventory.

However, backorders declined to -4 from +1. It was a minor move and not a critical factor for January. Employment increased to +4 from -4. Overall this was a positive report.

Richmond Fed Chart

The economic calendar for Wednesday will be dominated by the FOMC announcement and the Bernanke press conference after the meeting. There is about a 30% chance the Fed will announce QE3 but the majority of analysts believe it will come at the March meeting rather than this week. The Fed wants to avoid deflation and inflation is zero today. They would like to see a small increase in inflation to keep prices under control.

Economic Calendar

The market was weak today after Greek bondholders and EU officials came to a deadlock over the haircut for the private sector investors. The private sector debt of 190 billion euros has to be resolved before the troika will agree to complete the terms of the next 130 billion euro bailout scheduled to start in March. They have been trying to get a deal done for seven months now and have been unable to come up with a solution.

In theory the private holders have agreed to a 50% "voluntary" haircut in principal in exchange for some new long dated debt. However, the EU, specifically Germany, wants the interest rate on the debt to be something in the 2.5% to 3.5% range and that would equate to a 75% haircut on a net present value basis. The bond holders are holding firm at 4%. They gave the EU officials their "maximum" offer over the weekend and that offer was decline on Monday.

That increases the threat of an involuntary haircut where Greece will change the rules to force repayment at a lower amount. That would trigger the credit default swaps and negotiators have tried to avoid that scenario. However, at this point the odds are increasing. Analysts now say there are only about 3.7 billion euros of swaps in force and 90% of those have already been collateralized. That means when a swap appears to be in danger of being triggered the writer of that swap must put up collateral to insure their future performance. If 90% have already been collateralized then the triggering of the swaps would not be a major deal.

As Greece draws closer to a default on its debt the worries are increasing that it may default on more than just the 190 billion of private debt. The IMF was saying today that the ECB should also be willing to take a haircut on its loans to Greece. That brings up an entirely new set of problems that EU officials will have to face.

Greece has 14 billion in debt payments due in early March and will default on those payments unless the private sector debt swap problem is solved because the solution is a requirement for the next tranche of bail out money.

The IMF is about ready to pull the plug on Greece. Comments from various officials suggest they are no longer ready to throw good money after bad since Greece is likely to default anyway as their economy crashes and tax receipts decline. The concerns about a pullout by the IMF and a potential default by Greece pressured European banks. U.S. banks also declined as European investors shorted them to hedge against European losses.

To emphasize the decline in the European economy German manufacturing and services giant Siemens posted earnings that declined -23% on falling revenues.

The IMF warned that global growth will decline to levels bordering on stagnation and the entire eurozone will be plunged into a severe recession if the crisis in Europe is not solved soon. The IMF said growth in the world's most advanced economies will be too slow to make a dent in very high unemployment. Under a scenario that does not include a breakup of the eurozone the IMF is predicting a decline in eurozone growth of -4% and global growth to rise only +1.3%. The IMF chief economist said global growth is in "danger of stalling."

The problems in Greece and the negative forecasts by the IMF weighed heavily on the U.S. markets at the open. The Dow declined -95 points and struggled to recover the rest of the day to end down only -33 points.

The S&P closed slightly negative to break its six day winning streak. For four days now the S&P has hovered in the 1310 range with only minor gains but every dip has been bought. The worry over Greece, Apple earnings and the impact of the Fed meeting kept many traders on the sidelines. Volume was very low at only 6.1 billion shares and the second lowest level in 2012.

Note in the first chart below the complete lack of movement. Spikes were sold and dips were bought but the range held. This is a consolidation while traders awaited the events in Europe and the Fed meeting results.

Apple's afterhours gains will boost the S&P at the open but the hang time could be brief ahead of the Fed announcement at 12:15. Remember, we are still at risk of headlines out of Europe and the risk of a Greek default is growing.

After the Fed announcement anything is possible BUT assuming they don't announce QE3 I have growing concerns about the market. We have had a good run of nearly five weeks without any material profit taking. A decline of 2-3% from this level would be very healthy.

Just remember the gains by Apple and the stocks benefiting from Apple's growth will spike the S&P at the open on Wednesday. If that spike is sold hard like the two on Monday then I expect support at 1310 to break.

Current resistance is 1315 and support 1310 followed by 1280.

S&P Chart - 15 Min

S&P Chart - 60 Min

S&P Chart - Daily

The Dow spiked to critical resistance at 12,750 on Monday and then failed to even come close today. With the tech stocks likely to rally on Wednesday there may be another attempt at the highs but the Dow futures are not showing any material strength as of 9:PM on Tuesday. They are up only +21 points. If the Dow were to retest the 12,750 level and fail again I think it would be a sign of a exhaustion from the long rally.

The Dow is very over extended and that strong resistance is very clear for anyone with a charting program. Conversely, should the market catch fire and move over that level it would prompt serious short covering. This is a clear inflection point for the Dow and for the market in general.

Dow Chart

The Nasdaq futures are up +24 points tonight and absolutely flat. There has been no follow through since the initial spike. This suggests traders are not rushing in on expectations for a big rally on Wednesday.

Nasdaq Futures Chart - 5 Min

The Nasdaq shows the same pause after the five weeks of gains. The Nasdaq did end the day positive and should also be positive on Wednesday. If it closes well over 2800 the rally could continue to 2875 but with weakness in the other indexes that move could be blunted.

I am concerned the Apple spike could be a one and done event and the buying climax many analysts have been expecting. I would be very cautious of adding new tech longs at this point.

Nasdaq Chart - Daily

In case you have not caught my concern above I am becoming increasingly worried that a decline is in our future. However, the Russell is not sharing those feelings. The Russell managed a +5 point gain on Tuesday and it was a steady gain all day. Unlike the other indexes that posted a tepid rebound the Russell was bought early and that buying continued all day. The close at 787 was a new five month high.

Fund managers were buying small caps. Bond yields were rising as money was coming out of bonds and I believe it was flowing into equities, especially the small caps.

Wouldn't it be ironic if the day after the fund managers decided to commit funds to small caps that the market made a new multi-month high and then collapsed?

Support 780, resistance 792.

Russell Chart - 15 Min

Russell Chart - Daily

I would be VERY cautious about entering new longs at the open on Wednesday. The Apple spike could be a climatic event and the Fed is always a wild card. If anything I would probably consider looking at some puts on the DIA or SPY if the opening bounce begins to fade.

Earnings have been lousy. Greece is headed for a default cliff and the Fed is not likely to announce any new policy measures. Market expectations are high but reality may be about to bite.

The EOY special is over but we have a few packets left. First come, first served. When they are gone they are gone. 2011 Special

Jim Brown

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