Apple has declined 7.5% or $12 since the product announcement and it is weighing on the tech sector.
I warned about the normal post announcement decline for a couple weeks before the announcement. I said a decline in Apple shares will contaminate the other big cap tech stocks and they will likely decline in sympathy. That has certainly happened and the Nasdaq is paying the price. Apple has erased 84 points from the Dow and 55 points off the Nasdaq since the announcement. Since the Sept 1st high at $165, Apple has lost $67.8 billion in market cap.
The North Korean threat to launch an H-bomb into the Pacific to show the US they are not going to be intimidated caused the S&P futures to tank 8 points Thursday night but the S&P only declined 4 points at the open. North Korea is finding it difficult to get any respect for its illegal activities. I have written several times since the first missile over Japan that dips caused by NK would likely be bought. I have to admit that threatening to set off an H-bomb over the Pacific surprised me and I was shocked the futures dip was not worse. I think most people find it hard to believe Kim Jong-Un would actually take that step because it would be a major spike in the threat profile and could lead to immediate retaliation of some sort. After China "supposedly" cut off all banking relations, the hermit king may be having second thoughts. Talk is cheap but military tests are going to be a lot more expensive in terms of economic impact if they continue.
There were no material economic reports on Friday. Next week is a very busy calendar with no less than 12 Fed speeches including Janet Yellen. Now that the FOMC announcement is behind them the Fed heads are free to spin their own version of the future.
The new home sales and pending home sales are probably next in importance followed by the Kansas and Richmond Fed manufacturing surveys. The second reading on the Q2-GDP is not expected to show any material change.
The Atlanta Fed real time GDPNow for Q3 has flat lined at 2.2% until we get the new economic data next week.
Apple stores opened for business on Friday with the iPhone 8s and watches in stock. When Tim Cook was interviewed at 10:00 PT in California he said the watches and phones were already sold out in a lot of locations "around the world." In previous product launches, when he said the same thing just hours after the open, I mentioned that is something he has under his control. If Apple only ships 100 iPhones to multiple locations to be available for the open, they will sell out instantly and Cook can repeat his claims in hopes of creating some buying hysteria for the product. Phones may be sold out on Friday but the rest of the shipment will be there on Monday to fill orders.
You know Apple knows almost to the phone how many each retail location will sell on the opening weekend. They have done this so many times they have all this history on file. For them to sell out on opening day would either have to be purposeful or bad planning on their part. I seriously doubt it is bad planning by a company that is going to sell 85 million phones in Q4.
We know that preorders for the iPhone 8 were well below the levels seen for the model 7. China Mobile said they received 1.5 million preorders for the 8 compared to 2.5 million preorders for the 7 and 3.5 million for the model 6 in the first 3 days after their announcements. Piper Jaffray surveyed more than 400 iPhone users and 16% are planning to upgrade this fall compared to 15% at the same time last year. However, 66% of iPhone users are on phones more than 2 years old. That means they are ripe for an upgrade in the coming months even if they are not planning on it today.
This order cycle is going to be difficult to draw any real conclusions since the iPhone X is still a month away. There appears to be a lot of interest in the phone and that could be depressing the orders for the model 8. The Apple rumor sites claim the production of the X is going very slow with very bad yields. That means the X will be very hard to get well into Q1. That will increase the hype and make it more desirable. It may also frustrate users with existing phones that are limping along and they may decide not to wait and get a model 8 instead.
Cook said the problem with the cellular connectivity on the watch was going to be an easy fix with software because the watch is getting confused when there are multiple WiFi networks available at the same time and it tries to connect with the WiFi instead of by cell. Apparently, the watch is in high demand despite the glitch. Many tech reporters were happy with it despite the problem.
Personally, I think Apple has reached a buy point. Typically, it falls 4% to 6% in the three weeks after a product announcement. At -8% it has reached short term support at $152 and dipped slightly below the 100-day average. The confluence of the horizontal support at $152 and $148 plus the 100-day at $153 and the 150-day at $149, suggests there are a lot of buy points around this level. Granted, we have not made it through the 3-week period yet but even if it drops $2-$3 more dollars, the odds are good it is not going a lot lower.
The bottom line is that Apple has multiple devices in high demand including the iPhone 7, iPhone 8, iPhone X, Series 3 Watch, Apple TV, etc. There are customers still buying the model 7 because of cost. Six months from now investors will look back and say, "Why didn't I buy that dip?"
Cash Range - Monthly Range
7 - $549 - $649, $22 - $28
8 - $699 - $849, $34 - $41
8+ $799 - $949, $39 - $46
X - $999 -$1149, $49 - $57
Tesla (TSLA) shares crumbled $38 over the last week on multiple issues. The stock was hit with a major downgrade to sell at Jefferies with a $280 price target. Then a headline appeared claiming they were moving away from Tesla towards AMD for their AI processing. CNBC then broke a story they were eliminating some versions of the Model S starting this weekend. Lastly, we learned on Friday that Solar City would pay $29.5 million to settle allegations that it tried to cheat the government by overstating the cost of its installations to get a larger tax credit. It was a rough week for Elon Musk.
Tesla lowered the base prices for the higher end versions of the Model S and Model X to put them more in line with the cheaper Model 3. They are going to discontinue the rear wheel drive versions of the Model S and only offer the all wheel drive versions. This will reduce the complexity of the production lines and allow them to increase production rates. The Model 3 will be the only rear wheel drive car in the lineup. There is an optional all wheel drive version of the Model 3. Tesla is expected to move from production of 1,500 Model 3 cars per month in September to 5,000 per week by December.
Tesla is announcing its semi truck on Oct 26th and rumors suggest initial orders could be in the 100,000 range. This is going to be a major product for Tesla. They are going to need a diversity of products because Porsche will begin delivering its Mission E all electric sports car in 2019 with a price range of $80-$90,000. It has almost exactly the same specifications in range, speed and acceleration of the top of the line Model S except the S costs $162,500. Competition is coming!
Nvidia (NVDA) shares were rocked after news broke that Tesla was looking at moving to AMD and away from Nvidia for the chips to power the autonomous driving functions. The initial headline saw AMD spike and Nvidia decline. The actual story is that AMD and Nvidia are partnering on creating a chip solution for Tesla. It is no surprise that AMD is in the mix because Tesla hired Jim Keller to lead development of Autopilot. Keller previously worked at AMD and led the development of the Zen architecture and the Ryzen processors.
It appears that Nvidia and AMD have a team of about 50 engineers working to develop a comprehensive solution for Tesla. Here is where it gets interesting. I would not be surprised to see Tesla make an acquisition bid for AMD. The company only has a $13 billion market cap compared to $110 billion for Nvidia. AMD has a lot of products that are different from the Nvidia product line even though they both make GPUs. AMD has only existed for years as a foil for Intel. The bigger company could not be considered a monopoly as long as AMD existed. Now with Qualcomm getting into the processor market and AMD and Nvidia in a high tech partnership, it would make sense for Nvidia to acquire AMD. Since GPUs are a small part of AMD's product line, there may not be that much regulatory concern. Is it a long shot? Absolutely, but definitely in the realm of possibilities.
Wal-Mart (WMT) is going where no retailer has gone before. The company is partnering with smart lock maker August for in home delivery. Consumers can sign up for the service and drivers from Deliv will have access to their home and will deliver groceries right to the kitchen and refrigerated goods into the refrigerator/freezer. This is like having your UPS driver pick up your cleaning and put it in your closet. Wal-Mart said this "may not be for everyone" but it is part of the "natural evolution" for the company.
I am having a problem with this concept and clearly it could foster some negative events if the wrong people end up driving for Deliv. Wal-Mart is already in a price war for delivery with Amazon and this is one more step into that battle. Wal-Mart also said it is expanding its online grocery pickup service to include customers using food stamps.
Earlier this week the meal kit company Plated, made famous by Shark Tank, was sold to Albertsons for $300 million and will begin selling/shipping meal kits locally all over the US. Immediately Wal-Mart announced it would begin offering meal kits on its website by December. Wal-Mart is going one step further by offering meal kits from multiple companies rather than sell its own. This is a way for Wal-Mart to test the water before launching its own kits. Wal-Mart assumes no infrastructure and no marketing risk with this introduction.
Amazon (AMZN) announced it had teamed up with OLO (online ordering) to make it easier for customers to integrate with Amazon Restaurants. OLO has agreements with more than 200 restaurant chains with more than 40,000 restaurants on its service and 60 million users. You can preorder for pickup or dine in or you can order and have it delivered. Shares of GrubHub (GRUB) fell 7% intraday on the news but cut that in half by the close.
Amazon has already applied for a trademark application for "prepared food kits composed of meat, poultry, fish, seafood, fruit and/or vegetables, ready for cooking and assembly as a meal." Whole Foods already has meal kits from Purple Carrot but that is likely to fade away once Amazon gets its act together.
Finish Line (FINL) reported earnings of 12 cents that beat estimates by a penny. Revenue of $469.4 million just squeaked by estimates for $469.3 million. Same store sales fell -4.5%. They guided for the current quarter for a loss of 32-40 cents per share and earnings of 50-60 cents for the full year. The CEO said earnings were hurt by a "very promotional marketplace" and "we are planning for a challenging retail environment in the near term." They guided for same store sales in Q3 to be down 3% to 5% and the same for the full year. Shares fell -12% at the open but rebounded to gain 5.5% at the close. FINL shares are very heavily shorted with 29% of the float short. When the drop appeared on six times normal volume traders raced to cover and got caught in a sudden rebound.
Hewlett Packard Enterprise (HPE) said it was cutting 5,000 workers between now and year-end. That is 10% of the current workforce. CEO Meg Whitman said she was cutting "layers" out of the company suggesting she was eliminating some middle management and supervisory positions to save $1.5 billion. The plan to eliminate layers will lead to fewer lines of business and create a simpler, nimbler and faster operating model. Shares rallied 3% on the news.
The earnings cycle begins to pick up again next week as we head for the Q3 earnings that begin the second week of October. We have one Dow component this week and that is Nike on Tuesday after the close. Expectations are very low given all the downgrades on shoe retailers. Blackberry on Thursday also has low expectations and could see a spike if guidance has improved.
Ocean Rig (ORIG) said it had completed its restructuring with a debt for equity transfer. As part of the restructuring, they cancelled 22,222,222 of its treasury shares and 56,079,533 shares held by its subsidiary Ocean Rig Investments. The company also completed a 1-for-9,200 reverse stock split of the remaining shares. This left 8,975 shares issued and outstanding. The company also issued 90,651,603 new common shares to the company creditors. Let's just say the existing shareholders had a very bad day with the 1-for-9200 reverse split.
Another company crushing shareholder accounts on Friday was Versartis (VSAR). The company announced after the close on Thursday the experimental drug for treatment of growth hormone deficiency in children did not meet the goals of a late stage trial. The company said their drug somavaratan failed to show results compared to patients on Pfizer's drug Genotropin. That is how you produce an 87% drop in your share price.
OPEC concluded a meeting on Friday and said they did not decide to extend the production cuts in January. The existing production cuts expire at the end of March. The cartel said they were slowly winning the battle over excess global supplies and it was too soon to decide if the cuts needed to be extended. They targeted January as a decision time frame. Russia's oil minister said OPEC and non-OPEC producers would need to continue working closely well into 2018 to make sure their strategies would correct the problem. He said they would meet again to work out a strategy for the future starting in April. He also said oil demand was rising at a "high rate."
Crude prices traded over $50 for most of the week but we have entered into the low demand period for the next 6-8 weeks. The wild card is the lingering refinery outages. There is still more than 1.0 million barrels of daily capacity offline in Texas and supplies of refined products are falling sharply. Refinery utilization rose from 77.7% to 83.2% last week but it should be over 90% at this point on the calendar. That suggests refiners will be ramping up sharply as they finish the cleanup on their outages. Some refiners have put off planned fall maintenance to capitalize on the high crack spreads while other refiners are taking advantage of the down time to accelerate their fall maintenance to be ready for the winter fuel blends when they restart. Oil inventories should continue to climb and that will eventually weigh on prices.
However, Brent crude is currently $6 higher than WTI and that is creating an export opportunity for our light crude. This will help to limit the normal October inventory buildup and should help support the price of WTI.
Welcome to the health plan death rally. The market was negative and trending slightly lower ahead of the weekend until Senator John McCain announced at 1:30 that he was not going to vote for the new Obamacare repeal plan called Graham-Cassidy. That was the next to last nail in the coffin for this last chance to get something passed before time expires on Sept 30th. While it may not be completely dead, the odds of passage declined significantly with McCain's no vote. Senator Susan Collins will be the final nail in the coffin and she said Saturday she is leaning towards a no vote.
Dow component UnitedHealth (UNH) rebounded $4.75 from the lows of the day on the McCain news. Aetna (AET) rebounded $5 from the lows but faded into the close. The Graham-Cassidy bill would end subsidies to companies like UNH/AET. This headline was responsible for pulling the indexes back from the brink ahead of the weekend event risk. The S&P rebounded 6 points from its 2,497 1:PM low to 2,503 at 3:30.
The S&P spent the entire week in a very narrow range gaining only a couple points a day. For the entire week, the S&P only traded in a 12-point range. That is extremely rare. The S&P gained 1.99 points for the week to close at 2,502.
The 2498-2508 range has been tough resistance with the Dow gaining for 8 days straight but the S&P was struggling at these levels. The Apple decline caused the other big cap techs to be weak and that was a weight on the S&P.
The decline over the last two days was noise. It is not material in a longer-term outlook. In a normal year, the markets routinely make lows for the second half of the year over the next three weeks. There is almost no chance of that happening in 2017. The market is in an uptrend and Q3 earnings kick off in three weeks. Without the normal end of September budget battles and potential government shutdown, there is nothing on the horizon that would cause a major decline. The wild card would be an actual North Korean H-bomb in the Pacific. That would be a game changer.
The longer-term uptrend support is just over 2,450 and it would take a major dip even to reach that level.
Even with the UNH rebound, the stock was still the biggest drag on the Dow with Apple a close second. Note that the rest of the gains/losses were minimal. There was no conviction in either direction. Given the weekend event risk, the lack of a negative bias could be considered bullish for Monday.
Nike reports earnings this week but a $53 stock has little impact on the Dow unless the move is significant. After multiple quarters of disappointments, it should be time for some positive guidance.
The support is around 22,000 with small speed bumps at every 100-point number between Friday's close and 22,000. Resistance is around 22,500.
In the Dow's 9-day rally the average daily gain over the last 7 days was less than 0.3%. That is the lowest volatility for a 7-day period since 1896. So far, in 2017 the Dow has had three consecutive winning streaks of 9 days. That is the first time that has happened since 1965.
The Nasdaq had a tough week. The index fought resistance at 6,460 all week and then gave up the fight on Thr/Fri as Apple's declines proved too much for the index to overcome. The 6,400 level returned as support with the index trading down to exactly 6,400.81 on Friday before rebounding 25 points. This should continue to be initial support with 6,460 solid resistance. We need some catalyst to break us out of this two-week trading range.
The Russell 2000 closed at a new high by 0.4 points. The index traded over 1,450 throughout the day and held the gains despite the weekend event risk. The prior intraday high of 1,452 was tested on three days in July and was almost tested again on Friday. The Russell has rebounded 7.5% or 102 points since the 1,349 low on August 18th. The Russell has outperformed the other indexes for that period and a break over 1,452 would be very bullish for market sentiment. Portfolio managers do not buy small caps if there is any fear of a market correction in the near future. This is a bullish move.
Bearish sentiment rose slightly last week despite the markets making new highs through Wednesday when the survey closes. Bearish sentiment is still below the historical average and bullish sentiment is back over its average for only the third time in 2017.
Now that the Fed decision is behind us and Q3 earnings are three weeks away, there is nothing obvious on the calendar to cause a market decline. Obviously the market does not need a reason and can suddenly drop like a rock at any time, but normally it takes a negative catalyst to really push it over the cliff.
Investors should continue to buy any dips in equities with potentially strong earnings. Once we get past this next three weeks we will be heading into the best six months of the year which start on November 1st.
If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.
Enter passively and exit aggressively!
Send Jim an email
"Glory is fleeting, but obscurity is forever."