Apple Fail
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7/25/12

The market was up strongly at open this morning against an earnings miss last night by Apple (AAPL).  Earnings per share were short estimates by over 10% and sales were 6.0% below expectations.  The market finished yesterday strongly on a Wall Street Journal “inside” scoop that the Federal Reserve was ready to act aggressively to lower unemployment and increase domestic growth.

AAPL sales were affected by slower sales in Europe and consumers waiting to upgrade phones until the new iPhone 5 is introduced in the fall.  Before you think the sky is falling on the AAPL empire, note net income was up 21% from the same quarter last year.  AAPL fell last fall after missing estimates because customers were waiting on the iPhone 4S.  The iPhone accounts for more than half of AAPL’s sales.

The iPhone 5 is not expected to hit the street until the fourth quarter.  The company lowered estimates for the third quarter to $7.65 billion on $34 billion in sales.  This was below analyst’s estimates of $10.23 earnings per share on sales of $38 billion.

AAPL sold 17 million iPads in the second quarter, filling over half the world demand for pad devices.  AAPL settled a copyright suit last month and just introduced the iPad in China last week.  We recommend AAPL at less than $560.00 per share.

The company will start paying a dividend, is growing at 20% and selling for a low multiple of less than ten times next year’s expected earnings.

You can read the Wall Street Journal article, Fed Moves Closer to Action, which turned the market around yesterday afternoon.  Talking heads made a point that the author, Jon Hilsenrath, is well connected to insiders at the Federal Reserve.  Na Na!

This is a puff piece designed to move the market.  We fear it will fail.  The Federal Open Market Committee (FOMC) meets next Tuesday and Wednesday.  They set policy for the Federal Reserve.  If they don’t come out with a quantitative easing program Wednesday, the market is going to vote a fail.

More than 600 protesters in Anaheim broke windows and stormed a City Council meeting to demonstrate against the police shooting of a suspected gang member.

Patrons take cover.  Courtesy of Reuters

Demonstrators threw patio chairs and bricks through five store windows in a small mall.  Customers took cover and no injuries were reported.  The protesters gathered yesterday afternoon at four p.m.  What are they going to do when they have to go to work?  It always puzzles me how people have time for this.  The U.S. looks more like Greece every day!

New Home Sales reported this morning and dropped to 350,000 from 382,000 last month.  Last month’s number was adjusted up by 13,000.  Egan-Jones cut Italy’s credit rating to junk today.  The U.S. market is rallying.  Don’t get the cart ahead of the horse.

Tomorrow morning Durable Goods Orders are expected to drop to only a 0.4% gain in June, less than one-third the 1.3% growth rate in May.  Initial Unemployment Claims are expected to stay high at 380,000.  Friday morning will see the U.S. GDP drop from 1.9% to an expected reading of 1.5%.  Some believe it may drop even further.

In a strange twist, the market may rally through the end of the week if the readings are terrible.  This will be seen as building pressure on the FOMC to act next week.  We don’t think that is going to happen.  The better the market looks next Monday and Tuesday, the less reason the FOMC has to start quantitative easing.  Buy the deals but beware of the traps for now.

The mailbag:
Can you help a dumb Polish kid out?  What does quantitative easing mean?—Long-Term subscriber J.P.

John’s reply: Quantitative Easing is the term Ben Bernanke used to describe the Fed operation of printing more money.  They actually don't print it anymore, they just make an entry on their computer balance sheet and "create" a $trillion dollars.  Pretty neat huh?  They then buy Treasury bonds with this newly created money.  Now rather than just a computer entry, they have a Treasury bill that the government owes them the money back.  They can also loan money off their balance sheet to other Federal Reserve Banks.  And that is Quantitative Easing.

Editor's note:  We try not to use 'insider language' in our articles.  If you ever have a question, please write for clarity.  Our goal is to help you, not confuse you.

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