Inaccurate Coupling

Posted: December 18, 2014 in Business, Farros, Oil, Royal, Uncategorized
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Oil has been dragging stocks down.  Incorrectly.  Smart people are getting confused by what to make of “supply & demand” these days… they assume there is somehow less demand and that’s signaling a global slowdown.

Rubbish.

It’s because there is more supply… which could signal the beginning of the end of the horrible, terrible, monopolistic choke-hold the Middle East has held the world in.

Not only is that good news… but that’s GREAT news.

Oil is a proxy for energy… and the cost of energy affects the cost of EVERYTHING.

So when the price of oil goes down because we have new sources of supply, a several things happen:

(1)  The cost of EVERYTHING goes down

(2)  People have more money in their pockets to save & spend… and goodness knows the world spends

(3)  More spending means more corporate profits

Think of it this way:  Instead of paying a trillion dollars a year to the Middle East… we get to keep a lot of that money to save & spend on ourselves.

How in the world can anyone think that’s bad?

UPDATE:  Maybe this whole post is moot?  Maybe the market was just worried about the Fed… because since yesterday’s dovish comments, the stock market has gone up… while oil has continued to go down… to me an appropriate uncoupling that even Gwyneth Paltrow would be proud of. <smile>

Wow.  AAPL flash crashed at 6:51am pst this morning.

Within a minute, AAPL dropped almost 8 points… an almost 7% decline in the highest-valued company in the world.  That deserves a second wow.

It wasn’t based on news…

… because (1) the news on AAPL today was neutral.  While Adam Parker of Morgan Stanley was conservatively trimming his position in all of tech*, including AAPL… Barclays was raising its target to $140…

… and (2) all the news came out before the market opened… so presumably AAPL should have seen selling pressure out-of-the-gate, which it did not.

Instead, all the major selling happened during a 60-second slice of time… at precisely 6:51am pst… clearly the fingerprint of algorithmic trading.

There is chatter that the dive happened because someone tried to sell over six million shares at once… that’s about 10% of AAPL’s average daily volume… so that could have indeed mucked things up.

However, let’s be real:  That’s about a $700 MILLION dollar order… I’m pretty sure someone isn’t panic selling that by themselves on E*Trade… every professional in the world would know to s-l-0-w-l-y sell those shares over a period of time so as NOT to spook the market and therefore maximize the sales price.

I think this gets chalked up to a flash crash… a horrible, gut-wrenching by-product of modern-day “high frequency trading”… essentially computers trying to outdo computers making trades.  Not for the faint of heart.

Note that AAPL had cut its losses by more than half at the close… and if something truly systemic doesn’t get announced (as in, Apple issuing a profit warning or something), then we could see it retrace upward, maybe even this week… and helping this is yet another target raise tonight, this time by Canaccord Genuity (to $135 from $120)… so a nice potential trading pop may be set up for those that think that way.

*  Interesting that just last week Katy Huberty — of the very same Morgan Stanley — raised AAPL’s target to $126.  The lesson?  A bank can have multiple opinion makers… so it’s important to pay attention!

It’s my strong belief that oil’s extreme rise in 2007-2008 triggered The Great Recession (by triggering the subprime meltdown)…

     … but that oil’s extreme decline in 2008-2009 ultimately revived the economy (by putting more money in people’s pockets to save & spend).

(For more on oil and the economy, either search my blog for “oil”… or click here for something I wrote in 2009.)

Over the last few years oil scarily started rising again… back above the $100 level… which has acted as a tipping point in the past.

It did so gradually, though, i.e., didn’t misbehave… i.e., didn’t spike and didn’t cause the price of everything to crushingly spike (like it did in the period leading up to The Great Recession).  The world — including the world economy — is OK with gradual things.

But oil has been in retreat since June.

On Friday — with OPEC deciding not to cut production — oil plummeted…

… and by the end of the day was down more than 10%… to $66 a barrel, something we haven’t seen since (coincidentally) 2009.

And, expectations are that it will keep declining.

Which should be great news… unless of course you’re reading the news headlines, which is pretty much painting the decline as a disaster.

While it is tough news for the energy sector, it’s AWESOME news for 100% of everything else… because lower oil ultimately translates into (I’ll say it again) more money in people’s pockets to save & spend.

Why would the press do this?  I’m tempted to say “attention getting” (i.e., sensationalism), which I believe is partially true, but I suspect it’s also a nice contrast with the other positive news of the day… and there’s certainly news this year to be thankful on this Thanksgiving weekend.

Maybe more to the point:  Why wouldn’t OPEC cut supply, which would increase demand and therefore increase price?

Best guess is they are trying to drive oil prices down… which will make it harder to justify all the great investment going into energy alternatives… not just clean alternatives like solar and wind, but also increasing domestic oil supplies, too.

No doubt, OPEC is playing hardball with everyone in the energy business…

… which, thankfully, helps everyone else on the planet.

P.S.  Now we just have to make sure Europe doesn’t implode, Ebola doesn’t dig in, the U.S. debt ceiling doesn’t collapse, etc., etc.!

On May 30th of this year… when AAPL was at $633 ($90.42 split adjusted), I wrote the following:

Heard It Here First: Apple To $833… Err, I Mean $119

Technically, AAPL hit an interday high of $119.75 today, about six months after I penned that estimate.

I can’t remember what the average analyst estimate was at the time… but I believe it was somewhere around $700 or so (about $100 split adjusted).

When I made my estimate, though, I believe no one on The Street was higher than me… which is why I wrote the headline as I did.

More to the point:  Apple had already had a significant climb… from just below $400 (~$55) in June of 2013… to just above 500 (~$71) in January of 2014… to $633 (~$90) as of the end of May.

That’s a stunning climb for a company the size of Apple.  Most believed — rationally — that AAPL’s climbing was over.

What a difference a few quarters make.

APPL is now being driven by the very things we discussed back in May:  Underappreciated financials and a phenomenal pipeline of products.

I’m not ready to do a victory lap quite yet… but given today’s $119 interday price coincided with Apple becoming the very first company in history to have a market capitalization of $700 billion… I thought it was appropriate to at least mention.

Where does AAPL go from here?

Seems like professional analysts have been falling all over themselves in the last few months — and then again in the last week — to raise AAPL’s target.  Highest I’ve seen is Cantor Fitzgerald’s $143 target… unless, of course, you include Carl Icahn’s $203 figure. <smile>

With oil prices declining (which bodes well for all things Stock Market), I see the excitement over the continued insanely crazy demand for the iPhone 6 (and the earnings that will drive) taking us into the $120’s and possibly to $133

…which pathetically will still only reward phenomenal revenue and earning growth, the largest cash hoard in all of business-dom, and the strongest brand on the planet… with average valuation multiples.

This target is not as courageous as my last one… since it’s not such a big step from here.

What will allow us to take a bigger step?

iOS TV!  Where or where are you??

I just read an interview with a techie that was waxing on about the early days of the Internet.

The interviewer transitioned brilliantly:

For the record, Miller, who is 24, spent “the early days of the web” attending nursery school

Oh, the delightful presumption of youth… !

Lower Oil = More Money In People’s Pockets = Higher Economy = Better Earnings = Better Stock Market

I think that formula says it all… although, it may seem a bit odd given the absolute crushing of the market recently.

No doubt, I have my backside waving in the wind right now.

P.S.  Since the price of oil affects virtually 100% of the cost of everything, this means we’ll all have a few extra bucks in our pockets… and since consumer spending is 70% of the U.S. economy… and the U.S. economy is the commerce engine of the world… this turns out to be a very big deal indeed.

Misleading headlines happen all the time.

The big headline this morning from the Wall Street Journal:

Larger Apple iPad to Be Delayed

That’s what everyone picked up.  You might think, “wow, Apple’s really blowing it… yet another problem!”

If you read the article, though… or even just the subhead below the headline:

Apple Suppliers Concentrating on Meeting Demand for New iPhones

… you’ll find the real reason for a potential delay:  Because they’re swamped just trying to fill iPhone demand.

That’s a tremendous problem to have… unfortunately you’d never pick that up from the headline.

 

UPDATE:  Someone finally got it right!  From the BusinessInsider:

Apple Delays Plan To Make A Giant iPad So It Can Pump Out More iPhones

See the difference?  One suggests something negative… the other gets to the heart of the story — that overwhelming demand for the iPhone is causing Apple to juggle manufacturing — something that is clearly positive in the big picture.