Wednesday, April 23, 2014

What the heck? Part 2, Apple's numbers, and the missing piece to this puzzlingly slow expansion...

Twelve days ago I wrote you a letter titled "What the Heck?". It was at the end of the worst week for Wall Street since year before last. Then, lo and behold, the very next week turned out to be the market's best since, I think I heard, last July. And, as of yesterday, the S&P 500's 6-day winning streak was the longest since last September (I think I heard). So, now what the heck?

Well, I'll copy below the list of reasons (that the media's chosen few were blaming for that rough patch) I featured in "What the Heck?", and update my comments in italics:

Earnings season is going to be ugly. And it was, but, so far, only for that first week when merely half (I think I heard) of the S&P 500 companies having reported beat estimates. As of yesterday, 73% beat the estimates, which explains a lot, I suspect, about why the market has rebounded.

A correction is way overdue. Yep, still is.

Maybe it's the rolling over of the high flyers, like Tesla. Yep, that happened, but the broader market, while not cheap like a year ago, isn't flying high like it was in the late-90s---which is the comparison today's bears like to make.

How about biotechs? They've bounced, but I wouldn't touch em...

And what about China? Its economy is showing definite signs of weakness. Still is, but, like I suggested they might, they're doing things to try and stimulate growth (they just reduced bank reserve requirements). That sort of thing can calm markets near-term.

And what about tax time? Could it be that lots of folks are having to sell stocks to pay their taxes? Tax time's over... But I didn't buy that argument anyway...

How about stuff I wrote about yesterday? Change of sector leadership, etc.? Well, some of this year's losers were big gainers over the past few days. I still see change in leadership as a legitimate red flag for 2014---with the same caveats (economic backdrop, liquidity, bearishness, etc.) I listed last time.

So then, what the heck? There has to be a reason, right? People don't sell for no reason. Of course today we're talking buying. Here's what I said last time, except I'll have sellers and buyers switch places: That's right, they---the thousands upon thousands of them---buy for their own reasons. To know for sure, we'd have to ask each and every one of them. And when we're done, I'm guessing we'd want to turn around and ask the thousands upon thousands of sellers what inspired them to sell and accommodate all those buyers at those higher prices. I mean, what makes them feel bad about the future when so many others are scrambling to buy shares of stock?

I'll leave you with fair warning: The fact that virtually every dip since the beginning of this bull run has, in fairly short order, inspired a new round of buying that has pushed the major averages to new records doesn't mean the next one will produce the same results---at least not in short order.

P.s. Today Apple surprised the street with a beat on revenue and earnings. It also announced a $30 billion share buyback, an increase in its dividend, and a 7 for 1 stock split. Shares were up 8% in after-hours trading. Obviously investors loved, at least initially, what they heard. Here's what I heard: Apple's last round of share buybacks worked, in terms of boosting per share earnings (call it smoke and mirrors), although that wasn't the whole story: The revenue beat is legitimately good news, and, let's hope, speaks to an improving global economy---they did better than anyone anticipated in places like China and Japan (it for sure speaks to the still-strong appetite for Apple stuff). The new round of share buybacks, raised dividend, and stock split speaks to Apple's desire to boost its stock price in the short-term. For the long-run, if there's another huge growth spurt in its share price, it'll have to hit it out of the park with the yet to be officially announced new products that its CEO, Tim Cook, seems so excited about.

Lately, this (share buybacks and dividend increases) is a lot of what we've seen from corporate America. What I'm looking for is a commitment to capital investment going forward. Companies have the cash, they just---to this point---haven't had the confidence to expand. And, in my view, that's been the missing piece that largely explains this puzzlingly slow expansion. Stay tuned....

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