Apple Earnings Versus Fed Stimulus

Did you hear, Apple missed earnings? The news is out and the excuses are flowing, but the stock was down 5% in after hours trading. The impact will be on the NASDAQ 100 Index due to the weighting of Apple in the index. Will it stay down? Will it fall further? It is all about perception from investors looking forward. The new iPhone release anticipation could push the stock up again heading towards the release, whenever that is? The challenge will be emotions versus reality. Still a good company, still able to make money, but are investors willing to buy the stock? That is the question that will have to be answered.

The Fed rumor mill was working into the close on Tuesday with the Wall Street Journal releasing a story the Fed would act as soon as next week based on earnings results. This is starting to be like the boy who cried wolf… how many times do we believe the rumors? The news could be enough to offset the negative impact of Apple’s news, but it is still just a rumor until the Fed makes the announcement.

My question… will it do any good? If they cut rates effectively move to zero, or they add 500 billion dollars in quantitative easing, twists or whatever method of stimulus they prefer, will it do any good? Other than preserve the current valuation of assets, will it do anything to stimulate growth going forward? The answer is no! At least that was the answer the last two times the stimulus was offered. Yes, it provides some psychological benefits in the short term, but it doesn’t build growth in economic terms.

Oh what a tangled web we weave… The more the Fed and government attempt to “fix” things the worse they get. Economic cycles have a natural progression, when you interfere with that progression you may put off the inevitable or even avoid the worse case scenario for now, but eventually the cycle has to progress and complete in order to start the next cycle. The full payment for the financial crisis and the housing crisis are still being delayed with stimulus. Let the cycle complete and lets move on. Until we do we are just delaying the inevitable.

The good news is we get to talk about something other than Europe today. By the way, that is another cycle that needs to be let run out and move forward. Yes, the short term is painful, but isn’t the slow drawn out pain worse? Let Greece start over, let Spain start over, and Italy too if that is what it takes. Yes, there will be a mess to clean up, but we are just delaying and throwing money at a problem that has progressed beyond the current solution.

The market will react lower to Apple to start the trading day. How much depends on how soon the Fed acts. Despite what I believe they will act based on the playbook they have and offer some type of stimulus or liquidity to the markets. The impact of the rally will be less because the markets have not fully corrected to the current economic environment. Thus, the upside effect will be lessened when the Fed does announce. The downside reaction to Apple will be dampened based on the anticipation of the Fed action, and the Fed action will have less of an impact on prices because it lessened the downside reaction to the data. Sound good — right? Bottom line we stay in the current broad trading range with mild volatility hoping for something better. By the way… hope is not a strategy!

The markets are stuck in a news driven environment. The inability to create any sustainable growth going forward puts the market into a cycle of trading on events and news. Earnings are validating what we have been talking about for the last six months, the economy is slowing gradually and it is impacting growth of companies revenue. They have cut expenses to sustain the earnings side of the equation, but the revenue side is slowing and more companies are missing and lowering their revenue guidance. The simple conclusion is the consumer isn’t spending. Asia has slowed considerably, and Europe is a train wreck. All the issues we and others have been talking about for months are happening, and stimulus from the Fed isn’t going to fix the primary problem… economic growth.

If you like short term trading, this is your market environment. If you are not a trader, this is not our market environment. Know who you are before you venture into this current market cycle. One day at a time, one event at a time with a focus on discipline. Cash remains a sector, and one that works for those whose strategies aren’t working in this type of market environment.