Apple earnings not so sweet

Briefly, as the beta chasers continue to conveniently compartmentalize all of the encroaching “badness,” there isn’t much sense at this juncture to rehash all the numerous and accruing issues. However, I wanted to spend a minute or two on Apple’s (AAPL) supposedly spectacular earnings tonight: Headlines read that Apple’s profits leapt 67% and revenues increased 24%. Sounds good, huh? However, a closer look of Apple's balance sheet reveals a rather bulky increase in both Other Assets and Accounts Receivables. Other Assets (which are probably factored receivables) and Accounts Receivable increased a combined total of 54% year-over-year, making the reported increase of 24% in revenues look fairly suspect. It’s quite obvious that Apple’s retail chains are likely choking on a sizable amount of unsold inventory.

Can't stand prosperity

The latest Investors Intelligence survey of market newsletter scribes is now showing a somewhat disturbing chasm between those who are bullish and those who are bearish, 60.2% v. 21.5%. This is the widest margin separating the bulls from the bears in over a year. Contrarily, a bearish indicator. Whose remaining to buy? The narrowness of the market in recent days coupled with some pretty frothy sentiment indicators has a look and a feel of yet another interim top, at a minimum. Furthermore, I would not be surprised that this is also about all she wrote for some time, given the growing evidence of both peaking earnings and a sowing real economy....Why is Alan Greenspan giving us a nearly daily update on the chances for a recession. Apparently, today he pronounced that odds are now 49.2% for a recession (kidding). He says the odds are 50/50. Really, how useful is this to anyone given his abysmal track record of forecasting and spotting bubbles? Although, I’ll give him credit for finding one in recent weeks, China. The prediction of “50/50” essentially guarantees that he will be correct with his recession forecast. That and his China call may be his first accurate calls in over two decades. Speaking of China, Bloomberg is reporting that the Agricultural Bank of China is “saddled with $100 billion of bad loans,” and, “may move some of its 14,500 rural branches to independent companies to speed up a government bailout and sell shares for the first time.” Agricultural Bank of China is China’s fourth-largest bank which serves the majority of China’s farmers. China’s government has spent billions of dollars over the past decade bailing out some of its largest institutions. But what is surprising about the ailing Agricultural Bank of China is the fact that some of their largest banking institutions apparently cannot even stand prosperity. According to Bloomberg, some 23 percent of its loans are currently in default. It’s becoming increasingly evident that quite literally, the world cannot afford a recession. News such as this might explain the apparent acts of desperation by the U.S. Federal Reserve in recent months. How severe might an economic retrenchment become if given the chance to gain traction? Maybe this notion explains why Ben Bernanke was motivated to slash the Fed funds rate so aggressively in September even as the Dow Industrials was resting a mere 3.8% from its all-time high. Perhaps the world is as fragile as their actions might indicate?

Goldman Sachs (GS) defies gravity, logic…. reportedly working on splitting the atom

As mentioned last night, Microchip Technologies (MCHP) warned about its current quarterly results and guided its ensuing quarter lower as well. The stock was actually punished today by the tune of 12+%. This has been a rarity among members of this cult (semiconductors), whose normal method of operation usually entails the declaration that business had improved dramatically over the past few hours encapsulated within an earnings warning and therefore everything will be just fine. Absent, however, with this one was any mention of a massive stock buyback. Perhaps this particular operator may deem cold hard cash a useful commodity amidst the very probable likelihood of global recession in 2008….. But the madness was present again in other areas. Goldman Sachs (GS) set a new all-time high today eclipsing its July high of $233.94/share. Looking back at the wild unabated orgy of just 60-some days ago made it seem highly unlikely that Goldman and its ilk would soon match those recent all-time highs for quite some time; especially after what we have since found out about subprime, hedge funds, structured credit and derivatives-- essentially its entire clientele. Chalk-up another company whose market-cap has rebounded by an astounding $33-billion in roughly 55-days from its August 16th lows of $157/share closing today at $239/share. Even if a good portion of their client-base have been dealt a second chance by an abysmally misguided U.S. Federal Reserve and its egregious and immoral policy, it seems unfathomable that investors can possibly delude themselves into believing that what lies ahead for Goldman Sachs could even remotely approach expectations by this same touched crowd what they had believed might lie ahead pre-credit meltdown. Even with the Fed’s assistance, there is a near zero probability that that euphoric environment of mid-July, where the battle cry was “liquidity, liquidity, liquidity,” will be matched anytime soon. Recall that that was just a few weeks after Blackstone Group (BX) had wrung the bell for the private equity bubble. Even still, if you wanted to see a sick looking market, today was it. We’re fast approaching a market where the same people (or computer) trade pieces of paper back and forth amongst one another with essentially no discern for value, while the real economy sinks. It was yet another day of very narrow participation that was focused on the indexes almost exclusively; most likely a function of programmed buying of futures. Semiconductors were especially weak as I sense that their day of reckoning may be nigh…. And after the close, yet more evidence that ex-financial engineering, the rest of the economy is slipping. Alcoa (AA) reported Q3 earnings of $0.64 per share, $0.02 worse than the consensus of $0.66 per share. Revenues reportedly fell 3.2% year over year to and less than consensus even as aluminum prices remain near record levels. The company also felt that given the bad news it was in need of an announced buyback to wash away the bad. All financial engineering, all the time. The company said it has increased its share buyback authorization from 10% to 25% of all shares outstanding. Shareholders must wonder way the company hadn't thought of buying back all this stock when it traded considerably more cheap about five years ago. Obviously cash will be of no use to Alcoa in the even we slip into a recession? Also after the close, another former Dow component, International Paper (IP), warned that its Q3 earnings will be less than analysts' consensus estimates-- $0.52 versus $0.63 per share expected. And lastly, ChevronTexaco (CVX) warned too of lower projected earnings due to a sharp decline in refined-product margins for its downstream business. There was an excellent article in the weekend version of the Wall Street Journal that describes the recent “backwardation” of the oil futures market and how all kinds of companies had made some pretty bold bets on the opposite (contango) to continue. Even blueblood brokerage, Morgan Stanley (MS), apparently had found this “storage trade” to be too irresistible, thus getting itself into the oil storage business. As we reflect back on this period, there are so many instances of such that will make us shake our heads in wonderment and ask ourselves, “Shouldn’t that have been a sign?”

Headless (and brainless) (4) horsemen

Apple (AAPL), Research In Motion (RIMM), Google (GOOG) and Amazon.com (AMZN) (Read: The so called four horsemen) were all strongly positive today and each simultaneously pegging fresh new 52-week highs. Actually, with the exception of Amazon, all of them set new all-time highs. Is business simultaneously this good for all four of these names? Or is this "coincidence" a function of absurd copious amounts of liquidity and all the same computers programmed to chase these same respective chart patterns? This would be about the time Munder rolls out their “Four Horsemen Fund.” In spite of a continued drift of bad “real” news, the Quant’s among other momentum-based hedge funds now in charge of roughly half of the daily volume on any single day, continue to operate on some kind of “higher” imaginary plane deluded by the belief (or programmed) that these names are mostly immune from any slowdown in GDP. What if, just perhaps, even if just a 20 to 30-percent chance, that we are either in or on the cusp of recession? You don’t think this impacts the number of business people that think they need to check their e-mail on a Blackberry every 10-minutes? Or what about a company that is essentially a pure retailer, albeit an online version, Amazon.com? And what about online advertising and its impact on Google? We saw in 2000 thru 2003 how leveraged companies like Yahoo (YHOO) were to economic activity vis-à-vis online advertising. Mortgage and real estate brokers were among the biggest advertisers up until about six months ago. Doesn’t this evisceration of a major client eventually impact the “pay for click” model? And of course, as folks continue to struggle with meeting rent payments or paying for food and gas, how important on the margin will discretionary things like Apple iPods and iPhones become? From the lows on August 16th, Apple’s market-cap has rebounded from $94-billion to $140-billion. Research In Motion’s market-cap has nearly doubled from the lows on August 16th from $32-billion to $65-billion. Google’s market-cap has risen from $150-billion at its August 16th low to $188-billion at today’s close—an addition of $33-billion in market-cap in roughly 54-days. In doing so, it has also eclipsed the market-cap of Wal-Mart (WMT) as of today and is now the 11th largest company in the world. Just those three companies by themselves have appreciated a combined $112-billion in market-cap during this span. Amazon’s 54-day rebound is less impressive. But for it to be within spitting distance of its all-time year 2000 high is something I never would have envisioned. It, a retailer, now trades at 132-time trailing 12-month earnings and 50+ times expected forward earnings. It also trades at 4-times revenues---a retailer!!! But while beta was being chased after mindlessly (quite literally, via the quant's computers), oblivious to the world, Ryder System (R), a component within the Dow Transportation and a proxy for the real health of the economy, was forced to cut its profit forecast. Most ominously, it said that softness in the U.S. economy has spread beyond the housing sector. The company issued a statement saying that, "Economic conditions have softened considerably in more industries beyond those related to housing and construction." The Dow Transports, already far from confirming the recent highs in the S&P 500 and Dow Industrials traded down nearly 1.5 percent on the day. Also worth noting, copper was down roughly 4-percent today. Copper is a metal that will go down even as gold goes up due to its intimacy with real economic activity. The dire tone from Ryder showed up as tepid cautiousness across nearly every sector except for the ones impenetrable by human thought (read: The Quant’s computers) as the supposed GDP-immune beta stuff traded within its own little bubble (quite literally). The day was a near identical page from the final days of the tech and dot-com playbook when breadth was downright shabby except for the ones that ended with a “dot” and “com.” Finally, after the close of trading today, Microchip Technologies (MCHP), a specialized semiconductor products manufacturer, warned that of 2Q earnings of 35-cents versus a Wall Street consensus of 37-cents. It’s also warned that revenues would fall between $258 million to $259 million versus an expected $267-million. Remember, these companies essentially set their own guidance usually with room to spare. The company also revealed that its September quarter book-to-bill ratio was less than 1.00, or 0.94. They also said that it expects that December net sales will be down sequentially. The warnings and lowering of guidance within the semiconductor space is running at a high enough rate that I believe we are fast approaching an illuminating moment for those foolish enough to have followed Wall Street analysts into this latest brier patch.