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.

Buffett Bear buy is bull. Bull’s buying perseveres besides

As suspected, the rumored cash infusion by Warren Buffett and others in flailing brokerage firm, Bear Stearns (BSC) was discredited by David Faber of CNBC early this afternoon. Faber, incidentally, is about the only journalist associated with CNBC US that likes to actually confirm the validity of his information before reporting it as news. Faber confirmed this afternoon that the rumored buy-in of Bear Stearns (BSC) was indeed, bull. It’s a shame that the established media allows themselves to be played like a drum by those interested parties that may have indeed benefited from yesterday’s rumored 20-percent investment by Warren Buffett among others. I doubt that yesterday’s action in Bear Stearns shares will elicit anything more than a sideways glance by Christopher Cox and the SEC. This oversight agency is about as useful as I am in policing this kind of stuff. In spite of the apparent hoax, only about a-third of yesterday’s gains in Bear Stearns shares were given back today. Also, the broader market has already moved onto other things even as news of the now debunked Bear Stearns rumor ignited an across the board rally in nearly everything yesterday. As news of the hoax gently wafted over the market today, it was summarily dismissed as a reason to give back even an inch of yesterday’s broad gains. It’s almost as if the market is unable to discern the change of events as being a catalyst to offset the prior day’s gains as logic might suggest it should. It was useful as a catalyst that got us here. That’s all that matters. Thank you, but we’ll no longer be in need your Bear Stearns rumor now that we’re already here. We don’t care that what got us here has since been fully debunked. We’re here and that’s all that matters. Of course, the additional rally today on top of yesterday’s now debunked Buffet Bear buying rally sets us up for a mere 88-point gain tomorrow in the Dow Industrials and a 16-point gain in the Nasdaq for a 3Q closing that would put us at their respective all-time and 52-week highs---even with everything thing that transpired between June 30th and tomorrow’s final day of the third quarter. Yea, makes sense, huh? Just imagine how bullish a global nuclear war might have been for stocks during the quarter? Nice ramp-job, Fed. I mean, it’s obvious that the world’s central banks were sent into panic mode this quarter given the deep freeze of credit, subprime mortgage markets, hedge funds and bank and mortgage bailouts. I can only imagine how much fiat money was thrown at the problem if we had an accurate way accounting for all of it. But did they have to make it so obvious? It just simply defies logic that all that is need tomorrow is just a moderately positive day for both of these indexes to peg their 52-week highs on the final day of a quarter that witnessed a plethora of such disturbing market events. I can only imagine that whatever the size of the liquidity injection and all of the ancillary moral hazard that it eventually fosters; a sum that is capable of papering-over such serious issues in such short order is also going to show-up as some pretty serious inflationary pressure in coming months. You might want to top-off your gas tanks at the next fill-up.

Buffett Bear rumor buttresses stocks

Today we received word, via a New York Times report, that Warren Buffett and several interwoven parties probably somewhat dependent on the survival of Bear Stearns (BSC)-- hedge fund in drag, may be about to take a 20-percent stake in the otherwise doomed broker. Markets seemed on the verge of fading into the close until this "rumor" hit the tape which in turn ignited a pretty furious rally, especially among financials. The Times said, “Other investors who have expressed an interest in buying a minority stake include the Bank of America, Wachovia and two Chinese institutions — the Citic Group and China Construction Bank, these people said.” Of course, I remind readers of the Hovnanian (HOV) rumor as it concerned a possible Buffet buyout of that decaying homebuilder last month that never actually materialized. I don't even remember a dismissal of that rumor, it just kind of faded into the background. Buffet was also cited by the bulls on several occasions this summer when his recent investments in railroad stocks this summer seemed to have translated into robust rallies for the entire market as that news had been deemed good for the entire planet, per the bulls. Although, true as it concerned his buying of some railroad stocks, it was certainly not true as far as acting as a proxy for everything else given what later transpired in late July and August. I’ll also note that on or around the news of his railroad buying, it turned out to be a peak for the railroad sector in general. Not to disparage Buffett as being a magnificent investor, he is, but the very act of him spending money on something does not translate into being bullish, necessarily, for anything else. But again, Buffet’s name is used on so many occasions as being the subject in a number of major looming investments or buyouts which is almost always deemed to be good for the entire universe. Yet, so often these rumors turn out to be false or at least misleading. On the other hand, when Buffett throws cold water on the bull’s party as he has done on several occasion in recent years, he is often dismissed as being irrelevant, or out of touch with the "new economy," etc. Its my opinion that Buffett wants to have nothing to do with Bear Stearns as an investment, let alone to be a party to a coordinated bailout of such stupidity. He, of all people, most likely believes that Bear Stearns and its ilk, should reap what they sowed.

Hey China, " Dot-com" called. It wants it's bubble back

Anyone watching the slow train wreck that is Countrywide Financial (CFC), as of today’s close, shares are now lower than its September 17th closing price of $19.27/share. September 17th is the day BEFORE the Fed slashed its Fed funds rate with a full (and somewhat surprising) 50-beeps rate cut; probably partially out of deference to Countrywide and their fellow submerging mortgage lenders. Bear Stearns (BSC), notably, is also lower as of tonight versus its September 17th close. As is Citigroup (C) and Capital One (COF). Also, in addition to yesterday’s parade of lowered earnings guidance, Lennar Corp. (LEN), the largest homebuilder in the U.S., reported that its third-quarter net loss was $513.9 million, or $3.25 a share. This dire news exceeded even the most pessimistic estimates on Wall Street and was reportedly the largest quarterly loss in its 53-year history. I might add that in addition to Lennar's punk report, the S&P/Case-Shiller survey of U.S. home values showed that home prices in 20 U.S. metropolitan areas fell the most ever in July. Additionally, the Conference Board’s consumer confidence figures for September dropped to its lowest level in almost two years. The Fed and the rest of the world’s egregious money printers (read: China, Japan, ECB, U.K.) have certainly gone into printing overdrive, but is the liquidity going where they want it? From my vantage, they are just exasperating the remaining and existing asset bubbles—particularly the massively, mutating and growing asset bubble in China. Incredibly, the China Shenhua Energy IPO in China reportedly attracted a record 2.6 trillion yuan or roughly $350-billion in orders for its shares slated to list on the Shanghai Exchange later this week. In other words, the company could have priced itself at a market-cap 30-percent larger than that of Microsoft (MSFT) and there would have been enough takers for every single last share!! China Shenhua Energy is the nation's largest coal producer which I can only guess makes quite a bit less money than does Microsoft and is not close to being a monopoly. Hey China, dot-com called and it wants its bubble back!! But also, take a look at the performance of arguably some of the most absurdly, over-valued, albeit liquid (that’s key), stock action since their respective August 16th lows, the day the Fed clearly went into panic-mode by slashing its Fed funds rate to nearly 4.5% (unbeknownst to most market participants) thru today’s highs: Research In Motion (RIMM), $61.54/share to $97/share (57% rally), Apple (AAPL), $111.62 to $152 (35% rally), iShares FTSE/Xinhua China 25 Index Fund (FXI), $111.25 to $174 (55% rally), Crox (CROX), $44.10 to $64 (44% rally), China Life (LFC), $50.25 to $82 (60% rally), Baidu.com (BIDU), $161 to $304 (87% rally), Amazon.com (AMZN), $70.50 to $93 (32% rally) and to a lesser degree, Google (GOOG), $480.46 to $571 (19%). Yet, Google is still significant given its market-cap. That 18-percent move accounts for an additional $27-billion in additional market-cap alone. That is freshly minted market-cap nearly 2/3rds the size of an Amazon.com (AMZN) created in just over one-month for a single company!! Clearly, money is being printed at warp speed, but it seems to be finding its way, again, into the most liquid, speculative and overvalued assets as the leverage and momentum crowd grab hold of the loose credit and cram it into whatever is working. ….Watch for a stronger-than-the-data-would-otherwise-suggest tape through Friday as the performance sluts manipulate things into the quarter’s close, ala, tape painting as they try to run the clock out ahead of packaging of quarterly statements. If there hasn’t been an all-fronts effort to prop, plug and pull markets during the third quarter, ask yourself the logic behind an S&P 500 and a Dow Jones Industrial Average that will both likely close above their respective 2Q closing values? As of now, the S&P is just marginally higher while the Dow Industrials seems almost assured of closing out the third quarter with gains even as the world of finance has become quantifiably much more scary versus just three month hence. Markets are essentially where they were in mid-July just before it had dawned on folks that the leveraged buyout binge was nearly over. And so goes bubble-nomics.