WASHINGTON, April 26, 2016 – Stocks wandered aimlessly today, with widely followed averages ending almost flat in lackluster trading action Tuesday. Traders seemed to be marking time for two presumably bellwether events, Apple’s most recent quarterly numbers and Wednesday’s Federal Reserve post-FOMC meeting report.
As many analysts and investors had expected, Apple (symbol: AAPL) reported a significant drop in the company’s sales numbers, disappointing bulls and perhaps awakening interest in the short side of this trade. For its January-March quarter—fiscal Q2 for the Cupertino-based tech giant—Apple booked earnings per share of $1.90 vs. the $2 expected by a consensus of analyst estimates. Apple’s current earnings figure mark the first time the company has experienced a year over year (YoY) quarterly sales drop since 2003.
The culprit: as everyone knows, iPhone 6s models failed to generate a ton of excitement, although they have been selling well. Many iPhone customers, however, are waiting for what they believe will be the superior improvements in the iPhone 7 models, allegedly to be introduced this fall.
But not to be ignored in the quarters’ numbers is what appears to be a phenomenal demand for those retreaded and significantly upgraded iPhone 5-based iPhone SE models. Coming in at a significantly cheaper price point, and boasting a better camera and much faster processor than the iPhone 5 models, the SE is experiencing a big demand and is backlogged 2-3 weeks even at Apple’s online store. Apple introduced this model close to the end of the current quarter and then ran out of them due to heavy sales. This robbed some sales from Apple’s Q2, but is likely to provide a significant boost to Q3 figures when Tim Cook’s vaunted supply-chain skills will work this backlog off.
Balancing things out, Apple also announced it was boosting its dividend another 10 percent (roughly 5 cents per share) while boosting its capital return program, aka stock buybacks, by another $50 billion.
AAPL is being hit hard in after hours trading. As we write this column, at approximately 5 p.m. EDT, Apple’s stock is trading around $97 per share, down over $7.00 from its 4 p.m. $104.35 close. That’s a loss of some 7 percent at this point, though final figures may change.
In other market news, oil closed up once again, making at least some stocks in the oil patch happy again. It’s hard to say exactly where all the buying is coming from, as the supply situation worldwide doesn’t seem to have changed all that much. On the other hand, bulls may be enjoying a continuation of the massive short-squeeze that got this rally going to begin with. Problem is, when the shorts—who have to buy oil contracts to complete their roundtrip transaction—clear their books, what will happen next, particularly given that it’s almost sell-in-May time.
Adding to the confusion, the Federal Reserve’s Open Market Committee concludes its two-day meeting in Washington Wednesday, at which point it will publish its eagerly—or fearfully—awaited monthly report, which may or may not provide any hints as to whether the nation’s central bankers are planning to jack up interest rates any time soon. Consensus was once gathering around a June interest rate hike. But at this point, and with the world economy still extremely delicate, no one really knows.
Illustrating how thoroughly things are interlocked, the dollar-euro currency pair has been hovering between $1.11-1.14 dollar-to-euro since practically forever. An interest rate hike now might radically alter that number, with the dollar increasing in value and the euro dropping, leading once again to a potential big drop in the price of oil, which is still traded primarily in dollars despite China’s efforts to get in on that game.
All of which means that the currently loosening tie between the price of oil and the price of all other stocks could come roaring back, crushing the price of oil once again—an outcome no one really seems to want. It’s just another one of many nail-biters that characterize this market.
Whatever happens, we’ll start finding out tomorrow when we see what Apple’s numbers do for traders at Wednesday’s opening bell. If things get unhappy quickly and if the Fed then comes out with even the slightest hint of an interest rate increase any time soon… well, we hope you’ve already hedged your portfolio at least a bit, because things could get really nasty really quickly, given this market is already handily overbought.
Today’s trading tips
We’re still going light on the tips, currently content to hold mostly preferred stocks that will expire fairly near-term, i.e., between 2019-2023 for the most part. In an uncertain interest rate environment, particularly like the current one that’s likely to witness interest rate increases, stocks like preferreds, utilities, REITs and others that are primarily bought for their yield will likely get at least a modest spanking, share price-wise.
But if you’re out fairly short on the time horizon, the damage generally won’t be too bad, as you’re about to get those preferred shares redeemed anyway and in fairly short order. That’s why we continue to hold these term-preferreds. Unless catastrophe strikes, odds are small that we’ll get hurt if we hold them to maturity.
Our good sized position in Teekay Tankers (TNK) is now up close to 7 percent due to the price of oil increasing. On the other hand our very big position in Allergan preferred (AGN/PRA) took a beating today. There are apparently still a few big traders dumping those term preferred shares into the market as a result of the government’s killing of the Pfizer (PFE)-Allergan (AGN) inversion-merger.
The preferred issue will be redeemed at full face value ($1,000) in March of 2018. There are no guarantees in life, of course. But this is a huge company, and very likely to be around in 2018. Which means that in addition to the swell $13.75 per share quarterly dividend we’ll be paid between now and then, the currently $817+ shares will be redeemed at $1,000 apiece in 2018, adding an uncommonly good profit to this already high-yielding position.
We nipped back into a tiny bit of gold and silver ETFS, SGOL and SIVR. There are others, of course, but these shares, backed by actual gold in Swiss vaults, trade without a commission at our brokerage house, something very nice in this kind of trade. We trade in and out of these metals, but we may start holding them a bit longer, as silver in particular has been on an impressive tear recently.
Let’s see what happens Wednesday.