WASHINGTON, October 6, 2014 – Markets opened up Monday morning, something that’s become quite unusual these days. Perhaps investors were simply relieved that the world didn’t end this past weekend.
After all, Hong Kong demonstrators have not been cannonaded. Yet.
Aside from porous borders that allow anyone from Ebola plague victims to Mexican drug gangs to ISIS terrorists into the U.S. so long as they vote Democrat, the American republic has not been wiped out. Yet.
Apart from blatant yet unanswered hacking probes and cyberattacks on retailers, financial systems, and the Pentagon by North Korean and Chinese government operatives as well as Vladimir Putin’s fun loving ex-KGB’s Geek Squad, the U.S. financial system has not been eviscerated. Yet.
And the favored Washington Nationals haven’t been wiped out by San Francisco in the post-season baseball playoffs. Yet.
So relative happiness reigns in Washington and on Wall Street, at least for today. But who knows what fresh hell the news reports will bring us tonight or tomorrow?
As for today, a pair of big headlines have the pros somewhat transfixed, although neither issue involved seems to be driving markets big time.
The first big story hitting the wires this morning (actually, this past weekend) was news that Hewlett-Packard (HPQ) will be splitting itself in two, much as IBM gradually did throughout the 1990s. Going its separate way will be HP’s stagnating personal computer and printer business, an entity that’s likely to be bought at some point by someone else.
What remains of the former computing giant will consist of software and services, again the main drivers of today’s new IBM. The split seems to make sense, as both the personal computer and the printer businesses seem to have been almost entirely commoditized at this point, with all the various low-cost PC vendors competing against each other at lower and lower price points.
Financial pundits seem to be missing the point that only Apple’s computer line remains relatively healthy, proving that Apple’s philosophy of creating an entire hardware-software ecosystem seamlessly supporting all manner of devices might have been the way to go after all. But only time will tell.
Speaking of Apple, however, its preferred sapphire vendor, GTAT, walloped tech markets this morning with its stunning though not entirely unexpected announcement that it was filing for Chapter 11 bankruptcy protection. When the news hit the tape, the stock immediately took a 10 percent swan dive into penny stock territory before trading was halted.
As of 11:30 a.m. EDT, the GTAT seems to have opened again, and is fluctuating wildly between 75 and 90 cents per share. (Oops, they just halted it again. We watch the action live on our screen.)
The GTAT Chapter 11 thing is mostly a cash flow issue according to the company. They expect to continue as a going concern. But it’s hard not to think that there’s been a snafu in expected orders from Apple, which has supported GTAT by underwriting a huge new Arizona factory for the company, the better to create synthetic sapphire material on a more massive (and presumably cheaper) scale.
Apple planned or still plans to use synthetic sapphire as a way of strengthening its iPhone screens. Even today’s iPhone screens, which use Corning’s high-strength Gorilla Glass, are still prone to breaking when dropped. So the company’s thought was to begin using sapphire glass screens to improve their popular product’s durability.
The idea, apparently, was to first laminate Gorilla Glass screens with a thin layer of GTAT’s sapphire material, eventually replacing Gorilla Glass with screens made entirely of synthetic sapphire, presumably once that material’s high costs came down to more manageable levels.
But, again apparently, even the lamination idea wasn’t quite ready for prime time, and news of its implementation on the iPhone 6 models was noticeably missing during Apple’s new product show-and-tell last month. Sapphire glass is indeed listed as a key element of Apple’s more expensive Apple Watch models. But those devices won’t be available until January 2015 at the earliest, and those tiny watch screens aren’t going to use a ton of sapphire in any event.
Although Apple supplied the dough for the GTAT factory build-out, the company is not on the hook for GTAT financing should the smaller company fail. That said, though, we can’t imagine that Apple won’t eventually figure into GTAT’s future, as the larger company seems to have made a big commitment to using sapphire glass in future products.
Anything beyond this, however, must be labeled as informed speculation. We’ll just see how things develop.
Apple, GTAT and HPQ aside, this market is mostly directionless at present. At the beginning of this article, we noted that markets opened up, which they did. However, it’s now 11:45 a.m. EDT, and the averages are finally getting into their typical Monday swoon.
Today’s (missing) trading tips
Technical indicators seem to be misleading or outright wrong more often than not these days. So making a bet on anything here is frankly a crapshoot, at least at the moment. Headlines that influence the HFTs to place or pull their bets seems to be the order of the day, so who cares about earnings or value?
Dave Fry, who runs ETF investor service ETF Digest, confesses at times he’s just as confused as everyone else. In a portion of this site’s latest message that resides behind Dave’s modest pay wall, he provides what we think are some helpful insights on the current difficult-to-parse situation. We reproduce a short portion of his thoughts here in the hopes he won’t mind a great deal.*
Dave begins by observing, as we often have, that much of the stock market’s ongoing rally has been driven by institutions, funds, and rich bigwigs who have made much use of the Fed’s free QE giveaways—giveaways that have never been available to either you or the Maven.
All this free money has allowed “corporations to enrich shareholders, especially executive shareholders with stock options, by borrowing cheap and buying back shares. This has reduced float making it easy for companies to increase earnings over fewer shares.”
That’s a big reason why most stocks continue to perform surprisingly well, as opposed to your family’s bottom line. Effectively flat to lower earnings are magnified by being factored in to lower and lower numbers of shares outstanding.
We’d simply add to this our observation that this lucky subset of institutions and investors give heavily to the Democrats who collude with the unelected oligarchs, thus keeping this exclusive gravy train firmly on the rails.
According to Dave, however, this massive, favored treatment for the few “is the primary reason the income disparity in the U.S. exists. Most don’t discuss this or even hint that Fed policies are the reason for this problem.” He cites a study concluding that “if you gave every taxpayer $22K you would have accomplished more for the economy than QE. In other words, this would have been a bottoms up effort [rather] than the top down model we got.” (Bold characters above are Dave’s).
Dave confirms what the empirical evidence suggests. The Maven is disgusted, but agrees with his conclusions. But so long as institutional traders at Goldman Sachs and other big institutional traders are getting their expected bonuses, the Maven’s disgust doesn’t matter. It is what it is. And until we can get at least a few of those seemingly ubiquitous low-information voters to realize they’re voting for the wrong party—the one that’s owned by the rich guys—this nonsense will continue, right along with the extermination of America’s middle class.
(Hint: the Bad Guy Party begins with the letter “D,” not “R.” Don’t believe everything they preach on MSNBC.)
What to do? Hold on to good positions, hedge a bit with the S&P 500 short ETF (SH), hunt for the occasional IPO, and wait for Q3 earnings season to get underway.
*(N.B.: Dave’s regular daily commentary is free. But material like the brief excerpt above—along with usefully annotated charts, videos and exclusive investment timing advice—is available only by paid subscription. Just follow the link above. If you trade on your own, it’s always good to supplement the stuff you find on line by subscribing to one or more services that touch on your areas of interest, which is what the Maven does. The good material is never available for free. The clowns on CNBC are generally talking their book and should either be ignored or used as early warning indicators by contrarian investors.)