|by Wes George
AAPL: The Drama Continues
September 27th, 1999
We have nothing to fear but fear itself.
Last Monday was a dramatic moment for Apple to announce that it wasn't going to meet this quarter's earnings estimate. It's as if Steve Jobs timed Monday's afternoon announcement of the 20% to 30% earnings shortfall for maximum theatrical impact. In fact, the whole market seems like a stage set for a tragedy lately.
Act I, Scene I. A lovely day in the financial district, but a tempest is gathering off stage.
Enter Apple, stage left, waltzing to a new all time high, touching $80 a share intraday on September 20th with strong momentum. Then, Steve confesses that they overestimated Motorola's ability to crank out G4 microprocessors. Amazingly, the lack of new Power Mac G4s, just introduced a few weeks ago, were blamed for the 30% earnings shortfall in the current quarter estimates. Confused and dismayed investors react with melodrama abandoning the ship in droves. Many drown. Apple trades down 11 points after hours.
Our helpful narrator enters, stage right, to explain the scene. "Have you ever been striding down the street in a great mood, on a beautiful day, smiling at everyone you pass, only to walk smack into a sign post? Well, that's what Apple, or at least, Apple investors did.
"The fundamental success of Apple's business strategy hasn't changed one iota, but the company now has a nasty black eye. Apple is still on course for a record breaking Q1 2000, yet investor confidence is shaken. Apple's momentum has evaporated and we're in for days, maybe weeks, of churn. New resistance points have been established where none existed. Don't expect to see $80 a share again for some time."
Oddly, the mainstream press was quite gentle with their reporting of Apple's faux pas. There were no downgrades issued, and everyone seemed to agree that this was a buying opportunity.
Act I, Scene II. Crushed building in Taiwan.
As you know, this story is beset by tragedy. The very day Jobs announces that Apple won't meet earnings, an earthquake rocks Taiwan. Wall Street begins to fret over the impact of the earthquake on Taiwan's massive semiconductor manufacturers. With something like 2,000 people buried alive this may seem numbingly irrelevant, but among the traders on The Street a mild panic is about to ensue. The Semiconductor Index (SOX) had been the leading force in this market pulling the Nasdaq to new highs this month. As nervous investors begin to take their profits off the table, the SOX collapsed 20% and a general market evacuation begins.
While the production delays in Taiwan should be minor by all reports, they add uncertainty onto uncertainty. Especially in Apple's case. If you'll recall, Apple was never forthcoming about that phantom fire in the Mexican iMac plant some months ago. Yet by all accounts, it seriously affected iMac production causing shipping delays so universal that Apple even stopped selling iMacs online for a brief period. Now Apple claims the Alpha Top Plant where iBooks are produced is undamaged. Cautious investors are staying away from AAPL waiting for all the news to come out.
By Thursday, a chorus of traders on The Street were singing, "buy the SOX and short the box." It's an ugly tune referring to the PC "box" manufacturers as the real losers from this earthquake. DRAM prices are already up 20%. While the semiconductor stock oversold on the news, most of them stand to profit handsomely on Taiwan's misery.
Act I, Scene III. The fat guy sings.
Enter, stage right, Steve Ballmer, (Number Two at Microsoft) to deliver his darkly comic soliloquy on the absurdly overvalued condition of tech stocks, including his own Microsoft. Truly an act of astounding condescension and conceit. A less omnipotent corporate leader would be surfing getajob.com right now. It was like the emperor announcing that he has no clothes. The joke is on investors.
Essentially, Ballmer is right. Most companies can't justify PE ratios above 20. This should be no surprise to Wall Street, but the market nose-dived again, this time shattering the Dow support level at 10,450 leaving investors dangling over a chasm where the next strong support isn't till 9300. The Market is rapidly becoming a Roadrunner cartoon and it's the investors who find themselves cast as Wiley the Coyote treading air.
The final act to this play has yet to be written, nonetheless the direction is becoming clear to savvy investors. The S&P 500, The Dow, and the Nasdaq have all broken their supporting levels indicating more pain to come. Actually, the Nasdaq and the S&P 500 are sitting just under support suggesting that this week will be exceptionally critical. If we close down Monday then significantly more downside can be expected.
On the other hand, a small rally this week isn't impossible. The markets tried over and over again last week to rally but bears sold into each attempt. Volume could be on the low side as investors wait for the Fed to announce what they are going to do with the interest rates. Conventional wisdom has it that the Fed, especially after this downturn, and fearful of a Y2K panic, are not likely to risk a rate increase at this time. Any rally is likely to be seen as an opportunity to lock in some profits and move to the sidelines.
Then there is that old Dow Theory lingering in the back of every trader's mind. A fundamental tenet of the theory is that for new market highs to hold the three Dow indices must confirm the trend. The Dow Jones industrials, while setting new highs all summer, have not been followed by the Transportation or the Utilities. In fact, both show a strong bearish trend since July. Rising oil prices aren't helping matters.
Finally, there is the uncertainty of the Y2K specter that haunts the markets even as authorities predict the year 2000 will happen without major disruptions. The specter of Floyd lingering off the eastern seaboard reminded many investors, if only unconsciously, of the coming global Y2K storm. This set the stage for Wall Street's worst week in a long time.
The example of Apple's 4th quarter stumble could be analogous to what is about to happen to the market as a whole. Apple has had a huge price run up, backed by strong momentum, but it was too fast and too steep not to inspire a bit of greed and fear. Apple's one quarter missed earnings haven't changed the long-term outlook for the company and investors must know that, but they were looking for a reason, any reason, to take profits. Apple's momentum shifted direction with enough g-force to knock out a jet fighter pilot.
The stock market in general has some elements in common with Apple. Since 1997 the S&P 500 has doubled. The Dow is up almost 30% since last September. Many investors will opt to take profits and ride out the Y2K storm in the green. Any bad news, such a declining dollar or ugly trade deficit numbers are bound to play into the hands of the bears.
Any weird news, more earthquakes, or acts of terrorism inspired by Y2K could amplify downside volatility to the extent that a true panic could unfold.
The whole market looks like it is battening down the hatches. Gold has been inexplicably rallying, in spite of new reserves going up for sale. The worst performing sectors last week were hotels and insurance companies. The media blamed hurricane Floyd. But both are sectors that might be hurt by the Y2K storm as well. Other odd signs are the lack of bottom fishing going on in such hammered down stocks as Sears and Lockheed. One week into the traditional three-week earnings announcement period and the markets are running with 61% of reporting companies issuing warnings. It's usually closer to 50%.
Fortunately, Floyd didn't hit the whole planet, unlike the coming Y2K storm. Hurricanes are hard to predict when and where they will strike, but the damage they inflict is well understood. With Y2K it's just the opposite, we know when and where it will strike but the damage is impossible to estimate. It's easy to let your imagination run wild.
Whatever the Y2K outcome, it will be temporary. Next year looks like a continuation of the bull market, which is still quite intact. No matter how far the markets correct, the economy is solid. Productivity and earnings are projected to increase steadily. The big question for investors is not whether there is going to be a correction this autumn but where to call the bottom. We may be heading towards the last great buying opportunity of the century.
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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!
Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.