Sauced

Sauced.  Markets took a beating yesterday as Apple lowered 4Q guidance and a key economic indicator failed to please.  As reported here yesterday Apple issued guidance after Wednesday’s market close stating that they were cutting revenue estimates to $84 billion from $91.3 billion.  The predominant reason?  Lower than expected demand in China.  China is not only the second largest global economy but it also serves as a key revenue source for many US companies.  That latter point may surprise many investors in light of all the bad press that China has been getting since finding itself in the Administrations cross hairs throughout 2017.  In fact Apple had $52 billion in sales from China in its most recent fiscal year with more than 40 stores and millions of phones sold. That makes China Apple’s third largest market.  Beyond just Apple, 40% of S&P500 companies derive overseas revenue and China represents a large source.  The Chinese economy has been losing steam for some time but several factors have helped shield it from calamity.  While the Chinese economy shows signs of slowing down, it is still one of the fastest growing global economies boasting real growth of over 6%.  Economic releases that come from China are somewhat obscure and many analysts find it difficult to compare to other economies.  All of that aside, the Trump administration has certainly put China in the spotlight and the trade war is certainly affecting it as well.  Apple’s Wednesday announcement simply puts the problem in sharp focus for not only them but all of the other US companies that rely on China as a revenue source.  Turning back to the US economy, we received the ISM Manufacturing Index yesterday and it came in well below expectations at 54.1 versus last month’s 59.3.  That represents the indicator’s first dip below 57 in 6 months and its lowest level since November of 2016.  While a reading above 50 still represents growth, its unexpected slowdown is certainly noteworthy as it is considered an important leading economic indicator.  To learn more about the index, how it is constructed, and its importance, please refer to my geek-out Wednesday note from earlier this week (https://www.siebertnet.com/blog/index.php/2019/01/02/out-with-a-bang/ ).  The result of Apple’s slip and the ISM indicator miss caused much of yesterday’s sell off which left the S&P down by -2.48%, the Dow Jones Industrial Average off by -2.38%, the Russell 2000 down by -1.85%, and the NASDAQ 100 lower by -3.36%.  Cash flowed into safe haven assets as bonds rallied leaving the ten year treasury with a yield of 2.55% and Gold, which has been rallying, at $1290/oz up +.59% (see charts 20 and 12 in my attached daily chartbook).  While yesterday’s session certainly had the look of a panic trade, the VIX indicator ended the session at 25.45, which put into perspective, is still lower than it was in the days after Christmas.

Today all eyes will be on the Bureau of Labor Statistics’ Monthly Employment Situation release that is expected to show that 184k new non-farm jobs were created versus last month’s 155k.  The unemployment rate is expected to be flat at 3.7% and wages are expected to show a +3.0% year over year growth.  Yesterday, I ended my note with an obscure reference to “good is good or good is bad” which should bring you back to the days when the Fed was in easing mode.  Back in those days a bad economic number would increase the chances that the Fed would add stimulus and cause stocks to rally – that is what is meant by “bad is good”.  Just a few weeks ago Fed Funds futures showed a high probability of at least one 2019 rate hike and yesterday, in the wake of the weak ISM number, those same futures indicated a 40% chance of a rate cut for 2019.  That’s right, you read it correctly: “cut”.  So if today’s indicator misses by a lot, would chances of a cut go up making it a “bad is good” scenario?  We will certainly find out at 8:30 am today.  Later on this morning, Fed Chairman Jerome Powell will join past Chairs Janet Yellen and Ben Bernanke in a round table discussion and you can bet that traders will be watching that carefully.  Very carefully.  Please call me if you have any questions.

AAPL extended cheatsheet

daily chartbook 2019-01-04