Weak iPhone 8 Results Push Apple - AAPL Lower
Thursday was unusual for the stock market because for the first time in a while, the S&P 500 opened down about 0.5%. It shows how quiet the market has been that 0.5% is considered a big move. The selloff was driven by AAPL which I said to sell prior to today’s 2.37% decline. My reasoning for being bearish on AAPL was because it was near its all-time high even though bad sales results have been reported on the iPhone 8. At first the stock cratered on that news and the selloff got too large considering iPhone X didn’t go on sale yet. Then with the stock getting near the all-time high, the reversal became too large.
The catalyst of the selloff today was news that the company has cut orders for the iPhone 8 and iPhone 8 Plus by 50% for the rest of the year. Apple had never cut production for an iPhone this early in the product cycle. There are reports that the iPhone 7 last year outsold this year’s iPhone 8. Many customers are waiting for the iPhone X. The determining factor for AAPL stock is if these customers are going to buy the iPhone X or if they will skip this upgrade cycle altogether. As you can see from the chart, AAPL’s free cash flow yield is the lowest it has been in the past few years.
Even with AAPL selling off, the S&P 500 was able to rebound throughout the day, closing green. The VIX was down 0.2% as traders bought the micro dip. They kept the streak without a 3% selloff in tact as the record is just 2 days away.
Powell Becomes A Strong Favorite To Be Fed Chair
There is a possibility that any day the information on who President Trump is leaning towards as Fed chair could be leaked. Today it happened as reports leaked that Trump is considering Powell. This makes sense because the President wants a dove who isn’t Yellen because he criticized her heavily in the presidential campaign. Even though Powell would keep the Fed going in the same direction, the fact that Yellen isn’t in charge at least shows that the position has changed faces. Because of this news Powell’s odds surged 30% to 69%. Warsh’s odds fell 8% to 13%, Taylor fell from 16% to 12%, Yellen fell from 17% to 12%, and Cohn rose 6% to 11%.
President Trump has changed his leanings with past nominations, so this isn’t a lock. It’s still worth following the situation closely. He will be making the decision before his trip to Asia in early November. As I previously mentioned, the yield curve had been flattening in the past few weeks. Part of the reason for the flattening was Warsh and Taylor’s odds moving up as they are hawks. With the news that Powell is the front runner for the job, the difference between the 10 year bond yield and the 2 year bond yield increased from 75 basis points to 79 basis points. Because Powell is heavily favored, I wouldn’t expect much of a move in the bond and stock market after he’s picked. Obviously, if someone else is picked, it will cause a sharp move. The biggest day for the market might come in Powell’s first speech to the public. I expect him to say that the Fed will continue to raise rates gradually and that the balance sheet normalization will stay on the same path. It’s possible that he can change his opinion slightly as chair, so it’s still worth watching closely. Warsh and Taylor would have been more brazen candidates who could’ve made news in a bad way for stocks.
With this news today, the odds of a rate hike at the December meeting increased from 87.8% to 93.1%. The odds of 2018 rate hikes similarly didn’t move much. That’s to be expected because Powell is Yellen 2.0 or Bernanke 3.0. If there were odds for changes in the size of the balance sheet, they wouldn’t have changed much either.
October BAML Survey
I like to review the BAML survey which asks fund managers which trades are the most crowded because it has a high level of accuracy. As you can see, the long Nasdaq trade had an increase in those saying it is overcrowded. Tech earnings in the next few weeks will determine where they go the rest of the year. Until then, I don’t expect much action. The short U.S. dollar trade is no longer considered overcrowded by as many managers because the dollar index has risen about 2 handles since the bottom in September. I am surprised the long microcaps trade didn’t make this list. It’s possible that it would have gained support if it was on this list. Considering the fact that this list is usually on point, it might be that managers haven’t been focused on them. Managers might consider the microcaps to always be all over the place, so saying the trade has gotten too popular wouldn’t be accurate. The final reason why it might not have been added is because many managers might not be allowed to trade micro cap stocks due to restrictions. Either way, I think that was the most overcrowded trade for October as the IWC index rose 14.93% from August 18th to October 5th. Since then the index is down less than 2%.
Conclusion
From 2008 to 2016, Fed policy has been hotly debated and has affected stocks in both directions. Recently, with the Fed raising rates and starting the unwind of the balance sheet, there hasn’t been any worry from investors. The market went from dropping on the idea of a quarter point rate hike to dealing with 75 basis points in hikes and the start of the unwind without a blink of an eye. President Trump’s Fed pick has continued this new trend. You would expect some investors to worry about his pick because he has been so critical of the Fed. Instead the stock market hasn’t reacted much. Luckily, he’s going with an establishment pick which won’t roil the markets.
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