There's A Funny Sentiment Shift About Apple Stock On Wall Street Right Now

Earlier in the week I wrote a post previewing AAPL’s Word Wide Developers Conference (below) where the title suggested that expectations were high.  Let me clarify a little bit, they are only high because the company and Tim Cook in particular have their back against the wall a bit given what appears to be a lull in product innovation since Steve Jobs death in late 2011.

As I write, AAPL is down nearly 2% on the week, making back about a percent off of this mornings lows after flirting with the stock’s 50 day moving average.   At this point I think it is safe to say that when Tim Cook takes the stage for the keynote address on Monday afternoon expectations for tangible new products are not running high.  Most of the speculation over the last few weeks has surrounded on the operating system improvements and potential services like iRadio and possibly electronic payments.

It is my strong belief that investors will be disappointed by AAPL merely updating their software and services to a place that many in the “Technorati” already feel Android is.  If in fact there is no “WOW” moment at WWDC the next identifiable catalyst will be fiscal Q3 earnings that will fall in late July and Aug expiration.

I am clearly not a raging bull on the stock and think that this summer, possibly prior to earnings the stock could retest the $400 level on the mere fact that product news remains allusive.  That being said I would likely be a long term buyer of the stock on the next re-test.

But here is the thing, it appears that the investment world is in universal agreement that the lows are in, and from what I can tell from the financial press, Twitter, communication with investors and pundits, everyone and their mother is Long….again.  In the last month, Leon Cooperman and just recently Jeff Gundlach on CNBC’s Halftime report Tuesday, suggested they are long and that the stock has bottomed, and if you agree with them, and you are long… a levered overwrite could be the way to add some juice to your position without additional risk, aside from being called away at a much higher level (which is good!)

Theoretical Trade Against a Long Stock Position:

-Buy 1 Aug 475 call for ~10.00

-Sell 2 Aug 500 calls at ~5.00 each or 10.00 total

Break-Even on Aug Expiration:

-Profits of stock btwn 441 and 500, profits of up to 25 btwn 475 and 500, max gain of 25 if stock is 500 or higher.  In that instance your long stock would be called away with 59 profits plus an additional 25, which would equal an added 5.5%.  Btwn 441 and 475 just the profits of the stock and the ratio call spread expires worthless.

-Losses of the stock below 441.

Payout Diagram:

100 shares AAPL vs Aug 475/500 call 1×2 from TradeMonster

As you can see from the chart, the 1×2 acts to juice your long to 500, a level that would provide stuff resistance if AAPL manages a summer rally or pops on August earnings. This is a great structure if you bought the stock down here and would use 500 as a level to exit… it is also a great structure if you are long the stock higher and wish to get some of your money back on a rally back to 500.

Trade Rationale:  To summarize Jeff Gundlach in his interview with Scott Wapner on the Fast Money Halftime show on Tuesday:  Gundlach thinks sentiment is poor, the stock is cheap,  technicals show a base and cash distribution should offer support.  Here are some quotes:  ”it is too cheap”, and $500 should be a fairly easy place for the stock to go to” and ” basing out in a way that is fairly encouraging” he thinks “stock is a nice inclusion at current levels given low PE”.

That’s how I chose the strikes, to get to $500, earnings and guidance will need to be one of the catalysts.

Update -Video from Options Action on CNBC Friday June 7th discussing AAPL’s WWDC & the options strategy that I detailed above:

Original Post:  MorningWord 6/5/13:  WWDC & Great Expectations – $AAPL 

MorningWord 6/5/13:   This coming Monday in San Francisco, AAPL CEO Tim Cook will take the stage at the company’s World Wide Developers Conference “WWDC”, and make no mistake about it, expectations are running hot. Despite the strong likelihood of little new tangible product news.  Last Thursday, Enis highlighted Goldman Sachs’ derivative research team’s suggestion (here) to buy June 450 calls in front of the event, as they expect:

this event to once again be a positive catalyst for shares – this time driven by refreshes of existing services (iCloud and Siri) and/or a preview of the new iOS7 operating system. The options market has underestimated the positive nature of this event in the past. Over the past 10 years, looking from 10 days prior to WWDC to 1 day after, shares averaged a +5% return and implied volatility rose by +7% (average)

Well the stock hasn’t quite run just yet, at least not on anticipation of the event, and AAPL’s ytd performance remains a massive outlier on the downside (-15.5% ytd), just as it had on the upside in its amazing bull run up to last year.  But just as many have called for a long term bottom in AAPL of late, the one month chart below shows some fairly peculiar behavior starting off with the ~10% peak to trough correction, for apparently no reason, starting on May 8th and ending on May 16th and the subsequent 7.5% rebound that has seen the stock forming a decent base at near term support.

AAPL 1 Month chart from Bloomberg

Given next week’s conference and the potential for a positive catalyst to be announced, many market technicians have suggested that the stock could have recently made a Reverse Head & Shoulders bottom as we previously referenced  courtesy of Greg Bender of Bloomberg on May 30th.

AAPL 1 yr chart from Bloomberg

IN my early run through of product expectations from Wall Street and from the Blogosphere, it appears that few expect anything meaningful on the hardware front (possibly new MacBooks per BGR.com), while most are focused on a major upgrade of iOS (per GS via BusinesInsider.com) and added services like the rumored Pandora “Killer”, iRadio (per AppleInsider.com) or fingerprint scanning (here).

If you are buying the stock or calls for a trade into the event, my sense is that if there is any excitement it is probably going to come in the lead up to the event.  If the only material product additions are in fact software or services to be released in the fall I worry that there are few catalysts if any to own the stock (aside from share repurchase) between now and the iPhone launch in late Sept.

There are 3 things I would like to see happen in the days prior to WWDC, a rally back to resistance at or around $470, a selloff to 420 and/or an implied volatility spike.   A vol spike would be a nice opportunity to sell short dated vol and the price move could provide a nice entry to play for a reversal back in range.

Yesterday on CNBC’s Fast Money Halftime Report with Scott Wapner, investor Jeff Gundlach, who was short AAPL last year, recently just bought the stock around $405 and gave his reasoning for it:

To Sum Up, Gundlach thinks sentiment is poor, the stock is cheap,  technicals show a base and cash distribution should offer support.  Here are some quotes:  ”it is too cheap”, and $500 should be a fairly easy place for the stock to go to” and ” basing out in a way that is fairly encouraging” he thinks “stock is a nice inclusion at current levels given low PE”.

What’s most interesting is that Gundlach did not once mention the words new products in that interview.  That is what is going to drive the stock back above $500.  He did say that it is unlikely the stock sees $700 anytime soon, but given the market’s ytd rise and the unprecedented cash distribution plan, I would suggest that the stock is gonna need something more than buybacks, dividends & low PE to get this pig back to unchanged on the year ($532.17).

Last week at the WSJ’s All Things D conf, the most telling thing thing Tim Cook said on the product front was, “The wrist is interesting,” (here at 6:35pm) alluding to their probable entrance to the wearable computing market.  I am not sure this is gonna do it in 2013, if iWatch is the the iThingy that restores innovation. Don’t get me wrong, there are many technical aspects about AAPL the stock that are getting increasingly attractive, but some of the core fundamentals characteristics of the company, that have driven the stock’s success in the last decade still remain allusive.  I am still in the camp that a retest of the previous lows, possibly in front of, or after fiscal Q3 earnings in late July could be the appropriate spot to set up for a second half  of 2013 that could see refreshes and additions to iPad, iPhone and possibly something in the living-room.

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Canadian Households Getting More And More Leveraged

By international standards, Canada survived the financial crisis pretty well.

Now we're seeing indications that our neighbor to the north was only delaying the inevitable. Canadians are way more indebted than Americans (via Matt Phillips):

Statistics Canada

Canadian banks may have gone bailout free during the credit crisis, but household debt has now spiked to a record 165% of disposable income.

While U.S. home prices plummeted in the wake of the crisis, and are just now starting to show signs of life, Canada's house prices have risen a ridiculous 123% since January 2000.

We're seeing a classic housing bubble near burst, with Toronto home sales slumping 10% in the first half of May while prices simultaneously climbed 5.4% like it was no big deal.

Canada's economists may try to cushion worry with talk of a "soft landing" of future price drops, but the country is highly levered and its homes are crazy overvalued.

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NYSE Trader Explains How Dow Theory Works

Earlier this year Dow Theorists were looking at transportation stocks or "trannies" and saying it was a good time to buy.

The idea is that the durability of a rally depends on the strength of stock indexes. When the Dow Jones Industrial Average and Dow Transportation Average move in tandem, depending on the direction, they signal a buy or a sell.

The idea has six underlying principles.

Mark Newton of Greywolf Equity Partners walks us through the basics of Dow Theory:

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Wall Street Research Has A New Problem

You probably know the story — in the '90s Wall Street got carried away (to say the least) with the tech boom and the Chinese wall between its analysts' research and investment banking was crossed.

Since then, the Street's research has slowly won back some of its credibility, but former hot-shot Merrill Lynch analyst, Richard Bernstein — who now oversees $1.3 billion at his own firm, Richard Bernstein Advisors — still doesn't buy it. His interview in last weekend's issue of Barron's breaks down his thoughts.

To Bernstein, the problem isn't credibility. Now the problem is that Wall Street research is all basically the same stuff.

From Barron's (this is a Q&A, the italicized questions are from Barron's reporter, Lawrence Strauss):

You can show me a report, you can take off the banner, and I would have no idea who wrote it. It is very hard to differentiate one person's research from another's. "We don't care about individual names. We care about getting size, style, country, and sector right."

Is there anyone, in particular, whose work you like?

Michael Goldstein at Empirical Research Partners was one of my biggest competitors when I was on the sell side, and now we subscribe to his work. He is very good. But most of the Street research is remarkably similar, with very little value added, so we don't use a lot of outside research. About 95% of what we do is our own research, and there are only maybe three or four people whose work we subscribe to.

Has Wall Street research changed a lot since you started your career in 1981?

It has. If I want to find a strategy report on Botswana, I can find it on the Street now. Wall Street has a strategist for every country and product you can name. So the research has gotten broader. However, the depth has gotten so shallow, it is absolutely ridiculous. The strategists I always looked up to -- people like Chuck Clough of Merrill Lynch and Lee Cooperman and Steve Einhorn of Omega Advisors -- weren't necessarily tremendously broad. I am not sure they could tell you what was going on in industrial production in Botswana. But the depth of their research was fantastic.

So there you have it — one bank's research may be just as good as another.

The lesson here is, as ever, do your own homework.

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There's A Great Economics Experiment Happening Right Now, And It Proves That QE Works

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There is a great natural economic experiment unfolding. And it is not the QE3 versus U.S. fiscal austerity debate that some of us have been debating. Rather, it is the United States versus the Eurozone and the different policy "treatments" their economies are receiving. Jim Pethokoukis explains:

[W]e have an intriguing natural economic experiment. Two large, advanced economies are both undergoing fiscal austerity from spending cuts and tax increases. But one is recovering, though glacially, from a previous downturn; the other is deteriorating.

The likely difference: monetary policy. Not only did the Federal Reserve slash short-term interest rates to nearly zero way back in 2008, but it has also embarked upon a massive bond-buying program known as quantitative easing. The European Central Bank, however, only last month cut its key interest rate to 0.5 percent, still higher than the Fed-funds rate. And the ECB’s “unconventional” monetary policy has been far more modest, with bond purchases less than a tenth the size of the Fed’s. Its goals have also been more limited: stabilizing southern Europe’s debt markets and avoiding a financial crisis. At a recent speech in Frankfurt, Germany, St. Louis Fed president James Bullard said that unless Europe adopts an aggressive bond-buying program, it risks an extended period of low growth and deflation like what Japan has experienced since the 1980s.

This policy treatment explains the different NGDP trajectories in this figure:

Macro and Other Market Musings

What is puzzling to me is how anyone could look at the outcome of this experiment and claim the Fed's large scale asset programs (LSAPs) are not helpful. Some claim the LSAPs are just helping the rich, at best, and may even be deflationary. But it is not hard to imagine how much higher U.S. unemployment would be were it not for the Fed's QE programs. Just look to Europe's unemployment rate, as noted by Pethokoukis. Yes, the LSAP programs are far from ideal but they are keeping Americans from experiencing the unemployment seen in Europe.  In other words, QE is helping the lives of ordinary working people in the Unites States. And there are many ordinary working Europeans whose lives would be much better off if the ECB were to more closely follow the Fed's actions. 

The insights from this natural experiment should give QE critics pause. And so should the fact that these these programs are helping shore up the supply of safe assets. Critics who see the slow recovery and point to the Fed's LSAPs simply are not doing the right (if any) counterfactual.

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To embed this post, copy the code below and paste into your website or blog. The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at... More » David Beckworth is assistant professor of economics at Western Kentucky University in Bowling Green, Kentucky. I am using this blog as an outlet to express my ideas, concerns, and questions on macroeconomics and markets.

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CHART OF THE DAY: Explaining The Complete And Utter Collapse Of Chinese 'Exports' To Hong Kong

China's exports to Hong Kong grew just 7.7% in May, down from 57.2% in April and a whopping 92.9% in March. Overall exports grew just 1%.

Why the huge drop?

At the time of the big gains earlier in the year, analysts said it was because the export data was "the result of disguised capital inflows, as exporters could overstate export amount in order to move yuan into the mainland."

On May 5, the State Administration of Foreign Exchange (SAFE) announced that it would crack down on companies that used "merchandise trade invoices for arbitrage activities, and announced the introduction of strict limits on how much onshore banks can short or lend the US dollar," wrote Societe Generale's Wei Yao.

The sudden collapse reflects the effectiveness of the government's crackdown on disguised arbitrage flows.

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