Fiscal Cliff Thursday [5]
Courtesy of Phil’s Stock World [6]
Down 312 points yesterday.
That’s a hefty sell-off and we’ll see if we get some follow-through but we pretty much hit our downside targets on the head in a single day as I said to Members in yesterday’s Morning Alert [7]:
About 13,000 on the Dow. 1,400 on S&P, 2,980 on the Nas, 7,950 on NYSE and 800 on the RUT are about the lows we have to hold – all seem like good spots to go long to me with tight stops if we break below but let’s look at this as a head fake except with a bit more conviction as 50% of the population sincerely believes they have to flee the markets before 4 more years of Socialism take us up another 100%.
As noted in the morning post [8], this is mainly sour grapes selling by Romney fans but there are also legitimate reasons to take some of this year’s massive stock profits off the table ahead of possible large increases in capital gains and dividend taxes. Still, we knew this was coming on Tuesday, when the market rallied massively on thoughts of QInfinity and ZIRP as far as the eye could see.
We didn’t quite hold our targets so we couldn’t get too bullish at the lows but we remain hopeful that there was a bit of over-reaction in yesterday’s sell-off and that the truth will lie somewhere in between Tuesday’s ephoria and yesterday’s panic – let’s call it 13,100 on the Dow and 1,410 on the S&P as our goals for Friday. Then we may be able to take a deep breath and think about things over the weekend.
Despite once-again rising bond yeilds, Draghi says whether or not Spain gets an OMT bail-out is entirely up to them [9] and the ECB cannot/will not force them to do so. That’s keeping the Euro depressed ($1.274) and the Dollar strong (80.94) and that’s keeping a lot of downward pressure on stocks and commodities.
As we expected, oil had a huge build yesterday but we played it long in the futures (/CL) off the $84 line. We’re sitting back at $85 this morning after a brief visit to $85.75. Clearly the build in petroleum products was due to the storm but now we have another storm in the Northeast grounding planes and slowing traffic. Not too much immediate improvement in oil’s future – or the oil Futures, for that matter… So we take our Egg McMuffin money and run on that trade and we’ll be ready to go long off $84 again but happy to make $1 ($1,000 per contract) or even $0.50 as we follow the channel.
AAPL is back at our Summer buy target of $555 and the stock was just reiterated as a buy by Jefferies [10] with a $900 target as they see gross margins improving in Q4 (duh) and are tracking IPhone sales at 53M, a good 10% over street estimates. That can pop earnings per share over $16 vs. $13.52 currently estimated. We are already long AAPL and my comment to Members in Chat this morning was:
AAPL – I don’t watch all those different indicators, I watch the 200 and 50 dmas on StockCharts and AAPL failed the 200 at $590 last Friday and a week below it would be bad – especially after being rejected on Tuesday and gapping down yesterday. Meanwhile, it continues to make $135M a day while you wait and it is sitting on $140Bn in cash. Its market cap is now down to $524Bn, which is a p/e of 8.
Let’s say AAPL completely implodes and only makes $25Bn next year because no one likes its products anymore and it can’t make enough to satisfy the low demand. And it drops its margins on the stuff it can’t make enough. That gives AAPL a p/e of 16 and I STILL like it at this price ($524Bn – $140Bn in cash). So, I don’t give a crap what the squiggly lines are doing because I can buy a 2015 $450/550 bull call spread that’s 100% in the money for $50. This is not rocket science – you make 100% in 2 years if AAPL holds $550 without doing another thing. If you don’t like AAPL enough to make that bet – STOP LOOKING AT IT!!!
The market is giving us plenty of bargains at these prices but none more so than AAPL. It may go lower so scaling in is critical but $555 is a fantastic entry point for a long-term position. We’ll see how the day goes but we must make some progress or we’ll be adding more disaster hedges into the weekend – fortunately, we nailed the top on the 20th with our last batch of disaster hedges [11] and, hopefully, this is the bottom of the channel we expected to test but – hope is not a valid investing strategy – that’s why we watch our levels!