Sour Apple hints at broader weakness

Wall Street looks to its tech hero to save the day. But with Apple's earnings miss, it is clearer than ever that only the Fed can give the market what it wants: More easy money.

By Bill_Fleckenstein Jul 27, 2012 2:09PM

The first two days of trading this week saw more chaos worldwide, as Asian markets were trashed on Monday and European markets punished Monday and Tuesday. The locus of the trouble was again Europe's debt markets; Italian and Spanish bonds were hammered, with yields for the former climbing to 6.3% and for the latter to 7.4%.

 

On Tuesday, the yield for Spain's two-year bond climbed past 5%. (Contrast that with the U.S. two-year, whose yield, at 22 basis points, is a mere rounding error.) Spain is in the process of coming completely unstuck, with its regional governments (entities similar to states in the U.S.) going bust, on top of the central government and central bank's problems.

 

The swagger we saw the previous week (of buying companies despite the prospect of weaker third-quarter results) was dampened rather decisively Tuesday morning when UPS (UPS) lowered its expectations for the rest of the year and lost 5%. More important, that company is a pretty good barometer for the rest of the economy, but it remains to be seen if and when Federal Reserve Chairman Ben Bernanke gets the memo (more on that later).

 

The trading both Monday and Tuesday saw a pattern of U.S. stocks selling off, but then rallying late in the day to trim the losses, with Tuesday's rally due in part to the hope that Apple (AAPL) might save the day when it reported its results Tuesday night.

 

One bad Apple

Once again, the stock market was surprisingly resilient Wednesday, given the fact that the current "greatest company in the history of the world" stumbled at beat-the-number. In fact, it more than stumbled, as sales were very disappointing. It was one of the few times in the past decade Apple has not won at that silly Wall Street game.

 

Apple has looked vulnerable to me since March, as I pointed out at the time (the column was reposted on April 5 as part of a site refresh; it generated a fair amount of "hate mail" in the comments section, but unfortunately those are no longer visible). Thus, Apple's results this week were not a shock, nor should they have been to regular readers.

 

At any rate, that should have been a double whammy that brought on selling due to Apple's weighting in the Nasdaq 100 (NDX) (as well as many exchange-traded funds), and the fact that the economies of the world are so weak that even mighty Apple couldn't make its projections.

 

Instead, the undertow was offset by the fact that The Wall Street Journal ran a story above the fold by Jon Hilsenrath, a regular conduit of leaks and spin from the Federal Reserve, which suggested that the Fed was more prepared to "do something" quantitative-easing oriented (e.g., bond buying or money printing) than it has been. In my opinion, the article suggested that the Fed may act at next week's meeting rather than wait for the following one, on Sept. 13.

 

For what it's worth, The New York Times also ran a story on the same subject. As a close observer of this sort of news, I can't recall a time when both of those papers prominently featured gossip about what the Fed might do next. Obviously, the pressure on the Fed is heating up, just as it is on the European Central Bank, but it remains to be seen if Bernanke has enough imagination to do what he is supposed to believe he should.

 

Their coup runneth over

The faith of those stock bulls who think the Fed has their backs has buoyed the equity market through a host of disappointing earnings reports, at least when one looks at the next couple of quarters. When I saw the Apple news, I assumed it ought to be enough to "bust the tape," which would, of course, increase the pressure on the Fed for easing. However, in perverse fashion, the Pavlovian salivation about said easing tends to keep stocks from reacting to the bad news that actually does arrive.

 

The question for those who are short is: "Will we get a nasty plunge in the tape before Bernanke actually panics, or will he ease before that swoon occurs?" I wish I knew the answer, but I don't, although my suspicion is that bulls will need to be tested a bit more before they get their "coup de whiskey," as the Fed boys of 1926 called it.

 

The reason I keep rooting for the Fed to reach deeper into its bag of tricks is because I know that it will eventually, and I would just as soon get it over with. If we are ever to have a chance of cleaning up the mess in this country, we need to completely discredit the Fed and the concept of fiat money managed by a politburo.

 

The sooner things get worse, the better

 Getting to that juncture will precipitate quite a crisis, which will also create the pressure we need for the losers in Washington, D.C., to finally stop worrying about their own re-election and do something for the good of the country.

 

Unfortunately, that can happen only in a world awash in fear. Having Treasurys and the dollar under pressure due to recognition of the failed strategy of printing money is going to create the exact backdrop we need. That's getting way too far ahead of myself, of course, but we can only hope we get there as soon as possible.

 

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column in his personal portfolio.

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ABOUT BILL FLECKENSTEIN

Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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