Apple - S&P 500 Breaks Out Of Range
Before getting into Apple, let's review the market. S&P 500 increased 14 points to 2,822.48 on Friday. That is higher than the previous 4 attempts at hitting the September record high. The market has broken through that resistance and is now focused on the record high.
S&P 500 needs to increase 3.8% to get there. It's now up 12.59% year to date making this already an above average year. It will be interesting to see where the final tally puts this quarter’s returns in terms of the best historical performances.
Considering how the S&P 500 had its best weekly gain since November, the fact that the CNN fear and greed index is only at 65 is pretty good. It increased 5 points on Friday.
The market had the healthy mini-correction that I was predicting earlier in the month. I’m on board with the rally more than I have been recently. Especially since ECRI leading index’s growth rate has turned up.
Nasdaq increased 0.76%, Russell 2000 increased 0.25%, and VIX fell 4.59% to 12.88. This rally has destroyed the bear’s hopes for a 20% decline that lasts longer than one day. I’ve seen many bears proudly proclaiming they have been bearish since early 2018 when the market had a temporary peak.
The next few percentage points will be the final dagger in their predictions. To be clear, we don’t want the bears to give up completely because then it means the market is in need of a correction.
Apple - Tech Rallies While Real Estate Falls
Best 2 sectors on Friday were technology and consumer discretionary which increased 1.22% and 0.71%. Worst 2 sectors were real estate and the industrials which fell 0.38% and 0.25%.
Boeing stock rallied 1.51%. I think the stock will see choppy action until the design issues that caused the plane crash in Ethiopia are resolved.
Apple - A Big Announcement
Apple stock increased 1.3% on Friday even though Qualcomm won a lawsuit against it. A federal jury awarded Qualcomm $31.6 million in damages based on its patent infringement claims. There’s another bigger trial where billions of dollars are at stake. That decision is set to be made next month.
Apple stock rallied in spite of losing the trial probably because investors are excited about Apple’s announcement on March 25th. Apple will unveil a YouTube TV competitor and a news subscription service. I think Apple is trying to compete with Facebook with its news service. It may see an opening now that Facebook is being cast as not trustworthy. Facebook gets into hot water a lot over who it bans. It’s a difficult task to define the line of what is ok and what isn’t.
Apple - Creating a streaming subscription package might not be as lucrative as it seems.
As you can see from the table above, Hulu with Live TV costs $44.99 while content costs are $44.63. It doesn’t take a financial genius to determine that’s a bad business. Even worse is its gross margins are expected to fall to -3% in 2020.
Remarkably even with Alphabet’s enormous resources and control of the internet, YouTube TV is a big money loser. In 2019, its subscriptions will cost $40.00, but its content costs will be $49.84. Apple is an amazing profit machine.
Whenever anyone has counted out Apple, it has proven them wrong. Apple has great power to monetize its users. This power might help it limit content costs. I’m excited to see its product offering later this month.
Another Big Rally In The Treasury Market
Even though I was a big bull on the treasury market last summer and fall, I’m shocked at how much treasuries have rallied since then. I though the 10 year yield shouldn’t have been above 3%. But I never thought it would fall this far outside of a recession. Even though stocks are signaling the economy is recovering, treasuries are acting like growth will be very low.
The 10 year yield fell 4 basis points on Friday to just 2.59%. That’s 5 basis points above its 52 week low. Cycle closing low was 1.36%. The 10 year yield is only 19 basis points above the Fed funds rate.
The 2 year yield fell 2 basis points on Friday to 2.44%. It is still 21 basis points above its 52 week low. It is only 4 basis points above the Fed funds rate. The difference between the 10 year yield and the 2 year yield is only 15 basis points. I don’t think the 2 year yield will fall much below the Fed funds rate.
Meaning, as the 10 year yield falls, it will flatten the curve. It would be very interesting to see the curve inverting while the ECRI index’s yearly growth rate turns positive. That would mean two accurate signals are telling different stories about the 2020 economy.
Q1 GDP Update
As you can see from the chart on the bottom, the year over year change in the Atlanta Fed GDP Nowcast is close to the trough in 2015.
Also, as you can see from the top chart, the GDP Nowcast has volatile intra-quarter moves which often end up being noise. With improved data, this low point of 0.4% could be noise.
NY Fed’s Nowcast estimate fell from 1.4% to 1.37%. That’s about in line with the median of the estimates shown on CNBC. There was a huge amount of data that came out this week. But the good and bad reports basically cancelled each other out. Similarly, the Q2 Nowcast fell 1 basis point to 1.5%. St. Louis Fed Nowcast expects GDP growth of 2.12%. It is usually is optimistic.
Apple - Conclusion
It’s remarkable how the bond market and stock market are rallying so heavily in unison. At this rate of decline, the 10 year yield will soon fall below the 2 year yield and the Fed funds rate.
The treasury market is starting to pressure the Fed to cut rates this year. Fed fund futures market shows there is a 27.8% chance the Fed cuts rates this year.