Apple Earnings Miss

October 19, 2011

Today is all about earnings, the economy and Europe. Equity markets are opening with a slightly downward bias after weak earnings from Apple (AAPL) has put pressure on the NASDAQ. Both bonds and commodities are unchanged this morning while oil is sitting at its highest level in over a month.

A slew of economic data has come in over the past couple of days. PPI and core PPI were ahead of expectations while CPI was in line and core CPI was below expectations. In a rare bit of good news for the housing market, housing starts were well above consensus this morning, while building permits came in slightly light. Tomorrow we get the Thursday jobless data as well as the Philadelphia Fed, Leading Economic Indicators, and Existing Home Sales.

Inflation in the UK jumped a surprising 5.2% in September. Some economists say it wasn’t “real inflation” because there isn’t an associated wage-price spiral. The Economist said “However, that is of small comfort to normal people who have to pay a lot more for basic necessities but whose wages aren’t rising to compensate. They may not regard this as a policy triumph.”

Apple (AAPL) missed their fiscal Q4 sales and EPS estimates last night on weaker than expected iPhone sales. New CEO Tim Cook commented that iPad supply/demand was now in balance. Intel (INTC) bucked the trend in PC related stocks by beating numbers, citing big iron (i.e. servers) as the key demand driver. Additionally, it appears that AMD is swooning once again, helping INTC gain share. Bank of America (BAC), Morgan Stanley (MS), and Goldman Sachs (GS) all reported with BAC and MS beating on reported numbers, while GS missed. I thought the interesting dichotomy was the strength at BAC’s wealth management business (i.e. Merrill Lynch) versus the marked weakness at the GS wealth management business.

An unsubstantiated rumor that the European bailout fund may be 2 trillion Euro vs. a prior discussed 440 billion Euro helped the market surge in late trading yesterday. The rumor was later repudiated by Dow Jones. Most likely it was a trial balloon in advance of Sunday’s meeting.

After being rejected by the CBO as financially unviable, the CLASS Act, a major provision in the Affordable Healthcare Act, has been scrapped. The Act would have paid for long-term care for America’s elderly middle class, and was a long-standing priority of Edward Kennedy. The plan was supposed to be self-sustaining, however, it couldn’t withstand actuarial analysis. The program was also a big reason the Healthcare Act was able to pass Congress given it’s stated “savings” of $86 billion in the first decade.

Let's face it, despite the Obama Administration's insistence that adding 45 million to the government dole for health insurance would actually save us money, the reality is what we all knew, it's a budget buster. As much as Obama would like it to be true, he can't "will" away the basic laws of supply and demand. He has tried it in alternative energy, finance, and health care, all with miserable results.

Somali pirates have attacked 199 ships this year with a total impact to the global economy of $12 billion. Protection is expensive as Protection Vessels International (PVI), which charges $50K to protect a ship on a typical eight day trip. Similar to the Pittsburg Pirates, their batting average is down this year as their rate of successful hijackings has declined 28% from last hijacking season.

I stole the table below from the Wall Street Journal, which lifted the data from the CBO. What the information demonstrates is that all the banter about tax rates is nothing more than politicians trying to garner points with dissatisfied voters. Even with “low” tax rates in 2007, the budget deficit as a percentage of GDP was 1.2%. In my view this shows that tax rate manipulation is no substitute for solid fiscal policy that promotes growth, which helps tax revenues to grow. A bit of government restraint in spending might help as well given 2011, a year of “austerity” in government, resulted in a record $3.6 trillion in government spending, a 32% increase from four years ago.

	Taxes Collected	Government Spending	Deficit	Deficit as % of GDP
2007	$2,568	$2,729	$161	1.2%
2008	$2,524	$2,983	$459	3.2%
2009	$2,104	$3,520	$1,416	10%
2010	$2,162	$3,456	$1,294	8.9%
2011	$2,303	$3,600	$1,298	8.6%

The World Series kicks off tonight between the St. Louis Cardinals and the Texas Rangers.

Have a great day

Ned