This guest commentary was written by Mike O'Rourke of JonesTrading.
This market is making 1999 look like child’s play when it comes to equity market manias.
After lowering guidance to start the year, the largest US company was up 89% in 2019. Just a handful of weeks into 2020 the shares had returned 11% through Valentine’s Day. That equates to an annual appreciation of 131%. A few days later and the company withdraws its full year revenue guidance.
The reaction is that the shares decline 1.8% or are still on theoretical pace for another 89% annual return. There was a great deal of spin today rationalizing the markets mild reaction Apple’s holiday weekend 2020 guidance withdrawal, saying it was “expected.”
You can say many things, Apple’s a great company, Apple makes great products, Apple is the most profitable company in the world, Tim Cook is a master at managing the share price. All of which are true and all of which are valid reasons for buying Apple shares on any day, but one can’t seriously say it was “expected” that Apple would withdraw its revenue guidance for the year. It is absurd to make that assertion about a hardware company trading north of 25x time earnings, all driven by multiple expansion.
Apple certainly did not expect to be in a position to withdraw its guidance. It was only 2 ½ weeks ago CEO Tim Cook addressed the coronavirus outbreak in China on the Q1 earnings call. Cook stated “We expect revenue to be between $63 billion and $67 billion. The wider than usual revenue range comprehends uncertainty related to the recently unfolding public health situation in China.” Later during the Q&A Tim Cook elaborated
“The re-opening of those factories after Chinese New Year has been moved from the end of this month to February 10th, depending upon the supplier location. And we've attempted to account for this delayed start up through our larger range of outcomes that Luca mentioned earlier. With respect to customer demand and sales, we've currently closed one of our retail stores and a number of channel partners have also closed their storefronts. Many of the stores that remain open have also reduced operating hours. We're taking additional precautions and frequently deep cleaning our stores as well as conducting temperature checks for employees. While our sales within the Wuhan area itself are small, retail traffic has also been impacted outside of this area across the country in the last few days. And again, we have attempted to account for this in our guidance range that we've provided to you.”
There you have Apple reiterating wider range of revenue guidance was originally intended to account for the coronavirus disruption. Granted, the situation was fluid, and that was their best projection at the time.
Once again, market participants can’t rationalize the withdrawal of guidance and say it was “expected.” Since Apple’s conference call the S&P 500 had returned 3.3% and Apple itself gained 2.5% through Friday’s close. Neither had given any indication of pricing anything in. As we noted there are countless good reasons for investors to own or buy Apple, but anyone saying this was expected is both lying to themselves and ignoring risks that have yet to manifest themselves in the market. We are operating in an environment where mania has taken hold.
Retail has reengaged en masse in the form of zero commissions whether through Robinhood or the discount brokers. The FOMC is pumping liquidity at the same pace it was during the heyday of QE1. Passive managers and index products have no choice but to buy, and active managers can’t afford to sell in this environment. In most investing environments a withdrawal of guidance on a holiday would have been a red flag met with massive selling pressure knocking a company’s shares more than 10%.
The liquidity and euphoria has people behaving in the one-mentality of the early 1970’s and the late 1990’s. It has prompted markets to largely ignore Boeing doing significant damage to its reputation and losing its key product in excess of a year. The type of thinking that has sent Tesla up 186% in 4 months. It is the type of thinking the fueled books titled, Dow 36,000, Dow 40,000 and Dow 100,000. The thinking that one can pay any price for a company because they plan to own it forever.
The bottom line is there is no respect for risk in the equity market and mania is not indefinitely sustainable, there is no permanently high plateau.
This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.