Apple Could Benefit from Window Undressing in July

By The Greek:

It sounds strange to say but Apple (Nasdaq: AAPL) turned into a portfolio pariah over the last year, with the stock down 31% since the end of last June. It sank even further during Q2, and now everyone knows about it from Wall Street to Main Street. So, as strange as it may sound, it is possible Apple took some damage from window dressing before the close of Q2. After all, the stock was down 12% in June alone. Therefore, it is also possible that portfolio managers will be buying it back in July, and so the stock might just benefit from “reverse window dressing” or undressing in July.

Apple

Window dressing is when portfolio managers pick up stocks that have performed especially well just before the close of a reporting period. Likewise, they may dump losing stocks, especially high profile losers, before the close of a reporting period. In so doing, they can show a high profile winner and do not have to show losing securities on their financial statement of holdings. So when Joe Investor receives his statement showing him what his hired portfolio manager found savory, he does not see that stink of a name everyone hates on the list but does see that big name winner everyone loves, like say for instance Tesla Motors (Nasdaq: TSLA). That makes for a reduced possibility of Joe liquidating his stake in the mutual fund or other portfolio. In turn, that means the portfolio manager will not lose his management fee from those assets under management, and so he has some incentive.

It’s counterintuitive to value investing logic, yes, since many see value in beaten down shares, especially in a name like Apple (Nasdaq: AAPL), which many believe has extreme value appeal here. Apple now trades at a P/E of 9.1X the analysts’ consensus estimate for fiscal year 2014 (September) EPS of $43.62. Matched against 21% long-term growth expectations gives AAPL a deeply discounted PEG ratio of 0.4X. Still, it happens and it affects capital flows and stock prices, and so it may have contributed in making a cheap stock even cheaper in June.

For Apple (AAPL), I think many of you will agree that it has been a lack of news about any new disruptive product that has more meaningfully hurt the shares over the last year. I authored an article about that theory entitled, For Apple, No News is Bad News way back when. If investors were enamored with the company, it would not be in the position to be considered for removal for window dressing purposes in the first place. However, it was in that position in June, and may have been removed by a critical number of professionals as a result.

Now, heading into Q3 and July all those investors who believe in the name for the second half for whatever reason, have impetus to buy. Even if they were not window dressers, they know others were and will drive capital flow no matter what they do or do not do. So the prospect of other investors pushing the stock up from this most recent bottom here could be an important fear factor in getting capital back into the stock now. It’s a trader’s hypothesis; there’s no doubt about that, but it is still a viable a near-term reason to consider buying Apple here.

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Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Fed Talk is Cheap

By The Greek:

Stocks were higher Wednesday despite a sharp downward revision to Q1 GDP and another report of decreased mortgage activity on spiking interest rates. The catalyst for stocks was some soft comments from Minneapolis Federal Reserve Bank President Kocherlakota and others. Well, talk is cheap; the action of the Federal Reserve to pull away its asset purchase programs prematurely speaks louder than words. As a result, I do not expect this latest support to hold unless it is followed by a change in policy.

Security	June 26 Change
SPDR S&P 500 (NYSE: SPY)	+1.0%
SPDR Dow Jones (NYSE: DIA)	+1.0%
PowerShares QQQ (Nasdaq: QQQ)	+0.9%
Bank of America (NYSE: BAC)	+0.7%
iShares Dow Jones US Real Estate (NYSE: IYR)	+1.5%

How desperate must traders be to be bidding up stocks on some contradictory comments from a regional Federal Reserve Bank representative when the truth about the economy shows it’s not as secure as the FOMC believes it to be?

The Truth

First quarter GDP was revised significantly lower this morning in its third revision, which usually does not bring with it major change. I’ll leave it to the reader to run the regression analysis to prove this, and trust in my own observations over the last lifetime on this one. GDP is revised several times, and so by the third revision not much change is typical. Yet, Q1 GDP was cut to 1.8% growth from its recent reporting at 2.4% (that is a big difference for the mathematically challenged). The revised growth rate is consistent with the expectations of the World Bank and Conference Board for the U.S. economy this year, but less perfectly matched with the latest Fed view for 2.3% to 2.6% growth. Furthermore, judging by the trend over the last three Fed prints on this, the Fed’s economic forecast will be cut to 2.0% to 2.6% at next printing, in my view. Eventually, it might even make sense.

In its economic report the government stated: ”The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP increased 2.4 percent. With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was less than previously estimated, and exports and imports are now estimated to have declined.”

Add to that sour news the fact that mortgage rates spiked even higher last week, as reported by the Mortgage Bankers Association (MBA) today. For the week ending June 21, the MBA indicated that its Market Composite Index for mortgage activity fell by 3.0% to its lowest level since November 2011. Mortgage rates spiked last week after the Federal Reserve’s press conference announcing the tapering plan for the asset purchase programs. Here’s what happened to rates in the latest week:

Mortgage Loan	Rate	Change
30-Yr. Fixed Conventional	4.46%	+29 Basis Points
30-Yr. Fixed Jumbo	4.52%	+29 BPS
30-Yr. Fixed FHA Sponsored	4.20%	+35 BPS
15-Year Mortgage	3.55%	+25 BPS
5/1 ARMS	3.06%	+25 BPS

Perhaps not so surprisingly, Purchase Activity actually increased in the latest reported period, as some buyers on the fence rushed to lock in as low a rate as they could. Some believe rising rates will increase mortgage activity, and while I agree this could be a short-term phenomenon, it will not be a long-lasting sustainable economic positive or a catalyst for growth in the housing market.

So why then are stocks rising counter to intuition?

Fed Speak

Minneapolis Federal Reserve Bank President Narayana Kocherlakota wanted to clarify what he thought was a misinterpretation of the market since the FOMC Monetary Policy release and press conference. So on June 24, he published this clarifying statement and held a conference call to discuss the issue. He also appeared on CNBC this morning to discuss the issue, where I believe he caught the market’s attention.

President Kocherlakota’s statements were meaningful, mostly because they seem to give the Fed an out of this horrible trajectory it has decided on. The fact that this event occurred showed that there is some pressure on the Fed today about how markets have digested the message. Therefore, it may eventually react to stop the trend in mortgage and interest rates, hopefully in time to stop serious economic damage. But until it does, none of this matters.

The market believes the Fed is acting prematurely and taking away a critical support from the real estate recovery and from the still vulnerable economy. Interest rates will continue to rise as a result and the Fed thus destroys its own economic work. Talk is cheap, and actions speak louder than words. So the Fed should accept that the efficient market has spoken and that it was a mistake to taper asset purchase programs over the near-term, period.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Fed Monetary Policy Release

Fed Monetary Policy

This is the verbatim release from the FOMC

Release Date: June 19, 2013

For immediate release

Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Security Reactions	2:20 PM ET Wednesday
SPDR S&P 500 (NYSE: SPY)	-0.4%
SPDR Dow Jones (NYSE: DIA)	-0.4%
PowerShares QQQ (Nasdaq: QQQ)	-0.3%
SPDR Gold Shares (NYSE: GLD)	+0.2%
iShares Silver Trust (NYSE: SLV)	+0.3%
iShares Barclay TIPS Bond (NYSE: TIP)	-0.5%
PowerShares DB USD Bullish (NYSE: UUP)	+0.5%
Financial Select Sector SPDR (NYSE: XLF)	-0.4%