Market Briefing For Monday, Oct. 25

By Gene Inger

Monday, October 25, 2021 2:10 AM EST

Stock prices determining earnings isn't how markets work, at least not for long. And that's part of the problem now. First of all S&P got the record high and it faltered on follow-through; with ensuing 'selective' selling as anticipated.

The data points are being challenged by problems ranging from higher Oil as it impacts not just us; but the energy crisis in China. Not to overlook a serious challenge (with property implications) by Evergrande, which made a payment on its debt, thus avoiding a broadening sector plunge there, for the moment.

Banks & Oils benefit from the inflation that we've said all along was not just 'transitory' but enduring. The terminology of the Fed saying 'inflation will stay transitory for longer' than they expected, is absurd. Longer sure isn't transitory of course. Plus margin compression is a factor too, as it relates to earnings; and now the supply-crisis also impinges not just on margins, but on sufficient supplies of all kinds of products (can't use or sell what's not handy).

Stocks that are attractive now require special situation attractiveness, or they need to come down (if mega-caps) before you can expect investors to latch onto most of them again. This week was a wake-up call of sorts; surrounding an issue we've discussed before; and that was both 3rd party billing / linkage for purchase on IOS devices, and the security issues on Apple devices too as they require user willingness to allow 'tracking'; which most people decline.

Executive summary (focuses on what snapped the big-internet stocks):

SNAP indeed triggered a 'snap' of the big-cap tech stocks (or similar) as a direct result of their revenues reflecting the impact of restricted access; precisely the issue of Apple IOS software giving users the option 'not' to let an iPhone user be tracked by given software or Apps;
Something like 15% of Apple IOS users have 'allowed' tracking; so that's a crimp not just to SNAP, but also to Facebook, Google and so on;
Recently I had discussed the 'battle' between Apple and Epic; and more importantly between Apple and Facebook, which involved advertising of course; but it's all linked together which everyone now recognizes;
This can do more than change policies or business models of Facebook or associated social media services; but possibly push them either into a subscriber-based model only (which would compel user tracking info be allowed); or simply deny access to those who are unwilling to be tracked;
The latter might become similar to 'streaming video/TV services', which in a few cases allow ad-free viewing if you pay; with ads if you wish it free;
Revenue has to come somehow; and sharing general information has for years been normal for free streaming services; but that's been abused as well as hacked on-occasion;
So the conflict has arisen; mostly at this point the 'power of Apple', able to dictate perceived guarding of their customers' security (which this does help); but Apple's motivations are more commercial than protective;
Of course Apple wants users wedded to its services; but also genuinely to have real confidence they can visit many Apps without subsequently being pitched constantly by various ads that seem to know our interests;
Congress also was involved in these internet restraints; with Apple sort of heading-off more draconian restrictions by virtue of making being tracked voluntary; so in more case I'm among the 85% not wishing to be tracked;
Exceptions - for instance - would be by my home thermostat so it adjusts temperature activates lights and unlocks doors, as you near home; or for instance Uber or some services that really don't work without locations;
All that matters here is that people are generally clicking 'decline' on most sites and Apple controls the U.S. mobile market, like it or not; hence this is a big deal and the ramifications are increasingly impacting 'earnings' of a slew of companies, especially those involved with 'social media';
Also includes selling contact info for ads (that includes Google; whereas Apple does it internally for their own services, which you agree to receive promotion for simply by a required agreement clicked-on every time IOS software is updated;
Finally on the general topic; Apple's latest MAC Operating System, which is known as 'Monterey' (love Carmel, Monterey's not bad :) ) launches on Monday, one day ahead of initial delivery / sales of new MacBook Pros;
Intel (INTC) slid further as did others not 'directly' related to the 'earnings crimp' we just discussed again stemming from SNAP's wake-up call;
Aside all this there is the speculation of a 'retail resurgence'; however the bulk of that encounters the higher prices / limited supply; and may pull a bit of demand from the upcoming holiday season;
Generally there's no change in the expectation of a further robust period 'after' we get a resolution to the pandemic, which we don't have despite a degree of fatigue that has people largely behaving 'as if' it were over;
The general market flow is more neutral; but that's what we essentially have expected after 'record S&P highs'; the new week will be defensive to start with and while there could be a fairly 'springy' intraweek rebound; we are not 'all clear' simply because 'Roctober' is near an end.

In sum: all the conditions discussed through the week are ongoing; including the 'red flag' warnings to at least be cautious. Semiconductor shakeouts have exemplified the type of 'trap-door' selling that can radiate to various stocks in a certain situaiton. Then there are stocks like Intel which is benign relative to the online / tracking issues.

More so than Texas Instruments (TXN), also down a bit, semi opportunities will be created to enter these again for those desiring; but I think there's no urgency at the moment In the case of Intel it's the duration of a turnaround which will be very promising eventually; but it takes time.

Stocks like our home-run AMD are more stable (but extended; and that's why ringing the register for that 20% second portion of sales if you bought all the way down at 17 makes sense; or bet on it holding into the new tax year..and not at higher cap-gains rates). AMD or any involved with sub-contracted work done in Taiwan have a degree of risk that can't entirely be dismissed related to whether or not China will restrain themselves. Apple is not immune to risk related to China, but has nurtured a good relationship so far. Tesla too.

The solution to all of this would be an actual cure, more protective vaccine, or antiviral drug to deflect the pandemic, which rages on in much of the world or is barely controlled in others. There is another issue of growing concern; it's a 'ransomware' threat by hackers to 'unite' against the U.S. Are they listening to Russia's Putin? To use one of his favorite words; the world seeking perfection in this environment has 'phantasmagoria' (dreamlike fantasies?).

While we should recognize the potential 'buzz-kill' that China portends; there's a belief that they have to be sensible; although there's no assurance of that. It is noted that they have nurtured financing or operation arrangements for over a dozen countries (sometimes railroads or ports; Kenya is not the only one); a few of them have had recriminations as they reflect now on China's behavior.

I noticed that President Biden casually dismissed the Taiwan issue; by saying to Anderson Cooper (a CNN Town Hall) that we essentially would defend the Island. There's not a formal commitment (it's a gray blur); but probably that's the correct stance for him to take; even though some believe it's untenable to actually believe we could prevent a Chinese takeover if they really swarm it. It would however wreck China's image throughout Asia; and the fear is that they have enough problems developing that they might take a 'now or never' view; although we don't have evidence of that dominating policy, other than military moves and exercises. They just sailed into Japanese waters with Russia too; and I doubt that anybody's planning on attacking Japan (the disputed islands).

I expect some of the giants like Google to break to the downside; after some defense perhaps. It's a good example of a stock with a lengthy advance that's not had a correction of signficance. No assurance of one; but it makes sense for it to be rolling-over (I've noted sequential lower highs) and has influence in many ways on other stocks. Business is growing; just noting high valuation.

In most of these 'mega-caps' I've previously discussed some heaviness that's related to booking capital gains in this tax year to avoid perceived increases in 2022. However, those likely would not be retroactive; and may not occur at all so it's tough to weigh any decision on a huge stock one's held for years based on tax considerations; and typically one doesn't. Their revenue growth used to sustain earnings is the typical analysis; but doesn't factor lost revenue due to the entire ad-tracking aspect (gee, no wonder Android phones don't offer the same denial ability that Apple IOS does.. unless the App developer choses).

Relative to the big-techs; Apple has held up better; but it's underperformed a bit lately; which given a 'potential' head-and-shoulders top (just short-term); it may have some vulnerability nearby. Now I know that some believe 5G will be able to bolster their sales; but I don't think that's quite as massive as people think; though it will be a prolonged upgrade cycle; hence the iPhone 14 next year will be 'even more' tremendous' (assuming no China crisis). What really is rarely noticed is that AT&T has enhanced all their towers basically; so the customers that don't have 5G 'or' do but not super-fast, will find it's very fast.

In other words customers aren't missing the lack of saturated mid-wave band service. And new Qualcomm 860 modems provide better range. But before I delve into the tech aspects; I'm just saying fine longer-term; dubious for now. I am more concerned about the reactions near-term than the very long-term.

We'll see how the new week begins; but for now the 'storm warning' flags are still hoisted; but the degree of storm is hard to determine; aside what you see are companies that miss earnings (or revenues in the case of tech) tanking in swift fashion, which is sort of forewarning about limited support for stocks that disappoint. And you have a few with incredible moves higher; but that's also a market performance not particularly balanced. Continued caution prevails.

Tech stocks hit a wall; supply constraints are only a part of it; and some will do very well next year; but primarily later. Will mega stocks defy laws of gravity in the near-term? I think they already are feeling the effects of negative press as well as concern about revenue business models for some more than others

Those headwinds won't be cleared-up by earnings; however the overhang of 30% of S&P stocks reporting earnings over the coming week may impact the changing dynamic of this market, which reflects the 'walled-gardens' unfolding among many of the tech stocks (sort of forced to follow Apple's guideline as surveys show that consumers are indeed preferring to be able to opt-out of a constant stream of tracking.. but again there's a cost as firms have to make a degree of revenue somehow. And here you differentiate the capital flows and have a way to contest whether Facebook isn't going to have huge inflows as in the past, though I certainly concur about their 'social' dominance.

So the warning flares were fired in recent days; and we're sort of 'on-guard'.

This is an excerpt from Gene Inger's Daily Briefing, which typically includes one or two videos as well as more charts and analyses. You can subscribe for more

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