Russia vs. Apple: How To Monitor The Battle

April 24, 2014

Apple: The Good News

Apple, one of the darlings of the current bull market, delivered on the earnings, share repurchase, and split fronts after the close Wednesday. From CNN:

Apple said it will increase its share repurchase program to $130 billion, up from $100 billion. The company also announced an 8% dividend increase to $3.29 per quarter, up 24 cents from the previous $3.05. Apple also announced a seven-to-one stock split, which will take effect on June 9. That would make the price of a single share of Apple significantly cheaper, paving the way for the company to possibly be included in the benchmark Dow Jones industrial average. Apple also handily beat Wall Street’s profit and sales estimates for the past quarter.

Investors love stock splits, which was evident in Apple’s 8% pop higher in Thursday’s session.

Russia: The Bad News

Financial markets hate uncertainty. Loose cannon Vladimir Putin is a source of great uncertainty. As shown in the chart of Thursday’s session below, stocks made an about face around 9:40 am EDT.

Russia-Ukraine is a story that remains on the market’s radar. From The Wall Street Journal:

Russia said it launched military exercises along the Ukrainian border on Thursday after Ukrainian forces killed pro-Russian militants and overran three roadblocks outside the eastern city of Slovyansk, in part of a renewed military operation to regain control. Russia’s Defense Minister Sergei Shoigu said exercises involving land and air forces along the border had already begun. Russia has had tens of thousands of troops massed along the border since last month and has threatened to intervene in Ukraine’s eastern region if it felt ethnic Russians there were under threat. Referring to the situation in Ukraine, he said that “if this military machine isn’t stopped today, it will lead to a greater number of dead and wounded.”

Investment Implications – Establishing Guideposts

The Dow has been consolidating for almost four months now, which tells us investor doubts about the economy relative to stock valuations have been increasing. All things being equal, the bulls will improve their odds of success if they can push the Dow to a new closing high. The fundamental rationale behind the importance of new highs was covered on April 4.

If you prefer to establish reference points for the S&P 500, as long as price remains above the colored moving averages and the slopes of the moving averages are positive (bullish), then the odds of a correction taking hold are lower in the intermediate-term. The look near A below (gains followed) is similar to the current look near B. Remember, we think in probabilities, not certainties, which applies to these guideposts.

As noted April 23, it is unlikely the Fed will remove the stimulative winds from behind the market’s back, which gives the bullish case an automatic one-up on the bearish case. The big picture remains constructive for equities, but continues to have some lingering doubts on a shorter time horizon. Therefore, we remain comfortable with a bias towards stocks (VTI) coupled with an complimentary and offsetting exposure to fixed income (TLT). The markets and incoming data will provide ongoing guidance along with the levels and concepts outlined above.

Fed has done all it can to fix US economy's non-structural issues, now it must hike rates