In the words of Inigo Montoya, let me explain. No, there is too much. Let me sum up.
The market’s most immediate issues remain tied specifically to what’s going on overseas, particularly in Turkey. There, monetary authorities are meeting on a potential interest rate hike as a way of getting on top of the inflation problem (inflation’s at 7.5 percent, and the central bank’s lending rate is, uh, 7.75 percent).
So that’s a problem: Inflation is running real hot, the lira is in free-fall, and as Reuters’ Mike Peacock in London points out, the consensus view for a rate hike puts it at about 10 percent for when the bank announces its decision at midnight Istanbul time, 5:00 p.m. Eastern time (1000 GMT). Will that be enough to put a floor under the lira? Perhaps.
Now, U.S. companies don’t exactly have a lot of exposure to Turkey, and in this emerging markets rout we’re in the midst of right now, there’s a real question as to whether we’ve reached that “contagion” level. Sure, everything is selling off, but that’s not quite the definition, and it will take a little bit more time and effort – that is, more wholesale selling, liquidation of positions across various countries – to really call this a contagious effort. There are worrisome signs on that front, though. An analysis by Reuters’ Sujata Rao-Coverley, Dan Bases and Vidya Ranganathan points out that the increased funding through publicly traded fixed-income markets rather than bank lending means these markets are more intertwined, leading to the possibility of more selloffs that feed on each other.
Back in 1998, bank loans were the funding mechanism for lots of emerging countries. Furthermore, the sheer dollar volume now dwarfs what was out there in the 1998 Asian contagion that later saw the collapse of the ruble. EM bonds are now in the range of $10 trillion, versus $422 billion in 1993, per JP Morgan; funds benchmarked to EM have assets of $603 billion, more than double what existed in 1997. EM ETFs? About $300 billion now – compared with nothing in 2004. And let’s remember the main ETF for emerging markets – EEM is the symbol – which is routinely the second-most active ETF in the United States. Long-term investing this ain’t, and the flight exacerbates the worries.
After three days of selling, emerging markets have stabilized a bit on Tuesday, so that’s something. Again, these selloffs often combine magnitude and time, with the swiftness only one part of it – the sheer ongoing nature of it is the other part. But that doesn’t mean preparations aren’t in order: David Kotok of Cumberland Advisors said his firm is raising cash levels, noting volatility tends to spike in forex markets when central banks have held interest rates near zero for a long time (which they have).
The real watcher is likely China’s shadow banking system and the possibility of problems there. Banks have been selling massive amounts of exposure to investment trusts to individuals for some time with promises of big returns and using that money invested for lots of lending; one of those trusts distributed by ICBC had to be bailed out this week. If there’s more of that to come, it’s a real question of what’s going on with the banking system’s health there – and that again leads to some uncomfortable conclusions about growth in China, which is far worse a problem than any crisis in Turkey, given its sheer size and influence.
Meanwhile, on a domestic front, Apple’s earnings weren’t what was expected. Sure, the company exceeded revenue forecasts and earnings forecasts, but it fell short of expectations on iPhone sales by a lot, and nobody’s happy about this. The stock was hit hard in after-hours action, and was, of late, down about 6 percent. Of course, selling 51 million phones over a three-month period isn’t exactly shabby, and the company is still making money hand-over-fist.
The disappointment comes, in part, from the realization that Apple’s growth rates just aren’t what they used to be, and that Samsung is widening its global lead in the smartphone market, with one report putting its sales at 86 million phones in the quarter. Samsung, of course, is selling more low-end phones, so it’s not like Apple is getting its head handed to it here, but its market share is down to about 17.6 percent from 22 percent, according to Strategy Analytics.
Carl Icahn’s recent calls for the company to get more aggressive in giving money back to shareholders through a big buyback are going to probably only get louder. This raises the chances that the company doubles down on the financial engineering strategy of growing earnings that admittedly has helped the shareholders of names like IBM, AT&T and Exxon Mobil, but doesn’t speak well from the innovation front for a lot of these names.
The company – the most valuable in the United States – had been banking on a big deal in China to sell even more phones, but the market is starting to look saturated on that front, Pacific Crest analyst Andy Hargreaves told Reuters’ Bill Rigby. And Apple doesn’t have a game-changing product on the horizon either right now, so that means the investment thesis comes down to volume. It’ll keep making scores of money, but reduced market share and pretty new colors and bells and whistles won’t be enough when “hardware can only go in one direction, and that’s flat or down,” said Alex Gauna of JMP.
If Apple is headed in the direction of AT&T, it’s going to eventually turn into one of those companies where investors get excited about special factors pumping up earnings results, and AT&T’s going to have that today when it reports results. What’s going on here? Pension related stuff – the market’s gains mean companies with lots of pension assets can mark those positions to market (read: make them bigger). And where previous years of losses can hurt those positions for the likes of Verizon, Ma Bell and UPS, this year it’s a help.
Verizon’s adjustment boosted S&P 500 earnings per share by 42 cents this quarter, and AT&T could make just as big a splash this time around. So AT&T is expected to record a gain of about $7.6 billion in the fourth quarter as a result of this, which is massive. Now, David Randall wrote a story a few days ago noting that few fund managers buy a stock based on this sort of thing – AT&T’s primary business is, uh, selling telephones, no, wait, ah yes, telecommunications – so if the business stinks, never mind the pension stuff.
But it’s nice that the pension funds are fully funded or better now, just in time for a big market correction.