Capitulation Out of Tech
Federal Reserve holdings and potential loss
Good Morning Traders. Well Amazon certainly didn’t help things after the close yesterday:
Amazon.com Inc. “holiday sales and profit would come in well lower than analysts expected as cloud growth slowed and Amazon Web Services profit missed expectations by nearly $1 billion.” Amazon executives guided for fourth-quarter operating profit of break-even to $4 billion and holiday sales of $140 billion to $148 billion. Analyst expectations were for operating income of $5.05 billion on revenue of $155.09 billion, according to FactSet. AWS sales of $20.54 billion grew 27.5% from the year before, the lowest growth rate for the pioneering cloud-computing product in records dating back to the beginning of 2014, and lower than analysts’ average estimate of $21.2 billion; AWS operating income of $5.4 billion handily missed analysts’ average estimate of $6.37 billion, according to FactSet. -CBS Marketwatch
As far as Amazon overnight trading down 13% at $97.70:
Apple was a bit of a bright spot amongst the carnage as Zerohedge reports:
EPS $1.29 vs. $1.24 y/y, beating estimates of $1.26
Gross margin $38.10 billion, +8.3% y/y, beating estimates of $37.31 billion
Revenue $90.15 billion, +8.1% y/y and a record for the September quarter, beating est. $88.64 billion
Products revenue $70.96 billion, +9% y/y, beating estimate $69.04 billion
IPhone revenue $42.63 billion, +9.7% y/y, missing estimate $42.67 billion
Mac revenue $11.51 billion, +25% y/y, beating estimate $9.25 billion
IPad revenue $7.17 billion, -13% y/y, missing estimate $7.81 billion, and down for the 4th quarter in a row.
Wearables, home and accessories $9.65 billion, +9.8% y/y, beating the estimate $8.8 billion
Service revenue $19.19 billion, +5% y/y, missing estimate $19.97 billion
Apple stock is relatively stable overnight, up slightly:
A chart we did find interesting was the fact that Apple’s net cash is now down to $49Bn down a whopping 70% from its peak:
All in all not a great tone for the overall market, but with the Nasdaq taking the brunt of the rotational selling, we may see continued outperformance of the other indexes. For now the SP continues its outperformance as it has done so all of this year:
In regards to the futures markets, the Nasdaq hit a key Fib level overnight down at 10958 which will be key today. Bulls would need to reassert pressure up to 11255 and bears would want to see a close below that 10958:
The SP500 continues to hold near the support band around that 3800 strike so will see if it continues to support or if Vwaps are targeted below:
As far as all the other markets we cover here is a quick overview this morning:
The US treasury complex has seen selling pretty much since late yesterday afternoon and into this mornings session as the US treasury curve is a bit weaker with yields rising across the board posting a flatter yield curve thus far:
We believe the US treasury market to hold up here and would like to see a more sideways to higher trade over the next few days preFOMC. Speaking of the Federal Reserve, we have compiled their holdings and have a couple of insights:
The bulk of the runoff is coming in the form of 5-10yr maturities and they are adding longer duration (>10Y). This makes perfect sense, however they are mandated to not hold more than 70% of any single CUSIP, so this may become a challenge moving forward. If this rule has changed, we haven’t seen it, but please correct us if so. We do believe they will continue to shed shorter duration for longer duration and that they really won’t be able to decrease their balance sheet very much as the “Deferred Asset” will grow far too large and they will need all the UST interest income to offset it in the future. For now, our estimates are for a massive loss come Q3 which will be reported on November 30th. Our estimations are for a loss of over $1.6T, yes that is a T:
We compiled the SOMA data for our estimate and are very interested to see how close we come:
If we are correct, then we would suspect the Federal Reserve terminal rate to be close after the Nov 2nd 75bp hike and we will anticipate the FOMC to take a wait and see approach, under the willful protection of the fact that rate hikes take 6-18 months to filter through the economy.
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