The Indicator issued another "Null" Signal and the flurry of Null Signals is starting to concern us. When there have been patterns of these Null Signals in the past the markets are usually preparing to make a sharp move without notice or warning. And, those moves are usually "Event" driven. In other words, the markets "Go Nuts." We're talking both to the up and down sides.
And with the momentum pattern still neutral, but eroding, in the Sep 98 S&P 500 Futures, we're concerned that the markets are going to break to the downside; possibly post expiry. Without a clear signal from the Indicator, we'll probably have to consider the potential for Microsoft's earnings to be a potential event.
RFI knows full well that people have gone broke trying to bet against the likes of GE and Microsoft as far as their earnings go. Microsoft can manage their numbers almost as well as GE. And, RFI told someone yesterday that even if Mr. Gates had to "float the company a short term loan" Microsoft would make its numbers. We went on to say that even if Microsoft stopped dead cold today they'd still get 10% annual growth just from its investments and other income producing positions. Yet, for the past several quarters Microsoft has not only been warning of slowing growth but they have also stopped buying their own stock. And with the sluggish sales of Win98 people might be tempted to "bet against Microsoft." More pain to them.
Could any potential disappointment in Microsoft's earnings hammer the market? Don't count on it. Look at what happened to Intel the day after it missed its number. The markets rallied. So unless Microsoft's earnings are a "disaster" (don't bet on it) the markets won't be negatively impacted. So, we'll have to look for another "event."
We're still sitting on the sidelines and we're not inclined to jump into any position this close to expiry. Enjoy the show as it passes by. We'll take another look at the markets in the Weekly Update and see whether we should establish a position next week.
As far as Apple is concerned, after its much better than expected 3Q earnings ("Blow Away Quarter"), those in the short term Jul 35 calls should take their money and run for the doors. Don't play chicken with the markets. Otherwise, those new options series won't be opened until after expiry so those who will be pained will have to take their lumps.
RFI suspects that it will be hard for AAPL to sustain a level above 35 - 40 until after expiry, but there's a lot of "Good News" in Apple's 3Q report; even though others are saying that there's also "soft spots;" which there are. We'll cover that later.
AAPL posted profits of 65¢ EPS (diluted) which blew away consensus estimates. Even if you substract the one time gains to come in at 50¢ diluted, it still handily "Beat The Street." But, as expected, the analysts were focused on the "Units" rather than the "Cents." Which is what RFI stated after the 2Q results. Overall, there's fodder in the report for both Bulls and Bears. More for the Bulls though. And, CFO Anderson stated that we could expect sequential growth for 4Q; and while he would not elaborate he finally answered an analyst that we could expect sequential revenue growth in the lower end of the 5 - 10% level. RFI will up its 4Q estimates to the 66 - 72¢ range and go out on a limb by stating that AAPL might earn upwards of 80 - 95¢ on 1Q 99. There's going to be a lot of pressure inside Apple to "Break Three Digits" again this quarter.
The sequential and year over year unit drops should be attributed to two major factors. First, the "lack of consumer models" in the product line which hampered sales in Europe and Japan. They were mostly selling the older PowerMac Consumer (6500, etc.) models that were basically cleaning out inventory. The second factor were the constrained supplies of PowerBooks right after their launch. Those problems, with the exception of Custom Configurations at the Apple Store, have been solved. And that answers the question of "Availability" we mentioned in the MWNY Special Report. Apple also intimated that they reached their internal targets for the G3 PowerBooks; which RFI had reported at 75,000 units.
On a related item. Apple stated that the iMac is on track for a 15 Aug 98 launch so the slight delay in the first iMac boxes off the production line should not hamper the launch. Whew! Another concern addressed.
CFO Anderson stated that the biggest challenge for Apple in the current quarter and next is the launch of the iMac as well as being able to meet expected demand. The expected demand from the Installed Base of Mac Users is the first target audience, and sales ofthe iMac to the Education Channel are also expected to be high; along with the final sales of the Artemis box as it approaches end of life. Apple also intends to target new computer users as well as eventually targeting migration of WinTel users. To attain this goal Apple is going to launch an aggressive promotional and marketing campaign with the launch of the iMac; which will span both its 4Q and 1Q.
And as far as the initial target sales of the iMac are concerned, RFI's first year sales that we reported in the MWNY Special Report are within the range but the sales will probably be better than expected. About 37% of Apple's Installed Consumer Base have not upgraded their computers in over 4 years. So the potential upgrade sales in the consumer market alone might hit those targets RFI reported.
Going forward, while RFI has received reports that Apple's internal target for units shipped in 4Q are 1 million units, we're of the opinion that 750,000 - 800,000 total units are more reasonable. 1 million units in 1Q '99 is more reasonable.
There's a lot to cheer about in the 3Q earnings report but Apple now has to show The Street growth, and not just in revenues. The Street will want to see "Growth" in both units and market share for Apple. RFI suspects that if the iMac, other consumer models, G3 PowerBooks and the "New" DT/MT lines due out will hopefully deliver that growth. Our estimates for 4Q and 1Q are subject to revision.
Let's keep our fingers crossed.
Working......
Supplemental Update to follow.....
!6 Jul 98 Supplement
