If I tell you that I expected Wednesday's market correction, I will be lying. Not only didn't I expect a correction, but I honestly expected a market rally. After all, housing is recovering, corporate profits are good and the U.S. Presidential Elections are finally over. But the market in its infinite wisdom is not concerned with today, but with the future. As such, Wednesday the market gave us a stern warning to be mindful of that future and be careful how we steer the economic boat.
Apple (AAPL) fell almost as much as 5% on Wednesday and is now officially in bear market territory. The question is, why is Apple taking such a beating?
I mean, Apple is supposed to be super cheap. In fact, it's probably the cheapest technology stock in the space and theoretically at least, it should not be correcting this way. While I have a few ideas as to why Apple should correct (read about my Apple articles here), nevertheless, this percentage of correction has surprised even me (your resident SA Apple bear). Of course, the ultimate judge of what is going on and how low Apple might go is up to the market to decide, but that won't stop us from trying to figure out what's on the mind of Mr. Market anyway.
The market at the moment, if I am interpreting things correctly, is telling us that Apple poses more risk than most people believe. Now I fully understand why Research In Motion (RIMM) is falling like a rock, but not Apple. RIMM is more of a speculation play, because we don't know if the company's new BB10 platform and phone will be a success. And in times of uncertainty, investors sell speculative or questionable plays first and ask questions later. So I can understand why a RIMM is falling by 7%, but I don't understand why Apple has a similar behavior.
So if we assume that for some reason Apple is a risk aversion trade, the next question is, why would this be so? I mean, you don't see Microsoft (MSFT) and Google (GOOG) falling that much nor many other tech heavyweights. Why is Apple falling 4%, when it has already corrected close to 20% as of Tuesday?
I don't have a clear answer, but I'm sure there that there is an explanation. Remember, the market is a discounting mechanism. Prices today don't really reflect what is going on today, but what will happen in the future. So if we assume that Mr. market knows what he's doing, this might mean that in 6 to 12 months from now, many of the things we know about Apple will change in relation to what we know today.
But maybe the market's slide has nothing to do with Apple. Maybe Apple is simply an innocent bystander. The fiscal cliff that I have written about is definitely something that should be on everybody's mind. Personally speaking, and having lived this experience on Ground Zero here in Athens Greece, I do not know how any government in the world can curtail spending to the tune of at least 4% of GDP (more or less the estimate needed for the U.S.) without provoking a technical recession.
Granted that the United States has its own currency and the Federal Reserve is a big ally in the fight against asset deflation, but even so, I find it very difficult to see how the current U.S. administration and Congress will be able to maneuver in such a way as to avoid at least several quarters of economic contraction, if the fiscal cliff scenario is confirmed,
One other interesting thing Wednesday is the price action in the banking space. All the big money-center banks, J.P. Morgan (JPM) Bank of America (BAC) and Citigroup (C), were all falling to the tune of 4%-6%. This reinforces the theory that the market is very worried about future economic contraction. When markets smell recession, it is the banks that correct first. When the economy recovers, the banks always lead. If fact, banks are a sort of a leading indicator.
But since the economy seems to be recovering, there is only one thing that might stop it from recovering even more, and that is none other than fiscal tightening.
To me at least, the price action in the banking space means the market is anticipating deteriorating economic conditions looking ahead. We can not know at the moment how this will evolve over the next several months, but let me be clear, the U.S. administration does not have much leeway as to how to proceed with the matter. Sooner or later it will have to confront its demons. And the name of this demon is called fiscal tightening.
One day's price action isn't indicative of anything and does not provide much information for any conclusion. As such, we will have to see more evidence of fiscal tightening before we can proceed with this thesis. I assume we will get this information over the next several weeks or so, and thus get a better understanding of why the market corrected Wednesday the way it did. But for now, I think it's fair to say that the risks associated with fiscal restrain are very much on the market's mind and have a lot to do with Wednesday's price action.
If all this is coupled with the fact that Europe is falling of the cliff as we speak, then there are many reasons for a risk aversion trade to take place that might unwind speculative and leveraged trades. This of course includes a flight to the USD for safety as well as selling stocks and bonds, that are either considered speculative in nature or have had a good run up recently and traders have many good reasons to take profits.
And if you ask me, I think this is the main reason for the price action in Apple Wednesday. That is, the unwinding of leveraged positions, whether the assets that comprise these positions are speculative or not, or, traders simply taking profits as a precaution.
Then again, when one uses high leverage, he speculates by default, even though the assets might be of the highest quality. Europeans know all too well how easy one can lose a lot of money using high leverage in combination with AAA assets, that theoretically speaking, cannot lose value (Greek bonds for example).
So is Wednesday's price action a buying opportunity? Probably not, because if my thoughts of the fear of fiscal restraint have any logic, then prices will fall a whole lot more and there will be plenty of time to find opportunities once the dust settles.
Remember, if the U.S. is forced into fiscal tightening, we will all have a whole lot of adjusting to do, first and foremost, trying to figure out how much corporate profits will fall and how much we should adjust stock P/Es and future valuations to the downside.