Apple's Explanation For Revenue Plunge Doesn't Cut It (Podcast)

It is the story of the day, and it is the person of the day who knows what to say about this, and that is Shira Over, a Bloomberg opinion columnist, wrote a terrific column about Apple and the surprise cut to their first quarter forecast. Shia, thank you so much for being here with us today. The big question is is Apple facing something that is unique and surprising in China? Or did something have been to the Chinese economy that took a sort of spiral downward that is going to

affect the broader economy. What happened in two months? Yeah, as usual, Lisa, you you ask exactly the right question for which I do not have exactly the right answer. But I agree with you that the explanation from Apple needs more explanation. Right. So two months ago, um, when analysts. When Apple held its quarterly earnings call, analysts asked Apple about trends in China because it is no secret that

economic growth there has been slowing. It's no secret that there's been a trade war between the US and China, which may be unsettling consumers in China. Uh. And it's no secret that smartphone buying trends are changing in China as they are in the rest of the world. People are are buying new devices less often. And the only answer that investors seem to get from Tim Cook and other exactly another Apple executives is that things are great

in China. Right. So the question is did economic conditions substantially deteriorate in two months in China? Which is possible? Uh? Did Apple simply not foresee that all of a sudden, all of these trends that were blowing against it in China finally started to show up in results. Um? Was Apple simply not honest with investors about what it saw, hoped things would improve in sales results in China and

didn't quite get there. I don't have an answer to any of these questions, but I agree with you that just blaming an economic growth slad and in China is insufficient explanation for what is a pretty dramatic, uh deterioration of revenue for the world's most valuable company. Sure does Apple need to reevaluate their pricing? Is anyone going to spend a thousand dollars just so that they can get two hundred and fifty six gigabytes on an XX when they can buy an XR and be very happy for

that upgrade. I I think that is a question that Apple investors should be asking, and among many other hard questions they should be asking of Apple right now. So it's very clear that to Apple's credit, it charged an an unprecedented price for iPhones the thousand dollars and up in the last year plus, and people have been willing to pay that price, and they weren't willing to pay a thousand dollars up for other smartphones from Samsung, for example.

So there is a built in loyalty for Apple products, built in um realization or belief that those phones offer enough value to to justify a thousand dollars. But maybe that near term gain for Apple, the revenue growth was able to show only because it increased prices for iPhones and some other devices. Uh maybe that gave a short term revenue juice, and that's coming back to haunt Apple now. Uh, in in addition to all these other factors that are

being on smartphone demand in general. So sure, it was a rough period for Apple at the end of last year, shares down more than nine percent. After they're reporting this news after hours yesterday, at what point do we say, Okay, the worst case scenario is baked in and actually people are getting over their skis here. Yeah, that's again another

good question to which I did not have a great answer. Um. Yeah, I was actually I wasn't sure whether the decline that we've seen in Apple shares in the latter half of

was justified. There were also concerns a year earlier about demand for the iPhone ten right, a similar set of kind of reports out of the supply chain that demand didn't seem to be that great, And then that didn't really part of true, right, And so I was a little bit skeptical, to be honest with you, about these reports of of unsettled or waning or lower than expected demand for the iPhone models that have been released towards the tail. And it looks like those reports in this

case were accurate. UM. You know, growth expectations have obviously been recut even before Wednesday, and they're being recut again today, and I just don't know where the bottom is. The worry for me is if Apple hasn't been honest with itself or investors about what it's business look like, what its business looks like, what a smartphone buying trends look like, then I'm not sure people can have confidence in estimates

from the company or from the cell side analysts. Do you believe that Alexa is also having an effect on Apple because Siri is falling behind in terms of its popularity, maybe on the margins, UM, maybe on the margins. It is definitely a problem that Apple's Internet services and that includes things like Siri, are not up to par with competitors including UM, Amazon and Google, and that maybe hurting, say ails on the margins. But the big thing that's

weighing on on Apple UM the generates. You know, Apple generates two thirds of Daniel sales from iPhones, and the smartphone market has permanently changed period, and that's largely what we're seeing happen in China. The people that the easy growth has gone there are fewer first time smartphone buyers out there. People in many established countries are not switching from my iPhone to Android or the reverse growth has gone. Thank you very much, Shara Oviday, expert when it comes

to all things technology for Bloomberg Opinion. We've been getting numbers for US sales out of the big automakers, General Motors and Ford both reporting sales down. Joining us down to talk about Alan Baum, auto analyst and principle of Baum and Associates, General Motors shares in particular taking a big hit down nearly three per cent. Why, well, that

the drop is is there? And of course, uh, you know, since they've gone to quarterly reporting, Uh, the quarterly report that we're seeing today becomes magnified since it has to stand in for the previous two months. Alex Boum, can you just describe sort of the overall tone of the market for automobiles? What are we looking at? Seventeen million vehicles sold? Over seventeen million for this year, probably about seventeen point two. Um, I'm I'm looking at sixteen point

eight for next year. Yeah, it's a drop. Seventeen point two is more or less flat with two thousand seventeen, but obviously those are very strong numbers. UM. The concern I have going forward, and we're starting to see a little bit of it this year, is that retail sales have slowed down there down for the year, even though that the totals are flat UM and obviously profits are

are stronger on retail sales as opposed to fleets. UM. I'm also concerned, uh with fleet sales being tied to business UH business views and business UH expectations, and obviously with the markets going all over the place, as well as some real concerns about the coming year. In an economic global economic sense, I think that that's going to

hurt the fleet sales side. Can you give us a sense alan from your perspective, are auto sales being more hampered by trade wars or just generally because the global economy is slowing so much. Yeah, I don't think the

trade wars are hitting the consumer at this point. UM. You know, the the key thing that I say all the time at nauseum, the people who buy new cars are increasingly well to do in the United States, and so these these changes that occur, UH that that could really hurt consumer demand and expectations are probably on having more impact, at least in the car market, on middle income people who in fact aren't buying new cars anyway. They're buying the three year old LEAs cars, getting a

heck of a deal and a very good vehicle. I'm glad you mentioned leasing, because isn't that where it's getting more expensive leasing a new car getting more expensive, rising interest rates, and then you've got the lower projected resale values. This makes the automakers actually charge more and cut back on their promotions and tim It's actually more than that because what it's also doing, um we are seeing obviously the tip to crossovers and SUVs and pickups that's been

going on for a while. More of those cars are coming back in trade. And what's happening is simple supply and demand. People want the trucks. When they come back, they are more of them. So when you go to the dealer and turn in your three or four or five year old SUV or CUV, everybody else is doing the same thing and the value is going down, so your trade in is worth less towards that it was before.

And as you state, the least rates because of interest rates, and for that matter, because the residual values that are expected going forward are also rates are up, values are down, so obviously your cost is higher. And again, if we're talking about upper middle and and and wealthy people buying those cars, that's not as bad an issue as it might be, but obviously it limits how far down the

income stream UH new car buyers can be. I want to just get your perspective on the electric vehicle market, because if US federal tax credit fell in half from three seven fifty dollars, and we saw from Tesla yesterday they were cutting their prices by two thousand dollars to offset the lacks of the lack of a tax credit, that some buyers a perspective buyers might get. Are we seeing similar moves by other auto manufacturers in the US or other types of ways to offset the lack of

this extra stimulus. Well, first of all, that's only affecting Tesla, UM, it's affecting General Motors UH two quarters later. They hit the two hundred thousand mark last quarter. But frankly, General Motors is not selling a huge number of evs, so I don't see it as a big deal. And the other automakers have the full seventy because they're not even close, with the exception of Nissan to the two hundred thousand mark.

The bigger issue is, uh, we still aren't seeing the industry again with the exception of Tesla selling these vehicles in high volume general motors. The Chevy Bolt is a wonderful vehicle. Technically, it's not being marketed strongly. In fact, a lot of it's going to fleets for for testing on autonomy UM. And so Tesla really does have the electric vehicle market not to itself. And and there's a lot of vehicles coming, but clearly they're they're they're they're

serious about it because that's all they sell. Uh So, so they're obviously moving forward. And uh it is an issue obviously that they're gonna do two things. One they're gonna eventually sometime in this year we think, get the thirty five thousand dollar and change car out the short range vehicle UM. But as of course that that text

credit is declining. Alan and what if you could comment on changes in miles per gallon and fuel economy standards and emission standards in the United States and what you believe that will bring in the future. Well, it seems like the the auto I should say the oil industry is getting its wish. There's been a lot of reporting on that. Uh. The auto industry is getting more than

its bargained for. Uh and UH, and what I mean by that is they're getting the The e p A Nit's A plan is freezing the requirements at two thousand twenty values, which puts the US well out of step with the rest of the world. The obvious issue there is the automakers are global and they can't just say, oh, well, never mind, we were just not do that anymore. Uh. They've got to move forward. Um. Obviously, they they like a little bit of relief. What they don't like, like

every other major corporation, is uncertainty. And they're gonna get that in spades because obviously there's gonna be a lot of legal action once these standards are put into place, you think in April. The not the least of which, of course, will be the state of California, who is expecting it's uh, it's waiver to be pulled. Uh. And the bad news about that is not just what the effect might be, but the timing. Obviously, the legal process will be long, and automakers can't sit on their hands

and wait for that. They've got to move forward. Thanks very much for helping us understand the industry. Alan Baum is a principle of Baum and Associates based in West Bloomfield, Michigan. Talking about the automobile industry, what should investors do as the S and P five hundred, the Dow Jones industrial leverage, and the NASDAK declined. Well, one thing they should do

is probably ask Matt Mainly. He's the equity strategist for Miller tay Backing Company and he joins us now from Newton, mass Matt Maylee, thanks very much for being with us. What do you tell customers and clients who call and say, I bought stock in eighteen Everything I bought is now less expensive? Should I buy more? Well? Maybe not every everything you you had bought, because you have a lot

of stocks, especially in the fang stocks. Uh that I think we'll have a tough time bouncing back the same way. Uh they did last February when the market bounced back. Uh. So Uh the key is don't panic, um and don't just uh sell stocks willy nilly, I think things. I think you know, the bounce we've seen until today we've

seen over the last week or so. We'll continue for a little bit a while because I think the market got way washed out, and uh, I think that when the market continues to rally, you might want to when you go back into the market, go back into more defensive names, and especially names that will pay you to wait. In other words, names to pay a decent dividend and the companies that not only pay good divn in but have a history of of increasing their diven in every

year over over time. You know, Matt, it does seem like there was a knee jerk plunge down and that it seemed like it was almost irrational at the end of the year. But perhaps it was a little bit more rational than some had written it off as because, for example, Delta just came out and also cut its revenue forecasts based on disappointing ticket pricing among other aspects,

as follows Apple's cut its first quarter forecasts. I mean, it seems like there is actually something legitimate here that's going on with respect to a slowdown that we're seeing in the actual numbers. There's no question. I mean, it's something that I'm going into, uh into October, when the when the downturn started in the stock market, I've been quite cautious. And one of the reasons was, you know,

whenever the FED gets involved in a tightening uh program. Uh, there's always a delay from when they start raising rates to when it finally has an impact on the stock market and then on the economy. Me. Uh, it's usually anywhere from eighteen months to two years. Sorry. Uh, let's say the Fed's fault. I mean, I think it was something that FED had to do. The FED. You know, people want to blame the FED. I mean, we don't have a god given right to have the stock market

go up forever, every single year forever. Uh. We they added a lot of liquidity at a time when we needed it to save the financial system. At some point they we all knew at some point they had to withdraw that liquidity, at least some of it, uh, and uh that it was gonna be painful. I mean to think it wouldn't be painful to see how much it helped asset prices go up. To remove some of that liquidity is the right thing to do. And I point back to what happened with the with the chairman vocal

several decades ago. When he when he made us take our medicine a little bit, and although it was very painful over the near term, it was something that was very very helpful allowed the economy to get back and and you know, take the trains wheels off and and and be on its own. And that's something we need

to do. So even though I think we will could see some lower loads, as I mentioned, I think on a short term basis, I think we can see the arket rally, especially Apple, touching a very important support level here which should hold. Uh. But still I think we'll be a tough year this year. But that's okay for the longer term. Um, we can blame the FED all we want, but I in many ways I think they're doing what they need to do a lot of people said they should have done it a lot earlier. Either way,

it needs to be done at some point. We can't have massive liquidity injections forever because when we get another two thousand and date all over again. Matt Maylee, you began by saying, don't panic, don't sell Willie Nilly, don't buy willy nilly. So who's doing this willy nilly selling right now? With the SMP five hundred down two and a quarter percent. Who are the sellers? Well, I mean, you know, I don't want to spend too much time

blaming the algos, but that's certainly has had an impact. Um, but I think it's who are these mysterious algos that are able to move the market to such a large extent. Well, it's you know, the machine driven whether whether they be hedge funds, but there are some uh other uh investors that besides his hedge funds whore involved, who are engaged in these things. And when the market gets moving in

one direction, it exacerbates it. Now the thing that that it's not just selling though, it's also because of all the uncertainty. And remember back in the beginning of two thousand and sixteen, the market did bottom, but there was really only once uncertainty out there. It was oil. Oil was crashing, you know, and that was affecting the high yield market, and so those two things were getting knocked down and hurting the market. So once oil stabilized and

bounce back, uh, it was fine. Right now, we have a lot of other uncertainties we have, whether it be the said we have trade, we have a brexit, we have you know, slower growth, et cetera. So many uncertainties out there, so there's a you know a basically, uh, you have buyers stepping back, so we have a lack of buyers, and you have these algalis selling the thing

that the whole thing is exascerbated these people. With all the uncertainty out there, you have a lot of people sitting on their hands, and that's why I think we had these wild swings. Matt Mayley, thank you so much for being with us. Matt Mayory, equities trategist for Miller t back In Company. It has been called the flash rally, It has been called some weird activity happening in the

Witching hour and the Asian hours of trading. But what happened with the Japanese yen has caught the attention of FX traders across walls, treading across the globe. Joining us now to explain everything that we just saw and explain it way so that we have perfect clarity, has been Signarella,

he's global macro strategist for Bloomberg. What the heck happened with the end um hesitates to call it a flash crash, to be honest, that would assume that people were very long dollars and trying to get out of that position, and then as the sort of the box and the Algo trip it and there's this major sell off that happens, they were probably, you know, a reasonable amount of long dollar positions. I don't think the market was overbought. It tended to happen in a bit of an ill liquid

market in Tokyo. With the markets closed, the writing kind of was on the wall. But I have to tell you that the extent of the move really surprised me. As we handed off into Singapore last night, I did say to my counterpart, you're gonna have some fun today and watch the end after this Apple news, because the end being the haven currencies is where traders would want to go. But it was completely overdone by al Goes pushing it. And what they do is the program basically

is a momentum model. It will continue to push in one direction until it ostensibly reaches some sort of resistance, and then it's literally programmed to just just repeat and rinse and go back the other way. And the interesting thing actually, from what I've seen in trading this morning is as traded sideways all day, we've seen yields continue to extend declines, UH equities continue to sell off. All of these things would have suggested the end should have

rallied further in the US markets. And what that's telling me is markets courts short and wrong, and this sideways trading would suggest we might see a little bit of a bounce sometime in the next day or so. Vincent, can you just describe for people that may have and a sleep while all this happened, what actually went on? Well, it really is a situation where there are no there

are no more market makers. I mean when you look at the when you look at the floor of the New York Stock Exchange and you see news reporters picture the same concept in the FX market. There are no

market makers. The the vocal rule and government regulations has pushed all of those folks out of the business, so that when someone comes in and does size and tries to move a bit into the market, there's no one to really there's no supply to to smooth that move, so to speak, So it just basically leaps to a point until it hits a pocket of liquid. Right, But

I just want to know what happened. We just described people that don't know what happened to the value of the yen against the Aussie dollar, against the Turkish era, what happened last night, But there was a major programs buying yen selling other currencies simply as a haven flow to to protect against what looks like a trade war that could get even worse given what Apple's earnings were.

So if you if if you have somebody like Apple downgrading earnings going forward, and you'd expect that that then to um spread across other corporations. It doesn't look if a few direquity earnings and people are looking for haven flows and they choose the end because it tends to be a liquid market. Not so liquid last night, but it tends to be a liquid and there is a four day holiday in Japan that could be exacerbating this. Another factor that was blamed was retail investors in Japan.

I see you already see the skepticism dripping over your face. I mean, but basically the idea that retail investors in Japan are still reaching for yield, so they're going into currencies like the Turkish lira and the Aussee dollar, and they're inherently short the yen, and they were caught off sides with the big move on the heels of the

Apple announcement. You know it, I don't because the problem with that is we've already seen a pretty decent appreciation in the end, So we've gone up to the dollars traded up to sort of one twelve thirteen, down to one oh seven before, and then higher up to back one o eight, one or nine before this came back down again. That's not a market that we're an appetite for.

Retail investor tends to be that those type of swings um tend to to to trip margin calls way sooner than they would in the institutional market or pension funds or or the like. So a retail investor, while they love volatility um love volatility and sort of one direction momentum sense, they can't really handle the up and down movement so much because they get taken out of positions

very quickly. So they would have had probably small positions, I would guess going into this, So the suggestion that they would be the cause is probably not correct, and it has to do with the fact that the end at one point broke one oh five. Yeah, right, I mean one oh four eight seven against the dollar. That

was an early Asian trading. Yeah, and you had a couple of standard deviation move And again when the program see something like that and it's a big stretched trade, as they try to push it, if they can't push it any further, it just simply reverses. Uh. And you know when you say retail investors or anyone else, it's really difficult for human beings to get involved in that kind of trade because by the time you're looking at selling near the lows, it's probably already bounced going the

other way. So there are times when traders get caught long and even before they can cut the trade at a loss, they're back in profit because it bounced self viciously. That it's better lucky than good sometimes and that helps you if you're going to be called out on a margin. Yeah, absolutely. I mean sometimes sometimes you can't even get out of the trade after you've breached your margin fast enough and it either will continue or come back in your favor.

In this case, if down at the lows, it would have come back in your favor. And again, I think the trading sideways movement today is suggestive of um some other programs being caught short at bad levels. Who are momentums who tried to push it in and weren't successful. Well the end currently trading it one oh seven eight again the US dollar. Thanks very much, Vincent Cignarella, he is our global macro strategist for Bloomberg News. Thanks for

listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa abramoits one before the podcast. You can always catch us worldwide on Bloomberg Radio