It’s Just a Correction

MARKETS

Let’s Be Careful Out There

This is no time to panic

We’re going to get the rate cut we’ve been hoping for, but nobody is happy about it.

Apparently the labor market is weakening rapidly, and the Federal Reserve now must cut its benchmark interest rate by 50 basis points in September.

Or else…

At this point, early in today’s story, it’s important for us to remember that nobody remembers the last time this happened. And it wasn’t even that long ago.

And, like the 5.9 percent slide for the S&P 500 over 22 days from March 28 to April 19, this 6.5 percent correction from the most recent high on July 16 through Friday shall soon disappear in the context of the long-term trend.

Let’s not kid ourselves though.

There’s plenty of fuel for short-term downside, including the fact that Warren Buffett’s Berkshire Hathaway $BRKA BRKB sold a big chunk of its Apple $AAPL position during the second quarter.

We learned about that on Saturday, after Apple reported solid fiscal third quarter results and provided decent guidance for the period ending September 30.

So the biggest two-day slide since March 2023 could continue for a moment.

The S&P 500 has experienced 29 corrections of 5 percent or more since the March 2009 low.

And yields in the US Treasury market will reflect greater rate-cut and recession conviction, with the short end reacting most violently.

Investors, traders, and speculators will always find something to worry about, and right now it’s growth.

The concern is fresh and intense.

And there are complicating factors such as multiple wars that threaten to consolidate into a single global conflict and a historically unstable US presidential election.

The yield on the two-year US Treasury note has had its biggest five-day decline since March 2023.

Whether the Fed was too late on inflation or is too late on employment is not a productive conversation.

The re-pricing around the debate will present risks and opportunities. That’s because stock markets aren’t really all that efficient.

And the information they’re digesting isn’t always all that wholesome.

Consider the ongoing discussion over the degree to which Hurricane Beryl impacted the July nonfarm payrolls report from the Bureau of Labor Statistics.

The BLS itself said 1.54 million workers were part time or not working due to weather last month. But the BLS also said Beryl had “no discernible effect” on its data.

There’s also good context for the spike to 4.3 percent from 4.1 percent for the headline unemployment rate.

The labor force participation rate for the prime-working-age 25-to-54 year-old group rose to 84 percent in July, its highest level since March 2001.

Payrolls have grown at an average rate of 170,000 over the trailing three months. The up-move for the unemployment rate is a function not of layoffs but of expanding labor supply.

People, this is the 29th pullback of greater than 5 percent off a high since the March 2009 low, as data compiled by Charlie Bilello indicates.

“They all seemed like the end of the world at the time,” Charlie said on X on Saturday.

DEEP DIVE

Apple Stands Out

Warren Buffett sold a lot of AAPL shares at a big profit.

Apple $AAPL was up on Friday, rising 0.69 percent amid broader tech rubble, as investors, traders, and speculators responded positively to its fiscal third quarter report.

We won’t see the immediate reaction to Saturday’s news that Warren Buffett and Berkshire Hathaway $BRKA $BRKB sold a lot of AAPL during the second quarter until pre-market trading opens around 8:00 a.m. ET.

In the interim, let’s review some other pertinent facts.

Buffett and Berkshire established their AAPL position in 2016 when the iPhone maker was valued at approximately $600 billion.

They’ve now sold down about half of their position with AAPL the most valuable publicly traded company in the world at $3.342 trillion.

They also sold a significant part of their Bank of America $BAC position, their second-biggest holding, amid a total of $75.5 billion in stock sales during the three months ended June 30.

Buffett and Berkshire now hold $276.94 billion in cash, a company record in raw terms.

“We’d love to spend it,” Buffett said, “but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money.”

So it’s a valuation thing, and they’re sticking to their long-term strategy.

Pretty instructive stuff.

Warren Buffett and Berkshire Hathaway $BRKA $BRKB sold nearly half of their Apple $AAPL position during the second quarter.

Apple said revenue for the three months ended June 30 was up 5 percent, as the iPhone maker returned to growth after a soft fiscal second quarter.

Sales for devices, including the iPad, and services exceed analyst expectations. And management guided to similar growth for the three months ending September 30.

Though iPhone sales declined by 1 percent year over year there was meaningful recovery of its position in China. The flagship device accounted for 46 percent of total sales.

Sales for the iPad were up 24 percent year over year, helped by the release of a new upgrade for the first time in two years.

Notably, half of iPad sales were to first-time customers. Management also reported that two-thirds of Apple Watch sales were to first-time customers.

Not only can Apple benefit from upgrade cycles, markets for its devices are not yet saturated.

Double-digit services growth was in line with expectations. The unit – which includes hardware warranties revenue, monthly cloud storage subscriptions, and Apple TV+ – remains a key growth driver.

Greater China remains an area of concern. Sales in the region, which includes Taiwan and Hong Kong, were down 6 percent.

Competition from domestic manufacturers such as Huawei will continue. And AI will continue to form the crux of hope for AAPL shares.

CEO Tim Cook said he can’t speak about the impact of Apple Intelligence and other new AI features until they start shipping to customers in the fall.

One more note/non-sequitur, re: Buffett, to close this out.

When the Oracle of Omaha was asked to identify the one statistic he’d want to know after being stranded on a desert island for a month, he said freight car loadings.

BNSF Railway, the largest railway company in the US and a Berkshire Hathaway subsidiary, reported a 4.2 percent increase in freight car loadings for the second quarter.

That’s not recession-level activity.

FROM THE RESEARCH DESK

Is Intel a Terminal Case?

There are a lot questions about the iconic chip maker.

Another set of data compiled by Charlie Bilello show that Intel $INTC is the biggest loser in the S&P 500 so far in 2024.

INTC is down 57.25 percent year to date heading into Monday’s open, including a 26.06 percent dive on Friday for its worst day in 50 years.

Intel’s second-quarter results missed expectations and guidance was lower than forecast. Management also announced it would cut headcount by 15 percent and suspend INTC’s dividend.

There are serious questions about Intel’s $10 billion turnaround program – including whether the company is on a terminal path.

And Bank of America analyst Vivek Arya said in a note to clients late last week that the chip maker’s troubles are only just beginning.

Intel $INTC is the worst-performing stock in the S&P 500 so far in 2024.

Arya cut his rating on INTC to “underperform” on Friday, noting “there’s no quick or easy fix” available to management and that it simply can’t compete with Nvidia $NVDA, Advanced Micro Devices $AMD, and Taiwan Semiconductor $TSM.

The analyst trimmed his 12-month price target from $35 to $23. INTC closed at $21.48 on Friday.

Buckling under the competitive pressures of the generative AI boom, INTC will look even less attractive without a regular dividend to provide some ballast. There’s an immediate practical factor here too: Dividend ETFs will sell the stock.

Wall Street is relatively bearish on INTC. Of the 45 analysts who cover it, 32 rate it a “hold.” Two rate it a “strong buy,” six rate it a “buy.” Five analysts – including Arya – rate it a “sell.”

The consensus 12-month price target is $31.