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Pressure Rises on Apple for Earnings Beat as Market Wobbles

Monday, 23 Apr 2012 | 8:41 PM ET

Apple earnings will hang over the market all day Tuesday, as investors await what stands to be the most important earnings release of the quarter.

Apple
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Apple

“Earnings have been beating a very low bar and the guidance isn’t that great…(Tuesday) is the last day for the earnings season to trigger a market rally because if Apple can’t do it, nothing can,” said Barry Knapp, head of equities portfolio strategy at Barclays. Apple reports after the closing bell.

“I think even a good Apple number will get just a temporary positive from the market because the macro factors are big issues,” he said, referring to concerns about Europe and the economy.

Tuesday is also the start of a two-day Fed meeting, where the Fed is not expected to decide on any new easing programs. However, traders are watching to see whether the Fed tips its hand on “operation twist,” a bond purchase program scheduled to expire in June.

“I think the market is pricing in some sort of twist extension,” said George Goncalves, head of Treasury strategy for Nomura Americas. The “twist” program involves the Fed’s purchase of longer dated Treasurys and the sale of the same amount of shorter term securities, in a bid to drive down long term rates. The Fed ends its meeting Wednesday, with a statement at 12:30 p.m. ET, then a 2 p.m. forecast update and a press briefing by Fed Chairman Ben Bernanke.

“By the way I look at it, the low back end rates are not just because of Europe. There’s some probability being priced in that the market thinks twist gets extended. We think they’re going to be disappointed at the April meeting,” said Goncalves, adding it’s more likely the program would be extended at the June meeting. The yield on the 10-year Monday slipped to 1.931 ,the lowest level since Feb. 28.

There is also an important cluster of economic reports, with the S&P/Case Shiller home price index at 9 a.m., then FHFA home price data, consumer confidence and new home sales, all at 10 a.m. There is a deluge of morning earnings reports, including AT&T, MMM, Novartis, United Technologies, McGraw-Hill, Hershey, Coach, AK Steel, Illinois Tool Works, US Steel, Baker Hughes, Kansas City Southern, Air Products and Federal Mogul. Besides Apple’s release after the bell, there are reports from Amgen, Aflac, Baidu, Norfolk Southern, Ace Ltd, Buffalo Wild Wings and Panera Bread.

Besides earnings, corporate shenanigans are making headlines. Wal-Mart stock fell 4.7 percent Monday, after a scathing New York Times investigative piece detailed an alleged wide ranging conspiracy to bribe Mexican officialsby Wal-Mart de Mexico and then a cover-up in the home office. Wal-Mart has said it is cooperating with the Department of Justice and Securities and Exchange Commission investigations. On Tuesday, Wal-Mart’s Chief Merchandising Officer Duncan MacNaughton speaks in a previously scheduled session to Barclays Retail and Restaurants Conference at 7:45 a.m.

Also on Tuesday, Rupert Murdoch and son James will be asked about News Corp’s phone hacking scandal by London’s Leveson Inquiry, an independent investigation of media ethics in the U.K.

Apple of Wall Street’s Eye

Apple will be a big focus, as traders continue to game an earnings report that has been the target of much speculation. Apple is expected to earn $10.02 per share on revenue of $36.7 billion, according to Thomson Reuters. Apples shares have also been sinking, after surging to a high of $644 earlier in the month.

Even if earnings are good, some strategists expect Apple’s shares may still have further to fall. After a parabolic run up, Apple has begun to reverse with a now 11 percent decline.

Dennis Gartman, in Monday’s Gartman Letter, said Apple’s decline should not be dismissed as a “mere correction” and that movements of 10 percent or more are major.

“As we have said, Apple was the “General” of the global bull market, and when the “Generals” fall there is confusion in the remainder of the ranks. When Generals fall, the Major, Captains, Lieutenants and on down through the ranks look either for new leaders to evolve or they retrench. There are no new leaders that we see, thus retrenchment seems the order of the day,” Gartman wrote.

As Apple stock has fallen in the last two weeks, there has been talk about about disappointing I phone sales, and the speculation piled on, shifting to I pad and Mac pc sales. This week, the CBOE has been bringing out lower and lower priced puts, as investors look to hedge against downside risk, ahead of the earnings report.

For Apple, expectations run high. The company has beaten analysts’ forecasts 97 percent of the time since 2003, and it only missed once — in October, 2011, according to Birinyi Associates.

Birinyi also said traders react positively to Apple earnings 71 percent of the time in the minutes right after the earnings release. The stock averages a 2.6 percent gain in afterhours trading. By the next morning, Apple is usually flat ahead of the opening bell, but still positive 53 percent of the time.

But by the time the market opens and the stock trades in the next full session, Apple usually gives up gains. On that next day, its stock has moved lower 68 percent of the time, in a “sell the news” reaction for an average loss of 0.5 percent.

Apple also has an outsized impact on the stock market, adding 15 percent to the S&P 500’s gains from Jan. 1 through late March, Knapp said. He said the last time a stock had a double digit impact on the index was when Microsoft was a high flier in 1999. But Microsoft in 1999 was a high priced stock, with a p/e of 70, well above the 16 times price to earnings ratio for Apple.

After trading a wide range, Apple stock finished just slightly lower. It was down 1.28 at $571.70, just below its 50-day moving average of $572.

The broader market finished lower Monday, and like Apple, stocks were off the lows of the day. Stocks weakened as Europe has once more become a nagging concern. Disappointing German manufacturing data was a factor, as were developments in the Netherlands and France. The Dutch government Monday resigned over a budget battle. The first round of the French presidential election Sunday resulted in a runoff next month between President Nicolas Sarkozy and socialist candidate Francoise Hollande.

The Dow was down 102 at 12,927, and the S&P 500 was off 11 at 1366.

Less Pain at the Pump

The national average for regular gasoline was at $3.858 Monday, down from $3.90 a week ago, according to AAA. It was also up just fractionally from the $3.856 per gallon of a year ago. But that’s about to change.

“When you look at the number tomorrow (Tuesday) you’ll be able to say gas prices in the U.S. are lower than they were a year ago. You haven’t been able to make that statement since October, 2009,” said Tom Kloza , chief oil analyst at OPIS. “It’s been rare not to have year-on-year increases.”

Gasoline prices have been falling since peaking at $3.95 per gallon nationally. “I think you’ll continue to see choppy prices between $3.75 and $4.25 . I wouldn’t take the bet that we’re not going to see a $4 national average. I think we could and it might occur between now and mid-June,” Kloza said. But he did say the estimates for $5 and $6 gasoline as an average national price are now proven wrong.

Kloza said the decline in gasoline prices may provide some positive lift to consumers’ spirits, which economists have worried would be hurt by rising prices, adding more uncertainty to the economic outlook.

Follow Patti Domm on Twitter: @pattidommQuestions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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