Billionaire's Portfolio

July 27, 2016, 3:30pm EST

Yesterday we talked about Apple earnings that were coming after the market close.  Given the better than expected earnings that have been reported by other tech bellwethers like Microsoft, Intel and QUALCOMM, we thought the stage was set for a nice positive surprise out of Apple, perhaps the most important stock in the stock market, yet one that hasn’t been loved for more than a year.

With that, we looked at this chart below, and argued that a better number yesterday could start the closing of this peculiar divergence between the S&P 500’s biggest constituent (Apple) and the index itself.

Sources: Billionaire’s Portfolio, Reuters

Apple did indeed beat on the low bar of expectations (both revs and earnings).  And the stock has popped as much as 8% today, trading as high as $104.67 and beginning the closing of the gap in the chart above.  A return to the highs of last year would marry the yellow line (Apple) with the purple line (the S&P 500 index).  That’s 30% higher than where the stock trades now, and close to 40% higher than where it traded yesterday afternoon.  And that would price Apple shares at about 15 times trailing earnings, much closer to the index P/E.

So we thought yesterday that Apple earnings could overshadow the Fed today as a big catalyst for stocks this week.  The Fed did indeed prove to be a snoozer.  Remember last month, using the excuse of a weak jobs number they passed on a making a second rate hike on their “rate normalization” path.

As we know, they are most concerned with a global shock that could destabilize the global economic recovery and financial markets.  So they took the pass (again) on a rate hike last month with the idea that they could watch the Brexit vote playout.  Brexit happened, and the shock waves have since subsided.  The Fed today (very subtly) opens the door for a rate hike in September by saying “near term risks to the economic outlook have diminished” and acknowledging strengthening in the labor market.

Remember, in this world, when the Fed is confident to go forward with rate normalization, it’s a vote of confidence in the outlook for stability and robustness of growth.  With that, it’s a positive signal for financial markets.

As we’ve discussed this week, the real event is in Japan.  The Bank of Japan decision will come tomorrow night.  We said yesterday that “the element of surprise is powerful fuel for their policy actions, but they’ve haven’t done a great job of preserving that element – if anything, they’ve eroded their past work by giving markets negative surprises (balking on more action).”

We got a “surprise” overnight.  The Abe administration rolled out details (earlier than expected) of a spending package (bigger than expected, about 5% of GDP).  It’s speculated that it puts pressure on the Bank of Japan to act tomorrow night, as opposed to waiting to see the details on the fiscal plan.  We agree. We’ve thought Japan should and would ultimately crush the value of the yen.

Tomorrow night will be a huge moment for the global economic recovery.   The combination of fiscal and monetary stimulus in Japan has the power to further dampen fallout fears from Brexit, put the Fed back on path and give global growth a jolt.

It would all trigger a big run in global stocks, commodities and yields into the end of the year.

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