Apple Spills a Huge Secret

  • Apple can’t avoid reality: Coronavirus is a drag on sales
  • Now it can be told: Dozens of companies also suffering
  • S. victory on Nord Stream 2, German victory on Huawei?
  • How “goodwill” just slammed one of the big cannabis names
  • Presidential timber last year, off to the federal pen this year?
  • IRS tries to tax gamers for nonexistent capital gains (what?!)

The biggest U.S. company as measured by market cap just broke a conspiracy of silence.

If you missed the news when it dropped yesterday, it’s been all over the place today. Apple revealed it would miss its sales forecast for the current quarter, thanks to the coronavirus outbreak.

Apple is getting squeezed on both the supply and demand side. Production of iPhones is down because the outbreak has closed contractors’ factories in China. And with tens of millions of Chinese quarantined, that’s fewer retail sales of Apple products in China. (As we noted 18 months ago, China accounts for 18% of Apple’s iPhone revenues.)

The announcement blows the lid off a pressure cooker of suppressed news: No longer can Big Media ignore the virus’s impact on companies’ bottom lines.

Before we proceed further, a reminder that our job of pulling signal from the noise is extremely challenging when it comes to this outbreak.

We faced the same conundrum during the Ebola scare in the fall of 2014. We feel we struck a responsible balance then, and we aim to do likewise now.

We’re going out of our way to avoid baseless speculation and rumor-mongering (even as we stand up for the rights of others to do so).

But neither are we buying into the mainstream’s reassurances. Last week, Big Media had no choice but to concede that Chinese leaders have been less than forthcoming about the scope of the outbreak.

And now with Apple fessing up, Big Media also have to concede that somewhere along the line, there will be an economic impact beyond China.

Up until now, it’s as if reporters and editors were in denial. You had to dig deep to find evidence of any “spillover” effects.

You wouldn’t find it on, say, the front page of The Wall Street Journal — not even in the “What’s News” summary of the most important stories on the inside pages.

But the evidence has been there all along. “Consider Yum China (a division of Yum Brands), which operates Pizza Hut, Taco Bell and KFC food outlets in over 1,300 cities across China,” writes Byron King of our sister e-letter Whiskey & Gunpowder. “The company shut 9,200 restaurants and stated that profits would be severely hit by the virus outbreak.”

Byron also dug up the following vignettes you likely didn’t hear from the establishment…

  • “Copper and iron ore prices have tumbled as Chinese orders have ceased. There’s no new China demand. None. This affects numerous suppliers and national accounts from Africa to Australia and South America
  • “South Korea’s Hyundai motor car company has closed all factories due to lack of parts from Chinese suppliers
  • “Honda and Toyota closed auto assembly factories in China due to lack of parts. Tesla may follow. Japanese and U.S.-based factories will eventually run short of parts as well when the shipping containers don’t arrive
  • “Qualcomm foresees trouble making computer chips due to supply interruptions from China. This will slow output of smartphones from several downstream producers, including Apple
  • “PPG Industries — a major supplier of automotive paints and industrial coatings — has closed Chinese facilities and may slow production in other countries due to lack of materials from Chinese suppliers
  • “Sales of luxury brands such as Gucci, Versace, Kate Spade and more have plummeted from lack of Chinese demand. In part, it’s due to the sudden demise of a formerly robust tourist trade for high-end brands that comes via planeloads of Chinese visitors… Visitors who no longer walk the streets of London, Paris and Rome due to no more airline flights. And sales in Chinese stores have all but ceased.

Gucci

Gucci: Laid low by the coronavirus…

  • “Even Canada Goose has problems. The maker of fashionable winter coats — beloved by college kids and upscale millennials — announced that China’s ‘health crisis has resulted in a sharp decline in customer traffic and purchasing activity.’ According to a company news release, ‘Retail stores and e-commerce across greater China have experienced and continue to experience significant reductions in revenue.’”

And Byron’s laundry list goes up only to last Thursday!

Don’t get us wrong. We’re not forecasting an imminent stock market crash.

But now that headlines like these will become more common, they can’t help but be a drag on the performance of individual companies, if only for a while.

In particular, we’re on alert for similar warnings from other members of the MAGA club — Microsoft, Google, Amazon. As we mentioned last week, those four biggest companies account for two-thirds of the S&P 500’s growth this year.

If they report trouble with their Chinese supply chains or demand from Chinese customers… well, something’s gotta give.

It’s that nagging prospect, perhaps, that’s making today a “risk off” affair.

At last check, the Dow has shed 235 points — slipping to 29,162. As a reminder, Apple is one of the Dow 30 stocks. So the other major indexes aren’t suffering quite so much. (AAPL itself is down 2.8% on the day.)

Hot money is flooding into Treasuries and gold — the yield on a 10-year T-note at 1.54% and gold pushing past $1,600.

The only other time gold has been over $1,600 in the last seven years was for a few nanoseconds last month after the U.S. attack on Iran’s Gen. Solemani. We’ll see if it sticks this time.

Meanwhile, we have two early reads on the economy’s performance so far in February: The Federal Reserve says New York state manufacturing is in its best shape since last May… while homebuilder sentiment as measured by a homebuilder trade group is down a bit but still near 20-year highs. Virus? What virus?

The Trump administration is taking a (premature) victory lap over the Nord Stream 2 pipeline.

As we’ve chronicled since mid-2017, Washington has sought to thwart construction of Nord Stream 2 — which would transport Russian gas under the Baltic Sea to Germany. Late last year, a new round of U.S. sanctions became so severe that a major Swiss contractor gave up on the project.

Over the weekend, Energy Secretary Dan Brouillette said the Russians can’t finish the job on their own. “It’s going to be a very long delay, because Russia doesn’t have the technology,” he said on the sidelines of the Munich Security Conference.

Probably true.

Coincidentally or not — we’re inclined to think not — the German government appears set to defy the harangues of other Trump Cabinet secretaries in Munich… and cut a deal for 5G wireless with China’s tech giant Huawei. A threat on Sunday from Trump’s pugnacious ambassador to Germany appears to be backfiring…

Richard Grenell

German leaders are in no more mood to buckle to Washington’s demands than British leaders — who also are letting Huawei in. (If Big Media can be believed, there was a very tense phone call between Donald Trump and Prime Minister Boris Johnson in recent days.)

By the way, hostility to Huawei is a bipartisan thing. House Speaker Nancy Pelosi, heading home from Munich, played up Huawei’s alleged ties to the Chinese Communist Party: “If we were to let Huawei have the information-highway dominance, it would be like putting the state police in the pocket of every person who uses that highway.”

We can’t say it often enough. Forget the phase-one trade deal. Washington and Beijing are engaged in a Cold War that will drag on long after Trump leaves office.

“Sometimes the bigger they are, the harder they fall,” says our penny pot stock authority Ray Blanco — as he surveys the “splat” left by one of the biggest cannabis names.

Aurora Cannabis (ACB) — the top pot producer measured by capacity — reported its quarterly numbers last week. The headline figure was dandy. But within that number lurked “goodwill.”

“‘Goodwill’ is an accounting term,” Ray explains. “It’s basically the premium that a company pays when it buys another company. Sometimes, goodwill is justified because it reflects the premium that a firm needs to shell out to buy a fast-growing company whose value isn’t easily shown on the books. Other times, it’s an indication that a company overpaid for an acquisition.”

Aurora’s carrying a staggering C$3.17 billion in goodwill on its books — of which C$775 million will be written down this quarter alone.

“In other words,” Ray makes it plain, “the premium management paid for a big chunk of their acquisitions is worthless.”

Gone are the days when almost any ol’ pot stock was a surefire winner. Now sales and profits matter. The riches aren’t as easy to come by — unless you know where to look.

The news broke just before the long weekend but we can’t pass up a brief mention now: A federal jury in New York has convicted celebrity lawyer Michael Avenatti on all charges in his extortion trial.

It was last March when Avenatti tweeted the following…

Michael Avenatti

Barely a half hour later, the feds arrested him and charged him with trying to shake down Nike to the tune of $20 million. Avenatti faces up to 47 years; sentencing is set for next month.

As you might be aware, Avenatti’s most famous client remains the porn starlet and professed Trump paramour “Stormy Daniels.” Before his arrest, “serious” pundits were playing up Avenatti as a contender for the Democrats’ presidential nomination.

One of them, CNN legal analyst Jeffrey Toobin, now says he was “snookered.” No, really?

Bureaucracy at its best: The IRS can’t tell the difference between a cryptocurrency and a virtual currency used in online video games.

As you might be aware, the IRS is getting aggressive in its effort to collect capital gains taxes from folk who’ve struck it big with bitcoin and other cryptos.

Last fall, however, the agency posted the following notice on its website: “Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as ‘convertible’ virtual currency. Bitcoin, Ether, [Robux] and V-Bucks are a few examples of a convertible virtual currency.”

V-Bucks? Gamers will tell you that’s the virtual currency used in the phenomenally popular game Fortnite. It is not a cryptocurrency readily traded back and forth into dollars; You buy V-Bucks with your dollars and use them “to purchase things like outfits, pickaxes, wraps, emotes and Battle Passes,” according to the website of Fortnite’s developer Epic Games.

Last week, after inquiries from several media outlets, the IRS modified the language. “Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as ‘convertible’ virtual currency. Bitcoin is one example of a convertible virtual currency.”

And to make it even clearer, the agency issued this statement: “Transacting in virtual currencies as part of a game that do not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return."

The sound you hear in the distance? It’s millions of gamers, sighing in relief they won’t have to fill out a Schedule 1 with their 1040. Sheesh…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. “I hadn’t realized due to the volume of other email I receive that my 5 Min. Forecast hasn’t been coming,” a reader writes.

“Has it been canceled? Or is there a technical problem? I received a summary email over the weekend that reminded me I haven’t been receiving the daily distribution. Please advise.”

We’re still experiencing the filtering issues that have plagued us for — well, longer than we care to think. The good news is we have outside experts on the case now and we hope to be fully up to speed again by next month. (It’s a knotty issue; we won’t tire you with the ins and outs.)

In the meantime, each day’s episode is still posted to The 5’s archive page within minutes of being emailed… and we’re sending that link personally to everyone who asks us “where’s my 5?” We thank you for your continued patience.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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