The Action of the Major Market Indices on Friday is Telling. 

By Michael Markowski

Dec 7, 2009 

Friday’s stock market action was ominous because the market reacted negatively even though the unemployment data for November 2009, was much better than anticipated.  After it was announced that unemployment fell to 10.0% in November from 10.2% in October the major stock market indices including the Dow 30 Industrials and the S&P 500 composite indices opened up strong with the Dow increasing by over 130 points.  By lunchtime the Dow had given up all of its gains and the venerable index had turned negative.  It closed at the end of the day up by 20 points. 

The major indices not responding positively to better than expected news is telling.  It suggests that the market is tiring and that the easy money for the Bear Market rally has been made.   

One bell weather company who looks tired and could lead the markets down is Apple (NASDAQ:AAPL).  Its shares have been on a tear during 2009.  After trading below $100 per share for the first three months of 2009, the shares of Apple have rocketed by over 100% from its 52 week low of $78.20 and are currently trading at $193.00.  

My rationale for exercising caution is because Apple’s annualized Cash Flow from Operations (CFFO) and Free Cash Flow growth rates, although still growing, have decelerated significantly to mid single digits as compared to its last ten quarters.  For its most recent 12 months ended September 30^th, Apple’s annualized CFFO increased by 5.9% and its Free Cash Flow increased by 6.0%.  Over its previous 11 quarters dating back to its first 2007, fiscal quarter Apple’s annualized CFFO growth rates ranged between 44.9% and 233.5%.  Its annualized Free Cash Flow growth rates also ranged between 46.9% and 319.8% over the same period. 

In analyzing its Financial Statements and particularly its Cash Flow Statement I found worrisome signs for Apple.  The only reason why its CFFO and Free Cash Flow even increased over its latest two quarters is because it currently liabilities increased significantly over its previous two quarters in its latest fiscal year ended September 30, 2009.  This means that Apple is stretching out the payables that it owes its vendors or in laymen’s terms this means that Apple has become a slow payer of its bills so that it can maintain a positive rate of cash flow growth.  

Also, Apple’s receivables have increased sharply by about $1.4 billion over its last two quarters.  I don’t like to see this especially for a consumer technology products company. It indicates that Apple is putting a higher percentage of its products on retailers’ shelves for a promise to pay instead of receiving cash.  Those products, which are sitting on retailer’s shelves, which Apple has not been paid for, are subject to price markdowns, which occur frequently in the highly competitive arena of consumer electronics.  Based on the analysis, which I have done, I believe that the odds are high that Apple could disappoint Wall Street when it files its next quarterly earnings report.  Thus, I believe that Apple shares will likely be much lower than $190 after it announces its results for its first quarter ending December 31, 2009.  I also believe that Apple’s report and subsequent decline in its share price could also have a significant impact on the major market indices including the Dow 30 and the S&P 500.  

Investors should remain cautious and should use the stock market’s major run up, off of its March 2009 lows, to increase their liquidity.  For more information on the Super Bear Market and why I expect that it will last until at least 2015 go to www.bearmarkettracker.com.