Oct. 29, 2021

Reality Strikes With A Vengeance. GDP, Apple, And Amazon Report.

There are many who will miss the historic impact of yesterday. In the history of modern finance, this was as large a disconnect between reality and the market's behavior as we'll ever see.

In the span of a day, we went from the euphoria of all-time record highs in the NASDAQ and S&P 500, to some of the most crushing economic news ever.

First, the Nation's Gross Domestic Product was reported to be far below the growth level that the Street assumed. And this was followed later, in the afternoon, by two huge misses by two of the market's leaders: Amazon and Apple.

We begin, with the GDP Report. This will be key to unlocking our perspective on all of this.

Simply put, the consumer stopped spending. Well, there's more to it than that, and we'll explain in a moment. But bottom line, the American consumer stopped buying those long-term items which make up the heart and soul of the economy.

Things like automobiles, and furniture, and appliances. Things that last a long time. In economics, we call those durable goods.

And this GDP report showed that consumers dropped durable goods like a hot potato. Purchases fell by better than 26%. In other words, we bought only three quarters as many durable goods in the 3rd quarter as we did the quarter before.

In terms of the economy, this is gigantic. A larger drop than many recessions.

What's that do to the economy? It dropped it from a robust, solidly growth-oriented level, to a level just barely above stall speed. From double trend growth rates to a level approaching subsistence.

GDP growth went from two solid quarters of better than 6% growth, double the historic rate to just 2%. Just slightly above recession.


And what's most worrisome about this is how rapidly it came upon us. This isn't a slow gradual slide into a gentle decline. This is an all-out, slam on the breaks, smoke the tires screeching halt. The kind that throws you up against the windshield.

That's troubling. It implies that this economy may actually be in free-fall.

And when you think about this from the consumer's perspective it all makes perfect sense. Inflation, especially food and fuel is making it harder and harder for many to make ends meet.

Forget those long-term, high-ticket items. Many are struggling to put food on the table and pay the rent. So don't look for them to place an order with Amazon, or buy a new iPhone.

And that looks like what we were told yesterday afternoon, when both the giant, tech stocks reported in with their latest quarterly results.

Amazon was the first to report. It was one of those reports, that the more you dug, the worse it got.

It began by noting the good news, sales were up. But then came the very predictable expenses, all of which are rising dramatically. Did we expect anything else?

Labor costs are up, because of the nationwide labor shortage. The difficulty of getting goods to consumers because of the Supply Chain Issues. And rising shipping and freight charges, because of higher gas and diesel prices.

Put it all together and Operating Income drops by 22%. Stunning.

But we're not done. Looking to the future, which is after all the holiday sales quarter, looking to the future: Amazon is now estimating that they will earn somewhere between zero and $3 Billion dollars.

I know it's a big range, but by putting the zero card out there, Amazon is telling the world, you better lower your expectations. Things are looking so hot.

Reality is striking with a vengeance.

Apple computer reported next, and their report was more sanguine than Amazon. For Apple it was another big year in revenue, setting an overall record for total corporate revenue. This was driven primarily by the Apple service division, Apple cloud, etc.

But that's where the good news stopped.

It's in the sale of products that Apple is having trouble. Remember those consumer durable goods, up in the GDP report?

Of the principal Apple products, only the diminutive iPad showed improving sales. Their other products, principally the iPhone, and Mac missed Apple's own sales estimates.

The reason for the misses, you may have heard this before: supply constraints. And Apple sees no end in sight.

Next quarter, during the holidays, Apple projects that these Supply Constraints could reach $6 billion dollars. Goods that Apple won't be able to sell, because they're in some container ship or otherwise held up.

In fact, it's so bad, that Apple is not offering any guidance for the next quarter. The first time that's happened outside of the Pandemic year.

Now as you can imagine, traders did not take too kindly to any of this news.

In overnight trading, Apple dropped by nearly 5% Amazon slightly less. One estimate was, that in overnight trading the two companies lost a combined $170 billion in market value.

That's a reality with a vengeance.