What's Important in the Financial World (11/16/2012)


Worrying about Apple

Apple Inc.'s (NASDAQ: AAPL) share price erosion has taken the top spot of the financial news recently. The stock has fallen 17% over the past three months. A debate over why this happened rages between analyst who love the stock and those who hate it. But, without a large consensus, the debate has no center. Apple's new products, which include the iPhone 5 and mini iPad, have sold well, but perhaps not as well as many investors would like. However, no one has strong evidence that this Christmas season will be less than a sales triumph for the world's largest public company by market cap. One reason why shares have fallen may have to do with the profit-taking theory. Apple's share price rose as much as 70% year-to-date in September. Wisdom would dictate that prudent investor take some of those profits and lock them in. It makes sense. What other mega-cap stock has delivered such great returns in 2012? But Apple remains higher by 30% so far this year, while the S&P shows an improvement of less than 10%. Worriers about Apple's shares should settle down.

The Use of Seat Belts

Traffic fatalities continue to drop year-over-year. One reason may be the increased use of seat belts. The National Highway Traffic Safety Administration (NHTSA) reports that in 2012 "nationwide seat belt use reached an all-time high of 86 percent." Why do the other 14% of riders decide not to wear them? The NHTSA cannot answer that completely. One reason, the agency says, is that more states have instituted mandatory seat belt laws. But some of the other results make no sense. People in the South make less use of seat belts than drivers and passengers from other regions. "Seat belt use for occupants in the South increased significantly from 80 percent in 2011 to 85 percent in 2012," the NHTSA reports. The agency decided that the holiday was a good time to release the data, because so many people will drive during the next week. Remember:

"When it comes to driving safely, one of the most effective ways to protect yourself and your family is to use a seat belt," said Transportation Secretary Ray LaHood. "This Thanksgiving holiday, we're urging everyone on our roadways to buckle up - every trip, every time."

As if we did not know that already.

Stress Test Time Is Here Again

The time has come to "stress test" America's largest banks again. Nineteen financial firms will take part. The Federal Reserve has released guidelines for the tests. Some could make bank executives shiver. The Fed said:

The scenarios include baseline, adverse, and severely adverse scenarios, as described in the Federal Reserve's final rules that implement stress test requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Each scenario includes 26 variables, including economic activity, unemployment, exchange rates, prices, incomes, and interest rates

The worst case scenario is absurd:

In the United States, the severely adverse scenario features a severe recession, with the unemployment rate increasing 4 percentage points from current levels (an amount similar to that in severe contractions over the past half-century). Notably, the unemployment rate remains above any level experienced over the last 70 years from the middle of 2013 to the end of the scenario.

Real GDP declines nearly 5 percent between the third quarter of 2012 and the end of 2013; over this period, the unemployment rate rises to nearly 12 percent, and the four-quarter percent change in the CPI decelerates to 1 percent. Equity prices fall more than 50 percent over the course of the recession and, correspondingly, the equity market volatility index jumps above 70 at the start of the scenario. House prices decline more than 20 percent by the end of 2014, and commercial real estate prices fall by a similar amount.

Actually, that nearly happened in 2008 and 2009.

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, Market Open Tagged: AAPL