☀️☕️ Apple vs The Law(yers)

📊 Also: Magnificent 1; Nissan & Honda, VW & Renault; Adobe Down; Nvidia’s GTC kicking off; Bonds down, Yields up; Triple Witching 🎓 Triple Witching

📈 Market Roundup [18-March-24]

US large-cap S&P 500 closed 0.65% DOWN 🔻

Tech-heavy Nasdaq Composite closed 0.96% DOWN 🔻

Pan European STOXX Europe 600 closed 0.32% DOWN 🔻

HK/China's Hang Seng Index closed 1.42% DOWN 🔻

Japan's broad TOPIX closed 0.35% UP ▲

📝 Focus

  • Apple vs The Law(yers)

📊 In the Markets

  • Magnificent 1; Nissan & Honda, VW & Renault; Adobe Down; Nvidia’s GTC kicking off; Bonds down, Yields up; Triple Witching

📖 MoneyFitt Explains

  • 🎓 Triple Witching

💸 Personal Finance Corner

📝 Focus

Apple vs The Law(yers)

Apple has agreed to a $490 million settlement to resolve a class action lawsuit accusing CEO Tim Cook of misleading investors in 2018 about iPhone demand in China. Lawyers claimed Cook overstated demand during a November 2018 earnings call, even though Apple instructed many of its suppliers to cut production just days later. Then, in January 2019, Apple missed revenue guidance by close to $9 billion and the stock fell nearly 10% in a day. 

What Cook actually said was that Apple faced sales pressure in markets such as Brazil, India, Russia and Turkey, where currencies had weakened. But then he added, “I would not put China in that category.” If he was just referring to the weakness in contribution because of the weaker currencies at the time he was talking, he might arguably have a point (see below), but either way, Apple denies violating US securities law but settled to “avoid the cost and distraction of litigation.” Plus, the sum, though enormous by almost any measure, only comes to about 0.5% of the net profits made in the last fiscal year ending in September 2023 (i.e. less than two days’ worth of profits, or 11 hours of revenue.)

At the end of 2018, the USD could buy fewer and fewer CNY (meaning the CNY was increasing in value) though that reversed in early 2019 to continue the weakening trend - Image credit: TradingView.com

The settlement highlights some concerns about Apple's disclosure practices. Last month, citing risks from Apple's AI strategy, two major shareholders pushed for more transparency.  But it also underscores legal risks in providing any revenue guidance at all, acting as a disincentive for transparency in forward-looking guidance from the company. Apple, in particular, has not provided any formal guidance in its quarterly earnings statements since 2019. (This, of course, makes Wall Street’s analysts’ jobs of forecasting harder since they would then have to do some actual forecasting instead of “yeah, what he said, but I think lower/higher.”) 

“I have a genre of stories called ‘everything is securities fraud,’ which is where public companies do random bad things and people sue them for securities fraud… It’s indicative of this really big, interesting trend in American securities laws where all conduct gets reflected through the notion of securities fraud because it’s easy to bring cases and the damages can be really large.”

Matt Levine, Bloomberg Opinion Columnist

..... ▷ Matt Levine, a columnist for Bloomberg, uses the phrase "everything is securities fraud" to point out a trend where investors sue public companies for securities fraud whenever something bad happens, even if it doesn't directly involve misleading investors. 

US securities law does, however, explicitly allow management to be wrong about their earnings forecasts, with a “safe harbour” clause regarding “forward-looking statements” unless they had “actual knowledge” that the statement would be false.

Levine’s rather tongue-in-cheek theory suggests that anything bad done by or happening to a public company qualifies as securities fraud. Even contributing to global warming, sexual harassment, or mistreating killer whales could fall under this umbrella (but could Lyft’s misstatement of its margins? Or “unnecessary surgeries to implant fake medical devices”? Or when “‘a company gets hacked and does not immediately disclose it”?)

As such, securities law has become a popular way to fight various corporate issues because such lawsuits are easy to file and can lead to big payouts, not least for the lawyers involved (having himself been one at the prestigious and influential Wall Street powerhouse of Wachtell Lipton prior to a stint at Goldman Sachs.) 

Reuters reports that “lawyers for the shareholders may seek fees of up to 25% of the settlement amount.”

📊 In the Markets

Stocks in the US dropped on Friday, led by down days for six of the Magnificent Seven megacaps, amid uncertainty ahead of the Federal Reserve meeting later this week. Both the S&P 500 and Nasdaq posted slight weekly losses, their first back-to-back declines in over four months. 

Tesla was the only one of the Mag7 up on Friday, and that came at the end of its first back-to-back weekly drop since January as it faces intensifying competition in the electric vehicle industry. Earlier in the day, Nissan and Honda, Japan’s 2nd and 3rd largest automakers, announced plans to pool resources to develop lower-cost EVs in a last-ditch effort to survive, just as VW and Renault did two days earlier.

Or last-trench, maybe. - Image credit: 1917 (2019) / Dreamworks via Tenor

Adobe shares plummeted 13.7% after forecasting below-estimate second-quarter revenues due to stiff competition and weak demand for its artificial intelligence-integrated photography, illustration and video products. A rare, so far, sign that soft demand in something AI-related is even possible. 

Nvidia's annual GTC conference in San Jose on Monday will start with a 2-hour keynote from CEO Jensen Huang, outlining what’s ahead for the company. In past years, he has used the show to debut some of its biggest products, and techies are thinking Nvidia could launch Blackwell and B100, the successors to the Hopper graphics architecture and H100 graphics processing unit, triggering another buying frenzy. 

Investors still expect rate cuts this year but have now aligned their expectations with those of the Federal Reserve for three quarter-point interest rate cuts this year instead of what was, in hindsight, an audacious six or seven such cuts expected at the start of year. On Friday, following the two stronger-than-expected inflation reports earlier in the week, traders further scaled back expectations of a June rate cut, selling down Treasury bonds and sending yields a little higher.

Friday also saw the expiry of quarterly derivatives contracts, known as "triple witching🎓," boosting trading volume.

“Double, double, stock options and trouble, index futures burn and index options bubble” - Image credit: Sabrina the Teenage Witch / ABC via Tenor

📖 MoneyFitt Explains

🎓️ Triple Witching

Triple witching refers to the simultaneous expiration of three different types of financial instruments: 

Stock options, index options, and index futures contracts. 

It occurs on the third Friday of March, June, September, and December. During triple witching, investors and traders often engage in heightened trading activity as they close out or roll over their positions. 

This increased trading volume can lead to greater volatility in the stock market, with potential impacts on stock prices and overall market sentiment, potentially influencing short-term market movements and investor behaviour.

In anticipation of increased volatility and uncertainty during triple witching, investors may adopt a more cautious stance to protect their portfolios from potential losses, a ”risk-off” in the runup to triple witching. 

This means they may reduce their exposure to risky assets such as stocks and opt for safer investments like bonds or cash. 

The addition of index options in the 1980s led to the term "triple witching" (from the less Shakespeare-friendly “double witching” before that.)

💸 Personal Finance Corner

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