George Washington Takes a Bite out of Apple Stock (AAPL)

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It is often stated that George Washington never told a lie. But for millions of investors, the currency that bears his image may be the biggest illusion of them all.

George Washington Takes a Bite out of Apple Stock (AAPL)

The U.S. Dollar Index has had an earth-shattering year-and-a-half long run, jumping more than 22% since the end of June 2014.

In a sector where even the most minute changes are considered newsworthy, the dollar rally is a veritable miracle — one that happens to be more a reflection of comparative global weakness than inherent American strength.

It is this point that is raising serious concern for Apple Inc. (AAPL).

How the Strong U.S. Dollar Affects Apple Stock

On surface level, a strong currency is arguably the ultimate goal for a national economy — allowing it to project stability, confidence and consumer empowerment.

Americans from all walks of life have enjoyed the fruits of the rapidly rising greenback — namely, a nominally improved labor market and gasoline prices that have hit multi-year lows. Yet, the flipside of the argument is painful for exporters like Apple, as foreign purchasing power is comparatively weakened. In recent years, upward of 60% of Apple stock’s revenue comes from international sales.

The company that Steve Jobs built suffered an uncharacteristically volatile year in 2015, shedding 2% overall. While not a terribly bad loss, Apple stock had a promising start, jumping to a 20% lead in the first five months of the year.

No false pretenses have been offered this year, however, as AAPL is down an unfathomable 8% in the four days since 2016’s first opening bell. It’s the worst such start for Apple stock since 2008, when shares lost nearly 9% in the markets between Jan. 2 and Jan. 7.

The culprit is linked to a supply glut of the iPhone 6s, in which the Nikkei Asian Review reported that Apple intends to drop the production rate of its latest iPhone 6s series by approximately 30%. In response, several of Apple’s international partners saw a sharp selloff in their equity shares across global markets.

Production cuts, especially during the post-holiday season, is nothing new for consumer electronics companies. What is noteworthy for Apple stock, though, is the scale of the proposed cuts. According to the Nikkei report, AAPL initially requested Q1 production to be in line with the iPhone 6s predecessor model. Ultimately, this plan blew up in their face as global sales — in particular, those from China and Europe — failed to meet expectations.

Make no mistake about it: the iPhone 6s epitomizes the best of the Apple brand. Unfortunately, that cultural currency doesn’t necessarily translate into cold, hard cash. The point is really driven home when the iPhone 6s is prohibitively more expensive in foreign markets thanks to the relative strength of the dollar. Consequently, inventory is only piling up.

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Source: Source: JYE Financial, unless otherwise indicated

Fundamentally, Apple stock investors should not expect relief any time soon. After years of public debate and speculation, the U.S. Federal Reserve finally pulled the lid on interest rate suppression. Although the lifting of rates will be gradual, the commitment to the new hawkish policy is firm. The implications were well understood by the markets, with the dollar index jumping 1.5% on the announcement.

Across the Atlantic and the Pacific, the opposite is true. Some of the more spectacular losses in global markets so far this year have occurred in the German DAX Composite Index (-5%) and the Nikkei 225 (-6%). Of course, it would be remiss to not mention the Shanghai Stock Exchange Composite Index, which saw a 12% loss despite two instances where trading was prematurely halted by authorities due to excessive volatility.

The bottom line here is that the Fed is essentially green-lighting other countries to remain dovish — and there’s little to no incentive not to take up the offer.

Where Apple stock may be able to pivot is in product diversification. Ironically, the immense popularity of the iPhone — responsible for 66% of total revenue — has prevented other Apple products from gaining a strong foothold. Thus, anything that affects the supply demand dynamics for the latest iPhone 6s will ultimately affect the entire company.

The singularity of simplicity that has become Apple stock’s trademark is steadily becoming its greatest liability. Unfavorable currency exchange rates have exposed this weakness, demonstrating that consumers turned off by higher premiums for the iPhone 6s would rather buy nothing at all than to consider other Apple products.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2016/01/apple-stock-aapl-usd/.

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