Blog Posts by Jeff Macke

FarmVille creator Zynga (ZNGA) beat analyst expectations last night by reporting a profit of 1 cent per share. The Street was looking for a loss of 4 cents. Despite the minor triumph, the stock took a hit after-hours, at one point dropping more than 10% to under $3 a share. Investors were disappointed by a warning for the current quarter and a substantial drop in the number of people using its online games.

For casual investors the real shock was that anyone was still playing FarmVille or Words With Friends at all. It seems a triumph of persistence that Zynga still has 253 million monthly users, even if that number has dropped almost 25% since peaking in at 331 million in Q3 2012.

Jon Najarian, cofounder of optionMONSTER.com says the company is basically trying to stay alive long enough to get a piece of the online gambling business, which is slowly being legalized in the U.S. Though the company won't talk about it much, they did set up an online casino of sorts in the U.K. last quarter. As Najarian sees it, "That's the test tube for what they're going to do in the U.S."

Others might suggest that being one of a seemingly infinite number of online casinos in the U.K. demonstrates why Zynga may be striving to reach a mirage. Still there's hope for the bulls, which is more than can be said of growth for Zynga's existing products.

Amazon (AMZN) reports today after the market close and, as usual, there's a distinct lack of conviction on how to play it — if at all. Officially, analysts are looking for the online kingpins to report EPS of .09 on $16.2 billion in revenue. For the quarter ending June 30, Amazon is expected to earn 22 cents on sales of $16 billion.

Unofficially, estimates mean next to nothing with the world's largest online retailer. If they did, the stock would have been left for dead long ago. The company's trailing operation margin has a 1-handle, the forward P/E is over 70, and Jeff Bezos and Co. openly disregard quarterly results in favor of investments for the long term.

Related: Amazon Is a No-Brainer to Own Long-Term, Says Munster

Lesser companies have been vaporized by Wall Street for the kind of almost-random results Amazon reports quarter after quarter. The difference for Amazon is that Bezos is just so good at what he does. The Kindle was years ahead of its time, a transition away from books into media and general merchandise has been seamless and customers are rabid fans. Amazon just keeps finding places it wants to go and merrily steamrolling anyone in its way.

As a result, Wall Street is willing to forgive the company for almost anything. In the critical fourth quarter, it missed earnings estimates by a full 25% only to see the stock ramp straight in the face of prematurely giddy bears. Next to Best Buy (BBY), the only group more victimized by Amazon's Teflon operation has been the short-selling community.

Can the gang from Seattle do it again tonight? CNBC contributor and KKM Financial founder Jeff Kilburg thinks not. "It's just too rich," opines Kilburg in the attached video. "January 25 they put in that all-time high of $284. Are we going back up there? Why are we going back up there?"

Less than a week after Twitter established itself as the fastest (not necessarily most accurate) source for breaking news, a crudely worded headline from a hacked AP account caused an instant plunge in the U.S. markets that wiped out $200 billion in value.

The awkwardly-worded tweet ("Breaking: Two Explosions in the White House and Barack Obama is injured") briefly stunned Wall Street and Main Street alike. But investors barely had enough time to pull the trigger to buy or sell during this 4-minute plunge and subsequent rebound in the stock market.

So what in the name of rigged markets happened? Jeff Kilburg, founder & CEO of KKM Financial and a CNBC contributor, says the action had all the earmarks of a familiar culprit. "This goes back to the high frequency trading world we live in," he states in the attached video.

Kilburg's scenario is that the algorithms used by high frequency traders, or HFTs, scan Twitter for keywords, particularly from sources as generally credible as AP with its 2 million followers. Those programs see words like "bomb," "White House," and "Barack Obama injured" and start trading first and asking questions later, if at all.

The long awaited, much hyped Apple earnings report came out last night and offered a little something for everyone, particularly investors who've been arguing that the company has much bigger problems than a slumping stock price.

The Good

Apple (AAPL) reported earnings of $10.09 per share on revenues of $43.6 billion. Wall Street analysts had been looking for $10.07 on $42.3 billion in revenues. It was a slight beat of estimates that had fallen nearly 14% in the last month.

The Bad

* For the current fiscal period Apple lowered its revenue forecast to between $33.5 and $35.5 billion, well below the Street's estimate of $38.2b. In the same quarter in 2012, Apple booked $35b in sales and earned $9.32 per share.

* Gross margins also missed expectations at 37.5%, compared to expectations of 38.5%. In the same quarter last year, Apple's gross margin was 47.4%. The company says it expects margins in the current quarter to be between 36 and 37% compared to 43% in the quarter ending June 29 of 2012.

* Splitting the middle on revenue and gross margin guidance, Apple would gross profit of $12.6 billion vs. $15 billion last year. Unless the company finds a score of ways to cut expenses -- and they don't seem to have any plans to do so -- net income would come in somewhere near $7.5b or a drop of 15 - 16%, year over year. Assuming the number of share outstanding remains constant (a generous assumption), Apple would earn in the vicinity of $8 per share in the current quarter, compared to $9.30 last year.

The average analyst estimate for this quarter is $9.08. Expect that number to fall in earnest -- if not this morning, very soon. Apple is now running well below results that would get the company anywhere near the average estimate of $43.66.

* The company has spent $2.1b on R&D over the last 6 months, putting it on pace to spend around $4.2B for the year. To be generous, we'll say Apple's expected R&D expenditures are about 2.5% of revenues. To compare, the percentage of revenues used for R&D at Microsoft (MSFT), and Samsung are about 11% and 6% respectively.

Despite the questions raised by this underinvestment in new products, Apple stubbornly refuses to discuss timing on new product roll-outs. "Our teams are hard at work on some amazing new hardware and services we can't wait introduce this fall and throughout 2014," CEO Tim Cook said vaguely on last night's conference call.

Pressed further, Cook said "I don't want to be more specific, but I'm just saying we've got some really great stuff coming in the fall and all across 2014."

Cook's vague comments caused Apple shares to drop 5% by the end of the call, taking back all of its after hours gains. "It was very disappointing, I think it's time for Tim Cook to pass the baton," says Jeff Kilburg, founder & CEO of KKM Financial and a CNBC contributor, in the attached video. "I think the buyback was encouraging; at least they gave us something to bite on."

A year ago President Obama signed the so-called STOCK Act. The point of the act was to allow the public to see for themselves if members of Congress and their employees were trading on material, non-public information. "The STOCK Act: Bans Members of Congress from Insider Trading" was the bolded headline at the top of a lengthy and self-congratulatory press release.

Last Monday the White House website took the guts out of the STOCK Act in one run-on sentence under the headline "Statement by the Press Secretary on S. 76." Those so inclined are invited to read the memo themselves. The gist is that disclosures will no longer be practically available for all employees but only for the elected officials, which means staffers, lobbyists, employees, aides and anyone who works for or is close to a serving politician can do whatever they want. Corrupt officials could theoretically still dish insider info with little fear of discovery — it's just hard for them to trade off of the information themselves.

The idea of transparency is to remove doubt about conflicts of interest and malfeasance, real or imagined. When the rules are quietly changed to such a degree, it defeats the purpose entirely.

Hank Smith of Haverford joined Breakout to discuss this backtracking. "We only have ourselves to blame because we're the ones voting these clowns in," notes Smith in the attached video. It's a fair point, but the government doesn't make it easy for the public to see these flip-flops. The STOCK Act passage was on the front page. When it got de-fanged, the announcement was so buried that only the most hardcore of wonks could find the news.

When earnings expectations are as low as they are for Apple (AAPL), results don't get "released" as much as they escape captivity. Even if Apple sandbagged its guidance in order to make the actual numbers look good, the company is almost certain to report shrinking year-over-year profits for the first time in more than a decade.

According to Yahoo! Finance, Apple is expected to report earnings of $10.07 per share on $42.6 billion in revenues. In the same quarter last year Apple earned $12.30 a share. Negative earnings growth means Apple's much cited P/E of 9 isn't all that it would seem.

Hank Smith, CIO and VP of Haverford, is long Apple and says investors can win big tonight with just a little help from CEO Tim Cook. Smith says Cook can send shares higher one of two ways.

First, the company can come up with a more creative capital allocation strategy in the form of buybacks or a dividend hike. Smith reasons that Apple is better off buying shares with the stock at $400 than when it was $300 higher. Unfortunately Apple already started a $10 billion buyback program last October with the stock in the mid-$600 area. Suffice it to say, the program did little to support the shares.

Smith would much prefer a boost in the payout to shareholders. "Dividends are very real and the most tangible statement a company can make about the confidence in their current condition and future prospects," he states.

Starting Sunday the Federal Aviation Administration (FAA) was forced to cut spending by 10% as a result of forced sequestration cuts. According to Reuters the cuts have already resulted in delays of more than an hour in New York with more delays to come at other hub airports.

This sounds exactly like any other Monday in the last 20 years of air travel. Regardless, FAA authorities swear these delays are different and the direct result of the sequester.

From an investment perspective, the question is whether or not the scorching hot stocks of the major airlines can withstand a service slowdown, even it isn't their fault (this time). Yahoo! Finance senior columnist Mike Santoli says the sector could hit an air pocket if the delays cause business travelers to consider alternatives to flying.

"The story with the airline stocks is pricing power," Santoli says in the attached video. The industry has reduced capacity on travel routes and has seen massive merger activity. That makes for more crowded flights and fewer alternatives for travelers who don't want to share an armrest. Historically these stocks are "not a great buy and hold business," understates Santoli, suggesting a pullback in the sector should be expected.

Dow Jones Industrial Average component Caterpillar (CAT) reported results for the first-quarter that were every bit as dismal as most people expected. CAT earned $1.31 a share, or 9-cents less than estimates on the Street.

In a statement the company expressed optimism on domestic housing, but said a 50% reduction in mining related businesses and little to no inventory build going into summer planting season will hurt results. For 2013, Caterpillar lowered its forecasts for both earnings and revenue to the low-end of the previous range.

Yahoo! Finance senior columnist Michael Santoli joined Breakout to discuss whether or not weakness in Caterpillar's outlook bodes ill for the economy and markets as a whole. In the attached video Santoli says it's becoming obvious that no great global growth story is in the works, taking away a tailwind upon which companies such as CAT relied.

"Maybe this is the world we're in for the next few months," Santoli says. Pointing out that the iShares MSCI Global Emerging Market Index ETF (EEM) is down more than 6% in 2013, he suggests that this year, unlike last, investors are braced for weakness. "We've readjusted to this idea that we don't have any global boom going on."