iPad, iPhone 4, Android and the stock market

This is another try at a topic I think is important and that I’ve been thinking about for a while.

haves vs. have nots

AAPL just announced that it has sold 3 million iPads in the first 80 days of the product’s existence, or more than a million units a month.

Early estimates are that the company will sell a million of its newest iPhones on day 1, that is, today.  Even so, AAPL seems to be losing market share among smartphone makers to offerings using GOOG’s Android operating system.

Transportation companies like FedEx are working over time–and making lots of money–just getting enough of these devices into the stores so that consumers can buy them.

Step back for a second and figure how much money consumers are spending on just these two AAPL products.  Four million devices times, say, $600 each, and you get $2.4 billion–in less than three months and on what are, when you get down to it, super-cool but by no means essential purchases.  Frivolous is too strong a word, but it gets you going in the right direction.

What does this mean?  My take is that affluent people have lots of money to use to indulge themselves, and are willing to spend it.  I don’t mean this too critically.  We’re a Verizon/Android family, with four smartphones in service and climbing.  But these are not the sort of purchases you’d make if you were worried about being laid off tomorrow or were concerned about where the money for the next mortgage payment is coming from.

This group of consumers appears to be on solid ground in thinking economic recovery is underway.  One recurring theme in recent company earnings announcements has been that revenues are growing rapidly but earnings aren’t going to keep pace for a while, because firms are restoring cuts to wages and benefits made during the recession.

That’s one side of the US economy coin.

The other side is an unemployment rate of close to 10%, continuing large numbers of home foreclosures caused by delinquent mortgages, WalMart customers trading down to the dollar stores.

what about the stock market?

It’s clear that, unlike the case of any government bond market, there’s typically a much weaker link between a country’s domestic economic performance and its stock market.  In the case of the US market today, for example, half the earning power of publicly listed companies comes from outside the US.  Of the domestic portion, housing, construction, real estate, autos–areas of the greatest economic concern–have almost no direct stock market presence.  Perhaps their biggest representation is indirect, through a portion of the loan portfolios of listed financial companies.

Many times in the past in the US, investors have been willing and able to make sharp industry or sector distinctions that separated winning areas of the market from losing ones, even in shaky economic times.  From 1975-84, for example, small stocks soared while the Nifty Fifty trended downward for years.  When oil prices collapsed in the early Eighties, investors focussed on disinflation beneficiaries like utilities or consumer staples firms, which had a decade-long run.  Similarly, restructured American industry was a big focus of the first half of the Nineties, with technology taking up the running in the second half.  Traditional value stocks were a big money-making opportunity after the internet bubble collapsed.

Until now, the stock market recovery from the lows of last March has followed the typical pattern:  economically sensitive stocks have done well, defensives have lagged.

where to from here?

What strikes me as odd about the current market in the US is that we seem to still be trading very heavily on overall macroeconomic news and not on what I think are very clear company by company and industry by industry performance differences that are developing.

The heavy betting should be on the idea that the “invisible hand” is still hard at work and that these differences are emerging–the problem being me, that I’m just not seeing them yet.  You have to add more weight to this possibility because I’ve been generally right about the market over the past year or so, which would imply that I’ve gotten a little lazy and can’t match the research intensity of others seeking to make up lost ground.

Two other thoughts have been nagging at me recently, though.  One, which you’ll hear about soon, has to do with the “invisible hand,” which is the ultimate source of the efficient markets hypothesis and ultimately comes from theological speculation (not a good sign).  The other is the changing balance among styles of money management.

There has been a slow drift of equity money toward index strategies over the past twenty years or more, based on the tendency of active money managers as a whole to deliver worse than index performance.  But I think there are also three other developments that are affecting trading today:

–retail investors seem to me to have hit an inflection point of disillusionment with financial advisors/ mutual funds, and are switching away from active managers to ETFs

–major brokerage houses have laid off many of their most experienced securities analysts during the financial crisis as a way of cutting costs, with the result that company-specific information is not disseminated as widely or as quickly as it was even five years ago

–institutions like pension funds have been also been switching from traditional money managers to hedge funds.  Many of the latter are former brokerage house traders, who understand macroeconomics and short-term market trends, but have little training or experience in microeconomics or securities analysts.

The effect of these changes?   In the final analysis, I think company fundamentals win out.  The journey may be longer and more volatile, however, if not everyone is following the same roadmap.  Less focus on company or sector economic developments may also explain why technical analysis seems to have been more effective than usual as a tool during this upturn.

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