Monthly Archives: October 2010

iPhone on Verizon in January?: more AAPL marketing

October 13, 2010 By in Current Market Thoughts, Industry Analysis, internet, Recent Market Action, Technology, Wireless Tags: , , , , , , , , Leave a comment

Stories have been coming recently at an accelerating pace that AAPL will be offering the iPhone on the VZN network as early as January.  A Tech Crunch post in August seems to have started the ball rolling.   What sets this post apart from rumors launched as much as a year ago is the claim that it is based on pending orders of millions of CDMA-system chips from QCOM.  These chips would be needed to make a phone work on the VZN network, but would be useless on ATT.  (Comments from the CEO of VZN at a recent Goldman Sachs telecom conference seem to be pouring cold water on the possibility, though.)

What has AAPL said or done about this talk?  Nothing.  Quite a change from the way it handled the situation when a tech blogger/journalist found a prototype of the iPhone4 that had been left behind in a bar.  In that case, AAPL sent the police to the guy’s house, arrested him and confiscated his computer.  Now that’s more like it! That’s the secrecy-obsessed AAPL we’ve come to know and love.

And, of course, there’s the AAPL that consistently drops hints of upcoming new products in order to build anticipation among its fans.

It is possible that the management of AAPL is as secretive and vindictive as some of its actions–like the iPhone4 case–make it appear.  I don’t think so, though.  Rather, I think this is all part of a carefully crafted media strategy.  Naturally, without killer products the strategy wouldn’t be much good.  But as far as I can see, it has these parts:

1.  anticipation.  In money terms, it’s a substitute for advertising expenditures.  But creating a feeling of belonging, of insider knowledge that AAPL creates is a big addition to plain old buzz.

2.  forbidden fruit.  The fact that AAPL seems to be upset that we discover information that AAPL signals it wanted kept secret–we know this because AAPL calls its lawyers–makes us study and savor the information even more.

3.  “coming soon”.  This is a standard marketing tactic if a firm is unable to supply a product that consumers are clearly interested in and are buying from competitors.  The company will announce the imminent arrival of its version of the product in order to induce customers to wait for it rather than purchase a substitute from a rival.

This isn’t a tactic I’ve ever associated with AAPL.  But to me that’s what’s happening now.  To me, through the press AAPL is in effect saying, “Don’t buy an Android phone just to get the VZN network.  Wait.  The iPhone is coming soon.”  VZN is replying, “Buy an Android from me today.  Don’t be to sure that the iPhone is just around the corner.”

Why negotiate in public?  I think talks are down to the final details of which party makes how much from iPhone sales and neither wants to budge.  Also, AAPL wants to slow down Android’s momentum.  VZN doesn’t want to take the chance that news of imminent iPhone availability wrecks sales in its December quarter.

stock prices can “talk”

October 12, 2010 By in How often to measure, Portfolio management, Stock ideas, Trading Tags: , , , , , , , , , , , Leave a comment

not for everyone

I look at the prices of the stocks I hold every day.  Sometimes, but not always, I’ll look several times intra-day.  The advent of smartphones has made this possible for everyone to do, both for US and foreign stocks.  This is so, almost no matter where you are.

It takes a substantial amount of self-control and emotional discipline to do this productively.  I’ve seen almost every professional investor I’ve worked with, including myself, at one time or another mesmerized–and paralyzed into inaction–by staring at random fluctuations of stocks marching across the screen that’s virtually always on your desk.  The only short-term cure is to turn the machine off.  Otherwise, it’s kind of like watching a trashy TV show.  You know it’s a waste of time but you’re sucked in.

With TV, this compulsion to watch may come when you have other, unpleasant, stuff to do.  For investors, it’s typically when plans have gone awry and you’re hoping against hope that a miracle will happen and you’ll see the situation reversing itself on your computer.  It never works.

Still, there’s sometimes information to be gleaned from stock prices.  Sometimes, the movements are unusual in that they’re not random.  The only way you can tell is by checking them regularly.

how I learned

My first international portfolio job, managing holdings in smaller (that is, non-Japan) Pacific Basin markets, was also my first time working in non-US markets.  Every morning my boss would call me into her office.  She always had a report showing prices and volumes for all the major stocks–whether we held them or not–in all the areas I was responsible for.

She would name a stock.  I had to tell her the stock price change, in dollars and cents and in percentage terms, the trading volume and who the major brokers were who were active in the stock–both on the buy and sell side.  I also had to say how the trading in this stock compared with the trading in similar stocks in the same industry.

This grilling went on for 15-30 minutes, every day for several months.  I stopped having to do this, I think, when I started to give my boss significant information that she didn’t already have.  Although I wouldn’t have described the process as pleasant, my boss forced me over a period of time to try to distinguish between random and information-laden price/volume data and to think about and improve my analytic/intuitive capabilities in this area.  Otherwise, I might still be in that room!

an (obvious) example

A number of years ago, I owned a Canadian energy royalty trust.  The stocks were primarily owned by Americans attracted by high income.  I bought after they collapsed when Canada announced the payouts were going to become subject to Canadian income tax.  The stock I bought had a 14% dividend yield that was slated to be gradually reduced to 8% as the new income tax was phased in.

One afternoon, very close to 4pm, someone placed a million share order, at the market, in the stock.  The US$20 million that the order represented amounted to about half a day’s volume and was maybe 100x the size of the typical order.  The broker who got the order seemed to do the minimum legally required to find stock away from his in-house market maker and then filled the order, pushing the stock price up about 5% in the process.

This trade screamed that something unusual was going on.  Maybe you should  think twice before saying someone with $20 million to spend on a single stock is a total idiot, but this trade was done in a way that would humiliate any professional trader.  So either the buyer was an idiot by entering a huge order with no price sensitivity, or he knew something that the market wasn’t yet aware of.  The “something” also had to be such that even waiting until the next day was an unacceptable risk.

A few weeks later, the stock was bid for by a Middle Eastern sovereign wealth fund at a 25% premium.

why I’m writing about this today

As regular readers of this blog will know, I like the casino industry–because it’s simple to analyze–and I own both WYNN and 1128 (Wynn Macau).  Overnight, 1128 was up 8.7% to HK$15.98, after hitting an intra-day high of HK$16.40.  The stock just doesn’t normally move more than a few percent in a day.

Sands China (1928) and Galaxy Entertainment (0027) were both up 4.6%.  The Hang Seng, in contrast, was up 1.2% and its China Enterprises index was up 1.5%.

These are all unusual price movements, although 1128 jumps out as extraordinary, especially since all three stocks have been star performers in the Hong Kong market this year and are all trading at relatively high PE ratios.

What’s going on?  My guess is that information is leaking out that the Golden Week holiday has gone surprisingly well for the Macau casinos–and especially so for the American-run ones.

What am I doing as a result?  I’m hanging on to my entire 1128 position longer than I would otherwise.  In my analysis of the Wynn-related companies posted earlier this year, I had used a sum-of-the-parts method to look at WYNN.  I started with the idea that HK$15 (20x what I estimated 2010 eps would be) was a fair price for 1128.  Although I may not have written it, I’ve been thinking that HK$18 (same multiple, eps up 20%) is a reasonable first target for Wynn Macau for 2011.

Ordinarily, I’d be selling a portion of the 1128 I hold, maybe with a limit order of HK$16.50, hoping to buy it back later on at a lower price.  I think I’m going to wait and see, instead.

Addendum:  WYNN gained 8.5% in New York trading on Monday in a flat overall market.  If we figure that 1128 represents at current levels about 70% of the market value of WYNN, the move up in 1128 is the equivalent of a 6% rise in WYNN.  The “extra” 2.5% is the interesting part of the parent’s performance.

The Stuxnet worm: investment implications?

October 11, 2010 By in Current Market Thoughts, Industry Analysis, Technology Tags: , , , , , , Leave a comment

what it is

Stuxnet is a computer worm that was discovered last year.  Most, if not all, that is publicly known about the worm is summarized in a lengthy report that Symantec, the anti-virus company, posted recently on its website.  Although there’s tons more information about stuxnet on the Symantec website alone, I think deeper investigation would be overkill for a stock market investor.

Stuxnet’s main characteristics are:

–it is targeted at a specific type of industrial process control computer made by Siemens.  The controller, as the name implies, is a computer that directs the operation of industrial machinery:  typically pipelines, power grids or power plants, including nuclear power plants

–the purpose of the worm is to take control of the industrial process from the owners and give it to the worm’s creator.  The worm could contain instructions for the industrial process to either shut down or disable itself (explode?) at a future time.

–the worm is not propagated through the internet.  It is passed from one infected computer to another through wired connection.

–the worm uses flaws in Windows to spread

–45,000 control devices around the world are infected so far, according to Microsoft

–60% of them are located in Iran, according to Symantec, with Indonesia and India distant seconds

–Symantec estimates that it took a group of five-ten skilled programmers six months to create the worm, meaning 5,000-10,000 man-hours of work

It seems a reasonable assumption that the main target of stuxnet is Iran, since there’s where the bulk of the infected controllers are.  Given that there is little free flow of information either within that country or between Iran and the western world, it’s hard to assess how successful the worm is. The Iranian government has admitted that the stuxnet worm has infected the Siemens systems in its nuclear reactor at Bushehr, though.

Some have argued that the sophistication of stuxnet and the large amount of time and money that had to have gone into its construction that it  must be part of a cyberwar project masterminded by some national government and aimed at disabling Iran’s nuclear program. This makes sense and it fits with the widely publicized attacks earlier this year on Google that the company traced to a mainland Chinese military college.

Also, power plants and utility grids are typically not connected to the internet, in order to minimize the chance of software contamination.  So inserting the stuxnet worm into, for example, the Bushehr nuclear reactor system requires some James bond-like human activity to get the process started.  Someone has to insert the worm into a Windows laptop that will be physically plugged into the industrial site’s wired LAN, so that it can be transmitted to the industrial controller through uploaded instructions.  So the creator of the worm has to find a person with physical access to the targeted industrial system and either trick or compel him into loading the worm into his computer and introducing it into the target.  Not a feat you or I could easily accomplish.

investment implications

I think we’ve already seen one–INTC’s acquisition of MFE.  The idea of the combination is to provide anti-intrusion protection hard-wired into the processors that run industrial controllers.

In general, though, for now I think the stuxnet issue is one simply to be aware of so that you can be alert for new developments.

I can imagine three general paths the infected controller story can take:

1.  It ends up having no practical investing significance.  This would make it like the phenomenon of PC viruses, where there is an initial problem but which is readily solved and where there are many problem-solvers and the prevention industry becomes quickly commoditized.  Either that, or it remains something like the Cold War, present only in the background of government to government activity and invisible to most of us.

2.  It’s more like SARS or the avian flu.  That is, it becomes a significant threat to global commerce and actually disrupts world economic activity for a period of time, but is ultimately brought under control.  Yes, future outbreaks are possible, but a general system for control is in place.

3.  It becomes a serious and lasting threat.

The arguments against this are the time and effort required (at present, at least) to construct a worm similar to stuxnet, and the issue of obtaining physical access.

On the other hand, there’s the question of what one might call collateral damage.  Let’s suppose stuxnet was created by some government with an interest in slowing down or disabling the Iranian nuclear program.  Nevertheless, industrial controllers in Indonesia, India, Azerbaijan, the US and Pakistan have become infected, presumably unintentionally, as well.   If unintentional, I think it’s likely that the creator of the worm couldn’t be sure either of the precise point where physical access to the target could be achieved, or of its timing.  So he had to cast a wide net and accept the possibility that lots of controllers other than the target would be affected.

This alternative becoming more likely would have the clearest investment implications.  Power and energy transmission and distribution companies would become less attractive, despite high dividend yields.  INTC would probably have a significant growth spurt.

 

The September 2010 US Employment Situation: more minuses than plusses

October 10, 2010 By in Current Market Thoughts, economics, Strategy Tags: , , , , , , , , Leave a comment

the September report

The Bureau of Labor Statistics of the Department of Labor issued its monthly Employment Situation on Friday, October 8th.  The bottom line:  a loss of 18,000 jobs during the month, excluding the end of employment for another 77,000 temporary government census workers.  September will have been the last month where census workers will be a significant factor.  Of the peak of 564,000 temporary census employees in May, only 6,000 now remain on the  federal payroll.

The BLS also revised down the employment figures from the past two months by 15,000 jobs.

To me, the report has three important aspects:

–the service sector, the nation’s largest, continues to chug along, adding new jobs at an 80,000+ per month rate (86,000 in September),

–the goods producing sector, manufacturing and construction, has stopped hiring new employees.  The sore point seems to be non-residential construction, which shouldn’t be much of a surprise, and

–in a new development, local governments have begun to deal with budget deficits by laying off workers.  Nationally, teachers comprise 55% of the local government workforce.  They made up two-thirds of the 76,000 local government layoffs during September.

The overall picture that the September report presents is one of an economy more or less in idle from an employment perspective.  Private sector job gains are below the 100,000 level that represents absorption of new entrants into the workforce.  While Federal and state worker levels are holding steady, cities and towns are being forced to shrink their payrolls to adjust to lower levels of tax revenue being received.  It’s not clear how long this process will take.

more information from the household survey

The information above comes from what the government calls the “establishment” survey, that is, data it obtains from employers.  The BLS also does a “household” survey, which consists of interviews with employees.  The employee sample is smaller than the employer sample, so the margin of error in the former is larger than in the latter.

involuntary part-time work rising

One of the questions the BLS asks employees is whether, if they are working part-time, they are doing so voluntarily or not.  They also try to find out whether “involuntary” means their hours have been cut back by their employer or that the respondent wants full-time work but can’t find it.

The involuntary part-time worker group has jumped by 943,000 over the part two months, to 9,472,000.  Of that increase, about two-thirds of the newly part-time workers said their employers cut back their hours.

This is a potentially troubling development.  How troubling isn’t yet clear, since most of the rise comes from a seasonal adjustment of the raw data by government statisticians.  The idea is that workers who have their hours cut back during the summer normally have them restored in September.  That hasn’t happened so far this year.  At the very least, though, this is another potential weak point for the US economy.

my thoughts

Every economic recovery is marked by an initial surge in activity as consumers “catch up” on spending deferred during the bad times.  After that, the economy settles back to “normal” growth.   In the case of the US, continuing structural adjustment–hopefully municipalities will prove to be the final area to be pruning jobs–means that for now “normal” growth isn’t strong enough to add jobs.

No wonder the Fed it stalking about additional easing measures to stimulate job expansion.

Whether that will work or not is another question.  The day before the Employment Situation, BLS released August data in its series of job vacancy reports.  (See my post: FRB can’t change construction workers into manufacturing workers.)  This latest JOLT report shows that employers continue to have 3.2 million unfilled job openings, 800,000 more than a year ago, but can’t find suitable workers to fill them.

 

 


Prada listing–in Hong Kong?

October 8, 2010 By in Asian economic development, Current Market Thoughts, economics, Hong Kong, Industry Analysis, Luxury goods, Retail, Securities regulation, Stock ideas Tags: , , , , , , , , Leave a comment

The family owned European fashion house Prada (Prada, Miu Miu, Church’s) is talking again about going public.  That in itself is no surprise, since the firm has begun the process of listing several times during the last decade, only to withdraw at the last moment, citing unfavorable market conditions.

Maybe the  real stock market lesson is that we should expect a period of turbulence ahead.  In its desire to obtain the maximum price earnings multiple, Prada has made a habit of waiting until close to a market peak before calling its investment banks.  On the other hand, maybe it has leaned something from its unsuccessful past listing tries.

What I think is more interesting, though, is that the company is considering both London and Hong Kong as venues for its debut.

Lots of factors go into choosing a home market, including the regulatory environment and listing costs.  The two primary ones, in my opinion, are where the listing firm will get the highest price and where the publicity surrounding being a public company–the financial media coverage, the attention generated by periodic earnings reports, and the ability of present and potential customers to become shareholders–will have the post positive effect on the company’s business.

A decision in favor of Hong Kong would be a strong statement by Prada that that’s where it sees the growth in its customer base coming from.  I think it would also give Prada a clear advantage over other European luxury goods brands by giving itself a direct emotional link with Asian buyers.  And, of course, it would be a coup for Hong Kong as well.

Selecting Hong Kong may also be a bit less chancy since the debut of L’Occitane, a French perfume and cosmetics company, on the Hong Kong exchange earlier this year.  That stock, 0973, is up almost two-thirds in price since then and is now trading at 33x current earnings.

Prior to L’Occitane, Hong Kong has had companies listed there, but they have mostly been local brands, or companies whose apparel have mass market appeal–and which would tend to trade at lower PEs than luxury brands.

While it’s impossible to say without examining Prada’s balance sheet and earnings history for possible blemishes, it’s possible that Prada, a higher-end firm than L’Occitane, could IPO at around 30x.

Coming on the heels of a report by London-based consulting firm Z/Yen, that London, New York and Hong Kong are all of equal stature as the leading world stock markets, the Prada story will be an interesting one to watch.