Monthly Archives: April 2012

is anything “wrong” with Apple?

April 17, 2012 By in Constructing a Portfolio, counter-trend movements, Current Market Thoughts, Portfolio management, Stock ideas, Trading Tags: , , , , , Leave a comment

APPL’s extraordinary recent performance

I was talking about the stock with my brother-in-law, a big AAPL booster, a month or so ago.  I’d been fooling around with one-year performance charts, an obvious indication that I somehow had too much time on my hands.  But doing so made me realize that, as I pointed out to my brother-in-law (who probably already knew), APPL had had an extraordinary impact on the S&P 500’s near-term performance.  Over the prior 12 months, AAPL was up around 80%.  Over the same time span, the S&P was up a bit less than 4%.   But AAPL alone was responsible for most of the 4%!!

Some rough arithmetic:  AAPL probably represented 3% of the index at the beginning of the period.  3% up 80% is the same as 80% up 3%, which is also the same as 100% up 2.4%.  In other words, AAPL’s gains represented 2.4 percentage points out of the 4 percentage point advance the index made during that year.  The other 97% of the index chipped in only 1.6 percentage points.  Those stocks were basically flat.

Index dominance by one stock never happens in the US.  In emerging markets, where a single issue can be 10%-15% of the overall market, yes.   ..in the US, no.  Nevertheless, that’s what AAPL did over the past year.

Then it fell by 10%.

more numbers

Let’s take a quick look at how AAPL has performed, even after that fall.  And let’s include some of the “AAPL eco-system” stocks as well, to see how they’ve made out.

one year (through yesterday)

AAPL          +77.2%

INTC           +43.8%

QCOM          +24.7%

NASDAQ index          +8.1%

S&P 500          +3.8%

ARMH          -4.8%

 

six months

AAPL          +37.5%

INTC          +20.9%

QCOM          +20.1%

S&P 500          +11.8%

NASDAQ          +8.1%

ARMH          -1.9%

 

year to date

AAPL          +43.1%

QCOM          +21.1%

INTC          +17.1%

NASDAQ          +14.7%

S&P          +8.9%

ARMH          +0.8%

what I make of this

1.   Even after the drop of the past few days, the overall situation of AAPL outperformance hasn’t changed very much.  What has happened over the past six months, though, is that the rest of the market has begun to revive.  So AAPL’s gains aren’t as dominant as they had been when the rest of the market was drooping.

2.  The performance of “eco-system” stocks has been spotty.

—Qualcomm, whose chips are in virtually every high-end mobile device, has done well.  But its performance over each of the periods above is a pale imitation of AAPL’s.

—ARM Holdings, whose low power chip designs are in just about every mobile device, high-end and low-, has been left behind in the dust.  Of course, it was trading at close to 100x earnings a year ago.

—Intel, the “anti-APPL,’ the “dinosaur” that ARMH was going to put out of its misery, has been second on the one-year list.  Or course, it was trading at 9x earnings a year ago and yielding close to 4%.

3.  A counter-trend movement, where AAPL goes down and the rest of the world catches up a bit, wouldn’t be the least bit unusual after a year+ like APPL has had.

the rumors

Over the past few days, perhaps only in response to the AAPL decline, I’ve seen three worries circulating about the company, namely:

–Phone companies in the US want to reduce iPhone subsidies.  (Who wouldn’t.  The carriers pay AAPL $600 or so for phones that they resell for $200.)  There’s talk that ATT and Verizon want to charge $230 instead.  It’s not clear that the carriers will be successful.  But if they are, higher prices might clip a couple of percentage points off the growth of AAPL’s most important business (half the company’s profits).  But if that means 22% growth instead of 25%, that’s not such a big deal.

–Mac sales may be slowing.  One analyst is reportedly suggesting that AAPL computer sales may have been down year on year in the March quarter.  That wouldn’t be good, either.  But, realistically, Macs are too small to matter that much to AAPL’s business.  And although tere are good industry data for slow-growth markets like the US and the EU, I don’t think there’s any good way to gauge Asian sales.

–iPad sales may be slowing.  This would be a more serious issue, since tablets are 20% of AAPL’s sales–and thought of as the company’s next hot product after smartphones.  I’m not sure what evidence there is, however.

my take

I’m reading the downward AAPL price move over the past week or so as a natural reaction by market participants with short time horizons–taking profits in a stock that has performed so well in both relative an absolute terms.  The really noteworthy thing is that the reaction took this long.

It’s possible that the worries I’ve seen surface in the past couple of days are justified, but my initial reaction is that the declines prompted the rumors–not the other way around. We’ll know for sure when AAPL reports earnings in a couple of weeks.

What impresses me most about AAPL is its valuation.  On consensus estimates, the stock is trading at under 14x fiscal 2012 earnings and yielding around 2.5%.  If those are anywhere near correct, there’s nothing “wrong” with AAPL other than that no stock goes up each and every day.

Current weakness may well be the trigger for AAPL holders to give their position sizes a sanity check.  That alone may prompt further selling as long-time holders give more thought to exactly how much AAPL they hold.

 

“Are You a Stock or a Bond?”

April 16, 2012 By in Constructing a Portfolio, Getting financial advice, Portfolio management Tags: , , , , , , , Leave a comment

That’s the title of a book a friend gave me recently to read.  It’s written by Moshe A. Milevsky, a finance professor at York University in Toronto.   It’s well worth reading.

insurance as a hedge

Mr. Milevsky has had a life-long fascination with insurance.  So the book has comments on the role of insurance as a hedge against loss of a family breadwinner’s income.  There’s also a section on using annuities to stabilize retirement income flows.  There’s even a brief discussion of a precursor of the annuity, the tontine–an arrangement (devised by Lorenzo Tonti) where a number of elderly people invest money jointly and meet after a specified time to split the proceeds among the survivors–as one basis of the annuity’s appeal.

There’s also the usual academic nonsense about efficient securities markets, although that’s not crucial to the book’s message.

human capital

The most important aspect of the book, to my mind, is that it points out the crucial importance of considering one’s human capital when making a personal or family investment plan.  For almost everyone, a lifetime’s earnings from working will be their largest single source of economic wealth.  Yet people tend to take a very narrow approach when planning for diversifying their financial assets and ignore their human capital completely.  As a result, they overlook two important considerations:

1.  Are you, seen as your human capital, a stock or a bond?  That is, does your income have the potential to swing significantly from year to year and is your continuing employment highly contingent on continuing strong performance?   …or are you in a job where your future income is very predictable and where you’re highly unlikely to be forced out of work?

Entertainers, salesmen or money managers are like stocks;  tenured professors are the ultimate bonds.

People with very conservative preferences may be attracted to bond-like professions, and the less risk-averse to stock-like ones.  If each treats his allocation of financial assets as a completely separate topic from his choice of a career, then both will end up with incompletely diversified economic portfolios.  The professor will end up with too much bond exposure, the investment banker too much stock.

2.  How old are you?  Milevsky’s analysis here arrives at the conventional result.  A 22-year old college graduate has an immense economic resource in the present value of his future earning power.  So he can take a lot of risk with his financial assets.  For a retiree, on the other hand, the earnings gas tank is at empty.  So his financial asset allocation must be more conservative–both relative to his own past allocations and in an absolute sense.

(Are You a Stock or a Bond?:  Create Your Own Pension Plan for a Secure Financial Future, Moshe A. Milsvsky, PhD, FT Press, New Jersey, 2009)

 

 

Google’s proposed new class of common stock

April 13, 2012 By in Current Market Thoughts, Industry Analysis, internet, Japanese development, Stock ideas, Stock options, Stock Splits Tags: , , , , , , , , , Leave a comment

the C class announcement

Yesterday, in conjunction with its release of 1Q12 earnings, GOOG published a letter to shareholders on its website.  In it, Larry Page and Sergei Brin outline their plans to create a new class of stock–C shares.

On shareholders’ approval, the new C shares will be distributed as a stock dividend, on a one-for-one basis, to all holders of A and B shares.  C shares will be publicly traded on NASDAQ, using a different ticker symbol from the “GOOG” the A shares use.  As will continue to trade, though.

no voting power

The sole difference among the share classes will be in voting power.  Each A share has one vote; each B share, held by corporate insiders, has 10.   C shares will have no votes.

Since holders of B shares–principally Mssrs. Page, Brin and Eric Schmidt–wield over 70% of Google’s voting power, shareholder approval is a mere formality.

Google intends to file full details of the issue with the SEC next week.

why do this?

…to keep voting control of Google in the hands of the current B shareholders.

How could control be lost?

…through a combination of sales by B holders, issuance of new A shares through stock options or acquisitions for stock.

current shares outstanding

According to the company’s 2011 10-K filing, 67.2 million class B shares, representing 672 million votes, were outstanding on December 31st.  258 million As, representing another 258 million votes, were also out.  Employee stock options on just under 10 million new A shares had been granted and remained to be exercised.  (Notably, I think, the stock option count is growing very slowly.  Google only granted options on 718,000 new shares last year.)

Therefore, assuming all stock options grants are exercised, A shares represent 28.5% of the total vote.  Bs represent 71.5%.

implications of the Cs

control structure frozen

The most obvious is that the new class will provide a way for the company to issue potentially large amounts of new shares without altering the current control structure of the company.  Google has already said future employee stock option grants will be for Cs.  Bs continue to rule.

price of the Cs vs. Bs

It’s not clear that the Cs will trade at the same price as the Bs.  Arguably, voting power should be worth something.  But in this case, as the company is currently constituted, the Bs’ votes basically have no value.  So you’d think the two prices should at least be pretty close.

stock options

Stock options don’t seem to me to be a big deal–or any deal at all.  Here’s what I mean:

If we assume all outstanding stock options are exercised, the company currently has a total of 940 million votes.  Bs have 672 million, with 268 million more for the As.

For the moment, let’s ignore the possibility that insiders sell a significant number of Bs to get walking-around money.  Yes, company rules require that Bs be converted into As before being sold, so no outsiders can end up with the super-vote shares.  Bs, therefore, can–and in the past have–disappeared.  And, yes, Mssrs. Page and Brin are halfway through a modest (for them) sell program that goes into 2015.  But put these thoughts to the side.

As things stand now, A shares can only achieve a voting majority if over 672 million are outstanding.  That’s an extra 404 million shares.  At the 2011 stock option issuance rate, the As take over in the year 2575, or 563 years from now.  At the 2010 issuance rate of 1.7 million, the As grab the reins in a mere 238 years, in 2250.

Suppose B holders sell 10% of their stock–because they need a loose $4.4 billion.  That would imply that the Bs outstanding shrink to roughly 6 million and As expand to 275 million.  In this case, the As still need 325 million more shares to take over.  That would happen, at the earliest, toward the end of the next century.

Even for long-term thinkers like Google, dealing with stock options worries can’t be a pressing issue.

stock-based acquisitions

This is the only reason I can see for the C share move.

True, Google has $44 billion+ in cash; operations generated $14 billion+ last year.  But a seller may well prefer stock to cash.  And, of course, a potential acquisition could be very large.  It could also be very large and very sick, needing a big infusion of cash after the purchase.

Yes, the founders’ letter says  “we don’t have an unusually big acquisition planned, in case you were wondering.”  I’m sure that’s true.  But I’d emphasize the word “planned.”  It seems to me that Google may well have decided it needs to make an acquisition of a certain type over the next couple of years and have developed a list of possible candidates. The next step is figuring out how to pay for it–which is what I think Google is doing now.

Who know what such an acquisition might be?  I wouldn’t care to bet on anything.  But I do have a guess, however   …somebody like Sony.  But that company has been such a train wreck for such a long time that I don’t see any percentage in speculating that Google would rescue them.  There are also severe legal obstacles that Tokyo has erected to deter foreign takeovers of its domestic firms.  On the other hand, Sony is a post-WWII upstart, not part of the establishment.  And the company does have TV technology, cellphones, tablets/PCs and the Playstation in tens of millions of homes around the world.

 

 

 

 

what are bond vigilantes? …are they making a comeback?

April 12, 2012 By in bond vigilantes, Portfolio management, securities markets, Strategy Tags: , , , , , , , , , , 2 Comments

vigilantes…

Vigilantes were members of 19th century American “vigilance committees,” composed of citizens who banded together to render immediate, and often rough, justice in circumstances where they felt formal law enforcement actions were insufficient.  Whether this was a good thing or not, I don’t know.  But the idea of vigilantes has become part of American folklore.

…and bond vigilantes

I first saw the term “bond vigilantes” in the 1980s in the work of brokerage house economist Ed Yardeni.  My impression is that he invented it   …but, hey, I’m a stock guy not a bond expert.  The idea was that should the Fed falter, due to political pressure, in its mandate to contain inflation under Paul Volcker (as it had throughout the 1970s, under his predecessors), private bond investors would step into the Treasury market and tighten money policy (by pushing up bond yields) whether the Fed liked it or not.

The concept later morphed into the idea that private bond investors would routinely raise and lower bond prices, and thereby interest rates, in the way sound money policy would dictate.  The market would act in advance of formal Fed moves.  Fed actions wouldn’t normally break new ground, but would serve to validate the direction the market was already taking.  This supposedly took some political heat away from the Fed during the long and difficult road of containing the runaway inflation of the Seventies.

Like most generalizations from current experience, the bond vigilante idea worked for a while.  But it has long since lost its usefulness.  For one thing, China became a huge factor in the US bond market as it recycled its trade surpluses.  And Alan Greenspan gradually developed a penchant for smoothing every little bump in the economic road with another huge dollop of easy money.  Ironically, one of the “problems” he dealt with in this manner was the Y2K scare–popularized almost single-handedly by the same Ed Yardeni.

(If you recall, the thesis was that, due to a programming shortcut, every electronic device that contained a computer chip with a clock in it would stop working at the stroke of midnight on 12/12/1999.  That meant refrigerators, elevators, ATMs, PCs…everything.  Software of all types would go kablooey, as well.  So bank and medical records would likely disappear.  During 1999, survivalists were in their glory.  They stockpiled horse-drawn plows–inconveniencing the Amish considerably–and gold and silver coins.  Regular people stockpiled water and gasoline (because pumps might not work, either.

It’s hard to know–since none of the bad stuff happened–whether Yardeni was a hero for alerting the world in time to avert the worst, or just a little nuts.  But he certainly gave Greenspan an excuse for maintaining an easy money policy.)

why the trip down memory lane?

I think I saw the activity of bond vigilantes in trading during the first quarter of this year.  The 30-year yield moved up from 2.94% in December 2011 to 3.33% last week.  The 10-year yield went from 1.94% to 2.21% over the same span.  This, despite Ben Bernanke’s continual assertion that the Fed intends to keep interest rates low through this year and next.

Of course, yields have reversed themselves sharply in the current mini-panic over the latest Employment Situation report and the uptick in southern EU bond yields.  But I read this more as a ripple caused by short-term traders than anything else.

And why shouldn’t the bond vigilantes re-appear?  After all, Mr. Greenspan no longer has his hand on the money spigot.  And China is much less of a net buying force in Treasuries than in the past.

Significance?  We may be seeing the first steps in the normalization of interest rates–far in advance of when the Fed wishes.  Two implications, assuming the markets are correct:

–the US economy is in better shape than the consensus realizes, and

–a sharp divergence in performance between stocks and bonds–in favor of the former (previously, I’d made a typo here)–may be about to begin.

consumer electronics: a new front on the online/bricks-and-mortar battlefield

April 11, 2012 By in Industry Analysis, internet, Retail, Stock ideas Tags: , , , , , , , , , 1 Comment

I’d been planning to write this post before the announcement yesterday that the CEO of Best Buy is resigning.  Maybe it’s a bit more topical today.

trying to end discounts on consumer electronics

Early in the month, Korean and Japanese consumer electronics firms–among them, Samsung, LG, Sony and Panasonic–announced new rules for sales of their high-end products in the US.

Previously, the device manufacturers had at least threatened to, and perhaps actually withheld sales incentive payments to retailers who aggressively discounted the recommended selling prices set by the brands.  That didn’t stop internet retailers from undercutting their bricks-and-mortar rivals, however.  The manufacturers are now taking a new tack.

From April 1st, the consumer electronics companies say they won’t just not pay marketing money to discounters.  They won’t ship “hot” products to them at all.  To get the latest and greatest, buyers will have to go to full-price outlets.

Sounds crazy. 

Why would they do this?

Two reasons occur to me:

1.  The manufacturers want to preserve the bricks-and-mortar distribution channel.  In particular, they want to preserve the big-box strip mall retailers like Best Buy.

This would be somewhat like what the book publishers did a year ago, when they forced Amazon–by withholding newly-published “best seller” e-books from the internet retailer–to charge higher prices.  That provided a pricing umbrella under which independent bookstores could a least continue to limp along and under which Barnes and Noble could complete development of its own e-reader, the Nook.

2.  As far as I’m aware, the consumer electronics companies aren’t going to raise wholesale prices.  So they won’t initially make more money.  They may think, however, that if all retailers become more profitable, then they’ll be less likely to resist future increases in wholesale quotes–or future reductions in sales incentives.

the new plan won’t work

My guess is that this new plan will do more harm than good.  Four reasons:

1.  When prices go up, consumers buy less.  If the price of, say, high-end HDTVs rises by the $800 a unit that some are suggesting, sales volumes will doubtless contract.  Pre-Great Recession, a customer might think of a new HDTV as being like a new car–and finance it.  Not today.  Absent easy availability of cheap credit–and customer willingness to use it–the falloff in unit volume that higher prices brings might be surprisingly large.  And not every manufacturer is in rude financial health, so profit contraction could be painful.

2.  There’s no reason to think that loss in unit volume will be distributed equally across all competitors.  In an environment of smaller price differentials, competition won’t disappear.  It will just take a new form.  My candidate is perceived product quality.  If so, I think this means the market will gravitate toward Samsung and away from Sony.   In any event, market share losers would be under enormous pressure to go back to the old system, before the new competitive game causes irreparable damage to their businesses.

3.  The umbrella of higher prices will potentially allow competitors who don’t adopt the new system–or new market entrants, for that matter–to compete successfully by discounting aggressively.

4.  The move won’t fix what ails Best Buy, in my opinion.

Thirty years ago, suburban big box retailers were an evolutionary advance over urban department stores and local mom and pop shops.  They still are, but the latter, like the dodo, aren’t the competition anymore (actually, the dodo never were).

Today’s competition takes two forms:

–internet retailers, and

–Wal-Mart/Target/Costco, the discount retailers who are the modern successors to the department store.

Compared with the latter group, Best Buy stores are too big and too seasonal (think:  Toys R Us). Best Buy has to lease, light, heat/cool and staff its retail space for the full twelve months of the year, even though 60% of its profits come from sales that happen between the year-end holidays and the Super Bowl.  The others just expand and contract their seasonal departments, depending on the time of year.

Tilting the playing field away from internet retailers and to the benefit of bricks-and-mortar will, it seems to me, just intensify the battle between Best Buy and Wal-Mart et al.  I think we all know who’s going to win that struggle.

there is a better solution for consumer electronics

By the way, this all shows how prescient Apple was in opening its Apple Stores.