thinking about the iPhone 5 launch

Thinking about the iPhone 5 is, for me, a good way of focusing on the question of where APPL goes from here.  My conclusions in this post are preliminary enough that I haven’t documented what I’m writing in the way I would usually.

Here goes:

importance of the iPhone

The iPhone is by far APPL’s largest and most profitable product, accounting for over half the company’s gross  income.  It generates huge upfront cash from device sales (Industry estimates are that the iPhone 5 costs about $200 to make.  It sells for $650.).  In addition, APPL gets a percentage of the recurring fees the wireless networks charge their iPhone customers.  It also gets a big chunk of the money iPhone users spend on apps, books and periodicals.

On top of all that, the iPhone has replaced the iPod and the Mac as the iconic APPL device–the one that powers the brand name and motivates customers to buy the newest/best in the whole range of AAPL products.

the iPhone 5

–in many ways, it’s a “me, too” product.  Its most important new features, like larger screen size and LTE network access, have already been available on Android phones for a while.  Yes, Siri is apparently better (could she be worse?) and you can take panoramic photos, but still…

I don’t think this is necessarily a bad sign.  It probably signals, instead, that AAPL thinks that significant future hardware changes will be harder to come by, and easier to copy, than ever before.  Therefore, competition between iOS and Android (Google/Samsung) will play out on other fronts.

–AAPL is offering proprietary mapping services, provided by a wholly-owned, newly acquired, subsidiary.   GOOG maps are gone.

All the initial publicity is about how the new AAPL maps are, at present, not up to snuff.  I think they soon will be.  One might say that Safari and iWork aren’t great confidence builders, but they’re parts of what is now a small legacy business for AAPL.  I think there will be a lot more emphasis 1 Infinite Loop on getting maps right.

More important, AAPL may see proprietary apps as the next big phone differentiator.  This could be the way AAPL would like to steer the smartphone business, or it could simply be the way it diagnoses the competitive environment will evolve, whether the company wants it that way or not.

If so, rapid improvements with Siri and maps, as well as new proprietary apps will be keys to watch for.

–the iPhone 5 appears to have fewer Samsung parts in it.  If so, this is probably another facet of the intercompany competition highlighted by recent copyright litigation between the two.  To me, this would imply making a foundry-like deal with INTC as the logical next step.  For INTC, this might mean a better chance to have its proprietary processors (not just foundry output) appear in AAPL phones.

–the iPhone 5 appears to work on more networks than the one a customer contracts with.  According to one report I’ve read, changing the tiny sim card inside the phone will enable it to work on either T or VZ networks.  It may be capable of working on other networks as well.

If so, why have this feature?

There may be some manufacturing efficiencies, but I don’t imagine that’s the reason.

As the smartphone business matures, and assuming APPL wants to retain its upscale image, the company faces the issue of motivating customers in the developed world to buy a new $650 phone every two years.  At the same time, the price of the iPhone is far too high for all but the wealthiest users in the developing world to afford.  So the biggest growth area for smartphones would seem to be closed out to it.

Suppose, however, you could “recycle” used iPhones by buying them from T or VZ for, say, $100, replacing the sim card and furnishing them to a telecom carrier in the developing world?  Then you could expand your user base–and the associated income stream from carrier charges and apps etc.–without being forced to manufacture a cut-rate phone for the developing world that would threaten to dent your upmarket image.  You’d also be giving the developed world user a $$$ reason to upgrade.

Something to watch.

my bottom line

The best growth companies re-invent themselves every few years.  AAPL has already gone through several evolutions, from Mac company to iPod company to iPhone/iPad company.  The next turn of the wheel may be to become predominantly a software developer and usage royalty generator.  If that process is already under way–and if it’s successful–there may still be a lot more growth in AAPL than the consensus expects.

I don’t think there’s anything built into today’s AAPL price for the possibility.  I don’t think may people are thinking about it, either.  There’s a temptation to conclude that owning AAPL gives you a free call on the potential upside. In assessing downside risk if something like this doesn’t happen, however, the relevant question is whether AAPL becomes a MSFT (and just drifts) or a RIMM (and plummets).

Schwab’s new global trading service

Schwab’s global trading service

My brother-in-law called my attention to the new global stock trading service that Charles Schwab is rolling out.  Although I’m by no means a fan of Schwab (more about this below) , this seems to me to be a potentially very useful tool, especially for anyone interested in investing in Asian stock markets.

my discount broker foreign trading experience

Personally, I now do international trading through Fidelity.  But I’m signing up for the Schwab service.

I used to use e-Trade, which was the first to offer online trading in foreign markets.  But I found its trading mechanism cumbersome.  Customer service was poor.  So I switched to Fidelity as soon as its foreign trading vehicle was launched.

why have a foreign stock account?

Why an international account when most foreign stocks are also traded in the US, either through listed ADRs or over the counter through the pink sheets?  For many large cap stocks, particularly European ones where trading hours for the local market and the US overlap, it’s not necessary.

But there are two important cases where trading in the local market is the far better alternative:

–for smaller, less well-known foreign stocks, the spread between a US market maker’s bid and asked prices may be several times as high (I’ve seen as much as 10x!) as what the market in the stock’s home country trading

–when a foreign market is closed, a US market maker will widen his spread, sometimes by a mile.  This is partly to account for the risk he may be taking in holding the stock until the foreign market reopens and he can sell; partly in reaction to your apparent desperation, or lack of experience, in wanting to unload the shares instantly.  Waiting an extra few hours to make a home market trade can many times get you a 5% better price.

Fidelity vs. Schwab


1.  Fidelity offers trading in 17 countries, Schwab 12.

Both trade in:






Hong Kong






Schwab trades in Finland.  Fidelity doesn’t.

Fidelity trades in Mexico, New Zealand, Portugal, Singapore, Sweden and Switzerland.  Schwab doesn’t.

The coverage prize goes to Fidelity.  To my mind, however, unless you’re a small cap maven dealing in smaller markets, the difference between the two isn’t crucial.


I haven’t done an exhaustive study.  For online orders, they appear to be about the same.  For orders placed with a trader, Schwab charges a percentage of the principal, Fidelity a set price.  For me, Fidelity would be cheaper.  One important caveat, though.

trader availability

Fidelity’s international traders work basically the same hours as their counterparts covering the US.  Schwab says it has traders on the job 24/7.

Schwab’s availability would potentially be a big advantage for anyone wanting to trade during Pacific market hours or during the European morning, times when Fidelity’s international trading desk is shut.

tradable stocks

Schwab has a list of about 3,500 “rated” stocks.  If the stock is not on the list, you’re out of luck.

Fidelity has a similar list, whose size I don’t know.  I’ve always been able to get a stock I want to buy onto the Fidelity list by asking.

Fidelity quirks

Both Fidelity and Schwab say they have real-time pricing during foreign market trading hours.  I have no relevant experience with Schwab.  I do know, though, that as soon as the US market closed on Wednesday, September 26th, all my Asian stocks repriced to their close on Tuesday, September 25th–about 36 hours (and one full trading day) earlier.  They do so every day, which messes up the percentage gains and losses shown online once Asian trading begins.  A minor annoyance, but very unFidelity-like.

A year so so ago, I decided to sell some Wynn Macau (1128:HK) in Hong Kong and use the money to buy Sands China (1928:HK).  I entered an online buy order for 1928 and got a screwy error message saying I wasn’t allowed to short the stock.  The next day I called the international trading desk and was told the issue was a Reg S security.  Reg S is the error message I got a minute ago when I tried to enter a buy order for 1928 through Fidelity.

That’s obviously wrong.  I dealt with Reg S often as a global portfolio manager.  It allows a US company to sell stock abroad without adhering to SEC registration requirements.  Ordinary US citizens are barred from owning such securities.  But Sands China is a Hong Kong company, so Reg S doesn’t apply.  Another small thing, but weird.

In contrast, I can buy 1928 through Schwab.

my embarrassing Schwab past (you can easily skip over the gory details and go to the last paragraph)

Five or six years ago, I bought my first–and, to date, only–Hong Kong stock through Schwab’s international trading desk.  Foolishly, I placed the trade without asking in detail about commissions.

When I received the confirm the following morning, I was shocked to find I had been charged brokerage of over $2,000.  That was 4% of the principal amount of the trade, far, far more than even a traditional “full service” broker would charge.  I had expected maybe $100, $200 tops.

I figured this had to be a mistake, so I called the trader I placed the order with.  He said the commission was correct.

I asked for the commission to be reduced.

I pointed out that Schwab’s out of pocket costs for the trade couldn’t have been much more than $25 (something I knew to be true from long experience).   The trader hadn’t apprised me of the huge commission involved.  The charge seemed to cut against everything a discount broker was supposed to stand for.

The trader replied by stating the law of the jungle–yes, he hadn’t told me.  But I had assumed Schwab would have low commissions and I hadn’t asked    …which was true   …not an inducement to doing any further business, but true.  On the brighter side, I had only been hurt financially.  The sun was out, I wasn’t broke, I wasn’t in the hospital.  I’d also learned a lesson.

my “Talk(s) with Chuck”

A day or two later, I saw a “Talk with Chuck” commercial on TV, extolling Schwab’s great customer service and, as I heard it, saying that CEO Chuck was interested in feedback from customers.  So, still in denial and persisting with the thought that the commission was a bizarre mistake, I wrote a letter to Mr. Schwab making my case.  I figured that at worst I’d get a politely-worded “no.”  And there was always the chance that the benevolent Chuck would overrule a misguided subordinate.  What did I have to lose?

A week or so later, I got a call from an assistant.  She said she would look into the trade and get back to me.

Two months went by without a word.  I sent a second letter to Mr. Schwab, attaching a copy of the first.

I got a call from another assistant.

He explained the first assistant had closed my case as soon as she hung up the phone–which is, naturally, why I had gotten no reply.    …oh.

He also told me that, like a lot of others, I misunderstood “Talk with Chuck.” It doesn’t mean the CEO cares to hear from customers.  Rather, all Schwab employees are so drilled in the founder’s business principles that speaking with any one of them is just as good as speaking with Chuck himself.

The voice of Chuck then said he’d explain in detail why the huge commission was in fact proper.  No reduction, but he’d show me why the charge was reasonable.  But he couldn’t make the numbers add up to anything remotely close to $2000.  He said he’d get back.  Naturally, he didn’t.

why this tale?

Despite my long experience, I made a rookie mistake.  Why dig it up again?

Two reasons:

It shows something about the way Schwab does business.  Not something good, as far as I can see.

It also says that to break the “fool me twice” rule, I must think the Schwab global trading service may have something no one else has.  I do.  But I’m going to tread very cautiously this time, until I can see the reality behind the Schwab promises.

Updating Current market Tactics today and tomorrow

I’m updating Current Market Tactics in two posts.  Today, why equity professionals are shifting into neutral for 4Q12.  Tomorrow, starting to think about 2012.   (If you’re on the blog. you can just click the tab at the top of the page.)

foreigners now own more Japanese government bonds than any time over the past thirty years…Why?

foreign JGB ownership continues to rise

The Bank of Japan announced last week that foreign ownership of its government bonds has now reached  the highest level since 1979.

The foreign investors piling in aren’t individuals like you and me.  They’re mostly professional bond investors who manage mutual funds and institutional pension accounts and, to a lesser extent, non-Japanese central banks.

What’s the attraction?

To the layman’s eye, there would seem to be none.  The Japanese economy hasn’t grown much for over two decades.  The Tokyo government continues to borrow heavily to run its operations, so the stock of JGBs continues to expand.  And interest rates are extremely low.

There are, however, two positives.

90% or more of Japan’s government bonds are held by Japanese citizens and institutions.  They regard JGBs as the ultimate safe investment.  They also see themselves as having little other choice (without taking unacceptably high amounts of risk) than to continue to hold.  They roll their money over into new bonds when their current bonds are redeemed, too.  So–unlike the case with, say, US Treasuries, where foreigners own about half the outstanding bonds–there’s little chance of the JGB market being roiled by panicky foreigners repatriating funds to the their home markets.

Also, the Japanese economic situation is well-known.  It has been for all practical purposes unchanged for over two decades.  Chances of any change appear to be slim.  To boot, in the deflation-prone Japanese economy, low yields look somewhat better in inflation-adjusted terms.

In other words, although you won’t make much money–other than a possible currency gain–the chances of a loss appear to be very small.  That’s what makes Japan so attractive to global bond professionals.

not so in the rest of the world

The sub-prime mortgage crisis in the US and the Greece/Italy/Spain government debt crisis in the EU have driven bond yields for Treasuries and for German governments to within striking distance of JGB yields.  In fact, short-term German government notes trade at negative yields.

Inflation-adjusted, Treasury yields are already negative, as well.  It’s possible that economic recovery now under way will eventually cause inflation to rise further, worsening this situation–and causing the Fed to raise rates.

In Germany’s case, if the Eurozone is to survive it looks like Germany will have to accept more inflation than it traditionally has been willing to do.  It will also bear a large amount of the cost of bailing out profligate Spain and Italy.  (Greece?  It’s too small to matter; my personal bet is that Athens will be eventually expelled from the EU.)

in short

Marketers of bond funds continue to tell us that bonds are a good place to have our money.  If we look at what those managers are doing with any funds we give them, however, we see the best low-risk option they’re able to find is Japan, whose virtue is that losses will probably be minimal.

Another case of:  watch what they do, not what they say.

the Fed’s QE3: a “reverse Volcker moment”?

The most recent A-list editorial feature in the Financial Timeswritten by Pimco marketer Mohamed El-Erian, asks this question and answers it with a carefully hedged “Yes.”

Several aspects of the editorial are interesting:

–it’s not the usual El-Erian turgid statement of the obvious.  Instead, it’s concise, well-written and makes a point.  To me, this underscores the fact that Mr. El-Erian is writing, not as an individual, but as the voice of the collective wisdom of the largest and most successful bond investment management firm in the US.  As such, the opinion expressed should be taken seriously.

–the original “Volcker moment” was Paul Volcker’s decision as newly-appointed Fed chairman to deal with runaway inflation in the US by raising interest rates to extremely high levels for an extended period of time.

The editorial suggests Mr. Bernanke is currently in the process of deliberately trying to manufacture higher levels of inflation, thus reversing the major thrust of Fed policy over the past thirty years.  Calling the move a “reverse Volcker moment” implies that the decision may have equally momentous implications (more about this next week).

–although the editorial doesn’t say this (Pimco markets bond funds, after all), such a Fed policy reversal would likely have negative consequences for all securities markets, but especially unfavorable ones for bonds.

At present, long Treasuries yield about 3%, which we can break out into a 1% real yield and 2% as compensation for benign, stable annual inflation of around 2%.  If the world began to think that inflation in the US could be 3%–and rising–how would bonds be priced?  …at a 5% yield?  …higher?

That’s a big difference, one which would produce significant losses for current Treasury holders.

Japan joins the QE party

Japan’s QE

Two days ago, the Bank of Japan announced it is following the lead of the ECB and the Fed in launching a new round of Quantitative Easing (a term invented by an economist apparently obsessed with the Queen Elizabeth line of ships).

the EU starts, the US follows

The rationale for the European Central Bank to act is clear.  It is in effect using funds from the stronger EU economies to prop up the bond markets of debt-laden and uncompetitive Spain and Italy while they restructure their economies.

Why QE3 in the US is somewhat less clear.  The Fed is propping up the domestic mortgage-backed securities market, while simultaneously assuring investors that short-term interest rates will remain low for the next three years.   This will certainly be good for housing prices.  Addressing the looming “fiscal cliff,” or, better still, reforming the tax code would be much more effective confidence-building steps.  But these are the province of the White House and Congress.  QE3 is all the Fed can do.

The Fed’s intent is to create more jobs.  These might come either in direct fashion from a new residential construction boom (which wouldn’t be a good thing, in my view), or indirectly from the “feel-good” factor that stable or rising home values would produce.

The Fed realizes its action may do nothing.  But its attitude seems to be that it’s better to light one more candle than to stand by and watch the labor force erode through chronic unemployment (see my post).

Japan’s motivation

Japan’s motivation is murkier still.  If EU and US money policy become looser, then simply by doing nothing Japan’s becomes relatively tighter.  This change won’t make itself felt through lower nominal interest rates, which are close to zero anyway.  But the new tightness should manifest itself in relative strength for the ¥ versus the € and the $.

So far, however, that hasn’t happened.  The ¥ has weakened against its strongest trading rival, the €, and strengthened only mildly against the $.  Nevertheless, the Bank of Japan appears to have chosen to draw a line in the sand for its currency at the level of $1 =¥78.  It’s doing so to assist domestic export-oriented industry.

Yet, the central bank must know that such currency defenses seldom, if ever, work.  And it must realize that currency strength isn’t the main problem. Rather, the Japan Business Association (Keidanren) is lost is dreams of the glory days of a quarter-century ago.  Ex the big auto manufacturers, Japanese exporters haven’t evolved since then.  In newer areas, they have been surpassed by the US, in older sectors by Korea and China.

the essential differences

The ECB is acting because it sees no other choice if it wants to preserve the Eurozone.

The Fed thinks there’s little downside to its actions, and they may do some good.

Both central banks are seeking to stimulate their domestic economies.

Japan, on the other hand, is trying to defend its trade position.  And it’s “buying time” for adjustment for a sector that hasn’t changed in 25 years.  Not a great way to make a living.

From an investment perspective, even though the motivations of the various central banks may be different, the overall effect is that more money is sloshing around looking for a home.  In the near term at least, that’s good for global stock markets.