Monthly Archives: February 2013

David Einhorn and Apple (AAPL)

February 7, 2013 By in Industry Analysis, Recent Market Action, Stock ideas, Technology, Wireless Tags: , , , , , , , Leave a comment

It’s been a long day and I’ve gotten off to a late start.

the proposal

Hedge fund manager David Einhorn, who owns on behalf of his clients (so the internet tells me) over a million AAPL shares, has proposed to the company that it issue a perpetual (meaning it never comes due, and is therefore never redeemed) preferred stock with a total face value of $50 billion, paying a dividend of $2 per year.  The stock would be distributed for free to existing AAPL shareholders.

He’s apparently been discussing this idea with AAPL management since last May.

The proposal is a clever, novel twist on a finance truism   …namely, that if a security is a composite of disparate elements, like growth businesses and value ones, separating the two will increase the valuation of each.

The idea is that if a firm is composed of, say, mobile semiconductor design and cement mixing, growth investors will love the first and hate the second.  The opposite with value investors.  So either group will demand payment, in the form of a lower price earnings multiple, for being forced to take the part they don’t like or want.  Therefore, if you split the two parts up, the multiple on both will rise.

In the AAPL case, the potential split is between a security with earnings growth potential and one solely dependent on income/cash flow generation.

AAPL’s reaction to Einhorn

AAPL’s reaction has been to ask shareholders to vote at the next general meeting to change the company charter to explicitly ban the kind of preferred Einhorn wants.

…Einhorn’s

Einhorn’s reaction to that has been to sue, to seek publicity and to take his own case to shareholders.

my take

The story is nowhere as simple as this.  There’s lots of stuff going on behind the scenes.  Details tomorrow.

imminent crackdown on high rollers in Macau?

February 6, 2013 By in Casinos, China, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

an anti-corruption campaign

Overnight The Times of London published an article saying that the new administration in Beijing will begin a crackdown on corruption in China shortly after the start of the new year late this month.  This will included an attack on organized crime (triad)-related money-laundering junkets by gamblers to Macau.

Most Hong Kong-traded Macau gambling stocks sold off by 5%-7% on the news–the one exception being, oddly enough, MGM China ( HK: 2282), which is strongly linked to Stanley Ho’s daughter, Pansy.  US-traded gambling stocks with Macau exposure are selling off today as well, although to a much lesser extent.

What’s going on?

–I’m assuming the report is true, even though I’ve never–ever–seen The Times break an important stock market-related story.  If I had to guess, this is a deliberate leak from the police in Hong Kong.

–The extent of triad influence in Macau today is unclear.  In colonial Macau it’s thought to have flourished, with the rumored help of the Ho family of SJM Holdings–then the monopoly casino operator.  In my view, one of the main reasons the SAR invited American firms like WYNN and LVS to establish casinos a decade ago was to be a counterweight to traditional influences–partly for their superior technology, partly for their far superior compliance procedures.

–Income inequality, and in particular the vast fortunes that relatives of high officials seem to routinely accumulate, is a topic of increasing political concern in China.  It’s also a specific target of the new administration.  So a crackdown may have more targets than just the underworld.

–The selloff so far has been across the board, ex MGM and MGM China.  If the target is just the underworld, it’s possible that casinos associated with the Ho family, long rumored to have triad connections, would be hit the worst.  If the target is also high rollers in general, add the WYNN interests to the list, since that company specializes in catering to the high roller market.  Arguably, Galaxy Entertainment and the LVS companies will be hurt the least, since they focus on the growing mass market and haven’t had the greatest success in wooing deep-pocketed individuals.

what to do

No one really knows how severe or how long-lasting an anti-corruption campaign focused on Macau gamblers might be.  To pick a number out of the air, it’s possible that the result would be a permanent 10% reduction in the level of gambling in the SAR.  I think that’s probably too severe, but let’s stick with that figure.   After whatever initial downward shock there might be, this would mean a year without much growth in the SAR’s gambling revenues.  The pain would probably be distributed as I’ve described in the previous section.

I believe that the long-term prospects for Macau gambling are excellent–at least unless/until Beijing decides to establish a competing gambling enclave on the mainland.  There’s no sign that’s likely to happen; it’s just the only thing I can see that will upset the apple cart.  I’m all for anything that cleans up illegal activity.  So I look at the threat of a decline in the Macau gambling stocks as a temporary affair and mainly an issue of portfolio risk control.

These stocks have generally been outstanding performers recently, on the idea that the upturn in the Chinese economy now under way will mean a rebound in Macau gambling market growth.  So the stocks may have become outsized parts of your portfolio.  Trim position sizes, if necessary.  Imagine a 20% stock price decline from here.  Are you satisfied to hold all the stock you own now?  If not, cut the position sizes and wait to see what happens.

 

 

the sequester: stock market implications

February 5, 2013 By in Current Market Thoughts, economics, fiscal cliff, Portfolio management, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

what it is

It’s a mandatory package of federal government spending cuts totaling $1.2 trillion (less assumed savings on associated debt interest) in equal installments over nine years beginning in 2013.

50% of the $110 million in spending cuts are to be taken from the military (which, by the way, accounts for a staggering 25% of total government outlays), 50% from everything else.  Social Security, veterans benefits, Medicaid and similar “entitlement” programs are exempt from cuts.  Medicare is not, but reductions, if any, are limited to 2% per year.

where it came from

Negotiations over raising the debt ceiling in 2011 spawned the sequester.  Democrats and Republicans were unable to agree on $1.2 trillion of future budget cuts back then.  So the two sides set up a “supercommitee” with a deadline to iron out differences.  At the same time, Congress passed the sequester, a kind of legislative doomsday device, that would go into effect if no agreement was reached. The idea was that the sequester was so unpalatable to both sides that they would be forced to reach some better outcome.  Of course, they didn’t.

The sequester was supposed to go into effect on January 1st.

Last year’s fiscal cliff talks postponed the start for two months.

This morning President Obama has proposed an as yet unspecified plan for pushing the sequester back further.

stock market effects

In theory–and, in my view, in actual fact–the failure of all sides in Washington to have even the bare bones of a plan to reduce a dangerously large federal deficit means that investors are placing a relatively low PE multiple on the earnings of publicly traded corporations.

The beginning of any fiscal restraint would presumably result in a lower level of near-term results.    And companies dependent on government largess would certainly be hurt.  But the earnings negative would be offset–and probably more than offset–by Wall Street awarding a higher multiple to those profits.  (The market’s reaction would be caused by a combination of relief that Washington was becoming more responsible and that a source of uncertainty had been eliminated.)

Reaction to the upcoming sequester has varied by government body:

–Politico recently reported that the military has been accelerating its spending since the start of the current government fiscal year.  The implication is that the generals and admirals are gaming the system–figuring they’d create a situation where mandated cutbacks would use up such a large amount of their remaining budget that Congress wouldn’t dare to let them happen.

–On the other hand, I’ve been noticing that 4Q12 earnings for government-dependent firms (BMC Software comes to mind) are already being depressed as their federal customers are already cutting orders in anticipation of the sequester being triggered.

what to do

The sequester represents only about 15% of the total fiscal cliff.  So it’s not the dire depressant to domestic economic activity that the cliff as a whole would have been.  And it appears to be turn out that, in true Washington style, the sequester is being pushed farther down the road.  Even if the sequester is triggered, a domestic recession isn’t on the cards.

A significant reduction in government spending this year (and beyond) is inevitable, however.  What I found telling about 4Q12 results is that Wall Street has reacted very negatively to the company announcements that this was already affecting results.

I think we all have to clearly understand, for all the stocks we hold, how much of their profit comes from government sources.  I’d be wary of any that have significant (say, 20% or more) government earnings and that are not already trading at a discount multiple.

the January 2013 Employment Situation Report

February 4, 2013 By in employment, Employment Situation report, fiscal cliff, Stock ideas, Strategy Tags: , , , , , , , , Leave a comment

the report

At 8:30am est last Friday the Bureau of Labor Statistics of the Labor Department released its Employment Situation report for January 2013.  According to the ES, the US economy added 157,000 new jobs during the month.  This consisted of 166,000 new private sector positions, minus 9,000 layoffs among government workers.

The number was in line with expectations.  It’s also roughly the same as the figures tallied in recent months.  It’s about the number of new jobs needed, on average, to absorb new entrants into the workforce, as well–so it did nothing to lower the unemployment rate.

revisions are the real story

They’re positive.  And they’re huge!

November

The November 2012 ES initially reported job additions as +146,000 positions.  That figure was revised up in the December report to +161,000.  The (final) January revision is to +247,000, composed of +256,000 private sector jobs and a loss of 9,000 in the government sector.  That’s a +101,000 gain in jobs vs. the original job estimate, most of that coming in the January report.

December

The December 2012 ES reported +155,000 job gains.  The January report revises that up to +196,000, comprised of +202,000 jobs in the private sector and 6,000 layoffs among government workers. That’s a gain of +42,000 positions.  

my take

Despite all the angst about the fiscal cliff and its potential negative effect on the economy, the ES shows employment gains continued apace during the final quarter of 2012.  Therefore, none of the slowdown some companies experienced was caused because the job market fell apart.

Yes, some slowing happened.  But it has to have other causes.  Put a different way, slowness probably isn’t going to disappear even if job growth accelerates.

Possible causes?  …looming cutbacks in government spending, consumers’ saving more in anticipation of higher taxes.