Monthly Archives: March 2015

on the Apple Watch

March 10, 2015 By in Industry Analysis, internet, Luxury goods, Retail, Technology, Wireless Tags: , , , , Leave a comment

Yesterday, AAPL formally introduced its new Watch, which “was designed with a deep reverence for fine watchmaking,” and which has “a beauty that is both timeless and thoroughly modern.”

It comes in aluminum, stainless steel and 18-karat gold versions so far.  The first costs $350;  speculation is that the last will go for $10,000+, maybe $10,000++.

Analyst and media comment has focused on three points:

–smartphones have replaced watches to some degree, particularly with younger people, so it isn’t clear how big the market is

–the Watch is fully functional only when tethered to an iPhone, so Android users need not apply, and

–AAPL now gets,say, 60% of its revenue and 75% of its operating profit from cellphones.  Whatever its success, the Watch will just be a drop in the bucket.

I think the Watch is more important than that.

I think it’s an experiment, imitating something Nokia did almost two decades ago.

In its heyday, Nokia sold a small number of luxury cellphones, initially under its own name, later under the Vertu brand (long since spun off).  Although Nokia didn’t call much attention to Vertu, it represented maybe 5% of Nokia’s unit volume but (my estimate) around 25% of its profits.

Two implications, if the high-end Watches sell well, which I expect they will:

–AAPL’s Watch profits will be much higher than is generally expected, although they will probably remain in the drop-in-the-bucket category. More important, though,

–if very upscale Watches work, meaning they amount to 5% of unit volume, why wouldn’t $10,000+ iPhones work, too?

Happy anniversary!!! …six years since the bottom for the S&P 500

March 9, 2015 By in Current Market Thoughts, economics Tags: , , , 3 Comments

It’s hard to believe that it has been that long.  But the S&P 500, which closed at 2017 last Friday, hit an intraday low of 666.79 on March 6, 2009.

That was the market bottom.

As you may recall, world markets made a final severe downward lurch when Republicans in Congress blocked passage of a bank bailout bill–apparently condemning the country to a repeat of the Great Depression of the 1930s.  My sense is that even the grandstanding congressmen who cast the “no” votes were as horrified by the result as were the financial markets and constituents.  The rapid subsequent passage of the bailout marked the lows.

What I find most notable about the years since:

–the S&P has tripled, yet only appears to me to be appropriately valued

–the US economy is just getting close to normal now; Europe, whose banks were the ultimate “dumb money” holders of fraudulent mortgage securities created by their US counterparts, is still struggling

–the entire economic repair has been accomplished by the Fed, a feat that mainstream economic theory would have said to be impossible.  Other than the initial bank and auto company bailout, there has been no net help from either Congress or the administration.

–Millennials have surpassed Baby Boomers as the largest group of consumers in the US (not the wealthiest, but the largest).  This despite the role of the recession in delaying Boomer retirements

–according to the Economist the first month’s sales of the iPhone 6 last year represented 25x all the computer power that existed in the world in 1990.  For me, this one sentence explains the continuing disruptive power of the Internet.  It also highlights the role of the smartphone in causing the demise of the big, bureaucratic, cog-in-the-wheel, job-for-life corporation that arose after World War II

–despite the congressional call in 2009 for banks to bear full responsibility for the mortgage abuses they created, almost no bank executives have been brought to trial for the immense economic damage they did.  Yes, there’s Bernie Madoff and the occasional inside trader.  But these are outsiders, sort of like Michael Milken or Henry Blodget, not members of the financial establishment.

more employment: the February Employment Situation from the Bureau of Labor Statistics

March 6, 2015 By in Current Market Thoughts, economics, employment, Employment Situation report Tags: , , , , , , Leave a comment

The Bureau of Labor Statistics released its monthly Employment Situation report for February this morning at the usual 8:30am eastern time.  In contrast to the ADP report made public on Wednesday, the BLS figures were unambiguously strong.

The economy gained 295,000 new jobs during February, despite the unfavorable weather.  All but 7,000 were in the private sector.  Revisions of the prior two months subtracted 18,000 jobs from the advance–not a good sign, not a bad one either; the unemployment rate fell to 5.5%.

To me, the key development is that S&P 500 futures are down by more than seven points since the release.  I interpret this as meaning that worries about the ES figures being weak are not a key driver of the stock market any more.

I think the current market lull is mostly a technical phenomenon. But today’s figures certainly make it easier for the Fed to begin the upward march of interest rates from the current emergency lows toward normal at mid-year rather than later.  That idea probably also has some sort-term traders on edge.

the February 2015 ADP employment report

March 5, 2015 By in Current Market Thoughts, Recent Market Action, Technical Analysis, Trading Tags: , , , , Leave a comment

Market commentators blamed the early decline in the S&P 500 yesterday on a “disappointing” ADP monthly employment report.  I don;’t think this is right, in two respects:

–it doesn’t appear to me that, given horrible weather which can’t have been captured in any seasonal adjustment,  the report was disappointing, and

–even if it were, I don’t think the report itself was a cause of yesterday’s market decline.

As to the report,

according to ADP the US economy added 212,000 new jobs last month.  That’s not the explosive growth that the Bureau of Labor Statistics has been reporting recently.  But 200,000+ is still way above what’s needed to absorb new market entrants.  So it implies that unemployment is still being steadily whittled down.  Also,

the ADP numbers have been coming in substantially below the BLS ones recently, so there’s no good reason to believe that they are predictors of the official government figures being released tomorrow.  Even if they were, February would still be a continuation of the string of hefty job gains the economy has ben cranking out for over a year.

Yes, maybe there are computer-driven traders whose machine quickly scan important press releases and trade based on what they find.  But I don’t think they’re enough to keep the market down.

About the market,

it seems to me that yesterday’s decline is purely technical.  That is, traders believe that we’re at the upper bound of potential short-term upside (another way of saying that we’ve reached pretty close to the total gain investors believe the S&P 500 has in it for 2015).  They see little potential for quick profit, so they shift to selling, for two reasons:  they want to see how far they can push the market down before they meet resistance, and they want to establish more profit potential (say, +5%) before going long again.

Put another way, they’re trying to establish the boundaries of the trading range, or channel, they (me, too) think the market will be trading in until either better earnings news is in the offing or we understand more about what effect any Fed interest rate hikes will have on stocks.

paradox of thrift; paradox of indexing?

March 4, 2015 By in Current Market Thoughts, hedge funds, Investment firms, Portfolio management, securities markets, sell-side analysts, stock market Tags: , , , , , , Leave a comment

The paradox of thrift is the idea that the common sensical approach individuals take in bad economic times–that is, to save a lot more–actually reduces overall consumption and ends up making a bad situation worse.

 

People are beginning to talk about the same sort of situation happening with investing and index funds.

The idea of indexing was initially popularized by Charles Ellis, who argued that large numbers of well-trained, well-educated, highly motivated, highly compensated portfolio managers were battling it out with one another every day in the active management world.  Therefore, he argued, none would be able to maintain a clear competitive advantage over any of the others.  And they would all be running up costs in their (futile) attempts to do so.  Therefore, the wisest course for anyone would be to take the lowest-cost route–simply buying the index.

Of course, it took Vanguard to provide the means and many years for the idea to be accepted.

Today, in contrast, it’s accepted that the lowest risk course of action, and likely the highest return one as well, is to buy an index ETF or mutual fund.

Over recent years, there has been a steady flow of assets away from traditional active managers in the US and into index products–meaning less money from management fees to fund active manager research.  In addition, the recent recession has triggered the mass layoff of seasoned brokerage house equity analysts.  (This is due to the contraction in assets under active management, regulatory constraints on the use of “soft dollar” commissions and the dominance of trading over research in brokerage firm office politics.)

Are we at the point where indexing has culled the herd of active managers enough that the fierce competition which has made the US stock market super efficient over the past generation is no longer functioning?

No, not yet.  2014 was the worst year in a long time for active managers, as far as outperformance is concerned.  And we know that hedge funds have rarely been able to keep up with the S&P.

However, today’s Wall Street seems to me to be much more reactive than proactive when it comes to company news.  That is to say, the market seems to react more strongly to company announcements of good or bad news, rather to have anticipated them from leading indicators.  Take, for example, the shock Wall Street showed when firms had weak 4Q14 results because of euro weakness–even though the size of the firms’ EU business was well-known and the change in value of the euro is shown in currency trading every day.

So something has changed.  It may simply be that brokerage research departments were much more important to the smooth functioning of the equity market than has been commonly perceived.

My question:  will individual investors take the place of active managers in keeping markets efficient?