While it certainly appears that on a longer-term basis, tech is the best-positioned sector in the years ahead from the standpoint of growth, current free cash flow, and chart positioning (with the March 2000 high of 5100-ish on the NAZ still a long way off), my reading of sentiment is that the pros have started selling to the little guys. Now, the legitimate giant growth stock of our era, AAPL, is so cheap on a growth-to-P/E basis that it may be immune, but most of the NAZ is not doing well operationally (partly due to Apple). Thus I'm suspicious that this second great run of tech stocks in this calendar year "needs" to, at best, consolidate.
Yet my call that utilities (income) "should" outperform tech may or may not be true, given the ramifications of QE to infinity. After all, the premise of owning a high P/E, slow- or no-growth stock is that the dividend is desirable no matter whether the stock price rises. In this regard, the aggressive Fed rhetoric has forced me to reduce utilities' weighting. Income vehicles have simply performed poorly during QE1 and QE2. Why it should be different now, short-term moves aside, with a more aggressive QE policy, is unclear.
The Fed may have engaged in as important a policy initiative with QEternity as did the Volcker Fed in October 1979 with its new policy of restraining the money supply growth rate to fight the inflation that prior Feds had helped cause.
So as Lord Keynes said, when the facts change, so must our minds, and our strategy.
Interim pullbacks notwithstanding, it looks as though the U.S. its post-Depression history of rapid growth in the money supply in an environment of negative interest rates as far as the eye can see.
Historically, the more "negative" that interest rates are relative to price inflation, the faster gold and silver (and oil) prices rise. All other asset prices have been less predictable, including mining stocks.
Back into the inflation hedge pool big-time.
Showing posts with label AAPL. Show all posts
Showing posts with label AAPL. Show all posts
Friday, October 5, 2012
Sunday, July 22, 2012
Newton's Fruit Still Falling Upwards, and Other Observations
With markets at a strange "new normal" of zero-ish interest rates for heavily indebted but "safe" sovereigns, and where an historically normal long-term interest rate of 6-7% for Italian debt is, we are told, unsustainable, a relative sanity prevails in a few sectors of other markets. To wit, large-cap technology stocks are, despite operating in growth fields, relatively cheap. Amongst them, none is as large or as cheap as Newton's fruit, aka AAPL. As much of the investing public knows, Apple discloses how last quarter went for it on Tuesday afternoon. It will offer a hint of the current quarter.
Apple is growing at an enormous rate. Last quarter, its operating margin soared to 47%. It has made no $6 B acquisition as MSFT just has written off. There will be no writeoffs. More importantly to me, there will be no non-GAAP earnings presentation. There will be no acquisition of "cheap" debt.
For those occasional investors who do not follow all things Apple as I do, the company has been on an unrecognized roll in key but under-reported areas. It has been securing potentially important legal victories over Samsung in the court battle in California heard by the Korean-descended Judge Lucy Koh. Florina Mueller, an expert blogger on these matters, said this past week:
Mr. Mueller is a cautious blogger. It means something when he words this so strongly.
Competitively, Microsoft appears confused with its transition to Windows 8. Unlike Apple, which is adjusting its Mac OS toward that of iOS but keeping it different, MSFT is going all in on the tablet-phone OS for Windows. This is tres strange, given that MSFT has almost no market share in mobile devices. Worse, MSFT's partner in telephony, NOK, had its debt rating lowered into deeper junk territory last week. Also horrible for the Microsoft ecosystem is its "Surface" tablet product. Mr. Softee is now entering into direct hardware competition with the hardware licensees that have been so
I suspect that as Retina Display-enabled Macs roll out and few Windows customers "upgrade" to Win 8, the Mac's market share in "PCs" will increase. At some point, there could be a tipping point in which the Mac platform regains the lead over Windows in desktop and larger-than-iPad mobile computers.
Last but not least, the iPad is the product of the decade. (The iPhone was the product of the prior decade.) The iPad is estimated to have 90% share of its category, namely 10 inch tablets. It is up to Apple whether it wants to make Google's new small tablet, Amazon's Kindle line, etc. wildly unprofitable by launching a mini-iPad. Small matter. The iPad is Apple's main entry into the business market. The iPhone is a worthy partner. Tim Cook, as an ex-IBMer and an MBA, is much more oriented to succeeding in the business world than was Steve Jobs.
A few months ago, Apple's head product designer, Jonathan Ive, disclosed that the current project he is working on feels like Apple's most important project yet. One doubts this is simply the next iPhone iteration. Assuming it is the long-awaited full-size television, and that it launches next year, Apple will have in 2013 a rapidly-growing iPad product or product line, an important and still-growing iPhone product, a potential third blockbuster television product, and a Mac line that continues to gain market share and could surprise to the upside. Plus, iTunes is a large business that sooner rather than later would be a Fortune 500 company all on its own; and iPods remain a cash cow that both require no advertising expense and are so small that they take up little display room in Apple stores.
Apple is the financially strongest corporation in the world. It has the fastest growth of any large company. Its retail presence is so strong that if it wished, it could increase its marketing of other companies' products, thus filling any temporary gaps in its own product lines. It is becoming more like an integrated oil company in that it is expanding its manufacturing operations backwards along with the growing direct retail presence. Its dividend yield exceeds that of the 10-year T-note. Value Line anticipates that it will have at least $200 B book value, with no intangibles or goodwill on the books, by the end of CY 2013. It could easily earn $50/share this calendar year and could easily earn $100/share by CY 2015. Why is its P/E below market when it has the best financial statement and the fastest growth of any large company in the world?
I think the answer is that the business and analytic community has never seen any very large company grow so fast organically. There is fear that somewhere, somehow, Apple will go the way of RIMM and NOK; so, the analysts "won't get fooled again". LOL.
Regardless of how trading goes before and after earnings, AAPL is IMHO the best growth stock around. It is growing at an unbelievable rate. It sells at roughly 10X expected CY 2012 earnings net of expected cash and marketable securities on hand by end-2012, even after "haircutting" the value of offshore assets. Yet its two major product lines are early in their life cycles, and a major new product line may well be introduced next year.
So far as I can see, most stocks are overpriced given the serious economic and financial dislocations that exist today globally and in the U.S. and other leading economic powers. AAPL is an exception, though it is not a "Graham and Dodd" value stock. (LOL again)
The only other stocks I find worth owning include the occasional DE-type of reasonably-priced cyclical stock and a few other high-quality equities, but I think they get cheaper before they get more expensive. Then, for now, there is the derivative bond play, as it were, in the Con Ed-type stock. Steady ED is simply too cheap if one believes that its dividend is secure. You can own a 30-year T-bond at about 2.5% per year or ED at about a 50% higher yield with some inflation protection and- believe it or not- takeover possibilities. With the 10-year yield at (say) 1.5%, ED should be about double its current share price to re-establish its historical relationship to that benchmark bond. Thus ED is already discounting a major rise in interest rates.
Spain is now widely recognized as bust. I suspect that once Italy is so recognized, that will be the end of the bad news and it will be time to buy inflation hedges again. John Mauldin is promoting France as next up. I don't think that's in the cards, at least not this economic cycle, though of course we shall see what we shall see. Thus my game plan for now strategizes 2012's coming hurricane season months as reprising some combination of 2008 (Europe's sovereigns taking the place of US financials this time around) and 2011, as economies lurch down again as they did last year in the pre-recessionary phase.
Meanwhile, the valuation and growth trends favor AAPL gaining a higher relative P/E to the market while earnings grow rapidly. AAPL and ED, a strange combo to make up my investment faves.
Apple is growing at an enormous rate. Last quarter, its operating margin soared to 47%. It has made no $6 B acquisition as MSFT just has written off. There will be no writeoffs. More importantly to me, there will be no non-GAAP earnings presentation. There will be no acquisition of "cheap" debt.
For those occasional investors who do not follow all things Apple as I do, the company has been on an unrecognized roll in key but under-reported areas. It has been securing potentially important legal victories over Samsung in the court battle in California heard by the Korean-descended Judge Lucy Koh. Florina Mueller, an expert blogger on these matters, said this past week:
I've said it before that whatever happens at the upcoming trial, Samsung won't be forced out of the market, but a very significant breakthrough for Apple's intellectual property enforcement is increasingly likely.
Mr. Mueller is a cautious blogger. It means something when he words this so strongly.
Competitively, Microsoft appears confused with its transition to Windows 8. Unlike Apple, which is adjusting its Mac OS toward that of iOS but keeping it different, MSFT is going all in on the tablet-phone OS for Windows. This is tres strange, given that MSFT has almost no market share in mobile devices. Worse, MSFT's partner in telephony, NOK, had its debt rating lowered into deeper junk territory last week. Also horrible for the Microsoft ecosystem is its "Surface" tablet product. Mr. Softee is now entering into direct hardware competition with the hardware licensees that have been so
I suspect that as Retina Display-enabled Macs roll out and few Windows customers "upgrade" to Win 8, the Mac's market share in "PCs" will increase. At some point, there could be a tipping point in which the Mac platform regains the lead over Windows in desktop and larger-than-iPad mobile computers.
Last but not least, the iPad is the product of the decade. (The iPhone was the product of the prior decade.) The iPad is estimated to have 90% share of its category, namely 10 inch tablets. It is up to Apple whether it wants to make Google's new small tablet, Amazon's Kindle line, etc. wildly unprofitable by launching a mini-iPad. Small matter. The iPad is Apple's main entry into the business market. The iPhone is a worthy partner. Tim Cook, as an ex-IBMer and an MBA, is much more oriented to succeeding in the business world than was Steve Jobs.
A few months ago, Apple's head product designer, Jonathan Ive, disclosed that the current project he is working on feels like Apple's most important project yet. One doubts this is simply the next iPhone iteration. Assuming it is the long-awaited full-size television, and that it launches next year, Apple will have in 2013 a rapidly-growing iPad product or product line, an important and still-growing iPhone product, a potential third blockbuster television product, and a Mac line that continues to gain market share and could surprise to the upside. Plus, iTunes is a large business that sooner rather than later would be a Fortune 500 company all on its own; and iPods remain a cash cow that both require no advertising expense and are so small that they take up little display room in Apple stores.
Apple is the financially strongest corporation in the world. It has the fastest growth of any large company. Its retail presence is so strong that if it wished, it could increase its marketing of other companies' products, thus filling any temporary gaps in its own product lines. It is becoming more like an integrated oil company in that it is expanding its manufacturing operations backwards along with the growing direct retail presence. Its dividend yield exceeds that of the 10-year T-note. Value Line anticipates that it will have at least $200 B book value, with no intangibles or goodwill on the books, by the end of CY 2013. It could easily earn $50/share this calendar year and could easily earn $100/share by CY 2015. Why is its P/E below market when it has the best financial statement and the fastest growth of any large company in the world?
I think the answer is that the business and analytic community has never seen any very large company grow so fast organically. There is fear that somewhere, somehow, Apple will go the way of RIMM and NOK; so, the analysts "won't get fooled again". LOL.
Regardless of how trading goes before and after earnings, AAPL is IMHO the best growth stock around. It is growing at an unbelievable rate. It sells at roughly 10X expected CY 2012 earnings net of expected cash and marketable securities on hand by end-2012, even after "haircutting" the value of offshore assets. Yet its two major product lines are early in their life cycles, and a major new product line may well be introduced next year.
So far as I can see, most stocks are overpriced given the serious economic and financial dislocations that exist today globally and in the U.S. and other leading economic powers. AAPL is an exception, though it is not a "Graham and Dodd" value stock. (LOL again)
The only other stocks I find worth owning include the occasional DE-type of reasonably-priced cyclical stock and a few other high-quality equities, but I think they get cheaper before they get more expensive. Then, for now, there is the derivative bond play, as it were, in the Con Ed-type stock. Steady ED is simply too cheap if one believes that its dividend is secure. You can own a 30-year T-bond at about 2.5% per year or ED at about a 50% higher yield with some inflation protection and- believe it or not- takeover possibilities. With the 10-year yield at (say) 1.5%, ED should be about double its current share price to re-establish its historical relationship to that benchmark bond. Thus ED is already discounting a major rise in interest rates.
Spain is now widely recognized as bust. I suspect that once Italy is so recognized, that will be the end of the bad news and it will be time to buy inflation hedges again. John Mauldin is promoting France as next up. I don't think that's in the cards, at least not this economic cycle, though of course we shall see what we shall see. Thus my game plan for now strategizes 2012's coming hurricane season months as reprising some combination of 2008 (Europe's sovereigns taking the place of US financials this time around) and 2011, as economies lurch down again as they did last year in the pre-recessionary phase.
Meanwhile, the valuation and growth trends favor AAPL gaining a higher relative P/E to the market while earnings grow rapidly. AAPL and ED, a strange combo to make up my investment faves.
Thursday, June 21, 2012
Updates on Recent Posts, and a Mid-Year Resolution
Two days ago, I put out two posts here. One needs little further comment beyond reiterating the title, which was "Metals Comments: Silver and Others Breaking Down Again". No change there. Just to add that I think that oil works lower yet. Do I hear $60/bbl (WTI).
The other was about Deere (DE), AAPL, and GARP investing. Anyway, I went ahead that day and put in a 5% portfolio allocation to DE and more to HP (Helmerich and Payne), and more to AAPL. When DE and HP had strong upside days yesterday in association with the VIX dropping to 17, I got nervous about this ultra-rapid drop in the VIX from 27 to 17 even as the macroeconomic data was getting worse and Spain was now clearly insolvent. So I took a one-day, 3% profit in DE and dumped HP for a profit. I love the company but hate commodities right now, as per the above-mentioned post. Anyway, I also markedly decreased my longs in AAPL and took profits in about half of my bond-like stock plays, the utilities, beginning this morning and continuing through the downturn today. Europe continues to remind me of the U.S. in 2008. There is both a solvency and liquidity crisis there. The global macroeconomic spillover is somewhat negative for the U.S., though decreased European demand for resources will help us with imported oil prices. Probably more important is the liquidity issue. Who knows, but I continue to fear a recurrence of 2011 or worse.
In the meantime, daily consumer spending per Gallup.com has collapsed to $68. This is below the level at the same date last year and a full 27% below the level seen on-- are you ready-- October 27, 2008, a month after Lehman/AIG. And, it is not adjusted for inflation.
The times are out of joint. The plain vanilla Vanguard long-term muni bond fund VWLUX has had a total return the past year of about 14%. The leveraged Nuveen muni bond fund NIO has had a total return of about 18%. The zero coupon long Treasury has returned well over 50%. Meanwhile, the SPY has returned about 4% with much greater volatility. More relevant, I think, to economic conditions here in the U.S. is the Russell 2000. Its ETF, the IWM, has had a negative twelve month total return of 4%. All this interest rate decline is what in my view has been sustaining by stocks and the economy. But said rate decline is played out, one would think.
I have had a very good twelve months and a very good 2012. It's feeling like a good time to do what I hate at a time of ZIRP and positive CPI, but I'm going to try to stick to my mid-year resolution and sit on this lead with a lot of cash in my trading accounts (self-directed IRAs). Everything except AAPL that does not look overvalued acts badly, and things like T-bonds and AMZN that act well look overvalued. Strange days...
The other was about Deere (DE), AAPL, and GARP investing. Anyway, I went ahead that day and put in a 5% portfolio allocation to DE and more to HP (Helmerich and Payne), and more to AAPL. When DE and HP had strong upside days yesterday in association with the VIX dropping to 17, I got nervous about this ultra-rapid drop in the VIX from 27 to 17 even as the macroeconomic data was getting worse and Spain was now clearly insolvent. So I took a one-day, 3% profit in DE and dumped HP for a profit. I love the company but hate commodities right now, as per the above-mentioned post. Anyway, I also markedly decreased my longs in AAPL and took profits in about half of my bond-like stock plays, the utilities, beginning this morning and continuing through the downturn today. Europe continues to remind me of the U.S. in 2008. There is both a solvency and liquidity crisis there. The global macroeconomic spillover is somewhat negative for the U.S., though decreased European demand for resources will help us with imported oil prices. Probably more important is the liquidity issue. Who knows, but I continue to fear a recurrence of 2011 or worse.
In the meantime, daily consumer spending per Gallup.com has collapsed to $68. This is below the level at the same date last year and a full 27% below the level seen on-- are you ready-- October 27, 2008, a month after Lehman/AIG. And, it is not adjusted for inflation.
The times are out of joint. The plain vanilla Vanguard long-term muni bond fund VWLUX has had a total return the past year of about 14%. The leveraged Nuveen muni bond fund NIO has had a total return of about 18%. The zero coupon long Treasury has returned well over 50%. Meanwhile, the SPY has returned about 4% with much greater volatility. More relevant, I think, to economic conditions here in the U.S. is the Russell 2000. Its ETF, the IWM, has had a negative twelve month total return of 4%. All this interest rate decline is what in my view has been sustaining by stocks and the economy. But said rate decline is played out, one would think.
I have had a very good twelve months and a very good 2012. It's feeling like a good time to do what I hate at a time of ZIRP and positive CPI, but I'm going to try to stick to my mid-year resolution and sit on this lead with a lot of cash in my trading accounts (self-directed IRAs). Everything except AAPL that does not look overvalued acts badly, and things like T-bonds and AMZN that act well look overvalued. Strange days...
Tuesday, June 19, 2012
Deere Apple: GARP's Time Is (Approximately) Here and Now
Just wanted to put in a quick stock comment. Since I think that "safe" govvies are "played", I have gone to stocks with fortress balance sheets and unique large niches in core areas of the global economy. Thus I bought back into Deere (DE), which I have traded at higher prices this year, perhaps making a buck or two but jumping out as I sensed the downtrend in the shares. DE is heading for its 175th birthday. It has seen a lot worse than the mess going on in Europe! The P/E is about 9X projected 201s earnings, and its CEO was on CNBC a day or two ago reaffirming guidance and saying that construction is doing well in the US of A. Value Line's "fair value" or "value line" for DE puts fair value at about $110, not the $75 it's now at.
Also, I scaled further back into AAPL, having largely gotten out around $620+ after the DOJ lawsuit broke and trading had gotten just too crazy in the stock. Meanwhile, Microsoft came out with some event this evening that announced something more than vaporware but less than an actual product-- and was thus in stark contrast to Apple's recent WWDC where actual products ready to be shipped were announced.
Here is a pretty funny take on the event:
http://news.cnet.com/8301-17938_105-57455730-1/who-is-the-microsoft-surface-for-exactly/?part=rss&subj=crave&tag=title&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cnet%2FpRza+%28Crave%29
I also received an impressive e-mail from a techie who may be switching from PC's to the new Empire after being blown away by seeing the Retina display on Apple's new MacBook Pro 15 inch portable computer that was unveiled at the WWDC. He is looking at much higher AAPL prices, soon. Unlike yours truly, he actually knows the hardware-software industry as a veteran insider. I'll publish his comments in full if he allows me to.
With interest rates so low, patient money that does not have to mark to market and thus can ride out what might be a very stormy time in the weeks and months ahead will, I think, outperform most bonds with a truly select group of dominant equities that generate strong free cash flow.
Thus I have added select GARP companies to bond-like utility stocks as I have moved away from the highly-appreciated bonds that now have more risk than reward as I see it.
Also, I scaled further back into AAPL, having largely gotten out around $620+ after the DOJ lawsuit broke and trading had gotten just too crazy in the stock. Meanwhile, Microsoft came out with some event this evening that announced something more than vaporware but less than an actual product-- and was thus in stark contrast to Apple's recent WWDC where actual products ready to be shipped were announced.
Here is a pretty funny take on the event:
http://news.cnet.com/8301-17938_105-57455730-1/who-is-the-microsoft-surface-for-exactly/?part=rss&subj=crave&tag=title&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cnet%2FpRza+%28Crave%29
I also received an impressive e-mail from a techie who may be switching from PC's to the new Empire after being blown away by seeing the Retina display on Apple's new MacBook Pro 15 inch portable computer that was unveiled at the WWDC. He is looking at much higher AAPL prices, soon. Unlike yours truly, he actually knows the hardware-software industry as a veteran insider. I'll publish his comments in full if he allows me to.
With interest rates so low, patient money that does not have to mark to market and thus can ride out what might be a very stormy time in the weeks and months ahead will, I think, outperform most bonds with a truly select group of dominant equities that generate strong free cash flow.
Thus I have added select GARP companies to bond-like utility stocks as I have moved away from the highly-appreciated bonds that now have more risk than reward as I see it.
Monday, June 18, 2012
Newton's Fruit Falling Upward Once Again
CRUS, Cirrus Logic, which makes audio chips which trades essentially as an AAPL derivative, has broken out today strongly following a positive report from the Semiconductor Industry Ass'n that business has turned. I take this as a sign that AAPL is "probably" headed to new highs as well. I had gotten lucky and sold most of AAPL around $620+ after A) Cramer called it the stock of the century (I exaggerate only slightly) and then the DOJ e-books lawsuit was filed.
I have been scaling back into the fruit big-time. First intermediate-term target: $690-700 by year-end. Rationale: After FY Q3 earnings are released in about 5 weeks, TTM 12 month earnings could be $45. 15-16X those earnings gets one to about that range. I would also note that Value Line's "value line" places AAPL's "fair value" around $900 as of today.
Am selling my last 14-year Treasury Strip at a 9% return, good in that this one was not bought till late in the rally. My rule of thumb with trading zeroes is that I sell if I net 3 year's worth of interest payments on the trade. Especially so when it's a zero that pays you nothing to own it.
I have been scaling back into the fruit big-time. First intermediate-term target: $690-700 by year-end. Rationale: After FY Q3 earnings are released in about 5 weeks, TTM 12 month earnings could be $45. 15-16X those earnings gets one to about that range. I would also note that Value Line's "value line" places AAPL's "fair value" around $900 as of today.
Am selling my last 14-year Treasury Strip at a 9% return, good in that this one was not bought till late in the rally. My rule of thumb with trading zeroes is that I sell if I net 3 year's worth of interest payments on the trade. Especially so when it's a zero that pays you nothing to own it.
Friday, June 1, 2012
We are finally seeing the VIX and VXO break decisively above 25. Finally. Boy, has this been an exhausting wait. FB buyers and the like are capitulating. Finally.
We only had 12 weeks in a row of the NAZ being up this year-- a record, it was said, a longer streak than even in 1999. Reality can bite, n'est ce pas?
Note I'm not a short-seller. I simply have owned Treasuries (and high grade munis) as a natural hedge against the stocks-down/interest rates-down trend we've seen the last few years. Plus I own AAPL, and some OTC income stocks. I've simply been blogging "forever" that stocks have fundamentally been overpriced based on historical norms, and relative to the risks. I presume there are very good reasons why the Fed has been doing what it has been doing and why investors are finally focusing on return of principal.
The DoctoRx rule of thumb is that high-quality stocks can be bought when the above fear indices are above 25, though the timing may be terrible for a while. Typicall, these moves above 25 carry to or above 30. I would look for a BTD scenario around there.
Support for the NAZ is around 2200.
The dividend-paying top-tier NAZ tech stocks are my long-term faves for growth and income. I would look to scale into them on weakness in the bubble tech stocks (plus I own a fair amount of AAPL as a "permanent" holding).
More to say in a later post, perhaps Sunday night. A busy weekend looms on more than one front.
We only had 12 weeks in a row of the NAZ being up this year-- a record, it was said, a longer streak than even in 1999. Reality can bite, n'est ce pas?
Note I'm not a short-seller. I simply have owned Treasuries (and high grade munis) as a natural hedge against the stocks-down/interest rates-down trend we've seen the last few years. Plus I own AAPL, and some OTC income stocks. I've simply been blogging "forever" that stocks have fundamentally been overpriced based on historical norms, and relative to the risks. I presume there are very good reasons why the Fed has been doing what it has been doing and why investors are finally focusing on return of principal.
The DoctoRx rule of thumb is that high-quality stocks can be bought when the above fear indices are above 25, though the timing may be terrible for a while. Typicall, these moves above 25 carry to or above 30. I would look for a BTD scenario around there.
Support for the NAZ is around 2200.
The dividend-paying top-tier NAZ tech stocks are my long-term faves for growth and income. I would look to scale into them on weakness in the bubble tech stocks (plus I own a fair amount of AAPL as a "permanent" holding).
More to say in a later post, perhaps Sunday night. A busy weekend looms on more than one front.
Wednesday, May 30, 2012
Apple Turnover: Wednesday Trading Notes
I first blogged positively about Apple in the spring of 2010 (also was positive about gold in that same post and in follow-up posts). I have ridden AAPL up from about $200 early in 2010 to over $630, though I confess I missed some of the ride largely due to A) market fears (which were correct) and B) SJ fears (which were medically correct but so far irrelevant to the stock price).
In any case, let me segue to Treasuries. I began "pounding the table" for them about a year ago. At that time I went to an approximate 30% weighting in my accounts for 10-30 year maturities, heavily weighted to both the ultra-long maturities and to zero coupon bonds. After yields collapsed, I lowered that to about 10% and held it there as "insurance". With the latest collapse in yields, I have now lowered that to about 2% just this week. These funds have been recycled into stocks. These are not ordinary stocks.
The main stock is AAPL as a long-term holding, though of course I may trade it at any time. I am bearish on the stock market over the weeks and months ahead, but I "think different" about what's safe and what's not. As I've alluded to indirectly more than once, I think that the mega-cap "blue chips" with trailing twelve month P/E's of 15-20 but no organic growth and generally little, none or negative tangible book value are much riskier than Mr. Market thinks. They are less volatile on a day-to-day basis, but riskier. I'll leave it at that for now as trading awaits.
The secondary stocks are Con Ed (ED), which I can foresee rising in price to yield 3% as time grinds on; and further additions to my already significant holdings in leveraged closed end muni bond funds.
Finally, I want to add that I think that numerous measures of fair value for the Dow that are used widely on the Street are itching to buy the Dow here.
In any case, let me segue to Treasuries. I began "pounding the table" for them about a year ago. At that time I went to an approximate 30% weighting in my accounts for 10-30 year maturities, heavily weighted to both the ultra-long maturities and to zero coupon bonds. After yields collapsed, I lowered that to about 10% and held it there as "insurance". With the latest collapse in yields, I have now lowered that to about 2% just this week. These funds have been recycled into stocks. These are not ordinary stocks.
The main stock is AAPL as a long-term holding, though of course I may trade it at any time. I am bearish on the stock market over the weeks and months ahead, but I "think different" about what's safe and what's not. As I've alluded to indirectly more than once, I think that the mega-cap "blue chips" with trailing twelve month P/E's of 15-20 but no organic growth and generally little, none or negative tangible book value are much riskier than Mr. Market thinks. They are less volatile on a day-to-day basis, but riskier. I'll leave it at that for now as trading awaits.
The secondary stocks are Con Ed (ED), which I can foresee rising in price to yield 3% as time grinds on; and further additions to my already significant holdings in leveraged closed end muni bond funds.
Finally, I want to add that I think that numerous measures of fair value for the Dow that are used widely on the Street are itching to buy the Dow here.
Tuesday, September 21, 2010
Apple of the Public's Eye
I have more than once praised AAPL and gold as investments, such as on a Sept. 1 post. An article appeared today that indicates that Apple is playing in a different league than any of its corporate competitors, tech or otherwise. Per Secrets of Apple's customer success:
For the seventh straight year, Apple has topped its competitors in the PC industry in the University of Michigan's American Customer Satisfaction Index (ACSI), achieving a score of 86 out of 100. Its Apple's highest ranking since the annual survey began in 1995. . .
The Mac maker's nine-point lead is now the largest lead any company has over its competition in any of the 45 categories that the ACSI study surveys--including home appliances, gas stations, autos, e-commerce, airlines, and more.
AAPL is one of the few high quality large cap companies selling at a clear price-earnings ratio discount to its recent and prospective growth rate. Its growth comes with no debt, no leverage. And need anyone mention that its leadership role is in an intrinsically high-growth area, that of mobile information/communications? And that increasingly its growth is ex-U. S., and therefore it is itself an anti-dollar hedge?
If you think I like the stock, with appreciation for the substantial risks it and the overall stock market have, you are correct. Apple is sui generis. For a long time, that was a bad thing. Now it's the paragon- at a "GARP" discount to the market.
Caveat non-emptor?
Copyright (C) Long Lake LLC 2010
For the seventh straight year, Apple has topped its competitors in the PC industry in the University of Michigan's American Customer Satisfaction Index (ACSI), achieving a score of 86 out of 100. Its Apple's highest ranking since the annual survey began in 1995. . .
The Mac maker's nine-point lead is now the largest lead any company has over its competition in any of the 45 categories that the ACSI study surveys--including home appliances, gas stations, autos, e-commerce, airlines, and more.
AAPL is one of the few high quality large cap companies selling at a clear price-earnings ratio discount to its recent and prospective growth rate. Its growth comes with no debt, no leverage. And need anyone mention that its leadership role is in an intrinsically high-growth area, that of mobile information/communications? And that increasingly its growth is ex-U. S., and therefore it is itself an anti-dollar hedge?
If you think I like the stock, with appreciation for the substantial risks it and the overall stock market have, you are correct. Apple is sui generis. For a long time, that was a bad thing. Now it's the paragon- at a "GARP" discount to the market.
Caveat non-emptor?
Copyright (C) Long Lake LLC 2010
Sunday, September 12, 2010
Apple Continues to Excite Its Fans; AAPL not in a Stock Bubble Yet
The article from Canada, Hundreds camp out as Apple store opens, shows that the magic remains, at least in an area near Ontario:
Apple diehards waited in line through the night to get their hands on the latest high-tech gizmos as the company opened its first York Region store at Upper Canada Mall in Newmarket today.
By 8 a.m., hundreds had staked out a spot in a pair of lines that stretched in either direction from the Apple store’s glass-plated entrance. At the head of the throngs, hoping to score the coveted, yet highly elusive iPhone 4, was Richmond Hill’s Michael She. He and a contingent of friends and family had arrived at 9 p.m. last night to ensure they got one of the sought-after devices.
“I really want the iPhone 4,” Mr. She said. “You can’t find it anywhere else right now.”
One's reaction to this news, the entire article, and the general enthusiasm of Apple fans, may well be that this is cultish/bubble-type behavior. Or the reaction could be my considered one that given the inroads that the iPad, Mac line and even iPhone are making within businesses, what Apple has been doing is a legitimate series of innovations in a tech sector and economy that is short of new New things.
AAPL sells at a price-earnings ratio far less than its current and prospective 3-5 year growth rate. Given its clean financials, this makes it a classic "GARP" (growth-at-a-reasonable-price) stock. It is also hot in many overseas venues, as well. So AAPL fits my theme of investing in stocks with large international components. That Apple, the company, has a buzz among the public is better than if there were none, in this blogger's opinion. Perhaps an investing public burned by too much hype is correctly cautious with growth stocks.
In any case, the iPad may be the single hottest item for high-end gifts this fall; and iPods will be in favor for less costly gifts. Not to mention the iPhone and potential upside surprises with that line. AAPL continues to be a core holding in the DoctoRx portfolio.
Copyright (C) Long Lake LLC 2010
Apple diehards waited in line through the night to get their hands on the latest high-tech gizmos as the company opened its first York Region store at Upper Canada Mall in Newmarket today.
By 8 a.m., hundreds had staked out a spot in a pair of lines that stretched in either direction from the Apple store’s glass-plated entrance. At the head of the throngs, hoping to score the coveted, yet highly elusive iPhone 4, was Richmond Hill’s Michael She. He and a contingent of friends and family had arrived at 9 p.m. last night to ensure they got one of the sought-after devices.
“I really want the iPhone 4,” Mr. She said. “You can’t find it anywhere else right now.”
One's reaction to this news, the entire article, and the general enthusiasm of Apple fans, may well be that this is cultish/bubble-type behavior. Or the reaction could be my considered one that given the inroads that the iPad, Mac line and even iPhone are making within businesses, what Apple has been doing is a legitimate series of innovations in a tech sector and economy that is short of new New things.
AAPL sells at a price-earnings ratio far less than its current and prospective 3-5 year growth rate. Given its clean financials, this makes it a classic "GARP" (growth-at-a-reasonable-price) stock. It is also hot in many overseas venues, as well. So AAPL fits my theme of investing in stocks with large international components. That Apple, the company, has a buzz among the public is better than if there were none, in this blogger's opinion. Perhaps an investing public burned by too much hype is correctly cautious with growth stocks.
In any case, the iPad may be the single hottest item for high-end gifts this fall; and iPods will be in favor for less costly gifts. Not to mention the iPhone and potential upside surprises with that line. AAPL continues to be a core holding in the DoctoRx portfolio.
Copyright (C) Long Lake LLC 2010
Wednesday, September 1, 2010
Gold 'n Apple
The golden apple is an element that appears in various national and ethnic folk legends or fairy tales. Recurring themes depict a hero (e.g., Hercules or Făt-Frumos) retrieving the golden apples hidden or stolen by a monstrous antagonist. Alternatively, they are depicted as divine food and the source of immortality in Norse mythology.
Three golden Apples were featured in Greek mythology, in which a hunter named Atalanta raced against a suitor named Hippomenes who used the golden apples to distract her so that he could win the race . . .
(From Wikipedia)
Gold and Apple. Interesting how they have been linked over the millenia; they form ends of a barbell investing strategy for me at this time.
As an ongoing accumulator of AAPL stock, I am satisfied that it went up with a strong NASDAQ today. I am too old and out-of-it to use any of the stuff that Apple announced today, but it is good to see a blogger have very positive things to say. While not uniform, most reviews I saw on the 'Net were positive as well.
There are other product-related straws in the wind. Re the iPad, it's great to see the offbeat report that a private school in Scotland has shifted instruction entirely to the iPad. I never would have guessed; in fact, I traded out of AAPL stock after a 10% gain ($200 to $220) shortly before the iPad's introduction as I was worried it would be a disappointment. Given the success of this product and of the iPhone 4, along with the decline in interest rates which have made fixed income even less attractive, I am quite satisfied having bought back into the stock at somewhat higher prices.
Perhaps the most underappreciated news of the day is about the iPhone 4 and not today's presentation about the iPod line refreshment, iTV and the like. Worried about how the antenna controversy and/or Android are affecting sales? Here's a great headline for anyone who owns AAPL stock:
Apple unable to keep up with iPhone 4 demand, say execs
The brief article begins:
Apple is still unable to cope with interest in the iPhone 4, two of the company's key executives indicate. A Deutsche Bank analyst, Chris Whitmore, recently met with CFO Peter Oppenheimer and senior VP of retail Ron Johnson to discuss the state of sales. "iPhone 4 demand remains very robust and despite efforts to close the supply-demand imbalance and the continued supply ramp, Apple still cannot meet iPhone demand," Whitmore says of the discussion.
Yours truly is not a financial analyst. Looking at little more than seasonal consecutive quarter-on-quarter trends aligned with year-on-year comparisons, and also doing more than looking at the last 6 year's average price of AAPL stock to cash flow and earnings, I come up with a reasonable trading price of $450-500 for AAPL stock for some point in 2011. This derives from the Value Line chart which shows AAPL trading at about an average of 22X cash flow for the past 6 years. Of course, few traders forget that the third year of a President's term is usually a strong one for investors. (Of course, let's also not forget that the 3rd year of Herbert Hoover's term was not so hot.)
I am using $20/share for Apple's2011 calendar year earnings. (Apple is on a September fiscal year.)
Apple is growing at an amazing pace for a large company. In July, it preannounced $18 B for current quarter sales. Analysts are currently targeting $18 1/2 B. In its April 9 edition (merely 4 months ago), Value Line was predicting $14.8 B for current quarter sales. How often does a very large company have such a "beat"? I can't remember such an occurrence since the tech bubble.
So far as I can see, there is no undue speculation in AAPL stock. This does not guarantee positive returns, though. The stock will take a tumble if Steve Jobs retires. But I suspect that it is selling at about 15X CY 2010 and 12.5X CY 2011 earnings. Analysts have the company growing 18% per year over the next five years. In the past they have been conservative. These analysts thus have the stock at under 6X earnings 5 years from now. If Apple were selling 5-year debt, it would hardly pay any premium over Treasuries. So the prospective return from theoretical AAPL 5-year debt is perhaps 1.5% per year. Even if the stock is projected to sell for 9X earnings 5 years from now, it would then be projected to appreciate about 9% per year. This is quite an equity premium for a financial and operational powerhouse.
Compared to the S&P 500, AAPL is in far superior technical shape. The long-term 200 day (40 week) simple moving average of SPY (the ETF for the S&P 500)has begun to turn down. The 150 day sma is about to drop below the 200 day sma, and the 50 day sma is below both of them. SPY is now in a (mildly) bearish technical configuration. AAPL, in contrast, has bounced off its rising 150 day sma, which is properly aligned in a bull market configuration above a rising 200 day sma. AAPL is of course well above its 2007 high stock price of around $200/share, which at that time represented about 40 times its cash flow for CY 2007. I have been using the ability of a commodity or security to move to new highs compared with the pre-Lehman implosion as a sign of fundamental strength. I want to be invested where the charts are fundamentally "strong", given that I believe there are probably a few years of challenging economic and financial markets ahead of us in the U. S. (Thus I said positive things about MCD and CB recently based on operational and chart considerations.)
While from a sure thing (which does not exist in investing without illegal inside information), AAPL is similar to gold from an investment standpoint. Both marched on to new highs after the onset and current aftermath of the Great Recession/credit collapse/depression. Gold is within 2% of its all-time high and is up more than 30% from one year ago. AAPL is both further off its high but in an offsetting manner is up more than 50% above its year-ago price. Neither pays a dividend, and more and more people don't care about that, given that money of zero maturity (cash in the bank) pays little or nothing either.
AAPL and Au are also polar opposites. The former represents many of the best attributes of free market capitalism. It represents the future and appeals to techies and the young, among other groups. The latter appeals in many cases to older people who wish to preserve accumulated wealth against the ongoing Fed and governmental policies in many countries.
There are many cases where a "barbell" approach appeals to investors. This approach could involve holding cash and long bonds but no intermediate term bonds. For metals investors, it could involve holding gold and a very base metal, but not silver, platinum or semi-precious metal. For investment funds, I continue to find gold and AAPL stock as an interesting barbell approach to core investments in what continues to appear to be the bizarre world of central bank-mediated zero interest rates and federal deficits which despite the Summer of Recovery the administration promised two months ago show little sign of shrinking substantially.
Given the good news that iPhone demand apparently is "very robust" and added to a strong revamped iPod product line and rapid growth in iPad and core Mac sales, with growing exposure to sales outside of North America, I like the risk-reward in AAPL stock.
As a topic for another post, one reason I continue to "like" gold (meaning I give a Bronx cheer to Treasury's and the Fed's management of the dollar) is the price action of silver. Silver's 150 day sma has joined its 200 day sma as being in record territory (post 1980). Money-printing is pushing prices upward to record highs in MCD and to or near 12-month highs in CB, gold and silver.
The adage of "don't fight the Fed" continues to apply. I continue to look for the best risk-reward assets despite Fed policies I oppose. This takes some cognitive dissonance, but I'm liking the taste of golden apples so far.
Copyright (C) Long Lake LLC 2010
Three golden Apples were featured in Greek mythology, in which a hunter named Atalanta raced against a suitor named Hippomenes who used the golden apples to distract her so that he could win the race . . .
(From Wikipedia)
Gold and Apple. Interesting how they have been linked over the millenia; they form ends of a barbell investing strategy for me at this time.
As an ongoing accumulator of AAPL stock, I am satisfied that it went up with a strong NASDAQ today. I am too old and out-of-it to use any of the stuff that Apple announced today, but it is good to see a blogger have very positive things to say. While not uniform, most reviews I saw on the 'Net were positive as well.
There are other product-related straws in the wind. Re the iPad, it's great to see the offbeat report that a private school in Scotland has shifted instruction entirely to the iPad. I never would have guessed; in fact, I traded out of AAPL stock after a 10% gain ($200 to $220) shortly before the iPad's introduction as I was worried it would be a disappointment. Given the success of this product and of the iPhone 4, along with the decline in interest rates which have made fixed income even less attractive, I am quite satisfied having bought back into the stock at somewhat higher prices.
Perhaps the most underappreciated news of the day is about the iPhone 4 and not today's presentation about the iPod line refreshment, iTV and the like. Worried about how the antenna controversy and/or Android are affecting sales? Here's a great headline for anyone who owns AAPL stock:
Apple unable to keep up with iPhone 4 demand, say execs
The brief article begins:
Apple is still unable to cope with interest in the iPhone 4, two of the company's key executives indicate. A Deutsche Bank analyst, Chris Whitmore, recently met with CFO Peter Oppenheimer and senior VP of retail Ron Johnson to discuss the state of sales. "iPhone 4 demand remains very robust and despite efforts to close the supply-demand imbalance and the continued supply ramp, Apple still cannot meet iPhone demand," Whitmore says of the discussion.
Yours truly is not a financial analyst. Looking at little more than seasonal consecutive quarter-on-quarter trends aligned with year-on-year comparisons, and also doing more than looking at the last 6 year's average price of AAPL stock to cash flow and earnings, I come up with a reasonable trading price of $450-500 for AAPL stock for some point in 2011. This derives from the Value Line chart which shows AAPL trading at about an average of 22X cash flow for the past 6 years. Of course, few traders forget that the third year of a President's term is usually a strong one for investors. (Of course, let's also not forget that the 3rd year of Herbert Hoover's term was not so hot.)
I am using $20/share for Apple's2011 calendar year earnings. (Apple is on a September fiscal year.)
Apple is growing at an amazing pace for a large company. In July, it preannounced $18 B for current quarter sales. Analysts are currently targeting $18 1/2 B. In its April 9 edition (merely 4 months ago), Value Line was predicting $14.8 B for current quarter sales. How often does a very large company have such a "beat"? I can't remember such an occurrence since the tech bubble.
So far as I can see, there is no undue speculation in AAPL stock. This does not guarantee positive returns, though. The stock will take a tumble if Steve Jobs retires. But I suspect that it is selling at about 15X CY 2010 and 12.5X CY 2011 earnings. Analysts have the company growing 18% per year over the next five years. In the past they have been conservative. These analysts thus have the stock at under 6X earnings 5 years from now. If Apple were selling 5-year debt, it would hardly pay any premium over Treasuries. So the prospective return from theoretical AAPL 5-year debt is perhaps 1.5% per year. Even if the stock is projected to sell for 9X earnings 5 years from now, it would then be projected to appreciate about 9% per year. This is quite an equity premium for a financial and operational powerhouse.
Compared to the S&P 500, AAPL is in far superior technical shape. The long-term 200 day (40 week) simple moving average of SPY (the ETF for the S&P 500)has begun to turn down. The 150 day sma is about to drop below the 200 day sma, and the 50 day sma is below both of them. SPY is now in a (mildly) bearish technical configuration. AAPL, in contrast, has bounced off its rising 150 day sma, which is properly aligned in a bull market configuration above a rising 200 day sma. AAPL is of course well above its 2007 high stock price of around $200/share, which at that time represented about 40 times its cash flow for CY 2007. I have been using the ability of a commodity or security to move to new highs compared with the pre-Lehman implosion as a sign of fundamental strength. I want to be invested where the charts are fundamentally "strong", given that I believe there are probably a few years of challenging economic and financial markets ahead of us in the U. S. (Thus I said positive things about MCD and CB recently based on operational and chart considerations.)
While from a sure thing (which does not exist in investing without illegal inside information), AAPL is similar to gold from an investment standpoint. Both marched on to new highs after the onset and current aftermath of the Great Recession/credit collapse/depression. Gold is within 2% of its all-time high and is up more than 30% from one year ago. AAPL is both further off its high but in an offsetting manner is up more than 50% above its year-ago price. Neither pays a dividend, and more and more people don't care about that, given that money of zero maturity (cash in the bank) pays little or nothing either.
AAPL and Au are also polar opposites. The former represents many of the best attributes of free market capitalism. It represents the future and appeals to techies and the young, among other groups. The latter appeals in many cases to older people who wish to preserve accumulated wealth against the ongoing Fed and governmental policies in many countries.
There are many cases where a "barbell" approach appeals to investors. This approach could involve holding cash and long bonds but no intermediate term bonds. For metals investors, it could involve holding gold and a very base metal, but not silver, platinum or semi-precious metal. For investment funds, I continue to find gold and AAPL stock as an interesting barbell approach to core investments in what continues to appear to be the bizarre world of central bank-mediated zero interest rates and federal deficits which despite the Summer of Recovery the administration promised two months ago show little sign of shrinking substantially.
Given the good news that iPhone demand apparently is "very robust" and added to a strong revamped iPod product line and rapid growth in iPad and core Mac sales, with growing exposure to sales outside of North America, I like the risk-reward in AAPL stock.
As a topic for another post, one reason I continue to "like" gold (meaning I give a Bronx cheer to Treasury's and the Fed's management of the dollar) is the price action of silver. Silver's 150 day sma has joined its 200 day sma as being in record territory (post 1980). Money-printing is pushing prices upward to record highs in MCD and to or near 12-month highs in CB, gold and silver.
The adage of "don't fight the Fed" continues to apply. I continue to look for the best risk-reward assets despite Fed policies I oppose. This takes some cognitive dissonance, but I'm liking the taste of golden apples so far.
Copyright (C) Long Lake LLC 2010
Sunday, August 22, 2010
Weekend Update: More Stocks Finally Looking Less Bad than the Alternatives
The public continues to be in a sour mood, and continues not to engage in many elective purchases, as shown by Gallup's ongoing polling, which shows that one measure of discretionary spending by consumers remains stuck in the $65 per day range, roughly where it has been since the mild recession of 2008 turned into the nightmare of the Great/Global Financial Crisis. This level was in the $100-125 range well into 2008 per Gallup data no longer shown on the chart, if memory serves. This is a simply amazing drop. To think that this is not a form of a very great recession requires, in my opinion, one to think again.
Governmental retail sales data suggest to me that from peak in 2008 to trough in 2009, per capita inflation-adjusted spending dropped at least 15%, given that nominal sales dropped about 12.3% (Jan. 2008 through Mar. 2009).
Since then, conventional macroeconomists have simply gotten it wrong. The best advice that President Obama obtained early in 2009 indicated that at most unemployment rates would peak at 8%. Wall Street economists concurred. The stock market began anticipating a strong and sustained economic recovery, but personal income absent governmental transfer payments have yet to reach their peak. If it were not for all the millions of unanticipated dropouts from the labor force, the measured unemployment rate would be well over 10%.
Recently (finally), mainstream economists have been substantially lowering their estimates for 2010 and often for 2011 economic performance.
Are the markets are finally discounting, or over-discounting, the economic weakness that many of the Austrian persuasion (and others, such as Nouriel Roubini) have been foreseeing? Now that there is a growing understanding that the paradox of shifting a credit boom/bubble from private to governmental ownership does not induce more profitable economic activities, is there so much gloom that it's time to tack toward a form of optimism as exemplified by buying certain common stocks?
My sense is that there is still more economic pain to go but that the answer to the above question is a "Yes, but" type of answer. For guidance I refer readers to the paper by Reinhard and Rogoff (go to http://www.google.com/search?q=rogoff+reinhart&sourceid=ie7&rls=com.microsoft:en-us:IE-SearchBox&ie=&oe=&rlz=1I7ADRA_en and then click on the first link, to "This Time Is Different"), or read the book of the same name. I also refer readers to a variety of the books on the reading list of Econophile that present an array of viewpoints and historical narratives often from the standpoint of Austrian economics.
Since securities such as stocks and bonds of at least intermediate duration, or assets such as precious metals, are long-term, investors are forced to read tea leaves and look beyond the financial storms that are so common during hurricane season in Florida.
Now that the interest rate structure has come down drastically in a short time, while at the same time the S&P 500 has dropped about 9% since interest rates peaked April 5, common stocks are far more competitive against fixed income than they were this past spring.
While many valuation measures show stocks to be overvalued, that measure assumes a desired positive rate of return, such as 7-9% annually. If, however, one is willing to invest in stocks at a 5 +/- 2% (i.e. 3-7%) annual rate, I suspect that the formulas that indicate overvaluation would no longer do so.
Further, Jeremy Grantham of GMO LLC is out with his famous 7 year predictions as of July 31, suggesting that the best asset class 7 years from now will prove to be high quality U. S. stocks (he does not define high quality, and does not equate that with large cap). He has been pretty darn accurate to date with these predictions to date, so far as I know. He does not like non-high quality small cap U. S. stocks. He gives a 6.1% return from the class of high-quality stocks in real terms, which would be about 9% per year if prices rise 3% annually.
Supporting the idea that a stock market which currently is trading with a high degree of correlation between all stocks can have an identifiable subset with superior risk-adjusted prospective returns is the lfact that when the general stock market was at its most overvalued ever, in 2000, it surprises most people to look at numerous types of stocks and find that they peaked in 1997-8 and bottomed in March 2000 just when the NASDAQ peaked. Think of everybody rushing to the left side of a boat, then some rushing to the right side.
Many of the stocks that bottomed in 2000 made things, as opposed to techs that made vaporware or proposed to be the fifth online pet supplies company, or the recent enthusiasm for financials that made bad loans or bad investments but produced little or nothing or real value. This list of relatively undervalued stocks as of 2000 includes homebuilders and numerous industrial companies. In fact, the Russell 2000 Index, which includes stocks with market cap between 1001-3000 and is thus a proxy for small cap stocks, hit a record early in 2004 when the general averages were far behind their 2000 peak. Thus there is precedent for a large class of stocks to outperform their index.
For stocks, my working hypothesis has been that the process of creative destruction/boom-bust cycles within industries remains in play as follows.
After the energy boom and overvaluation of energy and gold stocks (and gold and oil themselves) in 1980, cheap energy fueled growth for over two decades until oil started a huge price rise about a decade ago. After tech stocks went wild in the late 1990s, the stocks were just as bad buys as oil drillers were in 1980, but the technology revolution fueled growth and efficiency and continues to do so. Tech is the major force in the economy fueling lower prices in a virtuous cycle, as opposed to lower prices simply resulting from oversupply due to malinvestment during the recent boom.
The latest fad was obviously for financials. It is said that about 40% of corporate profits at the bubble peak in 2007 were from financial activities. Of course, these were in many (most?) cases "profits" rather than real, economic profits. Thus the bust.
The analogy I am drawing is that the bust in the financials has the potential to fuel growth, but that the financials and their relatives such as housing- and finance-related businesses are likely to prove as disappointing investments on a multi-year basis as techs and energy stocks were following their busts and rebounds. Trading: OK. Buy and hold; I don't think so.
The special problem now, though, is how inextricably linked with all other financial assets the financial companies are and with the State itself. Thus, teleologically, the historical record per Rogoff and Reinhart of an average of perhaps 6 years post-credit collapse for matters to right themselves. They observed that stock markets bounced back well ahead of the economy as central banks flooded the markets with cash. Thus a bust in the price of energy was viewed as good for most of the country, but a bust in financial intermediaries plays havoc with a macroeconomic world-view in which borrowing and lending, rather than accumulation of true equity, provides a crucial key to growth.
So I believe that industries with real futures, meeting real needs of real people and other real businesses globally, and that are in fields that are as far from leveraged finance as possible, should (broad brush picture here) be optimally positioned to survive and, probably grow, and could be as good investments for years to come as depressed consumer stocks were in 1981 (pre-great recession of 1981-2). At a time of constrained credit, being self-financing is a marvelous situation. As an example, Intel recently announced a deal to buy McAfee (MFE) at about 15X earnings. Zeroing out MFE's cash, that's about a 7% earnings yield; Intel is paying with cash yielding nothing. The Street booed the acquisition. Whether it's a good one or not, just think what price Intel was paying for acquisitions or what Intel's investment portfolio was receiving for IPOs a decade ago.
This buy or potential buy "list" (I have no formal list) could include energy producers and high tech companies, but it really could include almost any company. Said companies would in general be of very high quality, a la Grantham's analysis, and thus would be financially stronger than the banking system itself. If a company were a strong enough multinational, it might be stronger than almost all sovereigns financially as well as somewhat independent of any one sovereign, as well.
So my personal investing strategy is as follows. I am heavily allocated to muni bonds and short-duration Ginnie Maes (yielding as much as long-term Treasuries when bought correctly), as well as to cash. I have sold all my intermediate to long Treasuries which I bought so recently, following the amazing plunge in rates this month. I went to about a zero stock allocation at Dow 13000 in summer 2007 and except for a few months in late 2009 ending in early May this year, have hardly been in stocks at all.
While noting that the chart on all sorts of stocks stinks, the same would have been said for Treasuries at all optimal buy opportunities during this almost 30 year bull market in bonds. Seasonality and the down-pointing charts, and the rise of statism in the economy, make the future of the economy and the public's prospective mood for stocks unusually uncertain and even scary. Nonetheless, in a time of very poor investment choices, as an investor seeking both current income and long-term capital appreciation that at least stays even with inflation, I have started in with a program of purchasing stocks that yield around or over 3% and that often have P/E's in the 10 range. My thinking is that some time within the next 7 years, these companies will at the least probably not cut their dividends and will probably raise them (examples such as BP notwithstanding), and at some point their stock prices will exceed their current prices; thus their total return potential adjusted for risk probably exceeds that of the 7 year Treasury note, currently at 2.05%. Such names include Chubb (CB), McDonald's (MCD)--both of which have strong charts; and Intel (INTC) and ExxonMobil (both of which have weak charts) and/or other oils.
I am avoiding yet higher-yielding pharmaceuticals because so much of their income comes directly and indirectly from governments, which are tapped out and will have to cut somewhere, and because their profit margins are ultra-high as a direct result. But I'm watching them carefully for signs of technical strength and improvement in their R&D productivity.
Barring major financial/economic events such as led up to the collapse in stock prices from 2007-August 2008 (i.e., pre-stock market collapse), in my humble opinion the highest-quality common stocks are finally beginning to merit a significant place in a diversified portfolio with a multi-year horizon and are finally competitive with munis for taxable accounts. I write this, though, with a distinct lack of enthusiasm given the fact that in Japan, there has hardly ever been a good time to go long stocks other than for a trade since the 1980s, and the U. S. is continuing to look Japanese. Nonetheless, analogies are imperfect, America is not Japan, etc. Most importantly, I have signed on to the stagflation rather than price deflation scenario.
Meanwhile, I do not think that stocks are safe and I believe that the rent money should not be entrusted to the stock market. I also continue to believe that gold is the single best investment for funds that will not be needed any time soon, given the apparent commitment of the ancien regime (aka the authorities) to more money printing and other financial maneuvers to "save" us rather than directly face up to the many historical and ongoing malinvestments that plague the U. S. economy. But an all-gold (or all precious metals) portfolio would be quite something else again!
Last but not least, and with the caveat that I know nothing about tech, AAPL appears to be a classic GARP (growth at a reasonable price) special situation stock with a company that is a financial and market share juggernaut. AAPL is very risky, though, and may or may not ever return cash to shareholders.
I am not an investment adviser and am proffering no investment advice in this and my other web posts. No obligation exists to disclose any changes in specific or general views discussed herein or by me elsewhere.
Copyright (C) Long Lake LLC 2010
Governmental retail sales data suggest to me that from peak in 2008 to trough in 2009, per capita inflation-adjusted spending dropped at least 15%, given that nominal sales dropped about 12.3% (Jan. 2008 through Mar. 2009).
Since then, conventional macroeconomists have simply gotten it wrong. The best advice that President Obama obtained early in 2009 indicated that at most unemployment rates would peak at 8%. Wall Street economists concurred. The stock market began anticipating a strong and sustained economic recovery, but personal income absent governmental transfer payments have yet to reach their peak. If it were not for all the millions of unanticipated dropouts from the labor force, the measured unemployment rate would be well over 10%.
Recently (finally), mainstream economists have been substantially lowering their estimates for 2010 and often for 2011 economic performance.
Are the markets are finally discounting, or over-discounting, the economic weakness that many of the Austrian persuasion (and others, such as Nouriel Roubini) have been foreseeing? Now that there is a growing understanding that the paradox of shifting a credit boom/bubble from private to governmental ownership does not induce more profitable economic activities, is there so much gloom that it's time to tack toward a form of optimism as exemplified by buying certain common stocks?
My sense is that there is still more economic pain to go but that the answer to the above question is a "Yes, but" type of answer. For guidance I refer readers to the paper by Reinhard and Rogoff (go to http://www.google.com/search?q=rogoff+reinhart&sourceid=ie7&rls=com.microsoft:en-us:IE-SearchBox&ie=&oe=&rlz=1I7ADRA_en and then click on the first link, to "This Time Is Different"), or read the book of the same name. I also refer readers to a variety of the books on the reading list of Econophile that present an array of viewpoints and historical narratives often from the standpoint of Austrian economics.
Since securities such as stocks and bonds of at least intermediate duration, or assets such as precious metals, are long-term, investors are forced to read tea leaves and look beyond the financial storms that are so common during hurricane season in Florida.
Now that the interest rate structure has come down drastically in a short time, while at the same time the S&P 500 has dropped about 9% since interest rates peaked April 5, common stocks are far more competitive against fixed income than they were this past spring.
While many valuation measures show stocks to be overvalued, that measure assumes a desired positive rate of return, such as 7-9% annually. If, however, one is willing to invest in stocks at a 5 +/- 2% (i.e. 3-7%) annual rate, I suspect that the formulas that indicate overvaluation would no longer do so.
Further, Jeremy Grantham of GMO LLC is out with his famous 7 year predictions as of July 31, suggesting that the best asset class 7 years from now will prove to be high quality U. S. stocks (he does not define high quality, and does not equate that with large cap). He has been pretty darn accurate to date with these predictions to date, so far as I know. He does not like non-high quality small cap U. S. stocks. He gives a 6.1% return from the class of high-quality stocks in real terms, which would be about 9% per year if prices rise 3% annually.
Supporting the idea that a stock market which currently is trading with a high degree of correlation between all stocks can have an identifiable subset with superior risk-adjusted prospective returns is the lfact that when the general stock market was at its most overvalued ever, in 2000, it surprises most people to look at numerous types of stocks and find that they peaked in 1997-8 and bottomed in March 2000 just when the NASDAQ peaked. Think of everybody rushing to the left side of a boat, then some rushing to the right side.
Many of the stocks that bottomed in 2000 made things, as opposed to techs that made vaporware or proposed to be the fifth online pet supplies company, or the recent enthusiasm for financials that made bad loans or bad investments but produced little or nothing or real value. This list of relatively undervalued stocks as of 2000 includes homebuilders and numerous industrial companies. In fact, the Russell 2000 Index, which includes stocks with market cap between 1001-3000 and is thus a proxy for small cap stocks, hit a record early in 2004 when the general averages were far behind their 2000 peak. Thus there is precedent for a large class of stocks to outperform their index.
For stocks, my working hypothesis has been that the process of creative destruction/boom-bust cycles within industries remains in play as follows.
After the energy boom and overvaluation of energy and gold stocks (and gold and oil themselves) in 1980, cheap energy fueled growth for over two decades until oil started a huge price rise about a decade ago. After tech stocks went wild in the late 1990s, the stocks were just as bad buys as oil drillers were in 1980, but the technology revolution fueled growth and efficiency and continues to do so. Tech is the major force in the economy fueling lower prices in a virtuous cycle, as opposed to lower prices simply resulting from oversupply due to malinvestment during the recent boom.
The latest fad was obviously for financials. It is said that about 40% of corporate profits at the bubble peak in 2007 were from financial activities. Of course, these were in many (most?) cases "profits" rather than real, economic profits. Thus the bust.
The analogy I am drawing is that the bust in the financials has the potential to fuel growth, but that the financials and their relatives such as housing- and finance-related businesses are likely to prove as disappointing investments on a multi-year basis as techs and energy stocks were following their busts and rebounds. Trading: OK. Buy and hold; I don't think so.
The special problem now, though, is how inextricably linked with all other financial assets the financial companies are and with the State itself. Thus, teleologically, the historical record per Rogoff and Reinhart of an average of perhaps 6 years post-credit collapse for matters to right themselves. They observed that stock markets bounced back well ahead of the economy as central banks flooded the markets with cash. Thus a bust in the price of energy was viewed as good for most of the country, but a bust in financial intermediaries plays havoc with a macroeconomic world-view in which borrowing and lending, rather than accumulation of true equity, provides a crucial key to growth.
So I believe that industries with real futures, meeting real needs of real people and other real businesses globally, and that are in fields that are as far from leveraged finance as possible, should (broad brush picture here) be optimally positioned to survive and, probably grow, and could be as good investments for years to come as depressed consumer stocks were in 1981 (pre-great recession of 1981-2). At a time of constrained credit, being self-financing is a marvelous situation. As an example, Intel recently announced a deal to buy McAfee (MFE) at about 15X earnings. Zeroing out MFE's cash, that's about a 7% earnings yield; Intel is paying with cash yielding nothing. The Street booed the acquisition. Whether it's a good one or not, just think what price Intel was paying for acquisitions or what Intel's investment portfolio was receiving for IPOs a decade ago.
This buy or potential buy "list" (I have no formal list) could include energy producers and high tech companies, but it really could include almost any company. Said companies would in general be of very high quality, a la Grantham's analysis, and thus would be financially stronger than the banking system itself. If a company were a strong enough multinational, it might be stronger than almost all sovereigns financially as well as somewhat independent of any one sovereign, as well.
So my personal investing strategy is as follows. I am heavily allocated to muni bonds and short-duration Ginnie Maes (yielding as much as long-term Treasuries when bought correctly), as well as to cash. I have sold all my intermediate to long Treasuries which I bought so recently, following the amazing plunge in rates this month. I went to about a zero stock allocation at Dow 13000 in summer 2007 and except for a few months in late 2009 ending in early May this year, have hardly been in stocks at all.
While noting that the chart on all sorts of stocks stinks, the same would have been said for Treasuries at all optimal buy opportunities during this almost 30 year bull market in bonds. Seasonality and the down-pointing charts, and the rise of statism in the economy, make the future of the economy and the public's prospective mood for stocks unusually uncertain and even scary. Nonetheless, in a time of very poor investment choices, as an investor seeking both current income and long-term capital appreciation that at least stays even with inflation, I have started in with a program of purchasing stocks that yield around or over 3% and that often have P/E's in the 10 range. My thinking is that some time within the next 7 years, these companies will at the least probably not cut their dividends and will probably raise them (examples such as BP notwithstanding), and at some point their stock prices will exceed their current prices; thus their total return potential adjusted for risk probably exceeds that of the 7 year Treasury note, currently at 2.05%. Such names include Chubb (CB), McDonald's (MCD)--both of which have strong charts; and Intel (INTC) and ExxonMobil (both of which have weak charts) and/or other oils.
I am avoiding yet higher-yielding pharmaceuticals because so much of their income comes directly and indirectly from governments, which are tapped out and will have to cut somewhere, and because their profit margins are ultra-high as a direct result. But I'm watching them carefully for signs of technical strength and improvement in their R&D productivity.
Barring major financial/economic events such as led up to the collapse in stock prices from 2007-August 2008 (i.e., pre-stock market collapse), in my humble opinion the highest-quality common stocks are finally beginning to merit a significant place in a diversified portfolio with a multi-year horizon and are finally competitive with munis for taxable accounts. I write this, though, with a distinct lack of enthusiasm given the fact that in Japan, there has hardly ever been a good time to go long stocks other than for a trade since the 1980s, and the U. S. is continuing to look Japanese. Nonetheless, analogies are imperfect, America is not Japan, etc. Most importantly, I have signed on to the stagflation rather than price deflation scenario.
Meanwhile, I do not think that stocks are safe and I believe that the rent money should not be entrusted to the stock market. I also continue to believe that gold is the single best investment for funds that will not be needed any time soon, given the apparent commitment of the ancien regime (aka the authorities) to more money printing and other financial maneuvers to "save" us rather than directly face up to the many historical and ongoing malinvestments that plague the U. S. economy. But an all-gold (or all precious metals) portfolio would be quite something else again!
Last but not least, and with the caveat that I know nothing about tech, AAPL appears to be a classic GARP (growth at a reasonable price) special situation stock with a company that is a financial and market share juggernaut. AAPL is very risky, though, and may or may not ever return cash to shareholders.
I am not an investment adviser and am proffering no investment advice in this and my other web posts. No obligation exists to disclose any changes in specific or general views discussed herein or by me elsewhere.
Copyright (C) Long Lake LLC 2010
Wednesday, July 7, 2010
Markets Churn as Deflationists May Be Overstating Their Case
Even David Rosenberg is buying into the austerity meme. In today's note, he discusses response to bear markets and recessions and says:
So it’s an open question as to where the exogenous positive shock is going to come from this time around, especially with policy rates already at zero and fiscal policymakers more bent on austerity rather than stimulus.
Remember that he is talking about the U. S. But he has it wrong. All we have is some resistance against continuation of the massive deficits, by far the largest peacetime deficits the U. S. has ever run. Properly accounting for the costs of Fannie Mae and Freddie Mac, the deficit exceeds that of Greece, I believe. This ignores the politically contentious future liabilities of Social Security and Medicare/Medicaid/Obamacare. There is no consensus for austerity. In World War II, there was virtually no production of any consumer automobile for the duration of the war. Now that's austerity. The average American uses perhaps 25 times as much oil per capita as the average citizen of India. Austerity? With the obesity epidemic raging? Hardly!
Meanwhile, Barry Ritholtz reprinted an updated graph of ECRI's confidential Long Leading Indicator (click on graph to enlarge), which so far as have been released, has in the past few decades turned down significantly before a recession has come on. It has not done so in a pronounced or pervasive manner, and ECRI predicts no recession to begin in 2010 based on large part on this fact. The shorter index, the publicly released Weekly Leading Index, has in fact turned down sharply.
So it’s an open question as to where the exogenous positive shock is going to come from this time around, especially with policy rates already at zero and fiscal policymakers more bent on austerity rather than stimulus.
Remember that he is talking about the U. S. But he has it wrong. All we have is some resistance against continuation of the massive deficits, by far the largest peacetime deficits the U. S. has ever run. Properly accounting for the costs of Fannie Mae and Freddie Mac, the deficit exceeds that of Greece, I believe. This ignores the politically contentious future liabilities of Social Security and Medicare/Medicaid/Obamacare. There is no consensus for austerity. In World War II, there was virtually no production of any consumer automobile for the duration of the war. Now that's austerity. The average American uses perhaps 25 times as much oil per capita as the average citizen of India. Austerity? With the obesity epidemic raging? Hardly!
Meanwhile, Barry Ritholtz reprinted an updated graph of ECRI's confidential Long Leading Indicator (click on graph to enlarge), which so far as have been released, has in the past few decades turned down significantly before a recession has come on. It has not done so in a pronounced or pervasive manner, and ECRI predicts no recession to begin in 2010 based on large part on this fact. The shorter index, the publicly released Weekly Leading Index, has in fact turned down sharply.
Since there is now so much concern about a new recession, it's a better time than a few months ago to think of a new up-cycle in the economy, or at least some stability. It would appear that a growth slowdown is baked in the cake, and that the powers that be will likely "stimulate" some more if a recession appeared again, which would then likely propel buying interest in gold and growth vehicles. So the game goes on . . .
So we have, as usual, cross-currents, which the powers-that-be have analyzed more thoroughly than you or I can. So how can one out-think the market? First, it helps to be able to look around you and ignore the hype and understand one's objectives and the goals of the powers that be.
The powers that be want you to trade a lot, so volatility is in their interest. They want price inflation for various reasons. One response is to own assets that defeat those purposes.
These include owning shares in financially strong companies at attractive prices, understanding that stocks as a whole are probably overvalued, but also paying heed to Jeremy Grantham, who agrees that both large-cap and small-cap U. S. stocks are about as poor investments as are U. S. long-term bonds, but that "high quality" U. S. stocks are about the best investments on a 7-year time frame amongst all his listed asset classes (GMO, free subscription).
Here are some dividend-payers that meet the DoctoRx criteria of being high quality, based on Value Line data, and that are doing well operationally. These are Tractor Supply (TSCO), Apple, TJX; and for gold-oriented investors, Newmont (NEM). Who knows, but perhaps all of these can be buy-and-hold investments that prospectively can beat buy and hold of similar quality bonds or cash.
Now that Treasury yields are at Japan level, cash is approaching trash. But anyone who shops knows that prices are rising, except for things that people own and for which buyers usually need large loans, namely houses.
Yours truly is not an investment advisor, and the above is not investment advice. For full disclosure, I bought TSCO today and after hours, it issued a major earnings and sales upside statement. So the stock is up a good deal after hours. If it is not up a great deal tomorrow, I may buy more. Based simply on the "value line" of Value Line, it is easy to see 50% price upside for TSCO within a year, similar to that which I can see as reasonable for AAPL.
Copyright (C) Long Lake LLC 2010
Thursday, June 24, 2010
Financials Breaking Down
The default rush to Treasuries despite more than abundant supply is a bad sign. The well-regarded but fundamentally pricy regional financial services/bank company with the symbol UMBF has hit a 12-month low today. Northern Trust has broken down. GS and JPM have been in classic bear configurations for some time. BAC is close to a technical breakdown, as well.
As the financials broke down well before the stock market topped in 2007, it is feared that the breakdown of these companies' stocks may presage a general "correction". Given national and global economic situations objectively, without judging the future, it is hard to see that the stock market should not trade at fair value, which observers I find credible peg at anywhere from 20-25% below current prices.
Investors must learn the investing lesson of Japan. This is that persistent ultra-low government borrowing rates that are associated with a sluggish economy eventually lead to stock prices reflecting said sluggishness rather than the growth expectations that are priced in. Thus, investors should ignore the current relative attractiveness of 2-3% dividend yielders except to the extent that said dividends derive from globally attractive markets, such as India and Brazil.
EBR feels that given the chimeric Japanecian (Grecianese) risk our government's finances bear (also called fat tailed possibilities), caution is appropriate. AAPPL and gold, as stated here recently, are both flat to up as of this post while stock averages are down. This reflects relative and absolute performance over various longer time periods, and while no bells are rung during trend changes, I see no valuation or other reasons for said trends to change.
Cash may be "trash", but sometimes it's less trashy than other assets.
Copyright (C) Long Lake LLC 2010
As the financials broke down well before the stock market topped in 2007, it is feared that the breakdown of these companies' stocks may presage a general "correction". Given national and global economic situations objectively, without judging the future, it is hard to see that the stock market should not trade at fair value, which observers I find credible peg at anywhere from 20-25% below current prices.
Investors must learn the investing lesson of Japan. This is that persistent ultra-low government borrowing rates that are associated with a sluggish economy eventually lead to stock prices reflecting said sluggishness rather than the growth expectations that are priced in. Thus, investors should ignore the current relative attractiveness of 2-3% dividend yielders except to the extent that said dividends derive from globally attractive markets, such as India and Brazil.
EBR feels that given the chimeric Japanecian (Grecianese) risk our government's finances bear (also called fat tailed possibilities), caution is appropriate. AAPPL and gold, as stated here recently, are both flat to up as of this post while stock averages are down. This reflects relative and absolute performance over various longer time periods, and while no bells are rung during trend changes, I see no valuation or other reasons for said trends to change.
Cash may be "trash", but sometimes it's less trashy than other assets.
Copyright (C) Long Lake LLC 2010
Monday, June 7, 2010
Gold'n Apple
Barry Ritholtz is out with a blog post with the respected technician Dick Arms pointing out that the extreme selling on Friday June 4 correlated with market bottoms in the past.
Only a similar amount of selling near the market peak in 2007.
And a similar amount of selling was seen Dec. 1 2008. But at that time the SPY was more than 30% below its 200 day moving average (smoothed). Now we are in the early stages of a market breakdown, so early that the 50 day sma is above the 200 day sma. We are not even in a bear market; there is little real fear that is the bottom-of-the-market/world-is-ending-type fear seen in late 2008/early 2009.
This was brought home this weekend in various small group encounters. Gold? It was as if I was from outer space, or a subversive.
The fact that gold is money according to the U. S. Government, IMF, China and Russia was not in people's minds.
Yet everyone I asked recently reports business down year on year. And last year, business was down vs. 2008.
The longer-term charts of gold and Apple both suggest that the current upswings in price have much more upside before they replicate growth surges off of prior intermediate highs. Apple could be selling for perhaps 10X 2012 earnings. That would be an earnings yield of 10%. Or you could get less than 1% yearly in a 2-year T-note. And gold is in a well-established bull market. Quite some time ago, Louise Yamada established a $1350/ounce intermediate price target for gold. Her longer-term targets start at $2000/ounce. In a liquidation panic a la October/November 2008, all babies get thrown out with bathwater, but the healthy ones rebound first.
Today's market action may have been telling. Gold approached another all-time high, yet only one current headline on Bloomberg.com mentions gold. Stocks get multiple mentions, as does the following that looks as though it comes from a ten-year old headline: Tech Lifts S.F. Prices as Ocean View Gets 26 Bids.
Here is the gold mention; it is being sold, not bought: Glencore may put gold assets on market, mulls IPO.
The subliminal message from the above is that gold is toppy, as the savvy Glencore looks to cash in on investor enthusiasm. And who knows? But this sort of action would be early, perhaps equivalent to NASDAQ 1000-1500 in the second half of the 1990s, not late 1999 when turkeys flew.
More sensible may be that of Rothschilds Bank; see Why Rothschilds is piling into gold, which begins:
Rothschild's Private Banking & Trust's head of investments Dirk Wiedmann has increased the firm's overweight positions in gold and hedge funds in preparation for further volatility and modest economic growth.
Wiedmann highlights short-term fixes for long term problems as a key headwind facing the global economy.
'The cracks in the financial system have been papered over and may not become critical for some time. Crucially, central banks will do all they can to prevent another recession. Policymakers will focus on short-term fixes and try to muddle through,' Wiedmann said. . .
Wiedmann expects gold prices to surge during the second half the year in an uncertain environment, comfortably breaking the $1,300 per ounce level - particularly if sovereign debt problems in Europe continue to escalate to a point where a break-up of the euro seems likely, he said.
For other commodities the firm has a neutral to negative outlook, arguing that buying opportunities may be emerging if financial markets stabilise.
Apple: secular, organic growth at a very cheap price/growth ratio and gilt-edged finances. Gold: The opposite, but public is not engaged and remains of the mindset that the thing to do is to own tiny minority shares of companies run by insiders for their own benefit, collectively comprising the "stock market". You can forget TRINS and sentiment indicators. What counts is what is happening in the real world. An overpriced group of mostly aging companies in league with poorly run governments are seeking price levels that take into account more risks than investors have been used to seeing come to fruition for quite some time.
Caveat emptor.
Copyright (C) Long Lake LLC 2010
Only a similar amount of selling near the market peak in 2007.
And a similar amount of selling was seen Dec. 1 2008. But at that time the SPY was more than 30% below its 200 day moving average (smoothed). Now we are in the early stages of a market breakdown, so early that the 50 day sma is above the 200 day sma. We are not even in a bear market; there is little real fear that is the bottom-of-the-market/world-is-ending-type fear seen in late 2008/early 2009.
This was brought home this weekend in various small group encounters. Gold? It was as if I was from outer space, or a subversive.
The fact that gold is money according to the U. S. Government, IMF, China and Russia was not in people's minds.
Yet everyone I asked recently reports business down year on year. And last year, business was down vs. 2008.
The longer-term charts of gold and Apple both suggest that the current upswings in price have much more upside before they replicate growth surges off of prior intermediate highs. Apple could be selling for perhaps 10X 2012 earnings. That would be an earnings yield of 10%. Or you could get less than 1% yearly in a 2-year T-note. And gold is in a well-established bull market. Quite some time ago, Louise Yamada established a $1350/ounce intermediate price target for gold. Her longer-term targets start at $2000/ounce. In a liquidation panic a la October/November 2008, all babies get thrown out with bathwater, but the healthy ones rebound first.
Today's market action may have been telling. Gold approached another all-time high, yet only one current headline on Bloomberg.com mentions gold. Stocks get multiple mentions, as does the following that looks as though it comes from a ten-year old headline: Tech Lifts S.F. Prices as Ocean View Gets 26 Bids.
Here is the gold mention; it is being sold, not bought: Glencore may put gold assets on market, mulls IPO.
The subliminal message from the above is that gold is toppy, as the savvy Glencore looks to cash in on investor enthusiasm. And who knows? But this sort of action would be early, perhaps equivalent to NASDAQ 1000-1500 in the second half of the 1990s, not late 1999 when turkeys flew.
More sensible may be that of Rothschilds Bank; see Why Rothschilds is piling into gold, which begins:
Rothschild's Private Banking & Trust's head of investments Dirk Wiedmann has increased the firm's overweight positions in gold and hedge funds in preparation for further volatility and modest economic growth.
Wiedmann highlights short-term fixes for long term problems as a key headwind facing the global economy.
'The cracks in the financial system have been papered over and may not become critical for some time. Crucially, central banks will do all they can to prevent another recession. Policymakers will focus on short-term fixes and try to muddle through,' Wiedmann said. . .
Wiedmann expects gold prices to surge during the second half the year in an uncertain environment, comfortably breaking the $1,300 per ounce level - particularly if sovereign debt problems in Europe continue to escalate to a point where a break-up of the euro seems likely, he said.
For other commodities the firm has a neutral to negative outlook, arguing that buying opportunities may be emerging if financial markets stabilise.
Apple: secular, organic growth at a very cheap price/growth ratio and gilt-edged finances. Gold: The opposite, but public is not engaged and remains of the mindset that the thing to do is to own tiny minority shares of companies run by insiders for their own benefit, collectively comprising the "stock market". You can forget TRINS and sentiment indicators. What counts is what is happening in the real world. An overpriced group of mostly aging companies in league with poorly run governments are seeking price levels that take into account more risks than investors have been used to seeing come to fruition for quite some time.
Caveat emptor.
Copyright (C) Long Lake LLC 2010
Thursday, June 3, 2010
The Apple of Corporate America's Eye?
Changewave Research (Emailed communication) reports that various Apple products are catching on in IT departments in corporations faster than mainstream analysts are projecting:
Apple. Planned corporate Mac buying has hit a new all time high, with 12% saying their company will be buying Mac laptops and 7% desktops in the 3rd quarter. . .
Surging Corporate iPad Demand. A total of 4% of respondents say their company has already purchased Apple iPad tablets – a very impressive number for a product less than two months on the market. Even more impressive, going forward 6% say their company plans on purchasing iPads in the next 90 days.
Apple. Planned corporate Mac buying has hit a new all time high, with 12% saying their company will be buying Mac laptops and 7% desktops in the 3rd quarter. . .
Surging Corporate iPad Demand. A total of 4% of respondents say their company has already purchased Apple iPad tablets – a very impressive number for a product less than two months on the market. Even more impressive, going forward 6% say their company plans on purchasing iPads in the next 90 days.
Also, every year, people who grew up recognizing the advantages of the Mac family and enjoying the iPod gain corporate market share, as it were, over the old-timers who are used to Wintel.
The kernel of the Mac family's operating system is intrinsically impervious to viruses. So the multiyear total cost of ownership can be less than for Wintel computers, and simpler.
No one knows, especially in a very dangerous global economy, but it would appear that with the so-far resounding success of the iPad, and with very clean finances, Apple Inc. is one of the few large companies with significant growth baked in the cake.
For what it's worth, AAPL and gold are seeing profit-taking today. It would be interesting if they start trading in a correlated fashion.
Copyright (C) Long Lake LLC 2010
Wednesday, June 2, 2010
As With Gold, So With Apple: Too Many Skeptics
Reihan Salam at The Daily Beast has just put out an article in which he says that he really likes Apple's products but is upset about income inequality in America (which has something to do with his point, he believes) and concludes by saying:
Apple won't be able to defy gravity forever. Short it now.
Now I don't know if Mr. Salam is a registered investment adviser; if he is not, he may be better advised to avoid direct instructions of the above sort.
The core point above is correct: nothing defies gravity forever. That was made clear much more persuasively by Marilyn in Diamonds Are a Girl's Best Friend:
"But square cut or pear shaped,
These rocks don't lose their shape . . .
Time rolls on and youth is gone
And you can't straighten up when you bend".
But so what? We, and our descendants, are all going to die. So there, Mr. Salam! Neither my point nor yours hits the mark.
The only point is whether AAPL is headed higher (given its lack of dividends). That's all. Social justice go bragh or not, Apple is probably running at an earnings rate of $15/share as I write. (Who knows outside of its top brass?) Earnings the past 5 years have almost doubled yearly. Given the recent accounting change, earnings this fiscal year are going to be more than double that of last year. And Uncle Sam isn't subsidizing its sales.
The only thing I can see is that it's the best I can find of a sorry lot of stocks. The technicals and fundamentals are in gear. The iPad is white hot.
Maybe one shouldn't own AAPL. If Mr. Jobs has a health issue, look out below. And the stock market is rolling over. But there's one in every crowd. In bull markets, perhaps 10% of stocks go down. And except for catastrophes such as in late 2008, some stocks go up in bears. To pay interest to a broker to borrow money to sell AAPL while it's in a historic growth phase while the rest of the consumer electronics sector struggles is extreme.
Right now, there's only one commodity with solid fundamentals and technicals I know. That's gold, of course, because it is not a commodity but a store of value that mostly does NOT get consumed as commodities do.
And amongst companies that make things, without getting into small-company world or very high P/E equities such as Intuitive Surgical, the equivalent of gold is AAPL. The stock is around $260. I have no way of guessing how much market share the iMac family is gaining, but soon enough we may be at or at least looking at $20/share of cash flow, and the "Value Line" for intrinsic fair value is now at 22X cash flow. Do the math.
Hint: Value Line's 2014 price target for AAPL was about $440, but that was before the blowout March quarter earnings were reported and before the iPad was on the market more than a week or so.
Short the stock? Huh?
Copyright (C) Long Lake LLC 2010
Apple won't be able to defy gravity forever. Short it now.
Now I don't know if Mr. Salam is a registered investment adviser; if he is not, he may be better advised to avoid direct instructions of the above sort.
The core point above is correct: nothing defies gravity forever. That was made clear much more persuasively by Marilyn in Diamonds Are a Girl's Best Friend:
"But square cut or pear shaped,
These rocks don't lose their shape . . .
Time rolls on and youth is gone
And you can't straighten up when you bend".
But so what? We, and our descendants, are all going to die. So there, Mr. Salam! Neither my point nor yours hits the mark.
The only point is whether AAPL is headed higher (given its lack of dividends). That's all. Social justice go bragh or not, Apple is probably running at an earnings rate of $15/share as I write. (Who knows outside of its top brass?) Earnings the past 5 years have almost doubled yearly. Given the recent accounting change, earnings this fiscal year are going to be more than double that of last year. And Uncle Sam isn't subsidizing its sales.
The only thing I can see is that it's the best I can find of a sorry lot of stocks. The technicals and fundamentals are in gear. The iPad is white hot.
Maybe one shouldn't own AAPL. If Mr. Jobs has a health issue, look out below. And the stock market is rolling over. But there's one in every crowd. In bull markets, perhaps 10% of stocks go down. And except for catastrophes such as in late 2008, some stocks go up in bears. To pay interest to a broker to borrow money to sell AAPL while it's in a historic growth phase while the rest of the consumer electronics sector struggles is extreme.
Right now, there's only one commodity with solid fundamentals and technicals I know. That's gold, of course, because it is not a commodity but a store of value that mostly does NOT get consumed as commodities do.
And amongst companies that make things, without getting into small-company world or very high P/E equities such as Intuitive Surgical, the equivalent of gold is AAPL. The stock is around $260. I have no way of guessing how much market share the iMac family is gaining, but soon enough we may be at or at least looking at $20/share of cash flow, and the "Value Line" for intrinsic fair value is now at 22X cash flow. Do the math.
Hint: Value Line's 2014 price target for AAPL was about $440, but that was before the blowout March quarter earnings were reported and before the iPad was on the market more than a week or so.
Short the stock? Huh?
Copyright (C) Long Lake LLC 2010
Friday, May 28, 2010
Apple's Business Accelerating as Economy Decelerates
In what passes for a sell-off in Apple stock world, AAPL is at a 5 week low in price.
It even briefly thrice dipped below its 50 day smoothed moving average only to bounce above it. Long lines have formed in multiple countries in Europe as well as in Japan to be in on their launch of the iPad.
A sort-of polling entity, Changewave Alliance, of which I am a member, is out today with survey results of its members. It has found an amazing satisfaction level with the iPad.
Fundamentally, the Value Line actual value line is as good a way to look for over- and under-valuation of growth stocks as any I know. For AAPL, the value line is set as 22X "cash flow", which for AAPL is very close to earnings. For calendar year 2010, I am guessing that AAPL with have cash flow of $15/share. Thus to be at its Value Line, it would be at $360. Yet more bullish is the fact that for the last 6 years, it has spent more time above than below this valuation level, despite rapidly rising profitability.
AAPL stock is 25% above its highest 2007 price with triple the earnings.
We are at a point in the economic cycle where discount retailers tend to stop outperforming. My favorites of Dollar Tree, Ross Stores and TJX are great companies, and their stocks remain reasonably valued, but with Wal-Mart struggling, one has to wonder if their margins have anywhere to go but down at this point.
Meanwhile the Economic Cycle Research Institute is out with more gloomy news today:
A measure of future U.S. economic growth fell to a 39-week low in the latest week, pointing to a slowdown in economic growth, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 125.6 in the week ended May 21, down from a revised 127.2 the previous week, originally reported as 127.3.
That was the lowest level since Aug. 21, 2009, when the index stood at 125.3.
The index's annualized growth rate tumbled to a 47-week low of 5.1 percent from 9.0 percent a week ago. That's the worst level since June 26, 2009, when it stood at 4.6 percent.
"The downturn in WLI growth evident since early 2010 has recently intensified, so it should be no surprise when U.S. economic growth slows noticeably in the months ahead," said Lakshman Achuthan, managing director of ECRI.
Short-term rates are increasingly like to stay around zero for the indefinite future.
While this is ultimately bullish for gold given how our leaders handle economic sluggishness these days, ECRI's forecast is decidely not bullish for any other commodity, and with slowing economic growth likely per ECRI, fears of a new recession and perhaps the actuality may lead to another forced liquidation even of the highest quality assets such as gold at some point.
Right now AAPL may even be outshining gold. Yet the former can be laid low by a downturn in the health of one man, which is not the case for the latter.
To summarize, the list of attrative investments continues to narrow. Whether Treasuries will be on that list as growth slows is uncertain. One suspects so, but who really wants to lend money to the U. S. Gov't at 4% annually for the next 30 years?
Copyright (C) Long Lake LLC 2010
It even briefly thrice dipped below its 50 day smoothed moving average only to bounce above it. Long lines have formed in multiple countries in Europe as well as in Japan to be in on their launch of the iPad.
A sort-of polling entity, Changewave Alliance, of which I am a member, is out today with survey results of its members. It has found an amazing satisfaction level with the iPad.
Fundamentally, the Value Line actual value line is as good a way to look for over- and under-valuation of growth stocks as any I know. For AAPL, the value line is set as 22X "cash flow", which for AAPL is very close to earnings. For calendar year 2010, I am guessing that AAPL with have cash flow of $15/share. Thus to be at its Value Line, it would be at $360. Yet more bullish is the fact that for the last 6 years, it has spent more time above than below this valuation level, despite rapidly rising profitability.
AAPL stock is 25% above its highest 2007 price with triple the earnings.
We are at a point in the economic cycle where discount retailers tend to stop outperforming. My favorites of Dollar Tree, Ross Stores and TJX are great companies, and their stocks remain reasonably valued, but with Wal-Mart struggling, one has to wonder if their margins have anywhere to go but down at this point.
Meanwhile the Economic Cycle Research Institute is out with more gloomy news today:
A measure of future U.S. economic growth fell to a 39-week low in the latest week, pointing to a slowdown in economic growth, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 125.6 in the week ended May 21, down from a revised 127.2 the previous week, originally reported as 127.3.
That was the lowest level since Aug. 21, 2009, when the index stood at 125.3.
The index's annualized growth rate tumbled to a 47-week low of 5.1 percent from 9.0 percent a week ago. That's the worst level since June 26, 2009, when it stood at 4.6 percent.
"The downturn in WLI growth evident since early 2010 has recently intensified, so it should be no surprise when U.S. economic growth slows noticeably in the months ahead," said Lakshman Achuthan, managing director of ECRI.
Short-term rates are increasingly like to stay around zero for the indefinite future.
While this is ultimately bullish for gold given how our leaders handle economic sluggishness these days, ECRI's forecast is decidely not bullish for any other commodity, and with slowing economic growth likely per ECRI, fears of a new recession and perhaps the actuality may lead to another forced liquidation even of the highest quality assets such as gold at some point.
Right now AAPL may even be outshining gold. Yet the former can be laid low by a downturn in the health of one man, which is not the case for the latter.
To summarize, the list of attrative investments continues to narrow. Whether Treasuries will be on that list as growth slows is uncertain. One suspects so, but who really wants to lend money to the U. S. Gov't at 4% annually for the next 30 years?
Copyright (C) Long Lake LLC 2010
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