The love affair with Apple hardware

Only Apple has demonstrated an enduring vision for the way human beings respond to hardware and integrated software. Generations of Apple customers have grown up with and loved Apple IIs, Macs, iPods, iPhones and iPads. Thanks to the foundation Steve Jobs built, plenty of similar devices in the future will carry on that tradition.

As a result, the prospects are good that Apple, unlike its competition, will introduce a continuously evolving line of profitable hardware for the foreseeable future. It's very hard to make the case that there are equivalent prospects for the current competition's hardware in the long run.

For more, read

Apple Will Outlive the Competition

Fed may make a new move soon

Fed could be about to make a major policy change

U.S. Economy Slack Justifies Stimulus, Top Fed Staff Papers Show

Fed economists see easy monetary policy as effective and would like to enhance the forward guidance in a more specific way, i.e. lowing the unemployment threshold to 5.5% or 6%. This is a specific policy proposal to implement the idea that anchoring expectations is a far more effective policy tool than asset purchases. 

Pay attention!

Apple is a luxury good with mass appeal

Analysts were rooting for Apple to go low end with its iPhone 5C. Instead, Apple decided to price it pretty high. It was not ready to tarnish its premium brand. It should not and it will not. On the contrary, it seeks to extend its premium brand. The hiring of Burberry CEO takes the game to a whole new level:

Apple Hires Burberry CEO in Tim Cook’s Best Decision Yet

Now think about the iWatch project. It's not going to be something dueling with Samsung's pathetic Gear. It's going to be a fashion item. It's going to be a Michael Kors watch with mass appeal. Design, design, design.

She is wicked smart.

Oxymoron Nobel prize in economics

The economics Nobel has been quite controversial in recent years. Today's announcement is utterly strange: Eugene Fama is known for his Efficiency Market Hypothesis which has never been tested affirmatively, and its influence has waned because of massive market failure in the last financial crisis. Yet, he is awarded the prize at the same time as Robert Shiller, who is known for various works that demonstrate, among other things, that market is not efficient or bubble prone!

And, Lars Hansen, known for developing some testing techniques, in between these two?

Debt ceiling deal illusive， Reid may hold the card

Facing an imminent debt ceiling deadline with dire consequences of US default, no deal yet seems likely to emerge on time.

Every single proposal from the House and Senate Republicans has been shot down by the White House or the Senate. Obama and Senate majority leader Harry Reid have been holding firm. To see where the deal dynamics is headed, it's important to understand why they're doing what they're doing: holding firm.

Reid: Soft-spoken, combative Obama partner vs GOP

Obama Hard-Line Debt Stance Rooted in Anger Over '11 Impasse

With public opinions shifting against the House Republicans over the government shutdown, who is going buckle first? 

Melt up

So we see futures are all pointing up, perhaps a deal out of the Washington gridlock is in the work?

This is all good:

Ignore all the noises.

But what's the signal? The yield curve still upward sloping? And slowly flattening?

Why Obama stood firm

In the meeting with House Democrats on Wednesday evening, Mr. Obama held firm to his stated intention to negotiate with Republicans only after the government is reopened and the debt ceiling is raised. He told Democrats that if he gives in now, Republican demands would be endless. “The only thing not on their list is my own resignation,” he told Democrats, according to a lawmaker in the room.

Looks like Mr.Obama has learned his lessons dealing with the GOP. 

For the full report, see 
As Pressure Mounts, House G.O.P. Weighs Short-Term Debt Deal

iPhone 5S: The new frontier

So, Apple announced two new iPhones on Sept.10: the colorful version of iPhone 5 (i.e. iPhone 5C) and the much improved more powerful iPhone 5S.

Nearly everyone was expecting iPhone 5C to be the cost effective device to compete in the emerging markets like China. Wall Street was disappointed when it learned the off-contract pricing: $550 to start with. It's even more disappointed when the two current Chinese carriers offer iPhone 5C at RMB 4488 (about $730), and there was no China Mobile deal.

Analysts downgrades followed. AAPL was down 5.5% following a 2% decrease. iCahn swooped in to buy more.

The market was obsessed with market share, even though Apple's ecosystem continues to grow. Apple's share has been shrinking because the low end has been growing like weeds at zero profit. This is mostly because of the aggressive strategies from Samsung, Lenovo, Xiaomi, enabled by the free Android OS. Most analysts were expecting Apple to join the cut-throat "pissing" contest at the low end.

Well, Apple appeared to have refused the temptation. It chose to stay at the high end, even in China. That doesn't mean the prices for iPhone 5C won't come down. I think between subsidies and discounts, the effective prices for iPhone 5C would come down quite dramatically in China over the next couple of quarters. But that probably won't happen until iPhone 5S has gone on sale for some time.

5S is where the market should focus on. It's the new frontier of the smart phone.

"Most forward-thinking."

"Desk-top class" architecture with 64-bit A7 chip.    

What do they all imply?

Here are some good discussions, among all the noise:

Apple positions itself for the coming convergence of mobile and desktop.

2015: 64-bit ARM chips in iPhone 5S serve up taste of Intel-free future for Apple.

The iPhone 5S-Class.

iPhone 5C pricing makes perfect sense.

(a balanced take after the 10% dive)

The iPhone 5C: Cheap Plastic Case, Not a Cheap Price — and That’s the Point.

(Interview with Cook, Ive, Federighi)
We're not in the junk business.

Ticket to the next generation of the internet.


Apple tops Google and Coke in brand valuation.


The market impact of 64-bit A7.


iPhone 5C is great marketing for 5S.

iPhone 5C: Deepening the conversion

Earlier this month, a report from AllThingsD compared first-time smart phone buyers versus seasoned buyers, across phone makers including Apple and Samsung.

This picture is the key result:

It shows that iPhone is attracting close to 50% buyers among those who have owned a smart phone previously, a comfortable leading position. But among the first-time smart phone buyers, not so much. The reporter put it in a rather negative light. We think it's not so bad.

Today, a CIRP report shows that 20% of iPhone users switched from Android phone users, whereas only 7% of Samsung phone buyers switched from iPhone. This helps to explain the picture above: Apple is very good at converting experienced smart phone users who want and can afford a better phone.

Given the proliferation of Android phones, which has been pushed by makers from Samsung to HTC to LG to Huawei to Lenovo to Xiaomi and others at cost or below cost, what would be the best strategy for Apple to deepen its conversion?

Is it better to use the older versions of iPhone, or is it at the point that Apple can do better with a new lower-cost iPhone? The answer is probably the latter.

Ever since AllThingD broke the "news" on August 10 that Apple is going to announce both iPhone 5S and iPhone 5C on Sept. 10, 2013, the rumor has been widely repeated and the expectation has set in. Today, Wall Street Journal claimed to have confirm it. If this is true, Apple has clearly decided that a lower-cost new iPhone is the way to deepen the conversion. This is both timely and an important strategic departure. We can see the following advantages of launching a new and lower-cost iPhone.

1. iPhone 5C would work hand-in-hand with the strategy of partnering with China Mobile.

2. It creates a high-end destination point for the group of low-budget users who cannot afford iPhone 5 or iPhone 5S, but would like to have the iOS experience. This is probably based on the recognition that there emerges two broad group of smart phone users: those at the high end and those who are more cost sensitive. Apple wants to be the high-end destination for both groups.

3. iPhone 5C is using the iPhone 5 spec, and newer technologies than iPhone 4. This helps to compete with other cheap phones that have newer form factors and technologies.

4. Apple can better control the costs with a new design. And possibly more importantly the new design allows a substantial differentiation from the flag-ship design, so that it serves to extend the iPhone brand but not cheapen it.

5. With this, Apple can continue to enjoy saving part of the education costs for first-time users and keep a healthy margin for its iconic device, extending the brand as well as the iOS ecosystem.

The media are too focused on market shares and seldom ask if a bigger market share makes sense at all if all it does is making sales but not profits. With the iPhone 5C out soon, it seems what competitors have done at the low-end is little more than preparing an educated customer base for Apple to convert.

Could it be that simple? We'll just have to wait and see.

=============================================
Here are some survey results since the new iPhones were launched.

More iPhone buyers switching from Android this year than in 2012

Obama may not get Dual Mandate

Obama's appointment for the next Fed chair has important implications for the market and the economy. Looks like it's now down to between Larry Summers and Janet Yellen. I hope he is wise enough to pick Yellen, but he may not. And that could be because he doesn't get what the "dual mandate" is.

The Fed's dual mandate is maximum employment and stable prices. Note it's "stable prices", not "no inflation." If you listen to what Obama said in the NYT interview:

 MR. OBAMA: And what I’m looking for is somebody who understands the Fed has a dual mandate, that that’s not just lip service; that it is very important to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets. But the idea is not just to promote those things in the abstract. The idea is to promote those things in service of the lives of ordinary Americans getting better.

And when unemployment is still too high, and long-term unemployment is still too high, and there’s still weak demand in a lot of industries, I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.

New bubbles? Right now the risk is dis-inflation or even deflation, and he is focusing on high inflation. Does he know that deflation is a much bigger threat than inflation? Does he know price stability means fighting against both high inflation and low inflation to maintain a stable inflation target?

Mr.Summers doesn't have a very good record in terms of forecasting the economy and in terms of economic policies. He is in the same camp as Alan Greenspan and Robert Rubin. He was too weak in advocating for a large enough stimulus to fight economy slump from the financial crisis. His credential is on the fiscal side. Why does the White House think he can do a good job in conducting monetary policy?

This is based on analyzing the words, published words. I'm glad to read NYT's take:

That is nonsense. Nothing that has occurred in the past week changes the fact that no one else can match Janet Yellen’s combination of academic credentials and policy-making experience. And no one ever confirmed to the job has come to it with as deep a grounding in both the theory and practice of monetary and regulatory policy as Ms. Yellen would bring.

......

In 1998, Mr. Rubin and Mr. Summers opposed Brooksley Born, then the chairwoman of the Commodity Futures Trading Commission, for correctly calling for the regulation of derivatives; in 2009, Mr. Summers squelched the sound recommendation of Christina Romer, then an economic adviser to Mr. Obama, for a larger stimulus. In the first Obama term, Mr. Geithner clashed unhelpfully with Sheila Bair, then the chairwoman of the Federal Deposit Insurance Corporation, and with Elizabeth Warren, then the chairwoman of the Congressional panel overseeing the bailouts.

Apple vs Samsung: Beware what you read from faulty reports

AppleInsider has a really interesting article exposing faulty reporting including CNBC, Forbes, WSJ,... about the profitability of Apple vs Samsung.

Samsung Electronics has not dethroned Apple, Inc. in mobile profits

What's causing this? I think it's probably that it's a new fashion to tilt to the negative side when the stock price has been falling. These reporters like to pile on... Most readers probably just stay at the headline level. 

A year from now, the tilt could very well be on the other side, that's when we should be unloading the shares.  

iPhone is going to win

I went back to China for two weeks in June. I asked everyone I met what smart phone they're using if they have one. Almost all want iPhone. Apple enjoys unsurpassed brand power in China.

This article clearly demonstrates the impression I had.

On my return, the market was hit by Bernanke concerns. First Mr Obama indicated that Mr Bernanke is no longer welcome to stay at the Fed (just bad, very bad communication); then Mr B himself made it clear that he had second thoughts about the Fed's asset purchasing program. Market went haywire.

Along went AAPL. Analyst downgrades hit the stock one after another. So we got to pick up some more shares below $400.

The rumored multi-colored budget iPhone seems to make so much sense. It'll appeal not just to users in places like China, but also to youngsters throughout the developed worlds. Every high school kid aspires to have one, what better way to entice their parents to buy them one than the colorful lower-cost iPhone?

This one thing should jack up market share for Apple.

iWatch would be another winner. It'll displace a few gadgets out there.

Larger iPhone. The new iOS 7 factor. The huge R&D budget.

New iPad, iPad mini.

New Macs, MacBook.

iTV...... the smart chips that will be getting into all sorts of places and change our lives forever.

I don't know why the stock is selling at PE below 10. Is the company not making money, and more money?

Oh, maybe I do know. It's Fidelity Contrafund, stupid!

---------------------

This is a good take. I agree.

(7/23/2013)
FQ3 earnings out: 31.2 M iPhone sold versus 26 M expected. iPhone revenue increased 15% in the quarter! The iPhone franchise is alive and well. Average price is down as the demand for 4 and 4S were high.

Remember this is a quarter without new products.

And, surprisingly, iPhone is gaining market share in June.

Is iPhone the world's defining mobile device?

Analytical and political sins of Reinhart and Rogoff

I read Reinhart and Rogoff's book "This Time is Different..." Very good piece of empirical work.

As a graduate student, I also enjoyed the now classic textbook by Obstfeld and Rogoff when it was still in manuscript form. I learned that the Keynesian ideas were alive and well even with a rigorous micro-foundation supplied to it.

But I would agree that Reinhart and Rogoff did commit an analytical sin in their 2010 paper about growth and debt, that 90% debt-to-GDP is somehow a clear marker for dramatic slower growth. It turned out there was an Excel error and an unconventional weighting scheme that caused the result.

Paul Krugman has been merciless in criticizing Reinhart and Rogoff position regarding 90% debt level, mainly because their paper had provided the wrong intellectual support for austerity policies. At times like post financial crisis of 2008, economists have the responsibility to provide sound economic advice based on sound empirical and theoretical work. When you mis-led in a critical way, you've done so much more harm than in other times. This is not the usual academic discourse, it is political with immense economic consequences.

In their latest response, it looks to me they didn't really address the analytical and political sins pointed out by Krugman many times on his blog. The way I read it, Krugman never sees it as a personal matter, it has always been about policy response to the crisis.

When you've committed a coding error like that, what should you do? They should really go back and clear up the wrong messages that have been sent by economists and politicians based on their mis-leading result. They didn't do that. So the sins remain.

Of course, Reinhart and Rogoff are not the only ones to blame for claiming that 90% debt level is the alarming threshold. Commentators and politicians bear even more responsibilities seizing on this highly debated piece of sloppy work as "proof" that austerity was the right response to the crisis.

Don't fight the Fed

Ignore the typos, get the point, and don't fight the Washington Whale.

Is it really just that simple? A lot of hedge funds aren't getting the macro picture right and losing billions? It's quite plausible.

Driven to be stupid

This is just unbelievably stupid: 

Harvard's Niall Ferguson Apologizes for Keynes Remarks.

The guy has been wrong so many times about debt, about Keynes, about austerity..., yet he is so driven by his ego that he just has to prove to the world that he is indeed very very sincerely stupid. 

Ferguson's Epic Fail.

Awesome Failure of Some Well-known Economists including Lucas, Fama, Taylor.

Why does this thing matter? Well, it's really about who you should completely ignore despite profound-sounding words and impressive credentials he may be giving you regarding macro and investment. And who you should pay close attention to.

Ignore Martin Feldstein if you can. Ignore Charles Plosser and Richard Fisher even if you cannot.

Win against the charging herd

Institutions have been selling AAPL shares like mad over the last six months. Fidelity's Contrafund is a prime example, along with many large hedge funds.

Danoff was hardly alone in trimming his Apple position. Some 870 institutional investors pared their Apple holdings in the most recent reporting period, while 419 sold off their entire positions, according to Thomson Reuters data. That compared with 254 investors initiating Apple positions and 1,185 adding to existing holdings.

The charging herd drove the shares all the way down to $385 on April 19. They always overshoot. And that's when it's a great time to average down. Looks like many smaller investors did just that. Not a bad way to win over the longer horizon than a couple of quarters.

Apple Inc., the Bank

Apple is now tapping the debt market, borrowing tens of billions of dollars, with very low yields to finance dividend payout and share repurchase.

Early chatter on the Apple (AAPL) debt offering has 3-year paper priced around 35 basis points over comparable-maturity Treasurys and 10-years priced 90-95 bps above (Microsoft priced at +70). The 3-year Treasury currently yields 0.31%. Borrowing at 0.66%, Apple can buy back shares yielding nearly 3% (with free cash flow yield far higher than that).

Capturing that yield differential and upside potential using borrowed funds with low funding costs is how banks make profits.

Additionally, with tens of millions of installed loyal users, Apple can do a lot more in electronic payments and financial services. Just like building out the retail stores, it's perhaps time for Apple to build a new kind of banking services in and out of the stores.

 

Oh, my GOLD!

On this tax day, everything seems to conspire against gold.

Panic !

But please, don't just blame it on some hedge funds. Everyday on the radio, you hear some nice sounding woman imploring the listeners to put money in gold, gold, gold, the surest asset of all assets. This has been several years in running.

It has been pure speculation on fear and explosive inflation. Perhaps this is the beginning of the end? Time will tell, just don't get near it.

Returning to greatness, leaving others competing for 2nd

Why Apple Inc like Tiger Woods will return to greatness.

(watch the video in the link)

or on YouTube

Interesting analogy between golf and high tech.

Ross Stores: honesty is appreciated

During the last conference call for Ross Stores (Rost), we had a taste of how honest the company is. When asked what went wrong in the Home segment in the fourth quarter, the CEO simply stated they've made some executional mistakes in their assortments. How often do you hear this type of frank acknowledgement of mistakes? Rarely.

See the Earnings Call Transcript.

Heather N. Balsky - Morgan Stanley, Research Division

This is actually Heather Balsky calling for Kimberly. We were just wondering how did home perform in the fourth quarter and how do you think that compares versus last year? And what are any strategies you have in place for home in 2013?

Michael Balmuth - Vice Chairman and Chief Executive Officer

Home trailed the company in the fourth quarter, and our strategies going forward are really to improve the executional mistakes we made. We've made some organizational adjustments, but we've made some executional mistakes within our assortments. So this is a year of getting back to basics in that business.

Heather N. Balsky - Morgan Stanley, Research Division

Do you have any examples of execution issues that you kind of are looking to improve?

Michael Balmuth - Vice Chairman and Chief Executive Officer

Just the assortments were substandard, and so we've adjusted those.

Both iOS and Samsung winning, how about Google?

This is an interesting interview.

AAPL upgrade cycle coming?

On the eve of Samsung's launch of iPhone 5's competing offering in NYC, AAPL is upgraded by one of its early bears, BTIG. Interesting to note that he thinks AAPL may miss its own guidance this current quarter and the next. Also this:



$174 billion revenue expected for 2013. Yet the stock is trading at multiples last seen in 2009, when the company was doing only $42 billion in revenue. For a nice summary and skeptical view, see this article.

Most important thing to remember is that most of the huge installed customer base of Apple products are happy with their experience. This interview with Apple's marketing chief is interesting.

Could this be the start of an upgrading cycle among the analysts?

(3/15/2013. One day later, after the Samsung Galaxy S4 launch, Morgan Stanley came out with a note predicting numbers bottoming.)

The "shock therapy" Sachs?

Remember the "shock therapy" advocate Jefferey Sachs, who in early 1990s prescribed rapid and systemic change to the former soviet block countries?

You would think he might advocate bold economic actions as a way to counter the severe recession of 2008?

To the contrary, he is all for the long-term, careful, structural, deficit-paranoid, piecemeal approach.

Surprising.

iWatch: inevitable innovation

A client asked about Apple stock. It is concerning as it keeps on dropping.

Many big funds are bailing out. Why? They got hurt, and they don't like their positions. They don't really have special insights as to how Apple as a business will do in the next 5-10 years. They herd on the way up and on the way down, along with wall street analysts.

Apple's cash hoard is huge. But how to return the cash to investors isn't a big issue. Apple may need it for product development, supply chain investment, or acquisitions. Increasing dividends from 2% to 4% or 6% does nothing to creating enterprise value.

Key will be product innovations. Sometimes the leader can be out-done by imitators or by new technologies. I have enough faith in the company to think that they'll stand still or lose their touch.

I don't want to speculate what's coming next, but something that would extend its iOS ecosystem will come to the market sooner or later.

iWatch appears to be very believable. Let me link to a nice article that says that iWatch fits Jonathan Ivy's definition of "inevitable innovation." From here, you start to see a closer link to the iPayment service that one day will deal away with cash and cards.

And, how about iCar?  Evidence:



However, news like these do very little for AAPL stock these days. Bad news get reflected, good news don't. This has to be the best time to buy AAPL shares and wait.

I have to agree with Barry Ritholtz on his take that Wall Street probably never understood Apple, although his use of the term "law of large number" is ridiculous. 

When and where can one buy primary growth options for free?

I used to teach an intro corporate finance course, and one of the important concepts for valuing a company is that its current value equals to the value of its assets-in-place plus the value of growth options.

The value of assets-in-place can be estimated from balance sheets and the streams of cash flows that these assets are expected to generate over the foreseeable years.

The value of growth options can be extremely high for technology companies that can break into new areas of growth. That's what gives tech companies very high earnings multiples. You normally cannot buy these growth options for free. That would be considered a financial free lunch.

Yet, if you look at AAPL today, you can't help but wondering why investors are offering you to take away the growth options for better than free.

Apple, the primary driver of mobile revolution and the maker of a series of iconic products iPod, iPhone & iPad, is now valued at an earnings multiple below 10! (Its share price came below $420 yesterday.) You can argue whether or not analysts' earning estimates are off, or if iPhone's profit margin is coming down due to the fierce competition from Google and Samsung, but you cannot be serious if you think Apple is just going to stand still, with or without Steve Jobs!

The company is doing over $120 billions a year in revenue, and making $40-50 billions in profit. More importantly, consumers love their products. I can't take my iPad away from my 4 and 8 years old kids! And they're having access to iMac and iPad in their schools on the daily basis. I have an Android phone, and my wife has an iPhone. I can tell you that I'd like to switch to iPhone next time.

The big picture is this and it's the most important for Apple investors: the world is converging to digital. We're going to be connected, more than ever, via these elegant devices wherever and whenever. These devices are not only indispensable,  they must also be friendly and a pleasure to use.

Apple is at the very center of this mega-trend. Best positioned, and has the most cash and best brain to push the mobile envelope.

If you like free options, buy AAPL.