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.
Tuesday, March 5, 2013
Friday, December 14, 2012
You think the Fed governors should know better
Three interesting headlines on CNBC today: Two inflation hawks expressing opinions and worries about inflation and inflation expectations, while a CPI report showing decreasing inflation (disinflation).
Do you think these governors know better than, say, an average college graduate? You can hardly discern any special insight from them, rather than their usual positions of worrying about potential inflation. How did they get from here (depressed economy) to there (heightened inflation risk)?
Do you think these governors know better than, say, an average college graduate? You can hardly discern any special insight from them, rather than their usual positions of worrying about potential inflation. How did they get from here (depressed economy) to there (heightened inflation risk)?
Wednesday, December 5, 2012
Recent trends
Today's US ISM non-manufacturing index for November came in at 54.7%, slightly better than expected and indicates a continuing and steady expansion of the main US economy since the 2008 crisis. Employment sub index went down to 50.3%, a 4.6 points decrease from last month, possibly reflecting the Sandy effect and the holdup due to the "fiscal cliff" (or "deficit reduction cliff") worry.
Compare this to the US ISM manufacturing index released a few days ago, there is an important contrast. Manufacturing had been leading the US out of recession until recently. Last month the manufacturing index dipped below 50 (contraction) at 49.5%, the lowest in 3 years. It is hammered by the weakness in Euro zone and Asia.
US domestic recovery, powered by consumer spending, however, has an underlying strength. Auto sales, retail sales, housing constructions have been relatively strong in recent months. Consumer credit has expanded, especially in auto loans. Home prices have started to increase YoY, which is expected to continue given the demographic trend and the Fed's easing stand.
While consumers are spending and relatively optimistic, businesses have become very cautious by piling up cash and holding off hiring. Resolution of the "fiscal cliff" issue could probably help bring these divergence back into a better balance.
Overseas, it is possible that China's new leadership could deepen economic reforms and provide a moderate stimulus to help shore up its growth. Continue to grow above 7% is crucial for China.
Even Europe could see more stability going into 2013. Both Italian and Spanish yields have come down substantially in recent months. ECB has been a tremendous force in stabilizing the financial sectors. The real economy however will continue to drag.
Given these major trends, there is a real opportunity for the equity market in 2013. Buy in dips.
Compare this to the US ISM manufacturing index released a few days ago, there is an important contrast. Manufacturing had been leading the US out of recession until recently. Last month the manufacturing index dipped below 50 (contraction) at 49.5%, the lowest in 3 years. It is hammered by the weakness in Euro zone and Asia.
US domestic recovery, powered by consumer spending, however, has an underlying strength. Auto sales, retail sales, housing constructions have been relatively strong in recent months. Consumer credit has expanded, especially in auto loans. Home prices have started to increase YoY, which is expected to continue given the demographic trend and the Fed's easing stand.
While consumers are spending and relatively optimistic, businesses have become very cautious by piling up cash and holding off hiring. Resolution of the "fiscal cliff" issue could probably help bring these divergence back into a better balance.
Overseas, it is possible that China's new leadership could deepen economic reforms and provide a moderate stimulus to help shore up its growth. Continue to grow above 7% is crucial for China.
Even Europe could see more stability going into 2013. Both Italian and Spanish yields have come down substantially in recent months. ECB has been a tremendous force in stabilizing the financial sectors. The real economy however will continue to drag.
Given these major trends, there is a real opportunity for the equity market in 2013. Buy in dips.
Monday, December 3, 2012
Republican tantrum next two years? It has already started
Paul Krugman is predicting that we're going to see a lot of temper tantrums from the Republicans over the next two years.
Well, it has already started with the clowns at CNBC: Santelli's Rage.
Every time I hear discussions between the perfectly reasonable Steve Leisman and this shouting madman Rick Santelli who seems to always have the backing of another clown Joe Kernan, I feel really sorry for Mr.Leisman. Why does he have to work there!
Well, it has already started with the clowns at CNBC: Santelli's Rage.
Every time I hear discussions between the perfectly reasonable Steve Leisman and this shouting madman Rick Santelli who seems to always have the backing of another clown Joe Kernan, I feel really sorry for Mr.Leisman. Why does he have to work there!
Monday, October 1, 2012
Why Wall Street should root for Mr.Obama
Intrade is giving 76% chance for an Obama win in November. Is this consistent with market being up double digit so far this year?
Probably yes. A big reason for Wall Street to root for Mr.Obama is none other than Dr.Ben Bernanke. A Romney win will create a big uncertainty for the central bank leadership, which is the only power supporting the economic recovery and corporate profits.
Housing is potentially a substantial driver for economic growth and employment growth for the next few years. That's another reason you don't want any more uncertainty around Fed leadership.
The single biggest drag on the economy in this post-crisis recovery has been the state and local government retrenchment. The government sector will unlikely be a growth driver under either Republican or Democrat administration, but at least it will cease to be drag with an Obama win.
Republican politicians and policy makers love to talk about uncertainties created by regulations. Look, businesses are supposed to deal with uncertainties. Nobody should expect to operate under certainty. That said, they often ignore the kind of important uncertainties that could be inflicted on the economy should the Republican arguments largely based on ideology prevail: the uncertainty to the Fed, the uncertainty to mortgage interest deduction, the uncertainty of further straining state and local governments, and the prospect of more unfunded wars...
The fiscal uncertainty that was on full display last year with the debt-ceiling debacle was undoubtedly fueled by the right wing in the House, which even their Speaker was unable to control. Why would Wall Street want more of it in Mr.Paul Ryan!
If you're a logical person who doesn't always see things through a partisan glass, you can't really make sense out of Mr.Mitt Romney. He is just full of self-contradictions. At a time when the globe is looking to the U.S. for some leadership, why would you want this person who seems to have a gift in insulting people in the White House?
I'm an independent, ready to bet on what the market is telling us to bet on: Mr.O.
Probably yes. A big reason for Wall Street to root for Mr.Obama is none other than Dr.Ben Bernanke. A Romney win will create a big uncertainty for the central bank leadership, which is the only power supporting the economic recovery and corporate profits.
Housing is potentially a substantial driver for economic growth and employment growth for the next few years. That's another reason you don't want any more uncertainty around Fed leadership.
The single biggest drag on the economy in this post-crisis recovery has been the state and local government retrenchment. The government sector will unlikely be a growth driver under either Republican or Democrat administration, but at least it will cease to be drag with an Obama win.
Republican politicians and policy makers love to talk about uncertainties created by regulations. Look, businesses are supposed to deal with uncertainties. Nobody should expect to operate under certainty. That said, they often ignore the kind of important uncertainties that could be inflicted on the economy should the Republican arguments largely based on ideology prevail: the uncertainty to the Fed, the uncertainty to mortgage interest deduction, the uncertainty of further straining state and local governments, and the prospect of more unfunded wars...
The fiscal uncertainty that was on full display last year with the debt-ceiling debacle was undoubtedly fueled by the right wing in the House, which even their Speaker was unable to control. Why would Wall Street want more of it in Mr.Paul Ryan!
If you're a logical person who doesn't always see things through a partisan glass, you can't really make sense out of Mr.Mitt Romney. He is just full of self-contradictions. At a time when the globe is looking to the U.S. for some leadership, why would you want this person who seems to have a gift in insulting people in the White House?
I'm an independent, ready to bet on what the market is telling us to bet on: Mr.O.
Tuesday, August 14, 2012
QE3 not about interest rate
One popular argument against more QE is that the interest rate is already so low, there is little to be gained by QE3.
If there is QE3, interest rate is not the thing. In fact, just like the immediate aftermath of QE2, long-term interest rates may actually rise!
European debt crisis has done a remarkable job of lowering the US interest rates for the Fed. This is part of the economic reality that we're in a global liquidity trap.
The main channels for QE3 are something else: raise risky asset prices and depreciate US dollar.
Too much money is parked with treasuries, not enough risk taking. Wealth-based consumption is now the most effective means to spur aggregate spending, given the spending power of the luxury consumers (~70% of retails), and given slow income growth for workers. You'd better hope that the luxury group continues to spend, to help create jobs, because the other groups are all de-leveraging and trading down.
Foreign consumption and US export are another promising channel that QE3 can tap into. Indeed, export has been a striking contributor to the little growth that there is in this anemic recovery. We need more of that.
Adequate amount of QE3 can be very effective because of these two channels, while at the same time it may do little to lower the interest rates.
The goal of QE1 was providing liquidity, and that of QE2 was to comeback deflationary risk. The goal of QE3 should be what it ought to be: lowering the unemployment rate.
There won't be diminishing returns, which is a myth that commentators like to talk about. QE1 was far greater than QE2 and most effective. There is no clean way to measure the returns of QE. The Fed should do whatever necessary to get us out of this depressing economy. If not, we all lose, except for a small group of power-hungry individuals.
Housing market is bottoming. The housing recovery is at best sluggish given the high unemployment and tight credit. This is a crucial area where QE3 can help by purchasing mortgage-backed securities, and by increasing asset values in general. Lending can only increase in force when there is a sustained value increase in homes.
The real job creators are small businesses, whose sentiments are highly correlated with the stock market. So, even though the Fed cannot say it in public, it should try to pump up the stock market given the circumstances. It should do so by chasing the like of Pimco and Blackrock out of the treasuries and into equities.
If there is QE3, interest rate is not the thing. In fact, just like the immediate aftermath of QE2, long-term interest rates may actually rise!
European debt crisis has done a remarkable job of lowering the US interest rates for the Fed. This is part of the economic reality that we're in a global liquidity trap.
The main channels for QE3 are something else: raise risky asset prices and depreciate US dollar.
Too much money is parked with treasuries, not enough risk taking. Wealth-based consumption is now the most effective means to spur aggregate spending, given the spending power of the luxury consumers (~70% of retails), and given slow income growth for workers. You'd better hope that the luxury group continues to spend, to help create jobs, because the other groups are all de-leveraging and trading down.
Foreign consumption and US export are another promising channel that QE3 can tap into. Indeed, export has been a striking contributor to the little growth that there is in this anemic recovery. We need more of that.
Adequate amount of QE3 can be very effective because of these two channels, while at the same time it may do little to lower the interest rates.
The goal of QE1 was providing liquidity, and that of QE2 was to comeback deflationary risk. The goal of QE3 should be what it ought to be: lowering the unemployment rate.
There won't be diminishing returns, which is a myth that commentators like to talk about. QE1 was far greater than QE2 and most effective. There is no clean way to measure the returns of QE. The Fed should do whatever necessary to get us out of this depressing economy. If not, we all lose, except for a small group of power-hungry individuals.
Housing market is bottoming. The housing recovery is at best sluggish given the high unemployment and tight credit. This is a crucial area where QE3 can help by purchasing mortgage-backed securities, and by increasing asset values in general. Lending can only increase in force when there is a sustained value increase in homes.
The real job creators are small businesses, whose sentiments are highly correlated with the stock market. So, even though the Fed cannot say it in public, it should try to pump up the stock market given the circumstances. It should do so by chasing the like of Pimco and Blackrock out of the treasuries and into equities.
Wednesday, July 4, 2012
Light of Hope?
Happy 4th of July!
So Europe is turning against austerity. Merkel is alone. Big question is still where the growth is going to come from? German consumers?
China's growth has slowed and policy is at the beginning of an easing cycle.
US is easing further, given the slow down in data? Quite possibly.
So for once in a long while, we can hope for an implicitly coordinated pro-growth policy actions among the major actors of the world economies...
So Europe is turning against austerity. Merkel is alone. Big question is still where the growth is going to come from? German consumers?
China's growth has slowed and policy is at the beginning of an easing cycle.
US is easing further, given the slow down in data? Quite possibly.
So for once in a long while, we can hope for an implicitly coordinated pro-growth policy actions among the major actors of the world economies...
Subscribe to:
Posts (Atom)