An Apple Without its' Core

I am sure all of you know at this point that Steve Jobs has taken an indefinite leave of absence from the Cupertino based Apple.  He is revered by many as one of the great chief executives of all time with his tangible charisma and mind-numbing control over the perfection of each Apple product.  So, where does the second-largest company head from here?

Nearly ever Wall Street analyst continues to deem this stock a buy, leaving the minority with hold ratings.  Almost all 1-year price targets are above $400 a share, giving the low end a 17% gain.  How can this be?  When Jobs announced his intentions to step away for an unspecified amount of time, the stock hiccuped a few dollars in the morning, only to rally back to its $340 price the following day.  Over the last year it has gained over 67%.  Their most recent earnings report shattered expectations with outstanding iPad and iPhone sales.  Adding Verizon as an iPhone provider will definitely give the iPhone a boost in market share on the gaining Android system.  Apple also has mountains of cash growing year over year, only to challenge Everest in size.  That's the backdrop.

Many believe that Apple will be on autopilot for the short-term and roll out the products they have lined up for the next several quarters.  Outside of these products that have essentially all but been released, where will Tim Cook, the interim man in charge, steer this ship next.  I find it hard to imagine Cook having the vision and drive of Jobs who stampeded his way, revolutionizing the mobile phone market.  This is the area of concern, a year down the road.  I would not argue against the purchase of Apple in the short-term, but for a long-term hold I think there are more questions than answers.  You probably are an owner of Apple already, and not just a few dollars.  Some of your money is undoubtedly in mutual funds and there are thousands of mutual funds with their money in Apple, and a large percentage of that money in Apple.

So, beware that most of you already own the stock in some way or another, those looking to diversify might seek other opportunities.  I am not going to stand against the known world and recommend not buying it, I would recommend the purchase of it now with profit-taking over the next year before we really see the new face of this juggernaut.

Update: bearish bets (puts) on Apple have dropped to the lowest level in over a year.  Another positive sign for the near term.

Don't be a Turkey this Thanksgiving

Don't get your feathers ruffled with the headline news surrounding the markets.  I think that this is a very strong market to be long right now.  As told from Warren Buffet's 13F filing with the SEC, he is a supporter of QE2 and a bull on the market.  His outstanding reputation might only be surpassed by his exceptional long-term  investing record.  To put it bluntly, if he is running with the bulls in Pamplona, you bet I am there hopefully a few strides ahead of the next guy.

The 30-day correlation coefficient between the 10-year Treasury yields and the S&P hit -.42.  Stocks and bonds are not moving together anymore after reaching a high .89 in June.  This is a major sign that investors are valuing companies based on their earnings and profit projections rather than the overall economy that has been scaring investors for the past couple of years.  From the beginning of the third quarter to the end of the next year's third quarter of a President's third year in office, the Dow has averaged 15.5% since 1896.  With the correlation coefficient so low, stock's performance reliant on earnings reports and financial results, and analysts forecasting 87% of S&P companies are going to have higher earnings next year, the market looks strong.

And for a Thanksgiving Week sendoff, a few statistics for the week historically:
59% of Thanksgiving weeks have the Dow higher
The Dow has fallen 3 of the last 4 Thanksgiving weeks
The Dow averages .59% gain

Enjoy the holiday and as always *preserve your capital*!

Buy the rumor, Sell the news

This is an old saying that we constantly heard during earnings season, leading up to QE2.  It is known as one of the old wives tales of investing.  A fairly simple concept, but with many different analysts expressing their different opinions, it turned out to be a confusing idea to some.

Basically, the saying suggests that the rumors leading up to some sort of announcement fall short of the high expectations of the rumors the majority of the time.  Much more of a concern to short-term investors than the long-term because of the quick swings of short-term reactions.  When Apple was scheduled to release their earnings, you begin to hear thousands of possibilities of what their earnings are going to turn out to be.  This anticipation has wild ranges and the stock price surged upward, crossing $300 a share for the first time, pricing the exceptional expectations into the stock price.  Then, when the news is announced, and it doesn't meet the high expectations, the stock price drops.  So, a profit seeking venture would have the short-term investor buying the rumors and selling when the news is finally released.  In the case of Apple, hopefully that investor got back in as now Apple is flirting with $320 like it's the hottest girl in town.

TIPS selling for negative yield first time ever

First things first, TIPS are Treasury Inflation Protected Securities.  The purpose for the creation of TIPS is to protect investors from the negative effects of inflation.  TIPS are able to achieve this by having a fixed interest rate, usually very low (in the case of the most recent auction, just .5%), and adding an indexing factor based on the CPI (Consumer Price Index).  The indexing is accomplished through an adjustment to the principal value based on the CPI.  So, while the interest rate remains fixed, the semiannual coupon payment is adjusting for the effects of inflation by an increase in the principal amount.  For example, if a TIPS bond is issued at par for $1,000 at a 2% annual rate, and inflation is 1% over the first 6 months, the inflation-adjusted principal would be ($1,000 * 1.01) $1,010.  The investor would receive a coupon payment of ($1,010 * (2% / 2 payments per year)) $10.10.  This differs from the $10 the investor would have received without the inflation adjustment to the principal.  Inflation is constantly adding to the principal and that final amount is repaid at maturity along with the last coupon payment.

In the case of the most recent TIPS auction, investors purchased the TIPS with a rate of .5% at a premium, $105.50 for a $100 face value bond.  Over the life of these bonds, the .5% rate alone, without the inflation adjustment to the principal would result in the -.55% yield due of the premium over face value.  With very moderate inflation around 1.5% every year for the life of the bond, investors who purchased these TIPS would break even.  Inflation has historically averaged 3% since 1926 and 1.1% the last 12 months.  So, if inflation heads towards the 3% historical rate, past the 1.5% break even, these investors will be returning money on their investment, most likely at a better rate than the near zero money market rates.

After an extended period of the Fed keeping short-term interest rates bordering zero to spur the economy and wage war on deflation, it seems as though inflation is starting to be priced into the market.  This is with anticipation of more quantitative easing measures by the Fed to purchase securities in the open market with newly printed money.  If the old truth holds that bond investors are a step ahead of equity investors, prepare for inflation and quit worrying about deflation.

I hope that settles some requests about the understanding of this negative yield TIPS auction.  Please continue providing feedback and requests and always *preserve your capital*!

Frontier, Emerging Markets

One of the most profitable opportunities out there in my eyes right now is an investment in frontier or emerging markets.  Frontier markets are economies that have yet to develop into what are known as emerging markets.  Once they become emerging markets, their next step is to join the U.S. as a developed market.  You can probably deduce by now that the frontier market is riskier than the emerging market and so on.  As with any investment, these risks require greater return. But, I believe there is return in excess of the compensation for the risk borne. 

I believe that investors are still sleeping on these opportunities out of naivety and fear.  The International Monetary Fund expects emerging and frontier markets to grow at nearly 3 times the average rate of developed markets.  Goldman Sachs strategists predict that emerging market total market capitalization will skyrocket from $14 trillion to $80 trillion in the next 20 years.  They have outstanding consumer growth led by rapidly expanding middle and lower-middle classes.  Some argue that these higher growth rates combined with healthier demographics provide a safer investment than in developed economies.  What did we keep hearing about during the recession?  How this company and that company were cutting costs, becoming leaner, more efficient.  Did that not happen in less developed economies also?  I think it probably happened to a larger extent because they were more strapped for cash.  Now with more growth and even leaner companies, it sounds like a recipe for a risk-adjusted excess return on your investment.  

There are a number of fundamental risks with frontier and emerging market investments.  Inherent in every investment is economic risk, which is more exaggerated in less developed economies. You need to also be aware of sovereign and liquidity risk with these markets.  However, the nature of ETFs enables you to shed much of the liquidity risk through a higher volume of trading and the sovereign risk with diversification.  Here are some ETFs that track frontier markets: FRN, MES, AFK, PMNA.  And emerging markets: EEM, VWO.  Take a look at those and see which markets and sectors you want to get exposure to.  

Enjoy and always *preserve your capital*!