Apple, no more blockbuster products

Posted by Ray on October 20, 2010 under Main | Be the First to Comment

Apple has been the alpha position to own in this market with virtually all mutual and hedge funds holding shares. It is not surprising since the company is on a roll with products and has great earnings, although I think the stock is way too expensive. I also seem to recall the last time all the ‘smart money’ was piled into just a few holdings like MSFT, INTC, and Pets.com (joking of course, but you get the point). That did not end well and I assume the same thing will eventually happen to Apple.

The iPod and iPhone took the world by storm, but the iPad seems less exciting for some reason and the Mac is just holding its own. Since the iPhone 4 there has not been anything else that the company has produced that seems exciting. The way the iPad quickly came to market it seemed like the company felt like it was forced to put the product out, it is just a huge iPhone. What has the company done to follow up on those blockbuster products? Not much. A new iPod Touch and now a new operating system for the Mac, hardly anything to get people really excited.

Without a new wonder toy I do not believe the company will be able to maintain its earnings growth momentum. Even if Apple launches the iPhone with Verizon it will surely be good in the short-term, for both companies, but I think you will just see more switching from AT&T to Verizon with people keeping their same iPhones that they got from AT&T, why spend more money since you just upgraded. Most iPhone customers have said that they would drop AT&T if Verizon or any other carrier offered the iPhone, which is why Verizon will get more subscribers, but the sales of new phones may be slower than most think.

Yes, I know new phones will sell, a lot of them at first, but, frankly, if people haven’t switched from Verizon to AT&T by now I highly doubt you will see the same success at Verizon. Not only that, but Verizon has sold, to happy customers, many Droid phones which means the iPhone does have competition on the shelf. So far it appears that the Droid type phones are gaining market share as well which probably explains why Apple inked the deal with Verizon.

In short, I think the iPhone at Verizon will be good for Verizon shareholders, but why would iPhone sales increase past a couple of quarters after the Verizon deal is done. The rush will be right away and then it will die down and people like me will not buy an iPhone because we actually like being able to talk on the phone. Verizon is the big winner out of all of this, I own shares in Verizon, and Apple, in my opinion, is simply trying to capture as much near-term success as possible since they have no new killer product to announce.

Of course, Apple does have China to sell its products to, but I think we may be surprised to see that the Chinese might not be as head over heels for Apple products as the yuppies and guppies are here in the states. Everyone has enormous price targets on Apple as well and any miss will be very painful for shareholders. I am also of the belief that when everyone agrees on something it is bound to do the opposite. The valuation of Apple is high and so is the beta, market weighting and its market cap, unless you believe Apple is more valuable than, say, IBM, I do not believe Apple is worth more than IBM, sorry.

I am well aware that being negative on Apple is just plain wrong and that people will undoubtedly flame me to death with their comments. However, that does not change the fact that the company is overvalued, doesn’t pay a dividend, has nothing Earth shattering in the pipeline and is doing what with its cash right now? Nothing. I do not subscribe to forward P/E multiples either so by all current metrics I wouldn’t touch it. Instead I would play Verizon instead and look for other companies that aren’t trading at crazy multiples, like Amazon or Salesforce.com… oh, wait, never mind.

Stick to income at a reasonable price like Verizon, BPT (BP Prudhoe Bay Trust) or commodities, specifically silver, and other soft commodities, it is too late for rare Earths. Yield plus inflation protection makes great sense right now, Apple just doesn’t.

You heard it here first

Posted by Ray on under Main | Be the First to Comment

John Carney at CNBC just put up a piece http://www.cnbc.com/id/39754650 which states: “This is a serious threat to financial stability. There’s no way Tim and Ben let this play out,” a senior banker told me, referring to Treasury Secretary Tim Geithner and Federal Reserve chair Ben Bernanke.

In short, Wall Street is betting that the bureaucrats will bail them out again.

I said this yesterday and these executives are right, banks will get bailed out again probably through QE. It is wrong and these banks have earned the right to fail, but the problem is that politicians do not have the will to help them this time. However, the Fed, which is proving itself so independent nowadays, will bail them out. As Zero Hedge reported PIMCO levered up on MBS and they know something, like $500B in QE coming directly to the MBS market, rumor has it. Again, QE will do nothing and while $500B is in the cards for MBS there is no word yet what the Fed will do with long dated treasuries… but they will buy them.

Let me be clear, No more bailouts…

Posted by Ray on October 19, 2010 under Main | Be the First to Comment

The President, Nancy Pelosi, Harry Reid and only God knows how many politicians have all said that the Fin Reg bill ends all taxpayer assisted bailouts for Wall Street. Well, the news lately will put that phrase to the test. To think that all of these foreclosures are not an issue was crazy to begin with, but throw in a little foreclosure fraud and overnight you get a $47B putback from BlackRock and the Fed… go figure.

I believe the putback situation we saw yesterday was merely the beginning and there are many more tens, if not hundreds, of billions of dollars to follow. The banking system cannot handle that type of volume, remember in 2008 it was MBS and derivatives of MBS securities that caused our little problem. There is no easy remedy for this problem, regardless of what JPM or BoA says, since we are talking basic contract law here. Now, Congress did try to sneak through a bill that would have solved the industries problem, H.R. 3808 which would make courts accept all sorts of junk affidavits, but Obama ‘pocket’ vetoed the bill. Do not think that bill went away because it can come back and probably will under a new name, but it will fail in the courts, in my opinion, remember Obama said Congress needed to fix some issues with the bill, a telling statement on his opinion.

Not only does he want Congress to merely make some cosmetic changes to it, but Obama also said that this is just a “minor paperwork snafu.” Oh, how I wish that were true, but it is not a minor snafu. I do not support homeowners who took on irresponsible loans, I have long said they should lose their homes, but I dislike actual fraud even more than irresponsible borrowers. Let’s also not forget that these same lenders often did not verify the borrower’s income either which makes this whole problem a bit ironic as lenders cut corners to give the loan and now they cut corners to foreclose on the collateral. There is a remedy to all of this, as written on Zero Hedge previously, which is a borrower accepts a loan modification which clears the title, guess how successful the HAMP will be now.

If Congress doesn’t create a fix, which they should not, banks will lose foreclosure proceedings to those defendants who decide to fight it. I do not believe anyone really knows how big this problem really is and, frankly, I would not trust anyone who attaches a number to it. After all, these will be the same people who said sub-prime loans were a nonissue a few years ago, the missed that one by a mile, obviously, so they will miss this one as well. Not to mention that this issue will once again be a global issue. Who knows how many of these bonds are sitting on the balance sheet of banks all around the world. Hell, we do not even know what outstanding derivatives are still in play with this paper.

To assume that this will pass with no real material issue to the banks is idiotic. The risk is real and the system is still very, very weak. Perhaps now we know why bank reserves are still so high, did they know this might be an issue? Probably as we know banks do not like to fess up to mistakes until, well, the global financial system is about to implode. The credibility of banks and government has probably never been so low in all of history and that is a problem especially if they need help again. I fully believe another bailout will be needed over this and that means the issues of 2008 will return in 2010 with a vengeance.

Remember, in 2008 it was really the CDO’s and CDS’s on tranches of MBS products that were the problem. We all remember senior and junior tranches that were in the headlines, but back then at least you could get the collateral back to try and sell, albeit at a much lower price. Today if these things are still blowing up and you cannot even get the collateral back that would be a total loss for the investor or bank if it got putback to them. See the problem now? It is just not the banks that have this problem, but the GSE’s as well who may be guaranteeing a lot of this junk now. The GSE’s have $5T in outstanding mortgage guarantees and some say that mortgages as far back as the late 1990’s might not have proper chain of title.

The math is enormous and this should scare people to death. Perhaps it will all go away. Perhaps judges will ignore the 200 year precedents of contract law, they did it with the auto makers, so why not now. However, if this doesn’t go away we are definitely in for a rerun of 2008 again on a much larger scale since even the government is reaching the end of their credit line. Maybe QE2 will buy these securities and that is how the problem will disappear, but if nothing is done the entire mortgage market and perhaps some well known banks are done… again, unless all our politicians lied to us.

Houston, you aren’t being told about a problem

Posted by Ray on October 18, 2010 under Main | Be the First to Comment

I admit I have been delinquent on checking out the Euribor rates lately since the Federal Reserve has me scared to death about QE2, more on that later, but I do not think it will be what you believe it will be in November. However, the Euribor went ballistic thanks to the ‘perfectly safe’ Irish banks began to show that the ‘stress test’ were pure bull. How can a bank pass a stress test a couple of months ago and then do insolvent, basically? That doesn’t happen in a normal world and it proves that the ECB totally flubbed the stress test.

The fraud that the stress tests were showing up in the inter banking lending rates which went from benign to cancerous in a heartbeat.  While the Euribor first continued to climb after the stress tests it did level out later in the summer, but now it went vertical and it probably is not looking back. Considering that European banks are still holding only God knows how much US MBS’s, which our current foreclosure fraud situation may render those MBS’s worthless over time, along with how much Greek, Portugal, Italian and Spanish debt and you got serious problems. The media is not going to touch this, but the bank lending markets talks about it only if you look at them.

The 3 month Euribor rate was below .90% until a week ago when it jumped to about 1%, .993% as I write this, which isn’t much until you consider we are in a zero interest rate policy (ZIRP). Actually, we are in a negative interest rate policy right now if you count all the QE going on. When you factor that in it kind of brings to light that something is wrong in Europe, still. US treasuries for 3 months are yielding about .14% so clearly European banks are pricing in a risk premium. The question is, what is the risk premium for? Clearly default is part of it and I think you will see more issues with banks very soon.

It is impossible to have bank holdings that consist of sovereign debt that is in trouble plus MBS holdings and not have any problems. There certainly will be more insolvency issues, but even if a bank is not insolvent their balance sheets will be impaired further. It is a mess and the real problem is that it is just not European banks, but US banks as well. While US banks do not hold a lot of sovereign debt, they do own tons of MBS holdings, unless the Fed buys them from the banks, which foreclosuregate, I hate these names we have now, will make many of these securities worthless or at the very least impair them well below par.

I do not know what is going to happen, but I am convinced that the serious problems that many thought were behind us never really went away. All we ended up having done was the government and the Fed paper over the problems. This went on all over the world with the ECB following suit as well. The Eurubor is telling us something, are many listening? Nope. Stocks are moving higher on some idiotic belief that inflating our way out of this mess will work, it might in nominal terms, but not in real terms. Phony stress tests clearly are not the answer as the fraud gets uncovered when banks that passed suddenly need a bailout. How central banks and governments have any credibility is simply beyond me. When a fraud is uncovered people usually talk about it, but the news on some financial channels is mute on the issue. When lending costs climb rapidly it usually makes news, did you hear about it? Nope. It is all just one big farce out there. I personally believe that the only safe haven seems to be commodities and I believe stocks are not as safe as people believe.