Are we at the end of the line?

Posted by Ray on March 16, 2011 under Main | Be the First to Comment

I rarely wear my beliefs on my sleeve and I do not mean to start doing so now, but I have been doing a lot of thinking and praying for the people in Japan. The images we are seeing and the reports we are bombarded with are horrifying to say the least. It also proves that we are all interconnected and what happens abroad does indeed impact us here in the US, even earthquakes and tsunamis. I hope that all who read this will take a minute to at least think a few kind thoughts of well being for the people if not outright say a prayer, donations to the Red Cross would not hurt either.

With all that said it is shameful for many of the pundits to hop in the TV and talk about how good this tragedy is for the Japanese economy. It is not a good thing and it will not bring prosperity to anyone let alone to the US. First and foremost, Japan likes to keep its business local so I can assure you Caterpillar will not win out on contracts versus its local competitors. Over and above that this horrible event will create a huge drag on global GDP as the number 3 player is out of the game and who knows how the nuclear situation will turn out. That means Apple should have saved its $200 on its press release announcing its plans on postponing the launch of the iPad 2 in Japan since everyone knew that already and, frankly, who really cares about the iPad launch in Japan when the locals are being exposed to radiation.

With the number 3 player out of the game the economy in the US, China and the world will slow, I am sure of this. It also means QE 3 is a given and the next one will be a fairly sizable easing program. I am so sure about more QE because the Japanese will have to sell treasuries at some point to cover the rebuilding effort. Their central bank have added an astounding 55 trillion Yen, $700B USD, of extra liquidity, but not even the Japanese can print their way out of this thing. They will have to sell and there is no one to pick up the slack for US treasuries right now, to the level of selling that will come. On top of that I believe Japan selling may be the trigger for China to unload some holdings as well, we will see about that. The Fed is the only one around to pick up the slack and give the US Treasury interest free loans, since earnings must be repaid to the treasury department.

Even before this tragedy I was perplexed about the Fed’s QE 2 program. It was not needed, in my opinion, as rates were low already and capital was flowing again. The only reason I could see QE 2 being needed for was to prop up the stock market and by Bernanke’s own admission that is what it did since bond yields have only gone north since the start of the program, the opposite of what Ben wanted to happen. Besides the markets needing a boost the only other reason I could think of for this type of easing program was that the end of the line was here. What I mean is that the Fed may have known that the market was going to want higher interest rates from the US since we have piled on the debt in the last few years.

Basic mathematics tells you that the US cannot handle higher debt servicing costs which is why the treasury rolled out over 50% of our debt to mature in less than 7 years. On top of that every 1% increase in debt servicing costs adds about $120B a year to the budget which is also known as the debt death spiral. However, with QE 2 the Fed can jump in and buy up this higher yielding paper and kick back 95% of the interest back to the treasury department, almost an interest free loan, which explains why the Fed is monetizing, sorry, buying just issued higher yielding paper. This signals to me that the US government may have reached a breaking point in its debt load.

I am not saying the US cannot issue more debt, not at all, what I am saying is people will want higher rates to hold the paper. No one believes that there is no inflation out there and the only time we see any interest is when things really hit the fan like right now. Think back a couple of weeks ago when the Middle East was revolting treasuries sis nothing and the dollar sank. Compare that to now treasuries are going up but only on the short end of the curve and the dollar, what you really should be watching, is not doing well at all. It is very odd because as treasuries rally the dollar should be seeing some decent strength and here we are sitting below 77 on the DXY still.

This all signals trouble to me as we have seen many revolutions combined with a major economy stopped due to a tragedy and the only thing going up is the short end of the treasury curve. The dollar is not the safe haven it once was and I am not sure what is anymore. I believe gold and silver offer a better alternative than the dollar at this point, but there is volatility there as well. At the end of the day though, precious metals are still the place I would rather be as I see no end in sight for easing and I see higher inflation. I believe this is the end of the line and the Fed has no choice but to monetize more debt. The sad thing about all this is that rates will continue to climb anyhow because it is just too risky to loan money to the US government at this stage of the game.

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.

If you just got worried…

Posted by Ray on July 21, 2010 under Main | Be the First to Comment

If you are just getting worried now about the economy over what Ben Bernanke said about the economy in today’s testimony I have to ask, where have you been? Did you not read the Fed minutes when they came out? Have you not read any of the economic indicators that have been showing we are heading for a slowdown? How about IBM’s cautious warning or other firms who are being cautious about the immediate future?

My point is simple, the data is fairly clear, a slowdown is coming, period. Double dip? Probably, but we will not know for some time now. However, it is likely we are facing severe challenges moving forward and Ben is scared, he is out of ammo and he knows it. Everyone is speculating and asking what he is going to do to spur the economy ‘if’ it weakens which is an absurd question because it is weakening and what is Ben doing? Nothing, why? Because he can’t.

Sure, he can stop paying interest on bank reserves, but banks will not lend because they are impaired still, he admitted that today. Plus, banks will just turn around and buy treasuries because lending is just too risky right now which is why banks are not lending, on top of their balance sheets being loaded with debts marked to make believe. Everyone also believes quantitative easing is on the way, but it is not. I have said this many times before and will say it again, QE accomplished its goal, lowered mortgage rates, treasury rates and the dollar. I ask, what direction are mortgage rates, treasuries and the dollar headed? We are out of the “liquidity” crisis part of our issues and are into the nobody wants to buy anything part of the problem, QE will not solve that problem.

Earnings season is a dud, period. I know, Apple, Apple, big deal they have the hottest products out right now and you expected them to fail or something? The question you have to ask yourself id this, what can Apple do next? They clearly had to push the iPhone 4 out and the iPad is something they really did not want to do, they were forced into it because they were told to by the geek squads. What product do they have next up their sleeve? Nothing so you better hope a whole lot of people want to keep buying an iPhone that doesn’t really work as the title implies. Outside of Apple we had a couple of other standouts in the earnings department, but more misses than anyone wants to admit. There were lots of revenue misses which means cost cutting worked, but poor sales are still poor sales. The Fed cannot stop that people.

If you were not nervous before you should be nervous now, but I have no idea why you were not nervous before. All the speeches or all the rigged stress tests in the world will not change the facts, the economy on a global scale, is slowing down. Even China says that Europe’s problems are creating big problems, like I forecasted previously, for their exports. How much do you want to bet that the Yuan strengthens further? I do not believe China is slowing down as much on purpose as much as China is just slowing down, but time will tell there. The real question is, if China does slow significantly more than forecasted what happens to the rest of the world? Answer, it isn’t good.

Retail Sales, Better than They Appear?

Posted by Ray on June 13, 2010 under Main | Be the First to Comment

The pundits came out to spin retail sales numbers as being not as bad as they looked, etc. However, they are actually worse than they appear when we take a step back and look at the big picture at what has changed over the past couple of years. It is interesting that anyone is trying to spin the retail figures as anything other than horrible, but I guess when you are long only mutual funds you know where your bread is buttered and it is not in showing how bad the data really is.

CNBC, the ultimate spin machine, they should change their name to Spin Co., liked to point out that electronic sales were up as well as furniture sales. Well, how about that 2 areas that went up out of how many? We won’t mention that, but the negative list is much longer. Here is what is important to note, electronics went up because prices keep dropping, check your email for discounts from Dell and Best Buy, but the real story is the iPad. What would happen if we subtract iPad sales out of the mix? I am willing to bet electronic sales look less rosy than the headline figure and the point is, how long will the iPad continue to sell so well? Who knows, but probably for a while. As far as furniture sales, well, you got me other than I am sure the sales were rich and prices are still dropping.

The real story, what even I forgot to think about when the figures were released, is the fact that there is much less competition than a year or so ago. Best Buy used to compete against Circuit City and Comp USA, granted they were smaller players, but still they are facing less competition than they once did. How about all the mom and pop stores that are gone? There are far less companies vying to all this business out there and the players that are left have zero pricing power which is downright scary in my opinion. On top of all of this many of the large stores closed down their less profitable stores as well so we had consolidation from a competitive point of view and consolidation from corporate point of view and sales are declining.

While this is not good news for the bulls, there is no way to really spin this, it is really bad news for the economy as consumer spending is such a large part of our GDP. However, I do see some positive things happening, people are spending less on junk they simply do not need. Let’s face it, the iPad may be cool, but does one really need one? This means that the less people spend on all of this junk, hopefully, the more they will save. While this makes many of your cringe, this is a very good thing. As a country we need to save more and spend less which is counterintuitive to most people, but with a higher savings rate we might be able to start fixing some of our fundamental problems in our country, like GDP being some 70% of GDP. Basically, we need to save more, produce more and spend less.

As far as the other “bright spot” on Friday, consumer sentiment reached a 2 ½ year high of 75.5. Surely this is fantastic news and a reason to buy, buy, buy, but this number is still in recession territory and diverges drastically from the ABC Weekly  Consumer Comfort Index. Of course polls are polls and will vary depending, but one thing is clear what appeared to be a huge upturn in the economy was a head fake. The data, most of it, is pointing towards another slowdown as the stimulus wears off. There is little political will to do another stimulus package, which is actually a good thing believe it or not. Things may get worse, but hiding problems are far worse than getting them out of the way.