MorningWord 10/4/12: AAPL’s Game Of Chicken Not Yet in The App Store

by Dan October 4, 2012 9:20 am • Commentary

MorningWord 10/4/12: Since VZ broke AT&T’s stranglehold on the iPhone back in early 2011, and Sprint joining the party late last year, there has been a lot of talk about AAPL’s  ability to command such a high subsidy from the wireless carriers, relative to other smartphones.  Many research analysts have played down this threat to AAPL’s industry leading margin structure, but in a market as well penetrated as the U.S., analysts may prefer to set their sights on emerging markets like China, where AAPL stands to make much of it’s market-share gains in the years to come.  

Overnight there was an interesting article on citing a Deutsche Bank research note suggesting that China Mobile (CHL), the worlds largest wireless provider with over 685 million wireless subs, is likely balking at the iPhone5 over the large subsidies for the device.  This could easily be a little game of brinkmanship in an effort for CHL to flex their muscles a bit, but this is one situation where I am sure the folks out there in Cupertino wish that Steve Jobs was still around to guide them through what could quite possibly be the most important negotiation in the company’s recent history.

Many bears on AAPL suggest that without Jobs, the future product portfolio that he had blessed prior to his death will be running thin, and the company that has dominated consumer electronics for so long will likely face the same commodtized hell as many of their pc & smart-phones competitors have in the recent past.  But the next leg of the bull story is going to come from broader geographic market-share, and CHL holds the key.  This is clearly a story worth keeping an eye on, the day that AAPL inks a deal with CHL, AAPL shareholders will likely be very happy with the stocks reaction.

On another note, Tiernan Ray, who writes for Barron’s, had an interesting post about AAPL’s mark up on Nand Flash in a post to his Tech Trader Daily blog yesterday (here).  Ray cites recent RBC Capital analysts Doug Freedman and “teardowns” of iPhone5 by and, which suggest that;

“about $83 per iPhone in chip content, the device could make up 4.6% of total global semiconductor sales in 2013, depending, of course, on the volume of units sold”, and  that

RBC was “surprised to see Apple continue to charge $100 for each incremental 16GB of NAND, given that AMZN is charging $50 (Kindle Fire HD 7” and Kindle Fire HD 9” LTE) to $70 (Kindle Fire HD 9” WiFi) for each 16GB of NAND. We estimate that Apple is able to procure NAND flash for ~$0.42 per GB (at market prices or better), while reselling for $6.25 per GB (calculated as $100 for each 16GB of step-up). This implies a favorable 93% gross margin on NAND.

At some point soon consumers may freak the u know what out at their inability to buy 16gb internal flash with the option to add their own flash cards as users of MOT, Samsung, LG, HTC and other smartphones are able to do.  This is another instance where Steve Jobs was able to convince users why their way of a closed piece of hardware was better than the competitors, but like the situation mentioned above, Tim Cook may not nearly be as talented at the “game of chicken” than his predecessor.





MorningWord 10/3/12:  Where the heck are some of these stocks trading at all time highs going from here?? There was a time when short term momentum trading kept me busy for most of the day, now at the ripe young age of 40, I find it a bit nauseating, frankly it just gives me a headache.  Back in the late 90s, and then again in the middle part of last decade, buying breakouts was a winning short term strategy.  Leadership and runaway breakouts are the hallmarks of a sound bull market, which at some point broadens out a bit so the leadership doesn’t have to do all of the heavy lifting.  

The market that we have been in for the last few years (up ~115% from March 2009 lows), at least from a statistical standpoint has been a massive bull market, but for most investors it really hasn’t felt like one given the fact that we were coming off of a 57% peak to trough draw-down in the SPX from Nov 2007 to March 2009.  The truth is, most investors make very poor decisions at market tops and bottoms, and those very decisions make it that much tougher to get back to even when we are in a situation as we are at this stage of the Bull.  If you could only have a couple of those Euphoric Buys from late 2007, or early 2008 back, and then just one or two of those hate sales at the lows back in March of 2009.  Investing in single stock names is hard, trading them on a short term basis can be harder, which is why I now look at run-away breakouts with a bit more skepticism than I did when I was a younger lad.

Lets look at IBM for example.  On Monday, the stock made a new ALL TIME high at 211.75.  Lets look at a few charts starting with the ones that won’t give you vertigo.  The 1 year chart of IBM shows the stock early in the year breaking out of a nicely formed base btwn 180 and 190 to establish a new all time high in the spring, only to fail with the broad  market and retest prior resistance on the downside.  The stock spent the summer months working through what appears to be a tidy little head and shoulders bottom, only now to break the neck-line.

[caption id="attachment_17407" align="aligncenter" width="490" caption="1 yr IBM head and shoulders chart from Bloomberg"][/caption]


The stock is up about 15% from the July lows, and up about 14% vs the SPX  up ~15%, which it is the 5th largest component.

Looking at the 5 year chart of IBM it is apparent that the almost 200% rally off of the March 2009 lows greatly outpaces the SPX, and has not once breached he long term trend-line off of the lows.  From a purely technical standpoint, the stock will need to consolidate a bit here around 200 before it can make a sustained break-out.  With earnings expected prior to Oct expiration, Q3 results and commentary for the balance of the year (the company does not give explicit guidance) could likely hold the key to whether or not the stock establishes a new range above 210, or falls back to the trend-line at about 190.

[caption id="attachment_17409" align="aligncenter" width="490" caption="IBM 5 yr chart from Bloomberg"][/caption]


And lastly, the all time chart, you better sit down for this one….and this is the one that leads me to the question, Where the Hell is this thing going??

[caption id="attachment_17410" align="aligncenter" width="490" caption="IBM all time chart from Bloomberg"][/caption]


IBM’s commentary may be very instructive on a lot of levels for many large U.S. multi-nationals from both a fundamental and a technical perspective.  While many investors view “Big Blue” as a defensive name, they are dependent on Europe and Asia for almost 60% of their sales, and obviously very levered to Enterprise spending. My sense would be that the stock will need a meaningful beat and raise to see a sustained break-out.


MorningWord 10/2/12:  The financial media gets really geeked up about headlines like this one yesterday from Bloomberg: *GOOGLE’S MARKET CAP SURPASSES MICROSOFT IN EARLY TRADING.  The truth is, aside from the 24 hour financial news cycle, whose job it is to create headlines, the only people who generally care about such milestones are C-level execs at the companies of the surging stock, if for nothing other than bragging rights.  What is more interesting though, is the divergence in the 2 aforementioned stocks, as GOOG traded at a new all time high, closing up nearly 1%, on a flat day in the Nasdaq, while MSFT closed down nearly 1%, to the lowest levels since early Aug.

GOOG’s recent strength can likely be attributed to a rotation out of AAPL in the last couple weeks, as the stock made new all time highs and a completed a much anticipated iPhone5 launch, while MSFT’s recent woes are more tied to good ol’ fashioned fundamentals.

Back in March, MSFT was dramatically out-performing the Nasdaq, up nearly 25% on the year, now the stock sits about 11% lower from those levels up only ~14% ytd, and now under-performing the Nasdaq which is up nearly 20%.   There are a couple obvious factors contributing to MSFT’s recent malaise, tablet cannibalization is real and will only magnify pc-centric company’s woes in the months/years to come, Windows8 will not spur any real PC upgrade cycle, and that MSFT’s latest stabs at mobile (both tablet and smartphone) are practically DOA.  

Here is the thing though, MSFT is a really horrible short.  Other than the above, there are very few boxes to check to help build conviction to press the recent weakness.  The company generates a ton of cash, has $51 billion in net cash on their balance sheet (~20% of their market cap), has a 3.12% dividend yield, expected to grow earnings at about 10% a year for the next 3 years, and only trades at about 9x those expected earnings.

So many readers may ask, why are you long OCT Put Spreads (read here), the answer was easier when I put the short on in Mid August in the face of horrible PC data from DELL and HPQ, but with both of the stocks apparently making new multi year lows every day, the trade may now be a tad obvious.

If I go back and look at the one year chart of MSFT, the technicals may help  inform my decision as we head into MSFT’s fiscal Q1 report Oct 18th and their expected Nov launch of Windows8.

On a one year basis, the chart below shows the clear wedge that the stock is forming.  Additionally, the stock is approaching the mid-point of the 12 week range, which could serve as a massive inflection point, one way or the other.

[caption id="attachment_17336" align="aligncenter" width="490" caption="MSFT 1 yr chart from Bloomberg"][/caption]


My near term price target on the stock is obviously about $28, as I chose the Oct 30/28 Put Spread, but I would be inclined to take profits on the spread south of $29, prior to earnings, and would look for any strength post their results to re-establish put spreads for what I think will be horrible reviews of Windows8 and many products made by others to run it.

So to be clear, I am not a fan of MSFT, the stock, their products, their strategy etc etc, but the stock is a tough short here for a whole host of reasons.  That said, I want to define my risk with tactical long premium shorts when the stock is up on spikes.  Vol is reasonable enough to express directional bearish views, despite the cheapness of the stock.



MorningWord 10/1/12:  When previewing NKE’s Q3 earnings report last week we mentioned that we thought it was curious that the company, the week before their report, announced a share repurchase program of $8 billion, double the previous one.  I am by no means an expert in corporate governance, but from a purely anecdotal standpoint, I would have to guess that a disproportionate amount of these sorts of announcements do not come out while the company is in its “quiet period”, essentially closing the books for the quarter.  Conspiracy theories aside, the Stock opened up nearly 3% on the announcement on Sept19th, only now to sit 5.5% lower from those highs.  While the company intends to buy a lot of shares, investors used the enthusiasm to sell.

NKE 10 Day Chart from Bloomberg

Over the weekend there was an article in the WSJ suggesting, Beware All Those Buybacks.  Nothing particularly earth-shattering, but a good reminder that while the mechanics of buybacks are usually in shareholders’ best interests, many corporations use their corporate coffers to manage earnings, which compared to dividends is likely to be a far less attractive approach to returning cash to shareholders.

Here are a few quick highlights:

-During the second quarter of 2012, companies in the Standard & Poor’s 500-stock index repurchased nearly $112 billion of their own shares, up 32.6% from the previous quarter

-investors have to make sure that is actually happening. Many companies buy back shares purely to offset the issuance of new ones as part of compensation packages, says Andrew Lapthorne, head of quantitative analysis at Société Générale.

-On July 18, for example EBAY reported it had bought back $355 million of stock during the second quarter and would repurchase $2 billion additional shares. The primary objective, the company said, was to offset the additional shares being issued as compensation.

-On average, buybacks haven’t been a great way to boost shareholder value, says David Zion, an accounting analyst at Credit Suisse.  From 2004, when companies first were required to disclose monthly share repurchases, through the end of 2011, 31% of S&P 500 companies have seen the value of those shares fall, Mr. Zion says. And just 36% have returned more than 7%.

In Enis’s Q3 preview of AZO on Sept 18th, he highlighted the company’s history of buying back their stock, using most if not all of their operating free cash flow to do so, while also raising debt to buyback their stock since 2007.  The stock has been a monster since the lows in 2008, up almost 300% in that time period, and with a tiny float, short interest at about 4%, a whos who of long only investors, plus some famed activist hedge funds, this stock seemed like it was built for these sort of corporate shenanigans.

Make no mistake about it, you’d rather own stocks, where the company sees the same value at current levels that you do, but as was the case with EBAY mentioned above, and FB’s announcement to do the same to offset additional shares to be offered for future employee compensation is just a simple corporate shell guy, stealing from Peter to Pay Paul so to speak.