Saturday, July 30, 2011

A New Threat to Apple's Empire?

I wrote yesterday about what could be the single biggest threat to Apple's charge to top Exxon Mobile as the U.S. company with the biggest market cap., but here's a new threat: iFraud.

China has long been the bastion of intellectual piracy. They've stolen and produced countless illegal copies of movies, music and software for decades now, but this is taking it to a whole new level. I am referring to reports of entire Apple stores being faked in China.

It's one thing to pirate copies of software or even electronics, since it's hard to find the people responsible. But allowing an entire illegitimate store to exist in a major city is a blatant disregard for copyright laws in the least!

Worse still, there are multiple stores within mere city blocks of each other!

I have no idea if Steve Jobs and company have any real recourse since the Chinese government itself is uninterested in enforcing intellectual property laws, but investors in Apple would be justified in asking Mr. Jobs what he plans on doing about this threat to revenue. Just because there are no legal avenues doesn't mean no action can be taken. Steve Jobs is renowned for his lateral thinking when solving problems, and he surrounds himself with some of the brightest people around.

It will be interesting watching this situation unfold, especially if shareholders put pressure on the company. Especially since Apple said last week that China was "very key" to its record earnings and revenue in the quarter that ended in June.

Friday, July 29, 2011

A Tale of Two Apples.

Apple Computers Inc was created in 1976 by Steve Jobs and Steve Wozniak, in Steve Jobs' garage. He was a college student and living with his parents at the time. It is the quintessential startup. They went on to produce the world's first mass market personal computer with a GUI (Graphical User Interface). Before that, everything was green or white text on a black background; functional, but limiting.

That's the first incarnation of Apple.

This incarnation of Apple peaked in 1984 with its famous 1984 Macintosh commercial aired during Super Bowl XVIII. This is extremely iconic of the Apple culture, which in turn is a reflection of Steve Jobs.

Not long after the Mac release of 1984, Jobs was ousted from the reins and the company pursued a long, downward spiral into corporate mediocrity. Unfortunately, I am thus far unable to find a stock chart that covers this early period of Apple, but you can see from the chart below that the price did plummet in 1985 after Jobs' departure, and only regained a bit of ground to tread water for the next 10 years.

After Apple's lost decade, Jobs was brought back and ultimately began what is now it's 2nd incarnation.

In 1996, Steve Jobs was brought back to Apple as an advisor. In July , 1997 Jobs became the interim CEO and began restructuring the company's product line after the previous CEO was ousted by the board of directors who were unhappy after overseeing a 3 year record-low stock price and "crippling financial losses."

In 1997, Steve Jobs announced that Apple would join Microsoft to release new versions of Microsoft Office for the Macintosh. This was a condition of Apple receiving $150 million investment (in exchange for non-voting Apple stock ) from Microsoft. This is truly a low point as Microsoft was Apple's main competitor and had been eating Apple's lunch since the departure of Jobs. (see chart below)

This alone would be enough for many companies to simply fall by the wayside, or be consumed by the bigger company (of course, Microsoft made this investment instead of simply taking over Apple at the time because the Clinton DOJ was accusing Microsoft of being a monopoly. If Apple collapsed entirely, or Microsoft consumed them, then Microsoft really would be a monopoly in the PC market and not just a more dominant force).

But Steve Jobs is not most CEOs. This bailout from Microsoft allowed Apple to stay afloat long enough for Jobs to redefine the product line and the company with it. It ushered in the current,insanely profitable era in which Apple now finds itself. In essence, Jobs took a second rate PC company and turned it into the leading brand of geek chic consumer electronics. From the iMac to the iPod and iTunes and now the iPhone, Jobs has not only resurrected Apple, he's transformed it into an integral part of millions of people's lives - far beyond computer users.

So what's the point of this little biography? It's simply to remind investors out there that regardless of the incarnation of Apple, there are two different Apple Inc's - the one run by Steve Jobs, and the one that isn't.

Don't be distracted by any corporate talking points - Apple Inc. IS Steve Jobs. When Steve Jobs leaves Apple again, investors should seriously question the company's future viability. Jobs is a creative visionary force and a savvy business man, but his ego is not one which lends itself easily to grooming replacements.

Thursday, July 28, 2011

Apple Inc. (AAPL) Seems Unstoppable!

Apple reported its earnings for Q2 last week and Jeff Macke of Yahoo! Breakout is upset - because he has nothing to complain about! It's no wonder, let's look at some numbers...

  • Apple's cash reserves grew 16%
  • Revenue growth is accelerating
  • Apple beat EPS estimates by more than 30%
  • Apple beat revenue forecasts by 15%.
  • Apple stock is trading at just over 18x earnings and in near a P/E of 15 .

This stunning outpacing of expectations is somewhat a reflection of the analysts covering the company, but
David Garrity, a Principal with GVA Research, believes that this momentum and rate of growth is sustainable, at least for the next few years and sets his price target at $525 per share over the next 12-18 Mos.

Here's an interview of Garrity explaining his views in greater detail. (Feed readers may need to read the full post to see the embedded video):


Wednesday, July 27, 2011

What's the Best Bond Index ETF - BND, AGG or LAG?

Most ETF investors look for a single holding to gain exposure to a given sector. That's certainly true for many bond ETF investors. I know I look for one fund to give me the most exposure to the entire bond universe at a low cost. For wide-spread exposure to the major areas of the bond universe, you're looking at 3 big name ETFs:

Here's my analysis of how each of these measures up on the following criteria...

Performance Chart.

Click for full version

As you can see from the chart above, all 3 ETFs have a very close parity with one another. This is to be expected since they each track the same underlying index. BND is the smoothest ride, with the least volatility, but it looks like LAG has a slight edge on the others however.

This round is awarded to LAG.

Expense Ratio.

As you can see from the chart above, it's a pretty close race to the bottom for expense ratios, but BND is again the winner here with an exp ratio of 0.11%. That's a full 0.09% less than AGG's 0.20% and even lower than LAG 's 0.13%.

ETF DB prefers LAG, but that seems to be based solely on expense ratio, which at the time was lower than both BND and AGG. At the time of this writing however, the clear winner in expense ratio is BND.


Another important metric of a bond ETF is its overall yield. After all, you're investing in bonds and bond ETFs to earn interest and generate income, right?

Here's how these 3 ETFs stack up on yield:

As you can see here, the appropriately named SPDR ETF LAGs (2.78%) behind BND (3.31%) and AGG (3.39%) in terms of yield. The winner in this round is clearly AGG, but it's a close one.

Asset Diversification.

Another aspect of any ETF or mutual fund I like to examine is the concentration of the underlying assets. For example, if an ETF holds 25% or more of its assets in one stock or one sector, then I know it's going to be more volatile and more sensitive to that stock or sector than a similar fund with more diversified holdings.

Here's how these 3 bond ETFs stack up on holdings:

This shows that AGG's top 10 holdings account for 32.75% of total assets, while the top 10 holdings of BND account for 11.19% of total assets, and LAG's top 10 holdings account for 19.58% of total assets.

Who wins? Is larger better or smaller better?

There's no real "right" answer here because it's more of a matter of style or aggressiveness. If you're looking for a smoother overall ride, BND is the winner. If volatility is your friend, AGG might be a better choice.

However, I'm going to award this round to BND based on my belief that most bond and bond ETF investors are looking for stable income, and not trying to play volatility and make a killing buying on the dips and selling on the peaks. For those reasons BND is the winner, since it is the most diversified and offers the least volatile

Trading Volume.

Finally, one more important aspect of any ETF is its trading volume. This is a measure of how many shares trade hands in a given day.

Here's a chart of average trading volume for the last 3 months:

884,821 shares of AGG trade every day, and 878,814 shares of BND trade every day (on average, over the past 3 months) while a paltry 34,149 shares of LAG are traded daily.

AGG and BND are pretty close, while LAG is left in the dust. What this means is that you may have a harder time getting your asking price when selling shares of LAG than you would selling shares of BND or AGG.

The winner in this round is AGG.

Overall best bond ETF is....

I'm awarding this title to BND. It's the clear winner in the categories that matter most: performance, expense ratio and diversification. It doesn't quite pull out a win on yield, but it's close. AGG is a respectable second, but the difference in yield is not enough to make up for the higher expense ratio and increased volatility in my mind. LAG is just late to the party and I'm not sure it brings enough to be a game changer frankly.

Tuesday, July 26, 2011

Fixed Assets - the BIG Picture! [Infographic]

The term "Fixed Asset" is used in accounting to represent assets that traditionally fall under the umbrella of property, plant, and equipment. Often times, fixed assets are listed on a company's balance sheet in their favor, but they are usually not the most liquid of assets. It's a distinction that could carry significant impact when trying to determine a company's real value. Fixed asset management is a sub-discipline of accounting that tracks, and optimizes the use of fixed assets for large companies. Here's an infographic from Sage FAS (makers of Fixed Asset Accounting Software) that shows the "big picture" of fixed assets in the modern, corporate world.

Click to see the BIG picture!

Wednesday, July 20, 2011

Just How Bad is Inflation? (VIDEO).

Here's an interview with Morningstar analyst Bob Johnson in which he discusses the current rate of inflation compared with historical rates, and the factors driving that rate higher as well as those keeping it lower.

The highlights:

The current rate of inflation is approximately 3.4%, which runs very close to the average rate since WWII is 3.5%. But later on in the interview he's forced to admit that this statistical average is skewed quite heavily by the double-digit inflation of the 1970's. So in essence, the current inflation rate is higher than the average from WWII, once the aberration of the 1970's is excluded. The true average inflation rate is closer to 2.5%.

Of course, all of this is predicated on the belief that the CPI number is true and not manipulated down by the government. I leave it to the reader to decide for himself on that point.

All in all, it's mostly more of the same from the economic experts: Inflation is really nominal... unless you happen to need gas, electricity, food and any product manufactured from hydrocarbons (i.e.: plastic).

Tuesday, July 19, 2011

8 Reasons To Own Gold (and Why it's Still a Good Idea)!

Our friends at Investopedia recently shared 8 reasons to own gold . What struck me most when I read the article is how most of the reasons are still true today, even as pundits debate the possibility of a gold bubble.

photo by hto2008

Before I go an further, here are the 8 reasons to own gold:

  1. Gold holds its value
  2. Weakness of the U.S. Dollar
  3. Inflation
  4. Deflation
  5. Geopolitical Uncertainty
  6. Supply Constraints
  7. Increased Demand
  8. Portfolio Diversification

First off, many of these reasons are inter-related. For example, Inflation and Deflation, and Increased Demand and Supply Constraints. Looking at this list it becomes clear that gold is the "go-to" uncertainty play. Not sure if inflation is rising, or we're destined for deflation? Buy gold.

The fact that the price of gold has skyrocketed over the past decade should not be surprising when we consider the 8 reasons above. Since September 11, 2001 we've had terrorism as a very real threat, which produced serious geopolitical uncertainty.

Production of new gold from mines has been on the decline since 2000, and according to

"annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. It can take from five to 10 years to bring a new mine into production."

Then you factor in the financial crisis of 2008, subsequent fears of hyperinflation and deflation, and the federal reserves seemingly hell-bent on destroying the value of the dollar and it's beginning to look a lot like a fundamentals issue rather than a chasing-performance bubble.

All of these uncertainties have led to an increase in demand, which in turn leads to an increase in the price.

I'm no expert, and I used to think gold was just the new dotCom bubble but I admit I underestimated the extent of the mess the folks in Washington D.C. would make of the financial crisis. Greece was never on my radar, much less the extent of socialism in their economy. If it was, I dare say the European "debt crisis" would have been much more obvious since it's only a matter of time before you run out of other people's money, and a credit crunch like the one in 2008 is all that was needed to put the brakes on that gravy train.

It doesn't look like the U.S. is going to take the action needed to fix its spending problem. Greece is likely to get booted from the EU or drag the EU and the Euro down with it. And we're unlikely to see any sort of stable growth economy for a decade or more.

All of that is without the impact of middle east unrest and oil prices, mind you.

It's looking more and more to me like high gold is here to stay, at least for a while more.