Investors are learning to approach each new economic number the way a goat might Mark Zuckerberg—with extreme caution.
Has the world changed so drastically in the last month, since the cream of corporate America cranked up its earnings forecasts? That seems improbable. Has the witch’s brew of high gas prices and low home values finally reached a tipping point? But gas prices are, in fact, down slightly of late, while housing has been down for a long time now. Is it worries about the US debt ceiling or a Greek default? The sub-3% yield on the ten-year Treasury argues otherwise.
In fact, the ten-year yield is, perhaps, the most credible warning sign out there. The bond market is the biggest one and reputedly the savviest of them all, and just because the ten-year yield dropped from 4% in April of 2010 to 2.33% by October and then reversed 84% of that move by February, doesn’t mean that this time the bond bulls haven’t sniffed out a real turning point.
We’ll know in about a month, because if the stock market hasn’t been led over the cliff by then by bellwethers warning of diminished profits, the apocalypse will have to be postponed once more. Until then, with growth slowed or slowing in Europe, Japan, and the US as well as China, India, and Australia, the S&P 500 doesn’t seem particularly likely to retrace its 4% retreat from April’s post-crash peak.
On the bright side, economic statistics say little about the prospects of blue-chip companies. Many sell to other corporations and into emerging markets, and their customers are unlikely to cut back because of $4-a-gallon gas.
How’s this for an IPO prospectus: This leading technology supplier owns perhaps the most valuable brand on Earth, sells to well-heeled customers willing to pay fat premiums for its devices, and is led by possibly the biggest business icon since Walt Disney. Sales in the most recent quarter were up 83% from a year ago, and 59% came from overseas. Earnings nearly doubled. The most expensive of several hugely successful product lines enjoyed a 28% sales gain, and it’s the one no one is talking about.
Subtracting net cash on the balance sheet, the company is priced at 11 times next year’s earnings forecasts, which, if the past is any guide, will prove unduly conservative.
No such initial public offering is forthcoming, or course, but that’s OK, because Apple (AAPL) shares are already out there. On Wednesday, while all the market averages were losing 2%, they traded in the green much of the time before closing slightly lower.
The stock’s built a solid-looking base over the last five months, and could break out soon. I think of Apple every time the going gets tough, because it typifies the disconnect between the fortunes of the US economy and those of the best corporations.
The buyers of the iMacs and the iPhones are, on the whole, considerably better off than the average American. In fact, Apple products are status symbols of the most profitable sort: the sort affordable to millions of aspirational buyers.
There are no yawning budget deficits or mass unemployment in Apple’s ecosystem, and probably not too many underwater mortgages, either.
Apple is the best of the best, but many of its advantages are broadly shared by other publicly listed companies. While few can match Apple’s $29 billion in cash unencumbered by debt, listed companies, by definition, enjoy access to cheap capital infinitely preferable to bank loans, and many can also tap the bond market for funds at rates that bank-loan applicants can only dream of.
Successful listed companies also have the edge in scale, technology, and recruiting. They are likely to continue outperforming a general economy saddled with vacant strip malls, depressed small towns, notoriously costly health care and education, and a swollen defense budget.
It’s the same trend that has so inflated income inequality among households: technology allows star performers to take the lion’s share of the spoils, while the rest must fight for what remains.
This is why, despite my great respect and admiration for friend and colleague Jack Hough, I don’t share his pressing concern that near-record corporate profit margins are about to collapse.
To the contrary, to the degree that the recent economic cold spell keeps rates low for longer and caps commodity prices, it will actually play into the hands—and bottom lines—of corporate giants.
If recent data eventually translates into the dreaded double dip, all bets are off. But the point is that for many on Main Street the double dip would merely be more of the same and not much of a letdown, whereas Apple might not even feel the chill. And its prosperous clientele might not notice, either.