AssetInflation's Instablog

Apple (AAPL): Putting $558 Billion Into Perspective

Mon, 26 Mar 2012 15:01:54 -0400

Is Apple (AAPL) really worth the money people are paying to own the shares? Is Apple's dominance so entrenched that they can withstand the upcoming assault from their competitors?

One way to answer those questions is to put the total market cap of Apple into perspective by understanding what $558B can buy. First we point to the argument that Apple is worth more than the entire US Retail Sector or the entire Semiconductor space. Just stop and think about how big those sectors are and what that fact is saying about the size of Apple.

Next, we compare Apple against 8 competitors combined in their space. In fact, if these 8 companies were combined, they would shake governments around the world with anti-trust claims of "how could anyone compete?". Could Apple? How safe do you think the future would be for Apple if these 8 worked to protect their market positions and market caps?

Apple vs. Our 8

Company	Symbol	Price	Market Cap
Microsoft	[[MSFT]]	$32	$268.46B
Sony	[[SNE]]	$20.55	$20.62B
Intel	[[INTC]]	$27.9	$139.36B
ARM Hldgs	[[ARMH]]	$28.11	$12.89B
Dell	[[DELL]]	$17.02	$29.99B
Hewlett-Packard	[[HPQ]]	$23.03	$45.54B
Research In Motion	[[RIMM]]	$13.78	$7.11B
*8 Total (not counting $34B of excess cash to shop with)**			$523.97B

Apple	AAPL	$599.34	$558.81B

If an investor could waive the magic wand and purchase chip leaders Intel and ARM Holdings ; hardware providers Sony , Dell , and Hewlett-Packard ; software titan Microsoft ; and waning but still significant Research in Motion ; would the value of these 8 companies be greater than that of Apple. Note: to be
fair our fictitious roll-up would still have $34.8B in additional cash to go shopping with.

Would AAPL really be worth more than the combination of:

a) the largest software provider
b) the largest microprocessor producer AND the most dominant low-power microprocessor producer
c) 3 international personal computer, laptop, and printer producers
d) 2 of the 3 largest video game producers
e) a large phone handset and operating system provider for smartphones

Imagine the combined power these 8 companies would have; the established business relationships, the customer branding possibilities, the technology, the earnings, the synergies, and yes, even the cash on hand.

Conclusion

Apple is a very successful company and has earned its place on top. They have great products, excellent vision, and have executed beyond anyone's dreams. Simply stated, they are a fantastic company.

However when looking at their valuation in terms comparable to their peers, Apple seems to be priced to "definitely succeed". When looking at the list of the 8 companies above, I noticed more than a few that also carried the same label at one time or another in the past. It made me think: Is Apple really "the one that will definitely succeed", or is it more likely that competition catches up to them?

Each investor can form their own conclusions, but for me the answer is simple: Apple operates in a very competitive space and no company's success is definite in the ever-changing technology space.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Mr. President More Jobs, Less Lawyers and Politicians

Sat, 03 Sep 2011 11:26:30 -0400

President Obama delivers a major speech this week, and the topic will be on job growth. He plans to discuss how to get the United States back on track and growing again.  He plans to improve mortgage refinancing, thereby saving homeowners $85B a year. In addition, ideas for building more infrastructure are a good idea, as the country could always improve their roads, bridges, and tunnels.

But one problem we see with any Washington generated initiative is none addresses the fear of future litigation. In the last three years, we have moved to a blame-throwing, lawyer-driven, full shakedown of the entire financial system. Whether it happens as a result of new zealous legislation, opportunistic ambulance-chasing class action attorneys, or from the state and federal agencies responsible for "oversight"; we see nothing but paralysis occurring with each passing day.

Mr. President, we have passed the point of lost confidence, we are facing a full-blown 'investor strike'. Investors are tired of the games being played by the bankers, politicians, and lawyers; which by the way are the only three groups of people making money in this morbid economy.

While everyone is trying to cover their own, the system has gone from fantasyland to surreal as $100s of billions (if not trillions) in valuations lie in limbo. With many of the system's largest having to defend against allegations that should have been dealt with in 2006-08, no one knows what's next. When is this going to stop, why would anyone want to invest in ANY company when the biggest of the biggest has been shaken down on the whim of a few?

This week's suit by Federal Housing Finance Agency (FHFA) takes the cake for the most absurd and damaging example of litigation gone wild. To sue 17 of the largest financial institutions three years after the fact on the basis that the two largest government owned buyers of mortgage backed securities were 'duped' is completely insane.

Bank of America (BAC) has been rumored to be Lehmanized for roughly a month, and the only reason the rumor has ears is the fear that their legal liability will exceed their $125B in net tangible book value. When the government shows no leadership, but instead joins the feeding frenzy, the cannibalistic consequences could very easily topple our whole economic system.

BAC might be the biggest and most infamous, however there are plenty of other names being sued that put our system at risk if this legalfest continues. JP Morgan (JPM), Goldman Sachs (GS), Morgan Stanley (MS), and Citigroup (C) all have substantial exposure. And, as the US Feds carelessly destabilize our own financial infrastructure, why not throw in Deutsche Bank (DB), Credit Suisse (CS), and Royal Bank of Scotland (RBS) too! (like Europe needs another reason to come unglued)

What is the purpose of all this litigation? Who has been punished?

The politicians that tinkered with the laws to favor reckless lending are the same politicians that write the laws to "fix the system". And to no one's surprise, no bankers have gone to jail and no executives have forfeited their tainted earnings.  In addition, the demand for good lawyers has grown exponentially, and with that demand has been a windfall of fees.

So since the politicians, bankers, or attorneys are "winning" (like Charlie Sheen), then the sad truth is that the losers are most everyone else. The damage inflicted on market valuations goes well beyond the financial sector, and impacts the psyche of every investor, CEO, and small business owner alike.

In addition, since the financial sector has been hunkered down and defending the onslaught, they have been protecting precious capital and withholding it from the system. Why would they make new loans, when they might need capital to pay for the 'next' potential settlement?   This is exactly why the velocity of money has ground to a virtual halt, as everyone is following human nature and protecting what liquidity they have left.

This insanity must stop, we need leadership from the top. We need confidence that our government is going to create circumstances to promote more business and job opportunities. We are tired of the drama in Washington and Wall Street alike. We know the blame can be spread to many, but what we really need now is to move forward.

On Thursday, addressing the fear of future litigation to our financial system must come first. We must have confidence in order to have jobs. We must have an environment built on stability of a sound financial system, or the Armageddoners will prove to be prophetic. Mr. President more jobs, less lawyers and politicians.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

S&P 500 Mini Opens Down 2.5% And Gold Up $25, As ECB Agrees to Buy Italian/Spanish Bonds

Sun, 07 Aug 2011 18:38:57 -0400

The news flow is picking up with crisis meetings all over the globe. There are thousands of projections floating about, and the situation is unstable to say the least. But the latest information has two notable pieces of data:

One: S&P mini's opened and they are down 2.5% as we type this (1168).
Two: The European Central Bank has sent out a statement confirming that they will enter the market to buy Italian and Spanish bonds in the open market.

From Bloomberg:

The European Central Bank said it will “actively implement” its bond-purchase program, signaling it is ready to start buying Italian and Spanish securities to counter the sovereign debt crisis.

We're expecting the commentary to get more heated as we get closer to the US markets opening (along with the news flow), but it appears that the powers that be have managed to pull off a bit of coordination this weekend. We will see how this evening and the day plays out, but for now its more bark and less bite.

And we almost forgot, with the turmoil of the dollar dropping and central banks creating more money, gold has surged to a fresh record.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Earnings Are Up? Wait for Big Oils this week!

Mon, 25 Jul 2011 16:27:26 -0400

The chatter on the street is that earnings season has been surprisingly strong this earnings season. While it should be no surprise as most of the companies in the S&P and DJIA (the most commonly cited beats) are international companies. These companies (in many cases) are worldwide and thus participate nicely in the global growth. When foreign profits come back in US dollars the translation is very positive, plus they have the ability to raise prices to cover higher costs due to their overall size.

However if you think earnings growth has been solid so far, wait until you see the earnings releases of XOM, COP, CVX, and BP this week. Their year over year numbers should be solidly up from 25% to 50%. Even more, their cash flows will enable plenty of flexibility regarding new share purchases, dividend increases, or new capital spending plans.

While the stock prices of these companies somewhat reflect the better earnings, all of them are trading at valuation levels that indicate that the earnings are "transitory". While earnings might level off for a few quarters, we believe that the inflationary impact of the world's reserve banks will continue to provide a floor under any drop in oil prices. Therefore we are believers in these large integrated names and believe that astute investors should make sure they are at least proportionately weighted in their portfolios.

Regardless of your investment stance on individual names, this week's reports will substantially boost overall earnings of the averages. While everyone is focused on the crisis of the day (US debt ceiling), we may wake up next week to some bullish upgrades courtesy of BIG OIL.

Factors To Consider When Choosing Your Assets

Mon, 25 Jul 2011 10:26:54 -0400

Many people have asked me “what factors should I look for when making a determination as to what to buy”. Most would agree that inflation is a negative factor on real net worth, but deciding where to invest is not as complicated as one would think.

First, realize that in a real inflationary environment that the companies that produce things that people NEED will be able to increase prices to compensate for their higher input costs. PRICING POWER

Second, any hard assets that are scarce or not able to be produced sufficiently with increased prices will benefit during inflation. Price increases typically lead to more volume or to substitution of other commodities, but in some commodities that does not apply. PRICE ELASTICITY

Third, realize that inflation is RELATIVE to the currency that you are dealing in. Stated a different way, the impact of global inflation will be felt differently by different currencies. Valuable assets in weaker currency countries will rise in “nominal value” quicker than in stronger currency countries. CURRENCY RELATIVITY

Fourth, the ability to adapt returns quickly in a changing environment will carry a premium. And the negative opposite is also true, the fixed nature of certain returns will destroy value. RETURN VARIABILITY

Those four factors are essential when deciding what assets to purchase. A good place to start when evaluating your portfolio is to apply these factors to your investments and see how they stack up. As a “very general” rule:

Large-cap multinational companies with exposure to more than 50% of sales outside of home country
Commodities that require large investments and long lead times to increase incremental output
Variable Interest Rate Notes and Bonds

Finally, a fifth factor that should be considered when choosing your assets is that Price Earnings ratios tend to fall in an inflationary environment. Be very careful to consider what valuation your company is valued at. While the PE ratio of the market will drop overall, many ratios of individual companies will be currently mispriced due to lack of recognition of our inflationary resurgence. PE COMPRESSION

GM and F, Un-loved and Under-owned

Sat, 23 Jul 2011 21:09:52 -0400

Next week will start the earnings season for the two largest US automakers. While Q1 earnings releases were clouded by the Japanese disaster (and the rapid rise in oil prices), this quarter contains far less uncertainty in contrast. Yes there is a "perception" that the automakers have too much truck inventory, but compared to last quarter this problem is miniscule.

Earnings and sales have actually been increasing vs. last year, and the companies are still operating in a sub-normalized environment. While the static on the street is whether the industry produces 12.5 or 13 million vehicles in the US this year, the clearer picture is that BOTH GM and F have managed to right-size their operating infrastructure (with and without government help). This gives both of them TREMENDOUS upside leverage to any future growth, and the analysis will soon shift to when that growth is likely to happen.

As with any industry, autos are cyclical; but investors shouldn't wait until the real growth in the economy actually happens to move on these investments. With price-earnings ratios solidly in the single digits and forward momentum positive, the risk of an upside "surprise" is more likely than a trend reversal.

Finally, be aware of sentiment shift with GM in particular and F to a lesser degree. The time to buy is BEFORE it becomes cool or hip to invest. At this point, many still (incorrectly) believe GM is on the verge of a second bankruptcy or that Ford's balance sheet is hampered by a mountain of debt. Neither of these perceptions are even remotely true and when the trade becomes obvious to all, the stock prices of both of these companies will be well north of where we are today.

Our belief at AssetInflation.com is that the inflection point has arrived and the auto industry is close to shifting out of neutral and rapidly into gear. We believe once this realization hits the common investor, that GM will be trading north of $50 and Ford beyond $20.

Simply stated, both GM and F are un-loved and under-owned. Not too many expect much from either company. The question isn't "if" this will change in the future, rather "when" will it change. We believe this next few weeks might shed some light on when, and our opinion is that we would rather be invested than not at this moment in time.