Yale Bock's  Instablog

If ever there was a very interesting week in the world, last week certainly was it. As my focus is the financial markets, the headline stories have to be the fall of both the price of Gold and Apple's stock below $400 per share. In many ways, the fall of the price of these two assets is what makes the financial markets so interesting (full of potential or sorrow?) for so many people.

First, let's start with gold and try to summarize the situation from both long and short side. On the long side (the one which believes the price of the metal will go up), the yellow metal is an alternative to fiat (paper) currencies. If one looks around the world in almost every region, other than maybe China, the Central Banks have been in a contest to see which one could issue more of their currency than the other banks. Viewed from a supply standpoint, creating more supply only makes the current circulation less valuable, holding everything constant (a big assumption). There is only so much gold in the world, and the only way more is put in circulation is from companies which mine it out of the ground. Even with those companies, there is a finite supply in the earth which they can extract. Under these conditions, gold bugs believe the large budget deficits of most (all?) mature countries, as well as the unprecedented monetary stimulus the world has engaged in, dictate a rise in the price of gold. Other reasons gold should see a rise in value include a persistent demand from China and India (43% of all gold bought comes from these two countries), as well as central bank buying to diversify currency holdings.

On the short side (which believes gold will go down), the main argument is it is not an asset which produces a cash flow which can then be discounted to create a valuation for a cash flow stream. No matter what asset one analyzes, the fundamental worth of an asset is their discounted cash flow stream. Without one, trying to value it like other asset classes yields a worth which can be based on non traditional methods. Historically, these kinds of problems take place when bubbles arise, like in the Tulip mania in Holland. All over financial markets, the rise of the price of gold, and the subsequent beating it has taken over the course of 2013, makes these issues very pertinent. So, where do I stand?

As in many situations all over the financial world (and other areas), much depends on one's perspective. Some believe that with the growth rate in China slowing down (expected 7.9%, actual 7.7% yoy), commodity demand is waning, leading to a deflationary environment. I find that argument a really bad one. China is only part of the global economy, but a big one at that. A slowing China does not mean a deflationary world, but many have jumped to that conclusion.

My own view is in the long term, let's say longer than the rest of 2013, gold has merit because printing more money historically leads to inflation, and they yellow metal is a good inflation hedge. Gold is nice insurance in case problems arise with military conflicts, or if people are generally scared of world events. The hard part of owning gold is the lack of an income and cash flow stream. Security analysis is based on cash flows, and without one an investment case is pure theoretical.

In turning to Apple, you have the opposite situation. The company does have defined cash flows, and oh, have they been impressive over the last 5 years. However, investor sentiment has turned very negative, and last week a warning from supplier Cirrus Logic thrashed the stock even more. This week brings their anticipated earnings report on Tuesday, and the results will have a big affect on how the market performs on Wednesday. Apple has more cash than any company, but the major issue is how much cash will it generate in the future? If it is anywhere close to what it did last year, and that grows at 5-10% per year, a buyer today will probably be very happy 3 years from now. As an investor, this is the fundamental question one faces with almost every security you look at.

During Monday of last week, the world also had to witness the unfortunate terrorist incident at the Boston Marathon. I really feel for those whose families lost love ones on a day which should be a celebration of their attitude, effort, and accomplishment. Those who continue to attack our country because of its unique values only create a stronger opponent which will not yield to such violence.

Next week will bring a ton of earnings reports, and the market will be very interesting to watch. Gold, Apple, oil, and plenty of others bear watching, and you can bet the whole world will be paying attention- you know I will.

Thank you for reading this week, sorry it has been a while, and I hope you have a good weekend!!! If you have any comments or questions about the blog, please post them!!!

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

Disclosure: I am long AAPL.

One of the interesting things about business is the different ways companies go about trying to attract customers. When a business has a large customer base, they have created a valuable asset. I think one of the major mistakes any owner or management person can make is to not understand the critical importance of attracting customers. Here is a simple idea- without customers, no business survives. Most starting entrepreneurs fail because of the inability to attract customers. What is great for all potential owners is we are now living in an age where it is more cost-effective than ever before to be able to reach customers because of the internet, social networking, and mobile devices. You can see that by seeing the growth of services like Facebook, LinkedIn, YouTube, Etsy, Instagram, Pinterest, etc. These companies have been built-in a relatively short period of time. Conversely, look at the episode of what is taking place at J.C. Penny's. The company is over one hundred years old and is now facing the grim task of rebuilding a tarnished brand. Much of the problem was created in the last two years because the management did not think about the importance of their existing customers. Yes, the customer base is older and more discount oriented, which are long-term problems which need to be addressed. Still, when sales are down 25-30%, the issue is you have alienated your buyers. Without customers, no business exists. Not a hard lesson, but many ignore it, at their own peril.

Another key takeaway from the JC Penny's fiasco is the retail business is an investor's graveyard. Over and over again, when you look at retail companies, you see how volatile their results are. It is often feast or famine, with hot concepts doing well for a few years, and then flaming out when their concept becomes less attractive compares to a new one. Very few management teams can continue to build a retail businesses over a long period of time. Those which are fortunate enough to do so can create very large companies and can generate a lot of value for shareholders. However, to do so is not easy, with plenty of obstacles lying in the way of ambitious organizations.

Well the market got another surprise in the Herbalife drama. KPMG, the company's auditors, decided to resign from those responsibilities. Investor's typically do not want to see auditor changes, resignations, or any sniff of an accounting related problem or discrepancy. Accounting is the so-called, language of business, and I am not talking about tax accounting. Without a good knowledge of accounting, any investor puts themselves at a big disadvantage to those who understand it thoroughly. You want to give yourself every opportunity to do well in the market, and understanding business accounting is a great place to start.

Friendships are very important in life as there is nothing like spending an enjoyable evening with people you respect and like. Friends can add a different viewpoint, a unique perspective, or world experience which add clarity. Just as important, a good friend can lend support and reassurance when people can get nervous about something which could adversely affect ones life. Support networks are crucial for anyone, in any city, in any industry, dealing with any of life's invariable questions. You cannot have enough friends, and I very much appreciate mine and the wisdom they provide.

The more I read about the venture capital industry, the more I question the wisdom of investing in startups. It seems there are lots of people who are investing in start ups these days, but the odds dictate very few of these investments end up providing attractive returns. With poor odds a probable outcome, investing in start ups is not for the faint of heart. Facebook and Twitter are alluring, but very seldom does the large pay off actually take place.

Here is a nice article about price optimization software for supply chain efficiency-http://www3.cfo.com/article/2013/3/applications_pricing-price-optimization-software-saas-cloud-zilliant-shaw-industries-gartner-strategy

The window for initial public offerings is wide open and there is a long line waiting to list-http://www3.cfo.com/article/2013/4/capital-markets_ipo-supply-initial-public-offering-filing-pricing-jobs-act-renaissance-capital

Both JC Penny's and Macy's won and lost in the Martha Stewart case this week-http://www.bloomberg.com/news/2013-04-12/macy-s-loses-bid-to-broaden-ban-on-penney-s-stewart-sales.html

Thank you for reading this week, sorry it has been a while, and I hope you have a good weekend!!! If you have any comments or questions about the blog, please post them!!!

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

Spring approaches rather quickly and the great thing about financial markets is there is always something to pay attention to. The focus has now been the situation in Cyprus, where the banking system will collapse without a European Union loan. Cyprus is trying to find ways to meet the EU requirements, and has considered various measures to meet everything the EU wants. The leaders of Cyprus are considering creating levy's on deposits of over 100,000 euros, and other similar kinds of measures. As of this writing, there has been no resolution to the banking problem in Cyprus. The reason why this is significant is because if there is a run on the banks in Cyprus because of whatever the politicians decide to do, it is very possible the same thing could happen in Italy and Spain.

Italy and Spain are critical to the stability of the European Union, so what happens in Cyprus has major consequences in Europe, and therefore, everywhere in the world.

Last week, Starbucks held their annual shareholder's meeting and as always, it was a blend of entertainment, information, and learning for anyone who attended or watched it. Howard Schultz always is prepared, and Starbucks is very well positioned for continued growth for as far as the eye can see. One never knows what could happen in the global economy, but the strategies and operations at SBUX are very strong.

An ex-SBUX executive is Lululemon CEO Christine Day, who had a major problem on her hands last week. Lululemon had to recall yoga pants it sold because of holes in the back side when people bent over. The company is offering refunds to buyers of these products, and the stock got beat up pretty good. Lululemon has been a very good company to own as far as stock performance over the last five years is concerned, and it just goes to show you good businesses and management groups still have their issues. There are two kinds of businesses, those that have problems, and those that are going to have problems.

I find it very interesting that Hewlett-Packard and Best Buy have started to see better performance from their shares. Many have written these organizations as dead because of their operating problems over the last year or so. I still think both will survive and very well could potentially thrive, though I think Best Buy has a much simpler task at hand than HP. However, HP has a couple of strong businesses and is a huge enterprise with a whole lot of staying power. I also think Meg Whitman knows what she is doing and has had a great deal of success, so she is not someone I would bet against. In the same domain as HP is Dell, which is essentially going up for auction this week. If Michael Dell loses his own company because he did not want to pay too much, it might serve him right.

In the energy world, the most notable development was the agreement reached between Russia and China about future energy production from Russia being delivered to China, in exchange for some financing help. Rosneft and Gazprom dominate the energy industry in Russia, and China desperately needs those sources for its emerging growth.

www.bloomberg.com/news/2013-03-22/china-s-xi-strikes-breakthrough-oil-deals-w

If ever there was a company which I think is on the wrong path, it would be Microsoft. Windows 8 has been a bust, but they are still trying to solve the problem-

http://www.businessinsider.com/windows-8-update-windows-blue-leak-2013-3

The cloud is for real and it will continue to change how business is done for quite some time-

http://techcrunch.com/2013/03/23/grow-to-dominate-in-2013-or-watch-someone-else-do-it/

Thank you for reading the blog this week, and I hope you are enjoying the spring weather, wherever you may be.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

Disclosure: I am long SBUX.