New: Not Normal

Apple – The New Income Stock

Apple is now an income stock. No kidding.

Traders have given income investors a gift. By crushing a company growing profits almost three times faster than Google, with more cash than most of the S+P 500 put together and after you take cash into account selling at a 50% discount to the S+P 500, traders have created enormous volatility. That volatility means the premiums traders re paying for options are borderline immoral. It is time to take their money. All we do in my service Options Income Blueprint is take the cash options buyers are willing to put up to take on risk. If you like these strategies remember these assumptions – you need to own or perhaps could end up owning the stock. That being said, do not turn away, if you have limited capital there is a strategy for you.

 Strategy One – If You Own Apple – Potential Annual Return, 27%

Let’s say the stock is around $453. You can sell a weekly $460 call that expires this Friday after the close and net around $250 per contract. Do it fifty times a year – take two weeks off to watch the Washington Nationals run through the playoffs and win the World Series – and you bring in $12,250. That is a return of 27% if the stock foes not move. If it does - it will – you have to roll the calls forward or buy them back at a lower price and sell them again.

Strategy Two – If You Do Not Own Apple – Potential Annual Return, 31.25%

 Look at $440 as the technical support price and sell an Apple $440 put that expires after the close this Friday. Do this only if you are a) willing to own the stock at $440 and/or b) you are willing to roll the put into a later strike price should the stock go down. You should get around $265 per contract a return of 0.625%. Do it fifty times a year and your return is 31.25%

Strategy Three – Sell a Call Against a LEAP – Potential Annual 102%

This strategy involves real risk. Not much, but it is real. And this is what you can do if you have limited capital, are an Apple bull and want to generate cash.

 Step One: Buy an Apple January 2014 $450 LEAP for around $45. You now have the equivalent of the stock in your account. You can use that to sell weekly or monthly calls. If you sold the weekly call that expires this week at a $470 strike price, you net about a buck or $100 a contract. Do it for eleven months you generate around $4,700 in cash - using $4,500 in capital. No kidding. Of course if the stock tanks, you could lose all the value in the LEAP. But if you do, and you can sell those calls, and if the stock is moving south you should be generating far more than $4,600 in capital, you can still make a profit.

Think about it. Apple is on sale. And you don’t have to own it to generate very high yield.

 

Apple Earnings – What Next?

You think the market is rational? Google had 5% profit growth and the stock went up 5%. Apple announced 13.5% profit growth and the stock sold off, after hours, 4%. Google sells for 31 times trailing earnings and has declining average click prices. Apple sells for less than 12 times earnings and average selling prices are stable or increasing across their product lines.

 

Here is Apple’s earnings announcement In short – and I took the liberty of adjusting results to reflect Q4 in 2012 having thirteen weeks and Q4 in 2011 having fourteen weeks:

 Revenues were $54.5 billion, up 25% over calendar Q4 2012

• Profits were $13.81 billion, up 13.5% over calendar Q4 2012
• iPhone sales were 47.8 million, up 39%
• iPad sales were 22.9 million, up 64%
• Mac sales were 4.1 million, down 15%
• Cash on the balance sheet was $137 billion or 28% of the market cap at the close of trading.

 And with these numbers, by far better than any company in tech land or the S+P 500, the stock sold off in after hours trading.

 The company, regardless of the seemingly endless and unfounded concerns by analysts, traders and erstwhile Apple experts, is clicking on all cylinders and these are astounding results in a world economy barely growing. Apple is now a Warren Buffet company – an overwhelming brand company with a strong management group and product lineup selling at a deep discount to the market and loaded with cash. If he could afford to, I bet Buffet would buy Apple. Apple is growing more than 20% a year – if it is a bad year it will be just 20%, it could be more than 30%, the range from analysts is quite wide.  And it makes money on its hardware products, something not true for most of its competitors.

 

That is the company. What about the stock?

 One year ago the stock closed at $423.65; the stock closed at $509.45 today, up 20% but well off it’s high north of $700. The S+P 500 is up 13% over the same time period. Not fair – Apple’s earnings will come in up more than 35%, the S+P 500 earnings were up 2%. From a fundamental valuation point of view, the stock is selling at a discount of 12% to the S+P based on trailing earnings, it is selling at a discount of more than double that based on consensus estimates for AAPL and the S+P 500. Google sells for 31 times trailing earnings, Apple for less than 12. And Apple has far stronger profit growth. If you go a bit deeper and look at enterprise valuations – taking the value of their cash into account – the stock is selling at a more than 40% forward discount to the S+P 500. Not to mention it is growing and the rest of the S+P is barely seeing any revenue growth.

 And the market does not care – at least not right now. The traders have taken hold, people are still taking some profits, giving investors the opportunity of a lifetime to buy the best company on the planet at a 25%-40% discount to the market. Yes, investors. What about traders?

 Let the stock stabilize through the end of the week. Then if you agree with me buy it and immediately sell calls – the sale of weekly or monthly calls will produce a 20% or more return if managed properly even if the stock does not move. Or look to sell a February put about four strikes below wherever it settles on Friday – if you are willing to own the stock at the strike price of the put.

The stock is on sale. You might was well generate a great deal of cash and income and enjoy the sale the while it lasts.

What Do We Do Now Mister Boehner?

The Speaker of the House, John Boehner, waved the white flag last nightand did what every good politican does in times of crisis -- he disappeared for a while, sending the House of Representatives home through Christmas. Does he understand most businesses and individuals - all involved in making investment decisions impacted by tax policy and federal spending -- are taking time off before Christmas? Yes, this cvolum eventually gets to investment possibilities but the political backstory deserves a few words. Agnostic words - my politics are not for public consumption - even though they may not appear to be.

It is hard to find a parallel to Boehner’s political ineptitude these past 18 months. Yes, he has a mathematically illiterate caucus – except when it comes to reading polls before primaries – no more literate than his Democratic counterparts. Yes, his right wing can never get anything they want that will pass the Democratic Senate. And yes, you never know when House Majority Leader Eric Cantor will re-sharpen the knife he tried to use on Boehner last summer.

That being said, Boehner’s troubles began when he assumed his role was to lead the Republican House Majority. It is not – his job is to be Speaker of the House, the entire House, and he has a constitutional, political and moral obligation to serve the country, not his party. The great Speakers – Sam Rayburn, Tip O’Neill – leaders of the entire House knew this when they compromised their overwhelming majorities in the House with Republican Senators and Presidents. Boehner is more akin to the failed leaders of the House in the period leading to the Civil War when the radical wing of the Democrats – backward looking Southerners – stopped any initiative that could have forestalled the Civil War. Boehner’s failure to lead the entire House is at the root of the fiscal cliff mess and the market instability related to that mess.

The issue now is whether President Obama will speak and ask thirty or so Republicans to cross the aisle and vote with the Democrats on a bill that passed the Senate earlier this year, a bill that would keep the Bush era tax cuts for all but those making $250,000 a year or more. He may, he may not. The political risk is zero – if he succeeds, he succeeds. If he fails he gets to blame the Republicans.

What will happen? Obama may succeed in finding thirty votes if he asks for them, Boehner may get a personality transplant over the weekend and so on. The bottom line: the U.S. is going over the fiscal cliff and the question is when is some order restored in Washington. The theoretical drop dead date is March, when the U.S  hits the debt ceiling again.

Enough about politics – what about politics and markets?

Markets had begun to discount political failure and while there will be instability it is hard to see a big selloff until we get hit by bad economic news. According to surveys by Changewave Research (part of the 451 Group), almost one third of businesses have and will continue to delay investment decisions due to the mess in Washington. This has created a noticeable drag on the economy that is being masked by GDP numbers that reflect inventory builds and the reduced cost of energy imports rather than real economic growth. This statistical anomaly will end in Q1 and the data showing a recession is here or around the corner will begin to hit the markets. Right around the time the U.S. hits the debt ceiling if the folks in Washington don’t get their act together. The flip side of this drag in business investment is these investments are being delayed, not canceled – for now –and the U.S. could see a mini-boom if the political equivalent of Moe, Larry and Curly – Boehner, Cantor and Senate Minority Leader Mitch McConnell - could figure out how to politically manage their caucuses and get a deal done.

How do you prepare for this instability, exploit this mess?

I am a true believer the best time to build a buy long term position is during times of instability. Take these three realities that do not change even if we head into a recession.

People gotta eat, here and in China.

People want cheaper and cleaner hydrocarbon based energy.

Washington is not healing anytime soon.

Consider averaging into growth companies with tremendous fundamentals – the best by far are agricultural outfits like Terra Nitrogen (TNH), Mosaic (MOS) and Potash (POT) or fracking outfits and beneficiaries such as US Steel (X) and Calumet Specialty Products (CLMT). Buy in 100 share lots, sell calls along the way, and use some of your cash to buy longer term calls on the VIX, the measure of market instability.

One last note – the American public is, two to one, ready to blame the Republicans for a lack of resolution of this problem. If the fiscal cliff mess lasts too long, and the economy takes more of a hit, the Republicans will lose the House in 2014. Does this matter to markets? Traders will tell us over time.

 

The Coming Burst in Growth and Progress

Economic growth is confused with economic progress – growth being a game of numbers, progress the evolution of an economy from lower value-added to higher valued-added output. Growth is seen to be linear, with business leaders, politicians and pundits more, rather than less, hysterical when it is not. Economic progress is a leaps and bounds process, normalizing into a linear shape over the course of decades. Within five years, the United States will see a burst of economic growth and economic progress due to the approach of energy independence, continuing superiority in computing capability and an increasingly productive and flexible workforce. At the heart of this burst of growth and progress will be the US manufacturing sector.

The U.S. has seen great economic progress throughout its history with that rate of change accelerating in the past century or so due to two great leaps. These leaps are best labeled as “energy” and “computing,” In the period of 1885 to1910 the discovery of ‘easy to exploit’ and therefore inexpensive supplies of hydrocarbons fueled the rapid industrialization of the nation principally around the automobile. In a period of five years, from 1969 to 1974, as a dramatic spike in oil prices signaled the end of the ascendancy of an automobile driven manufacturing economy, the microprocessor and the Internet were born.

Both bursts of progress were greatly aided by policies towards labor. Previous sentence needs some clarity. In this first burst of progress the nation supported economic progress and growth with liberal immigration policies and progressive policies that mitigated the potential negative impacts of a radical labor movement. In the second burst, aggressive policies to broaden the pool of college and post graduate talent, combined with enormous increases in defense spending on computing and related products, helped launch what is now known, in the broadest of terms, as the IT industry.

A third burst of economic growth and progress, fusing energy and computing, and supported by labor, is on the horizon.

• The U.S. is rapidly returning to a position of ascendancy in energy, with the International Energy Agency now forecasting that the country will pass Saudi Arabia as the world’s largest oil producer within a decade. Combined with natural gas output this will enable the U.S. not only to become energy independent, with all its consequences, but be the low cost producer and consumer of hydrocarbons in the developed world.
• As the U.S. approaches energy independence, the importance and relative value added of software, cloud and network based computing is growing compared to the relative value of hardware. The former is dominated by U.S. firms; the latter by Asian firms. As the price of devices, as well as the profits from devices and the gross margins available for future development from these devices fall, the opposite is true for the non-hardware aspects of computing.

 

 

Support from the work force – “human talent” - is coming in three forms:

• The cost of labor, from the factory floor to the IT hub, is falling in the U.S. compared to its competitors.
• The recent Great Recession has forced many workers to accept higher levels of uncertainty in pay, health care and other benefits in order to find work. At the same time, federal initiatives have created the perception that the safety net for laid off workers is stronger than before, especially in the area of health care.
• The U.S. labor pool is now the largest, as a percentage of the population, than at any time for any nation in human history. National policies towards women, minorities and immigrants have created the broadest, deepest labor pool in the world.

Why is this last point so important? Energy is the foundation for a society to improve the productivity of work, in turn improving the quality of life for members of that society. Computing, in all its forms, is the ability of man to improve communication and analysis of the world around us, a capability that began with the invention of the printing press. Computing and energy have been the twin drivers of economic progress over the past six centuries – the Gutenberg printing press complemented with the invention of low cost and mass production of charcoal in Britain in the 17th century. Going forward, the productive capacity of a society—which is the sum of the abilities of all the members of that society--can now join computing and energy as a dominant driver in creating a new leap in economic progress.

This evolution of economic progress being based on not just  energy and computing power, but the value of human skills, is not a new concept. It is one of  the basic tenets of capitalism as articulated by Adam Smith, who was first and foremost a humanist and creator of a system of moral values that ended with, and did not begin with, capitalism.  Smith, best known for that mostly unread bible of capitalism, The Wealth of Nations, was years before the author of an even lesser read work, The Theory of Moral Sentiments. That book’s value can be found in the first few pages when, and this is a paraphrase, Smith states – he does not argue – that nothing troubles us more than seeing the suffering of another human being and nothing rewards us more than seeing that suffering alleviated by one of our acts or an act by someone else in society. This notion of civil behavior is the moral predicate of capitalism. The work and wealth created in a capitalist system free of unfair profits due to an efficient marketplace was Smith’s solution, in part, to human suffering. A capitalist system in and of itself is the primary engine of social justice in Smith’s world view. The elevation of skills and abilities inside that capitalist system, by all workers, is therefore a primary goal of a morally righteous society. And, according to Smith, the participation of all who are willing to work in the marketplace produces the healthiest of all possible economies and societies.

This issue – labor – is prompting a growing debate in the U.S., one to be examined at a later date. More and more media coverage, such as a recent story on CBS’ Sixty Minutes, highlight a disconnect between the availability of skills and the requirements of new jobs in factories, with blame falling on the nation’s educational system and the unwillingness of employers to pay for training of new workers. This is a secondary issue; the larger issue is the ability of policymakers to create a path to the creation of millions of semi-skilled and unskilled manufacturing and related jobs.  Prior to the availability of low cost natural gas, any discussion suggesting the U.S. could see a renaissance in manufacturing using the less than skilled was seen as absurd. This is no longer the case.

Low cost energy is creating enormous opportunities to build “core” industrial facilities – refineries, smelters, petrochemical plants and so on. According to Dow Chemical more than 100 plants are on the drawing board or in the permitting process. These core facilities will provide a foundation for investments in manufacturing facilities using their output and employing workers with a wide range of skills. And this is why the United States can see a burst of economic progress – the lifting of millions into higher value added employment – and not just economic growth.

A quick look at this path to a burst of growth and progress reveals three major public policy issues.

Energy: The greatest potential impediment to the continuing rapid exploitation of hydrocarbon resources is unreasonable or unpredictable environmental regulations. With respect to hydraulic fracking, the technique of energy exploration and development spurring rapid advances in production, U.S. government policy has been conservative and to date, right headed. Most fracking issues are local, the potential supply of fracked oil and gas is so large the U.S. can easily tolerate some localities being highly restrictive, for the right or the wrong reason, and still attain energy self-sufficiency.  At the most macro of levels, fracking is a very good tool in the fight against climate change – low cost gas has killed off many coal fired facilities, significantly reducing local and national levels of pollutants. Low cost energy means the migration of core industrial facilities – refineries, smelters and so on – to the U.S., which in turns means lower polluting facilities. Simply put, if people are worried about the world environment, where is it better and cleaner to build a new refinery, the U.S. or China?

Computing: The two potential impediments to maintaining a clear ascendancy in “computing” are unreasonable trade policies and a reduced talent and skills pool.  U.S. trade policies must alter the shift in revenues, gross margins and profits currently flowing to nations subsidizing their own computing industries. This shift will create more domestically-centered profit centers that in turn will drive more creativity and computing ability within the country. Immigration policy has favored the importation of high tech talent and could be modified to expand the import of this talent. U.S. educational and immigration policies can quickly arrest any erosion in the size and quality of the labor pool available to the computing industry. Reforming educational policy in a market driven environment could be as simple as granting federally subsidized loans or scholarships to students in certain majors, i.e. the hard sciences.  This issue spills into a larger discussion of labor.

Labor: By far the most difficult issue facing policy makers is the reformation of the US educational system, something that is wonderful and chaotic and under-serving large parts of the population all at the same time. The current national system enables localities and states to educate or not to educate students as they see fit. At the same time, current public policies and an almost universal cultural rhetoric  insists that “college is for all.” While most reforms are aimed at “pushing” students into areas that will theoretically generate employment either without a college degree or after leaving college, the U.S. has a demand pull labor market with demand I don’t understand the previous phrase being shaped by the needs of employers and the sum total of these demand being the demand for skills by the nation. For this reason, U.S. policy could be changed to directly pay employers to train workers to the level required for those workers to acquire near term and perhaps lifelong skills that will support their own income needs and national economic progress.

The noise and rhetoric surrounding near everything related to the economy – the threat of a new recession, the ascendancy of China, the lack of skills in the US labor force – are just that, noise. The twin pillars of economic growth and progress – energy and computing – combined with the broad capabilities of the US labor pool have put the US on a longer term path of economic growth, and economic progress, due in large part to a renaissance in previously shrinking or dormant sectors of the manufacturing economy.

Michael Shulman

November 19, 2012

Trading The Next Decade

The most important headline of the past ten years concerning the long term future of the country was on the front page of the Wall Street Journal this morning, “US Redraws World Oil Map.” The substance of the article was news that broke a few days ago – the International Energy Agency is now forecasting the US will pass Saudi Arabia as the world’s leading oil producer within a decade.

Surprised? Too many people are.

This gush of oil – and perhaps more importantly, natural gas – is the result of a fracking here, there and everywhere. Obama did not win Pennsylvania due to this and that and the other thing; it is estimated by Alliance Bernstein that fracking will put 420 billion into the state in 2012 compared to $7 billion from the coal industry, Ditto – politically – the impact of fracking in Ohio. I have been to auto plants – yes, the bailout helped Obama, fracking helped a lot more.

The macro level consequences, besides having to listen to the primal screams of right wing radio shock jerks, excuse me, shock jocks, are incalculable. These impacts range from a rapid build out of core industrial facilities in the heartland – at least 15 are now in the permitting process, refineries and chemical plants and such – to the president of the US, ten years from now, telling European nations who bullets every two or three years for their armed forces to protect their own oil supplies with your own men and women and euros, we don’t need to any more.

Where should an investor start? Please remember I said investor, not trader.

I like US Steel (X) – I think the US will have a mild recession next year but their shipments of steel for pipelines and fracking is exploding. Capital spending on pipeline construction is up 82% this year – no kidding – and will grow in serious double digits for several years, not to mention the steel that is consumer during fracking. Yes, consumed. Wall Street has yet to completely understand this opportunity.

I like some second tier refiners, notably Calumet Specialty Products (CLMT) – they own the world market for aviation lubricants, a double digit grower, have a great yield mix of diesel to gasoline, are buying little refineries no on else wants in the Midwest and most important, their refining capacity can handle the truly dirty, lousy oil that comes out of shale formations, something most refiners cannot do. The stock yields almost 8%.

And I like the dollar. The US balance of trade is going to improve every quarter for as far as the eye can see –OK, there may be a quarter here and there I am a bit off but the flow of dollars to pay for foreign oil is shrinking fast with imports down 11% in the past year.

Going Long Obama

The election ended, the president was re-elected, the Republican House stayed Republican, the Democratic Senate stayed Democratic. And the sun rose this morning – in the east mind you – at least I think so. What does this mean for investors?

Let‘s step back for a second. The crowd on Wall Street voted against Obama but secretly hoped he would win and keep Chairman Bernanke in place. They feared Romney would replace Bernanke with a central banker who actually believed the nonsense about inflation and raising rates while we are still suffering from massive asset deflation, a massive reduction in credit worldwide and capacity to build anything and everything far greater than we need or can use (except some commodities, more on that in a bit.)

Let’s step back for a minute. The “fiscal cliff’ – which I now believe is highly overrated and this will accelerate as the media turn from the election to the next great set of headlines – is the creation of the right wing of the Republican Party. Don’t take it from me, read Norm Ornstein’s It’s Even Worse Than It Looks, a great read that puts 95% of the blame for gridlock and Washington nonsense on the Republican Party. Oh, did I mention Mr. Ornstein is lifelong Republican and is with a conservative think tank, the American Enterprise Institute. If the this right wing pivots right due to the election, then the fiscal cliff could become a problem and the Republican Party will lose control of the House in 2014, big time, a big deal for investors. More on that in a bit as well.

Let’s step back for an hour or so.  The Obama victory plus the fiscal cliff means we are entering a period of time when politicians will either lead voters or be led by them. If John Boehner, the Speaker of the House, continues to manage his caucus as if he were a traffic cop in Valium, and Obama lets him do it, we will be discussing a series of fiscal cliffs through the next presidential election cycle. Obama has told insiders he is going to take his hopes and plans to people outside the Beltway – sort of a super community organizer, with an airplane at his disposal – to put pressure on Congress to act. If he does that, succeed or fail, he is trying to lead. If Boehner continues to roll over and play dead for his right wing, well, more and more of the same. Leadership does matter.

Let’s step back for a day. What are the odds Obama and Boehner can get anything done during the lame duck session of Congress almost upon us. Zero to none other than pushing back the worst parts of the new taxes and spending cuts for three to six months. Not my opinion, Boehner said this in code. Obama, before he was re-elected, said he did not want to kick the can down the road. That was the candidate. The president will kick it.

Let’s step back for a week. In a week, we will begin to hear noise about how the Republicans are going to pivot, at least short term. Odds are they are not going to pivot as part of that kicking the can down the road exercise on the fiscal cliff issues.  At the same time the debate within the party about how to proceed on all matters will get louder. The money in the Party comes from the far right; the voters they need to win come from the center; than answer is a muddle for the Party and for the country. With one caveat – my first one, bear with me. If the Dems vote together supported by the President, they need roughly twenty five or Republicans to go AWOL to get past intransigence from the right wing of the Party. Boehner is not one to punish those who stray. He may want them to stray. And far more than twenty five Republican members of the House were in close elections and know the Republican base is eroding – fast. If these member go AWOL, there may be real action on structural issues as early as next summer.

Let’s step back and look at the markets and investing. What is going to drive short term trading through the New Year and 2013 based on what we know and can surmise from the election.

• Headlines on fiscal cliff Armageddon and so on will dominate headlines unless Jerry Jones hires a general manager for the Dallas Cowboys. This is going to make markets bumpy for the next 4-8 weeks.  The Street assumes there will be a compromise that at a minimum forestalls going off the cliff. Strangely, I agree with the Street. And since the worst case scenario is part of the market – a real plunge – kicking the can down the road will lift the market.
• During the fourth quarter, business investment will continue to contract due to uncertainty over taxes, the markets etc and the economic recession now raging in Europe – Germany will fall into recession this quarter, things are slowing around the world and Iran no longer wants to buy centrifuges form them or having them build their bunkers. This sets up a lousy first and second quarter, quarters that will register some growth now but when data is revised will show the US will be in recession in the first half of 2013.
• This means 2013 is not going to be as good a year for growth or corporate earnings as we expect, supposedly setting up a down market, History says markets often go down after an election year. Greece is going to leave the euro in 2013 and the recession in Spain will become a Depression and a near Depression in Italy and Portugal. Perversely, this means Bernanke and the Fed will do more.
• Bottom line: any good word on the fiscal cliff pushes the market up or keeps it in the 1345-1515 range on the S+P;, a weakening economy means Fed liquidity measures stay in place or are strengthened, the market goes up or stays in that trading range.

Let’s decide what to do. Do not trade market movements, look for great stocks or ETFs.

• First – everything points to more liquidity, the financial dinosaurs who think more Fed liquidity means inflation and that means they will push up gold (GLD), silver (SLV) and the gold miners (GDX). My favorite miner is Newmont Mining (NEM). These precious metals are gong to have a great run over the next one to four years as inflation fears overcome common sense.
• Second – remember I mentioned commodities? – people gotta eat and the close call in the election pushes major changes in the ethanol program back a few years – again. And when I say eat, I mean eat – more than a billion Chinese are not giving up their higher quality foods even if their economy slows down. Corn means fertilizer – Terra Nitrogen (TNH) may not appreciate a great deal but they sport a 7.7% dividend and due to fracking they are looking at low cost feedstock for two generations. Other fertilizer names – in my Options Income Blueprint service I recommend selling puts on these to generate weekly and monthly income – are Potash POT) and Mosaic (MOS). If China goes to a two child policy, I see these companies as the best long term investments on the planet other than Apple.
• Third – weak markets create great value in companies that trade down with the market despite their performance as a company. Think Apple (AAPL) – they are going to have an incredible fourth quarter with the iPhone 5 according to Changewave Research (part of the 451 Group), as I read the data a quarter far better than expected by most on Wall Street. And if you own Apple, you gotta sell calls if you want income – you can get 12% a year or more selling weekly or monthly calls on Apple.
• Fourth – Obama is going to approve the Keystone pipeline, this is going to be taken as a signal he is fracking friendly, which he is, and people are going to think gasoline prices may bounce a bit but are not going to go nuts given the increase in North American energy supplies. Stable gas plus Baby Boomers means RVs. I like the maker of the best RVs in the world – Airstream - aren’t they beautiful? - you have to visit their factory in Jackson Center Ohio – and they are part of Thor Industries (THO).  Last time I wrote about Thor about a year or so ago and said take a look the stock was under $20, it is now $43 and change, well, think about it, I may know what I am talking about.

One last note – and this is not about investing, maybe. I said I would get back to the possible future of the Republican Party. Here I am. That party is at a crossroads – no pun intended, American Crossroads is the Super PAC run by Karl Rove that spent untold millions using tactics from previous elections to win the 2012 election and we know how that worked out for Romney.  If the Republican Party continues to be driven by seriously right wing money, like that coming from American Crossroads,  they are done. And I am serious – they are going to go the way of the Whig Party in the middle of the nineteenth century, a party soon replaced by, you guessed it, the Republican Party. The Whigs looked backward and they wanted to maintain the status quo; they were anti-immigrant, anti the anti-slavery people if not pro-slavery; and anti the organization and support of the frontier. Simply put, they stood in the way of ideas whose time had come and got run over. And when the Whigs broke up, their rump of a party evolved into the most appropriately named political party in US history, the Know Nothings.

 

 

Trading the Fiscal Cliff, Trading Austerity

Pundits have given up talking about many things that have gone away – temporarily – such as Greece, the debates, life on Mars and so on. The continue to talk up the upside and the downside of the approaching fiscal cliff.

The fiscal cliff, from some of you have just come from breakfast or the equivalent with a Martian is a combination of tax hikes and budget cuts that automatically take effect on January 1 if Congress, in a lame duck session after Thanksgiving, the equivalent of trying to pass legislation on Mars, does not do something. Tradition, history and even the most sanguine view of this Congress says the odds are fairly long in the favor of something not being done or being done for 90 or 180 days.

I could walk you through all sorts of scenarios about what impact Congress and the fiscal cliff may have on markets and so on but there is one central, inescapable reality embedded within each scenario – cutbacks on government programs, be they wasteful or useful, are on the way and some of the more wasteful programs are going to get hit hard.

Last week I wrote about those great legal scamsters, the for profit colleges. Well, they call themselves colleges – they should be called “for profit, take your money, throw some words at you, a handful of you will matriculate and graduate institutions.”

Today let’s look at solar. The big run in solar came about with initiatives in the US, Europe and China boost use of solar energy and wind. All the subsidies and the hope and the hype looked to the sky for sunshine and a stiff breeze. They did not look down into the ground – the shale formations in the ground – and look at fracking. Fracking has increased US oil production 20% in a couple of years, cut the price of natural gas from north of $8 to well below $4 and promises to supply the US (and eventually the world as it catches up) with oil at $80 or less and natural gas at $4 or less for a generation or more.

Good bye sunshine, good bye wind. Wait, wait, we have an election. Obama is talking about renewables. As usual despite their cost. Romney is talking about renewables, someone stuck them in his debate notes. It’s election talk – budget7 reality and marketplace reality will catch up and down, down they go. Into oblivion, for most, bankruptcy.

The market pretty much agrees with this assessment and has crushed many of these stocks. Take a look at some names:

LDK Solar: Obama inaugural, $13.56. Today, $.88. Interim high: $15 and change.

Suntech Power: Obama inaugural, $9.31. Today, $.83. Interim high: $24 and change.

Yingli Green Energy (YGE): Obama inaugural, $5.02. Today, $1.75. Interim high: $18 and change.

Trina Solar (TSL): Obama inaugural, $8.01. Today, $4.43. Interim high: $30

First Solar (FSLR): Obama inaugural, $137.76. Today, $23.02. Interim high: north of $210.

If you had ignored the campaign rhetoric and tracked the price of fossil fuels and the advance of fracking, well, I made my point about solar. There is still room to short these names with puts – the stock with the most room to fall is FSLR.

The hope and the hype now is more muted – but any actually believe some of the campaign and debate nonsense and see Obama saving renewables in some form and Romney increasing defense spending. Ain’t gonna happen my friends. Renewable energy as a mass market product and service is done die to fracking.

What about defense spending? If Romney wins, you can bet the traders will pump up ship building outfits. A pure play is Huntington Ingalls (HII). They will pop and then when it becomes apparent the Navy cannot afford to pay for the ships it already has, the stock will fall. Do I exaggerate? In the past month since the first rumblings of the debates and campaign promises got sharper the stock is up and down, up and down, the market is down, most defense stocks are down. General Dynamics also has a lot of exposure but is so diversified it would be hard to say how the market reacts of Romney wins and then finds he does not have the money for the new toys he wants to buy.

 

The Apple Confusion

Back in the day, when people spoke English in full sentences, face to face, without the intermediary of a cell phone or computer or telephone, an argument of particular strength was often called a “confusion.”

And right now there is a big “confusion” going on about Apple.  By the end of last week it was pretty much known – excuse me, I thought it was pretty much known – that Apple would introduce an iPad mini on October 23^rd. A quick Google of “iPad mini” and dozens of articles discussing features and price points popped up. Yesterday the company made it official – yes, there will be an announcement and event on October 23^rd, product unspecified – and the stock moved up fifteen bucks.

Am I missing something here? Or does this mean the most widely held stock is not really being followed by professionals, analysts and individuals? The answer is yes – too many people owning the stock or even recommending the stock are not watching the company. A pity for  traders, great for investors.

Why the distinction?

If you sold calls (as I did) against an Apple position assuming the world had digested the iPad mini announcement and date you are now scrambling to roll that position given the sharp movement in the stock. My bad – I should have assumed, as I usually do, that most of the people on the Street are woefully ignorant of the companies underlying the stocks they own, discuss and recommend.

If you are an investor, this ignorance is great and supports the stock price – is currently determining the stock price - -which is half of what it should be. Not a few percentage points below where it should be fifty percent where it should be. Yup – my price target in my service The New Normal Investor has $1,200 as the target price and I actually believe it could be $1,400.

Why?

Just compare AAPL to other S+P 500 companies – look at profits, then look at growth rates for the past twelve quarters in revenues and profits, then look at upside catalysts and project future growth rates for revenues and profits, then look at how investors are valuing other large caps with the same growth rates. Sorry, you cannot do that – none has those growth rates – none has growth rates half of Apple’s.

The Apple bears – and they must be traders or people who bet the Houston Astros would win the World Series – argue this growth is not sustainable. Really?

• Apple may have the pre-eminent brand in cell phones, and the best smart phone on the market, and is having trouble meeting demand for the iPhone 5, but the company’s overall market share in the cell phone market is below 4%.
• The Apple Mac family is the premium brand among mass market desktop and laptop computers, commanding prices often twice that of competitors – and is the only product picking up share in a declining PC market (see Intel’s recent earnings announcement) and yet it still has, by my calculations, less than 5% of the worldwide desktop and laptop market.
• The Apple iPad is dominant – totally dominant, 65%-85% share – in the tablet market. That market is growing more than 50% a year. That being said, if you bundle low end laptops and netbooks with tablets – as many market research types do – Apple still has a relatively small share of that market, perhaps under 20%.
• And here is a kicker – the largest cell phone carrier in the world, China Mobile, 640 million  or so subscribers, does  not yet carry the iPhone, “yet” being the key word here.
• How about another kicker for the short term – ChangeWave Research (part of the 451 Group) surveys show pent up demand for the iPhone 5 is by far the greatest they8 have seen for any iPhone.  This means a terrific calendar Q4 and Q1.

The strenuous arguments against Apple are no more than a “confusion,” a creation of those who want to be heard for the sake of being heard, traders looking at very short term movements and headlines. Investors take heart – Apple, the second most valuable brand on earth (http://www.interbrand.com/en/best-global-brands/2012/Best-Global-Brands-2012-Brand-View.aspx) is, to my mind, the closest thing to a sure thing, in the real world, as I have ever seen in my career. And over time the stock should follow.

Disclosure: I own a great many shares of Apple, this position constitutes roughly one third of my liquid net worth.

The Beginning of the End of the For Profit Colleges?

One of the largest legal scams in the country is beginning to unwind – it will take years, and the lobbyists for this industry will push back hard with intermittent success but the scamsters have been outed and the future is clear.  I don’t use the term scam lightly – that is pretty much the conclusion of a scathing Senate report published this past May.

I am talking about the for profit education sector.

The unwinding of this sector became evident after the close yesterday when The Apollo Group, parent of The University of Phoenix,  announced previous quarter earnings that fell, revenue that fell and more importantly, enrollment that fell more than 13%. The stock was hit in after hours trading and opened this morning almost 10% down and at a price point lower than any I could find for the past ten years.

The University of Phoenix is the most successful of these outfits when you look at data on their matriculation and graduation rates – and they are still abysmal. According to a Senate report, quoted in the New York Times, “The Apollo Group, which operates the University of Phoenix, the largest for-profit college, got $1.2 billion in Pell grants in 2010-11, up from $24 million a decade earlier. Apollo got $210 million more in benefits under the Post-9/11 G.I. Bill. And yet two-thirds of Apollo’s associate-degree students leave before earning their degree…. Students at for-profit colleges make up 13 percent of the nation’s college enrollment, but account for about 47 percent of the defaults on loans. About 96 percent of students at for-profit schools take out loans, compared with about 13 percent at community colleges and 48 percent at four-year public universities.”

The crackdown has begun. Going back to that Times article, “Colleges with very high loan default rates in the two years after graduation (now changing to three years) lose their eligibility for federal student aid. As a result, the report found, many of the for-profit colleges try to move students having trouble with repayment into deferral or forbearance until they are past the years the government monitors.”

The full article can be found at http://www.nytimes.com/2012/07/30/education/harkin-report-condemns-for-profit-colleges.html

A summary of the report can be found at http://www.help.senate.gov/newsroom/press/release/?id=45c8ca2a-b290-47ab-b452-74d6e6bdb9dd.

The full reports can be downloaded at http://www.gpo.gov/fdsys/browse/committeecong.action?collection=CPRT&committee=health&chamber=senate&congressplus=112&ycord=0.

The bottom line: do you think this largesse will continue as federal deficit cutting becomes the only thing Congress does for the next few years? The answer is obvious and so is potential for big downside movements in these companies’ stocks over The publicly held players in this space are:

• The Apollo Group – APOL
• Career Education Corporation – CECO
• Corinthian Colleges – COCO
• Devry - DV
• Educational Management Corporation - EDMC
• ITT Educational Services – ESI
• Strayer - STRA
• The Washington Post (Kaplan subsidiary) – WPO

Disclosure: I do not manage money other than my own. I am not nor have ever been short any of these stocks in my own portfolio and will not short them going forward. In my service Short Side Trader I have recommended puts on COCO and APOL.

Apple: It Doesn’t Get Better Than Right Now

I own Apple shares, they represent one third or so of my liquid net worth. The fullest of full disclosure.

Those who bad mouth Apple – the company and its prospects – are so wrong headed they probably agree with Jack Welch that the Bureau of Labor Statistics cooked last week’s jobs report or there really was a continent, Atlantis, that slipped below the waves. Perhaps they even believe the Cleveland Browns can make it to the Super Bowl.

All successful companies are targets of pundits looking for headlines, air time, and investors in their funds. And some of these companies may deserve it for often a stock stays aloft even after a company is clearly on the downtrend. This is not the case with Apple – the reverse is true. Apple is grossly undervalued compared to its peer group, the S+P 500, the NASDAQ, whatever. It is selling off now as money managers pocket profits before they close the year on October 31, as individuals do the same and as traders see Q3 earnings as a bit light due to the iPhone 5.

It is, of course, all nonsense. Here is why.

Brand – Apple has the number one or two brand, based on its value, in the world depending on which set of analytics and which analytics company you choose to use. How strong? They do not have the name of the company on their stores.

Products – Based on critics comments, not mine, they make or own the best smart phone; the best laptop; the best tablet; the best online music store; the best online app store; the best integrated product experience.

Growth – Revenue growth north of 25%, profit growth double that for the past several quarters and, in my view, the next three years.

Margins – on average almost twice their competitors margins in computers, ditto for cell phones, more than double competitors’ margins on tablets, actually, no one else makes a dime selling tablets.

Running Room - unlike any other market leader in living memory, Apple has small to tiny market shares in the markets it is most successful.

• Less than five percent of the world cell phone market -- and growing in double digits.
• Less than five percent of the corporate computer market -- and growing in double digits.
• Less than ten percent of the overall computer market -- and growing in double digits.
• Less than twenty percent of the tablet/netbook/low end notebook market - and growing in double digits.
• Less than ten percent of the music market -- and growing in double digits.

 

Upside Catalysts – Unlike most huge companies, Apple has a series of upside catalysts in the next 1-12 months.

 

• Calendar Q4 earnings will be shockingly high, as will those of calendar Q1. According to surveys by ChangeWave Research (part of the 451 Group) the pent up demand for the iPhone 5 is most they have seen for any Apple product. ChangeWave does hyper accurate surveys that predicted the success of the iPhone – and named it – one year before it was introduced.
• An iPad mini is rumored to be announced sometime in the two weeks to six months. This product will have a lower price point and bring Apple to a new audience.
• Apple is rumored to be on the verge of concluding a deal with China Mobile – a company with almost 650 million (yes, million with an M) subscribers.
• Apple will enter the living room next year with another rumored product, a far more robust version of Apple TV.

 

You may have noticed I am not using point estimates for anything – I see no point, pardon the pun, that is a game for analysts living quarter to quarter and traders living hour to hour. The bottom line is simple – while major tech names from Dell to HTC see flat or negative growth, Apple will growth north of 25% for at least another three years with equivalent or greater profit growth. Better still, if the company only grew 10% on average, and it was valued as other 10% growth stocks in the S+P 500 (there are a few, not many), and maintained margins, the stock today would be worth of $1,240-$1,400.

 

As I said, I own it and to generate my own dividend I write weekly or monthly calls against the stock.  In one of my services, Short Side Trader, I have recommended or have open put positions on Apple victims – NOK, BBY, RIMM, DELL. I also like Apple’s cousins – Corning (GLW) for glass and Sandisk (SNDK) for flash memory.