INSIGHTS
JAN
4
COSTA’S CORNER: OUCH! THAT STUNG.
After seeing the reaction to Apple CEO Tim Cook’s comments about what a tough year 2019 might be and how China will affect Apple’s bottom-line, many investors are wondering, “Are Apple’s glory days over?”
Is Apple’s warning a warning for all of technology and is China’s apparent slowdown the straw that will break this bull markets back?
Sure felt like it yesterday but I am not a firm believer in Apple’s power to control the story.
Granted the stock has an inordinate amount of leverage in most indices and the fact that it is one of the valuable companies in the World overall, it’s still one company. It makes highly defined products over a couple of categories and is not number one in any of those categories.
It is highly profitable, but so are several other companies in various industries.
It makes top of the line products that, while the company will never admit it, have a limited shelf life.
What makes Apple so outsized in its influence?
To me, it seems, that investors have this unbridled faith in Apple creating the next “Big Thing”.
They did it with the IPOD (one of the greatest inventions of the 20th Century), IMac and then the IPhone. Products that redefined the category they were in or created new categories. That was the Apple way. Invent it, support it, and conquer it.
Herein lies Apple’s biggest problem: There isn’t any game changing technology in the pipeline.
The Apple Watch? Seriously? Neat gizmo but hardly a needle mover.
Self-Driving Cars? They are being schooled right now by Tesla and Waymo and God knows how many other companies that are developing this technology.
So, we all know how secretive Apple is and how they launch when they want to launch but there are thousands of people around the World watching and waiting for the next “Big Thing” and I don’t think Apple has another one in the tank.
I made mention of another problem that Apple has on CNBC right after the IPhone X was released. That is, they are going to start pricing themselves out of the very market they created.
If you have an IPhone 8 and it works fine, why would you spend $1200+ on a new IPhone X if it were only marginally better?
When you have a great product, how much better can you make it?
The only thing that actually saves the product line is Apple’s amazing ability to create products that have a limited lifespan.
No matter how good a product it is, it only lasts, what, 18 months before glitches or apps fail to work properly.
I’m not sure this is a sustainable business model for the long term. People will get frustrated and either switch (probably not very likely) or insist on getting the same exact phone at a much lower cost (not a profitable alternative).
So Apple does have a problem and that problem is how much longer can they sustain greatness? That belief in Apple and it’s ability to sustain that greatness is coming under much more scrutiny now and unless they can actually release products that are game changers and market defining, the Apple Decade may be over.
While I argue the outsize influence of Apple, the much more important issue is China.
The Chinese growth rate for years has been hovering between 6.5%-7.2% and that’s the way Beijing wanted it. This sustained growth helped build the largest middle class in history.
Sustaining that middle class is priority number one and the Chinese government is not going to let a trade war stand in its way of continuing that growth.
Let’s be realistic here, maintaining that kind of growth over a long period of time in a country as large as China is next to impossible without intervention. The Chinese government has intervened several times in the past several years what with devaluing it’s currency, loosening credit controls, massive infrastructure projects and so on.
So this softening of growth is not new to China and I fully expect the Chinese government to stoke that growth in the short term.
Here’s something that is not too painful, yet.
The JOBS report was pretty painless safe to say.
More people working.
Wages going up at a faster clip than at anytime since 2009.
More people entering the job market.
All signs of a robust economy and while maintaining this growth is not expected it is a sign that those short term worries about a slowdown are a tad misplaced.
Remember, wage growth is the single biggest factor in expecting inflation growth.
This is a simple concept that should always be on investor’s minds.
More demand for workers translates to higher wage demands, which then trickles down to higher costs and increased inflation.
I am in that small school that believes inflation can be a good thing.
That is if wage increases are larger than inflationary increases, everyone benefits.
The Fed, ever watchful of inflation has a target in mind and above that target they tend to act. We are above that target and unfortunately, this may prompt some sort of response from the Fed this month (unlikely) or next (more likely).
I will go on record as saying that the Fed should do nothing, no matter how strong the numbers are this month and possibly next. The economy is growing, the fears of recession are there but people are working, manufacturers are manufacturing and consumers are consuming. Why touch that?
Obviously, they look at a much broader picture and a picture much more in depth than what I just put out there but sometimes common sense should dictate the next move and I hope they use some.
Weighting stays the same;
50% stocks
25% Fixed Income
25% Cash
At some point, if readers want it, I will publish a separate breakdown of each component. This might be a much more interesting read since I tend to move in and out of sectors faster than I change allocations.
Is Apple’s warning a warning for all of technology and is China’s apparent slowdown the straw that will break this bull markets back?
Sure felt like it yesterday but I am not a firm believer in Apple’s power to control the story.
Granted the stock has an inordinate amount of leverage in most indices and the fact that it is one of the valuable companies in the World overall, it’s still one company. It makes highly defined products over a couple of categories and is not number one in any of those categories.
It is highly profitable, but so are several other companies in various industries.
It makes top of the line products that, while the company will never admit it, have a limited shelf life.
What makes Apple so outsized in its influence?
To me, it seems, that investors have this unbridled faith in Apple creating the next “Big Thing”.
They did it with the IPOD (one of the greatest inventions of the 20th Century), IMac and then the IPhone. Products that redefined the category they were in or created new categories. That was the Apple way. Invent it, support it, and conquer it.
Herein lies Apple’s biggest problem: There isn’t any game changing technology in the pipeline.
The Apple Watch? Seriously? Neat gizmo but hardly a needle mover.
Self-Driving Cars? They are being schooled right now by Tesla and Waymo and God knows how many other companies that are developing this technology.
So, we all know how secretive Apple is and how they launch when they want to launch but there are thousands of people around the World watching and waiting for the next “Big Thing” and I don’t think Apple has another one in the tank.
I made mention of another problem that Apple has on CNBC right after the IPhone X was released. That is, they are going to start pricing themselves out of the very market they created.
If you have an IPhone 8 and it works fine, why would you spend $1200+ on a new IPhone X if it were only marginally better?
When you have a great product, how much better can you make it?
The only thing that actually saves the product line is Apple’s amazing ability to create products that have a limited lifespan.
No matter how good a product it is, it only lasts, what, 18 months before glitches or apps fail to work properly.
I’m not sure this is a sustainable business model for the long term. People will get frustrated and either switch (probably not very likely) or insist on getting the same exact phone at a much lower cost (not a profitable alternative).
So Apple does have a problem and that problem is how much longer can they sustain greatness? That belief in Apple and it’s ability to sustain that greatness is coming under much more scrutiny now and unless they can actually release products that are game changers and market defining, the Apple Decade may be over.
While I argue the outsize influence of Apple, the much more important issue is China.
The Chinese growth rate for years has been hovering between 6.5%-7.2% and that’s the way Beijing wanted it. This sustained growth helped build the largest middle class in history.
Sustaining that middle class is priority number one and the Chinese government is not going to let a trade war stand in its way of continuing that growth.
Let’s be realistic here, maintaining that kind of growth over a long period of time in a country as large as China is next to impossible without intervention. The Chinese government has intervened several times in the past several years what with devaluing it’s currency, loosening credit controls, massive infrastructure projects and so on.
So this softening of growth is not new to China and I fully expect the Chinese government to stoke that growth in the short term.
Here’s something that is not too painful, yet.
The JOBS report was pretty painless safe to say.
More people working.
Wages going up at a faster clip than at anytime since 2009.
More people entering the job market.
All signs of a robust economy and while maintaining this growth is not expected it is a sign that those short term worries about a slowdown are a tad misplaced.
Remember, wage growth is the single biggest factor in expecting inflation growth.
This is a simple concept that should always be on investor’s minds.
More demand for workers translates to higher wage demands, which then trickles down to higher costs and increased inflation.
I am in that small school that believes inflation can be a good thing.
That is if wage increases are larger than inflationary increases, everyone benefits.
The Fed, ever watchful of inflation has a target in mind and above that target they tend to act. We are above that target and unfortunately, this may prompt some sort of response from the Fed this month (unlikely) or next (more likely).
I will go on record as saying that the Fed should do nothing, no matter how strong the numbers are this month and possibly next. The economy is growing, the fears of recession are there but people are working, manufacturers are manufacturing and consumers are consuming. Why touch that?
Obviously, they look at a much broader picture and a picture much more in depth than what I just put out there but sometimes common sense should dictate the next move and I hope they use some.
Weighting stays the same;
50% stocks
25% Fixed Income
25% Cash
At some point, if readers want it, I will publish a separate breakdown of each component. This might be a much more interesting read since I tend to move in and out of sectors faster than I change allocations.