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October 25, 2023
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Global Market Comments
May 4, 2018
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Global Market Comments
May 3, 2018
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It is the world?s largest company.
It is the planet?s most widely owned stock.
Of the 200 million Americans who possess financial assets, probably all of them own Apple (AAPL), either directly through a trading account, or indirectly though an ETF (it is a massive 11.67% of the PowerShares QQQ), public or private pension fund.
So to say that traders are on pins and needles ahead of the upcoming quarterly earnings report would be an understatement.
A year ago, Apple issued one of the most perfect reports in the history of capitalism.
It blew away even the most optimistic forecasts, announcing earnings per share of $2.33, versus a consensus expectation of $2.16, and $1.75 last quarter.
The firm earned $13.6 billion in profits on $58 billion in gross profits, the largest quarterly profit in world history.
The company sold a staggering 61.2 million iPhones during the three-month period, 4 million more than expected. Insignificant iPad sales dropped from 13.9 to 12.6 million units. MacBooks were in line at 4.6 million units.
No mention was made whatsoever of problems with a strong dollar.? The company now sits on an unbelievable $194 billion in cash, the equivalent of the GDP of a medium sized country.
Most importantly, Apple expanded its share buy back program to $200 billion. The big question now is, will Apple buy another company, or a whole country?
Wow!
Since then the stock has been grinding sideways in the most tedious manner imaginable. It was a classic ?Buy the rumor, sell the news? set up.
Which leads many shareholders to ask if, now that the stock is owned by every taxi driver, elevator operator , and shoe shine boy in the country (now I?m showing my age!), are we headed for another 45% selloff, much like the last time the stock peaked out in 2012?
Certainly, the grounds for concern are out there.
There are now no new blockbuster products coming out until we see the iPhone 7 in September 2016.
There are supply chain worries, as the global manufacturing network is now absolutely mammoth.
Some analysts are nervous about quality control, especially regarding new products like the Apple watch, which should sell an eye popping 30 million units this year.
However, I think this time it?s different.
While you weren?t looking, Apple has turned into a China play. No, they aren?t suddenly eating dim sum with chopsticks at corporate headquarters in Cupertino.
The Middle Kingdom, in short order, has become the firm?s largest grower of its earnings. This is a good thing. Last year saw an 80% growth of sales there. China is expected to become the largest market for Apple products this year.
What?s more, the ballistic growth there is expected to continue. Walk down the street in Shanghai these days, and you are amazed by how many people are speaking or texting into their iPhones, real and fake ones alike.
In fact, they have become the primary means through which people access the Internet there.
No doubt, this is due to Apple?s special relationship there with China Mobile (CHL), which now offers iPhone owners a great deal for their cell phone service. Did I mention that (CHL) has a staggering 750 million customers?
The iWatch is now viewed as the gateway for the sales of as many as 1.2 million future third party developed apps, the number iTunes offers now.
Apple Pay looks to replace Visa and Master Card at some point in the future. Apple TV is still lurking out there in the background.
We?ll learn more about all of this at the next developers conference in San Francisco in June.
All of this leads me to believe that there is far more fundamental support in terms of new products and business lines for the company than we saw during the last cycle.
There is also more distance in the rear view mirror since the passing of Steve Jobs. Successor Tim Cook has since proved himself as a world-class leader.
It turned out the timing for the company to transition from a founder-tyrant to a cutting edge administrator-manager was perfect. You don?t need to hold your breath anymore.
At least the stock market thinks so.
Therefore, I expect to see a $1 trillion market capitalization for Apple sometime in 2018, well up from today?s $602 billion. I think that means you need to use the current dip to load up on the stock.
Those who followed my advice to buy Apple a year ago are now drowning in riches (click here for ?Buy Apple on the Dip?). Since the July, 2013 bottom, the shares have risen by a meteoric 92%. It is the largest company in the world once again.
As a result, I have heard of my readers shopping for second homes on Lake Tahoe, sponsoring NASCAR teams, or buying new Rolex watches for significant others.
I recommended China Mobile (CHL) then as well, the big beneficiary of a new deal with Apple, whose shares have also gone ballistic.
The question of the day is: ?Now what do we do?
You are right to ask the question. The company?s stock is notorious for running up massively into every major product launch, and then giving back a big chunk afterwards.
So while the expected announcement of the iPhone 6 on September 9 is welcomed as producing a major new source of revenue, it could also signal the end of the current run.
Take a look at the long-term charts, and the hair on the back of your neck should stand up. The fanfare for the iPhone 6 will almost exactly come at a potential double top in the stock price. Could we be setting up for the greatest ?buy the rumor, sell the news? of all time?
The last time we visited this territory, which we visited on the launch of the iPhone 5, Apple?s shares plunged a gut churning 45%, prompting some shareholders to dump their iPhones in the trash.
Certainly the problems that caused the rally to fail last time are kicking in once again. The law of large numbers applies once more. Apple?s market capitalization is at $607 billion today. There may not be enough equity investors in the world to push the shares up appreciably from here.
Oh, and because of the recent rapid appreciation, most institutions are now overweight Apple, as they were in September, 2012. The only difference is that Apple accounts for only 3% of the S&P 500, compared to a hefty 5% two years ago.
The shares are now at a 15.5 earnings multiple, up from under 10 at the recent bottom, and 7 if you took out all of the cash. That is still a discount to the main market, as well as most other technology stocks.
The truth is that this is not your father?s Apple.
CEO Tim Cook has shown a much greater respect for investors compared to founder, Steve Jobs, who despised Wall Street with a passion. I know, because I escorted Steve to meet with institutional investors looking at a secondary share issue during the early 1980?s. It was not a happy time for me.
There is a $50 billion stock buyback program in place, which soaked up a ton of shares at the bottom.
We also now have a 2% dividend yield, a mere 37 basis points through ten year Treasury bond today, another idea Jobs poo pooed.
The company is also strategically in a much stronger position than it was in 2012. Apple has a far broader, more attractive, and more advanced product range than it did only 24 months ago. The China Mobile deal has kicked in big time.
There is immense demand for the new larger screen, faster iPhone 6, which will offer consumer untold bells and whistles. Some 50% of the iPhones in existence are 4s?s or older, so upgrades from the installed base will the largest in history.
This will enable it to retake market share from hated rival, Samsung, which moved to a big screen in 2013. This will open the way for an expansion of Apple?s profit margins, possibly by 25% or more.
Samsung?s smart phone strategy all along has been to copy Apple?s patents and milk them for whatever they are worth, before they inevitably lose the next infringement case in court. As I never tire of telling listeners at my speaking engagements and luncheons, you can?t steal your way to the top in technology.
I would expect, at the very least, that the market has to put the double top theory to the test at least once. That alone will prompt a 10% correction, back down to $92.
Then, if we really are still in a bull trend, it will bounce off that number and head to new highs. If it doesn?t, then it?s game over until the run up to the next big product launch. The iPhone 7?
So the clever thing to do here has to be to do a buy write and sell short Apple September, 2014 $105 calls against you existing stock position.
At this moment, you can get 96 cents for them, with September 19 expiration. If you are braver still, you can go out another month and take in $2.01 for the October 17, 2014 calls. Don?t go farther out than that, or you might miss the yearend rally.
That way, if the stock keeps rising, you will sell your shares out at the higher price of $105. If it falls, your average cost declines by 96 cents, or $2.01. Either way, it is a win-win.
Isn?t that what you pay me for?
Meet Your New iPhone
Hedge fund titan, Jim Chanos, is well known for his extremely bearish views on China. He says that the cracks are spreading on the fa?ade, real estate sales are falling, and that the economic engine is starting to sputter.
This will be bad news for the rest of us, as China imports 50%-80% of the world?s commodities. Commodity exporting countries will be especially hard hit, like Canada, Australia, and parts of the US. Modern China has only seen a bull market, and he doubts their ability to manage a true crisis.
There is a widespread misperception that the government will step in and provide any bailouts that will be needed. The domestic Chinese banking system has in fact already been bailed out two times. The harsh reality is that while Chinese companies are selling billions of dollars? worth of new stock issues in the US through IPO?s, a privileged elite is getting their money out of the country as rapidly as they can.
Jim says that he already has short positions in the Middle Kingdom that are profitable. There is no way that even a wrinkle in a market of this size is without global implications, and on that point Jim is right.
However, I think that Jim, who confesses to having never visited China, is missing the broader long-term picture here. China has literally been building a Rome a day, the ancient kind, and the modern size every two weeks. In a year, it builds the equivalent of the entire housing stock of Spain, and in 15 years the equivalent for all of Europe.
While a lot of apartment buildings have been constructed, the country is rapidly creating the middle class to fill them. Even allowing for a pull back from its past blistering 11% per annum GDP growth rate to only 7.7%, urban disposable income per person is expected to grow by 2.5 times to $7,500 by 2020.
Over the same time frame, some 160 million are expected to move from the hinterlands to urban areas. Rising standard of livings mean that residential floor space per person will jump from 270 square feet to 369 square feet, still tiny by Western standards. That is a lot of housing demand.
China has already taken steps to head off a housing crisis, unlike the US. Many banks are now demanding cash deposits of 40%, well over the official requirement of 30%. The government is in effect forcing the banks to deleverage before hard times hit. Too bad they didn?t think of that here.
I think China still has several good years ahead of it, and I am going to pile into the stock ETF (FXI) and the Yuan ETF (CYB) as soon as the current bout of malaise selling exhausts itself. The Country?s real challenge arises when its demographic pyramid starts to invert in about five years, the result of a then 35 year old ?one child? policy, when too many single children have to start supporting two retiring parents.
China: Not Enough Demand?
The Chinese government has announced the most revolutionary changes to its economy in nearly four decades. The implications for global stock markets are hugely positive, and until now, under appreciated. The Middle Kingdom?s state controlled media, never prone to hyperbole, are calling it ?a new historical starting point.?
Chinese stocks have rocketed since word of the broad ranging reforms leaked out last week, and appear to have much more to go. This brings to an end the 3 ? year Chinese growth recession, which saw GDP growth rates shrink from a white hot 13% annual rate, down to a more modest 7%. Until last week, Chinese capital markets were neglected, ignored, and left stranded on a back burner.
This is great news for all of us.
The sea of change promised by the events in the Middle Kingdom barely caught notice in the West, where investors were transfixed by the never ending rise of US equities and other risk assets. But my friends at the senior levels of the Chinese government have been gushing about the great things to come. They compare it to the 1978 revolution, when the ?Gang of Four? was thrown out, and Deng Xiaoping was named premier.
Some 35 years of wildly successful modernization, westernization, and capitalization followed. Chinese per capita incomes skyrocketed, from $100 to $6,000 today. The current round of liberalizations could eventually bring Chinese standards of living to American levels. Give it another 35 years.
Of course, reading the statement issued by the 370 senior party members of the third plenum of the 18th Central Committee, you get no clue of the brave new world they promise. These are always written in obscure code words whose meaning can only be deciphered by tracking nuances, changes, and references over decades. I have been doing this since the early seventies, when Mao Zedong was calling the shots, longer than most Chinese. It was a lot harder then, or am I simply getting wiser in my old age?
The goal of the reforms is to move China from its current emerging status towards middle class. The one child policy was abandoned, which has cut the country?s population growth by 400 million over the last 30 years. This should add back in 400 million in population growth over the next 35 years. Not to do so would risk labor shortages looming in the 2020?s, and the runaway wage inflation that invariably follows.
Internal passports that restricted population movements were abolished. Private property rights are receiving a boost. The economy will become more market oriented. The Chinese gulag that imprisoned tens of thousands was sent to the dustbin of history. The strengthening of the country?s social safety net will free up domestic Chinese savings, which now at 30%, are among the highest in the world. This will bring a surge in consumer spending.
Financial reforms are expected to follow soon. These include a more aggressive path towards a free float of the Chinese Yuan, known locally as the ?renminbi,? or ?people?s currency.? The breadth and depth of domestically traded debt instruments will be greatly expanded. You can expect far more active investment of the country?s nearly $4 trillion foreign exchange hoard abroad, especially in trophy assets in safe havens like the US and the UK. They are already soaking up commercial property loans by the billions here in the San Francisco Bay area.
This will accelerate the evolution of the Chinese economy from an export oriented consuming one to one that is more oriented towards domestic consumption. This is big.
The net net of all this will be to enhance the productivity and profitability of Chinese companies. That is what the Chinese stock markets have been screaming at us since last week.
The prospects for the world economy have been much improved by this second Chinese modernization. Rising Chinese standards of living will produce hundreds of millions of new consumers of American and European goods. Emerging markets (EEM), many of which are indirect China plays, do pretty well in the new paradigm as well. All in all, this should add many percentage points of growth to the world economy in coming decades.
It certainly makes my own forecast of a global synchronized recovery 2014 look good as well. As for stock markets everywhere, think higher, and for longer. ?RISK ON? is ?ON.?
The no brainer here is to buy the iShares FTSE China 25 Index Fund ETF (FXI), which has to rise by 63% just to match its 2007 high. The Chinese economy has more than doubled in size since then, making today?s (FXI) level relatively much cheaper. During this time, Chinese earnings multiples have gone from a huge premium to US ones to a large discount, making them a great rotation play.
If you want to sleep at night, buy the Hong Kong ETF (EWH), where accounting and disclosure standards are on par with those of England, a legacy from its colonial days. You can expect to Chinese Yuan ETF (CYB) to continue its northward market, as I have been predicting for the past four years.
You can also go into single stock plays, like China Mobile (CHL), the world?s largest phone company. Something tells me there are a lot of new customers and upgrades in its future.
Looks like there is going to be a lot more dim sum in my future.
?To Get Rich is Glorious?
Buy the rumor, sell the news. That was again the lesson of yesterday?s new product launch, where Apple (AAPL) rolled out their new premium 5s and low-end 5c iPhones. So many commentators heaped such abuse on the company in the run up to the release that today?s weakness was a sure thing.
Failure to announce a deal with China Mobile (CHL) in Beijing last night was the immediate reason for today?s $30 plunge, which prompted several houses to downgrade the stock. It was a classic ?closing of the door after the horses have bolted? moment. As with time immemorial, your broker is asking you to buy high and sell low, delivering to you a perfect money destruction machine.
However, this time, there is far more than meets the eye. China Mobile wasn?t the barrier to greater access to gargantuan 700 million mobile users. It was compatibility with China?s unique 3G TD-SCMA networks. The new plastic? $99 iPhone 5c bridges that gap.
Chinese customers can now buy the iPhone 5c retail unsubsidized, as are 70% of the mobile phones in the Middle Kingdom, and use them on the local China Mobile network for the first time. Analysts expect this will enable Apple to pick up 6% of China?s mobile market share immediately, much at the expense of rival Samsung. The full China Mobile subsidy package, which the uninformed and non-technical have been looking for, could still be years off, but has been rendered irrelevant by Apple CEO, Tim Cooks, move.
The reality is that Apple?s unit sales will remain stable, or even grow modestly, with no new products whatsoever, its marketing presence is so overwhelming. So the next version of the Mac Book Pro and iPad, due out in coming months, can only deliver upside surprises on profits. Expanded carrier distribution, better ASP?s, and higher margins will be the inevitable result.
The company also has plenty of room to cut prices and build market share as existing products, like the iPhone 4 and 4s, age. It?s clear that the ultimate low end entry point for Apple products will be the iWatch, to be launched early next year.
The net net here is that Apple?s earnings estimates will be revised up for the first time in more than a year.
This is happening with the additional rocket fuel of a massive $50 billion share repurchase program that continues unabated. Corporate raider and major shareholder, Carl Icahn, is trolling in the background demanding more.
It also helps that the company carried off one of the largest corporate bond deals in history at the absolute peak in the bond market five months ago, a brilliant move that resulted from no small amount of prodding from me.
My tumultuous personal life aside, I am entering this trade cautiously as usual, adding a deep in the money call spread that limits my risk. Note too on the chart that the strikes align nicely with major support levels that should provide an extra safety margin. These only have to hold for five weeks for the October expiration to work.
Take a look at the China Mobile (CHL) chart as well, which will go ballistic if the China recovery story is real.
Hedge fund titan, Jim Chanos, is well known for his extremely bearish views on China. He says that the cracks are spreading on the fa?ade, real estate sales are falling, and that the economic engine is starting to sputter.
This will be bad news for the rest of us, as China imports 50%-80% of the world?s commodities. Commodity exporting countries will be especially hard hit, like Canada, Australia, and parts of the US. Modern China has only seen a bull market, and he doubts their ability to manage a true crisis.
There is a widespread misperception that the government will step in and provide any bailouts that will be needed. The domestic Chinese banking system has in fact already been bailed out two times. The harsh reality is that while Chinese companies are selling billions of dollars? worth of new stock issues in the US through IPO?s, a privileged elite is getting their money out of the country as rapidly as they can. Jim says that he already has short positions in the Middle Kingdom that are profitable. There is no way that even a wrinkle in a market of this size is without global implications, and on that point Jim is right.
However, I think that Jim, who confesses to having never visited China, is missing the broader long-term picture here. China has literally been building a Rome a day, the ancient kind, and the modern size every two weeks. In a year, it builds the equivalent of the entire housing stock of Spain, and in 15 years the equivalent for all of Europe.
While a lot of apartment buildings have been constructed, the country is rapidly creating the middle class to fill them. Even allowing for a pull back from its past blistering 11% per annum GDP growth rate to only 7.7%, urban disposable income per person is expected to grow by 2.5 times to $7,500 by 2020.
Over the same time frame, some 160 million are expected to move from the hinterlands to urban areas. Rising standard of livings mean that residential floor space per person will jump from 270 square feet to 369 square feet, still tiny by Western standards. That is a lot of housing demand.
China has already taken steps to head off a housing crisis, unlike the US. The People?s Bank of China has raised bank reserve requirements five times, taking them to among the most stringent levels in the world. That is almost Canadian in its conservatism. Many banks are now demanding cash deposits of 40%, well over the official requirement of 30%. The government is in effect forcing the banks to deleverage before hard times hit. Too bad they didn?t think of that here.
I think China still has several good years ahead of it, and I am going to pile into the stock ETF (FXI) and the Yuan ETF (CYB) as soon as the current bout of malaise selling exhausts itself. The Country?s real challenge arises when its demographic pyramid starts to invert in about five years, the result of a then 35 year old ?one child? policy, when too many single children have to start supporting two retiring parents.
China: Not Enough Demand?
The market hung on tenterhooks all last week, waiting for the Chinese Q1 GDP figure. As recently as Thursday, rumors swept the market that the number could be as high as 9%, well above the consensus figure of 8.4%, taking the Dow up a red hot 181 points. When the flash hit in the afternoon Beijing time confirming 8.1% the equity futures flipped into sell mode. By the time the crying was over on Wall Street, virtually all of the day?s previous gains had been wiped out.
There are a few lessons to learn here for the aspiring trader. Never believe rumors, especially when they are supposed to originate from governments on the other side of the world. They are almost never true. They often originate from someone trying to unload an unfavorable position. Whoever dumped their portfolio of US stocks Thursday afternoon at the close did exceedingly well.
The second is that all is not well with the global economy. I heard China experts speculating that this quarter might be the bottom of the Middle Kingdom?s slowdown. But they are China experts to the extent that the probably ate in a Chinese restaurant once and watched one Bruce Lee movie. So much of what you hear about China in this country is nothing more than guesswork and I never pay attention to it.
I have a somewhat different take. There is no sign whatsoever that China?s growth recession is ending. Sure, domestic loan growth this month rose from ?700 billion to ?1 trillion, but much of that increase is due to carry over demand from the lunar New Year holiday of the previous month.
The biggest problem is that China?s main export customers are in distress. Its biggest, Europe, is in a serious recession and we have no idea how long that will last. The weakness of the Euro certainly says longer. Japan is falling off a cliff. Demand from a weak, 2% a year growing US is recovering, but is a shadow of what it once was. You can see that is the rapidly improving American trade surplus, which dropped from an eye popping $51 billion to $46 billion last month.
Think of the Chinese economy as a battleship. It is not going to turn on a dime. To complicate matters, China is only at the opening stages of a serious real estate bust. You can count on low end housing starts to plunge from 15 million to 5 million this year as the air comes out of the real estate bubble. That why copper has been so dead this year.
Two small easings of reserve requirements since November are not going to halt this slowdown. In fact, I think that Q2 could be even slower than the last. This is a big reason what I am looking for a prolonged ?RISK OFF? scenario over the summer.
Perhaps my old friend, Steven Roach, the former chairman of Morgan Stanley Asian and now in retirement as a Yale professor, put the best lipstick on this pig. The 8.1% report is down only 3.2% from the peak 11.3% growth rate. The 2008 crash saw the growth rate fall 8.2% from the top. We are a long way from that, thankfully.
There is a far more important message in the quarterly figure. This is not a temporary slowdown; it is a permanent one. There is never going to be a return to a continuous, white hot 11% GDP growth rate of the past. Recent years have seen the Middle Kingdom lose many of its competitive advantages.
Runaway wage inflation is rapidly eroding the country?s cost advantage. Oil over $100 a barrel is probably hurting China more than any other country. Remember, much of America?s infrastructure was built at $1 a barrel. This is why ?onshoring? will become the new economic trend of the decade (click here for ?Onshoring: The New Global Trend?).
But, as I never tire of pointing out in my meetings with the Chinese government, slowing the country down to a steady 8% rate is a good thing. This is a more sustainable and achievable rate that the country can live with. It reduces the volatility of the economy, not just for China, but for the world as a whole. Still, I often get back concerns about the country?s ?bicycle? economy that has to move forward quickly or risk falling over. These are leaders well aware that their country has a history of retirement in front of a firing squad instead of at at country club.
The whole affair also shows how important foreign developments have become for US financial markets. Look at the news flow driving markets these days and it all about China and Europe, with 5 minutes left over to wonder about whether Ben Bernanke is going to bring us QE3. That?s why you have to pay attention to someone like me who has been playing the game for 40 years and has pipelines straight into the key foreign ministries.
I think there is going to be a great buy in China sometime this year. Right when traders are jumping out of windows, managers are rending their hair, Merrill Lynch puts out a call to sell everything, and the Dow is down 2,000 pints? you want to back up the truck and load up on Chinese stocks.
This excursion should include international names like Caterpillar (CAT), Freeport McMoRan (FCX), BHP Billiton (BHP), and Rio Tinto (RIO), as well as domestic ones like China Mobile (CHL), China Telecom (CHA), and Baidu (BIDU). These are the companies that will far outperform everyone else in any sustainable Chinese recovery. You will also want to pick up some ETF?s like (FXI) and (CAF). But that time is definitely not now.
China?s Bicycle Economy