Featured Trades: (APPLE SURPRISES AGAIN)
1) Apple Surprises Again. Wow, and double wow! That's all I can say about Apple's (AAPL) ballistic earnings. Talk about firing on all cylinders and the turbocharger and the supercharger at the same time! Apple is now the world's second largest company and is boasting a positively mind boggling $76 billion in cash, one of the largest hoards in history.
While the 2,000 plus (AAPL) analyst community is scouring the horizon with potential technology takeover targets, let me propose one that most are ignoring: Apple itself. With these kinds of returns on capital, the wisest thing the company can do is buy back its own stock, providing additional returns to its already ecstatic shareholders. Buying anything else would be a step down in quality, profitability, and outlook.
Of course, the company is behaving as if the 2008 crash is coming back tomorrow, hence the huge insurance policy. This is erroneous. I happen to know that it is not coming until next year, or 2013 at the latest. They also have to brace themselves against the prospect that the brilliant Steve Jobs will go on to his greater rewards in the near future.
If the company does take my advice and start a serious buyback program, the stock will soar to $500 in a heartbeat. Then it will require only one more double to get to my long term target of $1,000 a share. I've never been one to pat myself of the back, but in this case I'll make an exception. Every time I put out this prediction, I get tons of abuse from other investors and 100 new subscriptions from happy and hardworking? apple employees. So here it is again in the next piece below, which I originally put out at $250 a share on June 3, 2010.
Hey Steve! I have another idea on how to use your cash mountain. Ever thought about getting into the newsletter business? My returns on capital are even better than yours. I'm only an hour away. Let's talk. Lunch at Stacks in Campbell, maybe? I'm sure they have something vegetarian there.
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Featured Trades: (NEXT STOP FOR APPLE: $1,000)
2) Apple's Next Stop: $1,000. When I took a young, cocky, long haired, Levis wearing Steve Jobs around to meet Morgan Stanley's institutional investors to pitch an Apple share offering 28 years ago, I vowed never to buy anything from the man. He was such a great salesman, and possessed such a messianic devotion to his product, the risk of getting legged over had to be great.
This proved a good strategy for the next 18 years, when the company nearly went under three times, and the stock repeatedly plunged from its initial listing price of $22 down to $4. Disastrous products like the Apple Newton came and went, and then poor Steve got fired. Ouch!
Living in the San Francisco Bay Area, I was also creeped out by the fanatical cult following that Steve enjoys. Criticize an Apple product here, and you risk getting attacked, ostracized, deleted from address books, and chopped off Christmas card lists. There was also no end of abuse from my IPod and Imac addicted kids.
I have to confess now that my prior prejudices lead me to miss the boat on Apple for the last decade, when the stock soared from $4 to $275, eventually topping Microsoft (MSFT) with a $238 billion market capitalization last week. To see the company bring out a ground breaking, high end $499-$829 product like the IPad and sell 2 million units in a short two months during unstable economic conditions is nothing less than amazing.
The recent stock performance has also been miraculous, bouncing back from a flash crash low of $195 to challenge its old high in a matter of weeks, while the rest of techland lies in ruins. Forecasts for the global smart phone market are ratcheting up by the day on the back of surging demand from emerging markets. Sales could reach 250 million units annually by 2012, of which 17% currently is sold by Apple.
The company has become a monster cash flow generator, spewing out $12 billion over the last 12 months. It sits on a cash mountain of $23 billion, or $45/share. Apple now has the envious problem in that sales of several of its products are going hyperbolic at the same time. Some analysts have Apple's earnings skyrocketing from the current $12/share to $30 over the next two years, which at the current 22 multiple would take the share price up to $675.
If the company's multiple expands to its pre-crash average of 35 X, that would take the stock to a positively nose bleeding $1,073, giving it a 400% return over the next two years. I'm not saying that you should rush out and load up on stock today. But it might be worth taking a stake on the next wave of fear that strikes the market. Note to readers: (originally published June 3, 2010).
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What a Long and Winding Road It's Been
Featured Trades: (TIME TO GET ON THE (SPX) ROLLER COASTER), (SPY), (SPX)
3) Time to Get on the (SPX) Roller Coaster. I think yesterday's reaction to a rumored settlement on the debt ceiling was a great 'tell' on the short term direction of the financial markets. The S&P 500 popped 20 points, bonds roared by two points, and it was off to the races for commodities. However, gold took a $30 hickey.
To some extent, I am making a political call here. I think that there is a 100% chance that we get an agreement on the debt ceiling by the August 2 deadline because the republicans have unwisely, and some would say recklessly, painted themselves into a corner.
The debt ceiling is the responsibility of the House of Representatives, and using it as a weapon to achieve political gains has never been done before. Reagan did it, Clinton did it, and Bush did it big time. If they fail to take action and the US defaults, all President Obama has to do is suspend payment of Social Security checks and correctly blame it on them.
That would assure a big win for the democrats next year and return to them control of both houses of congress. There is no way the republicans are willing to risk even a remote chance of this. So deal they must, and very soon.
A final agreement could create a short term love fest for equities and take the (SPX) up to the old high of 1,370, and possibly to a new yearly high of 1,400.
This is not exactly a low risk trade. I am not predicating the onset of a whole new bull market here, just a swing up to the upper end of a narrow, tedious, and boring range.
You can expect some volatility as the rumors continue that a deal is on, then off, then on again. But we know that the final answer is 'on', so if you get any big dips, you might want to double down.
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Featured Trades: (INTEGRATING AMERICA'S POWER GRID)
2) Integrating America's Power Grid. Until now, America's power grid has been divided into three unconnected chunks, making transnational transmission impossible, leading to huge regional mispricing. While California and New York suffered from brown outs and sky high prices, electricity was given away virtually for free in Texas.
A group of power companies is now proposing to build the $1 billion Tres Amigas superstation in Clovis, New Mexico that would connect all three grids. The plant would use advanced superconducting technology that will send five gigawatts of power down cables cooled at 300 degrees below zero.
The facility would solve a major headache of alternative energy planners, and will no doubt accelerate development. It would allow the enormous wind farms on the drawing board in the Midwest to ship energy to the power hungry coasts. Ditto for the mega solar projects proposed in the Southwest deserts, and the big geothermal plants being built in Nevada.
With Obama sending tidal waves of government cash towards the sector, the timing couldn't be better. It is also great news for major alternative suppliers like First Solar (FSLR). Some of these projects might now actually make some sense.
Featured Trades: (THINK AGAIN BEFORE BUYING THAT VACATION HOME)
3)Think Again Before Buying That Vacation Home.If you're entertaining buying a vacation home any time soon, I'd think again. In my annual review of the residential real estate market in the High Sierra mountain hamlet of Incline Village, Nevada, and I am sad to report that antidepressant addiction among realtors there is still at epidemic proportions.
This is the town on the shores of sparkling Lake Tahoe that is the home to the Godfather III, former junk bond king Mike Milliken, the mythic arms dealer Adnan Khashoggi, and a high school with one of the worst drug problems in the state. Devoid by edict of the down market fast food chains that afflict most of America, Incline boasts two municipal golf courses, where at 6,300 feet, the air is so thin that your drive travels an extra 50 yards. If you want a Big Mac, you have to drive down the road to California, if the road isn't blocked by snow.
Incline is also a Mecca for libertarian millionaires drawn by the absence of a state income tax. Unfortunately, they also possessed the financial sophistication to buy trophy waterfront homes, extract cash-out refi's all the way up, invest the proceeds in the stock market, and lose it all in the subsequent crash.
The result has been a meltdown of Biblical proportions in the housing market. Of the 8,000 homes in the village, 400 are for sale at distressed prices and another 400 or more discouraged sellers hang over the market. Brokers report a brisk business in short sales, foreclosures, and sales on the Washoe County Court House steps at prices down 60%-70% from the 2006 peak.
Jumbo financing is now an extinct species, unless you're happy to pay a 200 basis point premium over conventional loans. So the high end market has ceased to exist. One fabulous property on tony Lakeshore Drive, with every imaginable upgrade (a heated driveway, beveled glass windows, an elevator, and a fireplace in the bathroom?), originally listed at $14 million and sold for $4 million. Only cold, hard cash talks here. But high net worth individuals hate tying up capital in an illiquid asset when more attractive options about. Precious metals coins are especially popular in the Silver State.
Some properties have been on the market so long that snow drifts have collapsed balconies, the local wildlife have moved in, and prospective buyers are scared away by offensive odors. Break-ins by black bears have become a serious problem, leaving basketball sized poops on the living room floor and finally answering the eternal question, 'Does a bear shit in the woods.' Abandoned homes see their pipes freeze and burst, causing irreparable damage. In Las Vegas, foreclosed homes can be easily spotted from the air by their dead lawns and green swimming pools. In Incline the 'tells' are the ten foot high mountains of frozen snow dumped there by snow plows. I guess all real estate markets really are local.
Owners used to be able to cover half their annual carrying costs by renting out their properties during Christmas and New Year's, and for a few weeks in the summer. Unfortunately, that market has collapsed also. There are not a lot of high rollers willing to fork out $10,000 a week for a vacation rental in a recession. An earlier start to the school year has wiped out a good part of the prime summer months.
The only consolation is that conditions are much worse in Las Vegas. The optimists concede that prices could stay down for another decade. The pessimists can already be found at the bottom of the lake with the Godfather's Fredo Corleone.
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Featured Trades: (IS THE FAT LADY SINGING AGAIN FOR THE TREASURY MARKET?)
1) Is the Fat Lady About to Sing Again for the Treasury Bond Market? One of my best calls of the year was to pick the bottom of the Treasury bond market in February and pile readers into synthetic long positions by shorting puts in March. That handy little trade brought in a nice 4.51% profit for my model portfolio.
All good things must come to an end. Since my watershed call, the
Treasury bond market has rallied an awesome ten points. The long bond ETF (TLT) has soared from $87 to $98. My logic was that a flight to safety would send Treasury bond prices to the moon, and that we have gotten in spades. While the 'RISK OFF' trade started for the main indexes, gold, silver, and oil on April 29, it really started in February for copper, banks, and technology two and a half months earlier.
With QE2 now over, I think the party is about to end for the bond market. For the last eight months, the Federal Reserve has taken down virtually all of the Treasury's new issues. That amounts to $75 billion a month. That massive quantitate of new bond buying is over.
Private US and foreign central banks are not going to be able to make up the difference, no matter how many of their cars, textiles, electronics, toys, and finger traps that we buy. This big problem is that the bond market these days is very much like a Ponzi scheme. Unless there is a steady inflow of new suckers, the entire plan collapses like a house of cards.
So I am going to use this strength in the bond market to sell short some out of the money calls with September strikes. I'll be picking strike prices that equate to a ten year yield of 2.40%, last year's low in yields and high in prices. That allows room for a huge, multi decade double top in bond prices to unfold over the next three months and still allow me make money on this trade.
If I can see more confirmation of a double top in the bond markets, then I am going to have a reconciliation with an old flame, the (TBT), the 200% short play on the Treasury market. The only way I can lose money on this trade is for yields to blast through to new 30 year lows, driven by a true double dip recession and an utter collapse in the stock market. The volatility index for the stock market (VIX), stuck at a lowly 17% is telling us that is not going to happen, at least within the next two months, anyway.
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Additional Pieces And Charts For Premium Subscribers
Featured Trades: (THERE WILL BE NO QE3!)
1) There will be no QE3! Twice in the last week, rumors surfaced that Ben Bernanke was considering a third round of quantitative easing, first in the Fed minutes, and then in Wednesday's congressional testimony. The risk markets rallied furiously, and then quickly gave it all back.
If I have been asked one question more than any other this year, it is whether there will be a QE3. My answer remains the same: No, not on your life, not a snowball's chance in hell. My reasons are legion.
For a start, with the economy growing at a feeble, lethargic 2% rate, there is just enough growth to make QE3 unnecessary. All of the liquidity injected into the system by QE 1 & 2 is still there, but has yet to be used. It is the 'pushing on a string' theory with a turbocharger. That is why the Fed's balance sheet remains at a lofty $2.8 trillion. Bernanke has to wait for the existing liquidity to be put to work before he contemplates the creation of any more.
The political environment in Washington does not auger well for an additional measures to stimulate the economy. While Bernanke is thankfully independent of the congress and the president, he is not an idiot. In any case, there are a dozen additional tools the Fed can put to work to help the economy, which we will only hear about after the fact.
There are many more things that the administration can do as well. Witness the International Energy Agency's recent attempt to manipulate the price of oil down with its release of stockpiles. A mere $10 drop in crude is worth an entire tax cut in terms of its impact on the global economy. Expect many more of these to come.
I think at some point in the future we will see the son of quantitative easing. But not until we are plunging into the next recession in 2012 or 2013 at the latest. Then they will call it by another name. So QE3 is well and truly dead. Please stop asking the question.
What's Next Ben?
'The Fed can print money now, but they can't print jobs,' said Keith Wirtz, president of Fifth Third Asset Management.
(SPECIAL GOLD ISSUE)
Featured Trades: (GLD), (RGLD), (AEM), (GBG)
1) The Gold Bulls Are Vindicated. For the faithful who have successfully crossed the desert and suffered the slings and arrows of critics and the ridicule of non-believers, gold's move today to an all-time high of $1,586 delivers the greatest of all vindications. All it took was some comments by Ben Bernanke about the remote prospect of a future QE3, and it was off to the races. Another round of the European sovereign debt crisis is sending panicky continentals into gold in droves. Yesterday, buying of gold ETF's like (GLD) reached 21 tonnes in gold equivalent, one of the largest days on record.
It didn't hurt that we are about to enter a period of traditional strength in the gold market, with the Indian wedding season only two months away. Actually, it wasn't much of a desert, maybe more of a Zen rock garden, as the barbarous relic was stuck in a tedious and tiresome $100 range before it resumed its recent ascent. The Chinese buying I predicted put a floor under the price much higher than traders anticipated, frustrating hoards of buyers lower down.
So now the question arises of what to do with your bounteous profits, and how much risk does the yellow metal present here. I get asked this question a dozen times a day, by some who have been long since the current move started more than a decade ago at $260, and others who stood on the sidelines and watched in awe as it went to the moon, kicking themselves all the way. Is it too late to get in?
They call the yellow metal the barbarous relic for a reason. Let's face it. We've had a great run. Gold has been one of the top performing assets by a long shot, soaring some 510% since 2002, while most other asset classes sucked. Investors did even better in the futures, leveraged ETF's like the (UGL), and gold mining shares or their out of the money calls.
Anyone considering a short here will be insane to do so, as you will be going against the long term trend. Obama has not suddenly turned into a paragon of fiscal rectitude, and Ben Bernanke still has the keys to the printing presses. The Fed has yet to even admit its role in the credit bubble of the last decade. Fiat paper currencies are still running a frenzied race to the bottom. Politicians of both parties see the only way to win elections is to inflate, and to debase the greenback.
Almost all short term money market alternatives globally are yielding close to zero, meaning that the opportunity cost of owning the gold is nil. It turns out that they aren't making gold any more. The output of gold has fallen by 12% annually for the past decade, compared to a doubling of production costs to over $500/ounce.
Reserves everywhere are playing out, and top producer Barrick Gold (ABX) isn't opening a new mine at 15,000 feet in the Andes because it likes the fresh air. The upcoming slugfest in Congress over the debt ceiling will almost certainly cause many investors to just throw up their hands in despair and start shopping for American gold eagles at Amazon.
Now that we have broken out to a new high, many traders think the yellow metal won't pause to catch its breath until we hit $1,600. I still think my long term target of $2,300 is a chip shot, but it might take three years to get there. There are higher predictions of $5,000, $10,000, and $50,000 based on ratios of gold to broadening definitions of monetary assets (see below).
Below are the downside support points on the charts, with my comments.
$1,521 -50 day moving average, probably holds, but a break signals a more serious pull back
$1,422 '? 200 day moving average held last time, should work again. Unlikely to get there, but the world is a big buyer if it does.
$1,050- The 2010 low, the old multiyear high, and the place where the Reserve Bank of India kicked off the current love fest with its surprise 200 tonne purchase in 2009 months ago. Unlikely to get there, but the world is a big buyer if it does. Bet the ranch here.
$680 '? The 2008 low- In your dreams. We aren't going to get a full blown flight to liquidity we saw in that dreadful year. Relegated to the history books for good.
Use any serious dips to accumulate low cost, growing, gold miners with decent valuations, which are enjoying escalating operating leverage the higher the barbaric relic runs. Some new names you might entertain are Royal Gold (RGLD), Agnico-Eagle Mines (AEM), and Great Basin Gold (GBG).
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(SPECIAL GOLD ISSUE)
Featured Trades: (GLD)
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2)China's Insatiable Appetite for Gold. Gold bugs and naysayers alike take note. When the world's second largest and fastest growing economy liberalizes gold ownership by individuals, who happened to be the planet's most fastidious savers at a 17% rate, you better pay attention.
Among other reforms, the Middle Kingdom has repealed the death penalty for the illegal importation of the yellow metal, and is now going to some lengths to encourage individual gold ownership.? The potential demand this will unleash boggles the mind. China historically has been a hard currency culture, and only started using paper banknotes when they were forced upon them as a way to repay debts by foreign colonial powers in the late 19th century.
But the Chinese desire to own gold and silver never went away. In 2010, China imported 73 metric tonnes of the barbaric relic worth $2.6 billion to bring its official holdings to 1,054 metric tonnes. That leaves it far behind the US, which at 8,133 tonnes is the world's largest gold owner. China's gold holdings amount to only $37 billion, or only 1.5% of its $2.45 trillion foreign exchange reserves.
To get China's gold investment up to American levels on a GDP basis, it needs to buy 25 million ounces worth $31 billion. That amounts to 34% of the 2009 global annual production of $110 billion. Being astute traders, the Mandarins at the People's Bank of China are loathe to chase prices, so don't expect them to make up the gap in one shot. Instead, expect a quiet diversion of new current account surpluses out of the greenback and into gold.
You can also expect other emerging market central banks to make the same move. If non G7 central banks from the current 20% average of reserves to the 35% weighting now owned by the G7, it will require 1.3 billion ounces of new purchases, or 20% of the total world supply. I can hear the 'BUY' tickets being written already.
The Chinese aren't going to provide the next spike in gold prices, but they are building a floor higher than anyone expects. That's why the last sell off took us down only 5% to $1,480 before a rebound.
