Tuesday, April 24, 2012

An Apple a Day?

First off, I must confess that I am not one who analyzes individual stocks or has the aptitude (read: patience) to review P/E ratios, growth rates, and the like. However, as an economist who constantly reviews statistics, there are current elements of Apple’s valuation that deserve comment from a broader perspective.

In the interest of full disclosure, I have Apple products, and most likely will purchase additional Apple gadgets at some point in the future. They are not my favorites, but nonetheless, they are part of my technology wardrobe. To this point, however, I can live without my Apple products. In fact, during a recent trip to the West Coast, I was forced to work without an iPad or an iPhone, relying only on my Blackberry and my laptop. And I was - yes, it’s true - just fine.

An Apple a day, it seems, is not what the doctor ordered. Although Apple’s products are cool and life-improving, they are not life-sustaining. I don’t mean this as a shot at Apple, but rather at society. We can get along without i-This and i-That. A recent poll asked people if they would rather have an iPad or a share of Apple stock, which at the time was trading over $600 a share. My answer, although not one of the choices, would be, “Give me the 600 bucks!”

Therein lies the “core” of this story. Apple hit a market cap of $600 billion, which is equivalent to $2,000 for every man, woman, and child in America, or almost 5% of GDP. Hmmm. It just seems doubtful and even mathematically unlikely that this market cap could be sustained, even as Apple continues to sell cool products, generate profits, and hoard cash.

It reminds me of trend extrapolations made in years past. When I was in grade school, I heard warnings about the population explosion, how there would be no room left in the country. On that West Coast trip, however, as I looked out the window, I saw a great deal of open, unpopulated space.

In fact, U.S. population, which reached 308.7 million people in 2010, was up 9.7% over the previous decade, a slower growth rate than in the past. Add in the aging of the baby boomers and a few other demographic facts, and the U.S. could see a significant decline not only in its growth rate but in its overall population in the decades ahead, according to the U.S. Census Bureau. (Probably not a good head wind for Apple stock).

When I was in college, the student body attended an emergency health meeting on campus to discuss the AIDS crisis. The moderator told us, “Look to your right, to your left, in front of you, behind you. One of these four people will die of AIDS by the end of the decade.” Thankfully, that forecast was wrong.
My point is, we can’t take past trends, positive or negative, and project them on the same trajectory for the foreseeable future. In other words, apple trees grow--but not to the sky.

From where I sit, Apple is a fine stock and will probably perform like most other fine stocks, which are mostly influenced by the overall market movement. As readers who follow Astor’s philosophy, you will recall I believe that the equity market is influenced by economic fundamentals.

Will Apple continue its exponential performance of the past? Not very likely. In fact, I would not be surprised if it regresses a bit to the mean.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve results that are similar to those shown. Please refer to Astor's Form ADV, Part 2 for additional information and risks. Analysis and research are provided for informational purposes only, not for trading or investing purposes. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. There is no assurance that the Astor’s investment programs or funds will produce profitable returns, you may lose money. (300001-263)

Monday, April 16, 2012

After the Speed Bump…

Slow down: Speed bump. After that, accelerate with care.

That’s the essence of our near-term economic outlook. Although a tapping of the brakes is likely, there is virtually no danger of going off the road. The economic engine, having finally gained some sustainable momentum, will probably keep moving at a slow and steady pace, with a general upward trend overall for the rest of the year.

But first, the speed bump. Looking ahead to the first GDP report for Q1 2011(advance estimate), scheduled to be released in late April, our expectation is for a slower pace of growth compared to the 3.0% gain logged in Q4 2011. There are already hints that the economy lagged early in 2012. The Institute for Supply Management (ISM) reported that its PMI national composite index had dropped in February 2012 to 52.4 from 54.1 in January. Earlier this month, it reported a one percentage point gain for March to 53.4, which was still below January levels.

The curious indicator has been jobs. Total nonfarm payroll employment rose by 120,000in March 2012, decreasing the unemployment rate to 8.2%. The rate of job growth did slow compared to average gains of 246,000 per month in the prior three months. Expectations for March had been for 210,000 jobs to have been added. Nonetheless, it’s important to keep perspective, given that the job market was gutted during the recession. There was a time we would have thrown a party for a jobs report of +120,000.

It is also highly probable that the comparatively stronger pace of hiring seen earlier this year reflected the fact that, during the recession, employers cut their payrolls too severely and needed to correct that situation during the early stages of recovery. As we move forward, we would look for employment to improve in pace with economic output.

The Fed, in its Beige Book report, called economic growth “modest to moderate” for the period of mid-February through the end of March. Manufacturing, professional business services, and consumer spending were positive, although rising petroleum costs sparked some concern, particularly the impact on discretionary spending—all the makings of a second-quarter speed bump.

Once we get beyond the speed bump, we would expect improvement, but not the classic recovery days of taking 10 steps forward and then 3 steps back. The pace of growth is more likely to be gradual; 2 or 3 steps forward and 1 back. This will most likely create some market corrections as well. Looking at the ranges for the S&P 500 over the past two or three years, we would expect current pullbacks to stay at the higher end of recent ranges. The pullbacks, however, will hopefully only be step-backs, and not an indication of deeper problems or the start of another recession.

We view the step backs that do materialize as opportunities to re-examine investment decisions. Although we never signal or discuss portfolio moves ahead of time, I will say that we are making more than a simple “buy the market” decision. With asset correlations, as I wrote in my previous blog, returning to more normal, historic relationships, we have an opportunity to make investment decisions across a spectrum of assets, which reflect our analyses and opinions for a variety of markets.

Longer term for the year, we would expect that uncertainty related to the presidential election to impact Q3. Then, as we move into Q4, we would seek to reap the fruits of the portfolio adjustments that we are making now.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve results that are similar to those shown. Please refer to Astor's Form ADV, Part 2 for additional information and risks. Analysis and research are provided for informational purposes only, not for trading or investing purposes. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. There is no assurance that the Astor’s investment programs or funds will produce profitable returns, you may lose money.
(303121-259)