Apple

With Apple down about 25% from its highs, concern is mounting related to slowing iPhone sales and questions are arising related to their ability to come out with new and innovative products.  Apple has always been great at “seeing around the corner” and coming up with incredibly innovative products that consumers did not even know they wanted or needed.  As Henry Ford said, “If I had asked people what they wanted, they would have said ‘faster horses’”.  With the shares trading at a 10 P/E ratio and 5x EV/EBITDA, the market certainly thinks that with Steve Jobs gone, the company’s ability to “see around corners” has diminished.  Time will tell whether this is true or not.  But even if it is not true, Apple currently has almost $150 billion in net cash on their balance sheet.  It might be that their next big idea will not be related to what they know, but who they know.  Perhaps they will use that cash to invest in another company that is still seeing around the corner.  

Stock Market Contest

I hope everyone had a great holiday season.  As the new year begins, many people are thinking about the year ahead.  With that in mind, it is time for the annual stock market contest.  As I type this, the S&P 500 stands at 1990.  Please submit your guess (S&P 500 value at year end) by responding to this email.  Any and all are eligible. If you are reading this from a source other than an email, please send to bluce@carnegieinvest.com. The deadline is 11:59 pm on January 5^th.  I will not be sharing the names of the participants, except the winner if he/she chooses, but I will be sharing aggregated information for fun.  Here is a chart of the S&P 500 over the last two years to give you a frame of reference:

The Sharing Economy

I am fascinated by the new “Sharing Economy”.   The sharing economy is the new trend of people sharing their skills and resources with total strangers.  Technology has brought people together like never before and in ways never imagined.  The most recent sharing economy entity that has caught my attention is skillshare.com.  On skillshare.com, people sign up to learn random skills about a variety of subjects.  The key here is that the “teachers” are other users—total strangers—sitting at home behind their computers showing people the skills that they are passionate about.  Once they get more than 25 viewers, these “teachers” start to get paid.  Some examples the exploding Sharing Economy are (these all have links you can click):

Market Weakness

Since August, with the exception of a six-week period that ended earlier this week, the S&P has been trading below its negatively sloped 200-day moving average for the first time since 2011.  The 200-day moving average is a widely used method to define whether an index is in a downtrend or uptrend.  With this in mind, it would be easy to argue that the market has begun a downtrend.  Over the last 25 years, the market has performed poorly when below a negatively sloped 200-day moving average and vice versa. Since 1990, the S&P has increased almost 1000%.  Within that span, Investing only during periods when the S&P was below a downward sloping 200-day moving average would have resulted in a 75% LOSS of capital.  Currently, the market has just barely ticked into this territory, so it is quite possible that a “whipsaw” like 2011 occurs, but it is worth acknowledging this development.  MORE:  Are Stocks Headed For A Bear Market? 

Autonomous Cars

As I may have mentioned in a previous blog, Teslas are now able to drive themselves on the highway.  In just a few short years, the technology has evolved from cars merely having a rearview camera to cars that alert you if there is someone in your blind spot to cars that can drive themselves on the highway.  In California, there is fleet of self-driven Google cars driving around the roads every day.  Like any new technology, how exactly this will change the world is still speculative, but the changes are likely transformational.  This article, while aggressive, shares some potential economic impacts that autonomous vehicles may have:  How Uber’s Autonomous Cars Will Destroy 10 Million Jobs and Reshape the Economy by 2025 

An interesting moral dilemma for self-driving cars is whether to design them save the occupants or the lives of others in a life-threatening situation. For example, let’s say a group of six people unexpectedly crosses the street and the car has the choice of avoiding them at the cost of the occupants’ lives or hitting them, thereby killing some pedestrians but saving the occupants’ lives.  Which way should these cars be programmed?  It would definitely be weird to know you are in a vehicle that will sacrifice your life to save a greater number of other lives.

   

Flattening Yield Curve

Over the past two years, short-term interest rates have been rising steadily while longer-term rates have generally been falling.  This of course means that the yield curve is flattening.  So what does a flattening yield curve mean?  Theoretically, it can mean any one or a combination of the following:

I pondered whether I should hold back this blog, since it will make two in a week, but my guess is that readership will be low next week given the holiday.  I am hoping some of you will find the first bullet point interesting enough to quiz the family with during Thanksgiving break.

Fact Du Jour

One-third of the Fed district banks are run by Goldman Sachs alumni.  

Last night when I went to bed, my clock radio only had 18% battery left, so I was worried that it might not have enough juice to make it through the night.  This made me think…if back in 1985 you had told someone that a single company would be the market leader in all of the following consumer goods markets, what would you have said?: 

Non-Farm Payrolls

Non-farm payrolls for October were much better than expected, coming in at 271,000 versus an expected 185,000.  This means that market was up today and that people were applauding the surprisingly strong economic data, right?  WRONG!  Conversely, the market digested it as a signal that the Fed will increase rates sooner rather than later, which is theoretically bad for most stocks.  Looking into the specifics, high-income stocks like REITS and Utilities were down the most, and Financials were relatively strong.  Further, the dollar moved strongly higher on this news, which is a negative for the materials and energy stocks.

M&A

M&A activity remains very strong and, in fact, there were several deals announced today.  The chart below shows North American deal volume since 2003. As you can see, M&A activity is higher now than in 2007.  In the past, heavy deal volume often coincided with peaks in the stock market.  Is this time different?  Will this heavy M&A activity continue?