Sort of thing that makes you cynical about the integrity of markets.
Had mentioned in an earlier post that China will do whatever it needs to do to prop up its markets and it is doing so with all kinds of interventions since then. But this is expected and the Chinese markets are considered "manipulated" by most.
Had also mentioned that I was worried about Apple's results on the markets. In fact, I am more worried about that than Fed minutes or China since Apple has sufficient footprint to drag markets down. So, I have been monitoring Apple news and Twitter chatter. Apple going down below $100 is a psychological watershed moment for the markets.
Yesterday was a curious day for Apple. After opening down badly like it has been doing lately, it suddenly reversed course after 11AM Eastern and ended the day positive.
Turns out this coincided with a bullish report put out by an analyst at FBR Capital.
http://blogs.barrons.com/techtraderdaily/2016/01/04/apple-this-miserable-dark-period-for-investors-will-pass-says-fbr/who just a week earlier was almost bearish on the stock calling it "white knuckle time" for Apple but has been very bullish for Apple with calls up to $180/share for Apple in 2015.
All this is normal for analysts especially those that corporations seem to keep in their pockets not just Apple.
What is not published in most news is that FBR Capital is also a market maker for Apple and benefits from trading of Apple shares. Presumably, they are also involved in the massive stock buy backs Apple has been doing to prop up its price. This is what makes yesterday's action very interesting and suspicious.
I don't hold Apple stock except via mutual funds like most diversified portfolios and have no reason to talk about Apple one way or the other. I own a lot of Apple devices. In a way, I will be happy for the sake of my portfolio and the overall markets if Apple can hold its share price above $100.
But is there a qualitative difference between China and Apple in the way they do "market puts" to prop up share prices?
SEC does not consider stock buy backs as market manipulation although many consider it so.
http://www.bloombergview.com/articles/2015-06-15/senators-think-stock-buybacks-might-be-manipulativehttps://hbr.org/2014/09/profits-without-prosperitySome even considere it bad for the economy concentrating profits
http://www.theatlantic.com/politics/archive/2015/02/kill-stock-buyback-to-save-the-american-economy/385259/
Comments
Apple is exceptionally reasonably priced, but I think that does not change until Apple starts to tell the story of what the future beyond the iPhone looks like. People are concerned that the company is so reliant on the iPhone and if sales of that do start to slow or decline, that's more than a little problem.
However, at what point is that priced in? I mean, p/e of 11 and forward p/e of 9, tons of cash (although a lot of it overseas), nice dividend and buybacks. Apple does need to diversify beyond the next evolution of the phone year in/year out, but again, one could argue that at this point, a lot of that is priced in. If something happens - Apple makes a purchase rather than comes up with something - then I think Apple could do exceptionally well.
It just becomes a matter of patience and I think people are really growing impatient for the "next big thing" from the company. The things in recent years are all well and good, but I think people are - right or wrong - wanting to know what comes after the phone.
As for Apple going under $100, I think it'll probably happen - you're hearing stories about production of the iphone 6s being taken down by as much as 30% (http://news.investors.com/010516-788145-apple-may-slash-iphone-production.htm?ven=yahoocp&src=aurlled&ven=yahoo), but I'm not sure the market is quite as reliant on Apple as it might have been a few years ago.
Apple is a fine investment and I think you're getting to that area where if you're going to invest in it, now is probably the time as many have grown frustrated and moved on to to what is working now. Just really depends on patience and time horizon.
I don't know about the analyst situation in this case, but I don't think many of them are really worth listening to. So many are the last to take price targets down on the way down and the last to raise them on the way up. Ultimately, I guess I do have the philosophy that there are things likely going on beneath the markets and that will not change, nor can I change it; it becomes a matter of investing in compelling companies and really not having a focus at all on the day-to-day because you are going to run into this, that and the other. If you're in a quality company that does well over time, there's going to be a lot of day to day noise along the way.
Mon action was a good example of that but the conflicts of interests with a market maker for the stock and the buyback actions of Apple is even more disturbing. That was what I wanted to get across in the original post.
Perhaps it should be a different thread on the valuation of a company like Apple which is tangential to this thread.
My perspective on that based on doing valuations of tech companies both pre and post IPOs is that valuations are crapshoots in the current markets. Fundamental metrics are not any more valid than consensus on the price of tulips or bitcoins. Look at the valuation of FANGs and yet we cling to old-fashioned notions of P/E etc.
Apple is in consumer discretionary space where the fickle sentments can change very quickly within a year based on the next big thing. This is why some of the discomfort at Apple's lack of visibility into the pipeline is justified and the valuation metrics stay low (after all valuations are just social consensus metrics).
It is not difficult to establish a value for the company for investments in an objective sense. The capital markets when it was truly about investing had the following simple basis:
Current fair price/share = Shareholder value / share (net assets/cash/etc) + present cash value of the dividends expected over the period of time you were valuing it + present cash value of the increase in shareholder value in its balance sheet from its operations - the risk premium (that the company will not be able to make those dividends or the share holder value will decrease over that period)
It has nothing to do with multiples of anything or what the investor behavior/psychology is (except for the small part it plays in assessing the risk premium). This is/was investing.
What we do in the current markets are speculating (regardless of how long we hold it) because companies don't even have to pay dividends and companies like Apple don't really need your money when you buy a stock.
What has changed? Vanguard's Jack Bogle described this perfectly. The markets have become speculative on what you may be able to get from an investor in the future than what the value of a company is and that is potentially unlimited based on money supply, risk appetite, etc. In other words, a "greater fool" premium is now added to the above calculation which depends entirely on social consensus of the risk appetite and money supply with nonsensical multiples metrics which don't guarantee anything.
This becomes even more obvious when you do valuation of companies in the tech space especially the new ones pre-IPO but also applies to all stocks on the market.
The metrics are mosyly delusions of objectivity we try to maintain in this "social game" and are encouraged to do by those that stand to gain from it.
Sorry about the long post. Got carried away.
On a side mote, I had a chance to test drive iPad Pro versus Touch over the holiday for business uses. iPad Pro is much better in just about every aspect. Historically Our company uses mainly Windows systems and we are shifting to other platforms to improve productivity.
Absolutely. I fully accept the idea that I am a small fish in a big pond, and therefore - personally - I have to really look far into the future when I own something from the standpoint of, I am tired of being hyper-focused on the day-to-day noise.
I mean, I own Gilead, which is trading with a 9.5 or so p/e and basically has hit the ball out of the park each time out in recent quarters. I mean, it's almost a joke when the company has a positive news story that "Oh, so it'll be a down day for Gilead." It's absurdity, but I own it, I've added more and I really don't ponder it all that much; I can very easily see owning Gilead years from now. If Gilead announces that they are going to buy something, I can easily see the stock trading at a more reasonable multiple. I have no idea when that will happen, but I reinvest dividends in the meantime and the company has a buyback plan in place.
"Mon action was a good example of that but the conflicts of interests with a market maker for the stock and the buyback actions of Apple is even more disturbing. That was what I wanted to get across in the original post."
Things going on with analysts would not surprise me, but it goes back to the idea of having to have to have a long-term view because things like this are a reality and may very much effect the short-term.
Additionally, along the lines of the analyst situation you mention, the view that I have is that a lot of people in finance push legality to the limit and as long as they don't make a lot of noise, they keep doing what they're doing. It's only when they become too noisy that they get their wrist slapped - see Martin Shkreli recently, for example. Shkreli's still tweeting and still doing his video chats. People who rig LIBOR and do things like that probably were doing it for a long enough time until they were bold enough with it that they got in trouble.
There's a lot in finance that is pushing the limits all over the place and it will continue to go on because politicians aren't going to do anything about it. Too big to fail is now even bigger, no one learned anything from 2008, etc etc etc...
Also, don't apologize for a longer post. I've enjoyed your discussion.
The sad fact is that 95% of politicians have no idea whatever about what's actually going on in the financial arena, and the 5% who do and would like to actually take some sort of corrective action are crucified as "socialists bent upon the destruction of America and all that we proudly stand for" or worse.
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How many Apple fans would deride Apple for manipulating share prices when they are vested in it? That is like a baseball fan being asked to condemn use of PEDs in his winning team before they are caught! If you don't like baseball, look at deflategate or spouse abuse scandals, etc in NFL on how fans react based on which side of a winning team they are on.
Back to investing, I don't really get this short-term, long-term view as if the long term gets rid of all the "bad" ways in which markets function. Our percepton of what the market is, is colored by the chambers we live in in the same way once people tried to create models of the earth before anyone ventured out far.
Let me give an example in the pharma/bio-tech space that @scott brings up. I see that BioTech is very popular amongst members in this forum. It is true of anything that is high-flying. When asked why, they would probably say something like "lots of innovation, cures a lot of problems, aging demographics, necessary healthcare, etc". All true but as real as a flat earth explanation to reality. If Gilead isn't performing, why it must be dumb investors focused on short term which will go away if you have a long term vision. Perhaps, but it may turn out to be completely wrong too when it plays out.
Being involved in the tech space from funding, running startups to creating valuations for exits opens one's eyes to how markets function. BioTechs in the Bay Area has been a real hot space to be in. It may or may not last and has implications on the bigger companies as well because the "bigger fool premium" has inserted itself into that space.
BioTechs worked differently from Computer/IT/Semiconductor startups before because of the FDA approvals. They have a all-or-nothing characteristic in that you can work on some technology and if trials go well and you get FDA approval, you hit the jackpot else you went completely bust. No chance to pivot, etc. So, what happened when money wasn't flowing like water is that BioTechs often ran out of money before FDA approvals, or ran into stumbling blocks. Big pharma that once had huge internal R&D gave up on that and found it better to keep acquiring these starving startups to fill their pipelines as they would have removed the technology risk by then with trials. They assumed the FDA approval risk after much due diligence of the company. Venture Capital got a decent return but no unicorns (Billions of dollars). Bigger pharma or biotechs grew via acquisitions.
Easy money changed all that. VCs now could invest hundreds of millions of dollars into each startup than the tens before and more important discovered that they could get bigger returns by doing what Computer/IT startups were doing. Instead of selling to big pharma, go public even before FDA approval. Leveraging the "bigger fool premium", the pay-offs were bigger (except for the ones holding the shares in the end when FDA approval didn't come through). Because the startups could raise capital in hundreds of millions, they had no need to sell to big pharma whose pipelines were threatened. The future implications of this is what is crimping some of the high flying big companies in the circles where the actual valuations are made (in hedge funds, private equity, etc who are not as dumb as popular public perception paints them to be. They do badly at times because they take large risks not because they are dumb). It is a double whammy for some of the bigger companies (even if they are minting money now). Less acquisitions for their pipeline and money flowing into new IPOs instead.
The retail investors now took all of the FDA risk and in some cases even the technology risk when biotechs went public too early. This is similar to Computer/IT companies going public without any revenue yet. Easy money over the last decade made all this feasible with money chasing returns justified only because of the "bigger fool" premium valuation we have in place.
Will this last? No, but no one knows how long it will. Certainly, increasing rates tightening money supply is going to crimp the current plan pipeline and once IPO markets become inaccessible to BioTech startups, they will become feeders to big pharma again. But not all big pharma will necessarily survive until then based on their current and future pipelines. That creates a risk which crimps their valuations. Most retail investors wouldn't have the information necessary to evaluate which ones will survive and which will not which is dificult even for institutional money. Current cash flow and revenues are not good indicators of what might happen. Problem with "bigger fool" valuations are that they can collapse suddeny and dramatically.
None of this has anything to do with the underlying demand for health care. It is part of the easy money distortions and the consequent "bigger fool" game being played in the markets that has overwhelmed the supply-demand calculations.
I suspect commodities markets are also suffering from a collapse of the valuation game when financial institutions got out of commodities trading under increased scrutiny. It is my conjecture not being in this space that the "synthetic" demand for oil and commodities collapsed rather than all of it being due to reduction in "physical demand" which seems unlikely given how dramatic it has been without a recession.
This is what happens when you encourage long posts...