Apple’s slow record


“the worst quarter in terms of growth rates in an absolute age (since the iPhone 5), the article point out the obvious, that the iPhone makes up two-thirds of all revenues, and stresses that the newer products (the Watch, the iPad) are not going to pick up the slack of slowing sales of the iPhone. And by slowing, sales unit numbers grew by less than anticipated, a whole 2 million units less than the market forecast, still topping nearly 75 million for the quarter, no mean feat.”


To market to market to buy a fat pig. Stocks in Jozi delivered a session that was the opposite of the day prior, perhaps it was as a result of letting the fellows from the highveld doing the business at Centurion, thumping the English. OK, and Hashim Amla, he is an honorary Joburger, he wishes he lived here and didn’t have to commute between his hometown of Durban and his team in Cape Town. KG, Quinny and Temba Bavuma. Although, I know you chaps from Cape Town, you will claim Bavuma. The bottom line is, if you want a job done, ask us Joburgers next time, OK? And to think that those three went to three of the best known schools in Joburg (St Stithians, KES and St. Davids respectively). C’mon St. Johns, pull your blue and red socks up. Clive Rice and Bruce Mitchell are not enough, OK?

Back to the business of markets, we added a smidgen over two-thirds of a percent here in Jozi, stocks were led higher by gains across the board, mostly however by the resources index. And specifically the gold stocks, I noticed that several of the companies share prices making new 52 week highs were the gold producers. It seems like deja vu (missing my accent marks, forgive me internet), the last three January periods have seen gold stocks rally hard into the close of the month and then unfortunately all fizzling out over the rest of the year. Some of the moves are more eye popping than the after effects of a raw habanero, and of course feel a whole lot better for the folks holding the stocks.

Over the last 3 months, the share price of Harmony Gold is up 212 percent. True story. At the same time, over the last 12 months, the Harmony Gold share price is down nearly 3 percent, essentially flat in Rand terms. Over the last five years the stock is down nearly 60 percent in Rand terms, it always depends where you draw your line in the sand and measure from. The company has been the beneficiary of the much higher Rand selling price of gold, plus the price of gold has recovered a little in Dollar terms. And as such, the company is most leveraged to a higher Rand gold price, hence the explosion in the share price recently. The index as a whole is up 44 percent this year, what an astonishing move when measured against the overall market, which is down nearly 7 percent. Will it last? Your guess is as good as mine, the earnings ultimately set levels of share prices, if those are likely to be sustainable, then yes. If not, then no. That may as well be a no comment at the footsteps of the courthouse.

Over the seas and far away in New York, New York, stocks rallied sharply into the close. The Dow Jones (spell checker changed it aptly to Down Jones yesterday, apologies) added over one and three-quarters of a percent, the nerds of NASDAQ rallied a less impressive 1.09 percent, whilst the broader market was again somewhere in-between the two, which is normally always the case. The S&P 500 added 1.4 percent by the close, led by energy and materials stocks, which added over three percent.

Again, a rallying oil price has everything to do with the movements in stocks, whilst a windfall for consumers means more consumer related activities and purchases, stresses in the energy sector point to worries for the banks and investors holding debt associated with the same said companies. The suggestion is that half of all energy junk bonds are distressed, that amounts to 180 billion Dollars. Is that a lot? Yes, and no. Yes, that number sounds like a huge amount and is of course someone else’s asset, not such a “good one” any more. Whether or not it is going to cause a broad based financial meltdown remains to be seen, I suspect not at all. Memories of the financial crisis are still relatively fresh, perhaps that is why caution remains the better part of valour currently.

Stocks across Asia this morning are trading higher, apart from the Shanghai Stock exchange, which as we all know acts detached and decoupled from global markets. Another down day there, and that market is now down around 23 percent since the beginning of the year. Ouch. As we often say, add 100 million brokerage accounts, only 25 years of capital markets of relatively small size (compared to the economy), which is very immature by global standards, a propensity to look to save like crazy and a high level of risk taking and you have the perfect cocktail for volatility. And irrationality. A vicious rally could happen at any time, higher levels of leverage may be adopted at any time and markets could ramp up sharply. Equally the opposite, which is currently happening, could play out. We don’t own any stocks listed in China, or derivatives thereof.


Company corner

Apple, the largest company by market cap, at an astonishing 554 billion Dollars as of last evening (that equates to over 9 trillion Rand), reported numbers yesterday. These are numbers for the first quarter of their 2016 financial year. The headline from the company on their investor relations website says: iPhone, Apple Watch, Services & Apple TV Drive All-time Record Revenue. Record quarter all around.

The WSJ however says the following: Apple iPhone Sales Grow at Slowest Rate Ever, the FT leads with Apple’s iPhone growth era comes to an end, whilst the Bloomberg (not behind a paywall, most accessible) headline is Apple Forecasts First Sales Drop Since 2003 on iPhone Slowdown.

Read them all, they pretty much say and stress the same thing, the worst quarter in terms of growth rates in an absolute age (since the iPhone 5), the article point out the obvious, that the iPhone makes up two-thirds of all revenues, and stresses that the newer products (the Watch, the iPad) are not going to pick up the slack of slowing sales of the iPhone. And by slowing, sales unit numbers grew by less than anticipated, a whole 2 million units less than the market forecast, still topping nearly 75 million for the quarter, no mean feat.

And then guidance, which is also important, fell short of what the same said analyst community had pencilled in. And their biggest engine of growth, China, is perhaps not growing at the pace that the “90 dayers” were hoping for. What is a 90 dayer? It is someone who suffers from quarteritis. Quarteritis is a condition that I am certainly guilty of, when the going for a specific quarter is good, you tend to be drawn in, equally the opposite is true. Try not be a 90 dayer, try not get sucked in and suffer from a bout of quarteritis every 90 days or so.

CEO Tim Cook in fact made points worth noting about the most successful product that almost any company has ever had, from a profitability point of view, on the conference call (you will have to sign up, then it is free to read), courtesy SeekingAlpha: Q1 2016 Results – Earnings Call Transcript.

“We sold 74.8 million iPhones in the December quarter, an all-time high. To put that volume into perspective, it’s an average of over 34,000 iPhones an hour, 24 hours a day, seven days a week for 13 straight weeks. It’s almost 50% more than our Q1 volume just two years ago and more than four times our volume five years ago.”


It is a classic Oliver Twist and gruel (thin porridge) moment from the market, perhaps Apple certainly are not the mean master, nor is the market the poor little 9 year old boy, either way “Please, sir, I want some more.” The market wants more. The market wants higher iPhone sales, it wants a new product. The last real smash hit, which seems to be falling away is the iPad. I still have the version 1 that “works” for my needs.

In fairness, the products are so awesome that you don’t really need to renew that quickly. That is the biggest issue plaguing the company, as far as Joe Investor is concerned. Forget the fact that the current product is hugely profitable for the company, which could see a refresh cycle this year no doubt (the iPhone 7) catapult the sales higher (as the 6 did), the question then comes off the higher base, how much more?

The share price reflects all of this news. Post the results the stock is down two and a half percent. The cash and cash equivalent (around 216 billion Dollars) relative to the market cap at the open (540 billion Dollars) is nearly 40 percent, the highest percentage I can remember. The company is still growing earnings as a result of strong buybacks, the earnings multiple reflects the current reality, the stock is currently trading at less than 11 times, with the dividend yield of over 2 percent pre-tax. Granted that a lot of cash is offshore and some argue should be discounted (they would have to pay high tax rates to bring the cash back), I am sure the stock holders know that. The company also has piled on the debt, in order to facilitate the strong buyback and dividend policy.

The fact is that Apple are capturing you in their ecosystem, households are receptive to their products, the Mac is growing market share in a shrinking PC market, that tells you that the ordinary person still recognises that quality trumps the pay off on the “quality” price of the product too. As a stock holder it is concerning that a new product seems a way away, one has to remind oneself that quality is enduring. Whilst the product sales as a result of global economic weakness cited by Tim Cook seems to have set the price in a funk, the company has the resources and capabilities to reinvent, to grow other services and products through invention or acquisitions. After a while equally the currency headwinds will abate. We continue to maintain our buy rating on the business, most especially on current weakness.


Linkfest, lap it up

This is one of the reasons that the US is/was considered the land of dreams. Through most of the 1800s the Wild West was still being tamed and if you wanted land, you basically just had to show up and you could start a new life – A French Communist Utopia in Texas. Basically the utopia didn’t work because the men sent to start it were inexperienced and many died on the trip to Texas.

Sticking with todays Apple themeApple is making big leaps in processor technology – and Intel should be worried. Building their own hardware won’t impact profit margins that much but what it does do is allow Apple to have even greater control of the user experience, which is the reason people stick with Apple when they start using their products.

As people become more health conscious, as governments have rising health bills and tighter budgets, the easy target will be rising taxes on junk foods – Big Soda now has a planet-sized problem on its hands. If governments are paying our healthcare bills then it seems right that they can dictate to a degree what we eat? It will take some time before any meaningful taxes could be added but I think it will happen.


Home again, home again, jiggety-jog. As mentioned, stocks across the East are on balance higher, stocks locally will no doubt open higher, US futures are lower, no doubt Apple will drag things down, being such a big constituent of the index. We have opened better here on the session, led today (so far) by the platinum stocks.


Sent to you by Sasha and Michael on behalf of team Vestact.

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