Category Archives: Uncategorized

Apple as hegemonic swarm

The global Apple obsession is moving into high gear with the iPad3 on sale and the stock near $600, and what we and the world really need is another blogpost on the company, full of superlatives we have already read elsewhere. Baruch is happy to oblige.

Apple is increasingly the sun around which the planets of business revolve. Just taking the tech sector, there is now no major segment which is not being or will not be affected by this expanding giant ball of financial energy. To others (like Microsoft) it’s not a sun; for them, Apple is a black hole, sucking matter and energy into its gaping maw, or a hegemonic swarm, converting adjacent life into copies of itself and extinguishing diversity. For investors, especially ones focused on technology, Apple poses a quandary: do we need to own anything else? Don’t laugh, it’s a serious question.

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Quid custodiet ipsos custardes?

Baruch periodically, at times of market stress, records his macro thoughts and impressions, more as an aide memoire for himself than anything else. It’s good to come back later to see what I thought at a particular moment.

This might be the occasion to have another go at it.

Contra the more sanguine amongst us, Baruch is more worried about the macro than he has been for a while. At times before he has always had a sense of why the bears can be wrong, be it China consumer growth,  a housing-financed consumer boom, Quantitative Queasing, a new product cycle in technology – even if he hasn’t actually believed it himself, he can see how others could, and frankly that’s all it takes sometimes. This time around the bulls’ cupboard seems a bit bare, and this monumental debt-deleveraging thesis the perma bears have been clarting on about all this time seems, frankly, to be one of the best explanations around to explain what’s going to happen to us all.

In fact the ONLY problem with the bear thesis here is that it seems too easy, too based on an analogue of 2008, in my mind, to be probable. Not that the analogue is unconvincing. Like now, the summer of 2008 was also a time of signs and portents outside the action in debt markets (now sovereign, then subprime), if you were watching closely. High multiple stocks and semiconductor companies and their suppliers were quietly blowing up. Baruch’s stocks started giving way later in the summer slow season (which is where we are now) subsequently rallied briefly, then totally collapsed with the rest of the market in September and October post Lehman.

In Baruch’s experience history is a bad guide; there’s always something different the next time around. Ask the French about the Maginot Line. This crisis will likely be better or worse than the last one, in different ways.

So anyway, this is Baruch’s current internal dialogue:

  • OMFG we are so screwed! It’s just like 2008 again. I’m going to stick my head in the oven, even if it’s electric. It’s like all those newsletter writers say, we’re groaning under the weight of a massive debt burden which will take a generation of low, no or negative growth to get rid of. You seen Tracy Alloway’s AAA rated debt chart?! This isn’t the banks going under, it’s the people who bail out the banks, and once they’re gone the banks will go anyway. It’s an order of magnitude worse.
  • Chill baby. One word: Policy Response. We’re used to this now, and we know how it ends. No one’s dumb enough to let Lehmans happen again on their watch. The Single Market and the Euro are not just the most important economic policy initiative of Europe’s governments, they’re also the most important part of their national security and foreign policies. They’re not going to let that go without a fight. The ECB is there to defend the Euro, and when that’s finally under threat they’re going to step up, or they won’t have jobs. And ultimately, Bernanke’s got our backs — after a decent pause we can have another dose of QE, and I have to say I enjoyed the last one a lot!
  • Wise up, dude. Fiscal is blown up. S&P and the Tea Baggers, whatever they’re called,  seen to that. Don’t expect the Germans to get their wallets out any time soon either, they’re probably enjoying themselves too much, lecturing Southerners about Teutonic probity, and selling Euro-denominated Mercedes Benzes to Chinese people who can’t believe how cheap these things have become. Monetary’s all we got, Trichet’s heart isn’t in it and the operative clause with Bernanke is “decent pause”. The only thing scarier than not having QE3 in this environment is getting QE3 straight after QE2! What would that say about the state of the economy? Homicidal Zombie market eating your brains. Another good word would be “Money Illusion”, no? Bernanke’s got to wait, maybe until Q1 next year if he’s going to be in time for Obama’s re-election. And sufficient damage can be done within that “decent pause” to make last week seem par for the course. As TRB Josh puts it ,”think 1938, not 2008.”
  • What’s wrong with you? You LIKE being miserable? You’re like one of those dinner party bores, oh so wise about how terrible the state of the world is, so wise he kept his portfolio in cash after selling out in January 2009. Last week is just normal seasonality, admittedly a bit spicier than usual, but exactly what you expect in the summer after the Q2 results. And each time there’s some flipping moaning Minnie going on with your “oh we’re all doomed”. We’re down not even 10% from an 11-year peak – 11 year! — in the NASDAQ, and you’re saying that was it, it’s over? You got no basis for that yet. Important parts of the world are growing great, consumer spend in the US doesn’t seem too bad so far either – you seen Mastercard’s result the other day? – and so what, some spreads widened? When the US was going to get downgraded on Friday everyone went and BOUGHT 10 year Treasuries! You have to rethink your definition of a crisis; you’re traumatised, jumping at shadows. Nothing really bad has happened yet!
  • Oh man, are you complacent. When they bought them they were freaking out that there was going to be a recession. The fact they had to buy bonds that they know are going to be downgraded shows how screwed we are!
  • You’re an idiot. Go over-intellectualise and wallow in misfortune. Me, I’m getting me some stocks.

Anyway, that’s as far as Baruch can go. Where are you at?

No Second Chances

Baruch has been reading Asymco, a fascinating techie site he was put onto by Jean-Louis Gassé at Monday Note, and those interested in tech investing should really have a look at it. You can now see the site popping up on more generalist econo-investing sites like AR. Anyway, introductions over; there was something Asymco’s proprietor Horace Dedieu wrote earlier this month that made Baruch sit up and think.  “The post-PC era,” he wrote, ” will be a multi-platform era,

The thesis that one dominant platform wins the mobile “war” is naive.  . . Developers already understand this. Platform vendors know this. It’s time to unlearn the lessons of the PC era.

Evidence for this? Microsoft Windows Mobile platform apps are growing at a percentage growth rate that is faster than WM users grow, who collectively make up so little of the pie of smartphone users that the slice representing them would be mostly invisible. It’s not getting any better. WM activation rates are 1/28 of that of Android smartphones. The platform is continuing to lose share with subscribers yet, strangely, still seems to be gaining relative share in apps.

What appears responsible for this is the previously unheard-of ease of transferring apps from one platform to another, software tools such as Microsoft’s that allow the rapid creation of new apps and their adaptation for different operating systems, and an economic system that is set up to make writing software for mobile applications a “cottage industry” with a thousand points of light, rather than an industrial enterprise with 2 or 3 dominant players. The marginal cost of creating apps and sharing them between platforms seems to be very low indeed.  So why not make or adapt apps for Windows Mobile? You never know, it might come back. Mango, the new version which will be Nokia v.2′s adopted OS, might be the Apple or Android killer Microsoft hopes it will be.

If the ability to run the largest number of apps determines success then, far from being a returns to scale market like the one for PCs, the implication is that the market for smartphone platforms will be fluid, with nothing written in stone. There will be room for their relative shares to ebb and flow, variously dominating, fading and coming back repurposed for the new new thing in mobile computing: on this reading, it will be something like the game console market today, where 3 viable platforms survive.

What this means in its most practical sense is that there is hope for the platforms falling behind now, such as HP’s WebOS, RIM, and for OEMs like Nokia, for whom Mango is the only game in town. The implications for stocks are major. The option value in RIMM and Nokia would be much much higher than current share prices imply. This would make a lot of people who are short these stocks very unhappy.*

Comfortingly for them, however, there are equally compelling arguments that mobile computing will end up more like the PC industry than anything else. Firstly I suspect that, contra Horace, the profusion of WM apps has more to do with the sponsorship of Microsoft and its deep pockets than a sudden developer interest in championing losing platforms.  Secondly, its not just developers who decide who wins; operators remain in the mix. Their atavistc promotions and subsidy policies can also determine which platform sells. Don’t forget, moreover, that O/Ses are free! Android makes it so you can’t underprice zero to gain market share for your new platform. That helps to freeze things in place and mitigate against fluidity.

But most of all, the apps game remains secondary to the real goal of platform competition. The aim of the game, the whole schlemiel, remains to sell hardware, not software. Apple’s app store revenue is negligible in comparison to their hardware revenues, and will be for some time to come, at least until Apple finds a way to persuade people to buy higher ASP apps. Frequent purchase of 90c apps won’t move the needle against a $600-$900 hardware sale, even if everyone buys Angry Birds (and they probably already have). Until the dynamics of the mobile computing market stop being hardware heavy,  platforms are still vulnerable to hardware death spirals of the sort we’re seeing in RIMM and Nokia right now, where scale returns and operational leverage go into reverse

Don’t think either that just because is easier to write apps for a platform it is going to make it break out. The fact is that if all apps were available on all platforms rather than freeing up competition it would be likely to freeze the status quo in hardware into place. What killer app can Microsoft’s Mango offer me that I can’t get on my iPhone? What could possibly make me change my Android phone? A more functional OS? Better hardware at a cheaper price? Possibly. More likely that in the absence of anything significantly better than what I have currently I won’t change at all. Ecosystems are grabbing territory now that it will be hard to dislodge them from.

The dream of a fluid ecosystem for mobile computing is nice, especially for software developers tired of being the bitches of the hardware dudes. But it looks far off still. Mobile looks subject to the same laws that have governed tech markets throughout  history. That law is: no second chances. Value investing in consumer or enterprise tech very very rarely works. This is the key message for those who read Baruch’s last post and have fired their retail brokers and dumped their index funds, and who may be tempted to go off any buy RIMM at a 5x PE (don’t let me stop you, but do let me help you think before you do it)**. The graveyard of history is littered with those names that didn’t come back. For those that did, such as IBM, and indeed Apple, we forget just how low the low point was, and how wrenching it was to do the right thing so as to eventually re-emerge.

* you may think that this group of people includes Baruch. You may think that if you wish. But I couldn’t possibly comment.

** as I have said before, if you take anything you read on a blog written by an anonymous author as actionable investment advice, you may not be too bright. I can do nothing for you.

Embracing heresy

So very like Spinoza himself, who locked himself up with Aristotle and Maimonides before coming out with his great works, Baruch has been consulting ancient texts; in this case, the books of Peter Lynch, especially the all time classic One up on Wall Street. Lynch of course was and is famous for his advice to his readers to invest directly in single stocks, to “buy and hold”, in the parlance. This is now a heretical doctrine, but Baruch thinks its time has come. Or rather, come again.

So let’s say it: I think the best thing for moderate net worth retail investors to consider right now is to take their retirement account back into their own hands. I think people should start to do some research with the aim of buying 3 to 5 single stocks, maybe just as an experiment. And if the experience is good, they can do it, and they gain expertise, they should make single stocks a big chunk, say 1/3 or more, of their retirement account in the next 10 years.

Not many people in the econoblogosphere and beyond will tell you that this is a good thing to do, not least because in many cases it is them and their ilk you have been outsourcing it to all these years.* Even those who don’t have an axe to grind  will likely be mildly horrified by such advice. Take Felix; a couple months ago he wrote:

we don’t want . . . a world where most companies are owned by a small group of global plutocrats, living off the labor of the rest of us. Much better that as many Americans as possible share in the prosperity of the country as a whole by being able to invest in the stock market.

Right on, Felix! And of course, the best way of guaranteeing this is surely by having Americans (why only Americans?) invest directly in stocks!

Well actually no. Felix hurries to reassure us in his very next line

I’m not saying that individual investors should go out and start picking individual stocks.

Felix is clearly aware where his train of thought is leading, and is keen to retain his position as a prominent econo-blogger who is taken seriously. Telling people to pick individual stocks, however, is clearly the path to ridicule.

For a more concrete list of conventional wisdom on the main reasons not to own stocks look no further than this post by James Altucher, which is misconceived on so many levels it is hard to know where to start, but makes up for this by at least being entertaining.

Let us pity the mid size retail investor — the ones with enough capital that it matters, but not enough to get access to pre IPO Facebook stock.  They are the battery hens of the financial service industry, on the receiving end of the least bespoke and the most exploitative service available. These guys get a lot of advice, much of it worthless, and all of it conflicting; they are the key demographic for most of the for-money blogs, newsmedia, and the Old Man newsletters (as Josh at TRB puts it so well). If you are one of this accursed, confounded and confused group, a forgiveable reaction is to put your fate in the hands of a retail broker at e.g. Merrill Lynch or UBS. Knowing your luck, you’ll end up in a range of very reasonable sounding knock-in/knock out structured products you barely understand. They’ll have you picking up the nickels in front of the steamrollers that catch up with us every 5 to 10 years, charging a hidden 2% load for the privilege of eventually blowing you up.

The gift of Peter Lynch, if you play your cards right, if you make the right mental breakthroughs, is that you can leave all the babble behind. With practice and dedication, and a supreme act of will, you can tune it out and make it irrelevant. The main reason very few people will urge you to do this is that there is not a lot of money in it for them and you may stop reading their blog. Taking charge of one’s own investment future, if you can, is simply much more rational than handing it over to the mishmash of conflicting incentives that is the financial services industry. It’s not unthinkable; it’s the logical thing to do!

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So do you want to hear about my brilliant idea then?

Baruch was amused by the very earnest discussions he read on Abnormal Returns this weekend about hedge fund dudes sharing ideas. The WSJ had a long treatment on this which also quotes Baruch’s favourite quantademic Andrew Lo, who suggests that hedge fund managers sharing ideas may be creating systemic risk in the form of crowded trades and dangerous correlations.

On the same topic, The Rational Walk (again hat tip AR) has a detailed discussion of the possible motivations for investors sharing ideas. Quoting someone called Whitey Tilson, it posits a few viz:

1) It helps clarify our thinking to put our investment thesis in writing, especially on complex and controversial positions . . . .

2) When it is widely known that we have a position in a particular stock, we often hear from other investors who share valuable information or analyses.

3) Invariably, some people have the polar opposite view of a particular stock and, in sharing it with us, they can help us identify things we might have missed in our analysis. . .

4) When we share our ideas, it creates reciprocity and others share their best ideas with us.

How admirable, you might think. How open minded, open handed and collegiate. Bravo, that man.

Bullshit, thought Baruch.

First off, reading an article about how interesting it is that many investors can own the same security at the same time has the equivalent impact as reading an article tha says sometimes many women are interested in buying and wearing the same clothes at the same time. It is merely another revelation of the bleeding obvious, like the Economist last week which said that stocks which have gone up a lot sometimes go up more.

As for the crowded trades argument, well, crowding in illiquid, systemically important securities using leverage can be dangerous (think subprime CDOs), but I don’t think the Fed should lose sleep if 20 big hedge funds are all long VISA. When that tanked I don’t think anyone other than Visa and Mastercard noticed. It certainly didn’t rock my world.

Let’s not be naive. When it comes to the reasons for sharing ideas, there’s really only one, and OK, maybe a second, lesser but linked, reason why investors share their ideas with each other. The first and only real reason is what we call “reverse broking”, the sole purpose of which  is to make our stocks go up. The lesser reason is that most hedge fund dudes love to show off to their peers. There’s nothing more satisfying than going to one of those dinners, clarting on about your favourite stock and seeing it pop 3% the next day on no news and knowing it was a whole bunch of supposedly intelligent investors copying you because, you think, they think you’re just great.

That’s basically it; the ancilliary benefits to the investment process mentioned by Mr Tilson may be real, but they aren’t even the icing on the cake — they’re maybe the Hundreds and Thousands.

Frankly, these 2 are the only reasons Baruch ever shares his wisdom on particular positions with his peers, be they brokers or fellow strugglers. And you can be as sure as sure can be that when he does so he has bought his full position.* That’s why Baruch smiled at this, from The Rational Walk again:

. . . when Mr. Tilson published his analysis of BP in June, he took the risk that the response may have pushed up BP’s share price which could have prevented him from building up his position as the shares continued to drop in the subsequent weeks.

Right. For him to NOT have a full position at the time he published his analysis would make me, were I an investor in his fund, very angry. How irresponsible, I would think. I’m not paying him 2 and 20 to strew his pearls of wisdom amongst the Great Unwashed for free!

No, Baruch loves his colleagues and competitors, but as he has written in the past, investing at a professional level is a solitary pursuit. You don’t show your work to others unless you have a good reason to. And when people DO share their ideas with you, you’ve got to be pretty uncharitable in your thinking about that as well, because their motivations may not be pure. When Whitney Tilson publishes his ideas as to why NFLX is a great short — after he has lost just a ton of money on it –  can you be sure he’s not just trying to engineer a quick drop in the shares to exit his position with a small shred of honour? Let me hasten to add, I don’t think Whitney Tilson is a bad actor in this way, but trusting the altruism of participants in financial markets is not a well-accepted path to riches.

* this is one of the many reasons that Baruch doesn’t us this blog to pump his stocks. He has too much respect for you, his dear reader, to do that. Note also that if you see anything on this blog which could be construed as positive or negative commentary on a particular stock, it is in no way investment advice. Also you should assume Baruch is long or short to the gills.

Don’t tell anyone, but I am not sure I like my new iPad

It’s very embarrassing, but I think my iPad annoys me. Baruch feels that he should be raving about his iPad. It’s the biggest thing to hit consumer tech since, well since the iPhone 3G took off. When the history of early 21st century tech is written, it might even be  a more important product than the iPhone. And here am I, on record, complaining about it. I’m going to be that guy from IBM who said in I think 1945 that there would only ever be like, 5 computers.

So, why don’t I like my iPad?

1) Flash — ahh-aaaaahh! I miss Flash on my iPad like I don’t on my iPhone. I (mostly) understand The Great Jobbso’s reasons for treating Flash like a vampire looks at garlic, but I have somehow failed to make my 4-year old understand them as well. All he knows is that he is unable to play his favourite Flash-based Teletubbies game on the CBBC website. It doesn’t work, and he wants Daddy to fix it. Obviously Daddy can’t. He gets cross. So the poor little tyke’s had to go back to the PC for his Teletubbies.

Daddy had a similar experience with the Daily Show. Watching the Daily Show online is, for Baruch, almost the whole point of having The Internet. And it’s flash based. And its not just John Stewart, it’s like half the commercial video on the internet, from retail sites, to (I am told) porn, to hotel websites. Baruch hates those little lego blocks in the middle of the space where his video should be. His heart sinks when he sees them. He wonders what he’s missing.

I don’t have the same level of expectation with my iPhone. After so many false dawns in the mobile internet, I secretly think I am not supposed to surf the web on my phone, so anything I can do on it in that direction I still find mildly incredible. I don’t typically use it for streaming video. And I didn’t buy an iPad as a replacement for my iPhone.

Anyway, lack of Flash is a major problem on the iPad that I didn’t think about when I bought it. Here are more: Continue reading

Is the Nokiandroid an inevitability?

Priceless post by Jean-Louis Gassée on an imaginary conversation at Nokia between the amusingly named CEO Olli Pekka Kallasovo and his head of mobile devices Anssi Vankoji. The key point is where Fake Oily says to Fake Anssi:

This leaves us with one choice: Android. I have made the decision and I want you to implement it.

Go read it. It’s very funny.

More seriously, dear readers, I actually think it’s going to happen. I don’t share Jean Louis’ pessimism on this. These Finns are totally fucked. Symbian 3, Symbian 4, Maemo, Meego, no-one knows what to write code for, and everyone is just tired of listening, of attending another bullshit launch of another car crash handset. In his discussions with analysts, salespeople and other investors, Baruch feels a tipping point has been reached. Nokia have lost all credibility with investors and developers and will very rapidly fade into irrelevance unless they go Android, and do it while they can still make a difference in deciding the outcome of the war between Android and iPhone.

Needless to say, OPK and the current set of Finns will have to go.

Just think of the consternation at Motorola and HTC. Much gnashing of teeth. It’s a delicious prospect. Android is going to suffer a severe setback later this year when Verizon, the major refuge of the Androids, goes iPhone. Google getting Nokia on board, still the leading handset player in the world with a lock on the higher end in developing countries, would pretty much cancel that out and equalise the playing field. Needless to say, Nokia would immediately become Google’s préféré, the recipient of the latest updates to the OS.

Ultimately, Finns are nothing but pragmatic. I think this is going to happen and I think it will be sooner rather than later.