Terry Sawchuk
Founder & Chairman
The Markets
Oh how the mighty have fallen. Both Gold (GLD) and Apple (AAPL) have had a rough 2013. YTD (through 4-24-13) GLD is down 14.58% and AAPL is down 22.01% (per Google finance). Will the trend continue or are things about to change. This newsletter is neither a recommendation to buy or sell GLD or AAPL. We have decided to try something a little different. Terry will give you his perspectives on AAPL and Bill will give his thoughts on GLD.
As with all opinions, there are two sides to every story and GLD is no different. The TV and radio commercials will continue to spout that gold is the best investment for the coming hyperinflation. The continued printing of money by our Federal Reserve will weaken or even destroy the US$. This inevitable collapse of the US$ will lead to gold becoming the world reserve currency. These commercials will also suggest owning gold coins due to the impending collapse of the US$. The pro gold investors will also comment that the gold supply is low so you better get your piece now before it runs out.
On the other side of the coin (pun intended) you have some very different views. Many countries hold gold and other assets in their treasuries. There are plenty of countries having financial difficulties today and they will be and are currently selling their assets, including gold. The sale of this gold will create more sellers than buyers thus driving the prices down. Gold also has very few commercial uses making its value only that in the eyes of the holder. Several investors, including Barry Ritholtz, have recently written blogs on this topic. The main theme that is common amongst these investors is the idea that QE has been going on for 4 years and we have yet to see much in the way of inflation. This is not to say that we will not see inflation in the future but we are a long way off from hyperinflation.
I tend not to follow the extremes and like to see the world more from the middle of the road. While I think that the scare tactics of the TV and radio commercials suggesting that we own physical gold are absurd; I also believe that only looking at the lack of inflation over the past 4 years and not looking forward is equally ludicrous.
In the end, the markets don’t care which side is TRULY right. The markets only react to which side people THINK is right. GLD will continue to be a controversial investment in the coming years. There will be a time to invest and a time to stay clear. Getting on the right side of this trade will be tricky.
My good friend Mr. Langenstein has done a marvelous job of giving a balanced, yet pedestrian point of view on gold. Seems he’s not sure which side of the fence he sits. I will attempt to be a little more overt in where I stand. The recent fall in Apple shares has been astonishing. Granted, the unveiling of the iphone5 was underwhelming, the fact is, Apple is a virtual cash generating machine. Hot products will come, they will go, but what Mr. Jobs figured out, and in my opinion, the genius of what he built, lies in the “ecosystem”. The real value in Apple, is Itunes. It’s the online store where customers go and buy everything from songs, to their favorite TV shows, to applications for their phones, and who knows what might be next. They have essentially, perhaps even deviously, created an addiction amongst their customers, to the ease and convenience of having every form of entertainment, news, productivity, connectivity, social media, etc. right on that little phone. And now, on their Ipad, which is rapidly replacing the computer as the hardware of choice to do all things computer/internet related. To give you a glimpse of what this could mean, Apple reported earnings from Itunes downloads/sales of $4 billion in the first quarter. That means that already it is on pace to generate $16 billion in revenues for the year. That’s mind blowing.
Apple stock is trading at a P/E ratio of around 10. It also pays a 3% dividend and is buying back massive amounts of it’s own stock. Here is a quick summary of 2013 numbers:
“Our cash generation remains very strong, with $12.5 billion in cash flow from operations during the quarter and an ending cash balance of $145 billion,” said Peter Oppenheimer, Apple’s CFO.
That’s right. They generated what amounts to an annualized rate of $50 billion in revenues. They are sitting on $145 billion in cash, making their cash pile alone, bigger than 90% of the companies listed in the S&P 500.
We can talk about the next big thing (reported to be the iwatch), but really, it doesn’t matter. It’s not the gadgets that make the company’s future so bright (no offense to Google glass), it’s the ecosystem stupid.
Best regards,
Terry Sawchuk
Visit www.sawchukwealth.com to review past issues of The Marketview.
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