10 October 2013

When Quants Collide

Apple's decisions regarding the 5C encapsulates nearly all of the micro-economic, macro-economic, and quant issues into one compact ball of dirt. I'm here to 'splain it all. Hopefully, this will help you sleep better as the days go on.

Let's start with the macro view, which boils down to: are there enough folks with moolah out there to buy whatever the XYZ Corp. has to sell? If XYZ aims for the .1%, and understands that there's not much growth there, in terms of bodies as opposed to $$$, then all well and good. XYZ will toddle along pretty much until some global revolution guillotines them all. Rolex comes to mind, and I've documented how they're attempting to grow. Now, for Apple. What does the data say about its market?

In the process of looking for data, delineating the problem, I found this piece from 2008. I'm not aware that I'd seen it before. Reads like something I've written. On point.
"If you aren't gaining ground," Mr. Levy added, "then you look for other ways to pay for consumption, going into debt or, until recently, refinancing your home."

Boy howdy! The article lays out part of the basic premise: that the blue collar middle class wasn't just an appendix to some much larger groups making up that middle class, but a core component. Kill off the core, and you kill off the class. Kill off the middle class, and much of physical production has nowhere to go. (One should ponder the following conundrum: China and India have, among them, two and one-half billion souls, yet choose to export much of their production (direct and indirect, acting as labor overseer for US corporations) to the much smaller USofA. Why do that?) By extension, neither will the higher priced "service" jobs in all of the financial services sectors which can't survive on just the .1%. They need more families getting rich, not rich families getting richer. But, they're just too dumb to see that. The Koch's send boatloads of moolah to the Tea Baggers, and laugh out loud. Money makes the world go round, but it does so by... going around. Suck it all into the .1%, and the carousel stops. Abruptly.

So, the macro point of view isn't good for Apple as a growth company. If anything, the continued concentration of income and wealth bode ill for the likes of Apple. And Apple hasn't released a "new" device in some years. The Apple bulls have to rely on the company vacuuming ever more money out of that high end group of consumers. Assuming that individuals in that group will have more than one of each iThing isn't smart. Apple had iPod, iPhone, iPad. What next? Because without a Next, there is no future.

On to Apple itself, the micro venue. Apple has publicly disdained market share for unit margin for decades. Steve spiked the clone contracts just after he'd warmed up his executive chair upon his return. Market share went from 10% to 3%. Apple computers now account for a tad more than 10% of Apple revenue. There's no chance that computers will be the vehicle for Apple growth. Despite rumblings, that iPad (tablets, generally) will become the New PC doesn't strike me as credible. What has certainly been proven: many, if not most, knucklehead civilians had some version of PC only because their form of amusement was tied to it. As an amusement device, the phablet is fine. Putting a mediocre digital camera in a phone was marketing genius.

The act of making and pricing the 5C is telling. Cook clearly thinks he can party like it's 2009. It isn't. The rise of no contract cellular is very much a problem. At the same time, carriers are pushing early upgrades. What gives? Other than blatant schizophrenia? Well, yes. The no contract phone will be kept for ... ever? That's really the main reason to own one. When I was a kid, one mark of middle class existence was a new car every two or three years. This was before widespread leasing. If your family had real money, you traded in that Olds or Buick every other year for another. Planned obsolescence and conspicuous consumption. Everybody else? Ran the car into the ground, then went to the used car lot (or, my Pappy, the junk yard) for some marginal heap. Apple has been the GM of phones for the last few years, moving sheep to a barely different model ("look, taller tail fins!!!") every year or so. The carriers are caught in the middle. In their heart of hearts, if you remember the post-mortem on Apple's disembowelment of Cingular with iPhone/1, they'd just as soon sell their pipe and be done with it. Will folks JUMP or stand pat? Trite though it may be: the rich get richer and the poor have kids. Apple's market is sustained by adolescents, from well off parents, of course. Get them hooked on iThings while their brains don't fully work. But white, upper middle class parents (Mormons and Hassidim excepted) don't breed like rabbits. Not making new customers.

Now for the quants, financial services division. They can't make up their minds. Some figure Apple is doomed, unless it drops the 5C price (and commits to expanding its market base). Others see it going the Rolex route, with or without the forced upgrade shenanigans. The problem for quants is both having the right data, and using it wisely. The Great Recession happened because 99.44% of them used the wrong data wrongly. Given Apple's historic secrecy, and lack of "new" device type in almost a decade, there just isn't enough grist for that computer mill. Behavioural economics might well be the proper method of analysis. Galbraith summed up the issue: financial genius is a rising market. With the continued QE flooding moolah into the hands of haves, much (most?) ends up chasing equities. A rising market. A number of the amateur financial geniuses that aggregate through R-bloggers have said they've given up and will just ride the tide. And that's the core of the question.

If you're a multi-billion dollar entity, making placement decisions based on event data is just not practical. What to do? Look at some figures and decide where the best arbitrage rests. In the final analysis, for equities more than most other venues, when you've got that much to place, getting ahead of the mass of moolah yields the most capital gain. Buffett is the exception, in that he invests, or so he claims, on long term viability. Thus, physical production, mostly. Market manipulating hedge funds (at least, that's how targeted companies feel) that short specific companies for short term gain are another aberration.

Buy low. Sell high. The American Way. If everybody could do it, we'd all be rich. And we'd all be the same. So we'd all be poor.

Not looking good: In a research report Monday, Jefferies analyst Peter Misek said Apple had cut iPhone 5C build orders to 15 million or 20 million from 30 million because of slow sales.

No comments: