December 7, 2017

Something New And Profound Is Upon Us!

Last week was highlighted by the big hoopla about the big unveiling and roll out of the Trump tax plan. We can hardly stand the anticipation, speculation, Dems bipartisanship, yadda, yadda, yadda. The only real question is how much pork is Wall Street being served up and how far in debt does the country have to go to appease these corporate overlords. So they want the 20% rate or lower which we all know transcribes to a near sub 10% effective rate, really? Then there’s the issue of a pending government shutdown, which will no doubt-ably be averted last minute with a strong kick of the debt can down the road. Anyway the equity markets were whipsawed with the SP500 putting in a rarified 2% move in about an hours’ time on Friday. A rare increase in volatility, we are surprised the bots recovered. The NASDAQ market seems to have already started to roll over and seems to be having difficulty holding the 6400 level.

Staying on the tech theme we can’t help but to do some of our own digging into one of the NASDAQ’s stalwarts, that is Apple Inc.  We have been studying them for quite some time, going back and researching their troubled past and trying to uncover if and when their blue ocean strategy will finally mature itself into a standard sea of red.  For those that don’t know what the Blue Ocean strategy is, it can be defined as a corporate innovation that reconstructs industry boundaries and creates new and untapped market space and creates a whole new demand paradigm. 

This is basically what Apple did to revive its failing business back in 1996.  Steve Jobs came back and reintroduced the iMac desktop PC as a stylish, trendy unit that took computing to a new level of sophistication and style.  This allowed them to survive the dotcom crash and introduce their real innovation, the Ipod and then subsequently, open the Itunes music downloading service.  That was their real “Blue Ocean” and it allowed them to transform the way people listened, downloaded and purchased music.  The one stop shop if you will prime, primped and combining sleek tech with brick and mortar Apple stores to take care of all your fiendish needs. Apple was on to something, with their superior innovation and must have style.  They were an innovator who succeeded where Sony and Samsung seemingly failed.  However that was over a decade ago and it seems as if Apple’s success comes at an increasingly and alarming cost, that is lack of differentiation

There is no doubt Apple’s success comes mainly from its brand recognition and loyalty, but it’s also in part to its consistent cost leadership.  Meaning its production costs are superior to any of its competitors and thus enjoys the benefits of higher margins, however, we think things are changing and changing rapidly. 

On the first front, Apple’s own success is hinged primarily on one single product now, the Iphone, which accounts for 69% of their total sales.  The Iphone’s utility functions have inherently destroyed the need for Apple’s other products, most notably the Ipod and Ipad.  We can display this result in the following sales charts (statista.com):

 

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Now, when we look at a chart of Iphone sales, things don’t look too bad, but we see a constant theme developing.  We see a beginning year start or a large 1st Qtr demand push to only be followed by consistent and downward sloping sales:

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What truly stoked our interest in Apple so much lately is the fact that Apple raised their Iphone X retail price to $1000.  What’s the rationale, are they merely pushing the limits to see where the price ceiling is at?  Now we have to ask ourselves, how many of its customers can honestly afford an Iphone X? How many customers are going to abandon the ship and move to Samsung or Google?  It seems as if the price move is out of necessity not out of arrogance and their ROA ratio is plummeting as is their NET PROFIT MARGIN, down 45% and 21% in 5 years respectively:

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Yes, we know Apple has $261BN in cash, but check out this chart of their debt growth, which shows a 227% increase in 3 years, which puts their net current debt at $115BN:

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Now when we add the $3BN per quarter that Apple is spending on R&D or $12Bn a year and add their unfortunate position of relying solely on one single product with declining margins and a selling price that is out of reach of its general consumer base, we feel the headwinds are substantial.  Here is a current chart of Apple Inc:

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As a contra indicator here are what the analysts have to say after last month’s earnings and which should certainly be of no surprise to anyone of our readers:

  • Barclays raised its price target from $161 to $162.
  • BMO raised its price target to $195 from $180.
  • Citigroup raised its price target to $200 from $170.
  • Deutsche Bank raised the price target from $140 to $152.
  • Independent Research has a Buy rating and raised its target to $200 from $185.
  • Morgan Stanley raised the price target from $199 to $200.
  • Raymond James raised its price target to $185 from $180.
  • RBC raised its price target to $190 from $180.

 

Everyone looks quite bullish don’t they? The herd we like to call it.  Then again the central banks and AI are in control, so nothing to worry about! (Joke)

Unfortunately we have to stick with the equity theme as we read a nice article this week from 13D Research.  They put out a nice piece and one of the things they highlighted was the fact that companies are choosing to goose stock prices via buybacks, when they should be using the capital to shore up existing holes and plan for long term viability.  Case and point GE which they noted spent $45BN in 2015 and 2016 on share buybacks, at the highs none the less, all the while their pension shortfall was ballooning to over $31BN.  This seems to be the classic short sighted C-suite maneuver we talk so heavily about, by which the current regime enriches itself and disregards all future viability.  Kick the can; it ain’t my problem kind of mentality.  As the chart shows, GE is now being punished for its lack of vision and clear disregard for future viability, maybe the lightbulb is about to go out, permanently:

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Ok now to our passive long only SP500 and Bond futures chart, which looked like it was peeking out of its 2 yearlong trend channel, but nope, rejected:

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Moving on, Chair Yellen gave what may be her final speech in front of Congress last week.  Her prepared remarks are of the usual Central Bank rhetoric of:

  • “gradual” monetary policy adjustments
  • economy will “continue” to expand
  • Asset valuations are high, but the banking system is “well capitalized”
  • Leverage and credit growth well “contained”
  • Monetary policy is not on a preset course “data dependent”

If this truly is the chairs last real speech in front of congress and despite next week’s 90% chance of a 1.50% Fed Funds rate, the lasting memory we would like our readers to have of the chairwoman is this little gem or prognostication if you will.  Perhaps monetary largesse does have its limitations, the future is so uncertain:

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Also out this last week, was an article via GSachs which outlined that this is the longest bull market for a balanced 60/40 Equity/Bond Portfolio in over a century.  It hasn’t had a 10% drawdown or more in nearly 9 years.  They pointed out that one would have to go all the way back to 1929 to equate the returns that are being generated today! Well, we all know what transpired in the 1930’s right? World depression, war, a realignment of powers, then again, humans seemingly never learn from history, but maybe our memories will protect our ineptitude this time and we might be able to learn from our prior mistakes.  We wouldn’t bank on it, however that’s for sure.

{CryptoCorner}

  • In a surprise announcement the CBOE plans on front running the CME futures launch and is planning on offering its newest product next week on Dec. 10th. The CBOE is launching its Bitcoin future product under the code XBT.  The contract size will be 1/5th the size of the CME product and its cash settled as well.  CBOE announcement and contract sheet can be found Here and Here
  • We uncovered this week an awesome interview with Symbiont’s Caitlin Long, former managing director at Morgan Stanley. The fact that she is an Austrian school enthusiast made perfect sense why she runs a company focused on merging Wall Street with Blockchain solutions.  Her interview is great and a must listen too for all our readers.  She said many important things such as:

 

  • Borrowing money and interest rates should not be tampered with- free markets do not exist in the interest rate markets and it distorts the natural signals investors would normally use to make sound economic and investment decisions. Boy, we couldn’t agree more!
  • We have fractional reserving going on in the securities markets, both equities and treasury bonds- In the trading industry we refer to this as rehypothecation, or the ability to assign ownership to a security that in reality, someone else or multiple parties may lay claim to. This is what happened in 2008 and it was a clear shadow bank run, but in electronic form, not like the line out the banks doors in the 1930’s.

Blockchain can eliminate that rehypothecation because it eliminates the need for a central clearing function.  Peer to Peer and distributed ledger will dismantle these fraud and skimming mechanisms.  Ok, the interview was great and Caitlin had so many other interesting points, we loved every minute, so check it out Here

  • So maybe this is why JPM’s Jaime Dimon is such an avid Bitcoin basher:
  • In May, JPMorgan announced that it would team with the developers of Zcash, a year-old cryptocurrency whose Bitcoin-derived software gives users the option to “shield” their transactions from public view-full article found Here
  • According to our proprietary data set the largest Bitcoin wallet Bought 16,336 BTC adding wallet holdings to 141,177 BTC with a current valuation over $1.66BN
  • The # of addresses with at least 1 BTC rose 11857 on the week to 614,053
  • The # of addresses with at least 10 BTC rose by 186 addresses
  • The # of addresses with at least 100 BTC fell by 58 addresses
  • Total Bitcoins outstanding 16,710,146 +17,683 BTC on the week
  • Top 2 wallets hold 260,380 BTC worth $3.06BN
  • Bitcoin rests firmly above $10K

Blockchain seems to be everywhere in the media now and don’t let the naysayers tell you that everyone is in on it, they aren’t.  This is not indicative of any bubble, this is merely an understanding period, an understanding that something new and profound is upon us.  We hope that you are learning as we are learning and are as excited as we are about the prospects of the technology.  We know that in this transition period, adoption period, adjustment period whatever you want to call it, there will be positives and negatives.  We view the build out of the blockchain ecosystem to be a key component to all the new businesses that will arise because of this build out and we take quiet comfort in knowing that we have been a part of this movement years before anyone and we intend to grow right alongside with it.

We are going to leave you with two more charts from Keystone Charts, one displaying the ongoing flattening of the US yield curve and the other a picture of Soybean futures attempting a breakout.  The US 2s10 yield spread chart is approaching the all-important 47 basis points, just in time for next week’s rate hike, no doubt a few insurers and pension funds may have something to say at these levels:

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The next chart shows Jan Soybean futures breaking the 5 year trend line trading above the 1000-0 level, this seems significant, but will it hold?

 

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Ok, that’s it, sorry this was so long, but the charts and the content associated required a complete explanation.  We leave you with the weekly settles from Dec. 1st below.  Silver put in new low for the year at $16.39. The US 5yr continues to get punished with yields rising toward yearly lows at 2.12%.  The Euro has put in a decent move on the year and the Cryptos continue to see Bitcoin outperform with Litecoin perking up. Cheers!

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Finally, we will decidedly end our notes with our reaffirmation of the growing need for alternative strategies.  We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha driven strategies.  Alternatives offer the investor a unique opportunity at non correlated returns and overall risk diversification.  We believe combining traditional strategies with an alternative solution gives an investor a well-rounded approach to managing their long term portfolio.  With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks. 

 

It is our goal to keep you abreast of all the growing market risks as well as keep you aligned with potential alternative strategies to combat such risks.  We hope you stay the course with us, ask more questions and become accustomed to looking at the markets from the same scope we do.  Feel free to point out any inconsistencies, any questions that relate to the topics we talk about or even suggest certain markets that you may want more color upon.

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Capital Trading Group, LLLP ("CTG") is an investment firm that believes safety and trust are the two most sought after attributes among investors and money managers alike.  For over 30 years we have built our business and reputation in efforts to mitigate risk through diversification.   We forge long-term relationships with both investors and money managers otherwise known as Commodity Trading Advisors (CTAs). 

We are a firm with an important distinction: It is our belief that building strong relationships require more than offering a well-rounded set of investment vehicles; a first-hand understanding of the instruments and the organization behind those instruments is needed as well. 

Futures trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results. Futures trading is not suitable for all investors.

Nell Sloane, Capital Trading Group, LLLP is not affiliated with nor do they endorse, sponsor, or recommend any product or service advertised herein, unless otherwise specifically noted.