New heights of the stock market

"The stock market has just finished the best 1st quarter in 14 years."

Yesterday such headlines appeared all over the internet. The Dow is up 8% and S&P 500 increased by 12%. Nasdaq composite index is up 19%, best start from 1991. While Nasdaq performance can be partly explained by Apple's stock price growth, what pushes other indexes to new heights? That's a good question. Is it a sign of the final end of recession? Or is it just the result of central banks' support, and the markets will fall back when it'll be removed? Nobody knows for sure.

There are many different opinions represented in Chicago Sun-Times article:

Dow ends best 1st quarter since 1998; Nasdaq up 19 percent


In my humble opinion, there are many signs that recession is finally over, both fundamental and technical ones. While the support of central banks is important, and the problems of housing market in US or of the debt markets in Europe can definitely slow down the rise, the new bullish market is not far away from now. However, it seems unlikely that the Dow can reach its all-time high of 14,164.53 till the end of this year, as Robert Doll, the chief equity investment manager at BlackRock, and some others reckon. The time for this hasn't come yet. I would be only glad to be wrong about my last statement, though.

Apple Marvel: Part 2. Is $1 trillion capitalization possible?

In my previous post Apple Marvel: Part 1, I wrote some thoughts on the situation with Apple stock price. Now, I’ll continue analyzing it.

First of all, it seems a waste of time to try to build any complex models to predict stock price of Apple. In fact, it seems like no exact model can be built, just because this situation is quite unique. However, it may be possible to get a general idea on the future stock price behavior from analysis of the markets, similar companies and historical events.

Rising revenues - are portable devices and emerging markets the cause?


In October 2011, Apple Inc. reported enormous revenues. Detailed information about every aspect of its business can be found in Apple’s Form 10-K, as usually, but in a few words, total net sales increased by 66% to more than $108 billion, and net income reached $25 billion, 78% rise from 2010. The structure of net sales shows that almost half of total sales (43%) were produced by iPhone. Mac and iPad sales both produced about $20 billion, or 20% and 19% respectively.

Another important facts include these:

• iPhone sales represent 87% increase compared to 2010;
• iPad sales increased by 311%;
• Mac sales increased by 25%.

What about segment operating performance?

Well, the sales in Europe and Americas increased by 49% and 56% respectively, Japan sales represent 37% increase (figures would be higher if there was no earthquake), and 174% increase in sales in Asia-Pacific region (mainly because increasing sales in Greater China).

While all these numbers can be interesting and impressive, there are some certain conclusions that can be drawn from it. First of all, mobile products are becoming incredibly important for Apple. In 2007 there was no such thing as iPhone, iPad appeared even later, in 2010, yet now they generate more than 60% of the revenue. Secondly, if Apple hopes to increase its sales at the same rate, it will have to focus on emerging markets, such as China and South America.

"Perfect" markets and corporate wars.

These are the facts. Now let's look at potential problems. The major ones include rising competition, dependence from mobile products' sales and patent war started by Apple.

 It is impossible to get the sales increased by 50% every year without new customers. And while there are millions of loyal customers in Europe and North America, it seems unlikely that much more people will start buying Apple production there, just because virtually everybody who wanted to buy it has already become a client. In the meantime, the opposite is quite possible. Google Android, on which Steve Jobs spent so much time trying to destroy it, is becoming more and more popular. Moreover, Windows Phone 7 does its best to gain its place under the sun, and Windows 8, optimized for tablets, will be released till the end of the year.

Of course, there are also emerging markets, Greater China being the most important of them, where Apple can increase sales multiply. But there can be some challenges too. While China becomes more and more powerful player on the world arena, the majority of its population is still quite poor. Apple products are not very cheap, especially in comparison with Android-based devices that usually cost less than $150, both phones and tablets. Of course, they are not nearly as good as iPhone or iPad, but many people who can't buy Apple products will prefer them, thus strengthening Google positions on these markets.

And there is the third problem - corporate patent war, started by Apple. While the statement that this process was started by Apple may be not completely true, it's obvious that before Steve Jobs declared that he would do anything to destroy Android, the problem of corporations spending millions of dollars in law courts and then billions in fines was much smaller on the scale. The current patent system proved its failure years ago, but now it works like a disincentive, slowing down the production of new devices and complicating corpotation's work, not to talk about consumers being unable to buy certain products in their own countries. The main problem of Apple, as it was sagely stated in a new article in Businessweek, Apple's War on Android, is that it has only one phone model and one tablet model, and if one day some company will manage to proof that Apple violated their patents, the consequences for Apple will be disastrous.

So, what's the conclusion?

While it is possible for Apple to increase sales significantly for a few more years, it seems unlikely that such fantastic growth can last for long. The most popular company in the world simply can't become even more popular.

Will the stock price rise further when the revenue will stabilize at some point? Well, it's possible. In the markets' history there were such examples, besides current financial multipliers of Apple are not high enough to make the growth unlikely. I will pay attention to this "part of the problem" in the third and the last post on this topic. Then, with all three parts brought together, it may become possible to give an answer to the question stated in the header.

Another view - are the banks just intermediaries?

A new article in Paul Krugman's "The Opinion Pages" in The New York Times represents an interesting view on the banks and their role in the financial system. The question actually appeared in context of another discussion (there are links to previous posts on Paul Krugman's page), but this particular problem is interesting of itself.  In a few words, Krugman states that while banks can certainly be dangerous due to the tendency to accumulate risks, they do not increase consumption and demand for money by themselves. Rather, they are just intermediaries between lenders and borrowers.

Personally, I can't agree with this assertion, as I think that modern banks can influence demand, especially if they want it to be increased, but I still find this point of view quite unconventional and definitely worth consideration.

Here is the link:   Banking Mysticism

The age of uncontrolled markets is over?

As we have all seen, the idea to stop regulating financial institutions and let them do what they want to do was not a particularly good one. It may seem obvious now, but it definitely wasn't so evident ten years ago. The crysis has showed, though, that banks, hedge funds and many others will do anything they can to make more money. And it wouldn't be a problem if risks were kept under control. They only problem is that revenues and risks are not positively correlated. Besides evaluating risks for derivatives or complex financial schemes is usually an extremely difficult task.

The only solution in sight is to create a dynamic system of regulations to keep financial markets under control, and at the same time try not to interfere in their operations too much. The task may seem impossible, but with the right people it can definitely be accompished. Seems that Daniel Tarullo, one of the governors of the Federal Reserve appointed by President Barack Obama in 2009, is a good example.


Read about him on Businessweek:   Daniel Tarullo, a Fed Regulator Who Actually Regulates
Or in Wikipedia:   Daniel Tarullo

The housing market still far from recovery

While the first three months of the new 2012 year can be viewed as quite satisfying in terms of economy recovery, the story is far from end. Unstable situation in Europe is not the only problem. According to January and February statistics, the housing market in USA is still in a bad shape. The recent efforts to revive it made by the government look promising, though.

You can read the article in Businessweek to learn about it:

Foreclosures Still Haunt the Housing Market


Also you may want to view Ben Bernanke lecture in which he explaines why the housing bubble can't be viewed as Fed's fault. It is his second lecture out of four in George Washington University.

Apple Marvel: Part 1

On March 21st, Apple stocks closed at the price of $609.58, raising its capitalization to $568 billion. Although Apple has been the most expensive company in the world for more than a year now, the new heights being reached by the price of stocks are just astonishing. People started to ask if Apple should cost so much when it first outperformed Exxon, the world's most expensive company at the time. Now these questions begin to sound more and more loud.

Let's take a look at two charts: the first demostrates price of Apple stocks during the last five years, and the second shows the entire history of Apple stocks trading.

The company that was almost dead in 1997, have risen from nearly $13 per stock to more than $600. Moreover, in 2003 stock price was $20 on average, and in 2007 it was still about $80. Then Apple created iPhone and AppStore and the story began. In January 2009, stock price dropped back to $85 from nearly $200 in January 2008, but taking into account the whole market's conditions at that time, it's not very surprising.

Financial crysis of 2008 was severe, but rather short, Paulson, Bernanke and others did quite a good job, and markets began to recover. But now Apple wasn't just another company in a row. From the beginning of 2009, its stock prices climbed up without any significant pullbacks. In January 2010, it was traded at $200 per stock, at January 2011 the price was $325, and at the beginning of this year it reached $400 per share. Three months later, it is $600, and rising.

Five year change of its stocks price is more than 500%. Is it an enormous number? Of course, and any investor will sell his soul to devil to predict such rise. However, some other companies made their investors even more wealthy during the same period of time, for example, Alexion Pharmaceuticals (+1600% for five years) or Green Mountain Coffee Roasters (+1050%). The problem is that the other companies which value increased greatly, are much smaller. Alexion Pharmaceuticals and Green Mountain Coffee Roasters both have less than $20 billion capitalization, and most successful companies are valued at the similar point. Apple costs more than $500 billion.

Can Apple's value increase even more greatly and reach $600 or $700 billion, or even fantastic 1 trillion dollars? Maybe. I don't know exact answer, and nobody does. But there are some very disturbing aspects about future growth that would stop me from investing into this company, even though I like its reputation and its products.

Apple Inc. - the center of the world?

Apple is the most expensive company in the world. This is not just a simple fact to interpret. On the one hand, it means that everybody knows it, everybody sees its success, and of course, anyone would like to invest in it - mutual funds, individuals, hedge funds. People want to get their slice of the pie, and it only natural. It is also important to remember, that with such enormous capitalization, Apple's stock price affects almost all indexes, and many funds either invest in companies included into indexes, or they are being judged in connection with indexes' performance. So, virtually everyone is interested in the continuing growth of Apple's stock price.

But on the other hand, it means that people investing into Apple, will expect such enormous and even abnormal changes in its price in the future. What would you say, if the company which price doubled in two years will give you just 10% or even 20% profit in a year? It seems that you will be dissapointed. So the most successful company is not protected from failure in any way - actually, it is being put under great pressure of expectations.

Now let's look on it from the other side. When people buy stocks, they have different goals, of course, but any good investor must define strategy referring to the particular stocks or to the whole portfolio. What are the expectations connected with Apple stocks? Do people believe that it'll manage to reach $700 price? Or $1000 price? It is very hard to predict, but if you will look closely into stock charts, you'll see there were pullbacks after the first and the second reaches of $600 price, and the second pullback was quite significant. Of course, for almost any stock trading near $100-fold prices (or $10-fold, or $1000-fold) the picture will look pretty much the same, especially when the price reaches historic maximums. But massive sales near $700, for example, can make pullbacks more significant than those we see today, and this tendency may continue, making any new level more difficult to approach just because investors will not believe in the prospects of future growth - the company will be already too expensive. And such events may be viewed badly by the market which'll scrutinize the company's performance.

Of course, that is just one aspect of the problem. To be able to make conclusion on Apple prospects, one must also try to compare it to the other companies in the field, review its financial statements and look at the prospects of growth. I'll try to do it in my future posts.

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When I started to write this article, I discovered that the reach of $600 price by Apple stocks interested not only me. For example, there's a very good article in the Economist on this topic. I would recommend to read it to anyone interested in the subject.

Here is the link: Apple's share price - iRational?

P.S. My writing may seem incomplete or immature to you, but please try to find a few minutes to write a comment on it. It will help me greatly to improve my future posts, and I will be happy to hear if you like it.

Ben Bernanke - Saving the economy or destroying it?

Ben Bernanke is maybe the most interesting and controversial figure in the recent economics history. Some people accuse him of inconsiderate and risky management of Federal Reserve system, others think that he has done his best during the financial crysis.


Personally, I tend to agree with the latter. Late-2000s financial crysis was quite unique, if not something completely new. The world has never faced such storm in the economy, even the Great Depression was better in some aspects. Maybe there was a better way to rescue financial system, but taking into account time constraints and the great compexity of modern global economy, I don't think that the work done by Ben Bernanke and his team can be frown at.

Anyway, it's always interesting to read something thoughtful enough and free of prompt accusations on this theme. Today, I found an article in the Atlantic magazine, thanks to blog of professor Gregory Mankiw. He describes the author Roger Lowenstein as "always reliable", so it seems to me that this article is definitely worth reading.

Ben Bernanke - the Villain

Goldman's Double Game

Goldman Sachs is maybe the most famous and prestigious investment bank in the world, especially after last financial crysis. The reputation of its CEO, Lloyd Blankfein, also contributes to it. Despite of its reputation, though, Goldman is an investment bank, with all inherent features and characteristics of it. But the deal between El Paso and Kinder Morgan, respectively transporter of natural gas and storage company, in which Goldman Sachs was an advisor of El Paso, looks like something amazing even for this industry. And I mean amazing not in good sense.

Read article on BusinessWeek to get the details:

Goldman's Double Game

Saving Capitalism from the Capitalists

Recently I have discovered a very interesting book, thanks to the webpage of Konstantin Sonin, professor at the New Economic School. It's "Saving Capitalism from the Capitalists" written by Raghuram Rajan and Luigi Zingales, both professors at the Booth School of Business. I've read only about a quarter of the whole book so far, but it was enough to realize that it's brilliant. Though the book was published in 2003, and the world has changed a bit since than (for example, a conception of reselling insurance obligations is described to have no major flaws, which definitely seemed so in 2003, but today doesn't look like an entirely good and harmless idea), but the most parts of the book are very interesting, well written and applicable to all times.

The main idea of book that capitalism and capitalists are not equal. While some sorts of corporations and capitalists can definitely be viewed as pure evil, modern world can't exist without products and services they produce. And even more - with certain control over the system, even financiers can serve the society and provide necessary services. The main problem is to create open financial markets and efficient regulatory institutions. Then harmful effects of capitalists' actions will be reduced almost to zero level.

Of course, it's a very simplified way to express the main idea of the book, which has almost 500 pages. But I don't think that it'll be a good idea to try to retell it's contents there. Better get the book and read it. It's definitely worth it, believe me.

About this blog

Hello!

I have been thinking about starting a blog or some other social website like that, and I am not particularly happy with twitter and current social networks. So let it be a blog.

A few words about myself. My name is Alexander Dadashev. At the moment I am a penultimate student of Moscow State University in Russia. My majors are math and economics, but my real fields of interest are finance, management and, maybe, macroeconomics. My extracurricular interests include photography, cinema , writing and some others.

If you'd like to ask, why on earth someone living in Russia decided to write in English, well, it's not that easy to find that answer. I think I just wanted to have an ability to interact not only with those who speak Russian. Besides, I hope that for my friends and possible readers from Russia English won't be a problem.

Today I think it'll be some sort of a personal blog. In my studies there are sometimes ideas, conceptions or facts, which I'd like to be able to share with other in order to hear opinions, for example. So I'll use this blog to share some of my sorts, mainly on economic or financial topics.

Hope that it'll be interesting for somebody.