An Economy That’s Gone Off The Cliff

But first, I wanted to unload on AAPL.   AAPL has run up $74 billion in market cap since releasing its earnings a couple weeks ago.  That’s a 20% move.   The stock has gone parabolic (and the media morons call gold an investment “bubble?”).  The market cap of AAPL is now close to $470 billion.  At first glance the earnings and cash flow are quite impressive.   It has amassed a cash hoard of almost $100 billion.  It’s trading at 14x trailing earnings and a hefty 10x cash flow.  That is a very pricey cash flow multiple for a company that has “sustainability of franchise” issues now that the founder and creative genius behind all historical growth has passed away.  And the relatively low p/e ratio – a  heftly discount to the S&P 500 p/e ratio (22x), is suggestive of a market that expects a material decline in revenues, margins and earnings in the future.  Anyone paying for this past rate of growth is clearly not placing any risk on the sustainability of this growth.  But let’s revisit an old tech “monopoly.”

Remember Microsoft in the 1990’s?  It was on a similar growth trajectory and it had amassed a massive hoard of cash.  And once investors started focusing on the “reinvestment risk” of all this cash, the stock started to decline.  From it’s peak in late 1999 to its bottom in March 2009, MSFT cratered 75%.   Currently it trades 50% below its 1999 peak.  I would suggest that the odds are high that AAPL will follow a similar path of decline.  In a way it’s the ‘ole law of diminishing marginal returns (note: that is a law of nature).  And now that I believe the U.S. economy is taking another cliff-dive – along with the global economy – I fully expect AAPL’s unit growth and pricing margins to reflect this fact over the next several quarters.  In other words, if your investment advisor is calling to get you to buy AAPL, or your favorite mutual funds have a large holding in AAPL, hang up the phone or get rid of those funds.

Why do I say the economy is in cliff-dive mode, despite the robust Government-reported economic data?  Let’s look at some real grass-roots data, unadjusted from seasonal adjustments, etc.  First, take a look at retail gasoline deliveries:  LINK

(click on graph to enlarge)

You’ll note the steady decline since 2006, consistent with our shrinking real, inflation-adjusted GDP figures.  But then note the absolute free-fall starting in 2011.  These numbers are in gallons and not affected by price.   I think most would agree that gasoline sales are a pretty accurate reflection of the relative strength or weakness in the economy.

Second, per zerohedge, you’ll note that the retail sales number reported today on an unadjusted basis (i.e. without the “seasonal adjustments/manipulations) shows the biggest sequential (month to month) plunge in history:  LINK  The seasonally adjusted number for January came in well below expectations.  Furthermore, December’s number was revised down to a flat number.  Anyone remember all the hype over holiday sales?   Those “robust” sales estimates are being revised away and will ultimately likely show a decline in holiday sales, especially after returns are factored in.

Finally – and I’ve been waiting to use this chart – the Government likes to report monthly gains in income.  But let’s take a look at the real numbers (I apologize to whomever, I can’t remember where I sourced this chart).   Here’s a chart of the real rate of change of monthly personal income AFTER excluding Government transfer payments (welfare, social security, various other benefits):

(click on graph to enlarge)

That is not a pretty chart and the implications for the economy are quite ominous because, after stripping out the Government’s largess, it turns out the real personal income in this country has actually been declining on a monthly basis since the end of 2009.

Consumer credit numbers have resumed expanding at a very (un)healthy rate, especially student loans and auto finance credit. It is also likely that consumers are using a lot credit that has recently been made available to pay for necessities. You know, the stuff like food and energy that the Fed/Govt like to exclude from the “core” rate of inflation metrics. Regarding the expansion in credit that’s been occurring over the past few months, I’ll I can say is that this will end badly, with banks threatening to collapse and the Taxpayer once again taking on the liability. Wash, rinse, repeat until eventual systemic collapse.

I guess I come away from looking at the data by concluding that, in fact and reality, the economy has gone off a cliff again. As zerohedge points out, the last time we had a hat trick in sequential retail sales missing Wall Street estimates was in July 2008. Need I remind anyone what happened after that? I will remind everyone that in October 2008 the price of gold bottomed out after a big correction at $700 per ounce. I don’t think I need to fill in the dots to that statement. Circling back to my opening paragraph, if I’m correct about the true state of the economy, AAPL stock has a big decline ahead of it.

Posted by Dave in Denver

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