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Apple: For What It’s Worth

Something’s happening here
What it is ain’t exactly clear
—Stephen Stills, “For What It’s Worth”
 Something’s happening at Apple.  We’re not sure what, but something’s happening.
 Yes, everybody knows Apple’s quarterly earnings report disappointed Wall Street’s Finest.  And yes, everybody knows Apple managed to calm the disappointed herd, mainly by using the phrase “we’re thrilled” seven times during the call while pointing out that the big miss in iPhone sales was likely due to everybody waiting around to buy the new iPhone 4S.
 But not one of Wall Street’s Finest—not one—asked about the most disturbing pattern coming out of Apple’s earning release: the measly 1% year/year revenue increase at Apple’s retail stores, the 26% year/year profit decline at Apple’s retail stores, and the mere 4% year/year growth in visitors to Apple’s retail stores.
 Certainly, there was an impact at the retail stores from the Apple Faithful waiting for the new iPhone.  But even before this quarter’s jaw-dropping sequential-quarter momentum collapse from up 36% in June to up 1% in Septembera downshift we can not recall seeing at any retailer, ever (please come up with one, and we’ll highlight it here)the Apple retail stores had been losing their mojo.
 For example, from the December 2009 to the June 2010 quarter, retail visits rose from 51 million to 61 million.  This year, visits from December 2010 to June 2011 did not rise at all—from 76 million to 74 million.
 Something’s happening here.  What it is ain’t—exactly—clear.
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com
© 2011 NotMakingThisUp, LLC
                                                             
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.
NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.”  So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff.  And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management
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Gawker Gets It Wrong: The Cancer Did It

 Gawker, which is just one of the many excellent reasons the New York Times keeps cutting staff (I have yet to see an article “tweeted” or “liked” by anyone under the age of 30 from the Times) carried the following inflammatory story yesterday which zipped around the blogosphere faster than a Joe Biden expletive moment:
 Harvard Cancer Expert: Steve Jobs Probably Doomed Himself With Alternative Medicine
 Having established a provocative statement of purported fact in the title, Gawker’s unfortunate story led off with a howler of first sentence:
 Steve Jobs had a mild form of cancer that is not usually fatal…
 That statement is wrong.  How wrong, we wrote about in 2008, here.
 In fact, the five-year survival rate on the kind of “mild” islet cell tumor Steve Jobs had been diagnosed with in October 2003 is 42%.  Mathematically, of course, that means the cancer is indeed usually fatal.  And Steve Jobs survived seven years.
 Now, a big part of the problem is that Apple as a company did the medical world—and the blogosphere—no favors by downplaying Jobs’ condition over the years.  (And we wrote about that here.)
 For example, when Jobs appeared at a conference in 2006 looking like, well, like a cancer patient, Apple actually said, “Steve’s health is robust and we have no idea where these rumors are coming from.”  Two years later the company claimed Jobs had “a common bug.”
 With all the disinformation spread about Jobs over the years, it is no wonder Gawker got it so wrong; but, having gotten it so wrong, they ought to get it right.
Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com
© 2011 NotMakingThisUp, LLC
                                                             
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.
NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.”  So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff.  And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management
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Chatter—Mindless Chatter

 There was “chatter” in the markets on Friday that Wells Fargo—the large US bank of which Berkshire Hathaway is the largest shareholder—was going to make a bid for Morgan Stanley, the currently beleaguered US investment that has been the subject of all kinds of rumors related to its financial health, so much so that last Thursday U.S. Treasury Secretary Geithner took it upon himself to declare there to be “absolutely” no chance of another Lehman Brothers-type collapse when asked at a Congressional hearing about Morgan Stanley.
 How the chatter on Friday got started, we have no idea, nor did we bother to find out.  After all, desperate investors start takeover rumors for the same reason desperate short-sellers start going-out-of-business rumors: to help their positions in a stock, however fleetingly.
 The funny (or frustrating, depending on your point of view) side-effect of such “chatter” is that companies routinely call on authorities to investigate negative, stock-dropping, going-out-of-business-type rumors—Exhibit A being, of course, Lehman Brothers executives, who excoriated everybody but themselves prior to the collapse—but never call on the authorities to investigate positive, stock-boosting takeover rumors.
 Along the latter lines, Exhibit A would be the investment bank formerly known as Bear Stearns.  Prior to its 11th-hour rescue in early 2008 at the hands of the Feds and JP Morgan’s Jamie Dimon, Bear was the subject of too-many-to-count takeover rumors, starting at multiples of $100 per share in 2007 and stair-stepping down to a $30 per share rumor that went around the Friday before the Sunday of JP Morgan’s actual bid, which, as it turned out, was $2 a share (later upped to $10).
  In any event, whether it was deliberate or delusional or merely daydreaming, somebody—we know not who, nor do we care—got the idea Friday morning that Wells Fargo was going to buy Morgan Stanley, and the rumor went around Wall Street even though it shouldn’t have, because anybody who knows the least bit about its largest shareholder, Warren Buffett, and his investment process (see here), would know that the idea makes no sense at all.
 For one thing, there’s the “competitive moat” Buffett demands of his acquisition candidates, of which Morgan Stanley hasn’t exactly the widest, as the assets tend to ride up and down the elevator each day.
 Then there’s Buffett’s eternal “make or buy” question when he evaluates a business: “How much money would I have to spend to replicate the business?”  And it would be reasonable to think that Warren Buffett might expect that he and Wells Fargo—with assets in excess of $1 trillion—could, over time, replicate Morgan Stanley on an outlay of something far less than its current market capitalization of $27 billion. 
 So count us skeptical…and always amused at what new “chatter” awaits the markets, from whatever anxious shareholders are out there.
Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com
© 2011 NotMakingThisUp, LLC
                                                             
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.
NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.”  So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff.  And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management
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Thanks, Steve: Of Apple and iPads, Not to Mention “Layla and Other Assorted Love Songs”


 NotMakingThisUp has produced a number of virtual columns over the years which, tangentially or directly, involved the creations, both physical and corporate, of Steve Jobs.
 Those columns mainly, I admit, poked fun at Microsoft’s various attempts to duplicate the successes of its heretofore less successful technology competitor in areas such as music players, smartphones and operating systems.
 But the last one, which followed a year-end Wall Street Journal column that struck a nerve, had nothing to do with Microsoft and everything to do with Steve’s last magic act: the iPad…not to mention an album by Eric Clapton and a friend named Paul.
 By way of saying a heartfelt “Thank you” to the man (shown here)who made so much so possible to so many, we’re reprinting it below.   JM  

Tuesday, December 28, 2010

But What Would Eric Think?

Brett Arends is steamed.

He’s had it up to here with the Cult of Apple, and he’s decided to do something about it: what he’s doing is he’s not getting an iPad for Christmas.

This is how the Wall Street Journal columnist began his pre-Christmas diatribe against the latest must-have invention from Steve Jobs’ North Pole Magic Factory:

Why I Don’t Want an iPad for Christmas

 Everyone wants an iPad this Christmas, right?
 Apple’s tablet computer is this year’s hottest adult toy. Sales are booming. James Cordwell, an analyst at Atlantic Securities, expects the company to sell six million this quarter, half of them here in the U.S. It’s driving the company toward what will probably be yet another blowout Christmas period.
 But you can count me out. I don’t want an iPad for Christmas, thanks very much.
—Wall Street Journal, December 21, 2010


Arends’ reasons—there are ten in all, thus fulfilling the journalistic requirement for “Top Ten” lists at this time of year—include a few a rational ones (“The cost of the add-ons,” for one) and quite a few more irrational head-scratchers that, in the main, remind me of something Paul Hulleberg used to say.

Paul was a childhood best-friend, and a serious music-head in those days when serious music came on LPs (look it up, kids) packaged in fancy sleeves (look that up too, kids), which we would dissect along with the music (“Magical Mystery Tour,” with its 24-page color booklet, was a particular fave), debating everything from who-sang-what to what was the song about, anyway? (“Drugs,” we usually decided).

There was, however, one album from that period that we did not dissect.

It was “Layla” (technically “Layla and Other Assorted Love Songs”: look that up too, kids), courtesy of the post-Cream guitar hero Eric Clapton, but released under the assumed name of Derek and the Dominos.

Now, because Clapton’s name was not on the cover, and because the title song clocked in at seven minutes, the album failed to find an audience when it was first released, despite having both Duane Allman and Clapton playing together.

It was only a year later, when “Layla” was included on a Clapton ‘Greatest Hits’ compilation, that the year-old album became popular.

And therein lay the problem: Paul refused to buy “Layla and Other Assorted Love Songs” after the album became popular, because the whole point of us being music-heads was that we were supposed to find this kind of stuff before everybody else knew about it—not when Layla had become as close to a hit record as was possible on WNEW FM, which back then was the leading-edge New York music-head station, home to the likes of wispy-voiced Alison Steele (“The Nightbird”) and gravely-voiced Scott Muni.

“What would Eric think?” Paul would say. “I can’t buy it now that it’s popular.”

I’d throw an album cover at him and yell something like “Eric would say ‘Thank you for the five bucks.’”

My reaction, of course, made him say it every chance he got.

Which brings us back to Arends’ “Top-Ten” reasons not to buy an iPad: he seems less interested in what the thing actuallydoes—which is a lot—and more concerned about what itrepresents—which to him is a slavish devotion to the Cult of Apple.

Let’s take the first five of his so-called reasons:

1. It’ll be cheaper next year.
That may be true, but it may not be true. While the painfully slow first-generation iPhone soon became, as Arends writes, “a paperweight,” the iPad is no such thing: it is fast, easy to use, and excellent value for the money.

2. It’s going to be better next year.

“The next iPad will have new features—allegedly including video conferencing and maybe a better screen. This year’s model will be so over,” he writes. This may also be true—but it probably won’t, since not many people are a) sitting around waiting for video conferencing, and b) unhappy with the iPad’s gorgeous screen.

Unless Steve Jobs is going to attach a working personal jet-pack to the next generation iPad, it’s hard to see a reason the average user will care to wait.

3. Apple’s profit margins are too high.
This is the biggest head-scratcher. First, Arends gets the margins wrong. He cites Apple’s year-old 41% gross margin and says “Me, I don’t want to support someone else’s 60% markups with my own dollars.”

But Apple’s gross margins are now running at 37%, down significantly from last year thanks in no small part to the lower margins Apple gets on the iPad compared to the iPhone, the price of which is subsidized by the wireless phone carriers.

Second, the issue shouldn’t be what Apple’s margins are, unless, of course, like Microsoft’s margins they result from a monopolistic business model in which the consumer has no choice when seeking an Intel-compatible computer. The issue should be value-for-money.

And the iPad is terrific in that department.

4. Competitors are coming.
This is true, as far as it goes. Arends unfortunately cites the Samsung Galaxy Tab, which means he apparently has not seen a Galaxy Tab, nor used one, because the Galaxy Tab is the least of the iPad’s potential concerns, in our opinion. It has a surprisingly small screen, for starters; and based on hanging around the repair desk at Verizon stores, we are told the thing tends to seize up and need rebooting, which may explain why a friend’s 22 year old daughter recently called the Galaxy “an iPad for losers.”

5. No flash.
By this, Arends refers to Steve Jobs’ famous decision to leave Adobe’s Flash Player for video and animation off the iPad. This was a very a big issue when the iPad first came out, because most web sites used Flash at that point, and it was about the only thing competitors could talk the iPad down with.

But today, an increasing number of web sites (MLB, for example) that were Flash-only last spring now accommodate the iPad, and do so beautifully.

Of the remaining five issues on the list, one is merely list-expanding padding (“It’ll get boring”), while another regurgitates mainstream fluff (“The whole Apple cult is starting to creep me out”).

But what it all seems to come down to is, like Eric Clapton’s “Layla” those many years ago, the iPad has become too popular for some people to admit they want one.

Our own advice is, don’t listen to “Top-Ten” columnists, whatever newspaper they write for, and don’t listen to virtual columns like NotMakingThisUp: try it yourself and make up your own mind.

Meanwhile, I’ll have to call Paul and see if he’s got an iPad, or if he’s holding out like our Wall Street Journal columnist. Besides, it’ll give me a chance to find out if he ever, finally, bought “Layla and Other Assorted Love Songs,” too.

Paul had excellent taste: I’ll bet he’s got them both.


© 2010 NotMakingThisUp, LLC





Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com
© 2011 NotMakingThisUp, LLC
                                                             
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.
NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.”  So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff.  And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management