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What’s Apple’s problems tell us about innovation and corporate organization

Fortunately, we sold all our Apple a while back. And we did not buy it back at lower prices. That was good.

Last night Apple issued a dire earnings warning. Its stock plunged 8%+ this morning.

This is not only an Apple story. It’s a technology story:

If you don’t keep inventing new products consumers desire, your sales will suffer and your stock will decline.

What turned me onto selling Apple (and telling you to do also), was simple: I asked my family. All have iPhones. None of them were interested in buying a new Apple phone. As part of my research, I also bought a new Samsung Galaxy Note 8 and compared it to my iPhone 8 plus. As a phone the Samsung works as well as my iPhone. In fact, over WiFi calling it works better. The reason I love my iPhone is PhotoStream — a constant flow of family pictures — and FaceTime  video calling with the family. Samsung has equivalent features — but they don’t with mesh with iPhones. If you want photos of Eleanor, Zoe, Peter and Sophie, you must have an iPhone. Surprise. Surprise.

Even though Samsung doesn’t hype its phones like Apple does — with advertising, billboards, massive press conferences, etc. — Samsung sells more phones worldwide than Apple. According to semi-reliable guesses, Apple has about 15%, and Samsung 20% of the world market for smartphones.

Apple blamed its lousy sales on China. That’s politics. Maybe the White House will listen and do something about the Trade War with China? The Trade War is hurting all manner of American companies. Not just China. Good luck with an early end to the Trade War.

Innovation. New products we  want. New products I want. That’s what FANG companies need. The only one that seems to understand The New Product Imperative is Amazon. Here are the keys to new products:

+ Inventing them. This is the easiest part. Even I can think of a dozen new products Apple should make and I’d buy.

+ Making, marketing and selling them. This is the hardest part. Your company has to be organized for entrepreneurship. Apple isn’t. Like most companies, it’s top-down driven, bureaucracy aplenty, with zillions of unhappy worker-bees earning a nice living — but essentially doing nothing to make new products. In contrast , Amazon is organized for entrepreneurship. A recent trade article referred to “Amazon’s 100 CEOs.” Last night, Susan and I dropped by the Amazon store in New York’s Time Warner Center. It’s brimming with new products. Susan was in a hurry to get home and fee Rosie, otherwise I could have loaded up on the new Amazon products — especially those sporting Alexa connections.

Predicting 2019

What with Trade Wars, the Government Shutdown (800,000+ employees affected) and economic slowdowns in China, and Europe, it’s hard to forecast ebullient times for 2019.

There are four ways to make money in this market:

+ Stay out of it. Earn 2.5% to 3.00% in short-term funds of treasuries.

+ Go short on obvious technology names, like Google, Apple, Netflix, and non-tech names like Berkshire, and General Motors. My GM short is up 6.5% so far.

+ My friend who trades a little, while still working 50+ hours at this day job emails me:

One doesn’t need to be a genius to make money in this kind of market.
Buy low, sell high, repeat.
Put another way: buy panic, sell exuberance, repeat.
Or put yet another way: buy dips, sell rallies, repeat.
What part of this does David Einhorn not understand?

He refers to a Blomberg report that wrote:

“David Einhorn closed out 2018 with his biggest annual loss ever for the 22-year-old Greenlight Capital. The firm’s main hedge fund fell 9 percent in December, extending this year’s decline to 34 percent, according to an investor update viewed by Bloomberg.” For the full report on Einhorn’s miserable performance, click here.

+ Buy yourself a business. A friend sent me this listing:

Learned over the weekend

+ Every major appliance in your house should be protected, including washing machines, boilers and refrigerators. Here’s a device: Click here.

+ I replaced the motherboard on our Whirlpool washer. I bought the motherboard on Amazon and watched the “How to install” video on YouTube. It was blown by a power surge. From now on when I leave home, I’m unplugging the washing machines and turning off their water.

+ Reset, Reboot, Power Off. All words that say Unplug it. Wait. Turn it back on. Some take 30 seconds. The Whirlpool washer took overnight — even with the new motherboard. Go figure.

Worth bingewatching on Netflix

Stuff to read

+ As a grocery chain is dismantled, investors recover their money. Worker pensions are short millions.
Private-equity firm Sun Capital has filed for bankruptcy 5 times in 10 years, leaving $280 million unpaid.
From The Washington Post. Click here.  

+ The Malaysia Scandal Is Starting to Look Dire for Goldman Sachs. A pioneering twist on third-world corruption might be the biggest scandal the Vampire Squid has ever faced by Matt Taibbi of The Rolling Stone. Click here.

+ Trump versus the Economy by Nouriel Roubini. Between publicly chastising US Federal Reserve Chair Jerome Powell and escalating his trade war with China, US President Donald Trump has finally rattled the markets. While investors were happy to look the other way during the first half of Trump’s term, the dangerous spectacle unfolding in the White House can no longer be ignored.

Financial markets have finally awoken to the fact that Donald Trump is US president. Given that the world has endured two years of reckless tweets and public statements by the world’s most powerful man, the obvious question is, What took so long?

…Trump is now the Dr. Strangelove of financial markets. Like the paranoid madman in Stanley Kubrick’s classic film, he is flirting with mutually assured economic destruction. Now that markets see the danger, the risk of a financial crisis and global recession has grown.

Click here.  Posted on

Comment on the government shutdown

The taxidriver

A woman and her 12-year-old son were riding in a taxi in Detroit. It was raining and all the prostitutes were standing under awnings. “Mom,” said the boy, “what are all those women doing?”

“They’re waiting for their husbands to get off work,” she replied

The taxi driver turns around and says, “Geez lady, why don’t you tell him the truth? They’re hookers, boy! They have sex with men for money.”

The little boy’s eyes get wide and he says, “Is that true Mom?”

His mother, glaring hard at the driver, answers “Yes.”

After a few minutes the kid asks, “Mom, if those women have babies, what happens to them?”

She said, “They become taxi drivers.”

Harry Newton, who did buy the latest Apple watch — because it had some new, serious health features an old codger like me wanted. But I’m still sporting an old iPhone 8 plus. I’m writing a chapter on “Why Nobody Listens and What you can do about it.” The simple answer is run your own business. I don’t like beer. But I do like bagels.

  • Tom

    Apple and BRK’s outlook. Thoughts?

  • Mike Nash

    I remember you promoting the Apple watch but I wisely said “No way.” Please don’t post anything by Roubini. The man ALWAYS calls for an economic collapse. Of what possible value is someone who says the same thing over and over and over?

  • gerryb

    Dec 28, 2018 | 02:10 PM EST DOUG KASS
    My Favorite Large Cap Stock for 2019 is Goldman Sachs ($163)

    “Certain members of the former Malaysian government and 1MDB lied to Goldman Sachs, outside counsel and others about the use of proceeds from these transactions… 1MDB, whose CEO and Board reported directly to the prime minister at the time, also provided written assurances to Goldman Sachs for each transaction that no intermediaries were involved…”
    — Michael DuVally, Goldman Sachs spokesman, on Monday

    * Goldman Sachs remains “Best of Breed”
    * Trading under $165 a share and down from $230 a share a month ago (and a one-year high of $275), Goldman Sachs shares have likely over-discounted the Malaysian problem
    * We now face the unusual opportunity of becoming a GS “partner” at a discount to book value
    * One of my 2019 Surprises is that GS management acts opportunistically and takes the company private at a premium
    * GS was recently placed on my Best Ideas List

    I have received a number of emails asking me what my favorite financial is.

    My answer is Goldman Sachs.

    In fact, GS is my favorite large cap long idea for 2019!

    Ten days ago I made the case for the brokerage:

    I have been a longtime bear on Goldman Sachs (GS) ; here was my thesis.

    Several weeks ago, with GS trading more than $40 a share higher, I expressed concerns about Goldman’s legal exposure to the capital raise of sovereign wealth fund 1MDB and that the media had been slow to highlight the potential liability to the brokerage, which is a holding of Jim “El Capitan” Cramer’s Action Alerts PLUS charitable trust.

    However, on Monday I moved GS off my Best Ideas List as a short to the Best Ideas List as a long as the market has fully — and then some — discounted the brokerage’s Malaysian liabilities. Here was my post from Monday.

    By means of background, back in 2009, the government of former Malaysian Prime Minister Najib Razak set up 1MDB. About $6.5 billion was raised through Goldman Sachs in three bond offerings. Subsequently, the U.S. Justice Department has estimated that a substantial portion of the capital raised was misappropriated by high-level fund officials and their associates.

    GS shares are down by nearly 35% this year and have fallen from more than $250 to less than $170. As recently as mid-November GS shares traded at $235 a share!

    Here is my investment rationale:

    * For one of the few times since Goldman went public, investors can become a “partner” of Goldman Sachs at a discount to tangible book value. By my calculation, at the time its fourth-quarter results are reported, Goldman’s book value will stand at about $187 a share compared to the current share price of $168 a share.
    * Assuming a base case of $1.75 billion to $2.0 billion in reimbursement and fines for the Malaysian liability, the market has over-discounted its impact given Goldman’s sizable capital base and strong earnings generation. The event likely does not pose an existential risk to the brokerage.
    * On Monday Goldman Sachs fired back against the Malaysian government. I expect the litigation to be resolved sooner than later as both parties are incentivized, and there should be limited long-term impact on Goldman. Remember that the Malaysia government has a documented history of being notoriously corrupt.
    * While Goldman’s leverage has been administered lower by regulators, which has produced lower returns, the brokerage is still Best of Breed. Goldman’s employee base is a talented and innovative pool. History has shown the brokerage’s strong ability to strike a balance between risk and reward. The current management review of the company’s operations (next year is Goldman’s 150th birthday) will likely result in a thoughtful going-forward strategy that should improve current returns on invested capital.
    * Goldman Sachs is a prime beneficiary of the business retrenchment of previously large, profitable, healthy and well-regarded but now-crippled European financial institutions (e.g., Credit Suisse (CS) and Deutsche Bank (DB) ).
    * A reasonably high and sustainable profit growth picture lies ahead, absent the earnings volatility (from prop operations) of the past. Slower yet more stable and steady profit streams should be more valuable as the domestic economy matures.
    * Goldman Sachs has beaten consensus EPS expectations over the last four quarters by 15.4%, 24.6%, 28.3% and 16.7%, respectively
    * With a market capitalization of $62.5 billion, GS trades at only 1.7x sales, 0.85 of book value and 7.5x projected EPS of $25 a share. Goldman’s return on equity (ROE) is about 13.2%. A rule of thumb I sometimes use with financials is that a 10% ROE justifies 1.0x book multiple, so a 13% ROE justifies a 1.3x book multiple, projecting to a value of $247 a share.
    * With the share price so low, there is optionality that Goldman may go private. (See my 15 Surprises for 2019.)

    Bottom Line

    “Be fearful when others are greedy and greedy when others are fearful.”
    – Warren Buffett

    As described above, GS shares are statistically inexpensive today. Trading at 0.85 tangible book value, the shares provide the unusual opportunity for investors to become a “partner” in Goldman Sachs at a discounted price.

    While Goldman Sachs shares are not without risks, the market may have overly punished the brokerage’s exposure to the 1MDB financing in 2009.

    The Malaysian financing does not appear to pose an existential risk to Goldman Sachs.

    In the fullness of time I expect that Goldman could be liable for the reimbursement of the approximate $650 million in fees earned on the Malaysian transaction. In addition, it is quite possible that a large fine may be imposed. The cumulative impact is likely to be under $2 billion, a manageable figure given Goldman’s capital base. The key question is whether Goldman Sachs will be subject to criminal charges, which could jeopardize the company’s franchise. Based on the information current available, it seems to me that GS partner Tim Leissner and members of the Malaysian government were likely rogue actors and that Goldman’s exposure will be contained.

    “Price is what you pay. Value is what you get.”
    — Warren Buffett

    The Oracle of Omaha reminds us not to focus on short-term swings in price, but rather on the underlying value of our investments.

    I value Goldman Sachs at about $245 a share; barring a going private transaction this is a reasonable two-year price target providing a compounded annual rate of return in excess of 20% a year.

    Warren Buffett has taught us the value of being greedy when others are fearful. His stakes in American Express (AXP) (the olive oil controversy), Geico (near bankruptcy) and his numerous preferred investments during the Great Recession have proven to be enormously profitable investments and underscore the value of being an opportunistic long-term investor.

    “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
    –Warren Buffett

    Though not as extreme as American Express and Geico, Goldman Sachs’ current plight may be similar and Mr. Market has likely offered us in Goldman an unusual opportunity for investors with a long-term investment horizon and time frame.

    Position: Long GS