Apples and Oranges

“Those who cannot remember the past are condemned to repeat it” George Santayan

Apple has been a phenomenal company since its inception, but has not always been a good investment.  For those too young to know and those whose memory has failed them it is helpful to take a brief look back to help understand what the future might hold.

The early years when desktop computing was just beginning was a great time to own Apple.  The MacIntosh Operating System. Released in 1984, set Apple apart from the competition.  It was easy to use and intuitive at a time when the Microsoft DOS required users to memorize and type arcane command line instructions.  The processing of images and the application to the print/design world made it a big hit and allowed Apple to charge premium prices for the machines they manufactured.

Then along came Windows OS, released in November 1985, which allowed PC users to work with a simpler interface.  Microsoft never manufactured computers so their objective was to put the windows product on as many machines as possible and collect a royalty for each installation.  The race to sell machines was over quickly as the competition among manufacturers in Windows land continuously led to better and faster machines at lower and lower prices.  Apple’s market share plummeted, and even as they maintained higher margins on the machines they did sell, their share of market dwindled as did the price of Apple shares.

Apple’s next big hit the ipod, introduced in January 2001, finally gave the company relevance again.  Apple created and totally owned the category.  But with the music player market becoming saturated, Apple needed another big innovation to keep the company’s momentum moving forward.

Apple introduced the iphone in June of 2007 literally inventing the modern smart phone, and again chose to keep the IOS proprietary.  As the sole manufacturer of an item Apple invented, Apple has enjoyed out-sized profit margins and first to market leadership.  But as with all tech products, the lifespan of any innovative product is extremely short and seems to get shorter with each new product.  Google’s Android OS for smartphones, released in September of 2008 is once again a software solution buy a non-manufacturing entity who profits solely from installation royalties.  In fact the Apple lawsuits against Samsung are eerily similar to the Microsoft lawsuits of years past, as Apple attempts to protect its supremacy from competitor looking to upset their applecart.

At each step in their history Apple has chosen to be a manufacturer and rely on branded sales of their products rather than open the doors for others to add value and participate in the profits.  It is hard to wall off any area of technology for very long and once again Apple is losing market share to competitors at a rapid pace.

To keep the price of Apple shares climbing the company has now come to rely on dividend distributions and share repurchases, which while benefiting shareholders in the short term, do nothing to create future value.

The talk of the investment community has focused on Apple developing a television type product that everyone hopes will be like previous Apple reinventions, creating a totally new experience and a totally new category.  Perhaps they can.  Apple has certainly had more than their share of world changing technological breakthroughs.  But if they don’t it is entirely likely Apple could end up much like Microsoft, a company with a large cash hoard and no real idea of where to maximize the value of that cash.  I am not willing to give up on Apple today, but I would suggest they should be watched with a skeptical eye.

US Debt Downgrade – Let’s Get Real!

The topic de jour on the cable ‘news’ outlets is a possible downgrade of United State Treasury debt. Granted the antics in congress are sophomoric at best and certainly cause for concern, but to worry much about a possible downgrade of US debt is even more absurd.

First, the ratings agencies have a woeful track record of actually making any calls with respect to bond ratings of publicly traded companies. Where was S&P and Moody’s when Ernon collapsed? Why did so much toxic mortgage debt that led to the credit crisis in 2007 and 2008 receive a AAA stamp of approval from these same agencies that now threaten to downgrade US Treasuries? Why were the ratings agencies asleep at the wheel when AIG went so deep in the red that the US Government had to step in and bail them out? It is hard to see how these agencies have any credibility left. Perhaps this is just their way of inserting themselves into what is basically a political discussion, or maybe they have been wrong so often they feel a need to generate publicity for themselves.

Secondly, the US debt problem is not one of the ability to pay, but rather a political posturing for an upcoming election. Take a look at the following chart of countries that currently have AAA ratings for their sovereign debt.

Countries with AAA rating

	GDP (Billions)	Public Debt	Public Debt as % of GDP
United States	$ 14,720.00	$ 8,670.00	58.9%
Australia	$ 889.60	$ 199.27	22.4%
Austria	$ 332.90	$ 234.36	70.4%
Canada	$ 1,335.00	$ 453.90	34.0%
Denmark	$ 204.10	$ 88.99	43.6%
Finland	$ 185.40	$ 89.73	48.4%
France	$ 2,160.00	$ 1,814.40	84.0%
Germany	$ 2,951.00	$ 2,213.25	75.0%
The Netherlands	$ 680.40	$ 439.54	64.6%
Norway	$ 276.40	$ 131.84	47.7%
Singapore	$ 292.20	$ 299.21	102.4%
Sweden	$ 354.00	$ 144.43	40.8%
Switzerland	$ 326.90	$ 130.76	40.0%
United Kingdom	$ 2,189.00	$ 1,674.59	76.5%
Total Ex US	$ 12,176.90	$ 7,914.27	65.0%

You should note that the United States GDP is greater than the GDP of all other AAA rated countries combined. The US debt as a percentage of GDP is less than the weighted average of all the other countries and is about the midpoint of this group.

Now ask yourself which of these counties you would trust more than the US to lend your money to. Some on this list are just too small. Those in the European Union have their own debt woes via the weaker partners in the EU (Portugal, Ireland, Greece, and Spain) and there is some concern about the stability and permanence of the Euro itself. Some say China is the next world economic power. But even after a decade of break neck growth, the GDP of China is yet only a third that of the US. Besides who would trust their money to a state controlled economic system where wealth can be wiped out by fiat and true economic growth is questionable.

Finally, consider what alternatives a global investor has. There is not enough liquidity for the global economy to function without the US. Regardless of what the rating agencies threaten the US dollar and by extension US Treasuries, have always been and will likely continue to be for the foreseeable future, the de facto safe haven of the world. There is no country with the economic or military might to unseat the United States at the present time. When the going gets tough, everyone still turns to the United States as a refuge and looks to the United States for leadership. If US debt were downgrade to AA it would make no difference whatsoever. In the long run, all other debt is valued in relation to US debt. Sure maybe there would be a week or two of confusion, but in the end, regardless of the ranting of debt ratings agencies investors have voted with their pocketbooks that the United States is the premier credit on the face of the planet, and that should be enough.

Financial guidance without conflicts of interest

The Chicago Tribune has an excellent article on the different standards of care investors can expect from their financial advisors. You can read the article here.

Tell Your Life Story On Proust

I have written several times about leaving your heirs the gift of the life lessons you have learned. More valuable than mere possessions the love and experience you can pass on to the next generation can now be captured and shared privately at a site named Proust.

I hope you will check it out for yourself and maybe make use of it.

OTC Medical Supplies You Can Still Buy With Your FSA or HSA Account

January of this year brought new restrictions on what over the counter medical supplies were qualified purchases for Flexible Spending Accounts and Health Savings Accounts, but there are still many items that qualify. These included:

• Bandages and first aid kits
• Contact lens cleaning solution
• Eye drops
• Motion sickness medications
• Pregnancy test kits
• Sunscreen with SPF 30 or greater

Free Credit Score

Beginning July 21 if you are declined credit or do not receive a lenders best rate for a loan the lender must send you a free copy of the credit report it used to make it's lending decision. For more info see the NYT article.

Adding A Third Dimension to Bond Analysis

A paper I wrote "Adding a Third Dimension to Bond Analysis" was recently selected for publication in the Journal of Financial Planning. In the paper I describe how a bond varies in value over its lifetime and how to construct a bond price curve using a spreadsheet program. Although the paper is technical in nature and intended for a professional audience I though my readers might be interested in the concepts presented in the paper. I have included a link to the article here, and you can access the spreadsheet and download a copy to your computer here.