After Apple's fall, is it time to buy or sell?

After the announcement that Steve Jobs is stepping down as CEO, investors pushed Apple's stock down 0.7 percent on Thursday. By contrast, Wall Street analysts reacted with predictable optimism: Buy -- a lot.

So who is right? The pros or the investors?

The short answer may be the pros, though the stock is probably not the bargain that many of them assume.

One popular way to value a company's stock is to look at how high it is trading relative to its earnings per share. It's a rough measure, but it does show that Apple is not much more expensive than the average company. At Thursday's closing price of $374 per share, Apple is trading at 12 times its expected earnings over the next 12 months compared with 11 times for the Standard & Poor's 500 index.

Translation: For every dollar you spend on Apple, you should expect roughly the same earnings as you would get on the average company.

The difference, of course, is that Apple has a tendency to beat expectations and send its stock soaring. It's up 16 percent since Jan. 1, and it briefly topped Exxon Mobil this month as the most valued U.S. company.

One reason the stock trades at a discount to its stellar reputation is a bit counterintuitive: The company has been so successful at producing hot products, starting with the iPod in 2001, then the iPhone in 2007 and last year's big hit, the iPad. The problem is, no one knows if the company can keep this up, especially now that its visionary CEO is resigning (though he will stay as chairman). If Apple doesn't produce more big sellers, estimates of future earnings may prove too high.

But Shaw Wu, an analyst at Sterne, Agee & Leach, says investors are confusing the image of Apple as an innovative, rebel company with the less colorful, but reliable profit maker that it is.

"It's not just a company producing hit products," Wu says. "The earnings have become more predictable."

Despite the popularity of its iPhone, Wu estimates that it still only accounts for 5 percent of cellphones in the world. He believes the iPhone's market share could triple to 15 percent, especially given the opportunity in China, where the company has started selling. He notes that Nokia at its peak had 40 percent of the cellphone market.

Similarly, Wu is bullish on Apple's Macs and iPads. He says they now account for more than 10 percent of the world's computers. He expects that to double. He says that Hewlett-Packard, at its peak, captured 25 percent of the PC market.

Both Nokia and HP are now hurting in part because of Apple's successes with the iPhone and the iPad.

"China is the next big frontier," says Wu, who's been recommending the stock since it was $40. "It's where the next $100 (jump) could come in the stock."

There are plenty of reasons for doubt, however. Even if Jobs had stayed on as CEO, the company faced numerous challenges. Rival phone makers such as Motorola, Samsung and LG Corp. are making inroads using Google's Android operating system for smartphones, which are just about as easy to use as Apple's iPhone. And the success of the iPhone and rival smartphones, which can play music and video, means fewer people need iPods from Apple.

Then there's the challenge of mathematics. As a company gets bigger, it's harder to get the same percentage increase in earnings that investors have come to expect.

Apple earnings have been growing an average of 60 percent annually over the past five years. But can investors really expect that to continue with annual earnings estimated to hit $26 billion the fiscal year that ends in September?

Even Apple fans such as Timothy Ghriskey, co-founder of Solaris Asset Management, which owns Apple stock, notes that selling iPads and iPhones to the Chinese and coming out with new versions of old products will only go so far.

"There is predictability to the earnings two or three years out. But beyond that? Who knows what the next handheld communications device is going to be?" he says. "Apple has to keep coming up with the (next) new thing."

To bulls, though, the benefit of buying stock now is that investors have already priced a bit of this danger into the stock.

"There's always the risk they'll lose their mojo, their magic," says Wu. "But that's why it trades at 12 times."

Bernard Condon, AP Business Writer

The Hidden Dangers in Safe Havens

As Europe's debt troubles intensified earlier this month and United States debt was downgraded, many people rushed into gold and Treasury securities as a safe haven. It was the latest sign that in uncertain times, investors act in ways that can hurt them in the long run.

"They fled the perceived risk of falling stock prices right into the assured risk of overvalued assets," said G. Scott Clemons, chief investment strategist for the wealth management division at Brown Brothers Harriman.

What drove those decisions was not logic but fear — fear of a repeat of September 2008. And that fear may only have intensified when markets dropped again late this week, sending yields on 10-year Treasury notes to record lows and the price of gold above $1,800 an ounce.

Even if the fear is understandable, however, acting on it may not be the best long-term strategy.

"If you were right about the timing decision to get out, you're going to have to be right again about when to get back in," said Joseph W. Spada, managing director at Summit Financial Resources in Parsippany, N.J. "Even professionals have trouble doing it. If that's not going to be your strategy, then don't do it once."

But now that people have done it once, what are the risks of holding on to large positions in gold and Treasuries?

TREASURIES While the economy may seem bad to many people, it would not take much improvement for investors to lose money quickly on their investment in Treasury bonds.

A week and a half ago, the 10-year Treasury note was yielding only 2.10 percent, after Standard & Poor's downgraded the United States' credit rating. Since the yield of a bond moves in the opposite direction of its price, this meant demand for 10-year Treasuries was high.

If over the next six months, the yield were to move up another half of a percentage point to 2.60 percent, however, investors owning those bonds would have a negative 6.25 percent return, said Barbara Reinhard, chief investment strategist at Credit Suisse Private Banking in New York. If the yield curve were to move up a full percentage point during that time, the loss would be 14 percent.

She said such a quick increase could easily happen, as it did from October 2010 to January 2011 when the Federal Reserve began its second round of large-scale purchases of government debt, the program known as quantitative easing.

Now, plenty of people buy bonds with the intention of holding them until maturity. In doing that, it would seem that they would earn a return of 2.10 percent. But they would actually lose 1.5 percent, when the most recent inflation rate of 3.6 percent is factored in.

"That's assuming inflation doesn't rise," Ms. Reinhard said. "Right now, you're betting inflation will fall below 2.10 percent. You're betting against history because inflation has been around 3 to 4 percent historically."

This is not the brightest picture for people who added to their allocation of Treasury bonds. But many felt it was the only safe place.

J. D. Montgomery, a managing director at Canterbury Consulting, an investment consulting firm in Newport Beach, Calif., said he had a client who wrestled with where to put $5 million that he needed to keep safe. The client chose a three-month Treasury note, even though the interest was only $1,000.

There was at least some logic behind this. Most people who bought Treasuries were abandoning their investment strategy, and wealth advisers say that is more troubling than paltry returns.

"The risk of changing your strategy when it's being tested as opposed to changing it when it's not being tested is you risk derailing your long-term investment plan," said Gregg Fisher, president and chief investment officer of Gerstein Fisher, a wealth management firm in New York.

So what should nervous investors have done? Selling Treasury bonds when everyone else was buying them would have been a start. But that might have taken too much discipline. Moving to cash was the top option because at least investors would have money ready when they felt comfortable returning to the markets.

GOLD Investors in gold are a different breed. They often have a passion for the metal that goes beyond returns. And they are not going to be swayed by arguments that gold, hovering around $1,800 an ounce, is overvalued.

"When you buy gold you're saying nothing is going to work and everything is going to stay ridiculous," said Mackin Pulsifer, vice chairman and chief investment officer of Fiduciary Trust International in New York. "There is a fair cohort who believes this in a theological sense, but I believe it's unreasonable given the history of the United States."

As for the nonbelievers who piled into gold, they need to think practically now. Only about 11 percent of gold has an industrial use. While gold can get lost or buried, it does not get used up like oil or natural gas. And its actual cost is between a third and half of where it is trading. Dan Denbow, co-manager of the USAA Precious Metals and Minerals Fund in San Antonio, said it cost about $600 to produce an ounce of gold, but that rises to about $1,000 when all the costs of mining are factored in.

Yet a bigger risk may come from exchange-traded funds for gold. While they let small investors buy gold easily — the price of one share of the GLD exchange traded fund is roughly one-tenth the price of an ounce of gold — that same ease of buying means investors can just as quickly sell their shares in a panic.

No one I spoke to would venture a guess as to how high gold would rise before it hit its peak. But most stressed that people forgot that gold's value was driven by sentiment.

"Gold doesn't have any intrinsic value," said Larry M. Elkin, president of the Palisades Hudson Financial Group in Scarsdale, N.Y. "It's this era's wampum. At one point you could buy Manhattan for beads."

(Mr. Elkin said what bothered him the most about investing in gold was how irrational it was, unlike buying a blue-chip stock whose value rises and falls based on what the company produces.)

That said, having gold in a portfolio is still a good buffer against swings in other markets. Mr. Fisher calculated that over a 43-year period ending in June 2011, the average annual increase for gold, accounting for inflation, was 3.82 percent compared with 4.92 percent for the Standard & Poor's 500-stock index. Gold, however, was 28 percent more volatile.

"The smoother the ride, the more likely the investor is going to stay in his strategy," Mr. Fisher said. "That produces a better result."

He said that from the perspectives of both return and volatility, a better strategy would have been to put 10 percent in gold and split the rest 60-40 between stocks and five-year Treasury bonds. Rebalancing the portfolio to maintain those ratios would have meant an average annual return of 4.66 percent, with more than half of the volatility of gold alone.

For those who fled to gold and Treasuries, the hardest part will be deciding when to get back into other securities. The best way in uncertain markets may be to go slowly in small chunks — a practice known as dollar-cost averaging.

"There are real and psychological benefits to it, because getting someone to take that first step is the hardest," said Christopher Wolfe, chief investment officer for the private bank and investment group at Bank of America. "With a five-year time horizon, it makes a big difference. You might get one of those wicked big down days you could benefit from. But if you have a 30-year time horizon it doesn't matter."

Of course, if people had thought on such a long time horizon they might not have rushed 

 by Paul Sullivan

Monday, August 22, 2011

provided by
The New York Times

Asian stocks dip as global economic growth fears return

Asian stocks have fallen after fears about a global economic slowdown were fanned by weak US data.

South Korea's Kospi dropped 6.2%, while Japan's Nikkei 225 and Australia's ASX indexes shed 2.5%.

Investors are worried global growth is slowing more than first thought, and are concerned that major economies are heading back into recession.

The falls follow steep losses in the US and Europe on Thursday, and mark a week of stock market declines.

Concerns over growth and debt have been building over recent weeks and financial markets have been seeing extreme volatility.

Many analysts are questioning if a bear market - one in which the long term trend is negative - has now developed and is here to stay.

"Bear markets tend to happen when sentiments are low and that comes from weakened demand and bad news flow," Chou Chong of Aberdeen Asset Management told the BBC.

"The Western regions are having to face a period of lower growth and dampened demand. That is putting pressure on market sentiment." he added.

A number of industry heavyweights such as computer firm Dell have cut their earnings outlooks in recent days. At the same time, investment banks including Morgan Stanley have been revisiting their growth forecasts for this year.

We are shifting from a policy risk concern to a realisation that the economies are not as strong as we believed ”

On Thursday, Morgan Stanley said that the US and Europe were "dangerously close to recession", despite efforts by policymakers to boost growth and calm markets.

"Investors fear that policymakers no longer have the tools to avoid a recession," Frederic Neumann at HSBC in Hong Kong told the BBC's Asia Business Report.

What sparked the sell-off in stocks was Thursday's release of data on the US economy.

Manufacturing activity in the US's mid-Atlantic region slumped to its lowest level since March 2009, according to data from the Philadelphia Federal Reserve Bank, which is seen as an early indicator of the state of manufacturing nationally.

At the same time, sales in the US housing market fell unexpectedly and unemployment claims rose sharply.

The numbers weighed on sentiment in both the US and Europe.

"The issue now is there is building evidence that the economies themselves are weakening," Mr Neuman said.

"We are shifting from a policy risk concern to a realisation that the economies are not as strong as we believed and that is something that the investors have only begun to wake up to right now."

Mr Chong of Aberdeen Asset Management warned that given the uncertainty surrounding the health of the developed economies, markets were likely to remain volatile.

"Until we do see the US and Europe find a long-term sustainable solution to their growth and debt problems, markets will react to any near-term noises," he said.

The Dow Jones index closed down 3.7% while European indexes lost between 4% and 6%.

Commodity prices

On Friday, oil prices continued to drop as investors bet that slower  global growth would dent demand for crude.

"Investors have been spooked," said Yumi Nishimura of Daiwa Securities, adding that markets would be looking for more clues as to the state of the global economy.

"They are now focusing on next week's data such as US gross domestic product," she said.

Analysts said oil prices were likely to take further hits in the wake of the global economic developments.

"The world economy has clearly stalled and it is hard to see any meaningful recovery in demand unless commodity prices, and especially oil, continue to weaken," Capital Economics said in a report.

"The fragility of the world economy means there is high chance that fresh financial shocks will trigger more falls in commodity markets."

Amid the worries about the state of the global economy, so-called safe haven investments continued to rise in Asian trade, extending Thursday's sharp increases.

The spot price of gold hit a new record high of $1,833.81 an ounce.

The Swiss franc rose against the euro, despite recent attempts by the Swiss authorities to weaken it earlier this month.

http://www.bbc.co.uk/news/business-14585218 

Are Investors Too Pessimistic About Recession?

At some point, we all have to make a call on the economy and whether we are going into a recession. For Bob Doll, the Chief Equity Strategist at Blackrock, the answer is no, but the upside is still limited.

"In the near-term, probably not a lot since we've had a bit of a run off the panic low a week ago," Doll says. "But if there's no recession, and that's our mainline scenario, stock prices will resume their slow creep higher. If that's incorrect, I am afraid stocks will sell off again."

With that sort of unappealing upside-downside ratio, it is probably no surprise that the man overseeing more than $1.6 trillion dollars worth of other people's money is the latest high profile Breakout guest to stick a fork in buy-and-hold investing. "I think 'buy & hold and let it alone' has unfortunately not worked but re-balancing and dollar cost averaging has worked."

In short, you have to pay attention and take action. "When all of a sudden bonds go straight up and stocks go straight down, it begs for a re-balancing; to buy some stocks and sell some bonds. If you did that, you're already enjoying some benefits," Doll says.

But even with that bounce, 6 of 10 sectors are still down 10% or more in the past month, begging the question: Is it best to bottom-fish here or go defensive?

"I think that on sell-offs you add to cyclicality," Doll suggests. "I'm hedging a bit because cyclicals have had a big move up already off the panic lows but when they revisit, if they revisit those lows, and we still have conviction that we are not going to have a recession, I think you nibble on them."

Tech and Energy would be two favored examples. And if his no recession forecast proves wrong, Doll is also comfortable owning some Healthcare stocks too.

As much as 2nd quarter earnings season has been largely invisible - and eclipsed - due to world events, Doll says weak guidance and a lack of visibility fueled by a lot of "I don't know" comments has seeded an already uncertain environment.

Even so, his latest "Weekly Commentary" succinctly states, "Our summary view is that we believe investors are overly pessimistic about the possibility of a renewed recession in the United States... It is important to remember that equity markets have a poor track record as acting as predictors of recessions and corporate fundamentals remain strong."

In fact, Doll says of 30 stock market corrections of 15% or more since the 1930's, only two have accurately predicted recession.

Finally, Doll says stocks are inexpensive yet unlikely to post a rapid rebound and will continue to be driven by short-term economic issues.

http://finance.yahoo.com/ 

Markets fall as Merkel-Sarkozy debt talks disappoint

Continue reading the main story

European shares have fallen after talks between French and German leaders failed to calm investors' fears that the debt crisis could spread further.

The two leaders agreed to press for closer economic integration within the eurozone, but did not announce any specific measures to tackle the crisis.

Frankfurt's Dax and London's FTSE 100 indexes fell about 1%, while the Cac 40 in Paris lost about 0.2%.

The gold price also hit a new a record high, reflecting continued uncertainty.

After falling back towards the end of last week, the price hit $1,795 an ounce in early trading.

A proposed tax on financial transactions also hit bank shares.

Deutsche Bank, BNP Paribas and Barclays all fell by about 3%. Shares in the London Stock Exchange and Deutsche Boerse also fell by a similar amount.

Continue reading the main story

The tax could be used to raise money to help bolster any future bailout funds, but the proposal has already met with opposition from one member state.

"We can't have a situation where there is a transaction tax in Dublin and there is no transaction tax in London," said the Irish Republic's Finance Minister, Michael Noonan.

Eurobonds

German Chancellor Angela Merkel and French President Nicolas Sarkozy called on Tuesday night for "true economic governance" for the eurozone in response to the debt crisis.

The leaders called for much closer economic policy in the eurozone, but said that this could only be achieved by a "step-by-step" process.

Mrs Merkel also stressed that issuing so-called eurobonds - IOUs issued to investors backed by the eurozone as a whole rather than individual countries - would not be on the agenda until closer economic union had been achieved.

Continue reading the main story

Market Data

LAST UPDATED AT 11:13 GMT

Dow Jones	11405.93	Down	-76.97	-0.67%
Nasdaq	2523.45	Down	-31.75	-1.24%
FTSE 100	5318.15	Down	-39.48	-0.74%
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Some policymakers and investors have argued that issuing these bonds would go a long way to calming volatile stock markets and resolving the debt crisis.

Both the Italian Finance Minister, Giulio Tremonti, and billionaire investor George Soros have backed the idea.

Harmonising tax

To tackle concerns about high levels of debt among eurozone governments in general, Mrs Merkel also proposed that a requirement for member states to balance their budgets should be enshrined in each of their constitutions.

In another initiative to increase tax revenues, the leaders advocated harmonising corporate tax rates across the single currency.

The two leaders also said they wanted bi-annual meetings of the 17 heads of the eurozone governments, chaired by Herman van Rompuy, the current president of the European Council.

"There weren't any scoops as the proposals had been mentioned over the past few days. Overall, the outcome of the meeting wasn't convincing, with no eurobond project," said Patrice Perois at Kepler Capital Markets.

Mrs Merkel and Mr Sarkozy were meeting in Paris in the wake of recent turmoil on the financial markets, which came amid fears of a renewed global recession and concerns that Spain and Italy may be dragged into the debt crisis.

http://www.bbc.co.uk/news/business-14555275

Value investing

Value investing is a style of investing based on picking shares that have low valuations relative to their current profits, cash flows and dividend yield. It is one of the two main approaches to stock picking, the other being growth investing.

Value investing is generally regarded as lower risk than growth investing. Unlike growth investing, which is only suitable for investors looking far capital gains, value investing strategies can be used by investors looking for either capital gains or income — although an income investor is likely to use a different value strategy to one who wants capital gains.

Value investors look for low valuations on current earnings rather than for higher valuations that may be justified by future growth. A value investor is more likely than a growth investor to prefer a share with a low valuation and stable earnings to one that has a higher valuation and growing earnings.

Value investing is less likely than growth investing to interest investors who are looking for dramatic results in the short term, however there are a number of value investors who have been very successful.

There is strong evidence that value shares outperform growth shares over the long term. This is called the value effect.

Exactly what measures a value investor will look at varies. PE and dividend yield are obviously easy and are widely used but EV/EBITDA is also useful and the most successful value investors seem to pay a lot of attention to cash flows. The last is, after all, theoretically the most correct approach.

Investors who emphasise yield should also look at earnings and cashflows, if only to ensure sufficient dividend cover.

There is usually a reason for low valuations. This can lead investors into value traps. Investors should know why a stock is cheap before buying it. For example, if the historical or prospective PE (or yield, price/cashflow etc.) is very low, there may be a risk of a significant deterioration.

(http://moneyterms.co.uk/value_investing/)