Shame on you, Apple

Oh, and congratulations, too.

Shame and congratulations on you for completing the world’s most successful corporate issuance of bonds. $52 Billion in bids clamoring for $17 Billion of product.

Remember when Apple (AAPL) products had that kind of demand?

Remember when its stock had that kind of demand?

Remember, the cynics say that dividends and stock buybacks are the sort of things that you do when you can’t propel the business forward.

A few years ago, in a ruling that will forever remain controversial, the United States Supreme Court essentially ruled, that in at least a narrow definition, corporations were people.

For most purposes that designation is somewhat non-sensical, but for the all important world of campaign financing making corporations animate objects had a great benefit. Namely, the privilege of donating obscene amounts of money to political campaigns.

But along with all of the great privileges of belonging to the human race, there have to be some downsides, as well. Social obligations and the burdens and joys of human emotions come to mind.

Like Adam and Eve in the Garden of Eden, one of the very first human traits that they exhibited after they had done something very wrong and against the “rules” was to feel shame. Ironically, what they did wrong was to have eaten from “The Apple.”

This week, Apple should feel shame.

They borrowed money, as much as 75 basis points above US Treasuries in order to fund a planned $50 Billion buyback and the costs of three years worth of dividend payments.

From a business perspective, Apple should be congratulated, having found a way to satisfy increasingly noisy shareholders and hold the tax man at bay. Although I do wonder why they even had to go 75 basis points above US Treasuries, you can’t argue with the success of the initiative. You would, however, think that Apple was more credit worthy than our own government, but apparently they don’t even measure up to Microsoft (MSFT) in that regard.

While the interest payments are a deductible expense, the real beauty is that Apple is able to put cash directly and perhaps indirectly back in the hands of shareholders without the need to repatriate tons of foreign cash and pay US taxes once having done so. Of course, they also figured out a way to turn down the heat on Tim Cook, just a bit.

Having been an Apple shareholder as recently as last week, I suppose I would have lauded that move by Tim Cook, but now, I find it shameful.

Firstly, not that I expect any devastating news at Apple, but suddenly shareholders have taken a subordinate position to new bond buying stakeholders. The risk to shareholders is certainly small in that regard, but it is also certainly unnecessary.

Secondly, what happened to the ideals?

Although he was a ruthless competitor, the late Steve Jobs had ideals. First and foremost, they related to the products offered by Apple. But they also extended to the financial practices that eschewed capital markets and were ruggedly self-reliant in order to meet its corporate objectives.

While Apple still has exquisite products, among my previous critiques of the company quality of products has never been at issue, they are straying from the founder’s ideals on all counts.

While it can be safely said that the last time Apple ventured into the bond market, it did so to save itself from financial ruination, Steve Jobs had not yet returned to the company. We’ll never know whether Apple under Jobs’ leadership would have been driven to the point of desperation, but we do know that in the 25 subsequent years that source was never tapped again.

Whatever the basis for his ideals, they included a disdain for share buybacks and dividends. As recently as a 2010 shareholder meeting, Jobs stated that Apple needed to keep its cash for growth opportunities and further said that paying a dividend or buying back stock would not change the stock price. You can argue those points, but what you can’t argue is that Jobs’ idealism exchanged the illusory effects of dividends and buybacks for the real effects of stock appreciation.

So here we are. Shares had fallen in excess of $300, the pipeline appears dry and questions regarding TIm Cook’s continuing leadership have popped up.

In response, Apple has gone where the beleaguered go. They have gone the route of buybacks and dividends. Nothing terribly creative, but a step designed to quiet some of the complaints from shareholders and activists.

Yet, they went to the bond markets to get the necessary cash to perform what may in and of itself been unnecessary. By all reports they did so to avoid repatriation of foreign held cash and to avoid paying U.S. taxes upon those funds.

Remember the 2012 elections? Remember candidate Romney and the controversy surrounding his taxes? There was never a question as to whether Romney had broken the law or done anything illegal. It was an issue of his taking advantage of every loophole in the tax code that was imaginable. Not illegal, but most people innately believed that there was just something wrong about navigating a path that no one creating regulation or legislation could have imagined would exist.

Bill Gates and Warren Buffett believe that to be the case. I suppose that’s another way that Apple doesn’t measure up to Microsoft.

On its surface you know that there is something wrong when an individual can have an IRA valued in excess of $100 Million. Not because the amount is so large, but rather because of the annual contribution thresholds. For example, assuming Mr. Romney made a maximum $5,000 contribution each year for 30 years and achieved an annual 35% return, he would still only have $40 million.


Yet here Apple has garnered its own shame. Exploiting the tax code in a way that the average person, perhaps even investors in Apple, intuitively know is wrong. Maintaining a significant cash reserve overseas to avoid paying taxes just doesn’t pass the smell test for most people, despite being legal.

But by so doing, they are also not re-investing any significant portion of their $150 Billion cash reserve into the business, nor are they pursuing meaningful acquisitions. The money sits in a low interest environment.

Given that shameful disregard for shareholders,you could understand why there was a growing chorus for something substantive to be done.

While corporations traditionally did not have social responsibilities, that too is a burden of now joining the human race. Among the social responsibilities is to put their money to work and to pay taxes, without hiding behind the loopholes or the unanticipated escape routes found in existing regulations and legislation.

I’m not really certain whatever happened to Adam and Eve after their banishment from the Garden of Eden. Their expulsion was swift, and perhaps the entire human race paid a steep price for their actions.

I think Apple’s recent action will result in the same steep price for its shareholders as the euphoria around the offering has already disappeared. The future looks less optimistic as Apple settles into a state where they are no different from the rest and beginning to rely on smoke, mirrors and lapses in tax policy to perpetuate their leadership.

In the meantime, without anything substantive in its future, Apple will remain a trading vehicle that may offer risk to those looking at it as a long term value.

While I can’t hold Apple in esteem for their anti-social behavior, and blatant thumbing of its corporate nose at its responsibilities, I do think that if offers some exceptional short term opportunities, especially when coupled with a covered call program.

I look forward to more of those positions as shares come back down in price to the $410-420 range, which I anticipate occurring prior to next week’s ex-dividend date.

As long as they’ve already made a deal with the devil, I may as well get my piece.


The Clock is Ticking on the S&P 500

The age old question and certainly having its application in the stock markets is how does one see the glass. Is it half full or half empty? Is the market going higher from the current levels or have we already seen its best days?

I often like to say that I neither believe in technical nor fundamental analyses. Saying so is probably a reflection of the denial that has me refusing to believe that my intellectual capacity has greatly diminished.

While not really spending terribly much time with charts, I do glance at them. Like the spooky kid from “The Sixth Sense,” I do think I occasionally see patterns. I suppose to some degree that’s somehow related to a very basic aspect of technical analysis.

About a month ago, I started getting a bit leery about the market’s climb and have found it increasingly difficult to commit funds to new positions. That feeling was based upon what I perceived to be a very similar path that the market was following to that exhibited in the beginning of 2012.

Both paths are the kind that covered option sellers dislike, but fortunately don’t come along very often. Both times the market has essentially done nothing but climb higher.

This Thursday morning we’re fresh off closing higher nine straight days. In fact, March 2013 has yet to see a lower close. Needless to say, my prescience has yet to be fulfilled.

The last time that the market enjoyed a nine day winning streak was in November 1996 and it do so in May 1996, as well. I can say “enjoyed” because back then i wasn’t selling call options, so I’m fairly certain that I enjoyed those periods as well.

Out of curiosity and with an abundance of time on my hands as I await something to break in one direction or another, I was interested in seeing just how the market has done historically following such consistent daily climbs higher.

The short and quick answer is that such climbs in the S&P 500 or its related trading products, such as SPDR S&P 500 ETF (SPY) do not result in a reactive and sharp drop once the string of advances has come to an end. The market continues to climb.

So much for my theory and hopes that I could return to the more fulfilling days of trading ups and downs in the market.

While the current advance should, therefore, be a source of continued optimism, there may be a competing dynamic to be considered.

Looking at the bigger picture, beginning in May 1996, when that first 9 day advance occurred, which happened to be at the beginning of a secular market climb, it seems as if some kind of pattern was appearing.

Looking at the 17 year period illustrated above there may be some reason to believe that we are in the process of completing a 52 month cycle.

In each of the two previous broad and sustained market rallies the time frame has been approximately 52 months and the rallies have been on the order of 100% or greater. For those not chased out of the market as the nadirs were reached the recoveries were satisfying.

However, that satisfaction may have been tempered by the large market drops that ensued. In both previous cases the market plunged more than 40% over the course of the subsequent 18-30 months. Greed, optimism, a sense of invincibility may all have been factors in being caught in the continued downdrafts that devoured paper profits.

In hindsight, there were certainly precipitating factors that may have played a role in these drops, not all of which could have been predicted.

While perhaps the technology bubble should have been no surprise, nor should the real estate bubble, extrinsic factors, such as the terrorist attack of September 11, 2001 contributed to market declines during an already susceptible period. However, in the period from May 1996 to the present, there have also been an astonishing 18 periods of time when the market fell 10% or more.

As hard as it is to understand that the occasional fire that burns down a beloved forest is part of a cycle that sustains and evolves the environment, so too are those market declines an apparently necessary, or at least unavoidable component of reaching greater heights.

Clearly, and again, focusing on the big picture, those intermediate declines have been part of a healthy process as the S&P 500 has appreciated by more than 130% since that nine day trading range in 1996. Of course, that’s little solace to those that did see their profits disappear and that may have exited the market and greatly delayed their re-entry.

Being prepared for those declines is the tricky part. Balancing the need to be invested with the knowledge that much of your good work can be undone by a simple hiccough is disconcerting.

As we are now in the fifth year of the current climb and may be approaching that wall that we’ve seen twice before in the past 17 years, I continue to believe that there is ample reason to create reserves and take profits, even if that means leaving some on the table. Transitioning a portfolio may be a good strategy to gradually respond to future uncertainty.

In my case, that means being less likely to rollover covered contracts into the next cycle and instead being happy to see share assignments and realization of cash proceeds. It may also mean writing longer term contracts for those positions not likely to be assigned and grabbing larger premiums, albeit at lower time adjusted ROIs, in order to have a better chance of riding out any reversal.

Timing the market is something that most sane people would agree is impossible, certainly on a consistent basis. Everyone has the same charts to look at, yet the interpretations are in a wide range, often fitting personal outlooks and human emotions. The cynic and the optimist see the same data very differently and respond consistent with their own biases.

I am, by nature, a long term optimist, but a short term pessimist. Rarely, however, have I felt this level of pessimism. Sadly, I didn’t feel it in 2007, even after first having one of those warning mini- drops of 8% in July 2007.

The nice thing about being wrong is that you can always get back, although given that scenario, I have to believe that I would be even more pessimistic, as I don’t care to chase stocks as they’ve moved higher.

The other nice thing is as today (Thursday March 14, 2013) is thus far shaping up to be the 10th straight day of gains, I can look at the data all over again and perhaps arrive at a completely different conclusion.

Just like the professionals.


Google is a Bargain

How many times have you heard the expression that “everything is relative?”

Certainly, when it comes to the price of anything, on some level a determination is made of its relative value. It can be a complicated process combining objective and subjective measures and is often re-assessed in hindsight.

That latter part is especially true with stock purchases. Buying and selling stocks that should be a simple exercise as you don’t really need to deal with intangibles, such as emotion, fear and the specter of a collapse of the Euro. At least not if you believe that the P/E ratio is a fair measure of value and a simple means by which to make comparisons. It would also helped if absolutely everyone agreed with you in that regard.

Barely a year ago it seemed as if all attention and all excitement was focused on Apple (AAPL) and what kind of price targets it could breach in its unstoppable ride. How often did analysts refer to Apple’s price movement as something unique and special?

As Apple is now having some difficulty living up to those lofty expectations it really shouldn’t come as much of a surprise that it has hit a wall faced by other invincibles of past. Being unique and special is not all that unique if history is a guide. I did my best to suggest that in a number of Apple-centric articles in the past 6 months. While history suggests that Apple will fall even further it gives reason to suspect that Google will march significantly higher.

Let’s go to the charts.

Just look at what happened to some of its sector mates about a dozen years ago. Whether Cisco (CSCO), Microsoft (MSFT) or Intel (INTC), their charts all look very similar. Although the 200,000% increase in shares of Cisco at its peak may be an outlier, Microsoft experienced a 57,000% climb, while Intel and Apple had 18,800% and 21,400% increases from their opening day close trades.

While Cisco, Microsoft and Intel all experienced their high points during the technology bubble, Apple waited the same dozen years to begin resembling the pattern of its Silicon Valley neighbors. Coincidentally, that was the length of time that Steve Jobs was estranged from Apple, before his return following the purchase of Next Computer by Apple.

By the standards of a decade ago, Apple’s share price may still have some way to go to match Microsoft’s 60% drop, Intel’s 74% retreat or Cisco’s 76% plunge. Thus far, with its recent low of $420, Apple has fallen 40% from its 2012 peak. All you need to do is slide its representation on the charts above or below over to the left 12 years and see how nicely they superimposes with the others.

But then there’s Google (GOOG). The company that’s feared, has moved into everyone’s space, is willing to fail, yet somehow garners little respect and attention. Even as it achieved its trading highs, surpassing the $800 level, analysts downplayed the achievement. Instead of discussing the juggernaut that Google is and its expansive vision, the price increase has widely been attributed to people trading out of Apple and into Google. Those are the same people that downplay market rallies by saying that it occurred on light volume. If your banker doesn’t ask about the white powder on your deposits, they’re not likely to ask if they were the result of light volume.

Google simply isn’t really generating the same kind of excitement as Apple did just a year ago. No one has even thought Google deserved an utterance of the “Law of Large Numbers” as a reason why it would have difficulty in continuing its climb.


Granted, Google didn’t start it’s first day of trading as a sub-$10 stock, so it is a bit more difficult to achieve a 200,000% gain. To do so, its share price would have to advance to approximately $200,000, although it could conceivably split its shares on the order of the 288 fold times that Microsoft has done. While Cisco only had to climb to $22 to increase its share price 100% after it opened for trading, Google had to climb $108 for that distinction. At $838 it is currently up less than 700% from its closing trade on its IPO day in 2004.

700%? That’s nothing by relative standards. That is the poor section of Atherton, barely even good enough to step foot into Palo Alto. Besides, even Johnson & Johnson (JNJ) was able to mount that kind of appreciation in a nine year period beginning in the mid-1980s. By historical standards there’s nothing rarefied about Google’s performance.

Certainly, by no relative measure is Google over-extended. Further, Google’s mettle has been tested and it has shown its leadership qualities. Although Google fell more than the others during the market meltdown beginning in 2007, its descent started later and ended earlier. In fact, Google started its climb back more than three months before the market bottom, having advanced more than 40% in those months preceding the market nadir.

While Apple had out-performed Google in both the periods from the October 2007 peak and the March 2009 bottom, Google has handily beaten the others.

Google’s most recent advance began November 15, 2012, moving forward 20.3%. Coincidentally, the S&P 500′s march higher (13.6%) began on November 15, 2012.

Yet the Google chart looks nothing like that of its one time glorious and subsequently fallen neighbors.

 At this point all it has done is to return and mildly surpass its 2007 peak price.

Once ad click money truly started flowing in Google has always taken the opportunity to try new and exciting ventures, most of which have been scuttled or perpetually stayed in beta. While small in the scope of the enormously growing enterprise, under the leadership of Larry Page the ventures are increasingly bold and increasingly poised to create meaningful revenue streams in addition to the growing annuity that ad click revenue has become. Even if no meaningful or immediate direct revenue is recognized from a venture, Google is a disruptor in the market place and is able to soften the underbelly of a potential competitor. Just ask Apple.

With a growing cash horde and a dividend in its inevitable future, Google has already one upped Apple with its proposed, albeit controversial, stock split. Arguably, the series of stock splits that Microsoft, Intel and Cisco undertook helped to fuel their stock appreciation and Google is still on the ground floor in that regard, standing to benefit from the illusory increase in value.

Most of all, Google is still such a relatively young company that is just learning to walk. Granted, it is doing so during a very different era than did its counterparts, but even by Apple’s modest 18,000% growth, which was not artificially fueled by the technology boom, Google has plenty of room to still return incredible profits to new investors, if it follows the script that has been played out by others.

Finally, I would be negligent, and certainly not mindful of my own history, to not suggest that there are covered option opportunities always available with Google. Although I do not currently own shares, Google has been a frequent source of premium income for me over the past 6 years. With extended weekly options now available as well, there are many choices among strike prices and contract length that both price bulls and bears can find appealing. Even those thinking that there may be no more than an 8% drop by April 20, 2013 can get a !% ROI for their pessimism. For those with a tighter price range the rewards can be substantial if Google stays within that range.

Google is also always an exciting play upon earnings announcement. Of course the premature announcement of two quarters ago was more excitement than many would want to repeat, especially, RR Donnelley (RRD), but Google is a frequent candidate for the “Premiums Enhanced by Earnings” strategy, either through covered calls or put sales, whether its shares move up or down. Seeking to take advantage of its historically large earnings related moves may be a good, and fairly conservative mechanism to find an entry point for those not currently holding shares.

I’ll be looking forward to earnings on April 15th and hope to be in a position to pay a fair share of taxes on the profits the next April 15th.

Gloom Can Bring Good TImes

I often say that I neither believe nor follow fundamental nor technical analyses.

Maybe that’s because I’m incapable of understanding or learning the nuances of either. However, despite saying such, like so many things in life, the truth usually lies somewhere in-between.

I do look at charts, although I’m not entirely convinced that I know what I’m looking for or looking at when I stare at the graphic representation of what we observe in the market. On some primitive level I must be doing some kind of technical analysis because I do look for patterns, such as that mentioned about 9 months ago in how Apple (AAPL) was resembling the Google (GOOG) of 2008.

As someone who has been consistently selling options for more than 5 years, I can look at specific periods of time when those who criticize that technique would have been able to revel in their tremendous insight and understanding of price movements, while I would have been wallowing in introspection.

Luckily, that introspection never seems to last for very long.

One such period was from January 1, 2012 to mid-March 2012. One real characterization of that period, besides the seemingly higher close each and every day was the manner in which it happened. Coming immediately after the close of trading in 2011, a year in which triple digit moves in either direction were the norm, that initial period in 2012 was quite different. Those moves were rare. Instead, it was the same slow melt-up that we’ve witnessed thus far in 2013.

I’ll add the first 6 weeks of 2013 as a period that I haven’t been fully enamored of having sold options, although to be fully analytical, I’d have to admit that stock selection plays a role, as well. On paper, the adverse impact of Petrobras (PBR) and Cliffs Natural Resources (CLF), have to be given their due credit.

But looking back to 2012, it all just suddenly changed and made me feel much better about the strategy of selling options. It all started with those triple digit moves. Just as quickly, introspection gave way to a sense of high self-esteem.

As 2013 has been thus far following the same pattern, I’m beginning to see the light at the end of the tunnel.

Again, I’ll certainly admit to a very simplistic use of charts, but just as the charts of Apple and Google at different periods in their corporate lives looked remarkably similar and portended a future path for Apple, I am struck by the similarity in the slopes of the S&P 500 (SPY) for the two periods mentioned earlier.

Qualitatively, I could tell anyone how similar those periods were, without looking at any chart, owing to my trading results. However, the parallel slopes tell a more compelling and quantitative story. Beyond that, the time periods are identical. In the case of 2012, the ascendant period was followed by a brief two week flat period, which was followed by a quick 2% market drop. That drop was just as quickly erased, restoring investor confidence long enough to go through a 1 month and 8% decline.

On this President’s Day, coincidentally we are just concluding a two week period of calm and flat performance, with the S&P 500 having moved 2 points in that period.

There’s certainly no rule that I know of that insists that events repeat themselves. In this case, looking back at my 2012 results, I certainly hope that they do, as it is always preferable for the covered option seller to be doing so in a flat or down market.

Of course, a rational mind will ask what the stimulus might be for a market reversal or any large move regardless of direction. Whereas individual stocks may not require a publicly known stimulus to have a large and sudden move, the market itself needs some overt catalyst. Back in 2012, perhaps it was news of a double dip in the Spanish economy or Greek elections that turned out austerity. Who really knows?

On the horizon, the only known entity is the “sequester.” However, it’s really anyone’s guess where its current deadline for resolution may take us. The recent “Fiscal Cliff” was rationalized by many as being the impetus for the gains of 2013, but it’s not clear to me what effect the sequester may have, regardless of political agreement, or not. Any reduction in spending would be a positive and I believe that the market, which is still rumored to discount events six months into the future, is expecting some kind of resolution.

With less than two weeks to go for the clock to stop ticking, it’s hard to imagine the market being propelled forward on any agreement. Of course, it’s certainly easy to see how another delay or “kick of the can down the road” could be unsettling, especially to credit markets. Standard and Poors may have their own headaches right now with issuance of past credit ratings, but they still do have a job to do.

While politicians may avoid the risk of being labeled “unpatriotic” for voting in favor of defense cuts, they free themselves of that charge if no agreement is reached by March 1,2013, which is just in time for a repeat of 2012.

If I were very concrete and believed that we must stick not only to the same pattern but to the same time frame, I would paint a scenario that envisions a quick 2 week sell off while some gloom sets in regarding agreement on the sequester. That, of course, would have to be followed by another 2 week period, but this time rebounding as it appears that positive movement is occurring.

That brings us to the deadline and the charting anniversary for a large market drop as either there is agreement or there is no agreement.

Win-win, especially if you’re a covered option selling politician.