Happy Birthday Apple

     39 short years ago Apple Computer incorporated in the Great State of California; Steve Jobs, Steve Wozniak, and Ronald Wayne were the first three employees, now there are nearly 100,000 (not to mention the literally hundreds of secondary and tertiary businesses that Apple sustains.)

     No company has had a greater impact on the world than Apple. Indeed, it has become the largest company in the world with 2014 income at nearly $200B and a market cap approaching $1T,  but even more importantly, Apple has meaningfully changed the world for the better via a number of their products and services. Many of these technologies may not have been invented by Apple, but Apple "perfected" for mass consumption the laptop, streaming music, and smart phone all the while making their products an aspirational brand to own.

     With the forthcoming introduction of the Apple Watch in several weeks, Apple has progressed from manufacturing in a family garage do-it-yourself computer kits (assembly required) to a wearable computer that will be on millions of wrists throughout the world wirelessly connecting to the best ecosystem for content, payment, and functionality. Simply amazing. The tenacity, focus on quality, and ability to consistently deliver innovative products and services is the story of both Apple and America. Happy Birthday Apple, and I wish you many more successful years to come!

Apple Garage HQ

Apple 1

Apple Macintosh

Apple Mac Performa

Apple Portable Mac

Apple Newton

Apple Mac Book Pro

Apple Shuffle, Nano, iPhone

Apple Watch

New Apple HQ

Planes, Tranes, and Automobiles

2015 has seen the return of durable goods…really durable goods like planes, trains, and automobiles as respective leaders in the Dow's performance. A coincidence? I think not. After the perilous days of 2007, 2008, and 2009 when demand for durables basically collapsed, we saw the fall of the American manufacturing sector.  On the heels of the financial meltdown, a number of iconic GLOBAL manufacturers went bankrupt leaving investors and workers alike out in the cold.

Why the turnaround today? 5 years in the making the shift into overdrive is the result of a cash tsunami from sovereign entities that propped up the massive durable good sectors; manufacturing is time, labor, and capital intensive. These manufacturers became leaner and competitively meaner.

With the Fed reluctant to raise rates anytime soon due to an almost complete lack of gauged inflation, tepid GDP, and basically zero real wage gain I suspect "the fix is in" for planes, trains, and automobiles. Their labor rates, although variable, are typically negotiated for years at a time. Commodity costs have collapsed. Easy money from the Fed, tightening in the labor market, and a recovery in the real estate market all point to continued gains in durables.

2015…the Year of P/E Compression?

What if revenues continue to rise AND profits similarly increase in 2015 yet stock prices remain stagnant (which, based on the January 2015 close is looking like a likely scenario), well then I believe we will have a classic case of Price-to-Earnings compression. Similar to a spring which is compressed by force, the dynamics of the stock market work in a similar, if not identical process, to the linear compression of a spring.

Over time increased revenues which translate to higher and higher earnings have typically reflected their respective advances in increasing stock prices.

When this trend deviates it is typically an abnormal movement in the traditional relationship which generally results in equilibrium (price appreciation) being restored at some point.

The question always, is when? When does the spring bounce back? If indeed GDP is slowing (possible, but with oil's fall it should remain strong), then we can expect the typical bounce back to occur when that point of "tensile" strength (i.e. greed) overwhelms the compression of earnings.

Historically this has been a rapid fulfillment of missed bounce. With nearly all the economic factors lining up in favor of increased GDP, low interest rates, low gas prices, lower manufacturing costs, increasing home values, and decreased unemployment we are in the midst of a great revenue cycle. 

In the short term stock prices may remain "unsprung," but over time the reflection of increased corporate profit should translate to a significantly higher market.

Advice from "The Departed"

There's a great scene in "The Departed" when Frank is trying to determine the rat in his organization; he asks himself "Who can do what I can do?" And that fellow financial farmers, is a great litmus test that should be incorporated into your own decision-making process when determining security selection. I think it is a valuable tool to ponder "What company can do what XXX can do?" And if you find yourself without an answer, that's a GOOD sign. It implies that XXX is indeed in possession of some type of monopolistic ability, base, location, or combination therein.

A good read on this subject is "Zero to One" which similarly identifies all monopolies as being all different in their excellence. Check it out!

Happy New Year!

With solid gains again racked up in 2014, we now look to the upcoming investing year fellow financial farmers!

According to the Stock Trader's Almanac, years ending in "5" have been the MOST bullish (high returns) of any other year. Sound crazy? Well there's probably a pretty good reason for this anomaly, mainly it seems tied to political terms, and specifically, to the 3rd year of a Presidential term.

Consider the statistics that from 1885 to the present, essentially since reliable records of the index returns have been kept, the Dow Jones Industrial Average has had a mean return of 28.3% in years ending in "5"!

Let's also put things in perspective as well, though; consider that we still have record low interest rates with little to no chance of significant raises predicted anytime soon, a recovering real estate market that is still gathering steam, a job market that has pretty much reached its near-term full employment potential, sustained growth in domestic profits, and finally, and by no means the least, a protracted downturn in oil prices.

The combination of these factors bode well for a continued bull run in the stock market. 28.3% sure sounds nice to me. :-)

Although past performance is no guarantee of future performance, those who choose to Invest Like A Farmer can pull some interesting data points and reference material from years past to assist them in planting a solid 2015 portfolio.

Oil's Fall

From June 19th's high of $115.06 per barrel, we've seen oil fall over 50% to $55.26; this is probably the most important financial news of 2014.

Assuming we don't see a "V" recovery in the price of oil, and I think it is highly unlikely we will because supply to the market is significantly stronger than demand, this should bode EXTREMELY well for consumers, manufacturers, and transportation. A glut is nice is you're a price taker.

No doubt there has been carnage; just take a gander at any number of the North Dakota small to mid-cap plays and those charts are simply horrifying, especially for investors who had been purchasing on the entire way up. The global players though, have suffered glancing blows. Down single to low-teens, the majors stand to benefit if they can leverage M&A deals out of this bust to gobble up domestic fields.

Previous posts on this blog identified the fall in oil as a massive tax cut; that is without question true for the vast majority of Americans who regularly drive anywhere or own small businesses with light manufacturing or are dependent on transportation. From a macro view, the "trickle up" effects should be significant to large manufacturers' direct bottom lines (unlikely consumers will realize a price cut in the aisle, that's for sure!)

Ultimately, the crude bust should have meaningful effects on GDP, consumer sentiment, and socioeconomic advantages inclusive of a better hiring environment. What politics has often failed to do, a crude bust just did.

As a financial farmer there are a multitude of looming advantages; the labor rate, harvest and planting expenses, and seed cost will be all lower. Net positives all around to those who wish to Invest Like A Farmer. This should position 2015 & 2016 into meaningful extensions of the existing bull market. My long-standing call of Dow 20,000 by the end of 2016 may now be too low.

Great Returns Breed Complacency

If there has been one truism consistent in the investing realm it is that great returns breed complacency. Many of you who have chosen to Invest Like A Farmer have realized significant gains over the past several years by investing in large, monopolistic companies with healthy dividends. Now what?

Yearly, or better yet on a quarterly basis, financial farmers should survey the farm and conduct a thorough review of holdings, seed capital, and expected harvest returns. Action isn't necessarily warranted, but rather a game plan, no matter how perfect on paper, should be routinely reviewed in the field to see if execution is proceeding as planned. Course corrections may or may not be warranted.

Those who survived any of the numerous "setbacks" in the markets over the past decade (or longer) well remember the pain of a correction and the ensuing panic which destroys accumulated wealth in the stock market. Seed capital is best to have on hand sitting in the silo well in advance of a downturn, though it may draw little interest in the interim.

Multiple prosperous years don't necessarily warrant a change in strategy, but rather a top-level review of holdings, seed capital (cash) available, and coming cash flow needs. As readers of this blog well know, I champion having a healthy silo of seed capital at the ready. It has tremendous value in terms of peace of mind and potential to invest when the economic winds change.

Selling into weakness is not a pleasant experience, one that many old farmers can recall with a tinge of heartfelt pain. Make hay while the sun shines, but silo some of those gains too.

Double V is a W!

Like Halley's Comet, investors were recently treated to a surprisingly rare event--two sharply defined "V" patterns. I consider this oddity to be a "W" (WIN!) for investors. If the existing trend line stays in place we should see Dow 18,000 prior to the end of the year.

As the investing season grows long in the tooth, and with the S&P 500 and Dow at record highs, those who Invest Like A Farmer should consider any tax-loss selling in the coming days as well as rebalancing portfolios to established benchmark allocations.

Cash on hand (seed capital) has proven to be a valuable resource over the past year, with spurts of sell-offs proving to be excellent times to deploy new funds.

Remember, Investing Like A Farmer is simply the sum of short term successes (additive wins) that are harvested throughout the year in terms of capital gains, seasonal crop sales (dividends), and holding the plow steady in turbulent conditions (long-term, unrealized gains.) 

It's all about the epsilon.