Is Apple just another fruit followup

My Apple rant did elicit some interest from the financial media:

Is Apple just another fruit?

I don’t remember ever being that cranky after a quarterly call from an awesome, incredibly profitable company. I think Tim Cook is a great operations guy and he fully deserves to be the COO. Can we please have somebody with balls to become the CEO so Tim Cook can apologize to him/her in private and the real CEO can tell the investors how awesome the company is and manipulate sell side analysts' expectations as one should? Yes, I did just say that. It was hardly an embarrassing quarter for Apple. What made the results embarrassing was the executives' apologetic attitude and complete failure to communicate with the analysts. Somebody please call Greg Maffei for help? His Microsoft quarterly calls should be studied by all public companies. I am sure that he has a big enough ego to run Apple. It seems that it should be a prerequisite in Apple CEO interviews.

That was the most poorly managed quarterly call in some time. Did they waterboard Peter Oppenheimer to follow the apologetic spin? This is unbelievable. Do we really need the reality distortion field to make Apple tick? What happened to the amazing culture that Steve created? Was it really all Steve Jobs? Were they completely blinded by the lawsuits and just lost their focus? Apple sounded nearly like RIM talking about future amazing products sometime in our lifetime (or end of the year, whichever comes first). Maybe they should also change their name to some berry out of respect for fruits? After following Apple for so many years I fell that I am understanding the company less and less.

There are many ways to skin a cat (or peel a fruit for that matter) and that was not how one should do it.

Full disclosure. I own Apple shares personally and for our clients at North Shore Asset Management.

2012 EIEIO Cup Regatta at Seawanhaka Corinthian Yacht Club

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Last sail of the Oyster Bay season

iPhone 5 and thoughts about the future of Apple

The new iPhone5 is certainly a great phone by itself. It has all the necessary “next generation” phone characteristics: it is thinner, lighter, has a bigger screen (finally - although nowhere close to the currently best-selling phone - Samsung Galaxy SIII’s 4.8”). Of course it has a next generation processor, better camera with 720p video, longer battery life and finally brings iPhone’s capabilities to use LTE – true 4G data network that has been growing rapidly in the US and is beginning to catch on in the rest of the world.  

At the same time, just meeting the expected specs is hardly exciting and we can expect a lot of criticism of the new iPhone as just another high end phone with a smallish screen. Unlike in the past, we pretty much knew everything about iPhone 5, with leaks about nearly all of the obvious features, so the phone as such was not a surprise and largely a disappointment to the tech geeks who wanted to see a leap ahead of the competition. At this point, iPhone 5 is a very competent, beautifully looking phone with nearly all of the characteristics of a high end Android phone (except for the still small screen size).

Much more interesting is the increase in the understanding of Apple’s product design directions. We had hints of it in the limited changes from iPhone 4 to iPhone 4S, but now it is very clear that Apple has become a true master of adding just enough new features to the next generation iPhone to encourage the majority of current users to upgrade and to maintain iPhone dominance as the best selling phone.  Even more important might be the idea that Apple is focusing on increasingly using software (even more than in the past) to differentiate their products and to maintain their dominance of users mindshare if not the actual numbers of phones sold worldwide. It seems that the iPhone5 was not designed to be awesome or revolutionary, but was specifically designed to be a perfect iOS6 platform. With the new iPod Touch seemingly much closer to the iPhone 5 in its design than the last year’s iPhone 4s (as one would have expected based on Apple’s history), Apple’s focus is seemingly shifting to providing a platform for iOS consumption. Even the new iPod Nano looks like a smaller version of iPod Touch and extends the reach of the iOS operating system from a $149 device that plays music and videos all the way to the $829 iPad with 200,000 apps and LTE. 

If this is true, then we should expect any future hardware improvements to be driven by the idea of providing an excellent platform for the new versions of iOS and less on leaping over competition with revolutionary hardware designs. Does it make Apple just another electronics company? Is Jonathan Ive going to hang around to make small incremental improvements to a small number of products? Maybe, maybe not and it is probably nothing that will happen in the near future, but despite many rumors, we have not seen anything revolutionary out of Apple for quite some time. The situation reminds me of what Amazon has been doing lately. The new Amazon Kindle Fire might not be the best tablet at any price, but it is a very competent device and the entire range of Kindles was specifically designed to enable and encourage increased consumption of Amazon’s services. Jeff Bezos recently stated that “We want to make money whenpeople use our devices, not when they buy our devices.”  

Is that the future direction for Apple? Not at this point in time. Considering that iPhone represents approx. 50% of Apple’s revenues and more than 70% of their profits, a competitive iPhone is extremely important to Apple’s future success. Combined with iPad’s nearly complete dominance of the tablet space and Ipod’s continuing dominance of the music player space, it is an impressive franchise that will be difficult to challenge for some time to come.

With its beautiful design and just enough new features to get the majority of the current users to upgrade and to attract millions of new users, the iPhone 5 will likely become the best-selling phone ever and will be a big success for Apple. At the same time, I will be looking at Apple’s future products thinking more about Apple’s long term evolution as a company rather than the next quarter or two of best-selling devices.

Disclosure: As of this writing, we own Apple, Inc. (AAPL) shares for our clients at North Shore Asset Management, LLC. 

Old Market in Poznań

Krajkowo, Poland

IOD Celebrity Invitational Regatta

Scuttlebutt - Sailing Forum: DISCUSSION: Event Reports: Nantucket Race Week 2012

Apple Stock Drops On Missed Estimates After IPhone Lull

Bloomberg news: Apple Stock Drops on Missed Estimates After IPhone Lull

Internet IPO Puts Rise at Record Rate Before Facebook

Businessweek.com: Internet IPO Puts Rise at Record Rate Before Facebook: Options

Groupon, the largest daily-deal website, reported profit yesterday that topped analyst estimates as marketing costs dropped and it expanded. The results, which spurred an 18 percent rally in the shares after the close of U.S. trading, may bring investors back to social media companies, according to Michael Obuchowski of First Empire Asset Management.‘


Turning Point’

The results “might be a turning point,” Obuchowski, chief investment officer at First Empire Asset Management in Hauppauge, New York, which manages about $4.9 billion, said yesterday in an interview. “If Groupon can appease the investors and show solid numbers, then that could turn the tide and generate a lot more interest in those companies in general,” he said. These are “risky but potentially game- changing business models,” he said.

Global Risks and Global Response

Under another Mario taking over its reins, the European Central Bank (ECB) finally became much more attuned to the economic growth risks. Many have argued that ECB’s prior obsession with real or imaginary inflation under Jean-Paul Trichet contributed to the European economic woes with repeated increases in interest rates enacted with what proved to be the worst timing possible (July 2008 and July of 2011 are just two of the best examples). In contrast to his predecessor, Mario Draghi’s first order of business was to reverse the misguided interest rate increases and to provide support and increased liquidity to the European banking system that was hanging on a thread on the edge of the abyss threatened with significant exposure to the rapidly deteriorating in value sovereign European debt. The ECB’s decisive action that roughly followed the Fed’s blueprint, provided the shock therapy that helped markets regain composure and pushed many speculators to the sidelines. It is interesting to note the change in the VIX volatility index during the last 12 months (see Figure 1).

Figure 1. CBOE SPX Volatility Index. Source: Bloomberg.

The ECB’s decisive actions during December nearly cut VIX in half since its December 8th high of 30.59. One of the most significant issues affecting investors during the last 12 months was the effect of the European slowdown on China. With European Union being the largest market for Chinese exports, a deep European recession could have had a quite debilitating cascading effect around the world. If the Chinese economy slowed down significantly, that would have affected global demand for industrial commodities, seriously hurting the economies of rapidly growing materials exporting countries. 
A slowdown in the Chinese economy would have also had a negative effect on the US economy. Despite the common perception that US is primarily an importer of Chinese goods, in 2011 China was Unites States’ 3rd largest export market (behind Canada and Mexico) and continued to be the fastest growing one (See Figure 2). Despite the incredible 542% increase in the US exports to China since 2000, the $103.9 billion in 2011 placed the US in 5th place, with only a 7% market share of total imports into China.

Figure 2. US Exports to China since 2000. Source: US Department of Commerce.

The recent experiences of the 2008 global recession and the threat of an upcoming Euro wide recession seemed to have affected China more indirectly but with much more important long term consequences. The effect was a policy shift from strongly encouraging growth via exports to an effort to increase internal consumption in China. Such a shift is expected to enable China to be less dependent on the vicissitudes of global demand for goods and provide more stable growth by building a consumer economy. There are some fears that China’s move away from exports will negatively affect demand for commodities, but the more reasonable rate of increase in commodities demand is likely to be a healthier sustainable path that will push many of the short term speculators into other areas of interest. More about China and the effects of its internal changes on the US equity markets later on. 

Atlanta Fed's Jobs Calculator

I've been playing with the Atlanta Fed's Jobs Calculator: http://www.frbatlanta.org/chcs/calculator/index.cfm. It is a fascinating exercise and really helps to understand the relevance of some of the variables involved. The Jobs Calculator uses current, seasonally adjusted BLS statistics for employment, number of unemployed, civilian labor force, labor force participation rate, population growth, etc. You can enter the target unemployment rate and number of months needed to achieve that target rate. The calculator then outputs the required average monthly change in both household employment and in payroll employment that is needed to reach the target unemployment rate in the specified period of time. Of course, at this point, the most interesting exercise is the change in employment needed to reach below 8% unemployment rate by the end of October. The Employment Situation report for October will be released on November 2nd, only a few days before the election day on November 6th.  

According to the Jobs Calculator, to achieve a 7.9% unemployment rate, we only need average monthly change in payroll employment of 152,775 - more than 30% below the expected February's change of 225,000. If the monthly change in payroll stayed at 225,000 for the next 8 months, the expected unemployment rate would drop to 7.5% by the end of October. If it stayed on average at January's level of 243,000, the expected unemployment rate would be 7.4%.

Taking into account jobless claims settling comfortably below the magical 400,000 number and a declining, or at least anemic labor participation rate, those numbers are not unreasonable and may even be somewhat pessimistic. There is of course a big discussion about recent changes in BLS' statistics, seasonal adjustments during this unusually warm winter, etc., but the most important variable seems to be the labor participation rate. Many investors (including myself) expected that with improving job prospects, the labor participation rate will reverse its decline and push the unemployment rate higher at least for a period of time. Apparently there is no real data supporting such a logical expectation. Caroline Baum addressed this topic yesterday her excellent column arguing that labor force participation might be primarily a function of age distribution, with aging population moving to a lower participation rate. She cited Barclays economists failed to identify any period of time in the last 45 years where jobless rate was driven by those reentering the labor pool rather than those losing their jobs. If labor participation rate dropped to 63.5% (form current 63.7%), the average change in payroll at January's level of 243,000 would result in the expected unemployment rate of  just above 7.1%. We might have some interesting months ahead of us.

Device Hacking Continues: Medtronic, Others 'Lacked Foresight' | Qmed

Device Hacking Continues: Medtronic, Others 'Lacked Foresight' | Qmed

Google Sea View

Watch "Catlin Seaview Survey" on YouTube

New York Yacht Club - Harbour Court in Newport

New York Yacht Club Harbour Court

Fed Valentines

You had me at QE1. #FedValentines -- mobuchowski (@mobuchowski)

Reconstructing Speech from Human Auditory Cortex

Fascinating research from PLOS Biology. As described in Reconstructing Speech from Human Auditory Cortex, Brian Pasley from UC Berkeley and Stephen David from University of Maryland together with a team of collaborators were able to use brain waves to reconstruct words that subjects were thinking about. 

Using intracranial recordings from implanted subdural electrode arrays, they monitored superior temporal gyrus brain waves of 15 patients undergoing neurosurgical procedures for epilepsy or tumors while playing audio of a number of different speakers reciting words and sentences. 


After mapping which parts of the brain were firing at what rate when different frequencies of sound were played, they were able to identify the words patients were listening to and even reconstruct some of the words by turning the brain waves back into sound based on the computer model they've created. 


It is just the beginning, but this research provides directions for work on generating words based on intended speech directly from brain activity. Such development could completely revolutionize augmentative and alternative communication capabilities. 

The Pitch Drop Experiment | School of Mathematics and Physics

[New Satellite Takes Spectacular High-Res Image of Earth] Shared via (Purple Bowl Digest) on Android http://feeds.wired.com/~r/wired/index/~3/Nbr7UQ9ADfc/

Solar news

First Solar Never So Cheap in Takeover Boon for Energy: Real M&A - Businessweek

View from abroad

First look: White House says GOP threatens economy - Talker: Chamber Hacked - Top question: Who blinks first? - Volcker Rule coming in January - POLITICO Morning Money - POLITICO.com

The Science of Taste Or: Why Dry-Aged Meat Is So Damned Delicious

Gizmodo: The Science of Taste Or: Why Dry-Aged Meat Is So Damned Delicious [Food] http://goo.gl/mag/8w6qB

Breaking overnight: Limited euro deal, no 'bazooka' - Payroll tax deal: Mired in politics - Talker: Soros could score on MF Global bets - Cantor smacks down Bachus - POLITICO Morning Money - POLITICO.com

Jobs day preview - Politico

Jobs day preview: Too optimistic? - Top story: Euro deal emerging - Senate kills two payroll-tax bills - Talker: Gingrich praised GSE's as great model - POLITICO Morning Money - POLITICO.com

A trip to Europe

Germany Buys Itself First-Class Ticket on Titanic- Bloomberg

Live European GDP data from Eurostat

Interesting European GDP data from Eurostat. We are still missing a lot of Q3 2011 information at this point, but it should be coming shortly:

Eurostat Gross Domestic product, volumes - Percentage changes

Gross domestic product (GDP) at market prices is the final result of the production activity of resident producer units (ESA 1995, 8.89). It is defined as the value of all goods and services produced less the value of any goods or services used in their creation. Data are calculated as chain-linked volumes (i.e. data at previous year's prices, linked over the years via appropriate growth rates). Growth rates with respect to the previous quarter (Q/Q-1) are calculated from calendar and seasonally adjusted figures while growth rates with respect to the same quarter of the previous year (Q/Q-4) are calculated from raw data.

Researchers create spinal cord connectors from human stem cells, heralding breakthrough

Fascinating research. At this point it has great potential for medical research. In the future, who knows!

Researchers create spinal cord connectors from human stem cells, heralding breakthrough

GOP debate react: Newt strong - Calm down about GDP revision - Breaking overnight: China factories slump - Top story: Fed plans stress tests - POLITICO Morning Money - POLITICO.com

Timeless words from Winston Churchill

Criticizing politicians in the 1930s as "resolved to be irresolute, adamant for drift, solid for fluidity and all powerful for impotence".

Does Music Change The Taste Of Wine?

Great article by Jonah Lehrer about the limitations of sense of taste and the effects of smell, other senses and  and even environment like music playing in the background on our perception of taste. For more details on these fascinating cross-modal influences of perception, see
Does Music Change the Taste of Wine? and Christian Jarret's post Wine Tastes Like the Music You Are Listening To summarizing Adrian North's recent study on the effect of music on the taste of wine.

More from Ben White

Sports blink: Cardinals survive - Morning Money analysis: Economic game change? - Congress doesn't care about downgrades? - Lobbyists prominent among Obama bundlers - POLITICO Morning Money - POLITICO.com

Digital Light Field Photography

For some time, I have been following the development of light field cameras. Unlike conventional cameras, a light field camera captures the entire light field - color, intensity and direction of all the light. One of the results is the ability to focus after the fact on any part of the image. Fifteen years after proving the concept, first Light Field Camera is available for preorder from Lytro

You can experience the magic in Lytro's pictures gallery, or take a look at the video below

mobuchowski (@mobuchowski) has shared a Tweet with you: "TheStalwart: RT @LorcanRK: Ha hahahaha Ha. Brilliant. "Homeopathic economist suggests injecting "Up to £1" into economy" http://t.co/Ac2jooxI" --http://twitter.com/TheStalwart/status/125288269016600576

Prepackaged bankruptcy for Greece?

Am I the only person who thinks that all the recent moves in Europe suggest preparation for a Greek bankruptcy? Last week, after hearing about the larger than agreed to Greek budget deficit, the October 13th meeting was canceled and moved initially to Oct 17th, now it seems to be rescheduled again. Suddenly, nobody is really rushing to get money over to Greece. Recently Greece claimed to have enough money only until mid-November and there are approximately 2 million people who directly depend on the Greek government for their paychecks or unemployment benefits. Nobody can afford 2 million people to go to the streets, so we are running out of options here.

I did not really understand what the Europeans were doing until this morning's news. From all the signs it looks to me like Greece will be in a EU driven prepackaged bankruptcy within three weeks. In the meantime, IMF smells something or already knows something and they are not happy - urging all parties to stick to the July agreements. Why would they suddenly issue such a statement?

Unfortunately, at this point, prepackaged bankruptcy is probably the best and only option. It will be violent and we do not understand all its ramifications, so things can get ugly before bouncing back. However, it will stop the slow the bleeding and hopefully stop the European economic malaise. Of course the hope is that and once we get through it, Greece will be contained. I agree that avoiding a pan-European recession is much more important than bankrupting Greece, nationalizing a bunch of banks and saving other companies / institutions that might fail as part of the collateral damage. The problem is that we do likely not fully understand all the effects of a sovereign bankruptcy in the center of Europe. Stephen Wood, chief market strategist for Russell Investments said in a Bloomberg interview today that "While a Greece default is not something that can really be addressed or avoided, the consequences on the banking system can be avoided". I wish I was as optimistic about our ability to fully contain its effects on the banking system. At the time, I thought Lehman bankruptcy was the right things to do. I was clearly wrong. You live, you learn. I hope to be wrong this time.