Before You Capitulate

After this morning it seems as though the world has ceased to be the world we know. Today things seem bad, real bad, but before you capitulate lets take a look at some of the macro data from this past week and attempt to put everything into perspective. As you digest the information in which I am about to share with you, you must also realize that though the beautiful economic data that we immersed ourselves in at the beginning of the year may be faltering, the U.S. remains the best of the worse. Though the rest of the world may be falling apart and many around you capitulating, the U.S. stands to benefit from the misfortunes of those around the world. As the rest of the equities markets will be plagued with horrible economic data in the future, here at home, we seem to be making some progress (or at least not getting worse).

Lets begin with the most important data point, the employment situation. It is by no means as good as anticipated. Though many fail to look at this glass half full, we are nowhere near the grotesque situation we experienced in 2008 and 2009. So what if the recovery takes some extra time, we aren’t falling apart like our neighbors across the pond. We in fact are holding up quite nicely compared to the Europeans who employment situation is horrendous.

If you have read any of my previous work, you will know I am very bearish on the housing market as a whole, as I believe the U.S. housing market has been destroyed for a generation. What I am proud to share with you is that the housing market has finally stopped destroying my property value. No one is getting rich via equity of there home any time soon, but it looks like the months of 10 % losses are something of the past. So to sit there and say things are horrible is laughable. Things were horrible and the stabilization we are witnessing is a blessing that we should relish in.

Since jobs seem to be so important, lets take a quick look at the jobless claims. Last year I remember telling my colleagues how I would be much more comfortable with our economic situation if, and only if we get could get jobless under 400k. Look at the above image, we have done that and held nicely. Over the next year if we continue this trend my portfolio will likely have an inverse trend to the above chart.

Another point in which the masses seem to be quite preoccupied with, the GDP. Yes the GDP was revised downward a smidgen. The significance of the number 2 seems to be quite overblown in my opinion. We are by no means even looking at stepping in a negative direction. The GDP has fluctuated around this era for a majority of the recovery and will do so for some time. This negative revision suggests things are not on a steep uptrend in which some idiot analysts previously suggested. Though the number suggests things are just fine. Just like all the above data points suggest, things are just fine. Our economic data is not falling apart due to Europe. Though if the ridiculousness continues across the pond the equity markets will continue to fall apart. At the end of the day we will remain the best of the worse here in the United States and this will benefit our equity markets.

A song that sums up the week.

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My Concerns When Looking At The Future Of Apple

Disclaimer:For those of you ridiculously bullish on Apple (believe it can do no wrong) do not waste your time or my bandwidth reading this article.

Investors and consumers alike are truly in love with Apple. Some are new to this love affair, while others are veterans of a great run. Either way, the remaining part of 2012 lends itself to some interesting action in the stock. I will not serve to bore you with the news you already know, the items in the pipeline, rather, I will bring up a few concerns I have looking at the future of the tech giant. My first concern focuses on the release of the iTV and where it leads Apple.Concern number two revolves around the growing popularity of the iPhone and how this may serve to hinder Apple in the future.

Apple products scream cool and sophisticated. When I think about the Apple stock, all I can think about is wads of hundreds and fast cars. Apple has handily earned the previously mentioned  perception, they have done very well for consumers and investors alike. That being said, the iTV has set itself up to revolutionize the television industry. It has been set to do so by both the executives in the Apple boardroom and the masses throughout the world. Assuming that the iTV lives up to the hype, which by looking at Apples previous success, one can give the benefit of the doubt on, will Apple live up to the investors hype? Apple has blown away the investing public time and time again with its extroadinary iPhone sales numbers, but will it be able to replicate that with the iTV? One can take the side of the arguement that the iTV will simply serve as an addition to the many other successful Apple products, meaning that it is merely the icing on the cake. Though if you want to make the argument that the iTV is the next “IT” product for Apple, things are not so clear. To begin with, one must realize that the other television production companies will not go without a lot of kicking and screaming. RIMM merely handed over its market share as if we live in a socialist society, Sony and the other big players will not. Secondly one needs to be very concerned about the price point of the product. The iPhone was able to sell massive amounts of phones because the phone carriers supplemented a majority of the cost. One must ask, what will happen without supplements for the iTV? With the clout that Apple has, they will make the cable companies pick up some of the bill, all this has yet to be seen. So I sit patiently waiting to see how the iTV will play out for investors.

My next concern deals directly with the Apple flagship product, the iPhone. Don’t get the wrong impression, I have one sitting beside me as I write this post. My concerns actually stem from the success of the product. What seperates a Range Rover from a Explorer, or a Porsche 911 from a Mustang? Your first thought is likely the cost difference, which is correct, but more importantly the exclusivity that comes with a higher price. Many Americans can go out and get a Mustang or Explorer tomorrow with the help of the bank, very few can do that with a Porsche or Range Rover. The iPhone for the longest time has marketed itself has the foreign car of the smart phone world, attempting to sell itself to the upper echelons of society. What happens when everyone (waitresses to grocery store attendants) from all walks of life has this prestigious product? The iPhone ceases to be exclusive. This may have some negative effects in the future, as Apple suggests as of yesterday, that it will continue to have one size screen (meaning just one new product). I had hoped that they would come out with different sizes and price points, they don’t seem to want to. You can sit there and argue that the old version of the iPhone serves as the lower end price point. This may have some merit, but the fact remains the iPhone at $200 is no longer exclusive. A portion of its appeal has disappeared. If everyone can have caviar and Cristal for dinner (or lunch as I prefer), it no longer has the same allure. This may be remedied in the future through the phone carriers giving up supplementing the cost of the iPhone, increasing the price to make it out of the grasp of many. Again we will have to wait and see how this plays out, in the meantime I will go FaceTime my 14 year old niece on her iPhone.

Though I sit here, in deep thought, worrying about the future of Apple, I am still very bullish short term. Apple has held up nicely compared to the devastation that Fecesbook and other social media players have seen. Apple has continue to hold up fairly nicely in this market and I may look to get in soon.

Watch video below for a good laugh.

Photo by Tommy Klumker

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Scared Money Don’t Make Money

Soon a moment will come when all will capitulate and those standing with hoards of cash will look to make a killing. We have seen the story play out time and time again, when the worst slaps you in the face, those who are willing to take on risk prevail. Look back to the summer and fall of last year when every investor was running away with the fear of the indices going to zero. Those that got into the quality names around that time and held into the rally of early 2012 were handsomely rewarded. Don’t misunderstand me, those that bought bad companies were left with just that, bad companies (RIMM). So make sure you trim the fat off that portfolio, companies that will likely keep weighing down as the European hangover remains for some time. It looks like this hangover could continue to resurface in the years to come and the recession may last a decade.

At a certain point the markets become numb to the mess. If you get punched in the face again and again, at a certain point you throw up a block. Things are bad across the pond, but we have known this for a LONG time. There is a slim chance the end of the world (European Union) will come, but we have known this for a LONG time. At a certain point the markets are going to shrug it off as they have done before (many times). Those that are prepared to buy into the fear will prevail. At a certain point, which I am waiting patiently for, one should buy and prepare for greener pastures.


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Assuming Social Media And Mobile Are Dead

Right now, with all the negativity surrounding the technology sector, let us play a little game. Let us assume that the world will continue to fall apart, that death has come to technology, that social media, mobile and the cloud are finished. The social media critics have finally gotten their moment of glory, they have actually made money on their short positions. The game I hate to inform these bearish fools, has just begun. Let us attempt to create an argument that the future of both mobile and social media has collapsed, attempting to infer the worst case scenario.

In this factitious scenario, everything has obviously fallen apart. One will immediately ask, how will these horrible bubblicious tech companies make it through the next phase of technology growth? The answer comes easy, and the critics shall be dumbfounded, they will take part in the next exciting tech phase. Look at both Apple and Zynga, they have tons of cash. From my modest understanding of business, cash reigns supreme (just ask those that bought stocks in 2009). So assuming the worst has befallen many of the tech companies, mobile phones quit selling, people around the world turn off there cell phones, the 900 million Facebook users quit sharing, many tech companies will be able to profit from the next phase by merely buying into it with their hoards of cash.

Well you say, you have looked past the tech companies like Yelp, that lack cash on hand. Patron of capital overlook, critic of the social media, you sir seem to miss the big picture once again. What would a company like Yelp and those similar to it do without the potential of mobile and the foreshadowed profit from it? Innovate. Being a product of innovation and entrepreneurship, technology companies are some of the greatest innovators and entrepreneurs of our time. Mark Zuckerberg has been compared to Bill Gates and many other greats. These comparisons are not made because these young technology CEO’s are stupid. The comparisons are made, because these young men and women are the leaders of their field and will continue to innovate to stay on the top of their field. What seperates them from other companies is the fact that their CEO’s are often times serial entrepreneurs, so innovation comes with ease. Even if these company leaders are not serial entrepreneurs, they emanate entrepreneurship, just look at the progress in the last few years of many of their products. This may be a far stretch for some, but Apple did not get its gold star through a lack of innovation. For example, look at the story for Yelp is similar, they see a need and they fill it. If this need exists on a phone, in a tablet, or in a spaceship headed towards mars, they will innovate and profit from it.

Let us make some more rash assumptions, that these new companies have no cash and no innovation. Making the assumption that these technology companies will never be able to monetize anything and that their entrepreneurial spirit is a giant scam, where are we left? We are left with everyone in Silicone Valley being wrong, all the big money supporting the mobile and social media space being, take a guess, WRONG. In this hypothetical world we create, all these new companies that continue to get funding and grow users are not the future. We are assuming all the big and smart money has no knowledge. So again where are these companies left, without mobile and social media (and cloud)? The answer is simple they profit in the old way. They will take the massive amount of date they have collected and sell it in paper form. Yelp will publish reviews on paper and hand them out, Facebook will cease to exist and people will talk to each other in person, and Zynga will produce games for the Nintendo 64. If technology is not the future, go ahead buy stakes in the Yellow Pages and the Nintendo 64, while you are at it, invest in some rotary phones, because hell, the best investing takes place ahead of the curve.

Disclaimer: I am long some social media stocks, the social media critics are coming for me, so I’ll stay strapped.

For more of my previous opinions on social media click here and here.

Photo by Rob Boudon

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Looking Past The Facebook IPO At The Future Of Zynga

The negativity surrounding Zynga has led to a significant decline in the equity price, leaving many long term investors in the red. This recent price decline can be seen as a counter balance to the price increase seen in the earlier part of the year. At that time, many factors contributed to the increase. Among the most prominent were anticipation of the Facebook IPO and the possibility of a partnership with Wynn Resorts in the future. This exciting news had great benefits for Zynga shareholders as the market took notice of the companies potential. Though Zynga received a bump due to associations with big names like Facebook and Wynn Resorts, the market has failed to realize that Zynga’s business model allows for the company to grow and profit heavily through its effective monetization of products.

Considering the large sums of cash on hand and the potential for future profit growth, it would be an insult to associate the terms “unprofitable” and “tech bubble” with this enterprise. Zynga stands poised to make money for itself and investors through delivery of quality mobile gaming applications that are easily monetized. In the recent years, we have seen an increasing number of consumers turn to smart phones and mobile devices to fulfill their computing needs. In the gaming world, there has been a stark increase in the number of games played on mobile devices. In general this shift towards handheld devices and mobile computing will merge resulting in huge profits for Zynga. Apple, a prime example of the growth in the smartphone space, has given a great return to investors through their exposure to the unprecedented growth in the smartphone market. Because of the increase in the quality and availability of mobile gaming platforms, Zynga stands at the epicenter of this revolution to mobile gaming. The mobile games Zynga produces have the ability to be played on all platforms, be it that of Google, Apple, or any other smartphone leader that emerges in the coming years. Even if hype of Facebook and Wynn fails Zynga, Zynga stands ready receive unprecedented profits through the mobile gaming revolution.

With big names like Morgan Stanley and Barclays holding shares of Zynga, the current animosity towards this stock seems excessive. Additionally, many major analyst showed huge support during their latest conference call. The Q/A suggested strong support of Zynga’s business model and potential for growth. Skeptics point to the decline in Zynga’s DAU in many of its popular titles as catalyst for lower stock prices. These skeptics fail to realize that is part of the natural life cycle of gaming products. Avid console users trade games to GameStop on a regular basis to pick up different title. With current technology, exchanging a game is as easy as deleting it and adding another title. Switching to another game can be equated to changing channels on one’s television. With Zynga’s varied portfolio of games they are set to profit whenever a smartphone user changes his or her mind, for instance, retiring “Words With Friends” for “Draw Something.” Skeptics also insinuate that Zynga has failed to monetize their DAU. That point is valid, but given the context of the situation, remains immaterial. This merely suggests that in the coming months and years that Zynga will be able to better monetize their content, returning profits to shareholders. A prime example of this can be seen in the recent integration of Nike product placement in the “Draw Something” application. This novel method of product monetization highlights Zynga’s ingenuity and conjures hopes of furthered creativity in monetization. Mobile monetization, as mentioned recently in the financial news of Facebook, still sits in its infancy. Itis reminiscent of the early days of Google AdWords. The monetization of content by both Zynga and Facebook has ceased to be a choice. With the ingenuity these companies have shown in the past, in the creation of their unique enterprises, they are surely to profit handsomely from their millions of users in the future.

The potential Zynga has as it’s own company surpasses the scope of next week, well past the Facebook IPO. Zynga has positioned themselves in a market with massive growth potential, both domestically and abroad. They will be able to profit from all mobile carriers and will not be constrained to one product manufacture. The Electronic Arts CEO John Riccitiello recently spoke out against Zynga, suggesting that they and other companies in the social gaming market were purchasing startups at exaggerated price. With the responding negative price action in Zynga, one can be left wondering about the OMGPOP purchase. An appropriate rebuttal to Mr. Riccitiello’s comments would be that he lacks understanding of the mobile gaming market and furthermore that he is blind to the potential in this sector. Zynga, however, is poised to take advantage of this potential, all while taking in massive profits.

Photo by h.koppdelaney

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