Blain’s Morning Porridge – 10th Jan 2019 – Evolving Tech…

Blain’s Morning Porridge  – 10th January  2019

“A day wasted on others is not wasted on one’s self..”

In the headlines this morning:

A tale of two halves yesterday – very busy talking to clients about a new UK secured property related deal in the morning, before some space aliens kidnapped me for “lunch”. We kept it dry – as in Dry White Wine – which rather banjaxed the afternoon despite a rather superb discussion on how markets are undergoing a fundamental paradigm value shift – if only I could remember our conclusions… As they say.. no-one to blame but myself. (But, it was a proper start to the new year!)

Yesterday afternoon, therefore, the world kept turning without my interference. Trump threw a strop and walked out a meeting meaning the US Government stays closed. Critical US data isn’t coming in its regular cycle – but Fed minutes yesterday made clear US central bank was already cautious ahead of the December hike, but nothing like demonstrating their independence. A new short-term (we think) oil bull market emerged. We wonder what Theresa May’s plan B might be…

It does feel like the post holiday, post-Apple-reversal/Powell-patience-gab Stock rally peaked yesterday – although the chartists are still screaming the market looks over-bought.  I found myself talking about Apple and the chances of Global recession yesterday morning on the google-box – and came to the conclusion we’re in a completely new market that bodes ill for last year’s stock market darlings.

There are 2 reasons. The first is to do with company-life-cycles; the natural evolution of companies competing in markets. Let me try to explain by using Apple as an example:

Apple’s future value problem is simple: it commanded a premium because it was seen to dominate sectors of the consumer tech space thru brand, design, and let’s be honest, the Steve Jobs magic pixie dust. Because markets have no memory, and forget its an evolving competitive jungle out there, the assumption is the base case of Apple being the leading tech stock will last forever. Wrong. Look up my works ye mighty and despair…

Apple is constantly challenged across its space. In Occidental markets consumers are reacting to high prices by not upcycling products as rapidly – using a phone for 36 months instead of 24 before replacing it. In the mega important China market (because so many people each need a phone) they are buying patriotic domestic products that are cheaper and better suited to China’s digital ecosystem. In India – soon to be 1.3 bln potential Apple users – iPhone is nowhere because Apple won’t produce a cheap phone the masses will buy.

Many of my generation still think Mac is “cool” and justify buying Apple toys because we say we’re familiar with IOS… but we are ageing and I seem to get by perfectly well with Microsoft in the office. Apple ain’t innovated anything since Jobs. My kids don’t understand why I don’t buy some cheaper and better. Where is Apple’s next must have product? Sorry, but a more powerful iPad with enhanced retina scanning isn’t needed. iWatch? My last one fell apart and they wouldn’t fix it. In terms of “services” – I recently dumped Spotify to use iTunes, but I can switch any time between them and others. (To be brutally honest – Spotify is better.)

On the basis iPhone demand is saturated and it can’t really change its marketing without further cannibalising its own customer base, the company isn’t making must have new products, its expensive, and everyone else can do design as well… what stock premium should it command? Apple trades at a PE of nearly 13. Sony at 9 (and that’s a highly distorted Japan stock.)

Apple should be an “Emperor’s New Clothes” lightbulb moment for the market. Its just another stock – worth something (significant because of its huge cash pile). Figure out what that is. Yet, many stock analysts still produce hold and buy recs on Apple and other tech names.. almost no one rates them a sell…

Let’s then extend a similar hard pragmatic look at other stock market darlings. It’s easy to find lots to be worried about. For instance, Amazon’s Jeff Bezos about to be massively distracted by divorce (and who gets the shares…), Tesla admitting it doesn’t have the capacity to build cheap cars, its autonomous driving system is dodgy, and its being sued for fire deaths.

But, the real threat is the competitive evolution of companies, markets and consumer demand. Netflix is on my WTF list – spending too much money buying customers at a time when competition is rising. Disney is not a supplier of Netflix content – it intends to be a dominant competitor in the streaming market! Again, consider who you could buy your music streaming service from?

Spend 5 minutes perusing this infographic from Visual Capitalist – The 20 Internet Giants The Rule the Web:

I leave you to draw your own conclusions about competition in the Tech jungle…

Meanwhile, my second issue is the interest rate and tax structure of markets: For the last 10-years we’ve seen distorted interest rates – enabling companies to borrow at zero cost, make the rich richer and maintain competitive advantage without necessarily doing anything better. Trump’s tax cuts simply extended the false financial reality. Now, as the Fed minutes show, we’re back into a normal financial market.

While the Fed might not hike this year, normalisation is coming.. and that will have profound implications for many stocks addicted to cheap money – if I had time, I’d probably launch into We-Work and Softbank at this point – but I’m sure you get the drift.

Out of time! Back to the day job!