IQR Investments

Q1 GDP looks weak, but no worries

2017-04-28T09:54:00.002-07:00

The economy grew only 0.7% in Q1. Core PCE inflation was 2%. A sign of stagflation?

Not according to Calculated Risk.

First, the soft Q1 GDP data is part of a recent trend of weak first quarters, and was mostly due to weak PCE and inventory adjustment - no worries. It was pretty clear that PCE would be weak in Q1 (see two-month method). However investment was solid.
Read more at http://www.calculatedriskblog.com/2017/04/q1-gdp-investment.html#Qq2Cxipw7gGX89VW.99

Double-digit earnings growth has returned, after a period of earnings recession.

Rates to rise... residential investment robust...should invest in banks while they're still cheap.

A Love Story

2016-07-06T06:56:00.001-07:00

Chipotle Mexicon Grill (CMG) presents a clear opportunity

2016-05-09T13:53:00.000-07:00

It has no debt. It's a cash flow generator. It is facing a fixable problem from food viruses. Market is assuming that the management would not be able to take care of these problems effectively. Even without valuing its growth options in creating chains that operate in the same way but with different types of fast healthy foods, the current business appears to be valued at a significant discount.

Read the debate over CMG.

[Tseng] Chipotle invests about $880,000 in cash costs to open a new restaurant and earns about $650,000 in pre-tax restaurant profit per year within about two years. That’s a cash-on-cash return of over 70%, which is phenomenal and best-in-class among restaurants.

After accounting for incremental corporate costs, depreciation, maintenance capex, a very small working capital benefit, and taxes, I estimate real after-tax cash flow is well over $300,000 per year by year three and growing. By my math, the net present value of that cash flow stream is around $5 million. Clearly, new restaurant openings create a tremendous amount of value.

Management thinks they can open over 2,000 more Chipotles in the U.S. alone over time. That growth has a present value of more than $8 billion. As for the 2,066 existing restaurants, I assume the unit economics recover within a few years, and I value that at about $11 billion. That makes the business worth about $19 billion.

After certain balance sheet adjustments, I reach an equity value of around $640 per share.

And here are two similar arguments why the food-borne illness crisis will not stop restaurant chains from thriving again:

It's Absurd to Think That Chipotle Mexican Grill Won't Thrive Again.
Chipotle: Primising Deja Vu.

The one single biggest risk to CMG is another outbreak of E. Coli or other food contamination. So it's really critical that they have it under control, even though nobody can really guarantee 100% food safety. I see hiring its former critic and food safety experts as very positive steps.

It's Deja Vu All Over Again. Don't let a crisis go wasted. It's time for the company to repurchase its own stocks. Agree! From Nov 1 – Mar 14, the company has repurchased $787 million at $493 per share. It has another $180 million authorized for repurchase. Note the striking parallel to the repurchases following the 2012 price crash due to growth and margin scares.

Some critics have argued that Chipotle is facing a more fundamental crisis than E. Coli, namely that its menu has been "stale." I disagree. The company has been innovative, testing new items as part of their practice. The reason that they had not had any big changes in menu was because their customers wanted to keep it simple. However, with the E. Coli crisis hitting the business hard and many formerly loyal customers hesitating or leaving, it's the perfect time to introduce new menu items that can help attract a new cohort of loyal customers. I believe the management have this figured out. (5/23/2016)

(Chipotle story in three minutes)

It's really interesting to note that people actually CRAVE Chipotle burritos. Do a search on twitter or google to see those discussions. Sometimes it seems the craving is worse than Starbucks! You don't think the customers will come back in drove?

Why Millennials Love Chipotle?

A good interview about how Chipotle serves its food in integrity. Any other company able to do this?

The company has no plan to suspend its store expansion (about 220-235 new restaurants in 2016). It's not laying off any worker due to the food scare and slower traffic. Fully staffed.

Wall Street continues to be very skeptical on its turnaround prospect. Analysts have been cutting target prices, sometimes severely. The stock has been hovering in the range of 420-460 post earning report on April 26. It will require significantly good news to break out of this range to get close to 500.

Not surprisingly, mutual funds like Fidelity's Contrafund has been unloading the shares. I remember three years ago when AAPL was hammered down to $400 level from $700+ level pre-split, they were also selling the shares like crazy. Of course in that case, AAPL went on to new high after the release of a larger screen iPhone and a bunch of new products and services. This is another eerie parallel, between AAPL in 2012 and CMG in 2016. A chance for small investors to play contrarian!

It might be hard to believe now, but in two years, CMG is very likely to see new highs.

(6/8/2016)
A downgrade today by the pessimistic Maxim Group. Here is the rationale: traffic may disappoint. It's hard to tell if Chipotle's efforts have been enough to woo back the customers. Patience is required for the ultimate recovery.

(6/10/2016)
Business Insider reports today that foot traffic has returned. Peak lunch hour. Long lines. Costly promotions started to take effects. Brand perception is back up after the devastating E. Coli outbreak.

(6/13/2016)
Another downgrade from a pessimistic banker, Deutsche Bank, with a new price target of $340. This is the second most pessimistic IB after the Maxim Group. They're clearing out of the way. The more optimistic traffic news has not received due respect from the market or analysts yet. I believe if the traffic is improving, the sales result could surprise on the upside for Q2.

(6/13/2016)
The Harris Poll on restaurants still has a very negative effect on the market as many reporters keep referencing it. But, note that the annual poll was based on a sample of 97,120 U.S. consumers ages 15 and over surveyed online, in English, between December 22, 2015 and February 1, 2016. It was during the aftermath of the widely reported E.coli outbreak (the trough in the graph below). Since then the brand has already made a substantial comeback according the YouGov survey (YouGov BrandIndex has measured Chipotle's "Buzz score" daily):

So the reports are focusing on very lagged impression of the consumers.

The stock is hitting a new 52-week low today. Sentiments are extremely negative. Load it up!

Chipotle is testing Chorizo in Kansas. Un-informed reporters kept saying Chipotle menu never changes. But they introduced tofu last year. And looks like chorizo may be coming soon. It will help sizzle up sales.

(6/15/2016)
The stock took a beating and fell below $400, a new 52-week low. Today it was recovering, but went lower after this Bloomberg article came out: No News Is Bad News For Chipotle Stock. It contains no new information, but an important error in stating the forward PE = 50. No, it's not 50. Analysts consensus estimate for 2017 earnings is $11.81. At $400/share, the forward PE is about 33-34, the low end of CMG historcal PEs.

Market is pricing in excessively negative news, ignoring positive developments over the last three months. It's therefore very reasonable to expect a positive surprise in Q2 earnings, to be announced on July 19.

(6/16/2016)
A positive comment with target $549. 40% upside.

(6/21/2016)
The sentiments have been decidedly negative for weeks if not months. This article is an example. Analysts, short-sellers, restaurant reviews/surveys/polls, fund managers, ...even insiders, almost all negative! The only thing that could drive more negativity would be another outbreak... When everyone is so fearful about a leader/innovator, it's probably as bad as it gets.

(6/22/2016)
SunTrust optimistic that Chipotle will recover in two years. Price target for 12 months: $550. If you believe the recovery story here, then the price target is likely to be reached as soon as investors see evidence that the SSS inches up after stabilization. Market don't wait that long.

(6/28/2016)
The highly anticipated temporary customer loyalty program is finally here for the summer quarter. It's designed to encourage repeat store visits, and help Chipotle collect data for future marketing. Better than random Buy One Get One (BOGO) sort of deals they've done earlier. This is more systematic, and should create lots of buzz and traffic. Most importantly, the program encourages those frequent customers to come back and enjoy the food safely.

This article provides a detailed analysis of the loyalty program and its potential impact on earnings. The author has also come up with a valuation of $600/share for CMG.

(6/29/2016)
Chorizo has been added to the menu. How good is it? Here is a polite earlier review.

Another thumps up for early testing run.

Two recent negative reviews: Tastes like garbage; Flavors fail to show up.

Customers Going Bonkers (Thumbs up, exceeding expectations... "40% of locations indicated they ran out of chorizo due to stronger-than-expected demand and employees at several locations mentioned chorizo was the second most frequently ordered protein behind chicken.").

Business Insider provides another review with more people tasting it: mixed.

(6/30/2016)
3 Reasons Why Chorizo Will Spice Up Chipotle. Interesting take from Motley fool.

(7/1/2016)
I got my Chiptopia card today. Have to register it separately from your regular Chipotle account. A bit of a hassle to maintain two accounts.

I was thinking about the "Hot" status, as it appears to be the most generous -- you pay for 27 meals and they'll award you 29 meals. A tiny bit better than BOGO deals. But there is a catch: You have to redeem the catering bonus at once. Unless you have a large family, you can't just have that much food as a regular lunch or dinner, and you can't store it. The company suggests that you throw a party. I suspect that's what most winners of Hot status would do. It sounds like a marketing event for Chipotle to potential new customers! Ingenious! With that in mind, the catering bonus isn't so much of a giveaway at all.

(7/1/2016)

In the news also: Some employees have started to complain about being understaffed and overworked, as customers returning. One can read positive traffic news out of this.

Here is the link to the employee campaign letter. It probably started about a month ago, and is just now receiving media attention. Signed by 947 people as of today. Not all of them are employees.

What's remarkable is this claim: "After months of changes which included new safety implementations and our restaurant to undergo new management, our sales picked back up to almost an all new high." New high in sales? We don't know how much that's true across the country. I can't imagine that management would not step up hiring or expand work hours if sales have indeed gone up to new high.

But the letter was written after the Q1 earnings report. Perhaps traffic did improve substantially in May and June...

(7/6/2016)
Chipotle Will Be Back.

Chris Arnold, Chipotle’s Communications Director, told me that the company is seeing “encouraging signs” of recovery. In many restaurants, customer traffic is now approaching their pre-crisis thresholds. Business Insider moreover, recently referenced a YouGov study that shows Chipotle’s “daily buzz” and consumer sentiment metrics are on the upswing. The reassuring messages that customers are hearing from social media, earned media, and – most importantly – the word-of-mouth they’re hearing from friends and work colleagues appears to be steadily improving Chipotle’s image.

(7/8/2016)
Chipotle's new video will lure back customers.

(7/13/2016)
Survey: Concern about food safety hit 2016 low. This survey from William Blair looks quite revealing and shows a clearly improving trend. July could be key to the acceleration of the turnaround.

(7/152016)
Today, Morgan Stanley came out with a survey and a note saying that the recovery would take "years" and downgraded the stock and lowered the price target.

(7/19/2016)
CLSA upgraded CMG ahead of earnings report on Thursday (7/21). Price target remains at $460/share. Traffic is key, margin pressure can be dealt with later.

What to expect from the 2Q earnings report?

For example, with comps at the current level (down 26.4% yoy) our average unit restaurant volumes are about $1.9 million on an annual basis, and our restaurant level margins should improve to the low double digits in the next few quarters as the nonrecurring costs begin to level off. If comps are around negative 20%, AUVs would be about $2 million and margins would be around the mid to high-teens. If comps recovered around negative 10%, AUVs would be about $2.2 million and our margins should be in the low 20%s. And if we fully recover our sales with AUVs in the $2.4 million to $2.5 million range, we would expect margins in the mid-20% range which accounts for the recurring cost of new procedures and protocols that relate to food safety.

(7/26/2016)
CMG missed Q2 top and bottom, yet the stock rose 5.8% last Friday after the earning report. Big part of it could be short covering. But perhaps investors also saw promising efforts that will help to bring back traffic in Q3, Q4. These efforts include Chiptopia, Chorizo and marketing campaigns.

Today Stifel Nicolaus downgraded a bunch of restaurant stocks including PNRA and CMG. They set a low low low PT of $215 for CMG when the stock was trading at $440/share. Their reason is "recession." I don't think recession is likely over the next 3-9 months.

(8/3/2016)
A update on the ShopHouse sister restaurants. There are now only 15 ShopHouses, after 5 years. Most of them were opened in the last 3 years. The main bottleneck is certainly not capital, as Chipotle has plenty of long-term investments, and can readily borrow. It appears the biggest challenge is managerial talents.

ShopHouse is still considered a “growth seed” within Chipotle Mexican Grill Inc., Wildin said, but 14 of the chain’s 15 locations opened over the past three years.

“To me, that’s quite fast,” said Wildin. “It has been challenging, and one of the challenges has been developing top-performing people to lead these efforts and run these restaurants.”

(9/15/2016)
Bill Ackman took out a 9.9% stake in CMG. He has played in restaurant businesses for many years (MCD, WEN, GSR). I hope he can play a constructive role.

This article has some good graphs for historical data: The Rise and Fall of Chipotle.

(10/16/2016)
Q3 earnings report is approaching. We'll learn if customers have come back more often or not. Here is a long report about Chipotle's past, current challenges, and future.

(3/23/2017)
The stock is on a zig-zag uptrend this year. Same-store sales turned positive and expected to be 15% for Q1. Even better, this report says that M Science believes the actually result to easily beat the market expectation. Could be over 20%.

Very tricky time at the Fed

2016-02-24T19:05:00.004-08:00

I like Tim Duy's recent summary:

Despite some hawkish talk, the Fed will find themselves in risk management mode at the March meeting. Some will not like it. There will remain a contingent that fears standing still risks excessive overshooting of the inflation target.

Fed to stay neutral/dovish and tread cautiously(3/7/2016).

On Yellen's New Pivot to Go Slow on Rate Hikes and Said it Firmly (4/1/2016).

Analysis of the Fed minutes. (4/6/2016)

Still too much slack, unemployment rate moving side way (5/23/2016). Market now looking for a rate hike in July. This hike may not do as much damage to global economy as the one in December, but will slow down recovery progress. Look at oil market for hints.

David Rosenberg calls a summer rate hike "reckless and unnecessary." (5/24/2016) Strong words coming from a former bear, but he gives very good arguments against the hot heads in the Fed, especially the regional heads.

Earnings Recession

2016-02-07T19:39:00.001-08:00

One chart says it all:

Strong Dollar Pounds S&P Into Earnings Recession.

Zillow deserves a higher valuation than $100

2015-05-11T11:40:00.001-07:00

As the housing market shows signs of revival, perhaps due to jobs or low rates, the biggest bargain is not in home builders, probably not in housing-related services such as HD/LOWS, but in the newly enlarged and dominant online real estate information site Zillow (Z).

Suntrust has come out today to upgrade the stock from neutral to buy and raised its target from 110 to 130. It listed six key positives:

1) Secular shift – growing trend of researching and discovering properties online, enabled by greater information, data and attribution, esp. in the younger generations;

2) Mobile usage increasing – smaller brokers and MLSs will have a tough time justifying continued tech spending to keep up;

3) Dominant position – Z/Trulia combination creates a scale that is unmatched and creates a “must buy” for agent advertisers and a “must be on” for home sellers;

4) Strong ROI – we believe that as the better performing agents get more leads, conversion rate and ROIs will rise, creating significant pricing power for Z;

5) Optionality - around Rentals, mortgages, and digs are underappreciated;

6) Margin leverage – we think the margin profile is misunderstood and can approach levels >45%.

When the merger with Trulia was announced last July, the stock promptly jumped from 125 to over 160. But as the merger was finally completed with most potential in tact, the stock was punished to below 85 at one point on January 27. We couldn't resist and bought into it in a big way. As the stock recovered somewhat, the short interest rose to 50% of float according to Yahoo Finance. Short-covering can make this stock soar like any hot dot-com high flyer.

When Zillow reports tomorrow we'll have a chance to see how much progress it has made since the merger with Trulia in terms of numbers. It could still be a transition story, but as long as the six points above are in tact, we should be unfazed by any short-term negative.

And then there is the threat of Realtor.com and Murdoch. But judging from the spectacular failure of MySpace, how much credibility would you give Murdoch this time?

(2/7/2016 Note)

The stock has dropped below $20 (or $60 before the share split into Z and ZG). This is very surprising development. For a completely different take on the Zillow story, see Barron's article:
Zillow Share Could Fall By Half.

Safalow believes that the real market for Zillow and its rivals is much smaller than their fans suppose. Residential real estate is an "80/20" business, where a small portion of the nation's 500,000 active real estate agents do enough business to justify advertising with Zillow. He thinks it could be 15% or less. With Zillow claiming more than 55,000 agents as advertisers and Trulia, more than 70,000, the two portals may be reaching saturation -- especially given the companies' assertion that their customer overlap is modest.

It has already fallen more than half from the $140 level. It looks cheap. But if we believe the story of agent saturation in the article, and given how internet stocks have been hammered in the market, we may very well see further weakness of the shares.

End of my landlordship

2015-01-29T10:58:00.002-08:00

Today marks the end of my endeavor of being a landlord as I sold the last piece of my investment properties.

I got into this in early 2008. Nice timing! But I picked Dallas as the spot. The rent-to-price ratio have been high. On paper, things should work out in terms of cash flow.

But it wasn't nearly as profitably as expected. The maintenance costs ate up all potential profits and then some.

Plus, you get to deal with all sorts of tenant issues, weather issues, insurance issues, repair this and repair that, ...... and, the tedious tax reporting issues... I have to say I hated it.

The only upside, I guess, is I get to learn more about property markets, and why I should stay away from ever engaging directly in this business. Way too much hassle for my time.

There are better ways, more liquid ways, such as investing in home builders and related housing businesses, REITS, and home furnishing businesses...

It took me a couple of years to realize it's not my cup of tea. It took me another five years or so to get rid of the investment properties.

Bye bye. Thank you very much. I don't want to be a freaking landlord!

Charlie Rose Interview of Tim Cook

2014-09-16T19:26:00.000-07:00

There are two parts.

PART I

PART II

Wars

2014-08-19T08:03:00.003-07:00

Paul Krugman has an interesting piece on why we fight wars. The analysis on Putin sounds on target: the macho guy is set on exerting his influence not by economic means but via military prowess. But I think his take on China left something to be desired: China's main focus remains to be on economic growth. There is much to be gained on economic reform and trade. Not much on military actions, even against Japan. There is a crucial difference between China and Russia, and between China and Japan. China has never in her long history invaded a sovereign country in order to occupy and annex. Russia and Japan are different stories.

Jim Chanos Interview

2014-08-17T08:58:00.000-07:00

Avoiding the Middle Income Trap: the case of South Korea

China risks middle income trap

Where is AAPL headed?

2014-01-30T20:09:00.003-08:00

Higher in a year!

After the recent earnings beat but soft iPhone sales & guidance, AAPL tanked by over 8%. It's now back to $500/shr.

Market and investors are having doubts again on the prospect of the Apple story. I'm collecting some useful analyses here for reference.

What is it worth?
(good comment)

Carl Icahn's thesis.

Big-screen iPhone may arrive and dominate.

Wireless/solar charging, health apps, CDN, AT&T plan

iTunes now nearly half Google's core business, and growing fast.

iAnywhere

(Self-convincing arguments at their worst. It's the Law of Large Numbers, mind you! The last time I checked, Microsoft had monopoly positions in Windows and Offices around 2000. And they managed to missed three tech sea changes in Search, Mobile and Social-networking that were led by Google, Apple and Facebook. )
Apple acting more like microsoft (the Barclay downgrade).

Apple knows what it's doing with iPhone

2014-01-12T14:34:00.003-08:00

Last year was tough for Apple and for Tim Cook. The stock had a nosedive but came roaring back as new iPhones were launched and new deals were signed. 2014 is looking brighter. This is perhaps the year that AAPL retakes its historical high of $705.

Apple knew what it's doing.

Apple devices flow into the business world.

2013 market and 2014 outlook

2014-01-01T15:06:00.002-08:00

By many measures 2013 was a great year for equity investors in advanced economies.

In addition to what're shown in this chart, Japan's Nikkei had a 57% run. Even in USD term it has done well. Currency hedged funds have done even better.

Ugly year for the gold investors. Bad for commodities and emerging mkt funds. Bonds were pretty bad overall.

For a cogent analysis of the world economy, George Soros offers a pretty good one:

As 2013 comes to a close, efforts to revive growth in the world’s most influential economies – with the exception of the eurozone – are having a beneficial effect worldwide. All of the looming problems for the global economy are political in character

After 25 years of stagnation, Japan is attempting to reinvigorate its economy by engaging in quantitative easing on an unprecedented scale. It is a risky experiment: faster growth could drive up interest rates, making debt-servicing costs unsustainable. But Prime Minister Shinzo Abe would rather take that risk than condemn Japan to a slow death. And, judging from the public’s enthusiastic support, so would ordinary Japanese.

The European Union is heading toward the type of long-lasting stagnation from which Japan is desperate to escape

By contrast, the European Union is heading toward the type of long-lasting stagnation from which Japan is desperate to escape. The stakes are high: Nation-states can survive a lost decade or more; but the EU, an incomplete association of nation-states, could easily be destroyed by it.

The euro’s design – which was modeled on the Deutsche Mark – has a fatal flaw. Creating a common central bank without a common treasury means that government debts are denominated in a currency that no single member country controls, making them subject to the risk of default. As a consequence of the crash of 2008, several member countries became over indebted, and risk premia made the eurozone’s division into creditor and debtor countries permanent.

This defect could have been corrected by replacing individual countries’ bonds with Eurobonds. Unfortunately, German Chancellor Angela Merkel, reflecting the radical change that Germans’ attitudes toward European integration have undergone, ruled that out. Prior to reunification, Germany was the main motor of integration; now, weighed down by reunification’s costs, German taxpayers are determined to avoid becoming European debtors’ deep pocket.

After the crash of 2008, Merkel insisted that each country should look after its own financial institutions and government debts should be paid in full. Without realizing it, Germany is repeating the tragic error of the French after World War I. Prime Minister Aristide Briand’s insistence on reparations led to the rise of Hitler; Angela Merkel’s policies are giving rise to extremist movements in the rest of Europe.

The current arrangements governing the euro are here to stay, because Germany will always do the bare minimum to preserve the common currency – and because the markets and the European authorities would punish any other country that challenged these arrangements.

Nonetheless, the acute phase of the financial crisis is now over. The European financial authorities have tacitly recognized that austerity is counterproductive and have stopped imposing additional fiscal constraints. This has given the debtor countries some breathing room, and, even in the absence of any growth prospects, financial markets have stabilized.

Future crises will be political in origin. Indeed, this is already apparent, because the EU has become so inward-looking that it cannot adequately respond to external threats, be they in Syria or Ukraine. But the outlook is far from hopeless; the revival of a threat from Russia may reverse the prevailing trend toward European disintegration.

As a result, the crisis has transformed the EU from the “fantastic object” that inspired enthusiasm into something radically different. What was meant to be a voluntary association of equal states that sacrificed part of their sovereignty for the common good – the embodiment of the principles of an open society – has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. Indeed, the euro could destroy the EU altogether.

In contrast to Europe, the United States is emerging as the developed world’s strongest economy. Shale energy has given the US an important competitive advantage in manufacturing in general and in petrochemicals in particular. The banking and household sectors have made some progress in deleveraging. Quantitative easing has boosted asset values. And the housing market has improved, with construction lowering unemployment. The fiscal drag exerted by sequestration is also about to expire.

More surprising, the polarization of American politics shows signs of reversing. The two-party system worked reasonably well for two centuries, because both parties had to compete for the middle ground in general elections. Then the Republican Party was captured by a coalition of religious and market fundamentalists, later reinforced by neo-conservatives, that moved it to a far-right extreme. The Democrats tried to catch up in order to capture the middle ground, and both parties colluded in gerrymandering Congressional districts. As a consequence, activist-dominated party primaries took precedence over general elections.

That completed the polarization of American politics. Eventually, the Republican Party’s Tea Party wing overplayed its hand. After the recent debacle of the government shutdown, what remains of the Republican establishment has begun fighting back, and this should lead to a revival of the two-party system.

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

The major uncertainty facing the world today is not the euro but the future direction of China

That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35% of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008. But there is a significant difference, too. In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises.

Aware of the dangers, the People’s Bank of China took steps starting in 2012 to curb the growth of debt; but when the slowdown started to cause real distress in the economy, the Party asserted its supremacy. In July 2013, the leadership ordered the steel industry to restart the furnaces and the PBOC to ease credit. The economy turned around on a dime. In November, the Third Plenum of the 18th Central Committee announced far-reaching reforms. These developments are largely responsible for the recent improvement in the global outlook.

The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin. But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.

How and when this contradiction will be resolved will have profound consequences for China and the world. A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country’s political leadership, resulting in repression at home and military confrontation abroad.

The other great unresolved problem is the absence of proper global governance. The lack of agreement among the United Nations Security Council’s five permanent members is exacerbating humanitarian catastrophes in countries like Syria – not to mention allowing global warming to proceed largely unhindered. But, in contrast to the Chinese conundrum, which will come to a head in the next few years, the absence of global governance may continue indefinitely.

The love affair with Apple hardware

2013-11-21T07:43:00.003-08:00

Only Apple has demonstrated an enduring vision for the way human beings respond to hardware and integrated software. Generations of Apple customers have grown up with and loved Apple IIs, Macs, iPods, iPhones and iPads. Thanks to the foundation Steve Jobs built, plenty of similar devices in the future will carry on that tradition.

As a result, the prospects are good that Apple, unlike its competition, will introduce a continuously evolving line of profitable hardware for the foreseeable future. It's very hard to make the case that there are equivalent prospects for the current competition's hardware in the long run.

For more, read

Apple Will Outlive the Competition

Fed may make a new move soon

2013-11-06T07:23:00.001-08:00

Fed could be about to make a major policy change

U.S. Economy Slack Justifies Stimulus, Top Fed Staff Papers Show

Fed economists see easy monetary policy as effective and would like to enhance the forward guidance in a more specific way, i.e. lowing the unemployment threshold to 5.5% or 6%. This is a specific policy proposal to implement the idea that anchoring expectations is a far more effective policy tool than asset purchases.

Pay attention!

Apple is a luxury good with mass appeal

2013-10-15T07:47:00.001-07:00

Analysts were rooting for Apple to go low end with its iPhone 5C. Instead, Apple decided to price it pretty high. It was not ready to tarnish its premium brand. It should not and it will not. On the contrary, it seeks to extend its premium brand. The hiring of Burberry CEO takes the game to a whole new level:

Apple Hires Burberry CEO in Tim Cook’s Best Decision Yet

Now think about the iWatch project. It's not going to be something dueling with Samsung's pathetic Gear. It's going to be a fashion item. It's going to be a Michael Kors watch with mass appeal. Design, design, design.

She is wicked smart.

Oxymoron Nobel prize in economics

2013-10-14T07:52:00.003-07:00

The economics Nobel has been quite controversial in recent years. Today's announcement is utterly strange: Eugene Fama is known for his Efficiency Market Hypothesis which has never been tested affirmatively, and its influence has waned because of massive market failure in the last financial crisis. Yet, he is awarded the prize at the same time as Robert Shiller, who is known for various works that demonstrate, among other things, that market is not efficient or bubble prone!

And, Lars Hansen, known for developing some testing techniques, in between these two?

Debt ceiling deal illusive， Reid may hold the card

2013-10-13T09:07:00.001-07:00

Facing an imminent debt ceiling deadline with dire consequences of US default, no deal yet seems likely to emerge on time.

Every single proposal from the House and Senate Republicans has been shot down by the White House or the Senate. Obama and Senate majority leader Harry Reid have been holding firm. To see where the deal dynamics is headed, it's important to understand why they're doing what they're doing: holding firm.

Reid: Soft-spoken, combative Obama partner vs GOP

Obama Hard-Line Debt Stance Rooted in Anger Over '11 Impasse

With public opinions shifting against the House Republicans over the government shutdown, who is going buckle first?

Melt up

2013-10-10T06:15:00.003-07:00

So we see futures are all pointing up, perhaps a deal out of the Washington gridlock is in the work?

This is all good:

Ignore all the noises.

But what's the signal? The yield curve still upward sloping? And slowly flattening?

Why Obama stood firm

2013-10-09T18:46:00.000-07:00

In the meeting with House Democrats on Wednesday evening, Mr. Obama held firm to his stated intention to negotiate with Republicans only after the government is reopened and the debt ceiling is raised. He told Democrats that if he gives in now, Republican demands would be endless. “The only thing not on their list is my own resignation,” he told Democrats, according to a lawmaker in the room.

Looks like Mr.Obama has learned his lessons dealing with the GOP.

For the full report, see
As Pressure Mounts, House G.O.P. Weighs Short-Term Debt Deal

iPhone 5S: The new frontier

2013-09-12T06:24:00.003-07:00

So, Apple announced two new iPhones on Sept.10: the colorful version of iPhone 5 (i.e. iPhone 5C) and the much improved more powerful iPhone 5S.

Nearly everyone was expecting iPhone 5C to be the cost effective device to compete in the emerging markets like China. Wall Street was disappointed when it learned the off-contract pricing: $550 to start with. It's even more disappointed when the two current Chinese carriers offer iPhone 5C at RMB 4488 (about $730), and there was no China Mobile deal.

Analysts downgrades followed. AAPL was down 5.5% following a 2% decrease. iCahn swooped in to buy more.

The market was obsessed with market share, even though Apple's ecosystem continues to grow. Apple's share has been shrinking because the low end has been growing like weeds at zero profit. This is mostly because of the aggressive strategies from Samsung, Lenovo, Xiaomi, enabled by the free Android OS. Most analysts were expecting Apple to join the cut-throat "pissing" contest at the low end.

Well, Apple appeared to have refused the temptation. It chose to stay at the high end, even in China. That doesn't mean the prices for iPhone 5C won't come down. I think between subsidies and discounts, the effective prices for iPhone 5C would come down quite dramatically in China over the next couple of quarters. But that probably won't happen until iPhone 5S has gone on sale for some time.

5S is where the market should focus on. It's the new frontier of the smart phone.

"Most forward-thinking."

"Desk-top class" architecture with 64-bit A7 chip.

What do they all imply?

Here are some good discussions, among all the noise:

Apple positions itself for the coming convergence of mobile and desktop.

2015: 64-bit ARM chips in iPhone 5S serve up taste of Intel-free future for Apple.

The iPhone 5S-Class.

iPhone 5C pricing makes perfect sense.

(a balanced take after the 10% dive)

The iPhone 5C: Cheap Plastic Case, Not a Cheap Price — and That’s the Point.

(Interview with Cook, Ive, Federighi)
We're not in the junk business.

Ticket to the next generation of the internet.

Apple tops Google and Coke in brand valuation.

The market impact of 64-bit A7.

iPhone 5C is great marketing for 5S.

iPhone 5C: Deepening the conversion

2013-08-19T08:30:00.000-07:00

Earlier this month, a report from AllThingsD compared first-time smart phone buyers versus seasoned buyers, across phone makers including Apple and Samsung.

This picture is the key result:

It shows that iPhone is attracting close to 50% buyers among those who have owned a smart phone previously, a comfortable leading position. But among the first-time smart phone buyers, not so much. The reporter put it in a rather negative light. We think it's not so bad.

Today, a CIRP report shows that 20% of iPhone users switched from Android phone users, whereas only 7% of Samsung phone buyers switched from iPhone. This helps to explain the picture above: Apple is very good at converting experienced smart phone users who want and can afford a better phone.

Given the proliferation of Android phones, which has been pushed by makers from Samsung to HTC to LG to Huawei to Lenovo to Xiaomi and others at cost or below cost, what would be the best strategy for Apple to deepen its conversion?

Is it better to use the older versions of iPhone, or is it at the point that Apple can do better with a new lower-cost iPhone? The answer is probably the latter.

Ever since AllThingD broke the "news" on August 10 that Apple is going to announce both iPhone 5S and iPhone 5C on Sept. 10, 2013, the rumor has been widely repeated and the expectation has set in. Today, Wall Street Journal claimed to have confirm it. If this is true, Apple has clearly decided that a lower-cost new iPhone is the way to deepen the conversion. This is both timely and an important strategic departure. We can see the following advantages of launching a new and lower-cost iPhone.

1. iPhone 5C would work hand-in-hand with the strategy of partnering with China Mobile.

2. It creates a high-end destination point for the group of low-budget users who cannot afford iPhone 5 or iPhone 5S, but would like to have the iOS experience. This is probably based on the recognition that there emerges two broad group of smart phone users: those at the high end and those who are more cost sensitive. Apple wants to be the high-end destination for both groups.

3. iPhone 5C is using the iPhone 5 spec, and newer technologies than iPhone 4. This helps to compete with other cheap phones that have newer form factors and technologies.

4. Apple can better control the costs with a new design. And possibly more importantly the new design allows a substantial differentiation from the flag-ship design, so that it serves to extend the iPhone brand but not cheapen it.

5. With this, Apple can continue to enjoy saving part of the education costs for first-time users and keep a healthy margin for its iconic device, extending the brand as well as the iOS ecosystem.

The media are too focused on market shares and seldom ask if a bigger market share makes sense at all if all it does is making sales but not profits. With the iPhone 5C out soon, it seems what competitors have done at the low-end is little more than preparing an educated customer base for Apple to convert.

Could it be that simple? We'll just have to wait and see.

=============================================
Here are some survey results since the new iPhones were launched.

More iPhone buyers switching from Android this year than in 2012

Obama may not get Dual Mandate

2013-07-29T08:27:00.000-07:00

Obama's appointment for the next Fed chair has important implications for the market and the economy. Looks like it's now down to between Larry Summers and Janet Yellen. I hope he is wise enough to pick Yellen, but he may not. And that could be because he doesn't get what the "dual mandate" is.

The Fed's dual mandate is maximum employment and stable prices. Note it's "stable prices", not "no inflation." If you listen to what Obama said in the NYT interview:

MR. OBAMA: And what I’m looking for is somebody who understands the Fed has a dual mandate, that that’s not just lip service; that it is very important to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets. But the idea is not just to promote those things in the abstract. The idea is to promote those things in service of the lives of ordinary Americans getting better.

And when unemployment is still too high, and long-term unemployment is still too high, and there’s still weak demand in a lot of industries, I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.

New bubbles? Right now the risk is dis-inflation or even deflation, and he is focusing on high inflation. Does he know that deflation is a much bigger threat than inflation? Does he know price stability means fighting against both high inflation and low inflation to maintain a stable inflation target?

Mr.Summers doesn't have a very good record in terms of forecasting the economy and in terms of economic policies. He is in the same camp as Alan Greenspan and Robert Rubin. He was too weak in advocating for a large enough stimulus to fight economy slump from the financial crisis. His credential is on the fiscal side. Why does the White House think he can do a good job in conducting monetary policy?

This is based on analyzing the words, published words. I'm glad to read NYT's take:

That is nonsense. Nothing that has occurred in the past week changes the fact that no one else can match Janet Yellen’s combination of academic credentials and policy-making experience. And no one ever confirmed to the job has come to it with as deep a grounding in both the theory and practice of monetary and regulatory policy as Ms. Yellen would bring.

......

In 1998, Mr. Rubin and Mr. Summers opposed Brooksley Born, then the chairwoman of the Commodity Futures Trading Commission, for correctly calling for the regulation of derivatives; in 2009, Mr. Summers squelched the sound recommendation of Christina Romer, then an economic adviser to Mr. Obama, for a larger stimulus. In the first Obama term, Mr. Geithner clashed unhelpfully with Sheila Bair, then the chairwoman of the Federal Deposit Insurance Corporation, and with Elizabeth Warren, then the chairwoman of the Congressional panel overseeing the bailouts.

Apple vs Samsung: Beware what you read from faulty reports

2013-07-28T11:37:00.005-07:00

AppleInsider has a really interesting article exposing faulty reporting including CNBC, Forbes, WSJ,... about the profitability of Apple vs Samsung.

Samsung Electronics has not dethroned Apple, Inc. in mobile profits

What's causing this? I think it's probably that it's a new fashion to tilt to the negative side when the stock price has been falling. These reporters like to pile on... Most readers probably just stay at the headline level.

A year from now, the tilt could very well be on the other side, that's when we should be unloading the shares.

iPhone is going to win

2013-07-11T14:09:00.002-07:00

I went back to China for two weeks in June. I asked everyone I met what smart phone they're using if they have one. Almost all want iPhone. Apple enjoys unsurpassed brand power in China.

This article clearly demonstrates the impression I had.

On my return, the market was hit by Bernanke concerns. First Mr Obama indicated that Mr Bernanke is no longer welcome to stay at the Fed (just bad, very bad communication); then Mr B himself made it clear that he had second thoughts about the Fed's asset purchasing program. Market went haywire.

Along went AAPL. Analyst downgrades hit the stock one after another. So we got to pick up some more shares below $400.

The rumored multi-colored budget iPhone seems to make so much sense. It'll appeal not just to users in places like China, but also to youngsters throughout the developed worlds. Every high school kid aspires to have one, what better way to entice their parents to buy them one than the colorful lower-cost iPhone?

This one thing should jack up market share for Apple.

iWatch would be another winner. It'll displace a few gadgets out there.

Larger iPhone. The new iOS 7 factor. The huge R&D budget.

New iPad, iPad mini.

New Macs, MacBook.

iTV...... the smart chips that will be getting into all sorts of places and change our lives forever.

I don't know why the stock is selling at PE below 10. Is the company not making money, and more money?

Oh, maybe I do know. It's Fidelity Contrafund, stupid!

---------------------

This is a good take. I agree.

(7/23/2013)
FQ3 earnings out: 31.2 M iPhone sold versus 26 M expected. iPhone revenue increased 15% in the quarter! The iPhone franchise is alive and well. Average price is down as the demand for 4 and 4S were high.

Remember this is a quarter without new products.

And, surprisingly, iPhone is gaining market share in June.

Is iPhone the world's defining mobile device?