Tuesday, February 14, 2012

An Economy That's Gone Off The Cliff

But first, I wanted to unload on AAPL.   AAPL has run up $74 billion in market cap since releasing its earnings a couple weeks ago.  That's a 20% move.   The stock has gone parabolic (and the media morons call gold an investment "bubble?").  The market cap of AAPL is now close to $470 billion.  At first glance the earnings and cash flow are quite impressive.   It has amassed a cash hoard of almost $100 billion.  It's trading at 14x trailing earnings and a hefty 10x cash flow.  That is a very pricey cash flow multiple for a company that has "sustainability of franchise" issues now that the founder and creative genius behind all historical growth has passed away.  And the relatively low p/e ratio - a  heftly discount to the S&P 500 p/e ratio (22x), is suggestive of a market that expects a material decline in revenues, margins and earnings in the future.  Anyone paying for this past rate of growth is clearly not placing any risk on the sustainability of this growth.  But let's revisit an old tech "monopoly."  Remember Microsoft in the 1990's?  It was on a similar growth trajectory and it had amassed a massive hoard of cash.  And once investors started focusing on the "reinvestment risk" of all this cash, the stock started to decline.  From it's peak in late 1999 to its bottom in March 2009, MSFT cratered 75%.   Currently it trades 50% below its 1999 peak.  I would suggest that the odds are high that AAPL will follow a similar path of decline.  In a way it's the 'ole law of diminishing marginal returns (note: that is a law of nature).  And now that I believe the U.S. economy is taking another cliff-dive - along with the global economy - I fully expect AAPL's unit growth and pricing margins to reflect this fact over the next several quarters.  In other words, if your investment advisor is calling to get you to buy AAPL, or your favorite mutual funds have a large holding in AAPL, hang up the phone or get rid of those funds.

Why do I say the economy is in cliff-dive mode, despite the robust Government-reported economic data?  Let's look at some real grass-roots data, unadjusted from seasonal adjustments, etc.  First, take a look at retail gasoline deliveries:  LINK 

(click on graph to enlarge)

You'll note the steady decline since 2006, consistent with our shrinking real, inflation-adjusted GDP figures.  But then note the absolute free-fall starting in 2011.  These numbers are in gallons and not affected by price.   I think most would agree that gasoline sales are a pretty accurate reflection of the relative strength or weakness in the economy. 

Second, per zerohedge, you'll note that the retail sales number reported today on an unadjusted basis (i.e. without the "seasonal adjustments/manipulations) shows the biggest sequential (month to month) plunge in history:  LINK  The seasonally adjusted number for January came in well below expectations.  Furthermore, December's number was revised down to a flat number.  Anyone remember all the hype over holiday sales?   Those "robust" sales estimates are being revised away and will ultimately likely show a decline in holiday sales, especially after returns are factored in.

Finally - and I've been waiting to use this chart - the Government likes to report monthly gains in income.  But let's take a look at the real numbers (I apologize to whomever, I can't remember where I sourced this chart).   Here's a chart of the real rate of change of monthly personal income AFTER excluding Government transfer payments (welfare, social security, various other benefits):

(click on graph to enlarge)

That is not a pretty chart and the implications for the economy are quite ominous because, after stripping out the Government's largess, it turns out the real personal income in this country has actually been declining on a monthly basis since the end of 2009.

Consumer credit numbers have resumed expanding at a very (un)healthy rate, especially student loans and auto finance credit.  It is also likely that consumers are using a lot credit that has recently been made available to pay for necessities.  You know, the stuff like food and energy that the Fed/Govt like to exclude from the "core" rate of inflation metrics.  Regarding the expansion in credit that's been occurring over the past few months, I'll I can say is that this will end badly, with banks threatening to collapse and the Taxpayer once again taking on the liability.  Wash, rinse, repeat until eventual systemic collapse.

I guess I come away from looking at the data by concluding that, in fact and reality, the economy has gone off a cliff again.  As zerohedge points out, the last time we had a hat trick in sequential retail sales missing Wall Street estimates was in July 2008.  Need I remind anyone what happened after that?  I will remind everyone that in October 2008 the price of gold bottomed out after a big correction at $700 per ounce.  I don't think I need to fill in the dots to that statement.   Circling back to my opening paragraph, if I'm correct about the true state of the economy, AAPL stock has a big decline ahead of it.


  1. Just curious, where are you getting a trailing PE of 35? Morningstar & Yahoo both have it at 14.

  2. Yer right. I re-did my numbers and i get 14 as well. i can't remember where i got the 35 but its wrong. thanks

  3. wonderful to see that the GDX is consistently the worst performer relative to other main "index" even the financial.

    I am starting to wonder who the sheeple actually are? And who is leading whom up the garden path?

    On the topic of your AAPL - well one has to realize when one of your miners actually came out with much better results which blew estimates out the water and it goes nowhere but down.

    During a time such as we have that is the reason I bought Gold.

    And Embry - his consistent blah blah about the invisible hand - so why not the bulls have an invisible hand. It really just shows you that the precious metal community at the end of the day is very very DEPENDANT AND RELIANT on the actual people making investment decisions.

    Pathetic the bulls - they are the ones all fully invested already no one to take over.

    Its when you consistently talk about this stuff we "will be selling to the sheeple" - what do you think.

    And most precious metal people aren't really investors anyway - all just traders.

    All bullshit.

  4. Patience. I love all the negative sentiment surrounding the mining stocks. Ultimatle contrarian indicator. Sit tight and be right.

  5. More like "Patience of Gandhi"....LOL
    It's been the worst I ever seen it over the past nine years. The moves in gold and silver, or should I say the reactions from it in the miners are something now. I can see that the PTP are getting some big bang for using much smaller bucks in these moves lately, can you say "investor gun shy". You would think most investing in these miners think that gold and silver are going back under a 1000/15 into next year.
    I'm sitting tight and trying to be right, but feeling more like up tight and out of sight....LOL.
    Thanks Dave for all the info each week.

  6. I agree with your conclusions .
    In addition AAPL has consumer products that are luxury items to the majority of the world's population .
    They are also sought after by mainly young people with discretionary spending .
    The Global economy is being set up by politicians for a long term austerity period while the FED reserve is trying to create inflation .
    The resulting battle looks to me a sure winner for deflation which will squash demand for luxury items .

  7. Hey Dave, I am sick of seeing the Refinery Chart and all the over extended assumptions on the implications. Your Buddy Charles Smith was inferring demand was had dropped 40% from this chart. Hold on...yes demand is down maybe up to 5% but this refiners chart excludes the obvious gasoline and diesel imports which have dropped back to 2005 levels but still remain 2x the 2000 rate.
    The biggest contributor to the drop is BIOFUELS. I was recently told the gasoline in my market was up to 25% ethanol and soy oil. Natural gas liquids are also in the mix. Hmmm even though those have much less energy per unit that oil based fuel they are still replacing a bunch of petroleum. The much disparaged EIA has a lot of statistics and is worth investigating from time to time

    Best Kansas Crude

    1. Hey dude, I already slammed Charles Hugh Smith last week. His work sucks. I stopped reading him many years ago after I figured that out.

      Here's what you should know before you accept what you "told:"

      How much ethanol is in gasoline and how does it affect fuel economy?
      The 138.50 billion gallons of gasoline (3.30 billion barrels) consumed in the United States in 2010 contained about 13.19 billion gallons of ethanol.

      Most of the gasoline now sold has some ethanol in it, but the exact amount in the gasoline you buy varies by region. In general it will not exceed 10% by volume. Gasoline with 10% ethanol content by volume is called E10 and with 15% ethanol is called E15. E85 is 85% ethanol and 15% gasoline.

      The energy content of ethanol is about 33% less than "pure" gasoline, although this varies depending on the amount of denaturant that is added to the ethanol. Thus, vehicle mileage may decrease by up to 3.3% when using E10.

      All gasoline vehicles can use E10, but currently you have to have a light-duty vehicle with a model year of 2001 or greater to use E15 and a "flex-fuel" vehicle to use gasoline with an ethanol content greater than E15. Most of the gasoline with more than 10% ethanol is sold in the Midwest.

      Here's the link: http://www.eia.gov/tools/faqs/faq.cfm?id=27&t=4

      Thanks for your input but it's not clear to me if the "gasoline" number used in the chart would include "biofuels." The way the definition from the EIA website reads, the gallons number includes biofuels AND it makes for less energy-efficient output per gallon, which then indicate that sales of gasoline should increase, everything else being equal.

      There's no question that the total gasoline consumption as measure by the chart reflects a cratering economy AND that trend is getting worse over time.

  8. FEB 14th Judge Napolitano: Final Word After Being Fired on FOX NEWS Last Episode of Freedom


  9. Gold bottomed in November 2008 not August

    1. Whoops. We're both wrong. Bottomed in October. Thanks for pointing out the error though. I was tryng to multi-task today when I was writing this. I know a neuro-radiologist who is one of the best in Denver who says that "multitasking" efficiently is impossible for the brain to accomplish.

  10. I agree with your assessment. Buying AAPL (or any other asset) after a parabolic move like that is suicide. I will buy when it hits about 250.

  11. Honestly Dave, I really appreciate you putting up with all these putzes who quibble with your posts. It's like they can't perceive anything you are saying. Perhaps they are members of Obama's truth teams? Seriously, let's waste your time about the exact gas consumption metrics used...let's fact check some free thoughts you post about Apple...lets be a pm investor and quibble over the point that pms bottomed in the fall of '08.

    Me? I am free to dismiss or agree with you on my own. Enough said. Too busy now as I gotta find some E65 so my truck can get 7 mpg.

    Thanks again for this blog.

    1. LOL. Thanks for the feedback. I really appreciate it. I'm actually glad someone alerted to the mistake in doing AAPL's p/e. That was sloppy work on my part. But the gasoline guy was ridiculous. There's no question the economy has been in a real inflation-adjusted decline since 2006 and the gasoline consumption is a perfect signal.

  12. Dave, the chart you couldn't remember where you got it - it's from Morgan Stanley, but you probably found it at ZH:

    Courtesy of -who else- Google, no one really needs to remember anything anymore [ahem...]: to re-find wherever you originally found an image, just go to google, click Images (upper left), and now here's the trick: click the small camera-icon just within the left boundary of the search field - and presto: you can then either upload or paste-in the image you're trying to source. Like most things google, this works amazingly well: usually locations and even different sizes of the image you're looking for show up in droves...

    1. THanks Walter. Only problem with google is it's going to be a huge goldmine of data-tracking on everyone for the Govt...Big Brother IS watching, baby.

  13. even if it goes to $1000, still not buying paper shares of apple...no thanks to paper gains, sticking to physical gold/silver.

  14. Infinite growth, exponential population growth, finite resources. No matter how you cut the mustard what is coming won't be a recession or a double dip or even a depression. By comparison these concepts will look quite pleasant. Economies will now start to move backwards, slowly at first. There will a few little stutters up and down and then a very rapid plunge to the bottom. The bottom will resemble a period in time before the dark ages started with the same population levels (or less).