We’re back again this week on Cocktail Investing with Tematica CIO Chris Versace and Global Macro high priestess Lenore Hawkins where they share their take on the week’s news and the latest snapshot of the economy. Along the way, they walk through corporate earnings and share a number of thematic signals and distil all the noise down to clear, usable signals.
They discuss the fact that the U.S. is in third place with respect to GDP growth, but manufacturing and employment data has been coming on strong over the last few months. Amazon continues to wreak havoc with retail as Macy’s is said to be open to a potential sale with plans to close 68 stores and reduce its workforce by 10,000 … and it’s not alone. It isn’t just where people spend that is changing, but how they spend as well with mobile payments expected to increase over 30% in the coming year. And while much of Wall Street is ga-ga over Apple’s latest earnings report, Chris and Lenore share why they aren’t quite so enthused. But have you heard about the Big Mac vending machine?
They’re hearing lots of talk of the impact of a strong dollar as companies report on the December quarter and what we are hearing from the White House is a lot of policy plans that will likely make the dollar even stronger, which may have had a hand in the Fed giving us an exceptionally vanilla policy statement this week. Will they or won’t they? Will Trump’s domination of the headlines during his first two weeks continue…and is that good for the economy?
Listen in and you decide.
Stocks Mentioned on the Podcast
- McDonald’s (MCD)
- Target (TGT)
- Weight Watchers Intl (WTW)
- Amazon (AMZN)
- Macy’s (M)
- Microsoft (MSFT)
- Alphabet (GOOGL)
- Facebook (FB)
- Apple (AAPL)
- PayPal (PYPL)
- JC Penny Co (JCP)
- FedEx (FDX)
- UPS (UPS)
- Under Armour (UA)
Cocktails Mentioned on the Podcast
L’s Dirty Lemon Martini
First, put a few ice cubes and water in your martini glass to get that sucker really cold then assemble your ingredients:
- 2 parts vodka
- 1 part Dirty Sue Olive Juice (Available on AMZN)
- Splash of dry vermouth
- Empty the glass and pour a smidgen of vermouth into it, slowly swirling around to coat the glass. Toss any remainder.
In a shaker combine ice, vodka, Dirty Sue and a few solid squeezes of fresh lemon juice. Shake with vigorous abandon. My favorite is to get a few ice shards in my glass.
Pour into glass and as a final bit of glorious joy, skewer 3 blue cheese olives and slide them into the deliciousness.
Last night Tematica Research Chief Investment Officer Chris Versace appeared on CGTN America’s Global Business program to talk about Apple’s (AAPL) December quarter earnings and several other topics. As CEO Tim Cook put it, “We sold more iPhones than ever before and set all-time revenue records for iPhone, Services, Mac and Apple Watch…” which enabled the company to deliver better than expected revenue and earnings per share relative to Wall Street consensus expectations.
While Cook boasted of strong Apple Watch growth, iPhone shipments were up 5 percent year over year, hardly the robust growth levels we’ve seen in the past. Meanwhile, the Mac business — the next largest one next to the iPhone at just over 9 percent of total revenue — saw volumes rise 1 percent year over year, while iPad units fell 19 percent compared to the year-ago quarter. One bright spot in the company’s December quarter was Apple’s Services business, which rose 18 percent year over year and boasts more than 150 million paid customer subscriptions.
Circling back to that better than expected December quarter EPS, we’d be remiss if we didn’t point out Apple’s net income actually shrank year over year. If it weren’t for the company flexing its cash-rich balance sheet, which clocked in at $246.1 billion, to shrink the share count during 2017 Apple’s reported EPS would have been flat to down year over year instead of being reported up just under 10 percent. Coming into 2017, Apple has nearly $50 billion remaining on its current capital return program, which means more share repurchase activity is possible in the coming quarters.
One other sour point in the earnings report was Apple’s guidance for the current quarter, which fell shy of expectations. One particular call out was the impact of foreign currency, which is expected to be a ‘major negative’ as the company moves from the December to the March quarter.
The long and short of it is that while Apple CEO Tim Cook called it a record quarter, the reality is Apple’s financial performance remains closely linked to the iPhone, which still accounts for 70 percent of Apple’s overall business. To us here at Tematica this means until Apple can bring to market an exciting new product, or reenergize an existing one that can jumpstart growth, the company will be tied to the iPhone upgrade cycle. Expectations for the next iteration, the presumed iPhone 8, call for a new body, new display — hence Disruptive Technology company Universal Display (OLED) being on the Tematica Select List — and a greater use of capacitive touch that should eliminate the current home button and bezel. But we’ll have to see if this new model on the 10th anniversary of the transformative device’s launch will capture the hearts of customers, as the last couple of models have only had a meh response.
Despite its current reliance on the iPhone, there are hopeful signs at Apple, such as the new AirPods that echo past design glory, an Apple TV business that has 150 million active subscriptions and a growing Services business. The issue is even if Apple doubled its service business in the coming year, it would still account for 15-20 percent of Apple’s overall revenue. Moreover, if that happened in the coming year it would likely mean the next iteration of the iPhone underwhelmed, something Apple is not likely to shoot for on the devices 10-year anniversary. Near-term, Apple is likely to remain a victim of its own success in creating one of the most loved and most used devices on the plant.
We’ll continue to keep tabs on this poster child company for our Connected Society investment theme company, but with no evident catalyst over the coming months, we’re inclined to be patient and pick off the AAPL shares at better prices.
Additional Thematic Data Points from Apple’s Earnings Announcement
While we are not quite buyers of Apple shares just yet, there was a number of confirming thematic data points shared during the company’s earnings conference call last night:
- Rise & Fall of the Middle Class — “The middle class is growing in places like China, India, Brazil, but certainly, the strong dollar doesn’t help us.”
- Cashless Consumption — “Transaction volume was up over 500% year over year as we expanded to four new countries, including Japan, Russia, New Zealand, and Spain, bringing us into a total of 13 markets. Apple Pay on the Web is delivering our partners great results. Nearly 2 million small businesses are accepting invoice payments with Apply Pay through Intuit QuickBooks Online, FreshBooks, and other billing partners. And beginning this quarter, Comcast customers can pay their monthly bill in a single touch with Apple Pay.”
- Content is King — “In terms of original content, we have put our toe in the water with doing some original content for Apple Music, and that will be rolling out through the year. We are learning from that, and we’ll go from there. The way that we participate in the changes that are going on in the media industry that I fully expect to accelerate from the cable bundle beginning to break down is, one, we started the new Apple TV a year ago, and we’re pleased with how that platform has come along. We have more things planned for it but it’s come a long way in a year, and it gives us a clear platform to build off of… with our toe in the water, we’re learning a lot about the original content business and thinking about ways that we could play at that.”
- Connected Society — “every major automaker is committed to supporting CarPlay with over 200 different models announced, including five of the top 10 selling models in the United States.
We’ll continue to look analyze management commentary for more thematic data points as more companies report their December-quarter earnings over the next few weeks.
Weather can be a very disruptive force when it comes to the supply of food and other commodities. Crops can flourish under right conditions, but adverse weather conditions can reduce harvests we tend to see prices spike whether it be coffee, corn and the like. Following a near record corn crop, consumers in the US are experiencing the benefit of food deflation that is helping Cash-strapped Consumer dollars go a bit further. In Europe, however, cold weather has led to countries importing vegetables from the US. Shipping and freight costs, airline handling fees and the strength of the dollar make for a pricey solution for this current scarcity. If this weather continues into the March planting season vegetables could become an affordable luxury.
Due to cold weather in Europe’s key vegetable supplying countries, the continent is dealing with an extreme vegetable shortage. “The last time Europe dealt with a vegetable shortage like this was in 2005,” says Lisa Sternlicht with California-based A.M.S. Export.
In spring 2013, we exported a little bit of iceberg lettuce to the UK, but now we receive requests from the UK, the Netherlands, Germany and Switzerland. Even the Spanish might be in the game pretty soon,” continued Sternlicht.
It is uncertain how long Europe’s demand for US vegetables will last. Will the consumer continue to pay high prices for vegetables or will they switch to alternatives? “Airfreight comes with a price,” shared Sternlicht. Landed costs into Europe are around 2.3 and 2.5 euros per kg. On top of it, you have to add duties and airline handling. The strength of the dollar and the post-Brexit weakness of the GBP make it pricey.The current supply shortage could become even bigger in March. Important vegetable growing regions like Murcia in Spain plant produce this time of the year for a March harvest. The extreme cold weather has made it complicated to plant and time will tell what the impact will be.