By: Michael Vodicka
“But maybe most importantly, the company has $120 billion in cash. With a market cap of $380 billion, Apple could buy 33% of its outstanding shares tomorrow.”
It was a red week for stocks, with the S&P 500 falling 2% for its biggest decline since November.
That weakness was driven by China, which reported weaker than expected second-quarter GDP, further evidence that the debt-fueled emerging economy continues to slow.
Earnings season is also playing big in the headlines, and the early results aren’t great. Analysts are looking for a 1.1% contraction from last year, the first time earnings are projected to decline since 2009.
That played out last week with IBM and Bank of America both reporting weaker than expected earnings. IBM saw its biggest one-day decline in more than 8 years. Intel also posted a rare earnings miss, further weighing on expectations and sentiment.
Looking forward, this is going to be a huge week for earnings, with 70 more S&P 500 companies set to report, including Apple. So look for those results to set the tone for the next few weeks.
Hold or Sell Apple?
Speaking of Apple, I wanted to sound off and share my thoughts on what to do with this stock that many people have in their portfolio.
Apple has taken a pretty big plunge, falling from $700 to below $400 on Friday. All in that’s a hefty 43% decline.
There’s no doubt that Apple isn’t the company it once was. Everything about Apple changed when Steve Jobs died. But falling a few steps short of going into the nitty gritty details, my simple take on Apple is based upon risk-reward. After the huge 43% decline, I think Apple has much more up side than down side. Make no mistake, I don’t see Apple returner to high flyer status, but there are a few factors working in its favor.
The valuation on Apple is ridiculous at these levels, with a forward P/E of just 9 times, a sharp discount to the S&P 500’s 14 times. But maybe most importantly, the company has $120 billion in cash. With a market cap of $380 billion, Apple could buy 33% of its outstanding shares tomorrow.
The company is definitely in need of a hit new product, which will be tough without Jobs at the helm, but Apple it still a leading player in a number of markets and that’s not going to change any time soon. So after falling 43%, it is not time to sell. The risk-reward ratio is in favor of Apple. The company reports this week, and more than a few analysts are looking for a weak quarter. But longer term, I still think it makes sense to hold.
Is the Rally in Gold Over?
Gold has easily been the hottest and most controversial topic in the last week, with prices crashing more than 20% from the 12-month high. That has a lot of the biggest players on the Street throwing in the towel and saying that gold’s historic 12-year run has finally come to an end.
I couldn’t disagree more. I view it as a very rare opportunity to buy into a long-term bull at a highly discounted price.
There are a few key reasons why I think gold will continue to rally.
The biggest is what is happening to fiat currencies across the globe, particularly the dollar. By far the biggest economic stimulator in the last four years has been the coordinated devaluation of fiat currencies by central banks across the globe. Remember, a weak currency is good for exports because it makes a countries products and services less expensive.
The leading central banks of the world, including the Fed, Japan, China and England have been devaluing the heck out of their currencies for the last four years, and simple put, the market has become totally addicted to this monetary stimulation. Even the Fed admits that 50% of the gain in the stock market in the last four years has been driven by the weak dollar and monetary stimulation.
So what that means is that even if the central banks had an inclination to stop printing and devaluing, they can’t. Because it would crash both the economy and the stock market. Here’s a great chart of how the Fed has grown the money supply in the last four years.
But the central banks aren’t just devaluing fiat currency, they are also turning around and hoarding gold to protect their currency reserves from the devaluation of fiat currency that they are driving.
According to the World Gold Council, 2012 saw record global gold demand, with central banks buying gold at the fastest pace in almost 50 years. Gold demand topped $235 billion in 2012, an all-time high, while fourth-quarter demand of $66 billion was the strongest fourth-quarter demand ever.
That big charge was led by the central banks with 100’s of billions at their disposal, accounting for 12% of total gold demand in 2012, up from 10% in 2011. The central banks also didn’t seem to care about price too much. In spite of gold prices averaging $1,669 for the year, central banks bought more than 534 metric tons, the highest level since 1964 and a 17% increase from 2011.
The central-buying gold binge was led by Russia, China, Brazil and Iraq.
Brazil doubled its gold holdings in two months, buying 17.2 metric tons in October and 14.7 metric tons in November.
Iraq increased its gold reserves to 31 metric tons from 5.8 metric tons.
Ukraine raised its percentage of reserves in gold to 7.72% from 4.36%.
Russia is also aggressively buying. According to the World Gold Council, Russia has doubled its gold reserves in just the last five years, making it the fifth largest holder in the world. According to IMF data from Bloomberg, the Russian central bank has added 570 metric tons in the last decade, the largest accumulation of any country. This accumulation is being driven by Russian Prime Minister Vladimir Putin, who has been a very vocal critic of the United States monetary policy and the dollar as the world’s reserve currency.
But China stands alone as the biggest buyer in the world.
The country imported more than 800 tons in 2012, more than double the 396 tons imported in 2011. That means China spent more than $42 billion on gold in 2012, dwarfing the countries Treasury purchases of just $10 billion during the same time.
It is clear the Fed’s weak dollar policies are alienating former lenders and forcing them to diversify into other asset classes, particularly precious metals as an inflationary hedge.
But still, with just 1.7% of China’s total currency reserves held in gold, an almost nonexistent amount compared to the United States 76%, Germany’s 74% and Russia’s 10%, China still has plenty of latitude to convert dollar reserves into gold.
Gold ETF’s are also a big factor. In the past, investors had to purchase bullion to gain access to gold prices. But now, it’s as easy as buying a gold ETF to do so, making the gold market much more accessible to a whole new class of investors.
And finally, what I consider to be the biggest indicator of all is a simple matter of sentiment. The gold rally is the rally that everyone loves to hate. The entire ride higher has been coupled with huge amounts of skepticism and bearishness. And the simple fact of the matter is that bull markets never end with skepticism. A bull market ends when every single person you know is in the trade, like what happened with the NASDAQ in 2000 and housing in 2006. Every person in the world was an expert in Internet stocks and flipping houses. We aren’t even close to that point in the gold trade.
These are the reasons I am still bullish on gold and why I view this pullback as a big opportunity.
The Take Away
That’s all for this week. Earnings will be the big story this week. Look for the results to set the tone for the next few weeks.
Your Investment Partner,
Mike
