The Law of (un)Intended Consequences

One of the hallmarks of the “Age of Obama“, as Gwen Ifill has termed our current historical moment, is that we have to pass laws to find out what the consequences of that law will be. Remember then-House Speaker Nancy Pelosi’s “We have to pass the bill so that you can find out what is in it” statement in regards to Obamacare? More than a few people have commented on what would seem to be the amateurish nature of the Obama Administration.

One indictment on the level of prowess and sophistication that the Obama Administration has displayed are the number of apologies that have been issued for mistakes that mostly could have been avoided, such as the botched roll-out of the Obamacare website. Among many others. Being brought low and having to apologize after hundreds of times promising “If you like your doctor and your coverage, you can keep them” is about as embarrassing as could be imagined–if you are of the impression that this was, indeed, a mistake and not a calculated misrepresentation of fact as a means to an end.

The latest example which could result in vast “unintended” consequences is the highly controversial Executive Order to provide deferment from deportation for up to 5 million persons who are in the United States illegally. The case was made that this was a grant of mercy, a move of high minded moral compassion that would not have any negative effects for existing and lawful US Citizens. Cynically, Obama delayed proclaiming this move as official until after the election so as to shield his fellow democratic party members from the expected onslaught the voting population was expected to bring in reaction to any move to use Executive Authority to shield illegal immigrants. That seemed very democratic–purposefully delaying action so as to avoid repudiation by the voters. How transparent.

What has come to light, however, in the weeks since the announcement are the knock on effects of the Executive Order, including the likelihood that illegal immigrants who are allowed deferred action will be eligible to vote, receive government benefits, and receive tax-credits including back-tax credits amounting in some cases to $24,000. This in combination with being placed on the fast-track for eventual US Citizenship, jumping in line in front of the thousands of legal and lawful immigrants who have been doing things the right way. 

Additionally, it has been found that the slippery slope of amnesty just gets slipperier and slipperier: As the State of California has discovered in attempting to provide drivers licenses to the newly legalized residents, forgiving the act of illegal entry and settlement brings with it many other sticky issues such as forgiveness of other felonious behaviors like Identity Theft, Document Forgery, Tax Evasion, Harboring of Illegal Aliens, and knowingly Hiring and Employing Illegal Aliens.

Some would say that all the handouts and giveaways which amount to one heck of a welcome package to all of these illegal immigrants was a designed plan by President Obama, outgoing White House Counselor John Podesta, and the Democratic Party as an attempt to create a new voter base from scratch. I am much more concerned that it is just another example of the law of unintended consequences coming back to bite the amateur hour President and all the rest of us as well.

[The New American][Washington Times][ABC News][Associated Press[Fox News][Investors Business Daily]

Tango with Contango

Commodity traders are celebrating the return of the contango trade with anticipation of the most profitable year since 2008 in the offing.

After several years of less lucrative market activity the recent decline of oil prices by more than 60% from the June 2014 high has opened up trading opportunities for the commodities firms who profit off of volatility and speculative activities.

One of the ways these firms profit are by buying oil at the current “spot” price and storing it for delivery at a later date at a higher price. One of the oddest methods utilized by these firms is the renting of oil supertankers and keeping them offshore as floating storage tanks.

According to the Portland Press Herald, “As many as 60 million barrels could be held offshore within the next several months, the Vienna-based consultant predicted Jan. 6. Traders stored 100 million barrels at sea in 2009, Frontline Ltd., a tanker owner, said at the time.”

While the recent drop in oil prices are providing a much appreciated respite for consumers who are able to save at the pump, and negative effects of the downturn could end up having a very adverse effect on the improving employment numbers and the goal of US Energy Self-Sufficiency. Among the longer-term knock on effects could be a decline in renewable energy innovation, a shift in consumer attitudes away from green-energy transportation and back toward gas guzzling SUV’s, and a dissipation of political will to press forward on the Keystone XL Pipeline project and removal of the crude oil export ban.

[Financial Times][Wall Street Journal][Portland Press Herald]

Are We All Victims Now?

In a true tour de force, Philip Stephens of the Financial Times published an Op-Ed today suggesting that we have entered a period of time where victimization is now regarded by many to be the highest virtue.

We live in the age of victimhood. Wherever you look there is someone with a grievance. The richer and more powerful they are, the bigger the wrong that must be righted. Political leaders, bankers, corporate bosses and the plutocrats of the hedge fund industry have joined the poor and disadvantaged among the swelling ranks of the oppressed.

Of course the target for Mr. Stephens does not immediately lend itself to the same interpretation as that of the Radical Brownies, but the bridge is there, best illustrated by the 2006 white paper “We’re (Nearly) All Victims Now! How political correctness is undermining our liberal culture” by David G. Green. While I find the entire paper presciently fascinating, I find the below examples most pressing:

Victim status can alter the balance of power in the work‐ place by making it more difficult for employers to object to conduct that is open to valid criticism. Ironically Sir Ian Blair, the Metropolitan Police Commissioner who has been one of the champions of political correctness, has found that his ability to manage gay or ethnic minority officers has been weakened. He recently moved Brian Paddick to another position and altered the management responsibilities of Tarique Ghaffur. The Guardian remarked that Paddick was the highest ranked openly gay officer and that Ghaffur was the Met’s most senior ethnic‐minority officer, and quoted George Rhodes, chairman of the Metropolitan Black Police Association, as saying, ‘What message does this send about respect and reflecting diversity in the police service?’

The spread of Political Correctness has created another ally of the traditional “victim group”, those who are convinced to renounce their supposed inherent privilege and urged to feel offense on the behalf of the aggrieved. To reject third-party grievance is to become tacitly a party to the structure which maintains the inherent privilege, to accept becoming an active ally of the victim group is the acceptance that the privilege exists and is unjust.

To gain political recognition it is necessary to build a coalition to put pressure on political parties. This need encourages groups to define themselves as widely as possible, to increase their voting impact. But it is not just that existing groups seek recruits, it is also that individuals who previously did not see themselves as victims change their attitude in order to profit. I recall a successful American business leader telling me about his mixed feelings about using his victim status. He was a Puerto Rican who had been very successful in America without playing the ‘race card’. Yet, when his daughter was 18 he learned that he could get her into a better college if he highlighted her race. He believed in ‘making it’ on your own merits, but admitted that the temptation was too much and he seized the opportunity to benefit his daughter, despite his feelings that it was unjust.

The pressure groups and their partners in media who are enabling the wholesale attack and dismantling of civil discourse–recently visible in the events in Ferguson, Missouri, and elsewhere that were used to inflame social tensions in service of a specific menu of agendas–are well aware that they paint their opponents into very precarious corners by framing their arguments in the way that they do. When any rational opponent can be shouted down with an avalanche of “ists and isms” (Racist, Sexist, etc) they are able to control the place and time of battle, one of the surest recipes for success according to Sun Tzu in the Art of War. As all social groupings become increasingly Balkanized, increasingly at odds in competition over a smaller and smaller pie, the conflicts are likely to intensify and escalate to levels unseen in Western Democracies in decades.

[Financial Times][civitas.org][New York Times]

Grievance Politics Must Begin Early

Back in December a firestorm of criticism erupted when a Second Grade class in New Bedford, Massachusetts, “voluntarily” spent their recess protesting the recent Grand Jury verdicts in the Michael Brown and Eric Garner cases. A parent of one of the students happened to be a local police officer, and when he picked his daughter up that day she asked him “Daddy, do you shoot people?”.

As we are all aware, once people get attention–even negative attention–for doing something, then others will be out trying to mimic and get their fifteen minutes of fame. Enter the “Radical Brownies”. Founded by Anayvette Martinez and Marilyn Hollinquest in January after Martinez’s daughter said she wanted to join a girl’s group, the two parents went to the obvious next logical point and created a social grievance protest club.

What better way to indoctrinate the next generation of street protesters, looters and rioters than getting them started as young as possible? Certainly what Coatlupe Martinez meant when she broached the idea to her mother was for her mother to found a protest club that would get all sorts of media attention for its progressive ideas. Among those ideas, exclusion of any girls who are not of the correct racial make-up.

Thats right! As a way to teach diversity the Radical Brownies suppress diversity. Currently, All the members are girls of color or mixed-race. The founders say once the program expands to multiple chapters the organization will be open to everybody, but the program will always remain focused on young girls of color.

Reading enough articles–and believe me, there are enough of themyou will come to see a few things, one more obvious than others: There are probably better things these kids and their adult supervisors should be spending their time on, such as learning the correct usage of the English Language. I had a hard time finding a completely clear and coherent sentence from any of them. Examples below!

“White policeman are killing black young folks such as women, men and children,” one of the girls said.

Another girl said, “Mike Brown. He was shot because he didn’t do nothing. Only the police officer shot him because of his skin color.”

“The girls felt really just like passionate about the topic and they loved being there,” Martinez said.

I wonder if the the girls were as passionate about the subjects they were being brainwashed about as the two co-founders were for the media attention they have garnered for themselves in the last 6 short weeks? According to the co-founders:

“As co-founders we each have over 15 years of youth development and programming backgrounds with LGBTQ youth of color, youth, and youth of color. We are implementing best practices so we can build a strong structure for our organization. As queer women of color and avid trans allies we believe in creating trans and gender non-conforming inclusive spaces, therefore we embrace the spectrum of gender diversity throughout our lessons and activities. We work towards making the world a more radical equitable place!”

As Amanda Shea asks, “This type of organization would never fly if it were advertised for white girls only for their empowerment against societal pressures. So how is this acceptable for one race, but not another?”

Apple – The Best Opportunity Ever?

I did a really silly thing on August 20, 2014-I submitted a price target for Apple Inc. (NASDAQ:AAPL) of 300. The editorial staff at Seeking Alpha, however, did not do a silly thing; they rejected the article. Over the course of the next few days I quickly learned there was nowhere else which was willing to pay me for my trade story and non-metric based price target which called for a 200% increase in the market cap of already the most valuable company in the world. It is funny how sometimes, if you sit still long enough, the world will catch up with you.

I am not the only AAPL Uber-Bull; Carl Icahn thinks that AAPL is “one of the best buys in decades” and has stated he will be raising his own 203 price target. The current consensus street target price is 129.53, a good bit more conservative but more than likely to be inching its way up as AAPL creeps closer and closer to breaking through this level.

Following the blowout reported for Fiscal Q1 2015, which I had joined in with others who were for weeks prior referring to as “the impending highest profit corporate quarter of all time”, it is now worth assessing just what to expect out of AAPL in the next 12 months and beyond.

iPhone 6 and 6+

My own expectations for a record-breaking quarter were based on the pent-up demand I perceived from the previous two launches, the iPhone 4s and the iPhone 5, both of which failed to fully capitalized on what I perceived as “Halo Demand”-what I would describe as the consumer desire for The Best Thing Possible. The 4s disappointed because it was not the 5, and the 5 disappointed because the incremental advancement from the 4s was not game changing. As I and many others had foreseen, the iPhone 6/6+ would represent the snap-back of this rubber-band in demand. Once the 6 was released this was a thing I could see in reality on a daily basis as I walked by an Apple Store and only on a few of the coldest or worst weather days would there not be a line of buyers around the building waiting for the store to open, or, in the evening, to be allowed inside. Matt Lew cites AAPL’s backlog of demand. Jaded Consumer extolls the ability of AAPL to “not only sell scores of millions of smartphones in each quarter, it sells them at a profit unmatched in the field.”

While AAPL CEO Tim Cook promises that the upcoming iWatch will be “The Most Personal Device Ever”, I am completely agnostic of whatever iWatch may do in moving the needle for AAPL. Let us not forget how long Apple TV was supposed to be the next category buster and this has never come to pass. In fact I have for some time cultivated the suspicion that AAPL purposefully uses ruses such as Apple TV and iWatch as a smokescreen to cloud up the moves that are being made in relation to the core device segments.

Risks Ahead?

AAPL bears do exist-I know as I was one as well some years ago. Nolan Bushnell thinks there is some risk for AAPL if they do not soon “continue with some remarkable innovation, then pretty soon their ability to charge premium prices for their products will go away”. Paulo Santos thinks that AAPL may ultimately repeat the mistakes of the Mac/PC wars as smartphones become commoditized and lower-end phones catch-up in terms of capability and capitalize on their much larger user base. This is a theme I can visualize taking place rather well, as I was a kid who had an Apple IIe when IBM-Compatible was taking over the world. My first smartphone was a very cheap android that could do everything I could imagine it doing-after it died after two years of heavy use I replaced it with an iPhone 5c and aside from the normal progression of app design and some of the minor UX differences between the two I did not experience a “Wow, this is what all the fuss is about!” moment. So I can expect for some time that many consumers, both in the US and abroad, will continue to gravitate toward AAPL products do to the aura of Brand, while eventually the gap between functionality will be narrowed, perhaps erased entirely.

One of the strengths that AAPL iPhones enjoy now is the limited number of iOS and Phone version iterations. This makes app design for iOS a much easier thing for designers, as opposed to the 20,000+ combinations of device/OS related to Android. I do not expect this strength to be ceded by AAPL as the closed eco-system-while a weakness in some regards-protects this advantage. This same core developer ecosystem should contribute to AAPL being a leader in the expanding Universe of Things, which is where I expect the next innovation breakthrough to come from rather than a full reinvention of dying analog technologies like television or wristwatches.

Another AAPL bear I follow closely is Westend 511 who believes that Chinese OEMs “are becoming more aggressive in expanding their smartphone footprint and will focus on commoditizing the premium handset segment “, which could prove to be a significant headwind for AAPL investors who rely upon China as a #1 or #2 market. Westend 511 also touts that one of the true strengths of the iPhone lies not in its actual functional supremacy but in the high-bar for defection that many of the core AAPL brand enthusiasts, many early adopters from 2007 onwards, would face in moving to a different platform. As a relatively late adopter myself, as earlier described, I can certainly support this notion as well.

The Intel Handcuff?

Since 2006 AAPL has used Intel (NASDAQ:INTC) chips in Macs and Macbooks. AAPL designs their own chips for iPhone and iPad, and some have thought that AAPL would phase out INTC chips within the next few years. In a recent interview INTC CFO Stacy Smith stated that they are so far ahead of the rest of the industry that it would be a significant step down for AAPL to leave their chip architecture, securing their place with AAPL for the foreseeable future.

Where the titanic struggle in chip architecture is taking place is in mobile between the INTC X86 and the ARM V8-A. INTC lost $4.2billion on mobile in 2014 and could lose even more in 2015. If AAPL or Samsung do release larger tablets as has been rumored this could further encroach on INTC via cannibalization of Macbook and other laptops. AAPL’s recent success stands as a testament to the development of the A7, A8 and A8X chips. Samsung may be introducing a new 14nm chip series in the S6 due this spring, which would be a further nightmare for INTC in mobile. Mark Hibben thinks that Samsung may have to devote 14nm for AAPL, which would lead to further erosion of the competitive balance between Samsung and AAPL in AAPL’s favor.

Metric Analysis

As I fully expected, the Q1 results had a drastic effect on the metrics as I had measured them back in December to the positive-gains in the DCFx/DCFi and the IVC were across the board. The PEG ratio improved from 1.28 to 1.1 while the mPEG held firm at 0.61. The dividend yield decreased slightly due to price appreciation and the consensus analyst score stayed firm at 1.9. The big jumps were most evident in the DCFx (Discounted Cash Flow Value excluding Book Value) increasing to 211.23 from 183.05, the DCFi (DCFV including BV) increasing to 230.72 from 200.57 and the IVC (intrinsic value calculation) jumping to 272.48 from 181.44.

CONCLUSION

While I have but a fraction of the experience that Carl Icahn has under his belt, I cannot find any reason to disagree with his assessment. AAPL makes up a sizeable portion of the S&P500, may one day be added to the DOW, and is a top holding by many of the Mutual Funds where most Americans park their employer sponsored savings plans; AAPL is possibly the most important component of the market, and is close to being thedefacto market. I have no idea how long this trend will continue, nor how messy the divergence may become months or years from now to end it, but this is the case as I see it today.

There are several possible catalysts that are known now which could contribute to AAPL reaching 200 and going comfortably past in the next 12-24 months, some of which are products we have heard of and presumably some we have not yet imagined. One catalyst that could be a boon for shareholders specifically and I have not seen mentioned elsewhere is the very real possibility that Corporate Tax Reform, including an offshore profit amnesty, could very well be coming in the near term. AAPL has the largest foreign cash pile of them all and the ability to repatriate this largess and in part reward shareholders is something I think we can put a relatively high probability on.

As it stands now one of my biggest regrets is previously selling out of most of my AAPL shares, and my second regret is that I must now replace them at this much higher price. Replace them I intend to do, as well, as I would prefer for AAPL to be one of my Top 5 holdings and I expect to make this be the case sometime near April. Any other good opportunities out there right now I will compare them to AAPL until I am considerably overweight AAPL.

Disclosure: The author is long AAPL, INTC, BRK.B.