Tech revival? Watch AAPL


Author Cam Hui

Posted: 06 May 2013

There was some excitement this week about the relative breakout of the Technology sector against the market:

Given the dominant weight of Apple in the Technology sector, consider the relative performance of an equal weighted Tech index. the equal-weighted NASDAQ 100 (QQEW) against the SPX. While the XLK has rallied out of a relative downtrend against SPX, QQEW remains range-bound against the market. In other words, the average Tech stpcl has performed in line with the market in general.

The rally out of the downtrend is far more evident in AAPL:

So if you start to get excited about the potential rally in Technology stocks, pick the appropriate benchmark and know what you are betting on.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest. 

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Technical analysis as behavioral finance

Posted: 03 May 2013 12:18 AM PDT

A couple of items came across my desk that, in combination, made me think about how we think about finance today. The first was Mark Buchanan’s review of Gary Gorton’s book Misunderstanding Financial Crises where the author took down the blindness of economists and, by extension, the theory of rational expectations [emphasis added]:

I think it’s the most convincing book I’ve read so far that links the mechanisms of the recent crisis to crises in the past. In effect, he argues that the crisis was the direct result of the uncontrolled creation of money by the shadow banking sector, and ultimately took place as a classic bank run, no different from runs in the past, except that this run took place mostly out of public view because it didn’t involve ordinary bank deposits. The new kind of money in this bank run was stuff such as repo agreements and commercial paper which played the role of money for financial institutions. In 2007-2008, when lenders lost confidence (for good reason) in the mortgage-backed collateral backing this money, they demanded that money back, and the financial system seized up.

The explanation is convincing and wholly natural. The argument is most convincing because Gorton does a masterful job of placing this bank run in the context of the long history of past runs. And also because Gorton, as an economist, places blame squarely on the economics profession (himself included) for being asleep at the wheel:

Think of economists and bank regulators looking out at the financial landscape prior to the financial crisis. What did they see? They did not see the possibility of a systemic crisis. Nor did they see how capital markets and the banking system had evolved in the last thirty years. They did not know of the existence of new financial instruments or the size of certain money markets. They did not know what “money” had become. They looked from a certain point of view, from a certain paradigm, and missed everything that was important… The blindness is astounding. That economists did not think such a crisis could happen in the United States was an intellectual failure.

It seems to me that there is a certain amount of denial among economists. I have noticed, in talking about the ideas in this book with my economist colleagues, that there is a fairly clear generational divide on this. To younger economists and graduate students, it is obvious that there was an intellectual failure. Some older economists are inclined to hem and haw, resorting to farfetched rebuttals. It is clear that this is a sensitive issue, as like banks no one wants to have to write down the value of their capital.

…One other thing of interest. Gorton in a late chapter, when discussing the spectacular failure of the rational expectations paradigm, quotes University of Chicago economist James Heckman, winner of the economics’ Nobel Prize (yes, that’s not its actual name) in 2000, from an interview he did with John Cassidy in 2010.

Why didn’t economists saw the financial crisis coming? What happened to rational expectations?

In a recent interview, Nobel laureate Daniel Kahneman explained his problem with the rational agent and rational expectations hypothesis this way:

Think of the kind of market that Adam Smith described. You can get a lot of insight into how just the right amount of bread gets to London in the morning by assuming that the baker and the other participants in the market pursue their own interests in a sensible manner. The rational-agent model takes this idea to its logical extreme. If you want to predict the behavior of a market, you are best off assuming individual agents who act in a way that is predictable and fairly simple—for example by assuming that the participants are similarly motivated and exploit all their opportunities. I am not an economist, but I find it hard to imagine that they will ever give up the use of schematic individual agents, even if they endow these agents with a little more realistic psychology. And I see no reason why they should.

The rational agent model has more questionable consequences in the domain of policy because the assumption that individuals are rational in the pursuit of their interests has an ideological coloring and policy implications that many would view as unfortunate. If individuals are rational, there is no need to protect them against their own choices. At the extreme, no need for Social Security or for laws that compel motorcycle riders to wear helmets. It is not an accident that the department of economics at the University of Chicago, one of the most illustrious in the world, is known both for its adherence to a strict version of the rational actor model and for very conservative politics.

Rational expectations: Is this an anomaly?
The other item of note was a post at George Washington’s blog (via Zero Hedge) showing how much more likely an American is to die from heart disease, car accidents and other common causes of death than from terrorism:

– You are 17,600 times more likely to die from heart disease than from a terrorist attack
– You are 12,571 times more likely to die from cancer than from a terrorist attack
— You are 11,000 times more likely to die in an airplane accident than from a terrorist plot involving an airplane
— You are 1048 times more likely to die from a car accident than from a terrorist attack

Now ask yourself, how much has the United States government spent on combating terrorism compared to heart disease, cancer and automobile accidents? If this had been academic finance literature, then these mis-pricing or mis-allocation of resources would be termed an anomaly, much like low P/E or small capitalization were deemed to be market anomalies in the 1970’s.

Here’s another thought from the Chicago school: If the world needed to be rid of terrorism, or __________ [insert the dictator of your choice], wouldn’t the market have done it?

In praise of behavioral finance
Behavioral finance is the school of thought that tries to understand human behavior in the context of what “should” be rational expectations. I have long believed that technical analysis is a branch of behavioral finance.

I recently wrote an essay about the evolution of thinking about technical analysis and why it works. You can read it here.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest. 

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Wall Street analysts: Accuracy is the least of their concerns


Will the bears get their second wind?


Author Cam Hui

Posted: 26 Feb 2013

The weakness in equities last week was no surprise to me – though the trigger of the adverse liquidity effect the Fed removing QE was. As I reviewed the charts on the weekend, it became apparent to me that this week coming up could turn out to be pivotal in the tug-of-war between the bulls and bears.

Right now, it’s not clear to me whether the weakness last week will turn out to be a shallow correction or a much deeper one.

Cyclical stocks rolling over
As I documented last week (see Take some chips off the table) cyclically sensitive stocks are rolling over relative to the market. A review of some of the major sectors of the US stock market shows this to be the case. Consumer Discretionary stocks have violated an important relative uptrend against the market.

Cyclically sensitive Industrials can only be charitably characterized as testing a relative uptrend line:

The equal-weighted NASDAQ 100 as a proxy for Technology stocks, which minimizes the effect of heavyweight Apple, has violated a relative support level after rolling over out of a relative uptrend. (Believe me, the relative chart of Tech with Apple is much, much worse.)

The homebuilders, which had been a source of leadership and relative strength, are rolling over relative to the market:

Emerging defensive leadership?
Meanwhile, defensive sectors are rising in relative performance and they appear to be emerging as market leaders. Consider, for example, Consumer Staples:

…and Utilities:

A key test for the bulls and bears
The way I read it, cyclically sensitive stocks are faltering. Defensive sectors are rallying but have not fully assume the mantle of market leadership. This week coming up is a key test for bulls and bears alike.

Can the bulls regain the mojo? Can the bears get a second wind?

While I am leaning slightly bearish because of negative technical conditions (see J.C. Parets’ analysis on negative divergences and the signal from insider selling), I have to respect the upside potential posed by a couple of major market moving events this week.

First, there is the Italian election, where Silvio Berlusconi is attempting a comeback on an anti-euro platform (see this discussion by Joe Wiesenthal of Business Insider on the mechanics of Italian elections). A win by Berlusconi or a deadlocked government could really spook the markets.

The other is the looming sequestration cutbacks scheduled to take place on March 1. Based on the experience of the recent past, it seems that the markets have an ingrained Pavlovian response that there will be a last minute deal and remain relatively complacent about the outcome. I could go on and on about how to analyze the politics of sequestration, but I have no idea of the outcome.

I just know one thing for certain, we will have volatility.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Why I am still bullish (II)


Author Cam Hui

Posted: 06 Mar 2012

I got a fair amount of feedback and pushback on my last post (see Why I am still bullish). Most have pointed to contrarian sentiment indicators, such as the Rydex Bull/Bear ratio, showing that traders are excessively bullish on stocks.

The Do’s and Don’ts of sentiment models
Let’s go back to first principles on sentiment models. The basic assumption behind sentiment models is that if a certain group is in a crowded long position, then there is little or no buying power to push the market up further. I said in my last post that both individuals and institutions are in no way overweight equities relative to historical experience. Institutional fund flows into stocks have barely begun, which provides sustainable buying power. Individual investors have been selling out of equity mutual funds and funds flows barely turned positive. Are those signs for you to run for the hills?

Such conditions set up the possibility that we can experience a series of readings that show too many bulls in sentiment models, which are shown in red in the chart above, during a rally where the market advances steadily such as the QE2 stock market rally that began in late 2010. At the same time, technicians could see a series of “good overbought conditions” as the market grinds higher.

For traders, sentiment models can be notoriously fickle. Since the Dow first kissed the 13K level and pulled back, some measures of sentiment have seen bullishness drop significantly. In fact, the latest Bespoke survey, which is admittedly unscientific, shows more bears than bulls and we have seen similar levels of waning bullishness amongst the respondents of other surveys.

A case of bad breadth? Or just a “good” Apple?
Another knock against the bullish outlook are the negative divergences seen in the markets. The Dow Jones Transportation Average has lagged. But as Mark Hulbert pointed out, there has been disagreement among Dow Theorists about the significance of that divergence.

Other technical analysts have pointed to the poor relative performance of small cap stocks. It is said that when large caps lead the market, it is a sign of faltering leadership, i.e. the generals are leading but the troops aren’t following.

Are small caps truly faltering, or is is just the case of a large cap rocketship – in this case Apple?

The chart below shows the relative performance of the small cap IWM against the large cap SPY. The relative performance of small caps against large caps broke down in late February by violating a relative uptrend that began in October (shown in green) and at the same time broke down against a relative support level (shown in blue). Now consider the relative performance of IWM against EWI, which represents an equal-weighted S+P 500 and largely neutralizes the effects of Apple’s rally, shown on the bottom panel. Note that small caps remain in a relative uptrend against large caps. How much of the relative breakdown is due to the capitalization effect of Apple?

You can see the same effect more dramatically when we compare the relative performance of the NASDAQ Composite against the NASDAQ 100. Similarly, the small cap NASDAQ Composite broke down in late February against the mega-cap NASDAQ 100. However, the bottom panel shows that the NASDAQ Composite remains in a relative uptrend against the equal-weighted NASDAQ 100.

A correction is possible but not inevitable
So where does that leave us? If you are an investor, the intermediate term trend is still up (note that Warren Buffett recently expressed his bullishness). I would be inclined to stay long and ride out any short-term choppiness.

If you are a trader, you have to be prepared for a correction, which may or may not occur. In some ways a correction is overdue because stocks have been rising steadily this year without a single day where the market has fallen 1%. On the other hand, you also have to be prepared for the possibility that there is no correction and the market grinds upwards while undergoing a series of “good overbought conditions” until individual and institutions have fully loaded up on equities.

Even if a correction were to appear, it would likely be mild. The first support level for the S+P 500 would be the 50-day moving average, which is 3-4% below current levels. In this video, Jeffrey Hirsch, of the Stock Traders Almanac, believes that the market is likely to see a mild correction in the second half of March but would view that as a opportunity to deploy more cash. He then expects the markets to continue to rally until year-end.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Chart: In Four Years, Apple Sold More iPhones Than All Macs Ever


At what point does the market saturate and\or do people become unwilling to pay the higher margins for the brand?

TechCrunch

If anyone has any doubt that iPhones, iPads and other iOS devices are the future of Apple, just take a look at the chart above from Asymco.  It shows all iOS products sold cumulatively versus all OS X products ever sold (Macs) over the past 28 years. The iPhone has only been around for four years, but in that time more iPhones have been sold than all the Macs ever sold in Apple’s entire history.

The total number of Macs sold is 122 million. In 2011 alone, if you tally up all the iOS devices including iPods and iPads, 156 million were sold—more than all Macs ever sold. In one year. All told, Apple has sold 316 million total iOS devices over the past few years, iOS devices simply overwhelm OS X devices in terms of how many are out there. No wonder Apple is making OS X look…

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Apple Made $22 Billion In Revenue On Developing World In 2011, Just $1.4B in 2007


TechCrunch

CEO Tim Cook described Apple’s conquest of emerging markets today at the Goldman Sachs Technology and Internet Conference. He said “In 2007, and we didn’t launch the iPhone outside the U.S. until 2008, Apple’s revenue combined from greater China and several other parts of asia, India, Eastern Europe, the Middle East, Africa, and Latin America was $1.4 billion. Revenue for that group of countries last year was $22 billion. We’re only on the surface.”

Cook explained that the iPod didn’t take off as quickly in the developing world “because people were already getting music from their phones. But the world changed for us with iPhone. It introduced our brand to people who had never met Apple before.”

“The iPhone is creating a halo for the Macintosh, and for iPads. We see the synergistic effects of the markets not only in the developed markets, but in the emerging markets.” Next…

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Tim Cook: Sales In China Were $13B Last Year


TechCrunch

Apple CEO Tim Cook took the stage today at the Goldman Sachs Technology & Internet Conference in San Francisco to talk about Apple’s unbelievable first quarter, as well as the company’s outlook going forward. It’s been hard to avoid the headlines: Apple is red hot right now, as MG recently pointed out that Apple’s $13.1 billion profits in Q1 was equal to the company’s revenues in Q4 2010. One year and one quarter later, and Apple is growing like it’s on steroids. Throw in the fact that Apple now has $97.6 billion in cash and equivalents, and the overall picture is fairly jaw-dropping.

Or, perhaps what’s even more anxiety-producing, at least for Apple’s competitors, is that Tim sat in conversation today and almost sounded shocked by his own words — specifically over how much opportunity he sees for Apple in developing markets. The mobile device market is expected to grow…

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Apple’s problem with the inscrutable Chinese


Author Cam Hui

Posted: 02 Feb 2012 12:52 AM PST

Last week, the New York Times published an article detailing some of the troublesome working conditions in Chinese factories that makes Apple products:

[T]he workers assembling iPhones, iPads and other devices often labor in harsh conditions, according to employees inside those plants, worker advocates and documents published by companies themselves. Problems are as varied as onerous work environments and serious — sometimes deadly — safety problems.

Employees work excessive overtime, in some cases seven days a week, and live in crowded dorms. Some say they stand so long that their legs swell until they can hardly walk. Under-age workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records, according to company reports and advocacy groups that, within China, are often considered reliable, independent monitors.

The article ignited a firestorm of controversy. Consider the reaction that the paper published in a follow up entitled Apple in China: Has iOrwell Arrived?

The inscrutable Chinese
What should Apple do? How should the company react? Before jumping to conclusions, Charles Hugh Smith put the Chinese attitude into context and compared it to the attitudes in an immigrant societies such as America. He writes that in America:

Nobody cares where you’re from, or what caste you are, or anything like that. As long as you do your work without being a real pain in the rear-end, are pleasant to your neighbors and workmates, keep your pitbull chained, etc., then you are good to go. Many if not most of the people you interact with also know English as a second language, and since that’s burden enough for all of us, we dispense with all the insider stuff. America is on most levels a WYSIWYG culture: what you see is what you get.

Places like China and Japan are on the opposite end of the spectrum: they are not immigrant cultures. Very few nations have a culture that is adapted not to tradition and an opaque mindset but to getting on with immigrants from everywhere. This is one reason people want to come to America; they lose their baggage here and can be themselves, because nobody cares, we’re busy with other things, and it doesn’t take 15 years to figure out how things actually work here. If it did, the whole thing would grind to a halt and that would be really annoying.

Unspoken attitudes and preferences are far more important in cultures with long established traditions. Smith writes [emphasis added]:

[T]here are always two doors in Asia: the front door, carefully arranged to present a face-enhancing image to the outside world, and the back door, where everything important actually takes place.

A typical front door in China is the banquet with the glad-handing mayor. The back door is for his mistress, the cash “commissions” from various deals and the cover-up of the face-damaging deaths in the local factory. Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face.

What is going on at the back door in this Chinese manufacturing operation that makes Apple products?

The truth of the matter is that a class structure exists in Chinese society. Those at the top don’t think that “little people” matter. The dirty little secret is the belief that human life is cheap.

The Globe and Mail peeked behind this door recently with the article entitled: In de-coding class in China, cars are your best clue. The story began when Canadian envoy seemingly “lost face” with the locals because he drives a Toyota Camry:

A Toyota Camry isn’t usually the type of car that turns heads. It certainly isn’t considered a flashy ride on the streets of Beijing, where Audis, BMWs and Mercedes SUVs dominate where three-wheeled rickshaws once ruled.

So when David Mulroney, Canada’s ambassador to China, posted online photos of his official car – a silver Camry hybrid – the reaction from the Chinese Internet was something close to shock. Especially when he explained that even cabinet ministers in Canada only have a budget of $32,400 for their official car.

“Face” matters in China. It signals class and status, which matters a lot. The Globe article went on to decode the class structure, as interpreted by a Bejing cabbie:

Toyota sedan – Driven by putongren. Ordinary people. Not so ordinary that they have to use public transport or ride a bicycle, mind you.

Mercedes SUV – Driver Zhao presumes someone who drives one of these ubiquitous (and always black) vehicles is a laoban. The word means “boss,” but in this case laoban can mean anyone who recently come into cash and wants to show it off.

Buick GL8 minivan – Wildly popular in China (though discontinued in North America), these vans aren’t for soccer moms. To Driver Zhao, someone driving a Buick GL8 is a “xiao laoban,” or little boss. Someone who can’t yet afford the Mercedes. Just as often, the driver is a professional and the passengers are Western expatriate families with kids.

Audi A6 – Weibo had it bang on, it’s the automobile of choice for the Chinese bureaucrat. Seeing an Audi A6 in traffic means you’re idling beside part of the country’s power structure. As The New York Times put it , the A6’s “slick frame and invariably tinted windows exude an aura of state privilege, authority and, to many ordinary citizens, a whiff of corruption.” (The Beijing government says there are 62,000 official cars in the city, a figure that seems far too low. The state-run CCTV television station reported last year that the real figure is closer to 700,000.)

Humvees or Ferraris – Driver Zhao says the only people arrogant enough to drive one of these on Beijing’s streets are the well-off children of top government officials. As evidence of that, I once saw a bright yellow Humvee rip the wrong way through traffic in Beijing’s busy Sanlitun bar district, before proceeding to drive through a red light without so much as tapping the brakes. At least three policemen witnessed the same scene, but seemed to conclude from the driver’s brazen behaviour that he was too powerful to be stopped.

When the New York Times article appeared, the Chinese reaction is quite predictable, characterized by Smith as “Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face.”

For Apple, however, it has a tricky public relations problem with its customers, a problem that may eventually devalue its image and the value of its brand. It too, has “lost face” with its customers. How it responds will be a key test of new CEO’s marketing and management savvy. As well, it will be a sign of how far the West has journeyed to meet the East.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


https://superbullinvestor.wordpress.com/2012/01/26/1469/


TechCrunch

[tc_5min code=”517339509″]

Apple ended last quarter and the year with almost $100 billion in cash ($97.6 billion, to be exact—much of that is held overseas for tax purposes). For comparison’s sake, that is twice as much cash as Google, which ended the year with $44.6 billion in the bank.

What should Apple do with all of that money? They could buy Facebook, which is supposed to IPO at around a $100 billion valuation. But “it is not in Apple’s nature to do big acquisitions,” points out BGC analyst Colin Gillis at the tail-end of this video interview. “In fact, a big acquisition would probably be disastrous for Apple.” He thinks Apple should give some of that money back to shareholders instead through share buybacks or dividends. Watch the rest of the video, as we discuss Apple’s biggest quarter ever.

All Apple would say during the quarterly earnings call about its…

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https://superbullinvestor.wordpress.com/2012/01/25/1465/

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