The T-Report: Thank-you Washington, German Taxpayers & Apple

Posted by on Nov 28, 2012 in The T-Report | No Comments

Getting Paid to Make Hard Things Look Easy

Athletes, computer programmers, and others get paid well because they make things that are hard to do, look easy. Politicians have now mastered getting paid to make easy things seem hard.

As I sent in my early morning note to clients, I assume this is mostly just posturing on the part of our politicians. I got lucky and guessed that the next move in fiscal cliff would be some negative posturing and we got it. I don’t expect any reconciliation until at least Friday or Monday. You can’t blame the other guy and then immediately make-up. You have to go through the motions or else the “kumbaya” moment of everyone agreeing to try to agree loses some of its photo op magic.

So I continue to expect a resolution that will make the markets happy and nothing about yesterday’s announcements change that view.

The EU Makes Easy Things Look Like Mission Impossible

I can’t believe that the Troika and Eurogroup and European Finance ministers have been meeting regularly for months on Greece only to come up with that bizarre proposal masquerading as a “deal”. I also can’t believe that it seems to have taken European analysts 24 hours to actually read the thing and not just regurgitate the headlines.

Official sector losses are coming. Since it is too early for the Troika to admit that and take actual reductions on their debt, we will see reduced coupons and extended maturities (NPV reductions). They hint at it in the “deal” but with lots of conditions. Those conditions will be waived when push comes to shove.

The “German Taxpayer” Should Stop Getting So Much Money from Greece

There is an article in Bild complaining about the German Taxpayer funding the bailouts. German 5 year debt yields 0.4%. So if Germany was borrowing to finance the bailout of Europe, the cost is minimal. Since that 0.4% affects all German debt, and it is better than if there was no crisis, that alone might be a benefit to the German Taxpayer.

But that isn’t really the “cost” since most of the money comes from the EFSF or the ECB or the IMF. The EFSF borrows money in its own name, so it isn’t forcing Germany to issue bonds.

Then, so far, all debt payments have been made by Greece to the “official sector”. Greece is paying significantly more than 4% so Germany so far is booking a tidy profit just on the interest alone. The ECB which bought bonds below par in the case of Greece has also been booking price appreciation gains.

So far, the German Taxpayer has MADE MONEY from the bailouts. That may not remain the case, but at this stage the image of German’s reaching into their pockets to hand Greece some money and kissing it goodbye is just wrong. Germany is like a giant banker sweeping some excess cash to an account that pays better interest.

I don’t have the German budget details, but I bet if you looked closely and dug into the Bundesbank records, you would find that in 2011 and in 2012 the German budget deficit is LESS because of the bailouts.


Maybe I am behind on this, but it really struck me yesterday how odd it is that a massive company in a business that is reasonably understandable can have such a high beta. Apple moves more than the market virtually every day, and the market only moves so much because of Apple, making that beta even harder to explain.

It isn’t like Apple is developing a cure for cancer where the outcome is highly uncertain and binary. It isn’t like they have an oil leak where no one can guess what the damages will be. Last I checked, they weren’t working on cold fusion.

So you have this company that makes things, primarily gadgets, nifty little gadgets, but gadgets nonetheless. They also have managed to convince us we own a music library when all we do is lease it. That is impressive, but I don’t see how that can be at a higher beta than the market, when they are so large.

Apple is moving $10 billion a day or more in market cap every single day. Can we really be that uncertain about the future value of the business? Maybe it has something to do with taxes on their cash hoard, but these large moves have been going on for awhile.

I first talked about Apple as a new macro asset class back in the summer. Apple had transcended from being a mere stock, to an actual asset class. I was only partially serious then, but now I am mostly serious. How apple trades, and how the valuations change, strike me as a clear indication of how algo driven the market is, and how trading and price moves drive more trading and price moves, rather than valuations.

I wouldn’t worry about Apple so much, but it is so important to the index levels that you can’t ignore it. Apple drags the indices around. All it takes is a glance at S&P and Nasdaq and you can quickly guess the price of Apple. If it only moved the indices around you could ignore it more safely because it wouldn’t influence the other stocks. But that isn’t the case. The indices drive stock prices as much as stock prices drive the indices, so we are stuck looking at apple.

And right here, I don’t like it. I liked it at $570 on the way down (regrettably). I liked it enough to finally at $540 on the way up, but am now out. I lived through the pain, made the call that it was an oversold macro trade, and survived. It was such an ugly move that I can’t call it a victory, but here at $580, I don’t like the stock at all and that makes it hard to like risk.

So What Does that all mean?

I continue to think credit will outperform in the short term as the “chase for yield” is alive and well. I think the fiscal cliff and Europe are taking their normal meandering course and will work out. I am more concerned about my thesis on Europe because that “deal” was disappointing, but am not particularly worried.

So for now sit on a smaller long position than had coming into the week (I view it as a gift that the market let me cut yesterday before starting the decline).

I will be looking to add risk, as I think the combination of a fiscal cliff agreement, some positive news out of Europe and underinvestment here plus a pile of QE money looking for a better home, can spark the rally that takes us to new highs, but for now am patient as I don’t expect positive news, and think Apple will help drag the market a bit lower.