An Apple a Day…

361 Capital Market Commentary | August 24th, 2020

Keeps the global equity markets going up, up and away. As Apple Inc. approached the $500 level last week, and zipped past $2 trillion in market cap, it pulled all indexes in the U.S. and globally with it; all-time highs across the board. So now that Apple Inc. has gone through most all of its 2020 price targets set by Wall Street, what’s next? Raise the price targets! One top-tier firm followed the playbook today by lifting its outlook to $520 from $431, which it set on July 31st after the spectacular earnings release. So, what changed in a month? Well, the world didn’t end, and the non-U.S. markets are opening up quicker than expected. We are also one month closer to a 5G rollout! (Yeah, I know, a total stretch on that one.) And of course, the valuations in the stock market have risen, so we have to raise the multiple to keep up with the Jones’ stocks.

Seriously, Apple Inc. is an awesome company and it deserves to have a premium valuation and a big multiple. But at some point, it will get difficult to make a lot of money in the name. I love Apple, I own Apple, and if I had a massive gain in my position, I would stick with most of it in my taxable accounts. But for those without tax considerations, I would be using some of those sweet and juicy gains to buy those next big home runs that are likely sitting in front of you due to COVID-related pullbacks or underperformance. Charitable giving with some of your 2001-2003 tax lots would also be extremely generous. No one loves big, long-running price trends in the market more than me, and Apple Inc. can keep running upward from this $500 level, but I would prefer to watch it go higher with a few less chips bet on the biggest company in the stock market. Unfortunately, nothing goes up forever.

Who remembers the NBC market in 2000?

Tweet from @hmeisler

Friday was an incredible one stock market…

Tweet from @WalterDeemer

Does this mean everyone is going to split their stocks in the future?

Tweet from @bespokeinvest

Apple Inc. has had a few other one-month rips of +35% before. But not when it was the largest stock in the world!

@jkrinskypga: $AAPL
20-day rate-of-change now over 34%
Since ’00, only times this high were Jan ’01, May ’03, Nov. ’04, and April ’09.
Three were coming off major bottoms, only Nov. ’04 was while at a high. Pretty remarkable.

AAPL stock

John Authers weighs a great company versus its stock price…

As for Apple itself, the following chart shows its forward multiple, using Bloomberg earnings estimates, going back to the day it launched the iPhone in 2007, effectively ushering in the company’s modern incarnation. With the exception of a few weeks at the end of 2007, Apple has never traded for a richer multiple of future earnings. Given how much growth is already priced in, and how difficult it will be to find any new product to act as a game-changer like the iPhone, this seems over-optimistic:

Apple's Prospects Are Much Improved


Apple is now worth as much as the entire German stock market…

And for those keeping score, Germany is the 4th largest economy in the world.

Bloomberg Germany Exchange

Stock market concentration in the five biggest companies continues to rise…

As Apple’s market cap crossed $2 trillion this week, equity market and portfolio concentration remains a key focus for investors. The five largest stocks – FB, AMZN, AAPL, MSFT, and GOOGL – now account for 23% of the S&P 500, well above the high of 18% in the 2000’s. Concentration appears even more extreme within the Russell 1000 Growth Index. Those same five stocks represent 37% of market cap, the highest level of index concentration since at least 1995 (see Exhibit 1). However, mutual fund managers often face limits on the weight of any individual stock in their portfolio (usually around 5%). Record equity market concentration therefore poses concentration risk for fund portfolios but also introduces potential tracking error.
(Goldman Sachs)

Equity market concentration has surged

It is not often that the market makes a new high in a week in which every sector in the market had more decliners than advancers…

@carlquintanilla: While the SPX closed at an all-time high, “every single sector in the US stock market had more decliners than advancers last week. All 11 sectors, even tech. .. How rare is this occurrence? Extremely rare. In fact, since 1998 it has only happened four times.” – @TimmerFidelity

Sector Breadth

In the U.S., the COVID virus data continues to track as expected: lower cases, fewer deaths…

New reported cases by day in the United States

Economic activity in the U.S. will accelerate when people feel good about the virus containment…

Looking at the numbers, Angela Merkel gets a gold star as her restaurant sector is now posting +9% year over year comps.

As both history and data from today demonstrate, health and the economy are not antagonistic; they are dance partners, with public health taking the lead. The safer people feel, the more they will engage in economic activity.

A recent study of the 1918-1919 influenza pandemic by a member of the Federal Reserve board and economists at the Fed and M.I.T. compared cities that imposed stringent public health measures — including school and church closings, public gathering bans, quarantines and restricted business hours — with cities that opened faster and imposed fewer restrictions. The more stringent cities not only had fewer deaths but experienced “a relative increase in economic activity from 1919 onward.”

Containing the virus has allowed many European economies to recover far better than the U.S. Look at Germany, which has an unemployment rate of 6.4 percent. The rate in the U.S. is 10.2 percent. In March and April, according to OpenTable, the reservation booking company, business in restaurants in Germany and the U.S. were in the identical place, down over 90 percent year over year. Since then they have diverged widely: data for Aug. 16 (the latest data at this writing) shows German restaurants enjoyed 9 percent more business than last year, before the pandemic, while U.S. restaurants were down around 50 percent.


The bump up in cases has led to a pause in the Philly Fed Manufacturing Index…

But this should resolve itself in coming weeks as the COVID data improves and a new aid package from Washington D.C. is passed.

Philadelphia Fed Manufacturing Index

Could the homebuilding industry get any hotter?

Expect to hear about shortages of everything that goes into a newly built home. From the exterior materials, to the interior finishes, and appliances. And the mortgage food chain will be stretched. Also, good luck finding a mover.

Existing Home Sales

Lumber prices are running hard with the upward rip in the housing ETF…

Housing ETF

And not just houses, but look at this surge in used car prices…

@conorsen: Mannheim put out a mid-month used vehicle price report yesterday, reporting that prices for used vehicles are up 15.6% YoY:

Used car prices

It was a very big week for retail earnings. Here are some great comments…

Big retailers posted some huge comps in the second quarter:

• “The results we reported this morning are truly unprecedented. On the top-line, we delivered second-quarter comparable sales growth of 24.3%, the strongest we’ve ever reported”… “As we look ahead, there are many potential challenges on the horizon, including uncertainty surrounding COVID-19 economic headwinds from historically high unemployment, uncertainty surrounding government stimulus and a contentious November election” – Target Corporation (TGT) CEO Brian Cornell

• “Sales for the second quarter were $38.1 billion, up 23.4% from last year. Comp sales were up 23.4% from last year with U.S. comps of positive 25%” – Home Depot (HD) CEO Craig Menear

• “Walmart U.S. segment. Comp sales were strong again this quarter at 9.3% excluding fuel”… “There were several tailwinds affecting our Q2 performance including government stimulus, more people eating at home, a focus by customers on entertaining themselves at home, and investing in their homes and yards”… “As the benefits from stimulus waned towards the end of the quarter, we saw our comp sales settle into a normal range” – Walmart (WMT) CEO Doug McMillon

• “Taking a look at our second-quarter results in more detail, total sales increased by 17.1%… Average selling prices were up mid-single-digits in the quarter, while units were up double-digits” – Foot Locker (FL) CFO Lauren Peters


Continued strength in the Chinese Yuan tells us that all the rhetoric is just noise…


If you needed a sign to start building that short book, this might be it…

Tweet from @jsblokland

This three-month performance difference looks extreme…

@ISABELNET_SA: Energy & Financials vs Healthcare & Tech. This chart highlights the polarization in sector dominance

3 month Growth outperformance

Portfolio managers are beginning to shift some bond and tech profits into other areas of the markets…

Like eurozone and emerging markets equities, as well as the Materials, Banking and Industrial sectors which will benefit from better relative GDPs, a falling U.S. dollar, rising inflation, and higher interest rates.

Aug FMS shows green shoots

The big difference between mutual fund and hedge fund portfolios now sits in the financial sector…

Hedge Funds are significantly underweight, while mutual funds are very overweight. Mutual funds will win if the U.S. banks have adequate reserves to survive COVID, and an economic recovery leads to higher interest rates. If the world falls apart, then hedge funds will win this bet.

Hedge fund and mutual fund sector positioning
(Goldman Sachs)

Again, Financials at the lows by all measures…

@hmeisler: Amazing chart by @bespokeinvest today on Financials. I did not even need to look those dates up, both pretty much bear market lows.

Financials' share of S&P 500 Market Cap

The dean of valuation talks openly about the future of Colleges…

“If a kid of mine came in and said XYZ state university has accepted me, but I have to pay $40,000 a year for the next four years—economically, it makes absolutely no sense,” Aswath Damodaran told me. He’s a New York University finance professor, and not the sort to talk loosely about dollar amounts. Some people call him the dean of valuation—he’s written four books on the subject…

Damodaran says that higher education is an example of stakeholder capitalism run amok; that it should serve students but instead serves overlapping and sometimes conflicting interests; that it should have been restructured a hundred years ago, but hasn’t, because of its control over the degree system, combined with inertia. Society has been trained to prize four-year degrees. Me-too-ism plays a role.

“What’s different about this crisis is for the first time the inertia might be getting shaken because parents are seeing their kids at home and recognizing how little substance there is behind so many university classes,” says Damodaran. “Students are looking at what they’re missing about universities, and classes are not even making the top 10 list.”…

Damodaran says this crisis won’t cause students to abandon the university system next year. “But enough might decide to re-examine whether an education requires a four-year degree that it’s going to put at least the weakest colleges at substantial risk,” he says. “The Yales, or Harvards, even the NYUs, might survive. But further down the hierarchy, colleges without prestige and brand name are going to find themselves under assault.”


A very cool visualization for my fellow space geeks…

Tweet from @Rainmaker1973

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