Barron’s weekend summary: Cover story on firms benefitting from offering subscription services; Cautious feature on AAPL; Positive features on AMAT, CAT, DVMT
* Cover story: Subscription services are giving companies as different as MSFT and DE regular revenue streams and benefiting investors; Recurring payments are also changing the way Americans consume software, music, movies, TV, fitness, clothing and food (Positive on SNPS, ADVS, CDNS, AZPN, ADBE, ADSK, INTU, MODN, PTC, PRO, GWRE).
* Features: 1) Cautious on AAPL: As the company’s iPhone juggernaut slows down, it could look to ADBE as a model and create a subscription service for Apple Music, iCloud storage, AppleCare warranties, and its rumored video service; 2) Story looks at how Bernie Madoff perpetuated his massive fraud, and at some of the warning flags investors should keep in mind to avoid sophisticated Ponzi schemes; 3) Positive on DVMT: Michael Dell and Silver Lake Partners will reap $11B by gaining control of VMW, but holders of the tracking stock—who aren’t getting as much as they deserve in the deal—will still benefit by owning stakes in a company with $90B in annual revenue; 4) Positive on AMAT: While the company faces near-term challenges, the long-term outlook for growth remains bright, because new, more sophisticated chips require more manufacturing equipment; 5) Positive on CAT: Shares are down, yet investors have dire concerns that seem at odds with business conditions and near-term earnings forecasts, and the recent selling looks overdone; 6) Story says many taxpayers will get a nasty surprise when they finalize their 2018 returns, but there are still ways to minimize the damage from new restrictions on deductions and other changes to the tax law.
* Technology Trader: Positive on PYPL: Company has “become an essential arms merchant in the raging war for e-commerce dollars” as retailers such as WMT, TGT, and BBY battle AMZN—and is flourishing in the transition to smartphone e-commerce.
* Trader: As the market grows more volatile, investors should own high-quality, low-volatility stocks, and not chase the market’s moves, says Savita Subramanian of BAC/Merrill Lynch; Positive on LEN: Housing doesn’t have to boom for the stock to do well, and with a dismal spring selling season baked in, shares are cheap—and likely to rise on even a modest upswing in home sales; A recent paper from the New York Fed says that equity markets treat the Fed chair “almost as the pope of Wall Street,” and that his or her words can significantly move equity markets.
* Interview: Matthew McLennan of First Eagle Global favors companies with strong competitive advantages and market positions, as well as conservative leverage, regardless of where they’re located (picks: XOM, ORCL, WY).
* Profile: Luz Padilla, manager of the DoubleLine Emerging Markets Fixed Income fund, was cautious as this year’s emerging markets rout unfolded, and believes developed markets could be the tinder for the next crisis.
* Follow-Up: Cautious on LRCX: If earnings have finally hit bottom, the shares could be a deal, but if not, the question is how low they can still go.
* European Trader: Cautious on DB: The fact that shares are down doesn’t make them a bargain, and investors should consider dumping them in any forthcoming rallies, or purchase out-of-the-money put options that will pay out if the stock falls.
* Emerging Markets: Investors will almost certainly make money in Asia over the next three years, says Edmund Harris of Guinness Asset Management, but things could certainly get worse during the next 12 months.
* Commodities: Silver prices quietly sit close to their lowest levels in nearly three years following a 15% decline this year, and the metal deserves a closer look.
* Streetwise: Politicians should stop criticizing GM chief Mary Barra for plant closures, since she is guiding the 110-year-old company toward the autonomous, electric future, while expanding its profit margins and U.S employment.
Yesterday the US Attorney's Office of the Southern District of New York released a sentencing memorandum for Michael Cohen. We'll leave the political implications to our colleagues in the DC bureau, but one paragraph in particular jumped out at us (emphasis ours):
The largest source of undisclosed income was more than $2.4 million that Cohen received from a series of personal loans that he made to a taxi operator... for a total principal of $6 million. Each of these loans carried an interest rate in excess of 12 percent. Cohen funded the majority of these loans with a line of credit with an interest rate of less than 5 percent (such that Cohen was earning a substantial spread on the difference between the two loan rates)... In total, Cohen received more than $2.4 million in interest payments from Taxi Operator-1 between 2012 and 2016.
According to the US Attorney's Office, Mr Cohen committed a crime when he failed to declare profits from these loans. This strikes Alphaville as a completely needless grift, because for four years during the recovery, Mr Cohen had found a way to earn a 7 per cent spread.
Michael Cohen missed his calling. He is an amazing banker.
Let's reframe what Mr Cohen did as if he were just a bank officer running, say, the Cohen Amalgamated Taxi Bank of Chicago. He had two choices. He could:
Borrow at the prime rate and buy junk corporate bonds. It was actually a popular strategy during the recovery, so popular that we all agreed to call junk bonds "high yield" bonds
Build a highly specialized portfolio, borrowing at above prime to lend to high-yield risks he identified through his contacts in the taxi industry
The Cohen Amalgamated Taxi Bank of Chicago pursued strategy 2. It was the right call! Between 2012 and 2016 it beat the spread on the far more popular strategy 1.
Alphaville does not understand why Mr Cohen failed to tell his accountant about his loan portfolio. It was a pretty good business.
Here’s what happens when the big media companies take their content off Netflix
The streaming media pioneer could lose about a fifth of its content hours.
Following Netflix’s lead, nearly every major video company is moving into the streaming media business. And that means also moving their content off Netflix and onto their own services.
Disney — along with its soon-to-be purchased Fox — is launching its streaming service, Disney+, next year and pulling its content, including Pixar and Marvel films, from Netflix. The combined AT&T/Time Warner, which has licensed its popular TV series “Friends” to Netflix, may also pull its movies and TV shows from Netflix when its own streaming service gets off the ground at the end of 2019. Comcast, which is currently a part owner of Hulu but is likely to start its own streaming service in the next year or so, would pull content off Netflix to launch that one, too.
All of which means Netflix could lose a large chunk of its content. Comcast, Fox, Disney and WarnerMedia currently account for about 20 percent of Netflix’s content library, according to data from TV industry research company Ampere Analysis. This calculation is based on the number of hours of shows and movies that Netflix carries from a given production company. It doesn’t take into account show popularity, which means that 20 percent number likely underestimates the value of that content to Netflix. See Netflix’s new $100 million deal for a single WarnerMedia show.
Netflix wouldn’t confirm or comment on the third-party data.
That potential loss is part of the reason Netflix has ratcheted up its original content spending lately, with shows like “The Haunting of Hill House” and “Narcos.” Netflix is expected to spend $12 billion to $13 billion on content in 2018 — most of which will go toward original content — more than what traditional content creators like HBO and Disney typically shell out. As of October, original content made up 8 percent of content, measured in hours, on Netflix, according to Ampere.
It’s also possible that other content makers like Viacom and CBS — which already has its own streaming service, All Access — will pull their content from Netflix in the future as well.
Update: An earlier version of this article said Netflix’s $12-$13 billion in spending was for original content when it should have been for all content.
iPhone XS & XR adoption significantly lower than last year’s models, data shows
Analytics company Mixpanel has become a reliable source of iOS adoption information, but its tools also allow for tracking of iPhone model adoption. There’s been a lot of news about slowing iPhone sales, and Mixpanel’s data offers some interesting insight on that speculation.
The company’s data comes from analytics frameworks inside apps and mobile websites, which are able to view iPhone model numbers and other details.
According to the Mixpanel data, the iPhone XR is in fact the best-selling iPhone model each week, echoing what Apple VP Greg Joswiak said last month. This is judged by comparing the increase in iPhone XR adoption on a week-by-week basis with the iPhone XS and iPhone XS Max adoption numbers. The iPhone XR doesn’t lead by a wide margin, and there are individual days where it’s outsold by the iPhone XS or XS Max, but on a week-by-week basis, it pulls ahead.
If you look at the iPhone XS and iPhone XS Max data combined, however, the iPhone XR is regularly outsold by that combination. This shouldn’t necessarily come as a surprise, though, as it’s not necessarily a fair comparison to compare two models versus one.
iPhone 8, iPhone 8 Plus, and iPhone X adoption is also holding steady. In fact, there are some weeks where adoption numbers actually increase for those last-generation devices. As of December 8th, iPhone X adoption is at 11.39 percent, followed by the iPhone 8 Plus at 9.31 percent, and the iPhone 8 at 9.22 percent.
One interesting thing to look at, however, is the adoption rate of the iPhone 8, iPhone 8 Plus, and iPhone X after launch last year, in comparison to the iPhone XS, iPhone XS Max, and iPhone XR this year.
Mixpanel explains that five weeks after launch, the iPhone XR sat at 1.5 percent adoption, whereas the iPhone 8 and iPhone 8 Plus secured 3.6 percent adoption during the same period following its launch.
For the higher-end iPhone models, Mixpanel looks at adoption over the two month period after launch. The iPhone X secured approximately 7 percent adoption during this time, while the iPhone XS and iPhone XS Max secured approximately 5 percent adoption.
You can view Mixpanel’s interactive iPhone adoption charts here and here. Ultimately, the data shows that the iPhone XS and iPhone XS Max are off to a slower start than last year’s iPhone X, but the iPhone XR is indeed the best-selling iPhone, as Apple suggested last month.
Autonomy founder bets on Argentina recovery
Nation seen as one of best trades for 2019 by one of this year’s top-performing hedge funds
One of the top-performing hedge funds of 2018 is betting that battered Argentina could surprise investors and provide one of the standout trades of the coming years.
Robert Gibbins, founder and chief investment officer of Autonomy, which runs about $5bn in assets, believes an International Monetary Fund bailout and efforts by the government to turn round the economy can help drive a huge recovery in the country’s markets.
“In 15 years I think Argentina is going to be a normal country. That’s a huge call,” he said in an interview with the Financial Times.
Argentina has been a terrible bet for foreign investors in 2018. The peso has more than halved against the dollar this year, with annual inflation running at close to 50 per cent. While the stock market is up this year in nominal terms, the currency’s weakness means the MSCI Argentina is down 47.6 per cent.
That is despite efforts by centre-right president Mauricio Macri, who came to power in December 2015, to end Argentina’s isolationism after its 2001 financial crash.
However, there have been more reasons for hope of late. The IMF approved a $50bn loan in June. In September, it added an extra $7.1bn and said it would allow Argentina to access more cash up front. That, and an ambitious 2019 budget that targets a fiscal balance, has helped stabilise the peso, which is roughly flat since the end of August.
“I think we’ve certainly got a new monetary framework which should help with getting inflation falling more rapidly,” said Mr Gibbins. “A lot of the pain has been taken. Going into next year, we’re looking at a recovery in credit, a recovery in real wages, inflation falling, a crop recovery.”
“That is, I think, going to surprise market players,” he added. “People have been so burnt [in the past] it’s difficult for them to look through it.”
“Next year it’s going to be one of the few places where there’s going to be a very interesting story,” he said. “I’m getting the sense that people understand Macri has been left a mess and is cleaning it up.”
He added he expects a “capital markets rerating” that will see inflation, interest rates and fiscal and regulatory policies become more normal, in turn benefiting wealth and economic growth rates.
“They’ve got a new monetary framework which is going to be extraordinarily important in terms of getting inflation falling, I think quite rapidly in fact, and getting its fiscal house in order,” he added.
Mr Gibbins’s fund has been one of the standout performers of a lacklustre hedge fund sector this year, gaining 15.7 per cent to the end of November. Recent gains have come from bets on Brazilian debt and on long-term US rates, according to a letter sent to investors last month.
Autonomy’s strategy since it launched in 2003 is to take concentrated positions in a handful of heavily researched, global macro positions, and Argentina is one of its top ideas at the moment.
Another is climate change, which Mr Gibbins said is increasingly a major factor in investments. “We are already seeing the impacts, whether it’s the drought in South Africa which has a macro impact, or the drought in Brazil a few years ago, which has a huge macro impact, whether it’s the hurricanes we’re seeing in the Caribbean, which is having a huge macro impact,” he added. “We’re already seeing this, it’s just people aren’t linking it in. When we’re doing our work, this is clearly a factor that needs to be taken into serious consideration.”
Many of the most commonly used models to project climate change are underestimating the impact of what is already happening with regard to the environment, he said. In areas where insurance is becoming too expensive to offer, federal governments may have to step in to assist in the case of major natural disasters, he added.
“This now has to be a deep part of any investment process and when I talk to people, they say ‘yeah, yeah, yeah, but in 30 years…’,” he said. “But what we’re seeing, unfortunately, is that this stuff is happening now, and it’s not just [utility] PG&E getting smoked in California on the back of the wildfires.”
Index groups face fight over controversial weapons
Pictet, ING and Church of England among 80 signatories of Swiss campaign
Index providers, including S&P Global, MSCI and FTSE 100 Russell, face pressure from a global coalition of investors that is demanding they strip out controversial weapons manufacturers from mainstream benchmarks.
The Swiss initiative, led by Pictet and Swiss Sustainable Finance, secured the backing of more than 60 domestic asset owners and managers with assets of $2tn a month ago. That number has swollen to 80 signatories controlling $3tn after international investors joined the campaign.
Candriam, the European asset manager, ING, the Dutch financial services group, and the Church of England are among the latest to sign up.
Companies involved in cluster munitions, anti-personnel mines and chemical, biological and nuclear weapons should be excluded from main benchmarks, the group argues.
No specific companies are named but those already sidelined by parts of the international community include Hanwha of Korea; General Dynamics, Lockheed Martin and Northrop Grumman of the US; Larsen & Toubro of India, and Aryt Industries of Israel.
Many active managers screen out weapon makers, but passive investors, whose strategies replicate traditional indices, typically cannot.
“Investors tracking big-name benchmarks are all contributing to the financing of companies involved in controversial weapons,” according to a letter to be sent to the index providers by Swiss Sustainable Finance. “Many of them are unaware of this fact or are unable to invest in controversial weapons-free index funds/trackers.”
Eric Borremans, head of environmental, social and governance at Pictet Asset Management, said the index providers and Index Industry Association, the trade body, would be formally contacted in coming weeks to make the changes.
“Index providers need to reflect investor practices and expectations,” he said. “We are not talking about environmental, social and governance indices but mainstream indices.”
Mr Borremans said if such exclusions became embedded in index-construction rules, it would raise the stakes for those companies involved in such activities as well as promote greater transparency.
“Another outcome would be that controversial weapons manufacturers are dumped by the global investment community and that in turn would raise their cost of capital,” he said.
Edward Mason, head of responsible investment at the Church Commissioners for England, said the exclusion of controversial weapons manufacturers would be a huge step for responsible investment.
“Responsible asset owners do not want their passive investments forced to hold companies operating in violation of international treaties nor for such companies to be included in benchmarks and index-based derivatives,” Mr Mason said.
The campaign’s call for signatories is open until December 21 but may extend into January.
Countries including Belgium, Ireland, the Netherlands, New Zealand and Spain have laws against direct and indirect financing of controversial weapons manufacturers.
A Presidency Without Humor
Good jokes highlight the ridiculous. Trump’s jokes merely ridicule.
As with September’s memorial services for John McCain, expressions of mourning for George H.W. Bush — extolling the 41st president’s humility, loyalty, temperance, decency, bravery and devotion to public service — have contained thinly veiled rebukes of the current president. The sharpest one, I thought, came in Alan Simpson’s splendid eulogy at Washington National Cathedral.
“He never lost his sense of humor,” the former senator from Wyoming said of his friend of more than 50 years. “Humor is the universal solvent against the abrasive elements of life. That’s what humor is. He never hated anyone. He knew what his mother and my mother always knew: hatred corrodes the container it’s carried in.”
Did Donald Trump catch any of this as he sat there in the first pew? Lindsey Graham, the episodically spineful Republican from South Carolina, has claimed that, in private, the 45th president is “funny as hell” and has “a great sense of humor.” If so, it’s a better kept secret than his tax returns.
In public, Trump has almost no humor, even when the moment calls for it. At the Al Smith dinner in 2016, on the eve of the election, Trump turned an occasion for good-natured ribbing into a full-on assault of Hillary Clinton, peppered by dashes of self-pity. He was better at the Gridiron Club dinner in March, though the event wasn’t televised and his best jokes landed at the expense of his wife and his son-in-law. And he has already twice skipped the White House Correspondents Dinner — the first president voluntarily to do so since Jimmy Carter.
When Trump does make jokes, they tend to be flattering to his self-image. “Why do you want to leave your current job?” Jimmy Fallon of “The Tonight Show” asked him in a mock job interview during the 2016 campaign. “Because,” Trump replied, “I’m sort of looking to make a lot less money.”
Or they are cruel — and not necessarily meant as jokes. “Like when you guys put somebody in the car and you’re protecting their head, you know, the way you put their hand over?” he told an audience of police officers last year. “You can take the hand away, okay?”
Why is Trump so humor-averse? There are people who are unfunny because they are witless: Think of Second Lt. Steven Hauk, the Bruno Kirby character in “Good Morning, Vietnam.” And people who are unfunny because they are joyless: the Sgt. Major Dickerson character.
But Trump, I suspect, isn’t unfunny. He’s anti-funny. Humor humanizes. It uncorks, unstuffs, informalizes. Used well, it puts people at ease. Trump’s method is the opposite: He wants people ill at ease. Doing so preserves his capacity to wound, his sense of superiority, his distance. Good jokes highlight the ridiculous. Trump’s jokes merely ridicule. They are caustics, not emollients.
This brings me to Simpson’s second, connected point: “Hatred corrodes the container it’s carried in.”
In June 1971, Richard Nixon sent a memo to Chief of Staff Bob Haldeman complaining that his good-natured appearance at the White House Correspondents’ Dinner had been followed by a press conference in which “the reporters were considerably more bad-mannered and vicious than usual.”
“This bears out my theory,” the 37th president wrote, foreshadowing his current successor, “that treating them with considerably more contempt is in the long run a more productive policy.”
The press, of course, mostly hated Nixon, and he repaid them in kind. His mistake was to suppose that his only choice lay between ingratiation and hatred, rather than indifference and humor. It left him incapable of rising above. Till the end of his presidency, Nixon was trapped by a thirst for approval he would never get and an appetite for destruction he could never achieve.
It’s the same with Trump. He hankers for media adulation and boils with rage for not getting it. It doesn’t seem to occur to him that the surest invitation to mockery is humorlessness. Or that self-deprecation pre-empts derision. Or that the best way to undermine his media critics is to make light of their pomposity, not thunder at their impudence. Or that presidential charm trumps media vituperation every time.
In sum, that humor in democratic politics is also its most effective weapon: the strongest shield and the sharpest blade. It doesn’t just amuse, leaven and comfort. It defangs, attracts, and mobilizes. Winston Churchill was a wit, as were Jack Kennedy and Ronald Reagan. Nixon and Jimmy Carter weren’t.
Does any of this make a dent on Trump? I doubt it. His character is what it is. And his style of politics isn’t democratic so much as it is cult-of-personality. Trump appeared engaged throughout the service, but I suspect that Simpson’s speech flew right past him.