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November 16, 2011

Bullish Case For Apple: Life Goes On – But Many Stocks Are Priced Like It Won't (Guest Post)

By Ilene
“The shadow of that hyddeous strength, sax myle and more it is of length...”
~  “Dialog” by David Lyndsay (1490 - 1555?), referencing the Tower of Babel.
The pattern that has emerged in the eurozone is that austerity measures are demanded of a particular country, the government of that country is either unable or unwilling to implement the austerity measures, then bond yields skyrocket and the government collapses. During the transition, one form or another of the austerity measures demanded are enacted, and then the incoming administration is tasked with implementing these measures.
Excerpt from Stock World Weekly

Daniel Hannan, journalist with the UK Telegraph, has been reporting on the “hideous strength” of the European Union (EU) for many years. He contends that the “European Union is making its constituent nations poorer, less democratic and less free.” According to Hannan, every time a nation in the eurozone becomes a problem for Brussels (capital of the EU), the EU’s strength becomes manifest.

Both heads of state and political parties end up succumbing to its power. Perhaps, as a well-known euro-skeptic who campaigned against the Lisbon Treaty, Hannan’s comments should be taken with the proverbial grain of salt. However, with the ouster of Greek Prime Minister Papandreou and resignation of Italian Prime Minister (PM) Berlusconi, Hannan’s views are finding vindication.

Hannan was not alone in his use of stark imagery and strident prose.  Warnings of the grim consequences and global repercussions of a eurozone failure dominated the news. Yet for all the drama, including a bizarre mistaken downgrading of France’s credit rating by Standard and Poor’s, and a stunning 400-point drop in the Dow on Wednesday, the markets finished the week little changed.

Because investments are measured against other investments, the eurozone turmoil makes US equities look more attractive. Doug Kass opined,
“I believe that the events over the past year (especially in the eurozone) highlight the likelihood that the U.S. stock market will be favored among most other investment markets in the world. The U.S. stock market has become the best house in a bad neighborhood...” 
Kass listed his reasons, including the relative strength of the U.S. economy and financial systems compared to the rest of the world’s, political stability, and relatively strong regulatory and reporting standards. Kass concluded, “In the period ahead, I expect a reallocation trade out of non-U.S. equities into U.S. equities.”

Assuming the world isn’t ending, and the EU will survive (euro-skeptics might disagree), we are likely to see many disruptions in the eurozone over the coming months. Nation after nation may experience some form of a debt crisis and get dragged, kicking and screaming, through the central bankers’ sausage factory in Brussels, to be broken down and re-formed into fiscally compliant states run by economic technocrats. The political and social disruption resulting from eurozone nations will wear on investors’ nerves, and we believe investors will likely shy away from the turmoil in Europe and seek out the relative stability and sanity of the U.S. markets.

Phil discussed the negative psychological effect that the European debt crisis is having on investors.“It’s like the tar-baby. The more you talk about it, the more you get stuck in the mess and the more hopeless it seems. That’s the pattern, any ‘good news’ releases pent-up buying demand because, on the ground, the US economy is not bad, and Asia is slowing but still growing, and Europe is flat. So many stocks LOOK cheap. That means any thinking that this negativity will go away leads people to bargain hunt but then, usually a few hours later, the bears pounce back to poke holes in any long-range "fix" that has been proposed that day.

The bears are not wrong. The World’s nations have $60Tn of debt they are simply unable to repay in full. Fine, so what? As I’ve asked before, will that stop AAPL from selling 50M IPhones next year and making $30Bn? It might, due to lack of liquidity, cause Apple to only sell 40M IPhones and make $22Bn. Even at $22Bn, do we assume things get worse and worse for the next 3 years or that they bounce back to $30Bn (and don’t forget inflation)? I STILL want to buy AAPL with a $300Bn market cap, don’t I? This is why Buffett says 'Be greedy when others are fearful.'

That’s my bullish case - the world will probably not end. Maybe there’s a $30Tn default, maybe many banks get nationalized...and maybe there will be some revolutions, and some redistribution of wealth. But then someone will get hungry and drive to McDonald’s and order a happy meal, and Disney will get a licensing fee for the Toy, a package-maker will get paid for the box, an ink company will get paid for printing the box, and a farmer will get money for his cows and tomatoes etc… Life goes on – but many stocks are priced like it won’t.”

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Courtesy Ilene at Phil's Stock World   (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: Bullish Case For Apple: Life Goes On – But Many Stocks Are Priced Like It Won't (Guest Post) Rating: 5 Reviewed By: EconMatters