Monty Hall
Those of a certain age will fondly recall coming home from school, and goofing off before diving into our homework. If the sun was shining, we were out in the street. We played football, baseball, basketball.. whatever sport was in season. If the weather was lousy we watched television with our siblings. The king of daytime TV back in those "wonder years" was a man named Monty Hall. His TV show, "Let's Make a Deal", aired on a number of stations over the years but was seen somewhere from the early 1960's into the early 1990's. For those not of a certain age, the show was silly yet entertaining. Contestants would dress in silly costumes, and would then be offered cash in exchange to pass up an unknown prize behind a curtain or closed door. The prize had a minority chance of being highly valuable relative to the cash offered, but was more times than not.. quite worthless. An interesting concept. Take some cash, or take a chance.
Therein lies the actual conundrum in Beijing. Exchanging a better short-term trade condition for something still unknown. Talks began anew on Tuesday with Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer in China. These meetings are scheduled ahead of a return visit next week to Washington to be undertaken by Chinese Vice Premier Liu He, and perhaps an entourage of over 100 persons. Those meetings are where the many are hoping that a deal will finally be sealed. The Wall Street Journal reports that the United States and China are possibly hung up on how quickly, or fully, the tariffs that the U.S. had imposed on $250 billion worth of Chinese imports will be removed. The U.S. sees leaving at least something in the way of these tariffs in place as an enforcement mechanism.
There have been several major complaints made by U.S. businesses over decades in regards to China. Among these complaints would be anti-competitive practices such as subsidies for Chinese domestic businesses as well as forced technology transfers as the price of entry into Chinese markets. More alarming even than that has been consistent concern that Chinese businesses have engaged in cyber targeting resulting in the theft of intellectual property, information, and trade secrets. The Chinese side sees these charges as baseless and insists that as a nation they have complied with an agreement signed in 2015. That deal between the U.S. and China already covered the ground that both sides would not knowingly engage in nor support the theft of intellectual property. According to the Financial Times, the U.S. side may be willing to accept a softer position regarding such provisions in return for an agreement.
Agreement To Agree
Needless to say, we don't know what either side is willing to agree to, nor in real time do they, as the two nations appear to be closing in on something definite. I think we all know that the Chinese side will agree to mass purchases of U.S. goods in order to close for now the trade gap in statistical terms. My thoughts? I would certainly be disappointed if an agreement did not contain strict prohibition against the theft of U.S. or foreign properties. The truth is that even if agreed to in totality, would we trust the Chinese side to live up to whatever is written on the page? Of course not. The track record speaks for itself. Check out the following quote found at the FT website...
"No country poses a broader, more severe intelligence collection threat than China. China has pioneered a societal approach to stealing innovation... We have economic espionage investigations that almost invariably lead back to China in all 56 field offices, spanning almost every industry." Who said that? FBI director Christopher Wray. When? Just five days ago. My advice, though not asked for? Don't give an inch. If that means no deal, then so be it. If that means the coming of a Cold War? Knock, knock... the other side has acted as if we were already in one for quite some time. Though I wear my heart of my sleeve, as well as my flag, quite literally... I will very much approach the environment provided from the view of the pragmatic. I will trade whatever is in front of me.
Infrastructure
Roads and Bridges? Rails and Marine transport? Airports? Perhaps a comprehensive, broad-based roll-out of 5G technology? Ahh, so easy to agree to everything when in reality, nobody agrees to anything. Democratic congressional leaders and the president of the United States had an unusual meeting. There was no contention. Senate Minority Leader Chuck Schumer (D-NY) used the word "goodwill." Speaker of the House Nancy Pelosi (D-CA) called the talk "big and bold." As one might expect, the two sides talked about big numbers... like $2 trillion big, without discussing how to pay for such a project.
With fiscal policy long ago leaving the realm of sustainability... Raise taxes? That will slow economic growth. Can't do that. While it's nice to see everyone play nice in the sandbox, I honestly don't see a path to anything possibly being done on the grand scale. The idea of 100 year bonds has been discussed before. There will be a need in order to implement anything large to borrow in significantly larger size than what the nation has already experienced. One hundred years puts the screws to later generations. Should the good Lord grant me the fortune of seeing grandchildren, I probably don't want to hurt them. Why not 500 years? Or one thousand? What would one thousand year paper yield? I wonder. Heck, we may be closer to the ridiculousness that is Modern Monetary Theory than we thought. Oh joy.
Back to reality. Forget a large infrastructure deal. The idea is going to be trading the talk of an infrastructure deal. You know who popped on that news on Tuesday? Martin Marietta (MLM) , US Concrete (USCR) , and Vulcan Materials (VMC) . Basically, building materials. These names will likely be volatile going forward should the idea of financing actually draw some attention. That's when the big dogs like Caterpillar (CAT) , United Rentals (URI) , and all of the rails get hot. If they are going to talk about building anything, they are going to talk about using big equipment, and moving large stockpiles of material.
According To Plan
It's why I tried to lead you into Apple (AAPL) . It's why I'm there myself. It's why before you long Microsoft (MSFT) , ServiceNow (NOW) , and Adobe (ADBE) . It's why I have been long Zuora (ZUO) and have long endorsed the evolution of the U.S. economy toward one of recurring revenue streams that come complete with not just those higher total revenue, but in almost every case... higher margins.
Apple beat on the top and bottom lines on declining sales. I expected that. You expected that. The important numbers from last night's release are growth across the services ecosystem. Up 16.2%. Growth in service ecosystem gross margin, 63.8%, and the installed base for active devices, 1.4 billion. That's the gateway. The path toward this growth in recurring revenue that will in turn provide the growth in margin.
Declining iPhone sales? True. A trade deal with China helps there. Some how a six year high in iPad sales helps offset while adding to that installed base. The $1.4 billion active devices, at an all-time record is far more significant to the firm's transition, that is successful in evolving from the world's greatest consumer electronics firm into a world-class software/services operations will afford the stock price forward looking multiple. 15 times? Microsoft trades at 25 times. Why not 18 or 19 for AAPL being that Apple has to continue to support the future through selling the past. Food for thought.
A La Mode
Just look at guidance. Exceptional. The firm leads investors to revenue expectations of $52.5 billion to $54.5 billion for the second quarter. This brings the low end of projection above the prior mid-point of analyst expectations. The firm did this while ordering up some dessert for the masses.
What's more delicious than a dollop of half melted vanilla ice cream slapped down on top of a warm slice of apple pie? Nothing. Those long the shares were rewarded again on Tuesday evening in the form of outsized capital returns to shareholders. Huzzah!! A 5% increase to the dividend that will provide a forward yield now over 1.5% was only the tip of the iceberg. The firm announced a much higher than I anticipated $75 billion share repurchase authorization.
My Take
I have already given you my target price of $240. I have been well above consensus on this, but the analyst community is now catching on rather quickly. I wanted to add at $197, my older target given a chance. I still do, even though that would significantly increase my net basis. That likely does not happen today. You know what they say. You sell your losers to feed your winners. Apple is still a winner. So is CEO Tim Cook.
Economics (All Times Eastern)
All Day: Total Vehicle Sales (Apr): Expecting 17.1M, Last 17.5M Ann.
08:15 - ADP Employment Report (Apr): Expecting 181K, Last 129K.
09:45 - Markit Manufacturing PMI (Apr-rev): Flashed 52.4.
10:00 - ISM Manufacturing Index (Apr): Expecting 55.0, Last 55.3.
10:00 - U of M Consumer Sentiment (March-F): Flashed 102.0.
10:00 - Construction Spending (Mar): Expecting 0.2% m/m, Last 1.0% m/m.
10:30 - Oil Inventories (Weekly): Last +5.479M.
10:30 - Gasoline Stocks (Weekly): Last -2.129M.
14:00 - FOMC Policy Decision.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CLX) (1.48), (EL) (1.30), (HUM) (4.30), (YUM) (.82)
After the Close: (ALL) (2.32), (QCOM) (.71), (SQ) (.08), (XPO) (.41)
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