Apple vs. Microsoft

It was only a couple months ago that I wrote about how Apple and Microsoft’s market capitalizations are closing in on each other.

Today, Apple for the first time has a market cap higher than Microsoft, at $222 billion for Apple and Microsoft at $219 billion.

The real issue with the two companies is that Microsoft is really living off of its legacy product lines (Windows and Office) while Apple has come out with a huge stream of technological innovations, mainly the iPod and iPhone product lines (which secretly get the users to lock into their business model, similar to how software in the 90’s was “for Windows” only).

At this time, I don’t see how Microsoft can demand a market premium for its position – on the retail end, Windows has not fundamentally changed in 15 years (Windows NT 4 was the quantum leap product, and Windows XP was a great retail refinement of the Windows NT core). Microsoft Office has not fundamentally changed since the release of Office 97; everything else subsequent has been cosmetic in nature. With competitors chipping away at the cost premium that Microsoft charges (typically to large-volume corporate licensees), their ability to extract margin out of the marketplace with upgrades and obsolescence upgrades is limited. Microsoft will continue to produce cash like no tomorrow, but it is tapped out in terms of growth. Microsoft shares, as a result, trades like it – analysts expect $2.31/share in FY2011, while the stock price is $25.01/share – a yield of 9.24%.

Apple, on the other hand, has plenty of room to invade the computer marketplace, and combined with their mobile device market seemingly can command a high premium and has room to grow. As a result, they are given a premium in the stock market – analysts estimate $15.42/share in FY2011, on a stock price of $244.11/share – a yield of 6.32%.

Although Apple has competitive issues (i.e. Google is trying to invade the territory), it remains to be seen whether it can keep Google and other competitors at bay. Certainly its marketing arm continues to create users that have an almost religious-like adherence to its products.

I don’t have a position in either company and don’t plan on establishing one.

Flight to safety

The US held a 2-year treasury bond auction today and some $42 billion was awarded at a yield to maturity of 0.769%.

In Canada, the 2-year government note is trading at 1.69%.

I can’t think of a single rational reason why a retail investor (that has a lot less than $42 billion in the bank account) would want to purchase these types of securities when there are relatively risk-free alternatives (such as “near guarantee” GICs and corporate bonds of issuers that would only default in the event of an economic apocalypse).

Canadian oil companies

In today’s trading there are a few oil and gas companies that are tripping my price range thresholds – i.e. they might be worth further research and consideration.

I am generally of the opinion that the markets at this time are greatly oversold, with presumably most of the selling done across the Atlantic Ocean in Europe by panicked investment bankers and hedge funds. Unfortunately (or fortunately), I am still looking for areas to safely deploy cash.

The impact of touting a stock

Jim Cramer is very well known to anybody in the financial domain as a former hedge fund manager, but also a hothead on CNBC television hosting a daily show called Mad Money, where he praises and pans every stock on the book. He knows, and the audience should know that his show is purely for entertainment value (Cramer is really an excellent host that seems to never run out of his child-like adrenaline surges), but a whole bunch of amateurs take him seriously.

It used to be when his show came to the air that whenever he made recommendations that the stocks would go up, significantly, in after-market trading, only to recede to their previous levels a couple days later. Traders would usually target this phenomenon and try to capture the demand by short selling and taking profits later.

If anything, it was a very fascinating exercise of how sharks try to eat fish, akin to a poker game – that type of stock trading was definitely zero-sum, and Cramer had the ability to attract a lot of amateurs that were also trying to make the fast dollar off of each other. It was undeniable that in the first few months of the show, Cramer had the ability to move stocks and somebody was probably able to consistently take advantage of it (e.g. being associated with somebody directing or producing the show, for example).

So it was with interest when a fellow named Controlled Greed, who has 5,514 subscribers according to Google Reader, on May 22 mentioned that he took a position in the previous week some illiquid smallcap company (XETA). It has a market capitalization of 39 million and an average volume of 6,700 shares or roughly $25,000 traded a day.

Most notably, on no news, the stock opened up Monday about 5% on 1900 shares. So his article did attract a few market buyers, which I found to be fascinating.

My econophysical studies of situations like these suggest that “immediate popularizations” of stocks has an impulse function effect on the share value, but the value of the impulse declines substantively as the value of the popularization exponentially decays, and eventually reaches a null point (where it is indistinguishable from background noise) a few days later (the decay rate being variable). But you have to wonder how many of those 5,500 readers now stick XETA on the watchlist, waiting for some sort of substantive news. I will not. One of my rules is that by the time you read about any obscure stock pick on any popular medium, it’s already too late.

Canadian Interest Rate Predictions

The last three weeks of market volatility have had a profound effect in driving demand for risk-free, liquid government investments. The Bank of Canada has been a recipient of some of this inflow, as demonstrated by the 5-year benchmark government bond rate:

Speculators would have made a fairly good gain had they bought around 3.1% and sold today at around 2.6%. Of course, the best trades are done in retrospect, so this is just like saying that I could have picked the last 6 digits of the lottery and won a million dollars. Whether the yield will go lower or not remains to be seen.

What this does mean, however, is that 5-year fixed rate mortgages are likely to drop from their existing levels of around 4.54% (at ING Direct) or 4.39% (a typical mortgage broker) to something down 25 basis points or so. I would expect the 5-year rate to be around 4.25% for most retail customers. I generally ignore the posted bank rates since they are always inflated and when negotiating, they usually have a standard rate that is a good percent and a bit below those rates. Competition has whittled that process down to a formality of just asking, but I am sure there are some financially uninformed people that believe the posted rate is the only one they can get.

The Bank of Canada will be raising the target (short term) rate on June 1. This is inevitable, but the question is whether they will be raising 50 basis points or 75 basis points. Right now the 3-month banker’s acceptance futures (the only short term interest futures instrument actively trading in Canada) is implying a June rate of 0.81%.

My prediction is that the Bank of Canada, on June 1st, will raise the overnight target rate 0.5% to 0.75%.

Since this is mostly baked into the markets, the effect this will have on longer-term rates is nil. However, for those that are on variable rate mortgages, they will be paying 0.5% more since the prime rate will go up a corresponding amount. On a $300,000 mortgage, this would mean $1,500/year in payments or about $125/month additional.

My projection for the end of December will be 1.5%, down from 1.75% as projected a month earlier. My prediction is that rates will go up another 0.25% on July 20, 0.25% on September 8, no change on October 19 and up 0.25% on December 7.