Wednesday, July 14, 2010

Why It's Time to Short Apple

Apple’s been on an incredible run. The Ipod, then the Iphone, and now the Ipad have taken the company to a whole new level. As a result, it is now the second largest company in the US by market cap after Exxon-Mobil. (As of today, the stock is $252, giving it a market cap of approximately $230 billion).

Unfortunately for longs, I think the company’s fortunes will dip, for the following reasons:

• The Iphone is facing massive competition from Asian manufacturers who will accept a much lower gross margin than Apple. Furthermore, many of these phones, particularly those based on Google’s Android platform, are even better than the Iphone. I happen to own one, and it’s excellent.

• Smart phones will obliterate the Ipod market. Once you have a smart phone, there is absolutely no reason to have an expensive Ipod, especially when people’s music ultimately moves to the cloud. The only reason to have an additional MP3 player is for exercising, but that can be a very small, very cheap MP3 player.

• The Ipad will significantly cannibalize the Macbook market. There are a certain number of people who will always need a full-fledged computer. But there are also a significant number of people (older folks, light users, etc.) whose needs will be fully met by a device such as an Ipad. Those people, especially if they are loyal Apple fans, probably own both a Macbook and an Ipad right now. But when it comes time to purchase a new Macbook in three or four years, they will not do so. Ipads sell for a fraction of full-fledged computers, so the math does not work out well for Apple. Of course , this has implications for Dell and other computer manufacturers, too, but we’re only talking about Apple here.

Apple has proven many times that it is the finest innovator in the world. Unfortunately, as much as they try to protect their markets, others will ultimately be able to provide the same functionality at a much cheaper price. And in Google, Apple has a formidable new competitor in the race to be the world's best innovator. Google’s software is simply elegant, especially the way it integrates internet search functions with GPS navigation.

One day, Apple will invent entire new markets like it did with the Ipod, and its P&L will get another power boost. The problem is that nobody knows when this will happen. The only conservative approach is to assume that this is not coming any time soon – that the company’s short to medium term prospects are reliant on the products in hand. Remember, Apple spent almost the entire decade of the 1990’s in the woods after Microsoft essentially undercut its technology with Windows. It’s easily possible that the same kind of thing could happen over the next several years.

Wednesday, March 10, 2010

Notes from Norway

I just spent five days in Norway at a board meeting and retreat.
We spent three days in Beitostolen, which is a 3.5 hour drive north of Oslo, about 50 miles west of Lillehammer, site of the 1994 Winter Olympics. Beitostolen has both alpine and nordic skiing, but the mountains are not as big as the mountains where the Olympics were held. The last two days of our trip were spent back in Oslo. I am flying home now and here are some of my observations.

• The snow is spectacular. In places it reaches the eves of houses.

• I now understand why Norwegians win so many Olympic medals in Nordic skiing events: the entire population cross-country skis. For practically the entire drive up to Beitostolen, I saw perfectly groomed trails along the side of the road with two perfect ski tracks in them. Occasionally, we’d see a skier making his way somewhere or other although he seemed to be in the middle of nowhere. Other times, we’d see a lonely track split from the big trail and head across a wide frozen lake, only to end at a tiny house on a distant shore. When we got to Beitostolen, it became clear that skiing is a way of life. On the weekend, whole families were clothed in expensive gear, skiing around – carrying packages, pushing and pulling sleds with bundled up babies in them, only noses showing, back and forth to the market, lunch, shopping, or just in a big loop to get some exercise. Every car had three or four pairs of skis on top and people in restaurants were as likely to be wearing ski boots as regular boots.

• I’ve eaten nothing but Cod and Reindeer for five days.

• I’m not kidding about that five days of Cod and Reindeer.

• I only saw a bit of Oslo, but what I saw was pretty, if unspectacular. It has a beautiful waterfront which looks like it would be tremendous fun in the summertime, although it was dominated by the hulking, ugly City Hall, which looks like a parody of the headquarters of a socialist bureaucracy (which, in fact, it is).

• Here's from my hotel room - better.

• Norwegians drink. Hard. Until late at night. Sometimes they fall down. Then they go to sleep. Then they get up and ski.

• It’s cold.

• I’ve learned a bit about Norway, which is a very interesting country. Here is the very, very short version as told to me by a local. Norway is currently enjoying only its second period of prosperity in its long history. The first was during the heyday of the Vikings, and was driven largely by pillaging. The second began during the last half of the twentieth century and was driven by the discovery of a massive stash of oil just off the Norwegian coast. The Norwegian government has used the proceeds from the sale of this oil to provide for its citizens, and today the country’s sovereign wealth fund is worth about $500 billion, or something like $100,000 for each of its five million citizens. There are a lot of comfy cars like Land Rovers that people use to drive around in all that cold air and snow.

• It occurred to me that all that skiing is probably a cultural relic. Before the discovery of oil, Norwegians were very poor people. They didn’t have Land Rovers to get to the market. They probably had to ski there. This is also probably why they’re very good at bundling up.

• Regrettably, the women in Norway are not as attractive as the popular conception.

• Notwithstanding any of the above, I like Norway and Norwegians very much and look forward to my next visit.

The Devil Kindle

I was over at a friend’s (Doug Merrill) house one day when I was about thirteen years old. Standing in their cavernous living room, I happened to notice the family’s spectacular collection of books. Such things would not normally command the attention of a hormone-sopped teenager, but the Merrill’s book stash was particularly impressive to me because it required a gleaming, track-mounted stepladder to reach its topmost heights. The room itself was always impressive: ceiling many stories high, arched by truly substantial wood beams, and floor to ceiling windows overlooking a cliff on the most glorious point on the Severn River - maybe all of Anne Arundel County.

But for some reason that day, it was the books that caught my eye.

“Man, you all have a lot of books,” I said to Doug. “Where’d you get them all?”

Doug looked at me with a bit of a confused expression. “Those are my mom & dad’s books… They’ve read all those books.”

I didn’t argue, but nor did I believe that any two human beings could devour such a towering stack of prose and history. I didn’t really believe him.

Well, now Teresa and I have our own budding library. It’s not quite as impressive as the Merrill’s, but to be fair, Teresa and I have not had as much time as the Merrills when I stood marveling at their hoard that day. But now that I look at our own, I am beginning to think that ours might rival Phil & Ellie’s someday in the not-too-distant future. I’ve revised my calculation of whether the Merrills actually read all those books, and offer my apologies to Doug. In retrospect, it’s not all that surprising – his parents had to get all that formidable knowledge from somewhere.

The End

Well, now Teresa has gone and gotten a Kindle. She won it at a charity auction and was up all night, playing with it, downloading various books, articles & newspapers. I was similarly intrigued, and although I’ve been avoiding it because I don’t want another travel gizmo that needs to be recharged in my hotel rooms, I must admit that I was smitten.

But walking through the library today, I stopped, looked around and realized that our unofficial book collection project has officially ended. We’ll never catch the Merrills. From now on, every book that Teresa buys will be electronic. It will sit on the virtual shelves of her Kindle, rather than on our real shelves.

And that’s a real shame. There’s something majestic in a hoard of real books with real pages and real worn bindings. I’ve even got a section in our own library with all of our college textbooks, from Serge Lang‘s Calculus to Nordhaus’s Economics. What a pleasure it is to walk into someone else’s library, crane your neck sideways and learn a little about what makes them tick.

As technology has continued its ineluctable march through history, delivering one feature packed device after another to make all our lives easier, I’ve often made fun of those who choose to spurn the latest thing, calling them Luddites.

But standing in our library today with a hole deep in the pit of my stomach, I couldn’t help but think that maybe even I might have to spurn this latest bit of technology. Who knows, maybe all those Luddites were onto something.

Monday, February 1, 2010

Groundhog Day in Melbourne II

Well, GDP supposedly grew 5.7% last quarter. The numbers are preliminary, still subject to adjustment. The announcement came with all sorts of qualifiers from the Commerce Department; but nevertheless, it is an impressive number.

Previously, I’d been on pins and needles for several quarters waiting for other financial shoes to drop, sending us reeling into the deep winter of a double dip recession. We’ve had some positive financial results from our portfolio companies of late, however, so it seems that things may indeed be getting better, notwithstanding a ten-plus percent unemployment rate. Combine it all, and it just leaves me jittery.

But something happened yesterday to put all our fears at ease. We can finally breathe a sigh of relief. The Great Recession is behind us. We can all get on with life.

How do I know?

Well, Federer won the Australian Open. He thumped Andy Murray in straight sets.

Life has once again returned to normal.

Recently, the once-invincible Roger had been less than perfect. He’d always lost to Nadal at the French, but then he started losing to him everywhere. Then all manner of journeymen, hackers and good-for-nothings started to get the better of Roger. He lost his number one ranking, and was finally reduced to tears at last year’s Australian Open.

Our economy, too, came crashing down from its once-unassailable heights, at just about the same time and in the same gargantuan manner. When a giant falls, he falls hard.

We reached the depths of both recessions about a year ago – the winter of 2008/2009, culminating in that teary trophy ceremony at the Australian.

(For more background, see Groundhog Day in Melbourne I).

As spring unfolded, however, it appeared that perhaps things were not as bad as they once seemed. Roger performed admirably on the European clay court circuit and then, after the gangly, howitzer-wielding Robin Soderling took out Nadal at the French, Roger claimed that only major title which had eluded him. Tears flowed again, but this time they were tears of joy.

Then Federer claimed Wimbledon in an epic five setter against Andy Roddick that went to 16-14 in the fifth – a serving slugfest on both sides, masterfully played. Only a few weeks later, Roger blissfully announced that he had become the father of twins. The tears flowed deeply.

Tears of joy flowed on Wall Street once again, too, as big US banks started posting improbably large profits on trading gains. Unemployment was somewhat intractable, but from many other perspectives, financial professionals were forced to conclude that life on earth was not actually coming to an end. Cash for clunkers seemed to be working, and the auto industry pulled out slightly from its historic slump. For the first time since 2006, investment bankers, hedge fundies and brokers of all stripes were actually able to relax on their August 2009 family vacations.

The start of fall brought the US Open and a new sense of optimism. All seemed well until the final. Federer started well against Del Potro, impressively outmaneuvering the powerful youngster in the first set. But then cracks started to appear in RFed’s game, and the raw power of John Martin the Door’s forehand started to wreak havoc on the Fed’s confidence. Roger lost in five, looking weak and beaten by the end.

Similarly, fall saw fresh new signs of economic distress. Housing starts were woefully weak; foreclosure rates started creeping up again; small regional banks continued to fail. Pundits wailed about weakness in commercial real estate markets, whose Byzantine securities could create distress far beyond their own boundaries, like those in the residential mortgage market.

By Christmas, nobody really knew where we were.

But then came the fourth quarter GDP growth rate of 5.7%. When I first saw it, I thought it was a mistake. It couldn’t possibly be so robust. Could it?

But now Roger has sealed the deal. His performance yesterday was reminiscent of the go-go days of 2004. It made one ponder whether any human, past, present or future, could possibly withstand such an onslaught.

So I can now confidently assert that our economic winter is over. Punxsatawny Phil can do his thing about the actual winter (bring on the snow!), but otherwise, roses are already coming up everywhere.

Disclaimer: I say all of this in equal parts jest and hope; in truth, I still have grave concerns about our economy.

Sunday, January 3, 2010

Notes from Snowmass (New Years 2010)

Snowmass is possibly the best family mountain we’ve ever visited. It’s enormous, with a huge range of skiing for everyone. There’s great cruising for the moms, great steeps and bumps for the experts and lots of cool glades for the kids. In a big snow, The Burn would be fantastic. We only got a bit of snow, but it was enough to have serious fun. We spent the week with the Merrills, the Peskins, the Trapnesses, the Marshmans and various other families from Jersey and other past associations. At times, there were twenty of us skiing together.

Here are a couple of notable events from the week:

• Oliver (9) had a tough week, with trips in both a police car and an ambulance. On our second day, he came down the mountain early with Nancy Merrill intending to call it quits because of cold. He thought he spied our condo, so he stopped several hundred yards uphill of where Nancy stood, took off his skis and walked off the hill. Unfortunately, it wasn’t our condo, and he didn’t really know where he was at all. So he descended the mountain and got even more lost amongst the masses. After about 1.5 hours of furious searching by several adults, Oliver was brought home in the front seat of a police cruiser, having been spotted with a bewildered look on his face by another thoughtful dad. Thankfully, all ended well.

• The next day, we let all the kids ski alone, with Walker (12) and Henrick Trapness in charge of the whole group of ten or so boys. Upon taking leave of us, they promptly headed for the terrain park. On his first trip down, Oliver hit the first jump a bit too fast, and ended up inverted, landing on his head and shoulders. He got the wind knocked out of him, and his brain got a bit jangled, so he was essentially mute and breathing strenuously when the medics got to him. They put him on a board, secured his neck, hooked him up to oxygen and took him to the mountain first aid station. Walker had quickly called both Teresa’s and my cell phone, and we showed up at the station even before Oliver did. The doctor on the mountain had no way of knowing whether Oliver’s spine was OK, so he ordered an ambulance, and Teresa piled in with the stretcher and they headed off for a scary trip to the hospital and a CT scan. I followed in the car. Thankfully, all the tests at the hospital proved negative, and after a few hours, Oliver was given a clean bill of health, although he was still feeling bruised and achy. The doctor told him he could ski if he felt up for it, and ironically, by the end of the next day, he was back on the slopes and handling black diamonds with ease.

• We spent New Year’s Eve with the Marshmans and Merrills in Aspen watching fireworks and drinking hot chocolate spiked with double espresso vodka. A good time had by all, even if we were in bed by 10:30PM (that’s 12:30PM EST!).

• We spent our last day skiing at Aspen Highlands, which everyone loved. It has fantastic steeps, and there are plenty of good double blacks that were even fun for Teresa and the kids. Almost on a whim, Walker (12) and I headed out to check out the Highlands Bowl, and we ended up hiking all the way up to Highland Peak, about a 40 minute hike with skis up to 12,400 feet. I was incredibly proud of Walker for toughing it up such a serious and cold climb, and then skiing down such harrowing expert terrain. At the top, there were about six bearded mountain men, Walker and me. Here are a couple of pictures of the Peak and the Bowl (from Google Earth).

A snowcat takes you to the spot where the tree line intersects the ridge, then you've got to hike the rest of the way. We made it to the farthest peak.

Here's what it feels like to walk along the ridge. Best not to look down!

Here are Walker and me at the summit. We found out later that day that George and Alex Marshman had also made it to the Highland Peak.

• On Saturday, we set out from Snowmass at 11AM for dinner at Carl and Allie’s at 321 Jasmine Street in Denver. The whole crew (20 people!) were there waiting for us. I hadn’t seen most of them for more than five years, so it was to be a great family reunion. Unfortunately, mother nature would not cooperate. The snow started in earnest about half an hour after we started on the road. By the time we got to Vail, I-70 was closed because of an accident. We stopped for ice cream and coffee, and by the time we set out again, the road was open, but it was only a taunt. By the time we got to Dillon, the road was unpassable again, and we spent four hours parked on I-70 with a thousand other stranded cars, with only a single can of lemonade and one granola bar between the five of us. By the time we got through Eisenhower tunnel, it was too late to visit lest we miss our plane home. I was devastated about missing the Wells, but ultimately pleased to be able to make the plane. Ironically, the plane was extremely comfortable, since about a third of the passengers missed it, still being stuck in the mountains somewhere.

• By the way, 511 does not work for Diddly. The Colorado Highway Patrol has some serious work to do in keeping motorists informed about travel conditions.