Tower Private Advisors
- Greece, again
- Apple thoughts
Capital Markets Recap
“With respect to Greece, it’s Groundhog Day.”
“European Leaders ‘Confident’ Greece Meeting Bailout Demands”
“Greece Struggles to Win Aid Package as Europe’s Doubts Mount”
“Europe Demands More Greek Budget Controls in Bid to Forge Rescue”
“Germany Seeks to Avoid Two-Step Vote on Greek Aid, Lawmakers Say”
“Greek Bailout Deal Nearer After Germany Signals Backing at Feb. 20 Meeting”
Apple stock is sort of like some metaphor about being out in the lead; lots of metaphors (dogs) are metaphoring (nipping) at its metaphors (heels). It’s the largest stock in the S&P 500 at 3.79%. The next closest is ExxonMobil, at 3.32%. One word applied to its recent ascent is “parabolic,” and talking heads ponder if anything can stop Apple in one soundbyte and when’s it going to crash in another. Everyone knows it has the coolest, must-have products. Its products are also made in factories in China–one at least–where people are dying to throw themselves from upper-story window. Of the 57 analysts who cover the stock, just one (1.75%) says to sell it; he has a price target of $270, while the average price target is $578.
If you have a $100,000 portfolio with 5% in AAPL, 15% in the Technology Sector SPDR because you want to have technology sector exposure equal to the index, and the remaining 80% in the S&P 500 ETF because you’ve heard that it’s good to just index, then you’ve got 10.53% in AAPL. That’s 5% from your AAPL shares, 3.03% from your S&P 500 ETF, and 2.50% from the portion of the Tech SPDR. Both the SPDR and the S&P 500 index use market capitalization weighting–weighting each holding according to the market valuation (shares x price) of each. Let’s see if that makes sense.
Here’s a look at Apple and four other of the top 10 holdings in the S &P 500. The pie chart shows the relative allocations of Apple, ExxonMobil, GE, Procter & Gamble, and Johnson & Johnson. The column chart shows each of the five on three different fundamental measures: sales, earnings, and enterprise value (a measure of value that includes debt.) Would you rather invest based on what others think of Apple? If so, you get the pie chart. If you think that your holdings should reflect, somewhat, the fundamental size of a company, then consider the column chart. It says that, based on sales, from which income is derived, Apple is 29% of ExxonMobil’s size, about 90% of GE’s size, and about double J&J’s size. If you think that earnings are a better measure of relative attractiveness, then Apple is about 80% as large as ExxonMobil and three times the size of Procter & Gamble. Enterprise value might be the best measure of relative size if each can be considered going concerns. If so, Apple is 78% of Exxon’s size; 55% of GE’s; just 30% larger than P&G.
The U.S. is Greece. The economy’s in shambles. My brother-in-law doesn’t have a job. My 401(k) is a 201(k). And on and on and on. Those anecdotal observations aside, the U.S. economy is powering on, and if it keeps up the heady pace it has enjoyed thus far in 2012, then economists are going to have to start upping their GDP estimates.
Here is a look at the Citigroup Economic Surprise index for the U.S., the G10 nations, and the Emerging Markets. The index measures actual economic releases versus economists expectations. When they’re too pessimistic, the line rises; when too optimistic, the line falls. Right now, all three are rising (economists have been too pessimistic), and all three are above the dashed line, meaning the economics are improving absolutely, as opposed to just getting less worse.
This week, that strength was seen in housing data and a couple of regional indicators. In housing, the National Association of Home Builders’ Builder Sentiment Index reached its highest level since mid-2007 on strength in Present Sales, Future Sales, and Traffic of Prospective Buyers, as seen in the chart below.
Housing Starts were about 6% better than in December and better than economists had expected. Building Permits were about in line with December figures. Undoubtedly, though, housing is being distorted by the crazy weather most of the country is having. In the long-term scheme of things, housing starts are still a shadow of their former selves. One troubling aspect of housing continues to be Foreclosures and Delinquencies, shown below. While the latter is improving and would, intuitively, seem to be the pipeline for the former, Foreclosures remain stubbornly high.
Still, the pieces are in place for a housing recovery including, especially, First Time Homebuyer Affordability. This measure looks at, according to the National Association of Realtors:
The NATIONAL ASSOCIATION OF REALTORS® affordability index measures whether or not a typical family could qualify for a mortgage loan on a typical home. A typical home is defined as the national median-priced, existing single-family home as calculated by NAR. The typical family is defined as one earning the median family income as reported by the U.S. Bureau of the Census. The prevailing mortgage interest rate is the effective rate on loans closed on existing homes from the Federal Housing Finance Board and HSH Associates, Butler, N.J. These components are used to determine if the median income family can qualify for a mortgage on a typical home.
To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, a composite HAI of 120.0 means a family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. An increase in the HAI, then, shows that this family is more able to afford the median priced home.
The calculation assumes a down payment of 20 percent of the home price and it assumes a qualifying ratio of 25 percent. That means the monthly P&I payment cannot exceed 25 percent of a the median family monthly income.
Both the Empire State Manufacturing index and the Philadelphia Federal Reserve’s Philly Fed index showed improvement this month, with the former taking out 2011′s high.
What’s more, these two indexes are confirmed by Dallas and Richmond Fed surveys, as shown below.
Finally, the minutes of the Federal Reserve’s Open Markets Committee’s January meeting were released this week. The minutes are dreadfully boring, so to make them a bit more interesting, I paste the entire transcript into Wordle. There it takes the most commonly occurring words and makes those largest; less commonly occurring words show up smaller. It’s obvious that the Committee is not terribly worried about Europe, judging by its size, which is a bit surprising.
Key indicators to watch
- Initial Jobless Claims
- University of Michigan Confidence
- Kansas City Federal Reserve Survey
- Existing Home Sales
- House Price Index
- New Home Sales
Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors