First Quarter 2017
The last few years, we have spent a lot of time talking about macro events and the economy. We don’t have anything new to add this quarter, so we’ll give a quick update on some of our individual stock holdings.
Warren Buffett bought Apple stock this quarter, at a price (our guess) of around $115-$120. We first bought Apple stock for our clients in 2013. It was trading around $57, and currently at $141. We are a little surprised Buffett now owns 17 billion dollars’-worth of a technology stock. He used to insist he didn’t invest in technology, because he didn’t understand it. What changed between 2013 and 2017?
His confidence in Apple might relate to the coming revolution in mobile-pay technology. Apple has the fastest, most secure Smartphone app for debit-/credit-card transactions. Mark has fallen in love with Apple Pay, because it is faster than cash for buying stuff. Casey’s, Jimmy John’s and Best Buy are a few among many retailers that accept Apple Pay. Mark has timed his Apple Pay purchases at Jimmy John’s at four seconds or less—very impressive. A thumb-print authorizes transactions, and the store never has access to customer credit-card numbers—very secure. Apple Pay does require an iPhone, but the app takes it from a portable computer, to a potentially integral part of all debit- and credit-card transactions.
Warren Buffett’s knowledge about the credit card industry dates back to the American Express stock he’s owned for nearly a half-century. He has been invested in Visa and MasterCard for years. For Buffett to buy Apple’s stock indicates his belief the iPhone creates a moat, distinguishing it from other Smartphone manufacturers. Buffett coined and popularized the term, economic moat, defined as a business’s ability to maintain and protect its competitive edge over its competitors.
We think the development of direct, electronic consumer transactions is just beginning, and Apple may be developing a moat. Two Smartphone operating systems exist, controlling over 80% of our phones. Apple is one of them. We think this is a great situation for Apple to be in, and we will continue to hold the stock.
April marks the announced retirement date for Dan Tarullo. Who is Dan Tarullo? The Federal Reserve’s point-man, who oversaw supervision and regulation for the banks. Tarullo was the guy who kept the big banks in line. His departure will make it easier for banks to deregulate and increase their lending amounts. Big bank opponents adored Dan Tarullo. Big bank proponents loathed him.
We anticipate Tarullo’s replacement to roll back myriad too-big-to-fail safeguards implemented after the crash. The industry will love it. For a while, so will the economy. Retro-deregulation will allow the big banks to increase their leverage from nine times their equity, to more like thirteen times it. Increasing their lending by 50% will fund a lot of good, and not-so-good projects.
For those of you who’ve watched the movie, “The Big Short,” imagine we’re in year 2003, or 2004 of this new paradigm shift. It takes time for the banks to do dumb stuff, and we have time to evaluate what they are doing. Tarullo’s retirement will help BGC Partners, Wells Fargo, PNC, and USB, the most. We think the proverbial wind will be at their backs, for at least the next two years.
We haven’t changed our view that owning the dollar is a bad bet over the next five years. We have written in the past, for a lot of your investments, the direction of the Dow or the S&P 500 is secondary to which way the dollar goes.
Investments that should do well if the dollar declines are Royal Gold, Nucor, IBM, Exxon, iPath Commodity index, (DJP) and all our Latin American exchange traded funds. Owning these investments is one way to start hedging your portfolios, should inflation return. If we head into deflation again, like we have been since the crash, these investments won’t do as well as owning an index fund. We believe the markets are in the early phase of transitioning from deflation to inflation. The dot.com collapse bottomed-out the stock market in 2003, but Latin American stocks rallied, with commodities spiking 600%. We hope it happens again.
We have not seen any meaningful opposition to Level3’s merger with CenturyLink. Our best guess is this deal will finalize in the third quarter. At that time, we will receive a dividend of $26.50 per share for each Level3 share you own. Level3 stock will then convert to 1.4286 shares of CenturyLink stock. The dividend yield on CenturyLink is currently around 9%. We consider that yield secure, if the Level3 merger goes through. There will be pressure on CenturyLink’s stock from the arbitrageurs holding it lower, until the deal is finished. Once it closes, we think CenturyLink’s stock belongs in the 30s, and not the 20s.
Maxwell Technologies bought another Ultracap company to secure its dominant position in the market. We anticipate this deal helping Maxwell’s position in selling to the auto industry. American Public is still struggling with new enrollment trends. Regulatory relief would help with that. We are closely monitoring that area, and will keep you up-to-date.
Any questions about your account, or any topics covered in this newsletter? Please feel free to call (417-882-5746).
Mark Brueggemann IAR Kelly Smith IAR Brandon Robinson IAR