Apple to pile up cash even after first dividend in 17 years:THE Apple juggernaut keeps on rolling. The announcement that it is to spend $45 billion on share buybacks and dividends over the next three years helped the shares top $600 just 23 days after they breached $500 (the move from $400 to $500 took 34 days).
Apple’s first dividend in 17 years was no surprise, given its $100 billion cash pile. Returning cash to shareholders will satisfy those who feared it might fall foul of what legendary investor Peter Lynch called the bladder theory of corporate finance (the more cash that builds up, the greater the pressure to urinate it away on grandiose acquisitions).
Not that Apple will suddenly become cash-starved. Despite the giveaway, data analysis firm Asymco estimates that sales could result in Apple ending 2012 with over $35 billion more in the bank that it did at the end of 2011.
Montier warns on profit margins
JAMES MONTIER, GMO’s acclaimed British strategist, has warned that corporate profit margins will fall. “Freakish” US profit margins are at record highs, despite the “weakest economic recovery in post-war history”. Why? Huge government fiscal deficits, which have offset de-leveraging forces. The deficits will stay large in 2012, but it’s “unthinkable” that they will remain at current levels over the next few years.
Unless households re-leverage and there is an unexpectedly strong economic recovery, corporate profits will then struggle.
The same goes for the UK, Europe and Japan, where corporations have enjoyed “exceptionally high profit margins” relative to historical averages.
Inevitable moves towards fiscal retrenchment will see profit margins revert to more normal levels. Analysts, in a “this time is different” attitude, project that profit margins will continue to hit historically unprecedented levels.
Montier, like GMO’s Jeremy Grantham, believes in mean reversion. “What goes up must come down,” he says.
Market volatility is on the way out
THE DISAPPEARANCE of market volatility has been one of the stories of 2012. US equities are moving by an average of just 0.46 per cent a day compared to 1.04 per cent last year – the biggest reduction since 1934, notes Bloomberg. The daily movement is the smallest since 1995, while trading volumes are at their lowest level in 13 years.
Correlations between individual stocks and the overall market, which hit record levels last year, have also collapsed – to 0.43 from 0.86 last December (a figure of 1.0 would mean all stocks move together). That halving marks the fastest retreat in over three decades.
Europe is no different. The VStoxx Index, Europe’s volatility gauge, has fallen two-thirds since last September, and is 30 per cent below its historical average.
Bizarre buffeting of Buffett by biographer
IT’S HARD not to sympathise with Warren Buffett after Alice Schroder, his official biographer, slammed him last week. On Buffet’s call to buy stocks in the aftermath of Lehman’s fall in October 2008, Schroder said that investors who took his advice would have missed the market bottom in 2009 – the “greatest buying opportunity in decades”.
But Buffett said at the time that he hadn’t “the faintest idea as to whether stocks will be higher or lower a month – or a year – from now”, but the market would be “substantially” higher in the long run. The SP 500 has risen by almost 50 per cent since then.
Schroder also said “many of his major stock picks for the past five years” had been lacklustre. She listed four – all of which have outperformed the SP 500 over that time. Last year’s $10.8 billion investment in IBM got a “yawn” from investors, she said.
In reality, Buffett was allowed by regulators to build up his IBM stake confidentially so others would not piggy-back on his strategy. Buffett paid an average of $170 for IBM, which is now trading above $205. Buffett isn’t perfect, but these criticisms are bizarre.
