Its Own Drummer

AAPL has recovered its losses following the July 24th earnings announcement.

Apple shares plunged last week in the wake of disappointing earnings "that missed expectations by a country mile" and a lowered near-term outlook.

The stock began to recover, then received a further boost on Monday when securities analyst Toni Sacconaghi argued that the time was "ripe for Apple’s potential inclusion in the DJIA [Dow Jones Industrial Average]", as well as an Apple stock split. His reasons:

(1) Technology companies are under-represented in Dow (compared to the S&P 500 the Dow is under-weight technology by ~370 bps), with IBM accounting for over two-thirds of the current tech weighting;

(2) A stock split would enable AAPL to be considered for Dow inclusion, given that is a price based index;

(3) Apple’s recent introduction of a dividend is consistent with other Dow components, all of whom pay a dividend.

In the Internet age a meme goes viral and becomes seemingly unstoppable. However, in this case it's way premature. No one in a position of authority has said that a stock split, much less Apple joining the Dow, has even been discussed. It took years of cash accumulation (plus the death of Steve Jobs) to occur before Apple began to pay a dividend. Besides,

Apple’s got other things on its mind these days; locking horns with Samsung in court, figuring out what to do or not do with its $100 billion plus cash hoard, not planning the unannounced launch of the unannounced iPhone 5 on the not-confirmed date of Sept. 12.

So, we’d imagine the company isn’t thinking about whether or not it might be added to, or belongs, in the Dow Jones Industrial Average.

One thing is certain: the Dow needs Apple more than Apple needs the Dow.

They'll Come Back Home

Twenty years ago Francis Fukuyama declared the End of History to be at hand with the triumph of liberal democratic capitalism.

Charles Murray argues that this consensus has crumbled:

"Capitalist" has become an accusation. The creative destruction that is at the heart of a growing economy is now seen as evil. Americans increasingly appear to accept the mind-set that kept the world in poverty for millennia: If you've gotten rich, it is because you made someone else poorer.

Mr. Murray attributes the negative attitude toward capitalism to several factors:

the prevalence of crony capitalism, i.e., winners win by pulling strings with friends in high places;

the accumulation of fabulous wealth through financial legerdemain;

the many successful liberal capitalists, such as those here in the Bay Area, who won't defend the system through which they produced their wealth;

the segregation of capitalism from virtue, i.e., "The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin. Little of that has survived."

This humble observer is not as pessimistic as Mr. Murray. The alternative to capitalism is statism. The crises of the past decade swept statists into power throughout the West, and they were given rein to implement their pet solutions to major problems. For the most part they failed.

Capitalism in practice always looks bad compared to other "-isms" in theory. Now that citizens have had a chance to see how the alternatives operate in the real world, they'll come back home.

We Serve by Cooking and Listening

For years we've been making variations of a simple baked chicken dish for the Sunday lunch at the community center. Our clientele finishes everything we prepare, but just because they're easy to please isn't a reason for not improving their sensory experience.

The chicken in the basic recipe is quite bland, so on Saturday I steeped the drumsticks in a marinade of soy sauce, brown sugar, garlic, and a dash of whiskey. On Sunday morning I stir-fried some onions and spooned them into the rice and cream-of-mushroom soup. After browning, the chicken was laid on top of the mixture and covered with aluminum foil.

Before entering the oven

et voila

Into the oven went the two trays before I headed off to church. One feature of this recipe is that the chicken can be overcooked without drying out or degrading. It was a good thing that I had the luck or foresight to turn the oven down to 325 degrees, because our minister turned out to be especially loquacious this morning. The chicken had been cooking for over two hours when I returned home.

Our customers consumed all seven trays (each) of chicken and salad that we had prepared. One of them insisted on engaging in an extended theological discussion about the nature of evil, the doom that awaits those who live in the Bay Area, and the messages that are written on rocks (which he proceeded to pick up and show me).

Sure, it would have been a lot easier to write a check and have someone else prepare the food. But then I wouldn't have been able to test whether my modifications were an improvement to the recipe (they were) or learned about the world of mystery in a small pebble.

The act of charity affects those who give and those who receive in ways sometimes unforeseen.

Fool Me Twice, Shame on Me

The troubles of too-big-to-fail banks weren't the only reason that the world financial system nearly collapsed in 2008.

Another major problem was the widespread use of complex financial products that didn't react as their investors thought they would to changing market conditions . The most infamous of these are derivatives, which Warren Buffett prophesied in 2003 were "financial weapons of mass destruction".

Less well-known, but just as damaging, were bonds based on securitizations of cash-generating assets such as credit-card receivables, home mortgages, or airplane leases. In a typical securitization thousands of assets are sold by one or more financial institutions to a special-purpose vehicle (SPV) that issues bonds to pay for the assets.

Quantitative modeling by investment banks "proved" through stress-testing that, for example, the "AAA" tranche of bonds will always get paid its principal and interest even under dire economic circumstances. The AAA bonds were able to command a low interest rate because they were low-risk; the B and C tranches had higher risk because they had a lower priority in the cash flow "waterfall" and had to pay a higher interest rate. Through the magic of financial structuring and computer modeling, the total of A, B, and C bond proceeds often exceeded the cost of the original assets, and financial institutions were able to make a pretty penny by flipping their portfolios into securitization SPV's.

Of course, when people stopped paying their mortgages, credit cards, and leases, it turned out that the administration of late payments, penalties, interest, and liquidation proceeds was much trickier than had been designed on paper. Even the triple-A bondholders had to take a haircut.

Which brings us to the latest brainstorm by the creative geniuses on Wall Street: the securitization of rents on foreclosed homes. There are many questions about how this securitization would work, beginning with whether the SPV actually owned the homes or merely owned the rents under contract. If the SPV did not own the homes, it seems to this observer that there is too great a risk of conflict with the property owner. Also, the bonds would have to pay too high a rate to make a securitization worthwhile. So it's likely the property, as well as the rents, is part of the deal.

Whatever the structure or yield, I can't see how or why any prudential investor would want to invest in this stuff now, having been burned very recently. Caveat emptor.

Brave Knights Dispel Dark Nights

Thought for the day, from C.S. Lewis:

“Since it is so likely that (children) will meet cruel enemies, let them at least have heard of brave knights and heroic courage. Otherwise you are making their destiny not brighter but darker.”

Now He Tells Us

Sandy Weill, retired Citicorp chairman and one of the principal architects of the too-big-to-fail banking system which was in large part responsible for the 2008 financial crisis, has called for breaking up the big banks.

The former Citigroup chairman now believes it was a mistake to scrap the Glass-Steagall separation of commercial and investment banking, once seen as one of his crowning achievements. As stunning as this admission was, he was only catching up with what markets already think.

Given the interconnectedness of financial markets and financial institutions, a full reinstatement of the Glass-Steagall Act would probably be too expensive to implement, even allowing for the benefit of reduced risk to the financial system.

Nevertheless, expect some Glass-Steagall-inspired ideas, such as the Volcker Rule, to be adopted in the near future:

the Volcker Rule....is intended to limit the ability of big banks to make large “proprietary” bets. (Proprietary trading is jargon for speculation – betting on asset prices going up and down.)

The basic idea of this is simple and completely compelling. Paul A. Volcker, the former chairman of the Federal Reserve System, has stressed that this measure will help us move away from an arrangement in which the people who run big banks get the upside when they are lucky – and the rest of us are stuck with some enormous, awful bill when things go awry.

Let's pause in our mockery, even vilification, of Sandy Weill to recognize how difficult it is for the very rich and powerful to admit that they were wrong. Okay, time's up, resume your mockery and vilification.

Intellectual Propriety

The mess that is the U.S. patent system has become a major impediment to both technological innovation and economic efficiency.

In an attempt to provide clarity and reduce litigation, Court of Appeals Judge Richard Posner, who "commands a respect and influence surpassed on the federal judiciary only by the nine justices of the U.S. Supreme Court", recently threw out a lawsuit between Apple and Google in which the tech giants accused the other of patent infringement. Judge Posner has deplored the "social waste" of phenomena such as defensive patenting and patent trolls:

Defensive patenting means getting a patent not because you need it to prevent copycats from making inroads into your market, but because you want to make sure that you're not accused of infringing when you bring your own product to market. The cost of patenting and the cost of resolving disputes that may arise when competitors have patents are a social waste.

Patent trolls are companies that acquire patents not to protect their market for a product they want to produce -- patent trolls are not producers -- but to lay traps for producers, for a patentee can sue for infringement even if it doesn't make the product that it holds a patent on.

The Apple-Google case that Judge Posner dismissed was just a warm-up to the Apple-Samsung "Patent Trial of the Century" that began this week in San Jose. The case's resolution could well alter the "trajectory" of future litigation. The issues are complex and important. One example--the rules for standards-essential patents:

When an industry decides that a technology shall become the standard, companies with those patents on the technology get an immediate financial windfall, because everyone has to pay for its use.

The trade-off for those companies: agreements and rules to prevent them from price gouging. Holders of standards-essential patents typically agree to license them on terms that are "fair, reasonable and nondiscriminatory."

But what constitutes a "fair" or "reasonable" price is a matter of much debate. What should happen if a company balks at a licensing offer and uses the patent anyway is also an unsettled matter.

The law surrounding them is "extremely murky," according to Brian J. Love, a patent expert and law professor at Santa Clara University. The Apple v. Samsung case could provide some clarity.

43-year-old Judge Lucy H. Koh will need the wisdom of Solomon to sort through all the claims and steer the jury toward a satisfactory resolution.

They Do Know Jack

While California tech companies duke out their intellectual-property battles in overburdened courtrooms, one venerable Tennessee company shows how these situations are resolved in a civilized manner.

When Jack Daniel's Properties thought that the design for a book cover (see below) too closely resembled the label of the famous whiskey, it asked that the author change the cover when the book is reprinted and offered to help pay for the redesign. Jack Daniel's didn't even require that current copies be removed from shelves.

I think I'll forego that daily dose (for medicinal purposes) of wine and polish off that bottle of Jack that's been sitting in the cupboard. Then I'll replenish the inventory with one of those new large bottles that I saw for $30 at Costco.

My gullet is only too pleased to reward examples of good corporate citizenship.

Image from Mashable

Limits to Loopholes

Businesses are passing up tax deductions and credits, not because of ignorance but because of complexity:

Executives, particularly at small and medium-size companies, complain that many of the tax deductions are either too cumbersome or too confusing. In some cases, the cost of obtaining the tax benefit is greater than the benefit itself....The result: many companies are saying "no, thanks" and are likely paying more taxes than legally required. And corporate breaks that Washington hopes will boost the economy often prove ineffective.

In our middle-class household we are eligible for several tax breaks that we decline to claim because of the complexity of record-keeping and the incremental expense to our business tax software (not Turbotax). Last year we didn't bother filing the forms for the Domestic Production Activities Deduction or the Foreign Tax Credit, whose complexity is daunting even to professionals. (We did take the FTC as a deduction--less beneficial than a credit--but much easier to claim.)

Jobs, health care, and war and peace will be the main concerns of the electorate this November. As for this voter and long-suffering tax filer,

If any of the political candidates had a credible program to simplify the tax code, I would support that candidate in a heartbeat even if it meant that my bill would be, say, 10% higher, and in our case we’re talking about an increase of thousands of dollars.

Keeping it Going

A few repairs needed

The tandem bicycle has been out of commission for over a year. I took it to Talbots for service. Replacement tires, brakes, and seats, plus other repair work, will cost about $200. That's a bargain when compared to the cost of a new bike, especially one of the newfangled $2,000 electric models that the WSJ featured this weekend.

The repairs will be done in ten days, and I signed the estimate. The bike should be perfectly satisfactory....at least until a certain tech company springs a surprise entry in the bike market.

Diagram from Patently Apple

Government Workers Fired Because They "Hid" Surplus

Friday's Chronicle headline

Ex-Director Ruth Coleman (Sac Bee photo)

"Surplus Scandal": an only-in-California headline:

The director of California's state parks department resigned, her deputy was fired and the state attorney general launched an investigation Friday after state officials said the agency hid a surplus [bold added] of $53 million over the past 12 years.

Comment: if they had merely spent (wasted) the money, they would not only have kept their jobs, they'd probably have gotten promotions.

Question: if they had told the higher-ups about the surplus, would it still be there?

Quit laughing so hard, you'll hurt yourself.

Oh No, Not Again

Oh no, not again. Multiple killing of innocents by another human being.

Many thousands of words will be written about the shooter's motivations, mental condition, life story, and political/sexual/religious orientation. Thousands more will be written about the prevalence of guns.

Will new insights be gleaned? Will there be agreements about solutions? I think we all know the answer.

Politicians had the good sense to cancel today's rallies and asked their supporters to put politics aside.

President Obama: “There are going to be other days for politics. This, I think, is a day for prayer and reflection.....And what matters at the end of the day is not the small things, it’s not the trivial things which so often consume us in our daily lives. Ultimately it is how we choose to treat one another and how we love one another.”

Governor Romney: “I stand before you today not as a man running for office, but as a father and grandfather, a husband, an American. This is a time for each of us to look into our hearts and remember how much we love one or another, and how much we love and how much we care for our great country,”

If It Was Easy, I'd Have Already Done It

I've made fitful attempts to clear the clutter.

Larger items, though physically more difficult to dispose of, are the easiest to toss or give away, like I did last month with some furniture.

The thousands of letters, photos, financial records, and other documents are what stymie me. I need to scan and tag them electronically, perhaps adding a detailed description. Then they must either be disposed of or organized in a rational filing system.

This process also carries with it a lot of emotional baggage. Kathleen Hughes, baby-boomer writer who is well along in her task, describes the paradox of keeping.

The longer you keep something, the more valuable it seems but the less anyone seems to know about its origins.

Ms. Hughes adds:

Taking heed, I am adding descriptions to every scan. "You're not that interested now," I tell my children. "But one day you're going to be very interested. Trust me."

When motivation flags, remember that we're doing it for the children:

One of the best gifts that parents can leave their children is an organized life. Harried heirs often must sort through decades of memories and clutter, clueless about items' significance. Of course, it's better to communicate the details of one's estate while one is alive, but that's a difficult conversation that understandably keeps getting postponed.

I hope that, as with exercise, I make a habit of clearing up. Getting started is tough, but the end result is a source of happiness. Gretchen Rubin:

Now when I look around my office, I feel a shock of relief. All those clean surfaces! No more stacks of papers and books teetering on the edge of the desk! No more feeling harassed by uncompleted tasks! It gave me a real boost.

Waiting For The Next iPhone

WSJ: iPhone 4S vs. next iPhone

The leaks about the next iPhone ("iPhone 5"?) have become more credible. The WSJ publishes some of the specs: a thinner screen using "in-cell" technology, a larger 4" display, and a new IOS 6 operating system that will contain 200 new features,

including enhancements to “voice assistant” Siri; a new 3-D maps service with turn-by-turn navigation; integration with Facebook; a “Do Not Disturb” feature to avoid unwanted messages at night; and a new app called Passbook organizes loyalty cards, tickets and boarding passes to display the right card when needed.

The next iPhone will likely be announced in the fall, perhaps as early as August 7th. We plan to upgrade two iPhones whose contracts will expire on 7/29/12 and 9/15/12.

The uncertainty is the carrier: we have become disenchanted by AT&T's continuing rate increases accompanied by no improvement in service, and our experience with Verizon on the iPad data plan has been similar. We'll be giving Sprint a look.

Taking My Medicine

I dropped by the local Lucky Supermarket to pick up a few items, and as usual I got distracted by a promotional display. Seagram's Escapes is a wine cooler in a tropical wrapping (actually, the bottle's fine print labels it "flavored beer").

I've been trying to cut down on the soda, and Escapes seems like an excellent replacement. It contains 3.2% alcohol--medical experts advise that a bottle a day is good for the health--and the price was right at 10 for $10.

In the interest of health research I will try each flavor over the next ten days. We must make sacrifices in the pursuit of knowledge.