S&P 500: Leaders no longer leading

Daily new cases of COVID-19 continue to spike upwards, warning of further shutdowns as medical facilities are overrun.

USA: Daily COVID-19 cases


The latest labor report disappointed, especially as the November survey came before the latest round of layoffs after states imposed tighter restrictions.

Payroll growth flattened, leaving total payroll down 5.99% compared to November last year.

Payrolls Annual Change

Hours worked are slightly more encouraging, down 4.68% on an annual basis, compared to -2.9% change in real GDP.

Real GDP & Hours Worked


Encouraging news on the vaccine front but “when you hear the cavalry is coming to your rescue, you don’t stop shooting. You redouble your efforts.” (Dr Anthony Fauci)

Now This News


Progress in manufacturing vaccines that will soon be widely available has buoyed stocks despite the dismal economic outlook. The S&P 500 made new highs, assisted by hopes of further stimulus and ultra-low interest rates. The large megaphone pattern is a poor indicator of future direction but does flag unusual volatility.

S&P 500 SPDR (SPY)

Growth in the big five technology stocks has slowed in recent months, with only Alphabet (GOOGL) breaking above its September high. Too early to tell, but failure of market leaders to make new highs is typical of the late stages of a bull market.



Vaccines should succeed in flattening the third wave and suppressing future outbreaks but are unlikely to succeed in restoring the economy to normalcy.

Federal debt is at a record 123% of GDP and growing. Further stimulus is required to support the still-fragile recovery.

The Fed will continue to expand its balance sheet to support Treasury issuance.

Ultra-low interest rates are likely to stay for a number of years.

If massive federal debt, QE and ultra-low interest rates does not cause a spike in inflation, that will encourage authorities to push the envelope even further (we fear this would have disastrous consequences).

Unemployment is expected to remain high and GDP growth likely to remain low.

Zombie corporations and commercial real estate with unsustainable debt levels will continue to be a drag on economic growth.

Growth stocks are expected to remain overpriced relative to current and future earnings.

Epic v. Apple (AAPL)

Apple logo

If Fortnite-maker Epic Games’ Australian legal challenge against Apple is successful, the tech giant may be forced to loosen its grip on its valuable mobile app ecosystem, with Epic arguing that competition law obliges Apple to allow rival stores and payment processing mechanisms on its devices.

Currently, the Apple-controlled App Store is the only way to get apps to consumers on iPhones, which make up more than half of all in-use smartphones in Australia. And all payments for digital goods, in-app purchases and subscriptions must use Apple’s payment mechanism, from which, in most cases, Apple takes a 30 per cent commission.

ACCC: Rod Sims
ACCC chair Rod Sims

Australian Competition and Consumer Commission chair Rod Sims said the Epic case was a well-timed test of the current competition laws, which were recently revised to better prevent misuses of market power

“Apple, as one of the two main app stores, is in a very strong position. It would seem like they have quite a lot of market power and can set the terms and conditions under which various apps operate,” Sims said. (from Tim Biggs at The Age)

Epic Games lawsuit

Epic Games filed suit against Apple in the US District Court for the Northern District of California, on August 2020, challenging Apple’s restrictions on apps from having other in-app purchasing methods outside of the App Store. Founder Tim Sweeney had previously challenged the 30% revenue cut that Apple takes on each purchase made in the App Store. Epic made changes in Fortnite intentionally to bypass the App Store payment system, prompting Apple to block the game from the App Store and leading to the Epic lawsuit.

Epic also filed another lawsuit against Google (GOOGL) the same day, which challenges Google’s similar practices on the Google Play app store for Android, after Google pulled Fortnite following the same update. (Wikipedia)

Apple Segments

Apple Inc. AAPL Segments

Services only account for 20% of revenue (FY20) but gross margins (66.0%) are more than double that of products (31.5%). The contribution towards overall operating profit of $66.3 billion is likely to be disproportionately high.


Apple would take a significant profit hit if its monopoly hold over app registration (via its App store) and processing of digital payments was removed. The company is already backing off from its former uncompromising stance, offering to halve commissions on sales via the App store (including In-App purchases), but only for developers with sales of less than $1 million. Allowing free competition from competing app stores and digital payment processors would compress margins even further.


Staff of The Patient Investor do not directly or indirectly own shares in the above company.

Apple Inc (AAPL)

Stock: Apple Inc
Exchange: NASDAQ Symbol: AAPL
Date: 7-May-20 Latest price: $300.63
Market Cap: $1.3 Tn Fair Value: $181.52
Forward P/E: 25.06 FV Payback (Years): 11
Forward Dividend Yield: 1.10% Debt/FCF: 2.1
Financial Y/E: 28-Sep-20 Rating: HOLD
Sector: Technology Industry: Consumer Electronics
Investment Theme: LT Growth Structural Trends: Growth of online services


We consider Apple (AAPL) to be priced above fair value, but the technical outlook is bullish.

We rate the stock as a HOLD but have not included it in our model portfolio because of declining long-term revenue growth.


We project annual revenue to fall 15% in the next 12 months, recovering to 7% growth in the long-term. Estimated fair value is $181.52 with a payback period of 11 years.

The payback period recognizes AAPL’s strong market position but also its reliance on continuing sales of devices (as opposed to services).

Technical Analysis

AAPL continues in a primary up-trend, but expect strong resistance at its Feb high of 325. A Declining Trend Index warns of secondary selling pressure. Respect of resistance at 325 would suggest another test of primary support at 230.

Twiggs Trend Index & Twiggs Momentum (13-week)

Company Profile

Apple was a pioneer of the personal computer revolution, introducing the Macintosh in 1984. Today, Apple is a world leader in five areas of consumer electronics:

  • iPhone smart phones;
  • iPad tablets;
  • Mac computers;
  • Apple Watch; and
  • Apple TV.

Apple devices run internally developed semiconductors and software platforms — iOS, iPadOS, macOS, watchOS, and tvOS — with an enviable reputation for connectivity across all Apple devices.

Products are sold online, through company-owned stores, and through third-party retailers. Apart from device sales, about 20% of revenue is derived from services, including:

  • the App Store;
  • Apple Music;
  • Apple Pay; and
  • iCloud.

Apple’s headquarters are in Cupertino, California and the corporation employs more than 100,000 people.


Morningstar sums up Apple’s competitive strengths:

We assign a narrow economic moat rating for Apple that stems from the combination of switching costs and intangible assets. We think the firm’s primary moat source is customer switching costs, as Apple bolsters the user experience with a cohort of auxiliary products…….

Regarding intangible assets, Apple’s differentiated user experience via iOS coupled with its expertise in both hardware and software design allows the firm to more seamlessly build integrated products.

….Recent survey data shows that iPhone customers are not even contemplating switching brands today. In a December 2018 survey by Kantar, 90% of U.S.-based iPhone users said they planned to remain loyal to future Apple devices. Also, users of ancillary products (especially the Watch and AirPods) lose significant functionality when paired with a smartphone other than the iPhone. Ultimately, we believe that existing iPhone users are relatively locked in to the iOS ecosystem and interface.

Major competitors include Samsung (Galaxy) which, coupled with Google (Android OS), dominates market share in smartphones. But neither offer an integrated suite of products that can compete with Apple.


Apple sales are dominated by iPhone but there is little year-on-year growth.


Growth is concentrated in the Services and Wearables segments.


Geographically, sales in the US are growing fastest, while China declined in FY19.


Apple is losing market share in China as local smartphone technology improves. From The Wall Street Journal:

Apple’s share of the Chinese smartphone market has been shrinking, crowded out by tech giants such as China’s Huawei Technologies Co. that market increasingly sophisticated phones at a lower price tag.

Apple’s share of the Chinese smartphone market contracted to 7.8% in the first three quarters of 2018 from a peak in 2015 of 12.5%, according to Canalys, a market research firm.


Revenue growth and operating cash flows have been disappointing in FY19 and FY20 so far. We expect a 15% fall in the next 12 months due to the impact of the coronavirus outbreak and declining sales in China.

Revenue & OCF

Thereafter we expect annual growth to recover to 7% in the long-term.

Declining operating margins reflect an increasingly competitive environment.

Operating Margin

Capital expenditure declined as a percentage of sales, suggesting limited growth opportunities.

Capex % of Sales

Capital Structure

Stock buybacks reduced shares outstanding by 32% since FY12.

Shares in Issue

A further $50 billion has been authorized for the year ahead.

Buybacks & Dividends

Buybacks from FY13 to FY17 were largely funded by debt.

Net Debt Issued

Debt at $99.5 billion (Q2 FY20), or 2.1 times projected free cash flow, however, remains comfortable when compared to cash & marketable investments of $156.8 billion.


Apple did not issue guidance for the quarter ending in June, as it usually does, due to uncertainty from the coronavirus outbreak.


Staff of The Patient Investor may directly or indirectly own shares in the above company.

A worm in the Apple

Apple Inc (AAPL) enjoyed stellar growth over the past 12 months, jumping more than 50%.

Apple Inc (AAPL)

But is that due to solid operating performance or window-dressing, with almost $140 billion of stock buybacks in the last two years?

Apple Inc (AAPL)

Free cash flow — operating cash flow less stock compensation and investment in plant and equipment — has been falling since 2015.

Apple Inc (AAPL)

And the company has depleted its cash reserves over the last two years, to fund stock buybacks. The graph below depicts the change in Apple’s net cash position (cash plus marketable securities less debt).

Apple Inc (AAPL)

So why the management enthusiasm for stock buybacks?

Is the stock a good investment? No. Free cash flow per share has barely lifted since 2015 despite $237.5 billion used to repurchase 1144 million shares.

Apple Inc (AAPL)

Apple have returned surplus cash to stockholders in the most tax-efficient way possible, by buying back stock rather than paying dividends. The added bonus is the reduced share count which gooses up earnings per share growth and return on equity.

Apple Inc (AAPL)

Investors in turn get excited and run up earnings multiples. The current price/free cash flow ratio of 23.2 exceeds that of the heady growth days up to 2015.

Apple Inc (AAPL)

The stock keeps climbing, supported by buybacks and rosy EPS projections. The problem for Apple is when they run out of cash, or exceed reasonable debt levels, then the band will stop playing and those heady multiples are likely to come crashing down to earth.

It’s not only Apple that’s doing this. The entire S&P 500 is distributing more by way of buybacks and dividends than it makes in earnings, eating into reserves meant to fund new investment.

S&P 500 Buybacks & Dividends

The result is likely to be low growth and even more precarious earnings multiples.

Apple Inc. (AAPL) – window dressing with buybacks

Apple (AAPL) is a notable omission in my international model portfolio. Here is one of the reasons.

Michael Santoli at CNBC reports that Apple’s sales and earnings over the past 4 years are essentially flat. The only metric that has improved is earnings per share (EPS) because of stock buybacks. Shares in issue have shrunk by 20.7%, from 5.8 to 4.6 billion.

Apple (AAPL) Metrics

Let’s break this down.

Earnings per share grew by an average 5.7% over the past 4 years, of which 0.2% was from actual growth and 5.5% from buybacks. Apple spent $170 billion on stock buybacks in the 4 years to September 2018 at an average of $150.85 per share.

Apple Stock Buybacks

In FY18 buybacks totaled $72.7 billion, or 7.5% of current market cap ($965.4 bn), well above its earnings of $59.5 bn. Apple is distributing capital to stockholders by way of buybacks.

FY19 estimated earnings yield is 5.4% and dividend yield is 1.4%, leaving retained earnings are 4.0%. Far less than the buyback yield. The company has heaps of cash and can basically keep doing this for a long, long time. But it erodes shareholder value.

Total return investors can expect, if they buy at the current price of $213.04,  is 5.6% (5.4% earnings yield and 0.2% actual growth). That is all that Apple will earn on the money invested into buybacks. An admission that the company is standing still, powerless to inject new growth.

A PE ratio of 17.9 appears modest but it isn’t if you only have 0.2% growth. That amounts to a PEG ratio of a staggering 90 times growth!

Bottom Line

Apple is no longer a growth company. Earnings are shrinking in real terms and the only way the company can maintain the illusion of growth is by buying back stock at exorbitant prices.

Apple Inc. (AAPL)

Apple (AAPL) is a notable omission in my international model portfolio. There are several reasons.

First, sales growth has been declining for several years.

Apple Revenue Growth (AAPL)

Second, Apple is vulnerable if there is a US-China trade war. Greater China represents almost 25% of projected sales and imposition of tariffs or other trade barriers could hurt Apple. But, even without trade barriers, sales in China are already slowing.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad…” (Tim Cook, January 2 letter to shareholders)

Third, Apple is losing market share in China as local smartphone technology improves. From The Wall Street Journal:

Apple’s share of the Chinese smartphone market has been shrinking, crowded out by tech giants such as China’s Huawei Technologies Co. that market increasingly sophisticated phones at a lower price tag.


Apple’s share of the Chinese smartphone market contracted to 7.8% in the first three quarters of 2018 from a peak in 2015 of 12.5%, according to Canalys, a market research firm.

Fourth, Apple is testing primary support at $150 on the long-term chart. Bearish divergence on Twiggs Money Flow warns of selling pressure; a peak at zero would strengthen the signal. Respect of resistance at $180 would also be bearish, while breach of support at $150 would confirm a primary down-trend.

Apple (AAPL)

Last, Apple is trading at a Consensus Forward P/E of 14.8 (Morningstar, February 12, 2019) which equates to an estimated LT growth rate of 10% at 12.5% p.a. rate of return. Given the current sales outlook, that seems optimistic.


It’s a funny kind of bear market

The US economy continues to show signs of robust good health.

Total hours worked are rising, signaling healthy real GDP growth.

Real GDP and Total Hours Worked

Growth in average hourly wage rates is rising, reflecting a tighter labor market. Underlying inflationary pressures may be rising but the Fed seems comfortable that this is containable.

Average Hourly Wage Rates

The Leading Index from the Philadelphia Fed maintains a healthy margin above 1.0% (below 1% is normally a signal that the economy is slowing).

Leading Index

But market volatility remains high, with S&P 500 Volatility (21-day) above 2.0%. A trough above 1% on the next multi-week rally would confirm a bear market — as would an index retracement that respects 2600.

S&P 500

The Nasdaq 100 is undergoing a similar retracement with resistance at 6500.

Nasdaq 100

The primary disturbance is the trade confrontation between the US and China. There is plenty of positive spin from both sides but I expect trade negotiations to drag out over several years — if they are successful. If not, even longer.

I keep a close watch on the big five tech stocks as a barometer of how the broader market will be affected. So far the results are mixed.

Apple is most vulnerable, with roughly 25% of projected sales to China. Recent downward revision of their sales outlook warns that Chinese retail sales are falling. AAPL is testing its primary support level at 150.

ASX 200

Facebook and Alphabet are largely unaffected by a Chinese slowdown, but have separate issues with user privacy. Facebook (FB) is in a primary down-trend.

ASX 200

While Alphabet (GOOGL) is testing primary support at 1000.

ASX 200

Amazon (AMZN) is similarly isolated from a Chinese slow-down although there may be a secondary impact on suppliers. Primary support at 1300 is likely to hold.

ASX 200

Microsoft (MSFT) is the strongest performer of the five. Their segment reporting does not provide details of exposure to China but it appears to be a small percentage of total sales.

ASX 200

The outlook for stocks is therefore mixed. Be cautious but try to avoid a bearish mindset, where you only see problems and not the opportunities. Even if China does suffer a serious slowdown we can expect massive stimulus similar to 2008 – 2009, so the impact on developing markets and resources markets may be cushioned.

Best wishes for the New Year.

Tech leaders bearish

There are five tech giants that dictate market direction. All reflect bearish sentiment in the market but only Facebook (FB) is in a primary down-trend. Not enough to call this a bear market.


Facebook (FB) is the only one to have broken primary support. At present it is retracing to test the new resistance level at 150.


Alphabet is headed for a test of primary support at 1000 while declining Money Flow warns of selling pressure.


Apple (AAPL) also signals selling pressure and has penetrated its rising trendline. Expect a test of primary support at 150.


Amazon (AMZN) is stronger, respecting its LT trendline, but declining Money Flow  warns of selling pressure. Breach of 1500 would be bearish.


Microsoft (MSFT) is strongest with Money Flow holding above zero. Breach of 100, however, would warn of a test of primary support at 85.


If another, most likely AAPL or GOOGL, breaks primary support then the needle would swing into bear market territory.

Buckley’s chance that rate hikes will slow

Average hourly wage rates are rising, with Production & Non-Supervisory Employees growing at an annual rate of 3.20% and All Employees at 3.14%.

Average Hourly Wage Rate

This is a clear warning to the Fed that underlying inflationary pressures are rising. There is Buckley’s chance* that they will ease off on rate hikes.

The Fed adopts a restrictive stance whenever hourly wage rate growth exceeds 3%, illustrated below by a high or rising Fed Funds Rate.

Average Hourly Wage Rate

The market is adopting a wait-and-see attitude ahead of Tuesday’s mid-term elections. Stocks like Apple (AAPL) have been sold down on strong volume despite good earnings results: earnings per share of $2.91 and revenue of $62.9 billion for Q4-18, compared to consensus estimates of $2.79 and $61.5 billion.


Optimism over a possible trade deal with China may not last the week.

A harami-like candle on the S&P 500 reflects indecision, while bearish divergence on Twiggs Money Flow warns of long-term selling pressure. Breach of 2550 is still unlikely but would warn of a primary down-trend.

S&P 500

The Nasdaq 100 tells a similar story, with primary support at 6300.

Nasdaq 100

* William Buckley was an English convict transported to Australia. He escaped when the ships laid anchor in Port Phillip Bay in 1803. The nearest permanent settlement, Sydney, was more than 1000 km away and, considered to have no chance of survival, he was given up for dead. Thirty-two years later, having lived among the Wathaurung Aboriginal people, he emerged from the bush when a settlement was established at Port Phillip in 1835. “Buckley’s chance” is an Australian colloquialism meaning having no chance at all.

Stocks: The year ahead

A quick recap of the quarterly chart overview from December 2012:

The S&P 500 is headed for a test of its 2000/2007 high at 1550. Declining 63-day Twiggs Momentum and a lackluster economy suggest that resistance is unlikely to be broken. Breach of the rising trendline would indicate a test of support at 1100.

S&P 500 Index

Canada’s TSX Composite Index is gaining momentum. Follow-through above 13000 would indicate another test of 15000.


Germany’s DAX threatens a breakout above 8000. Follow-through above 8200 would confirm a strong primary advance.

DAX Index

The FTSE 100 broke resistance at 6000, suggesting an advance to 7000.

FTSE 100 Index

India’s Sensex is testing resistance at 21000. Rising momentum indicates breakout is likely, heralding a fresh primary advance.

BSE Sensex Index

Singapore’s Straits Times Index lags behind, but breakout above 3300 is likely and would indicate an advance to 3900.


The Shanghai Composite is headed for a re-test of long-term support at 1800/1750. Rising momentum suggests that a bottom will form at this level. Recovery above 2500 and/or the declining trendline would strengthen the signal.

Shanghai Composite Index

The ASX 200 is headed for a test of resistance at 5000, supported by rising 63-day Twiggs Momentum. Breakout would signal an advance to 6000, but weakness in China or the US may delay this for some time.

ASX 200 Index