What the iPhone 5 means to Apple's Future

I am an apple maven. I have been for a while. I own an iPad 2, iPhone 4S, iMac and MacBook. I like the hardware design, the operating system and how innovative and cutting edge the company has been - until now.

The release of the iPhone 5 disturbs me. It is apparent that the leap from no phone to the first iPhone and then subsequently to the iPhone 4 were each in their own respect historic moments. Each defined the future of apple and propelled it to become the world's largest company by market cap (depending on the day). Furthermore, the iPhone paved the way for a new breed of communication hardware.

The majority of apple's earnings are determined by iPhone sales and it appears that the iPhone 5 will continue to sell very well. It already has gotten off to an impressive start. What concerns me is the lack of technological improvement from the iPhone 4 to the 5 - in hardware design and software. Despite the current successful sales volume, this lack of improvement means to me that perhaps their competitive advantage is diminishing and the next big innovation is there for the taking - from anyone.

I believe that apple's decline won't be immediate. In my opinion, they will continue to maintain or increase market share over the course of the next 2 to 3 years - especially with the anticipated release of the new inexpensive iPad. However, this iPad is just another repackaging of an existing product - not the creation of something new and different.

The iPhone 5 was apple's moment to demonstrate that it can continue to thrive without Steve Jobs. Although I will continue to be an apple fan for now, I am unfortunately very skeptical about apple's ability to maintain its financial ranking and market cap beyond the immediate future.

The Pros and Cons of a UK Housing Price Decline

I don’t typically like to speak negatively of other people’s comments and/or forecasts but I had to say something about this one.  In the most recent UK Housing article by propertytalk

(http://www.propertytalklive.co.uk/index.php?option=com_content&view=article&id=9993&catid=64&Itemid=85), Assetz House Price Watch not only made a statement today that house prices have increased but that the forecast for UK housing is positive and according to their index, they do not see a double dip recession within the anticipated future.

I am sorry but who is he kidding.  Just two days ago, the Nationwide Building Society released statistics stating otherwise.  They detailed that UK house prices fell in July for the fourth time in five months. Furthermore, the Nationwide House Price Index fell 0.7 per cent in July from June and the index now stands 2.6 per cent below its level of a year ago. Nationwide said the reading was the biggest year-on-year decline since August 2009 when Britain was mired in recession.  House prices are on average 13% down on their 2007 peak.  The good news is that this is better the majority of our European counterparts. 

Just today, JLL released a study, the Residential Eye Report 2012, stating that the “UK Housing industry is facing serious headwinds, both immediate and long-term.”  This doesn’t sound like a promising forecast to me. 

I believe that it is important here to explore the reasons associated with why prices are declining and what impact that this is going to have on residential investment.

Why are house prices dropping?

In my opinion, two reasons:

•         Lack of liquidity
•         Collateral damage from the Euro Crisis

The banks are not lending.  As a result of the last Credit Crisis, the banks have not fully recovered and thus are buyers are not able to obtain the financing required to purchase a home.  It is a perfect storm: lenders are requiring larger deposits and the buyers have less savings to provide as a deposit due to recessionary market conditions.  Stuart makes mention that he does see a double-dip in the cards.  We are in the middle of the double-dip.

However, is it necessarily a bad thing? 

Depends on the investor.

If you own the property, then obviously not.

If you are looking to purchase a property, it depends on your investment objectives and horizon.  If you have a short-term view, I would probably advise veering away from UK residential investments – except for London.  London has proved itself to be very resilient and the UK numbers would be a LOT worse had London not been in the picture.  According to a recent study conducted by UBS, London residential is considered the premier property safe haven city globally.

If you are seeking yield and has a long-term investment horizon, I do agree with Stuart, it could make sense to invest in non-London regions if you have the stomach to endure a possible further drop in house prices.  Due to house prices being low and supply not increasing (resulting from the lack of construction financing) within the foreseeable future, one may be able to purchase residences that offer 7%+ yields.  However, unlike commercial properties, there is the hassle of upkeep, wear and tear, etc. that one must be mindful of when purchasing this type of investment.

If prices drop, the average home purchaser will be able to afford more and the average investor will be able to obtain a higher yield – as long as rents remain or increase.  Due to the lack of rental supply and the fact that the US multi-family model has not made its way to the UK yet, most analysts do not foresee a drop in rents any time soon.

Why This Downturn Is Different

During the 2008 Credit Crisis, many institutional investors turned to emerging economies like China as an alternative and for the most part, it paid off.  From 2008 to 2010, there was an overwhelming sentiment that the Emerging economies had decoupled from the Developed economies. Furthermore, due to China’s increasing consumption, commodity prices and corresponding commodity based economies such as Australia and Brazil were able to piggyback on the perceived decoupled growth. 

While the West has suffered, China’s reported GDP annual growth rate has ranged between 9.2% and 10.4%.  The perception of decoupling has held so far but I have concerns that the global economy is going to experience a shift that may surprise many.  China, despite its attempts to maintain an image of constant double-digit growth, is currently experiencing a soft landing and consequently, it appears that many of the industries and countries that piggybacked on their growth are experiencing likewise.  

“A rising tide lifts all boats” and unfortunately, the opposite rings true as well.

China is not as decoupled as the global economy had hoped.  China’s forecasted growth is 8.2% for 2012 and most analysts don’t perceive any rebound in the near future.  The reason for this is because the current Euro Crisis has demonstrated that China is not as self-reliant as many hoped. 

The question is what impact will this have on the global investment environment? 

This is yet another reason for why there is currently a global flight to safety which means that everyone is seeking what they perceive as the safest means of capital preservation.  Investors are currently paying the German, Dutch, Austrian, Finnish and Danish governments for the privilege of placing their funds with each respective treasury and it appears that UK may be joining the club.  UK yields on 2-year government bonds appear likely to turn negative as investor demand for low-risk investments continue to increase. 

This means that investors are willing to incur a guaranteed nominal loss in lieu of making an investment that could go either way and bear the uncertainty associated with such investment.  This is unprecedented.

Just yesterday, the VIX (Volatility) Index, which many refer to as to the “Fear Index” was at its highest all year.  The VIX is a gauge of investor sentiment.  Warren Buffett has said time and time again “Be fearful when others are greedy and be greedy when others are fearful.”  According to Buffett, now would technically be the time to invest. 

Is it?

In my opinion, for the most part, it isn’t.  And here’s why:

-       The Euro Crisis is going to resolve itself any time in the near future and will most likely get worse before getting better

-       The libor scandal will have far–reaching implications and will most likely negatively impact the profitability of the banking sector.  Consequently, this will eventually further tighten an already struggling borrowing market

Yet, in my opinion, gold has had its run, defensive equities are overvalued and treasuries cannot be priced any cheaper. 

Where should a savvy investor invest their hard earned capital without bearing unnecessary risk?

Good question.  Let’s revisit the topic in a few days and I will provide you with my thoughts.