The Dropping of the Apples

By David Stockman  |  May 15, 2019

And then there is that day when all around,
all around you hear the dropping of the apples, one
by one, from the trees. At first it is one here and one there,
and then it is three and then it is four and then nine and
twenty, until the apples plummet like rain, fall like horse hoofs
in the soft, darkening grass, and you are the last apple on the
tree; and you wait for the wind to work you slowly free from
your hold upon the sky, and drop you down and down. Long
before you hit the grass you will have forgotten there ever
was a tree, or other apples, or a summer, or green grass below,
You will fall in darkness…

– Ray Bradbury,
Dandelion Wine (1957)

We’re at the point in the game when “reports” that the Donald will delay tariffs on automobiles by up to six months drive 350-point snap-back rallies for the Dow Jones Industrial Average.

That’s despite data from the Commerce Department showing that retail sales slipped 0.2% and from the Federal Reserve showing industrial production slid 0.5%.

It’s just more evidence that financial markets can no longer perform their core function: honest price discovery.

That’s one of the major topics of the May issue of The Stockman Letter, with an emphasis on Apple (Nasdaq: AAPL).

Apple management reported the company’s fiscal 2019 second-quarter earnings after the market closed on April 30. The stock ended that day’s normal trading at $200.76. The next day, May 1, AAPL surged as high as $215.31.

By May 13, it was down as low as $182.85, a 15.1% negative swing.

China has made trading AAPL almost literally a one-a-day delight for Wall Street speculators…

As is reflected in the broader market, there’s something wrong at Apple’s core.

Let’s acknowledge the most amazing outbreak of product innovation and sales and profits growth in corporate history. But, after more than a decade, the iPhone’s activation energy is nearly spent.

Indeed, Apple’s performance peaked with its fiscal 2015 results. It’s been struggling to stabilize its markets, to revamp its product mix, and to re-set its financial course ever since.

It simply hasn’t happened. Management’s most recent guidance implies the company’s trailing-12-month results as of Jun3 30 will be still way below peak levels of three and a half years ago.

Apple’s real profitability looks to be off by about 10% from that peak. At this point of in its repositioning game, the operating leverage built on the iPhone is eroding faster than its Wearables, Accessories and Services unit can support it.

And that’s to say nothing of the Big Red Hole…

Apple has a dual problem when it comes to China.

There’s the Trade War, of course, and the possibility that the Donald will subject the iPhone to tariffs. Apple would either revamp its supply chain or pass an estimated 14% price increase to iPhone buyers.

Meanwhile, Apple’s sales in the Middle Kingdom have declined by 25% over the last six months. We’re talking about real money here. Apple’s sales in China for the first six months of fiscal 2018 were $31 billion. They’re down to $23.4 billion for the first half of fiscal 2019.

Here’s the point – about the market and about Apple…

When it reported results for the 12 months ended September 30, 2015, AAPL’s market cap was $625 billion. It was valued at 8.9 times operating free cash flow.

That’s not unreasonable. It was at top of an historic run of innovation that translated into unprecedented financial success. That iPhone advantage is no more.

And, over the course of 42 months, many more headwinds have gathered. Free cash flow was down for the trailing 12 months ended March 31.

But AAPL hit a market cap of $992 billion during its post-earnings rip. That’s 16.6 times free cash flow.

The difference between then and now is a story of rot.

Core Competency

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

To common sense,

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR