James McKeigue
Apr 27, 2013

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This week one of the biggest financial stories was the release of US tech giant Apple’s results. At one point last year, Apple was the world’s largest firm by market capitalisation. But since then the share price has fallen dramatically.

That doesn’t look like changing. In this week’s results, Apple announced its first drop in profits for more than a decade.

“For now it looks as if Apple’s glory days are behind it,” said Matthew Partridge in Thursday’s Money Morning. “The company’s rise was based on its seemingly unerring ability to provide beautifully designed, intuitive products that everyone wanted.

The iPhone and the iPad have accounted for virtually all of Apple’s profits in the past few years. Fans have been willing to pay high prices and upgrade regularly, mainly because no one else has matched the quality of Apple.”

Trouble is, that could only last for so long. “One rule of capitalism (when it’s allowed to work) is that high profit margins will attract competitors hungry for a piece of the pie. When that happens, those margins will inevitably be eroded.” 

That’s what’s happening now. Apple’s success has come from its amazing ability to maintain prices but now smartphones and tablets are becoming commoditised. Worse still, says Matthew, there are signs the markets are converging.

“Instead of a separate 5” smartphone and a 10” tablet, more and more people are looking for a ‘phablet’. That’s an ugly name for a 7” hybrid device which has a screen big enough to make notes and do basic office tasks on, but which fits in your pocket and makes phone calls too.

“Apple so far doesn’t do phablets,” and it won’t be launching any new products until Christmas. “Six months is a very long time in the tech world. That’s long enough for customers to be seduced by other providers”, says Matthew.

In The Right Side email, Bengt Saelensminde wasn’t impressed by Apple’s decision to launch a big share buyback, rather than launching any new and exciting products. “What a pathetic move!”

Bengt takes a look at the business model of Apple’s biggest rival – Samsung – and what investors can learn from it. What you might find fascinating is the other businesses that Samsung is involved in.

How will the UK housing market return to normal?

Merryn Somerset Webb wrote one of the most popular stories on the website this week. It was all about – you guessed it – house prices.

Since the financial crisis hit, house prices in most parts of the country have fallen, notes Merryn. Prices are down by over 50% in Northern Ireland, by 14-16% in most northern parts of the UK and by 8-10% in the south. The only area that’s managed to hold on is London.

So why, asks Merryn, does everyone seem to think things are picking up nicely? “Transaction levels and buyer interest levels are both reported to be rising slowly; nominal house prices rose 1-2% in the 12 months to February; and PR companies have once again started sending out nonsense press releases – I got one a few weeks ago suggesting that houses in streets starting with “U” are the best investments.”

Who’s behind all this “happy talk”? The government, of course.

“I like to think that the coalition occasionally thinks of something other than house prices, but anyone looking at its policies wouldn’t be so sure.

“Interest rates remain at their lowest for over 300 years; the Funding for Lending Scheme is chucking out cheap money; and for those who can’t even afford to buy under these circumstances, there are shared equity schemes and Help to Buy, a massive mortgage guarantee scheme.”

What all this means, says Merryn, is that everyone who buys a house in the UK with debt is effectively supported in doing so by the government. 

“That’s nice for would-be distressed mortgagees, nice for homeowners in the south who get to hang on to their belief that small houses on the outskirts of drab commuter towns are ‘worth’ £1m. And it’s nice for those who think the job of the state is to rig the market.

“But it is bad for first-time buyers, bad for those who have taken out huge loans to buy something at the wrong price, and bad for capitalism.”

This can’t last forever, warns Merryn. Indeed she outlines the three ways in which it could end:

1. Real incomes can shoot up – unlikely;
2. Prices could fall fast when interest rates normalise;
3. Alternatively, nominal prices can stay steady, with temporary boosts from more silly schemes, and real prices can fall by about 3% a year until the job is done.

At the moment we’re seeing option three, says Merryn. But don’t rule out option two.

The comment section below the article soon filled up with readers debating UK house prices. Boris MacDonut thinks that the third scenario is the most likely. “Steady as she goes. The weighted average of ‘expert’ expectations for base rates is no rise for 2 or 3 years and only 0.5% or at most 1% by 2018.”

However, ‘commentator’ has a much more bearish outlook, noting that “prices outside Central London are falling in real terms because of high and rising inflation.”

Looking further ahead they cite “a mansion tax on Central London property… and more forced sales as baby boomers have to raise money to cover care costs/inadequate pensions savings” as other bearish factors.

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Why gold is money

The gold price has staged a reasonable recovery this week after its painful plunge last week. In the latest edition of The Price Report, Tim Price, took an in-depth look at gold.

What investors need to understand, says Tim, is that gold is, and always has been, money. To prove his point he highlights the three fundamental characteristics that economists believe money must have.

“It acts as a unit of account; meaning that we can use it to price other things;

“It acts as a medium of exchange, meaning that we can use money to avoid the inconvenience of having to resort to barter;

“It acts as a store of value – we can use it to preserve our purchasing power if we choose to defer spending today so we can spend tomorrow.

“Our monetary authorities – governments and their central banks – historically attempted to sideline gold by severing its link to paper money”, says Tim. Yet, “throughout human history, no purely paper money system has ever lasted. Not one.

“Bear that in mind the next time you hear a central banker, politician, commercial banker or trader denounce gold as some kind of barbarous relic. Not perhaps as barbarous as a form of money that is historically guaranteed, at some point, to revert to its intrinsic value of zero.”

Because we are forced to use the state’s paper money, gold no longer acts as a unit of account, says Tim. “But in both other respects, gold continues to act as money.

“The market in gold is deep and liquid, as evidenced by the fact that when institutional investors and hedge funds were blindsided by the market crash of 2008, they sold gold holdings to make good on losses elsewhere. They sold gold because they could. In some instances in the post-Lehman meltdown, there was simply no price for illiquid assets.

“And it is undeniable that gold acts as a store of value over the longer term. A gentleman in ancient Rome could clothe himself quite comfortably with an ounce of gold. The same is true in London or New York today.

“Now that is a store of value and long-term purchasing power. Bear in mind that since the US Federal Reserve was established in 1913, the US dollar has lost 98% of its purchasing power. Governments have a natural tendency towards inflation.”

It’s powerful stuff and certainly puts the slide in the gold price into perspective. In fact right now Tim thinks that this type of long-term safety record could be more important than ever.

He thinks that three popular financial assets could be about to collapse, taking a large chunk of the nation’s wealth with them. To find out if your wealth is at risk, and how you can protect it, click here.

A very useful ratio

Regular readers will know all about Tim Bennett’s weekly video tutorials. They’ve also proved a huge success on YouTube where they’ve notched up almost two million hits.

This week Tim took a look at ROCE – return on capital employed. It’s one of those key ratios that can help investors get to the heart of a firm. So if you don’t have a clue what it is, or just need a refresher, click here.

How to beat the City spin doctors

“Thinking of investing in the resources sector?”, asks Bengt in Monday’s Right Side email. “Then you need to ask one vital question: “Is this company full of substance, or full of spin?”

Bengt doesn’t like it when businesses hire PR firms. “Sure, companies should try their damnedest to get across coherent information to shareholders – and having someone to check regulated press releases makes sense.

“But hiring a PR firm to produce press releases and jolly-up the statements puts spin above substance.”

Instead he likes to crunch the hard data to get an idea if a company really is successful. With that in mind he gave his readers some tips on how best to “do your homework” on a company.

1. Go through the company news releases and build a picture of what the company has been up to. If the company is relatively new on the scene and there is no history; then steer clear – easy!”

2. Assuming the company has been around for a few years, collect the raw data and record it somewhere. I prefer a spreadsheet. Though it sounds like hard work, in reality, the process can be fun (!) and usually doesn’t take more than a few hours.”

3. The last, but probably the most important thing you need to know about any resources company is whether management has any skin in the game. Do they have a considerable amount of their own wealth tied up in the company?”

It’s a handy guide for DIY investing and something worth remembering the next time you’re looking at a stock.

• This article is taken from the free investment email Money Morning.

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Have a great weekend!

The MoneyWeek teamMerryn Somerset Webb
John Stepek
Tim Bennett
James McKeigue
Matthew Partridge
David Stevenson

Comments (1)

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  • 1. John C

    (27 April 2013, 09:12AM) 
    Complain about this comment

    Gold does tend to hold its value over the very long term. But over all reasonable time periods – say, one investor’s lifespan – gold is a pure speculation. And although gold may preserve wealth, unlike companies it doesn’t create wealth – unless you’re a gold-miner.

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