Financial Market Commentary

The market continues its fascination with Apple’s downfall. The stock has now shed approximately 50% of its once record-setting market cap, which exceeded $700 billion in September 2012. Writing for Wall St. Cheat Sheet on April 20, Nathanael Arnold asked “Is Apple Down for the Count?”, although his article concludes that “All Apple needs to do to reverse its fortunes is unveil another must-have product and it could very well once again become the darling of Wall Street.” In this article I will take a detailed look at Apple’s fundamentals vs. key competitor Google, with an occasional comparison to Amazon as well.

Let’s start out with a quick tour of Apple’s profile (all data are from S&P’s Capital IQ, unless otherwise specified). With a market cap of $365 billion, the stock is still a major presence in the NASDAQ-100. Their ROIC of 232% is off the charts, and despite a Friday (04.19.13) closing price of $390.53, the analysts’ consensus target price 12 months from now is $190 higher, at $580. Although the stock is not much to look at from a dividend yield perspective (1.4%), their P/E of 8.8 is lower than technology down-and-outers like Intel (9.4) and Cisco (11.4). Does Apple really merit a P/E multiple usually reserved for deeply troubled companies? We’ll seek to answer that question with a thorough look at the company from a fundamental perspective.

The chart below shows the 3-year compound average growth rate (CAGR) for Apple’s key metrics. The company looks great from a rear-view mirror perspective. Average annual revenue growth = 54%, with EPS growing an average of 69% per year. The company has grown free cash flows an average of 34% per year, and economic value-added (EVA) has grown at an average annual rate of 74%. Hard to think of another company that could compete with these results. Of course, the market is a forward-looking discounting mechanism, and after we complete the historical tour, we’ll model Apple’s future a little later in the article.

Apple’s historical profit margins and yields look anything like those of a challenged company. Not only are operating and free cash flow margins large — in the 20% to 30% range — but the trend is up for both metrics. As a new dividend-payer Apple’s dividend yield is unexciting, but at $390/share the stock has an earnings yield of 11.4%. Not a lot of double-digit earnings yields to be found these days.

Apple’s stock performance chart looks like a horror movie. Despite a rough 12 months for technology stocks in general, Amazon and Google managed to post returns of 20-35% over the period. Apple is down 30% year-over-year, and 50% since its all-time high in September 2012. Without question, that is one ugly stock chart.

The fundamental process I follow first compares the level and trend of per-share fundamentals with a key competitor. We’ll match Apple against Google in the following charts. In terms of revenue per share (the primary source of all fundamentals), Apple is the clear winner. They’ve grown revenue/share from $40 to $170, while Google’s revenue/share has “only” expanded from $70 to $150 over the same period.

The tendency for Apple to beat on per share fundamentals continues for the next several charts. They’ve overtaken Google in terms of EBITDA/share:

Earnings per share:

Net operating profit after tax (NOPAT) per share:

and Apple’s per-share profits are well supported by free cash flow per share:

Apple’s operating margin has expanded from 22% to 35% over the past 5 years, while Google’s has compressed from 30% to 26%. Operating margin is a key driver of discounted cash flow (DCF) analysis, as it directly affects EBIT, NOPAT and free cash flow. Large and expanding operating margin is therefore a strong positive in any DCF analysis.

In terms of relative valuation, Apple’s free cash flow yield has been expanding, climbing to 7.0% in 2011 and topping 9.0% in 2012, while Google’s has never exceeded 4.5%.

Both stocks’ price to sales ratios have been declining since 2009, with Apple’s stock consistently providing better value based on this metric.

Next we’ll look at the classic profitability ratios. Apple’s ROA has expanded every year for the past 5 years, most recently topping 24%. Google’s ROA shows a 4-year downtrend, compressing all the way down to 11% in 2012.

Return on equity shows a similar pattern. Apple’s ROE of 35% is more than double Google’s ROE of 15%.

Apple is an absolute killer in terms of ROIC, another key driver of value creation. Google’s ROIC has never exceeded 50%, while Apple’s ROIC has been well above 200% in both 2011 and 2012.

Economic value-added, or EVA, is one of the purest measures of value creation. While both companies generate large and growing EVA/share, Apple has also overtaken Google based on this metric.

Next we’ll examine trends in Apple’s key income statement drivers as we set up for our discounted cash flow analysis. Apple’s 5-year revenue growth CAGR is 44.8%. Gross margins have expanded from 35% to 44%, with operating margin expanding from 22% to 35%. Net margin shows a similar trend. Common shares expand as stock options are exercised, but the average yearly rate of 1.6% does not dilute Apple’s valuation severely.

Now that we’ve considered the trend in the income statement drivers, we’ll forecast Apple’s future income statement. Years 2013-2016 are explicitly forecasted, with 2017 representing our horizon forecast — the values we model in perpetuity. I’m going to really stress Apple in the forecast to build in a solid margin of safety, as the general consensus is that the company’s operating performance will begin to suffer from competitors like Google and Samsung. As the table below shows, I’ve tapered future revenue growth from 12.0% in 2013 down to 6.0% in 2016, and only 2.0% in perpetuity thereafter — these are very conservative assumptions, and probably appropriate given the intense competition in mobile phones and tablets. I’ve gradually squeezed gross margins from 40% to 36%, operating margins from 31% to 27%, and net margins from 22% to 18%. This reverses half of the gains in margins Apple has earned in recent years. As a new dividend payer, Apple will probably devote a fair amount of energy to growing dividends. I taper dividend growth from 16% to 6%, and use a perpetual dividend growth rate of 4.0%, slower than slow-growing, large-cap dividend plays like J&J. Once again, all the forecasting assumptions are deliberately conservative.

To calculate Apple’s weighted average cost of capital (WACC), I bumped their historical beta up from 1.03 to 1.20, which raises their WACC to 10.1% (very high in this low-yield market). The higher WACC will suppress Apple’s per share intrinsic value in the DCF model.

The table below shows Apple’s estimated per share intrinsic value each year from 2012 to 2017. Even with the conservative modeling assumptions, Apple has a DCF intrinsic value of $539/share, $149 higher than Friday’s closing price of $390. Granted, the squeezing of the margins in the forecasts puts the stock on a very slow-growth trajectory, but a per-share increase of $200 over the next 5 years (with dividends also likely to grow) is not something too many investors would complain about. The stock models up as extremely undervalued at $390/share.

Let’s turn our attention to some metrics typically associated with competitive positioning. In the exhibits that follow I use 3 stocks — Apple, Google and Amazon — and treat them as a 3-stock market. The graph shows that, based on the total sales revenue of the 3 companies, Apple is gaining market share while both Google and Amazon lose some share. This is just a fancy way of showing how much faster Apple has been growing, even against star stocks in the same sector.

Apple has certain cost advantages over Google and Amazon as well. Apple spends far less on research and development per dollar of sales, which is truly amazing when you consider that the company is still viewed as the greatest innovator of all time:

Apple has consistently spent less on CAPEX/sales than Google, and spent less than both companies in 2012.

Apple also dominates in terms of selling, general and administrative expense per dollar of sales.

The exhibit below takes a different look at Apple, using tools provided by EVA Dimensions, LLC. Their PRVit (“prove it”) scorecard ranks Apple as a buy, based on a combination of intrinsic value (ranked in the 94th percentile of the Russell 3000), and actual valuation (ranked in the 48th percentile). EVA Dimension’s PRVit system shows that Apple is fundamentally more attractive than 84% of the stocks in the Russell 3000.

Of course, Apple’s technical chart looks like something out of a Freddy Krueger movie. The stock price has totally broken down, plunging ever-further below its 200-day moving average for the past 3 weeks. The MACD is increasingly negative, indicating that the negative price momentum is accelerating. The only small bright spot in the chart is the relative strength index (RSI), suggesting the stock is temporarily oversold.

Summing up, Apple’s profound stock price decline of approximately 50% over the past 7 months has left it in desirable fundamental territory. It outperforms Google based on virtually every fundamental measure, and a discounted cash flow model using very conservative assumptions suggests the stock could be undervalued by as much as $190/share. Technically, the stock looks terrible, of course, so it’s hard to pull the trigger and issue a full-fledged buy recommendation right now. The stock bears close watching, however. If technical sentiment turns, or Apple announces a significant reinvigoration of its product line, or a competitive resurgence in the iPhone/iPad space, or even Apple TV, the stock could easily regain $100 a share or more and still be fundamentally undervalued. Apple belongs on every investor’s watch list.

Disclosure: The author owns no shares of Apple at the current time.

The chart says it all. In addition to “Dr. Copper” (the metal with a Ph.D., as veteran analyst Barry Ritholtz once quipped), Gold, Aluminum and Coffee have all joined the downturn in commodities prices.

Every time we see this sort of divergence, stocks eventually follow. It’s likely to happen even in a Quantitative Easing-fueled, “buy the dips” environment. US stocks have shrugged off an exceptional amount of disappointing macro data in recent months, including plunging Purchasing Managers’ Indexes, a huge miss on the nonfarm payrolls number, and shockingly low GDP growth. Let’s see how long equities can stay aloft before the QE helium starts leaking out of the balloon.

This week 3 market bellwethers — Caterpillar, Oracle and FedEx — all missed their earnings targets. Predictably, the overall market shrugged off this news, preferring to instead focus on Bernanke’s promise to continue repurchasing illiquid debt from banks’ balance sheets at a rate of $85 billion per month. This excess liquidity has been driving up the prices of stocks, real estate and commodities for the past several years, so the market’s habit for shrugging off bad news is familiar in this bull market cycle. But can stocks continue ignoring bad news forever? The chart below shows the returns for CAT, ORCL and FDX for the past quarter:

In a bull market, we expect leadership from risk-on sectors like Industrials (CAT and FDX) and Technology (ORCL). The graph shows that CAT’s price action has been sounding an alarm since mid-February, when it decoupled from the bull market and turned negative. CAT’s reaction to their earnings miss was therefore less severe than that of ORCL and FDX, which had been participating in the rally until announcing their earnings misses this week. The market reaction was swift, as these misses were largely unexpected.

In the old days, pundits like Louis Rukeyser and Marty Zweig (both watching the big tape in the sky now), would have called strike three on this troubling trifecta of news. If CAT’s not selling as many bulldozers as they thought, doesn’t it mean the global construction boom is slowing? If FDX isn’t growing its shipping business, doesn’t it mean global commerce is slowing? If a technology sector leader like ORCL is surprised at how slowly its profits are growing, doesn’t it mean they’ve overestimated businesses’ ability and need to buy and use their database and business knowledge products? Well, that’s what these signals used to mean — before euphemisms like “Quantitative Easing” were introduced into the vocabulary.

From a technical perspective, all three stocks have broken below their 50-day moving averages, with CAT and ORCL sitting right on their 200-day moving average. FDX still has a few dollars of leeway before it touches its 200-day MA. Nervous territory for investors in these stocks, to be sure.

For the more intrepid out there, however, the S&P 500 continues chugging along, well above its 50- and 200-day MA:

These fundamental and technical developments add to my worry list, which began with my March 14 post S&P 500 Decouples from China and Brazil. Renowned technical analyst John Murphy lists such decoupling as a warning signal in his recent post on Wiley’s Capital Exchange Blog, John Murphy’s 5 Laws of Intermarket Trading.

It might be time to take off the tin foil hats, turn down the sound on CNBC, and do a little thinking for ourselves about the market’s prospects for spring and summer. Sell in May and go away worked well in 2011 and 2012 (although the market revived appreciably in late 2012). But, as Larry Kudlow is so fond of saying, no one ever went broke taking profits.

As the graph below shows, in the 4 months spanning November 2012 through February 2013, seasonally-adjusted housing permits have been 515,000 units larger than the non-adjusted permits number. Considering that the US had 838,000 housing permits pulled in the past 12 months, these miraculous adjusted numbers seem to fit the Fed’s “QE can fix the economy” narrative a little too suspiciously for my tastes.

It’s been an interesting quarter in global markets, with the S&P 500 up over 8% since the turn of the year. US stocks mirrored stronger moves in Chinese and Brazilian stocks through January. Since that time, China has steadily faltered, with Brazil following over the last week. US stocks have continued logging their 0.25% daily gain, however — at least for now.

If the world’s growth engines are signaling “time out,” how much longer before US stocks re-couple with the global trend and we get that long-expected correction? If a downward move starts, be nimble, and don’t expect a full -10% as in markets of yore. After a few percent to the downside, expect money to pour in from the sidelines as conscientious objectors try to make up for missing the turn-of-the-year rally.

Back in December I weighed in with my economic call for 2013 in my Sluggish Business Conditions Expected to Continue post. Now the Washburn University Applied Portfolio Management students have completed their own update to my forecast, which is posted below. The goal of the exercise is to identify the stage of the US business cycle and map that to the corresponding stage of the financial cycle (which leads the business cycle, as shown in the diagram below):

The analysis is used to practice “sector rotation,” i.e., put new money to work in the stock sectors thought to perform well at that particular stage of the financial cycle, and allocate away from sectors that are positioned to do poorly.

The APM students’ notes and rankings for The the Conference Board’s 21 leading, coincident and lagging indicators are provided below. The closest matching variables from the FRED database  (research.stlouisfed.org)  are analyzed, in some cases replacing proprietary Conference Board metrics, such as consumer confidence and their leading credit index(TM). The students’ overall interpretation of economic conditions is depicted in the table and graph below:

The diffusion index values and graph reflect the students’ interpretations of the lagging, coincident and leading indicators (reviewed in detail below). Their analysis concludes that US business activity accelerated in early- to mid-2012 (lagging indicators = +87%), and accelerated even further through Q4 and the end of the year (coincident indicators = +93%). Looking forward, however (leading indicators = -12%), their call is that the pace of business activity will cool off slightly, which is in line with the recent surprising contraction for US GDP (-0.1% for Q4 2012). With the pace of economic activity slowing, the students’ overall conclusion is that the economy is entering a contractionary phase — whether it’s a mid-cycle slowdown or beginning of a recession remains to be determined — which means we are just past the peak of the financial cycle, as evidenced by the recent outperformance of “risk-on” sectors such as financials and industrials:

Leading Indicators. The students’ ratings for each of the leading indicators, along with the Conference Board weights for each indicator, are shown in the table below, with detailed notes following:

Average Length of the Manufacturing Workweek:

The most highly weighted leading indicator, Average Length of the Manufacturing Workweek, measures the average number of hours worked in a week for US manufacturing employees. Emerging from the 2008 recession, the metric successfully led the market uptrend beginning in May of 2009, shortly before the recession had officially ended. Since that time, the measure has stabilized to its pre-2008 recession levels. It is interesting to note that, although the number of hours in a workweek remains stable, total manufacturing employment has been in a dramatic downtrend that started before the 2008 recession. Overall, it appears that the Average Length Manufacturing Workweek indicator has established a “new normal”, evidenced by stability in the number of hours worked, but a significant decrease in total manufacturing employment. The indicator is rated zero.

ISM New Manufacturing Orders Index:

The ISM New Manufacturing Orders Index is a diffusion index that measures the number of manufacturing orders received by US manufacturers. The index has been highly volatile over the past 20 years, which has hampered its ability to effectively act as a leading indicator. Immediately after the close of the most recent recession, the metric returned to levels sustained prior to the downturn in the economy, but has been balancing itself around the 50 mark throughout the last 18 months. It should be noted the short-term trend in the diffusion index is beginning to mirror the trends prior to the 2001 and 2008 US recessions. Given its sustained trend of volatility, the ISM New Manufacturing Orders Index is expected to continue fluctuating around the 50 mark, which could signal the beginning of a new economic recession if there is any further decline in the index. This indicator merits a -1.

Consumer Sentiment Index:

Reflecting the changes in consumer preferences within the economy, the Consumer Sentiment Index is one of the few economic indicators that is expectations-based. Just prior to the 2008 recession, the index had some marked volatility, but was more stable until around 2007, when a sharp decrease signaled an economic recession. Notice in late 2012 the index dropped sharply, indicating that consumer confidence in the US economy has still been fairly negative since the end of the most recent recession. Despite a relatively upward trend in the Consumer Sentiment Index, the growth has been much slower than in prior years. Overall, the Consumer Sentiment Index is expected to remain stable or begin a downward trend, as consumer confidence in the economy remains at a low point since the commencement of the 2008 recession. This indicator warrants a score of zero.

Interest Rate Spread, 10-year T-Note Yield Less Fed Funds Rate:

The interest rate spread, also known as the yield curve, measures the difference between 10-year Treasury bond rates and the overnight federal fund rates. The slope of the yield curve is primarily influenced by the Federal Reserve Board’s monetary policy and investor expectations of long-term interest rates. In previous business cycles, the interest rate spread has been relatively effective in signaling economic changes; however, in 2008, the metric appeared to lead the recession too early on. Since the close of the recession, the spread has been trending downward, but has remained stable at 1.5%. Overall, given that interest rates are expected to remain low, the interest rate spread is expected to either remain stable or slightly decline over the next 6-9 months, which would send a negative signal regarding future economic growth. This indicator is scored zero.

Manufacturers’ New Orders for Consumer Goods:

Measuring the amount of new durable goods ordered by consumers, the nominal and real durable goods orders chart tracks the money spent on items with larger price tags and longer lives. While the chart dropped off severely prior to the 2001 recession, it seemed to take longer to adjust and drop in 2008. Notice that the peak in 2011 for durable goods orders was far below the previous peaks in 2007 and 2000, indicating that while some consumers are ready to purchase items for the long run, others are still wary of economic conditions. After the 2008 recession, orders increased quickly until 2012; from 2012 to the present, there has been a steady decline, which could predict further contraction of durable goods ordered. As the 2011 peak’s downslope is not nearly as sharp as the peak in 2000, one could assume that the market is simply adjusting and the downward movement seen recently will be offset by some upward movement. Therefore, this indicator merits a zero rating.

Chicago Federal Reserve National Financial Conditions Index:

The Chicago Federal Reserve Board (FRB) diffusion index measures how easy or tight credit conditions are in the US. As the value trends downward past zero, the ability for an individual to borrow money in the US becomes easier, characterized by loosened credit restrictions. Just prior to the most recent recession, this indicator peaked just as the recessions was considered to have begun, unsuccessfully indicating a downturn in the economy. The Chicago FRB diffusion index fell approximately 300bps to a low of -1.5% just after 2010 and has slowly recovered. Given the Federal Reserve’s current policy, characterized by ongoing low interest rates since the end of the 2008 recession, the index has been only increasing slightly. Consequently, the Federal Reserve Bank is expected to keep interest rates very low over the 6-9 months, which concludes that the Chicago FRB diffusion index will continue on its slow trend upwards, but will remain below zero, indicating continued loose credit conditions. This indicator will be rated +1.

S&P 500 Stock Prices:

Since stock prices are thought to be forward-looking discounting mechanisms, it is easy to conclude that stock prices should lead the economy. While both the 1991 and 2001 recessions were successfully predicted by this indicator, the recovery in 2002 actually lagged behind until 2003. Notice that we have been in a secular bear market for the last 12 years after stock prices are adjusted for inflation. This means that, while the real stock prices do have a recovery period during the expansion, the peaks have fallen progressively lower in the expansions following the 2001 and 2008 recessions. The most important thing to realize is that right now, the stock market is trending up; though it may not be an explosion of upward momentum, it has been rising since mid-2012 and has not taken a downturn yet. Given the slow trend in the real S&P 500, this indicator merits a score of zero.

New Orders for Non-Defense Capital Goods:

The Capital Goods Orders graph shows spending on capital goods by US businesses. Though the series predicted an economic downturn in 2008, the capital goods orders almost missed the 2008 recession entirely; it was lagging at the beginning of the recession and barely had an upturn before the recession ended.  Notice that, although the real line peaks in both 2008 and 2011, these peaks are not even close to the previous high point realized in 2001. The graph shows that capital investments have been contracting for the whole year of 2012 and capital investments have been generally shrinking since 2000. Overall, as we just had a peak in 2011 and these peaks are followed by troughs, further contraction of capital investment can be expected. Consequently, this indicator will be rated -1.

Average Weekly Unemployment Claims:

The Average Weekly Initial Unemployment Claims leading indicator measures the number of people filing for new unemployment benefits. The indicator has an anti-cyclical relationship with the business cycle; a low number of unemployment claims indicates the economy is expanding. In recent years, it has been a relevant indicator in illustrating the economy‘s downward spiral during the 2008 economic recession. Prior to the past 2001 and 2008 recessions, weekly unemployment claims remained low until sharply increasing in the months leading up to the economic recessions. As seen in the graph above, the amount of claims has dropped tremendously since its peak in 2009. Notice how the metric is currently balancing around 375,000 per week, which appears to be relatively high compared to the 1990s. Although comparatively high, recent months show a slight downward trend of average weekly unemployment claims, indicating the economy is slowly recovering from the 2008 recession. The indicator will be given a rating of zero.

New Building Permits:

This indicator measures the number of new private housing construction permits requested by home builders. Prior to the 2008 recession, the number of building permits gradually declined, successfully indicating a recession was about to surface. It is also interesting to note that during the last recession in 2008-2009 the number of new housing building permits reached a 30-year low. Reviewing the metric’s trend over the past few years, steady growth in the number of permits authorized represents a strengthening economy. Overall, the number of building permits for new private housing has yet to surpass pre-recession levels, but is expected to remain trending upward over the near-term. Therefore, this indicator will be rated at zero.

Coincident Indicators. The students’ rankings for the Conference Board’s four coincident indicators are shown in the table below; detailed notes on each indicator follow.

Manufacturing and Trade Sales:

The indicator of manufacturing and trade sales is a coincident indicator that measures the total retail sales and real total retail sales (accounting for inflation). This indicator acted as a leading indicator in piror business cycles, and as a coincident indicator in more recent years. Both total retail sales and real total retail sales have been on a steady rise since 1992.  Total retail sales surpassed real total sales during the 2008-2009 recession. The steady uptrend indicates a growing economy. Retail sales have resumed normal rate of growth since the 2008-2009 recession and are showing a full recovery.  This indicator therefore merits a diffusion index score of +1.

Total Nonfarm Payrolls:

Total nonfarm payrolls is a coincident indicator that measures the total number of people in the US with a fulltime/part time job, temporarily or permanent. The total number of nonfarm payrolls has decreased during the recession (2008-2010) but increased since 2010.  Total nonfarm payrolls is getting back to the level that it achieved before the recession. The overall trend is going upward. The upward trend and steady increase of the total nonfarm payrolls is indicating a recovering market and economic expansion. For this reason the coincident indicator nonfarm payrolls gets a diffusion index of +1.

Personal Income Less Transfer Payments:

Personal income less transfer payments is a coincident indicator measuring the extent to which income in the US is growing from market base sources excluding any government redistribution of income.  US GDP grows by a greater amount when consumers’ spend freely.  Personal income is the main source of spending. Transfer payments are redistributions of tax revenues by the government including social security, welfare and business subsidies. The indicator lagged true economic conditions by several months, for instance during the last recession (2008-2010), when it reflected the overall economic situation two months late. Nevertheless, personal income less transfer payments is at an all-time high and increasing. Therefore personal income less transfer payments will receive a diffusion indicator score of +1.

 Industrial Production:

The index of Industrial production is a coincident indicator which measures physical output at all stages of production in the manufacturing, mining, gas and electric industries. Although the industrial sector only represents a fraction of the total economy, this index is positively correlated with changes in total output. The nominal works well as a coincident indicator, increasing and decreasing in sync with economic expansions and contractions. The inflation adjusted industrial production index fails to increase during the 2002-2007 expansion, although it decreases sharply with the 2008-2009 recession and rebounds weakly before resuming a sideways trend. Although both series have been increasing slightly since the last recession, the series did not manage to grow over the past 12 years, which is not indicating current economic expansion.  Therefore this indicator will receive a diffusion index of zero.

Lagging Indicators. The students’ rankings for the Conference Board’s seven lagging indicators are shown in the table below; detailed notes follow.

Average Prime Rate:

The Average Prime Rate is a benchmark used for pricing loans. The indicator trails the economy as banks set the price of credit. The demand for credit will grow if the economy has been expanding, and banks can mark up the price of credit and charge higher rates. Commercial and Industrial Loans depicts the level of the interest rate regardless of total loans outstanding. If new credit is not created due to low rates, the economy may not expand. The Average Prime Rate functions more like a leading indicator heading into recessions as the US Federal Reserve begins cutting interest rates in anticipation of future economic weakness. During the last three recessions, it acted as a lagging indicator, increasing well after the end of the previous recessions. The Average Prime Rate has been in a secular downtrend for the past thirty years, declining with the general decrease in inflation and interest rates for the same period. The Prime Rate has remained very low rate due to the Fed’s commitment to zero interest rate policy ever since the 2008-2009 recession.  Low interest rates have contributed to the rebound of commercial and industrial loans. The Prime Rate could not be much lower, and business loans are increasing, therefore this indicator  is scored  +1.

Ratio of Consumer Credit to Personal Income:

Consumer Credit to Personal Income functions as a lagging indicator.  Consumers normally wait to increase borrowing for at least 3 to 6 months after a recession ends and they can see tangible signs of economic recovery. Consumer credit to personal income functions well as a lagging indicator around 1981-1982 and 1991-1992 recessions.  During the early 2000s credit bubble, the current value of the series becomes hard to discern. Early in the 2008-2009 recession, the ratio began a sharp decrease, which means consumers offset the lost income during the latter part of recession by increasing borrowing relative to income. As teh recovery began, the ratio declined as income grew and consumers reduced debt. In the recent two years, the ratio began to climb back close to its last high point, which may suggest that total personal income has grown to the point that consumers feel comfortable increasing their total borrowing once again. The series decreases by 1% after each recession, which means consumers still have old debts to pay off before a new cycle of consumer borrowing begins.  In the long term, the main trend of this series is upward.  Therefore the indicator will be rated as a +1.

Consumer Price Index for Services:

The Consumer Price Index for Services is a lagging indicator that measures the percentage increase or decrease in the cost of services over time. The index only sometimes (1983 and 2009) lags behind the economy, other times (1988 and 1998) it reflects increase in service costs before a recession. Notice how the index increased sharply (4.4%) following the 2008-2009 recession, but has decreased by a greater percentage (7%) since. The index is decreasing on the whole, indicating a decline in the cost of services over time. Note that the index has not reliably lagged behind economic changes.  Nonetheless, the comprehensive decrease in cost of services suggests recovery from the most recent recession.  This index receives a +1.

Commercial and Industrial Loans:

The index of commercial and industrial loans is a lagging indicator that measures the amount of consumer and commercial borrowing. Troughs in borrowing usually occur a year or more after a recession ends. Consumer borrowing has risen at a faster pace than commercial borrowing.  After recessions, commercial borrowing decreases more than consumer borrowing.  After the 2001 recession consumer borrowing did not slow down at all. Both consumer and commercial borrowing have reached or exceeded their pre-recession levels indicating the economy has recovered. In the past, borrowing has steadily increased, with the exception of post-recession periods.  Currently borrowing is increasing again indicating economic growth.  This indicator therefore merits a diffusion index score of +1.

Inventory to Sales Ratio:

The Inventory to Sales Ratio Index is a lagging indicator that measures the amount of inventory held as a percentage of sales. The index reliably decreases by a larger percentage than normal after a recession. Notice how the index increases significantly before or during a recession and decreases at the end of a recession. The index has remained relatively unchanged (between 1.25 – 1.30) since 2010 indicating an Inventory to Sales Ratio similar to pre-recession conditions. Significant increase in Inventory to Sales hasn’t consistently lagged behind economic recessions.  However, significant decreases in Inventory to Sales Ratio have reliably indicated the onset of and expansion phase.  Therefore, this index receives a +1.

Unit Labor Costs:

The index of unit labor costs is a lagging indicator that measures amount of labor cost per worker and the real amount of labor cost per worker (which considers inflationary effects). Labor cost per worker usually peaks midway through a recession and decreases about a year after a recession. Notice how unit labor costs are increasing while real unit labor costs are decreasing. Unit labor cost increasing indicates U.S. businesses are adapting to higher wage demands from workers.  Real unit labor cost indicates the unit labor cost increase has increased slower than the rate of inflation, however. An increase in unit labor cost since the last recession shows economic growth.  The continual decrease of real unit labor cost indicates workers’ wages are not keeping up with inflation.  Therefore this indicator receives a score of zero.

Duration of Unemployment:

The indicator of average duration of unemployment is a lagging indicator that measures the average weeks a person is unemployed. The labor force participation rate is also depicted. Duration of unemployment has increased during recessions and continued to increase for about a year after recessions before slowly declining. The labor force participation rate has steadily been decreasing and not shown any sign of turning around since the 2001 recession. Notice that duration of unemployment hit an all-time high after the 2008 recession and has only recovered about one-fourth to the level it was before the recession.  Also, the labor force participation is at an all-time low. Unemployment and labor force participation have not recovered since the 2008 recession. The average duration of unemployment indicates little or no economic expansion.  This indicator therefore merits a diffusion index score of -1.

Apple’s price has recovered from its recent lows, and the stock showed surprising strength in a down market Friday, popping back up to $475. As the chart shows, however, Apple’s overall trend remains lower.

The MACD remains stuck in strong negative territory, and Apple’s price is still $30 below its 50-day moving average. The technicals are still not siganling buy. Fallen tech growth stars don’t usually have profitable second acts as value stocks. Apple has been both a unique company and a unique stock over the years, but without Steve Jobs, it seems that even Apple can revert to the mean — financially and operationally.