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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Is this a flight from smart phones to oil? Exxon Mobil became world’s biggest company last month. The commoditisation of smart-phones. Google enjoys record valuation. Markets celebrate again as more good news comes out of the US. Sterling falls some more

Is this a flight from smart phones to oil? Exxon Mobil became world’s biggest company last month

Exxon Mobil just missed out on a record in 2012, raking in $44.8 billion in 2012, which was 9 per cent up on 2011. Its record was set in 2008, when the company made $45.22 billion.

As an aside it is interesting to note that the then world’s largest company made its highest ever profits in the year when markets and banks, and indeed capitalism went into near meltdown. In 2012 the big growth came from refinery and profits from oil exploration but production fell.

BP will be releasing its latest results tomorrow.

At the time of writing Exxon’s market cap is $410 billion.

For a while last month the US oil company was once again the world’s largest company by market cap, while Apple was relegated into second spot.

Poor old Apple, it could only enjoy profits of $41.7 billion last year, with growth at a positively pedestrian 61 per cent.

At the time of writing Apple’s market cap is $425 billion, with Exxon Mobile once again trailing behind with a market cap of $410 billion.

The commoditisation of smart-phones

Exxon Mobil’s p/e is 9.28; Apple’s is 10.28. From one point of view that seems quite odd. Apple saw growth running at 61 per cent, and yet enjoys a p/e only slightly higher than Exxon’s.

But perhaps we only need to look at the contrasting fortunes of Samsung and HTC to get an indication of why.

A year ago HTC was number two in the US smart phone market; only Apple was enjoying higher sales. In Q4 profits at HTC fell by 91 per cent.

The news did not come as a surprise. Last month, its CEO Peter Chou told ‘The Wall Street Journal’: “Our competitors were too strong and very resourceful, pouring in lots of money into marketing. We haven’t done enough on the marketing front.”

Meanwhile, profits at Samsung were up 76 per cent in Q4 last year, with its Galaxy smart phone leading the charge.

The smart phone business probably has not peaked yet, but it must be moving close to that point. At that stage, revenue will come from replacement phones and maybe via incremental innovations.

But the contrasting fortunes of Samsung and HTC show quickly this market can change. Smart phones are beginning to look like much of a muchness, and even quite trivial benefits can give a company a major sales advantage, until rivals catch-up and then someone else comes up with a trivial benefit themselves.

Even Nokia and the renamed BlackBerry seem to be following this trajectory of market leadership to crash and who knows – with their latest product offerings – maybe short –term recovery.

Google enjoys record valuation

Perhaps that is why the Google approach is so compelling; it does not sell smart-phones (not in a big way, anyway), but it does make it easy for hardware and consumer electronics companies to make them. Traditionally, the tricky bit in the smart phones business is the operating system. Google supplies this free, and as you know, makes money from advertising.

The strategy appears to be pleasing investors. The company’s profits were up 7 per cent in Q4 on the year before, hardly the growth rate shareholders in the company have become used to, yet shares surged on Friday, hitting a new record high, and taking the company’s market cap to $255 billion. Its p/e ratio is around 24.

The reason given for last week’s jump in the Google share price was speculation that it is close to reaching an anti-trust settlement with EU regulators.

One can be pretty bearish about Google too.

There are an increasing number of reports that several hardware companies are considering disabling the Google bit of the free operating system, and installing other search engines. So Motorola launched an Android smart phone with Google disabled, with Microsoft’s Bing as the search engine instead. In China, a number of companies are using Baidu (Google’s main rival in the search engine business in China).

Google is apparently paying Apple quite large sums of money for it to continue to use the Google search engine. It may only be a matter of time before Google pays makers of Android phones to include its engine in the free operating system it has designed.

And if Google pays Android makers to use its tools, is that very different from Amazon subsidising its Kindle Fire from the money it makes from online sales/advertising?

There is another way of putting it. The smart phone business is increasingly looking like a mature industry, and smart phones are looking like commodities.

 

Markets celebrate again as more good news comes out of the US

The first half of last week were not good days as far as news on the US economy goes. Despite that, markets did pretty well. Friday, however, was a good day for economic news, and the markets did very well.

Just to remind you, earlier last week we saw data showing that US consumer confidence was back to a 14 month low, and US GDP contracted (just) in Q4.

But then Friday came along and things looked a lot better.

First off, the job data was good, or at least it was good-ish.

January saw another 157,000 new non-farm jobs. It was the sixth successive month to see more than a 150,000 monthly increase in non-farm labour.

Perhaps even more encouragingly, data for November and December was revved up by a substantial 127,000.

Some cynics look at the US job s data and say that the growth is coming from part-time jobs. Maybe it is, but in January the average hours worked also rose from 34.5 to 34.6.

The bearish take on the data is that US unemployment is still 7.9 per cent; in fact it went up in January from 7.8 per cent in November and December.

Friday also saw the latest Purchasing Managers’ Index from ISM for US manufacturing.  This rose from 50.2 (just a smidgeon over the 50 no change mark) to hit 53.1, which is a one year high. This was an encouraging report, and does suggest Q4’s contraction may indeed have been a one-off.

Markets certainly don’t need much encouragement these days, and on Friday they were very encouraged. The Dow passed 14,000 for the first time since 2007. In fact, the index is now just 155 points shy of the all-time high set on October 9 2007.

As for the FTSE 100, it ended last week on 6347, a five year high and 374 points off the post dot com crash high set on October 30 2007, and 583 points off the all-time high set on December 30 1999.

Meanwhile, the yield on US ten year government bonds rose above 2 per cent last week and for the first time since April. At the time of writing the yield on US ten years is 2.0457, and 2.0957 on UK ten year treasuries.

Sterling falls some more

Sterling has taken quite a tumble this year.

On January 1 there were 1.2297 euros to the pound and 1.6318 dollars. This morning, there were 1.1518 euros and 1.5698 dollars to the pound. Sterling is at round a six month low against the dollar but a 16 month low against the euro.

The recent falls in sterling will be good for exporters but not so good for inflation.

Those who say the UK needs export led growth may find reasons to be bullish on sterling’s fall.

Those who say we need to see real wages increase as inflation falls must be feeling a touch bearish, right now.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


Showing 3 comments

  1. Garry Hawkins

    “Those who say we need to see real wages increase as inflation falls must be feeling a touch bearish, right now.”

    The major worry for inflation is that real wages increase at the same time as inflation increases. I’m bearish on the UK, but can see things are improving elsewhere: US, BRICS, CIVETS and other emerging markets. The FTSE100 should be OK – as most of its constituent companies rely on overseas earnings in currencies that are largely appreciating against Sterling.

  2. Exxon Mobil is to Apple/Samsung, as Oak Tree is to Ivy/Honeysuckle.
    And Income is to Solidarity, as Tall is to Big.

    I had notice of my annual wage increase from HM DoP, today. Modest to a fault, but always very welcome.
    Apart from the usual suspects (MP’s/Civil Servants and the professional/self employed), I can’t see many others getting similar fiscal stimulants. Big deficit, small ullage and free flowing labour market, all favour the case for increasing inequality of renumeration, (until the gap is unsustainable and something has to give).

  3. Garry Hawkins

    “until the gap is unsustainable and something has to give.”

    Tony,

    It’s called a Sterling crisis and/or a gilts strike.

    G.

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