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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Is Apple planning a watch? Barclays cleans up its act. MPC speaks, but why? Draghi and the Maradona theory of interest rates

Is Apple planning a watch?

It is like a scene out of ‘Star Trek’. You look down at your wrist watch, and start talking. Or maybe it is instead a scene that would have been considered too farfetched even by the creators of the TV series that brought us Captain Kirk and Mr Spock. For there is a rumour out there, and the rumour says Apple is working on a smart watch. (That‘s a clever watch, not one that looks really smart, although with Apple’s design credentials it probably fulfils both descriptions.) Presumably from this watch you will be able make phone calls, send text messages, watch television, check out Facebook, and do all those other smart phone things.

Not sure where this rumour got started, but the first to give it media attention was the ‘New York Times’.

Truth be told, Apple needs something special. The smart phone market is becoming another commodity market. A company releases its latest smart phone, and maybe for a few weeks it is even the best smart phone in the world. Then a rival comes up with its latest offering, and it becomes the new best product.  Apple has the power of its brand, but it has lost the innovation edge. That isn’t because Steve Jobs is no longer with us, it is because Apple operates in what is becoming a mature market, with low barriers to entry.

Its share price is down 33 per cent from peak, and investors are taking fright over the company’s falling profit margins. Its p/e ratio may seem modest, even more so when you deduct its huge cash pile from its market cap, but if the company is just one of many in a crowed and highly competitive market, what future does it hold?

On the other hand, Jonathan Ive, Apple’s design mega-star, said last year that he is working on what feels like the company’s most exciting product to date. Most have assumed he was referring to Apple’s Internet TV product, but maybe he was taking about a watch.

Maybe. Don’t you think watches feel a touch 20th Century? If you want to know the time do you look at your watch, or your smart phone?

Or maybe the new smart watch will be to smart phone, what the wrist watch was to the pocket watch. Maybe in a few years’ time, a phone that sits in your pocket will look as dated as a watch hanging from a chain, dangling from the inside pocket of your jacket.

For the smart watch to work, Apple needs to crack the problem of a curved screen. But then it has been reportedly working on this technology for some time.

But there is a snag, and you have probably spotted it. How small must the screen be? Maybe Apple needs a screen you can fold up, so that it sits neatly on your wrist, but you can open it up when you want to go on the Internet.

Or maybe the smart watch won’t really be a smart phone/watch at all, just a very clever watch. Perhaps Apple has invented a watch that enables you to travel back in time, so that you may see the share price lift.

Still with Apple, but not with watches, the company has now filed a patent for a solar powered iPhone. Sounds interesting, but not sure how it will work. Do you get much light in your pocket or handbag?

Maybe the solution would be for the solar panel to sit on your wrist, charging up a battery, which you can link to your phone. Now there’s an idea.

Maybe, maybe and maybe.

What is clear is that innovation in the world of smart phones is not over. It just may have to go off in a new direction. If you think Apple is the company to do this, then you might see recent falls in the company’s share price as an opportunity.

PS:  If you a interested in these things, the technology in the solar patent filed by Apple was described as: “Integrated touch sensor and solar panel configurations that may be used on portable devices, particularly handheld portable devices such as a media player or phone are disclosed. The integrated touch sensor array and solar cell stack-ups may include electrodes that are used both for collecting solar energy and for sensing on a touch sensor array. By integrating both the touch sensors and the solar cell layers into the same stack-up, surface area on the portable device may be conserved. In addition to being used for capacitive sensing, the integrated touch sensor and solar panel configurations may also be used for optical sensing.”

 

Barclays cleans up its act

When you think about it, the changeover at Barclays is pretty staggering. There was Bob Diamond, American, loud, apparently indestructible, and now we have Antony Jenkins, so, well… so un-brash, so un-American, let hope he is not un-indestructible.

For one thing, he is closing down the division which helps clients avoid taxes. That’s a pretty bold step.

For another thing he penned a piece for the ‘Telegraph’ today in which he said: “There are some who believe the current storms will blow over. They are hunkering down waiting for life to return to normal. They think that as financial performances improve when the economy rebounds, the regulatory pressures and demands for changes in behaviour will melt away.

“They have got it badly wrong. This is not a cyclical shift we are witnessing but a permanent, fundamental, change affecting the economy, the environment in which we operate and the behaviour of our customers.” See: A road map for success and our commitment to real change

Perhaps even more interestingly, he said the bank cannot rely on the conditions that created growth for the bank over the last 30 years.

It is easy to be cynical, but what is wrong with sometimes displaying faith in human nature? Mr Jenkins seems to be a man who wants to address previous errors, and see Barclays return to more old fashioned values.

There was a time when the when the bank manager was a pillar of the community, Captain Mainwaring type figures bestrode the local stage. Is Mr Jenkins really changing things, returning us to what we thought was a bygone era? Or is just words?

And what about the P&L? Is Mr Jenkins sacrificing profits on the altar of public relations, or in the long run are good public relations and rising profits the same thing?

Maybe the shift at Barclays is born of a pragmatic quest for long term profits, and efforts to build a company that may not be subject to future fines for some wrong-doing; promoting  a product that hasn’t been invented yet, wiping out half the profits, or even creating losses?

Whatever is the truth, just remember Tony Hayward was brought in to help change the safety culture at BP. But, as BP’s experience showed, changing culture takes time.

Before the matter of banks is finished with today, here is a thought. There was a time when your bank manager was your financial advisor. Then things changed, and the bank manager’s advice consisted of recommending that you bought the bank’s products, so we started using IFAs instead. Now that IFAs can no longer make their money from commission and have to charge clients a fee, many might look elsewhere for their advice. Is this an opportunity for banks that put faith in their branch managers?

MPC speaks, but why?

It all begs the question: what is the point of having minutes?

The Bank of England typically announces its monetary policy decision on the first Thursday of the month (most months that is) and then the minutes are released a couple of weeks later. By doing it this way, media speculation on what the MPC is thinking, and what its members think about this, that, or what they like for breakfast, is doubled. We get it when the monetary policy is announced, and again when we get the minutes.

This time around, however, things were different. The Bank of England announced no changes, or sort of. It did reveal plans to buy the bonds it had previous bought under QE, and which are due to mature, but that is hardly a new policy. Realistically, it was confirming its past policy was the right one.

But what was odd this time around is that it also issued a proper statement – you know, one with sentences in it.

The Bank of England stated: “The Committee discussed the appropriate policy response to the combination of the weakness in the economy and the prospect of a further prolonged period of above-target inflation. It agreed that, as long as domestic cost and price pressures remained consistent with inflation returning to the target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation. Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term. The MPC’s remit is to deliver price stability, but to do so in a way that avoids undesirable volatility in output. The Committee judged that its policy stance was fully consistent with that remit. The Committee agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation.”

But why? Why did it feel the need to say these things?

Is it that the next inflation report due out this week, or the inflation data also due out this week will strike a worrying tone? Is the Bank of England getting its apologies in, as it were, in advance?

Draghi and the Maradona theory of interest rates

Mind you Mario Draghi has a harder job at the ECB. Somehow he has to persuade the markets that he is doing all that is necessary to stop the euro from rising, without actually doing anything.

These days many are saying that Mr Draghi practises what’s called the Maradona theory of interest rates. What’s that exactly? Well here is what Mervyn King said on this topic, back in 2005.

“The great Argentine footballer, Diego Maradona, is not usually associated with the theory of monetary policy. But his performance against England in the World Cup in Mexico City in June 1986 when he scored twice is a perfect illustration of my point. Maradona’s first “hand of God” goal was an exercise of the old “mystery and mystique” approach to central banking. His action was unexpected, time-inconsistent and against the rules. He was lucky to get away with it. His second goal, however, was an example of the power of expectations in the modern theory of interest rates. Maradona ran 60 yards from inside his own half beating five players before placing the ball in the English goal. The truly remarkable thing, however, is that Maradona ran virtually in a straight line. How can you beat five players by running in a straight line? The answer is that the English defenders reacted to what they expected Maradona to do. Because they expected Maradona to move either left or right, he was able to go straight on.”

So there you have it. Mario Draghi does nothing, but the markets are so convinced he is going to act, that they behave as if he is doing what they he should rather than what he does do. Roll on the Messi theory of interest rates, or the David Beckham theory of fiscal stimulus?

 

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


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