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JakilaTheHun (99.92)

Muni Bonds, Apple, and the GDP Equivalents of American States



January 19, 2011 – Comments (4) | RELATED TICKERS: MUB , AAPL , CMF

It's been a long time since I've posted an edition of the "Hunnish News Invasion".  Unfortunately, I find that I don't have the time to put those together these days.  Instead, you get "The Hunnish Quick Thoughts Invasion!"   Ohhh ... the HORROR!  Today's subjects: muni bonds, Apple, and GDP equivalents of American states.


Muni Bonds are Very Cheap

I am not a bond investor; nor do I even have much of an interest in becoming one.  However, if you ask me, muni bonds are very cheap right now.  Investors are overreacting to the conditions out there. 

Bond investors are at the top of the totem pole.  This is true with corporations and it's even true with most governments.   But it's especially true with state and local governments, because they're sort of f@#$ed if they default, whereas, a large national government feels a lot of pain in a default, but the creditors probably feel it more.

What this means is that state and local governments that are under stress will take painful measures to meet their obligations.  This means higher taxes and lesser services.  In some cases, it might mean the development of a new revenue generation scheme (e.g. the attempt in California to legalize and tax marijuana). 

But it probably won't mean default except in a small percentage of situations.  When you consider the fact that a lot of AAA rated bonds are now paying in excess of 5% yield, things are really starting to look overdone.  

I would green thumb all the major muni bond ETFs here on CAPS, except it's unlikely that bonds, no matter how beaten down they are, will outperform the S&P 500 over a long-term horizon.  

However, if you're interested, here is Seeking Alpha's Guide to Muni Bond ETFs and CEFs.


Mississippi = Bangladesh

The Economist posted an interesting chart the other day.  It shows the the GDP of every state in the US compared to the closest comparable nation.   Of course, some of these might be a bit deceiving; Vermont is closest to Yemen, for example.  Yet, Yemen has a population 36 times as great as Vermont and it's area (square mileage) is 22 times, as great.  Hence, for Vermont to have an economy as big as Yemen is a good thing for VT and a bad thing for Yemen.

All the same, I like the idea behind the chart because it emphasizes a different way of thinking about economics.  Too often, we think about things only in terms of nation.  China is an "emerging economy."  The US is a "developed economy."  These statements are actually broad generalizations and it hides deeper understanding. 

Shanghai and Beijing are, for all intents and purposes, part of the 'developed world.'  Rural China is the "third world."  New York City is part of the "developed world."  While I wouldn't call rural Mississippi the "third world", there are very poor areas in that state that might be more equivalent to some less well-off places in Latin America. 

I'd be interested to see a similar chart, but with areas in the US compared to other parts of the world in terms of GDP per person.  That would be interesting. 



I've been skeptical of investing in AAPL for awhile now.  Even wrote a boneheaded article about it sometime last year. But I've never been tempted to short it or buy puts on it.  Rather, I've simply decided to keep away. 

But I still believe there are good reasons to be frightened of buying into Apple.  And none of them have to do with Steve Jobs.  Look, Apple will be OK without Steve Jobs.  You can't deny what he's done for the company, but it's at a stage where it's built up and established in such a way that it can be successful without him.  He might look like a one-man show, but there is a very talented team behind all these devices that Apple is putting out and they will continue to innovate. 

The problem is that 'continuing to innovate' may not be enough.  The iPad was a spectacular success, but it still hasn't replaced the iPhone --- and it never will.  And this is the crux of the issue:  Apple's enormous profits are heavily dependent on the abnormally high margins from the iPhone.  Without those fat margins from the iPhone, AAPL might be a $80 - $100 stock right now, rather than a $350 one. 

And the thing about those margins: they will experience pressure in the coming years.  In fact, they already are.  People just don't notice it because top line revenues have been increasing so much from new sales.  This trend will probably continue over much of 2011 with the iPhone's introducation at Verizon.  But those margins will shrink; and at some point, earnings are not going to look nearly as pretty because of it.  

The culprit here will be good old fashioned economics.  When companies earn "abnormal earnings", competitors swoop in to try to gain a piece of the pie.  Fortunately for Apple, it's competitors haven't competed very well with it in the past.  Google and HTC are the exceptions, however.  Android phones are very popular. 

Whether or not you think Android or the iPhone is better is irrelevant.  What's important is that Android is legitimate competition and it will create margin pressure for Apple.  And what else might be important is that whether or not you prefer the iPhone, the phone carriers will probably prefer Android unless Apple is willing to drop its prices. And it's probably a good idea to keep the phone carriers at least semi-happy, because if they stop promoting your phones and start flooding their stores with Android phones, that's not going to be good for Apple, either. 

Of course, Apple will realize this and drop prices to compete.  But that creates margin pressures and eventually, those big fat profit margins start looking more normal.  And when a majority of your earnings are dependent on those fat margins, there will be a 'reversion to the mean', so to speak. 

Even if Apple keeps innovating and churning out more brilliant products, I don't know if it will be enough to offset the margin pressures for the iPhone.  But I don't think this trend will become apparent for at least another 9 months and it might take another 2-3 years.  For now, the Verizon iPhone sales will cover up the margin pressure. 



4 Comments – Post Your Own

#1) On January 19, 2011 at 4:38 PM, Griffin416 (99.97) wrote:

Agreed, the muni market is astoudingly cheap, but I disagree slightly on the non-outperformance as I am loading up on them now. The link to the ETFs is very helpful for people who don't know.

 I live in NYC, so for instance, EVY one of the NY muni ETFs out there yields 7.7% now. At my 37% tax rate, that is equivelant to a 12% return. If you reinvest, that number is compounded over time. Not only does this beat the "regular" long term return of the S&P, but I can sleep at night. Every couple of years, I simply buy on the dips (depends on my asset allocation, obviously)

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#2) On January 19, 2011 at 5:20 PM, Option1307 (30.65) wrote:

Whether or not you think Android or the iPhone is better is irrelevant.

Umm no, cleary my Droid Incredible is better! ;)

Great blog per usual, kepp up the good work!


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#3) On January 19, 2011 at 5:27 PM, rfaramir (28.64) wrote:

I think Apple's rise will continue, just not at the previous pace. Even without SJ. Nothing else works like an iPhone, so even though there are vague competitors, they won't lose much margin. Some, of course, but not much. They are very good at servicing the healthy end of the market and letting others starve trying to serve the other end.

Munis are down for a good reason. I think we will see some surprising defaults. They don't have as much freedom to raise taxes as their spending requires, and don't have the guts to cut their spending down to their income. They don't have the authority to print their way out of it, either, so default looks 'good' to them. They are evil who default, but some will be evil.

Yes, GDP per capita would be more interesting.

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#4) On January 20, 2011 at 2:11 AM, ath002 (< 20) wrote:

Good post Jakila,

 I do miss the Hunnish News Invasion, any chance of you ressurecting it?



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