Apple disappoints on hardware, but beats on software

At today's developer conference, Apple once again disappointed the world by not introducing any new hardware products. But the company did unveil a stunning display of new software features and device integration that will make give new life to existing products, from phones to tablets to laptops and desktops. When OS X 10.10 and iOS 8 are released in a few months, the Apple ecosystem will become an even more compelling platform than it already is, one that could be very tough—if not impossible—for anyone to beat.

Apple did announce a greatly expanded cloud product/service today: iCloud Drive. This is a central storage service that syncs all data and photos across all devices. This sort of functionality had been sorely missing for some time and should be a welcome addition to everyone who uses an Apple device.

Apple's legion of developers were surprised and excited by all the new features discussed today. Swift, a new and more powerful programming language, coupled with Metal, which greatly speeds up graphics processing, plus 4,000 new APIs and the ability to have integrate apps, could all but revolutionize the future of apps for Apple devices in coming years.

Today Apple showed that it remains firmly on the cutting edge of technology and software, and, to judge by the breadth and depth of today's announcements, it should hold a commanding lead against would-be competitors for many years to come.

I've been an Apple user and fan since 1986 and an AAPL investor for over a decade (full disclosure: I am long AAPL as of this writing). I'm very excited by what I saw today. Software advances of the sort unveiled today are arguably worth more than a new hardware product. But in any event, it seems very likely that Apple in the second half of the year will come out with a larger iPhone and at least one new class of device. The future looks very bright.

Apple's current PE ratio is 15. But if you back out the overseas cash and assume they pay taxes to repatriate it, then the PE ratio drops to less than 12. This is not an expensive stock.

Apple's earnings have been in a two-year hiatus, but new products and greatly expanded software capabilities should be enough to drive earnings higher in coming years. With a current earnings yield of 6.6%, the market seems priced to the likelihood of stagnant or declining earnings for the foreseeable future. That's a very pessimistic take on today's announcements.

Construction spending remains strong

Net of revisions, April data for construction spending was close to expectations and still reasonably strong. Total spending is up over 8% in the past year, with most of the gains coming from the residential sector, where spending has been growing at double-digit rates for more than two years. Residential construction spending is now up over 60% from its June 2009 low, and total construction spending is up over 25% from its early 20011 low. This is a significant and ongoing turnaround in the most-depressed sector of the economy, no matter how you measure it.

Manufacturing report a modest positive

Two spreadsheet errors at the Institute for Supply Management added some extra volatility to the markets today, and fortunately it was resolved in favor of a relatively healthy outlook. The May reading for the manufacturing index rose to 55.4, up slightly from April's reading of 54.9.

As the chart above shows, the current level of the ISM index is consistent with overall economic growth of about 4% or possibly 5% in the current quarter. That is entirely reasonable, since there should be some "bounce back" in the current quarter after the weather-depressed first quarter. But it doesn't necessarily imply that the economy has accelerated from the 2-3% pace of the past few years. The outlook for growth remains modest, and the economy still has a very large "output gap," which could be as large as 10%.

The outlook for US manufacturing is a bit better than that for the Eurozone.

But as the chart above suggests, the continued improvement in Eurozone swap spreads (red line) points to further gradual improvement in Eurozone manufacturing conditions.

The Export Orders component of the ISM index is in relatively healthy territory, suggesting that global manufacturing conditions remain healthy—and that the much-feared China slowdown has not been significant.

The Employment component remains only modestly positive.

Overall, there is nothing to get excited about in today's ISM report, but it does reaffirm that the negative growth in Q1 GDP was only temporary.