AAPL update -- still looking good

Apple (AAPL) is on track to post a new closing high today, so I thought I would celebrate that and reiterate my view that AAPL is still an attractive stock to own. I've been recommending AAPL repeatedly since my first post on the subject in Oct. '08, and I've owned the stock for almost 10 years and still do.

Apple's success lies in its ability to innovate and to use industrial design to make complex computers easy to use. Its products are beautiful and reliable, and its software is well-thought-out. Apple is arguably the only computer electronics company that has the capability to innovate in more than one area, and it has expanded its product line impressively over the past several years. Its market share is very strong in smartphones and mp3 devices, and it is steadily gaining market share in the laptop and desktop area. Apple's market cap has surpassed that of Microsoft, and for good reason. Microsoft is a one-trick pony that long ago lost the ability to innovate, and it's products and software appear to be designed by engineers rather than by artists and industrial designers.

An article in today's WSJ reminded me of my recent trip to Best Buy (BBY), in which I took three Argentine friends there so they could buy some cameras and computers. Argentina has virtually no Macs—everyone uses PCs, and the great majority of the PCs run the now-obsolete Windows XP. I showed them the Macs we have at home, and encouraged them to upgrade to a Mac laptop. They were reluctant however, since none of them had much computer expertise. What would they do if they ran into a problem?

The one thing that piqued their curiosity, however, was the iPad. They were entranced by its magic and simplicity. I used the iPad to show them our photos of Africa, and then I pulled up a map of California so they could plan their trip to San Francisco. Scrolling around the map, zooming in on details, flipping through photos, all accomplished with a single finger. "Does this map program come with the iPad? Will it work in Argentina?" they asked. Yes, I replied. "Can I do email and internet on the iPad?" Yes, I replied, and it's quite easy. You really can't screw things up, because all you need is a finger. No file system, no launch commands, no ability to push the wrong button. There's only one button in fact, and it always takes you back to home base. No moving parts. Sold.

After almost three hours of haggling with a very patient and spanish-speaking Best Buy employee, they loaded up their shopping cart with two iPads, two Canon SLRs, and an assortment of lenses and accessories. To my surprise, they even negotiated a 20% discount on the accessories. While they were checking out (around 3pm on a weekday) I noticed that the store was unusually full of customers, and there were quite a few standing in line. It's purely subjective on my part, but I think that Best Buy has really filled out their product line and has learned how to sell things much better than it did just several months ago. Now, as the article mentions, they plan to sell iPads at all their stores, not just a select few. There's potential here for BBY to do quite well as the economy improves..

As the article also mentions, according to Best Buy's CEO Dunn, "internal estimates showed that the iPad had cannibalized sales from laptop PCs by as much as 50%." That's the thing that has always sustained my belief in a bright Apple future: Apple's ability to gain a significant share of the gigantic market of Windows-based computers.

Deflation still a no-show

August inflation at the producer level came in at or slightly higher than expectations. So far this year, both headline and core producer price inflation are running at about a 2% annual rate. At the very least, this continues to rule out deflation, especially when we look at the price action at the crude level, where prices over the past year are up almost 20%.

Why then are so many observers—and the press—still obsessed with deflation? My guess is that the collective mindset is dominated by a faulty understanding of how inflation works. Even the Fed is guilty. It's very easy for people to believe that rising prices are the result of very strong demand, and that therefore weak demand should result in falling prices. We obviously have a very weak housing market, for example, and we observe that prices have indeed fallen significantly—by as much as 50% or so in the formerly high-flying Inland Empire market, and about one-third on average in major metropolitan areas, according to the Case-Shiller data. With everyone saying that the recovery is miserably weak, and with so many defaulting on their obligations and so many trying to deleverage, it is easy to extrapolate and say that demand is weak and therefore deflation is a real threat.

But the decline in housing and housing-related prices is not deflation, it's a relative price shift. It's the market's way of signaling that we have an excess of housing inventory, and the only way to clear that inventory is to lower prices. Lower prices send a signal to producers that we don't need new houses, so workers migrate out of the construction sector and into other sectors.

It's perfectly normal, even during times of inflation, to have some prices rise while other prices fall. Deflation is when all prices fall. That can happen only when the amount of money available in an economy is less than the amount desired—when money is effectively in short supply. If there's a shortage of money, then prices have to fall. If demand is weak and there is a shortage of money, then you have the ingredients for something nasty like a deflationary depression.

But that's not what we have today. There are a number of market-based indicators that tell us that money is not in short supply, and that money is in fact in abundant supply. If the dollar is weak relative to other currencies, it's because there is an abundant supply of dollars relative to other currencies. If gold and commodity prices are rising, it's because there is an abundant supply of dollars—lots of dollars chasing a limited outstanding stock of gold. A steep yield curve also reflects abundant money, because it is the market's way of saying that short-term interest rates are going to have to rise by a lot at some point in order to reverse the Fed's current willingness to over-supply dollars to the world. Very low swap spreads are another way that abundant dollars show up, because when money is easy to come by, then counterparty risk goes down.

Commodities are on fire, and that's good

This index of spot industrial commodity prices is up over 50% from March '09, and it is only 2% below its all-time high of July '08. I think this is highly significant, for a number of reasons.

Global growth: where there is this much commodity "smoke," there is almost surely some economic growth fire. Commodity prices don't move up strongly in the absence of demand. That almost all commodity prices are rising (and rising against virtually all currencies) is a good indication that the global economy is growing, and exceeding the expectations of the world's commodity producers.

Inflation: The world's central banks are about as accommodative as they have ever been. They are all fighting deflation, and they are all bent on ensuring that monetary policy presents no obstacle to economic growth. Short-term interest rates in many parts of the globe are at or near zero. That gold and commodity prices are rising sharply is an excellent sign that money is in abundant supply. An oversupply of money tends to increase the demand for tangible assets, since they are ultimately a hedge against the loss of value of fiat currency. Thus, rising tangible asset prices are an excellent indicator of potentially inflationary monetary policy. At the very least, strong commodity prices virtually rule out the risk of deflation.

Risky assets: Risky asset prices (e.g., equities, corporate bonds, emerging market debt) are arguably priced to the expectation that growth will be meager at best, and many are priced to the expectation that deflation is a significant risk. The action in the commodity markets says those expectations are way too timid, and that therefore risky asset prices are generally quite attractive. If instead of meager growth and deflation we in fact have generally strong global growth and at least some inflation, then nominal corporate cash flows are going to be much stronger than is currently being discounted. Growth plus inflation is a fantastic recipe for owners of high-yield bonds, for example, since those ingredients combine to deliver low default rates.