Month: September 2016

“All Components Face Price Pressure” – Apple Forces Suppliers To Accept Price Cuts, As JPM Cuts Production Estimates

In the latest confirmation that the long-awaited rebound in demand for AAPL products keeps getting delayed, even as a surge in low-priced Chinese competition continues to steal market share, overnight the WSJ reported that the tech giant is forcing its suppliers to accept both price cuts and volume reductions in order to preserve profit margins: “as Apple Inc. grapples with falling iPhone sales this year, it is pushing to cut better deals for parts with its suppliers, while carriers in the crucial China market have mobilized to push iPhone sales with deep discounts. In recent months, Apple suppliers say the Cupertino, Calif., company has told them to accept price cuts for parts destined for the next-generation iPhone while cutting forecasts for order volume. This is likely to hurt some suppliers’ earnings in the second half of the year.”

And while AAPL is preparing to wage tax battle in Europe, it is engaged in a far more critical for its future profitability war in China, where in the past two weeks, China Telecom has started selling unlocked 16-gigabyte iPhone 6s models for 4,288 yuan (US$642), based on checks at its retail outlets, the WSJ reports. That is below a price of 5,288 yuan listed on Apple’s China website. Rival carriers China Mobile and China Unicom Corp. have also offered fresh iPhone discounts, although they aren’t as steep as China Telecom’s. In the U.S., major telecommunications operators sell the unlocked 16-gigabyte iPhone 6s for US$649.

While carriers typically discount iPhones before new-model launches, it is rare for iPhones to be cheaper in China than in the U.S., as a combination of import duties on components and value-added taxes boosts prices.

While Apple’s recent woes in China are nothing new, these moves highlight the difficulties Apple faces to shore up demand for its products as global demand slows and upstart Chinese companies become serious rivals. As a reminder, in Q3, Apple’s profit slumped 27% from a year earlier amid weaker sales especially in China. Meanwhile, Samsung, its biggest rival, reported its most profitable quarter in two years in the second quarter as it got a head start on shipping its latest Galaxy S7 smartphones.

Worse, by forcing its supply-chain to “eat” the decline in top line growth in order to preserve margins, Apple risks alienating key suppliers as well as adversely impacting their own supply-chains and operations, resulting in further production delays.

But the biggest surprise is not the price cut demands, but the corresponding volume declines: according to the WSJ, suppliers say this year Apple pushed to cut both component prices and order volume. The company told suppliers that despite the volume cuts, orders would rise significantly after new-device launches. But given that iPhone sales have been falling this year, suppliers say they are wary about betting on a smash hit. The demands for discounts have irked some suppliers, many of whom get a large proportion of their sales from iPhone parts.

“The reason why everybody is extremely unhappy about it recently is because they played a ‘double cut,’ cutting both the price and the volume of orders,” said a person at one of Apple’s suppliers.

While the ongoing cuts may help boost near-term results, over the long run AAPL’s strategy is likely to backfire: analysts say the discounted parts will likely help shore up Apple’s earnings in the second half, but damp profit outlooks for suppliers including iPhone assembler Foxconn Technology Group, metal casing manufacturer Catcher Technology Co. and chip-processing company Advanced Semiconductor Engineering Inc. While a few hard-to-replace Apple suppliers have strong bargaining positions—such as chip maker Taiwan Semiconductor Manufacturing Co. and camera lens module maker Largan Precision Co.—Apple has multiple sources for other components, giving it leverage to seek better prices.

Negotiations over cuts in component prices started in January, suppliers said, and have already begun to affect earnings figures for Apple and parts makers. The price cuts helped Apple beat analysts’ estimates in its latest quarter, analysts said, with gross margins coming in at 38%, in line with its estimate of 37.5% to 38%. Apple has forecast gross margins of 37.5% to 38% for the current quarter that ends in September.

 

Some component makers say Apple told them it could cultivate less-costly Chinese suppliers if they didn’t accept the price cuts.

 

Apple generally cultivates several secondary suppliers for each component, except for a few important parts—such as the processor—for which it is hard to find alternatives given the complexity in manufacturing.

 

“With global smartphone growth slowing, Apple needs to find a way to maintain its high gross margins,” Fubon Financial analyst Arthur Liao wrote in a note in July. “In our discussions with…the supply chain for the iPhone 7, all components except [the camera lens] face price pressure.”

Finally, adding insult to injury, in related news moments ago JPM analyst Narci Chang released a note in which he warned of “hiccups” in iPhone 7/7 Plus production, and cut its iPhone 7 production estimate for H2 to 70mm, down from 85-90mm last year for new models. 

Based on our recent supply chain visits, we believe there could be supply hiccups at certain components (i.e. display BLU, casing, and EMS assembly); hence we expect some modest change to iPhone production build. Our expectation of iPhone 7/7 Plus build in 2H16 is now approaching 70mn units, down from 85-90mn level last year for new models, also down slightly from our previous expectation of 75-80mn units. However, total iPhone build stays roughly unchanged at ~110mn units in 2H16, suggesting strength in iPhone SE. For total iPhone production build, we now expect 45mn in 3Q and around 65mn in 4Q, respectively. Upside risks include (1) Impact from Apple Upgrade Program and (2) More Apple Store openings. New iPhone unpack event is scheduled for September 7, 2016.

 

Should this adverse trend continue, Tim Cook may be forced to do the unthinkable, and begin considering broader iPhone price cuts around the world, not just China, something which many have warned over the years, could be the beginning of the end for the company’s heretofore untouchable business model.

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Black American Consumer Confidence Just Crashed Most In 15 Years

While consumer comfort among black Americans is more volatile than among white Americans, Bloomberg’s confidence survey points to a massive collapse in comfort for black Americans last week (from an exuberant 47.9 to a dismal 37.7). This is the biggest percentage drop since Obama’s Syria “red line” in Aug 2012 and biggest absolute drop since Feb 2001.

The biggest punge in Black Americans’ comfort in over 15 years…

 

And thishappened while White American’s comfort barely budged…

 

Did The Donald’s outreach hit home?

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The Last 7 Times (Since 1970) This Happened, The US Economy Entered Recession

The slowdown in US construction spending growth is rapidly becoming another fiction-peddling chart that President Obama, Janet Yellen, and equity market bulls need to ignore…

 

Since 1970, each time growth has slowed this much, the US economy has plunged into recession…

 

It’s probably nothing though.

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Pamela Anderson Comes Out Against Porn

It’s weird enough trying to shoehorn Anthony Weiner’s sexting scandal into a parable about online pornography. But what makes this Wall Street Journal op-ed truly bizarre is its co-author: icon of ’80s fantasy Pamela Anderson. “If anyone still had doubts about the addictive dangers of pornography, Anthony Weiner should have put paid to them with his repeated, self-sabotaging sexting,” the ex-Baywatch actress and Playboy model writes.

“And if anyone still doubted the devastation that porn addiction wreaks on those closest to the addict, behold the now-shattered marriage of Mr. Weiner and Huma Abedin.”

Now, “porn addiction” is usually a proxy for other problems, so I would be skeptical of Anderson and her co-writer Schmuley Boteach’s conclusions even if they were broadly applicable in Weiner and Abedin’s case. But the fact is that there’s no evidence Weiner’s problems were related to online pornography, or that he even consumed it regularly. The (now myriad) sexual improprieties Weiner is accused of are all of the sexting and dick-pic sending variety.

As The Washington Post notes, “sexting between consenting adults is considered by many to be a safe form of sexual expression.” But like anything that brings pleasure or fills some psychological need, this form of ” electronic foreplay” can also become compulsive.

Compulsive behavior is generally rooted in the same sorts of underlying psychological issues, whether it’s gambling or checking social-media or food-restriction or sexting. But Americans have a soft-spot for holding media responsible—Photoshop begets anorexia, Grand Theft Auto causes anti-social behavior, etc. And this holds especially true when it comes to sexual activity. So while people have cheated on their spouses, sent ill-advised erotic communications, and gotten-off on exhibitionism for centuries, folks for some reason want to believe that online porn is the culprit for Weiner and his kinky contemporaries.

Sample one more overwrought paragraph from the Anderson/Boteach article:

Put another way, we are a guinea-pig generation for an experiment in mass debasement that few of us would have ever consented to, and whose full nefarious impact may not be known for years. How many families will suffer? How many marriages will implode? How many talented men will scrap their most important relationships and careers for a brief onanistic thrill? How many children will propel, warp-speed, into the dark side of adult sexuality by forced exposure to their fathers’ profanations?

And, for a chaser, check out Judith Levine in the Fall issue of n+1. Levine’s essay, which explores children of the 1960s and ’70s (including her own) exposure to erotica and pornography and traces the roots of the anti-porn hysteria, is the perfect antidote to fact-lite, melodrama-heavy fearmongering over online porn today. She points out that while courts in the ’70s and ’80s wavered on the free-speech protections owed pornography, the basic premise that viewing porn caused harm to kids and teens was always just presented and taken as a given, despite there being little evidence to back it up.

Today, these untested “truths” about porn and young people have become conventional wisdom. And crusaders are using the same playbook now when it comes to adults. The science never seems to back up what they want to find, but if every infidelity, sexual compulsion, or kink can just be assumed to be attributable to porn? Who needs science and facts when we can hold these feels to be self-evident?

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US Manufacturing Crashes Into Contraction In August, Election Uncertainty Blamed

Following China's rising (official) and tumbling (Caixin) PMI data overnight, US Manufacturing prints this morning were both weak. PMI modestly disappointed, dropping from July's 52.9 and August's preliminary 52.1 to 52.0 final with new orders and employment sliding. Markit's explanation is simple: "there's anecdotal evidence to suggest that this at least in part reflects a slowing in the economy in the lead up to the presidential election." We guess productivity has been declining for the same reason for the last 9 months? ISM had already rolled over in July, and August's collapse (from 52.6 to a contractionary 49.4) has erased the dead cat bounce hopes of Q2. Across the board, ISM factors deteriorated with new orders plunging.

Dead cat bounce is dead again…

 

The ISM breakdown…

New Orders plunged… to the lowest sicne Dec 2015

 

Maunfacturing Employment tumbled…(suggesting another decline in manufacturing payrolls tomorrow)

ISM respondents seem oddly encouraged?

"We have been getting lots of inquiries, but not a lot of sales order placements." (Chemical Products)

 

"Business was flat this month overall." (Computer & Electronic Products)

 

"Continued strong market demand for our products related to construction." (Nonmetallic Mineral Products)

 

"Commercial construction continues to be strong, and therefore our business is very good." (Fabricated Metal Products)

 

"New product distribution is increasing." (Food, Beverage & Tobacco Products)

 

"This past month, sales increased over the trend from the first half of the year. There seems to be a general, albeit slight, loosening of capital purse strings." (Machinery)

 

"Medical device is still strong." (Miscellaneous Manufacturing)

 

"Business conditions are generally flat." (Transportation Equipment)

 

"Hard to find production associates. Unemployment in the area is around 4 percent. Can’t get enough employees [which] leads to lots of overtime." (Plastics & Rubber Products)

 

"Oil prices continue to seek a ‘footing’; rig count slowly increasing." (Petroleum & Coal Products)

Commenting on the final PMI data, Chris Williamson, Chief Economist at Markit said:

“Despite the PMI falling in August, the survey suggests the third quarter is shaping up to be the best quarter so far this year for manufacturing, with output growth picking up compared to the first half of the year on the back of improved export sales.

 

“The overall rate of expansion remains only modest, however, and the upturn fragile. Weak domestic demand remains a drag on order books. Concerns about the outlook have also resulted in a marked reduction in the rate of job creation.

 

“There’s anecdotal evidence to suggest that this at least in part reflects a slowing in the economy in the lead up to the presidential election, meaning there’s scope for growth to revive later in the year. In the meantime, the overall sluggish pace of expansion signalled by the survey, and the slacking of inflationary pressures, provides support to those arguing that interest rates should remain on hold.”

Charts: Bloomberg

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Obama Granted Iran “Secret” Nuclear Deal Exemptions, Despite Claiming Otherwise

One of the recurring criticisms of Obama’s landmark Nuclear deal with Iran is that in Obama’s scramble to get a formalized agreement, he had implemented many loopholes allowing Iran substantial leeway far beyond what was disclosed for public consumption. And, in the latest blow to US foreign policy under the Obama administration, a new report confirms precisely that. According to Reuters, the United States and its negotiating partners agreed “in secret” to allow Iran to evade some restrictions in last year’s landmark nuclear agreement in order to meet the deadline for it to start getting relief from economic sanctions.

The report is to be published on Thursday by the Washington-based Institute for Science and International Security, said the think tank’s president David Albright, a former U.N. weapons inspector and co-author of the report. It is based on information provided by several officials of governments involved in the negotiations, who Albright declined to identify.

“The exemptions or loopholes are happening in secret, and it appears that they favor Iran,” Albright said.

Among the exemptions were two that allowed Iran to exceed the deal’s limits on how much low-enriched uranium (LEU) it can keep in its nuclear facilities, the report said. LEU can be purified into highly enriched, weapons-grade uranium. The exemptions, the report said, were approved by the joint commission the deal created to oversee implementation of the accord. The commission is comprised of the United States and its negotiating partners — called the P5+1 — and Iran. One reason for the exemptions is that, according to one senior “knowledgeable” official, if the joint commission had not acted to create these loopholes, some of Iran’s nuclear facilities would not have been in compliance with the deal by Jan. 16, the deadline for the beginning of the lifting of sanctions.

Which means Obama lied: the U.S. administration has said that the world powers that negotiated the accord – the United States, Russia, China, Britain, France and Germany – made no secret arrangements. A White House official, speaking on condition of anonymity, said the joint commission and its role were “not secret.” He did not address the report’s assertions of exemptions.

What was the significance of the secret loopholes? As Reuters reports it meant that as a result of the process, it would make it impossible to know just how much weapons-grade uranium Iran could yield, arguably the biggest sticking point of the entire agreement.

As part of the concessions that allowed Iran to exceed uranium limits, the joint commission agreed to exempt unknown quantities of 3.5 percent LEU contained in liquid, solid and sludge wastes stored at Iranian nuclear facilities, according to the report. The agreement restricts Iran to stockpiling only 300 kg of 3.5 percent LEU.

The commission approved a second exemption for an unknown quantity of near 20 percent LEU in “lab contaminant” that was determined to be unrecoverable, the report said. The nuclear agreement requires Iran to fabricate all such LEU into research reactor fuel.

If the total amount of excess LEU Iran possesses is unknown, it is impossible to know how much weapons-grade uranium it could yield, experts said.

Additionally, the deal allowed Iran to meet a 130-tonne limit on heavy water produced at its Arak facility by selling its excess stock on the open market. But with no buyer available, the joint commission helped Tehran meet the sanctions relief deadline by allowing it to send 50 tonnes of the material – which can be used in nuclear weapons production – to Oman, where it was stored under Iranian control, the report said.

Albright said the exceptions risked setting precedents that Iran could use to seek additional waivers. Furthermore, these behind the scenes arrangement with Iran have certainly empowered the Tehran regime to believe it has the upper hand in bilateral relations with the west, which may have led to such debacles as Iran arresting US navy crews or encouraging “close encounters” with US ships in the Straits of Hormuz.

Albright served as an inspector with the U.N. International Atomic Energy Agency (IAEA) team that investigated former Iraqi President Saddam Hussein’s nuclear weapons program. While Albright has neither endorsed nor denounced the overall agreement, he has expressed concern over what he considers potential flaws in the nuclear deal, including the expiration of key limitations on Iran’s nuclear work in 10-15 years.

To be sure, it wasn’t just Obama who kept the details from the public – Congress was likewise complicit. The administration of President Barack Obama informed Congress of the exemptions on Jan. 16, said the report. Albright said the exemptions, which have not been made public, were detailed in confidential documents sent to Capitol Hill that day – after the exemptions had already been granted.

Still, some deny this was the case: Democratic Senator Bob Menendez, a leading critic of the Iran deal and a senior member of the Senate Foreign Relations Committee, told Reuters in an email: “I was not aware nor did I receive any briefing (on the exemptions).”

Reuters conveniently notes that “the report’s assertions are likely to anger critics of the nuclear deal.” It may also boost Trump’s polling, as he has has vowed to renegotiate the agreement if he’s elected, while Democrat Hillary Clinton supports the accord. It is unclear if and how much cash Iran or its proxies may have donated to the Clinton foundation.

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The Election Year Fix is In… But Can Janet Make It To November?

The election year fix is in… and Janet Yellen is praying the markets hold together until November.

President Obama met privately with Yellen in April of this year. It was their first private meeting together since November 2014 (the Congressional election in which the GOP took both houses of Congress).

President Barack Obama met with Federal Reserve Chair Janet Yellen on Monday to discuss the U.S. economy amid signs that growth may be slowing as consumers retreat from spending.

Ahead of the afternoon meeting, White House Press Secretary Josh Earnest described Obama as "pleased" with Yellen, who he appointed to lead the Fed in 2014. It is the first time since November 2014 that the Fed chair has met with the president on her own. The meeting was closed to the news media.

Source: Bloomberg

The timing of these meetings is not coincidental. And if you think Obama and Yellen were discussing “signs that growth may be slowing” a mere 8 months before the former left office, I’ve got a bridge to sell you. The economy has been weak for EIGHT years. This is not a new issue.

The fact of the matter is Obama most likely gave Yellen her marching orders: hold the markets up until November.

Since that time, I and others have noted that a mysterious “someone” steps in and PANIC buys stocks anytime they begin to break down. The manipulation has been so obvious that a child could see it.

This has propped the markets up. But because NO ONE believes this current rally, the market fails to break higher because there is no real buying power.

As a result of this, the markets have essentially flatlined, staging nearly 39 days of flat price action. You have to go back to the ‘60s to find a more boring period for stocks.

Again, the election year fix is in. Janet Yellen got her marching orders from the White House. And she will be doing everything possible to hold the markets up going into November.

However, the financial system is already starting to come apart at the seams. The is now $230 TRILLION in debt in the financial system, up 300% from 2007 levels.

You’ll no doubt remember, 2007 was NOT a time in which debt was irrelevant. And over the next 12 months, the markets staged the worst crash in 80 years.

On that note, we are already preparing our clients for this with a 21-page investment report titled the Stock Market Crash Survival Guide.

In it, we outline the coming crash will unfold…which investments will perform best… and how to take out “crash” insurance trades that will pay out huge returns during a market collapse.

We are giving away just 1,000 copies of this report for FREE to the public.

To pick up yours, swing by:

http://ift.tt/1HW1LSz

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

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SpaceX Rocket Explodes On Launchpad

A SpaceX booster rocket exploded on the launch pad in Cape Canaveral, Florida, as tropical storm Hermine bore down on the area. The cause for the explosion is yet unknown (AP reports it took place during a test-firing), but thick black smoke could be seen rising from the pad. As RT reports, the blast shook buildings some distance away, according to witnesses who reported it on social media.

Bloomberg reports that SpaceX was conducting a test firing of unmanned rocket when the blast occurred, AP says, citing NASA.

  • Rocket was supposed to hoist an Israeli satellite this weekend
  • Test in advance of a planned Saturday launch
  • Test was considered routine

 

 

Injuries are unknown for now…

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Amtrak Spending $2.4 Billion on New ‘Faster’ Trains That Probably Won’t Go Any Faster

Amtrak’s announcement that it plans to spend $2.4 billion upgrading its fleet of Acela trains is a little bit like a guy who plans to buy a new Ferreri to use on his daily commute and nothing else.

Sure, you’ve got a flashy new toy that can outrun anything else on the road—but if the roads are clogged and you can’t put the pedal down to really make that baby hum, then what’s the point?

The 28 new trains will be running by 2019 and will be able to go 160 mph, according to Amtrak. That’s 25 mph faster than the Acela’s current top speed. That modest increase in speed is a key part of Amtrak’s decision to purchase the new trains—or at least a key part of their public sales pitch—and was dutifully reported in the media as evidence that the government-run train system would soon provide faster service up and down the east coast.

Is this the European-style high speed rail of progressive dreams? Amtrak’s president and CEO, Joe Boardman, seems to think so. He said the new trains will provide passengers with “the experience of the future.“

The reality of the present suggests a different outcome.

Even if the new trains are capable of going faster, that doesn’t mean they actually will. In fact, they probably won’t, because the current Acela almost never reaches top speed. Like highways, railroads have speed limits that take into account infrastructure and congestion. Most of the Northeast Corridor between Washington, D.C., and Boston is crowded with slower commuter trains and traverses rail lines that aren’t capable of handling an Acela train at top speed.

According to Amtrak’s official Northeast Corridor timetable (which contains the speed limits for every section of rail between D.C. and Boston), there are just three small patches where the trains are allowed to go 135 mph or faster.

Going north to south, the first is a 50-mile stretch in Rhode Island and eastern Connecticut, followed by a 25-mile stretch in central New Jersey and then a 20-mile stretch south of Wilmington, Delaware and into the very tip of northeastern Maryland. That’s all.

“The reality is some of the $2.45 billion will be spent improving a short stretch of track between Washington and Baltimore, but this is likely to shave no more than a few minutes off its train times,” says Randal O’Toole, a senior fellow on transportation issues at the Cato Institute.

Between New York and Washington, the current average speed of Amtrak’s fastest “high-speed” Acela is 82 mph, but most run at about 78 mph, O’Toole’s research shows.

“Will the $2.45 billion loan allow Amtrak to boost that average speed to more than 85? Probably not,” he says.

Meanwhile, Amtrak has a $21 billion maintenance backlog. Upgrades that improve safety and reliability along the route would be welcome, and maybe some of the aging Acela cars are due for replacement—but does that mean they all need to be scrapped and replaced?

In some ways, this latest purchase is a metaphor for the state of high speed rail in America right now. The Obama administration and Amtrak officials have spent the last eight years promising that railroads—a technology of the 19th and early 20th centuries—would be the transportation system of the future. Those grand plans to reshape how Americans travel keep running into some pesky facts of life in the 21st Century: like the fact that most of America is not densely populated enough to make high speed rail work the way it does in Japan or Germany, or the fact that there’s a limited amount of space on train lines in the northeast.

President Barack Obama started beating the drum for high speed rail even before he became president. The federal stimulus bill, which Obama signed into law in February 2009, contained $8 billion for high speed rail projects. A quarter of that money was earmarked for a high speed rail project in California that’s more than a decade beyond schedule and billions of dollars over-budget. He kept pushing for more, including a promise made in his 2010 State of the Union address to provide 80 percent of Americans with access to high speed rail within 25 years.

After the speech his administration laid out ambitious plans for high speed rail corridors in the northeast, yes, but also across the southeast, in Texas, in California and a few other places where it wasn’t needed and didn’t make sense.

“I think President Obama would like to be known as the high-speed rail president, and I think he can be,” Transportation Secretary Ray LaHood told NPR at the time.

As Obama gets ready to leave office, that dream of a European-like high speed rail system running from Boston to Washington, D.C., is likely an impossible one, because of the lack of a dedicated line not shared by slower commuter trains.

A European-style high speed rail system would have to operate on its own right-of-way, but thats a problem too. There’s simply not enough available space in the densely populated northeast. Acquiring a new railroad right-of-way by buying up some of the most expensive real estate in the country is simply unaffordable even for the federal government, and relying on a massive application of eminent domain would uproot untold hundreds of families and businesses while still being prohibitively expensive.

Amtrak says a project like that would cost $150 billion and take 25 years—and that’s before the inevitable delays and cost overruns.

“There’s no conceivable way to generate enough traffic and revenue to cover the capital costs of such a project,” said Bob Poole, director of transportation policy at the Reason Foundation (which publishes this blog).

Considering all those constraints, the Acela is actually pretty good. It gets you from city to city without having to sit in traffic or endure a TSA pat-down.

It suffers because there are lots of political reasons for overpromising what high speed rail in America could be. Once you set aside the aspirational rhetoric, the reality is that we’re probably never going to have trains that actually run at 200 MPH or even 160 MPH for more than a few miles at a time—no matter how much money Amtrak spends on fancy new railcars.

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