In the wake of Enron, the markets are naturally nervous about
insider selling. So the filings by CFO Fred
Anderson to sell a further 159,332 shares (after recent sales
of 274,000), by VP Nancy Heinen to sell 125,000, by Exec VP Timothy
Cook to sell 310,0000 and by board member Sina Tamaddon to sell 250,000
makes investors wonder about the current quarter. Is all the good news
out?
With the iMac backlog, the PowerBook upgrades reinforcing the
attractions of Apple laptops, and the new
eMac helping 
in education, sales should
comfortably exceed 900,000 and may even return to a million. With the
corporate sector still looking weak in the US, sales to professionals
will reflect this, but Apple is exposed less than the other PC
companies.
Apple's education market share should be well up on last quarter's
poor showing (under 15%), but US education sales are bound to reflect
the shortfalls in state budgets and be considerably down. However the
consumer market and increased sales outside the US should outweigh
these.
While the outlook for Apple is fairly bright, there are a number of
issues about the quality of earnings overhanging the market, some of
which will continue to make investors think twice about investing in
technology stocks in particular.
With the current treatment of options for executives, these are not
charged against company earnings. However, if those options are treated
as compensation in future, they will be charged, and Apple's loss last
year, for example, would have been much larger. Though given the amount
of lobbying money behind preserving the current arrangements, these are
likely to stay in place until the government needs to add to the tax
base.
Then there is the concealed options position of companies such as
Dell. Basically, these companies bet on their share prices rising and,
until the dot-com collapse, made lots of money. They bought options so
that they could purchase their shares at a given price in the future
and sold puts so they agreed to buy an equivalent number of shares at
an agreed price on the same date. Profits from this boosted earnings as
companies don't need to declare separately any profits from trading in
their own shares. Now, however, the costs of covering these positions
is eating into their cash reserves - Dell has lost $1.25bn this way and
has exposed positions into 2003.
Other companies, such as IBM, have set their pension fund rates of
return at a level which boosted profits.
The excesses of Enron have brought off balance sheet debt to the
fore. In its better than expected last quarter results, Cisco
identified off balance sheet property liabilities. Until the total
amount of debt can be easily sorted out by the average analyst - and
preferably by the average investor - the risk in owning shares is
larger, and therefore fewer investors will want to do so.
Another issue highlighted by Enron is the value of an audited set of
accounts to investors, particularly if the auditors are
consultants.
There is also is the investigation into the boosting of Initial
Public Offerings (IPOs) by such as Merrill Lynch, where analysts worked
closely with investment bankers to give positive research notes on
stocks they didn't believe in. Although it appears that the SEC and the
relevant house committee would prefer this to go away, New York State
Attorney General Eliot Spitzer seems determined to follow it up. So the
SEC has made a few new rules that might help in the future, but if
emails are found at the other major investment banks similar to those
at Merrill Lynch, then only experienced investors will be likely to
touch IPOs or secondary offerings for some years.
Soon the European Union will bring in regulations so that sales tax
is paid on all Internet sales to EU residents. The threat of referral
by the Bush administration to the World Trade Organisation is
meaningless, as the regulations are designed to bring non-EU companies
in line with EU-based companies that already pay the sales tax. While
this won't affect Apple, which charges the tax through their local Web
sites, it will certainly decrease AOL profits, for example.
Profitable US companies are also registering abroad in havens such
as Bermuda to reduce corporate taxes and thereby increasing profits. As
Apple has tax credits from previous losses to keep the tax rate down,
it is unlikely to gain much from such a move.
Lastly, the expected recovery of the economy keeps on being
postponed. Now consensus is for the last half of 2002. First quarter
GDP initially looked good. Then, when the government related security
expenditure and replacing depleted inventories were factored out, the
annual growth rate was seen to be 1.3% - not even enough to stop
unemployment from rising. Now that analysis has shown there wasn't a
post Clinton depression, if it doesn't recover soon there will be less
and less confidence in the Bush administration's handling of the
economy.
While the market keeps on reacting to favorable earnings reports
from large companies, sentiment stays bearish. Average Price/Earnings
of stocks are higher than before previous bull markets - Apple is
trading at 40-50 times expected 2002 earnings. So although, with all
the hardware announcements and continuing improvement in core software,
it is reasonable to expect Apple to outperform the sector, the
prospects for the market and the sector are not too bright.
