Monday, March 26, 2012

Crooked Microsoft Smartphone Bake-Off

Microsoft's retail employees apparently don't read the rules to the Microsoft bake-off contest to which they invite customers to compete, and which it uses to attract customers. Making up new rules to disqualify winners with Android devices is so low, one suspects employees are docked if Microsoft's tool doesn't win.

If Microsoft had let the guy win a little notebook with MSFT's OS, he'd have presumably posted instead about his (presumably) fantastic new laptop. Marketing is why the contest was created, right?

UPDATE: A Microsoft evangelist, aware of the negative impact of this press, has apologized for one incident and claimed he stood behind the bake-off. To make sure people understood Microsoft "meant" the apology they threw in the hardware that had been at stake in the competition. Microsoft knew when the test started that it faced some risks, and trained employees on picking a test suited to the specific challenging device. Properly-configured Androids or iPhones – properly configured for speed on the test, not safe use in a security-demanding environment – can beat Microsoft's product at different tests, so the tester needs to be aware which race to announce after the challenger turns off his phone. So Microsoft wants the tester to collect information about the customer and the phone, have the phone turned off, then announce a "challenge" that the particular phone and/or configuration is most likely to lose at. Isn't it great to make the rules?

Sunday, March 25, 2012

Why Issuing Shares Isn't All Bad For Shareholders

I've seen one too many articles describing accretive share issuance as "dilution". I wrote an article at Seeking Alpha (which gets more page hits than I did when I wrote about it here in 2011) in order to explain the difference between issuance that dilutes shareholder value, and issuance that accretes shareholder value.

I hope they get it.

I also hope ACAS maintains its issuance discipline in its managed funds. It's been wonderful and I'd rather not see a good thing spoiled.

ECAS Results Bullish for ACAS

Just published at Seeking Alpha is a new article on What European Capital's Results Mean for American Capital. I argue there that the recent announcement of 2H2011 results for American Capital's wholly-owned fund European Capital – despite its lackluster headline numbers – is in fact extremely bullish for ACAS' shareholders.

I'm working on an article on "one stock portfolio diversification" and American Capital's global reach and NAV stewardship will be featured therein. I'll also quote Buffett and ask just how much portfolio diversification one investor really wants. It'll be a while in coming.

Wednesday, March 21, 2012

Chrome Share Grows, Helps Advance Use of Standards

Chrome, which Google launched as a crash-resistant WebKit-based internet browser on September 3, 2008, now appears to have a weekend internet traffic share exceeding Microsoft's Internet Explorer, which previously commanded virtually all of the browser traffic on the Web. Google's reluctant assault on Microsoft's dominance has included ChromeOS, but its main thrust has been in offering data using freely-available standards and offering APIs to allow third-parties to deliver data handled by Google. The result? Steve Ballmer's description of non-IE browsers as "a rounding error" is more laughable than ever. IE-only web crippling is in full retreat; most of the Internet now uses something other than IE.

The Chrome browser and its Google Gears component made certain that users on any platform could access Google's internet-based offerings. Chrome with Gears is, in effect, like iTunes after Apple launched music-purchase as a feature: it protected the company's prospective users from content lock-out that would have resulted from continued Microsoft dominance of the ecosystem. And like iTunes, Chrome has succeeded. Chrome has grown in use so that on the weekend – when users aren't forced by corporate overlords to use an inferior browser – it's the leading browser on Earth.

Adding together WebKit and Mozilla, it's clear that standards-dedicated HTML interpretation is now in fact the global standard, especially in the now-much-targeted mobile segment. Standards-noncompliance is now the minority position rather than the de-facto standard. Moreover, WebKit browsers (mostly Chrome and Safari) now exceed Microsoft's browsers on an ongoing basis, and not just on the weekend (and constitute about 2/3 of the mobile traffic).* Who would have imagined such success for WebKit when Apple announced it at the Worldwide Developer's Conference as a new derivative of KHTML? Now, lazy web site developers can't rely on ignoramous clients to tell their online customers to go get Internet Explorer: everyone must meet the standards supported by WebKit, which in turn supports legitimate standards.

The success of WebKit leads to more momentum behind improving its underlying performance, and the desirability of advancing new, more feature-rich web standards. Since standards mean something now that most of the web users have tools committed to standards, effort dedicated to the promulgation of new open standards is no longer at risk of being wasted: browsers compete for early standards conformance, and most of the world uses one of them. As standards-conformance becomes a sufficient test for content accessibility, developers become to code to known standards rather than troubleshoot accessibility on a whole hatful of competing browsers.

The web is becoming free of dominion by Microsoft, and it can't come too soon.

*: Looking only at the desktop, Microsoft still ekes out a majority of browser share, giving open alternatives a next target. Overall browser share, however, is no longer Microsoft's, and mobile browser share seems well out of its grasp so far. Of course, there's WinMo 8 to come in the fall.

Tuesday, March 20, 2012

Apple Leads Satisfaction, Not Just Size

Apple's satisfaction still leads the mobile industry, not just its sales volume. As mentioned at Daring Fireball, the poor turnout of 4G phones raises questions about whether Apple will make its next phone 4G – if it does, it risks the battery dissatisfaction seemingly endemic to 4G hardware. As shown by infrared photography, Apple's new iPad has increased heat – likely a result of increased power use by the product's new 4G, graphics, and display hardware – I believe directly related to the new iPads greater thickness and weight: all that performance requires more battery.

Adding less than 1mm to an iPad may give a lot more battery volume than adding that little to a phone. We'll have to wait to see what Apple does with batteries over the next six months, and whether Apple manages a technical miracle with the next phone.

Anyone have intel on when Apple will move to a smaller manufacturing process for its in-house chips? From 45nm to 28nm for the A6, as rumored here and here? The smaller process would reduce power consumption for the processor – and the more Apple crams into its system-on-a-chip, the more power savings Apple can expect from the improved manufacturing process. In the original iPad, Jobs said the power-eater was the display ("It's all about the display. Our chips don't use hardly any power."); does this remain true in the age of higher-performance silicon?

The answer to these power questions will govern the design limits within which Apple works on the next phone. If the display is the power-eater and the iPhone's display will not approach the pixel count of the new iPad, the phone may not face as much consumption increase in its next iteration as the iPad did in its last. On the other hand, the phone has a lot less room for a battery ....

Monday, March 19, 2012

Apple's New Dividend

Starting in July, Apple pays a quarterly dividend of $2.65 a share. At Apple's high-water-price of $600, the annual rate of this dividend ($10.60) amounts to just over 1.75%. At the $590 price printing around the time of this post, it's about 1.8%.

Commencing at the end of September, Apple will also repurchase shares from the open market under a buyback program with a $10B budget over 3 years. The primary goal of the repurchase program is to neutralize dilution caused by employee incentive programs that involve printing shares. $10B is about 1.8% of Apple's current market cap of $555B.

Apple's thinking on its use of cash has been interesting. According to Tim Cook on the conference call, Apple first concentrated on U.S. cash holdings, because of the negative tax impact of importing foreign-earned funds. Apple then took stock of its expected capital needs, and added some buffer for opportunistic acquisition, and worked out what it expected to be able to return to shareholders. This sort of thinking is interesting because it makes no grandiose assumptions about the relative capability of Apple and its shareholders to make productive use of otherwise idle cash. It also identifies the cash Apple isn't employing for its business purposes so that shareholders aren't paid funds Apple really can employ for business. This satisfies the concerns raised by Warren Buffett in his letter to shareholders in Berkshire Hathaway's 2011 Annual Report (e.g., at p.99-100).

After determining how much money Apple would return to shareholders, it did a strange thing: instead of making a decision about the value of Apple shares vs. the value of cash, Apple decided to pay a dividend because – as explained by Tim Cook – this is what shareholders wanted. Personally, I'd have preferred the tax-efficiency of share buybacks, and the impact over time of share buybacks in the face of continued business growth. But it's hard to fault management for doing something because its owners ask. The fact Apple has $10B dedicated to what amounts to a dilution-prevention program is sort of concerning: can't they get loyalty for less than $10B? They should call Buffett back to get notes from his shareholder's letters.

Sunday, March 18, 2012

Apple's Tablet Market Moat

A new article at Seeking Alpha attempts to describe why Apple has safety in the tablet market with comparison to commodity vendors like Dell. After that article was submitted, the press revealed more reasons for developers to prefer Apple's ecosystem. Apple will be hard to catch in mobile.

Since Google makes its Android money on advertisement to mobile users, rather than on sales of devices or software, its incentive to make life good for Android developers is rather different than at Apple, which needs people to buy devices and can't retain its market unless its entire ecosystem offers perceived value to users and the developers who serve them. Google hasn't managed to use Apple-like control over users' software experience, instead allowing carriers to continue to dictate upgrade cycles. For example: only just this month, Samsung announced Android 4.0 would come to the Galaxy S II. Seriously? Just now announced availability of an OS released last fall?

Among the factors discussed in connection with the tablet market is the as-yet unreleased Microsoft Windows 8 tablet operating system. As an ARM platform, it won't be able to run desktop applications coded for x86 machines. Presumably Microsoft's business model will be akin to its business model on the desktop: it will sell operating system licenses to tablet manufacturers, and it will sell developer tools to developers. Based on Apple's success in acting as a transaction intermediary at the App Store, Microsoft should be expected to sell to developers its Product Activation feature – repackaged as the exclusive way to run applications on Win8/tablet. Microsoft will almost certainly try to secure subscription fees from users of tablets as it does from users of its console products. I have some theories about how this market will succeed at delivering value to customers, but they're a topic for another day.

Apple's position in the home entertainment market – which seems to include iPads now – has taken a step forward as AV receivers now support AirPlay from iOS devices and iTunes. Those without built-in support can do what the rest of us do, and plug into the AV receiver's HDMI port a $99 AppleTV, now upgraded to 1080p. This support will definitely be a trend to watch. If we start seeing this in cars' in-dash systems, we'll be able to dispense with some of the awful map controls in manufacturer-supplied GPS systems. Even without AirPlay, some manufacturers are targeting iPhone for in-car infotainment. The fact that iPhone is in specific demand from car manufacturers is an interesting development for a company that fifteen years ago was about to go under because its desktop business hadn't caught on in business. Now, OEMs line up to supply Apple with lower-cost parts through which Apple raises margins over the life of its products. (Some examples of competed-for parts are described in the video appearing here.)

The article at Seeking Alpha lays out the basic argument; these little additions were just a bit late to make the press.

Wednesday, March 14, 2012

Compliance Among App Store Advantages?

The RetroDreamer blog offers some insight into why the App Store is so much more attractive to developers than Google's Android counterpart.

Apple handles all the transactions with end-users, and cuts developers a check for 30% of the take. For the 30%, Apple handles the credit card transaction fees and the local compliance obligations with tax authorities and anything else the App Store – as the retailer – is obliged to handle by way of legal compliance. The developer in effect sells to Apple here in the U.S. on consignment and gets paid when Apple gets paid. Simple enough, right?

Google structures the transactions as deals between the developer and each end-user directly, and rakes 30% from the table in each deal. What's the difference? Let me count the ways.
  1. Developers using Google's store deal directly with end users with regard to chargebacks, mis-purchases, purchases by children, etc.
  2. With each end-user's click at Google's store, a developer makes a contract for sale with an end user and becomes responsible under local law for compliance with (or violation of) local laws.
  3. Developers using Google's store are responsible for complying with sales tax and VAT obligations, including tax filing obligations, in every jurisdiction where any end-user clicks "buy". This means developers – to comply with applicable law – must learn about their obligations in every jurisdiction in which they "do business" by selling directly. More likely, the developers ignore the law because they have no idea what laws they are violating, and go free only to the extent they are too small to chase. However, success could be expensive. Taking a company public after some success could be hard with this kind of overhanging liability to scores of foreign governments and their punitive tax codes.
Fun, right?

In the U.S. Apple adds sales taxes. In foreign jurisdictions, Apple prices apps in local currency – presumably based not only on currency exchange but also on its obligation as a vendor to comply with VAT. By contrast, for developers 30% Google expects them to go bare. Google doesn't want to run a store, it wants to run a transaction processor. Google wants developers to manage their own store in Google's marketplace.

There are places in which this could be a very big difference. Some jurisdictions are heavy on VAT and unforgiving of nonpayment. I expect to see something about this on the news within a few years, as some successful U.S. developer gets whacked with a tax deficiency notice in Europe and discovers his legal costs exceed the value derived from the foreign business enabled by the Google marketplace.

Apple Pops on Misleading Headline

When I looked for an explanation this morning why Apple should be up $9 so early in the day, the only relevant news I saw said: Apple's cash stash leads U.S. record $1.24 trillion. Apple's been accused of hoarding cash, but this number is larger than it's whole market cap (for now). Now maybe the pop is based on yesterday's news that Apple's new iPad will govern NAND Flash pricing through 2015, or the rumor about my pending new Apple article at Seeking Alpha. Sure, that's it.

But back to the crazy Apple $1.24 trillion cash headline.

The original story from Moody's was US Corporate Cash Pile At $1.24 Trillion, Over Half Located Overseas. That's right: the entire worldwide cash supply of all U.S. companies stands just under a trillion and a quarter bucks. At least, at the equivalent thereof; more than half is outside the US and much of that is in local currencies. Meanwhile, Congress has outspent its means so much for so long that the United States now owes over ten times that amount – in fact, about twelve and a half times that amount – in a national debt exceeding $15.5 trillion dollars.

Okay, so about $4.75 trillion is owed to other government agencies like the one that holds Medicare trust funds or the one that safeguards Social Security retirement funds. But so what? If we expect a fund to be maintained for members of the public entitled to benefits, we should account for them like any other debt and add it in. Even without the $4.75 trillion owed to other governmental bodies, Congress has run up a 14-digit national debt.

If the best that can be saved for use is thirteen figures across the entire panoply of American businesses' global operations, how is it that we can permit Congress to spend fourteen digits?

It's not like we're making an investment in a war that will secure productive oil fields on other continents or ensure we don't run out of cheap foreign labor. We had the oil fields and labor as easily as by opening our checkbooks and always have. What are we allowing Congress to do in our names?

There's a good question to ask regarding the future value of U.S. currency and how that value compares to that of our largest trading partner. There's another article needed on that, of course, but the contrast between the most we can save and what we permit Congress to spend is simply shocking.

Tuesday, March 13, 2012

MTGE Announces Offering Up To 11.5m Shares

In an offering that could more than double MTGE's shares outstanding at a post-ex-date price that is nearly a dollar north of then-likely NAV, American Capital Mortgage Agency has announced its intention to sell shares under its registration mentioned by the Jaded Consumer at Seeking Alpha. The updated proposed price of the latest 1.5m share registration is $21.86, though the price is "[e]stimated solely for purposes of calculating the registration fee" rather than posing a hard limit. The recent registrations and amended registrations combine to over 11.5m shares.

MTGE's wild price range – recently past $24 – makes an ultimate issuance price hard to pin down. However, MTGE's last-published NAV was less than $21 and its last-quarter NAV increase was nearly a dollar per share – increasing shareholders' value per share 91¢ after paying an 80¢ dividend. With a 90¢ dividend about to go ex-, MTGE's NAV would be near $22.68 near quarter-end if its results were (other than the dividend increase) exactly the same this quarter as last quarter. Of course, MTGE's performance would have to decline to return the exact same result as last quarter, as it began the quarter with more invested capital this quarter than it did last quarter.

Today's close of $22.47 doesn't leave much room for above-NAV issuance if buyers are to receive a discount to market. When is this issuance, exactly?

Thursday, March 8, 2012

MTGE past 24

MTGE's meteoric rise – from trading at a NAV discount to trading both above its last-published NAV but also above the intended offering price filed with the SEC on February 23 (but thankfully subject to amendment) – has been stunning. The stock, which took a couple quarters of demonstrated performance to claw its way back to the IPO price of $20, just passed $24. It's been barely over half a year.

At the recently-announced dividend of 90¢ per quarter, the current price presents an annual dividend yield of about 15%, but 18% of the IPO price. Since the investment underlying each share has been growing quarterly, ACAS' ability to get MTGE to produce future income seems solid.

'Chrome' Exploit Windows-Only? Another Flash bug?

The headlining Pwn2Own crack suggests Chrome was cracked within a few hours of the contest's open. But was Chrome cracked at all? Just as purported Safari cracks historically included what amounted to cracks of Adobe Flash, it seems this new crack is a Windows 7 exploit, functional on 32-bit and 64-bit Windows 7 with Flash installed, but not otherwise accessible.

The real culprit may be the incomplete sandboxing of Flash under current versions of Chrome.

Tuesday, March 6, 2012

New Orleans Violence: Something In The Water?

New Orleans, frequent murder capital of the United States, is home to a well-known professional sports team. Nobody would describe American football as a gentle sport, but the Saints have been outed for taking their violence to levels inappropriate even to football. The Saints paid players a bonus when they succeeded in causing play-finishing injuries to opposing players.

Why did they pay a bounty to players injuring opponents? It turns out New Orleans fans have the same bloodlust in their sport taste as they do in their street life.

Maybe the end of the bounty is related to the larger move to stem the flow of blood in New Orleans.

Monday, March 5, 2012

Holder to U.S.: No Rule Of Law Needed

Eric Holder, who called his fellow Americans "cowards" a few years back, has no qualms about telling them they aren't entitled to what the Constitution of the United States plainly guarantees persons the government suspects of treason. The Attorney General of the United States has gone on record backing summary killings of Americans abroad under something at least as specious as the "enemy combatant" theory so lambasted when advanced by George Bush when he sought to deny due process to Guantanamo detainees.

A little background, first. The Constitution is a very short document, enumerating a small number of powers and allocating them across the three branches of the federal government and providing one mechanism for amending the Constitution (whether proposed by Congress or by a convention of the states, an amendment requires ratification by 3/4 of the states). The document grants power to Congress "[t]o define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations", but defines no crimes except treason. Treason is given a definition and a standard of proof that is very specific. To prove treason under U.S. law it is necessary to show that a defendant levied war against the United States or gave aid and comfort to the enemy, and this proof must include two witnesses to the same overt act.

For a firebrand inciting violence against the United States on the Internet, this proof is presumably within the reach of a determined prosecutor: one would presumably gather a couple of readers familiar with the traitor's works to testify – for example – that the works were really his, were consistent with his body of work, that the traitor had taken credit for them, and that the exhibit before the court (exhorting violence against the United States) is a true and correct copy of the defendant's work. In the United States, a defendant has a right against self-incrimination (in the Fifth Amendment), but there exist jurisdictions in the United States in which a trial in absentia is permitted. Surely effort to murder United States citizens in attacks abroad and aimed at the homeland could become subjects of trials in which genuine effort is made to satisfy due process – if through no other method than ensuring public oversight of the decision to kill in the name of the law.

But not for Eric Holder. Today, Eric Holder blatantly said that when a federal agency suspects an American living abroad of plotting to kill Americans, it is A-OK to kill them without trial. His conclusion that government-backed killings under these conditions "would be lawful" without trial is simply mind-boggling.

Has he read the Constitution he's supposedly there to uphold? Has his Commander-in-Chief?

There's a way to do this, and it's got to comport with our written law if the rule of law is to have meaning. Instead, what we get are circular explanations why treason executions are okay without treason proof or even a trial:
"Some have called such operations 'assassinations.' They are not, and the use of that loaded term is misplaced," [Holder] said. "Assassination are unlawful killings," while killings under the conditions he outlined would be lawful.
"Holder: Not 'assassination' to target Americans in terror hunt" by Terry Frieden
The "conditions" seem designed to invoke something like a self-defense defense to the unlawful execution claim, as they turn on a decision by some unknown non-juror working for the government deciding "that the individual poses an imminent threat of violent attack against America[.]" Another condition is circular: a federal agency determination that "the operation would be conducted within the principles of the law of war" assumes that federal bureaucrats are able to determine that the suspect is a member of an enemy body with which the United States is at war, without actually trying the target for treason. Yet, determining that the individual is levying war against the United States is the very essence of treason under U.S. law.

Killing an American abroad in an attack against some other war target – like an training camp or communications center identified by intelligence assets during a time of war – raises no special legal bar. The (possibly posthumous) discovery that enemy combatant casualties included a U.S. national is quite different, however, than having CIA contractors fly an attack drone outside of the combat zone of an undeclared war to deliberately pick out a specific target American from among civilians in a community because the target American is accused – on however convincing a pile of evidence – of being a traitor. Treason has a standard of proof, and criminal defendants have well-defined rights, and the United States purports to be a nation led by the rule of law.

When we lose the law, we lose the rights the law purports to protect, and our freedoms cease being priceless because they become for sale at the price of our next election.

(Bonus question: does anyone have a line on whether Eric Holder was ever involved in an effort to prevent an Eastern Bloc defector from obtaining a jury trial after he arrived in the West, and was to be prosecuted for skyjacking (his escape method)? I heard a story along these lines and have become interested in whether there's any veracity to it.)

Apollo Investment vs. Berkshire Hathaway: A Response

A comment at Seeking Alpha to Why I Sold Apollo Investment - Part III seems to invite a whole article in response.

OJL13 wrote (and here I paraphrase) that at Berkshire's high price for Class B shares, small investors can afford few shares, which stand little chance of outperforming Apollo when Apollo actually pays a dividend.

When I first noticed Berkshire Hathaway in the early 1980s, it was trading at $3,850 a share and doing an outstanding job of making money. I was attracted, but thought then as OJL13 does now: how many could I expect to buy? What was worse, commissions in the early '80s were in the hundreds of dollars, and there were penalties for what they called "odd-lot" trading – that is, buying or selling a share count not divisible by a "round lot" of 100. So I didn't buy. Shortly after, a news story covered its hitting the $4,000 mark. But what's $150 out of $3,850, right? Not even enough to pay a commission. (At least, in the early '80s)

Fast forward a bit. Those once-$4k shares (now referred to as the Class A shares) have a book value per share of about $100k, and trade above book. A new Class B share – which danced with $4k itself a few years back before a 50:1 split – now allows investors to buy near $80 per slice. And today, that purchase is pretty cheap: buy/sell transactions can now be accomplished at a broker of your choice for under $10 each, at any share count. The odd-lot penalty is dead.

Now, the investor's real questions are:
  1. Does the investor require liquidity (currently spendable money) that you don't want to realize by selling a partial stake?
  2. Does the investor desire immediate taxation on dividends paid by a company losing share value that can result in a tax deduction only in the future, at some hypothetical and potentially distant point of exit? (And does the investor intend risking lowered returns as net assets per share dwindle?)
  3. Does the investor believe that Apollo's management can produce a return – net of its high fees – that beat those of Apollo's alternatives? And here one notes that Apollo's alternatives include Berkshire, which is making broad leveraged bets (using both long-term derivatives and interest-free "float") in favor of the U.S. economy with a back-office overhead of only 24 employees, and is not saddled with an expensive external manager.
The problem raised by the reader really comes down to an issue Berkshire discusses in its 2011 Annual report. On pages 99-100, Berkshire frankly discusses the decision to retain earnings and the alternative, to pay dividends. Berkshire's discussion is spot-on, and are a must-read for those weighing the merits of demanding dividends from investments.

Investors' choice is simple: will management will make more money with after-tax earnings, or will an investor make more money with what will be left of the after-tax earnings after the investor then pays taxes on receipt of a dividend? If management can make more money with the earnings, investors want management to retain the earnings to provide investors not only the benefit of carefully-selected management (why else would an investor buy?), but the benefit of avoiding avoidable double-taxation required upon payment/receipt of the dividends. Dividends make sense in circumstances such as when (a) a tax-pass-through structure makes double-taxation avoidable if some dividend-payment test is met (e.g., the 90% distribution requirement of RICs like Apollo Investment and REITs like AGNC and MTGE), or (b) management can't think of anything more productive to do with the earnings than you can.

I think that the comparison of AINV against lower-overhead leveraged debt investments such as AGNC and MTGE shows that AINV isn't the best place to put money. Over the last year, the market has agreed:
Losing over 40% of investors' share price (to about $7) is not a small price to pay for a dividend that's been cut to $0.20 per quarter (~11% of the remaining $7 share price). This performance was lambasted not long ago by Selena Maranjian, who singled out AINV among high-paying stocks whose equity decay rendered investment pound-foolish.

Unless there is some underlying reason AINV should be thought erroneously undervalued by the market, AINV is a sell. Period. Its expensive management is producing net losses for shareholders, with no remedy in sight. The only question is where to invest sale proceeds. So, let's have a look at the Berkshire Hathaway Class B shares over the last year:

As discussed in Why I Sold Apollo Investment, Part III, Berkshire turned in this blah-looking share price performance while beating the S&P 500 in book value per share growth and acquiring outstanding companies with terrifically growing – and in 2011, record-setting – operating earnings. Berkshire's price is an erroneous undervaluation of its true value. Apollo's assets per share and dividend have – as discussed in Part I of the series – declined awfully over the period. The fact that Apollo's management is charging a huge fee to produce subpar results explains why it's a sell, whereas Berkshire's outstanding returns coupled with its paradoxial price decline explains why it's a buy. Of course, maybe it's not a buy for you. A near-term investment horizon would, for example, make it hard to sit patiently waiting for the market to properly value derivatives whose true value may remain a puzzle until the last of them expire in the late 2020s.

In a tax-deferred account, I've suggested MTGE as a replacement for AINV as a leveraged debt investment. American Capital Mortgage Investment shares the tax-efficiency of a tax-pass-through structure, and in a tax-deferred account this allows reinvestment without the irritation of taxes nibbling at one's reinvesting annual returns. In a regular (taxable) account, some investors will find their tax burden (as low as 0%, depending how broke one is and what tax credits and deductions are available in a given year) to be lower than that of corporations (35%), providing a diluted version of the same benefit.

In a taxable account, Berkshire's post-tax results are hard to beat for long periods of time, and the company has some real basis for a conclusion it is undervalued. Maybe not as undervalued as ACAS (manager of AGNC and MTGE), but that's a different article. As discussed in the original article, the Berkshire recommendation is based on (a) free leverage, (b) equity exposure, and (c) mispriced assets (the derivatives, float, and tax liabilities are all systematically overstated by GAAP in comparison to their real present value as liabilities). It is also based on something seemingly utterly absent at Apollo, which is quality management.

Saturday, March 3, 2012

Apple's Enterprise Push Gets Government Momentum

Despite reports that the Air Force had backed off an iPad deal, that branch of U.S. military awarded a $9.36 million contract to Executive Technology Inc. to supply up to WiFi-equipped 18,000 iPad 2 devices. The Air Force will use iPads to replace paper flight manuals, checklists, and log books in the manner approved last year by the Federal Aviation Administration for commercial airlines. The Air Force move places it in the footsteps of existing adopters of iPads for this purpose at the commercial airlines Alaska, American and United. The article on Alaska Air's deployment suggested that some customers would use the iPad to replace as much as seventy (70) pounds of paper manuals and charts, presumably a source of fuel savings on flights that would charge customers a small fortune to add a 70-pound bag to every leg of every flight. Other commercial aircraft have tested the iPad, and the ultimate extent of eventual deployment remains unknown.

Thousands of pages of paper will be replaced with a searchable, more easily-carried, easily-updated, and much more lightweight tablet. If this proves a positive value proposition at commercial airlines and in the military, Apple's push to become the backbone of next-generation textbooks may have real potential even without dramatically revamping the content of the books to include multimedia experiences and user feedback.

The Air Force deployment follows U.S. government deployments of iOS by the National Oceanic and Atmospheric Administration and the Bureau of Alcohol Tobacco and Firearms (both to adopt iPhones to replace previously-standard Blackberry devices). The U.S. Forest Service and the Bureau of Land Management are known to be evaluating iPads as replacements for notebook computers. Foreign government iPad adoption has been noted. Commercial deployments have moved beyond evaluation and testing: in an unusually pro-Apple move, MS-Windows shop Halliburton is dumping Blackberry for iOS. Halliburton historically had 4,500 Blackberry-wielding employees. Over the next few years, all these Blackberry devices and their server infrastructure will be replaced with Apple products.

This large-scale move to iOS in government and enterprise has created an environment in which users will experience that they can share documents and conduct business without needing Microsoft Office, which is not available for iOS devices. With this knowledge, will Office's lock-in endure as well as if it did while users everywhere could buy MS-Office and thus never learn they could work without it? The trend also raises questions about the relative competitiveness of various hardware makers in selling hardware into enterprise.

A Jaded Consumer article submitted to Seeking Alpha explores pro-Apple trends in government and enterprise as the basis for a long/short trade to bet on what appears to be a tectonic shift underway in enterprise mobile technology. (The article Apple: The Long and the Short of It went live Monday 3/5.)