Rotten golden apples in a can

Friday, April 26, 2013, Vol. 37, No. 17

It has been a particularly tough stretch for sage taxicab investors. My recent taxi tips have centered on three clear winners. Gold, Apple and Cash. Let’s evaluate.

Cab Tip #1: Central Bank Money Printing = Gold Prices Rising

Central banks worldwide have printed and will continue to print money to promote inflation. Unfortunately, gold prices are not set in a binary system. Gold has many influences. Global growth rates, inflation rates, aggregate market and financial sector risk factors, currency movements, ETF flows, associated leverage and collateral levels, trader profiles, commercial hedging activity, central bank acquisition and divestiture policies, existing market supply and demand fundamentals, future production expectations, and marketplace psychology all factor into gold’s daily movements. By the way, if you own gold directly, it actually costs you money to transport, store and safeguard. So the commodity actually costs money to own and tends to act schizophrenically.

Bottom line: While the cab driver may see gold in a monogamous relationship with money supply, in fact gold frequently enters and exits correlations with multiple partners. Since the beginning of the year, gold prices have fallen about 20 percent trading at late 2010 levels.

Cab Tip #2: Rising Cell Phone Trends = Rising Apple

Smartphones like the iPhone account for 1 billion of the 6 billion cell phones in the world. As the smartphone entry cost falls, penetration rates worldwide will rise. Last year, Apple sold 125 million iPhones compared with 72 million in 2011.

However, success invites imitation. In Q1, cell phone sales for Samsung (smart and dumb) likely doubled Apple’s. While the cellphone market may continue to be a winning long term investment, leadership positions change as Motorola, Nokia and Research in Motion can attest.

Bottom line: While the cab driver has correctly identified the macro trend he has neglected the micro trend. At $700, Apple shares were priced for perfection. Perfection and technology rarely co-exist. Today Apple sits 45 percent below its September 2012 high.

Cab Tip #3: Rigged Stock Market = Hide in Cash

Including dividend, the S&P 500 has advanced roughly 150 percent since March 9, 2009. The cash buried in the back yard actually depreciated by 6 percent over that time period. So adjusted for inflation, the S&P returned 144 percent while the yard returned -6 percent.

Bottom Line: While the cab driver is correct to accuse the stock market of being volatile with uncertain risks, the back yard may lack volatility but the risk is certain. In an inflationary world, coffee can investments will lose 2-3 percent of purchasing power to inflation annually.

These last few months have been tough for water cooler- and cab-wise investors alike. Gold has fallen, Apple has fallen and global stocks have risen. Perhaps the rhetoric will now turn toward stock market advocacy. Equity fund flows have exhibited renewed interest. Should this trend accelerate and finally attract the endorsement of your local cab driver, pay the fare and walk.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.