Microsoft, Apple and Big Tech for the Remainder of 2012

Last week, I suggested that Microsoft ($MSFT) would be the ultimate winner in the long war for dominance of the smartphone and tablet markets.

Though Apple ($AAPL) dominates today, it has no real defensible “moats” that would prevent an aggressive competitor from muscling in on its turf.  Consumers are notoriously fickle, and there is little to lock them into the Apple ecosystem.  You can access your key services—such as Facebook ($FB), Twitter, Skype and even Apple’s iTunes—from just about any device, after all.  And if Microsoft is able to leverage its dominance of the desktop market by familiarizing users with its Windows 8 operating system—which looks and feels more or less the same on desktops, tablets and smartphones—Microsoft may well dig the elusive moat that Apple has thus far been unable to dig.

Moreover, Apple’s “idea man,” the late Steve Jobs, is not something that can be replicated, and going forward Apple will find it increasingly harder to stay ahead of its competition.

As Apple discovered to its dismay during the PC era of the 1980s through the mid-2000s, computers are ultimately commodity products for which it is difficult to charge a premium (and yes, I lump smartphones, tablets and PCs together as “computers”).  The iPhone’s popularity has been bankrolled by generous subsidies by service providers like AT&T ($T), Verizon ($VZ) and Sprint ($S).  But as these carriers start to push back against subsidies, Apple will find it harder to maintain its margins without lowering its prices—something the company will be reluctant to do.  In a very short period of time, Apple may again see itself fall from the position of industry leader to that of a niche provider.

None of this suggests Apple’s imminent demise, of course.  As I wrote in the previous article, I’m talking about a long war of attrition that may take a few years to play out.

But none of this matters in the short term.  In the short term, I expect most Big Tech stocks to move together in a fairly tight correlation as investors reassess the economic picture.  For the remainder of 2012, I see investor risk appetites returning, and I see Apple and its competitors Microsoft and Google ($GOOG) leading a rally in technology shares.

I recommend investors pick up shares of the Technology Select SPDR ($XLK) and plan on holding for the remainder of 2012.

With the bad earnings releases of the third quarter mostly digested, I expect to see a broad-based market rally, and I expect more cyclical sectors such as technology to lead.

Disclosure: Charles Sizemore is long XLK through his Tactical ETF Model. This article first appeared on TraderPlanet.

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Japanese Purchase of Sprint is an Act of Desperation

For those who might have missed the news, a Japanese company is buying American mobile phone operator Sprint Nextel (NYSE:$S).

By buying Sprint, SoftBank will jump from being Japan’s third-largest mobile provider to being one of the largest providers in the world.

But Sprint?

Sprint is a mess.  I recommended the company last year as a deep value play, as the company was priced so cheaply as to be worth more dead than alive.  But I never—at any point—believed that Sprint was a quality company.  It was a cigar butt with a few puffs left in it and nothing more.

What’s more, Sprint is in that unenviable position of being “stuck in the middle.”  With only 16% of the U.S. market, Sprint lacks the scale of an AT&T (NYSE: $T) or Verizon (NYSE: $VZ), and its high debt load makes growth difficult to manage. Yet Sprint is too big and bloated to compete with smaller upstarts like MetroPCS (NYSE: $PCS) that appeal to cost-conscious consumers and pre-paid subscribers.

So why SoftBank’s interest?

The answer to that question is easy.  They’re desperate for mobile subscribers anywhere they can get them, even at an also-ran like Sprint.

You see, Japan is dying.  And I mean that literally.  The Japanese population is actually shrinking, as deaths due to old age outpace new births, and aging.  Roughly a quarter of the Japanese population is already over the age of 65.

How do you grow a mobile phone service when you have fewer consumers to sell to every year—and when the consumers you have are aging and using their phones less?

The answer, of course, is that you don’t.  And the same is true of virtually all Japanese companies.

Readers might think back to the 1980s, when it seemed like Japanese corporations were taking over the world.  They even owned—gasp!—the Pebble Beach golf course and the Rockefeller Center.  A severe stock market and real estate crash put the brakes on Japanese ambition, but demographic necessity suggests that Japanese companies will go on another binge of acquisitions, and soon.

In the 1980s, they bought trophy assets like Rockefeller Center.  Today, they buy burned-out cigar butts like Sprint.  How the mighty have fallen.

They’re buying more than Spint, however.  Ernst & Young reported that  Japanese purchases of foreign assets were up 81% last year

This is a trend that I see having legs.  Investing in it is a little trickier, however.

Anticipating what the Japanese will buy and getting in line before them is tricky; few investors would have seen the SoftBank deal coming unless they had already been intently studying the global telecom sector.

Japan is buying U.S. Treasuries—the country recently retook its place as America’s biggest creditor from China—but it’s hard to see much upside when the 10-year Treasury yields less than 2%.

After being chronically overpriced years into a secular bear market, Japanese blue chips are finally what I would consider cheap, or at least close to it.  By the Financial Times’ estimates, Japanese shares trade for 13.3 times earnings, about on par with the U.S. Dow Industrials.  But Japan’s largest companies tend to be heavily exposed to their slow-growth domestic market, making them a little less than exciting.

It’s hard to find much to like among Japanese large, liquid Japanese stocks.  As I wrote recently, Sony (NYSE:$SNE) has trailed Apple (Nasdaq:$AAPL) as a consumer electronics company and seems to be a company without direction.  Toyota (NYSE:$TM) and Honda (NYSE: $HMC) are fine auto companies with a global reach—and Honda sports an attractive dividend of 3.1 percent—but both are too heavily exposed to Japan’s shrinking market to be worth owning.  The story is much the same among Japan’s other large-cap titans.

Perhaps the best course of action would be to simply avoid Japanese equities and focus instead American and European firms with a more global reach.

Sizemore Capital has no position in any security mentioned.