Penn Wealth Publishing

2019.09.15 Penn Wealth Report Vol 7 Issue 04

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16 penn wealth Report volume 7 iSSue 04 15 Sep 2019 Penn Wealth Report Copyright 2019. All Rights Reserved. inveStment intelligence weekly BuSineSS Report dear apple: without killer new hard- ware we don't really need your ServiceS In a November, 2018 issue of e Penn Wealth Report, after Apple (AAPL $142- $201-$233) shares had dropped 25% in price—to $177, we gave a full-throated defense of the company. While our thesis has played out and the shares have moved back above the $200 mark, the announce- ment that Jony Ive is leaving the firm gives us pause. Even more troubling than the departure of Steve Jobs' kindred spirit (Tim Cook could certainly not claim that moniker), we now learn that Ive essentially checked out years ago. Based on stories from e Wall Street Journal and tech industry publications, Ive has apparently been upset with Apple's focus—under Cook—on services, at the expense of new hardware. We have certainly sensed that shift; most recently with the failed attempt to create an effective device charging pad and the company's medio- cre attempt to enter the home automation space with the Apple HomePod (yawn). Not long before Steve Jobs died, he pro- claimed that he had cracked the TV code. Something tells us that what he envisioned was certainly not the underwhelming Apple TV of today. If Jony Ive did mentally check out from Apple years ago, that would explain the company's recent lack of exciting new prod- ucts. What concerns us the most, however, is the fact that Tim Cook doesn't seem to get it: without killer new products, we will soon have little need for your services. A Steve Jobs, or a Jony Ive at his prime, cer- tainly doesn't come along every day, but Apple had better begin searching for that old magic. If not, they might as well bring back the hap- less John Sculley—who is only remembered for the fact that he fired Steve Jobs. inveStorS aren't Buying into deutSche Bank'S reStructuring narrative Five years ago, Deutsche Bank (DB $7-$7- $13) had a market cap of $50 billion and a share price of $30. Now, Germany's largest bank has a market cap of $15 billion and a share price of $7.49. Ironically, the bank's announcement of a massive restructuring effort drove the shares down another 7%. As for the transformation plan, DB will cut 18,000 jobs (about 20% of the work- force) by 2021, and exit the equities trading business altogether. What a change from several years back, when the bank was on a mission to compete with the likes of Bank of America (BAC) and Citigroup (CIT). Where, then, will the company retrain its focus? Banking clients on the retail side, in addition to companies based in Europe, will take up roughly two-thirds of the apportioned capital, with the investment banking side pulling in the remaining one- third. Our major problem with this new strategy is the current state of the European economy. In the bank's home country, for instance, a 10-year government bond has a negative yield, which portends bad things for a bank's margins. To illustrate this point, just look at DB's net profit over the past four years: in 2018, the bank turned a tiny profit of $315 million, but in the prior three years it lost $850 million, $1.5 billion, and $7.5 billion, respectively. Ouch. Maybe investors want to pick up shares of Deutsche Bank at $7.50 for the divi- dend yield? ink again; DB shares offer a 0% dividend. en again, at least that is more than the government of Germany will pay out on a 10-year bund, or any other maturity for that matter. madoff whiStleBlower callS ge the BiggeSt caSe of fraud he haS witneSSed General Electric (GE $7-$8-$14) was once our most respected company, with shares sitting in nearly every client's portfolio. A symbol of great American ingenuity and innovation, it topped the list of the world's largest companies back in 2000, with a mar- ket cap of nearly $500 billion. How quickly things can change—due to management— in the fast-paced world of business. Today, the company is a shell of its former self, with a market cap of just $70 billion fol- lowing its largest decline since the financial crisis. e reason for the 11%, one-day drop was a bombshell report issued by the man who blew the lid off the Bernie Madoff Ponzi scheme, Harry Markopolos. e certified fraud analyst calls the company's accounting practices "a bigger fraud than Enron and WorldCom combined," and even set up a website ( to detail the company's purportedly nefarious acts. Markopolos said his team spent seven months analyzing the company's account- ing practices, finding $38 billion worth of fraud hidden by bogus financial statements. e company vociferously denied the alle- gations, with CEO Larry Culp buying over a quarter-of-a-million shares after they fell below the $8 mark. Only time will tell whether or not the analyst's accusations are correct, but the company has been on a downward slide ever since Jack Welch handed over the top spot to Jeffrey Immelt back in 2001. Remarkably, Immelt leapfrogged over Robert Nardelli and James McNerney to be awarded the CEO position from GE's board of directors. Nardelli went on to transform Home Depot (HD) into the leading home improvement chain, while McNerney left GE to successfully lead 3M before moving on to reinvigorate Boeing (BA). Larry Culp succeeded Immelt in October of last year, but little seems to have changed. Whether or not these serious accusations are true, we wouldn't touch GE shares in any of our five strategies. e company continues to flop and flounder in search of a cogent strategic plan that involves more than shedding units to raise cash and lower its debt load. Weekly Business Report technology hardware & equipment commercial BankS e content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money. induStrial conglomerateS

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