Another Byte of Apple

Called a 'wedge' during flight - a flock of swans (black or otherwise) every so often need to rest, or feed, so essentially they're fueled for their journey's next leg. When in flight a glance upward at the 'bevy' (another term for flying swans) won't easily discern which are the boy swans (cobs) and which the girls (pens).

So it is with the current day-to-day debate about the bull vs. bear short-term; at the same time a reasonable observer would accept that the 'flight' is underway; and that it began as we contended, via the launch around last year's 'migration' away from excessive price levels, sustained by waning Fed support and all the buybacks that artificially perpetuated impressions of better growth or earnings, as in realty were already deteriorating while many ignored substantiating facts.

That's true now as well; whether looking at the European bank problems (by no means resolved; just jawboning out there to ease mass concern developing); of course looking at China (where everything seemingly quieted down; but nothing has changed to ease their debt problems or slowing economic growth pace); or for that matter the Middle East (where risk of conflict between Russia & Turkey is far underestimated by most observers; even though it really is sort of lunacy).

Another Byte of Apple

That's also the case with respect to politicians getting involved in trying to stick Apple (AAPL) cured County Government owned iPhone, used by it's deceased terrorist employee. I mention that because this is a complex case we suspected could backfire on a favorable 'initial' press statement by Apple, especially if they later capitulated in a way that reduced confidence in everything stored on an iPhone being secure.

It matters to everyone; including our enemies (corporate not just political), and has not been elevated to a level that is really healthy in one respect: it denotes the extent to which our 'technocrat' society has become digitally-dependent. By the quirky nature of what brought this long-simmering (since Snowden mostly) issue to the front-burner, and the unanimity of desire to uncover terror plots and understand more than the particular issue; we'll finally find out whether security 'trumps' privacy; or whether the ability of Apple to create 'real' encryption got to a point where potentially even legal warrants can't exhume data, without maybe it appears (emphasis on the 'maybe') opening a Pandora's Box comprising our 'real' or 'grander' National Security, and hence more cyber-warfare concerns.

Yes the rhetoric got that carried away Friday, and at least it's better understood that this apparently was never so simple as the White House put it; just extract the information from one phone used by a terrorist. Seems like (given technical ability) Apple was (and has in the past) done just that. The compelling order of Friday focuses on the urgency of the one phone; but the demand is still for the ability to access more than that (hence the backdoor key concern), which would take more than a short-term to reverse engineer (essentially). That's sort of the impression the 'hurry-up' aspect generates; as what seems like an effort to try to push-aside the bigger picture of what has legal and practical complications. 

In a sense, while we'd like the data on that phone (if any, incidentally) to be in the FBI hands 'right this minute', we think that (given the ability of China, maybe Russia or one day even ISIS if they still exist) compromising our infrastructure, electric, water and all, is worth a Judicial discussion about this (not knee-jerk reactions like 'The Donald' had; notwithstanding superficial sympathies his very emotional reaction reflect of first-blush common sense). I revert to my view just yesterday: compromise. FBI gets the info of this or future devices; no backdoor broad key; but has an agreement from Apple to dedicate engineers to comply in the future to Court orders or proper Federal Warrants to assist decryption or access. In-turn; Apple (and more important customers and future business app developments like IBM's) may be able to preserve the ecosystem's integrity. 

It's a very big deal when you expand the universe of thought to the ecosystem and access. And (for which we should be pleased) it reveals how 'open' and so easily accessible to hacking, almost all other systems and software must be; in a way that they either automatically provided data, or were so easy to hack the FBI could do so easily without any assistance. Funny how you never hear the simple reality that having a relatively closed ecosystem helps this a lot. (Apple's approach dating to a Unix basis of the Mac Operating System; isn't the same as IOS, but as most 'apps' are constructed using Apple SDK's, they are in fact more stable and less vulnerable, by design, to intrusion. When discovered to be otherwise, Apple forces them to redesign, fix, or kicks them out. This constrains hacking; and is why Government 'could' prohibit messaging from auto-deletion; probably a more important aspect that all this discussion about a single device.)

Before we get back to the 'swans', let's just remember that a terrorist cell would likely be using something like SnapChat, or Kik or What's App; and where the messages self-destruct, a backdoor key would not be helpful if messages are not stored on a Server (Cloud) somewhere, in which case no reputable digital company would fail to comply with a valid legal request. (And I do suspect there were more accomplices in California than we've ever heard rumored; as is the case in Europe too.... remember what the 

Hanover Police Captain said to press the day they stopped a soccer stadium attack shortly after Paris... he said 'if we tell you how many and how dangerous this was, you will panic'. There's been a clear pattern to pipe-down or hush-up the extent of the plotting by the Islamic terrorists and extremist groups. They say it's so the enemy doesn't win just by a greater infusion of worry; but it also politically influences migrant controversies.)

One more thing, speaking of messaging: this coming week is Mobile World in a slightly warmer part of Europe this year, Barcelona. Last year there was rancor as 'cellular carriers' faced-off with Facebook's Zuckerberg over lost revenue in the telco sector due to 'free' messaging on FB Messenger or similar 'apps'. He argued they would get more customers based on expanded Facebook service. 

Well not exactly; this has always been free on a computer (or WiFi zone) for all services (recent years has seen texting unlimited and included in bundles by at least all major cellular providers). So, given that even poor kids or very elderly (a segment disinclined to pay for cellular much less texting) can do so with FB or Skype or other services, there's really no argument by the telco's against FB as they bundle text, BUT there is a calling to attention of the limited 'audit' that exists of encrypted or vanishing app's, which goes way beyond 'sexting' or any of the other uses kids have for those products. This is why it seems Apple has to decode 'that' phone, whether it's lose-lose for them; or win-win (if as part of a compromise they might prohibit any vanishing non-recoverable message apps .. or voice calls that cannot be traced when there's entirely legal justification). I thought this would be political and backfire; but while that's perhaps true; there is now a National (if not global) conversation about privacy, and that's good. It's almost a sequel to Snowden, in terms of provoking intelligent controversy. 

Back to the swans: this is a wedge within the flight; it's about to be over, and that's whether the refueling allows the flock to resume in the general direction of the trend sooner or a bit later. Much of this centers around banks and hedge funds. The latter are falling apart (some); and tighter credit conditions in Asia, and Europe, can spill-over into U.S. banks. If not you wouldn't hear Deutsche Bank (DB) having to buy-back stock, or  Jamie Dimond supporting JPM shares. 

The banks now talk about exposure being minimal. Derivatives and credit type issues are still facing Energy and other sectors. It differs from 2008 but there's an indirection association by virtual of a fractional banking system. In Germany there is the largest derivative book in history; and goes even beyond what we'd discussed for ages; their unique position in rebuilding the former East Germany as well as loans to Russia; not just former captive nations. 

In the case of other banks; they are more directly tied to the ramifications of the Chinese ending hoarding; and the ongoing commodity crunch that rotated from sector-to-sector for years, reaching energy this past year. Yields would not be a continuing erosion if these trends had changed; and that continues debunking a lot of the central banks spin (not just our Fed) about recovery or growth rates.

Late Friday the EU struck enough of a deal with the UK sufficient to keep Great Britain in the EU, with the vital protections (like never being part of super-state governance) many in the UK want. It's a polarization there too; as if the EU isn't moving toward a greater unity; where is it going? Back go greater sovereign or political isolation between the members; and this too was assisted by terrorism, as was the awareness of what some call the 'Islamic invasion of Europe'. While it's hard to say how the referendum will go in Great Britain; for the moment that 'swan' is merely poised; sort of waiting to test the winds ahead before lifting off. 

In sum: to call the past week the best of the year; is really amusing. It's barely impressive; born of a phony oil production-cut story; and led by short-covering. It also did not inspire in terms of sectors or S&P levels achieved. I'm not going to recite all the fundamental, geopolitical, or other aspects of the market, since first of all we knew immediately (over a week ago) that they'd try to take this up; that a sort of 'fix was in' for a snap-back (and some were going to sell on it; so it's interesting to see how they feel now). 

Also noted; that it would not be clear for some time whether a valid or genuine double-bottom was constructed or not. Our bias leans to the view that it was not; and that it will take several cycles (barring exogenous events; like a default of bank liquidity issue for-instance) of pullbacks and upward probes to settle it.