👋 Hello, in today’s update:

  1. Apple debuts four new products
  2. What is an inverted yield curve? And what should investors do about it?
  3. What else is happening?

1. Apple Debuts Four New Products

Apple is expanding its service line-up with four new products set to be released throughout 2019.

Watch the keynote

  • Apple TV+: Not many specifics, didn’t say how much it would cost??? They will have original content from Oprah, Spielberg, and Reese Witherspoon. That’s about all we know.
  • Apple News+ (The Netflix of magazines): Cost $9.99 per month. Combination of magazines like Time, Sports Illustrated, and Rolling Stone. In addition, they added publications like the WSJ, The Skimm, and TechCrunch.
  • Arcade: Made for gamers. One subscription, no ads — you can jump from your iPhone to your iPad — to your mac, and pick up where you left off. I took a peek. Their games look cool, but I doubt we’ll be seeing Madden, Call of Duty, and other popular games with this bundle. It seems they are curating the best indie games you find in the app store and sticking them in Arcade.
  • Apple Card: Apple’s take on a credit card. Built on simplicity, transparency, and privacy.
    • Looks great. Just like you would think an Apple product would look. Minimal design, no numbers, and limited text.
    • No fees, no hidden cost.
    • Real-time fraud protection.
    • Coming this summer.

Where Apple gets its revenue

Source: Statista

Total revenue for 2018: $265.6 billion

How much each segment contributed to 2018 revenue (in % terms):

  • iPhone: 62%
  • Services: 14%
  • Mac: 9.6%
  • iPad: 7%
  • Other products: 6.6%

Our thought bubble

The iPhone’s utility isn’t going to be replaced anytime soon. It’s a critical part of people’s lives. It’s still a cash cow, but its days of high growth rates are behind them. And they can’t keep increasing prices forever. So what’s the next best thing to earn more money from huge install base?

Sell more services. And that’s exactly what Apple is doing.

Two of their fastest growing segments are services and other products. Services include the 30% rake they take off app store purchases and other services like Apple Music. The four new bundles will be included in this segment. Airpods is the fastest growing product in the other products category.

Wall Street’s reaction: A big yawn… Their stock is up ~28% YTD, but this news produced no big price bump.

2. What is an Inverted Yield Curve?

Source: Axios

What’s going on?

The 10-year/3-month yield curve inverted last Friday and has remained inverted. For investors, knowing about the yield curve inverting does not give us an edge. In fact, this has no effect on whether or not we make an investment. But an inverted yield does affect a bank’s profitability and I think it’s helpful to explore why that is.

Let’s back up, and learn some basics about government bonds.

The U.S government issues three types of securities: T-Bills, T-Notes, and T-Bonds.

  • T-Bills: Maturities range from 4 weeks (1-month), 8 weeks (2-month), 13 weeks (3-month), 26 weeks (6-month), and 52 weeks (1-year). T-bills are issued at a discount and paid in full at maturity (this is their interest rate).
  • T-Notes: Maturities range from 2, 5, 7, and 10 years.
  • T-Bonds: Known as the “Long-Bond.” Identical to T-notes but mature in 30-years.

What interest rates does the Fed actually control?

Two. The federal funds rate and the discount rate.

The federal fund’s rate is the interest rate at which depository institutions (banks and credit unions) lend to one another. For example, if bank A has a surplus in their reserve account at the Fed, they can lend to Bank B who needs a larger balance.

The effective fed rate is determined by market forces, but the Fed can influence the rate through their open market operations.

For example, if they wanted to raise the rate, they could sell bonds, which decreases liquidity (money supply) banks have to trade with each other. And vice versa if they wanted to lower rates. They would buy bonds and give banks the cash (increase liquidity).

The discount rate is the rate the Fed charges banks to borrow directly from them. Known as the discount window, this option is more expensive than borrowing from other banks and is used sparingly.

What rates we should really pay attention to

The 10-year rate gets the attention, but for banks, the more important rates are the 3 and 5-year T-notes.

Why is that? Loans are the bank’s primary assets. Deposits are counted as liabilities. Banks have a mix of maturities, like business and consumer loans — which are tied to overnight rates such as Libor — commercial real-estate loans with maturities of around five-years, and a mix of securities with durations of three to five years.

Their longest duration loans are 30-year mortgages, which are usually sold off and securitized (i.e. no longer on their balance sheet).

When the loans, with durations of three to five years mature, they have to reinvest those proceeds back into lower yielding debt securities, which pressures their net interest margin.

Net interest margin is a measure of bank profitability.

It’s calculated as (Interest income-interest expense)/Average earning assets.

For example, if a bank earned $1 million from their loans and had to pay $500 thousand for deposits, with assets (loans) totaling $10 million. Their net interest margin would be 5%. ($1,000,000 – $500,000)/$10,000,000 = .05 or 5%. 

ETFs to watch

XLF is the largest financial ETF with $22 billion in AUM. We’ll also be watching the regional banks. Their ticker is KRE, also a SPDR product.

None have sold off to buy levels, but we’ll keep you abreast of their situation.

3. What Else is Going On?

Airbnb is chipping away at hotels.

Source: Statista

We’ll dig deeper into Airbnb as we move closer to their IPO.

That’s all for today. Thanks for reading,


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