Jan

11

 Apple stocks more than tripled in just 2 years. Useless to say that I missed this move and that I did not triple my capital during the same period investing somewhere else. I am contrarian by nature, however I was "forced" by some type of compulsion to buy the IPhone4 (not the stocks unfortunately). I followed the herd. Now that I regret it (poor strength of network signal and a battery that lasts for half day at best…) I also understand how strong the AAPL trend is. They sell expensive products that sometimes do not meet expectations but that people are ready to buy at prices which are higher than products of competitors. What a money machine. Difficult, however, to keep the momentum…Time to short AAPL?

Marlowe Cassetti writes:

I will repeat my reply to the Chair's post of July 29th titled Mystical Ideas. I quote myself:

The chair has touched on a point of interest that has bothered me. I don't know about Lady Gaga, but Apple's climb towards the top of market valuation appears to be inline with the phenomenon of a bubble. Yes, I understand that we cannot declare a bubble until it bursts, but let's look at the facts: There are some 47 stock analysts that cover AAPL, all but two have either a buy or a strong buy recommendation. It is the darling of the market. Its market cap is approaching $ ¼ trillion and at the rate it is moving it is on its way to challenge Exxon Mobile Corp. XOM produces stuff that the world needs, AAPL doesn't produce stuff that the world needs just what they like to have, until something else strikes their fancy. It reminds me in the 1980's when people couldn't buy enough Wang stock. You hadn't arrived if your office didn't sport a Wang word processor. The bubble will burst when the last fool buys in at a nose bleed price.

Back to today, for Christmas I bought myself an iPod touch … my first Apple product ever. It cost only $58.00 plus some expiring frequent flier points. I was looking for a MP3 player and I got much more that a music player. I'm very impressed with its versatility and elegance. But at $300 retail it is certainly pricey. about what I paid for a very capable netbook for my wife.

Perusing a chart of AAPL it has relentless upward momentum. You cannot step in front of a freight train and short it.

William Weaver writes: 

Marlowe touches on an interesting point regarding AAPL v XOM; more specifically, how AAPL, as a consumer discretionary stock, has approached the market cap of a consumer staple, which supplies a needed good versus a wanted good. For the past 6 months I have been working on scraping purchasing data from thousands of domestic websites as a way to gauge consumer spending; at some point I am looking to sell this as research, but so far trading it has been very successful.

What I've found is that it is very easy to measure discretionary purchases and very hard to measure staple purchases as most of the latter are done offline. That said, the spending data of only discretionary purchases has a .44 correlation coefficient to the following one-month return in the S&P 500 using 69 non-overlapping months. To me this says that discretionary spending drives market returns, which begs the question, is the market ever really in-line with needed value, the value of what one needs to survive, not what one wants? Would a bubble then be any return over the risk free rate assuming the risk free rate is not in a bubble itself?

With that notion, one should never short a discretionary stock like AAPL, as the market is driven by such companies. (just for fun) Remember in 2007-8 when the Washington DC metro banned Crocs because they were dangerous on escalators? We all asked "with what shoe laces" and then a day later it was found that the head of the DC metro had held a large short position for many months as the stock climbed? It doesn't pay off; the risk is much greater than the reward. At best, one could buy OTM put leaps.


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5 Comments so far

  1. Igor on January 11, 2011 11:51 am

    Paolo whenever I read your articles the film "Five Graves to Cairo" comes to my mind! Thanks!

  2. Jason on January 11, 2011 1:04 pm

    I wouldn’t short it until (if) the general markets show definite signs of weakness. It’s foolish to short leading stocks until they’ve had a chance to bleed a while. AAPL may very well be a holdout if (when) a new bear market begins.

    AAPL has absolutely no future without Steve Jobs and might as well change it’s ticker symbol to SJBS. That fact is independent of general market direction.

  3. Ghost of Markets Past (circa 2000) on January 11, 2011 4:55 pm

    Hello Paolo:

    Peter Misek of Jefferies seems to disagree with you as he just put a $450 price tag The AAPL ( http://tinyurl.com/TheAAPL ). This reminds me of the fun times right before the crash (the first one and the big one for us younger folks). The estimates just ran further and further away from reality. Until they didn’t.

    Think of all those funds that own The AAPL. (Yea, there might be 4 or 5 of them left that don’t.) Everone else doesn’t want to have to explain to the always fun and joyous pension consultants or Mr. & Mrs. IhaveWayTooMuchMoney why they haven’t shown Mr J appropriate love by buying truckloads of his fine & proper ‘Merican Co.

    Now with all of the “Smart $” already in and thinking about all those juicy profits they are about to seize on, let us think on the fact that all the elephants are locked in the same room together. All keeping one eye on the the same exit door. All wondering who is going to get out first ’cause once that first Elephant blares his trumpet & starts his fast march out the door, the rest will stampede through the wall.

    Then again, in a market that only goes up, maybe a $1,000 price tag is more appropriate.

  4. Russell Sears on January 11, 2011 5:44 pm

    Let us not forget that us old guys are not the target market for these products. I am  a parent and a parent that watches other parents. These products are for the young. Some use them as babysitters for the mobile Moms like TV was in our day.

    They may be discretionary, but they are also hip. They are regularly stolen, broken at high schools and replaced. Upscaling is often considered a fashion must, despite the functionality missteps.

    The business is profitable and appears scalable, up and down so while they may be a bubble… most likely they are not tulips, unless they too suddenly loss the "cool" factor in a Steve Jobs heart beat.

  5. BG on January 11, 2011 9:33 pm

    AAPL packages and sells user friendly ways to communicate and interact with information.

    AAPL innovates and history is in favor of the innovation vs the commodity. That said its clear Steve Jobs is the driving force behind it and buying puts on AAPL is the equivalent of buying life insurance on Steve Jobs.

    Compared to XOM, one does wonder how companies like AAPL reduce the “need” for the products XOM produces. How much less do people need to travel to get the information they need today or produce the service they did in the past.

    Personally 80% of the work I do can be done from any location and I imagine that percentage increasing as more people I interact with integrate technology into their lives.

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