Thursday, October 11, 2012


This is not a market-timing blog or anything like that, but every now and then I get the itch to make a post about it even when I have no real information or analysis to offer.  So most can skip reading this post.

Anyway, last October and November, I made a bunch of bullish posts on the stock market.  When there was a lot of fear of a real European implosion, I wrote that a crash is unlikely (read here).

I was thinking about this again recently, and if someone asked me now if a crash may happen, I would say it is much more likely now than last year; I wouldn't so strongly make a call against a crash.

One obvious reason is that the market is up a bunch since then and things aren't as cheap as it was. 

Here are some charts:

S&P 500 Index, Past Two Years

Volatility Index

You can see it wasn't so hard to be bullish last fall; there was so much fear and hysteria in the market.  Now the market is much higher and the VIX shows no fear at all.  I am not one of those people calling for a crash every time the VIX goes below 20% or near 15% or whatever, but the market is much more ready for a correction than it was last year (when the market was already in a correction).

Credit spreads seem to be at historical lows too, and that's also usually a sign of compacency.

This doesn't change my long term favorable view of stocks and this shouldn't make any different to true value investors; value investors don't make money getting in and out of markets.  As a long term value investor, I would clean house and dump things that are luke warm and make sure what's in the portfolio are good, solid longs.   Other than that, I wouldn't advocate doing anything about this; just sit tight, come what may.

Shorts Give Up, Longs Lag
I don't have any data, but it sort of feels like this market just went up and blew out the shorts all year, and the underinvested longs lagged severely and had to jump in.   I think as shorts throw in the towel, it's probably a good time to start looking for good shorts (if that's what you do).

Apple has been nagging at me too for a while.    Apple is still cheap excluding cash on the balance sheet, but at this point it sort of feels like this Apple fever is sort of peaking out.   What bothers me is that I can't really analyze this in a meaningful way.  It's just a gut feel sort of thing.  It just feels like Apple had a parabolic run and peaked out even though the business continues to do well and there is still probably a good runway for growth going forward.  And the stock is still cheap.

One thing that is worrisome is how Apple was so much a product of Steve Jobs.  Reading about Apple and Steve Jobs, you realize how important he was to the success and dominance of Apple.

I read quite a bit about Sony recently and it is interesting to note that Sony also lost it's way after the passing (or retirement) of Akio Morita, the charismatic co-founder of Sony.

When you have a strong leader like that who is a founder, things can get done that can't happen in a regular company (not run by the founder).  In fact, in the book Sony versus Samsung,  the author states that one reason Samsung was able to clobber Sony was because Samsung was still run by the founder who was able to get things done.  No successor CEO can possibly have the same kind of power (even if they have the authority).   When Morita wanted something done, it got done.  When Idei wanted something done, it often didn't get done.

Steve Jobs can ask for a lot, and ask for things people say is impossible.   No successor CEO will have that kind of power because no CEO will have that sort of credibility and loyalty; people will just quit if pushed or treated the way Jobs treated them; it just won't be the same.

And yes, I understand Apple is not just about the gadgets; it's the eco-system.  Other tech/gadget companies didn't have the same synergistic thing that tied everything together.   The iPod is no Sony Walkman, and the iPhone is no Razr. 

Here too, I think online app stores and things will eventually catch up to Apple;  tablet computers too will eventually become commoditized with more or less similar features and similar apps avalailable online.

But what really haunted me was the fact that Apple is building all these expensive stores all over the place at the best locations.    This positive lollapalooza can work wonders when there are great products to sell, but what if the run in hits runs it's course?  What will they sell at these spectacular retail locations?  Maybe it doesn't matter; they might make so much money and get their investments back so quickly that closing them if needed may not be a problem at all.

Apple had a really good run after the passing of Steve Jobs.   It's almost as if they were worried, and then decided after the fact that it just doesn't matter that Jobs is no longer there. 
The biggest worry, though, is that Apple seems to be the favorite of so many different people; hedge funds, mutual funds, retail investors etc. 
There have been some articles written here and there about how over-owned Apple stock is.  I haven't done any of my own work on that, but it does seem to be a very popular holding.  And no matter who you ask, they all say "it's cheap".
I don't know.   You don't get rich shorting low p/e stocks,  but this one might actually be one to look at.  Of course, like any short, if it runs against you you can't sit on it for long as these things can really go parabolic and you can lose tons of money.  And a lot of very smart people are long this thing and I am definitely not smarter or more informed than them (in fact, I have very little information on Apple).  It's just one of those intuitive things.
Anyway, I know this post is a little different than what I usually post (my gosh, I sound like a day-trader), but it's something that has been on my mind recently.
And yes, I will dabble, perhaps foolishly, in Apple on the short side.



  1. I love your blog but this post re: AAPL makes no sense. The stock is fundamentally cheap by just about any measure. The business is humming right along. The iPhone 5 is a big hit. iPads absolutely dominate the tablet market. Mac continues to gain ground on the PC. The iPad Mini is right around the corner. Maybe iTV. There is zero evidence of a decline in the business. Steve Jobs died over a year ago. Despite all the evidence you are going to short it based on a gut feeling? Huh?

    1. Yes, I know. Einhorn is in total agreement with you. I will probably get stopped out quickly and this will turn out to be a pointless, money-losing speculation on my part. If I ran other people's money, I'm sure they would be pissed if I short AAPL in their accounts, lol... no doubt about that.

      If that turns out to be the case, it's not a big deal; this trade won't put me out of business... Sometimes we do silly things to get it out of our system.


  3. Just because a stock trades at a low PE multiple does not mean that it is "fundamentally cheap". That is only true if the earnings are stable or are higher several years out, as most of the value in a company over say 10x earnings is based off earnings far into the future For instance, say RIMM traded at 7x growing earnings in 2010. It would not have been "fundamentally cheap" because, as it turned out, the fat margins were at risk due to competition.

  4. The 'easy' $ in AAPL short may have already been made, but I would not be too surprised to see it with a 5 handle within a week or two.

  5. The ecosystem battle between Android and iOS looks eerily similar to the battle between Windows and MacOS in the 80/90s. If history is a guide, the mobile/tablet categories will be commoditised just like what you've already said, and Android will win. The scary part is, Google doesn't need to earn anything directly from Android. And it has built such a strong moats around its massive data index. (You just need to look at the recent flop of Apple's Map. Google's Map works isn't a fluke.)

    To justify Apple's price tag, Apple has to create yet another killer category. Apple TV? Without Jobs around, it will be a daunting task to get the major studios on board.

  6. as if your graphs aren't clear enough, i like this one..... third time lucky....;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

  7. Kk, maybe this is your worst post ever! (Or maybe an attack from some cybercriminal, see last Panetta's speech!). Jokes aside,
    1) Mr. market.
    Yes, I agree with your reasoning that now there is too much complacency (I've increased cash in the low teens in my p.a. ... --> so wait for the next new highs!)
    2)a Aapl. The leadership.
    Very difficult to assess but it is possible that working in one of the greatest company ever, where people are surely well paid and there is a meritocracy, is something that creates an intangible like "corporate culture" that can work for a while.
    2)b Aapl. Over-owned.
    It is obvious for a public company of that size.
    2)b Aapl. Not cheap.
    Every ratio or metric you use doesn't tell us is expensive like a fashion phenomenon could justify. In my opinion there are some other stocks increadibly expensive like RHT, CRM, LNKD, ISRG that don't have the same public awareness.
    One factor that continue to surprise me is the resilience of this incredible growth although those kind of products are really the most discretionary items I could imagine. But people continue to spend so much money to buy them. For how much it will be possible that so much share of wallet of ordinary people is spent in these discretionary items?
    Kind regards, Giuseppe

    1. Yes, I understand that (worst post); this is not consistent with what I usually post, lol...

      But as you know, I don't make this sort of post very often. I know resisting this sort of urge is the key to successful investing but this has been nagging at me a while, so I don't make this post lightly. I know that there have been AAPL naysayers all the way from $10.

      I did own AAPL for most of last year and earlier this year and did very well on it. It was a very big position for me earlier this year, so I do understand the bull story very well.

      As a short, yes, the valuation box can't be checkmarked, and that is a big deal. So this may not be such a wonderful idea.

      As for p/e ratios and valuations, though, there are examples where low valuations didn't really mean it was a great investment. Cyclical stocks often are horrible buys at low p/e ratios (peak earnings etc...).

      Financial stocks too were pretty cheap at 8-10x p/e right before the crisis, and before any problem was evident at all. I still didn't like financials because I understood the credit cycle and I didn't want to capitalize those earnings over time.

      That's sort of my feeling Apple right now. They are doing really well and have tremendous momentum, and it's probably true that they will do well for a little while. But to really evaluate Apple and say a 10x p/e is cheap, I have to be convinced that they will still be dominant 10 years from now. Will they be? It's certainly possible. Ten years ago, nobody thought Apple would be this dominant.

      But for me, Apple just doesn't pass Buffett's ten or twenty year test, and that is my biggest concern as a long (or former long). This, of course, doesn't automatically make it a good short.

      But you know, I am a bit phobic to fevers and manias, and despite the low valuation, this feels like one. All the books out there about Apple and Jobs, and the idiots who are starting to show up at work in black turtle necks (Jobs wannabes); this sort of thing just really bothers me and I just can't be on board something like that (again, even though I was for a while).

      What made me fall out of my chair the other day was some sort of Apple stock owner's club or some such thing on CNBC. They were basically ridiculing any Apple naysayers; it really reminded me of the Beardstown Ladies. They have it all figured out: Just own AAPL and get rich; it will go up a lot every year!

      Again, this is not rational and is not based on any analysis. But sometimes, you know, when things get too hot, even though not all of the checkboxes are checked, you have to watch out.

      Anyway, that's just my feeling... (and yes, emotions/feelings are not good for investment performance).

      So yes, this is probably my very worst post (unless the market crashes or AAPL stocks peak out in which case others will say this is my best post, lol... but I doubt either of those will happen); I don't have any problem with that assessment.

      Stay tuned for more of the usual Brooklyn Investor-type posts... I will get back to normal programming (before this blog gets overrun by technicians and day-traders!).

  8. What I can never get over is how the smart money piled into MSFT, INTC, CSCO and so many other tech stocks back in the late 90's. They were calling MSFT cheap at 70X earnings.

    Now people are calling Apple expensive at 11X earnings? The game is over for Apple?

    Apple has HUGE problems because they can only sell 5 million iPhones in the first week? People are having to wait to get them, because they can only make 1 million in a week?

    By some estimates Apple has 90BB in cash and short term investments...That is more than the market cap of MOST large cap tech companies...

    At today's prices, Apple could buy BOTH Dell & HP and have PLENTY of money left over...

    Yes, Apple's margins may go down, yes they could have difficulty with some things in the future. I don't think the Apple "story" is anywhere near over though.

    What Apple has managed to accomplish is totally unprecedented.

  9. Just wants to say I enjoy your blog and while I have the opposite view from this post, I thought I might suggest what I consider to be two of the best analysts of all things Apple in case you felt like digging into it a bit more as you usually do: Horace Dediu at and Andy Zaky at (I have no affiliation with either). Best regards.

  10. Nice Information! I personally really appreciate your article. This is a great website. I will make sure that I stop back again!.

  11. While this article was provocative, it was misleading and misguided with little actual substance as you admitted. I get your point that companies like this are valued largely based on future earnings and in tech that is iffy. Besides its culture and ecosystem at current to help it, Apple also spends a greater percentage of revenues on R&D than any other company. At least historically they did. I don't know for sure since the revenues have become so huge.
    There are many other key considerations that you have not mentioned and it seems were not aware of.
    In the future, I'd appreciate not having any more articles that are not founded on a strong depth of knowledge and experience about the full subject matter.
    Especially when you express such a strong opinion about a course of action without basis for it.

    1. Hi, thanks for the reply. As I said before somewhere, AAPL was a huge part of my portfolio for much of last year and earlier this year so I understand the bull story pretty well.

      I just took a quick look at AAPL's R&D and as a percentage of sales, for the last five years were: 3.2%, 2.9%, 3.0%, 2.8%, 2.2%. If you go all the way back to 2003, it's 8% or so.

      A quick look at MSFT shows R&D of 13%, 13% and 14% in the last three years. IBM seems steady at 6.0% of sales the last couple of years.

      Anyway, I understand my viewpoint is not popular at the moment and it doesn't have any "meat" on it... and I appreciate contrary views.

      Many smart people including Julian Robertson and David Einhorn are on the bull side and I know that too.

      We'll see what happens... To me this is more of a conundrum than a strong conviction short.

  12. First of all love your blog. Second, I wouldnt short AAPL. While to some extent I agree with your notion that you have to believe that in 10 years AAPL will still be dominant - I think that is the proper perspective of the long, not the short. Do you really want to fight the tape on this until Apple eventually does come out with a bad product? I think the maps fiasco isnt enough to deter sales (remember antennae-gate?) of the iPhone5, and if PC sales declines are any indication, iPads are still crushing it. At 11x earnings, I think this is a rather terrible short honestly. In fact, I still think AAPL work out well over the next 1-2 years given the iPhone 5 and the growing corporate acceptance of iPads and iPhones. Eventually, they'll miss badly w/o Jobs at the helm and the stock will come down, but I would wait until we see that terrible product first (like RIMM) that will be the harbinger of financial weakness. Plus, just the growth in smartphones alone is still stunning - they can even lose some market share and show solid growth. The growth rate in smartphones is forecast to be 39% in 2012, 18% in 2013, and 13% in 2014 (IDC/IMS research). Lots of wind at Apples back, I think they just need to NOT screw it up to continue growing.

    As for everyone loving Apple, I have to say that I just read through 50+ comments from an anonymous hedge fund blog (the kind that moves stocks by 10% in a day b/c all the members are gazillionaires), and there were only a couple of bulls out perhaps 50 naysayers. I think institutionally it may not be as hot as you suspect. Anecdotal I know, but telling too. Kinda made me more bullish, although admittedly I have been lightening in the 660 range.

    1. Thanks for the data point. This is certainly a tough one. The honest answer is that this belongs in the "too hard" pile, so I wouldn't fight this thing too hard either. If it is played from the short side, the best way to play it is to trade it tightly and not let losses run because it can really run up...

      This is not one to short and leave in the portfolio (which is probably true for most shorts)...

      Actually, the deceleration in growth rates in smart phones is scary...

      Thanks for posting.

  13. Never had a crash from a VIX of 15 . . . never. You will get at least a couple of weeks warning as the market turns choppy and volatility spikes to at least 22-24 before you can get abrupt weakness.

  14. If Henry Singleton ran Apple, I would consider investing in it.

    The challenge is this - technology changes rapidly and there is a significant component in regards to probability that is underestimated, in my opinion. If we look at Apple's history even with the founder, he had to try a large number of things before getting a cash generator like the iPhone. What are his odds of success? Something like 1 in 10 products? Steve Jobs did an absolutely amazing job, and I'm sure the odds changed over time as he improved within the same industry (who sticks around in the tech world more than 10 years?).

    Henry Singleton realized that probability played a big role and that things changed quickly, so I believe that any expenditure or investment above a 4-5 figure threshold had to be approved by him. He knew that at certain times, a company within his portfolio had to be "wound down." If he was in control of RIMM, I believe he might have started winding down the company sooner than had occurred, siphoned the cash, and put it elsewhere. Imagine if you're the CEO... times are great (RIMM 7 years ago), and you begin to wind down R&D and lay off all of your employees. How would that feel? In terms of cash generation, it could be the best decision around.

    We have very few tech companies that have stood the test of time and generated real profits for their owners *and* provided a clear outlook over the next 10 years when we can predict what they will earn. I would argue that Microsoft is one of the best examples today, but even there, we are slowly seeing less dependance on the operating system as things move to the browser. They too could lose what they have. Most tech companies seem to use up the cash till it's game over. The executives and VC's have often sold out long before that mattered, so the incentive wasn't there to generate cash & return it to shareholders.

    I would love to invest in a tech company if I saw more executives that were frank about what they're doing. Not all of these will create companies - some are just "projects" that last 7-10 years and then will be shut down. Intel might be one of the few that stands the test of time, and even they face significant risks.

    And finally - would we have known to not invest in RIMM 10-15 years ago because Apple would create this amazing product? If we couldn't see the future then, what makes us think Apple will be around in 10-15 years and generating a profit that investors will pay for?

    These are just my personal thoughts and I mean no offense to anyone, because these are really great companies - I'm still young and have a lot to learn.

  15. Hi Brooklin, Good post thanks again, here I wrote something about apple, it includes some points that I think you might be interested with. Like its supply and manufacturing dependencies.



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