I have decided to post a recent email exchange to illustrate the psychological component of a potential Apple short. As all who follow me know, I believe that the amount and quality of competition that Apple is and will be facing in the near future will curtail its hyperbolic growth and/or margins, essentially invalidating the lofty price targets that have been assigned to it by the well followed sell side analysts. There is also a market psychology side to this as well. Apple has, by far and wide, the greatest amount of reverence I have ever seen bestowed upon a corporate entity. Its employees, products, and stock are literally worshiped and zealously, if not aggressively defended. This nearly blind devotion can and does tend to cause one to take a blind eye to shifts in market dynamics, fundamentals, competitive forces and adverse macro economic trends. In a nutshell, emotions take over where the brain should be leading. At ~$340, a near doubling, the greatest competitive forces the company has ever had, the removal of first place in market growth rate (mobile) as well as displacement in market share, a myriad of global macro-economic disasters, abject worship by Wall Street's sell side analysts (who tend to lose more than they win, yet drag many a retail investor down with them) and the fact that it is one of the world's most largely held stocks - albeit held by many who overlook the obvious - Apple makes an appetizing short if the entry can be timed and hedged correctly. Think about it. Here you have an opportunity where a company MAY be slowed down considerably hitting potential macro, competitive and logistical headwinds in a potentially stiff macro environment, with an all time high triple digit share price (good for options traders) and there is literally close to ZERO competition for the short because EVERYBODY is long and convinced Apple is not a fruit but bread-like manna from heaven. When everyone is crowding to one side of a boat, it is wisest to make your way over to the opposite side.
On that note, here is an email exchange that I recently had with a polite yet zealous Apple fan that follows my blog.
In continuing with what appears to be one of the very, very few voice that look at the mobile computing wars from an empirical perspective I will update readers on the price action in Apple and why I feel that the market may be getting wise to what BoomBustBloggers have known since last year. I want to make it clear that this is in no way to be considered investment advice or a recommendation. It is simply a reflection of my thoughts and ruminations on the mobile computer space and the relative prospects of the front leaders therein. On March 16th, I posted Shorting Apple and Why Software Developers Can Make More Money On Android wherein I discussed the suitability of shorting(putting) Apple stock with tight stops. This, or course was in direct contradiction to the recommendation of Goldman Sachs who has a $430 target on the company. See Taking The Challenge To Goldman Sach’s Apple Proclamation One Step Further and Is It Now Common Knowledge That Goldman’s Investment Advice Sucks!
I followed up the next day with Note For The Few Realistic Apple Bears…
Shortly thereafter the trade was stopped out with a roughly 31% gain. I have put a similar position back in this morning. Let's take a look at the divergent price action between the two mobile computing war front runners.
Apple has had the expected effervescent launch to its iPad 2 last week, which was tarred some in Asia by the trifecta calamity Japan's earthquake, resultant tsunami, and consequent nuclear reactor near meltdowns - still going on. The problems Apple face go farther than a mere temporary (or not so) hampering of the Japanese market to the new iPad 2. Apple is relying on the iPad 2 to diversify its current ~65-70%+ concentration of profits in its highly successful iPhone product line. Any disruption in the selling of iPad 2s gives Google's Android tablet products more room to expand and capture market share. From CNBC:
The iPad 2 battery, which IHS iSuppli said is "unusually thin", is manufactured by Apple Japan, an Apple subsidiary, and likely requires advanced manufacturing technologies that reside in the country.
"Logistical disruptions may mean that Apple could have difficulties obtaining this battery, and it may not be able to secure supply from an external, non-Japanese source," the report said.
Production at many Japanese manufacturing facilities has come to a halt following Friday's 9.0 earthquake and subsequent tsunami, which has left more than 5,600 people dead and destroyed swaths of the country.
Toshiba, which is one of the companies that produces the NAND flash memory used in the iPad 2 according to IHS iSuppli's research, briefly shut down a flash memory manufacturing facility in Japan and warned it could face hurdles distributing its products.
Suppliers of other components whose factories weren't damaged are likely to be affected by logistical issues, such as difficulties procuring raw materials and shipping finished products, the report said.
Apple launched the iPad 2 in the United States last week to strong demand, with many stores selling out of the device and analysts estimating that the company sold 1 million units during the debut weekend.
The current wait time for an iPad ordered online is 4-5 weeks.
Within 4-5 weeks, Samsung should be launching its 10 inc Tab product which arguably the most competent threat to Apple's iPad 2 to date, and only the 2nd of over 3 dozen tablet-specialized "Honeycomb" devices to ship in the next quarter or two. From As The Tablet Margin Crunching Parade Marches On, Consumers Benefit From The Cheapest Prices Of The Best Products:
Even without the launch of these higher end specialized products, Android 2.x tablets are already flooding the retail markets. Here is a page from Sear's website after typing in the term "tablet"... Click to enlarge.
These are not just the junk tablets often pushed over from the wholesale Chinese shops either. Included for $300 and change is the Viewsonic 10" tablet which can dual boot Windows 7 and Android, and its cousin the pure Android 10" tablet. With a software upgrade to versions 2.2 to 3.0, this tablet mirrors the much more expensive Motorola Xoom and Samsung Tab and can run neck and neck if not beat the iPad 2 at nearly all function - yet it is priced less than the current iPad 1. Yes, all available from Sears. Remember my admonitions concerning margin compression - these prices are, and will continue, to drop like rocks.
- The Tablet Pricing Wars Have Commenced, Targeting Apple’s iPad 2 Which Is Not Even For Sale Yet…
- Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!
So, as the iPad 2 enjoys one to one and a half month delays, these Android tablets will continue to sell and occupy mindshare that probably would have gone to Apple. If Apple does not succeed in diversifying its profit base farther, it will be left vulnerable. The Japanese incident is a perfect example. The two popular mobile products that are grown (ever so slightly) market share are very vulnerable to happenstance disruptions. Google actually benefits from this by building a very diversified base of vendors from every hardware corner imaginable, many of which may not be as effected as Apple who has sole sourced certain components. In the meantime Google Is Said to Test Mobile-Payment System With VeriFone - Bloomberg. If Google is successful in cornering this market, it simply adds to the ubiquity of Android as it will surely be built into the OS. Do remember how quickly Android has risen from near zero to pole position in terms of market share.
In 7 quarters, Android went from last place to first place - WORLDWIDE! Expect the same to happen in the tablet space where competition is even worse and the Android camp has a much larger stable of much more capable competitors ready to jump out of the gate as the iPad has only one year head start as compared to the iPhone's 3 year head start. Does the market see this? At the money, front month puts jumped 41% while Apple fell faster and farther than Google during the market rout, and gained less, slower during the government pump up.
I am slowly gathering puts on Apple again, with tight trailings, of course. Apple's situation may not become apparent immediately, but it is definitely in more of a competitive bind than many are letting on. I have been clamoring that Apple's margins will get chopped by Android's commoditizng the smartphone space - both on the lower and and the higher end. See Apple on the Margin and my on air proclamation just hours before Apple released earnings and declared - surprise, surprise - a drop in margins. Go to 3:40 in the video... [iframe http://plus.cnbc.com/rssvideosearch/action/player/id/1618325359/code/cnbcplayershare 400 380]
- The Potential Equity Investments Most Likely To Prosper From the Google/Apple/Microsoft Mobile Computing Battle
- The Nokia/Microsoft Alliance & Android’s Commoditization Of The Mobile Computing Platform…
- Apple Gears Up To Combat The Margin Compression That Apparently Only It, Google & Reggie Middleton Sees Coming
- Will Google Win The Mobile Computing War? Let’s Walk Through Where They Stand Now & How To Value Them
- Sony Bites The Bullet & Joins The Android Camp, Adding Its Entire Suite of PSOne Games To The Android Platform
- If You Need More Proof Of Apple’s Inability To Keep Up With Google’s Android & Over 100 Other Android Hardware Vendors…
Subscribers are reminded to review the Apple iPhone Profit Margin Scenario Analysis Model as well as review the Apple Earnings Guidance Analysis document that details how Apple’s management expertly manages sell side earnings expectations, and consequently their share price. Non-subscription readers should reference How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue and then compare and contrast to Will Google Win The Mobile Computing War? Let’s Walk Through Where They Stand Now & How To Value Them.
Regarding the post that I made this morning, Shorting Apple and Why Software Developers Can Make More Money On Android - the Apple bear position has indemnified and paid for itself with a 66% return on OTM puts in front of a trailing stop. The rest is gravy from here and if Apple pops back up I'll simply wait for it to get too close to that Goldman Sachs recommendation and have at it again.
I have finally started dabbling with Apple shorts and puts. My OTM S&P put positions were profitably stopped out due to trailings yesterday when the market recovered some of its losses. I have decided to use Apple in the place of the S&P puts for the time being. Medium to long term, the trade is more evident and obvious to anyone who is objective and follows BoomBustBlog. It is significantly more risky shorter term. Alas, there are marginal gains already, and once they accrue to the point of indemnifying my trailing stop, I will add more. After I finish the current leg of my global real estate research to be disseminated to institutions, I will offer tidbits of the modeling (I have already offered subscribers significant info on why I think Apple is a risky long play). From a contrarian standpoint, it may be safe to go short with tight stops, after all although Apple Gears Up To Combat The Margin Compression That Apparently Only It, Google & Reggie Middleton Sees Coming, we still have those guys over at West Street... Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past? I have taken The Challenge To Goldman Sach’s Apple Proclamation One Step Farther, Apple’s Closed System Risks Failure! Listen, everyone, regardless of what investment positions or tech products you may have in your stable, needs to ask themselves the appropriate "What if's". I have spurred the conversation with "Will Google Win The Mobile Computing War? Let’s Walk Through Where They Stand Now & How To Value Them"
Remember, I may not always be right, but it does pay to look at the track record... Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? More attention should be paid to the little guy, after all by now it is Now Common Knowledge That Goldman’s Investment Advice Sucks! Didn't you get the memo? I'm sure many traders have spurned Apple due to the Japanese market being cut off right at the launch of the iPad 2, but the issues go deeper than that. I will cover it in depth at a later date, though.
Note: Timely subscriber research at the end of this article
In the controversial article Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! I attempted to make clear that those that are really in the know know that looking towards the future, Apple is not the real threat. As quoted from the blog post:
The CEO of the hardware side of the recent Microsoft/Nokia alliance (Elop) put it most accurately – recognizing what I have been saying for about a year now, and that is Google/Android is at the forefront of the mobile computing wars – according to Nokia’s Elop: “Our first priority is beating Android!”.
Note to Subscribers: New subscriber information available at the bottom of this article.
Apple has announced the release of the iPad 2 and it is an impressive piece of hardware, very nicely packaged and comes with margin boosting accessories (that are actually pretty slick) such as a magnetic cover. With that being said, the RDF (reality distortion field) and FUD (fear, uncertainty & doubt) absorbed and regurgitated by the tech media is simply horrendous and is an example of how difficult it is to get truly unbiased information (not to mention true grit analysis) these days. I truly believe, as in the political and banking rags, many tech sites simply recycle press releases and marketing material from Apple in lieu or performing critical analysis and independent research. Let's debunk some of the myths that I have found on some popular tech sites.
Myth Debunker 1: Apple's incremental upgrade is enough to kill the competition
Last week I posted a comprehensive piece, The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess. The goal was to outline the literal mess that those who decided to drag us through this “Great Global Macro Experiment”have left us in. Since then, in merely one week's time, we have bore witness to:
- The potentially imminent toppling of another multi-decade, long standing regime, the third in as many months. Gaddafi asserts control amid worldwide dissent - Libyan U.N. mission urges Gaddafi's downfall - Gaddafi son denies civilians bombed - Analysis: Libya could face chaos in post-Gaddafi era. Leading up to the Libyan affair, Tunisia and Egypt fell into the hands of virtually weaponless protesters (at least from a conventional weapons perspective) armed with simply laptops and cellphones (the new age computers and apparently the weapon of choice for those in uprise) to post messages on Twitter and Facebook, amassing solidarity with supporters to converge in certain areas to join the mass protests. Identifying, fearing, and failing to understand the true power of the Internet in toppling a regime, Libya has repeated the faux pas of Egypt in attempting cut the country off from cyberspace - attempting to halt the charge of an African bull elephant with an Acme Walmart (by way of China) fly swatter. It is apparent that Egypt's efforts to isolate its populace from the Internet, although failing to halt the toppling of its regime, did succeed in hiding the futility of such an effort from Quadafi, et. al. This not only forms another basis for contagion, but one that was actually foreseeable nearly a year in advance- see Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!! and First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does? Subscribers should reference Potential Spillover Effects from the Middle East to the EU.
My stance on China's comeuppance for attempting to pack 50 years of growth in to 3 years is still quite unchanged. I am fully aware that many "smart" bankers and analysts have different perspectives, but as I posted a couple of weeks ago, "Currency Crisis! Inflation! Sovereign Defaults! Bahhhh… Who Are ‘Ya Gonna Believe, The Government Or Your Lyin’ Eyes?". From Bloomberg, this morning: U.S. Index Futures Fall After China Raises Banks’ Reserve Ratio
China’s central bank raised reserve requirements for lenders for the second time this year to counter inflation and curb property-price gains.
...Reserve ratios will increase half a percentage point starting Feb. 24, the People’s Bank of China said on its website today in a one-sentence statement. Today’s move came 10 days after China raised interest rates.
And anecdotally on the ground as reported by BoomBustBlogger John:
We import from Asia, V-nam mostly. After Chinese new year factories returned back to:
- 8% devalution in the dong
- New Taxes for using moterbikes and cars
- Interest on loans from 14 to a new 20%
- and more prices controls.
On top of that the real kicker. Business in Vnam had to buy US$ from the black market, the diff was 30% compared to the banks. Business would buy on the black market and get a fake bank reciept at the banks rate and keep the 30% spread & use the fake reciept for accounting, this helped keep their prices down. Now the gov is matching the black, the spread is gone.
We have people on the ground in Vnam. So who is going to pay these new prices that are coming over here right now, higher prices are on their way. Can you say margin compression, possible a big one. Look for shorts in low margin retail, big ticket item retail that are heavy into made in Asia not made in USA.
In reviewing today's headlines, we come across the reliably unreliable Eurozone statistician and forecasting figure failure, again: Euro Zone Economic Growth Below Forecasts:
The euro zone economy grew at the same quarterly rate in the fourth quarter as in the third, data showed on Tuesday, defying expectations of an acceleration.
The European Union's statistics office Eurostat said gross domestic product in the 16 countries using the euro at the time grew 0.3 percent in the October-December period, the same as in the third quarter.
Year-on-year, the expansion was 2.0 percent in the fourth quarter, compared to 1.9 percent in the third quarter.
Economists polled by Reuters had on average expected increases of 0.4 percent quarter-on-quarter and of 2.1 percent year-on-year.
Of course, it is that expected (yet not actually achieved) growth that was supposed to fund the deficits in many of the PIIGS group austerity plans. Export was a major component of this, but if the Eurozone is growing slower than anticipated (big surprise) and the EU members rely primarily on trade with each other, then who will buy all of the stuff to allow these states to pull each other out of the hole. The kicker is that the individual countries' forecasts are considerably more optimistic than the economists' forecasts, which in and of themselves were simply too optimistic. This has been a pattern since the markets collapsed three years ago. Referencing "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!" you can see where this is a pattern in country after indebted country in Europe - both in and out of the Eurozone - Greece, Spain, Italy, Portugal, even the UK. To wit...
Ever since the summer of last year, I have been one of the very few - if not the only - commentators that have warned of impending margin compression in the current NASDAQ and general market darling, Apple. This is not speculation, it is basically a foregone conclusion. In addition, it is really not difficult to surmise. Apple enjoyed virtually competition free dominance in the graphical smartphone arena for nearly three years, but the onset of Android has not only brought heavy competition, it has brought competition that is superior in many areas. Competition, almost by definition, means margin pressure. It's simple business logic. Despite what appears on the surface to be common sense, Apple afficiandos from consumers to investors to analysts to arm chair pundits fail to grasp what should be considered a very simple concept. I have spend considerable digital ink attempting to illustrate this last year...