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Posted by on Oct 2, 2011 in Markets, TG Roundup

Is Apple About to Fall?

A few weeks ago I mentioned that I would not buy or short Apple stock. I changed my opinion now. Is Apple (the stock, to be precise) to fall from grace? I believe it is.

First reason:Economy

Yes. The economy sucks. Unless you live on planet Mars, or you are a Federal Reserve Bank governor who claims that the dropping iPad prices are the reason that the economy is good (or whatever he said), you already know that the economy is in the tank. For more than 3 years it has been in the tank. However, there were few exceptions – Apple stock more than doubled from the peak set before its pre-2008-bust. Another miraculous recovery at which I am dumbfounded is in the bonuses paid to the hard workers on Wall Street firms and IBs, despite the damage they have to their own firms, retirement portfolios, and the worldwide economy.

Now, I for one believe that the economy has entered another recession (per official definition) in June 2011. The price of Apple stock is yet to reflect this reality.

Second reason: Market conditions

Apple is the darling of many funds. Several hedge funds are receiving redemption notices. Several stocks and even commodities are in liquidation mode. When you are in a liquidation mode, you don’t see the value. You just sell. There is an age old saying among financial professionals, “When you can’t sell what you have, sell what you can.”  They can’t sell certain things like bank shares ’cause there is little value in them.   But they sure can sell Apple shares on which many have hefty gains. So, I expect Apple shares to be sold and sold in size.

The health of the financiers matters to a whole lot of things – including supporting stock prices. As go the financials, so goes the market, even the high fliers with justifiable share prices like Apple. Remember that the financiers (i.e. Banks) are in trouble. Again. If you don’t believe just the fundamentals, look at the chart of XLF index.

XLF Daily:

 

To me XLF chart pattern appears like a pennant with strong support at 12. For the last 2 months this support was tested and in 7 tries, the XLF price breached this support twice. The first time in early Aug 2011 and immediately recovered ground back into the pennant.  This time on Sept 30, XLF breached that support decisively, that too at the end of the trading week to result a bearish weekly close.

What is a pennant, you ask? (From Babypips.com): A bearish pennant is formed during a steep, almost vertical, downtrend. After that sharp drop in price, some sellers close their positions while other sellers decide to join the trend, making the price consolidate for a bit.

Bearish pennant after a downtrend
As soon as enough sellers jump in, the price breaks below the bottom of the pennant and continues to move down.

Bearish pennant and breakdown
Under the pennant “theory” XLF will get to at least $7. Here is the math:

  • 17 (peak)-12(support breach)=5;
  • 12 (support) – 5 = $7 (target price).

$6-$7 can also be seen as a possible support based on the XLF Monthly chart  below which shows no support till 2009 low of $6.x.

As go the financials, so goes the market. It will be hard even for Apple to buck the market trend. So, as go the market, so goes Apple.

Third: Fundamentals

Currently this may be the least of the worries for Apple. For the time being, there is nothing on the scene that is really threatening Apple’s juggernaut. I think iPhone 5 will be a big hit. Android will sell well. But iPhones will steal bigger market share from Blackberry. However, the iPad may be vulnerable. Competition is aggressively cutting prices. Readers of this blog have seen some discussion on Amazon’s Kindle Fire and its possible threat to Apple’s iPad. Just yesterday Best Buy announced steep price cuts to Android tablets. (via Android Central):

Best buy has released a statement saying that as of Oct.1, the price of the HTC Flyer (read our review) will drop from $499 to $299.  This is hot on the heels of a similar announcement about the BlackBerry Playbook, which also saw a $200 price drop to $299.  After seeing products sit on the shelves, and fire sales, and cheap competitors, it looks like retailers (and likely OEM’s — Best Buy isn’t eating the entire loss I’m sure) have realized that there are a lot of people who want a tablet device, but don’t want to spend $500-$800 on a Galaxy Tab 10.1 or an iPad.

Now this is the part where things get interesting.  The Kindle Fire looks to be a huge hit with Android fans who want a stock tablet experience hacked in place for a couple Benjamins.  For $100 more, you get twice the storage, cameras, and the coveted SDcard slot.  The Flyer is already bootloader unlocked, and at this price development should take off like a rocket.  And for those that don’t feel like rooting and fiddling with things, we already know that Honeycomb (and we assume Ice Cream Sandwich) is coming for the Flyer.  That decision just got tougher.

Personally, I have an Android phone (HTC Droid Incredible), a HP Thinkpad (with web OS) and an Apple iPad. I use all these for web browsing, checking mail, listening to TORi etc. I don’t particularly see an added advantage to having iPad over any other Android device. That said, I love my iPad and I am no ordinary consumer. For a proven and stable platform like Android, it is nearly impossible for normal consumers to ignore these low prices. I think they will switch to Android tablets. Apple will have to cut prices, which will translate to margin shrinkage and lower profits three to 6 months down the road. So, fundamentally Apple is a SELL.

Fourth: Technical

Sell signal on the daily chart (rising wedge support breached):

Based on the monthly chart, key supports are at 350, 250 and solid support at 200

Fifth Reason:

You don’t need a fifth, damn it! 🙂

Disclosure: As of Oct 2 (pixel time) I do not have any position in Apple. I am considering buying some short-term puts. Again, this type of trading is not for faint of hearts. If you are already sitting on hefty profits on your Apple position, it may be the best time sell.  Then again, I could be wrong – just as I have been wrong several times before. OK, OK, this is my FIFTH, how about that for tongue-in-cheek comment? 🙂 [I really hope most of you get my joke here.]

caveat emptor

5 Comments

  1. Well, sadly that day has come. Apple founder & CEO Steve Jobs passed away. A Buddist college drop out raised by adopted parents, he was a dreamer who steadfastly pursued his vision against all odds both business and personal and created so much real wealth for so many people unlike the wall street casino. I guess as a Buddist he may have believed in reincarnation! Can’t wait for another great business leader. Hope there is a deep bench of excellent innovators.

  2. Ramana garu, you gave a great history/perspective. My take from business point of view is that WinTel failed to take their customer’s pulse and figure out what it takes to get them hooked on yr after yr with a WoW factor that commands premium pricing for their products and services. Apple not only mastered that skill but enjoys cult like loyalty from new and old customers alike. Here I’m not rooting for Apple but I think they are on tear right now. Don’t ask me how, but in my opinion when Apple’s market share drops by a third from where it is now in each product line, then it’s time to get off it’s band wagon.

    • Yes, Apple mastered the skill of ‘wow’ing folks! 🙂 At the cost of looking like an Apple sycophant let me say few more things. 🙂 I rely on history a bit more because you know those who forget it are condemned to repeat it. hehe..

      It used to be Windows a while ago in the late 80s and 90s when they announced windows 3.1, and then 95 and so on. But what is radically different from that to this is that Windows was like monopoly. There was no one to compete so people have to live with what they have and when they have! Every time Microsoft came up with new and bigger OS so did the system requirements grew. Can you remember the disaster called Windows Vista? On the other hand when Apple came up with Snow Leopard, not only they introduced 100s of new features but the OS size actually reduced. When I installed it, it gave me an additional 7GB on my hard disk! What a bonanza to have! Also look at the features like Time Machine and so on. Everyone is forced to rethink what they are doing. PC/Windows was so entrenched, it was virtually impossible dislodge that. Microsoft Windows actually killed Sun Microsystems’ Solaris platform where the later is actually far superior. So what actually Apple did is more than commendable. Here Apple has to out-innovate everyone and they are doing it. Yes, they do have a premium on their products but at a reasonable cost I must say. We should not compare Apple products to others just like Mohan said about comparing Mercedes to Kia.

      The reason why I am writing all this is because when you said if somehow Apple’s market share going to drop by a third of it’s current value, that is not going to happen based on it’ tech prowess. There could be other reasons like this putrid economy or patent suits by rivals or if it engulfs every other product then an anti-trust by govt. Anyway tomorrow (I am still in PST) ‘Let’s talk iPhone’ will reveal more for Apple revelers to rejoice I believe! 🙂

      Cheers!

  3. I am not competent to comment anything about how the stock price of Apple Inc is going to gyrate in the coming days but here is my take on it’s technology side and a bit on it’s marketing strategy.

    As many of you might know Apple was the company which started the personal computer revolution even before the advent of IBM PC and Microsoft riding a hitch on that, way back in the 80s! Apple kept it’s architecture close in those days and even though their HW was far superior to IBM PC and had innovations like pointing device (mouse), multi-color hi-res graphics, calligraphic fonts which made it look lot more advanced those days compared to IBM PC. But, I should emphasize But, Apple failed to market it’s product based on it’s strength primarily because they closed both their HW and SW architectures to outside world. This shunned many free lance developers to develop any thing new on Apple platforms and naturally Apple was limited few enthusiasts about it. On the other hand IBM PC opened up it’s architecture to others and Mircrosoft with it’s DOS operating system as well as Windows later also opened it to all others. However inferior these two are, people loved the freebies. It exploded the use of PCs and we all know how ‘successful’ microsoft is! Since these are open, so it was vulnerable to all the rogue programmers to develop viruses also and we still live with the melody even now!!

    So Apple almost died when microsoft was thriving on dishing out faulty and sub-standard features sometimes even copied from Apple itself, mainly because it was almost ‘free’. People don’t mind spending hours cleaning up their system or rebooting cursing viruses causing them to do that but they want ‘free’ stuff! This human psychological guilty pleasure was fully encashed by microsoft for decades. But fortunately Apple anticipated the potential of media usage and started out small with the iPod strategy and then iPhone, iPad etc. But this time they are not so close in SW architecture. They came up with the App development environment which is open but under final supervision by Apple! The App development concept itself was not a new concept (Linux platform has scores of them contributing even now, which is free) but the way Apple did it is commendable. This time they are careful to open up the architecture in a way that will not have rogue progammers peppering it with Viruses. It may still have an odd one or two viruses but for the most part it will fool-proof because any serious app developer has to register with apple and pay a nominal fee ($99 as I know). This puts a check on the system being run amuck by viruses. While developing this ecosystem, Apple is concentrating on dishing out the best of hardware as possible. The close integration of HW and SW architectures is a must to keep a good quality of any product. I think this strategy is going to win for sometime until either Apple somehow makes some mistakes in terms of maintaining it’s quality or compromises on some things.

    Now Android in my opinion is what Microsoft is in the 80s, trying to dish it out ‘free’ and keep it ‘open’ architecture so it can ported onto multiple HW platforms. Since there will hundreds of HW platforms, the overall numbers will be definitely more than Apple, but will they have the same quality, I doubt it very much. There may be a one odd product out there which may click but it’s lifetime will be limited. But then people want free or cheap stuff which they don’t mind losing time or even money in eventually, but they will buy these in flocks. So it may provide the ‘success’ needed for markets in the short term!

    There will be bitter quarrels to own the space of these devices in the coming months and the courts also may play a role in deciding the future of these companies to some extent. There are already HW related patent suits on Apple from Samsung, HTC and SW related ones between Apple and Motorola (now part of Google) mobile units. One needs to follow these to know who is going to win to get an idea about the future of any of these companies!