Apple iPhone M-A-N-I-A And Technology Investing

Chart of Apple 1997-present.

M-A-N-I-A. Webster's definition: excitement manifested by mental and physical hyperactivity, disorganization of behavior, and elevation of mood;

I've been sour on Apple, no pun intended, since about $89. The first time it hit $89. That's been quite a while. My timing was wrong but not the premise nor I am quite certain the end result. The delusionals are driving Apple into a once in a lifetime blow off. We are most definitely in the mania phase of Apple as we speak. That's the phase when the stock effortlessly slides through massive chunks of price in a very short period of time without pause. It appears almost as floating and it really quite amazing to witness. Incredibly, Apple is also at an important Fibonacci resistance level as I write this. Today Apple hit a major Fibonacci time zone resistance from its 2000 top. Similar to my S&P comments last week, this is the first time since 2004 such an event has occurred in Apple. Both could spell significant trouble for Apple. Global synchronized Fibonacci resistance across many markets? Is that bizarre? (See my Fibonacci post last week for an educational link or Google it.)

Similar to internet stocks in 2000, this is an extremely risky investment. When I see the activity in the stock, there is no doubt weak hands are involved. Alot of odd-lot action in the stock which means main street investors and the clueless are buying. Or, more likely, the stock is being transferred from strong hands to weak hands. If anyone is still recommending Apple to new investors, you may want to lump them into the same category as the internet savants in 2000. Apple could always go higher but just like the bubble in 2000, this is going to end badly. Last week a pretty decent chartist made the comment he had a hard time believing this market correction could amount to anything because Apple was making new highs. Plausible. What would that perspective mean for short term traders watching the same action? They would likely be drawing the same conclusion and may have been piling into Apple last week when the market was experiencing weakness. Then what happened? Apple didn't participate in Friday's or today's rally. Fool's feint upward? There are many other technical sell signals on Apple as well. Then there are the fundamental valuations. Apple is priced at a level of incredible absurdity. Of course it was at $89 too and we are now nearly $40 higher.

Apple's stock looks very similar to the Shanghai Index but worse. In fact, if you do a little phase shifting, the movements in 2000-2001 peaks to the bear market lows till today are perfectly correlated between the two. Without labeling, you could mistake the Shanghai Index chart for Apple's stock or vice versa. The only difference being Apple's mania is much more substantial. Why should that surprise anyone? The same intermediate term macro factors are driving both assets. As I've written on here, China's business cycle is tied to the American consumer cycle and so is Apple's. This brings me to a favorite quote posted on my blog. It is from a man who just so happened to know a little of what he was talking about as it came to success and failure as he had plenty of experience with both.

"Success is not final. Failure is not fatal. It is the courage to continue that counts."
--Winston Churchill

The key part of that quote I want to focus on as it pertains to technology investing is "Success is not final." Those who are believers in the new Apple should be extremely cautious in their conclusion. With investing, conclusion is determined by the point at which one takes a profit. Paper profits are not profits at all. Profits are the result of wisdom to take money off of the table. There are many today who are as enamored with Apple as others were with China as recently as a few months ago. In fact, many are one in the same. Investing is not a popularity contest or measured by how much you love your iMac or the success of a point in time product like the iPod. If that were the case, Apple would have been a great investment over the last twenty five years. Instead, Apple significantly underperformed the broad market in the bull run from 1982 to 2000. Reading the tea leaves of Apple's stock alone would have me draw the conclusion the American consumer is just about ready to take a hiatus from supporting the global economy for quite a while. Blow offs like this typically happen at the end of very long term fundamental trends. We'll just have to see.

There are many macro factors which will affect Apple's stock in the future. Today, much of Apple's gains have come from valuation expansion. From investor's false clarity of vision and from a belief that Apple has achieved some type of transformational change of their business. First off, Wall Street has no historical precedence for understanding technology stocks. The ten most popular or fad technology stocks of the late 1960s were no longer listed in the early 1970s. Similarly, how many have disappeared from the scene since the internet bust? This cycle of misunderstanding will be repeated until the end of time because the majority of investors and money managers don't understand technology. We are in an age where everyone fancies themselves as a technologist. Here's a simple test everyone can take. If you can read Ray Kurzweil's books and explain the technical details of the how's and why's of what he is talking about, you might classify yourself as a technologist who can predict trends. Otherwise, stick to changing the disk drive on your Ameritrade PC as the extent of your technical abilities when it comes to investing. You'll save yourself alot of money. Need more evidence? Ask Warren Buffett. He hates technology as an investment. Do you want to own Apple for the long haul because you think the iPod will transform the world or make money like Warren Buffett?

Technology is a powerful investment thesis and presents outsized opportunity for return but only if one recognizes the limitations. One of which is the lack of appreciation for and understanding of what technology is and isn't. Technology investing is not like banking or insurance. Technology is a destructive tool. Innovative destruction is a right of passage to any successful technology company. Therefore, by definition, Apple must destroy its existing products in hope of maintaining future relevance. One must recognize no one knows what the future holds in Apple or any technology stock but it will not be what is here today. Do investors clearly understand this statement by looking at the chart above? Hardly. They believe Apple has achieved some type of nirvana. They are already discounting future profit and growth through the action of the stock. The innovative successes of today are never the successes of tomorrow. That is a very different premise than buying toothpaste, food, insurance or banking stocks. It is an extremely simple fact yet so many simply don't think about it or get it. That doesn't mean Apple or other technology stocks don't have staying power or can't achieve longevity as a business. But, it does mean if you are riding technology momentum, you are going to get seriously burned if you think it will last. The only thing that is constant in technology is change. The only thing about investing in technology that is constant is that one needs to understand that and change as well.

Please remember this is not an Apple bashing session. This is about reality. I admire Apple for the creative branding, great customer experience, great customer support and great industrial design of their products. But. As a generalization we've seen unprecedented investment flow into consumption based investments this cycle. In the end, as an investor it wouldn't even matter whether Apple has achieved transformational change. Investment monies and asset expansion are cyclical. Apple's stock will eventually be shunned in favor of investment not consumption. Read that sentence again and again if you believe Apple's stock will deliver superior returns over the next cycle. It is a key to investing success. It has always happened this way and it always will.

Apple is still a PC company. PCs more than ever are legacy products. That includes laptops. The technology is comparatively ancient. Even the processor is comparatively ancient technology. Putting more circuits on a single substrate is always advancing and incremental changes in architecture are ongoing but the PC is not a showcase of any leading technologies. In addition, Apple will never crack the corporate market to any large extent. I won't go through the lengthy explanation but it isn't going to happen under today's constructs. If the constructs change, there is an extremely low probability Apple would be the leader anyway. That leaves Apple with an attempted growth transformation into the consumer electronics space. It is a business Apple will find difficult to lead over a sustained period of time in my estimation. Consumer electronics is a bloody, high volume, low margin business and most fail. Even for the successful there are many failures or marginally successful products with a few major successes in between. Apple has no experience in delivering a large stream of innovative products on a sustained scale as their consumer electronics competitors have for decades. For them to be successful with their current business model means they will have to do something no consumer electronics company has ever done; get all of their future product launches perfect. Or, they will have to bring more products to the market in hopes of maintaining some level of success. Doing so will likely dilute the Apple brand with failures. Think that won't happen? Think again. Apple's past is littered with them. This isn't the staid business of Louis Vuitton making hand bags. We aren't even at the starting line for the great race of future innovations so declaring Apple the victor with this massive stock run is very unwise. They may be one of many victors but the iPod will be extinct soon enough and what will be the next innovation? What are the chances it will be led by Apple?

Niche or premium consumer brand? Maybe. But, that's what they have been for decades. In the end, it still doesn't matter. Investment monies will rotate out of consumption and valuations will return to trend or worse. Apple's stock will have a very serious decline at some point.