Friday, September 25, 2009

Update On The Madness That Is Wall Street - The Apple Bubble

I pulled this data yesterday to highlight the type of lunacy which reigns in much of today's financial markets. Apple is the perfect Wall Street momentum stock - Wall Street picks a concept they can sell that has strong earnings momentum, they liquefy the stock with a tremendous amount of trading volume and then run the propaganda machine off the table. We saw the same thing with the housing bubble, the internet bubble, the commodities bubble and the emerging markets bubble. Not just in the stocks but in the actions and liquefying of related financial products

Momentum is a strategy that has made Wall Street enormous profits in these bubbles. But momentum strategies only work when there is enormous liquidity available. We have had that in spades with easy credit, highly-levered balance sheets and derivatives. The monster has been building for fifteen years and they all contribute to the liquidity scheme. That is going to change drastically over coming years as globalization implodes. And so will the success of such algorithms. This at a time when many trading firms and hedge funds are just recently launching momentum strategies.

Main street buys into this type of mania and misinformation then ultimately gets burned. Although main street has been substantially limited in their participation of this action since the 2000 collapse.

The chart of Apple is frightening. Absolutely frightening. A massive move higher with literally no support underneath it. But then all the Fed is doing is attempting to reflate the same bubble given we see no underlying change in economic policy, easy money is going to go right back into the same failed schemes. We often hear many pundits state that concept stocks defy valuation. That's rubbish. Every stock has an intrinsic value. We've remarked that Apple's is likely well below its post-collapse low. Really, it's the dynamics of liquidity bubbles which defy valuation. And we have been in one for about 15 years.

I have attached the buy and sell points of a momentum algorithm onto the stock and you can see within the last year there have only been four trades. Two of them were incredible money winners and the other two stopped out with small returns. What I want you to take away from this graphic is that Apple's pricing action has little reflection of fundamentals. Wall Street uses the same type of momentum algorithms. And with massive sums of free money, they ride Apple's stock or any other investment the same way I would. That is, until something breaks. How does this have any foundation in reality? It's simply a pump and dump game that fleeces main street. The only difference is that I don't have billions of dollars and a legion of traders using leverage to drive markets into wild swings. And soon neither will they. Momentum investing is not a sustainable strategy. If anyone understands what is going on in financial markets, they realize the hot money in this stock will eventually dump it like a bad habit at the sign of any bad news. Be that bad news associated with Apple or bad news associated with the financial firms plowing this stock.

Sustainable cash flows, intrinsic value, book value, dividend/sustainable cash flow yields or any other fundamental metric is completely irrelevant not only in the valuation of Apple but in any financial product. When I, as a financial firm, have all of the liquidity and leverage available to me that I would ever want to drive financial products without any concern of fundamentals, I am able to create any reality I want. That is, until the liquidity pool recedes. We already lived through this more than once. It ain't over.

Where is the investing genius in any of this? Harvard-educated MBAs in financial firms hiring legions of science-minded drones to create mathematical strategies inversely correlated to long term fundamentals. ie, Unsustainable stupidity. Then pay yourself hundreds of billions of dollars in bonuses over the last decade in order to take advantage of it. It is pure madness. But for now Frankenstein finance lives. It too will eventually die the death of the monster it is if the government won't kill it. All because of an unhinged currency and legalized bribery of our public officials. Glorified by the crooks who created it.

I have said this a dozen times and it is worth repeating for any new readers. Only a firm understanding of fundamentals will save anyone from the Frankenstein Wall Street has created.

posted by TimingLogic at 7:56 AM