By Michael Nystrom | July 25, 2008 Back on June 2nd, [1] I suggested (for entertainment purposes only) that gamblers might want to take a crack at shorting Apple's stock. At the time, Apple was trading around 186, and some called me crazy [2] for wanting to short a stock in an uptrend. This was, after all, Apple, seller of the most popular technology products on the planet. But I had my reasons, and as I said it was a gambler's play. Which is to say that it was a calculated risk with a tight stop - the only kind of play a responsible gambler should make. Apple drifted down slowly for a month an a half until the day I was waiting for: earnings. [3] The stock took a big dive down to 147, before recovering smartly. As noted in the previous article, our target was in the 145 - 150 range, so we made out with a tidy profit of close to 20% in about a month and a half. Mission accomplished, but what's the story on the stock now? Should we go long, short or just leave it alone? First let's review Apple's "story" and then take a look at a super long-term chart and see what we see. Apple was able to stay in business thanks to the return of Steve Jobs, who refocused the company in the late 1990's. He introduced the iMac, which was a big hit back then because 1) it was pretty, and 2) it made it easy for non-techies to connect to the Internet. (For those of you too young to recall, it used to be a little complicated to set up your computer with a modem, the right software & settings, and use your home telephone line to access the Internet.) You probably remember that iMac being pretty cool at the time, and that everyone wanted one. Today it looks kind of dorky in comparison to its progeny. Apple's second big coup was not only the introduction of the iPod, but the whole concept of legally selling downloadable songs. Of course, these days it is commonplace. You can even buy songs on Amazon [4] now, but remember back in the day - the original Napster? You could download any song you could think of completely free from your internet neighbors. None of the studios could figure out how to sell music online (idiots). Apple's breakthrough was to coordinate with the music companies to sell individual songs for just .99 cents, easily and legally. To date, they've sold over 4 billion songs! As a result, the iPod became the industry standard MP3 player -- simple, beautiful and easy to use for even the technology incompetent. As of last year, it sill had 70% of the market! Apple's third coup was the recently introduced iPhone. Man, what a beautiful piece of equipment that is. But no doubt it will look dorky too one day. It just seems to be a law of technology: Suff that looks cool now later looks incredibly dorky. If you don't believe me, just check out that picture of Michael Douglas from Wall Street [5] in 1987. He's out on the beach, talking on his ultra modern cell phone. That was way cool at the time, too... But I digress. The iPhone is cool for now, until something cooler replaces it. It even doubles as an iPod (which unfortunately for Apple gives the iPod some stiff and cannibalistic competition). Don't get me wrong -- everyone loves Apple products, including me. But herein lies the problem. Competition for Apple's innovations, once scarce, is now everywhere. Apple has been so successful with the iPhone that they're already inspiring knockoffs and competitors, like the HTC Touch [6] from Taian. And certainly you've seen the ads on TV for the Samsung Instinct. [7] This thing looks like an iPhone, only cheaper and with an all-you-can-talk/surf/text calling plan from Sprint for $99 per month. There's the story. What does the market think? Below is a 10-year monthly chart of Apple. Look at that monster run-up from mid 2004 until the beginning of this year: from 15 to 202 in 3-1/2 years. A 13-bagger, as Peter Lynch [8] would call it. But we've seen charts like this before, and haven't we all learned how the story ends by now? Look at the big drop at the beginning of this year. Investors cashed in. The stock rallied again, almost hit a new high, but couldn't quite make it. I have a feeling that stock ownership changed from the oldies to the newbies and from strong hands to weak. Off the top of my head, Apple's chart reminds me of this one: That's right, KB Homes. There was a time when housing stocks could do no wrong either (like only yesterday [9]), but you can see the at the same signature pattern, which is just a graphical representation of mass psychology. First comest the huge run-up (confidence) that becomes parabolic (over confidence), sharp pullback (sudden loss of confidence, or the "oh-sh*t!" moment), recovery almost to a new high (relief), then off the cliff and down the slippery slope of hope [10] (panic). Is it possible that Apple is just a fad, destined for oblivion like the Atari, Commodore, and the Sony Walkman? Remember once upon a time when having a Walkman clipped to your belt and those headphones around your ears was a super cool status symbol? Sony still makes a video/MP3 Walkman (it looks like the iPhone [11]), but it is no competition to Apple. Mark my words - one day people are going to look back at those iPod earbuds that everyone thinks are so cool now and think they're pretty dumb, just like Michael Douglas' brick-sized cell phone or that clunky old Walkman. In the future, they'll probably have some kind of device that beams the music right into your brain. Will Apple be making it? Odds say they won't be. Oh, and I hear you out there. Yeah, even though the iPod displaced the Walkman, Sony is still around, they still make great products, and they have the Viao laptops and the Playstation, which remains the best game console around for hardcore players (so I'm told). No doubt. But they haven't made for a steallar investment since their share price crashed back in 2000. And if Sony, which makes the beautiful (MacBook look-a-like) Vaio [12] can see its stock crash, Apple can too. The company is not the stock. Don't confuse the two, and don't fool yourself. This is not investment advice, but a gambler might want to be short Apple at these prices. Be careful around 135 when it hits its longterm up-trend to see how the stock behaves. I could of course be completely wrong and it could bounce there, or anywere else. So keep your stop tight. As of now, that's the play, subject to change at any time of course. But I think we'll see Apple back at 50 before this is over. Its not like its never happened before. Market Update - The Silent Crash Is Starting to Make Some Noise
Robert Prechter has got a new video out called "The Silent Crash is Starting to Make Some Noise" that is worth your time and money to watch. This is a 42 minute slideshow with 27 slides, mostly charts. Prechter narrates. This is a followup to his excellent 2006 video that was simply titled, "The Silent Crash." Unless you're already a subscriber, [13] it will cost you $20 to watch, but it is well worth it, in my opinion. The show starts with this slide: [14] This is the Dow priced in real money - gold. It is down 73% to date from the peak. If Congress, the Fed and the Treasury had not been colluding to inflate the our currency and destroy the dollar, this is what the nominal Dow would look like, too. And according to his analysis, it soon will. As Mises put it [15], "There is no means of avoiding the final collapse of a boom brought about by credit expansion." Yes, the powers that be have postponed the final collapse for the past several years, but the reckoning awaits us patiently. There is no means, says Mises, of avoiding it. As time passes, it becomes easy to fool oneself into thinking we may have escaped the worst - but in case you haven't noticed, the storm clouds are gathering. Prechter will offer you some chilling reminders that the worst is yet to come, and hopefully spur you to act. The time to protect your assets is now. The movie comes with a money back guarantee. Check it out here. [16] I will have more updates in the future as my time permits - sign up to my low volume, no spam email announcement list [17] to be notified.