Tough days have returned for those of us preaching caution in the financial markets. Stock indices are once again rocketing higher, shrugging off bad news quickly, and screaming upwards on any sort of hint of good news. I guess that is what happens when you get almost every Central Bank in the world (apart from the US and China) pulling the rip cord on aggressive monetary easing. Every time you turn around another country is pushing short term rates down below zero, and it is often affecting the entire yield curve. I read recently that nearly a quarter of all Eurozone government bonds are now negative yielding. We even had our first corporate issuer with a negative yielding bond. Nestle’s bonds have slipped below zero. The absurdity of the whole situation seems lost of most investors. There is an increasing desperation to buy any risk asset, after all, it is probably a better alternative than paying someone to keep your money. The idea that this might not end well does not enter the equation. They need to buy something – anything…
All of this easy money is once again awakening the animal spirits. Nothing sums this froth up better than Apple’s recent run. Now before you dismiss me as some neophyte who doesn’t understand that by many fundamental metrics Apple is actually cheap, let me assure you I am familiar with all the bulls’ arguments. I just don’t agree with the idea that the world’s biggest company can continue growing at anywhere near the rate that the bulls would have you believe. Apple’s CEO Tim Cook’s recent refutation of this idea could be the main driving force behind this latest runaway move.
An onstage interview with Tim Cook on Tuesday turned into a mini-debate about mathematics that left everybody in the audience a little bit dumber. Gary Cohn, president of Goldman Sachs Group, opened the presentation by rattling off several numbers from Cook’s tenure as Apple chief executive officer, including the monster quarter the company just posted. “So far, Apple seems fairly undeterred by the law of large numbers,” Cohn said.
The law of large numbers has come up frequently in relation to Apple this decade—including when Steve Jobs was in charge but especially now that the company has surpassed a market value of $700 billion. Analysts refer to this math theory to explain why investors should worry about the future prospects for Apple and other giant companies. As the thinking goes, financial growth begins to slow for a company that achieves a certain mass of revenue because it becomes increasingly difficult to find new businesses that move the needle.
“We don’t believe in such laws as laws of large numbers,” Cook said at the Goldman Sachs Technology and Internet Conference in San Francisco. “It’s just sort of an old dogma, I think, that was cooked up by somebody. Steve did a lot of things for us over the years, but [here’s] one of the things he ingrained in us: that putting limits on your thinking [is] never good. We’re actually not focused on the numbers. We’re focused on the things that produce the numbers.”
All I can say is wow! What a masterful job of deflecting the question. In a couple of sentences Tim was able to;
a) conjure up the mythical presence of Steve Jobs
b) belittle the idea that we should even address that concern
c) reinforce the onward and upward dream
Although I don’t expect Tim to admit he knows there is no way that Apple can keep growing at this rate forever, I would think it wiser to keep expectations low. Instead Tim is leading the market to believe Apple is not being constrained by being the largest company in the world.
Investors are eating it up hook line and sinker. We have now had two days of gapping into new highs, with another gap looking likely this morning.
Over the last couple of weeks, Apple has added over $100 billion of market cap. It has become the first company to ever surpass $700 billion, and in a sure sign that should send shivers down the spine of the bulls, there is talk about Apple becoming the first trillion dollar company.
My twitter stream is filled with Apple bulls whooping it up at every gap higher. One of my colleague’s friend has sold almost all his stock portfolio to instead hold a super concentrated Apple only account.
And the final troublesome omen is crazy old Carl Icahn hopping on Twitter and CNBC to explain why Apple is worth $215 per share once they lever the company up with massive bond issuances to buy back all the stock.
Now don’t get me wrong, I think Apple is a great company. And I agree it is cheap. But the biggest company in the world should be cheap on a growth multiple. Once you hit a certain size it becomes increasingly difficult to maintain that growth rate. You run out of new markets. You run out of people.
I don’t buy for one second that it is so easy to dismiss the law of large numbers. Yet the market wants to believe Tim Cook. They want to believe that Apple will continue to grow at this rate indefinitely. The hype about the new up and coming watch, or the much fabled TV, or even the article that Apple was rumoured to make electric cars and compete with Tesla – these are all signs that investors are placing a lot of faith in Apple’s ability to continue their success.
Over the years I have seen many different companies explain why this time is different. Why they should be exempt from all the rules that eventually affect all companies. But of course, it never is different.
Apple recently reported the largest quarterly profit per share ever recorded. Do you know who held the record previously? The answer will startle you. Russia’s Gazprom had been the company with the largest quarterly earnings. I am sure that when they reported that result, everyone was foaming at the mouth bullish on Gazprom as well.
I think the new Apple watch is going to be a dud. But I don’t think it even needs to fail for Apple’s stock to stumble. All that needs to happen is for the market to realize that Apple’s growth rate in its traditional products is not sustainable. Once that happens, they will shoot the stock.
Don’t forget that success brings competition. And success that leads to becoming the largest company in the world brings a lot of competition. Apple does not have a monopoly on good products. They will not be able to continue their dominance forever. It will get progressively more difficult as they get bigger.
Stocks peak when the news seems best. Don’t get caught up in the hype. If you are long Apple, good for you. Well done. But for goodness sake, ring the register up here…
The US stock market is being fuelled by the cheap money sloshing around the globe. Investors are chasing the best performing asset, and it is feeding on itself. In the process they are ignoring the basic tenant that as an asset goes up in price, it becomes less attractive. Instead there is a positive self reinforcing feed back loop occurring. Investors are convincing themselves that their investment thesis has merit, and they are buying more as it rises. It is a classic case of the Soros’ reflexive theory in action. But the thing about reflexivity is that asset prices are pushed to the point where they make no sense. Don’t get more bullish as prices rise.
I am going to leave you with this great tweet that I stumbled on yesterday…