Blow-Off Bubbles: You've Been Warned (AAPL)
The Market Ticker ® - Commentary on The Capital Markets
Posted 2012-04-10 10:15
by Karl Denninger
in Company Specific
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Blow-Off Bubbles: You've Been Warned (AAPL)
 

You heard the bell ring.

You're ignoring it.

You're going to get sheared.

I'm talking about Apple.

I know, I know, I'll wind up banning a dozen more people on my forum who will play fanboi over this post.  I don't care.

I have been on the cellphone company subsidy model as utterly unsustainable for a long time, and in fact it got written up in Leverage as one of the many traps that consumers fall into, driven by their innumeracy.

Apple has exploited this with the famous "$199" cellphone that really costs you $1,200 or more over the course of your 2 year contract.

The problem is that this subsidy model is severely attacking cell carrier margins, and the limit of this game and exploitation has apparently been found.

That which drives ridiculous valuations, predicated on unsustainable business models, bites at least as hard on the way down as it helped on the way up.

Netflix anyone?

You're going to get creamed folks.  The next device will not be coming with the "upgrade every year without shelling out a crapload of cash" subsidy model.

But without that model the premise of unit sales growth that has driven the firm's numbers is going to come in materially, just as it has for iPods which have reached effective market saturation.  We're now into replacement cycles which is a decent business but it is by no means an exponential growth function and the "must have the newest" is tempered substantially when it comes with a $600 price tag for the consumer.

In 2007 and early 2008 we had the "four horsemen" who were similarly ignoring the same sort of shift in their sales metrics and the premise that underlay their earnings stories in the general economy.  Likewise, today we're seeing the same thing but the advance is even more narrow than it was in 2007, being driven almost-exclusively by Apple -- one company!

This is not going to work out.

Disclosure: Or what a short this will be when they miss -- and they will.

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User Info Blow-Off Bubbles: You've Been Warned (AAPL) in forum [Market-Ticker]
Dji
Posts: 1245
Incept: 2009-04-21
Silver
Ponzi world 3rd rock from the sun
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Hey Gen whats the MFI looking like ? Who's the bag holders too?

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Don't be a bag holder-Me

What goes up Must come Down- Alan Parsons Project
Asimov
Posts: 103939
Incept: 2007-08-26
Gold
East Tennessee Eastern Time
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Apple was 36% of the entire q1 s&p500 earnings.

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It's justifiably immoral to deal morally with an immoral entity.
If you trade based on what other people say, you will lose money. Especially what I say. I won't be held responsible. Festina lente.
Genesis
Posts: 130710
Incept: 2007-06-26
Admin A True American Patriot!
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Right, which means a miss could take 20% off the S&P in about a week.

Yeah.

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I don't care if it makes sense -- only if it makes money. -- Me
Bank (n): See scam, fraud and theft. Eat a bankster -- they're low-carb.
What part of "shall not be infringed" was unclear?
Ssaini
Posts: 13
Incept: 2010-01-15
Silver
New Jersey
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Whaooooo..... Amazing ride up for AAPL...that too just in three months.

Karl, what you think about CMG & PCLN? Can't understand a company which simple sells BURITO...trades at around 427 and same for PCLN ...they just book the online tickets.

Never heard your comments about these two stocks as compared to AAPL.

Asimov
Posts: 103939
Incept: 2007-08-26
Gold
East Tennessee Eastern Time
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Yup.

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It's justifiably immoral to deal morally with an immoral entity.
If you trade based on what other people say, you will lose money. Especially what I say. I won't be held responsible. Festina lente.
Zarathustra
Posts: 5953
Incept: 2009-04-29
Silver A True American Patriot!
Funkytown
Online
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Karl, refresh my memory. Who were the "four horsemen?"

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"And in knowing that you know nothing, that makes you the smartest of all." - Socrates
Drench
Posts: 28631
Incept: 2009-11-10
Green
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Apple Hits $600 Billion Market Cap

http://www.cnbc.com/id/47003841
Genesis
Posts: 130710
Incept: 2007-06-26
Admin A True American Patriot!
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Apple, Amazon, Google and RIMM

The problem is that when the market broke they all broke with it -- none of them stood strong.

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I don't care if it makes sense -- only if it makes money. -- Me
Bank (n): See scam, fraud and theft. Eat a bankster -- they're low-carb.
What part of "shall not be infringed" was unclear?

Village-idjit
Posts: 490
Incept: 2010-06-09
Gold
B'ham WA
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Zara... perhaps a parallel to the Four Horsemen of the Apocalypse....bringing Military Conquest/War, Mass Slaughter, Famine, and Death to the stock market bubble!
Pookie
Posts: 260
Incept: 2009-06-18
Green
Florida
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I can't wait to see this AAPL bubble burst.

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Once you admit that the individual is merely a means to serve the ends of the higher entity called society or the nation, most of those features of totalitarian regimes which horrify us follow of necessity. --F.A. Hayek
Steph4liberty
Posts: 1683
Incept: 2010-10-22
Gold
Raleigh, NC
Online
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Yup...the fall will be epic.

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"Man will never be free until the last Banker is strangled with the entrails of the last Politician" - unknown

"This isn't a market anymore, it's a computer game." - Drench
Marvinmartian
Posts: 750
Incept: 2011-03-16
Green
Pasadena, CA
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Apple laptop/desktop product cycles have a relatively short lifespan. New features are implemented that stress hardware capabilities and make newer software releases run slower on older machines.

Examples: Spotlight which indexes files by content, iCloud which drives network traffic like crazy when streaming media is accessed, html5 "features" like scalable-vector-graphics integrated with openGL and graphics cards.

Some older Apple desktops wont even allow newer software to be installed. I have a older iMac, which has a Intel Core Duo chip inside it which has a 32 bit memory path. The current 10.7 release of OSX requires the Core 2 Duo with a 64 bit path.

I'm not an iPhone user, but I imagine a similar evolution of features holds with respect to that platform, so older devices look and feel clunky when run with newer software.

Thats life in the computer biz. Moore's law is not just for memory density.

Reason: grammar fix
Frat
Posts: 1935
Incept: 2009-07-15
Silver
NKY
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In think you're spot-on in your eval of the cycle. As a family we hit it last year when the 4s came out. I was going to upgrade from the 3s (my previous 4 taking a swim with me the day you so graciously said yes to a couple beers!), and I had a $200 choice - the 4s with 16gb or the leftover stock of 4 with 32gb. Being someone who has 30gb used currently, it was a no-brainer. The 'improvement' just wasn't enough. When I decided I wanted a tablet for the family, $259 for a kickass Archos with microSD (& a cheap 32gb card) slot hands down kicked the iPad's ass for my house. I love it, and don't regret it one bit.

The market has finally (as it always does) come out with alternatives that are better than the original in many cases. That's especially true when it comes to functionality versus price point. Apple has (again) peaked with its offerings. Until and unless they get (yet another) must-have new product, they're going down. And I don't think they've got another one coming.

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We're ****ed. Where's Henry Bowman when you need him?
Jmanng
Posts: 537
Incept: 2009-01-03

Boston, Massachusetts, USA
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It is amazing watching Apple. People have been calling its stock a bubble since it hit $300 and yet it keeps on going up. Maybe you guys are right this time or maybe not. I don't have the guts to play it.

Reza30
Posts: 289
Incept: 2009-02-15

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I can only speak for myself regarding "Apple's success" and people who fund it:

1. Category 1--Most folks who I know buy Apple stuff to "Keep up with the Jonses". they even throw away their perfectly working Apple products as soon as a new version comes out, hoping to show that they own all the latest and the greatest and as such how sophisticated they are as consumers.
2. Category 2--These folks have a lot of discretionary income since they have not paid their mortgage in a while. They think there is too much inventory and banks won't kick them out.
3. Category 3--These folks have a lot of discretionary income due to the recent market rise and are totally convinced that Bernanke will never let the market go down again as long as he remains at the Fed.

Aethor
Posts: 126
Incept: 2011-11-15
Green
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It seems to me that, shares-wise, AAPL is a pyramid schema.

- you don't get any dividends
- nobody is going to buy it to take over AAPL (at current price, who could do it, even if anybody would want to?)
- so, the only way or reason why you would buy AAPL is to sell it to someone else for an even bigger price.
- that person (the next buyer) also is not going to have any material advantages from the shares he buys; he can only sell it to the next buyer for a hopefully even bigger price.
- yes, Apple as a company makes a lot of money. But AAPL holders aren't seeing any of it.

This is, practically, a pyramid schema. And the fact that a pyramid schema worked for some people doesn't mean it works as a business model in the long run. Eventually there are no new buyers, and the holders are left, holding the bag.

Unlike a pyramid schema, at least, Apple can then start giving dividends; but if the management decide they would rather have their fat bonuses, and give no dividends, how is the normal AAPL holder going to enforce his will? In a company where a single person owns 51%+, if he wants, he slams hand on the table, tells them what he wants done and that's that.

An AAPL holder who holds some insignificant percent of a percent of the company has no power at all. And if he can't force them to give him his share of company earnings, all he has is worthless paper.
(If he even has the certs... but that's a different story)

Ckaminski
Posts: 1577
Incept: 2011-04-08
Green
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how about a #4:

Apple products work great and I get **** done faster with them than I do on a Windows machine running VMware (so I can run Linux) and gets better battery life out of a mobile and provides a better experience than Mobile Ubuntu. If Windows had BSD under the hood I'd still be a 'Softie.


The only problem I've had with it so far is Minecraft. :-)
Striker754
Posts: 671
Incept: 2009-07-09

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Aehtor, guess you missed where they announced they are paying a dividend now?

The things you are describing are not unique to AAPL. Any stock that doesn't pay dividends fits your criteria.
Maybe-not
Posts: 73
Incept: 2011-04-26

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I have an ipad 1. It was free to me from a family member that upgraded. I really can't figure what it's purpose is other than entertainment or checking e-mail. The longer I have it the more things I find that don't run on it. Google maps street view is one. Or maybe I don't know how to make it work? I do like it. I can see that it would be nice to have and have more purpose if you traveled alot. I don't. It is in my view nothing more than a convienance or entertainment device. It is not something I will ever upgrade or spend my money on. My desktop is only a short walk from my couch and my android phone will do everything the ipad will do and it seems to me...more! It just has a smaller screen.
Aeropilot4fun
Posts: 18
Incept: 2009-12-03
Green
Wisconsin
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Well, there is also the app revenue from the phones/iPod's and iPads to be factored in there. Its not just the SP service model on the rev split from the carriers thats in play here.

I do find your comment funny about banning fanboys tho.

When the markets slide, the profits people will seek will come from their AAPL, precious metals, and other performing holdings and the drop will be brutal no doubt.
Ckaminski
Posts: 1577
Incept: 2011-04-08
Green
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http://www.fool.com/investing/general/20....

Quote:
The Steve Jobs Betrayal
You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?
Enter your email address below to find out what made Jobs so enraged!


I once thought fool.com a respectable place to go get investing advice. Not so much anymore.
Ramthebulls
Posts: 10858
Incept: 2007-09-24
Gold A True American Patriot!
Queens, NY
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not for a few years now Ckaminski. For example, note this hitpiece against me personally http://www.fool.com/investing/internatio.... because the Fool was annoyed that I offered evidence suggesting one of their stock touts was a fraud. (Stock is down 60% since I published my piece).

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Umbrage is like love. No matter how much someone takes, there's always more for you to give.
Genesis
Posts: 130710
Incept: 2007-06-26
Admin A True American Patriot!
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MF has been full of crap for a long time.

----------
I don't care if it makes sense -- only if it makes money. -- Me
Bank (n): See scam, fraud and theft. Eat a bankster -- they're low-carb.
What part of "shall not be infringed" was unclear?
Crzymorse
Posts: 1189
Incept: 2010-06-25

Maryland
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I have an iPad 1 too, definitely can't handle the software upgrades from Apple well nor most of the newer apps. However, for consuming content and sharing between devices, TV, phone and desktop it's tough to beat. The desktop/laptop is now for work and a high tech typewriter. Was a dedicated Microsoft/PC user until all the crapware destroyed the user experience.
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