Jul 23/15 – No more magic dust

2015-07-23 10am EDT  |  #Apple #breakevens #Icahn #Steve Jobs #Tim Cook #VIX

Well I guess they didn’t sell as many watches as the Apple bulls predicated. I don’t know about you, but I have yet to see one in the wild. None of my friends will even admit to wanting to buy one. I know, I know – it’s a new product and the fact it is bombing isn’t important. Funny how quickly the narrative changes when the great new product flops. So let’s talk about what is important. The smart phone market. The bulls will tell you that Apple is on track to sell more phones than ever before. But that’s kind of a facetious argument. What’s important to the Apple stock price is the rate of growth in their sales. The Apple 6 and 6+ phone was a major upgrade cycle. Many customers were anxiously awaiting for Apple to finally cave and produce a larger screen. When the new larger versions were released, there was an abnormal amount of upgrades. The problem is the Apple bulls have interpreted this unusual cycle as the normal rate of growth for Apple. The Apple-eons believe Steve Jobs left a secret stash of the magic dust for Tim Cook, and he can continue the mind numbing growth in market share. I have news for them. He didn’t leave the dust, and Tim can’t continue growing share at this rate.

This earnings report was the first shot across the bow. Maybe Apple isn’t quite an infallible as the bulls believe. Although many were dismayed at how much Apple fell, I was actually surprised it didn’t fall more. This stock has been trading heavy for the past couple of months. While stocks like Amazon and Facebook have been rocketing to new highs, Apple has been going nowhere fast.

Carl Icahn has said that Apple is such a great investment that if it goes down, you should just buy more. And this is the problem with the stock. It has taken a mythical can-do-no-wrong aura with the hedge fund community. They are stuffed to the gills with Apple stock.

I will take the other side of their trade. I contend they are blind to the reality that Tim Cook is no Steve Jobs. Don’t get me wrong, Tim Cook is an able operator. But Steve was truly one of a kind. For the past few years Apple has been able to coast on the products that Steve left in the pipeline. The watch was the first non-Steve Jobs product – and it shows. So far the market has not woken up to the fact that Apple is no longer the truly unique Steve Jobs led innovative company, but it won’t be long.

Apple is over owned, over hyped – a true hedge fund hotel. When old curmudgeons get on CNBC telling viewers about the excitement of a new tech product while trying to pump the stock, I humbly suggest there might be better investments out there…

All about the VIX

Picking a top is always a mugs game. It is almost impossible to forecast when the music will stop.

Yet there are some signs that help you determine if we might be getting close. The P/E to VIX ratio is one such indicator.

During the previous two market tops, this ratio spiked to new highs right before rolling over. This ‘complacency’ indicator gave clear warnings that investors were paying too much for stocks with too little fear about the potential for a decline.

Right now, we are near the highs, but have not pushed through. Watch for a spike in the coming weeks as the “time to head to shore” signal.

Speaking of the VIX, let’s have a look at some other interesting charts about our favourite volatility index.

Let’s start with VIX seasonality.

We are entering into what has traditionally been the most consistent rise for the VIX index. I know everyone thinks the summer is the ‘safe’ time to sell vol as nothing happens, but maybe it is already priced in?

The next chart is VIX versus the inverse of the 5 year break even rate. Although the stock bulls are all celebrating the commodity collapse, they should be careful what they cheer. VIX has recently been correlated to inflation expectations.

In this day and age of over indebtedness with anemic growth, the biggest problem is a lack of inflation (although some might argue that growth is the real problem, but I don’t think we will get growth, so inflation is the only way out). If breakevens are going down (up in this chart) then inflation is slowing. In other periods that might be a good thing, but in today’s environment, this lack of inflation is associated with periods of falling risk asset prices.

Thanks for reading,

Kevin Muir

the MacroTourist