Apple Computer Inc, in this week's Market Wrap

Scott Schuberg

The passing of former Apple CEO Steve Jobs last Wednesday was a reminder that, in keeping with his own life motto, one should endeavour to live every day like it is one’s last.  He spent the better part of 40 years pushing computer software and hardware as far and hard as science would allow him to, and died way too young at the age of 56.

The Rivkin Securities desk did field questions from clients about where Apple’s (RivSec: AAPL) share price might go in light of this news, and the wash-up is analogous to many instances when traders and investors get confused by the materialisation of bad news and the impact (or lack thereof) on related securities.  In light of this, while acknowledging the sadness of the event, I thought it might be interesting to explore the market dynamics that one encounters when price expectations of an event meet with a market reaction.

Factors that are influencing AAPL’s share price on a fundamental earnings growth basis, as far as our analysis is concerned, are as follows:

1. Apple’s ‘closed’ platform is limiting its growth, as its platform can only be accessed on Apple hardware devices, whereas Google’s (RivSec: GOOG) Android software is available via many manufacturers including Samsung, Motorola, Sony Ericsson and LG.  So there exists a relative value trade between GOOG and AAPL as to which company will succeed in dominating the pockets and living rooms of device users globally.  We tend to see this being a factor that will limit AAPL from growing exponentially like GOOG can.
2. The anticipation and then official succession of Tim Cook as AAPL CEO(since 24 August, 2011) did mark the end of the ‘Steve Jobs era.’ Like all companies that are CEOed by their visionary founders, there is a risk that a change in culture will occur when they leave.  There will be those who will have already taken a negative view in anticipation of this happening well before the removal of Steve Jobs as CEO in August.
3. As mentioned in the opening paragraph, while Jobs pushed technology as far as he could, there is a limit to the trajectory of technological product development.  The speed of AAPL’s innovation relating to desktop, laptop/tablet and mobile phone devices since the iMac was introduced in 1998 and the iPod was introduced in 2001 cannot necessarily be sustained.  It is difficult to think of an old brand that has managed to capture its ‘glory years’ and maintain the exponential growth that they experienced during that time.  The ‘wow factor’ of AAPL’s breakthroughs could slow along with optimism about access to more explosive growth.
4. The recent death of Steve Jobs really relates to inevitable CEO succession mentioned in point two rather than the unfortunate event itself.  AAPL’s share price has not deviated significantly from the general performance of the NASDAQ (RivSec: NDAQ100) technology index since Jobs’s death last week; and, if anything, those who may have ‘short sold’ the stock in anticipation of this event will be forced buyers in a market that did not react to this well-anticipated, albeit negative, news.  Jobs’s death is sad, but not entirely relevant to the movements in the AAPL share price in the short term.

Using this as an analogy to broader markets, one can easily imagine how, for instance, the materialisation of a Greek sovereign bond default might be influenced by various market dynamics: How effectively have traders and investors already priced in this event?  How much short-covering (those who have implemented a negative view who will reverse that trade when the relevant news materialises) will occur once a default is announced?  Will a relative trade between European and US capital markets strengthen US assets regardless of poor US economic fundamentals?

It is very easy for economists to perform exclusive analysis on particular asset classes and countries without taking into account the external factors involving the movement of money for reasons that sometimes seem counterintuitive.

I’m aware that not all Rivkin clients are interested in ‘trading’ the market, thus preferring a multi-year buy and hold strategy; however, there are a significant number of clients who have a keen interest in the short-term movements of capital markets and their constituents.  While our primary area of expertise is the Australian equity market, our analysis of global markets has matured over the past three years and, from time to time, we may introduce tradeable ideas that exist beyond our shores.

As mentioned in last week’s Market Wrap, we’re encouraged by the fact that theS&P 200 (RivSec: Aussie 200) has bounced twice off levels above 3,800 and not managed to close below that level.  We’re sitting in the high 4,100s as I write and this gives us breathing room before we get back to a technical level that gives us a little concern, being 3,773 to 3,794, the historical weekly closing levels that provide theoretical buying support.

The recovery in the Aussie dollar (RivSec: AUDUSD Spot) is a great reflection of the strength that has returned to markets, turning performance around since hitting US$09387 just last Tuesday and trading today at a much healthier US$0.9820.  While it is bitter sweet for our economy to see our dollar higher, it’s certainly a reflection that a large number of volatility bets in foreign exchange markets have been removed, which would have been positioned for risk aversion and strong US dollar buying.

Scott Schuberg