The Mother of All Tech Rallies Hails Apple's Ascendancy
December 6th, 1999 

"For the last five years we have been in a new industrial era in this country. We are making progress industrially and economically not even by leaps and bounds, but on a perfectly heroic scale."
Forbes magazine, June 1929

With the Nasdaq up over 60% year to date and Apple up roughly 175%, most technology investors are sitting pretty. Should you take your profits and run? If you're like me, it's tempting. Only the rosy glow of a techno-economic global nirvana beyond the Millennium (i.e. greed) keeps me in this market. That, and as a trader you just have to go with the momentum's flow, though I know not where it goes.

Even a Chimpanzee could have aped Peter Lynch this year if he stayed long in the big cap technology and the Internet stocks, so don't let your fat profits swell your head. On the other hand, it would take the clairvoyance of an Old Testament prophet to declare just how high this bull rally can soar or just how abysmal the correction will be on the far side. My crystal ball is fogged up solid.

Are Investors being too optimistic?

It's absolutely fascinating to watch the tech stocks waltz weightlessly to new highs. Last week the Nasdaq reached a 118% divergence above its 50 day moving average, a new record.

I remember a time not so long ago when technology was considered almost like the cyclicals-- a marginal, if high growth, sector of the economy which should be relegated to a small percentage of your portfolio, and only then for those with high risk tolerances and long term horizons.

Today those assumptions are standing on their head. A growth portfolio must be technology heavy, while the horizons shorten as investors struggle with the increasing opacity of the future due to the accelerating rate of innovation.

Oh sure, the general outline of an Internet led global explosion in commerce is obvious, but sorting the individual long-term winners from the losers is a futile task at this point. That's why the big caps are doing so well while the small caps languish. The Russell 2000 is only up 10% this year!

Investors, lacking a solid handle on how to evaluate technologies, trust that Qualcomm, Cisco, Intel and Microsoft (the Four Horsemen of the Apocalypse, according to Joe Kernen of CNBC) will buy any innovations they need to be market winners. That much seems a sure bet. But is it?

By now the current stock prices for most big cap technology leaders exceed all but the most optimistic long-term earnings expectations. Nevertheless, according to I/B/E/S International, most analysts have just that type of Pollyanna forecast, projecting that S&P 500 earnings will soar 15% per year for the next five years. That's the highest long term consensus forecast I've ever heard. And, it's an unsustainable projection unless the GDP continues its current rate of growth during all five years, a historically unlikely scenario.

But maybe history doesn't have much in common with the 21st century

There is the Dow 36,000 crowd who argues that what we are witnessing is a unique event in the history of the stock market. Stock valuations have been too low because the level of risk in the stock market was mistakenly perceived as higher than it really is by old school investors who survived such anomalies as world wars, a great depression and run away inflation caused by cold war military escalations. Stock prices are in for a one-time surge in price to a higher level that recognizes the lower risk evaluations suggested by the new economic model.

What we have witnessed in the first five weeks of this Y2K melt-up in the technology stocks is the awakening of investors to the new rulez of the new economy. Yes, there can be high growth without inflation. Yes, the productivity rate is uptrending due to increased innovation, Moore's law, better software, wider bandwidths and the Internet's role as the ultimate price deflator. Productivity will continue to blossom, at even higher rates, as far into the next century as your imagination can carry you. No, full employment is not 5% unemployment as we were taught in economics 101. We are already at 4.1% unemployment rate and going down with little wage inflation precisely because, in the big picture, we are in a deflationary period.

The Internet's full potential for creating a frictionless global economy with vast leaps in productivity has only recently been imagined, much less fully implemented. Business to business transactions executed over the Internet open competition up and push prices down. Middlemen everywhere, from chemical commodity brokers to Nasdaq market makers, face rapid evolution or extinction as open electronic communication networks (ECNs) displace their protected turfs with world wide "open outcry" digital marketplaces.

The Internet makes the concept of the global village meaningful and fortunately so, because--as Hillary might say--it takes a global village to support stock valuations beyond today's highs.

Many investors realize the markets have become a momentum game. Value stocks (those with low PE ratios) are probably lagging in this market for a reason. Analysts are issuing 12-month price targets on companies like Nextel and AOL that assume their triple digit PE ratios will become the norm rather than the exception.

Companies like Apple have the furthest to soar in this mother of all tech rallies because they are a most unlikely of combinations-- value plays strapped to growth rockets and stoked with momentum. Apple's P/E ratio of 31 is still safely below the hardware sector's average of roughly 50, while their momentum is the strongest in the sector.

That said, behemoth equity price spikes in the stock market have always been followed by a rapid, if partial, retracements as history clearly shows. Soon enough we'll see if this is the end of the world as we know it, or just an equity price bubble.

What about Apple?

After a short period of consolidation in the mid $90s, Apple gained $20 last week in what was the stock's single best 5-day rally since the first week of January 1998. As Apple surged towards the $100 mark there were several volatile high volume days that shook out incredulous shareholders, while bringing on board a new batch of investors who can more clearly envision Apple's potential in 2000. This should lessen the impact of profit taking short term while setting the stage for the continuation of AAPL's uptrend going into January.

What new investors to Apple see is a corporation that has transformed itself from a niche player into a PC market leader. Moreover, they perceive that Apple has yet to leverage its formidable hidden values, such as QuickTime, which would make a killer IPO. Or OS X, which is Apple's ticket back into the enterprise market. Or Apple meta-retail centers which could seamlessly hyperlink bricks and mortars with e-commerce in a way that would become the model for the future of retailing.

Apple has more than a few card tricks left. Surprises, such as announcing a major Internet initiative, or the formation of some unimagined and lucrative new business alliance are like aces in the hole. Cards our rivals have already played, Apple still holds close to the chest with a poker face to boot.

Apple's lead in innovation...

Gateway, Dell and others are racing to emulate Apple's formula for success, but so far they have all fallen short of the mark.

Ironically, the PC vendor's greatest strengths are their biggest liabilities. The inferior operating system their computers are saddled with makes PCs, by definition, user-unfriendly. The EasyPC initiative is just, as Ralph Nader might say, "sloganism".

Perhaps even worse, Gateway and Dell were founded by marketers with clever business schemes to take advantages of productivity and retail inefficiencies in the PC market. They have done so well at lowering the price of PCs that they have sent their own profit margins into a tailspin. The average price of a Gateway PC is down 14% this year.

These same people can't design brilliant new form factors that shift the way people think about "computing", such as the iMac has done, because that has never been their area of expertise. They haven't promoted a culture of design quality in their corporate psychology.

Everything has been subordinate to a very narrow cost-analysis that ignores the immeasurables, like the Human Factor. They discounted design gestalts as a frivolous expense from the first day they opened their doors, it's hardly surprising that they can't do Bauhaus at this late date.

Only one PC vendor has the R&D infrastructure to produce world-class award-winning product designs that capture mind share on the scale the iMac and iBook are doing. Only Sony, a global leader in consumer design since the 60s, has the savvy to compete with Apple in this arena, fortunately they're shackled by the legacy of Windows. bigger than we thought!

Witness the WebPC by Dell. Besides being late to the game, over-priced and merely borrowing elements of innovation that the iMac introduced 18 months ago, this oval shape gray stump is an obviously rushed and poorly thought out design. The form doesn't follow function.

The WebPC's shape is entirely arbitrary with elements of the absurd, such as hardware push buttons that serve what should be software functions. Should there be a hardware switch for checking your e-mail? Such baroque silliness is reminiscent of the push button transmission found on some cars in the 1960's.

Most amusing of all is the Dell logo button displayed prominently on the front of the WebPC. The "Dell" button dials directly to technical support! To my knowledge, this is the first time a Freudian slip has ever been built physically into PC hardware.

Great artists steal

Meanwhile, Apple is positioned to emulate the Internet and retail marketing models pioneered by Dell and Gateway in a way that will turn Apple's rivals Bondi Blue with envy. Apple could be the ultimate "click and mortar" play of the year 2000.

After all Apple has a built-in, largely untapped, global audience of millions of Mac fanatics who literally can't get enough Apple products or content!

As Buzz Light-year sez, "To infinity and beyond!"

Your comments are welcomed.