|by Wes George
Market Sectors: Apple's Destiny vs. The PC's Fate
June 28th, 1999
Facts are stupid things
until brought into connection with some general law.
Let's talk about market sector rotation, shall we? A market sector is a group of corporations all engaged in roughly the same line of business and defined by their very own index. The corporations that make up a market sector each possess individual destinies linked together in a complex system of market space interactions that operate well beyond the control of anyone. Perhaps that's the difference between destiny and fate.
Mathematically inclined traders have a technical tool called the Correlation Coefficient that roughly measures how news, events or actions concerning one corporation will reverberate in another's stock price. See below for a precise definition.
Here's how it works
Apple rightfully belongs in the computer hardware manufacturing sector. (We could argue about the OS /software elements of Apple's business model. This does effect Apple's relative correlation to the destiny of other PC box makers, but let's ignore this complication.)
From the illuminating distance of 365 days, AAPL has a mildly positive correlation coefficient with the rest of her industry. Up close, bad news for Apple -- such as recent delays in delivering iMacs and the Lombard PowerBooks into the hands of impatient consumers -- spawns a negative correlation with the price of, for instance, Gateway stock. Thus, bad news for AAPL is good news for GTW.
Likewise, when a calm Michael Dell appears with a beatific smile on CNBC and tells the world he expects the PC market to continue its expansion, this 'news' not only boosts DELL's price a few points, but has a positive correlation with GTW and CPQ. Poor little AAPL declines because she sports a negative correlation with DELL when it comes to short term news sentiments. Got that?
But let's get back to market sector rotation. Since earlier this year it has been clear to most observers that something isn't quite right with PC manufacturers. Gross margins have been declining for more than a few quarters now. Units shipped may be up, but profits are down. The PC price war began to take its toll this year. Packard Bell and Micron have set off margin calls. IBM decided early and wisely to exit the PC manufacturer market space almost entirely. Prices on the low-end machines keep plummeting, first through the $1,000 support level, then $600, and now down to $350. Creative Internet rascals are conniving ways to give you a PC just for your eyeballs!
Let's face it, it would appear to be unwise to add to your positions in the PC market space today. Only day traders revel in the technical advantages of sideways or declining trading ranges. If you're from the "invest and relax" school, your money might appreciate faster for you in another sector, and you might sleep better at night.
The big fund managers know all this (and more) and are already rotating out of the sector as best they can. They can't get as far away as they would like, however, because so much money has flooded their behemoth funds in recent years that there aren't enough quality stocks to sink it all into. The funds finance the debut of hordes of IPOs each month just so they have somewhere, anywhere, to put all that cash. And PE ratios of 50 don't even raise an eyebrow. Perhaps we're even at the top of THE Bull Market, but that's another story altogether.
The signs of a bull market top for the PC sector are everywhere you look. The free PC movement just won't go away. Studies show a decline in PC usage suggesting the consumer market is as saturated as the corporate. CompUSA is phasing out retail computer sales and moving towards "a broad range of new digital consumer technologies". Windows 2000 is a forgone flop and it isn't even out of beta. The Pentium III has inspired about as much excitement as, well, leftover pizza.
Even the late to the party investment bank upgrades on Apple last month are a sign of a bull top. Witness the sudden general public's interest in Apple's stock price. In another classic signal of a bull top, about six weeks ago the Mac Observer instituted a daily front page feature, the Apple Stock Watch', to accommodate the surging passions surrounding AAPL's then soaring price.
Other studies presage the real digital growth market this Christmas will be for cheap single application specific consumer goods like digital cameras, DVD peripherals, MP3 players, GPS thingamabobs, wireless e-mail zingers, tiny digital recorders and the list goes on. Sony stands in the middle of this market sector and SNE soared 15% this month.
Semiconductor manufacturers that make the right kinds of silicon, like Texas Instruments and LSI Logic, also stand directly in the benefit path. Intel, AMD, Motorola, and IBM, who make the wrong types of silicon, have all peaked for the year. Except maybe Motorola, since they have some really cool toys hidden up their sleeves. Oh, yeah, and if you believe Lou Gerstner, IBM is really an Internet start up staffed with wooly Gen-X hackers.
As a disciplined stock trader you should be able to shift paradigms on a dime. The only proper way for a trader to express his/her opinions on a company's prospects is with a pinky finger stroke on the return key when placing an order to buy or sell. Of course, as a member of the Mac punditocracy, I've soiled my traders' robes beyond repair.
Yeah, I huffed and puffed and I slobbered all over my monitor about how Apple was immune' to the scarlet fever sweeping the PC market sector. I wailed that the PC manufacturers owned the enterprise market (which is where they caught the falling margins bug in the first place). I thought the iMac was a consumer-led product, inoculated against such ills. But it just ain't so. Ultimately the whole industry, friend and foe, rides in the same damned boat and that boat just happens to be sinking. Slowly.
The Dowist Faith
I was weaned on and still hold faith in the Old Testament of the Dow Theory. Of course, as the old saying goes, this guarantees that I "miss the first third and the last third of each major market move and sometimes there is no middle third".
The trick for Apple traders today is to figure out whether we are on the left or the right shoulder cleft of a bull top in AAPL's stock price. A true Dow theorist would express no opinion at this point, but as an undisciplined, soiled, member of the press, I get to go on and on. Let's weigh some--I want to say facts, but that too strong a word-- issues.
MacWorld lingers just 22 trading days away. Rumors abound that this is going to be a particularly special MacWorld. Steve Jobs has something up his sleeve. And it may be more than the consumer portable. Maybe something wireless? Maybe something iMacish? Of course, no P1 at MacWorld would definitely push AAPL past the right shoulder of the bull top.
Last year at this time, AAPL was trending up sharply. This year the expected pre-MacWorld uptrend has surprisingly broken down with an unhealthy dose of high volume. The winds have shifted to the south for the whole PC market and not even the prospect of Steve's famous reality distortion field has slowed them. Not even the fact that Apple is again poised to surprise the analysts with above the mark earnings has cushioned her descent. Most perplexing of all is the mysterious limbo game APPL is playing with the PE ratio. How low can she go!
There are a couple of rays of hope yet. The most promising seems to be the consumer portable that has the overlooked potential for completing the transformation that the iMac started on Apple. If, in the jaded eyes of the Street, Apple becomes more associated with the consumer digital appliance vendors and less with her own PC peers, then perhaps Apple's destiny will be free from the restraint placed on her by the dismal fate awaiting the PC market sector.
The Correlation Coefficient
The statistical measurement of the degree to which the movement of two variables, X and Y, are related. The measurement is given by the ratio of the covariance of X and Y to the square root of the product of the variance of X and the variance of Y.
From the Traders' Glossary of technical terms and topics.
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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!
Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.