Monday, September 29, 2008

Shorts to Market: "I'm Not Dead Yet!"

The shorts who fled financials weren't disappeared to another planet, just another investment. Now that the SEC has put the kibosh (temporarily) on creating any short position in 799 listed financials, short-inclined folks with a pessimistic view on the market and the economy have simply turned to other securities. High-fliers with exposure to contracting disposable income are surely a magnet -- and lo, Apple (AAPL) has plummeted below 110. -- whose numbers might be rather outdated -- says short interest in AAPL has increased recently over 24% from under 21 million shares to over 25 million shares. This doesn't result in a particularly crazy fraction of the float (under 3%, though at 110 this might be a bit excessively bearish), but as outdated as ShortSqueeze numbers have appeared in the past, I'm not sure how much further the short interest might have become. (What's a good source for up-to-date short interest?)

Apple, which hasn't demonstrated particularly effective use of cash, could theoretically plow some of its approximately $24 per share of cash into a stock buyback while it was so targeted, and could thus dramatically increase the per-share performance metrics going forward. When Apple lost half its value in a single day in 2001 in the wake of the Cube during the Enron-era panic, Apple was in a different financial position: it had had an unprofitable quarter, and paranoia about solvency was perhaps further warranted. On the other hand, Apple's failure to buy back shares when they traded under $20 irritated some longs when Apple was clearly doing better: Apple should have had more confidence in Apple.

Apple presently is both profitable and rolling in cash, so presumably Apple is in a better position to buy back shares. There's a new financial panic -- caused by subprime mortgages -- but Apple's profitability isn't at issue, only the rate of its growth (a metric that share buyback will improve). I expect Apple's shareholder-hostile management to continue with Great-Depression-survivor-like cash-hoarding instincts (the '90s were long and lean for Jobs, who personally secured the loans that floated NeXT while it was losing money hand over fist, which likely leaves him uninterested in risking inability to tolerate a long cash burn), rather than buttress the value of the shares when shorts have gifted management with a buyback opportunity.

I will wait for general-market malaise and Apple-specific FUD to mature into a share price in the 90s or lower before adding to my current exposure to Apple. Short interest will cause a cascade of sales by those with profits in Apple they hoped to "protect" with trailing limit orders, and will scare folks with long-held positions into rethinking whether they should take their profits while they remain. It will take a while for genuine sales numbers to appear and clarify that Apple's position remains solid, and in that time FUD will have an opportunity to work its magic in eroding confidence in the shares.


Glenn Hefley said...

I've been reading quite a bit about this "slow down due to Consumer confidence" Life Ionizers had the Internet Sales today ever; Consumer confidence in my experience and according to history is really a change in consumer interest. History shows us that in Low Market periods (including the great depression) spending rose in many areas (entertainment, health, advertising etc). So the Apple drop, the Google drop and the Amazon drop are all fleeting figments of panic, and just like a few weeks ago, Google, Apple and Amazon will all climb back to their original positions.

So while this panic is going on, I'm going to drink some alkaline water, download some music to my iPhone and go see a movie, just like most of America is doing tonight.

Jaded Consumer said...

There is definitely going to be change -- is there ever anything else? -- but whether the specific changes in spending turn out to be bad for a particular business or turn out to be a boon is something I don't expect pundits to get right.

It's easy to imagine international vacations dropping, but handbag purchases exploding. I'm not predicting handbag purchase explosions (though based on what I know about blogs focusing on handbags, I could plausibly claim to be reporting a sales explosion in handbags), but there is a significant fraction of the population that is still spending money on something other than an overpriced adjustable mortgage and cans of beans.

What I think is behind the Monday drop is leveraged speculators covering margin calls in the wake of a surprise drop in confidence in the near-term prospect of financials. Anyone with any exposure to any company with an interest in home mortgages is facing a drop in equity, and if they need to raise capital that capital will come from everything that still has equity: advertisers, online stores, etc.

I would think high fuel prices would be a bullish indicator for an online store, actually. No business owner I know has cut advertising as a way to improve revenues, either, so the Google drop doesn't make particular sense.

We're back to the aphorism that we should buy when there's blood in the streets, I think. The question is, who besides Buffett has cash with which to buy? (Well, there are people routinely socking away money into 401(k) accounts, but they mostly are steered by the plan limitations into poorly-managed funds and won't be in a position to make intelligent allocation decisions, unfortunately.) And taking on leverage during a panic involves an appetite for risk that goes beyond the norm.

Interesting times, indeed.

Still, it doesn't have the panicked feel of 1987. This doesn't mean it's not bad yet, just that it ... could get worse still!