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Cash Position Best for Apple Investor

by: Zach Bass October 06, 2008 | about stocks: AAPL / QQQQ / SPY    

Zach Bass

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Friday was an important and telling day. All hopes of retail investors were pinned on the Bailout passing Congress. We were told that without the Bailout we were doomed. Well, the market rose initially in anticipation of the bill being passed, and then when word came down that it was passed, the market summarily sold that news and sold it hard.

The fact is, our politicians sold us feel-good legislation. It won’t solve the problems this economy is facing, it won’t even come close.  Consider that AIG alone needed $85 billion to become solvent, and that’s just one company. How is $700 billion going to solve the credit crunch of the entire banking system? Well, it’s obvious that the market recognizes that the Bailout was a temporary diversion, because now investors are focused on the economy. The ISM Manufacturing numbers are a very telling indicator as to what is to come, and the decline in jobs was the exclamation point. We can expect unemployment numbers to start to accelerate from here.

Now, to the uninitiated, ending up 30 points down on the day for the Nasdaq, and a measly three points with Apple (AAPL), may not seem like such a big deal. But when you consider that the Naz has dropped nearly 11 percent this past week, and AAPL has dropped almost 25 percent, you’ve got to recognize this is scary stuff. Put on your crash helmet and buckle up because that’s not the worst of it!

The Naz lost an important level on Friday, and did it in such a way as to confirm the gravitas of that event. The 2000 level represented a potential triple bottom reversal, meaning that one would expect that when challenging a bottom for the third time, as the Naz did over the past four years, that we would reverse off that bottom. But we didn’t. In fact, we plunged through it on big volume and ended up a full 1% below that mark. That my friends, is a classic breakdown, one that will be very difficult to reverse anytime soon. What we can expect are much lower prices from here.

So, what is an AAPL Investor/Trader to do? I have been recommending a cash position. Preserve that capital, it’s going to come in handy when we finally do come off the bottom. Wherever that may be. And where do I think the bottom is? The only time I feel comfortable calling a bottom is when we have bounced off a level and backtested it at least once, and rallied off of it. But in this Bear market, you can still only assume that it’s a temporary rally. 

Is there any place to hide? What about commodities like Gold? All I can say is forget about it! Commodities are dead. That includes Gold, Oil, Steel, AGI, you name it! I can see some relative safety in consumer staples, such as paper, non-perishable foods like soups and canned veggies, as well as soups, and cereals. These are the things people are going to start to hoard as jobs are lost and money becomes tight.

click to enlarge

Let’s look at a few charts that illustrate the situations. These are all weekly charts of AAPL along with all the major indices. Everyone shows a massive break down through the neckline support of a strong and well defined Head and Shoulders pattern.

Then you can see that the next levels of support are quite a ways down. For example, with AAPL the next strong level of support from there is in the low 80s. The Dow has some support in the 10,000 area and then again around 9700, but after that there may be no support until 8500. The Naz has virtually no support under its current price. There is distant support around 1750, but that’s not much consolation.

These charts, along with several other charts are available in the Gallery, where you can view or download them. Check out the Head and Shoulder Parade in the Gallery.

Disclosure: All cash.

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This article has 25 comments:

  •  
    Oct 06 08:23 AM
    Well Zach, all I can say is, I hope we are wrong. I've been forecasting that the "fat lady is about to sing" and I know now that she has begun. We just don't know how long her song will be.
    Reply
  •  
    Oct 06 09:25 AM
    Where are all the haters now? This blog post has been up for an hour and we have yet to see a fanboy ripping Zach apart over his "cash over AAPL" blog.

    Say what you want about Zach's posts over the past few weeks, but you should see now he was right. It's not that he doesn't like Apple. But he saw the reality of what was coming. Fundamentals, brisk iPhone sales and packed Apple stores don't mean a d@mn thing in this market. It's all going down. AAPL is not immune to this.
    Reply
  •  
    Oct 06 09:28 AM
    I'm long apple (may but more if we dip below $90) and im short amazon. see why at 20smoney.com
    Reply
  •  
    Oct 06 09:43 AM
    It is BUYING TIME again!... Thanks for the cheap shares!
    Reply
  •  
    Oct 06 10:40 AM
    Rather than sell and lock-in potential losses, the smart strategy for "long-term" AAPL investors is to average down. If I had sold my 4800 shares during the last economic downturn I wouldn't be up $500,000 in my holdings today. I will be adding to my position during the panic and bloodletting. I just love to feed off of the weak minded short-term thinking goons that call themselves investors.

    Oh, and nice article Zach. Keep up the good work. :o)
    Reply
  •  
    Oct 06 10:50 AM
    All I have to say is that those who take his advice and sell at these levels will likely regret doing so very soon.
    Reply
  •  
    Oct 06 11:25 AM
    Apple is now trading at a forward P/E of 15 and they've sold more iPhones than even the most bullish estimates. At some point this craziness must end.
    Reply
  •  
    Oct 06 11:33 AM
    Say, Zach - what the heck do you know about Head and Shoulders?
    Reply
  •  
    Oct 06 11:43 AM
    i hope this stock drops to $25
    Reply
  •  
    Oct 06 01:04 PM
    Bought more. People aren't going to go back to typewriters.
    Reply
  •  
    Oct 06 01:28 PM
    Cash is obviously safer in this market for anyone with leverage than a security whose price is subject to irrational depression, and Apple doesn't have a safety net any more than other good companies that are being hammered.

    However, the author of this piece misses the substance of the federal government's stabilization transactions. This isn't throwing $85Billion and $200Billion and now $700Billion into the wind to stop a storm as he suggests. I've discussed both Apple's "safety net" and this author's position on the bailout at The Jaded Consumer.

    Tom B's comment is definitely on the right track for unlevered long-term investors: people aren't going back to typewriters. Or LP records. Or The Walkman. Or land-line telephones. Apple's margins advantage is sustainable in a way Dell's wasn't, and Apple's cash flow seems to make the idea of sudden failure a distant fiction.
    Reply
  •  
    Oct 06 01:51 PM
    Apple is exactly the company I want right now. 20 billion in cash with ZERO debt. Based on today's stock price that is about $23/share in cash. P/E under 20 for a company with 20%+ growth. Strong management, strong products.

    The economy might be tanking, but the customer base of Apple: wealthy, educated, and employable. Students will still buy computers. Households will cut back on other things, not computers. Computers are now a must have item. Along with cell phones.

    I'll be adding to my Apple position. In fact, I'm getting ready to pull a John Templeton.
    Reply
  •  
    Oct 06 02:00 PM
    "We can expect unemployment numbers to start to accelerate from here" Hi zach can i borrow your future predicting crystal ball?
    Reply
  •  
    Oct 06 02:35 PM
    AAPL seems to be resisting further damage this afternoon; looks promising.
    Reply
  •  
    Oct 06 02:59 PM
    @Apple Heavy wrote: All I have to say is that those who take his advice and sell at these levels will likely regret doing so very soon.

    I have been suggesting a cash position since early September. Had you listened, you would not be worrying about the near-term.
    Reply
  •  
    Oct 06 03:06 PM
    So, your advice on going to cash would have been timely in August, not now. I went 50% cash since early summer, so I can shop now!
    Reply
  •  
    Oct 06 03:17 PM
    If AAPL closes in positive territory today.........
    What, me worried? I don't bet my mortgage money in the stock market, I do not buy stocks on margin (painful lesson learnt after the dotcom bust), and my 2 German high-end autos were bought cash.
    So, no worries here.
    Reply
  •  
    Oct 06 03:21 PM
    jim cramer said apple will drop to $60 . EVERY ONE START SELLING.
    Reply
  •  
    Oct 06 04:09 PM
    People are certainly in the Halloween holiday spirit right now. Everyone is all dressed up scary, flailing there hands around, and going "wooooooooooooo&q... and "BOO!"
    Sure times are bad right now, but never underestimate the media's flare for drama.
    The people that have the most cash are going to want the best price to get back in. These people will be dressed the scariest and screaming the loudest.
    Reply
  •  
    Oct 07 12:42 AM
    Well, I hate to say it but Zach is right in some ways about this.

    Despite Apple's excellent products and position, this market is tanking big time - as I figured it had to some years since. The only things keeping it afloat were the housing bubble (which I also saw coming and sold up while the getting was good) and of course, Greenspan's "irrational exuberance." (Oh yeah - and the M-I complex's war profiteering outfits...)

    The Street is rather like a bipolar case off their meds at the best of times, and in this situation and economy, more so.

    However, as Baron Rothschild is said to have remarked; "Buy when the blood is running in the streets." (One hopes he was being metaphorical, and that it doesn't actually come to that...)

    However, my bet long term remains on Apple. I sold off half my shares when they were high. As I had bought low, they paid for the lot, with a few bucks profit, so its "house money" now - and I plan to keep what I have, and when I think it has bottomed out, get more.

    If you can't stand the heat, then by all means get out of the kitchen - all these amateurs and day-traders have helped create the havoc in the market (along with some corporate greed-heads at various levels and their political accomplices).

    Like Zach, I don't anticipate any speedy recovery from this, so don't bet your bottom dollar on ANY stock - unless you can afford to lose it. Remember, the market is just like Vegas - a gamble - but if you have done your homework and due diligence, AND are lucky... you may come out on the other side (whenever and wherever it is) in one piece.

    As to the notion that cash is somehow "safer" - don't forget what "cash" is - paper - with NOTHING behind it anymore. So as to gold and silver, own some (the real thing, not "shares"). Same goes with food - own some (real) food, not just shares. If the foreign investor trends continue, and any more oil producers yank the petrodollar, be aware that the BIG crash will come sooner rather than later, as all the US has left as a real ace in the hole is its military machine...

    Meantime, good luck to all of you.
    Reply
  •  
    Oct 07 10:28 AM
    day traders should be in cash for the duration of this mess (probably 2 years, at least)... but value investors should be buying companies that have a large moat...like apple...cash reserves, no debt, spending $ on great innovation, new competitive pricing, global name recognition and STILL extremely profitable retail space. there will always be people with money to spend. they'll be buying their tech toys and more and more of them will be in the apple stores. apple will survive this and make $ for long term investors, esp. those who buy at such depressed prices.
    Reply
  •  
    Oct 07 12:05 PM
    Who don't wants ipod, imac? People all over the world talk about that, but why aapl share continue to drops? Because tech outlook is darken, let say uhm, aapl beat analysis on Q4, would u guess it up or down? I wouldn't guess 'cause it better run (with money off course) and take cover...
    Reply
  •  
    Oct 07 01:39 PM
    I second mollytjm.
    Reply
  •  
    Oct 07 02:16 PM
    thought this article was about the cash position of Apple. lol.... Apple now trades at 10x EV/cash flow. Thats absurdly low. They got 20B reasons to own the stock in this environment. Cash is king and Apple is king right now.
    Reply
  •  
    Oct 08 01:15 AM
    In my not so humble opinion, the way to play AAPL on the long side is to sell puts. The implied volatility on out of the money puts is outrageous. Look at the October 70's - selling for a buck and change. More than likely they'll expire worthless, and in the alternative getting long AAPL at $69 sounds good assuming Steve Jobs doesn't drop dead anytime soon.
    Reply
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