Why A Market Defined By Apple Is A Symptom Of Something Very Wrong
Must read commentary by BigMacro & Co.'s Daniel Somos on how "Apple is really taking over the world" which confirm why the entire market can be summarized by the following equation: APPLE = STOCKS = AUDUSD = GOLD.
From BigMacro & Co (full pdf)
When the NASDAQ index was “founded” they put a cap so that no company could be larger than 24% of the index. This was because Microsoft would have been dominating the index if they would not have capped it. Now, it’s Apple approaching the limit because of its rapid growth, currently it is 20% of Nasdaq. Now look at the chart below. It is the Australian dollar plotted against Apple. To my knowledge Apple as a company has no specific exposure to Australia large enough to account for the fact that in September they started to move in sync. This leads me to a simple equation:
APPLE = STOCKS = AUDUSD = GOLD
What do I mean by that? Seemingly uncorrelated assets start to correlate – this is a classic symptom of something being wrong. I believe the reason Apple and Australian dollar trade the same is because the market is now driven by a single factor – cheap dollars. This goes back to my first point.
Everything is moving based on the FED quantitative easing program, the market does not even care about other economic or company specific factors anymore. Is this a healthy market which will translate into a self sustained bull market? No!
And what does this say about the US. I believe growth - and I am not talking about Keynesian growth, I am talking about something that took you 2 hours to produce before now only takes 1 hour to produce, like GDP per capita per hour – comes from 2 factors: technological advances and lower barriers of effective capital allocation. We know that we can forget about lower barriers of effective capital allocation, which has banking and regulation as the two main components. US banking is mostly involved in capital miss-allocation, small banks are going out of business at record pace (yes, more than last year) and it is not like small business regulation and taxes are getting any better anytime soon. So the last hope is technology.
So once upon a time the biggest company in the Nasdaq index was Microsoft, and I think it’s pretty easy to argue that Excel and Word did make a lot of things more efficient (real growth) than compared to typewriters and whatever people used before Excel. So isn’t it great that Apple is growing like crazy. Well, I have an iPad and it actually makes some time savings for me. But overall, I think the growth behind Apple is not based on a massive industry spending motivated by increased efficiency, but rather consumers who stopped paying their mortgages and are now buying iPhone 4 with the money instead so they can play Angry Birds. So that does not make me very optimistic about the future of the US economy.
And the greatest trick that Apple ever pulled is not lost on at least a few out there: we have just learned that another stock is about to define its own host market: Brazil's Petrobras weighing in the MSCI Brazil Index will rise from 16% to 21%, and its weighing in the MSCI LatAm Index will increase from 11% to 14.5%.
Soon, the entire world GDP (because after all GDP is now only a reflection of the stock market) will be determined by a guy drilling for oil off Rio, renting Netflix movies on his 2,837th generation iPad, while buying cocaine on Amazon.