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The 5 Most Crowded Trades on Wall Street: Part 1

EconMatters's picture




 

By EconMatters

 

 

Herd Mentality

 

Here are 5 of the most crowded trades in financial markets, where a lot of group think has led to large fund flows on one side of the trade. This has been a very common phenomenon the last couple of years in financial markets, partly due to participating in the same investment conferences, limited trading opportunities, lack of imagination, investors seeking security with the crowd, Fed incentives, shared information and networking otherwise called industry collusion, trend trading, and going with ideas that have worked in recent history.  


Risk/Reward Perspective

 

Now crowded trades can remain crowded trades for a long time, they can even become overcrowded trades long before they start to reverse themselves. However it is important to know that a lot of funds have already been committed to these trades from a one sided perspective. Thus the price to value relationship or value proposition from a risk reward perspective is just not that great, and in some of these five cases, is in fact pretty bad or skewed in the opposite direction.

 

Apple

 

Let’s start things off with Apple this stock has had an amazing run from the large pullback when Samsung pulled ahead of Apple with the better smartphone with a bigger screen. Since then Apple has finally reacted and upgraded their phone`s specs with the culmination being the large screen size in the last phone iteration. Samsung has come out with some small improvements for their last smartphone iterations, but currently Apple probably has the overall consensus best smartphone as viewed by the mass high end smartphone buyers. Samsung is coming out with the Edge Smartphone in April, and this phone`s specs are probably better than Apple`s latest product offering, but it remains to be seen if the specs are noteworthy enough to gain market share from Apple for the high end buyer given Apple`s Higher Brand Value among consumers.


So You Have Done The Big Screen…What Now?

 

I think that once Apple finally came to market with the big screen phone there are only small incremental improvements to smartphones from here on out, and smartphone margins are going to come down across the industry. I also think that Apple will no longer have the best smartphone in four months as the other companies bring out their latest offerings to market. I look for one more really good earning`s report from Apple, but that is probably as good as things are ever going to get for this company. The downside risks as all the Hedge Funds and Management Funds unwind this trade on profit taking and seeking better returns elsewhere in the markets is significant.

 

Smartphones are fully Commoditized

 

I know this company is sitting on a lot of cash, but cash can be burnt through rather fast on the downside of a major commoditization cycle in a company`s hardware offerings. I wouldn`t be surprised if Apple drops below a $50 stock over the next three years, and remember how fast Apple dropped the last time all the money managers left this stock. The amount of fund managers who currently hold this stock in their portfolios is off the charts from a percentage standpoint, it is probably the second most crowded trade on the street.

 

In fact, I would categorize Apple as an overcrowded trade right here, not that it cannot go higher, but probably an ideal candidate for legging into a short position at anything above $130 a share, if it ever gets back to those levels. Maybe hope for a spike on second quarter earnings and start building a short position in this overvalued stock. The ideal time for establishing a short position was when it spiked on all that hysteria over building the next I-Car, speaking of how companies can burn through loads of cash reserves by going outside their core competencies.


 

Apple Meets the Definition of an Overcrowded Trade

 

But from the standpoint of who is left to buy this stock, those already heavily invested on the street, and the downside risk from these elevated levels as the Fed ends its easy money policies, Apple is setting up for one of the greatest exoduses that we have seen on the street in ages. I wonder if similar to the last time Apple dropped like a rock and a bunch of fund managers got left holding the bag citing valuation arguments and the increased need to bail their underwater positions out with increased share buybacks; if the same phenomenon occurs again.


 

Deer in Headlights

 

This stock price is much higher this time around, and once the exodus starts, and key technical support levels fail, the very nature of how overcrowded this trade is will become apparent to investors. They can lose so much value on their positions in less than 6 months’ time once the sentiment turns on this name that I would say Apple is the most dangerous holding on the street right now for portfolio managers. Once this name starts breaking you cannot worry about slowly unwinding the position, you just have to start dumping this stock like a fire sale because everybody else will be trying to get out at the exact same time. Those slow to anticipate the magnitude and breadth of the selloff in this Halo Stock once the selling momentum snowballs will be left looking like Deer in Headlights.

 

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Tue, 03/17/2015 - 00:08 | 5896924 MATA HAIRY
MATA HAIRY's picture

Bullardish

Mon, 03/16/2015 - 23:09 | 5896709 phoenixdark
phoenixdark's picture

amzn why is that stock almost 400 should be 4.

Tue, 03/17/2015 - 00:00 | 5896906 one_hundred
one_hundred's picture

my roomate's step-mother makes $79 hourly on the laptop . She has been fired for 10 months but last month her pay was $18694 just working on the laptop for a few hours. see here... www.globe-report.com

Mon, 03/16/2015 - 21:37 | 5896340 disabledvet
disabledvet's picture

Most short sellers are just like the long traders..."if its down take it zero.'

 

Coal, steel...certain mining plays.

 

 

Apple is the gold standard for the entire electronics industry.  

 

I prefer my watches from Switzerland of course...

Mon, 03/16/2015 - 21:24 | 5896300 Patton
Patton's picture

Unbelievably stupid assesment of Apple.  The sentence where you write that smartphones are commodities may be true on the surface, but you completely missed the point.  What is not a commodity is the ecosystem.  No one can replicate Apple's ecosystem. Every other smartphone maker creates only hardware.  Then you pompously proclaim that Apple will drop 60% in value based on no real logic or reason other than it being "crowded".  A batshit crazy prediction if you ask me.  iPhone 6 demand was off the charts, and I'm willing to bet that the iPhone 7 demand will be even greater. 

Tue, 03/17/2015 - 01:27 | 5897059 damicol
damicol's picture

Spoken like a true  Cook  cock sucker,

Idiot, eco system  crap,  that's nothing but bullshit and is just that, fucking morons delusional bollox, means sweet fuck all in the real world.

Apple is nothing more than a gigantic fraudulent ponzi scheme, a financial con trick just as GE and IBM are.

Flogging cheap Chinese made tat all overpriced to simple motherfuckers who get suckered by listening to advertising shit.

It will fall, when the demand  shifts to see and  no stock ever in the history of the world has ever escaped that fate.

 

 

 

 

Tue, 03/17/2015 - 01:43 | 5897079 Patton
Patton's picture

Holy shit dude, take your lithium 1,000 mg.  

People like you contribute nothing but paranoia and negativity into the world.  Who gives a shit if you don't like the ecosystem?  Guess what?  600 million people do.  They have stores in every corner of the planet.  You can go purchase your fucking Android piece of shit Boost mobile in a strip mall kiosk with your APMEX silver eagles you fucking loon.  

 

 

 

Mon, 03/16/2015 - 19:21 | 5895916 JailBanksters
JailBanksters's picture

If something looks to good to be true then it probably is. Thing is you can't buy apples, sell your apples then buy more apples. All you can do is keep buying more apples and hoping they won't go rotten by the time you need to sell them.

Mon, 03/16/2015 - 17:17 | 5895551 ThroxxOfVron
ThroxxOfVron's picture

IF I am not mistaken Apple declared something around a 40% profit last quarter.

There is a lot of room for Apple to cut profit margin before pain sets in.  I don't know if the other smartphone and/or .net device manufacturers have anything approaching this profit margin.  The smartphone price war is probably going to get pretty ugly for the manufacturers that are competing with Apple if Apple decides to use it's margin and cash cushion to squeeze them or try to kill them off outright...

The iPad is still a high margin device as well.  It is expected that larger iPads are in the works.  Maybe even Airbooks with touch screens ala the WIntel devices available presently -or more importantly fully fledged touch screen slabs with USB and Thunderbolt or Lightening ports running OSX in lieu of iOS.   

IMHO, it is a the larger iPad -or more inmportantly- the OSX slab that will buy Apple a few quarters of renewed interest from consumers.

I expect the iWatch will only be marginal product if it is released with the specs and features promoted thus far.  It may grow into a more viable product or product line in the future; but, as advertised I think it is an overpriced fashion toy of limited utility or appeal.

So much for a discussion of the product lines..

Apple has a lot of 'cash' on hand but it sure as hell isn't in cash.  That money is invested somewhere and has risks associated with it to some lesser or greater degree that are largely unknown.  IMHO, this is the great mystery concerning Apple and could prove to be the corporations undoing if it caught on the wrong side of one or more large trades that have not been hedged TBTF style..

I am surprised that Apple has not purchased an existing industrial and/or consumer products conglomerate or even an automobile manufacturer outright by now.  The only thing that might sell overpriced electric cars faster than a Tesla moniker might be an Apple moniker.  Driverless need not be in the original outings but could be initiated via software/hardware updates/upgrades.  

I expect that if Apple is to survive in the long term that it will have to offer a wider variety of product catagories along the lines of Yamaha which makes everything from keyboard synthesizers and audio mixers to portable generators and motorcycles, etc...

Mon, 03/16/2015 - 20:11 | 5896026 Quantum Nucleonics
Quantum Nucleonics's picture

Actually, most of Apple's "cash" IS in short term, low risk investments.  A discussion of products is silly.  Apple gets nearly 70% of revenue from iphones.  WHEN (notice, not "if") the product cycle no longer offers a compelling reason to upgrade, which might be at hand, look out below.  There's a reason AAPL trades at a discount to the market multiple, and it ain't because it's "undervalued".

Mon, 03/16/2015 - 17:20 | 5895577 weburke
weburke's picture

They got moved to the dow, so the s and p can tank I suppose. Their p/e is low. 

Sales are huge. Folks just want them. I pads, phones, computers, their stores are the busy ones at the malls. 

 

https://www.youtube.com/watch?v=JUY2fOeQMrQ

Mon, 03/16/2015 - 20:00 | 5895993 Quantum Nucleonics
Quantum Nucleonics's picture

Heh, genius, stocks don't do exclusive deals with different indices.  Apple is in both the Dow and the S&P.  In fact, it's by far the largest weighting in the S&P500, more than 4%, double #2 XOM.

Mon, 03/16/2015 - 18:30 | 5895273 Comte d'herblay
Comte d'herblay's picture

/

Mon, 03/16/2015 - 15:51 | 5895239 Osmium
Osmium's picture

No stock is dangerous when the FED has yer back.

Mon, 03/16/2015 - 15:10 | 5895088 Smiddywesson
Smiddywesson's picture

I have to agree with this author.  My reasoning is as follows: 

 

After a six year run, the bears no longer have any money, and the public that isn't back in by now isn't going to get lured back in.  At some point, this becomes a trap for the Boyz to offload their stock.  The only people left to hold the bag are the big fund managers.  Therefore, whatever they hold the most are going to be the biggest losers when the party comes to an end.  That means Apple and all the other rock stars.

Mon, 03/16/2015 - 15:54 | 5895243 Ham-bone
Ham-bone's picture

Couldn't disagree more.  The reason to buy Apple has nothing to do with fundamentals or market share or margins...it's everything to do with it's inclusion among the TBTF institutions...just like JPM, Citi, etc.  Buy it because it won't be allowed to suffer from "market activity"...it is the Nazdaq and now the S&P...without it's buybacks and ever higher price, millions of pensioners and consumers ain't got a pot to piss in.  Two words describe the "market"...moral hazard.  Big reccommend on anything with strong moral hazard.

Mon, 03/16/2015 - 15:02 | 5895044 KnuckleDragger-X
KnuckleDragger-X's picture

Apple works by creating demand and then manipulating the demand with carefully controlled supply. Steve Jobs was their idea machine but they are running on past glory nowadays and I figure the iWatch will be the first of several disappointments to come.

Mon, 03/16/2015 - 14:58 | 5895034 jaxville
jaxville's picture

Apple phones are too big.  Bigger is going backwards.

Mon, 03/16/2015 - 17:00 | 5895502 boogerbently
boogerbently's picture

So, AAPL is the 5 most crowded trades ?

Or were there 4 others I missed ?

Mon, 03/16/2015 - 18:12 | 5895738 Negative Kerry
Negative Kerry's picture

It's a three part series...article 4 will be a retraction and article 5 an apology.

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