An Apple Today Won’t Keep the Bear Away

Dear Reader,

Did you know that…

Apples are high in fructose — a type of sugar. Fructose is used to make high-fructose corn syrup, which is linked with obesity and heart disease.

Fructose can only be absorbed in the liver, and when it’s there, it produces harmful fats called triglycerides, which can lead to heart disease. Eating too many apples can lead to excess fructose in the body, which can contribute to diabetes and obesity as well.


Too much of a good thing can lead to serious health side effects.

The same applies to your wealth.

Portfolios overweight (pardon the pun) in Apple shares are getting fatter by the day.

The record-setting advance in U.S. stocks is fueling readings of investor bliss not seen since the dot-com era. Gains in Tesla Inc. and Apple Inc. following stock splits helped push the Nasdaq 100 past 12,000.

A sentiment gauge, Citigroup’s panic/euphoria model, which tracks metrics from options trading to short sales and newsletter bullishness, is having its longest run of extreme bullishness since the early 2000s. At around 1.1, the current reading is almost three times the level that denotes euphoria.

That blissful sugar high investors are feeling is from binging on Apple and other sweet-tasting tech stocks.

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Too much of a good thing…

The fructose overload is evident in the Citigroup panic/euphoria chart:

Port Phillip Publishing

Source: Bloomberg

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If this was a medical chart, the patient would be rushed to ER. All efforts to avoid serious damage to internal organs would be made.

But when it comes to the economic quacks (sorry, doctors) overseeing the markets, ‘too much of a good thing’ is never enough. More. More. And some more again.

All logic is abandoned

And speaking of logic — or more precisely, the lack of it — let’s put this statement to the test ‘Gains in Tesla Inc. and Apple Inc. following stock splits helped push the Nasdaq 100 past 12,000’.

There’s a widely-held belief that stock splits (turning one share into 10) suddenly makes the shares more valuable.

Talking heads parrot the line of ‘retail investors will find the lower stock price more attractive’.

Please tell me how splitting a $10 note for 10 $1 coins changes the value of the transaction…it doesn’t. Logic is one of the first casualties when investors are obsessed with seeking sugar hits.

Wall Street veteran (and if you’ve been on the street for 60 years, you qualify as a veteran) Art Cashin, explains what actually happens with a stock split…

The real point I can’t believe all of them [analysts] have missed has to do with shorting the stock, particularly stocks like Tesla, Amazon and Apple where there are large short positions due to skeptics. When someone sells a stock that he doesn’t own (short), he then has to borrow it from someone who owns it so he can make delivery. He promises then to re-deliver an identical type of stock from whom he borrowed.

When the stock splits, it complicates life for short sellers and often they have to go into various negotiations that are the equivalent of a short squeeze to buy back the stock, rechanging it for stock that will be due after the split is effective. So, it was perfectly natural to watch Apple split and then have people begin to buy it and Tesla split and people begin to buy it.

Stock splits DO NOT create extra value. The split simply creates (temporary) extra demand for the stock from short sellers.

Why is Apple stock so popular?

According to the popular narrative…it’s a growth story. But is it?

Average quarterly revenues (black line) have increased by around 40% over the past five years. A growth rate of around 7% per annum compound.

Good, but hardly a growth story.

Port Phillip Publishing

Source: Six Colors

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Then when you look at Apple’s free cash flow (the cash left over from Apple’s revenue after it pays for its operating expenses and capital expenditures), that’s been anything but a growth story.

Free cash flow (blue line) has been flatlining for the past three years.

Word of warning here…

And while Apple is not generating any more free cash flow than it was in 2017, the share price (yellow line) has managed to go parabolic.

Word of warning here…parabolic share price growth is never a good sign.

Port Phillip Publishing

Source: Crescat Capital

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This manic and irrational pricing behaviour is a common feature of markets that are close to major reversal.

If we travel back in time to the US market’s last big sugar-hit high, we see a similar pattern.

The top five and top 10 largest companies in the S&P 500 Index have a disproportionate weighting within the index.

Apple, Amazon, Facebook, Microsoft and Google represent 23% of the index.

The other 495 stocks in the S&P 500 Index, make up the other 77%.

Port Phillip Publishing

Source: FactSet

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The growing concentration in the very top tier of the S&P 500 is highlighted in the advance-decline line for the Nasdaq Composite Index (CCMP).

The advance–decline line is a technical indicator that’s used to measure the number of individual stocks participating in a market rise or fall.

Port Phillip Publishing

Source: Crescat Capital

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Up until 2018, the advance-decline (blue line) was mostly positive. Which means the number of stocks rising was greater than those falling.

This is a good sign. Showing the market advance is broad based and there are multiple pillars holding up the index.

After 2018, the advance-decline trend goes into its own decline.

The base for the advance is getting narrower and the pillars supporting a much higher price are becoming few and far between.

We’ve seen this before. Eventually, the structure becomes completely unstable and collapses.

Yes. It collapses.

And here’s the proof.

This is what happened to the handful of blue chip stocks that dominated the index at the peak of the dotcom boom.

Port Phillip Publishing

Source: Hussman Funds

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Apple lost 81.1% of its value.

Can it happen again?


If we go back to when Apple’s free cash flow started flatlining in 2017, the share price was US$147. Today, (adjusted for the 4:1 stock split) the share price is US$536.

Just going back to the 2017 price would result in a share price fall of 72.5%.

A little change in social mood and a slight slump in revenues and hey presto, you could get an 80% collapse in the share price.

I know, that sounds silly, irrational and patently ridiculous in an environment where investors ‘logic’ pushes up a share price almost 300% on flatling earnings.

Eating too many apples can lead to excess fructose in the body, which can contribute to diabetes and obesity as well.

One of the symptoms from diabetes can be blurry and clouded vision.

My guess is those investors who’ve indulged too much on Apple and the other tech darlings are suffering from an acute case of blurred vision.

Market history — going back to the late 1920s — shows the same pattern…a handful of blue chip stocks capturing the imagination of investors right at the peak of a long-running bull market.

Sadly, investors seem destined to learn that an apple today won’t keep the bear away.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion