Thursday, April 18, 2013

Apple (AAPL) - This Just Isn't the Company it Used to Be... And it Never Will Be Again.

AAPLis trading $390.50, down 3.0% with IV30™ up 1.6%. The LIVEVOL® Pro Summary is below.


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Apple Inc. (Apple) designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications.

The stock price today is an annual low and the implied is an annual high. Earnings are due out on 4-23-2013. I have seen a lot written and heard a lot spoken about AAPL by very reasonable and intelligent people. There's just one thing... I think most of them are wrong (which may very well make me the fool at the poker table).

I wrote a few articles on APPL between early Dec of last year and late Jan of this year when the stock was trading in $530 range. You can read those posts here, but really the article titles and the recap I will provide below may make visiting the old posts unnecessary.

Apple (AAPL) - "Just the Facts Ma'am" -- Well, that Supports the Opinion: "Everything has Changed. The Old AAPL is No More."

Apple (AAPL) - Have We Moved into a Totally New Volatility Paradigm for This Company? Has Everything Changed?

AAPL - Everything has Changed. The Old AAPL is No More. The New AAPL is a Riskier Entity and the Market Doesn't Know What that Means Yet

Here's a recap of those posts which I still hold to be true, IMHO. Then I will go into the current situation and specifically demonstrate why I believe the Dec articles are still accurate. This really isn't a chest pounding roar of "how I was right," it's just what I see in the option market, for whatever that's worth (if anything).


In my opinion, AAPL is a completely different entity than it was prior to Mr. Jobs' passing. I think AAPL is MSFT -- not yet, but soon... A company with disruptive technology unafraid to use less than the most ethical approaches to dominate markets, but this is America, and there are competitors, and eventually, someone else has the boy (or girl) genius with the next big ideas. Gates is done breaking the barriers of new ideas and technology. Jobs is too (absolutely all due respect). Remember when MSFT had a market cap of $600 billion?

On the vol side we can see that the implied has been rising into the event, but in sort of empirical yet circumstantial evidence of my prior hypothesis that AAPL is in fact a totally different entity than it was a year ago (or whatever), we can see the implied is trading higher than the last eight earnings announcements. Note the blue "E" icon on the stock chart indicating earnings.

Last eight earnings announcements (IV30™):
Today: 42.27%
12-25-2012: 36.79%
7-24-212: 34.99%
4-24-2012: 40.43%
1-24-2012: 32.35%
10-18-2011: 37.58%
7-18-2011: 32.06%
4-20-2011: 27.51%

So, in English, the options are reflecting greater risk now into this earnings announcement than in the prior two years (eight earnings reports). Again, circumstantial evidence of my hypothesis.

This is a vol and stock note on the largest company in the world. I see a potential paradigm shift in the way the option market reflects risk in APPL -- and the shift is not trivial. I'll even call on your knowledge of Econ 101 from your college days.

In terms of a six-month return the stock has gone from $562.83 (6-5-2012) to now just under $550 for a modest 2.4% decline. Of course, the focus has been over the last 2.5 months -- AAPL hit an all-time high of $705.07 on 9-21-2012 and since then (as of this writing) is down over 22%. Note the free-fall from the all-time high to the low on 11-15-2012. The 52 wk range in APPL is [374.36, $705.07].

On the vol side, we can see recent rise in the implied.

But, here's what really caught my eye. The most recent closing low in stock price was on 11-15-2012 when AAPL closed at $525.62. At that time, the IV30™ was rising and hit 32.55%. Shortly thereafter, we can see the stock rise again, only to now start another downward trend. But, with the stock $20 lower then than it is today and in what for all intents and purposes was an absolute free fall from an all-time high (see the chart again), the implied only hit 32.55% on 11-15-2012.

But now, with the stock having already reversed the straight down move from the all-time high, and now headed on a new downward trajectory (after a small recovery), the vol has expanded (increased) significantly more to over 36%. So we see a $20 higher stock price now, with a free fall having ended, yet the implied is now higher than it was during the free fall. In English, the risk reflected by the option market has shifted -- it's higher.

Vol can behave much like demand (in fact, vol is demand for protection (puts) or speculation (calls)), where there can be an increase in quantity demanded (that's moving on the same demand curve to the right) and an increase in demand (which is a totally new demand curve drawn above the prior one). I've included a contrived picture of some "widget" demonstrating the difference in an increase in quantity demanded (moving from one red dot to the other) and an increase in demand (moving from blue Demand curve D to red Demand curve D'), below.

IMHO, AAPL is seeing a new demand curve (i.e. vol) -- we're no longer moving on the same vol curve and have moved to a new (higher) one. Like the difference between an increase in quantity demanded and an increase in demand, AAPL is showing a brand new risk curve -- a new paradigm if you will -- and it reflects higher risk.

This will be an interesting one to watch. If the hypothesis is correct, AAPL will be at elevated vol levels relative to the past in all situations (going up, standing still and going down). Those situations could (should) include earnings.

The main contention in that [12-5-2012] article was that I saw a potential paradigm shift in the way the option market reflected risk in APPL. The article today will focus on the same topic -- but with empirical evidence not from the implied volatility side (forward looking), but from the historical realized volatility side (backward looking).

Now to the historical vol measures.  First, I have included the HV180™ chart and below that the HV360™ chart for AAPL over two-years. Note that HV is measured in trading days (not calendar days like implied vol), so HV180™ represents an average of ~9 months of data and HV360™ represents an average of ~18 months of data. So, in English, these are long-term trends not affected by short lived stock volatility.



I've drawn that yellow horizontal line to make it easier to see the high. What we can see here is that AAPL is now at multi-year highs for the very long-term HV180™ and HV360™ measures.

A fair question to ask, is, "how does this compare to the broader market?" Of course, the rationale being, if AAPL is mirroring the overall market, then this is not a firm specific trend, it's a coincidental data point.

Below I have included the same two charts, but have added the long-term HV for SPY as well.

AAPL HV180™ vs SPY HV180™

AAPL HV360™ vs SPY HV360™

I've highlighted the growing vol difference for both measures. The long-term HV measures for AAPL are rising as the SPY long-term HV measures are flattening. It bears repeating that the charts we're looking at here comprise of 9 months and 18 months of closing stock price data -- these are not averages that move easily with the blowing of the wind. These are very long-term measures for the largest company in the world.

The bottom line, in my opinion, whether it's b/c of the loss of Steve jobs, or a variety of other technology specific reasons (or all combined), AAPL is no longer the AAPL we once knew. The implied volatility (option market forward looking measures) bear this out, and the empirical historical stock movement bears it out as well.

The old AAPL is no more. And new AAPL is a riskier entity -- so says the option market and so says the empirical historical long-term stock returns.

This is a different company -- and the market doesn't know what that means yet.

So that's the recap, and now here is what I see today.

Let's start with the one-year Charts Tab below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock has fallen 45% from its all-time high and ~25% since the Dec articles. The stock is now at an annual low and has made consecutive annual lows for the last several trading sessions.

Let's turn to the vol side, where I re-iterate my belief that the old AAPL is no more...

I have highlighted in yellow the IV30™ for the last four earnings cycles and the level as of today. The implied is trading higher than all prior four earnings cycles and is still a few days away from the next earnings release. In fact, though it is not pictured here, the vol is higher than prior five earnings cycles. In English, the vol should continue to climb into that 4-23-2013 date.

So, I see continued annual highs in vol every trading day moving forward until the earnings release barring any reports from the firm or any research firms which sort of break the "silence" of news. But, what about the overall market?

The VIX is sitting at 17.81% today. Here is the VIX on the date of the prior five earnings cycles for AAPL:

1-24-2012: 18.91%
4-24-2012: 18.10%
7-24-2012: 20.47%
10-25-2012: 18.12%
1-23-2013: 12.46%

So, with the exception of last Jan's earnings release, the market vol (VIX) has been higher than the current level while at the same time AAPL's implied into earnings has been rising. So VIX was lower, but APPL vol was higher.

In my opinion, AAPL simply is becoming Microsoft. A massively successful, free-cash flow machine that in many respects is a technology laggard rather than leader. When Bill Gates stepped aside as CEO, MSFT had its issues. With the passing of Steve Jobs, AAPL has its issues too. But the evidence reflects the same conclusions as before with one exception.

Last time I said:
"The old AAPL is no more. And new AAPL is a riskier entity -- so says the option market and so says the empirical historical long-term stock returns.

This is a different company -- and the market doesn't know what that means yet."

Now I say:

This is a different company -- and the market DOES know what that means. That's why it has lost more than $200 billion in market capitalization and continues to breach new highs in volatility even with a lower VIX.

There will be ebbs and flows and certainly AAPL may be due for a bounce -- earnings could be awesome... but this isn't the company it used to be... it just isn't... and it never will be again.

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