Stocktake

Investors worry about falling Apple

Apple investors are nervously awaiting this week’s earnings report, which takes place after the market closes tomorrow.

The stock hit $485 (€364) last week, which is 31 per cent below last year’s $705 peak. Bespoke Investment Group notes that Apple, which is still the most valuable company in the world, has experienced 10 declines of 20 per cent or more over the past decade, and that the current decline is no greater than average.

In other respects, this is no ordinary correction, however. The current decline has lasted nearly 50 per cent longer than average.

Additionally, the 32 per cent spread between Apple’s stock price and analysts’ average target ($728) is at its widest since early 2009.

The “gaping hole” between the stock price and analyst targets is easily the biggest of any SP 100 stock, according to Bespoke.

Analyst downgrades can be expected if earnings – particularly iPhone 5 sales – disappoint, but that may already be priced into shares, and any kind of earnings beat could trigger a relief rally.

Market strategist Barry Ritholtz cautions against being short on the stock, saying it is setting up as a “bear trap” ahead of earnings.

“I’m not excited about being long but there’s such risk, this thing could explode to the upside,” said Ritholtz.

Big bear expects carnage

Has London’s most famous bear finally turned bullish?

Société Générale’s Albert Edwards has been apocalyptic since the mid-1990s, warning of an “ice age” for equities. Last week, however, he said European stocks were “unambiguously cheap”, even referring to a “once-in-a-lifetime opportunity” for long-term investors.

Edwards slammed UK pension funds for the extent of their move out of equities and into bonds. “Even as a trenchant equity bear, I have to say that this is ridiculous,” he said. “It allows the rest of us to pick up stocks at cheaper and cheaper prices.”

The bear in Edwards is alive and well, however. He expects US equities to more than halve, and says European investors still face major falls over the next 12 to 18 months.

Always colourful, his conclusion is vintage Edwards: “I expect there to be total carnage. But I’m more bullish than I was.”

Evidence of tiring S&P 500 bull

The S&P 500, which last week hit its highest level since December 2007, has been in a cyclical bull market since March 2009.

The duration of the current bull – 3.8 years – is the average duration of all bull markets since 1929, notes Investech Research, and slightly above the median duration (3.6 years).

Bull market durations vary widely, of course. Barry Ritholtz sees the current cycle as similar to 1973-74, when a six-year bull market began.

There is some evidence of a tiring bull, however. Just 9 per cent of SP 500 stocks hit new 52-week highs last week, compared to a peak reading of 22 per cent last year. Figures are similarly low for each of the 10 SP 500 sectors.

Market breadth typically narrows before markets top out. Technical analyst Paul Desmond’s study into market tops found that on average just 6 per cent of stocks hit new highs at the peak of bull markets.

Current breadth figures are no cause for panic, but bulls will be hoping that any new highs will be accompanied by an expansion in breadth stats.

Will we ever learn from crisis?

The global financial crisis was fuelled by reckless lending and poor regulation, with taxpayers eventually having to ride to the rescue of bankers everywhere.

Unfortunately, a new survey indicates there’s little to suggest that a recurrence is unlikely.

The most important investment lesson of the past five years is that central banks and governments will continue to bail out troubled creditors, according to 59 per cent of respondents to a survey of 999 investors by the CFA Institute.

Just 9 per cent believe that institutional creditors will be more prudent in future.

Only 3.8 per cent agree that major financial institutions are working to manage risks appropriately, while the same percentage believe that financial regulations adopted since 2008 will prevent future systemic failures.

Moral hazard, anyone?

Cat picks the cream of stock

A cat named Orlando has beaten a selection of investment professionals in a stock market challenge organised by the Observer.

Each “investor” bet on five FTSE companies at the start of last year, with new picks on a quarterly basis. The cat chose stocks by throwing a toy mouse on a grid, eventually turning his £5,000 (€5,995)

investment into £5,542 compared to £5,176 for the pros.

It’s a cute story but only the naive will be shocked. Fund managers habitually underperform, and luck tends to be a factor among those that do beat their benchmark.

Last week, Merrill Lynch research showed that just 39 per cent of fund managers beat the S&P 500 in 2012. Goldman Sachs found that 65 per cent of large-cap funds underperformed. In 2011, four out of five fund managers underperformed.

More strikingly, only 10 per cent of 1,991 US stock funds beat their benchmark in both 2011 and 2012. You will find similar data for every decade and every continent.

Forty years ago, American economist Burton Malkiel famously wrote that a blindfolded, dart-throwing monkey would match experts' investment efforts. Whether talking cats or monkeys, the time for surprise has long passed .