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By RodgerRafter
April 18, 2005

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The Annual Apple Shareholders Meeting
I'll make my annual pilgrimage to Cupertino next week so that I can get up at the mike and give Steve Jobs a piece of my mind.

Here's my report from last year.

I've spent a lot of time over the past month, trying to figure out what to say this time. There isn't much to complain about, given the company's performance, and they've cleaned up their corporate governance issues a lot since I met with the CFO a couple of years ago, so like last year I've decided mainly to ramble on about the state of the economy. I plan to say something along the lines of this:

"5 years ago Apple was riding the success of the iMac and the internet boom to outstanding profit growth and record highs in the stock market. Then the tech bubble burst and the economy went into recession. Apple's profits dried up and before long the stock had declined by over 80%.

In 2005 the stock has again been setting new record highs as Apple has been riding the success of the iPod and digital music boom. Back in 1999 and 2000, the tech bubble and its eventual fallout were obvious to many of us who didn't have our heads in the clouds. The current credit and real estate bubbles are even more obvious to us now, and the consequences of their imminent bursting will undoubtedly be much more severe for the American consumer.

My question for the management team is what steps are being taken to avoid another steep decline in profitability as the company heads into a difficult consumer spending climate, similar to or worse than the 2000-2002 period."

As usual, Steve will probably not try to disguise that he thinks I'm nuts, but within 2 to 3 years I expect I'll again be proven correct.

2000 vs. 2005
The year 2005 continues to shape up like the year 2000 in many ways...
The tech bubble bursting Fed tightening cycle started on June 30 1999.
The credit bubble bursting Fed tightening cycle started on June 30 2004.

In March of 2000 the Nasdaq rallied to record highs while the Dow and the rest of the market were breaking down. In March of 2005 the Homebuilders' Index (*HGX) rallied to record highs, while the Nasdaq was breaking down.

We had a big selloff leading up to tax day of 2000, hitting the techs especially hard, as those with big gains faced ugly tax bills. We're having a big selloff leading up to tax day of 2005, hitting the builders especially hard, possibly for the same reasons.

Use of margin reached record levels in early 2000, and margin related forced selling accelerated the decline, as people who got used to stocks always bouncing quickly lost all they had gained during the bull market. All types of leverage have reached extreme levels in at hedge funds, private investors (especially among real estate investors) and just about any financial institution.

In 2000, people thought they were rich because of the imaginary values of their 401k's.
In 2005, people think they are rich because of the imaginary equity in their homes (as well as the imaginary values in their 401k's).

Of course there are many, many things that are different between 2000 and 2005, and there's no way that it will play out as a carbon copy. For one thing, in my book, the fragile states of the economy and markets are much, much worse now.

Is the Market Broken Yet?
The Nasdaq-100 has had a rough year and week, but its biggest one-day decline this year has been a mere 2.01%. That's nothing compared to the good old days, when it occasionally would drop 7% to 10% in a nice old-fashioned melt down. I've rambled in past posts about some of the reasons why I think volatility has been sucked out of the market, and I think it is only a temporary phenomenon. Eventually, volatility will get tired of being shunned and will come looking for blood.

I think the main reason for the boring state of the market is that a fairly large group of hedge funds make their profits by placing large bets on the market staying within narrow ranges. This strategy works great until it doesn't, sort of like doubling your bet at the blackjack table each time you lose, confident that you can't possibly lose 20 in a row. Well, when you do finally lose 20 in a row, your little strategy for a sure $1 ends up costing you $1,000,000. When these highly leveraged volatility leeches do finally get burned (assuming they exist to the extent I predict) they could get hit extremely hard, turning what should be a 3% decline into a 6% decline or greater.

The market has a way of letting stupid little simple strategies work just long enough for enough dimwits to become convinced they've found an easy road to riches (see "Buy the Dip", "Dogs of the Dow", "Real Estate Flipping", "Technical Analysis", etc.). Then the market lets these herds of dimwits put most of their life savings down on said stupid strategy and takes them to the cleaners. "Volatility Sucking" may have reached the end of its usefulness to the market's powers-that-be. At that point, I'll pronounce the market broken.

But there's no guarantee that the market will break anytime soon. For one thing, the Fed has been saving up ammo. They've been ultra-tight lately, and can go much easier with a set of permanent injections at any point. They could also cool it on the rate hikes for a while (May 16th was the last hike in 2000). The Fed is also part of the Plunge Protection Team, and they could coordinate with the rest of the PPT (including the US treasury) to buy up futures with treasury funds and cause a rally when needed. In my mind there's a 25% chance that the PPT was behind the late rally on Tuesday (and similar recent ones)  which supposedly was led by massive and sloppy purchases of futures.

The way things are going, we could have a good little panic as bad earnings and inflation news spooks an already stressed market over then next couple weeks, but until the Fed has caused a big dollar slide with a shift to an easier monetary policy, and the Treasury Department is finished using taxpayer money to help the well connected exit their positions, I don't think we'll see the market really move down to more sensible levels. That should be a multi-year process.

Time to Get Clobbered
It's no secret, based on what I've said on this board about my trading strategies and the types of positions I've been taking, that my portfolio has done extremely well this week. My experience over the years has been that whenever I have a really good run, it'll soon be time for things to change course in the market and for me to get clobbered.

Consequently, I'm currently looking hard for longs and places to exit some of my shorts. This current selloff could end early tomorrow (and clobber me real good), or it could end in May (causing me to miss out on a lot of potential profits), but I'm sure it will eventually end and a significant sucker's rally will begin. By the time that happens I hope to be much more neutral, with international longs balancing my Going-To-Zero short positions. As the risk reward equation shifts deeper into a selloff, so will my relative weightings.

Stockgate Shmockgate
I did a little poking around the web after reading reports that NBC's Dateline would eventually get around to breaking "the biggest financial scandal in the history of the world" after running out of pop celebrity interview re-runs. Turns out the story is about as valuable as those interviews. The scandal is essentially that people and institutions can accidentally short some stocks without really borrowing shares. The big brokers love it when people short stocks because they get to charge big fees for providing shares to short. Never mind that sometimes they don't actually have shares to loan. The system is set up so that they can say they are loaning shares and charge the fees anyway. They have three days to find the shares before settlement. If they trades fail to settle, then they can still go 13 days without any consequences. After that, they can just rotate big blocks amongst themselves so that none of them ever really have to come up with real shares to lend.

Now some people get really worked up about this "Naked Shorting" because they think it is the reason that their POS stock isn't going through the roof. Sure, some overvalued stocks might be more overvalued if not for naked shorting, and sure, some Going-To-Zero stocks might take a lot longer to go to zero if not for naked shorting, but in the long run this is a trivial issue. It's getting far too much attention from people who aren't too bright, because they are the mystified ones buying into overvalued or GTZ stocks who can't understand why the stocks aren't going through the roof. The real scandals that need to be exposed to the general public are the ones that we talk about on a daily basis on this board. When traders and brokers legally work the loopholes in the system to make money while holding prices down, it is apparently reason for some people to get extremely worked up. However, the real scandals about the ways shareholders get routinely cheated by corporate executives, and how brokers fraudulently skim profits off of unsuspecting investors, will never get produced, much less aired.

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