Apple 2.0

Covering the business that Steve Jobs built

'Like biscuits and gravy': Apple shorts and skimpy narratives

May 23, 2012: 7:31 AM ET

Mac Week's first news editor sticks a fork in the stories that hedge funds tell

Image: Hormel

FORTUNE -- In a Huffington Post article published Wednesday, veteran Apple watcher Jonathan Littman offers a taxonomy of the narratives that hedge funds tell when they've shorted Apple (AAPL) and are trying to drive the stock down.

Selling short, it's worth remembering, is accomplished by selling shares you don't own and buying them back at lower price, turning a profit on the difference. This is a perfectly legal strategy, provided you actually deliver the shares when they're due. In Rolling Stone last week Matt Taibbi published excerpts of court documents that show Goldman Sachs, Merrill Lynch and other major Wall Street firms engaging in illegal "naked short selling," in which the shares sold short were never borrowed in the first place and never delivered as promised upon expiration. But that's another story.

In his Huffington Post piece, Littman looks at three recent examples of narratives offered the public by Apple analysts and fund managers that had little or no basis in reality yet were quite effective in inducing broad selling.

"Skimpy narratives and major short bets," he writes, "seem to go together like biscuits and gravy."

His three narrative types:

  • The Achilles Heel. This narrative, illustrated by BTIG's Walter Piecyk, revolves around the hero who uncovers some previously secret financial weakness that foreshadows doom. On April 9 Piecyk cut his Apple rating two weeks before Apple's Q2 earnings report on the theory that wireless carriers were about to rebel and stop subsidizing the high cost of iPhones. "Many saw Piecyk as a genius," writes Littman. "He'd brilliantly anticipated a huge correction on the hottest stock in the world. Few seemed to notice that Piecyk's 'carrier subsidy' argument had not materialized or even been remotely relevant."
  • The Parabolic Curve. This narrative came with a visual metaphor that people could understand -- the soaring line on the Apple stock chart. "What never made sense," writes Littman, "were the analysts who equated the curve with Apple's long-term business prospects. The stock price (and curve) on any given day is not the company. Apple's business is a real, tangible thing, and while the Parabolic Curve Narrative likely influenced many to sell, that's a totally separate thing from the health of the company."
  • They Can't Continue Forever. The key argument here -- used most recently by Jeffrey ("iPad 87") Gundlach -- is that Apple has lost Steve Jobs, its visionary hero. "They Can't Continue Forever," writes Littman, "often also compares Apple to companies that flew high and fell hard -- i.e., Microsoft, Cisco -- ignoring the fact that these behemoths never inspired the vast international brand fever of Apple. Jobs' brilliance was to appeal to individual aspirations... That explosive trend is just taking hold internationally, especially in booming new markets like Asia. No other technology company approaches the brand mania of Apple fans."

It's a smart piece, a companion to his May 3 "The Goliath Effect," which explored the reasons the market has painted a bulls-eye on Apple. You can read his newest effort here.

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Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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