AAPL, Apple Inc.

aapl

Yesterday, on BNN, there was this fellow who, without batting an eye, estimated that Apple will trade at about $1645 by the end of 2015. Roughly, that is an increase of 3x in another 3 years. If you extrapolate the above chart in a linear manner you will obtain substantially higher levels. According to Bigcharts the stock has a p/e of about 17 but you should not look at that for this stock. More important is the price to earnings which is “really” only running at about 2.5 X and could easily double or more just to catch up with the peer group.What peer group would be a reasonable question since it is a universally accepted fact that this company has no peers. When mathematics or logic enters into the equation you can rest assured that the result is wrong.

From a EW perspective there are possible 5-waves up. The ratio’s between them are roughly 1:1.62:1 a common thing. In the great recession this stock was cut in half and then some. Earlier in the decade it had lost more than 90% of its value. Things happen, they always do. Hold on to the stock by all means, but make sure that you are operating with a tight stop.

J Law- Keynes- Bernanke and the Mississippi Bubble

Everyday lately there are a number of stocks that make new all time highs. Some by huge amounts like AAPL, others only fractionally, but new highs nevertheless like Colgate-Palmolive. It certainly makes one wonder if we are still repairing the damage of the great recession three years ago, or are already embarking on the next bubble phase. Even some of the broad averages, such as the S&P are now within 9% of there all time highs and sporting decidedly rich P/E ratio’s.

Economics is a wonderful dismal science. The only one where the practitioner can claim , with a straight face, that the patient on his death bed is now feeling so much better, after an aspirin , that things are now even better than before. We see it all the time. If, for instance, employment numbers are good this is bad as it threatens QE3, and then, to save the day, Bernanke thinks aloud and expresses a wee little bit of doubt about the continuation of employment growth, and this , of course is good. Merkel achieves the same thing by announcing that the firewalls should be higher (bad?) and , like Pavlov dogs the traders in Frankfurt bid the DAX up (good?).

This brings us to the easy-money approach. The first practitioner that put theory to practise is undoubtedly a Scotsman by the name of John Law. This colourful fellow gambled away his considerable inheritance, killed a man in a duel, was sentenced to death, escaped and moved to France and Holland, got the ear of the Duke of Orleans, set up the first central bank in Paris, and died a pauper in Venice. Without getting into too much academic detail, suffice it to say that Law, Keynes, and Bernanke are all three basically cut from the same very-easy-money-is-very-good cloth. All three believed that the lower interest rates the better, always, not just in times of distress. All believed that there was no limit to how far you can go with creating money and all believed  it to always be beneficial to the economy, particularly to production and employment. Furthermore, in almost every instance there is a government, an exchange of paper (debt), and a deliberately created expectation of a promised land just around the corner. In Law’s case this involved land, the river delta of the Mississippi, that covered about 1/2 of the USA as it exists today. Arguable Law was almost as powerful a man then, as Bernanke is today! The stock of his Mississippi Company is shown below;

Mississippi Comp.

After a very prosperous period of about 7 years the stock peaked, reversed and then caused one of the largest financial calamities ever in France. In England the South Sea Bubble occurred at precisely the same time and, of course, had the same disastrous results. The question now is, “what if Bernanke has it wrong too????”.

Interest Rates.

See also Keynes in a previous blog. This fellow believed that the best rate for interest rates would be zero, which thought process seems to have been adopted entirely by Bernanke. Others, more correctly, believe that capital is just another economic input that has its own price, essentially where the pain of delaying gratification equals the joy of immediate consumption. No one knows where that equilibrium is at any point in time but history would suggest that it is above 2% in real terms, so about 4.5% Given that taxes take a big bite out of the return perhaps the equilibrium level should be a few percentage points higher, somewhere between 6/7% seems reasonable.

The notion that the Fed. actually controls interest rates has taken hold over the past few years despite evidence to the contrary. Remember the “conundrum” that we had a few years ago and now again, in the midst of operation twist long rates are actually going up not down. In truth it probable was only possible to have such low rates thanks to first Japan and later China, both of which had sound economic reasons to “sacrifice” return for exchange rate and trade advantage. So, for the sake of argument, assuming that the Fed cannot control interest rates, when might they start going up?

Charts are hard to come by but here is one of the US Fed. Funds rate, basically call money:

FED funds rate

We know that the lows in interest rates came about a little after the second WW, say 1947. This was a time when all concerned would have wanted low rates simple to rebuild. Often, for reasons I do not understand, markets just love symmetry. Applied here one would expect that the period from 1947 to 1981, thirty-four years, would be repeated on the other side which would bring us to 1981 + 34 = 2015 give or take a year.

BANK OF CANADA INTEREST RATES -1975BANK OF CANADA INTEREST RATES - 2011

Using short-term (one year?) rates from the Bank of Canada (unfortunately I could not find a single chart) we get similar results. Low rates (1%) prevailed from 1947 to 1951. Let’s assume that the low was right in the middle, that is in 1949. It would then take 32 years to get to the highs of 1981, so in order to achieve perfect symmetry one should aim for 2013 for rates to turn, again give or take a year. Last year, to almost everyone’s surprise, long bonds were by far the best investment class to be in with an overall return somewhere in the order of 35%. Next year may repeat that performance, but chances are equally good that it will turn out to be the worst asset class.  By the way, higher rates would be good for a lot of different investors, but initially as rates start to go up the process can be double painful.