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Apple Logic

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The following alert was posted on the Buzz&Banter in real-time last Friday

Half hour ago I tweeted that if Apple's (AAPL) daily chart belonged to any other company, shorts would be salivating at the thought. The Head & Shoulder pattern, complete with shrinking volume as the "Head" was forming is pretty much textbook. Within 10 minutes I was flamed by half a dozen "Apple disciples" including this little gem:

"RT @FZucchi:$AAPL I bought next week's 650/635 put spread 1x2 for 0.40. Would get me long at 620. YOU ARE A NAIVE AND BAD TRAIDER".

As you can tell from the tweet, I'm not terribly bearish on AAPL, so much so that I'd be fine getting long at $620. But the rage engendered by a rather innocent observation, together with a TV piece this morning of people that have formed a club to invest/trade exclusively in AAPL's stock, is not unlike the type of allucinations millions of newly self-coined "real estate investors" were having in 2005-2007.

Purely from a consumer standpoint, my sense is that AAPL has indeed changed media distribution as we know it, and its competitive advantage - including its cash stash - will allow it to prosper for many years. Tim Cook is no Steve Jobs, but I'm sure there are plenty of competent folks who can perpetuate Jobs' legacy, even if not on the same level.

But before extrapolating "continued business success" into a trillion dollar market cap let's not lose sight that AAPL's margins are a rarity. The stock always looks "cheap" because so much of the revenues flows to the bottom line. That's why EPS estimates are usually way off from what the company reports. It is called leverage.

Alas, I think anyone who reads this knows that leverage cuts both ways, and I think folks got a taste of it in the last earnings report. More worrisome is that if there's a truism in finance is that profit margins are quintessentially "mean reverting". Perhaps AAPL is the company that breaks the rule, but betting on 6 sigma events is typically not a recipe for financial success.

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POSITION:  Position in AAPL