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Apple, Absurdity, and the Bear Paradox


Every tick down in Apple makes the stock a better income trade than fixed income, and the Bear Paradox may result in a bottom very soon.

Almost all absurdity of conduct arises from the imitation of those who we cannot resemble.
--Samuel Johnson

Apple (NASDAQ:AAPL) has grabbed the headlines over the past few weeks on aggressive selling, leaving many wondering whether the downtrend is nearing its end, or only just beginning. While I rarely address individual stocks, I think it is very instructive to consider the performance of Apple within the context of something I've called the Bear Paradox. We all know that bond yields are at incredible low levels, and intellectually understand that anyone looking to buy and hold 10-year Treasuries is very likely to take a loss. Why? Because the 10-year Treasury yields about 1.6%, and inflation is simply higher than that.

The level of bond yields makes any kind of a deep correction in stocks unlikely. Why? Because any big drop in equities makes stock dividend yields rise relative to Treasuries which likely then yield even less during a risk-off period. So think that through – corrections make stocks a much better income play than fixed income as equities become bond alternatives. The Bear Paradox, then, means that any decline in stocks paradoxically makes them more attractive relative to bonds which get closer and closer to yielding nothing.

Now think about this from the perspective of the Apple investor. The US Treasury has huge debt, no cash, no growth, and yields 1.6%. Meanwhile, a stock like Apple has no debt, huge cash, big growth, and yields as of this writing 1.97% (with this potentially rising on dividend hikes and any further weakness in the stock). Take a look below at the price ratio of Apple relative to the iShares Barclays 7-10 Year Treasury Bond Fund ETF (NYSEARCA:IEF). As a reminder, a rising price ratio means the numerator/AAPL is outperforming (up more/down less) the denominator/IEF.

Note that the ratio of Apple to Treasuries is hitting a relative support level. With Apple now acting as a better income play than bonds, what would you rather own for the next 10 years? If Apple continues to drop, would each tick lower make the stock even more attractive relative to the absurdity of bonds, which are yielding nothing and offer a guaranteed loss in terms of purchasing power?

Sometimes I wish there were an app for instant logic....

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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