Jason Schwarz: Apple’s institutional slingshot; a rational explanation of irrational stock action

“The Apple slingshot is not a hedge fund conspiracy. It is not caused by any of the negative rationale that you may hear in the media, which includes the underwhelming launch of Apple Maps, the lack of innovation from Tim Cook, iPhone 5 supply constraints, iPad mini cannibalization, Samsung competitive threats, the earnings miss, and of course the absence of Steve Jobs,” Jason Schwarz writes for Seeking Alpha. “To the uninformed, these variables sound reasonable enough to support a selloff, but to those who understand Apple’s historical stock precedent, these reasons appear to be nothing more than noise. Seasoned Apple investors know there is more to it.”

Schwarz writes, “Suppose you were a mutual fund manager and your strategic models allowed for a maximum 8% allocation in any individual stock. What would have happened to your Apple holdings in 2012? As of September 21st, Apple was up 74.9% year-to-date. Apple allocations at the largest mutual funds had grown to between 13% and 15% of total holdings with the fiscal year end approaching on October 31st. Because of Apple’s strength, because it was such an outlier when compared to the rest of the market, these money managers were forced to re-balance their portfolios in order to comply with their risk models. The Apple slingshots, or in other words the deeper than unexpected selloffs, are caused by systematic institutional re-balancing. This is the unintended consequence of Apple’s status as the most widely held stock of most hedge funds, indexes, pension funds and mutual funds. Apple’s slingshot selloffs occur because of its strength, not because of its weakness.”

“As confidence grows that the fiscal cliff will be resolved, Apple finds itself in a favorable supply/demand stock scenario for the first time since July 26th,” Schwarz writes. “The next run is coming and the stock will skyrocket just as it has during the last 10 slingshots because every money manager on Wall Street trusts Apple’s fundamental growth story and they know that maxing out Apple allocations is key to outperforming their index.”

Read more in the full article here.

MacDailyNews Take: Shhh, Jason, some of us are trying to make some money!


  1. Hogwash. There are a few problems with his reasoning to explain the vicious sell-off:

    – To make sense, most fund managers have to make their investment decisions in unison, have the same investment rules, and own similar investment portfolios.

    – They also completely ignore the same rules that have forced them to recklessly sell AAPL only a few days or weeks before to bring their portfolios into balance just so that they can turn around and buy AAPL recklessly to bring them out of balance again.

    – They are oblivious to facts and circumstances surrounding Apple business and its management and the fact that two consecutive earnings misses, chronic shortages of the flagship product (which was blamed for the last earnings miss), or serious erosion of margins means nothing to them and has nothing to do with their selling. If so according to him, they will merrily buy AAPL (after they have finished selling it) even if Apple misses earnings this quarter, a real possibility.

    Fact is every AAPL comeback in the past was supported by solid earnings growth through game-changing products and flawless management executions. AAPL comebacks the last 10 times by themselves do not guarantee its coming back this time. It may or may not. The point is it will be decided by Apple fundamentals, not the willy-nilly selling and buying by fund managers as suggested.

    1. Hogwash. There are a few problems with your counterarguments:

      – Yes, they do. That’s the actual state of affairs.
      – Untrue and a straw man argument to boot.
      – Apple has not had any recent earnings misses let alone two consecutive ones. Why parrot made-up rationalizations, winchester? Shortages are not “chronic;” they are the inevitable result of production ramp-up of a new product combined with overwhelming demand for same. There has been almost no erosion of margins let alone “serious” ones.

      Strangely, I agree with your final paragraph. Go figure…

  2. a stock split does not intrinsically add value but a lower stock price does encourage more individual buyers (to dilute the power of the big funds)

    Many individual buyers simply won’t pay 500- 700 for a share of stock and won’t bother buying into ‘fraction share’ type deals.

    stock split will help reduce aapls dependency on big funds whose ‘re balancing’ or ‘manipulation’ whack the stock. Funds control i believe 70% of aapl now.

    Saying that people can buy aapl even if they can’t afford 500 chunks by buying ‘funds’ plays into the fund managers hands again. what we need are more individual long term investors to calm the stock.

    Long term we’ve seen aapl PE already compressed from about 30 some years ago to below 12 now (worse ex cash).

  3. I manage funds and I can confirm that what Jason Schwarz describes is exactly my situation. Our rules determine that no single stock may exceed 5% of the portfolio. So this fall I had to rebalance the AAPL investments contre coeur. At USD 530 I have room to buy back some. Not sure I will do this before the end of the year.

  4. That ruling makes no sense since you should not be able to buy more than 5-8%. However if the stock jumps up above that then the quality of the stock should be examined before rebalancing.
    The rules are there to stop manager loading up in a few stocks not to punish the fund for having successful stocks.

  5. I find this story to be a bunch of B.S.! Why? Because I don’t see this happen to any other companies stock. This is just another anal-est excuses. Has anyone seen Google’s stock drop more than $200 a share in a month? The fiscal cliff effects everyone not just Apple. There are a lot of negative stories about all companies and yet Apple’s stock is hit every time while other companies stock do business as usual. Again I claim shenanigans!

  6. This is gonna be so much fun watching all the Dumbocrats bitch and moan, seeing their investment evaporate under Emperor Odumbo, the Kenyan Stool Sample.

    Good luck with your socialism. I’m sure this time it will work.


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