Analyzing the Apple/Greece Disconnect

| About: Apple Inc. (AAPL)

Six months from now, we will be telling the world that we were buyers of Apple (NASDAQ:AAPL) in the midst of the Greek crisis. Greece is too small to stand alone, its debt obligations are too large to allow a default, and China owns 25% of its $3 trillion of currency reserves in euro-denominated assets. The Chinese premier is scheduled to visit the euro zone at the end of the week and whispers on the Street suggest his backstop could put an end to the contagion fear.

At this point in the Greek story, investors have to extrapolate each scenario down to its bitter end and decide which is most likely. Our opinion in that the austerity/bailout route is much more likely than the scenario of Greece leaving the euro zone, defaulting on its debt, experiencing chaotic inflation in the new currency, bank nationalization, runs on banks, etc.

Under normal economic circumstances, the euro zone might be able to stomach Greek chaos but not in the aftermath of the 2009 global credit crisis and the 2010 euro crisis. The Greek can will be kicked down the road.

A strong euro is very important to China in its efforts to create global demand for a currency other than the dollar. Many want to link Greece to the Lehman precedent, but it’s important to remember that Lehman failed because it had to fail. The U.S. government had to create an environment of panic in order to secure bailout funding from Congress. Lehman had a completely different dynamic than Greece. The failure of Greece accomplishes nothing for anybody. Obama wants to be re-elected; China wants a strong euro; Germany and France have committed to euro zone unity as they realize the importance of the euro zone scale in their own efforts on the global stage. Either the Greek people will take the brunt of economic pain on this one, or the rest of the world will suffer. My bet is that this little guy loses on this one.

The current stock price of Apple is the perfect example of momentum gone amuck. Apple stock is being used as a source of funds, or a short term source of risk liquidity during this uncertain time for the market. From the Thursday high through the Monday low, Apple was down $18. Being underweight the stock during the weekend window and keeping 50%+ cash has been the only saving grace during this disconnect from Apple fundamentals. The recent emergence of technical traders telling investors that Apple is broken and that now is the time to sell is deafening. These guys are out of their minds. We are confident that the opposite is true. Every move that we have made this year, every dollar of cash raised has been in an effort to survive until the opportune moment. It appears we are in the vicinity of such a moment. Profitable conviction will not arrive from the advice of technical traders.

A very interesting report out of Flurry, a mobile analytics firm, shows that mobile app use has officially surpassed time spent browsing the web. In June 2011, users spent an average of 81 minutes per day in apps while spending 76 minutes per day on the web. Certainly this is good news for the mobile hardware leader. Apple stock will bounce.

Three statements come to mind; the first is our own: We can reconcile a low portfolio value when Apple is down but we cannot reconcile a low portfolio value when Apple is at a high. The second is from Warren Buffet: "Be fearful when others are greedy and greedy when others are fearful." The third is a generic war philosophy: "Don’t fire until you see the whites of their eyes."

Buying Apple in the midst of a Greek-triggered market selloff will sound like a no-brainer once this turbulence passes ... but in the midst of it, it is more difficult to execute. This selloff is presenting us with an opportunity to load up to 70% of the portfolio in Apple, and averaging into new positions with our current 65% allocation of cash presents a 5x return on investment if we can time it right.

Disclosure: I am long AAPL.