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Certainly, the drum beat to short Apple stock (NASDAQ: AAPL) is growing louder by the day - with every tick that the corporation advances above its $550 billion market capitalization and deeper into $600 / share territory. I am afraid that Apple Corporation could become a "victim" of its own Web 2.0 success, as it remains a focal point for a motley crew of hack journalists and assorted amateurs who have taken to the airwaves to further their own personal career agendas. These misfits will scream "short" every other month throughout eternity, in hope that Apple shares will endure a correction, and that they will finally be lauded as savants.

I am hopeful that long-term retail investors can steer clear of such doomsday propaganda and foolishness. Shorts are playing with fire, and it is critical that we refuse to partake in the hero role. Somewhere, Henry Blodget is laughing, while the spirit of Steve Jobs remains absolutely irate.

The Economics of Shorting Stock

To short shares of stock, investors are actually borrowing shares from other investors and immediately selling those securities for cash up front. At a later time and date, short sellers will "cover" the trade, or re-enter the market to purchase shares and make good upon the original loan. Short sellers therefore collect profits- when a particular stock drops in price. By sheer logic, the short selling technique is often a losing proposition. First, share prices can range from anywhere between zero and infinity. Secondly, short sellers must actually rely upon the false assumption that markets are rational, which means that nominal share price and underlying business value differentials will quickly come back in line toward reality.

In the case of Apple, shares of the consumer electronics corporation have skyrocketed from a $12 split-adjusted 2002 price to $625, as of April 2012. At these storied stock levels, fear mongers continue to lay down the short selling gauntlet - with their elementary parabolic "what goes up, must come down" logic. For kicks, let's ignore fundamental value, outflank these hacks, and beat them over the head with their own empty rhetoric.

Do we really believe that the stock market is a rational pricing mechanism?

To cue up Alan Greenspan, it is obvious that the stock market is privy to both irrational exuberance and pessimism. In recent times, we have been held hostage to a maddening pattern of speculation, boom, bust, and recovery. Most likely, Apple naysayers are a pack of fearful sheep that worshipped at the altar of Frank Quattrone, Charles Prince, Blodget, and every other slick-talking cheerleader - only to get destroyed by the dot-com, real estate, and credit debacles of the 2000-2010 decade. To clear their names, these sheep have launched a short selling Don Quixote campaign against Apple stock, in hopes that their predictions will materialize and correct the pain of past failed investments into the "next big thing."

Let's entertain these Don Quixote do-gooders and make believe that Apple stock is indeed, overvalued. When, pray tell, can we exactly determine that the share price will begin to fall?

Silence from the peanut gallery.

Ignoring the fundamentals, who is to say that Apple will not spike to $1,500 / share within the next three years? Investors have proven themselves to be a curious lot - who are more than willing to sustain multi-billion dollar valuations for businesses that have bled cash for years upon years en route to bankruptcy. Foolish short sellers are giving the market too much credit- if they believe that Apple shares can self-correct to their own fair value calculations within a reasonable amount of time.

Inevitably, Wall Street "analysts" will continue to cry Uncle and scream "short," with every leg up in Apple stock. Obviously, there will come a day when these oracles will be proven correct by a slight correction and will be deserving of a round of applause and brief toast.

Personally, I believe that the risks involved with taking a short position on Apple stock far outweigh your expected chump change compensation and strong Jim Harbaugh pat on the back.

The Fed: Favorable Tailwinds for Apple Stock

Prospective short sellers in Apple stock must recognize that the Federal Reserve Board is flooding financial markets with cash, which translates into support for higher prices for all equities. Interest rates on bank deposits, money market securities, and bonds are effectively zero, while savers must also grapple with inflation that remains on the uptick. In other words, investors have been left with no other option but to funnel money into stocks and commodities, in hopes of generating positive real returns. Financial markets have responded to the forceful invisible hand of the Fed with a 13,000 Dow, $1,700 per ounce gold, $125 / barrel oil, and $4.50 / gallon gasoline. Certainly, Apple shares have also ridden the wave of quantitative easing into the $625 / share stratosphere.

On a macro level, Apple short sellers are making the implicit argument for either a stock market collapse or a gradual return to austerity in the form of higher interest rates and reduced government spending. I would argue that Washington and the Federal Reserve have already set the precedent to ride to the rescue with cheap money - as was evidenced by Black Monday 1987, September 11th, and the 2008 housing crisis. It is comical to believe that The Federal Reserve would actually drive interest rates higher and stymie growth as we shift gears into election season. The Fed has proven time and time again - that it prefers to stimulate the economy, rather than to curb inflation as part of its dual mandate.

Do not fight The Fed, as its member banks account for roughly 20% of our gross domestic product (U.S. BEA defines banks, insurance, and real estate companies as financials). The banks run the show, and obviously would prefer a low-interest rate regime for access to cheap capital. Right now, Bernanke, as a mouthpiece for Washington, is in no position to drive interest rates higher to sabotage our Big Banks and anemic, jobless recovery. Ironically, counterculture Apple shareholder types stand poised to benefit from the machinations of 1-percenter crony capitalism.

It Really Is Different This Time: Apple is Cool

Yes, we recognize that Apple's $550 billion market capitalization make it the world's largest publicly-traded corporation - far surpassing Big Daddy Exxon (NYSE:XOM) by a cool $150 billion. We also recognize that Wall Street has heaped more cash upon Cupertino than it has upon Big Three Detroit and Big Media, combined. But, here is the kicker:

Apple's price-to-earnings ratio (18) equals that of Procter & Gamble (NYSE:PG).

Apple short sellers must therefore be willing to concede that profits at a consumer electronics juggernaut will grow at a smaller rate than the earnings of our stodgy toothpaste and detergent maker from Cincinnati, Ohio. It is only reasonable that Apple naysayers should also take dead aim at Procter & Gamble and scream at each other on CNBC to short that stock into oblivion.

If Apple shorts were thinking with logic, instead of behaving as sheep, then they also must believe that Apple earnings will reverse course from its pace of torrid 63% average annual growth - between 2007 and 2011. At the time of this writing, Apple has also stockpiled more than $95 billion, or roughly $100 per share, in cold, hard cash. The fact alone that cash directly accounts for 15% of Apple's market capitalization further turns bearish Apple price-earnings-growth projections into complete rubbish. In plain English, one must be ready to argue that Apple is on the road to business collapse and bankruptcy to justify a short position for significant profits on the downside.

We could stop here as we toy with these misguided short-sellers, but why not completely eviscerate them?

East Coast stiffs in Brooks Brothers suits simply do not know the meaning of "cool." Cool is the difference between Nike (NYSE:NKE) and Reebok, Magic and Bird, South Beach and South Central, Apple and Microsoft. Cool is a je ne sais quoi that translates into pricing power far and above that of your basic commodity. As the leading member of Web 2.0, Apple has leveraged its brand of cool into a closed loop of design, retail, music, computing, and telecommunication technologies. Certainly, hipsters, young professionals, celebrities, and even rank and file drones will gladly pay up to remain part of the "in" crowd, as evidenced by Apple's obscene 40% profit margins and rock-star product releases.

Do not short Apple stock. If anything, the argument could be made that shares are still a buy at $625 as a long-term investment.

That is, unless, some hippie kid and his geek-face buddy are plotting successful Web 3.0 Revolution in some California garage, somewhere.

The spirit of Steve Jobs lives on.

Source: Do Not Short Apple Stock