Apple Inc: The Hype Must Go On

While catching up on my reading I came across this paper: "Equilibrium Portfolio Strategies in the Presence of Sentiment Risk and Excess Volatility" by Bernard Dumas, Alexander Kurshev and Raman Uppal from the National Bureau of Economic Research.

Abstract:

Our objective is to identify the trading strategy that would allow an investor to take advantage of "excessive" stock price volatility and "sentiment" fluctuations. We construct a general-equilibrium model of sentiment. In it, there are two classes of agents and stock prices are excessively volatile because one class is overconfident about a public signal. As a result, this class of overconfident agents changes its expectations too often, sometimes being excessively optimistic, sometimes being excessively pessimistic. We determine and analyze the trading strategy of the rational investors who are not overconfident about the signal. We find that, because overconfident traders introduce an additional source of risk, rational investors are deterred by their presence and reduce the proportion of wealth invested into equity except when they are extremely optimistic about future growth. Moreover, their optimal portfolio strategy is based not just on a current price divergence but also on their expectation of future sentiment behavior and a prediction concerning the speed of convergence of prices. Thus, the portfolio strategy includes a protection in case there is a deviation from that prediction. We find that long maturity bonds are an essential accompaniment of equity investment, as they serve to hedge this "sentiment risk.

What I find interesting is that overconfidence in either direction causes disruption. The same should apply to consumerism. Any heavy swing in confidence by the fringes will cause the average Joe to hold back and start saving. Once the rational consumer starts to pull back, there isn't much Bernanke or anyone else can do.

What annoys me is that according to this theory, either way there is going to be a pullback. The media too, tends to swing from boom to bust thus contributing to the overconfident syndrome. If there were some way to get back to the middle of the road, I wouldn't be worried about what I'm seeing here.

No matter which way the hype goes, this is still overconfidence and tends to put-off the rational consumer. Just like when the VIX jumps, traders may love it but investors start pulling money off the table. Likewise, consumers are trenched with pessimistic news about mortgages and energy costs one day only to be touted the Great Gatsby the next.

It looks like Apple (AAPL) management realizes this and the hype machine must go on. The alternative is a flux to the overconfident negative. There is no middle road. The stock does correlate the general consumers' mood swings as seen in August.

I expect some heavy swings in sentiment over the next few months; likely to continue to be reflected in AAPL's share price. Perhaps AAPL can be used as an overconfident consumer sentiment barometer - both ways.

Disclosure: No conflicts.

Comments

[REB:]

Your title and one paragraph implies that Apple's management is over hyping Apple's prospects and products. I've owned the stock for 8 years and followed Apple since the '80s. Apple's public presentations and advertising hasn't changed when Jobs is involved despite the stocks bumpy ride. Their marketing is quite successful and it's design has nothing to do with stock price. Look at their advertising for "hype". It's the opposite. Their public announcements are few and typically related to new product. The hype is supplied by the media's response to these products and the speculation over financial impact. Apple's ability to impact and redefine their markets is rare. It is this that fuels the "hype".

2007 Sep 26 10:26 AM

[lars:]

We'll let the earnings decide...shall we? Isn't speculation such as this article in the same league as "hype"? What am I missing here...all research data done by the big investment banks seem to support AAPL's high multiple...and then some.

2007 Sep 26 08:36 PM

[artman1033:]

This is not AAPL. This is about AMZN or BIDU.

2007 Sep 27 07:16 AM

[Tom B:]

Gee, high profile stocks can be volatile. Maybe you should write a book on finance.

2007 Sep 27 08:50 AM

[jgphoto1:]

REB's comments are spot on. I get so weary of reading about the Apple "hype machine". They introduce their products in a very compelling and professional manner that many companies could stand to learn from....then they go back to work. As a general rule they do reveal let alone hype products prior to release. After the release they pretty much stay clear of getting involved with the public dialogue which runs the full spectrum from pure FUD to gushing praise. I find it ironic that the often alluded to Apple hype machine is a direct creation of the media that persits on pinning that label on Apple.

2007 Sep 27 09:58 AM

[geotopia:]

AAPL has seldom been aligned with the general market. In the 90's, for good reason, it was plummeting during one of the biggest market booms in history. That it is currently riding the wave is deceptive. There are times when you have to stop looking at numbers, pause, and ask if there's a real intrinsic value in a company's stock price - look at their products, sales channels, ability to market said products. If they are cabable and currently executing a revolution, then you have to separate them from the market. This is case in point with AAPL. Sorry, contrary to your thesis, these guys, with Steve at the helm, are clearly and consistently delivering revolutionary products and paradigms quarter after quarter. Applying historical or statistical models to Apple's current performance is a blunder.

2007 Sep 27 12:44 PM

[geotopia:]

AAPL has seldom been aligned with the general market. In the 90's, for good reason, it was plummeting during one of the biggest market booms in history. That it is currently riding the wave is deceptive. There are times when you have to stop looking at numbers, pause, and ask if there's a real intrinsic value in a company's stock price - look at their products, sales channels, ability to market said products. If they are cabable and currently executing a revolution, then you have to separate them from the market. This is case in point with AAPL. Sorry, contrary to your thesis, these guys, with Steve at the helm, are clearly and consistently delivering revolutionary products and paradigms quarter after quarter. Applying historical or statistical models to Apple's current performance is a blunder.

2007 Sep 27 12:44 PM

[Saul Sterman:]

REB, Lars, artman1033, jgphoto1 and geotopia,

Thanks for the comments. Instead of replying to each individually, basically it is amazing how changing a title can throw out of whack the entire thrust of the article. The original article can be seen here: www.crossprofit.com/ar...

As you can see, I was not referring to APPL management hyping anything. This is all about the consumer. As to historical correlation, I was referring to the dip this past August and not years back. Being a consumer oriented stock (I-pods and I-phones) I expect the stock to swing heavily with serious large swift changes in consumer behavior over the next several months. There is nothing that management can do other than recognize their new status.

The article is about consumers, NOT APPL management. Sorry for the misunderstanding and thanks to the SA editors for changing the title!

2007 Sep 29 04:18 PM

[Saul Sterman:]

I'll try posting the link again. The link above doesn't take 'id=114'.

Here goes...

www.crossprofit.com/ar...

If it didn't work this time, copy and paste.

2007 Sep 29 04:39 PM