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  • Are High Flying Tech Stocks Supported Only By Hype And The Fed? 0 comments
    Nov 26, 2012 10:39 AM | about stocks: GOOG, AAPL

    Since our last article suggesting the tech sector is undergoing major changes, we have seen Apple (NASDAQ:AAPL) slide from it's peak of 700 to a valley of 525. Recently it has recovered a bit.

    Google (NASDAQ:GOOG) has experienced a similar drop, started by an earnings release error.

    Pressure has been mounting on Apple and Google from investors, as they are some of the most widely held institutional stocks. Through mutual funds and other institutional buyers, they are some of the most widely held tech stocks in the market.

    While tech companies create buzz about their latest and greatest, at the end of the day for the markets it's all about the share price. Since 2002, Apple share price went from 11 to 700, a greater than 6000% return.

    (click to enlarge)

    Bill Gross says the stock market is a Ponzi Scheme, meaning that new money coming into companies is what's really driving the price up, not other factors. Without the creation of new money by the Fed, this would only be possible with a limited number of companies. Now the Fed has announced QE3 (QE Infinity) what can we expect in terms of inflation, and in terms of asset prices?

    Inflation or returns

    If an investor simply bought Gold (not GLD but actual Gold) in 2002 and did nothing, he would have received more than a 600% + return. Most investors have not done so well. But even with a 600% return in 10 years, how far ahead of the curve would the investor be considering other inflation?

    A 2009 article from WSJ states:

    Many investors realize that stocks have been among the worst investments of the past decade. But they may not realize quite how bad the decade was, because most people forget about the effects of inflation.

    This is based on standardized, official inflation numbers which do not include food and energy, and are considered by some to be extremely conservative. Including food and energy inflation figures may be much higher.

    The Fed

    (click to enlarge)

    The Fed officially stopped publishing M3. But even looking at the above chart which includes M1 and M2, it paints a clear picture on the ever expanding money supply. Anti-inflationists should note that in a debt based monetary system, it is necessary to continually create more currency. Also, if all the debt in the world was somehow paid off, money would cease to exist. By understanding how monetary supply affects markets, it is not suggested that the Fed pursue any other policy, nor that another system would work better (such as the Gold standard). There have been 5.3 billion ounces of Gold mined in human history, at a current spot price of $1,700 this equals $9 Trillion USD in value, assuming that you could account for all of it. That wouldn't be enough to cover the GDP of the US for 1 year which is about $16 Trillion.

    Until we do find a better monetary system using recent developments in technology, it's important to understand the relationship between money supply, the Foreign Exchange markets (because printed Dollars exchange for another currency has a completely different effect on the markets), and the domestic economies of each country.

    Not all newly created money went into the US markets, for example $3 Trillion (some estimate as much as $16 Trillion) went to support European banks. Other newly created money is sent to commercial banks who strangely keep it on deposit at The Fed earning a risk free return.

    Now compare the 2 above charts (Fed chart goes back to 1981 but curve is similar) and conclude what you will.


    The inherent problem with this system is that by just investing in Apple or Gold an investor would be break even or slightly ahead. Of course, most investors did not achieve a 600% return in the past 10 years. But some have, and some have done even better. If you look at the Macro picture, a small group of investors have done very well while the average investor is flat or losing. To make matters worse, some of the tools and investment programs that have done well such as hedge funds, are not available to average retail investors either due to a high minimum investment of $1 Million or more, or due to regulatory qualifications.

    This would suggest investors find the next Apple but this path is also perilous, as the majority of small startups will be bankrupt in the next years and only a small handful will be profitable.


    Investors should either commit to investing as a full time job, which is research intensive. A process of education about the markets should be taken first, and when going live caution should be used. The alternative is finding an advisor who is trustworthy and competent, not always easy. New software tools offer average retail investors the ability to follow successful professional traders for a small fee, with a little low investment. There are many such services we will not name as not to advertise or recommend a specific one.

    Forex Risk Disclosure: Click here to read. The risk of loss in trading foreign exchange markets (forex), also known as cash foreign currencies or the forex markets, can be substantial.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: GOOG, AAPL
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