When Apple Leads, the Market Catches Fire

Apple was up over $10 today in a rare 3 percent plus move not related to an earnings release and its biggest gain since the 3.28 percent January 24^th bounce after the post earnings sell-off.   The stock was bolstered by Apple’s announcement that Steve Jobs will give the keynote speech at the company’s Worldwide Developers Conference on June 6^th.

The concern over Steve Jobs health is repressing the stock price, which, is undervalued, in our opinion.  The balance sheet has $71 per share of cash and liquid long-term investments.   If Apple can earn $27 per share for the fiscal year ending in September, which we think it can, the stock is trading at a cash adjusted P.E. of 10.5.  The all-time closing and intraday high, of $363.13 and $364.90, respectively, made on February 16^th , are less than 5 percent from today’s close.  A chip shot.  (click here for our valuation matrix)

We believe the overall market needs Apple as its leader just as the chart below shows has been the case since the March 2009 crash lows.    The company embodies the “new global economy” and its innovation is the medicine to cure a relatively ugly global macro picture.   Think iPad-like medical devices/apps that become small town medical clinics, which could then greatly reduce health care costs, for example.

We can’t see the Malthusian case as the story — where investors, traders, and sovereigns continue to dump dollars for commodities, such as crude oil and foodstuffs – that will lead markets higher and a good outcome.  In fact, we believe “that trade” is one of the main factors behind the downshift in the global economy and is close to its tipping point, both, economically and politically.  QE3, anyone?

Wall Street does need its crack and has a lot of political power so we aren’t heavily betting against another round of quantitative easing.  Banks are not expanding credit and the Fed is the only printing press in town.   Even if it sends gas prices to $10 per gallon, real wages in the tank, the economy lower,  and ushers in an “Arab Spring” in the G7 and/or abandonment of the U.S. dollar.

Technology and “Innovation Nation” (IN)  is what will save us, not zero interest rates and more QE3, and the policy obsession should be to facilitate the Innovation Nation.   The Apple story is not over, in our opinion, and we need the stock to kick into high gear here to power equity markets higher.   Hopefully, today was the start.

Note the chart consists of two data series:   1) S&P500; and 2) the Apple/S&P500 price ratio, indexed to a base price of March 6, 2009, the S&P500’s intraday crash low.   Once the market, as reflected by the S&P500, lost Apple’s leadership earlier this year it began to stall.

(click here if chart is not observable)