Hedge funds: Riding the AAPL slingshot

Jason Schwarz's "Seven Reasons the Shorts Love Apple" is an investor's must-read


[Originally posted Dec. 20, 2009 on Fortune.com]

"If you can keep a good stock down," writes Jason Schwarz, "then you are able to load up for the ride back up. It's like a slingshot -- the harder you pull, the more propulsion you generate."

Schwarz, an investment analyst with a knack for self promotion -- through a newsletter, an e-book, and a new hardcover -- has written an easy-to-follow primer on why Apple (AAPL) has become the hedge funds' favorite punching bag. It was published as a gallery last week in TheStreet by Jim Cramer, a guy who knows a thing or two about manipulating Apple's stock price. (See here.)

For investors who wonder why Apple goes down just when common sense suggests it should go up, it's a must-read.

Below fold, the highlights:

1. Apple is the market leader. This one stock has become so important to the market that its action is contagious. This influence makes Apple a prized possession for both the longs and the shorts. Knocking down an easier target like Research In Motion (RIMM) or Citigroup (C) doesn't generate the same snowball effect.
2. Apple always bounces back. Over the long run, Apple fundamentals will certainly take the stock higher, but hedge funds want to maximize the ride. Keeping a great stock down allows them to profit from quick predetermined trades rather than being fully invested all the time.
3. The predictability of Apple reduces a short's risk. Everyone knows when the next iPod, iPhone,and iMac refreshes will hit. This has turned into a calendar-driven catalyst stock. During the quiet time, the stock is vulnerable.
4. New media have changed the game. Anybody can say anything and the masses will believe it. The topic of Apple currently dominates this new media. There is no accountability or verification of sources like the old days. In such an environment, hidden agendas can be pushed endlessly without disclosure.
5. Apple secrecy. As the unparalleled leader in tech innovation, Apple feels that it is necessary to keep future products veiled to all competitors, consumers and investors ... Apple has yet to sell a single Tablet, yet hedge funds already have made millions from rumors surrounding the product. The lack of transparency from Apple creates a perfect storm for short-term traders.
6. Apple innovation. This company is so good that it causes imaginations to run wild. A hedge fund could float a story that Apple is thinking of buying Saturn in order to develop a new brand of Apple cars and people would go nuts ... The constant innovation coming out of Apple provides traders with endless material for believable speculation.
7. Steve Jobs is the visionary of the century. This one man is the single greatest asset in corporate America, which causes Apple stock to trade with a Steve Jobs premium, a variable that the shorts can use as well. Apple's stock is always vulnerable to losing Jobs.

You can read the rest of Schwarz's piece at TheStreet. His market timing newsletter is called Economic Weather Station.

[Follow Philip Elmer-DeWitt on Twitter @philiped]