Sunday Evening Dec 9 2012 Why is $AAPL performing so poorly?

Like many people, I am invested heavily in AAPL common stock and options, both puts and calls. As the stock has risen my theoretical return on the year has increased, but here as it declines over 20% from its high of over 700, my portfolio has gotten considerably less valuable. Why is this happening to such a stock with incredible fundamentals?

I think the answer is two fold, and relatively simple. First margin requirements were raised last week by at least one clearinghouse, and I am sure many who hold this stock on margin don’t want to pony up the increased margin, so they liquidated shares.

Secondly, I think AAPL is also suffering from both tax loss selling AND tax gain selling. The tax loss selling is pretty straightforward, there are some that bought higher than here, significantly higher, like the high 600’s. Perhaps they have gains for the year in other holdings and want to offset some by taking some losses. This is an old technique and basically follows the idea that tax deferred is tax saved.

But this year is REALLY different, many people are selling to book gains as income tax rates will almost certainly be going up for those making over $200-250K/year which includes a lot of traders. Even if tax rates don’t increase and the politicians vote to ‘kick the can down the road’ there is a significant tax increase built in to start Jan 1. This increase is part of the Affordable Care Act (ACA, or as many call it Obamacare). For wages, the amount withheld for Medicare will go up 0.9% from the 1.45% currently paid by individuals, for wages above $250K if married, $200K for singles.

There will also be a tax on unearned income, such as capital gains, dividends and interest and this new tax is called an unearned income Medicare contribution and this tax again applies to those with incomes noted above. This tax is 3.8% of the unearned income.

No one wants to pay more tax than less, so companies have begun special dividends this year to try to distribute the $$ before the new taxes kick in. Those traders and investors may be deciding to take their gains in AAPL this year rather than next year for these taxes alone, never-mind what happens if we go over the fiscal cliff.

I think this selling will come to an end sometime in the next week or so and then downward pressure will be relieved. Right now AAPL is selling for about a 12 PE, the lowest in 10 years and has a PE of about 7-8 when you back out the cash they have.

When the buying starts and the greed sets in, the move up could be violent and surprising. Stocks move higher and lower than people expect and AAPL could test a new high, even before the end of the year.