Update on Market Efficiency

Our last post on the curious behavior of the AAPL stock price was a little over three weeks ago, and since it is now (approximately) two months since Apple's last quarterly report, and since some "forward looking statements" were made in the last report, AND since in the intervening period Apple has

• Announced the new iPad
• Sold a bunch of them
• Announced a dividend (for the first time since 1995) and a stock buyback.

Curiously, the stock price (at this point the run-up has been sufficient to mandate using a log plot) has been increasing almost mechanically log-linearly:

For those who care about such things, the (annualized) Sharpe ratio of an investment in Apple over this period is very close to 9(!)

What to make of this? Apparently the process of gigantic mutual funds loading up on AAPL is continuing, and its speed depends in part on the decision-making speed of the appropriate committee, and partly by the reluctance of said committees to move the market to much, so that the buy orders to their brokers are spread over weeks (of course, we all know that the market is efficient, trends do not exist, and you can only hurt yourself by acting quickly. Why, you might pull something...)

A brief update on gold

There have been considerable conniptions, consternation, wailing, and gnashing of teeth over the price of gold in recent times. Here is a quick look at reality. Below is the graph of the natural logarithm of the price of gold (measured by its proxy GLD) from its inceptions in 2004 to present day:

You will note that the graph hugs its trend line very closely, and has not really deviated much from its appointed rounds. You do see a wiggle at the very end, but a quick check will reveal that over the entire history, GLD has been gaining 7.2 basis points a day on average, with standard deviation of 13.5 basis points a day (so Sharpe ratio of 0.85), while over the last twelve months, the average return has been 6.8 basis points a day, with standard deviation of 13.4 basis points, for Sharpe ratio of 0.81, so yes, the risk adjusted returns have dropped, but not hugely. Notice also that the graph (at least in the date range shown) shows no indications of a bubble (you can see a mini-bubble in early 2008, followed by the mini-crash in late 2008 -- presumably the mini-bubble was caused by the contemporaneous, and much more substantial,  oil price spike, while the crash was caused by the general panic of the crash of 2008, but not again that the crash was much more mild than the crash in the oil prices (factor of six, peak to trough), and the stock market (close to a factor of two).

Efficient markets?

On January 24 2012, Apple came out with its quarterly data, which completely obliterated analysts projections. AAPL was trading at a P/E multiple of around 12 at the time (already quite low for a company with Apple's growth). Following the earnings report, we saw the following price movement (presumably not over, unless Apple really screws up the iPad 3 badly):

In other words, after a relatively modest 4% jump on the day following the earnings announcement, the stock has been going up linearly. No significant news has come out since the earnings report (there have been reports of the coming iPad 3 for several months, and since, in the post-Steve Jobs era, Apple secrecy is not what it used to be, the rumors have been detailed and consistent. Much has been said of the considerable Apple cash hoard, but that, again, is not news. The question is: since all the relevant information has been available for over a month, why such a slow reaction time, which flies in the face of the efficient markets hypothesis. The only explanation I can come up with is that Apple is large enough that to significantly move the price, very large pension funds and mutual funds have to decide to buy, and whatever these guys are, quick on the uptake is not it. The morals of the story seem to be: not all opportunity lies in $10 cap micro stocks, and those of us with money in (for example) TIAA-CREF should be very sad.