AAPL Rebalancing In May, May Keep The Nasdaq From 2,800 Today

The Nasdaq is finally rebalancing!  

That is good news but not so much for Apple, Inc., whose current 20.49% weighting in the index will be cut to 12.33% on May 2nd. This explains a lot of the strange movement in the Nasdaq as apparently the cognoscenti have already begun jockeying their positions – trying to guess which of the 100 stocks in the Composite Index will curry some of AAPL’s lost favour.

Perhaps the the moves up in fellow 4-letter stocks like PCLN ($25Bn market cap), NFLX ($13Bn), OPEN ($2.5Bn), BIDU ($50Bn) and GMCR ($9.4Bn) don’t seem quite so crazy in light of the 40% reduction in AAPL ($314Bn) – take the money out of one bucket and you HAVE to fill up the others!  

This does make me feel better as there may actually be a rational reason for NFLX having a p/e of 82 despite the fact that they have a completely indefensible service that already has competition from several on-line clones as well as big boys like AMZN, not to mention every cable and satellite company in America. Why does WFMI, a GROCERY STORE, trade at 41 times it’s projected 2011 earnings in the middle of the worst food inflation in U.S. history? It’s not just because rich people are stupid and will overpay for anything because they hate to have people think they can’t afford stuff – it’s because their market cap is $11.4Bn and if you take 40% of AAPL’s $300Bn and distribute it around the Nasdaq – then WFMI get’s $1.2Bn of additional allocation.

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That’s not exactly how it works but that’s the effect. A $1Bn Index fund who follows the Nasdaq has $205M of AAPL stock (20.49%) and, after the reweighing, they are to have $123M of AAPL stock. The other $82M does, in fact, get distributed to the other Nasdaq stocks according to the new weightings. Do you think that doesn’t distort the markets?  Of course, that doesn’t “just” affect the Nasdaq – AAPL is a heavyweight in all the indexes.

The special rebalancing of the NASDAQ-100 Index will be enacted based on index securities and shares outstanding as of March 31 – now it is very clear why the MoMo stocks were jacked up like crazy into the end of Q1 – now the market manipulators have guaranteed bagholders for their stocks come May 2nd! On that date, they KNOW what the weighting will be and fund managers will be forced to buy more PCLN, OPEN, BIDU, NFLX, CMG, etc – regardless of their actual merit. They will take these bloated monstrosities off the hands of the IBanks who have been pumping them at top dollar and then – look out below as there is no actual reason for any of these guys to trade at their nose-bleed multiples.

We have been snapping up INTC on the way down and now we will snap up even more as we THOUGHT it was a pointless shake-out but now we can see it was a shake-out with a major point as INTC is going to double up in weighting, as will MSFT and ORCL.  MSFT was also on our shopping list yesterday (our weekend pick) so things are going to get interesting in the next few weeks and very interesting as we roll over into May.  

Notice on the chart that virtually all of AAPL’s losses actually transfer to the Big 4 and NOT to the MoMo boys – we’ll see how quickly that party ends but I’d be jumping off that train RIGHT NOW! Notice that “all others” will, on the whole, carry less weight after the rebalance, not more. The Nasdaq will remain very much controlled by AAPL, GOOG, INTC, MFSF and ORCL with a combined 37.3% of the indexes weighting.

In other market-shaking news, The Bernank says the Fed WILL act if inflation is “more than transitory.”  Apparently, he finally had to pick up the check at a restaurant this week or perhaps he pumped his own gas over the weekend.  “We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability,” the Fed head said. Of course, the trick here is the definition of inflation.  If prices were to stop climbing and remain as ridiculously high as they are – the Fed would consider that “price stability.”  In fact, commodities leveled out at these ridiculous prices for the rest of the year and then began to fall – the Fed would likely step in to stop DEflation, which they fear far more than INflation.

Meanwhile, Ben’s pal Timmy says that the U.S. will officially run out of money no later than May 16th, hitting our $14.29 TRILLION debt limit.  Don’t worry though – Timmy’s mum gave him an emergency credit card and the Treasury can actually juggle things for about 60 additional days before things really hit the fan so don’t be fooled by the overly-dramatic sense of urgency you hear from the media – who are dying to find another crisis as the Japan thing is starting to get boring.

Finally someone is investigating High-Frequency Trading! Unfortunately, it’s the EU as the European Securities and Markets Authority has begun an investigation into automated trading firms, asking for details on trading strategies and the computer algorithms that drive their trading deals. The probe is part of a fact-finding project to enable ESMA to “better understand high frequency trading strategies and the impact of these strategies on the functioning of the markets as a whole, including the risks associated with HFT.” 

Two major charts I’m looking at come from Doug Short over in Chart School. The first one is the p//e value of the S&P as well as the Q ratio (value replacement cost),, which are back near all-time highs not counting the absolute madness of the late 90s:

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Our other chart of note coming into Q1 earning season is the price of gasoline, which is back near all-time highs that even the madness of 1999 couldn’t have touched.

Of course, the last time gas prices were this high the markets were obliterated 3 months later but it was a different world in 2008 – people had jobs and the global economy wasn’t teetering and homes were worth 25% more and food was 30% cheaper and the Government was $5Tn less in debt – none of that is true now so “this time will be different” – I’m sure…

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