If I have the right numbers in my head (which I may not), Apple currently makes $40 billion a year in profits, has $150 billion in free cash, and has a market value of $500 billion. That's a (price-cash)/earnings ratio of 7.75.
In what way is that divorced from fundamentals? Sounds like the market thinks that Apple has a very good franchise with a half-life of seven years, which seems about right to me. But if you told me the franchise was twelve years, I would not be surprised. And if you told me Apple was going to pull a Microsoft or a GM and burn all of its cash and its future earnings in a vain attempt to preserve a franchise beyond its natural life, I would not be surprised either. Apple's fundamentals are uncertain, but it does not seem to me that its market price is or was disconnected from them…
Muhammed El-Erian writes:
We should listen to what gold is really telling us: Like Apple, valuation has become divorced from fundamentals….
The consensus gold narrative is a familiar one… investors rushed into gold as a means to hedge against identifiable risks (inflation), as well as to counter nervousness about big uncertainties (including previously unthinkable disruptions to economic systems). Rising prices generated even higher prices, significantly disconnecting valuation from underlying fundamentals of physical demand and supply – that is until an otherwise insignificant bit of news pulled the rug from under the operating paradigm… the real catalyst for the dramatic price drop was a rumour that Cyprus could be forced to sell its holdings by its European partners. This involved a tiny amount of gold (valued at less than $1bn at the time), but it made investors suddenly pay attention to the possibility of significant supply hitting the markets from other European economies (particularly Italy with holdings of some $130bn)….
In corporate terms, think of the underlying dynamic as one of a powerful brand where valuation has become completely divorced from the intrinsic attributes of the product – thus rendering it vulnerable to any change in conventional wisdom…. Over the past year, a similar dynamic has played out in Apple and Facebook shares…. After a steady increase to just over $700, Apple’s share price hit a dramatic air pocket. Its price collapsed to less than $400. Today, it trades at around $440. Why? Basically because, as powerful as it is, the brand’s “enchantment” (to use a term coined by author and former Apple employee Guy Kawasaki) ended up inducing investors (inadvertently) to disconnect valuation from the reality of the furious catch-up on the part of Apple’s competitors. In the case of Facebook, it was widespread familiarity with the name, and the associated hype, that persuaded investors to oversubscribe to an IPO that valued the company at $38…. Today it is trading around $26….
[C]entral banks, pursuing higher growth and greater job creation, have inserted a sizeable wedge between financial markets and economic fundamentals. Firm and repeated central-bank commitment to asset purchases has done more than push a growing number of investors to add portfolio risk at ever more elevated prices. It has also repressed market volatility, lowered correlations and given the illusion of stability…. [M]arkets have outpaced fundamentals on the expectation that western central banks, together with a more functional political system, will deliver higher growth. If this fails to materialise, investors will worry about a lot more than the intrinsic value of gold.