Disclaimer: Author is short Apple shares (AAPL)

Even in the recession we are in, there are still bubbles around us. What if I told you that a company is making a lot of money off of a brand that is considered higher-end, the product costs almost twice as much as its rivals and its added features are not important to the vast majority of consumers, and that the company’s products are highly discretionary? You would think that company would be assigned a very low PE right now, with low earnings forecasts. Alas, Apple is defying this, even though it answers ‘yes’ to all of my questions.

Whether its the iPhone, Macs, or other Apple products, Apple is considered ‘high end.’ In particularly the case of computers (which are viewed as the engine of growth), Apple’s products are much more expensive than its peers. In the Mac’s case, there are no major advantages for owning a Mac for the common user (yes, Mac lovers hate mail me). An example is that my girlfriend would rather buy a $500 Acer than use my $2500 Powermac that I bought a couple years ago.

The main reason people started buying a lot of Macs- Apple is ‘cool.’ A good barometer for me for bubbles is what does my sister like (a spoiled older teenager) and what does my personal trainer like. Both were buying Macs near the end of last year…a little before the economy fell off the cliff. Given the economy’s in a spiral, people can’t afford to pay for ‘coolness’ much longer, especially with an extra $500 price tag.

The iPhone, while a very nice product, has problems too. The main one is that everyone already has an iPhone. Apple stock had a setback last year when it came out that iPod sales slackened since everyone and their dog already had an iPod. Same with the iPhone. There isn’t much more market left, and in the current environment, people aren’t going to be so quick to upgrade their cell phones unless they break, not just to get a new toy.

Apple is the ultimate bubble consumer discretionary, yet it trades at a fairly high multiple because of perceived growth. Past performance is does not always equate to future performance, whether its a mutual fund or a company. In the case of Apple, I call iBubble.

See ya at $40-$50 a share.

Are you extremely bearish on the market? Some will tell you to rush and by SDS or BGZ, ETFs that track the double and triple the inverse reactin of the S&P 500 respectively.

That may be a good idea if your holding period is a couple of days, but it doesn’t work out well for long-term bets. Whether you are buying an ultra long or an ultra short, the mechanics of the leverage the ETF uses burns you long-term.

This is mainly due to the fact that the ETF doubles or triples the daily, not monthly or yearly index. Let’s see the effect of this. Suppose the S&P 500 makes the following moves over the course of 5 days (double move in paranthesis).

Day 1: +5% (+10%)

Day 2: -3% (-6%)

Day 3: +1% (+2%)

Day 4: -12% (-24%)

Day 5: +10% (+20%)

The standard S&P 500 would have moved -.4%, essentially unchanged. The math is 1.05*.97*1.01*.88*1.1.

The ultra’s math would be 1.1*.94*1.02*.76*1.2, resulting in a loss of 3.9%, well more than just double the loss of the S&P 500.

The ultra inverse’s math would be the flip of ultra long, so it would be .9*1.06*.98*1.24*.8, resulting in a loss of 7.3%. So even though the market went down a little, the ultra short managed to go down a lot! How did this happen?

It’s because of the mechanics of leverage and the fact that negative moves have more of an effect than positive moves. Think about it. If the S&P 500 goes down 50%, it then needs to double to just get back to even. The short ETF, even though it is betting against the market, still moves in the same way as the stock.

If you are bearish long-term, don’t buy SDS or BGZ and just hold. You can get burned during just a short market rally. If you’re a long-term bear, either short SSO or BGU (the ultra longs) or just short the SPY or individual stocks.