The big question preoccupying the talkers at CNBC is whether the post-March upturn is the beginning of a new bull market or only a pause in a bear market that will last for years. Don’t obsess over figuring out the answer. Markets are always perverse and unpredictable. Instead of trying to time your next buys and sells, think about what is going to happen over the next decade and how you will cope with it. You should be thinking about the purchasing value of the dollar.

Dremen, like your Notes editors, believes we are in for a bout of “wild inflation” – something along the lines of what we saw from 1979 to 1982. (For those of you too young to remember, this period saw the CPI rise 13% a year and long-dated US Treasurys yield as much as 15%.) Why this dire outlook? This, again, from Dremen:

Simply because our Treasury and its counterparts in other countries are printing money around the clock. They are also printing bonds, and with the same objective: reviving stagnant economies. The Keynesian belief that large fiscal stimulus is crucial to ending an economic downturn is prevalent among policymakers worldwide. No democratic government could stay in power these days if it didn’t undertake countermeasures against unemployment, the possibility of deflation and the worst financial crisis since the 1930s. It is inevitable that all this stimulus will be followed at some point by a period of rapidly rising prices.Central banks, including our not-so-omniscient Federal Reserve, will again fail to take the punch bowl away from the party soon enough, keeping stimulative polices going far past the point when unemployment has turned a corner and the financial debacle is behind us. Treasury Secretary Geithner and Fed boss Bernanke are trapped by politics and events. They make pronouncements downplaying the inflation threat, but inflation will hit like a tsunami within three years, maybe sooner..

So what can you do about this threat to your savings? First, sell long bonds. When inflation hits long-bond prices are going to plummet as yields skyrocket. Remember, bond market crashes can be as bad as stock market crashes.

Dremen also recommends repositioning your portfolio with heavier weightings in oil, natural resources and cyclical stocks… and cutting back on utilities and consumer staples. If you believe, like we do, that a crash in stocks is coming, hold off on buying stocks until values come off their current highs – buy the dips.

The third weapon in your armory against inflation is real estate. Dremen reckons real estate will be “one of the best investments in the years ahead.” Remember Buffett’s great contrarian maxim: “Be fearful when other are greedy and greedy when others are fearful.”

Also keep in mind Steve Sjuggerud’s rule of thumb for successful investing: buy assets that are cheap, hated and on an upswing.

You want to know the really funny thing? Traders and investors don’t care! All they care about is that Washington has Wall Street’s back. And that the Fed and the Treasury can keep on producing dollar bills like Willy Wonka produced Everlasting Gobstoppers.

In our eyes it’s no different to Bernie Madoff’s little scam. Big Wall Street players shoved money into Bernie’s Ponzi scheme knowing that the profits were ginned up somehow. But they didn’t care. They knew it didn’t really matter how Madoff was producing his profits; it just mattered that he was producing them. They knew that some poor schmuck down the road would get clobbered.

And that’s how it’ll be with this rally. When it seems like stocks are going up and will never come down… and the networks, giddy with excitement, can do nothing but praise God for the coming V-shaped recovery… and when every last mom and pop investor is sucked in… it will all come crashing down.

It may not be quite as spectacular as the end of the 48% 1930 bear market rally… But it will be ugly…

Of course, there are always pundits willing to give sensible reasons why stocks are defying gravity. Right now, there are three eminently sensible reasons being splashed around the mainstream press (hat tip, David Rosenberg):

Eminently sensible reason #1: Bernanke reappointedWe really fail to see how it could possibly be that the same central bank official, who, over a span of a decade, presided over two massive bubbles and their busts, can be viewed as being a positive force for the markets. Perhaps there is some solace in knowing that the same person who created this awesome and complex $2 trillion Fed balance sheet will be around to dismantle the largesse since he’s probably the only one that knows how.

Eminently sensible reason #2: The first monthly increase in the Case-Shiller home price index

As for the second point, there is a difference between a trendline and the noise around that trendline. Home prices are down a massive 31% from their peak and have been in a vertical-down pattern for nearly three years. Perhaps a respite is in order, but with the true underlying unsold inventory near 12 months’ supply, which is double what would typify a balanced housing market, it would seem like wishful thinking that we have suddenly achieved a fundamental low in residential real estate values (especially at the high end).

Eminently sensible reason #3: The seven-point jump in consumer confidence in August

With regard to point number three, we welcome any rise in consumer confidence but an honest appraisal of the data would show that 54.1 is still a very depressed level. In fact, the average index level during recessions is 73.0 – August’s reading was nearly 20 points below that. So, if the recession is indeed over and done, somebody forgot to tell this 70% chunk of GDP otherwise known as the consumer.

All we know, dear reader, is that following great crashes we get great bear market rallies. And these euphoric rushes of blood to the head have a nasty habit of suckering overoptimistic investors. As resource investing legend Doug Casey put it in yesterday’s Casey’s Daily Dispatch, there were eight such rallies during the Great Depression. These rallies lasted an average of 11.3 weeks, during which time the average increase was 52.6%.

Simple math will tell you that this rally has lasted almost twice as long as the average bear market rally during the Great Depression.

Doug reckons what he calls the “wonder rally” on Wall Street won’t survive the September. He points out that options traders are now betting that the VIX – the volatility index – will increase 13% in the next five weeks, according to data compiled by Bloomberg.

That’s the biggest spread since August 2008 – just before the S&P 500 saw its worst two-month plunge in 21 years. See, these two indexes – the VIX and the S&P 500 – have moved in opposite direction 81% of the time over the last five years.

As Doug says, however, it’s critical that underground investors keep an open mind regarding equities right now. The reason is simple. The government is pumping phenomenal amounts of funny money into the economy. And equities are extremely sensitive to this kind of fiscal policy (more sensitive, that is, than the wider economy, which tends to react slower to stimulus).

This is a big wild card. And in our humble opinion it’s a big reason behind why stocks are doing so well right now. Long suffering readers will recall that here at Notes we believe traders and investors are betting on the government’s ability to backstop the market rather than on the market itself.  There is also a strong likelihood that Washington’s fiscal and monetary stimulus will trigger an inflationary cycle, which would also benefit stocks in the short-term.

Common sense isn’t exactly fashionable these days. But take a moment to think about just how extraordinary a 49% rally stocks is over just five months. As our favorite underground analyst, David Rosenberg, points out, this is “unprecedented back to the 1930s.”

In the last cycle, it didn’t happen until February 2004 – 18 months into that bull phase where again there was tremendous policy stimulus and an oversold low to climb out of. In addition, household credit was expanding rapidly. Even coming into what was a secular bull market in 1982, it took a good seven months to rally 49% – and that was with the benefit of a V-shaped economic recovery. Going back to 1950, it has taken an average of around 18 months for the market to rebound 49% from a recession trough, not five months as has been the case thus far.

That stocks have climbed out of their recent recession trough over three times as fast as after the average recession sets serious alarm bells ringing here at Notes HQ. As we’ve said before, if you have money in stocks right now, you better be sure that money is nimble.

The bull run/bear market rally has had three major phases. This from our favorite underground analyst, David Rosenberg:

1. March 9 to May 6 when financials led the way

2. May 6 to July 10 when it was all about defensive growth and strong balance sheets (tech and health care leading the way)

3. Since July 10 it’s all been about basic materials and consumer discretionary stocks.

Whatever way you look at it, however, it’s clear that we underestimated the level of euphoria backing this rally.

The recent run-up in stocks has been closely linked with the “green shoots” hypothesis, as we pointed out in yesterday’s Notes. We’re deeply suspicious of this hypothesis, however.

First, the data points don’t support a V-shaped recovery, something the green shoots hypothesis implies. Tyler Durden and David Rosenberg made this point loud and clear in their joint recent white paper on the recession. (You can read it here).

Second, we believe that the scrutinizing over numbers is a red herring. We know that the economy is getting worse. Whether or not the pace of the plunge is slowing or not is unimportant. Those who focus on this “second derivative” recovery miss the big picture analysis: the US economy in the most perilous position it’s been in since the Civil War.

Yesterday, Strategic Investment editor James Dale Davidson made this point loud and clear to the underground. Despite the $23.7 trillion TARP overseer Neil Barofsky reckons the feds have promised to backstop the economy, James is convinced that we remain in a secular bear market. And he reckons the S&P500 will retrace its March 9 lows before the recession/depression ends.

This is a Depression, a credit cycle gone bad that still has many chapters to    unfold.

If I am right, you can expect the stock market to work its way, after many adventures, to valuations lower than the March lows. Secular bear markets seldom, if ever, bottom at 13 times earnings, where the S&P 500 stood on March 9. That is approximately twice as rich as the multiples you can expect to see at the ultimate bottom if history is any guide.

Two further points.

Over the past century, the stock market has yielded an average dividend yield of 4.4%. Today, the S&P 500 yields just 2%. This implies well below average returns from here on in.

Another fact you should consider in plumbing the bottom is that financial sector profits, illusory though they may have been, accounted for as much as 75% of all corporate profits in the US in the early years of this decade. These financial sector profits were exaggerated by the explosion of leverage in the corporate sector at that time.

As deleveraging is now the rule of the day, a return to highly leveraged earnings in the financial sector is unlikely. It is far more likely that stock valuations will “revert to the mean.”

And this means a much longer bear market than anyone on CNBC imagines.

3. Since July 10 it’s all been about basic materials and consumer discretionary stocks.

3. Since July 10 it’s all been about basic materials and consumer discretionary stocks.

1. March 9 to May 6 when financials led the way

2. May 6 to July 10 when it was all about defensive growth and strong balance sheets (tech and health care leading the way)

Yet here at Notes we remain cautiously bearish. Why? Because it is our humble opinion that this remains a bear market rally, impressive as it is. Gluskin Sheff’s David Rosenberg says the rally lacks three key ingredients:

1. Leadership
2. Quality
3. Volume

History is littered with such bursts of euphoria. Probably the most infamous is the bear market rally of 1930. Stocks recovered strongly following the November 13, 1929 low. Wall Street became wildly confident that the worst of the crash was over. And for a time the bulls were dead on. From a low at 199 on November 13 the Dow rallied to a high of 294 in April 1930 – up 48%. By the end of the year, the Dow was down to 158. And by July 1932 it had plunged another 41 points.

Believe it or not, this rally occurred in the absence of an economic recession. Although it is largely overlooked today, the U.S. economy held up following the October crash. The rout in stocks was at the time considered to be an isolated incident – a direct consequence of excessive speculation and nothing more.

It is sobering to consider that few thought during the first half of 1930 – when the business curve of the Harvard barometer was almost horizontal and therefore did not signal a recession – that a devastating depression lay ahead.

The lesson from history is that depressions – or bear market rallies – aren’t avoided simply because they are not predicted. Nor are stocks always a bargain because they are “cheap.” At its November low, the Dow sold for only 10-times earnings; it had peaked at 15-times earnings in early 1929. But try telling investors who bought into the Dow in November 1929 that they’d got a bargain!

We bring this up not because we believe that history is destined to be repeated, but because we believe it often rhymes. And it would be foolish not to revisit the lessons of 1930 at this juncture – one year after our own “great crash.”

The casualties of the bear market rally of 1930 included some of the best investing minds of the era. Legendary investor Jesse Livermore lost all his money in the 1930-32 decline and eventually ended his own life. And a reclusive John D Rockefeller issued a statement that contained these fateful remarks:

In the ninety years of my life, depressions have come and gone. Prosperity has always returned, and will come again… Believing that the fundamental conditions of the country are sound, my son and I have been purchasing sound common stocks for some days.

Call us old fashioned, but we simply don’t believe that a secular bull market can last in a recessionary environment. And we firmly believe that the recovery drum has been banged a little too hard by the mainstream media.

To wit, we strongly recommend that Notes readers spend some time familiarizing themselves with the recent “fact finding” study on the depths of the current recession by two of our favorite underground sources, Tyler Durden of Zero Hedge and David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates.

What follows is a very quick-and-dirty rundown of Durden and Rosenberg’s case.

1. The US consumer makes up 70% of US GDP, yet retail sales and wage-based income are steadily declining. And consumer deleveraging continues despite efforts by the Fed and the Obama administration to stem the tide.
2. The business outlook remains bleak. May business sales decline a hefty 18% year-on-year. This is clearly a recessionary signal. Other key business outlook indicators, such as the Philly Fed’s Business Outlook Index and the MAPI Business Outlook Index, are pointing down.
3. There is no reason to believe that an inventory bounce is in the works. In fact, the decline in UPS package volumes (-4.7 year-on-year in June) show that inventory weakness is accelerating.
4. The recent falloff in jobless claims is due to seasonal factors, not an improvement in the economy. “Official” unemployment is under 10%. But the U-6 data (which includes the so-called “underemployed”) is 16.8% – 6.5% higher than a year ago. A consumer driven recovery in this environment is highly unlikely.
5. Housing is still in the ditch. It will take at least five years to mop up excess inventory. This means house price deflation will be a secular trend. This will continue to act as a drag on the banking sector and impair credit quality.
6. There is no top-line business growth. Better-than-expected earnings in the second quarter were achieved by cost cutting, which will have a negative, not a positive, impact on the economy. Stock holders will eventually want to see revenue growth. When this fails to happen, stock prices will come under pressure.
7. State revenues are imploding. The Rockefeller Institute of Government predicts a slide of 20% in the second quarter. California is the first state to go bust. It won’t be the last.
8. President Reagan’s low-tax lesson has been forgotten. There are no fewer than three tax increases planned for upper-income households by the Obama administration. We are looking at a top marginal rate jump of 10 percentage points by 2011. This will bring the top rate to 45%.
9. Although credit spreads are tightening, S&P downgrades of corporate bonds hit records in June. And credit conditions for small companies remains incredibly tight.
10. The overall inflation rate is currently running at -1.4% year-on-year. This is the lowest rate since 1950. There is no threat of real inflation until the excess slack in the economy is absorbed. [Note: We disagree with Rosenberg and Durden here: we see a clear-and-present threat of inflation down the road.]

Yesterday, the Dow lost another 131 points. Another big day down and it will be in the
7,000-range. Oil sank too – down to $62. The dollar, bonds, and gold stayed about where
they were.

Economists are still talking about an “exit strategy.” But in view of what is actually going
on in the economy, they’ll probably want to stay on this highway a lot longer. This is the
long road to ruin, of course. It may be fatal, but it is not – yet – unpopular.
Broadly, what is happening is exactly what should be happening.

The stock market rally is getting old…and may have already peaked out. The consumer is
running out of time, money and credit. He has no choice but to cut back. Savings rates are
rising fast – from zero to about 5% of disposable income.

Naturally, businesses are finding it hard to make sales. Earnings are collapsing…stock
dividends are down sharply…

…and of course, businesses try to cut expenses by lightening up on their payroll.
When the correction began, it was led by losses in the financial sector. Those losses led to
cutbacks throughout the economy. Now, it’s the cutbacks that are leading to financial
losses. The economy followed the markets; now the markets follow the economy.
Investors are realizing that their favorite companies will find it hard to prosper in this
new economic environment.

“US consumers fall behind on loans at record pace,” says a Reuters headline.
Delinquencies are going up on a wide range of household debt. Debtors have never had
such a hard time keeping up with payments. Credit card delinquencies, for example, are
running at 6.6%.

Well…duh.

And no wonder “banks get stingy on credit,” as reported in the USA Today. “Despite
massive government efforts to bolster the credit market, banks are pulling back severely
on card lending,” begins the front-page article.

Once again, we see the feds’ plans failing. They give trillions to the bankers; the
bankers cut back on consumer credit. And why shouldn’t they? They can see what the
rest of us see – the consumer can’t keep up with the debt he’s got already.

“Consumers aren’t going to be able to save the U.S. economy this time,” The
Richebacher Letter’s Rob Parenteau reminds us.

“Total U.S. retail sales have rolled back to levels we haven’t seen since 2005. Imagine if
every single retail shop opened in the last three years shut down overnight. It’s already
that bad.

“A lot of people, from Wall Street to Washington, have a great deal invested in you
believing we can reverse that trend. But, in actuality, the freeze in consumer spending
and the consumer economy could actually take many more years to thaw.”

At least, the consumer has wised up. He’s sick of debt. He’s seen where that road leads.
What he wants is to get out of debt…to be free…to be safe.

It’s the government that remains stuck in deep illusion… The feds know that it was too
much credit that got consumers into trouble. Their solution? Give them more credit!
The banks are issuing fewer credit cards than they did last year – 38% fewer. They’re
pushing credit limits down too – the average limit on a new card is down 3% so far this
year.

Instead of passing money on to customers, the banks are using the feds’ free cash to build
up their own reserves…raise their salaries…and pass out bonuses. Makes sense. What else
could they do with it?

“Uighurs are beasts” shout crowds of Han Chinese in the remote northwest of the
country. Uighurs are the Moslem minority. Han Chinese are the majority. And, judging
from the photos, the Han want to kill the Uighurs.

One thing smart people always do is to underestimate the power of foolishness. It is
wild and reckless to stir up a race war. But that doesn’t stop people from doing it. Any
kind of war is a blow to reason and civilization. But that hasn’t made war unpopular,
even among the most reasonable and civilized people on the planet.

It was within the lifetimes of many people reading this Daily Reckoning that the most
advanced countries on earth began a war of annihilation. At the beginning of the 20th
century, high culture and science were dominated by Germans. German musicians and
composers…German poets and writers…German mathematicians, physicists, painters,
philosophers – even the German economy was a world leader, second in output only to
the United States of America.

Then, the Germans went off their heads – along with the Italians, the Russians, the
Japanese…and many others.

But the Han have it right. The Uighurs are beasts from time to time. So are the Han…the
Teutons…the Anglo-Saxons…and all the tribes on earth. Occasionally, for no apparent
reason, the masks and restraints of civilization give way to mobs…and the old beast starts
howling at the moon.

It happens in markets too. What is a bubble, if not a wild and reckless thing? A kind
of madness? A mass illusion…a foolishness, in which people leave reason and civilization
behind?

What if the United States had to pay its debt in gold?

In the old days, before the monetary reforms of the 20th century…notably, Richard
Nixon’s unilateral decision to renege on America’s promise to pay its bills in
gold…countries had to settle up with each other in the yellow metal. The system worked
well; it was reliable; it prevented bubbles. Edward Chancellor explains:

“A country had to pay for its imports or foreign investments with money gained from a
surplus on trade. If more money was sent abroad than had been earned through exports,
then gold would be packed onto ships to discharge foreign creditors. A declining stock of
bullion would induce the central bank to raise interest rates in order to attract gold from
abroad. Rising rates would produce a credit contraction, unemployment and general
economic misery. The typical nineteenth century was severe, but short-lived.”

Then came the improvements. And the Great Depression. And now we are faced with
another one.

Governments are fighting this one…just as they did the last one…but with much more
money. The cost is in the trillions – most of it in the form of public debt. How will
these debts be paid? We all expect that they will ultimately be eased by inflation – in
full or in part. But suppose the feds had to pay up in real money?

Colleague Simone Wapler compared government debt to government gold. The United
States has gold worth about $241 billion, she reports. Its official national debt is $11.5
trillion. That gives it a debt/gold ratio of 48 – meaning; the feds have 48 times as much
debt as gold.

Britain is even worse. Prime Minister, then Chancellor, Gordon Brown sold much of
England’s gold at the worse possible moment – about 10 years ago. This leaves the island
with only $9 billion worth of gold compared to $1,274 billion of government debt – a
ratio of 1 to 139. But Japan is the worst of all. It has $23 billion worth of gold and $7.3
trillion of government debt, for a ratio of 1 to 323. (Of course, Japan has vast holdings of
dollars too!)

What nation has the best gold/debt ratio? Switzerland. It has only twice as much in
government debt as it has in gold.

Source:The Long Road to Ruin

The latest Spectrem Millionaire Investor Index was released on Wednesday. It confirms the gloomy mood of investors. The index is based on interviews with a subset out of 250 high wealth families. After 3 months of growing confidence the index fell 18 points to -20. Its largest fall since it was started 5 years ago. A range of -11 to -30 is “mildly bearish”. This reverses a record 17 point advance seen in May. This shows just how volatile market sentiment is right now. As for their biggest fears, they were split between the economy and the political climate (27% of the vote each).

“Millionaires ended the first half of 2009 with a substantial decline in investment optimism, ending a run of three-consecutive monthly advances that began in March. The broader affluent population also saw optimism fall. With the economy and the political climate ranking as top concerns, the nation’s wealthiest investors appear to be reassessing their springtime optimism as we move into the summer months,” said George H. Walper, Jr., President of Spectrem Group in their Press Release.

This survey echoes what I have been saying about mixed messages in the market. Investors hate uncertainty. The recent strong performance in the equity markets looks like yet another bear market rally. Having lost a substantial amount of their wealth during 2008 the rich are now being more cautious.

I expect a shift of funds back into conservative assets such as cash, gold and fixed income in the second half of the year.

If you are interested learning how to better manage your money with the Family Office, please reply toinfo@contrarianprofits.com

• British GDP shrank 2.4% in the 1Q (more than the 1.9% shrinkage expected)
• The VIX – a widely used measure of market volatility is – fell 25 points. But it’s still 25% higher than average.
• US equity trading volume is also down – signaling a lack of demand… and a possible sagging in the recent bear market rally
• US Treasury yields have remained more or less unchanged over the month of June despite the boys at the Department of the Treasury flooding the market with an impressive $176 billion in new issuance
• Crude oil prices are up over $71 a barrel. Meanwhile, the IEA has lowered its forecast for oil consumption. (There is enough storage for 62 days of global consumption – 10 days above Opec’s stated goal.)
• June auto sales are will come in at about 10 million units annualized. This is less than 50% their peak and roughly back at levels last seen in the 1960s.

Rosenberg writes that “the crisis at the lower levels of government in the US is now so intense that as many as TEN states may not have a budget prepared for the fiscal year that is about to commence next month!”

Wow!

Notes faithful will be aware that we view the fiscal crisis in California as a precursor of what’s to come in America. The mechanics of this are very simple. The government spends too much money out of an empty pocket to appease and please. It relies on a just about half of the population (according to the IRS the top 50% of earners pay 97% of income taxes) to contribute the majority of the tax revenues. This upside down pyramid eventually topples (revenues shrink while spending increases), and the government is thrown into a “budget crisis” (which is really a spending crisis by a different name).

The US federal government isn’t far behind state governments (a) because it has a larger tax base to rely on and (b) because it can borrow seemingly infinite amounts of money on the international debt markets thanks to the dollar’s status as world’s reserve currency (foreign governments and banks need dollars to buy a wide range of commodities, which are priced in the US currency).

But one day (sooner rather than later in our humble opinion) foreign buyers of US debt wake up and realize that huge increase of dollar-denominated debt on the market is causing the value of the buck to decline… and they look for alternatives.

This is happening already. China and its fellow “Bric” nations, Brazil, Russia and India are already vocalizing their discontent with the dollar-pegged system. The problem is they don’t yet have an alternative mechanism to the dollar. But they’re working on it. And when they come up with an answer to their dilemma, $174 billion in Treasury bonds a month will no longer find a happy home. The feds will have no alternative but to raise yields to attract investors. Higher yields mean higher borrowing rates overall, which mean you can forget about a sustained recovery or a return to the golden years of US economic dominance.

According to Rosie, the situation in the ten problem US states “is so acute that state governments are now threatening to go after unused gift cards for sales revenues — affecting $7 billion of income for the retailing sector.”

If the last three months are any indication, the U.S. tech sector has shaken off its recession-heightened late-winter doldrums, and could see its fortunes soar in the year’s second half as businesses and consumers open their wallets and the broader economy picks up speed.

The technology-laden Nasdaq Composite Index was at the forefront of the most-recent market rally, having soared more than 45% since hitting its 52-week low on March 10. That outpaced both the Dow Jones Industrial Average – up 30% in that time – and the Standard & Poor’s 500 Index – up about 37%.

According to industry analysts, the technology sector – because it is heavily reliant on borrowing, as well as consumer demand – can serve as a harbinger of economic recovery.

“Technology tends to be a leader in the early stages of an economic turn. That’s what we took for as confirmation of a sustainable rally-money rotating into a sector that historically is seen as consumer- and business-sensitive, and requiring more leverage in terms of borrowed money, because it is more sensitive to the economy,” Marc Pado, U.S. market strategist at Cantor Fitzgerald told MarketWatch.com. “I expect technology to continue to lead well through this year and into February of next year.”

Spearheading the Nasdaq’s charge has been Redmond, Wash. software giant Microsoft Corp. (Nasdaq: MSFT).  While its fiscal third-quarter profit fell 11% from a year earlier, Microsoft beat analysts’ expectations, helping the company’s stock to surge more than 50% from its mid-March low. Microsoft is up about 16% in the past month.

Semiconductor manufacturer Texas Instruments Inc. (NYSE: TXN) could trade in the is up more than 45% in the past six months to its current level of about $21 per share. The company could trade up into mid-$30s within 12 months, according to Paul J. Nolte, director of investments atHinsdale Associates Inc., an Illinois money management firm.

Earlier this month, in fact, Texas Instruments sharply raised its second-quarter financial guidance. The reason: Customers had slowed the rate at which they were reducing chip inventories – a signal that the market for semiconductors may be stabilizing.

The company now expects to report earnings per share (EPS) of 14 cents to 22 cents, up from the previous forecast of 1 cent to 15 cents per share.

Opening New Windows

The long-suffering PC market may get a shot in the arm this fall with the Oct. 22 release of Microsoft’s Windows 7, which is all but guaranteed to generate better reviews than its predecessor, Windows Vista. Pre-release versions being publicly tested are already being called better than Vista, which was dogged by geeks and general end-users alike for its slow performance and questionable compatibility with legacy software and hardware.

Stopping short of admitting the goof and giving away Windows 7 to existing Vista users, Microsoft is offering cheaper upgrades to those who pre-order Windows 7 between June 26 and July 11.  The company will offer free Windows 7 upgrades to anyone who purchases a PC pre-installed with Vista after June 26.

Windows 7 is expected to be the operating system of choice for information technology (IT) managers who make purchasing decisions for corporate users.

“The upcoming introduction of Windows 7 could spur a rapid corporate PC upgrade cycle starting in late 2010/early 2011, catalyzed by the end of support for Windows XP and a recovery-based increase in IT spending,” said Jeffries & Co. Inc. analyst Katherine Egbert wrote in a recent research report.

But history shows that a release of a new operating system – no matter how positive the buzz – will translate into only a slight increase in PC sales, Microsoft Senior Vice President Bill Veghte said in a webcastearlier this month. On the business side, enthusiasm is high for Windows 7, but corporations will not rush to upgrade when it is released. The release “will get drowned by the macroeconomic environment,” Veghte said. “As the macro environment comes back, people will have to buy new PCs. People aren’t using PCs any less.”

Game On

Looking ahead, the tech sector is anticipating a slew of product releases in the year’s second half – many of them in the $22 billion video-game sector, which lives and dies on new releases.

Activision Blizzard Inc. (Nasdaq: ATVI), the largest third-party game publisher in the world, will lead the way with the latest in its rock music game series with the September release of “Guitar Hero 5″ on four platforms: Sony Corp.’s (NYSE ADR: SNE) PlayStation 2 and 3, Microsoft’s Xbox 360 and Nintendo Co. Ltd.’s (OTC ADR: NTDOY) Wii. The third iteration of “Guitar Hero” became the first video game ever to achieve $1 billion in sales.

But the music from Activision won’t stop with the last strum of a toy guitar: The company will debut “DJ Hero” in October for the same four platforms. “DJ Hero” will ship with a mock turntable and should appeal to fans that don’t turn to rock for their music fix.

Activision will release new titles for proven franchises such as “Modern Warfare” and “Tony Hawk.” The first “Modern Warfare” title, released in 2007, has sold 13 million copies worldwide and is one of the best-selling games on Xbox 360. The new “Tony Hawk” game represents the 12th installment in the series since it was started 10 years ago.

While sales of console games typically garner most of the attention, it is Activision’s “World of Warcraft” (WoW) playing the role of its single largest sales generator. In 2008, WoW accounted for $1.1 billion in revenue, or 38% of Activision’s total revenue. Sales from all of Activision’s console titles were $1.2 billion. WoW has more than 11.5 million subscribers, Activision said.

Since its dropping down to its 52-week low of $8.14 in January, Activision shares have risen steadily, and are now trading in the $12 range. With a war chest stuffed with nearly $3 billion in cash and ratingsof mostly “Buy” or “Strong Buy” from analysts, Activision may warrant closer study by individual investors, too.

Activision’s rival, Electronic Arts Inc. (Nasdaq: ERTS) also has some potential-big-hit titles coming in the year’s second half, but saw its losses more than double to $1 billion for the fiscal year that ended March 31. Like most game publishers looking to cash in on the holiday shopping season – primetime for consumer spending – EA is saving its best for the second half of 2009.

Titles such as “Madden NFL 10,” “The Beatles Rock Band” and “Left 4 Dead 2″ will sell well, but the outlook for EA on Wall Street is mixed, with the majority of analysts rating the company as a “Hold.”

Some analysts say that EA can weather the current downturn in consumer spending, as it sits on more than $1.6 billion in cash, according to its annual regulatory filing with the Securities Exchange Commission (SEC), but the outlook for the 2009 Christmas shopping season remains uncertain.

Will iSpend?

Following a sharp drop in its stock after the revelation that its chief executive officer’s health may be worse than previously thought, shares of Apple Inc. (Nasdaq: AAPL) have slowly been climbing back toward its 52-week high of $180.91. The shares are currently trading at about 21% below that peak.

The Cupertino, Calif.-based company on June 8 removed a barrier that had stopped many consumers from purchasing its popular iPhone when it lowered the price of its 8-gigabyte 3G model to $99. With wireless plans starting at around $70 per month, Apple’s phone – and perhaps more importantly, its app store – will find its way into the hands of many more consumers in the second half of 2009.

Couple the 8GB iPhone 3G with the newly released, feature-rich 3GS model – and then stir in a barrage of television commercials – and the result should be a marked improvement in revenue.

It is unlikely that Palm Inc.’s (Nasdaq: PALM) Pre will put a dent in iPhone sales, partly because of sustained shortages as Apple floods the market with its phone. However, Sprint Nextel Corp. (NYSE: S) customers locked in their contracts looking to upgrade to a phone with a growing app catalog will see the Pre’s similarities with the iPhone.

Sprint Chief Financial Officer Bob Brust told investors via a webcast at Wachovia Corp.’s Annual Mid-Year Equity Conference that Pre shortages still exist weeks after its launch.

“We still have a backlog of subscribers but it’s not unmanageable and we get shipments every week,” Brust said. Sprint is the exclusive carrier of the Pre.

Analysts estimate that 50,000 to 100,000 Pres were sold in its debut weekend earlier this month, while Apple said the new iPhone sold 1 million units in its opening weekend.

Source: Rebounding Tech Sector Stars Could Play Key Role in U.S. Economy’s Second-Half Rebound

[Editor's Note: This tech-sector preview is the opening installment of a new Money Morning series that will make economic projections for key U.S. sectors for the last half of 2009. As part of that series, look for forecasts for housing, energy, U.S. stocks and the emerging markets.] ]]> http://www.contrarianprofits.com/articles/rebounding-tech-sector-stars-could-play-key-role-in-us-economy%e2%80%99s-second-half-rebound/18629/feed 0