If you grew up in the United States, you know that English literature is one of those subjects they foist upon you in 10th grade or so. I recall very little from English Lit 101. Most of the stories and poems we read (or pretended to read) have become a hazy blur.

But after all these years, one poem still stands out. Due to its oddness and simplicity, I have never forgotten it. The poem is “Red Wheelbarrow” by William Carlos Williams, and it goes like this:

so much depends

upon

a red wheel

barrow

glazed with rain

water

beside the white

chickens.

That poem comes to mind as I ponder the odd yet powerful simplicity of this global market rally. If you take a look around, it is quite impressive how everything has moved higher. And I do mean just about everything. Commodities are up. Currencies are up. Emerging market equities (and bourses around the world) are up. Dead duck U.S. consumer retail stocks are up. Crude oil, which has moved twice as far in half the time in comparison to all previous rallies of the past two decades or so, is way, way up.

So what’s going on? With apologies to William Carlos Williams, here’s the poetic take:

so much depends

upon

a red China

stockpile

paid for by

stimulus

beside the massaged

data points.

Translation for all you non-poetic types: China has taken the “industrial inflation hedge” concept and gone to town with it. It has been stockpiling raw materials and hard assets like crazy, and this in turn has popped the Baltic Dry Index (lots of shipping required) and driven commodity prices up.

At the same time, a steady stream of rosy data points on the Chinese economy has convinced investors that all is well, that “decoupling 2.0″ is at hand, and that the dragon shall boldly lead us into the land of milk and honey (i.e. global economic recovery).

Stockpilin’

The “industrial inflation hedge” concept was introduced in these pages some time ago (and originally to Macro Trader members some time before that). On April 22nd we observed the following:

Hard assets like copper and nickel and zinc are immune to the whims of the printing press, and China will need all those metals and more, in substantial quantities, to build out the vision of economic prosperity it holds for the coming years. And what better time to stock up than in the quiet period before a stimulus- and debt-fueled inflation tsunami returns?

We further observed, in that April 22nd piece, that China would employ three specific strategies in its “stealth abandonment” anti-dollar campaign:

1. Speak to those with ears to hear (i.e. test the waters with subtle trash talk against the dollar).
2. Quietly circulate the yuan (start small, with the intent of later challenge once strength has accrued).
3. Embrace the industrial inflation hedge (buy boatloads – literally! – of raw materials and hard assets).

All three elements have come to pass, as predicted and expected, with one major caveat. Your humble editor expected these strategic moves to be deployed gradually and quietly. Instead they have been deployed rapidly and loudly, to a shocking a degree.

The dollar trash talk has become anything but subtle… Chinese officials are now making aggressive, vocal demands that the yuan be used in more transactions, even going so far as to call for the issuance of yuan-denominated U.S. debt (!)… and, last but not least, the dragon has gone absolutely hog wild with the industrial inflation hedges.

In an eye-opening piece titled “China’s Commodity Buying Spree,” The New York Times chronicles just how much of a hoarding groove China has gotten into:

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.

Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil.

No wonder commodities have been ripping and snorting like the good old days. And no wonder traders are looking around and starting to see inflationary pressures everywhere.

The Page One Problem

We went on record expecting this to happen, and it did. Man oh man, did it ever… and it’s still happening, right now. Copper and oil are breaking out to fresh highs as I write. The commodity currencies, too, are flying higher than a kite (great news for all of you who took our table-pounding currency diversification advice some months back). That’s all a reason to be happy, right?

Yes, but to be honest, for me it also creates a reason to be nervous. I look at some of these incredibly extended trends and I think about an old Yogi Berra line: “Nobody goes there anymore, it’s too popular.” Trends are like people – they can get frail with old age. Trends can also get winded. They need to breathe.

What’s more, China has been so blunt and upfront in its “down with the dollar, up with hard assets” campaign that I’m starting to wonder how far we are from the “page one” problem.

By page one I mean page one of the newspaper. The idea being, you don’t make money from news stories that are splashed above the fold in bold headline type. You make money from the story buried back on page sixteen, where few have really cottoned onto it yet.

It’s the process of migration from page sixteen to page one that produces the profits. By the time everybody and their brother know the deal, it’s pretty late in the game.

Then, too, I wonder how many checks China can write. Ninety freighters full of iron ore! Damn! Where are they going to put all that stuff? When it comes to hard assets, are they going to just buy everything available… or only buy as much as they can afford? Is there any distinction between the two?

It’s very tough to say, of course. We know little about China’s hidden intent, and Beijing likes to play it close to the vest. China-watcher energy analysts are so data starved, for instance, some of them are using the free satellite capability of Google Earth to make guesses about where China might (or might not) be storing crude. (Apparently there is a way to interpret building structures and ground movements with oil in mind.)

China’s strategic intent and spare buying capacity thus become key factors here. If the dragon intends to throw another couple hundred billion directly at hard assets, then maybe the page one treatment won’t matter. A buying spree with that kind of aggressive depth and duration could drive a move for quite a long time, regardless of how many caught wind of it… sort of how oil soared to triple digits and beyond even as the world gaped in awe.

But one has to wonder… could even cash-rich China find itself tapped for funds at some point? I mean, how much aluminum, copper, tin, canola, soybeans and so forth can a country sit on? And beyond a certain point, when the stockpiles pile up to the sky, aren’t there more pressing uses for the funds?

Dubious Data Points

The other disconcerting thing is the lack of visibility when it comes to China’s economy. We are told that China is doing amazingly well, and the official statistics seem to back this claim. Investors certainly seem to believe this, as China’s health is the rationale for bidding up emerging markets like gangbusters.

But there are all kinds of weird discrepancies on the ground. For example, China’s electricity usage has gone down when it should have gone up. That doesn’t make sense if factories are humming.

And then there’s this, via Grant’s Interest Rate Observer. In a recent Morgan Stanley fact-finding trip, the analyst who led the trip reported 11 out of 12 investors left Chinese soil with fresh concerns. “It’s not that the stimulus is not working,” the analyst noted, but more that “the trip exposed massive levels of excess capacity…”

So it sounds like China indeed has a leg up on the United States in terms of putting their half trillion bucks or so to immediate and aggressive work. But while the mandarins in Beijing know how to move fast, they aren’t necessarily the greatest at figuring out what to spend the dough on.

One might further think Western investors, as acquainted with the ills of government as they are, would be more skeptical than Chinese locals in regard to anticipating positive effect. But no… the outsiders buy the China recovery story hook, line and sinker, while the insiders maintain their doubts. “The local Chinese are clearly skeptical,” the same Morgan Stanley analyst tells Grant’s, “as savings rates are rising despite government incentives to consume.”

So Much Depends…

And now we come full circle back to the William Carlos Williams poem.

What we are experiencing now, I believe, is a massive sentiment-led rally (or bull move, or whatever you wish to call it)… and it is almost all pure sentiment so far, with buying rooted in hopes for the future rather than actual improvements reported. “So much depends” on China as savior – the cornerstone and lynchpin of the decoupling 2.0, turn-the-clock-back mentality that has now gripped the globe.

My slim hope is that the Chinese really and truly know what they are doing, because, in fueling investor optimism with such flair, they are playing a high stakes game. My worry is that they drop the ball, somehow, and the result shows up as a violent wake-up call for “high beta” assets… emerging market equities, energy, commodities and the like.

What happens next is far from clear. The huge stockpiles could continue to grow at a breathtaking pace – after all, Beijing has plenty of greenbacks to work through – and the dragon’s data points could continue to impress, or at least not frighten.

But with that said, a stumble from the dragon… and the shock of a sharp, swift deflationary contraction immediately following… does not feel like a far-fetched scenario at this point. It would certainly have profit potential as a surprise event, given how far the notion seems to be from Mr. Market’s mind.

Source: The Fate of This Rally May Rest in China’s Hands

This from Smart Profits Report:

Stating that the retail sector has suffered a bombardment of bad news the last few months is like saying the Atlantic Ocean is wet.

My colleague Paul Moore wrote an excellent piece on Tuesday, detailing Circuit City’s (NYSE:CC) problems. Let me first say that I agree with Paul on Circuit City and that its woes are company-specific and a result of poor management, rather than a sector wide problem.

While we may not see bankruptcies springing up everywhere, expect this holiday season to be a bloodbath for retailers.

Let’s look at what this year’s crucial shopping season has in store – and of course, the best ways to profit…

A Shift In American Shopping Philosophy

“Shop ‘Till You Drop.”

No sooner have many Americans digested their Thanksgiving turkey and got over the tryptophan-induced grogginess and bloating than they rush out to the mall, with this rallying cry ringing in their ears.

The most important factor in trying to forecast retail sales is income. And because we’re not a nation of savers, if Americans are making money, they’re usually spending it soon afterwards.

The problem right now, though, is this: Because the country has endured a widespread slump, Americans are starting to change the way they think. They’re fearful about their incomes.

Average consumers have already cut back on their spending, and will likely tighten their wallets even more as we head deeper into this overarching bear market. And with good reason, too…

The Stats Paint An Ugly Picture

• On Wednesday, Fidelity Investments started the process of laying off 1,300 workers.
• Chicago Mayor Richard Daley said Wednesday that CEOs who do business in Chicago have warned him that mass layoffs are coming this month and in December – with more on the way next year.
• According to the Bureau of Labor Statistics, over 235,000 people lost their jobs in 2,269 mass layoff events, which are described as layoffs involving at least 50 people in a single action.  This was the highest total since 2001.
• Job losses on Wall Street alone are expected to total at least 45,000.

On top of that, initial jobless claims are at the highest level in eight years and we’ve got an unemployment rate of 6.5% – a figure not seen since 1994.

Those figures alone spell trouble for the retail sector, but when people suggest those numbers could climb into the double-digits, well… you can imagine the misery that would ensue.

Simply put, people are just plain scared. Retail is enduring a double-whammy. On one hand, it’s suffering because people are already getting laid off and don’t have the income to buy flat-screen TV and iPods. And following swiftly behind it is the very significant issue that existing workers, mindful of the ugly trend, are worried that the next swing of the axe will hit them.

In other words, it’s bad right now and likely to get worse. One of the biggest casualties of the whole affair will doubtlessly be the retail sector, as it gets pounded like a veal scaloppini.

Your Christmas Stock Shopping List Should Include These Three Retailers

Since the market hit the skids, I’ve been a big advocate of compiling stock watchlists to keep on your radar. That way, when it’s time to pull the trigger, you’ll have all the resources and information right there at your fingertips. All you’ll need to do is take a deep breath and fire.

So, with that happier thought in mind, here are some retailers you might want to start thinking about:

~ Kohl’s (NYSE: KSS)

Kohl’s is in an excellent position to take advantage of the bankruptcies of competitors such as Mervyns. According to Toronto-based Thomas Weisel Partners, Kohl’s has picked up 20% of Mervyn’s market share in areas where Mervyns had to exit.

Since Mervyns plans on closing another 149 stores in California, that gives Kohl’s even more room to maneuver, which should provide a holiday boost.

~ Wal-Mart (NYSE: WMT)

There’s no doubt that Wal-Mart’s core demographic is feeling the pinch in this economy, with little leeway to buy new televisions and other extravagances.

However, while they can easily cast aside those extras, they still need necessities such as food and clothing – areas where Wal-Mart excels because of its lower prices.

And speaking of lower prices, you’re likely to see Wal-Mart attracting new customers these days, too. Gone are the good old days when you could just stroll into Coach and treat yourself to a new purse or briefcase. Luxuries like that are off the table for now, so Wal-Mart options are looking better and better to many people.

As CEO Lee Scott states: “Wal-Mart has momentum as we move into the fourth quarter. At a time when our customer is feeling the pressure of a tough economy, Wal-Mart’s price leadership is more important than ever.”

One caveat, though. Despite blowing third-quarter estimates away, with profits rising 10%, Wal-Mart has trimmed its fourth-quarter profit outlook, due to economic concerns.

~ Dollar Tree (Nasdaq:DLTR)

Not surprisingly, Dollar Tree shares are up significantly this year. In fact, the company boasts the best margins in the business right now. It chalked up double-digit earnings growth over the past two quarters and consumer traffic is increasing. The stock is trading at just 1.09 times its expected 14% growth rate. We don’t advocate shoplifting, but this is a steal.

… And A Happy New Year

The retail picture isn’t pretty. But it’s not completely ruined.

There will be a time when it will be right to get back in to stocks like Whole Foods (Nasdaq:WFMI) and Tiffany’s (NYSE:TIF). And that time will be before the economy is showing signs of recovery.

Why? Because we want to buy them cheaply when nobody else wants them. But we still have time before that occurs. In the meantime, concentrate your efforts on the companies like the ones I mentioned above – ones that should thrive and emerge stronger because of the hardship.

Source: Grandma Got Run Over By A Reindeer: How You Can Profit From The Retail Sector Bloodbath This Holiday Season

This from Today’s Financial News:

It is tough for many investors to admit, but marketers rule Wall Street. On most days, it is not true fundamentals that rule the Dow. It is the change in the way we perceive a company’s valuation that makes a stock go up or do.

If marketers do their job, share price rises. If they fail, shareholders feel the pain.

Investors rarely weigh a company’s marketing talent in their decision-making process. It is a flaw that could cost them dearly. In many cases, a firm’s marketing team has more to do with moves in its valuation than do changes on its income statement.

A perfect example is Under Armour (NYSE:UA). The company has one of the best marketing strategies in all of business, but even the most talented salesman cannot sell something to a person with no money.

Blinded by the facts

Look around Wall Street. Best Buy (NYSE:BBY) told us yesterday it has witnessed a “seismic” shift in consumer spending. Macy’s (NYSE:M) posted a horrid third-quarter earnings report. And Linens ‘n Things is headed to the history books.

On the other hand, Goodwill Industries reports sales are up by 7%. Ultra-discount stores like 99 Cents Only (NYSE:NDN) and Family Dollar (NYSE:FDO) are seeing their share price soar. Wal-Mart (NYSE:WMT) is the only major retailer with even a semblance of good news.

The only places Americans are spending their money is at the cheapest store they can find.

So what in the world continues to make investors believe Under Armour and its expensive discretionary clothing lineup will maintain historic sales levels?

Let’s face it. The American economy is in a deep recession. The folks that were buying Under Armour’s over-priced and trendy gear are now the ones that have lost their jobs and cannot afford their homes.

The last time I recommended betting against the company, we raked in gains of over 70% in just five days. With share price above $21 today, it is time to do it again.

Here are some facts to prove my point:

-    U.S. retailers recorded their worst October ever, with overall same-store sales dropping by 0.9%.
-    Consumer confidence is at its lowest levels ever.
-    Under Armour continues to operate with negative cash flow.
-    Maverick Capital, which owned over 7% of Under Armour, just unloaded its entire position.
-    The number of shares short has grown to 36.5%.

With figures like those, it is hard to believe investors are willing to maintain the company’s price-to-earnings ratio of 23. It is foolish to think the company will maintain a sales pace anywhere close to levels it has enjoyed lately.

Even the company’s executives know a rough road is ahead. They just lowered their operating income estimates to a range of $97.5 million to $104.5 million. They previously announced expectations of $104.5 million to $105.5 million.

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—————

With consumers basically locking their wallets and throwing away the key, even the new estimates are far too high. With consumer spending at the retail level dropping by nearly one percent, investors should not believe Under Armour will grow its sales by 24%.

Under Armour’s brand is one of the strongest in the industry, but a brand can only take you so far. Once a company matures and enters its slow-growth phase, fundamentals take over and investors take a dramatic hit.

Under Armour’s overly loyal investors have had a tough time realizing this time-tested fact. They will suffer as share price drops towards $15 after the next earnings release.

Unless you take a short position, steer clear of this falling star.

Source: Under Armour (NYSE:UA) Cannot Hide From A Recession

This from Smart Profits Report:

Here in the U.S., the mess continues unabated. The government had to reshape its bailout for AIG, including forking over an extra $40 billion. But despite the floundering company’s fourth consecutive negative quarterly report, the markets reacted positively to the story.

That didn’t help avert the crisis other areas, as Detroit’s automakers repeated their increasingly desperate pleas for some financial muscle and Circuit City (NYSE:CC) filing for Chapter 11 bankruptcy in order to seek protection from its creditors.

This came just a week after the electronics giant announced that it will close 155 of its 1500 stores. No wonder investors aren’t showing any confidence in the markets.

The fact that a mismanaged institution like Circuit City would declare bankruptcy wouldn’t be all that disconcerting at most times of the year. But when it’s right before Christmas…

However, this news might not be as bad as it seems. Smart investors know that Circuit City is an anomaly rather than a harbinger of the retail sector’s future…

Black Friday Or Red?

Black Friday – the traditional post-Thanksgiving excuse to shop until you drop – is only a couple of weeks away. Retailers like Circuit City, which depend on the holiday season for the bulk of its annual revenues, typically capitalize on the bargain-buying hordes in a number of ways. First, it opens the doors before the birds have started their early morning wake-up call and offers free prizes for the first few customers.

Even mismanaged companies can breathe a sigh of relief during holiday season, as they know exactly what to expect: Customers and cash.

But Christmas isn’t coming early for Circuit City. Not when Hewlett-Packard (NYSE: HPQ) and Samsung reduced or canceled its lines of credit at the very time when the retailer needed it the most. Sony (NYSE: SNE) even went as far as stopping delivery trucks in transit.

Why Circuit City Can’t Compete With The Big Boys

Take a look at the chart of the three-month LIBOR trend below. It indicates that the credit markets are beginning to loosen. The cost of inter-bank lending appears to have peaked on October 8 at just under 5.4% and has trended downward since.

As far as Circuit City is concerned, its pressing need for cash unfortunately happened to coincide with the credit crisis, and peaked shortly after LIBOR began to fall.

The threat of liabilities off the balance sheet has haunted both the company and its creditors for some time now. Circuit City is tied into multi-year leases that resulted in $116 million worth of termination cost liabilities as of August 31. And last week’s announcement of 155 store closures will probably account for $183 million more.

Even if the company were able to liquidate everything, the liability related to closing stores would be devastating, as the firm’s 1,500 locations are reduced. How many other companies can say they share those same sad stats?

In A Changing World, Circuit City Lacks Foresight

To top it all off, Circuit City showed a fatal inability to evolve with its industry.

Over the past few years, the Apple (Nasdaq:AAPL) database has emerged as the central point for music purchasing, edging out the previously popular CD. And folks who still like CDs usually rely on Wal-Mart (NYSE:WMT) and Internet retailers such as Tigerdirect and Buy.com, which offer lower prices compared to, say… Circuit City.

Cast the financial aspect aside for a second and chief competitor, Best Buy (NYSE:BBY) offers enviable customer service in its Geek Squad and personal shoppers. By contrast, Circuit City didn’t have the capital to capture the high-end of the market and, with pricing pressured at the low-end, the firm has quite simply languished until its cash reserves have disappeared.

Sure, the credit crisis didn’t help. But Circuit City can only blame it as a catalyst and not as a primary reason, since it’s been losing ground to Internet companies ever since iTunes made its debut.

Circuit City Had It Coming… But Its Main Rival Should Benefit

So at the risk of sounding blunt, Circuit City had this Chapter 11 coming. It’s simply a logical conclusion to six months of trouble, in which the company had to cut its dividend, lost an opportunity to be acquired due to lack of disclosure, and put plans for a new distribution facility on hold.

In this gloomy economic environment, most onlookers may see Circuit City as a prime example of what is going to happen to the rest of the retail sector, as we slide further into a recession. And with the critical holiday season around the corner, who can blame them?

A closer look, however, shows that while those fears are understandable, they’re not well-grounded. For some retailers like Best Buy, which will undoubtedly benefit from consumers not wanting to buy gift cards and extended warranties from Circuit City, this may actually be the end of the beginning rather than the beginning of the end.

Source: Circuit City Blows A Fuse… But Here’s Why Its Bankruptcy Doesn’t Spell Holiday Doom For Retailers

Stores like Whole Foods (NASDAQ:WFMI) and Trader Joes are watching their customers head to low-cost competitors like Wal-Mart (NYSE:WMT) and Safeway (NYSE:SWY).

It is no surprise to see an ultra-cheap retailer like 99 Cents Only Stores (NYSE:NDN) climb its way to the sole spot on the list of companies reaching 52-week highs today. The global economic crisis has actually been the best thing to happen to the company’s share price in a long time.

The rationale behind the positive run is obvious. When the economy is in the gutter, consumers have less money to spend on the things they need. So they go to the cheapest retailer they can find.

A wino’s delight

When we need a toothbrush, why spend $4.99 on a fancy name-brand brush when you can get one for less than a buck?

Or how about cleaning supplies? Or stationary? 99 Cents Only even sells bottles of wine at its namesake prices.

Of course, 99 Cents Only is not the only ultra-cheap retailer doing well these days. Dollar Tree (NASDAQ:DLTR) and Family Dollar (NYSE:FDO) are both multi-billion dollar companies making their investors money over the past few months.

While these companies may appear as an oasis in a desert of losses, investors need to use caution. All three stocks have gotten a lot of attention lately and are becoming overpriced.

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With stocks as volatile as nitroglycerin, gold should be trading above $2,000 an ounce! But the dollar insurrection has shaken up the commodities markets. Some experts now put gold’s downside at $500… even $400.

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—————-

For example, after more than doubling its share price since July, 99 Cents Only has a price-to-forecasted-earnings ratio of over 30. If the next earnings report misses expectations by only a small margin, shareholders could be in for a sizeable drop.

Granted, sales have increased over the past three months and are likely to surge even higher during this quarter, but the competition is catching up. Traditional retailers, which are often slow to react to economic waves, are finally making moves to target consumers during a recession.

Eye-catching sales and incentives are drawing cash-conscious consumers back into retail stores. Beyond that, ultra-discounters do not offer all the products consumers require. They will still head to the more-expensive “big box” stores for their needs.

Consumers are changing their habits, leading savvy investors to follow. Track the trends and invest appropriately and you could be one of the traders celebrating a 52-week high today.

Source: Cheap date: 99 Cents Only Store (NYSE:NDN) hits 52-week high

This from Money Morning:

Apple Inc. (Nasdaq: AAPL) used to rule its niche world and will continue to do so, with lots of room to grow.

As Coldplay’s “I used to rule the world…” played softly on the outside stereo speakers of my sailboat “Southern Cross” as my family and I pleasantly glided by Execution Rock on a gorgeous Sunday afternoon in the Long Island Sound, I could not stop myself from thinking how the song got there.  It was coming out of my daughters’ Apple iPod, interfacing with the boat’s new iPod-ready stereo system.  And I was wondering whether it was time to get into Apple’s stock.  Yes … even on a weekend sail.

Strong Results

A few days after my family’s sailboat outing, I saw that Apple had posted its strongest results ever. The Cupertino, Calif.-based company said that it’s launching its next generation of Apple computers at higher prices – justified, as usual, by the uniqueness and hard-earned “coolness” factor that’s inherent in Apple machines.

Additionally, Apple just got Best Buy Co. Inc. (NYSE: BBY) to start selling its popular Apple iPhone in its chain of Best Buy electronics stores. And with Apple currently sitting on a $25 billion cash hoard, and having no debt, the speculation now is that Apple will launch a huge stock buyback.  After all, given Apple’s uniqueness and innovation excellence, there is little out there that could complement the company and it has a history of eschewing acquisitions.

At Friday’s closing price of $98.24, Apple shares are down about 52% from their 12-month high of $202.96. The stock is trading at 20 times earnings, but with its consistent high earnings growth, the company’s Price/Earnings/Growth Rate (PEG) ratio is less than 1.0, meaning the shares are right now priced at bargain levels.

If those consistent, predictable earnings continue, this stock is an absolute steal. But that raises the question: Will those predictable earnings continue?

For now, at least, the company seems to have all its “ducks in a row.”

While Dell Inc. (Nasdaq: DELL) and other PC makers are suffering, Apple is on a roll.  The iPod continues to rule the MP3 player market and has given birth to an entirely new, higher-end, higher-margin product, the iPhone.  The iPhone – and to a lesser, but still-important extent, Apple computers – have each been a tremendous success.

In the last quarter, Apple sold nearly 7 million units, more than five times the number of phones than in the same quarter last year.  This points to major market share gains from the estimates as recent as May. For a look at these market-share estimates, let’s take a look at Chart I:

Chart I: Wireless Phone Market Shares (By Brand)

56% Symbian (primarily Nokia)
13% Windows Mobile
12% RIMM Blackberry
9% LINUX
7% MAC (iPhone)
2% Palm
1% other
Source: Industry statistics, Money Morning Staff Research.

More importantly, Apple has recently been selling more units than the king of the enterprise-mobile phone segment, Research in Motion Ltd. (Nasdaq: RIMM) lately.  The mobile phone market is huge and has been almost doubling in size year after year.  And although growth is expected to slow a bit in the future, the profit possibilities remain huge.  Could these market growth numbers and Apple’s share gains be maintained?

To get a better idea, I started by studying the worldwide market-share sales projections for the “smartphone” market. Admittedly, these statistics harken back from before the current financial crisis really took hold in the past month or so. Still, it’s a good starting point. Let’s take a look at Chart II:

Chart II: Projected Global “Smartphone” Sales

The year-by-year and projected annual breakdown of global smartphone sales between both the high-end consumer and conventional corporate users (in millions of units).

Year Corporate          High End Consumer
2006 :                     12            +              39
2007                       21            +              77
2008                       40            +            134
2009                       74            +            219
2010                     111            +            300
Sources: Industry Statistics, Money Morning staff research.

The Competitive Landscape

To make some sense of the competitive landscape the Apple iPhone is facing, I called my friend Brenda Lewis, principal in Transactions Marketing, Inc., and a venture manager who has launched many mission-critical wireless businesses and who lives and breathes mobile phones.  I wanted to validate the industry forecasts for growth in “smartphones” – both for high-end consumers and for enterprise users.  I shared my forecasts and what I heard from Brenda was eye opening. “These forecasts for the high-end consumer are far too high now, especially given the lack of personal discretionary income in most markets,” she told me.

Of course, she is right.  Personal discretionary income has likely gone negative in the U.S. market because of high household debt and the need to replace lost retirement savings. But it’s also severely reduced in Europe and Japan, because of lower trade flows and job losses due to the global downturn.

Even so, there are roughly $5 trillion worth of stimulus packages that have been committed to the overall global economy by various governments around the world.  And we can expect to start seeing the benefits of those liquidity infusions very soon.

So the picture and slowdown we are feeling right now will “surprisingly” improve in about six months. In the meantime, economic numbers will be very tough, since the financial freeze brought the economy to an abrupt stop and unemployment is likely to spike – even from the already-increased levels we’re seeing right now.

Economic inertia is hard to shift quickly.

So until the economy turns around, it’s wise to consider other possible catalysts. For instance, what about the possibility that corporate users could adopt the Apple iPhone?  My hopes for being the discoverer of that as-yet-unknown-by-Wall Street catalyst were likely dimmed by Brenda, who said that corporate chief information officers (CIOs) “will likely use the downturn as a reason to reduce the number of devices permitted for enterprise use and to consolidate central CIO control of current business unit devices, a continuation of a trend of the past five years.”

Again, the enterprise-market segment, which she knows intimately, has two main concerns:

• Total cost of ownership, which includes the initial price for the phone, as well as the service and, very importantly the maintenance.

• Data security.

The latter one is a killer for the iPhone in the enterprise market, since corporate IT departments cannot remotely shut down iPhones that are lost or are stolen as they are able to do with Research in Motion-made Blackberries. In addition, the locked nature of the iPhone makes it very difficult for IT departments to customize solutions for company use.

So, while the iPhone is superb from the consumer standpoint for its “coolness” factor and functionality, and for the fashion statement they make for those who wear them in visible locations, Blackberries actually accomplishes many more business-critical functions for corporations, and at a lower cost. This means that Apple’s traditional consumer focus – a niche that it dominates – is shrewdly placed.

Competitive Threats for the iPhone

What about risks to the Apple iPhone’s success in its own turf – the high-end consumer?

Well, for starters, Apple faces many brewing challenges: For instance, Wal-Mart Stores Inc. (NYSE: WMT) is starting its own online music-download service, and will undercut the Apple iTunes prices by about 25%.

Wireless phone heavyweight Nokia Corp. (ADR: NOK) is operating a similar story overseas, and it is unclear how long it will take them to come to the U.S. market. More ominous is the ultra-secret plans of Internet-search behemoth Google Inc. (Nasdaq: GOOG), which has launched its own branded Google Phone, which will be sold by Walmart at a discounted price of  $148 (compared with a price of $199.99 for the Apple iPhone at Best Buy, for example).

The Google Phone is revolutionary and appeals to the spirit of the U.S. “techie” crowd: freedom.  It is designed with an operating system, called Android, that’s been tagged with the marketing slogan – “apps (applications) without walls.” The whole goal of the device is to speed up users’ ability to access and surf the Web via a mobile phone – all too often a very slow process, right now.

The Google phone also emphasizes the hottest trend in phones today, with the ability to provide “location services,” such as customized weather forecasts, directions and listings of nearby businesses and attractions.  Finally, the operating system is, unlike Apple’s, is “open source.” This means that it will be extremely easy for anyone to develop new applications for the phone and for corporate IT departments to create customized applications for their employees to use on the phones. There’s even an alliance of software developers – called the “Open Handset Alliance” – whose chief goal is to encourage such custom developments.

As if this new threat were not enough, Nokia, the king of the mobile consumer market, announced its Nokia Tube (5800). Research in Motion is adding to its Blackberry lineup with a newly launched iPhone competitor called Bold. And Samsung Electronics Ltd. is coming out with its entrant, Instinct, a touch-screen phone with some features that are not available in the iPhone, like streaming TV.

And even Garmin Ltd. (Nasdaq: GRMN), the ruler of the GPS device world – and the topic of a recent, well-read “Buy, Sell or Hold” feature here in Money Morning, has launched its nüvifone, that, unlike the iPhone, gives you turn-by-turn directions.

My conclusion is that Apple’s iPhone business will continue its strong growth, but that the growth won’t be as strong as Wall Street recently projected. There will be market growth concerns in the near future, and with rivals ganging up on the successful iPhone, some of the market-share-gain momentum that we’ve recently seen will be blunted a bit in the future, although Apple will keep gaining absolute market share.

What about their computers?  Enjoying the synergistic “halo effect” from its iPod, iPhone and iTunes strategy, Apple keeps gaining market share in the computer market. Another Apple hit was its adoption of Intel chips that can run the Mac OS X, Leopard, and Windows Vista operating systems in the same machine, even simultaneously, with virtualization software.

I am encouraged by these machines, but not exuberantly so. Apple now faces very serious price competition from Windows-only systems.  But on the other hand, the segmentation of the market is critical and the ease of use, maintenance, fast recovery from hibernation, advantage in graphic-intensive tasks, intuitive use and virus-free environment make a Mac irresistible for its traditional constituents, provided they will keep paying the very steep Mac premium pricing.

The conclusion is that, moving forward, with 41% of sales coming from abroad and very small absolute market shares in its key iPhone and Mac businesses, Apple is very likely to be able to continue to gain market share, albeit at lesser pace. Also, given its consumer-centric focus, as the consumer gets hit in developed countries, sales growth will wither, while growth in emerging markets actually can accelerate.

Apple is not a pure computer company any longer, but is instead a consumer products company – and one that possesses a very cohesive strategy. That’s what will allow it to continue to survive and thrive.

The stock – with a PEG ratio of less than 1.0, is a bargain right here. But in the highly volatile environment, wait for weakness to start accumulating it, and take your time.  Apple’s results are much less dependent on the iPod today, and thus the soon-to-be revealed disappointing Christmas season is nowhere as important as it used to be.  So I would buy two-thirds of my position prior to year-end and the remaining third over the subsequent three months in the first quarter, as the bad news over the economy keep trickling in.

ACTION TO TAKE: BUY Apple Inc. (Nasdaq: AAPL), but do so with some care. Purchase two-thirds of your position between now and year-end, and the final third during the first quarter of the New Year.

Source: Buy, Sell or Hold: Apple Inc.

This from Today’s Financial News:

Should a retail chain be severely and directly impacted by the fall of the nation’s real estate market? Should retailers divert from their core strategic mission and invest directly in the nation’s real estate market? Those are the questions Target Corp. (NYSE:TGT) investors are asking the company today.

According to William Ackman, the boss at Pershing Square Capital Management, the answer in Target’s case is no. He is pushing the company’s management to spin off its nearly $20 billion in real estate holdings into an independent real-estate investment trust (REIT).

Sure, almost every retailer’s revenues will be negatively impacted by an economy that is slowing because homeowners can no longer use their houses as built-in ATM machines. But that is something retail investors must expect. What they may not expect is the value of their positions to drop because of fluctuations in the value of the land their stores are sitting on.

By unloading its land investments, Target is free to focus solely on its retail mission without the threat of fluctuations in the real estate market dramatically altering its earnings potential.

For example, shares of Target have dropped by nearly 50% in the last year. While it is impossible to accurately determine how much of that drop can be attributed to lower retail sales growth and how much can be blamed on the decline in its real estate holdings, we can be certain that the fall would be dramatically smaller without the burden of real estate losses.

But we must remember the real estate pendulum swings both ways. Right now, real estate prices are depressed and share price is down. When the momentum swings the other direction, Target shareholders would see their holdings appreciate at a higher rate thanks to real estate gains.

Even with this risk, Ackman is right. It is not Target’s responsibility to hedge against real estate fluctuations. All it does is distract the firm from its core goals. By selling off its holdings and leasing its properties, investors are given a much more pure revenue stream to analyze and predict.

After the spinoff, if investors want to remain invested in the land holdings, they can use their proceeds of the sale to invest directly in the newly created REIT.

When investing, it is extremely important to compare apples to apples and oranges to oranges. When a company’s balance sheet is compromised by non-strategic irregularities, it makes forecasting difficult and smart investing nearly impossible. It is impossible to tell what is an apple and what is an orange.

Keep a close eye on Target over the next few months. Share price jumped on the notion this morning and has since leveled off. If Ackman’s demands find momentum, share price will continue to climb.

Source:Target (TGT) investors call for real estate sale

Lower gas prices, the theory goes, should translate into a bump in spending. This would be a big boon to the retail sector in the run-up to the Christmas buying season.

Andrew Gordon is skeptical of this analysis. He says the real savings per household will be too small to make any real difference to consumer spending, even though he expects gas prices to continue their fall.

A quick look at the numbers might suggest otherwise. After all, every penny increase for a gallon of gas equals more than $1 billion in consumer spending over a year, according to Citigroup (NYSE:C).

But let’s break down the numbers a little more.

On June 1st, American households were spending an average of $83 a week for gas. Gas peaked around mid-July along with crude’s peak. American households were spending $86.50 per week for gas. Since then the price of gas has dropped roughly 12 percent to $76. So families are now saving $10 per week from the peak in mid-July.

But gas is still falling. And it’ll continue to fall as crude bursts under the $100 per barrel barrier. Gas is right now averaging $3.65 a gallon. I believe it’ll easily go below $3.50 by the end of the year. That’s another four percent drop. But let’s be conservative and raise gas savings by two percent. So families will be saving $12 per week from now until the end of the year.

There are 12 more weeks to go before the holiday season begins. The savings for families before they hit the stores on “Black Friday”? It’s a grand total of $144.

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And, mind you, this is not a check you get in the mail. The savings will accrue gradually. People will hardly notice the savings. Of course, they might notice that they’re still paying high prices for food and other goods – despite a drop in commodity prices. Take a look at the CRB commodity index…

Commodity prices are down an average of 25 percent from their peak in June. They’re hitting a support level right now and are oversold (according to the Slow Stochastics).

But with the rest of the planet following the U.S. economy down the toilet, prices could easily continue to fall. The real test will come when (and if) prices fall to the 200-week moving average support at about 340.

They haven’t fallen below that level since mid-2002 when the economy was just coming out of a recession. Of course, back in 2002, you didn’t have trillions of dollars of hedge fund and other institutional money fleeing the commodity markets, either, like you do today. So the drop in commodity prices is happening much earlier in the economic cycle.

These falling prices, however, will take a while to reach the stores. You see, manufacturers have been swallowing the bulk of input price hikes over the past few months when these prices were surging. Now that they’ve fallen back, these companies have a chance to build their profit margins back up.

PS: Yesterday, Wave Strength Options Weekly editor Adam Lass recommended investors to short the retail sector. Read on here to learn more about how to profit from the retail sector’s woes.

Source: The Hype Behind Cheap Gas

Commodity prices had been soaring since last November, and producers couldn’t raise the prices of their end products fast enough to keep up. So you can understand if they are hesitant to freeze prices or lower them now that commodity prices are falling.

Combined with inflation running high and consumer confidence running low, this means the retail sector will struggle in the coming months. Most of the companies in the sector have already reported second-quarter earnings. And most were able to meet or beat expectations. However, a number of them have lowered expectations for the third quarter.

Unfortunately, there isn’t an ETF that makes money when the retail sector goes down. However, staying away from the retail sector can benefit your portfolio. Should the economy turn around in the fourth quarter, retailers will benefit at Christmas time. By then, their earnings expectations could be extremely low and easy to surpass. So stay away from the retail sector for now… but look at it again come the holiday season.

P.S. Making money these days is as much about knowing what NOT to buy as it is about buying right. Investment analyst Rick Pendergraft can show you simple system he uses to make investing decisions. Learn the details here.]

The fast growth of the emerging world made it clear that demand for commodities of every kind was going to soar and a quick look at pretty much any part of this sector – whether precious metals or palm oil – left little doubt that supply wasn’t going to be there to meet it.

So I started being bullish on precious metals, industrial metals and any kind of fossil fuel seven years ago.

Then, three years ago, I started my love affair with soft commodities as I began to understand how people’s eating habits would change as incomes rise and, of course, as global governments decided that biofuels were the silver bullet that would kill off global warming.

Over the same period of time, it seemed obvious that the housing bubble and the consumer boom it was driving couldn’t go on for ever, something that would hit growth in the west hard.

I was far too early with much of this (I started trying to sell my own flat in 2003 – luckily no one bought it until mid-2007).

But still, when the time came, I wasn’t holding any houses, housebuilders, commercial property or retail stocks, either here or in the US. I’ve been very clear on all sorts of other things, too.

Sometimes, I’ve been right (recommending investing in Brazil for example) and sometimes completely wrong (buying uranium just as it tanked). But the point is this: it has been an easy time to have big opinions and I’ve had lots of them.

That’s not the case any more.

Sure, I still wouldn’t touch anything to do with property or western consumption with a bargepole. That bit is easy. And I wouldn’t buy most physical commodities right now, either – as oil starts to pull back from its mini bubble, other things will too.

On the other hand, I remain convinced that the commodities supercycle has many years to run as the Chinese and the Indians keep buying cars and building highways. Not being a trader, I’m not prepared to sell all my long term holdings in big oil and mining shares, either.

Then, there are stock markets themselves. Look at the numbers in isolation and they seem pretty cheap: the FTSE 100 trades on a price/earnings (p/e) ratio of a mere 11.5 times and yields 4.5 per cent.

That’s not bad. Until you think about how bad the economy might get as house prices keep falling, consumers stop spending and unemployment rises. If that means earnings don’t rise, 11.5 times is a high price to pay for equities. And then there’s inflation – now rampant everywhere.

There is an idea that equities are a good thing to hold in inflationary times – because they are a “real” asset they are supposed to hold their value. But it didn’t quite work out like that in the 1970s.

Instead, according to Barclays Capital, between 1969 and 1979 the average annual real return for UK equities was -2.3 per cent.

That’s better than bonds, but not exactly the kind of return that would have you rushing out to put your name on the list for one of Burberry’s £11,000 alligator skin handbags.

Thinking about inflation is confusing too: will prices still be rising next year?

Five years ago, it was easy to place your bets on inflation. Interest rates were low, money supply was rising far too fast around the world, commodity prices were beginning to break out, and it was already clear that the prices of jeans and DVD players imported from China couldn’t actually fall indefinitely.

So the fact that inflation is on the up everywhere shouldn’t come as too much of a surprise.

But if – as I think we can expect – the credit crunch really gathers pace and recession takes hold might we not see the return of deflation instead?

Société Générale’s number one bear Albert Edwards thinks so. He’s expecting the next few years to offer us a sample of Japanese-style deflation accompanied by a brutal bear market. Nasty.

I think I’m more inclined to expect stagflation than deflation, given how entrenched easy money policies are in the US. But, either way, there doesn’t seem to be a good reason to buy much in the way of western equities.

Now the good news. My ongoing confusion about the current state of our markets tells me one simple thing – that I should hang on to my gold.

The price of gold has already fallen 14 per cent since its peak of $1,033 back in March, and it also had a bad week as the dollar rose.

But, in uncertain environments, what we all need most is insurance. And gold is the best financial insurance you can get over the long term.

There is a perfectly reasonable fundamental case to be made for holding gold: supply is limited and demand high. However, the real point is that the future is very uncertain and not in a good way.

We could see an inflationary recession. We could see a deflationary recession. But what I think we can be pretty sure we won’t see, over the next few years, is stable growth with stable prices.

Tim Price of PFG Wealth puts the case nicely. “There are few things you can count on in a full-blown economic and financial crisis,” he says.

“Not central banks, politicians or Wall Street banks, and not paper currencies – the dollar lost 98 per cent of its purchasing power during the 20th century.”

“But several thousand years of world history point to an alternative store of value, in the form of this iconic, shiny yellow metal, whose very scarcity is its abiding strength.”

You can get exposure to said iconic metal by buying the ETFS Physical Gold ETF (PHAU).

Source: Why It Pays to Hang On to Gold