Now that the E*Trade (ETFC) acquisition chatter has officially started, I have a few thoughts on the matter

Google (GOOG) is looking to grow through acquisitions. Is this good news for investors? Let me offer up a sports analogy. In baseball, the lifeblood of a franchise is the minor league farm system. Producing your own talent produces a success that is more sure than trying to build a winner through free agency. Once every ten years the Yankees might win a World Series with a team built through free agency but I’ll show you example after example of how a team with a solid farm system outperforms.

Growth through acquisition is akin to a baseball team that abandons their farm system. Google management is sucking the life out of their R&D team each time they purchase a Youtube or an AdMob. Employees who innovate at Google might get used to the new growth through acquisition model and come to expect it. It doesn’t seem like working R&D at Google is as appealing as it once was.

Back on December 5, 2007 I sent the following note to investors (economictiming.com):

The rate of change of economic data is worsening so it’s time to short the following group of downside leadership: Financial Sector SPDR (XLF) at $30.60, MGIC Investment Corp (MTG) at $23.75, Amabac (ABK) at $23.70, Countrywide Financial at $10.45, Freddie Mac (FRE) at $33.30, Beazer Homes (BZH) at $8.13, PMI Group (PMI) at $12.65, and Citigroup (C) at $33.40.

The easy money has been made! That 3.5% GDP report was artificial! When the first time home buyer credit expires we’re doomed! Yes, it seems to be that time again. The bears are telling us that the rally is over. I first warned you about premature top calls when the bears came out in full force with the Dow at 8400 back on May 7th, then I warned you again with the Dow at 9500 on August 28th. Here we go again.

With the reaction to last week's GDP report you would have thought it was -3.5%. CNBC was full of experts doing their best to diminish the report because of the 2.3% contribution from cash for clunkers. I agree that cash for clunkers was a one-time event so let’s take it out. That’s what we do with one time events in corporate earnings reports. Let’s do it with GDP. What does that leave us with? My calculations show we’re still in positive growth territory with with 1.2% GDP and I don’t mind the fact that we had a hugely successful program that put money in the pockets of car salesmen nationwide. Take your ruler and place it along the 12 month GDP growth trend and you’ll see significant improvement from Q408, Q109, and Q209. The direction of economic recovery is still in place with or without cash for clunkers.

Microsoft (MSFT) CEO Steve Ballmer gave us a glimpse into Apple’s (AAPL) future with a statement he made at the Windows 7 release. When asked by CNBC’s Jim Goldman to respond to the threat of competition from Apple, Ballmer remarked,

It's amazing: people say Apple sells 10 million PCs. There will be 300 million Windows PCs sold in the same time frame. So it is interesting to me that people spend so much time talking about the 3 percent of the market in that case...I wouldn't trade our 300 million new users a year for their 10 million. I just wouldn't do it. I kind of like what we're doing and the way we're serving the market.

It’s looking like this earnings season has a consistent theme among US companies. Most are showing an ability to manage their way through the recession with cost cuts but hardly any companies are showing significant revenue growth. Except Apple (AAPL). Apple’s report stunned just about everyone. Apple’s closed ecosystem is proving to be the way to win in modern technology. Unless your business model has some kind of moat surrounding it, you are destined to become just another commodity caught in a pricing war. Apple’s earnings report defies the logic that says you can’t sell high priced computers in a recession. 3.1 million Macs and 46% net income growth shows that avoiding the low margin netbook fad is the way to go. Oh by the way, real earnings growth was much higher. Apple’s real net income was $2.85 billion on revenue of $12.25 billion (non-GAAP). Consumers are rewarding this company because they trust the products.

The big debate going on in the tech world right now is whether or not Google’s (GOOG) Android is going to put an end to the iPhone market share growth. Android is an open platform akin to the Microsoft (MSFT) operating system that dominated share in the PC market for so many years. Because of Microsoft’s past success, many assume that Android will eventually overtake the iPhone for similar reasons. The problem with this assumption is that modern tech is too complex; the only way to simplify it is to control both the hardware and the software. Steve Jobs’ insistence that Apple maintain such tight control on the Mac OS hurt Apple during the last generation but it will propel them to greatness in the future. In a world of constant downloads and upgrades it is imperative that all users can seamlessly perform such functions. The latest release of Snow Leopard has already doubled the rate of Leopard. It’s so easy to do and it only costs $29. Most who upgrade to Windows 7 are going to need a new computer along with new software that is compatible. That doesn’t work for today’s generation.

As Apple (AAPL) investors prepare to listen in on the Q4 conference call, I want to give you some big picture things to think about. The most important thing you will hear in the call concerns the progress of the App Store. Apple’s App Store has opened up a can of worms that will define the 2010-2020 decade. Online distribution of content and software will quickly become the only way to distribute. 24 months from now we will laugh about how we used to cut down trees to print newspapers that were hand delivered to our homes. How archaic. The fact that all major newspapers and magazines are offering apps through the Apple ecosystem cements the future success of Apple’s Tablet device as the digital solution to the bygone era of print media. This part is easy to see coming but what else should we prepare ourselves for? What’s coming in 2011 or 2012?

The fundamental purpose of Apple hardware will change. The biggest money making opportunity on planet earth is the current opportunity to build products that properly utilize apps. The key to innovation will be to figure out how to effectively merge multiple functions onto a single device. The iPhone is the perfect example. It filled so many needs through seamless integration. The Tablet will do the same.

With the iPhone getting set to launch in China this month, what are the expectations? According to the majority of recent analyst upgrades, Chinese sales expectations are low. In their upgrades, analysts are talking about accounting changes, they’re talking Mac upgrades, they’re talking Tablet, they’re talking about the smartphone bonanza, but no one seems too concerned with China. I suppose most are lumping the Chinese market into the same category as India or Russia-two countries where the iPhone hasn’t lived up to the hype-mainly because of the high price tag. In those countries the carriers don’t offer subsidies. I think China is going to be different. Here’s why:

Disclosure: Long AAPL

It appears that the mandatory regulatory repositioning of E*Trade (ETFC) stock is complete. U.S. Securities and Exchange Commission filings show that E*Trade’s largest shareholder, Citadel, has now sold off $206.8 million over the last couple of weeks. These sales reduce their stake to a more comfortable level of 9.4% of the shares outstanding.

Citadel’s primary purpose for selling is to stay below the 10% mark; bank stakes above 9.9% require investors to submit intensive federal oversight that a hedge fund like Citadel desperately wants to avoid. Citadel actually owns much more than 9.4% of E*Trade but because of an agreement that restricts their ability to convert E*Trade debt into stock, they are able to escape the regulatory headache. Citadel may want to continue to reduce their holdings in order to have increased wiggle room underneath 9.9% for future conversions but the rate of sales appears to have moderated significantly.

Steve Jobs loves small innovative companies. That’s why he bought P.A. Semi to produce low power chips and it’s why he bought Placebase to replace Google Maps. Both of these young companies do things a little bit differently and fit the Apple (AAPL) mold. One company who doesn’t fit the Apple mold appears to be Google (GOOG); Steve Jobs continues to distance himself from Google after Eric Schmidt left the board, Google voice was rejected for the app store, and now this maps replacement.

Could Google search be the next shoe to drop from Apple’s offerings on the Mac and iPhone? You don’t want to get on Steve’s bad side and it looks like that is exactly what Eric Schmidt has done. He should have known better. While on Apple’s board of directors he took advantage of a non-competitive and synergistic relationship with one of his top customers. Steve will never forget it. Google’s release of the Chrome web browser to compete with Apple’s Safari and their release of the Android mobile phone platform to compete with the iPhone was certainly not what Jobs had in mind when Schmidt originally came on board on August 29, 2006. Unfortunately for Google, we’re finding out that Google needs Apple a lot more than Apple needs Google.

As the market continues to trade sideways in August, investors like Doug Kass, Jim Cramer, and Warren Buffett are loudly voicing their opinions on the future direction of this market. Kass went so far as to say that the market has reached a top for the year. Little does he know, he’s just fulfilling my article from back in May that 2009 would be the year of premature top calls. Add Kass to the list. Sorry buddy, I don’t think that’s a list you want to be on. As all of us gather information and make our own market projections, there are a few points of perspective that I would like to throw into the mix.

1-Don’t be fooled by the Geithner bottom. Too many investors are getting nervous about the steep climb we have been on since the March lows. If you remember, the March lows were an anomaly caused by the lack of decision making from Washington. The market was anticipating an imminent solution to the financial crisis but in early March, Treasury Secretary Tim Geithner offered up no such solution. The market tanked. I’m not using those levels as a barometer for how far this market has come. Instead, I’m looking at the massive drop we’ve encountered since 2007. I’m using the Dow 9,034 level that we began the year at. From that perspective, we haven’t had much of a run at all. Are we better off than we were at the beginning of the year? You better believe it. Financial armageddon is in the rearview mirror and we are seeing profitability return to AIG, Fannie (FNM), and Freddie (FRE). Housing has hit a bottom. The rate of decline of economic data is showing improvement. We’re even seeing positive moves upward in durable goods, consumer confidence, housing, etc. In my opinion, a move back below Dow 8,000 represents the re-emergence of a systematic threat to our financial system. Highly unlikely. Whereas a move up to Dow 11,000 represents an orderly recovery that is slowly underway. Highly likely.

The unknown variable concerning Apple’s (AAPL) rumored iTouch Tablet is how this device will connect to the Internet. Will it be Wi-Fi? Will it be 3G in 2009? Will it be Verizon’s (VZ) 4G in 2010? With all the unknowns, the only thing investors can do is speculate based on what we do know. We know that Apple has benefited from the subsidized iPhone pricing model to the tune of approximately 60% margins. We know that the first release of the iPhone didn’t generate the demand that Apple wanted so they lowered the price points down to $99, $199 and $299. Consumers are obviously uneasy about paying $499 or $599 for an electronic device that isn’t a laptop. That price point doesn’t seem to be in our cultural DNA. We also know that consumers need a phone and they need a computer but they don’t need a Tablet. Anyone who owns a Tablet will still rely on a computer and a phone. The opportunity for a subsidized pricing model on the Tablet will be determined by its mode of connectivity.

My opinion is that built-in 3G through a single carrier like AT&T (T) is not in Apple’s plans. The company seems to desire an expansion of its mobile customers to include others such as Verizon (here in the U.S.). The problem with this kind of expansion is that Verizon’s 3G network requires a different format than AT&T’s. Apple isn’t going to produce a unique Tablet for each carrier so it seems that the 3G connection between multiple carriers isn’t going to happen. Perhaps Apple waits until 2010 to release the Tablet in conjunction with Verizon’s launch of 4G, if they do this they will be alienating their loyal iPhone customers still at AT&T who would then be forced to open a second wireless account with Verizon. Distributing the Tablet through multiple wireless carriers would be a major headache and hassle to say the least. I don’t anticipate this will happen.

Digital content has been available for years, but the right vehicle to consume the content has been lacking. We still cut down trees and hand deliver newspapers to people's homes. That worked in 1900, but 2009? Are you kidding me? The iTouch Tablet is about to change society as we know it. The demand for this product is going to overwhelm Apple (AAPL).

Let’s connect the dots from the latest round of leaks, rumors and inferences regarding the Apple Tablet. In March, Reuters reported that Apple had ordered a substantial batch of 10 inch touchscreens from Taiwan to be delivered in Q3 of 2009. In April, the Wall Street Journal reported that Steve Jobs was actively involved in the development of the Tablet. In July, the China Times reported that Apple will debut their new product in October for $800 after agreeing to production deals with Foxconn, Wintek, and Dynapack. TheStreet.com is reporting that Apple will release a subsidized Tablet through Verizon (VZ). Then, in this week's earnings call, Apple management went out of their way to trash the netbook space but they refused to deny the coming Tablet, saying they will only release products that are ‘innovative and that they are proud of'. These are all reputable sources that seem to unveil the secrecy surrounding the pending product.

I have taken a leave of absence from investment writing over the last month in order to finish my book titled The Alpha Hunter that will be released by McGraw Hill this fall. Along with the book I will be launching a revolutionary online investment advisory service at economictiming.com so my time is limited this summer. However, I can’t help myself...I’ve got to post on Apple’s (AAPL) latest news. Here are my takes:

1. Calvin Huang of Daiwa Securities is the Apple analyst that everyone should be listening to. Huang totally trumped Piper Jaffray’s Gene Munster who had previously told investors not to expect the Tablet to be released until 2010. I read Munster’s report from last month and immediately thought his logic was off base. Huang is the analyst with the best contacts in Asia, he’s located in Taipei, he has done the real research. He is reporting that Apple will ship the 10-inch touchscreen tablet in Q4 2009. It will be manufactured by Hon Hai Precision Industries with chips from Infineon with technology from ARM Holdings.
2. Steve Jobs is back. The WSJ has reported that Jobs has been actively working with the company during the last six months. Unnamed sources from Apple suggested that his publicly announcement return to the company will be held in conjunction with a special product announcement. That new product will be the Media Tablet. Jobs will redefine the netbook space this holiday season. It needs to be announced soon in order to freeze the current netbook market and to allow developers 3 months to create applications for the new device. This is the timeline that Apple follows for a new product that doesn’t have to compete with their existing products. Because there is no threat of cannibalization, Apple wants to get the word out asap.
3. China will be one of the 80 countries to distribute the iPhone in August. Consumers in China and India will flock to the cheaper 3G iPhone. Jobs will probably announce the deal at his come back event.
4. The $99 iPhones will sell like hot cakes at Wal-Mart (WMT).
5. AT&T (T) made a huge mistake in not allowing the new iPhone 3GS tethering capability to work in the USA. This small piece of technology is a high speed wireless game changer and it represents the final straw to break the back of the AT&T/Apple exclusivity contract that runs through 2010. Apple will not renew the deal and the iPhone will become available through Verizon next year. A big Apple catalyst for 2010.
6. There’s only one thing better than using your finger to navigate the latest technology; using your voice. Apple’s voice control software built into the iPhone 3GS could become a wonderful surprise.
7. The Macbook Air price cut is significant. That is the best laptop on the market by far. Any business user who owns one knows they can never go back to the old ways. The Air will see increased demand.

So now let’s talk price targets. The announcement of Steve Jobs' return in conjunction with a product announcement pushes this stock up to $170. The announcement of a China iPhone deal pushes it up to $180. And holiday sales expectations to be released in January of 2010 could push it over $200. Trade accordingly. The biggest pop could come by the end of July.

Wish you could have shorted the Microsoft Zune? The problem with shorting the Zune was that it was such a small piece of the Microsoft (MSFT) empire; its lack of sales was insignificant on the share price.

But now we have Zune part 2 coming at us in the form of the Palm (PALM) Pre. Once again, a washed up company is trying to compete with Apple’s (AAPL) dominance; you know how the movie plays out. Only in the sequel, the washed up company isn’t diversified to ensure their survival. Unfortunately, Palm is a one-trick pony whose entire fortune relies on the success of the Pre.

The Apple (AAPL) app store is a game changing distribution model for software developers. 3G mobile internet connection speeds have enabled the distribution model to really take off to the tune of 1 billion app store downloads in less than a year. There’s a small cap company that you need to know about who is perfectly positioned to benefit from the mobile boom.

This sector is one of the only things booming right now. Gartner research just released data showing that worldwide mobile phone sales totaled 269.1 million units during the quarter, a 8.6% decrease from the first quarter of 2008 but the smartphone segment of the market surpassed 36.4 million units, a 12.7% increase from the same period last year.

Most financial stocks have experienced nice spikes from their lows and no longer offer the opportunity for investors to make easy money.

In this case, easy money is defined as the profit that comes when failure is taken off the table. The easy money in Bank of America (BAC) took the stock from $2.50 up to $11. The easy money in Citigroup (C) took the stock from $1 to $4.

Could we get a little correction in this market over the next few weeks? Sure. But I chuckle at the masses who have been waiting for a pullback over the last two weeks. One would assume they are waiting for a 10%-15% pullback but no, most just want 2%-3%. Is that really worth the risk? Seems like big risk with little reward to me. The big reward and path of least resistance this year is to the upside.

My economic timing strategy says that you couldn't buy in 2008 and you can't sell in 2009. '08 was a falling knife, it felt like everything outside of housing or financials was a good value buy but the rate of economic contraction was increasing, and it's force brought down all ships. Because of the economic trap, bottom call after bottom call turned out to be folly. Now in 2009, everything is the opposite. There are 2 types of investors today, those who want a pullback so they can get in, and those who are already in. That dynamic makes short selling a tough game. Last year I expected many to call premature bottoms and they did, this year I expect many to call premature tops and they will.

Michael Arrington at Techcrunch is reporting a rumor that Apple (AAPL) is in talks to buy Twitter for approximately $700 million in cash. The rumor states that Apple optimistically hopes to announce the acquisition at their developers conference in June. Investors need to understand that this is just a rumor; Apple’s precedent suggests that it won’t happen, both parties are mum on the speculation, but I see this as a great opportunity for Apple so I’m going to chime in.

Many analysts have been wondering why Apple continues to hoard their $30 billion in cash and I think the reason is simple - there has been a drought of innovation. There haven’t been any companies worth buying. Twitter, however, is different. The platform is growing 40% per week and is now approaching 25 million users. I began using it on my iPhone a few weeks ago and now find myself checking it multiple times a day. It is so much more efficient to get my news updates through one click at Twitter than it is to surf 50 different news outlets when I’m on the go.

To get an idea of the kind of impact Apple’s (AAPL) Media Tablet might have on Apple stock, let’s review the iPhone precedent. 2007 was a great year to be an Apple investor as the stock rose 31% prior to the unveiling of the iPhone, then it went up another 32% before the iPhone actually went on sale, and then it surged 62% between June 9th and Christmas day as iPhone sales surpassed expectations. Can lightning strike twice for investors? It happens all the time.

The coming Media Tablet may very well have the same positive impact on Apple stock in 2009 as the iPhone did in 2007. Apple is on the brink of adding another leg to its innovation empire as they prepare to introduce us to an entirely new product category. Manufacturing reports suggest that the Media Tablet will have a 10 inch touchscreen that could be even thinner than the iPhone. It will be the ultimate newspaper/magazine replacement catering to those Internet users looking for the perfect portable reading device. Wireless connectivity will further expand the dominance of Apple’s App Store as games, books, education and news software will finally function on an ideal piece of hardware. The Media Tablet will be the first computer with the capability to utilize the App Store platform that has already generated over 1 billion downloads since it was launched in July 2008.