Jason Schwarz's  Instablog

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.  

At the time, it was difficult to imagine that group of stocks dropping even further but did they ever! The economic direction dictated the trade.  Today we find ourselves at the opposite end of the spectrum.  Economic data is improving and my new list of upside leadership includes: Apple, Amazon, Cisco, IBM, Intel, Google and Baidu.  The tech sector is flush with cash and poised for growth.  The only thing that can derail it is another economic drop, so watch the economic weather carefully as you position your portfolio.  

The leader of this leadership group is Apple.  They are in the best position to take advantage of the mobile Web.  Still in it’s infancy, Apple already dominates the 3G wireless spectrum.  AT&T’s brand has suffered because of the stress this one product puts on its entire system.  My favorite piece of anecdotal data was the Google report from February (http://blogs.zdnet.com/Apple/?p=1316) that said Apple’s iPhone produced 50 times more search requests that any other mobile handset.  Google initially thought they had made a mistake in tabulating their data so they made their engineers check the logs again and found that yes, iPhone use was surging.  Since February, the trend has continued.  In its September mobile metrics report, AdMob discovered that the iPhone OS increased its global market share up 7% to 40% while Nokia dropped 9% down to 34%.  Mobile Web browsing will continue to grow and grow.  In August there were 10.6 billion worldwide requests representing a 9% increase from the month earlier.  

In my article ‘Apple’s Greatest Idea Yet’ (http://seekingalpha.com/article/106744-apple-s-greatest-idea-yet) I argued that the App Store is more important to Apple than the Mac, the iPod, or the iPhone.  Then in another article, ‘The App Store Changes Apple’s Mission’ (http://seekingalpha.com/article/106744-apple-s-greatest-idea-yet) I forecasted that in the future, Apple will excel as they build innovative products to take advantage of mobile apps.  Because of the closed software/hardware Apple ecosystem, this company is better positioned for growth than any company in the history of technology.  100,000 apps available through the App Store makes it difficult for competitors to outdo the iPhone.  New products like Motorola’s Droid are supposed to surpass the user experience of existing products but they are unable to do so because they lack the seamless ecosystem.  Tech has become so complex that consumers now demand a user experience that is intuitively simple.  Google’s Android will try to emulate the Microsoft ‘open’ success of the past but that clearly was a different era.  We no longer tolerate the bugs that come from mixing software with multiple hardware manufacturers.  The mobile era is all about convenience and Apple delivers.  

What size market are we looking at for the iPhone?   Since we’re talking about simplicity I’ll make this easy, there are 6.795 billion people in the world and more than 50% own a cell phone.  The global cellphone market sold 291 million phones in the Q309 with Nokia selling 37%, Samsung selling 20.7% and Apple volumes rising to its highest ever of 2.5% (http://biz.thestar.com.my/news/story.asp?file=/2009/10/31/business/5012496&sec=business).  iSupply estimates that the smart phone market is now on its way to invading the old school cellphone market share.  They estimate that the smart phone market will increase from 184.2 million units in 2009 to 235.6 million units in 2010 (28% growth) to 334.1 million units in 2011 (42% growth).  Smart phones make up 15% of the overall mobile handset market; within the smart phone market Apple’s share increased to 13.3% in Q209.  Apple sold 78% more iPhones in FY09 over FY08.  iPhone units are tracking a similar path as the early years of the iPod.  Could the iPhone one day grow to 70% of the smart phone market?  If they did then we would need to raise our price target to $5000 instead of $500.  The point is, there is much upside to the current 2.5% global market share and this will be a primary stock driver for the next two years.  You might want to be in on this one.  The Apple Revolution is coming. 

Disclosure: long AAPL, BIDU, AMZN
 

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 (http://seekingalpha.com/article/136078-2009-is-the-year-of-premature-top-calls), then I warned you again with the Dow at 9500 on August 28th (http://seekingalpha.com/article/158844-four-reasons-we-re-headed-even-higher).  Here we go again.  

With the reaction to last weeks 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.  

Worried that we’re going to double dip?  Hope is on the horizon.  Although consumer spending dipped -0.5% (again due to the expected drop off after cash for clunkers) personal incomes remained stable.  Although the lagging indicator of employment continues to drop, this earnings season has showed us that corporate America went too far.  Their rate of layoffs exceeded what was necessary.  The financial crisis caused them to overreact.  They reduced inventories at the fasted rate relative to GDP since World War 2.  First Trust chief economist Brian Westbury says, “In Q4, we think the Great Destocking comes to an abrupt end, adding 4.8 points to the real GDP growth rate.”  

It’s important to remember that this is what a bottom looks like.  Some weeks the despair of the recession creeps back and other weeks the recovery appears better than it actually is.  Economic timing trends show us that the overall recovery is still headed in a positive growth direction with annualized consumer spending up 1.2%.  The recovery coming out of the  worst recession in 80 years is a powerful cycle that not even the bears and their premature top calls can stop.  If you’re looking for increased conviction in your investment decisions, you need a sound understanding of the rate of change of economic data.  Economictiming.com is a great tool to utilize.  Beyond the data we have also heard positive comments coming from the contemporary group of economic leaders: Google, Apple, Microsoft, Amazon, Costco, Nike, JP Morgan Chase, Goldman Sachs, Blackstone, Nordstrom, and Ford.  This black cloud hovering over the market is just a typical correction, nothing more.  

Disclosure Long AAPL

Microsoft CEO Steve Ballmer gave us a glimpse into Apple’s 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,(www.cnbc.com/id/33419795)  “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.”

 The trend of the 2010 decade appears to be one of Apple gaining market share and Microsoft losing market share.  There is no question that Microsoft is king of the hill but investors are never concerned with the current king, we are always trying to forecast who’s next.   Broadpoint AmTech analyst Brian Marshall actually thinks the Windows 7 launch will boost Mac sales.  He wrote, “We have concluded that no negative correlation exists on Apple’s hardware sales when Microsoft launches a new OS.  Ironically, we believe new OS launches from Microsoft may have even acted as a ‘delayed accelerant’ to Apple’s computing sales.”   

 When looking at Apple’s future you need to comprehend what kind of market share numbers we’re talking about.  The global PC market is so large that if Apple were to control only 10% of it, the earnings could drive the stock up significantly.  According to IDC, Apple now claims 9.4% of the U.S. computer market (http://www.macobserver.com/tmo/article/idc_puts_u.s._apples_mac_market_share_at_9.4_for_september_quarter/) in the US, and NPD reports that Mac revenue market share of the premium price segment over $1000 is at an astonishing 91% (www.betanews.com/joewilcox/article/Apple...; To give you some perspective on how quickly Apple is gaining, back in January of 2008 Mac’s revenue share was only 66%.  It takes years to create a trend in the PC market because of the rigid barriers to entry and Apple has clearly done so with the Mac lineup.   

 On Apples most recent quarterly conference call they reported that Mac revenue in Europe was up 45% year over year in the region, Apple Japan was up 36%, and the Asia Pacific was up 39%.  It looks like they are well on their way to 10% global market share.  If they were to sell 30 million Macs in 2011 (which could include the Tablet released sometime in 2010) this stock will eclipse $500 based on the fundamentals.  It's about as far fetched as Bank of America to $20 sounded back in March 2009 and oil to $30 sounded back in August 2008. Most impressive for Apple is that computers only make up one tier of their business.  Hence, this article is merely part one of a series mapping out Apple's market share rise by 2011.    

 One of my readers, Mikesan,  made the following comment: ‘I once read that at product design sessions Steve Jobs encourages people to start sentences with ‘wouldn’t it be great if...’ and they go on from there.  Compare this to Microsoft which is more like ‘isn’t it great we can still do this’.  Two companies headed in different directions.  Ballmer might want to be careful next time he touts Windows 7 on 300 million computers.  The trend is not his friend.  

 disclosure: long aapl