Cramer: Apple to $500 AAPL

Cramer on Wednesday raised his price target on Apple from $400 to $500 a share. Yet at the $500 level, the technology stock will be selling at just 11.5 times his estimates for next fiscal year's earnings, only three quarters of what the average company in the S&P 500 index sells for.

Apple's stock [AAPL 386.90 10.05 (+2.67%) ] rallied 10 points on Wednesday while the overall market did nothing, yet Cramer said stocks are still the best asset class to own. To make his case, he compared the United States versus the "United States of Apple or more appropriately, iUSA." This comparison shows why stocks should be owned, he said, especially as companies are doing everything right while the country's leaders are doing so many things wrong.

For starters, Cramer noted the U.S. is deeply in debt. If the U.S. wasn't such a large part of the world economy with a currency that has a legacy of being worth something, he thinks the International Monetary Fund would be knocking on the U.S.'s door at this rate of spending.

Apple, on the other hand, has $76 billion in cash and no debt to speak of, Cramer said. Some critics have actually complained that Apple should be putting its cash to work. Cramer thinks it made the right decision to keep its cash, though. After all, he doesn't think there have been any companies worth acquiring. He would, however, like to see Apple pay a dividend. Being as there are only 30 companies in the U.S. with a market capitalization larger than the cash position of Apple, some may argue it already has more than enough money saved for a rainy day, he argued.

So when it comes down to it, would you rather invest in a country that is deep in debt or a company that's prudent enough to say it will sit on its money until it finds a company worth buying? Cramer is going with the latter.

Next, Cramer compared U.S. leaders to Apple's management. For a long time, people thought of Apple as an one-man band, Cramer said. Many people thought Steve Jobs was the brains behind the operation and the one guy calling all of the shots. Since Jobs took a medical leave of absence last year, though, we've learned that Apple is culture full of great minds, who develop innovative products and give the customers what they want, Cramer said. Apple's management seems to encourage innovation and then nurtures it.

Meanwhile, Cramer asked what innovation has Washington fostered?

"Who the heck can even afford to innovate in that horrible atmosphere of rancor and anger where partisanship is the worst it's been since the Civil War," Cramer complained. "Oh, and let's face it, with the United States, the customer is always wrong, or at least the domestic customer, since we give money away left and right to unfriendly foreign regimes that a less diplomatic man than myself might call our enemies."

Cramer then discussed the balance of trade. Many companies and unions are complaining that we need more protection from trade partners overseas, he said. They want the government to help them sell more, but Apple is taking share left and right. It's destroying its competition around the world, he noted. Thanks to ingenuity, execution and brainpower, Apple is doing well in market after market.

Many Americans believe our best days are behind us, Cramer said. Nobody believes Apple's future isn't as bright as its past, though. He thinks Apple's future prospects are strong.

So what's the bottom line? To Cramer, Apple is a great example of why capitalism is worth cheering for. Unfortunately, Apple also puts U.S. leaders to shame because all they can do is bicker.

"The United States of Apple?" Cramer said, "Now that's a place Cramericans can call home."

Phony Default Crisis May Yield Bargains: T, PFE, PM, INTC, DBC

If the drama in Washington rattles markets, here's what investors should buy.

America is two weeks away from defaulting on its debt, dramatists in Washington say. Fortunately, this crisis is as phony as a million dollar bill, which is why Treasury bond prices have barely flinched, which in turn is why the players involved will mug for the crowd until the last possible moment before striking a deal.

That doesn't mean investors should shrug the whole thing off. As Monday's steep decline in the Dow Jones Industrial Average showed, fake crises can produce real losses for investors. They can also provide some excellent buying opportunities.

In brief, there are at least four reasons not to fear a U.S. default. First, the debt limit America breached in May and must raise by Aug. 2 is an artificial barrier created by Congress mostly so that its parties can scold each other every so often about having to expand it. They have done so 11 times since 1940 (and many more times through extending deadlines and stretching definitions). Second, world demand for U.S. Treasury bonds remains ample, with China, Japan and Britain raising their holdings of late.

Third, under the gloomier of two sets of long-term projections by the Congressional Budget Office, federal debt won't hit unprecedented levels relative to the size of the economy until at least 2025. Fourth, as I've noted before, the U.S. budget shortfall isn't nearly as worrisome as European ones because America overspends on health care and defense by preposterous margins, and can therefore extract vast spending cuts from a handful of painless reforms the moment it musters the political will.

Of course, the U.S. can't necessarily prevent a threatened downgrade of its credit rating by Standard & Poor's, Moody's or Fitch. But if the Treasury market is impressed with the opinions of those firms, it hasn't demonstrated it. The 30-year yield rose Monday, but the 10-year yield recently slipped below 3%. That's less than half its average in Fed data going back to the Korean War.

Such low rates make Treasury bonds unappealing at the moment, despite their credit safety. Corporate bonds look similarly overpriced but municipals are somewhat more attractive by comparison, with tax-free yields of 3.2% on 10-year, A-rated issues. Shares of large, multinational companies look cheap, meanwhile. The largest 5% of U.S. firms by stock market value trade at a modest 13 times this year's earnings forecast and carry an average dividend yield of around 3%—half again as high as the broader market's yield. AT&T (NYSE: T - News), Pfizer (PFE - News), Philip Morris International (NYSE: PM -News) and Intel (NASDAQ: INTC - News) pay an average of 4.3%.

Gold topped $1,600 an ounce Monday, up 8% since the start of July. It might gain more, but what gold can't do is provide its owners with income or any intrinsic justification for its price. Those are two sources of much-needed support when asset prices broadly fall. Investors who are keen to hold commodities should consider dabbling in a diversified basket of grains, energy and metals, like the PowerShares DB Commodity Index Tracking fund (DBC - News).

Among the best things to hold during a phony default crisis is cash. It pays next to nothing, but the dollar looks cheap relative to the euro based on purchasing power parity (a comparison of local costs) and if policy makers in coming days overplay their role and rattle foreign creditors, bonds might swoon and offer better yields, and shares might tumble in the U.S. and abroad. Long-term, however, all the breast-beating in Washington is a promising sign. It means law-makers are properly serious about the importance of deficit cuts. If the drama creates bargains in the near-term, here's hoping the results are worth it.

A Sell Signal for the Stock Market?

A big drop in the transportation sector killed hope for a Dow Theory buy signal.

As the month of July began, the stock market was in the midst of a rather significant rally and the Dow Jones Transportation Average broke out to all-time highs.

But within a few days, the good times turned to bad as this economically-sensitive sector crumbled.

On Monday, the Dow Jones Industrial Average lost 94 points, though the index was trading even lower earlier in the day.

The bears have apparently resumed control of the stock market and that keeps the market on track to challenge its previous 2011 lows one more time.

When the transports reached their new high recently, followers of the century-old Dow Theory suddenly got excited. The theory states that a major new high in both the Dow Industrials and the Dow Transports means the market is in sync and ready to move even higher.

Of course, the composition of the industrials index has changed drastically and we can argue that truckers and railroads have less to do with transporting products in a service and information-based economy than in the past. But even with such changes, Dow Theory has still been able to keep investors on the proper side of the market for many years.

So when the transports broke out earlier this month, Dow Theory followers were eagerly awaiting the same in the industrials. After all, the stock market was hot, interest rates were low and many commodities, which are input costs for many large-cap U.S. companies, had backed down from earlier highs.

However, it was not to be as the sector's mood changed abruptly. The iShares Dow Jones Transportation Average Index Fund (ticker: IYT) dropped sharply to form a second "gap" on the charts in as many days (see Chart 1).

Chart 1

A gap is simply a price zone where no trading takes place because the market is moving too quickly. Supply and demand become so far out of balance that prices must jump, rather than smoothly trend, to the next level.

The transports fund gapped up with heavy volume on July 7 as it moved through its April high. A technical breakout combined with a gap is normally a very bullish sign, if it holds its ground for a day or two without dropping back. Unfortunately, it did fall back. And making it worse was that the decline on July 8 was also a gap.

A gap up followed immediately by a gap down is called a "gap reversal" and as its name implies, the trend turns from up to down. The transportation sector has been in decline ever since.

Although not as dramatic as gap reversals, similar breakout failures are visible in railroad stocks such as Union Pacific (NYSE: UNP - News) and truckers such as Con-Way (NYSE: CNW - News). Both of these groups were in strong rising trends so technical problems here bode poorly for all transports.

Airline stocks are among the weakest in the transportation sector. Although thinly-traded, the Guggenheim Airline ETF (FAA) illustrates how the airlines group has fallen over the past eight months (see Chart 2).

Chart 2

It also shows a steep breakdown over the past week despite the general malaise in crude oil prices over the same span. Typically, airlines and oil move in opposite directions as fuel makes up a huge percentage of airline costs. That both are weak tells us there are other reasons why investors should avoid these stocks including a solid declining trend.

Shipping stocks are in even worse shape as the Guggenheim Shipping ETF (SEA) probes fresh 52-week lows (see Chart 3). While the ETF is also thinly-traded, the price trend is very clear. Investors see no reason to buy, even at what appears to be very low levels.

Chart 3

Aside from the potential for a Dow Theory buy signal snuffed out, the transportation sector is now in short-term decline. The Dow Jones Transportation Average itself could easily fall from current levels to reach its March low at roughly 4920.

At that point, we'll have to see how it reacts. If it cannot hold on there, forget a Dow Theory buy signal. A Dow Theory sell signal will then be on the table.

McAlvany Weekly Commentary

Infinite Investment Options Now Being Reduced to One – Gold

Posted on 20 July 2011.

A Look At This Weeks Show:
- “Gold is not money,” says Bernanke. Tell that to the Chinese as gold tops $1,600.
- Bond markets indicating what the “New European Union” will look like after the shakeout.
- The conflict of statists and individual liberty that is at hand.

• 
• 

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Jim Rogers: Fed Will Launch QE3 by Q3

International investor Jim Rogers expects a third round of quantitative easing by the third quarter of this year.

The head of Rogers Holdings expects this will happen "in the fall or early next year,” Rogers told CNBC, as FT Adviser reported.

"It's the wrong thing to do but that's all they [US policymakers] know to do. They are not very smart people so you better own commodities," says Rogers.

"They will see things not getting better and will do what they do."

Jim Rogers (Getty Images photo)

Rogers comments came after U.S. Federal Reserve chairman Ben Bernanke hinted the Fed might provide "additional policy support" should economic conditions warrant it, indicating that a third round of quantitative easing may be offered.

Commenting on the bond market, Rogers said "I have no idea what can cause the bond market to rally but I don't think it will rally any time soon."

"If the world economy gets better I will make a lot of money on commodities because of the shortages,” Rogers says.

"But if the world economy doesn't get better I'm probably going to make money on commodities too as they will print more money.”

Moneycontrol.com reports that Arjuna Mahendran, head of Asian investment strategy with HSBC Private Bank told CNBC-TV18, that a probable QE 3 will only shoot the elevated commodity prices further.

“We have seen in the last two instances of QE, it created bubbles in the commodity space, principally, in oil but also in gold and other metals,” Mahendran said.

Oil Service Stocks Showing Strength: CPE, CRZO, HK, OIH, SGY

Oil Service stocks have been quietly showing relative strength, and the recent buyout ofPetrohawk Energy Corporation Co (NYSE:HK) may be giving this group a shot in the arm. Often when there is a buyout, it will fuel more speculation in its sector as investors try to position themselves for another possible acquisition. It’s interesting that this group has been performing well, despite the fact that Oil has basically gone nowhere after a sharp pullback in May. If crude gains any strength, it would be another possible catalyst for this group.

The Service stocks as a whole are also showing an interesting pattern. The group as represented by the Merrill Lynch & Co., Inc. Oil Service HOLDRs (AMEX:OIH) ETF is rebounding after what appeared to be a breakdown in June. OIH had fallen under a consolidation in May on increased volume and after a failure to bounce near $155, headed even lower. However, it bounced sharply after the false breakdown, and appears to be completing a reverse Head and Shoulder’s pattern. The neckline is the prior resistance area near $155 which is starting to get breached. If OIH can hold above this level, it would likely trap a group of bears and act as a floor for the near future. (For more, see How To Trade the Head And Shoulders Pattern.)

One stock in this sector that has been showing good strength is Carrizo Oil & Gas, Inc.(NasdaqGS:CRZO). CRZO had been working on a base all year before finally clearing it in June. There are no signs of the market correction in this stock as it continued to set higher lows over the past several months. It is now pulling back for a retest of the breakout area and appears to have attracted buyers at this level. Traders should watch to see if CRZO can hold above its prior base.

Stone Energy Corporation Common (NYSE:SGY) is another stock in the Oil Service sector that is worth monitoring. While it hasn’t cleared its base, it has cleared some resistance levels and appears to be headed for at least a retest of its 52-week highs near $36. It held critical support near $28 on several occasions without breaking and this would be the key level for traders to focus on as a line in the sand. (For related reading, seeMastering Short-Term Trading.)

A smaller stock in this group that could be headed higher is Callon Petroleum Company Common (NYSE:CPE). CPE had been correcting in a wedge since surging to a high just above $9 in February. It shed about 30% of its price in a few months before, finally turning sideways later in the summer. It recently cleared the wedge it had been bound to, and after trading in a tight range above the breakout point and its 50-day moving average, CPE could be ready to resume the prior trend.

While I am leery of the Oil stocks having a sustained rally with Crude Oil being stagnant, we are also headed into the heart of hurricane season and the summer driving season. If Oil gets a spike, it could spark more interest in this group. With many of these stocks already acting well, it could lead to some great trading opportunities. (For more on crude, see Contango Vs. Normal Backwardation.)

What's the Real Inflation Rate?

Let's take a brief detour from all the debt ceiling nonsense. I want you to visit any street corner on Main Street, USA and ask someone if the money in their wallet buys the same amount of stuff as it once did.

Not only will their response will be the fastest way of gauging true inflation, but it will belie the cozy figures the government via its media puppets has been feeding to you.

Inflation vs. Deflation

In debating inflation versus deflation, we must first ask a few pertinent questions: Can inflation occur during a deflationary cycle, or is this a contradictory statement? Does inflation and deflation happen independently of one another? The answer can be found by evaluating an abbreviated history of asset prices.

Over the past 20 years, the government's measure of inflation, the Consumer Price Index (CPI), has steadily increased, averaging a 2.5% growth rate. Since 2005, the CPI has maintained that Steady Eddie pace. Meanwhile, major asset classes like U.S. stocks (NYSEArca: VTI - News), residential real estate (NYSEArca: XHB - News) and commercial real estate (NYSEArca: ICF - News) have declined in value.

What does this prove?

First, it illustrates that not all asset classes move at the same velocity in whatever direction. (Doesn't this make a credible argument in favor of diversifying one's investments? Not interested? OK, go ahead and put all your money in Apple.) Second, the rising cost of medical services, food, rent, i.e. (inflation) can happen during a period of falling asset prices (deflation). And what about the deflationary forces of declining salaries and payrolls, while commodities prices (NYSEArca: DBC - News) marched steadily upward? Doesn't it show that deflation can occur within an inflationary cycle and vice-versa? For non-believers, the period of 2007-11 is enough proof.

Alternative Measures

While the CPI is the government's way of reporting headline inflation, it's hardly complete. Another way to gauge the real rate of inflation is by analyzing the U.S. dollar's buying power. Why is this a better reference point than CPI? It's because the destructive forces of inflation take places when a currency loses value. It causes a corresponding rise in the cost of everyday necessities.

Let's ask a few more questions for our army of armchair economists: What happens when a country expands its monetary base at a rate faster than its GDP? Does it devalue the existing money already in circulation? Don't the laws of supply and demand come into play? When there's lots of supply, doesn't it destroy demand and thereby cut the item's price?

What about the value of the U.S. dollar in gold (NYSEArca: IAU - News)? Over the past 35 years, the dollar's value in gold has steadily deteriorated. In 1975, you could buy one ounce of gold for $165. Today, that same $165 dollars buys you around one-tenth the ounce price of gold. Likewise, the dollar's buying power versus competing currencies like the Australian dollar (NYSEArca: FXA - News), euro (NYSEArca: FXE - News), and Canadian dollar (NYSEArca: FXC - News) has fallen.

Inflation and Your Wallet

Here's another disturbing question: Does the CPI measure your personal experience with changing prices? Not necessarily. It is important to understand that Bureau of Labor Statistics bases the market baskets and pricing procedures for the CPI-U and CPI-W populations on the experience of the relevant average household, not of any specific family or individual. For this reason, it's improbable that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions.

For example, if you or your family spends a larger-than-average share of your budget on medical expenses, and medical care costs are increasing more rapidly than the cost of other items in the CPI market basket, your personal rate of inflation may exceed the increase in the CPI. Conversely, if you heat your home with solar energy, and fuel prices are rising more rapidly than other items, you may experience less inflation than the general population does. A national average reflects all the ups and downs of millions of individual price experiences. It seldom mirrors a particular consumer's experience.

Conclusion

At close glimpse, the U.S. government's CPI inflation is a sub-standard measure of true inflation. Likewise, other distorted views of inflation abound. The Federal Reserve projects inflation of less than 2% for each of the next three years! Try to remember that figure because it will likely come back to haunt Bernanke & Co. along with the rest of the country.

Even though the inflation rate is up, how come it's not being fully reflected in the government's CPI figures? Is it because the real inflation rate is higher than what's being projected? And if it is, how much higher is the true inflation rate than what's being reported? What are some ways to protect your financial well-being against these subtle forces? ETFguide's next Webinar titled, 'Inflation - How bad will it get?' will tell you.

As we've seen, inflation and deflation can happen during the same time period. It's not a question of one or the other, but rather both. And capitalizing on the next cycle, versus being a helpless victim, will separate the winners from the losers.