Agora Financial’s Rude Awakening

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Laguna Beach, California

• The worldwide wireless boom and the leaders in the pack,
• This month’s editorial meeting in Baltimore: where crisis met opportunity,
• How to text “hello” in Chinese and plenty more…

Eric Fry, reporting from Laguna Beach, California…

Your editor just returned from the bi-monthly powwow in Baltimore when he and his colleagues exchange and debate investment ideas. Your editor came to the meeting with a heightened feeling of anxiety about the condition of the U.S. stock market and the health of the U.S. economy. He departed from the meeting in a state of complete terror.

Sure, a few of his colleagues expressed some upbeat thoughts, and enthusiastically endorsed a stock or two. But some of his other colleagues presented very compelling scenarios of doom and/or gloom. These cautious colleagues did not set out to scare anyone, they simply presented data and observations that suggested the U.S. consumer is about to face a world of hurt.

Specifically, home prices continue to slump, jobs continue to disappear and credit continues to withdraw from the economy. These three difficulties might have been surmountable, except for the fact that food and energy prices are skyrocketing at the same time. The cost of just about everything is soaring at the very same moment that consumers’ sources of cash and credit are drying up.

“My heating oil is now over $5 a gallon,” one Connecticut-based editor complained. “It was costing me $1,500 a month last winter to heat my house. Who can afford that without cutting costs elsewhere?”

“The cheap energy and food days are over,” another editor warned. “This isn’t a commodity bubble. It’s the new state of the world. Sure, you could see corn back off from here, and you could see crude fall $20 or $30 during a short-term set-back. But high commodity prices are here to stay…Inflation is roaring back and the U.S. consumer is not prepared for that.”

“You got that right,” said Byron King, editor of Outstanding Investment. “Things might get very ugly over the next 12 months.”

Byron detailed one of his specific concerns in a Wednesday missive to his subscribers:

“The storms in the Midwest have caused terrible hardship, and have devastated agriculture. Now we have what one weather expert has called “beyond the 500-year flood.” Think about that. If you take it literally, the last time it rained so hard was when Christopher Columbus and the Spanish were exploring the islands of the Caribbean.

So now there are entire farming regions in which the crop is lost. According to one report, 16% of the tillable land in Iowa is underwater. And they don’t grow rice in Iowa – they grow corn.

“By the time the soil dries out, there will be no chance for most farmers to plant anything worth harvesting in the fall. That is, if they can afford the ever-rising costs for what we so politely call ‘inputs.’ Flood or no, the cost of seed, tractor fuel, fertilizer and everything else is just going out of sight. So for many farmers, it’s too late to do anything but apply for federal crop insurance and call it a year.

“I expect that the U.S. Bankruptcy Courts will be busy over the next year, sorting out all the filings that will be coming their way. The nation will lose farms and farmers. We will lose many of the merchants and vendors who sell into the farming business, and some of their bankers. I expect that a lot of grain elevators will go under, along with some farmers’ co-ops. And don’t be surprised when a lot of ethanol plants wind up in the hands of a U.S. trustee.”

Despite observations like these, the assembled minds at the editorial meeting did not MERELY groan and kvetch, they also suggested some investment ideas that could prosper amidst the difficult economic environment that they anticipate. A couple of editors suggested oil-drilling companies. Another one sang the praises of a beaten-down hydroelectric company. And another mentioned a gold company that hopes to extract the precious metal from the ocean floor. Clearly, even a very ill wind can blow some good.

So let’s take a break from doom and gloom…and venture far, far away into the realm of technology – a sector where the impossible seems to arrive on a daily basis, and where the ominous thunderclouds of economic foreboding rarely dim the radiant hopes of wide-eyed entrepreneurs. Let’s venture to that magical place that’s just one train-stop shy of Fantasyland, the land where Steve Jobs cranks out his crowd-pleasing techno-widgets…

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A is for Apple, B is for Billions, C is for China
By Wayne Mulligan

The global wireless industry has been exploding — over 250 million subscribers in the U.S., over 500 million in China, there are more people on this planet that own a mobile phone than those that own a computer — bottom line, this is the place to be for the long haul.

But we can’t talk about wireless without addressing the hottest company in the sector right now: Apple (AAPL: NASDAQ) and its headline-making iPhone…and we can’t talk about the hottest company without discussing the hottest market: China! So a TickerHound member asked:

Good question! But I think the better question is, why isn’t the iPhone in China YET? After months of failed negotiations between Apple and China Mobile (CHL: NYSE) — the largest mobile service provider in the world in terms of subscribers — the companies were unable to reach an agreement.

But after Apple’s announcement on Monday, I think it’s clear that while negotiations between the two companies may be at a standstill, they won’t stay that way for long…

The Chinese wireless market is by far, one of the most desired mobile markets on the planet. This is a country with roughly 1.4 billion citizens and not even half of them have a mobile phone…yet…

There’s a tremendous opportunity for growth in China and Apple knows it. Although a deal hasn’t been reached to bring the (genuine) iPhone to China yet, Apple is definitely gearing up for it.

Apple just recently presented the world with the “iPhone 2.0″. Aside from the widely covered feature additions like 3G wireless technology, GPS, reduced price point, etc., Apple unveiled a feature that I personally jumped out of my seat for…and it’s geared directly for the Chinese market.

Having lived in China for a period of time, I can attest to the difficulty in sending Chinese text messages and e-mails from a mobile phone. Typically you’ll have to type the message using a spelling system known as pin-yin. Pin-yin is the transliteration of Chinese words into westernized spelling. So if I wanted to type “hello” in a text message, I’d have to type “ni hao” using a western keyboard and that would then be translated into the appropriate Chinese characters.

Obviously the use of a stylus would make things much easier. In fact, that’s exactly what Motorola (MOT: NYSE) had in mind when they launched the Motorola Ming in China two years ago. That’s precisely what Apple had in mind when they launched their Chinese character recognition software on Monday.

With the latest version of the iPhone, you can use your finger to write out Chinese characters directly on the screen. This will make writing text messages and e-mails much faster and easier.

So the real question becomes, what would it mean for Apple’s business if it secured a significant share of the Chinese handset market? Well, let’s look to the Motorola Ming for an indication of what may be in store for Apple…

Motorola Ming had roughly 1% of the entire Chinese handset market at the beginning of 2007. Given that China has a mobile subscriber base of 583.5 million people, that would mean 5.8 million phones by today’s numbers.

It would be easy to make the argument that the iPhone has much more hype, demand, functionality, etc. built around it and therefore could reasonably capture more of the market than the Ming. But let’s be conservative here. Let’s assume Apple is able to sell 5.8 million iPhones in China…

If Apple sticks to their $200 price point for the 8 GB model — which is certainly realistic considering the Ming’s price point was in the upper $400’s — that would be roughly $1.16 billion in additional top-line revenue for Apple.

Also, if you consider the “halo” effect Apple’s products tend to have (sell one product, you sell more of the others), then it’s easy to see how substantial adoption of the iPhone could turn China into an increasingly important source of revenue for Apple overall.

[Rude Endnote: The monthly editorial meetings in Baltimore always provide a fascinating wealth of ideas from the full gambit of Agora Financial’s editors. Intrigued by the process behind the curtains at H.Q., many readers have asked me over the years how proceedings are conducted. Obviously I can’t give exact details, but roughly…

We usually converge in a flurry of handshakes and espressos an hour or so before the meeting commences to catch up on the month gone. Editors fly in from all over the world, so there’s always a few interesting stories from Australia or Canada to amuse the crowd. Then, after lunch, we take our seats and the buzz really begins.

Kevin Kerr usually weighs in early with his outlook for the grains, fresh from his latest whirlwind tour through the Midwest. “Corn’s going through the roof,” he’ll say one month. And then, “I’m telling my readers to expect a bit of a pullback,” he’ll say the next meeting, “We’ve taken some good profits…but things are getting a little frothy.”

Some of the other editors will prod him for more details, others will see how his forecasts bode for their own investment ideas.

“I’m working on an idea for an alternative energy play that runs along a similar theme,” Byron will announce. “Kevin and I have sat down and done the math…ethanol just won’t cut it…that’s where this company comes in.”

Then Chris Mayer, our value investing guru, will reveal the latest details from his trip to China…or India…or The Middle East. “Well that’s going to fit in nicely for my next argument,” he’ll say. “I’ve found three companies in China/India/wherever, that are going to capitalize on this exact environment of high energy and falling dollar value.”

Rude’s own Eric Fry and our executive publisher, Addison Wiggin, will look for ways to better play the themes, suggesting alternative mechanisms to capitalize on the trends and encouraging each editor to re-evaluate their ideas in light of the new evidence presented at the table.

The meeting will continue around the room, each editor bouncing ideas off the other, offering expert opinions in their chosen fields of interest and refining the investment ideas of their colleagues. This way, through healthy debate and constructive criticism, the ideas that end up in each of Agora Financial’s investment newsletters and research services have been through the gauntlet of at least ten individual market analysts. In short, only the best survive.

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Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com