Tuesday, May 31, 2005

Bloomberg.com: Bloomberg Columnists

A good primer on the yield curve is posted at Bloomberg. One of the things not well understood is that higher short rates are used to lower long rates. In a run away economy it may take a while for the Fed to "get on top" of the curve but the point of raising short rates is actually to lower long rates.

One might fuss with me and say the point of raising short rate is to lower inflation, but the long rate is set by the market as a forecast of economic growth and inflation. A rise in short rates sometimes slows the economy, sometimes slows inflation and sometimes slows both.

Now-a-days, it is important to be aware that the curve is an international yield curve. We live in a global society. The yield curve in Europe is ready to take on a positive slope as central banks begin to lower short rates. This is analogous to taking ones foot off the brake and applying a little gas through the accelerator. Long-rates will be free to rise as the speed of the economy picks up. The US curve should not be far behind.

JP Morgan suggests zero growth in the US. The flat yield curve is suggesting slow growth; however, my forecast is that the curve is about to shift. The pressure is coming off Chairman Greenspan. The European economy is so slow that short rates are coming down. Greenspan can take his foot off the brake without letting inflation get out of control. When he lets off on the brake, long rates will trend up. It is even possible that he has had his hit the brakes too hard. If so, he may even have to cut short rates. In 1984 and again in 1994, the US economy was in a similar position. When the Fed eased up, the stock market caught fire.

Ironically, it is possible that it is the European market that leads the way this time. Germany appears likely to elect a Chancellor who is pro American! France is ready to boot out the current administration. The market may recognize that the No vote is a yes vote to capitalism.



It is all the more fun to be up on a down day. Money moves on down days. A down day can be a smoke screen. On big counter trend down days, Papa John used to say, "The big boys are buying". He liked to see what was holding steady or going up when the market fought through resistance.

Today, little stocks, airlines, semis, telecoms, REIT's, utilities and bonds are doing well. The German market traded higher today as did US Bonds. The Eurodollar index was taken out and shot.

Airlines are the big winner, up 2% on average, but note the technology flavor of the rally. Semiconductors, disk drives and telephone equipment. It sure looks like companies are spending capital on equipment in preparation of good business ahead. By the way, investors often incorrectly think of airlines in terms of consumer use; vacations buses. The real money is made when businesses open-up their travel budgets. When business is good, employees travel and they don't spend a month in advance shopping the internet for the lowest cost ticket.

We are up about 2% today while the markets are down about .5 to 3%. The BULL is going to snort, paw and feed along the trail but don't try to corral him. He is leading the herd. If you don't want to ride with the herd, you had better git out of the way.



Our Stock of the Week selections have done well. Today, we bought shares in one of the stocks that has increased 40% since first appearing on our list. Even after the 40% rise, USG is still a value stock. The price to earnings ratio is still under 6!

The risk feared by investors is that the asbestos legislation that has passed a senate committee will never be signed into law. My market fear is that I will be hit by something new not something old. Old news is built into stocks. New trouble hits and hits fast. Really bad news comes when there is no trouble in sight. The worst of the decline from bad news typically occurs in the first few days of trouble.

One of the reasons we like USG is that many of the building products sold are for commercial buildings. We are too nervous to buy home-building stocks at today's prices. Home-builders have low P/E ratios and have been on very long market moves. We don't pretend to know when the end will come.

Jim Cramer says many of the home builders have become land trust; he implies that they have years of profit growth ahead. One of Papa John's favorite old jokes was to suggest that "you better buy land now because they are not making any more of it". Papa John was wise enough to know that every thing has its own season.

Home-building will eventually slow. When it does, it may be because the economy is so strong that interest rates have risen. The rise in rates may be because businesses have gotten into a panic to build before their competitors build. Building product makers can ask almost any price when the market gets "hot".



A good friend was kind enough to allow me to help him with a new account. You might know, the account was opened on the last day of 2004 when the market was on an intermediate-term high. We immediately invested all funds aggressively.

Had I a crystal ball, I would have told him to wait. We would have waited and waited until the market bottomed in late April (as I recall). This friend has other stocks, other accounts and other investments. Not having the crystal ball, we bought high beta stocks--swinging for at least a home run or two.

The account tanked faster than a school bus in quick sand. After three months, my friend was starting to wonder if I knew what I was doing. His account was down more than double the decline in the broader market. The only thing we had to show on the positive side was several realized tax losses. For example, we bought EBAY, rode it down 25% and swapped it for Google. We now have a nice profit in Google and a few thousand dollars savings on income taxes. We were also burned by trucking and railroad stocks. We made profits on oil drilling stocks but decided prices were too high.

Near the bottom, we added heavily to our airline holdings (jumping from oil to airlines). We are now sitting on a 6% gain for the year! Other stocks have helped; we have gains in QCOM, TXN, TIVO in addition to Google and three airlines. Again, this is an aggressive account and only a small part of the owners total portfolio. He is comfortable owning high beta stocks and over-weighting airlines even though the balance sheets are extremely poor.

This account will continue to be a roller coaster ride (we think we are still climbing a steep airline hill). A roller coaster is fun for some but a nightmare for others. Having broken to the top side, it is our hope to never go negative again. As realist, we expect to see big jumps and dips in the future. In an older aggressive account, we dropped sharply during the same time frame but are now on net new highs. This account did so well in late 2002 and 2003 that it is no big deal to see it jump up and down a little.

I send my thanks to my friend. It was a surprise to me for the account to be down so much so fast. I appreciate the confidence he showed at the bottom. As an private investor, I am helping my friend at no charge. As an old retired guy, this adds meaning to my life and I am thankful. I helped another friend make a quick $40,000 profit on a low risk real estate deal earlier this year. Life is grand. Roller coasters are fun.

Airline Stocks: Northwest gains upgrade, leads broad sector rally - Airlines - Transportation - Markets/Exchanges - Market News


This morning five of my families stop performing stocks are airline stocks. Unfortunately, we do not own Ryanair which posted a 19% jump in profits.

NWAC is our top airline this morning. It received an upgrade from Merrill Lynch. CAL, our largest position, is up 4%. One must use caution now that Merrill has jumped on board. The favorable report may push the stock ahead too far too fast. The moves of recent weeks have been substantial.


The Globe and Mail: Economy grows at 2.3% rate


The Japanese economy made the news today; the malaise that started in 1989 may finally be over. In the meantime, the world economy is slowing. Canada grew at only 2.3% the past quarter while Germany, France and other European countries are in or near recession.

Now-a-days, the worlds economies are closely linked. There is a much higher relationship than in past years. This means that as Europe lowers short interest rates to stimulate their economies, the FOMC will have room to lower US rates without currency concerns. The US dollar has strengthened in recent weeks while the Eurodollar is reeling.

The bottom line is that declining interest rates will boost corporate profits and demand for stocks. US stocks owned by Europeans will increase sharply.



In response to a regular readers inquiry in regard to eBay, I quoted several sections from the annual report. As a private investor, I cannot make recommendations but I can report that eBay has been a very profitable holding for my family and that we intend to continue to hold. We bought more two or three weeks back when the stock was in the low 30's.

The numbers reported in the annual report are just like the ones for the past 10 years--truly remarkable. The room for continued growth was also made clear.

"...listed more than 1.4 billion items last year, a 45% increase from 2003."

"...successfully closed listing on eBay, of $34.2 billion in 2004, up from $23.8 billion in 2003."

"Operating profit grew more than 68%..."

"...free cash flows growing more than 95% to $992 million."

"2004 was a year of expansion...in India...Philippines...Malaysia...Korea...US (Rent.com)...Germany...the Netherlands...craigslist.org..."

"PayPal...adding 23 million new accounts in 2004 for a total of 64 million user accounts."

"PayPal now has more accounts than the total cardholder base of Discover and the account base of Bank of America."

I also wrote about the potential I see in China and in continued PayPal growth. No other company has been able to develop a system to compete directly with PayPal. American Express and Visa are not about to roll-over but PayPal is giving old systems a run for the money.

The stock has been and continues to be a very expensive stock. I wrote that my family has invested much more into CAL. CAL is considered by most to be a more risky stock than EBAY but not by me. When one buys EBAY around the current price, he pays $12.83 for $1 of sales. When one buys CAL at the current price, one pays $.09 for $1 of sales. Using Price to Sales as a guide, EBAY is 142 times the price of CAL!

I calculated this morning that my families position in EBAY is less than 1% of our total holdings. We are comfortable holding a very high priced stock as part of a portfolio of assets. We know that high priced stocks historically under-perform the market by a large measure. It is a very rare stock that can maintain a high valuation for decades and that is what it will take for EBAY to be a good investment from here.

A similar blog could be written about My family owns shares in each of these and our largest position is now in GOOG. Brokerage firms are making news as they announce price targets of $300 or better for GOOG. If I did not own the stock, it would be a tough decision to buy it at $270 per share. I believe it will be added to the S&P 500 before long but this is a relatively weak reason to buy a stock.

If I did not own, I would probably buy because the long-term growth is going to be very large from here. However, I am mindful of the many studies (Dreman, O'Shaughnessy, Siegel and others) that show poor long-term performance of high priced stocks. Growth is not as important as what you pay for growth. After the quick Google move from the $190 area to $270, one can argue that the market is now over-excited about the growth prospects. My family will hold onto GOOG, YHOO and EBAY. These bucking broncos should give us an enjoyable ride. Again, we hold a lot of other positions. I avoid mentioning all holdings and strategies (I'm not willing to freely give away all I have learned over the past 40 plus years of investing, but I am willing to assist with the management of portfolios).




AMTD has tried to buy TD Waterhouse for a couple of years. TD has wants to expand but wants to run the show. ET made an offer for AMTD but AMTD wants to run the show. As owners of AMTD and ET, my family is eager to see consolidation provided AMTD does not pay too much for TD Waterhouse.

AMTD did a marvelous job of integrating its past take-over targets. AMTD retained most of the customers and consolidated back office operations smoothly. A lot of investors total misunderstand the costs of "electronic service businesses". A successful businessman said to a group the other day that he couldn't see how cell phone companies make money when the give away $200 phones. I don't know the exact numbers but I figure that after the equipment is in place, it cost about $.50 per month to provide cell phone service that is billed at $35 per month. It probably cost far more to bill and collect the $35 revenue than it does to provide the service. In other words, the entire business is about amortizing the equipment costs which includes everything from towers to hand sets.

There are brokerage firms that offer "free" transactions to large accounts. My family trades mostly with BrownCo. We pay $5 to buy or sell stock. We know that $2 of the trade goes to pay the exchange fee. If BrownCo can turn a profit at $5 per trade, then AMTD can certainly do well when charging $10.50 per trade. It was a big deal when Schwab lowered its "discount" commissions to the same range as AMTD and ET. The good news for the companies is that as a group they are playing a good game of "tit for tat". This means that no one has been willing to offer services at a loss to out-grow their competition.

One of the biggest mistakes made in business is to charge too little. New owners of businesses often fall into the trap of offering "specials" at below costs to attract business. They often attract business that they don't want in the first place and business that is "hot". The guys that came as the result of low price are constantly looking for a lower price elsewhere.

Give me the customer that wants my product for a fair price. I will take care of him and he will take care of me. As long as I provide a good product or service, he will be loyal. He will not spend half his life looking for the best deal and I will not abuse his trust by over-charging.

After AMTD has opened an account, the cost of executing a trade electronically is about the same as the cost for Google to post this blog for me. The acquisition cost to acquire the account is much different. Google offers the service for free and does not need to advertise or promote the service. AMTD, ET, TD and Schwab all spend large sums advertising. The game now is about marginal revenues versus marginal costs. The established systems can handle more business for next to nothing more in costs. Adding TD customers to the AMTD platform would involve effort to move accounts from one system to the other or to convert the old system to the new system. After the moving costs are amortized, a very large proportion of the new revenues will go to the bottom line.


Monday, May 30, 2005

WSJ.com - China Cancels Tariffs On Textile Exports

WSJ.com - China Cancels Tariffs On Textile Exports

Politicians need a whipping boy and China is currently serving well. The recent fuss over trade is the US and Europe demanding China to respect intellectual property rights. The big lever being used is textile trade. The US and Europe benefit from the low cost production of textiles in China, but we also want to get paid royalties due in other areas. If the Chinese would fairly spend some of their profits on intellectual property, the trade would be good for all.

A list of US intellectual property is long. Companies like QCOM, IBM, and MSFT are "ripped off" millions of times daily. Of course, music, TV and movies are also routinely pirated.

Some years ago, Japan was one of the worst offenders. As pressure built and the years past, Japan realized that it needed the protection of international law for its own intellectual property. As the China economy grows, China will want to enter the business of selling intellectual property at higher margins than are available from knitting socks. It is in China's long-term interest to comply with international law. Of course, it is easy for China to ignore abuses and say it is not their fault.

QCOM receives about $20 in revenue each time about half the cell phones in the world are activated. The China market is huge. One can see why a company like QCOM desires international compliance.

It is important that China obey international law. The smoke screen over the peg of the currencies is just smoke. It is not nearly as politically powerful to say, we are not going to buy under-wear from you until you pay us cell phone royalties.

Those who believe China is taking all the good jobs are misinformed. China has lost about 4 manufacturing jobs for each American manufacturing job lost. Today's world can manufacture more goods using less people. This is called productivity. A century ago, the number of farmers required to grow our food was maybe 60% of the population. Today, about 3% of the US population is farmers. China didn't take all the good farming jobs either.

We live in a wonderful time. Disposable income is high and growing. In the same way that years ago, Americans became two car families, they are now becoming two home families. Trade with China is one of the reasons we can afford two homes. America learned a valuable lesson in the years after Smoot-Hawley. We participate in free trade with many nations. CAFTA needs to be passed. Pressure on China to comply with international law is important but we need to be careful not to kill the goose that is supplying us with golden eggs.


WSJ.com - French 'No' Vote Blocks EU Treaty; Huge Setback for a Stronger Europe

WSJ.com - French 'No' Vote Blocks EU Treaty; Huge Setback for a Stronger Europe

The best one word description for the European economy is malaise. There is no end in sight. The central bankers are lowering interest rates in an attempt to boost the economies. Unemployment in France is over 10% and in Germany over 12%. I believe it was 1847 when the US tried to isolate the US economy. Europe tries to hard to protect its manufacturing base. America has benefited by buying labor intensive products from low cost producers. The US in effect profits from the low cost goods as this allows our companies to focus on more profitable enterprises.

Stocks in Europe have done well recently. The reforms in Germany and France will improve or lower the total costs of production. For example, it is now legal for the French to work more than 35 hours per day.

The Eurodollar has weakened recently. Relative interest rates and relative growth rates are now in favor of the US dollar. Foreign investors in US dollars should benefit from superior returns and a bonus from currency moves. The US BULL market is alive and well.


Saturday, May 28, 2005

Creative Destruction

Creative Destruction

During the dot.com days, you may have heard too much about "creative destruction". However, the process of "creative destruction" is very much alive in today's economy.

The term was first used by Joseph Schumpeter. The easy way to understand the idea is through example. Today, cell phones and VoIP phones are killing the old land-line phone business. Consumers are gradually replacing high cost phone service with more convenient cell phone service or very low cost VoIP service.

Over the next few years, a merger of cell phone service and VoIP service will make high cost land lines a thing of the past. No doubt, the late adopters will hold onto land lines for a long time and land lines will be offered in bundled packages at shapely discounted prices, but in the majority of cases the land lines will be replaced.

Verizon, SBC, BLS and other land-line phone companies are currently spending billions to build high speed internet service capacity. Again, land-line service will be offered as a part of a package of services but the days of paying $25 or more per month for traditional "local" phone service is on the way out.

Americans lead a blessed existence. We often fail to appreciate that our free economy allows us to adopt new products and services with relatively little pain. Other more protectionist economies, allow old inefficient services to bleed to death slowly. America is a more efficient economy because we are open to change.

Fortunately and unfortunately the ground rules of our economy are often slow to change. There are many times when old laws prevent the forces of creative destruction to work. Our governmental system of checks and balances works well but is very slow at times. The recent compromise in the Senate will have consequences that are impossible to forecast. The net total effect is going to lead to some outstanding changes.

It is hard to appreciate how the compromise will benefit the country. What the compromise will do is allow for legislation to pass without it being forced through by one party. The resulting legislation will be weakened in some ways but improved in others. Yes, even in our government, the US practices the art of creative destruction. The old is going to be replace by the new.

There will be many discussions about the process in the years ahead. Politics will obscure the power of the compromise. But, again, legislation will pass and judges will be confirmed as a result of the compromise.

Let me leave you with an example of things to come. Depression era legislation to "protect" community power control needs to be over-hauled. Check into the acronym PUHCA. You will find that big changes are under-foot. Warren Buffett is investing 9 Billion in power generation partly because the "new deal" antiquated laws are likely to be changed. Profits will be made by efficient power companies and small inefficient companies will go away. This is good for America. It is good for consumers. Creative destruction is a good thing.


Skype Tops 100 Million Downloads - BizReport

Skype Tops 100 Million Downloads - BizReport

Skype reported 100 Million Downloads more than a month ago. VoIP is "creative and destructive capitalism" at work. The telephone world is changing quickly. We will down-load Skype on our new computer at the beach. For most of us, there is no good reason to continue to pay monthly rates for a traditional land-line phone.

This is one of many current situations where cost are being driven down. Technology and free trade are the major factors behind the incredible growth in productivity that is occurring around the globe. China has enjoyed a productivity growth average of better than 6.5% for a decade. During this time, long-term interest rates have fallen, fallen some more and some more. One should not expect inflation or high long-term interest rates as long as the aforementioned forces of "creative destruction" are alive and well.


CPA and Former Merrill Lynch Broker Says

In many businesses I see, what appears to be a negative can turn out to be a long term positive. Airlines can use the problem of higher oil prices to adjust ticket prices up. However when oil prices come down, the odds are the ticket increase will not be returned to reflect those lower costs. Airlines were always considered classic oligopolies or businesses that move in directions together rather than competitive businesses like grocery stores. I believe they will attempt to recapture some of the oligopolistic tendencies that served them better in the old days.

Furthermore the airlines are restructuring and reducing their number of flights. I would imagine NWAC would be more than glad to operate a little more like the low cost providers, like LUV, and only run two daily flights from Raleigh to Chicago as opposed to the current 4. A

We shall see.

Friday, May 27, 2005

Surprise--America Owes Too Little - Forbes.com

Surprise--America Owes Too Little - Forbes.com

After reading LJ's post at Scroogeview about leverage, I could not resist re-posting a link to an article by Ken Fisher in Forbes. Ken is one of the all time best--a professor of stocks. He makes a clear case that America could use more leverage and make more profits.

This point is a little different than the point made by LJ. Fisher shows that the total debt owed by the Federal Government is low relative to our total assets. Furthermore, the US is extremely efficient in its use of capital and the country could take on more loans at a profit. Like a business who has a marginal cost of capital that is below its operating margin, it makes sense to borrow more.

The naysayers who whine about investments from China are confused at best. It is in the best interest of Americans to buy goods cheaply from China and to sell them treasury bonds at low interest rates. What business would not want such a sweet deal? Think about it, if you could buy goods from China at very cheap prices and China offered to floor-plan the goods at treasury bill rates, would you not quickly become a major importer of goods!


Scroogeview: More Profits, Same Sales

Scroogeview: More Profits, Same Sales

Leave it to a CPA to understand operating leverage. Other investors would do well to gain an understanding of leverage.

As LJ points out, there is more leverage in the system than financial leverage. The current situation is that companies are increasing profits without increasing sales.

This point is very similar to a point made by Professor Jeremy Siegel; fast growth is not as important as how much you pay for growth!

In this Bull market, the economic growth is reasonably good but the profit growth is outstanding; analyst continue to be surprised and they have been forced to raise their projections of profit growth.


Stocks or Bonds?


Smart investors buy what other investors do not want with investors avoiding auto production, we're taking the plunge.

Teleflex Incorporated, has been a leading global supplier to the automotive, marine, industrial, medical and aerospace industry for 60 years. As experts in the markets they have revenues exceeding $2 billion, and operate in 27 countries with 3 diverse business segments: Aerospace, Medical and Commerical

Looks like 2005 will be a strong year for the company--We're jumping in"

Bill Cara: Capital Markets & Social Equity

Bill Cara: Capital Markets & Social Equity

On May 16, Jim Cramer did one of his (becoming famous) 180's and said he would no longer recommend oil stocks. Bill Cara said he would take the other side of the trade and buy oil stocks. Today, Bill has posted the recent move in energy stocks.

On May 17, I said I would not take either side of the energy trade but would keep buying value stocks. I have been buying stocks that offer high sales per share. One group in particular has been the airline stocks.

The bottom line is that I have been having even more fun than Bill (without doing a detailed analysis, it seems that Cramer has hit some good stocks but has also churned in and out of a lot of stocks with only a small profit or a small loss). My families most aggressive account has experienced several days of net new high gains. Yesterday was a very sweet day as our equity jumped more than 4%! When you are already sitting on net highs, it is fun to have another strong up day. The excitement comes with our belief that the airlines are just beginning a long-term move.

One of our fundamental beliefs is that investors should keep their costs low. One way to do so is to trade infrequently. In addition to lowering brokerage fees, one can hold for long-term gains to cut the tax burden by better than half (one can deduct up to $3,000 in net short-term losses each year).

Bill may have won his 10 day bet with Cramer in one sense but the oils have not been the top performing group during this time. Yesterday, the average airline stock was up 4.76% in one day! Even better, the gains made will not be taxed for probably 4 more years and even then at half the short-term rate.

The price of oil is up again today, but how long will it last? The reason Buffett purchase a power company is because electricity is going to be used indirectly to power automobiles. The continues to use more and more coal and less and less oil. Airlines are going to raise ticket prices to more than off-set the price of oil!



Two market leaders today are DAL and TIVO. We are not adding to either position today but we have added another airline to our portfolio

We have purchased shares in AWA for $5.43 per share and are declaring it a Stock of The Week selection. AWA, the symbol for America West Airlines, has entered an agreement to purchase USAir. Airline traffic is back to levels reached in 2000. Load factors have reached long-term peaks; fares are rising; full seats at higher prices will increase revenues significantly.

Our stock of the week selections already include two half positions in airline stocks. A full position in AWA gives us a total of two positions. Given the size of the portfolio, it is reasonable to purchase additional shares in this industry. In our aggressive family account, we now own 5 airlines. In order of position size they are CAL, AMR, NWAC, AWA and DAL. CAL is our largest holding--Google is making a good run for the honors but has a ways to go.

TIVO is a volatile position with tremendous potential. We tripled up our position a month or so ago and are enjoying the recent sharp jump in price.

Airlines are probably the most hated stock group. The market is warming quickly. This means the stocks are approaching an over-bought position which means they may need to suffer through another correction phase. I would not bet on this possibility. The long-term up-side potential is too strong; one should not play games and miss the big move.


Thursday, May 26, 2005


As always, it is fun to be hitting net new high portfolio values before the market gets back to net new highs. Owning airline stocks sure makes it easy to accomplish. Today the airline index was up 4.76%! Our biggest position was the leading group making us happy.

News reports are that the summer airline season is expected to be the best in years. Traffic growth of 6% is expected. Of course fares will rise on flights that are almost sold out.

Airlines are traditionally "second half" stocks. These means they tend to do well during the expansion phase of the business cycle. This cycle will last 2 to 4 years.

Please note that help is available at no charge. If you need another opinion about an account please give us a "holler".


Bill Cara: Capital Markets & Social Equity

Bill Cara: Capital Markets & Social Equity

Boeing has made a giant move for a big stock, however, I urge sellers to proceed with caution. We have never had international commerce to the extent we have today. For example, I know of a relatively small NC furniture company whose management have been making frequent trips to China. CAL has recently added flight after flight to international locals.

In the past, Boeing has performed well during the second half of an economic expansion. Short-term, BA may decline in price a little. My family does not own the stock but as long-term investors, although this stock would not be our first choice, we would be comfortable buying at today's price.

Selling anything in a bull market can be the biggest financial mistake you will ever make. Stocks can easily go up 25% in price this year.


Wednesday, May 25, 2005


When talking heads are upside down, how can the public not be confused? Today, I have listened to a number of market commentators and I have read a number of blogs. One good discussion included Ed Yardeni as a bull and Bill Gross as a bear. Barry Ritholtz tried to explain the "conundrum" of a 4% 10 year bond in the middle of a strong but slowing economy on Kudlow and Company.

The reason that neither the bulls nor the bears can put this economic puzzle together is because they either do not focus on an important piece of the puzzle or they do not see the size of the hole that it would plug.

Productivity in China has grown at a compounded rate of better than 6.6% for a decade or more. Six point six percent productivity is a huge number. During this unusually strong run, the work of two people has been replaced by the work of one person!

If a business is able to be more productive than competitors, the business makes more profit. Therefore businesses have incentive to increase productivity. When competitors catch-up, consumers are the winners. Both businesses make and their products more cheaply and consumers buy at lower prices.

Politicians have bashed China for political reasons, but the truth is that Americans are buying goods at incredibly low prices. By opening our markets to free trade, America has been challenged to increase our own productivity. The progress made in the past 10 years is unprecedented. America was already an industrialized economy so it was not possible for us to experience the same productivity rate as China. However, our rates have been incredibly high. For 10 years, our productivity growth averaged better than 4%.

Again, the consumer is the winner when all businesses reduce the cost to manufacture products. Inflation has been on the run for quite a number of years. The costs of many goods and services have declined. Many times the savings realized are not obvious to consumers. When a consumer buys a book from Amazon, the nominal price might be 25% below the price of the same book at Barnes and Noble. The savings are not equal to 25%. Most likely the book was delivered by Amazon free. The consumer that took an hour to drive to Barnes and Noble spent extra money on gas other transportation costs and he "lost" an hour of time. The total savings to the consumer may have been more than the total nominal price of the book.

Every single day, billions of transactions happen that cost less now than they would have a few years ago. After several years of strong economic growth, it is natural for market watchers to expect inflation to rear its ugly head; but, it has not!

The bears see the 4% yield on the 10 year treasury bond and assume the bond market is forecasting very slow economic growth and perhaps a recession. The bulls see a 4% yield versus stocks at 16 times earnings and say stocks are so cheap that the economy has to strengthen. The bulls avoid bonds because a 4% yield does not seem to be compatible with strong economic growth. Ironically, the bears and the bulls have been making money. Bonds have appreciated in value as have stocks. Only those who are hiding in money market accounts are getting creamed.

Again, productivity may start out as a benefit to a business and indeed business profits continue to be stronger than all expectations. However, productivity generally becomes a benefit to the consumer. A productivity growth rate of 4% shows up eventually as almost a 4% disinflation rate for that particular product. The other beneficiary is the wage earner. If productivity is up 4% and wages up only 3%, the 4% is against the total product cost whereas the 3% is only against the wage portion of the product costs. Productivity gains can be shared at least temporarily three ways--increased company profits, increased wages and lower prices to consumers.
I submit that the 10 year rate of 4% is not forecasting a supper slow economy (although the economy is slowing) as it is forecasting a super low inflation rate. The FOMC preferred measure of inflation, the PCED, shows a rate of 1.6%--before the recent declines in oil and commodities.
Oddly enough, the ten year rate is also being held down by the fear of the housing bubble. The number of boomers who are ready to buy second homes is being pushed down because of all the hype about the real estate bubble. The demand for second homes at these low rates would indeed be much higher if buyers were not being bombarded by "news" of the real estate bubble.
A bubble in real estate will exist when most market watchers capitulate to the idea that Americans on average can now afford two homes, that there are millions of Americans at prime buying age, and that the housing boom will continue for years to come. The current fear of a bubble has definitely slowed housing sales.
We are living in an era like non before this one. Even the industrial revolution did not change the world as quickly as our world has been changed in recent years. The increase in the average standard of living has been remarkable. Investors have already forgotten that birth control pills have dramatically changed our world. Families today with two children have little understanding of the difference in their standard of living between their family and a family with 4 children of just a few years ago.
One of the prime reasons the crime rate in America has gone down sharply is because the birth control pill has reduced the number of unwanted children (In "Freakonomics", Steven D. Levitt gives a lot of the credit to Roe vs. Wade). Grand children are currently participating in the largest inter-generational shift in wealth in history. The wealth of grand parents is being split in pieces that are larger than ever before.
The point is that there are many powerful disinflation forces and wealth creation forces at work today that were not present a few years ago. Free trade, lower birth rates and technologies from cell phones to internet services are powerful forces. We are living in a golden age. It is time to stop fretting about low interest rates and to realize that low interest rates are a blessing.


Google continues to get a lot of "ink" in the blog world. Again, this is one of those over priced stocks that has huge potential. Investors should by a moderate amount and lock it away. Everyone knows newspaper advertising is dying at the hands of internet advertising. Everyone knows TV, Radio and other advertising is getting by passed. Everyone knows there will be tremendous growth in internet advertising and everyone knows Google is getting a major share of new advertising. Google will become a very big and very profitable company. No one knows just how big.


The Big Picture: Nasdaq streaks

The Big Picture: Nasdaq streaks

Another good post from The Big Picture. There have been 2080 NASDAQ streaks since 1971 but only 39 streaks of 39 days.

The Bull is running. He rested today but the run has been strong enough to expect it to follow through in the coming weeks.


Airline Stocks: Airlines trade higher as AMR notches gains - Airlines - Transportation - Markets/Exchanges - Market News

Airline Stocks: Airlines trade higher as AMR notches gains - Airlines - Transportation - Markets/Exchanges - Market News

My family is enjoying the rise in AMR. It is leading the airline index. We have more CAL than AMR but both stocks are doing well.



It is 5:40 in the morning at Myrtle Beach SC. The sun is trying to peak through the clouds that hang like pictures over the ocean. The moon was full a couple of days ago so the tides have made huge shifts daily. Twice each day the beach is almost gone with water lapping the dunes and twice each day the beach is as wide as you will ever see. One couple is walking hand in hand on that very wide, long and beautiful beach this morning.

I don't blog as much while at the beach but it is more fun. My Mom and Sister are here with me and my wife. We have eaten too much but we have walked 5 miles or more each day. The weather has been fantastic but the high today will be in the low 70's.

Marilyn and I met with a real estate lawyer yesterday. He continues to close properties at a rapid pace. Recently, he has closed hundreds of undeveloped lots. Boomers who are five years or more away from retirement are buying empty lots along the inter-coastal waterway. The price of undeveloped land 5 miles from the ocean but on the waterway has soared in the past two years. The lawyer sees no slow-down any time soon. He says the demand from 50 year old couples to own a second home is no where near satisfied.

My belief is that investors should pay up to buy ocean front property. The demand is strongest year after year for ocean front locations. Even in a tough economy beach front property is in demand. Careful shoppers are finding older properties at significant discounts to the price of new properties. A dual market has developed.

Developers are marketing new properties to boomers who live all through the northeast and Midwest. Many properties are being sold sight unseen. This makes some sense because those who travel to the beach see only the empty land where the property is being constructed.

The average every day vacationer who shops for a beach condo to buy is taken aback by the price of the new construction- new three bedroom ocean front units are typically priced between $600,000 and $1,200,000 and new four bedroom ocean front condos are typically priced from $900,000 to $2,000,000. Careful shoppers willing to renovate an older property can save $150,000 to $500,000. Many of the 10 to 20 year old buildings look great after renovation and in many cases the units offer more space in addition to the lower price.

The couple I mentioned has turned and is headed back up the beach. It is quiet except for the sound of waves crashing into the shore. Beach Blogging is as good as blogging gets.

WSJ.com - House Vote Eases Stem-Cell Limits, Ignores Veto Vow

Stem cell research holds out the promise of tremendous benefits. The truth is that no one knows if the talk is simply hype. The potential to save millions means ethical questions need to be solved. Research needs to be done. This tough issue is not going to go away. A majority of US citizens see the potential benefits as being significant. Bush has never used his veto power. With solid majorities ready to support legislation in the house and senate, Bush will probably influence the legislation but in the end avoid the veto.

Making money in stocks off pure research is tough. I know of no company on the verge of profiting off stem cells. Of course, if research developed a cure for a major desease such as diabeties, the profits could be large. Perhaps one should buy one of the biotech EFTs.


WSJ.com - Buffett Returns to the Deals Table With a Big Bet on Energy Sector

A few days ago, Buffett could find nothing worth buying. Yesterday, he paid 9 Billion for a utility. Furthermore, he said he may be buying in this area for the next 20 years. Buffett negotiates just like any of us who are trying to buy a car. Until the deal is finally made, we can't find a car at an acceptable price.

DUK recently purchased Cincinnati Energy. Consolidation is coming hard to a utility near you! Buy the stocks before they are taken over!

There has been much talk about requiring utilities to offer time of day pricing. Under this plan, consumers might charge storage batteries or convert water to hydrogen at night. The lower price per kilowatt should pay for the batteries in a few years and new fuel cells need hydrogen to operate. Power companies are more efficient when they run full tilt 24 hours per day. Lower priced fuel alternatives can be used. Expensive gas or diesel generators can start up and shut down quickly to meet peak demand but this adds to our energy imports versus using cheap coal that is available.

The reason energy companies have not built new refineries is that they understand the changes coming. GM has worked on fuel cell powered cars for the past 10 years. GM has built and sold hundreds of buses that operate off fuel cells. The technology is getting close to economic large scale production. Big chemical companies have begun using hydrogen to fuel their operations.

The next step in the process is to convert all cars to 42 volt electrical systems. Trucks and SUVs have been converted. The larger batteries will pave the way for the use of hybrid featured cars. Full use of fuel cells will not happen until a distribution system is built. Buffett is going to be involved in the generation of the power. His energy group may also be involved in the manufacturing of hydrogen. A major shift in our use of energy is in the works.


Tuesday, May 24, 2005


The following three books are the best of the best that I have read lately.

The Bottomless Well, by Peter Huber and Mark P. Mills.
The Next Great Bubble Boomby Harry S. Dent Jr.
The Future for Investors by Jeremy Siegel .

I list The Bottomless Well first because it is the one many investors need to read the most. Too many folks do not understand that commodities go down in real value over time. One can look at a long-term chart and see this quickly but the ramifications are many. The key realizAtion needed is that inflation is not going to get out of hand because of commodity prices. Tight labor markets are the primary force behind inflation. Free trade has reduced the pressure on labor markets. Therefore, do not be overly concerned about inflation.


Bill Cara: Capital Markets & Social Equity

Bill Cara: Capital Markets & Social Equity

Today was a counter trend day. Bill posted a few lists showing gold miners doing well and the winners of recent days such as airlines and online brokers doing poorly.

I told my wife the first thing this morning that the market would struggle after the senate decision but I projected that by the end of the day the NASDAQ would be up--if not the Dow.

This market is too strong for the counter trend to last long. The primary trend could resume by tomorrow.


Stockcoach's Corner: May 2005

Stockcoach's Corner: May 2005
Stock Coach confirms our stock of the week trading strategy. We look for value stocks that have relative strength.


The Prudent Investor - seeing too many bubbles: OECD slashes growth forecasts - ECB rejects rate cut advice

The slowing of European economies is good news for US inflation. China is still a hot economy but the currency is pegged. Inflation may get bumped a little because of trade tarriffs with China, but over all inflation is tame. Long-term rates are low, real estate is still affordable.

The Big Picture: Don't Fight the Tape

Watching the tape at the old Harris-Upham brokers office 43 years ago was the first time I heard the phrase, "Don't Fight the Tape". Barry was quick to switch from the big bear to the bull mode. Barry is to be congratulated for having the
good sense not to get locked into a bearish stance.

One of his readers asked about the buy and hold philosophy. A permanent Bull will make excellent money by practicing the buy and hold approach. A paramnet Bear will eventually get burned and burned badly.

I have been pushing stocks hard since August of 2002. I have remained bullish now for almost three years. It has been a joyous ride. The worst four months were January through April of this year. The good news for my family is that we "loaded up the truck" in February, March and April and are currently sitting on net new high portfolios.

Barry correctly notes that the speed of the turn implies that the market may take a rest before the next big surge. It does not matter. It is a mistake to try to catch a bull market on pull backs. It it is truly a bull, the market is not going to let you in cheaply. You have to lasso a bull at full run if you hope to catch the biggest part of the move.

Which sectors is a tough question. Defensive issues have done well as have technology. Gold, materials and energy have gotten slammed. Oil could bounce again but I am betting the other way. Our most recent additions have been in technology, airlines and a couple of weeks back we added online brokerage stocks.

Another way of saying, do not fight the tape, is to buy relative strength. Technology, airlines and online brokerage stocks are out-performing the market. Google is another stock that is making a big push. Expectations are that Google will be added to the S&P 500 index. Institutions currently under-own Google. Million's of shares will be purchased by the index funds if the stock is added. I suspect that the stock will be trading over $300 per share before it is added.

The BULL is in a stampede. Hop on a horse and ride with the heard or get out of the way! The market would have loved a kill the filibuster vote today but before the day is out, I suspect the market will have turned up. The Dow is down 29 and the NAS is down 5 at this moment.

John McCain if running for President, Again

John McCain will get a lot of credit for reaching a compromise to avoid the vote on the filibuster. In the short run, Bill Frist and George Bush are stymied in their attempt to let the majority confirm court judges. More judges will go through than without the vote, but the "moderates" have assumed a powerful roll.

"Moderates" is in quotes as several of the group are out of the mainstream. It is an interesting group to include Byrd, Chaffee, and Graham. The group could propose social security, energy and other compromise legislation.

The American system of checks and balances sometimes creates strange bedfellows. It is also like trying to block water from going down-hill. Finally, passing a bill through congress is like making sausage, the end product is pretty good but no one likes to watch it being made.

Most Americans do not believe the country is headed in the right direction. The time to buy stocks is during times of pessimism. I can hardly imagine more pessimism during a "great" economy. The economy is great because it is ideal for the growth and profit of American businesses. Stable growth with low inflation and low interest rates, what more could an investor want?



GME continues to out-perform expectations. Good stock and great selection by Kupsky. Our Stock of the Week selections continue to do well. We recently traded out of our biggest loser. This gives us a realized loss for income tax purposes and moves the money to a stronger stock.


Monday, May 23, 2005

The Happy Capitalist: Roth 401(k)

The Happy Capitalist: Roth 401(k)

Good info here on Roth 401-K. Roth accounts are fantastic for estate planning. Those who wish to become super rich should avoid tying up too many assets in retirement accounts.

Some folks are leveraging their homes more now-a-days because they have a non-levered 401-K account.

Stocks are under priced. Buy the Bull.

WSJ.com - As Prices Rise, Homeowners Go Deep in Debt to Buy Real Estate

Real estate deals, just like stock deals go bad all the time; most real estate deals of late have been very sweet. Everyone keeps trying to pick the top. The problem is that the top of any market tends to be a steep precipice that is reached long after the first calls for a top. Do your remember the irrational exuberance in the stock market in 1998? The market peaked a couple of years after the call.

Money is cheap-mortgage rates are headed down, 76 million baby boomers are at prime earnings ages and homes are in demand. The real estate market has a good year ahead.

In Big Bull Markets, stocks and real estate go up together. Part of the wealth that is driving the real estate market is in 401-K plans. Those who are saving large amounts annually feel justified in using leverage outside the accounts to buy real estate. This is a perfectly logical action to take.

Lending institutions are being asked to tighten standards. This request is also reasonable. The leverage involved in real estate adds risk. Homes do not normally swing in value more than 20% in a few years time. With demand still extremely high, those who invest 20% in second homes are currently finding 100% equity gains in a very short period of time. The Bull is not over.

WSJ.com - How to Make $600 Million? Get $1.3 Billion

The hedge fund story continues to unravel. At a time when the market is soaring, big players have taken big hits. They are not ready to re-lever their accounts. Move BULL ahead.

WSJ.com - Moderates Reach Compromise On Judicial-Nominee Showdown

The ability to change the court is huge. A lawyer friend tells me that 2% of our GNP is wasted because of law suits and fear of law suits. Our legal system is designed to protect us--not to tax us.

Frank Howard, legendary football coach at Clemson, once said that a tie is like kissing your sister. Compromise can taste about the same.

John McCain, leader of the compromise, is running for president, again. The deal crafted, allows republicans to get judges through the senate. American businesses and consumers have "won".

Time will tell if Bill Frist or John McCain won in regard to their respective campaigns for the presidency. At least 6 democrats agreed not to filibuster. It makes one wonder if compromise can be reached to amend social security. The moderate middle group, democrat and republican, have assumed a powerful roll. The elections of 2006 will be interesting.

I believe the stock market would have responded very positively to a vote to end filibuster of judges. The compromise ends the filibuster. It is hard to gage but the BULL market is still a BULL market. Stocks are so cheap relative to bonds and real estate that any news is likely to be seen as positive for the market.


WSJ.com - Broadcom Levels Suit on Qualcomm

The royalty battle heats up. QCOM makes money off half of all cell phones in existence. Broadcom is trying to increase royalty income in the cell phone field. My family owns MOT, QCOM and TXN. This is a big and growing business. Sometimes, too much competition takes away all profits.

If my family did not own telecom equipment shares, we would start with half QCOM and half TXN. The patent suit is a buying opportunity for QCOM shares.


Barron's Online - HDTV: Who Wins, Who Loses

HDTV is coming to a home near you. A bill to be introduced in congress could make the "drop dead date" at the end of this year. To do so would require boxes to be available to switch digital back to analog--for those not willing to spend the money on a new TV. Barron's Online discusses winners and losers. TXN is my favorite winner. DLP technology from TXN is in digital TVs, cell phones and other electronic devices that display information. This technology is particularly good for products that use battery power.



One of the groups that is taking a breather today is airline stocks. Several air stocks have had a nice bounce recently and AWA is up again today. However, energy is bouncing back today after a couple of rough weeks.

My money is still on the airlines. This group is being ignored by most investors but business is good. The turn is at hand.



I added more MOT in a family member's account today. The tech stocks are performing well in the face of lower interest rates and lower commodity prices. MOT has, for the first time ever, announced a $4 Billion stock buy back.

The market is technically over-bought on a short-term basis but the wall of worry is being climbed. The senate may end the filibuster tomorrow. About the only mutual funds being purchased by the public is covered call funds that do poorly in bull markets.



Long term rates continue to forecast a slow down in inflation. Tech stocks, housing stocks and other interest sensitive stocks are off to the races.

Low long rates give all potential home buyers a reason to go shopping now! Mortgage rates are heading down for at least one more time. This is an amazing development at the start of the summer buying season in the middle of one of the best housing markets ever.

Buy stocks.


Net Stocks: Google's potential inclusion into index drives stock - Advertising - Consumer Services - Media - Manufacturing - Analyst - General

Our Google Gulp has worked well and we see no end in sightThe new Google portal is a great start on a "full service" platform.


Heeding Income's Call

1. Public money flows to "hot funds".

2. Hot funds perform poorly.

3. Covered call funds are hot.

4. Covered call funds do well except in bull markets.

5. The Bull Market is here!

6. Buy The Big Bull Market.

Stocks Prove Good Investment

Check out the fabulous "Stock of Week" perfomance on our companion stock blog. Kupskey's stock picks are helping portfolio performance return 16%. Had the same amount of money been invested in S & P 500, the return would be .01% and the treasury yield at 2%.

Current Value of this Portfolio:
$46,229.53 Simple Return: 16.49%
S & P 500 Value :$43,936.57 Simple Return: .01%
Treasury Bond Value :$41,125.08 Simple Return: 2.82%
As you can see, overall individual stocks are outperforming the
S & P 500 and Treasury Bonds with great success.
We sold RGX and took a tax loss of $1024. The proceeds were reinvested in this weeks Stock pick: J. Alexander's BUY THE BIG BULL BOOM BUBBLE!

Past performance does not guarantee future performance. We make no recommendations! If you want to talk about the market feel free to call me during office hours at 336-778-0543 or write meStocks or Bonds, PO BOX 1797, Clemmons, NC 27012, USA

Saturday, May 21, 2005

Winston-Salem Journal | Job cuts likely in merger

Winston-Salem Journal Job cuts likely in merger

Piedmont Airlines was founded and grew up in my home town of Winston-Salem NC. The merger with USAir took the headquarters of the combined company away but there are still hundreds of USAir employees in Winston-Salem. A recent deal has assured Winston-Salem that a reservation center will remain open in Winston.

Now the next merger has been announced. AWA-American West-is buying USAir. USAir is about twice the size of AWA but it has been in bankruptcy twice in the past few years. The new board will be controlled by the current AWA board but the surviving company will be called US Airways.

On Cavuto on Business, Jim Rogers suggested that the airline business is making the turn toward profits. For the past few months, I have been "pounding the table" in regard to airlines and have encouraged my friends and family to invest in airline stocks. Our airline investments in order of largest holdings are CAL, AMR, NWAC and DAL. DAL is considered the riskiest of the four and AMR is considered the safest.

AWA has purchased the assets of USAir with no money down. It has "hired" 30,000 USAir employees at the lowest rates of pay offered in many years. It has had to assume a lot of debt and the new company certainly faces many challenges.

The plan is to cut 5,000 employees through attrition, cut 59 planes, close the USAir headquarters and save $600 million per year. The prior cuts in pension benefits were substantial.

Perhaps the most positive fact one needs to know is that AWA has successfully competed with LUV for the past several years. AWA is a low cost carrier and goes head to head with LUV in Las Vegas, Phoenix and Philadelphia. USAir does 90% of its business through the Charlotte NC hub.

Larry Kudlow says the airline business model is broken. He says no one can make
money off the hub and spoke system. I disagree. Cities like Chicago, Charlotte, New York, etc. will always have sufficient traffic to serve as connection points for numerous other cities. Low cost carriers can always compete point to point but those who need a connecting flight are apt to travel via one of the major carriers. One might be able to save money by taking two seperate short hops but the waiting time between hops adds a cost that many businesses cannot afford.

USAir will emerge from this tough time as one of the majors. The combination of the 7th and 8th largest carriers boots the merged company to number four and gives it a good chance of a profitable future.

One must wonder if DAL will not combine with another carrier. In prior attempts at big mergers, anti-trust concerns killed the deals. Under the current circumstances, it is difficult to argue to kill mergers when the failure to merge may raise costs to consumers dramatically when one of the carriers liquidates. Through code sharing, NWAC, CAL and DAL work together. Without checking the figures, I believe I am right in saying that together these three form the largest US based national and international carrier. (See my post a couple of months back where I showed that LUV is by far the largest US carrier in terms of total stock value--it is no where near the others in terms of sales.)

AMR is a surviving national and international carrier and UAL is a limping national and international carrier. NWAC and CAL cover hundreds of international cities from both the east and west coast. Both firms are experiencing very high load factors on international flights. When high load factors eventually cause high seat prices, the result will be a double whammy. A plane flying 300 seats at an average of $200 per seat generates $60,000 in revenue and is a big loser; whereas the same plan flying 350 seats at an average of $600 per seat generates $210,000 and is a big winner. The cost to operate the two flights are not very different.

My family will buy AWA. We have close friends who recently invested their 401-K funds to start a small business. We wish them the best and pray for them but we take substantially less risk investing in 5 large airlines than they take in starting a small business. It is often said that 90% of all small businesses lose money and close down within 5 years. It is possible that one or more of the carriers we have purchased will go bankrupt but I believe there is a ninety percent chance that 4 of the 5 survive. Even if only 3 survive, the 3 survivors will do very well and make up for the loss of the other two.


One of the best measures of stock value is the price to sales ratio. The airlines have extremely attractive price to sales ratios.