Thursday, January 31, 2008


This morning the economic news was bad. The market is going up anyway. BREAKOUT, BREAKOUT, BREAKOUT!

Today's action is "bull market break out action".

If you can add money to your accounts, now is the time to dig deep. In case you have not heard, the FOMC took off the brakes by lowering the Fed Funds Rate twice in 8 days time by a total of 1.25%. This is a massive shot in the economic arm. For the first time in 19 months banks can profitably "borrow short to lend long".



A funny thing happened during the recession of 1991. The housing market gathered strength. By the time the recession was over, housing was on a roll. A few years after the recession, the housing market soared. Since 2005, we have witnessed the "bursting" of the housing bubble. Those who rode the housing market up from 2001 through 2005 did very well. I wonder what the next bubble will be?

The mid cycle correction has flirted with becoming a recession. During this down turn, the economically sensitive airline business has held up well. For example, in the month of January 2008, CAL flew almost 1% more full seats than last year and, if memory serves, last year was the best January on record. The seats were extra full even though fares were increased several times during the year.

The majors have started 2008 with one of the biggest fare increases ever. When a business raises fares and continues to sell more product, one knows that demand for the product is strong. Each of the major airlines now has more cash than market cap. If they each could reach an agreement with their share holders, they could buy all the shares for more money than the current market price. Or, they could buy one another and pay cash.

The expectation has been that DAL will merge with NWA or UAUA and CAL will merge with the one left standing. The expectation has been that the cash on the books of both companies will be preserved while the buyouts are treated as a merger of equals.

Yesterday, after a couple of years of trying, the Midwest Airlines merger was approved. NWA picket up a 47% share and the right to buy the rest under certain conditions. This was a small potatoes deal relative to a DAL -xyz merger but the important point is that the antitrust lawyers let the deal happen. Did this give a green light to other consolidation?

The answer to the last question really does not matter. The airlines have already been permitted to link up into international alliances. The major carriers in effect have partners within the USA and around the rest of the world.

We all know that the world went global gradually over the past 25 years and that the global trend is accelerating. The big airline traffic growth is from under developed nation to developed nation. Places like Nigeria are where new airports are being built. While many of these countries support regional and state owned airlines, they cannot win permission to fly to the developed world without "sharing the traffic". The fast growth in traffic out of Asia, Africa and Eastern Europe is translating into fast growth for companies like CAL, DAL, NWA, UAUA and AMR.

I believe the airlines are in position to be the next "bubble". The bubble of the late 1990's brought great profits to all sorts of companies that provided computers, the connection of computers to networks and communication companies. The growth in these areas will not disappear but the competition is as fierce as ever. What these companies have done is to make it all the more possible to use the human capital that has heretofore wasted away in poverty stricken countries. China has been the lead story in this regard. Twenty five years ago, China had about 800 million people who survived off of about $1 of income per day. Today, there are still 180 million Chinese who survive off the same real amount. What a blessing it has been for Americans, Europeans and others to have received the benefit of low cost products while helping to bring more than 500 million Chinese out of poverty.

The good news is that "The End is Not Nigh" (as written by GaveKal Research). The speed of communication between the US and places such as Nigeria are about to move from fast to super speed. Google is one company that has funded a massive new under water connection. The increased speed of communication will bring all the more people out of poverty and into the world economy. Peace and prosperity "trade together". I do not know the correlation coefficient but the world has witnessed the joint break out of prosperity and peace any number of times.

Kids growing up in the poorest of villages in Africa today will become world travelers. Over the next decade, millions university courses will be delivered over the Internet. Millions of people will speak English and their native language well and millions will feel a connection to the USA. A large number of the best and the brightest will come to America to work and to live. No matter who is elected President of the USA, one of the top priorities will be to reform our broken immigration system. Some will continue to resist any reasonable compromise and they will ask why we need people to come here? It is so easy to forget that America would be nothing if it were not for immigration. It is easy to imagine a very different world if Eisenstein and millions of other brilliant people had stayed home.

The bottom line is that the global economy is alive and well. Dramatic growth in US exports has given America a shot in the arm. Now that we are in the prosperity phase of the business cycle, the export bubble is being inflated.

The next bubble is an export bubble of US designed goods and services. The airlines will participate in this bubble and indeed enjoy one of their own.

The massive cut in the Fed Funds Rate of from 4.25% to 3% in the past 10 days will take a couple of months to show up in economic growth. Since the yield curve is now positive, for the first time in 19 months, banks can afford to lend again. Late yesterday, the senate finance committee retreated from the most ridiculous of their tax rebate schemes. The package that left the committee is not all that different from the house bill. Clearly, the congress wants to get this bill passed in time to take credit for the economic up turn. If the full senate passes this bill, there will be some noise out of the house-senate conference committee for a few days but the final bill should be passed quickly. Once done, the cooperating news media will interview congressional leaders who will be eager to tell how the economy is likely to bounce as a result of their brave, yes even courageous, actions. The market sentiment is ready to bounce. Much of the uncertainty of the nomination process is almost over. Pretty soon, we are likely to know that the candidates are McCain and Hillary. Both democrats and republicans are currently concerned about the deep fissures in each party. Rush and other boisterous right wingers will fuss long and loud until the smoke clears between Hillary and Obama. Once the democratic decision has been made, the right wingers will coalesce behind McCain. There is a good chance that Huckabee will be the republican VP nominee which would bring a large portion of the social conservatives into the McCain camp.

Of course, anything can happen in politics. As we know, early in the year, McCain gave up his commanding lead to Rudy and Hillary's coronation took a very long detour. In recent days, the republican establishment has rallied around McCain while the democratic establishment has splintered. No matter, Hillary is still the odds on candidate of the democrats.

McCain, assuming the right wingers come out to vote against Hillary (or Obama), represents a difficult challenge for the democrats. He polls very well with independents. He also wins handily among those who believe in peace through military strength. He clearly deserves credit for the success of the surge in Iraq. With the prospects of a major economic revival, lower oil prices and good political and military news out of the Middle East, McCain is a slight favorite to beat Hillary. Though Obama has skills, I suspect that McCain would ultimately beat Obama by a significant margin. Even democrats have recently seen that a black man cannot yet expect to win a majority of white votes in many communities. Obama would bring out the black vote but no matter what we may wish, he would also bring out the anti black vote.


An analyst has upgraded his UAUA earnings estimate and given "back door support" for the potential for merger. He reports that labor relations have "calmed down". It must have been 15 years or more ago when UAUA unions won operating control of the company. The lesson is that even a monopoly loses when it tries to force its will on others.

On economic weakness, oil prices are down a couple of dollars per barrel today. CAL is up more than a $1. The airlines are gradually climbing even in the face of the economic slow down. They will do very well when the slowdown is over. So well that the pundits who have bashed the airline business for many years will talk about the "airline bubble".


Did you ever see a pig being lead around with a ring through its nose? Our wonderful politicians clearly know they can take the public where ever the politicians decide is best. In the latest game of silliness, the senate is writing all sorts of new complications into the tax law as a part of the bill to "give back" Americans some of their tax dollars. As we all know, the congress will borrow the dollars to send us so that they can be paid back later, after the election is over.

Writing more tax rules is the "big game" in Washington. Tax rules, some 59,000 pages of IRS code, are written and re-written because these lawyers enjoy the benefits of the 250 Billion Dollars spent each year by tax payers to file the complicated forms. Other billions of dollars are directed toward certain investments in order for the public to jump through the hoops provided.

There are a dozen ways that the congress could stimulate the economy without adding more "junk" to the IRS code. One of the simple solutions would have been to permanently lower taxes on corporations. Corporations pay zero taxes as the tax bills are passed on to employees in the form of lower wages, to customers in the form of higher prices and to a very minor way to share holders. As we all know, the stimulus package is not about helping consumers but about helping voters feel more positive toward incumbent politicians. The noise from the senate is all about giving tax breaks to more people while excluding illegal immigrants. The reality is that the senate has great power and it likes to strut its stuff while giving a long list of insiders the benefit of even more complicated tax forms. Again, the winners in these bills are the lawyers, accountants, lobbyist, investment advisors, brokerages and legislators. There is a good chance that a filibuster will stop the senate bill in its tracks and force the senate to accept the more streamlined house bill. Such a result, the least bad result, is all the hope the common man can have when watching the congress at "work".


The antitrust investigation in regard to the merger of Midwest Airlines has been called off. The chair of one house committee, who has his states interest in mind, has said that he will fight any and all mergers of major carriers. While Midwest is a small deal, its success suggest that other deals might be acceptable to the Bush Administration. AMR has increased its free cash hoard to 5.2 Billion Dollars and is rumored to be ready to outbid DAL for NWA. I still believe CAL and NWA would make a nice match. In any event, airline mergers are tough. It takes time to realize significant savings. I continue to be happy for the majors to remain independent. As was just proven again, the majors are in the position to raise fares as necessary to cover high fuel costs. The $20 per ticket increase that just went through on about 2/3rds of all flights represents a major increase in revenues. 2008 will see higher profits than are currently predicted by airline analyst.

Last year, there was fear that Chuck Shummer and Lindsay Graham would lead the US into a trade war. The fact is that Americans have benefited enormously from free trade. The public does not fully appreciate the benefits received from free trade. With the US economy at the trough of a mid cycle correction, times are relatively tough in the short run and the public lives in the short run. Still the folly of the Shummer-Graham tirade ended quickly and there is no end in sight to continued strong growth in trade. Democrats made a lot of noise but voted for the new trade deal with Peru and are likely to pass the deal with Columbia this year. US exports are at record levels and growing rapidly. With the cost of labor in American running at around 15 to 25 times the cost in developing countries, the sense of sending labor intensive activities to developing nations is a win-win for us all. Now that the US has moved into the prosperity phase of the business cycle, complaints about jobs moving overseas will fall because plenty of high paying jobs will "bubble up" in America.

The bottom line is that the growth in international air traffic will continue for many years to come and that these flights are not the price sensitive tourist class flights. Business traffic is the source of airline profits and business is booming. The GNP numbers for the 4th quarter showed economic growth of only .6% but business strength was hidden by the decline in home construction and inventory adjustments. The first quarter will see growth of around 3% and the "temporary stimulus" will boost the second quarter to well above trend. International traffic growth will hit double digits year after year. Traffic growth within the US will not be as robust but price competition will be deemphasized in this market. The highest profit growth will be on routes that connect hubs to international locations.


With today's .5% cut by the FOMC, for the first time in 19 months, the Fed Funds Rate is below the 10 year rate. My guesstimate is that the 10 year rate has been above the Fed Funds Rate more than 95% of the time over the past 50 years. The Bush Administration has had its foot on the economic brakes for 19 months in a row. The political timing looks just right. Yes, it is impossible to separate politics, economics and religion but it is a shame to see the power of government used for the political and economic gain of those in charge. The public has sold billions of dollars worth of securities because they have "bought the risk of recession" while insiders have bought billions of dollars worth at low prices. In just a few months, the public will vote for one establishment candidate or the other. No mater which party wins, the new congress will continue to fight the same old battles to raise or lower taxes and complicate our lives in order for the insiders to "earn" their fees.


None of the prospective nominees are economic conservatives. McCain is famous for reaching compromise. Some would say that compromising to "get something done" is a good thing but driving the bus into the ditch just so you can say you moved it is not a good thing. McCain, like Clinton and Obama are for a new tax hidden in sheep's clothing. They all believe in the "cap and trade system" of polluting rights. Once again, the educational system in America has failed us. Politicians can get away with building yet another power base because they can euphemistically call a tax increase a strange name and sell it to the people as the way to "save the world from global warming". The difference between a carbon tax and a cap and trade system is that the cap and trade system promotes corporate payments to the highest priced Washington Law Firms and the subsequent courting of congress members.

With the "big guns" now lining up behind McCain, the republican race is over. Huck will stay in to win a few southern states and Romney will pick up delegates in Utah and others here and there but the republican race is over. Huck has a good shot at the VP slot as he can help pull in the southern vote, the evangelicals and even the Regan Democrats.

Based on the real estate cycle that typically last 17 to 22 years, it is past time for another big tax simplification bill like the one that was passed in 1986. McCain has said that he is for tax simplification. He has even asked Huck, during one of the debates, to explain the FairTax. Still, the odds that he make the support of the FairTax part of his platform in the general election seem slim. I hope I am wrong on this point because otherwise there is not a great deal of difference between Hillary and McCain.

Huck is truly believes he could make the US energy independent within 10 years because the replacement of the income tax with a consumption tax would give all Americans great incentive to reduce energy consumption. Take away the disincentives of the current tax code and all sorts of possibilities would easily become realities.


The scale of nuclear power is simply too big to be easily understood. The temptation for the average man is to believe that windmills can take the place of power plants. While I grant that we have more "stuff" than we need and while I grant that one of the reasons to support the FairTax is to reduce the proliferation of too much "stuff", windmills are not the solution to all our energy needs. Nuclear power is not the total answer either but the contribution from nuclear is going to grow dramatically over the next 20 years.

Right now there are 439 nuclear power plants in opperation. They produce 372,059 billion kilo watt hours of electricity per year. To replace this production with 10 foot diameter windmills, we would need to construct about 161 Billion windmills. The fact of the matter is that there are currently 33 new nuclear power plants under construction, 94 more planned and 222 more proposed. Those that are under construction and planned should all be operating within 8 years. The new plants will produce about 125,000 billion kilowatt hours. Some of the 439 will be decommissioned or retrofitted. Once a few more of the new plants are completed on time and under budget, many more of these plants will be planned.

Warren Buffet has purchased millions of shares of coal trains. Somewhere in the world, there is at least one new coal fired electrical plant starting up almost every day. While the media goes on and on about alternative energy, coal is being consumed like never before. Solar cells are in the news but they generate .04% of the electricity consumed. All the while huge amounts of natural gas is being used to make fertilizer which is used to grow corn which will never come close to replacing other sources of energy.

Combination battery-capacitors have been developed that are ideal for electric vehicles. These batteries hold twice the power of the best on the market today while they cost 30% less and offer much improved performance characteristics.

Electric motors are several times more efficient than internal combustion engines. Politician need to forget about cap and trade systems. They need to tax consumption and let the market figure out which fuel should be used. A tax on consumption would do far more to save the environment than the piece meal results produced by a cap and trade system.


Professor Michael Shermer says that if one were to visit the Yanamomon tribe down by the Amazon river, one would see the way people lived hundreds of years ago. If you were to count all the different "products", such as flint arrows, baskets and clay pots, used by this tribe the number might reach 300. He goes on to say that if you were to visit the Manhattan Tribe along the Hudson River and you were to count all the products used by these people the number would reach about 10 Billion!

I am sure that people "need" these products. I am not a "minimalist" who believes that mankind must live like privative men or perish. However, I submit that we have fallen into the habit of consuming more than we need.

Many Haitians are eating mud cakes because they cannot afford a cup of rice. The world's policy of converting food to fuel is morally wrong. I hope you will support the FairTax. We all deserve savings incentives. One does not need to falsely believe that the world is about to run out of resources in order to believe that waste is wrong. Many of us enjoy telling about how we were taught to clean our plates because Chinese children were going hungry. As children we could not see how cleaning our plates helped a hungry child on the other side of the world. Today, we take the food those children would like to have and put it in our gasoline tanks.


James Williams, who writes an oil newsletter, and Phil Flynn, who is an oil trader and TV pundit say that oil is headed toward $70. The IEA has cut 2008 energy demand by another 100,000 barrels per day. Another $20 Billion investment in Canadian Tar Sands has been announced. Canadian production from tar sands is expected to grow rapidly for the next 5 years. Wayne Angel, former member of the FOMC, says that interest rates will stay low for a long time because commodity prices are apt to fall. Lower prices are the equivalent to a consumer tax cut. STIMULUS FROM THE FED, STIMULUS FROM THE CONGRESS, STIMULUS FROM THE OIL MARKET--BOOM, BOOM, BOOM!


It is rumored that Apple is about to slash the price of the iPhone and it is rumored that Dell Computer and Google are ready to announce a GPhone, similar to the iPhone. Nokia, the company that has set all kinds of records for selling consumer products, is opening up its software. The competition for hand held computer-phones is going to be brutal for the companies but a windfall for consumers. Billions of hand held computers will be sold in just a few years. Wireless connectivity and voice recognition capacity is going to make these devices the most powerful computers ever built!

No more rings in our noses. FREEDOM!

Wednesday, January 30, 2008


The spread between the Fed Funds Rate and the 2 Year Treasury rate is as tall as it has been since the market bottom in 1991. The futures markets expect that the FOMC will cut the Fed Funds Rate by .5% today. Such action is a very powerful stimulus to the economy, much more so than the silly fiscal stimulus package where the people will receive the grand sum of $150 Billion now and have to pay it back in the future. The package is about the same as coming home to find out that your spouse has borrowed $1,200 on the family credit card to buy a new sofa, the sofa sits fine but the new payments seem to last longer than the sofa. The fiscal stimulus will rob about two points of GDP growth from future quarters and pack it all into the third quarter just before the elections take place.

Unfortunately, the Bush administration and the congress is engaged in "market timing". Bush 41 lost the White House after only one term because his timing was off just a little. The big cuts in the Fed Funds Rate, piled on top of the fiscal stimulus will do wonders between now and the elections. The problem is that neither action will solve the problem of an economy overly burdened with rules, regulations and taxes. The US has the highest corporate tax rates of all major countries with the exception of Japan and Japan is suffering from a 10 year economic slow down. What is not appreciated by the public is that corporations pay no tax but only pass along the tax in the form of higher prices or reduced wages.

The most efficient poverty program is to reduce taxes on capital and labor but critics are apt to attack such policies as being "trickle down economics". The temptation is to believe that governments should actively confiscate money from the "rich to give to the poor". This romantic notion goes back at least a couple of thousand years beyond the tales of Robin Hood. The problem of oppressive government should not be fixed by oppressing others.

The good news is that ordinary investors can take advantage of the political games being played. Investors simply need to be aggressive buyers during the "goose the economy times". Investors must remember that the "goosing" is not produce a precise response. The market is still worried that tax rates will climb if nothing is done. However, as the democrats point out, taxes were raised at the start of the prosperity phase in the 1990's and the economy boomed anyway. Indeed, many a dollar will be pulled out of 401-k accounts and many a capital asset will be sold in order to get the lower tax rates available for the next two years. The activity created prior to the tax law change will serve to stimulate the economy. This period will not be the first in our history where it made sense for one to sell a capital asset and then buy it back just to establish gains at the lower rate.


The "disbanding" of al Qaeda in Iraq is about to offer up a "sweet peace dividend". Iran no longer has the support of al Qaeda in Iraq as a reason to resist a deal. George Freeman says that Bush is a lame duck president but he still has a year to push Iran toward a deal. With relative peace in Iraq, the government is boosting oil revenue which is being shared with the various parties. The government expects to boost production by 400,000 barrels per day this year and by 5 to 7 million barrels per day over the next decade. The relative peace will allow US troop levels to be reduced in Iraq, while they will be increased by a smaller figure in Afghanistan.

Unfortunately, in politics, solving a problem is often a mistake. After Bush 41 won the Gulf War, the public voted swallowed the saying, "its the economy stupid", hook line and sinker. It may be that leaving Osama bin Laden isolated in the mountains of Pakistan is a "crazy like a fox move". The American people need a reminder that there are "bad guys" who would harm us if we let down our guard. History has shown us time and again that war after war could have been prevented. The usual antidote to war is to remain so militarily strong that others know it would be suicide to attack.

Had the world not let down its guard, WWII would have never been fought. Hitler was able to dream of world domination only because the rest of the world cut back on defense.

According to people in the know, from US oil producers to Saudi Sheiks, the current price of oil includes a $20 "global risk premium". There has not been much news about Iran lately but that does not mean progress is not being made. A deal will come as a surprise. In the mean time, steady progress is being made in other Middle Eastern Countries. Countries such as Jordan and Libya continue to move in the direction of "modern societies". The millions of people of Iran are growing jealous of the prosperity of their neighbors. Good things are happening in this part of the world, even while the AP focuses its daily report on the number killed in the area.


The law of the land calls for the separation of Church and State. The law of the land prohibits the free exercise of religion. It is impossible to separate politics from religion or economics from politics or any other combination of the three. Huckabee is seen as liberal by some conservatives because he believes in helping those who need help. McCain is seen as a maverick republican because he has reached across the political isle for compromise with democrats. McCain just won a major victory if not the republican nomination in Florida. He lost among those who consider themselves to be very conservative. The good news for republican chances in the fall is that he won handily among those who consider themselves somewhat conservative or moderate. It is hard to imagine seeing large numbers not voting as a protest when the opposing candidate will be Hillary or Obama. When I do online test to see which candidates I am most like, McCain does not show up as being most like me on social or economic policy but Obama consistently comes up as being the least like me.

Hillary is actually much closer to the center than is Obama, but that does not mean that I would vote for her. While I know it is impossible to call short term market action, I am willing to bet that late today the market will be quite strong. Part of this is based on my belief that the FOMC will cut fed funds by 50 basis points. The other part is based on the improved chance republicans in the presidential race. Now that al Qaeda is melting into the fabric of a democratic nation, the Obama -- Clinton positions on international affairs will look worse and worse as the election nears.

Romney just spent a huge amount of money in Florida. He ran about 10 times as many TV ads as did McCain. The irony is that McCain has benefited from the fact that money is not the key to the nomination of candidates. The McCain-Feingold legislation has proven to be a joke but it did not matter partly because Americans like to vote for the under dog who does not have so much money. If you don't believe me look at the total $ per vote totals of Huckabee versus Romney. Democrats find themselves flush with money. The bulk has come from the far left and the party has been pulled so far away from the middle that their chances of winning are falling. It is surreal to see Ted Kennedy endorse Obama while remembering John Kennedy. President Kennedy was strong on defense and strong on the economy. If he were alive today, I cannot imagine him voting for Hillary or Obama.


Democrats complain because of the loss of manufacturing jobs in America. Many like to believe that government can wave a magic wand and bring those jobs back. Well government could bring those jobs back if it really wanted. Indeed, government could bring back the millions of farming jobs that have been lost over the past 100 years. For example, the government could prohibit the use of tractors on farms. Today it would take several 100 if not 1,000 or more mules to substitute for the work being performed by one monster GPS guided John Deere. In regard to manufacturing jobs, there are about 1.1 million industrial robots doing work that would take a few hundred million people to do. In the same way that it makes no sense to farm by mule, it makes no sense to produce by hand.

The interesting thing is that the growth in the number of industrial robots has slowed. The fact is that the world is flush with goods, more stuff is being made than ever before. While inflation is defined as too much money chasing too few goods, a part of today's conundrum is that we have more goods than can be used. In the past 10 days, my wife and daughter have "free cycled" hundreds of items that Marilyn and I will not need in our new "down sized" house. In 36 years of marriage, we accumulated a lot of "stuff". We build huge landfills to hold the "stuff" we no longer "need".


The new robots are service robots. Just like in real life, it typically takes more intelligence to do a "service job" than to do a manufacturing job. Service robots are more difficult to program because they must know how to do a broader range of skills. A big game changer in new robots is speech recognition. A handicapped person gets great comfort from knowing that he will be understood when he says bring me the phone or take me to the bath room. Bill Gates says that service robots are at the level of personal computers in the early 1980's. Back then, we thought we had something when we got our dual floppy drive 256K machines.

In the early days, the personal computer was more of a novelty than a truly efficient way to perform a task. I for one spent countless hours inputting list of sales leads when I could have been making calls. The service robots of today are just becoming cost efficient for specialized applications. The power of the voice recognition will change the way we use computers. Nuance and other companies are taking advantage of this power now. Productivity is going to continue to be a strong number. The jobs of mule driver or auto welder will not come back but the jobs of building and servicing robots is going to be in high demand--until the robots take over :)


A programmer has invented an algorithm that recognizes faces. For a very long time, I have wanted my computer to recognize me and to allow me access without my having to input a password. The implications for security are great. While there will be "big brother concerns" that must be worked out, it will be wonderful to quickly get on an airplane after walking past a security camera. It will be comforting to know that should a known criminal or terrorist walk past a security camera that he will be identified as such.

Stephen R. Covey, who wrote "The Speed of Trust" says the whole world will speed up when we are able to trust more. Checking out at the grocery store would not require the input of a pin code should credit card scanners be converted to security cameras.

Last week, lockers were broken into at the local YWCA and I was frustrated to learn that there were no pictures taken at the entrance to the building. It is said that the people of London are photographed over 400 times per day. The people do not feel like their personal space has been violated as the photos are put to good use to prevent terrorism. Yes, it is a shame that such protections are necessary but, again, a strong defense is the heart of prevention. The fact is that people become more honest as the probability that dishonest actions will be penalized. NO MORE PASSWORDS--make our lives easier through the use of technology!


The underlying theme in the above post about robots and other new technologies is that technology will continue to allow us to do more while using fewer resources. Some very old ideas are "in the news" because they achieve more while using less. For example, I mentioned Dover Elevator a few times in recent days because the worlds population continues to move to the city where transportation by elevator is many times more efficient than transportation by auto. Sure enough, Dover reported strong earnings and the stock has risen. Big money is going to be spent on other high efficiency products over the next several years. One of the "robots" on the way is vehicles that transport people from and to tightly defined areas. For example, massive airport parking lots will be accessed by self driving golf cart sized vehicles. Combine the face recognition software with the self driving vehicle and you will not even need to remember where your car is parked.

More efficiency means low inflation. Low inflation means low interest rates. Low interest rates means high asset prices. The FOMC is likely to cut rates today. BOOM, BOOM, BOOM!

Tuesday, January 29, 2008


The Salt Lake City Airport is preparing to offer incentives to DAL as soon as DAL buys NWA. The airport officials believe this will be the first of the mergers between the "big boys" and it believes that Salt Lake can become the "Gateway to Asia". NWA is tied for the lead in Pacific Coast traffic and DAL is tied for the lead in Atlantic Coast traffic. The combined carrier could route a lot of traffic through Salt Lake. The city has been planning to raise fees at the airport to pay for a new light rail line between the airport and down town. The projected cost is peanuts compared to the 2 billion dollar upgrade Delta wants the airport to make. Delta wants the city to pay for the light rail independently and retain all airport fees for the purpose of airport upgrades. Undoubtedly, the city of Salt Lake will be called upon to contribute to the upgrade kitty.

The fact that DAL is in discussions with various cities and states that will be effected by the merger makes it all the more likely that a transaction is in the works. Minnesota has already apparently accepted the loss of a corporate headquarters in exchange for beefed up employment at other facilities.

My CPA friend and former Merrill Lynch Associate, Lamar Jones, says that CAL is projected to have free cash flow of better than $10 per share by next year. He sees $80 as a reasonable two year price target.

Over the past couple of weeks, there has been a turn in the transportation index. This "economically sensitive" index has run up on strength in airlines and the rails. With 49 coal electricity plants planned for construction in the USA, it is clear that trains are going to haul a lot of coal during the prosperity phase of the business cycle. It is also clear that the airlines will haul a lot of passengers.


This morning I wrote again about how China is building power plants at the rate of one new plant every 4 days. I suggested that these new plants will allow China to get into the manufacturing of even more goods that will be sold at lower prices. I just read where Wal-Mart has once again rolled back prices from 10 to 30% on thousands of items. Of course, Wal-Mart knows how to get publicity by rolling back prices before gradually raising others but the fact is that the price of goods keeps falling in real terms. Full seed ahead for international flights. The billion dollar airport is needed.


The lead article in the current issue of New Yorker Magazine is about economic bubble after economic bubble. The article explains how in current times we seem to go from bubble to bubble instead of a broad economic boom to a broad economic bust. No one seems to be able to understand why these bubbles keep occurring. A lot of finger pointing has been directed at Federal Reserve Officials, at members of Congress and at the Bush administration. Alan Greenspan expressed the frustration of the most economically astute by saying that the current situation is a "conundrum". What is not fully appreciated is that in order to have a bubble, you have to have an anti-bubble and a new anti-bubble has surfaced.

At the heart of the "conundrum" is the fact that the real GNP continues to grow at a much faster rate than would be predicted by the rate of the 10 year treasury bond. Last quarter, the numbers defied belief with the inflation adjusted GNP at 4.9% while the 10 year was falling hard below 4%. The 10 year currently trades for 3.6% but how can it be that corporate profits are coming in at much higher rates -- AGAIN!

For old timers in the market, they just cannot get over the price of gold soaring to over $900 while the long bond also has soared in price. How can it be that we have high inflation and low inflation at the same time? During a time of confusion, the markets have not known which way to turn.

The news media, those guys who always try to make a mountain out of a mole hill, are in never never land. They have help to convince the American public that a heck of a recession is here. This morning, the numbers have once again upset the apple cart. Durable goods orders show that the economy is actually in a boom time. The world just does not seem to fit together the way it once did.


I have given the answer here many times before but I can identify with the profit who cried out in the wilderness. If my words were more widely disseminated then it would not be just the market insiders who are buying stocks. The words I am referring to are the words about how extremely low inflation rate.

I think my readers and indeed most of the population appreciates that when a person pays $3.95 to watch a pay per view movie, versus driving to the video store to rent the movie for $3, he is actually saving. The total cost of the rented movie must include the cost in time and expense to drive to the video store twice. I have written dozens of times about how this and trillions of other daily activities is lowering the cost of living. Everyone seems to understand that the electronic down loading of a movie or document is far more efficient than the physical delivery of the same movie or document. What is not appreciated is that the substitution of the inexpensive alternative represents a subtraction from the inflation rate.


For 25 years, China has been exporting dis-inflation in manufactured goods to the rest of the world. A slowdown in this exporting occurred last year because China temporarily ran out of energy. China could not continue to find more goods to make when it did not have enough energy to employ the hundreds of millions of people lined up to take the next products forward. This is no longer the case. China is averaging adding a new power plant every fourth day! The environmentalist can whine all they want about how much more coal is being burned but the result in the near term is that more and more goods can be made in China where the labor costs are low. As an aside, I would remind the environmentalist of two things, 1) Kuznets Curve is at work here and the environment will ultimately improve as a result of bringing China into the developed world 2) Cleaner alternatives would be used for power if the environmentalist were not standing in the way.

Anyway, the fact remains that 135 million people were lifted out of extreme poverty in the past 5 years while the rest of the world enjoyed lower priced goods. As the good folk at GaveKal Research have written, "The End is Not Nigh". The Chinese have the electric power to put another 100 million people to work over then next few years. As a result, the cost of manufactured goods will continue to fall.


The continuing movement of the poor into manufacturing jobs combined with the continuing incredible advance of rapid transmittal of information is a powerful combination. The net effect is that "real inflation" (ha ha, that is a funny term), is almost negative!

With the GNP running at an average of better than 3% and the 10 year bond selling for significantly less than 4%, where is the inflation? Put another way, inflation is a measure of change and the big perceived change is in oil. However, the US only uses slightly more oil today than it did 35 years ago, Japan uses less. At the same time, we are using billions of times as much digital storage space but the cost of it has falling by factors exceeding 100,000 times.

Robert Solow's Nobel Prize in Economics.

Robert Solow won his Nobel Prize in 1987. A long time for knowledge to be known but not appreciated. Solow showed us a couple of things. One is that "backstop resources" are unlimited. I have written and written about the power of substitution. Substitution is frequently nothing more than using backstop resources when the supply of the "normal resource" is scarce. To beat a dead horse, there is an unlimited amount of substitutes for oil. Once the quantity of oil is truly in the scarcity stage, the only question will be, "what is the lowest cost substitute for oil?" By understanding that man can eventually find a substitute for any good, Solow understood that 2) economic growth is determined mostly by technology.

Indeed, Solow calculated that 80% of economic growth is a function of technological development. In the "old days", economist said that growth came from the expansion of labor and capital. For the past 20 plus years, others have argued against Solow's "high" figure of 80% due to technology but it seems to me that the number is even higher. The compounded effect is that one worker does the work of many as a result of technology and $1 goes a very long way compared to the distance it would travel 20 years ago.

The other day, I wrote about GPS guided tractors plowing 40,000 hectare farms. This example was used because the image of a tractor plowing day and night on without the presence of a human is powerful. In the same e-letter, I mentioned Dover Elevator as being a beneficiary of the massive immigration to the city. The elevator is a super efficient people mover. I don't have the numbers handy but I know that a car is very inefficient relative to an elevator. Put another way, all of the developed countries have seen a dramatic slow down in the use of energy per person as electricity has grown to become the primary source of individual power usage.


As of Monday, 20 of 24 S&P Technology Companies had reported surprisingly good earnings. The headline in most papers was that new home sales were at the lowest level in 25 years. A short term figure was used to continue to exaggerate the severity of the "bad housing story". The median price of the average sale continues to make the news without any hint that the average sales price of the average sized house has not fallen. Yes, when times are tough, people may choose to buy a slightly smaller house but it does not mean that the economy will fall apart as a result.


The democrats continue to paint themselves into a corner. The markets will get a huge boost if it becomes clear that the "tax increaser's" are not going to sweep the house senate and presidency. An article by Charles Krauthammer offers a good illustration of how twisted many of the democratic positions have become. His article highlights the John Edwards gyrations but Hillary and Obama will either be fighting for the hearts of Americans from the extreme left or they will be forced to confront themselves at every turn the way of John Edwards.

The following is a quote from Russ Feingold as posted in the Krauthammer article.

"The one (presidential candidate) that is most problematic is Edwards, who voted for the Patriot Act, campaigns against it. Voted for No Child Left Behind, campaigns against it. Voted for the China trade deal, campaigns against it. Voted for the Iraq war.... He uses my voting record (Feingold's) exactly as his platform, even though he had the opposite voting record."

Krauthammer ends his article with the following statement: "It profits a man nothing to sell his soul for the whole world. But for 4 percent of the Nevada caucuses?

Now that the Kennedy establishment has fallen in behind Obama, the democrats are more and more the party of the extreme left. The war is wrong no matter what the results. The fact is that war is sometimes necessary. I wish it were not true but it is. McCain is looking stronger and stronger because he understands how to win a war. The war in Iraq and Afghanistan is not over but the majority of the terrorist are now holed up in the high mountains of Afghanistan and Pakistan. More than 1,000 years ago, one of the greatest terrorist of all times hid out in those mountains and occasionally came down to wipe out entire villages. He picked his targets carefully and raided cities from India to Turkey. He survived because he would raid and then relax. By the time the Indians were almost ready to join forces with the Persians or the Turks to go after him, he was no longer a threat worth the trouble. The average person thinks that it would be a cake walk for American forces to go into the mountains and find Osama bin Laden. It would not.

It is actually a good thing for some to have "gotten away". America needs to keep its guard up. We enjoyed too much the "peace dividends" after War War I and after the Cold War. America went soft on defense during the Clinton administration. Clinton was a great president in that he and the congress passed a lot of significant reforms. Reforms that helped the economies of America and the rest of the world. Clinton did not maintain our military strength and the result was an embolden enemy.

Going into the mountains or sequestering the terrorist in the mountains is a choice that will have to be made by the new president most likely. While great pressure is on the Pakistanis to allow US troops to go after the terrorist in the mountains, the situation in Pakistan is almost as complicated as any other in the Middle East. Pakistan is currently divided into four "states" and the northern "state" is controlled by radical Islamist. These radicals are members of various tribes and religious sects. If the rest of Pakistan can continue to move into the "modern world", these tribes will eventually be absorbed into the greater community (eventually is a long term word). Republicans win votes by being willing to protect the world from the growth of terror. Wiping it out is nearly impossible. Winning the presidency could come down to who is "for the war and who is against".

Believe it or not, the percentage of the world that is experiencing armed conflict continues to decline. People who are enjoying good food and good times are not inclined to go to war. From the Carpe Deim web site I read that 135 million people escaped poverty in the past 5 years. Prosperity is "breaking out" around the globe. In America people are about as anxious as they could possibly be because even the "experts" do not understand why there is one "bubble" after the next. The anti bubble is a good thing. The anti bubble means that interest rates are very low, which means that the discounting of income streams yields soaring asset prices. The price of homes soared like never before from 2002 to 2005. Since that time the prices have fallen back a tiny little bit relative to the prior climb. With interest rates back down, the tiny decline is over. Home prices and other asset prices are ripe for another big run.


Sunday, January 27, 2008


Time is running out in several situations. Time to invest before the market moves swiftly. Time to vote. Time to win the war.

When Bush 41 won the Gulf War quickly, his popularity soared. He seemed politically unbeatable. Unfortunately for him, the American people are short term thinkers. They want to know, "what have you done for me lately?" Bill Clinton, a master at reading political polls, took on the popular incumbent and won.

Bush 42 has practiced the Clinton game of "political timing" and he has played "an interesting game of RISK". In the game of RISK, one masses ones armies at "strategic land bridges". Bush jumped into the middle of the land bridge of Iraq. In doing so, he separated the Syrians and the Iranians. He also jumped in the middle of the land bridge of Afghanistan. Did you know that Afghanistan shares a border with Iran and another with China? More importantly, Afghanistan is on the other side of Iran from Iraq. Bush surrounded the most powerful of the enemy without going into battle against them. He recruited Pakistan to squeeze the Taliban from the other side. The bottom line is that he has carefully timed the "winning of his war". With this war dragging on, surviving democratic candidates have moved further and further to the left. The risk for democrats is that they are about to select an "anti war" candidate just about the time that victory is declared, and Americans love a recent victory!

In recent weeks, the Bush administration has increased the pressure on Pakistan and the Musharraf administration to go after the terrorist who live in the mountains just beyond the Afghanistan border. The US has built up its troop strength in Afghanistan and could divert troops from Iraq to Afghanistan or Pakistan to clean out one of the last big rats nest of terrorist. So far, Musharraf has not agreed to allow US troops to go into the mountains of Pakistan but it may not remain his decision to make. The political situation in Pakistan is volatile, to say the least.

Over in Iraq, the Iraqi military is taking the lead in going after one of the last of the big rats nest of terrorist in Iraq. The US will support the action in the Nineveh providence. In the mean time, Iraq is ramping up its oil production and will soon let bids to develop one of its large rich fields and the Sunni contingent in Parliament only have one more week to decide to rejoin the government before a new Iraqi government is formed. Bathist have been allowed to retake lower level government positions and 9,000 of the Sunni militiamen are being trained to join the regular army. About 80,000 Sunnis are being paid $300 per month to assist in routing al Qaeda. The whole point is that the war in Iraq is not over but the remaining task are along the lines of mopping up. With the insurgents using women and children to deliver suicide bombs, a bomb here or there will be hard to stop. However, the "minds of the people" have turned against these atrocities and the perpetrators will be stopped.

If you do not believe attitudes are changing in the Middle East, I offer one more fact for your consumption. The first female soccer game was just played in Saudi Arabia! As always, the down trodden stand to gain the most from change. Conditions are not perfect in the US or in Iraq but men and women in these countries have the legal right to vote and to serve.

For the majority of Islamist, there is no perceived need for a physical jihad. The great many believe that the "greater jihad" is an inner struggle for faith. Military confrontation still seems necessary in regard to the terrorist strong hold in the mountains of Afghanistan and Pakistan. Should these areas be "cleaned out", the majority of the people of the world would breath a big sigh of relief. What do you think? Is is likely that another major attempt will be made to capture or kill Osama bin Laden between super Tuesday on February 5 and the first Tuesday in November?


Time is running out before the big stock market bounce. Many stocks in many different sectors will bounce and climb, bounce and climb. The Business Week front cover indicator has called the turn in drug stocks. The massive influx of people around the world into cities suggest that Dover Elevator Corporation will enjoy the next several years. The chair of US Airways says that the coming round of airline mergers will involve all six of the major carriers. Total home sales in 2007 were the 5th highest on record and suddenly long term mortgage rates are at historical lows. The refi index is out the roof again, which suggest that Lowe's and Home Depot should see a steady stream of home improvement projects.

The home sales situation is most interesting. We currently have a record number of people at prime home buying ages. Under our tax laws, the government pays a significant portion of the cost to buy a home. In the same way that a 1% drop in the 30 year bond rate increases the value of a bond by about 10%, the recent drop in long term mortgage rates has decreased the cost to by a home by about 10%. In a short amount of time, the lower cost will be translated into 10% higher prices.

It has been easy to slam the silly stimulus package that is about to be passed by the government but the key to it is the timing. It will not matter that the stimulus had little to to with the economic turn if the congress gets a lot of press just before the economy hits third gear. Time is running out, the Senate needs to act quickly for the stimulus package to be in line to get some of the credit for the coming turn.


The average pay for data entry in the USA is $35,400 per year. In India, the average pay is $1,900. However, the average annual raise in America is running at less than 4% and the average annual raise in India is running at 14%. Under these circumstances, in an age of lightening communications, it only makes common sense for IBM to perform a lot of data entry in India. It also makes sense for India to use IBM to perform all sorts of "computer work". The "gloom and doom crowd" only see the "outsourcing of jobs to India". Because the "gloom and doom crowd" has a negative mind set, they cannot seem to see that America and American corporations are in a "win-win" trade with India. American corporations keep having one positive earnings surprise after the other and they keep hiring Americans at high wages. It takes a lot of people working at $1,900 per hour to provide the "profits" for India to afford to pay for data services from IBM. IBM will be one of the "big cap stocks" that should see substantial appreciation over the next several years. The turn is here, the huge surplus of dollar reserves held by country after country are being recycled. That is the kind of recycling I can get behind!


New claims for unemployment insurance has typically climbed sharply before recessions are announced. New claims have been as high as 800,000 in the weeks leading into recessions. New claims were 390,000 in March of 2001. Last week, new claims fell to 300,000. All the while, indicator after indicator keeps flashing buy signals.

Inflation in Germany just turned down sharply. The two year note just hit a momentum low that I have never seen before. The t-bill rate to the fed funds rate still shows that there is room for the FOMC to act. The t-bill rate to the S&P dividend rate is close to par! Why buy a cd if a big blue chip stock will pay you more, if Uncle Sam will give you a tax break and if the value of the shares are bound to go up over time?

Insiders are buying and buying and buying stocks!

The dollar is turning!

IBES valuations are at record levels! Stocks are as cheap as they have ever been!


Since the Bush tax cuts automatically expire in 2010, the risk of a major tax increase has hung over the markets like the sword of Damocles since the democrats won control of congress. The current democratic race riot could be the gift the republicans do not deserve. Republicans, with control of the congress and the presidency, spent money like democrats. The American people have the right to be upset and the outlook for republicans has not looked good. However, the Clintons may have over played their hands. Their practice of divide and conquer has not gone over well when a favorite son has been under attack. Hillary has been forced to move even further to the left to hold on to the 'loyal base". It was no surprise for Obama to win in South Carolina where half the democratic voters are black. The surprise was the massive turnout and the percentage of whites who voted in protest of the Clinton games. This does not mean that Obama has a cake walk to the nomination. Indeed, I believe Hillary is still odds on to win. However, the risk has grown that Hillary will have to accept Obama as the VP candidate and the risk is that she will run so far to the left that she will have a hard road back to the centrist middle later.

Rush Limbaugh and other "conservatives" continue to attack McCain and Huckabee. Rush says he may not vote republican if either are the nominee. I took another online political test today to discover once again that I am an economic conservative foremost and thus, according to the survey the candidate I should support is Rudy. On the other hand, Huck is the most socially conservative candidate and most of my answers align well with his. If I change my answer in regard to education, my answers are even closer to Hucks.

My Dad was a big believer in public schools. He like to tease that other children needed to go to school with the Millers, because kids learn more from other kids than they do from the teachers. Dad also believed in "taking dormitory". He was ready to push his little birds out of the nest. However, my children and I attended public schools and know that improvement is needed. Since I believe in markets, vouchers seem to be the most efficient way to "force" schools to improve. Huckabee supports public schools. He is a big fan of arts and music as being part of the creative process that needs to be taught to all children. He and Dad would have been good friends.

The race in Florida is neck to neck between McCain and Romney. However, in national polls, McCain is far ahead of Romney. A Romney win in Florida means the race is still wide open. A McCain win could just about seal the nomination for McCain. A Romney win could encourage Rudy to stay in to win delegates in his strong holds such as New York and New Jersey and for Huck to win southern states.

Since McCain polls well against democrats, winning the support of independents in particular, a settled republican race and a protracted battle by the democrats could give the stock markets a heck of a boost. The market will be quick to discount a republican win if it is to happen.

BUY, BUY, BUY -- Any number of events could be the catalyst that starts this fire to burning!

Friday, January 25, 2008


It has seemed like we have been walking through a wild rose thicket in recent weeks. It has not been a pretty trip and the thorns have stuck. Suddenly the roses seem to be blooming. Well, why not? fertilizer has been applied and applied again.

In this case the fertilizer has been multiple decreases in interest rates and the new shock of nitrogen is the stimulus package. The stimulus package is the least effective of the two but it will come on top of the interest rate deductions.

The federal government will borrow about 150 Billion so that it can write a check of $300 to those who make between $3,000 and $75,000 per year. The check is up-sized to include spouse and children. The Bush Econ. Counsel estimates that the stimulus will raise the GDP by as much as one half of one percent. That is probably almost true for about one quarter, then, it is also true that the GDP will be depressed by an equal amount once the business tax on depreciation goes back up and when the payback of the loan becomes more of a drag than the remaining stimulus from the spending.

In the mean time, MSFT, CAT and other companies are announcing "WHAT RECESSION"? Earnings and growth has remained strong in many areas of the business economy and the retailing stocks have taken off, saying "Good times are ahead for consumer spending". Retail stocks traditionally do well after a down turn and this time will be no exception.


The big cuts in interest rates produce the big effect. When a consumer discovers that he can buy a house with a monthly payment that has been reduced by hundreds of dollars for 360 payments, he is apt to cause the construction of a new house. The current over hang of housing inventory has fallen for three months in a row. New construction died but it will be revived when the rest of the over hang quickly disappears. The disappearance will be rapid as soon as those who have been waiting out of fear begin to fear they have missed the bottom. A number of bottoms have already come and gone. For example, way back in November the refi index jumped 92%! To make sure you didn't miss that statement, I am going to write it again. The November numbers show that refinancing applications jumped 92% from November of 2006 to November of 2007. It continues to be falsely reported that credit is not available for home loans. Credit is available but one can no longer borrow 100% of the price of a home on a variable rate, interest only loan.

Of course, during the "prosperity" phase of the business cycle, it will be big business that borrows and spends to take the economy up another notch. As I wrote a few days ago, Commercial and Industrial Loans have finally passed the old peak. In other words, the current situation is similar to the situation after the mid cycle turn early in 1996. BOY, IF THE MARKETS WILL BE HALF AS GOOD AS THEN, IT WILL BE A SWEET RIDE.


In a number of situations, time is running out. For example, the airlines need high oil prices as part of the rational for consolidation. If times are too good, Congress may fight consolidation. It has been rumored that NWA unions are ready to go along with a merger. The talk is still that DAL will buy NWA but NWA could always run to CAL if a better deal could be struck. UAUA is ready to fall into the arms of DAL or CAL once the NWA matter is settled. UAUA continues to cut money losing routes. After years and years and years of cut throat competition, it really seems strange for airlines to have reached the maturity to cut loses. CAL is one of the members of the Standard and Poors 4 star portfolio. S&P has a $35 one year price target which is the S&P forecast of earnings times a PE of 8.8. My belief is that S&P will prove to be low in its earnings forecast and low on the market PE. As soon as it is clear that we are in the prosperity phase of the business cycle, the sentiment will reverse and the PE will rise to double 8.8 or even more. A 21 PE is consistent with the history of airline PE's during the prosperity phase.

Time is running out on the government stimulus package. It will take at least a couple of months for the checks to be sent and if they are not sent soon then it will be all the more apparent to the American people that the checks are just a vote buying scheme. I checked the sentiment of my bible study group and found that to a man they understand that the stimulus package is a political stimulus package. I am not suggesting that we will go from bad news to all good news over night. Indeed, the trillions of dollars the public has piled up in money market accounts will only come back into the market at much higher prices. Still, those who follow the markets will know that the stimulus package if it comes too late and time is running out quickly. Checks in April and May may be timed well but if checks do not arrive until June they could arrive after the economy is obviously very strong.


Google Health has been talked about for a very long time. I see great potential for improving the health of Americans through better sharing of information. Although the Google Health site is not up and running yet, there is an introductory page up and running. It does not allow one to sign up yet but it should be available soon. Consumers, doctors, insurance companies and pharmacist will soon have a great new way of maintaining and sharing records efficiently and Google will have built one more huge market for advertising space. GOOGLE STOCK IS DOWN BUT THE BUSINESS STILL HAS POTENTIAL TO GROW IN MORE WAYS THAN WE KNOW!


Did you know that more than 160,000 lives were saved in 2005 as a result of lower mortality rates from coronary heart disease and stroke? Times are good, progress is wonderful, the life of the average man is changing for the better. Many more will be saved once better data is easily available.


I will never get over reading time and again the great discoveries that are being made by the "global warming crowd". A big headline in Science Daily yesterday was that Carbon Dioxide is boosting the growth of trees! WOW! It took a big subsidized study of highly paid and brilliant scientist to discover that trees benefit from C02! The details of the report include that in addition to growing faster, that the leaves stay green a little longer. Here again, I must say that by the the fifth grade, students are well trained that people breath out C02 for the benefits of plants and the plants provide us with our oxygen. Sure, it takes a masters degree in biology and chemistry to begin to have a full understanding of how many acids there are that react with how many bases to "regulate" the health of our planet, but the basic knowledge that higher levels of C02 will automatically increase the production of oxygen should be an "understood".

Some nice work has been reported in regard to Diatoms. It takes 30 of these little fellows lined up in a row to equal the width of a human hair but together they consume more C02 than all the trees combined! After these little fellows do their job, they fall to the ocean floor where more CO2 is sequestered than in all the plant life on the earth. Once again, man keeps trying to make himself bigger than he really is. As a result, we waste trillions of hours of time that could be spent solving the real problems. I certainly believe in scientific discovery and I support pure research but almost everyone else does as well. When an issue is demagogued to the point where trillions of dollars are being spent in harmful ways, it is time for resistance and ratio. NO MORE CORN ETHANOL SUBSIDES!

By the way, did you know that the population of the heartland keeps falling while more and more money is spent to subsidize corn farmers? A site worth seeing is rows of super sized GPS guided tractors driving themselves through 40,000 hectare farms. Yes, big money has been made by those who collect the subsidies and more and more corn is being grown at lower and lower costs. The bubble has to be ready to break because record levels of corn are being produced while it has become more widely understood that corn oil in car engines was never a very good idea. Avoid investments in agricultural land, farm equipment and fertilizer producers. Even companies that produce wonderful new seeds have been hyped to extremes. The TURN IS HERE -- AVOIDING CERTAIN INVESTMENTS WILL BE GOOD FOR YOUR FINANCIAL HEALTH!


Many technologies are possible today only because "systems" are in place. For example, in mass quantities, it will cost just a small amount of money to build "dirty bomb" detectors into cell phones. Vision for a moment a well dressed person carrying an over sized brief case that contains a radioactive "dirty bomb". Right now, this person could wonder down almost any street in America undetected. On the other hand, what if every cell phone included a radiation censor and automatically sent detections of radiation to a central database? Suddenly the dirty bomb briefcase would have no where to hide. Of course, cell phones could also monitor air quality, help us all avoid the most congested streets, and report locations of vehicles and people.


Yes, the US economy will grow at a slower rate this quarter than last. No surprise in that because last quarter was a boom, boom, boom quarter. It is typical for GDP to bounce around a little from quarter to quarter. The invisible hand of Adam Smith is working 24/7 and it makes trillions of adjustments daily. The slow down in home construction is creating untold and unlimited opportunities around the world. The slowdown in construction has curtailed the demand and lowered the price of materials and money. The cost of money is the great economic transportation vehicle. Who knows what invention will surface as a result of the lower cost of money? The "new stuff" coming down the pike is taking on all shapes and sizes. In Winston-Salem a new business will hire 72 people to take used microwaves, toasters, vacuums, computers and other small appliances and electronic devices apart so that these used parts can be reassembled into "new stuff". Wow! That is the kind of recycling that we can all support. I am not aware if a government subsidy is required to make this business work. If subsidy is not required then the laws of economics tell us that this recycling is worth the time and effort.

The bottom line is that big money is going to be made over the next several years. Most of the big money will be made by mature businesses. Companies like MSFT that are selling huge quantities of already invented products will make incredible profits as businesses around the world expand the use of computers. Many of the "exciting new discoveries" will take decades to produce products. It is exciting to think that solar panels will someday replace coal fired electricity plants but it is realistic to understand that 49 coal fired plants will be constructed in the US in the next several years. GE will sell massive "engines" for these plants. At the same time, it will only be a relatively few and mostly subsidized solar panels placed. The growth rate of solar panel use is high but it would take an explosion of sales year after year for a long time for total sales to come close to the total money involved in the construction of these 49 plants.


Last night, McCain served up Huckabee a fat pitch. McCain reported that at every town meeting he sees people wearing FairTax t-shirts. He said the enthusiasm seems to be contagious and he wondered if Huckabee could tell him why? Of course, Huckabee hit the soft pitch out of the park. What was this soft pitch all about?

Well, of course, McCain, Rudy and Huck all want to counter the massive spending of Romney. In several cases, it was clear that the candidates tried to be supportive of the guy that would most likely take votes from their most feared opponent. Romney, for example, played nice with Rudy because McCain and Romney are in a dead heat and Romney believes that if Rudy's numbers go up, McCain's will go down. Still, there might have been more that short term tactics involved in the the question from McCain to Huckabee.

A number of pundits have repeatedly suggested that Huckabee has been running to win the vice-presidency. In particular, it has been suggested that McCain might choose Huck. Neither McCain or Huck are a part of the "old money" crowd. McCain married a big chunk of "old money" but he is not a wall street insider. While McCain has previously answered no, when asked if he supports the FairTax, he has said time and again that he is for a flatter, fairer, easier tax. His question was not framed as being an attack on the FairTax. It was more of a question of curiosity, as if he were saying I have heard some good things and would be willing to take another look.

I have often said that McCain would make an excellent secretary of defense. Right now, his odds of winning the republican nomination are probable the highest. Romney has the money and a slight delegate lead but his constant change of heart on issue after issue was hammered last night in subtle ways and by direct confrontation. It is interesting that the direct confrontation came mostly from the moderators. The subtle stuff came mostly from the other candidates. Rudy talked about the way Hillary was for the war in Iraq when the polls showed 60 percent support and how she turned against the war when the polls showed 60% against. McCain made similar points about being consistently for winning the war on terrorism and not being poll driven and Huckabee responded to a question about faith by saying that he does not have to wake up each morning and read the polls to know what he thinks about an issue. The series of answers stood out as demonstrating that Romney is poll driven and the point was driven home when Huck asked Romney a question about his alleged support of the second amendment combined with his support for gun controls. This pointed question was in stark contrast to the "make nice questions" asked of the other candidates. (Ron Paul's question was an exception but Paul's support comes from the anti war crowd and his question was addressed to McCain. Attacking McCain on a military question is a losing strategy.

Since Rudy and Romney are card carrying members of the Wall Street crowd, it would seem that Romney will pick up a good share of Rudy votes if it becomes more clear that Rudy cannot win. On the other hand, a number of "big money" conservatives, who once supported Thompson, are now behind McCain.

When Tim Russert asked Huck how he would solve the social security shortfall, Huck responded that the problem will be solved by the adoption of the FairTax. Huck was ready to explain how when Russert interrupted. Russert wanted to know how Huck would solve the problem without adopting the FairTax because "the experts" say that passage is unlikely. Huck said he was tired of Americans being told what they cannot do. He went on to explain that the FairTax would do away with the payroll tax and it would fund Social Security out of one understandable and "unified budget" without changing the benefits as promised.


Jobs are created when capital is available for investment. It is a mistake to tax capital or labor. This is where the income tax is so upside down and harmful. The laws of economics are just as pure as other laws of science. One of the fundamental laws is that if you tax something you get less of it. We currently tax returns on capital and returns from work. Democrats want to raise the tax on capital, in order to be more fair to the "little people". What they do not understand is that higher taxes on capital reduces the number of jobs and the average pay available for labor. After introducing the FairTax to regular readers, a common response is in regard to no tax on dividends or capital gains. It seems so foreign to think that there would be no tax on capital. All the people who ever want to get a good job should support the concept of no tax on capital. Again, if you want fewer people to smoke, you put a tax on cigarettes and if you want fewer people to work, you put a tax on capital and labor.

Romney deserves credit for his proposal to eliminate the tax on capital for all who earn less than $200,000 per year. This is a great attempt at compromise and a proposal that could win the support of democrats. It would be a big step in the right direction but it fails to address the basic fundamental that all capital should not be taxed. One of the problems with the proposal is that it leaves power in the hands of politicians and thus it leaves the system of "lobby, lobby, lobby for goodies" in place. Two of the big battles that would be fought time and again would be to adjust the $200,000 level up or down and to adjust the tax rate on earnings above $200,000. The republican argument would be if the tax rate is zero up to $200,000 that 15% or less would be reasonable on the excess.

Combining a flat income tax with the Romney proposal produces a tax plan very similar to the FairTax but it leaves the huge income tax "industry" still in place. The better plan is to eliminate the hassles and politics involved in maintaining the income tax. Keep in mind that a person who spends 100% of what he makes pays the same under a flat income tax as he does under a flat consumption tax. The big differences are in the incentives offered for the creation of more capital and jobs and the elimination of the filling of an income tax return.

Again, maybe I read too much into a couple of questions but I can envision a McCain-Huckabee ticket that included support for the FairTax. Such a ticket would be attractive to those who want the country to be secure from terrorist attack. It would also attract the support of the great many who perceive the current system as being top heavy for the rich. The result would be a strong and fair America.


Oil has once again bounced. After failing to cross the century mark, oil fell quickly to $87 but has since bounced back to $91. CAL, for the third time in three weeks just doubled its fuel surcharge. This one is likely to stick. The airlines are determined to make money in 2008 no matter what happens to the price of oil.

CAL pilots are preparing for merger. They will insist on having input to the decision. The irony is that the power of the unions will increase after the mergers take place. On the other hand, the unions will not regain the power they had during the regulated days before 1979.

Another irony is that the job of these highly paid people is in ultimate jeopardy. It seems far fetched but how many years ago would it have seemed far fetched for tractors to be driven by GPS connected computers. Just a few years ago, who would have expected US forces in Iraq to be supported at every turn by remotely piloted drones. Thousands of drones have been deployed in Iraq and more are on the way. The "pilots" sit at consoles in various locations, including even bases in Florida and the "heartland states". It is rumored that if a terrorist were to take over an American plane, that the controls would be remotely disabled and the plane would be flown remotely. Of course, if the terrorist had a bomb on board, they might explode the plain but they would not be able to crash the plane into other targets.

Of course, pilots will be in the cockpit for many years to come. For more than 20 years, express trains carrying fruits from Florida to New York have had the ability to make the trip without having a human on board. We still pay a few people to go along for the ride but the railroads have successfully ended the worst of the feather bedding practices of old. In the old days, an engineer got a full days pay for each 100 miles traveled. The trip from Florida gave several people 12 days pay for one long ride.


With "good economic news all around", the odds of another cut in the fed funds rate has been reduced. There is no recession. Earnings are going to continue to be stronger than forecast. The public will soon realize that some in the liberal media have done it again. As I recall the worst offender has predicted 21 out of the last 1 recessions.

Sure, another "shoe" may drop. No matter, the market is likely to be much higher in 6 to 12 months.

Thursday, January 24, 2008


This morning, Don Hays sent subscribers an update to his "Lessons From the Past" article. Don is an old, successful, investor.

His numbers show that the AAII indicator has leaped to the highest level ever with two exceptions, one in August of 1990 and the other in October 1990. Individual investors are now bearish over bullish 2.5 to one. If one backs off to 2 to 1, one can find 23 instances of such extremes. In those instances, the market was up 23 out of 23 times over the next 12 months. The average big stock was up 21.75% in those 23 instances.

Yesterday, a reader asked me if it would be possible for the market to have a major decline from here. My response was that a great depression is always possible but highly unlikely. He asked for the probability of making money from here. I think the above statistics are a powerful answer. One can honestly say that in all cases where the public is willing to sell at any price, prices have proven to be very cheap indeed.


Don went on to give the readings of great indicators that are at extreme levels. The arms index has reached 3.0 only 4 previous times, which included October 19, 1987 and March 10, 2003. I very much enjoyed the market results after those two events. The average 12 month return was 24%.

Don listed other indicators but the granddaddy of them all is the IBES valuation indicator. This is simply the stock /bond yield ratio. It has never, ever, been at such extreme levels in my life. Yes, this is one of those events that you look back on for the rest of your life and say "boy, I wish I had sold my house to buy stocks back then" or boy I could have made $20 million dollars had I bought aggressively back then. Since there are no other readings at current levels, we back off to the second highest reading of all time to discover that the average big stock was up 30% 12 months after the reading.

If the average stock is up 30%, the average stock fully margined would be up 150% and many stocks will be up several hundred percent without margin. I have lowered the asking price on my home by $10,000 in the hope that I can sell it quickly enough to invest in stocks! In full disclosure, my new home is supposed to be ready in a few months so a portion of the proceeds will be needed to buy the new home.



Today will be the first day of bidding for the 700mhz spectrum to be auctioned by the federal government. This is the spectrum that will be made available when analogue TV signals go off the air next year. The big bidders are expected to be AT&T, Verizon and Google. There could be surprises as 214 bidders have put down the large deposits necessary to be qualified.

The stock market hates uncertainty. It is not clear whether Google will "bid to win" or not. In order to influence the FCC to rule that the spectrum should be an "open network", Google obligated itself to bid at least 4.x Billion Dollars. I don't remember the exact amount but the point is that that amount will not win. Google and the public has already won because at least a portion of the system must be open to all devices. Since this ruling was made, Verizon has agreed to open its network. As a result, the direction is to more choice and therefore more innovation in future connection devices. New high speed hand held phone-computers will be offered by numerous manufacturers. The daily life of many people will change dramatically once they are constantly connected to the rest of the world through the Internet.


Google has swung down in price due to the fear of the market that the company could choose to spend billions and billions of dollars to build a communications network to compete with the likes of AT&T. I do not know the answer to the question but I believe that Google will prosper on the open network of others or by setting up a competing network.


It is always hard to recommend high PE stocks. Such companies have to experience serious growth over a number of years to justify their high price. In this case, I believe Google is well positioned to continue its incredible run of fast growth. A good way to think about the potential for Google growth is to think of Google as General Motors way back in the days before the Interstate Highways were built. It was clear that more cars would be driven more miles after the highways were built and GM enjoyed many years of high profits in the 15 years or so after the highways were built.


Online video requires extraordinary bandwidths. One high definition movie takes more than 8 hours to download on the typical home connection. However, some homes are already connected to the "super highway". These homes can download the same movie in 3 minutes 15 seconds! Before the interstate highway system was built, the ability of companies to expand across the country was limited. In the same way, the market to all kinds of goods and products will open up as these new networks are built.

The Internet will morph into the Video Internet over time. Of course, the video rental business will be far more efficient and the price to rent a video will ultimately fall dramatically in real terms. But video rentals is just a drop in the bucket to the change that will occur. Universities have already made some 15,000 courses live on the web. The students do not have to come to class but can participate from any Internet location. Many professors now emphasis class participation for grading purposes without requiring students to be present. The professor might ask a question and expect chat style answers from all students. An automated system might tell the professor how many students answered correctly. The speed of covering material can be adapted instantaneously to the level of proficiency on display.

In the work place, meetings will be "attended" on line from any location. Indeed, the work warrior will pop in and out of multiple meetings as if he is in 5 places at once. Have you noticed the way teenagers communicate now a days? They don't actually call as much as they text message. The reason is that they can carry on multiple conversations at the same time through text messages.


I have made it abundantly clear that I expect mergers and huge profits for the major airlines and I have made it clear the kind of growth in advertising revenues Google will garner when the "new Internet" is in place. If you are not stretching to take advantage of these opportunities you are missing an obvious boat.

Because Google sells at such a high PE and because its growth rate will ultimately have to slow it eventually will get too big to grow so fast, I expect Google's net return to be substantially below its current growth rate. The company will get bigger and bigger but at a slower and slower rate. The PE will ultimately be reduced. My long term guess is that the company will give off average returns of 12 to 18% over the next 5 years and probably for many more years after. The problem is that these returns will come in a crazy and unpredictable pattern. The recent decline in the stock offers a great opportunity to pick it up while it is down but there is no way to know how long it will take before it soars again. On the other hand, a lot of uncertainty will go away as soon as the bidding for spectrum is complete.


Yesterday, the Dow Jones made giant turn. One problem is that big boys are still whipping around a lot of colorful lures trying to catch a few fish. As always, the news is all about the "wrong stuff". In the back ground, many a base has been built over the past 5 years for substantial stock price moves in the coming years. As usual many of the big winners will be stuff that still looks pretty dead right now. I am often asked to give list more stock selections in my e-letters but I do not like to do so. Those who ask for the names are those who want to be "the drum major". They want to make the decisions of what to buy and when to buy. I am guilty of wanting to be the "drum major". I believe that my study of the markets for the past 45 years gives me a reasonable hope to do better than the average investor. My prayers are not always answered as I wish but I am thankful for the opportunities that have been granted to me. I am confident in my "top down few of the economy". This old world is a complex creation that I will never fully understand but my understanding of the business and real estate cycles have been confirmed as correct on many occasions. Right now we are seeing a turn take place. One place that it is clearly happening is in the area of commodities. The peak for the cycle has passed. Now that this "battle ship" has turned, I expect it to go a long way.


This Sunday there will be a FairTax rally in Jacksonville Florida. During the South Carolina Primary there was a FairTax rally held in Columbia. About 8,000 people came out for the Columbia rally. I hope the Jacksonville rally will be much larger. It is going to take the will of the people to dramatically change the crazy quilt of tax laws that are "on the books". The US tax system is broken. Pretty soon the 2008 battle in regard to the alternative minimum tax will begin. Once again, millions of dollars will be spent by powerful lobbies to tweak the system a little here and a little there. In the next few months, American Citizens will spend more than $250 Billion attempting to comply with the current law. More than 90% of the tax returns will include substantial errors.

The politically powerful are united in their hatred of the FairTax. They do not want to lose the power and wealth the income tax diverts to lawyers, brokers and lobbyist. The club for growth spent at least $750,000 dollars of Romney supporters money to denigrate Mike Huckabee. Hucks campaign for the presidency has been wounded but hope lives on. For just a moment after McCain won in SC it appeared that he might be the virtual winner of the republican nomination. My main problem with McCain (I have many concerns on issues) is that he is not a man of vision. He would make a great secretary of defense because he understands military strategy but he has little vision or skill to lead the country economically.

The most recent polls show Romney is pulling ahead in Florida. The question for Romney remains how much money he will have to spend to secure a majority of the delegates. Others have tried to buy the nomination without nearly the success that Romney has enjoyed to date. For example, back in the days when 11 million dollars was a very large sum of money, John Connor from Texas spent 11 million dollars but only secured one delegate. WOW! Buying votes at 11 million dollars each is a bit excessive but Romney is almost in the same ball park. He has reportedly spent about 100 million, 25 million of his own to win 54 delegates. Huck has spent a tiny fraction to win 30 some delegates. Florida is winner take all for 57 delegates. The winner will have momentum but a good friend at church surprised me Sunday when he said that if Romney or McCain is the Republican Nominee then he will vote for Hillary.

Rudy is blowing his wad in Florida. The polls show that he has fallen behind McCain and Romney. In national polls, Huckabee is in second place behind McCain. One possible scenario is that Romney wins in Florida and Rudy is mortally wounded. Suddenly Romney, who has high negatives, would be the front runner. Where would the pro Rudy, anti Romney vote go? McCain would certainly get some of it but McCain has angered a lot of conservatives over a lot of issues over a lot of years. Hucks negatives were raised substantially by libel. Much of the negative stuff presented about him is a huge exaggeration at best. Still, Huck should win several southern states on February 5. It is possible that prior to February 5 that Romney will have a lead in the delegate count while polling third in most states. I don't think he is willing to spend a hundred million or so on the gamble that he can buy enough votes to win. Again, if money made the real difference Phil Graham and Nelson Rockefeller would both be among our former presidents.

The big point is that the eventual nominee must be able to beat Hillary for any of this to matter. I believe it will take a revolutionary economic proposal like the FairTax for the republicans to "pull off the upset". In the past few weeks, Bill has once again showed his mastery at political games. He has flipped Obama over and rubbed his tummy. He has also slapped him a few times with a rolled up newspaper. Dick Morris, one who despises the Clintons but knows them well, is correct in saying that Bill has served as a lightening rod for Hillary, he has sucked up tons of press coverage and he has made Obama look like a real rookie.

Hillary will bring out the vote, both democratic and republican. Bill has played the race card masterfully so far. If Hillary does not recruit Obama to be on the ticket, some blacks will stay home but no republican will get a much help from blacks or Hispanics. Single women will turn out for Hillary in droves. Huck got something like 47 percent of the black vote as Governor. His support of the FairTax could bring over a lot of the old Reagan Democrats. The FairTax gives the lower income two parent family a nice tax cut. It is widely believed, even among republican stalwarts, that the current system is widely accepted as excessively good to the wealthy. The fact is that the current system tries to subsidize every thing. Under the FairTax, if a person wants to give money to a church or charity he can or he can keep if if he wants and there are no tax consequences either way. On the other hand, if he spends the money or gives it to a church or charity that spends it (on a new product or service), the government gets its cut.

My belief is that the income tax has become so ridiculous (something like 59,000 pages of regulations) that many who receive subsidies would support the FairTax candidate, once the real facts about the FairTax have been brought to the consciousness of the public. The FairTax is easily demagogued but once the details are understood it is easy to become a strong supporter. It is my hope that the battle cry of the 2008 election becomes "Kill the IRS". I hope you will take the time to review the and the web sites and send a check of support.


The futures markets suggest that stocks will start off well this morning. Of course, futures are volatile and yesterday the futures suggested that the Dow would fall a few hundred points. Well it did but then it climbed about 600 points from the morning low. We must not get too excited yet because the FOMC is still "behind the curve". The fed funds rate is still at 3.5% while the two year note is at 1.8%. This means that bank lending is "being taxed". Banks basically borrow the money that they lend. It is difficult to borrow money at 3.5% and to lend it profitably when certain loans are pegged to certain market rates. If a bank loan rate happened to be the two year note plus 2 percent, the current loan rate would be 3.8% which is simply to close to 3.5% to be worth the risk.

The point is that while indicators show a high probability that the market will be up substantially within 6 months, these indicators are not reliable at all inside of 7 weeks. The best news I can give you is that many indicators that are highly reliable 6 to 12 months out have been in BUY, BUY, BUY mode for several months already. Conditions are ripe for a BULL MARKET RUN.