Wednesday, December 31, 2008

Bye-Bye Recession

The FOMC has announced an all-out assault on the housing recession. It will buy 500 billion dollars worth of "mortgage paper" by mid 2009. Big Ben Bernanke has jumped on the mortgage end of the housing see-saw; when the cost of money for 30-years goes down, the net present value of housing goes up. The mortgage-housing see-saw is an Archimedes lever, the kind that can move the world.

Put another way, the demand for mortgage paper just increased by an astounding 500 billion dollars. Banks and insurance companies, which are holding trillions of dollars of deeply discounted paper, can see the light at the end of the tunnel. The value of all of these assets will increase as the supply is soaked up by the FOMC. Our government is likely to make high rates of return on these purchases.

The FOMC is now indirectly financing cars at .25% interest and pushing the price of home mortgages down. The seeds of economic recovery have been planted, watered and fertilized. Bye-Bye recession, you have worn out your welcome. It is time to pack your bags.

Tuesday, December 30, 2008

Go Honda Go!

In the past year and two years respectively Honda Motor Corporation shares went down 37 and 47%. Some pretty awful numbers until compared to their competitors. Toyota shares went down 40 and 52%; Ford went down 67 and 70%; Nissan went down 67 and 71%. GM wins the prize as best of the worst, down 86 and 88%!

Since December 5th, there has been a bounce in the Japanese shares. The numbers are HMC +14%, NSANY + 12.5%, and TM +9.6%. GM and F went down 12.4% and 16.5% respectively.

On the other hand, if one measures from November 24th GM shares are up 17.6% and Ford shares are up 55.2%. The average move of the Japanese shares from this date is flat. One of the points to be noted is that when a stock price is very low, it only takes a small price move to achieve a high return. Another obvious point in the numbers is that Ford and GM took the early hit and have actually been bouncing along in a bottoming process for the past year.

This morning, Honda announced a November sales increase in China of 8.7%! Also, as expected, GM is now offering zero down, zero interest on selected cars and truck models, just after receiving the first 5 Billion Bailout Dollars from the government. GM is in effect passing along the very low rate financing the government is giving to GM.

Six months ago, there were virtually worthless 6 thousand pound heaps of metal parked in driveways and car lots all across the country. These heaps of metal were giving the owners negative utility. The owners continued to pay property taxes to own the vehicles but they could not afford to drive them. The cost to operate those vehicles has fallen sharply, dramatically increasing their intrinsic value. The invisible hand of the market is at work. Most buyers are replacing big cars with smaller fuel efficient cars while the old cars are gradually being "consumed". Some of the least fuel efficient vehicles will be around for years to come but there will be a dramatic increase in number of miles driving in fuel efficient vehicles. My good friend, who is planning to speculate on the price of oil, perhaps appreciates the return of value to these piles of steel, but I don't believe he appreciates the magnitude of the turn or the "big sale" on auto shares.

The IRS allowances to those who drive their cars for business hit 58 cents per mile this year before dropping to 52 cents for the next 6 months (these numbers were read last week and posted from my old and beaten up memory). There is a lag in these allowances; business drivers lost money year after year as the price went up, but they are making money at 52 cents. My friend is correct in believing demand for gasoline, from business and personal driving will pick up. As detailed in other letters, there are many reasons to believe that it will be many years before new demand for oil catches up with new supplies of oil and alternatives.

Regardless of the payments for driving, Americans are now saving about ONE BILLION DOLLARS PER DAY on gasoline! GM just received a $5 Billion bailout check. Five billion dollars sounds like a lot of money until you consider that consumers are saving that much in 5 days. Furthermore, savings on gasoline are only the very visible tip of the iceberg. Consumers will save more on food in 2009 than on gasoline. The wholesale price of the corn, wheat and soybeans have all collapsed. The price of milk, eggs, steak, chicken and pork chops will all fall as the result of falling "input prices".

World wide, consumers are saving 9.5 Billion Dollars per day on oil and at least as much on food. These 19 Billion Dollars per day are not an increase in taxable income but an increase in spendable dollars. In addition, to the savings on food and energy, individuals are locking-in 30 year mortgages and corporations are buying back long-term bonds; locking-in huge compounded annual savings on the cost of money. Despite the announcements of gloom and doom, real retail sales are rising. I don't have the numbers but I suspect the 8.7% increase in Honda sales in China was composed of a stronger than 8.7% increase in unit volume. The price of steel has fallen off a cliff. It is possible for Honda to sell cars at lower prices and increase profit margins at the same time.

Consumer cyclical stocks are early leaders in the Bull Markets that follow recessions. Bank stocks normally start their rise long before recessions are over and consumer cyclical stocks tend to start moving up at least a few months before recessions are over. While the pundits who say the economic recovery will not start until the second half of 2009 are probably correct, but the time to buy financial shares, consumer cyclical shares and high yield corporate bonds is now!

Buy a basket of auto companies if you wish. Those who would not tough GM with a 10 foot pole might buy a few shares as part of a basket or even better, they might buy high yielding bonds.

401-K Accounts! Many companies have at least temporarily stopped matching 401-K account distributions. If your company has done this, move your savings contributions from your 401-K to a self directed discount brokerage account. You will enjoy many benefits, including avoiding a 10% penalty should you have to tap the accounts before retirement. You will also pay taxes at today's rates rather than at higher future rates. You will get the benefit of capital gains rather than paying at ordinary income tax rates. Warning: as an amateur investor, I only offer ideas, not investment advice.

Friday, December 26, 2008

Another Turn in the Works

The tick-tock of the economic cycle clock continues to force the hands of time forward and another sector is set to make the turn. The most recent significant event was the receipt of bank holding company status by GMAC. GM has gained access to FOMC and TARP funds. Zero interest rate, no money down, auto loans on very competitively priced autos will lead to a rebound in sales. Share prices are likely to rise before, during and after the increase in sales. The risk of bankruptcy restructuring is real but prices have discounted the risk.

In the old days, US auto companies were at the top of the market cap weighted list of consumer cyclical stocks. Today, Ford is number 10 and GM is number 23, wedged between Mohawk Carpets and Stanley Works Tools. Of the top 8 S&P 500 consumer cyclical companies, the only domestic company is Nike at number 6. Three foreign auto companies, Toyota, Honda and Daimler, lead the list and Nike is wedged between Panasonic and Sony. Fuji Film follows Nissan, number 7, and the handbag maker, Coach, is pushing Ford for the tenth spot. The big truck builder, PACCAR, holds the 9th spot. Is it not unreal that a handbag company is currently valued about the same as Ford or that a hand tool maker is worth more than GM?

While a gaggle of footwear, apparel and jewelry companies dominate the rest of the list, audio and video equipment companies, home appliance companies and furniture/furnishing companies are other segments that sell at deeply depressed prices. These companies should see major rebounds now that the refinancing index has rebounded sharply. Most people do not borrow money to buy their gasoline but many do to update their living room furnishings.

Today, Boxing Day, is the big retail sales day in England. This year, 70% discounts are common. The volume of goods sold will be huge but, in money terms, total sales are likely to be down. Too many goods chasing too little money is the definition of deflation and that is what we are seeing in the short run. After the need for basic goods has been met, the savings is likely to be spent on durable goods. The savings is just getting started, for example, wholesale gas prices are forecasting retail gas at $1.39 in early 2009.

The decline in interest rates will be a more significant factor in the coming economic up-turn than even the decline in the price of consumer goods. Less than half the worlds assets are financed but during these times of depressed asset values, many assets are financed close to or, in some cases, even above 100%. The huge decline in mortgage rates, combined with lower prices, in most countries around the world, has made the purchase of assets much more affordable. Many who who have steady incomes are beginning to realize just how wonderful deflation can be.

It is certainly not all bad for businesses. A significant part of the decline in the monthly payment needed to buy a car does not come out of GM's pockets. When GM offered interest free loans a few years ago, it cost GM 9% to borrow the money, today, with new alternatives in place, GM will borrow the money for as little as .25%. Consumers can in effect lock-in .25% car loans through the purchase of "interest free car loan promotions". GM will increase its sales by passing through most of the low cost financing savings to its customers.

Years from now, millions of people will tell about how they made out or could have made out during this recession. They will tell how they purchased or could have purchased prime real estate in the middle of town for ridiculously low prices. Yesterday, I drove through the small town of Clemmons and noted a number of homes for sale, in the business district, on the main street. In downtown Winston-Salem, I noted several prime locations up for sale. Trillions of dollars worth of real estate is changing hands at low prices. Class A office space can be locked-in at very attractive lease rates. REIT's with money are having a field day. The financially strong are gradually accumulating great future wealth.

While financial stocks turn-up about the half way point of recessions (as the big real estate battle ship makes its difficult turn), consumer cyclical stocks tend to move-up about three quarters of the way through. Small cap stock value stocks, which includes many small banks and retailers, also tend to begin their move well before the recession has ended. Broad indexes such as the Dow and the S&P 500 will show negative relative strength though three or four years of recovery but even they will start to fly near the end of the recession. The peak of the bell curve investment bubble has recently been over the top of treasury bonds but it is clearly moving forward as the junk bond market has made significant gains recently. Junk bonds also move-up before recessions are over and they continue to move-up during the early years of the recovery.

The bottom made in financial stocks and REIT's on November 20 is holding firm, even though GDP numbers for the fourth quarter are expected to be among the worst ever reported. US GDP may have fallen as much as 6%. I suspect, equity markets, and especially the financial sector, will weather this next storm of bad news much better than most anyone expects. Again, the bad news has already been discounted by low prices. The November bottom is likely to hold and positive surprises are likely to be met by significant gains.

By suggesting that mortgage rates are on the way to 4.5%, the FOMC has slowed the turn. While the suggestion is probably true, it has encouraged anxious home buyers to wait for even lower pirces and lower interest rates. Still, day after day, the best real estate bargains are being picked off. The price of many parcels of raw land, once ready for development, but now to lie fallow for 10 years or more, have dropped by 60% or more in value. Many of these parcels will be held for investment for ten to fifteen years, at which point they will be sold at prices 500%, 1,000 percent or more than their current value.

For those wanting to buy a home or second home, the rates available on adjustable rate mortgages makes waiting a fools game. In most markets, the supply of available homes is coming down and the remaining sellers are not inclined to lower prices. Resort areas that are normally accessed by auto travel, such as Myrtle Beach, will see the biggest bounce as the cost of travel to and from these areas has been cut more than half.

Terrible numbers in places such as Las Vegas continue to skew the national averages, but there are numerous good stories out there, for example, some of the Florida markets that were collapsing have turned. Foreign buyers are part of the reason. When the bounce in the US dollar reversed itself, foreign buyers have been given another chance to scoop up the best bargains they have seen in years. Real estate is at its most affordable real price in scores of years. With new construction at it's nadir, supply is being absorbed.

The timing of the auto turn is being carefully manipulated. The most faithful of Republican voters still find it hard to believe how much money the Obama campaign was able to collect from big business. Voters sometimes forget that big business are much more concerned about profits than politics; they give to both conservative and liberal campaigns. It is in the self interest of GM and political leaders for the big sales gains to occur only after the "best bailout deals" can be made. By spring, you can expect to see very attractive terms on even the most fuel efficient of cars. Again, share prices will move long before sales increase.

Other "News"

A war between India and Pakistan seems eminent. The US has signaled that it will not stand in the way if India wants to go after Pakistani terrorist groups. It does not appear that the Pakistani government is politically strong enough to attack these "freedom fighters" (in all wars, both sides believe they are fighting the "just" cause). There are always wars being fought but it is relatively rare for two nuclear armed nations to be at war.

The good news is in the fact that more and more nations are agreeing to become nuclear power nations while giving their pledge to not develop bombs. The UAE is the most recent nation to sign-up to receive low cost fuel and low cost removal of waste by a nuclear power consortium supervised by the UN. Nuclear power plants are being built in scores of countries.

India and China are leading in the development of even lower cost nuclear power. India is making great progress in the use of abundant supplies of Thorium and China is now building nuclear power for half of what it cost in the US. In the US, Obama wants us to divert massive quantities of concrete and steel to the building of roads and bridges at a time when it is needed in the construction of alternative energy plants.

Microbes to the Rescue

A few days ago, a US company received $75 million of start up money. In the lab, this company has developed techniques to increasing the rate at which methanogens digest coal. These one celled creatures eat coal while breathing carbon dioxide. The products produced are clean burning natural gas and oxygen. Some scientist believe the speed of the digestion process will ultimately be increased by 1,000%; others suggest that it can be increased 10,000%. Methanogens are already hard at work digesting organic matter in swamps, peat bogs, coal seams, tap pits and in millions of hectares of shale formations.

Steven Chu, Obama's new Secretary of Energy, has worked on molecular generation of energy for 20 years or so. He has received grants of over $400 million from BP to support the work of hundreds of lab technicians and scientist. Other one celled creatures are adept at producing hydrogen.

While I would like to see more use of private funding and less intervention by the inefficiency of government, major microbial efforts are underway. Ultimately, we will wonder why we burned so much stuff!

Wednesday, December 24, 2008

Wall of Charts

The following link is to my "Wall of Charts" posted on facebook.

Tuesday, December 23, 2008

Tick-Tock Tick-Tock Goes the Investment Clock

The Tick-Tock of the Investment Clock continues. As expected, the bond market rally bell curve has moved slightly forward from dead over from the treasury market to a little more over the high yield market. The HYG bond fund has moved from $64.30 on December 11 to $74 yesterday. The JNK fund moved from 27 on December 12 to 29.11 yesterday. These increases do not look large until you remember that these funds are throwing off 12% yields and that we are early in the move.

The bell curve bubble has moved forward up and down the line.

1) Commodities are clearly on the down hill side of the bubble. This bubble continues to deflate but not as rapidly as before. Wholesale gasoline prices suggest a retail price of $1.48 within 10 days. Copper went from $4.20 per pound to $1.48 as quickly as the first plunge on a roller coaster, zoomed over the next little hill and is now down to $1.23. Slack demand should ultimately push copper all the way down to 50 cents but that could be after a significant bump. The momentum is dying because prices are moving below the marginal cost of production at some facilities. Some marginal mines and some of the "gooey" oil fields will have to be idled before the final bottom is made. Gasoline prices are likely to bounce back up 50 cents or so by summer, before falling even lower next winter.

2) The peak of the bell curve has moved over to the bond market, indeed it is even starting to shift from treasuries to corporates. Low interest rates are dramatically improving the outlook for future profits and are reducing the risk of defaults. Numerous companies are taking advantage of a chance of a lifetime. Companies that have cash are buying back their own debt at pennies on the dollar. In 2002, I purchased Nextel when it had a negative book value and a ton of high priced debt outstanding. The company had cash flow. The stock went from $2.90 per share to $28 per share over 3 years or so. A big part of the move was that it bought back much of the debt for 50 or 60 cents on the dollar. Companies are making needed adjustments. By laying off workers and making other cut backs, they are cutting loose cash tied up in marginal production. Some of the found cash is being used to buy back bonds. Such a situation leads to a healthier balance sheet in a hurry. Eventually, forward looking businesses will need to expand production to increase profits, but in the short run, buying ones own debt cheap is an easy decision.

3) The bell curve over the stock market sector is also moving forward. Over 16 days, the financial sector is up 22.3%. Last summer, the talk was all about MEI, Materials, Energy and Industrials. Over the last 16 days, energy was up 2%, Materials up 8 and Industrials up 8.4. The air is also going out of defensive sectors with utilities up 2.2%, Consumer Staples up 8.1% and health care up 10.2%. Those who remember the last recession know that bank stocks had fully recovered by the time the average stock started to move.

The rotation to small cap value is also well underway. In the 9 years after the 73-74 real estate recession, the average small stock went up 1579%. There are energy, material and industrial stocks within the small cap value category but, even so, IWN was up 17.4% while energy was up 2%. Small cap value funds are a good way to play small cap bank stocks as these are well represented.

4) The turn in real estate continues. On November 18, I posted a portfolio on Yahoo. Here are the results: CAL up 36%, REM up 16%, REZ up 13.5%, HYG up 6.8%, IJR up 5.07%, BRK-B up 2.8%, TIP up 4.2% and GOOG up .6%. REM and REZ are both related to real estate. REM is a mortgage REIT and REZ is a residential REIT. The total value of the portfolio has increased from $10,000 to over $10,900 in a little over a month. I will sell the TIP today to purchase a IWN.

Refinancing is a booming business. Yes, one needs a job and a good credit rating, which most homeowners have. Balance sheets are being improved by homeowners who are paying off old debts, such as car loans with consolidated loans against homes.

The housing market is improving in most markets. While home sales are low, they are concentrated in used homes, many of which are being sold to get rid of mortgage deficiencies. The new buyer gets a bargain and the mortgage company gets a weak loan paid-off; one that might be carried on the books at a deep discount. Banker friends expect horrible profit numbers for the quarter but they may be surprised as the value of mortgage backed securities are starting to move up.

In my portfolio, my favorite stock, CAL, was my top performer and my second most favorite stock, GOOG was my worst performer. I am not worried about GOOG for the long term. In 2009 and 2010 there will be a proliferation of hand held, low cost, wireless computers on the market. Yesterday, Staples, which does not typically have the best prices, offered an HP mini-notebook for $349. A couple of weeks ago, COSCO offered a very similar HP, if not the same one, for $449 and an Acer model for $349. AT&T is offering the Acer Mini in the Winston-Salem market for $99 with a two year data plan, connected by cell, WiMax or WiFi (automatically the cheapest service available).

Among other things, GOOG will make bundles off the free GPS software it offers for these machines and for internet connected cell phones. As more unlimited service wireless networks come available, whey would anyone buy a separate GPS? Search for coffee on a wireless GPS device and GOOG will be more than happy to show you the locations of the nearest KrispyKreem, MickyD's and Starbucks. The advertising costs for the vendors will be lowered, the customers will get their coffee at the closest vendor of their choice and Google will make an extra 15 cents.


Despite my love for Google, I must say that Facebook is coming on strong. As I recall, MSFT purchased 4% of this company for $15 Billion a couple of years ago. Social networks are spreading like wildfire, Facebook is the leader and social networks compete with a lot of "Google functions". Email, blogging, photo-video sharing, group scheduling, and much more are "improved products" on social networks. The move from party line phone lines to private lines is somewhat analogous of the move from e-mail to Facebook mail. For example, members of a church can share with "friends" without giving out their email address to the public. If you are a Facebook member, send me an invitation to be your friend and I will share my growing wall of charts with you.

Infrastructure Boondoggle

There is talk that the Obama administration will go for an 800 Billion Dollar infrastructure bill. This silly move comes on the 50th anniversary of "I, Pencil" by Leonard Read. If you have not read this letter, do a google search for the Leonard Read Foundation as it is posted there.

The point here is that it takes the input of millions of people to determine if a pencil should be made and, if so, another complex system to make one. Planned economies such as the old Soviet Union have demonstrated time and again that it is impossible for central planners to make the right amounts of the right products at fair prices.

One of Obama's big planning ideas today is that we need more mass transportation, smaller and fewer cars and more electric cars. At the same time, the Obama administration is intent on pushing up the price of concrete and steel by building roads and bridges for what we need less of. By pushing up the price of steel and concrete, the price of electricity will go up, as it takes tons of steel and concrete to build windmill, conventional or nuclear power plants. Why not let the market decide what should be built?

Oh! yeah I forgot, Obama owes unions thousands of Davis-Bacon jobs. He has to pay the unions back for his campaign contributions. To fill campaign coffers for the 2012 election, we must pay a lot of people $50 per hour, in wages and benefits, to lean on a shovel.

Dan Mitchel has posted an excellent anti Keynesian video at the Cato Institute. It shows how borrowing money to build roads does not stimulate an economy. It simple shifts the stimulus around. Instead of building power plants where they are needed the most, we will build bridges and dog parks in "political neighborhoods".

The good news is that the economic clock will continue to tick-tock forward. The economic clock will largely ignore the wasteful government spending. The great depression was prolonged when the government increased taxes in order to pay people to lean on shovels. Some of the mistakes of the great depression are not being repeated. This time, the tax increases needed to pay back the money borrowed to pay people to lean on shovels will come after the economy has returned to health. Politicians will enjoy believing and telling that their road building scam had something to do with it.

Thursday, December 18, 2008


One of the many old saw's about bankers is that they will loan you their umbrella but ask for it back when it rains. Common stereo types tend to be built around kernels of truth. Today, banks are lending money. The TV pundits keep saying that the credit markets are frozen but the numbers posted by the St. Louis Federal Reserve show that the growth of total loans and leases during this recession have never fallen below about 7% and as of last month were growing at about 9%!

Which do you believe, the opinion of TV pundits who might be "selling the news or talking their books" or the US government statistics offered by one of the 12 Federal Reserve Banks? It is true that banks have tightened their lending standards, that a frightened public is selling equity, buying government securities and paying down debts and that total loans are increasing. How can all of this be true?

The market, with the assistance of the FOMC, is virtually giving money away! The fed funds rate is being targeted at 0% to .25% and the FOMC has threatened to buy long treasury bonds. This extraordinary threat, along with the crash in prices of oil and other goods, has helped push mortgage rates and long treasury rates down to levels not seen since the 1940's. The 30-year bond is down to 2.6%! The 10-year bond is down to 2.09%! The 2-year note is down to .07%! The ninety day t-bill is down to .01%! And yet Gold declined in value yesterday! Gold is starting to anticipate an economic recovery that will push up real interest rates! Or perhaps the gold market is saying that at a zero percent inflation rate a .01% 90 day t-bill rate still makes holding gold expensive!

The prime rate is down to 3.75% but if a bank cannot make money by taking in money from the Fed at .25% and lending it to solid prime rate qualifying businesses with at a 350 basis point spread, then when will they ever make money?


A few of my banking friends have said that the banks will throw every possible write down and the kitchen sink into this quarters earnings reports (yes, that was said last quarter too). The reported earnings will be horrible. Some of these banking friends believe that the time to buy the bank stocks will be just after the earnings reports. However, as noted here time and again, banking stocks make a bottom long before the end of the typical recession and it looks like this has already occurred. Yesterday, I looked at the average performance of all financial stocks in the S&P 500 index and they were up 11.9% over the prior two days, yesterday they went down a little but they are up today. From the November 20 bottom through two days ago, the average financial stock was up more than 30%! The market place understands that banks have seen a dramatic decline in their cost of funds, that loan demand is strong and that banks are currently able to be very picky about who gets loans. This combination is ideal for future profits.

The coming profit write downs are related to the past decline in real estate values. However, each time mortgage rates drop a little, the net present value of the rental income stream of real estate soars. In other words, the value of real estate goes up, each time there is a decline in mortgage rates and there has been a significant decline in mortgage rates. Homes are intrinsically worth much more today than they were a month ago.

While many of the best bargains have been scooped up, there remain plenty of lesser bargains available. Not millions or billions but trillions of dollars worth of assets are rapidly moving from weak hands to strong hands. In other words, the only way for loan growth to be strong during a time when most people are focused on paying off debt and when only those with solid loan scores can qualify is for the highly qualified to be buying a lot!


Twenty-five years ago, Bill Lienbach, a broker at Merrill Lynch took his time to explain a number of things to me. I continue to be blessed by his kindness. Bill had a knack for using simple analogies to make complicated things easy to understand. In regard to currencies, he said you have to ask whose bucket is full? One country can pour so much water into another countries bucket but eventually the other country pours it back. Right now, the Europeans buckets are getting very full. The spread between the 10-year guilt and the 10-year bond has suddenly soared back to very high levels. As a result, the Euro has suddenly gained value against the dollar. Suddenly an international investor in Europe has reason to buy US real estate rather than Euroland real estate.

One of the great ironies is that politicians, the uninformed and even the well meaning who do not fully understand international economics (oops I just caught a lot of people in that net) like to go on and on about the importance of a strong dollar while the governments around the world are often engaged in a contest to try to weaken their currencies. Right now, probably every country in the world would love to export more goods. Every country has spare capacity in some area. The way to sell more goods is to weaken ones currency and the way to weaken a currency is to force down the price of long term money, which can be a difficult task to accomplish. Unfortunately for all countries, the world wide demand for their goods is not what it used to be.


People continue to look for the market bottom. They seem to forget that stocks do not bottom all at the same time. Back in on July 15, when the price of oil was $147 per barrel, the airline stocks made their bottom. My favorite company, Continental Airlines, symbol CAL traded at $6.65 on that day. Today it trades at $17.47 an increase of 262% during a recession! A few weeks ago, when talking about the turn in real estate, I mentioned REZ, a real estate investment trust. Since November 20, REZ is up 41%, the S&P 500 is up 12% and the Financial Sector is up 31%.

The ride to the bottom was no fun but investors should catch as much of the ride to the top as they possibly can. After all, the government is giving money away to the rich.

Wednesday, December 17, 2008

The Seeds of Economic Recovery Planted

I posted a chart, from the St. Louis Federal Reserve, on my Facebook wall.

Here is a link to it.

Much More Than a Santa Claus Rally!

We are at the time of year when investment people talk about the Santa Claus rally. This rally, which tends to start by mid December, is also known as the "January Effect". During the early days of the New Year, large contributions to pension plans tend to push the market up. While the history of seasons can be very misleading (sharp skews can result from histories of a small data sample), the current move should not be discounted as just another Santa Claus rally.

This rally kicked off on November 20. The average financial stock is up 11.6% in the last two days and up 31% since November 20. Technology stocks have also done well; they are up 14.9% since November 20.

It is worth repeating that the market cycle sequence is Stocks Down, Commodities Down, Bonds Up, Financial Stocks Up, Consumer Cyclical Stocks Up and then Technology Stocks Up. There are overlaps and retracements but the pattern is strong.

The rally in financial stocks is a result of the turn in real estate and both begin their recoveries several months or even a year or more before the end of recessions. Consumer cyclical stocks and technology stocks are the big movers once the market rally gets started and, yesterday, retailers were among the big winners. We should not jump to the conclusion that consumer cyclical stocks will take the leadership reigns tomorrow, next week or even next month but we are clearly seeing the bubble right at the Bonds Up point of the cycle. Crude oil, at $43 per barrel, might go lower but it does not have that much more room to fall. Treasury bonds are very expensive and have very little more room to rise.

If you own balanced mutual funds or life style funds or income funds you should sell. Small cap value stock funds will beat the pants off these hybrid bond funds over the next several years. Small cap financial stocks and small cap consumer cyclical stocks will likely soar. Years ago, I memorized the fact that in the 9 years after the 1973-74 real estate recession, the average small cap stock went up 1,579%!!!!!

A few days ago, there was a full moon. We have a full moon approximately every 28 days, so no big deal. This particular full moon was closer to the earth than at any time since 1993. Those who notice repetitive cycles can successfully predict future events. Astronomers can tell us precisely when the next moon perigee will occur.

The average real estate cycle is 18.3 years. The real estate cycle has a higher standard deviation that does the moon but the current bottom is similar to those of the past. There have been three of these bottoms during my life. At the peak of the construction boom in 2005, homes for sale were being built at the annualized rate of 1.2 million units. Last month, homes for sale were built at the annualized rate of 280,000 units. New construction starts are at record lows and the ratio of completions to starts is at the second highest level in history. Housing crews are focused on completing partially built homes and not on starting new projects. I expect a new all time peak in December.

The home absorption rate is a mean reverting number. The long term moving average is between 900,000 and one million units. With only 280,000 being built, it will not take long for inventories of unsold homes to return to normal. Long before the national numbers show normal, most markets will have below average inventories. The extremely over built resort markets are distorting reality. Inventories are already back to normal in a lot of markets and prices will rise shapely as demand begins to fight for supply. With mortgage rates ready to follow 30 year bond rates to historically low levels, the average worker can afford a much higher priced house than he currently realizes.

The process of correction was well underway before the dramatic FOMC announcement made by the FOMC Chair yesterday. Once again, it was fun to witness a dramatic announcement and all the discussion thereof only to note that the FOMC has already been doing what it announced for at least a couple of months. Still, the actions of the FOMC are powerful.

The FOMC formally moved the Fed Funds Rate target down 75 to 100 basis points. The new target is from 0% to .25%. This is where the Fed Funds have been trading since October. The FOMC also announced that it will buy long dated agency and treasury paper, however, in reality, the Fed balance sheet has soared over the past several months as a result of buying all sorts of paper, including long dated agency paper. The Fed added the statement about buying long treasuries in order to persuade bond traders not to dump long treasuries. In other words, the FOMC said "don't worry about the long term inflationary effect of pumping too much cash into the system, we are serious about moving interest rates down".

One of the guests on Kudlow's show last night expressed great fear of too much cash and thus hyper inflation. His fears are way off the mark, for several reasons. Two big ones are: 1) That when the FOMC borrows money from the Treasury to buy paper already on the market, only a swap of assets takes place, not a printing of money. It is the same as if I borrowed a $1000 from my Mother and purchased a Fannie Mae bond with it, Mom could get stuck if I failed to pay her back but no new cash was created, the FOMC owns the bond rather than the bank that sold it. 2) The money printing presses crank up when banks are quickly lending the same money over and over again. During an economic boom, money is "hot". A person that acquires money is quick to spend it and the bank that receives it as a deposit is quick to lend it again. During an economic slowdown, the "Paradox of Saving" takes hold to stop the printing presses. Banks, companies and individuals are more cautious about spending; businesses wait for their customers checks to clear before they produce another widget. The situation is similar to the rubber-necking that occurs when there is an auto accident. A few people are involved in the accident but the reason the traffic piles up is because every one passing has to take a good look.

Yes, a significant number of people have lost jobs (they are very involved in this accident) but most of us are suffering only because the speed of cash has slowed (gotten jammed in traffic). In this analogy, the action of the FOMC is like the action of the police when they arrive and start waving the traffic through. The tow trucks are currently pulling the wrecks away; by the time the people in the back of the traffic jam get to the accident site, there will be nothing to see and the speed of money will soar. The value of the Fannie Mae bonds will also jump, the banks will certainly want to buy there bonds back. The FOMC balance sheet will go down almost as fast as it went up. (Some of the TARP deals will take 5 years to unwind but only because the banks will want to enjoy the low cost funds for as long as possible, while they make high returns off them.)

NEVER BEFORE in your life has the FOMC done so much to push the economy forward. This FOMC traffic cop has just created an extra lane by directing traffic onto the shoulder for several hundred yards. The backed up traffic (financial stocks) is starting to get past the wreckage and is speeding down an unobstructed road.

When a line of cars stop at a traffic light, they follow a pattern of simple harmonic motion. Except for the idiots that run up hard behind you and stop in a hurry, the stopping motion is similar to the swing of a pendulum. When the light changes, the line starts to move, it slowly gathers momentum and of course, just as the traffic is moving rapidly through the light, it turns yellow and once again, the stopping process begins.

The market caution light was shining brightly in 2006 and very brightly by the summer of 2007. This caution light was the flat yield curve. I was the idiot who ignored the warning light this time, even when it flashed red several times by inverting. Today, we have come a very long way down the road. The Fed Funds rate at the time of the inversion was 5.25%. Today, the Fed Funds rate target is 0 to .25%! In the spring and early summer of 2007 the FOMC was standing on the brakes. It caused a multi-car pile up. Today, the FOMC has opened up new lanes and is offering to refuel cars that have run out of gas for free. Traffic is starting to move. You should catch a ride with a bank car, a real estate trust truck or a beach condo train.


Bernard L. Madoff made big news last week when his Ponzi scheme came crashing down. Investors lost an estimated $50 Billion. Mark Perry has asked an interesting question. Who built the largest Ponzi scheme of all time? The multiple choice answers are Charles Ponzi, Bernard L. Madoff or Franklin D. Roosevelt. Of course, Roosevelt is the correct answer. Ponzi schemes work for as long as they cash flow. Madoff was undiscovered for years because new deposits and partial refunding of principle disguised as principle were more than enough to meet withdrawals, until withdrawals increased during a weak economy. At the end, the customer accounts showed value of about 50 Billion Dollars but, when Madoff saw he could not meet redemption's, he gave piles of money to family and friends before revealing his deceit.

In the case of Social Security, the public has long known it to be a Ponzi scheme. It will continue to cash flow if and only if benefits are reduced or payroll taxes are increased, according to most experts. The hidden good news is that productivity growth will, after a very long time, repay loans from the treasury; provided benefits are not increased or that payroll taxes are not cut. The coming Obama tax plan is the equivalent of a massive earned income credit, where, in effect, $500 to $1,000 of payroll tax is refunded to the payer, out of general revenues. As usual, when the misguided take aim at the rich, the middle class is inadvertently shot. Despite the denials of Obama, under his plan, the $50,000 to $100,000 earner will pay extra payroll taxes to cover the additional deficit.

The answer to Obama is to do well despite the extra tax. Equity investors will do very well over the next several years. No matter what the percentage of taxes (less than 100%), it is wise to make high returns when they are available. Some day you will look back on these days and wonder why you were not more aggressive while the price of equity was so cheap!

Tuesday, December 16, 2008


Americans love to win; we love to break records. A broken record is a two sided event. It is a win and a loss.

Thursday night, Tyler Hansbrough is likely to break the UNC basketball all time scoring record. This record was last broken by Phil Ford, 30 years ago. Phil broke the record set by Lennie Rosenbluth in 1957, 51 years ago. Tyler, Lennie and Phil are among the greatest college basketball players to ever play the game. When the press does a news reel of Phil, they typically show him running the 4 corners offense. When Carolina had the lead late in the game, Phil could put the game on ice like none other. It took at least a double team to take the ball away from him, which meant a Carolina player was open. Phil could take any other player one on one and he could find the open man for a layup if he was double teamed. But, I praise the Lord for allowing me to be present many times when Phil raced down the court on a "transition fast break". It was a sight to see.

A dream competition would be a fast break competition between Kenny Smith, Ty Lawson and Phil Ford all at their prime. Kenny Smith might barely beat Ty down the court, Ty might barely beat Kenny at taking the ball to the rim, but neither could "stop and pop" like Phil. Phil would get two steps in before Kenny and Ty got to motoring but they would be waiting for Phil at the basket; never-the-less, Phil would score. He would switch from a full speed run, stop on a dime and shoot a dead on 10 footer. It would be a fun contest to see.


The real average hourly earnings of American citizens jumped by 2.5% in November, the biggest jump on records that go back to 1964. In the past three months, real average earnings have grown at the annualized rate of 18.8%! The consumer price index fell by 1.7%. (Numbers by way of Brian Wesbury).

When the media reports such figures, they love to say, "the biggest decline since the 1930's". They are "selling the news". Their idea is to suggest that we are in another great depression without going on record with a prediction. They either know better and are trying to increase market share or they are they are caught in a mind set where they cannot see the other side of the issue.

Yesterday, I wrote about how the bond markets are suggesting an average inflation rate of zero over the near term. The government numbers for November show a core inflation rate of zero. A zero inflation rate is about as good as it gets. Last month, the bond markets and the "news stories" suggested that deflation was here. Other "news stories" suggest that a period of hyper inflation is coming. By next summer, a bounce in things like gasoline prices will cause these folk to go ballistic.

Yes, Thursday will be a sad day for Phil Ford and fans. The good news is that Phil Ford and his fans, the Tar Heel Faithful, are also Tyler Hansbrough fans. We will celebrate the achievement of Tyler and we will honor the achievement of Phil.

By the same token, we should not read the headline, CPI, Biggest Fall Since the 30's, without appreciating that the year over year annual gain is real hourly wages of 3.1% is the largest on records that going back to 1972. The one month gain of 2.5% is not even the icing on the cake as we already know that the price of gasoline and other goods fell considerably more during the first half of December.


The sad thing about getting a 3.1% raise is that a third or more might go to paying more taxes. The neat thing about a decline in prices is that one gets a raise without owing more in taxes.

Sure, we all have abundant evidence that times are tough, individuals are hurting. However, the composite numbers keep showing significant strength. The increase in the average real hourly wage just set a 44 year record and most people hardly noticed. They will.

The cumulative effect is what is ultimately felt. A $100 per month savings on gasoline is only $100 the first month it is saved. And two months later, when the monthly savings have grown to $200 per month, there is still no great celebration. However, when that $200 per month is used to solve a growing families need for an additional $42,000 worth of house, there are a lot of people made happy. Let's not forget that leverage is often a good thing.

Housing starts have hit a record low. The market is taking action to quickly correct an over supply of houses. Fast rising real incomes and reduced construction will resort in a faster than expected absorption of houses. A healthy housing market will cure a lot of problems. The stock market is starting to price in a recovery that will begin 6 to 12 months (an average of 9) from now. Will new recovery records be set?

Monday, December 15, 2008

Markets are quickly returning to normal.

A lot of scary stuff is being said about the economy. Even optimistic economists tend to suggest that the economy will be weak until at least the third quarter of 2009. Of course, certain market sectors are already starting to price in the coming powerful recovery.

As always, it makes sense to compare what people are saying with their money to what is being spoken. One of the key market moves of the past few days has been the shape interest rate decline in the 5-year inflation adjusted notes. The deflation scare is over, at least for now. There is hardly a basis point difference in the TIP rate and the nominal rate. The markets are now forecasting no inflation and no deflation! How about that!

The huge spread between high yield bonds and AAA bonds was maintained last week only because the rate on the AAA bonds declined as rapidly as did the rate on the high yield bonds. Forecasters are expressing great concern about the expectation of very bad earnings numbers, but their concern is pretty much old discounted news. The coming major move in the market will be a major expansion of PE ratios, not an expansion of earnings. The rise in earnings will come much later.

Our family can finance the purchase of a 20% share in a beach condo. You can enjoy owning and using a beach condo without incurring the normal hassles of owning real estate. Over the next 15 years, you will see your equity rise while enjoying other benefits of ownership. We had much rather share 20% with an owner rather than to rent the units out to a steady stream of strangers.

Friday, December 12, 2008


Your analysis ignores the regulated monopoly created by the tricks and turns in the CAFE standards. Foreign cars must be significantly retooled to meet US regulations. If you want to sell a lot of cars in America, you must do like the Japanese and build your plants here. Now that the plants are here, the monopoly protection helps them just as much as the "little three in Detroit". The "little three" must become at least as efficient as the domesticated foreign producers. If they cannot or will not, we should let them expire.

When you have monopolies, you do not have free markets. The unjustified salaries and wages and huge inefficiencies were born and breed by the monopoly rules written by Detroit lawyers and passed into law by congress and signed into law by presidents. We get into trouble when we are inconsistent in sticking to our principles.

It took the rail roads 25 years to "retool" into profitable businesses after the regulated protection was ended. It took the airlines 30 years and some believe they are not there yet. America can and should compete on an even playing field. We have no reason to be afraid of competition. If, as a result of open markets, the Japanese, South Koreans and Chinese take over the car business, it will be because our competitive strengths lie elsewhere. The highest paid jobs are no longer the manufacturing jobs. Thousands of labs across our country are researching and designing products that are far more rare and valuable than autos.

The reasons that gasoline taxes should be increased are because we should eliminate the taxes on productive pursuits and raise our revenue by taxing the least productive pursuits. The huge tax increases on cigarettes was justifiable because this habit of many was doing great harm to the many more non smokers. Those who waste fuel simply because they can are polluting the air of everyone else unnecessarily. By raising the tax on driving while reducing the tax on income, we will increase our incomes while reducing our driving expense. We can individually make our own choices to achieve the common good. We do not need to play favorites.

Republicans and democrats are guilty of picking and choosing winners and losers based on politics and not based on merit. The practice is too common. It ranges all the way to billion dollar bailouts of rich bankers to uniform school teacher salaries no matter what the level of competence. The invisible hand works when price is set by supply and demand, not by political regulation or favor.


Cast all your anxiety on him because he cares for you. I Peter 5:7

Jack Miller
1825 Curraghmore Road
Clemmons, NC 27012

On Fri, Dec 12, 2008 at 11:43 AM, Al wrote:

Unions are evil, government is evil, business is evil. All three have been willing to gain at the expense of the other two in the past. But, all three have also done many good things too and are necessary to maintain a balance of power that will lead to real progress.

Only individuals pay taxes. Business taxes are added to the cost of doing business and passed on to the customer.

Taxes are necessary to provide for the common good, which is not always the same as perceived by the individual

The common good is a dynamic target, always changing, sometimes a little, sometimes a lot.

Economics and politics cannot be separated, but must be balanced. Extremes have gotten us to where we are today.

How should the auto manufacturer situation be approached?

The manufacturers have been working with the unions and current and future costs have been reduced and will get even more reductions. The $75 per hour cost per employee has been cut nearly in half for new hires. New more efficient vehicles are in the works, but remember less than a year ago the buying public was happily buying big vehicles at high profit margins. Imported vehicles have been growing in size over the last 20 years. It is only because of the home government tax policies on fuel that foreign manufacturers have had smaller, more efficient vehicles available.

If our government will pass higher taxes on fuel, then I think we should offer loans to the vehicle manufacturers, as we will have a reasonable expectation for repayment based on continued higher fuel prices. The public will continue to buy more fuel efficient vehicles because fuel prices will become more consistent. The trend in industrialized countries has always been for the consumer to purchase the biggest, most powerful vehicle he can afford. If the government wants to control the amount of fuel used do it with taxes, not with CAFE or gas guzzler surcharges.

If congress continues to let the market determine the total price of fuel, then bankruptcy is the best solution. Let the free market determine who manufactures our vehicles. The price of and profit made on larger vehicles will rise based on supply as world manufacturing capacity of larger cars will be limited for some time. The surviving domestic manufacturer will do well.



On August 31, 1981, US air traffic controllers went out on strike. Reagan gave them 48 hours to return to work or they would be fired; they didn't, he did. Air traffic controllers were over paid even more than auto workers are today. In the short run, Reagan's action contributed to one of the worst manufacturing recessions ever. Over the next 19 years, the US enjoyed a tremendous economic boom, punctuated by the real estate recession of 1990-91.

Recessions are manufacturing recessions or real estate recession depending on what drags us into recession. Real estate and industry tend to take turns dragging the economy down. Before a manufacturing recession, excess manufacturing capacity is built to meet great demand for goods. At the peak of capacity utilization, there is high inflation. High inflation leads to high interest rates and a crash in the production of goods. The crash in unemployment ultimately leads to lower demand for real estate. Before a real estate recession there there is great demand for real estate until too much is built. Both industry and real estate are hurt by both types of recessions but both the going-in and the coming-out are different.

The high interest rates that precede a manufacturing recession hold down the excess building of real estate. Real estate construction is slowed by the high interest rates, so the demand to supply ratio stays strong and the price of real estate tends to hold pretty well, only taking a hit near the end of the recession. When the recession is the result of an excess supply of real estate, real estate prices fall early and industry holds up until close to the end of the tough times.

The firing of the air traffic controllers happened early during the recession, but no where even close to the real beginning. In September of 1979, the Carter Administration, enjoying the support of his party in both the house and the senate, gave the auto industry a $1.5 Billion Dollar Band-Aid. The government "fixed" the auto industry by getting it through the recession, without forcing it to make the changes it needed to make. The collapse of the auto industry in 1979 is roughly parallel to the collapse in home construction two years ago. The current collapse of the auto industry is a result of government meddling more so than the result of poor management. The political solution reached years ago was to give the US a semi monopoly on large vehicles. Now that the demand for large vehicles has collapsed, the auto companies were left with high legacy costs that should have been fixed in 1979.


Obama ran a populist campaign. He wants to treat people fairly. It is clearly unfair for some workers to make $100 per hour at the expense of all other citizens. The campaign to be fair makes bailing out union workers that average $74 per hour a difficult pill to swallow. After Obama's inauguration, there will be a Jimmy Carter situation. Has the US learned from it's mistakes?

Starting in 1928, there was a long series of mistakes made by government officials. Tariffs on foreign goods were imposed, the money supply was restricted, taxes were raised and raised and raised so that government could spend more and more and more. A manufacturing recession was inadvertently converted into the Great Depression. FDR was a very popular president but his "infrastructure" programs extended the economic down turn. The Blue Ridge Parkway is a beautiful scenic highway with beautiful massive stone bridges but diverting precious money to the building of massive bridges is not what our country needed to get out of the depression.

During the Lyndon Johnson "new New Deal", many of the FDR mistakes were made but the money supply was not restricted. Poor Jimmy Carter caught the inflation whiplash from the "easy money new, New Deal". Carter followed through with the standard democrat approach by bailing out Chrysler. Carter was president at a secular trough. Reagan was at the right place at the right time. Bush was the president just after a secular peak, he was at the wrong place at the wrong time. Obama is at the right place at the right time. If the government will simply avoid doing great harm, the American economy is going to boom.

The American economy well be well served if a packaged chapter 11 bankruptcy is negotiated for GM. Americans are ready and willing to buy cars made in America, but they will be well served by free markets. Unfortunately, the new CAFE standards were once again designed to make it difficult to import cars to America. Without these rules, consumers would enjoy significantly lower car prices. We do not protect America when we restrict car imports, we only protect the high wages of both executives and workers at car companies. We protect the huge campaign contributions the unions make to our congressmen, senators and presidents. Make the playing field fair and we do not need to limit campaign contributions. The reason that massive amounts of money are donated to campaigns is for the purpose of gaining an unfair advantage on the rest of Americans.

Again, Obama ran as one who seeks fairness. It is not fair for a poor man to pay $73 per hour for the labor to make his car and for the poor man to be forced to make political campaign "contributions" to maintain his oppression.

A packaged bankruptcy will not get rid of the very complicated CAFE standards that have been passed but bankruptcy will reduce the cost of cars and it will reduce the size of union slush funds. There is a turn taking place in housing, foreclosures are down and a massive refinancing at low rates is taking place. The demand for goods is ready to jump. Reagan fired the air traffic controllers about a year before the market took off but that was a manufacturing recession. Economic conditions are now similar to the late fall of 1982; oil prices are down, interest rates are down, housing prices are stable and lagging indicators such as unemployment rates are soaring.

Like they say, "fade the initial reaction". In other words, the markets will probably fall on the "bad auto company news", but the long term health of American industry will be dramatically improved by forcing workers, management and share holders to take the hit. All of us are consumers. We will all benefit from lower prices.

Thursday, December 11, 2008

Which Economy is Hurting the Most?

The EURO rallied mightily against the US Dollar from 2000 to 2008. From July of 2008 until October, the US Dollar turned with a vengeance. Since October, there has been a cat and mouse game of which area is the weakest. The US economy lead the way into the recession. Then it seemed like the wheels were falling off the cart in England and in most of Euroland. For the past few weeks, Euroland has bounced back. One can earn about half a percent more on ten year Euro paper than on US paper. The 10 year notes are now projecting very slow growth in Euroland but extra slow growth in the USA. So what?

The fact of the matter is that both areas are benefiting from the decline (turn) in input costs. Consuming nations, including Japan, are enjoying the turn and producing nations such as Saudi Arabia and Russia are taking the big hit. Countries such as China and India are the hybrids which are receiving inputs at lower prices but which are being slammed by the slow down in consumption of goods.

As the largest beneficiary of lower input prices (like the alarmist note, we consume 25% of the worlds energy supplies), the USA will lead the world out of recession. Japan and Euroland will take the hike with us. China and India will walk behind us at a distance. but once they start catching up, they will gather speed and run right past us, again (in terms of growth rate). It will take the resource providers, such as Russia, much longer to recover. The price of oil is not going to rebound as much as the economy.

The price of gasoline is likely to hit a US average of $1.50 pretty soon. By Memorial day, it might be back up to $2, but the glide path is down. According to reports from Brazil, the marginal production cost of their multi billion barrels discoveries is under $40 per barrel. My estimate of margin production cost on the last barrel of around 80 million per day is $35. The implication is that gasoline will get down to the $1.15 range within a few years. The big swings are fading and the price will be relatively stable for a number of years. Hybrid autos will show dramatic gains in market share when the 2010 cafe standards kick-in.


Holding the HYG bond funds is making the wait more fun. This junk bond fund has moved up just a little in the past 3 weeks, but when you hold bonds that have a current yield of 12+% and a yield to maturity of 21+%, there is no hurry. Was November 20 the Turn Date for junk bonds? I don't know, but all sorts of spreads have been settling down. The wild swings are mostly gone. The thirty year home mortgage is still high relative to 30 year treasury bonds but last week a credit union temporarily offered a come-on rate of 5.08%! When the words of Bernanke caused mortgage rates to drop two or three weeks ago, there was an historic surge in refinancing applications. Despite the fear in the market by many savers, there are still those ready to borrow on good terms. There is pent up home buying demand.

The narrowing of spreads is the return of "health" to the credit markets. Problems that built up over decades, such as the extremely high cost structure at GM, will not be solved easily but it is no longer true to say that "as GM goes, so goes the nation". GM is a very tiny portion of our GNP relative to what it was 50 years ago. Fifty years ago, there were hardly any fast food places to drive to. Today there are probably more people working in genetics labs than there are at GM.

Like other manufacturers, GM is seeing massive declines in input costs. Thousands of jobs have been replaced by robots that do not care about health insurance. Unfortunately, the company owes 68 billion dollars! It will take a lot of profitable sales to pay off its built-up debts, which are trading as low as 13 cents on the dollar. The bill to lend the auto companies 14 Billion Dollars is likely to pass. By March, these companies will need to have put together a "packaged settlement". The current idea is to appoint an Auto Czar to work out the details. The attempt will be made to do the packaged deal without doing a "packaged Chapter 11 deal".

The important fact is that we are drawing very near to the jumping off point in the cycle for consumer cyclical goods. A couple of hundred million US consumers are in the best financial position they been in for many years. Credit card debt as a percentage of disposable income peaked in 2005 for most consumers. The affordability of the average home for the average income was negative in 2005 but it is at an all time high now! The swing in real estate has been a much more significant economic event than the 70% drop in the price of oil. Real estate is the big daddy of asset classes.

The Russian economy has probably fallen the hardest. The US economy fell first but it is already seeing signs of recovery. The massive turn of the "Real Estate Battleship" is well underway. Now is the time to leverage real estate. Investors will make high returns on stocks and junk bonds over the next couple of years but the aggressive will make a fortune by taking over ownership of real estate with $1 down and the assumption of debt. Even properties that are currently worth less than the mortgage balance will be highly profitable to those who have the resources to make the monthly payments. The rents on many underwater properties are sufficient to make 90% or more of the payments.


The poorest of people are enjoying great relief as a result of the decline in the price of food (those who live off of corn meal see the price decline long before those who buy corn chips and cokes). Many of those who live off the equivalent of $1 per day are in much better condition today than they were last summer. It is interesting to note that one of the reasons that food is in greater supply is because when consumers cut back on their purchases of clothing, cotton farmers converted to corn or soybeans. Also, the bankruptcy of several ethanol plants did not hurt.

The poorest of the poor own cell phones. Suddenly there is a glut of cheap cell phones and the cost to provide service is falling rapidly. In the US, AT&T bought a WiFi provider because the more AT&T customers use WiFi, the less they use expensive cell towers. If an iPhone user is connected by WiFi most of the time, then AT&T collects the same revenue at a fraction of the costs. Today, one who has a WiFi enabled lap top can drive across the country and stop to make free connections at 10's of thousands of locations. Drive into the parking lot of a Holiday Inn and you are in business. Hot spots in places such as McDonald's and Starbucks are a low cost method of attracting customers. The fellow who buys a second cup of coffee at a Panera Bread Restaraunt pays the covers the cost of hours of WiFi service. A $100 per month connection at a store opened 12 hours per day cost the store 27 cents per hour.

While easy communication access is providing a major boom to productivity in the US, it is the poor who are benefiting the most. A very short text message might save an African a two day walk; that is called a productivity gain!

The bottom line is that the economies that were enjoying the rise in commodity prices are now hurting and the people who buy commodities are now being blessed. The self correcting hand is at work. The slower the economies the lower the prices fall and the more profitable certain businesses become.

By the way, over the next few weeks, I plan to add a lot of investment pictures to my FaceBook page. You are invited to check them out. I am finding that FaceBook is not all "fluff". It is a very powerful communications tool.

Wednesday, December 10, 2008


The greatest investors of all time have been optimistic people. This optimism has worked as an investment strategy because 90% of the time one should be optimistic about equity investments. Who is smart enough and lucky enough to be out of the market for only the "right 10% of the time"? No one! Many a great investor never "goes to cash".

While most professional investors do not try to time the market, the public continues to try. Right now, the public is so negative on the market and the safety of money in the bank that US Treasury Bills are paying ZERO INTEREST!

Last year, T Boone Pickens spent millions of dollars on advertising, trying to convince the congress to pass a big windmill subsidy bill. In the ads, T Boone repeated the democratic campaign mantra that the greatest transfer of wealth in history was taking place. He said that the US was sending 700 Billion Dollars to oil producing nations which do not even like us. I bought a couple of steaks at the local market the other day from a butcher that I do not even know. Did I transfer wealth to the supermarket? Maybe a few pennies worth.

The $700 Billion was not a transfer of wealth. We got billions of barrels of oil and the sellers got paper. Right now, a much more incredible "transfer is going on". The nations who sold us oil are loaning them to us at a ZERO percent interest rate! Before long, many of these dollars will be spent to buy goods and services from US companies. After all, if you can't earn interest on your savings, you might want to buy something.


US corporations face a marginal tax rate of 35%. There is junk in the tax code that allows some portion of earnings to escape the 35% rate. Still, the 35% rate is higher than the rates in almost every other country. Ten years ago, during "boom" years, US tax rates were lower than those in scores of countries. If we want to increase employment in America, we should lower the tax rates on corporations. The fact of the matter is that these higher taxes are largely passed on to workers and consumers. Every time you buy your groceries, in addition to the sales tax that you see added on, you also pay the hidden corporate tax. Every employee earns less than he should as a result of the taxes on his employer. Democrats disparage this fact as "trickle down economics". The idea is that if the truth hurts, make it the butt of a cruel joke (at best and a lie at worst).

Sanity is returning to the compensation paid to top officers in scores of companies. As a part of a new law to lower tax rates, we can expect to have new regulations to make excessive compensation non tax deductible. The key change needed is lower taxes but the inclusion of compensation regulations is not a terrible thing, given that the "boys club" has gone off the deep end. I want government to be as non intrusive as possible, but monster companies can compensate employees far beyond market rates without a significant impact on corporate earnings. Boards of Directors are clearly "part of the old boy network problem".


During the past six months, there has been a massive transfer of wealth. The public, which accumulated equity positions over the prior 7 years or more, sold out at low prices because the wheels seem to be coming off the wagon. Some 35% of Americans now believe their FDIC insured savings are not "safe". People are fearfully taking money out of insured deposits and buying government bills. These folk need to understand that if the banking system collapses (which it is no where near doing), government t-bills will not be worth anything either. Of course, the price of gold is high, even during a time of deflation, because of fear. Many coin dealers are sold out. Gold would appreciate in value if the financial system collapsed but, over time, gold is a good investment only about 50% of the time.

Equity in stocks or real estate is a good investment about 90% of the time, gold about 50% and T-Bills about 5% of the time. Right now the public is buying t-bills that pay ZERO INTEREST! Whenever the public runs hard one direction, it is time to run hard the other direction. The public is selling second homes, rent homes, stock mutual funds and stocks. It is time to be optimistic and to buy equity with a vengeance. The Dow Jones Industrial average is up 15% from the bottom. Those who are totally out of the market have already missed the first 15% of the rally. The total of this long rally will be several hundred percent but the powerful compounded first dollars are the big ones.

Yesterday, I wrote about how the powerful science of Eugenics is starting to change the world. I did not receive a single response on this controversial topic. Readers have other more pressing matters on their minds. Many readers are like the general public, almost numb from the 40% decline in the average stock. The science of Eugenics is nothing but the hard blowing Schumpter gales of creative destruction. As a result of Eugenics, great quantities of scarce resources will be conserved. The demand for almost everything, including health care services will be reduced as the practice of Eugenics becomes more common. At the same time, the invisible hand of Adam Smith is supplying consumers around the world with massive amounts of buying power. The 3.3 Trillion Dollar annual savings on oil is massive but only a tiny part of the total stimulus the world is receiving. Yes, I am pulling a T-Boone here. The 3.3 Trillion Dollars represents a reduction of income for the oil producers and is thus a negative stimulus for the oil producers but I suspect you are on the receiving end of this trade. Unless you own large quantities of oil company shares, you are enjoying the benefit of lower prices. More importantly perhaps is the fact that American businesses are enjoying dramatically lower input costs. Finished goods prices are generally going up relative to input costs. This will show up as significant growth in profits a year from now. It is time to be very optimistic.

Tuesday, December 09, 2008

The Gift

The Gift
by Jill Cooper

She stood at the window watching the snow falling gently to the ground. Thanksgiving was over and soon it would be Christmas, her favorite time of the year. But her heart was heavy in spite of the snow and the feeling of Christmas that it should invoke. The Christmas spirit that she had felt all year long seemed to have been drained out of her with a couple of simple phone calls, each from a family member saying they didn't want to exchange gifts this year because they couldn't afford them.
As she turned from the window her eyes fell on her little tree standing in the corner. It's lights twinkled ever so brightly, casting a warm glow over the small pile of gaily wrapped gifts lying under it. A smile touched her lips as she thought of each person that the gifts were for. In her mind she could see the joy and excitement on their faces as they tore open the gifts and saw what was in them.
All year, she had carefully planned their gifts and had sacrificed much time and money in order to be able to buy them. She listened to each person's big desires and little ones and had drawn so close to them that she knew not only the things they verbally said that they wanted but also the things they hadn't voiced. She knew she had bought each one the perfect gift -- Not the most expensive gift, maybe, but the perfect one for them.

Yes, she had sacrificed a lot to buy the gifts, but because her love for each person was so great and because of the joy she felt in giving, she didn't see it as a sacrifice at all. So what if she had to turn the heat down a couple of degrees and wear a sweater in order to be able to have a little extra to buy that special something for someone she loved. Yes, it's nice to go out to eat at the end of a long hard day, but it's even nicer to watch the face of a child open a present and go into rapture over his new car or to see mom get tears in her eyes because you not only remembered her favorite perfume but also how much she had longed for it.
Of course there had been times when she had looked in the store window thinking how wonderful it would be to own a dress like that, but when it came to a choice between that and the fur trimmed coat her granddaughter wanted, the coat won hands down. To see that granddaughter running towards her and throwing her arms around her once more thanking her for the new coat would make her feel more beautiful then any new dress could.

Oh, she knew there were those out there who would scold her and say she should think of herself more and do more for herself, but she just shook her head in pity for them. They had no idea what they were missing out on with that attitude.
It was that very same attitude that had caused the heaviness on her heart right now. The phone calls she had received came from people who had spent all year spending money on the things they wanted: new cars, TVs, clothes and going out to eat and now they had nothing left to give to someone else.

"When did it happen?" she wondered, "-- this change in people's thinking." What happened to the times when even a small gift was greatly appreciated because you knew the person had sacrificed so much in order to buy or make it? What happened to the times when parents, spouses and children worked so hard in order to be able to give that special gift to someone they loved? When did it become acceptable to call on your expensive cell phone, from your favorite restaurant, to let others know that you can't buy them a gift this year because you can't afford it? Had she been mistaken all this time in her understanding of gift giving?

With a droop in her shoulders she turns and walks toward the little tree. How could it have lost its sparkle in a matter of moments? Why do the presents under it suddenly look less gaily wrapped? With tears gently rolling down her cheeks, she stoops to turn off the tree's lights. As she reaches for the plug, her hand accidentally brushes her Bible laying on the table. As she looks up through the blur, her eyes alight upon the passage on the open page. "For God so LOVED the world that he GAVE his one and only Son, that whoever believes in him shall not perish but have eternal life."

A sweet peace starts warming her heart. She begins to smile and her tears are flowing even more freely now -- not from sadness, but from joy. The lights on the little tree become brighter and brighter, lighting up the whole room with it's sparkle. The gifts under it look more beautiful than those in the most expensive department stores for, in that moment, she realizes that she wasn't wrong to love, to sacrifice and to want to give gifts to the people she loves.

Hadn't God Himself so loved us that He gave, with the greatest of sacrifices, the most wonderful gift, His Son. She was so glad that God hadn't spent His time in heaven selfishly using all His resources for Himself. She was thankful that He hadn't sent her a message saying, "Sorry, but I can't afford to give you a gift this year."
In those few moments of heartbreak she had learned something more. She had learned what God must feel like to have the gift that He sacrificed so much to give be rejected and scorned. How hurtful to take away the blessing of giving from someone or to reject their gift.

Yes, it seemed to be popular to say, "We can't afford to exchange gifts this year", but it didn't matter. She would continue to love, sacrifice and give, always following her heavenly Father's example.


I bought a few shares of JNK today. This fund of "junk bonds" offers a current yield of 16.2%. Many of the bonds held should appreciate dramatically as the US economy gradually turns. Real estate is the great big battleship that has gotten halfway turned. When it finally gets a head of steam going the "other way", the credit markets will improve and the stock market will anticipate great earnings by the end of 2009.


Big turns are being made! Major, significant, long lasting turns!

All last year, I wrote about how a major decline in fuel and other commodity prices would feed the worlds economy. Despite solid economic arguments, very few people believed me and some almost attacked me for being so wrong. Now even after the "food" of declining prices is being delivered daily, few people believe that the "big turn is here". Some of my readers site the negative attitude of the people as the reason that the delivery of low, low prices will do no good. The delivery of low prices is already "feeding" the worlds economy and, now that the turn has been made, lower prices will be around for several years. People don't believe, because they do not want to believe. If they wanted to believe, they would open their eyes.

REZ is the symbol for a broad based housing real estate investment trust, it is up 58% in value in less than 2 months. Making an even more vicious turn is SRZ, Sunrise Nursing Homes, which is up 485% in a few weeks. The turn that is taking place in real estate, the biggest asset class is powerful and, yet, several of my readers have called the bottom, by selling out, or moving their accounts to a "safer situation".

Since the "turn in airlines", call it July 14, 2008, UAUA is up 233%, CAL is up 133% and AMR is up 113%, all while the S&P 500 is down 21%!

The "up sectors" have started to trump the down sectors. Since November 20, CAL is up 50%, AMR is up 48%, UAUA is up 41% and the S&P is up 13%.


REAL MONEY is flowing into the hands of consumers like seldom if ever seen before. Sure, a lot of people have lost a job or have seen their work hours or pay cut. At the same time, the 93% of the labor force is working and, the great majority of the "other people", most of whom are receiving retirement checks, have seen a massive blood transfusion of REAL money. The fellow drawing social security got several "raises" recently. His cost of heating, gasoline and corn flakes all went down. His cost of living is going down. Yesterday, Intel announced a minor little break through that will reduce the cost of one "chip" by 95%. The average fellow will never knowingly buy one of these chips but as a result of this and other developments, the average fellow will be able to check the price of corn flakes at Lowes and Food Lion with his pocket computer.


Handel was born to wealth. His father tried to force him to study law but, fortunately, his mother encouraged him to continue his musical pursuits. As a young man, he was well known enough to gain the patronage of Prince George, later to become King George of England. By 1737, at the age of 52, Handel had already lived the good life, just when disaster struck. He had a stroke, lost the use of his left arm and had recurring vision problems for the rest of his life. By 1740, a series of failed productions cost him his fortune. He was barely able to hold onto his rented house and he literally went hungry for days at a time. He suffered from the same type of despair that is prevalent today; he lived during an age of economic revolution but it seemed as if the world was coming to an end.

Fortunately a friend left a manuscript about the life of Jesus for Handel to read. Actually, much of the text was a redaction of sections of Isaiah, Haggai and Malachi which foretold the coming of a great Messiah. Like they say, "the rest is history".

Handel read the manuscript and "made the turn" immediately. He worked feverishly for the next 24 days, surviving on little sleep and little to eat. His "first draft" was completed in the summer of 1741. On April 13, 1742 (at Easter), Handel's Messiah was first performed. Needless to say, it was a great success. No one knows which was the original composition because Handel modified it to suit the orchestra that was assembled at each new presentation. Later, Mozart added numerous other scores. While Handel continued to have health problems for the 18 years after he penned his master piece, he died as a highly respected and very wealthy man. He received full state honors and more than 3,000 mourners attended his funeral.


History does not exactly repeat itself but it does make beautiful rhymes. The financial V-turn made by Handle has been made in centuries past and will be made in centuries future. You are living during historic times, time that are similar to the industrial revolution during which Handel lived. This time, the air is full of stories about nearly bankrupted auto companies and of massive levels of real estate foreclosing, but also a time when the average person can better afford the average car or the average home THAN EVER BEFORE! Handel died with an estate of over 20,000 pounds but he lived when there was no air conditioning and when underclothes were a luxury and clean underclothes were the height of luxury.

The contrast between perception and reality is incredible. I have used the Dickens line, "It was the best of times, it was the worst of times" before, to describe the situation and here again we have a rhyme of history. Now-a-days, help for the needy is much more available, so the "times" are not nearly as bad as in the days of Dickens, but the contrast between perception and reality is just as great. Today, people literally think we are in the early days of a "great depression" when we are indeed in the middle of a long-term economic boom. One of the amazing numbers is that productivity growth has continued to stay strong throughout the recession.

The other day at Cosco a stranger and I were checking out a display of Acer NetBook Computers, 10 inch portable and WiFi connected $349 computers. These small laptop machines and their cousins will soon be everywhere. For example, today, my church is a WiFi hotspot but few people use the Internet there. Soon, the Sunday School Classrooms will NetBook Computers. If you have ever performed the task of collecting the roll and offering from Sunday School classrooms, you will immediately appreciate the idea of having the roll input directly from the classroom. If you have ever tried to maintain a church directory, you know how nice it would be if members were easily able to input changes to their personal profile, changes that would automatically be available to all other church members. Taking the roll is just the beginning of an Internet connected church (society). Video conference bible studies and educational forums will become common.

The stranger at Costco told me about how he travels the world as a consultant who helps companies "lean out". This fellow appreciates the importance of productivity. He makes better than $300,000 per year teaching others how to be efficient. To the worker at a factor, the word productivity is often a frightening word. Wile it means producing more product while using less labor, the definition for the factory worker is more likely to be doing more work for lower pay, not true, but when most people believe something the perception becomes reality. For the factory workers who have been seeing their "real" numbers decline dramatically, productivity stands for the loss of jobs. As usual, the common belief is upside down. By doing more with less labor, we are financially able to afford many more workers doing many more things. The average person, today, receives the equivalent work of 58 slaves just through the use of massive amounts of electricity. Most of this electricity is use to produce things that were considered luxuries 50 years ago. The dramatic growth in jobs today is in areas that did not exist 20 years ago.


Some of the new "stuff" is scary, incredible and life changing. For example, the world is about to be transformed by the science of Eugenics, "the self direction of human evolution". You may not like the sound of eugenics; you may be morally opposed; you may especially dislike the "new direction of abortion"; but, you nor I nor any government is in control of science.

One likely direction is that couples who desire children will more and more often in vitro fertilize multiple eggs, genetically screen and select the "best" fertilized egg and implant the selected egg in the womb. DNA chips can already test a fertilized egg for 270 known genetic "problems". In Denmark, where testing is done for Downs Syndrome, there has been a dramatic drop in Downs Syndrome births. Societies around the world will grapple with the moral questions of: What happens to the other fertilized eggs? and, Is it moral to not screen for Downs Syndrome when we can?

In a few years, parents will be able to select for strength, intelligence, wit, size, hair color and thousands of other traits. Wow, talk about productivity! How often does a gifted genius such as Handel come along? How often would such a genius be born if one could select from a dozen "optional children"? What if one could combine the best of several embryos?

Few would argue that the work done to genetically modify rice has been an evil committed. As a result of improvements 1,000 percent improvements in the production of rice, billions of people are fed. Moral questions will never be fully sorted out by man but a new age is here. Genetically modified bacteria will digest coal and gooey oil into clean burning "natural gas" and genetically selected and ultimately modified human embryos will be vastly superior, in certain ways, than would be their unselected brethren.


The here and now is the future. We do not know what will happen tomorrow but the indications are that the resource rich countries have had a good long run toward prosperity but now it is the consumer countries' turn. Nations such as Japan and the USA where we import and use the cheapest resources we can find are having a field day. Suddenly, to sell their goods to the USA, the Saudi Arabians and the Chinese must cut their prices to the bone. Americans are enjoying the turn in the dollar. US Businesses are buying raw materials at the lowest prices in 5 years and they are taking as much time as they can before lowering prices to consumers. When the PPI declines faster than the CPI, businesses get very healthy indeed. A few thousand dollars invested in US equities (stocks or real estate) will likely be many thousands of dollars in just a few years.

One does not need to take the high risk of investing in genetics projects that are not currently producing products for sale. One of the major benefits of eugenics will be dramatically more healthy people. The avoidance of cancer and other diseases will make for long lives during which assets will see many more years of compounding. We are going to see a period of great wealth and we are just in the early stages. In the meantime, the public will spend money on everything from bicycles to fruit cakes. It is an easy time to make big money, you simply must not cower in fear in "balanced mutual funds", bonds (buy JNK or HYG), CDs and money market accounts. Now is not the time to bury your talents. It is an age where the adventurous will see great things.

Friday, December 05, 2008


Ninety-three percent of Americans who want to work have steady jobs and most of the rest are drawing unemployment pay. The typical family drives two cars 1,000 miles per month each. At 20 miles per gallon, they buy 100 gallons of gasoline per month and they will soon be saving $2.60 per gallon, or $260 per month, over the peak prices of last summer. The typical family is saving at least as much in lower heating and cooling costs and double as much on the price of other goods. The average family is saving $1,040 per month, not counting any reductions in interest costs!


The home affordability index just hit an all time high! The average family has 141% of the income needed to buy the average home. The all time high was reached before the latest sharp decline in mortgage rates. Long term interest rates are very low.


A few weeks ago, treasury market interest spreads were prediction deflation for the next year or more. Those spreads have rapidly faded. Central bankers are stimulating like never seen before. Certain markets are turning, while the relief of lower fuel prices continues. Last summer, very few believed me when I said that oil would ultimately trade back down to at least $35 per barrel. My calculation was based on the cost of production from some of the most expensive oil fields. Yesterday, a major firm lowered its bottom estimate to $25. That is possible, if lower demand means that the $35 oil fields are closed.

Add up all the numbers and you will find that consumers are getting healthy very quickly. One thing that you can count on in America is that financially healthy consumers will spend their money. In the short run, a lot of people have cut back. They are paying off old debts and waiting to buy an electric car. They will soon discover that high mileage cars are available and cheap. The long term growth trend of owning a home and a second home is set to resume. The extra low price of real estate is huge. Trillions of dollars of real estate is available at the lowest prices ever. Many a family can afford five homes is they wish.

The average family will actually save more than $1,400 in lower costs in 2009. The bulk of this money will be spent on other things.

Unemployment is a lagging indicator. This morning, much was made about job losses. The fact is that in recession after recession, the highest job losses show up just when the worst of the recession is over.

My family has a 20% share of a beach condo available. We do not want to sell at current prices but, like so many people, we need to lighten our load. Let me know if you want to enjoy visiting the beach for the next fifteen years while watching the value of your investment soar!

Thursday, December 04, 2008


I just bought a few shares of the I Shares Junk Bond Fund, symbol HYG. The current yield is 12.9%.


Consumers and businesses are getting the break of a life time. Central governments around the world are pumping money into the world economy like never before. Earlier today, England and Sweden cut their interest rates, yesterday, it was Australia and China. The cut by England, of one full percent, took rates to levels not seen since 1951! There is talk that the FOMC will set a 4.5% target on 30 year home mortgages and start buying those next!

The 1% cut by England was a huge price decrease. When my wife finds a big discount advertised in the newspaper, she will often ask me a question like, "what is 25% off on top of 50% off"? The uneducated are sometimes fooled into thinking the discount is 75%. Of course, the second 25% discount is only a 12.5% discount on the original price and the monster discounts are on a few "come on" items. This is not what just happened in England. The price of money in England was cut and cut and cut from 5.75% down to 5% and then the bank got serious. On October 8 the bank cut from 5% to 4.5%, on November 6 the bank cut from 4.5% to 3%! and on December 4 the bank cut from 3% to 2%!. The total cut from 5.75% to 2% is a huge money sale. The total discount is 65% and it is on "every item in the store". In other words, the cost of any good or service in the entire country has been reduced by the lower cost of money.


Folks, it does not get any better than this! In the summer of 2007, I misread the situation and believed that we were only having a mid cycle correction. I cried wolf and lost my money and my credibility. Had Hank Paulson and Ben Bernanke used all the tools they had available in 2007 they could have flooded the banking system with money back then and avoided the worst of the real estate crisis. I made the mistake of believing that reelecting a republican to the White House was more important to the "old money crowd" than making a killing in stocks, bonds and real estate.

As a result, Hank proposed a new method of relief to banks. He chose a method that was a very public, drawn out and divisive. A program that had to be passed by congress. Over the past few weeks, central bankers have flooded banks with money by using "standard methodology". Sure, the FOMC has purchased an unusual array of paper but the methods being used were in place before the vote by congress. Only half of the money voted by congress has been used and it went to the selected few. The current public display over the potential auto bailout is accomplishing the same purpose as the banking bailouts. The investing public is confused, angry and not willing to participate. The public could not buy enough real estate or stocks from 2004 to 2007 when prices were high, but they have been scared into selling or holding off on purchases for the past 6 months while prices have been extremely low.

There is a huge sale on equity prices, equity in real estate is especially cheap and equity in stock prices has not been this cheap since at least 1982. In addition there is a huge sale on money. The present value of assets is discounted by the rates on long bonds and long bonds have not offered such low yields since the 1940's.

Today, you have the opportunity of a life time.

A friend wrote a week or two ago to ask if he should lock into a 30 year mortgage. I pointed out that mortgage rates do not normally hit bottom until 2 years after the end of real estate recessions. I noted that spreads between the 30 year mortgage rate and the 30 year bond are still extremely high but that spreads are gradually narrowing. Since I wrote him, the 30 year bond rate has fallen and fallen again and spreads are still too wide. My youngest daughter has a variable rate first mortgage that is down to 4%. Chances are good that I will recommend that she "lock-in" sometime in the months ahead, but not yet. In the mean time, she will enjoy the lower mortgage payment. She will also enjoy significant appreciation in the value of her house.

The payment on a $240,000 loan at 6% is $1,438. The payment on a $240,000 loan at 4% is $1,145. The difference of $293 per month is a 20% cut in the cost of the house. When pent up demand from the public surfaces, the value of a $300,000 house will jump by $60,000 quickly. Her home is within walking distance to a major medical center. The demand for homes in her area will grow for years to come.

Beach condos and houses, that had very little rental value this past summer when gasoline went for over $4 will see a massive increase in rental value by the summer of 2009 and again in 2010. The sale on money and gas is a powerful combination. Beach homes will bounce in value by surprising amounts.

Everything in the store is on sale! Some are much better bargains than others. The price of copper has fallen from around $4.25 per pound to $1.55 per pound. However, there is still little demand for new homes and little demand for new cars and little demand for other capital goods that contain copper. The price of copper was below 50 cents when this cycle got started and it will return to about that price before this cycle is over. The price of copper and the price of a 30 year home mortgage will not reach bottom until about 2 years after the recession is over.

Yesterday, Al expressed concern that the public will gradually return to their excessive use of energy. He is right but it will take a very long time. When CAFE standards were introduced way back when, the pressure to build more fuel efficient cars grew each year that the standards tightened. This time the standards jump in 2010 and then go up each year for many more years. The next bottom in gasoline prices will be after 2020. The advent of nuclear power assembly lines (I know of two so far) will also decrease the demand for petroleum for the next 20 years or more. Furthermore, this time, the only way to meet the CAFE standards is to veer away from reliance on the internal combustion engine. The key proven technology to date is the hybrid vehicle. While there is much talk about the all electric vehicle, battery performance and costs have a long way to go before all electrics are competitive. On the other hand, the latest hybrids have come close to being economically worth buying and relative costs continue to fall. Early adopters almost always pay too much but when new technology reaches economies of scale, the reason to buy switches from being the proud owner of the latest and greatest to practical, economic reasons. Al is right that the hybrid technology will give Americans the ability to stay in big comfortable cars but I still see a continuation of the 40 year suburb to city cycle. In about 30 years, there will be a surprising number of people who have opted to live in town or close to town. Many of them will commute without cranking a car engine.

Many an American is making the smart decision not to buy a new car right now. Why buy a new car when highly profitable assets are on sale for deep discounts. The person who puts $20,000 into a new car will own a 5 year old significantly outdated car in 5 years that is worth less than half of what he paid for it. On the other hand, the person who takes over the payments on a beach property, to help the seller keep a good credit rating, might put in $20,000 more than the rent over the next 5 years but then have ownership of a property that is producing positive cash flow; his equity might be over $200,000. In relative terms, the fellow with the 5 year old car has paid more than $200,000 for it.

Assets are on sale and money is on sale, at levels not seen in 50 or more years. Buy now!