BULL BOOM BUBBLE BUST AHEAD!

Harry S. Dent, Jr. has written a new book, The Next Great Bubble Boom, How to Profit from the Greatest Boom in History: 2005-2009. This is a quick and worthwhile read. It is an update to: The Great Boom Ahead, Your Guide to Personal and Business Profit in the New Era of Prosperity written in 1992. In 1992, Harry correctly called for a stock market BOOM through the end of the decade. Now, he predicts a BOOM from 2005-2009 that will be bigger than the internet bubble of the 1990's!

As many of you know, my investment strategy is built around long-term market cycles. For example, I purchased long-term treasury bonds near the bottom in the early 1980's when brokerage firms called for higher inflation and lower bond values. I purchased real estate near the bottom of the real estate recession in 1991 only because I had confidence in my read of long-term cycles. Harry's book speaks to me because he presents interesting facets of the long-term cycles.

My way is the simple way. I do not want to fix what works but I constantly adjust for new information. Harry, using information age technology, has input much data to reach more precise levels of output than my simple approach can achieve. The good news is that he presents the outputs in simple formats that will help all who take the time to read the results. It is neat to learn more about the reasons my cycle investment strategies work. New knowledge gained should help me tweak my methods for even better results.

Predictions of the future are not precise, but we make good use of forecasts every day. Harry uses the science of Demographics to improve the accuracy of his forecasts. If one knows that over the next 5 years a record number of US citizens will reach 18 years of age, then it is not a stretch to predict that college enrollment is about to increase. If one knows the bell curve peak of marriage occurs at the age of 26 and that large numbers of citizens are currently 26 years of age, then it is not a stretch to predict a lot of first time homes will be purchased in the next 5 years. If one knows that record numbers of "Baby Boomers" are sitting on an empty nest, it is not a stretch to predict that more meals will be eaten out, that more second homes will be purchased or that the Social Security Trust Fund surpluses will start declining in about 8 years. Those who have not studied these cycles may wonder at the length of a real estate boom; those who have may wonder how high prices will be at the peak. Harry presents a number of ideas that can help us all make money.

Harry combines Demographics with the study of product life cycles. The product life cycle is not a new concept. In the late 1960's, my marketing professor, a former Hanes Hosiery (Sara Lee) executive, went over and over the necessity of and methods required to re-invigorate the life of a product. He very much believed in taking an old product like Tide detergent, adding a fresh lemon scent and spending huge sums to let every housewife in America now about the "New Fresh Lemon Scent". Same old detergent but it smelled better. Done properly, the product goes through another "S-Curve" of rapid growth.

The professor was particularly proud of the incredible new cycle created when Hanes packaged their hosiery in plastic eggs. A whole new cycle of growth happened because of this new "innovation". The hosiery were basically the same before and after the new packaging but the idea worked and sales zoomed. Re-inventing an old product does not always work out so well. When Coke's new Coke failed, they had to bring back the old Coke as Classic Coca-Cola. Harry notes an 80 year cycle of truly life altering inventions.

The comparison Harry makes of the invention and adoption of the automobile and the invention and adoption of the digital information age is priceless. Those who understand where we are in the product cycle of the internet can do well indeed. Before getting to the details, it is fascinating to consider that innovations are successful only when there are large numbers of folks reaching their peak spending years (the peak of the curve is around 48 years of age). Again, not a new thought but a powerful concept--when folks have money to spend, someone will invent a new way to spend it!

The comparison of the auto "S-Curve" and the information "S-Curve" is striking. In 1900, cars were owned only by one tenth of one percent of the population; a toy for the wealthy. By the time the Model-T was designed in 1907, ownership was up to 1%. The Model-T was affordable by many and by the time of the next innovation, the assembly line, ownership was up to 10%. It had taken more than 14 years of production to reach a 10% adoption rate. Over the next 14 years, ownership went from 10% of all families up to 90% of all families! From 1928 forward, the auto business has been "mature". There have been many small innovations and much consolidation since but the adoption of the new technology and the large fortunes were made from 1914 to 1929.

Near the midpoint of the growth phase, in 1921, another innovation occurred; installment financing. If the auto was so great, why was another innovation needed? Because there typically is a "shake-out" time in the life of any new product. Psychologically, about half of any population is relatively ready to jump on board when a life changing improvement comes along. The other half always needs to be convinced. "Why should I pay $900 for a car when a good horse and buggy cost only $190?" "Glass windows in moving vehicles are simply too dangerous to ever gain wide acceptance."

Henry Ford got a jump start by offering a good product at the best price. When he was able to offer even lower prices after he invented the assembly line, sales exploded. Ford won big and 24% of all car companies went out of business between 1917 and 1922. General Motors had struggled to reach a 12% market share. Halfway through the growth phase, it was time to shift into a new gear. Ford kept making more of the same. General Motors won the second half of the growth phase by offering to take back the "old Chevy" in trade for a new Buick or Oldsmobile. The real kicker was GM offered to finance the balance. Who wanted a black Ford when one could afford a beautiful Buick.

Overlay the chart of GM from Feb 1912 to Feb 1922 with the chart of INTC from July 1992 to July of 2002 and you get a very close match. But the point to note is that the big money was yet to be made in 1922. We have all heard about the roaring 20's. The pattern continues to follow the trend. The stock market bubble of 1920 hit bottom by the start of 1922 but the fellow who bought GM in 1919 made 2,200% by 1929.

Harry Dent demonstrates where we are in the new "GM's" of today. Internet adoption hit 10% in 1996, 50% in 2001 and is projected to reach 90% in 2006. We are still in an internet boom! The mobile phone reached 10% in 1994, 50% in 2001 and is forecast to hit 90% by 2008, we are still in the mobile phone boom! Broadband adoption reached 10% in 2001 will hit 50% this year and is projected to reach 90% by 2009. VoIP phone service has reached only 2% of the population but is set to explode onto the scene.

The wide adoption of the auto was disruptive for many an industry as is the internet. Quite a few blacksmiths were forced to learn to become mechanics or gas station attendants. Modern motorized freight companies were started, sending draft horses to slaughter. Businesses that adjusted to the new technology and embraced it boomed and those that didn't burst.

The stock market that boomed from 1913 to 1919 had to adjust to the new realities. The bust from late 1919 to late 1921 was painful to those who held onto their wagon works stocks in the hopes that the auto was only a rich man's toy. Also some of the auto companies and auto related companies, had grown too fast, all the cash was gone and they had to merge or close. Does the auto story parallel the boom and bust of the internet bubble? Many who had made a fortune on GM 1919 lost 75% in the next couple of years, similar to the NASDAQ drop of 77% after the internet bubble. The big money made in GM was from 1922 to 1929.

The information age boom has a long way to go. Perhaps the biggest innovation yet is the advent of super fast search capacities in combination with contextual advertisement. Yes, I am writing about Google and Yahoo again. Overture invented the concept of paid search. Google made it fly. Yahoo bought Overture (as an Overture shareholder I thought Yahoo bought it cheap) and Yahoo has built a highly profitable internet model. One part of Yahoo I use frequently is the finance section.

I love the Yahoo model but I cannot get over the beauty of the Google system. Google invites one and all to become financial partners with Google. Google offers all comers sweet deals. The deals are simple; it is hard to turn down a Google deal.

To the advertiser, Google says we will send many high quality leads for your product or service in exchange for a very small fee per lead. The fee will be determined by the market but you can pay little or much. If you pay little, you will get a few leads. If you pay much, you will get many leads. In any event, your cost per quality lead will be lower than ever before.

To the content provider, Google says we will to do all the work and give you 80% of the revenue if you will provide advertising space. In many cases, Google provides the space for the content and the adds free! The advertisement is promised to be relevant to the content of the space. Is it any wonder that growing millions are offering Google advertising space.

To the consumer, Google says we will give you free services. Use all you want and by the way, there are relevant non-obtrusive advertisements posted off to the side. The list of services offered and consumed is growing quickly. I don't have the numbers but it is my impression that the number of businesses yet to adopt contextual advertisement is very large. Google is way out in front in this market and it is a very large market. The worldwide savings and productivity enhancement will be very large and it will take 10 years or more to reach the 90% stage.

Many competitors are going after a piece of this very large pie. Many firms have done well by specializing on any one of many areas for "matching" a "buyer" and a "seller". Many of these "match makers" charge substantial fees. Many would do well to be the first in their specialized area to re-construct their systems in order to partner with Google. Many of us have learned that if you want to find something, search on Google. Google is generating huge volumes of leads at low relative costs to millions of businesses. I doubt if the 10% level has been reached in regard to contextual ad placement.

This Bull Market will be big. This economic Boom is still young. I have done sampling and find that many folks want nothing to do with the stock market; once burned twice shy. My sampling includes a number of wealthy small business owners, professionals and employees of major corporations. The data show that the level of liquid assets to disposable income is at record levels in America. Many will capitulate when it seems that all their friends are getting rich. When the capitulation comes, the stock market Bubble will be huge. The Bust to follow will be tough on all. The key is to buy early and to sell early. Make the big middle profit and let the Bubble go as high as it will.

Innovations are coming so hard and fast this boom may be bigger and longer than the industrial revolution. The industrial revolution included numerous boom and bust cycles. More than 100 years passed between the invention of the water power frame and the invention of the steam engine. The cottage industry (manufacturing in the home) was virtually wiped out in the early 1700's in England. Most inhabitants of 21st century America have little understanding of how well off we are.

The information age, gives our fiscal and monetary leaders tools they have never had before. The productivity enhancements embedded in the new technologies are real. Our society is producing record levels of goods and services while lowering the costs of production. Productivity and wealth are synonymous; you can't have one without the other. The past ten years have been years of record productivity growth. Productivity growth typically slows when the expansion phase of the economic cycle begins. The past two economic troughs were roughly 9 years apart. 1981-82 to 1991 to 2000-01. If the pattern were to hold, the next recession would begin in 2010. Harry suggest that the stock market will peak around 2009 to 2010.

We can hope the next peak "will be different". This has been the normal pattern at all prior peaks. At least some of the population are always able to explain why the next recession does not need to come. There were several articles, including one in the Wall Street Journal, in 190 that suggested Greenspan was going to pull-off a "soft landing". Harry presents a cute chart showing the consensus opinion as the top is reached, rolls over and then his bottom. The thought goes from "We won't have recessions anymore" to "It's going to be a soft landing" to "Things are so bad they well never improve".

When I find myself thinking, "maybe this time will be different", I try to remember my Boy Scout training. Even better, I try to re-read the story of the dream of Joseph and the 7 fat cows. Because Joseph understood that 7 years of famine were coming, he prepared. He produced extra grain and stored it for the tough times ahead. He saved himself, his family and thousands of others by taking advantage of the "good times".

The best way to avoid getting hurt badly in the Bust is to do well during the Bull and the Boom. If you do well during the Bull and the Boom, you may even ride the Bubble with some part of your assets; just be sure and put a substantial part in safe keeping.

The Bull Market and the economic Boom are already here. Consumers will buy radio-TV-internet equipped cell phones in the next several years and $29 per month local only home phones will go the way of the horse and buggy. Smart newspaper publishers are buying into internet publishing. Right now maybe less than one percent of the public has dropped their newspaper subscription because of information access over the internet. RSS feeds and other technologies will soon quicken the pace. RSS just one of many more new technologies in the early adoption phase.

The Bull, the Boom, the Bubble and the Bust are just ahead; play these moves well and make a fortune!

GOOGLE FEATURES--WOW AGAIN!

For 19 years, my wife and I have maintained as many as 44 resource calendars. We never found inexpensive good ones. We would have saved at least ten thousand man hours had good ones been available all 19 years.

Rumors are swirling again. Larry Paige, co-founder, says he is surprised at many of the things the company is supposedly ready to do. The company does not like to discuss products until they are beta ready.

The rumor I like is about calendars. There is evidence that Google is crawling the web to find calendar postings of events. The idea clearly is to make a calendar search function similar to the new movie search function. The movie function allows one to search by actor, director, genre, key word or whatever. The best part is to get show times at local theaters and to even buy tickets on-line.

Indexing calendars should be extremely helpful to almost everyone while dramatically cutting the costs of publication. No more paying a newspaper to list anything from a church service to a rock concert, anyone with a web site could post their events for free and get wider response at the same time. In a blink of an eye, Google could aggregate the listings in the order requested by any searcher. The listings could easily be sub-divided into many categories. An event could be anything from the sale of an antique shot-gun at auction to what is on TV at 8 PM. I can not tell you how many times I have been frustrated while searching a newspaper trying to find a particular event.

Back to the resource calendar, those looking for an available date for a condo at Myrtle Beach could find my empty properties in the blink of an eye. We are talking about a business where the typical agency fees are 35 to 55% of the gross revenues! Condo owners would be more than happy to pay GOOG a few cents each time a potential customer found an empty spot. Vacation planners who often spend hours identifying available properties would find them in an instant.

Many businesses have spent millions on scheduling programs. My business spent tens of man hours setting up outlook group calendars. Churches often have many groups to schedule. A church secretary could post a Methodist Men event on several hundred personal calendars in the blink of an eye.

The other day, I attempted to explain the power of the new Google autolink. I am still trying to fathom the power myself. Let me share a couple of examples with you.

Barnes and Noble discovered the power in its business quickly. You see, one of the many things the autolink does is convert ISBN numbers to web links. AMZN (Amazon) and GOOG have been in a close relationship for a while and in this case the web link was to AMZN. Visitors to Barnes and Nobles web site found that they could click on any ISBN number on any Barnes and Noble web page to go directly to AMZN to see the comparable price of the same book. When Barnes and Noble discovered this fact they quickly set up all the ISBN numbers as links back to their own site. The Google program is set up not to over-ride existing links. (I read this info on a Google Blog late last night and failed to write down the source. I'll try to find it tomorrow).

There are several services in regard to a cars VIN (Vehicle Identification Number). This is another valuable autolink for Google. There must be many web owners who would be happy to share advertising revenue should someone want to check out a particular number. Again, the number of uses is more than my feeble mind can imagine. Obvious other uses are address autolinks to maps, package tracking numbers, and bibliographies.

One key point is that in many cases, the owner of the web site would say halleluia and welcome the Google links. For example, a company ships a package by FedEx and sends an email to the recipient which includes the tracking number. If the company sent a Gmail, the recipient could click on the tracking number to find the status of the package; no extra work required by the sender. It would have been the same if the recipient had looked up the package on his web account with the sender. The sender would routinely post the tracking number and the recipient would have immediate access to the tracking service. Typing in a few numbers would only be a small time saver but this would happen billions of times every day!

Google is not the only one in this marathon. Google is half way home at the 13th mile and Yahoo, though three miles back is holding the distance. MSN is ten miles back but running slightly faster. There are many more contenders; broad based and narrow based. ASKJ is one of the broad based that relies on Google's adds for much of its revenues. ASKJ may decide it has to divorce itself from GOOG. Narrow based services might be shopping services or even match makers.

The toolbar or browser may be the key. As each service is added to the Google or Yahoo toolbars, the "stickiness" to the customer is enhanced. Right now I use Yahoo, CBS.Marketwatch.com and Morningstar.com for stock market services. When more is available on GOOG I may use it. At some point, most of us will gravitate to the one service that does the most for us. If the ASKJ dictionary is a just little better than the Yahoo dictionary but we have chosen to load the Yahoo toolbar making the Yahoo dictionary handy, we will tend to use the Yahoo dictionary.

Don't count Yahoo, MSFT or ASKJ out because many things could happen. Google insiders are naturally selling some of their shares, the owners are young not experienced in running a large company and MSFT has taken on powerful interest and won before. On the other hand, Google is the innovator with several big head starts in a business that still has huge upside.

I have read where analyst suggest the Google advertising revenues can't continue to grow so fast. I can see a lot of folks dropping their newspaper subscriptions and throwing away the yellow pages as Google gathers steam. I am even beginning to rethink my investment in TV Guide! I will check out the numbers later but the newspaper ads for events alone in every little and big paper in the world has to be a big number.

WOW AGAIN!

VALUE TIME

I read a piece by Standard and Poors today that put in sophisticated terms part of what I have been saying for a few months; now is the time to invest in large cap value. Two or three months ago, I emailed several readers directly in regard to IRA and 401-K accounts. I suggested moving out of small cap growth funds and into the S&P 500 index. The move has paid off. The S&P 500 index has out-performed other markets and closed at its 2005 high Friday.

The fancy language used by Standard and Poors boils down to a call to avoid interest rate sensitive securities. Again, I have suggested that one should avoid bonds and I have even publicly announced my trade of DUK for NSC. The S&P article states that growth stocks are more sensitive to interest rate changes than are value stocks and the duration of the market is now 19 years; up from 15 in 2003 but down from 23 in 1999.

Duration is a measure of the time it takes to get your money back from a bond investment. A bond with a high coupon interest payment would be of shorter duration than a lower coupon bond on the same maturity. S&P has applied the concept to the stock market. Undoubtedly they will charge a stiff fee for lists of stocks by duration.

I don't see much value for such a service. It is easy to understand that NSC (Norfolk Southern Railroad) is economically sensitive relative to DUK (Duke Energy) which is more interest rate sensitive. Trying to determine the exact number implies a higher degree of accuracy than I think is reasonable to expect.

So far, I have been wrong about NSC and DUK by a tiny margin. I would still have made the trade knowing a duration number on these stocks. I would still be at a tiny loss and would be at the tax advantage of holding the gain un-realized on DUK. However, I still believe the US economy is moving into an expansion that will cause long-term bond rates to rise. I do not believe the rise will happen until after the trade deficit starts to turn or until after the dollar strengthens. Never-the-less, I want to be out of DUK and into NSC before these other events occur.

Note, I am not advocating trading out of growth stocks. It is the Standard and Poors article that talks about growth stocks having long duration. This is obviously true because growth stocks generally pay smaller dividends than value stocks pay. But, I don't buy growth stocks for the dividends and projecting capital gains far in the future is problematic at best. The point is that it would be a mistake to sell out of a superior growth stock only because its duration is lower than any number of value selections.

MYRTLE BEACH REAL ESTATE

DISCLOSER: My wife and I own resort rental properties in Myrtle Beach. We are in the process of retiring; our rental properties are for sale. We plan to keep 10 to 20% ownership in one or more ocean front condos for our family's enjoyment. Having purchased our first Myrtle Beach property in 1973, we have a long history of ownership. We have forgotten more about owning resort rental property than most folks have learned. It is a difficult business but has its just rewards. Our opinions are biased by our personal ownership experiences and we are happy to share information. Our rental web site is http://www.myrtlebeach4fun.com.

HOT! HOT! HOT!


The average home price in Myrtle Beach went up 14.7% in 2004; a very strong number. Not as strong as Las Vegas, up a whopping 47.3%, but still a very strong number. Across the country, in 62 of 129 areas, the National Association of Realtors reports values were up 10% or better.

Another sign of strength for Myrtle Beach is air traffic growth. The 2004 air traffic growth was 15%, almost the same as home appreciation. One notable success is the Hooters Airline. It seemed to be a joke when the airline was started a couple of years ago, but it is growing quickly and bringing golfers and vacationers from all over. Recently added flights are to and from Pittsburgh, PA and Rockford, IL.

USAir is still carries more traffic than anyone else to Myrtle. An important note is that USAir offers international flights through Charlotte. USAir is under chapter 11 bankruptcy protection for the second time in 3 years. The firm has negotiated over 1 Billion Dollars annual labor concessions! Last week USAir received a loan from a Wisconsin Airline for 125 Million Dollars. Air Tran, a regional carrier out of Chicago, is trying to push into Charlotte. Air Tran clearly wants to take over USAir routes if the firm were to liquidate.

Yesterday, in a show of strength, several carriers announced $20 per flight price increases. I happen to believe the airline business is already making the turn. Year over year revenue seat miles are up at several carriers. Large non-cash depreciation expenditures are masking increasing cash flow.

Another very important event for Myrtle is the construction of interstate highways. Evne without good roads, Myrtle has been the second fastest growing city in the country for thirty years. Now major segments of several interstate roads have been completed. There is a rush to get the others done. Our properties are within a couple of miles of the intersection of interstate 73 and interstate 74. These interstates will connect Michigan with Myrtle Beach and Myrtle Beach to I-95 and I-20. I am old enough to remember rural areas where interstates were built. I live in Clemmons NC and regularly visit Cracker Barrel, K-Mart, grocery stores, several banks, office buildings and other locations that sit where there was nothing but a couple of dairy farms before the interstate came.

A lot of TV talking heads keep ranting about the strength of the real estate market. Of course, they recognize that low interest rates have made homes more affordable and they sometimes mention new laws and lending programs designed to help single parents. Sometimes they even acknowledge that millions of immigrants have purchased many of the re-sale homes. The two things they most often miss are the support real estate is receiving from the baby boom generation and from the falling dollar.

Baby boomers are between the ages of 44 and 60. These are peak earnings years and relatively slow spending years. College tuition may have been a bear but it is over or almost over. Baby boomers are typically too young to down-size. In this mobile society, should their jobs take them to a new town, they are likely to pay-up to buy the big house in the nicer neighborhood. Buying a second home is also a consideration. The empty nest syndrome is a powerful motivator to go do something. Harry S. Dent, Jr. has written several books that show the importance of the demographics. I will write again about his latest book, "The Next Great Bubble Boom--How to Profit from the Greatest Boom in History 2005-2009".

Having written about the falling dollar helping real estate before, I will not go into great detail. The bottom line is that the lower dollar increases travel and real estate purchases in our country and prices are set buy the highest bidder. Adding just 1 or 2% to the number of renters who want to visit America and another 1 or 2% of Americans who travel in the states after deciding they do not want $15 Belgian chocolates, tightens supply versus demand. Higher demand pushes up rental and purchase prices.

No one knows how much lower the dollar must go to correct our massive trade deficits. I do not believe the decline in the dollar is the crises it is made out to be. I actually think it is the perfect solution to allowing those who have much to buy from those who have little. Indeed, records show that England ran a trade deficit during the entire industrial revolution during which time the English became more and more wealthy as a nation. The beauty is that their trading partners also increased their standard of living. It is a simple fact that free trade is of benefit to both sides of the trade--otherwise neither party would trade! Yes, the industrial revolution caused the cottage industry to fail. However, higher paying jobs were created and the country prospered for the entire 19th century.

In any event, it is true that if our dollar declines ten percent versus a currency, then the holder of that currency can buy US real estate at the "old" price and give the real estate owner 10% more dollars! The data are clear; the US dollar has declined three consecutive years and the net worth of Americans which includes their real estate holdings is now at a record all time high!

ADVERTISEMENT: Owning a 10 or 20% interest in a second home is the best way to own a resort property. Neither Marilyn nor I recommend owning time shares but we enjoy partial ownership. We are seeking partners to own 20% shares in a beautiful ocean front corner condo. It is easy to maintain a beautiful home if it is used only by owners, their friends and family. Owning with others cuts the over-head costs while others pay 80% of the ownership costs. Give me a call at 336-778-0543 if you would like to learn more. You can email me at jackmiller@triad.rr.com.

DOLLAR DOWN--REAL ESTATE UP

The joke continues. Friedman is wrong again. The falling dollar increases the value of your real estate!

Thomas L. Friedman writes a regular column for the NY Times. It is syndicated to my home town paper the Winston-Salem Journal. Friedman is one of those who cannot get over the re-election of Bush. As a result, he continues to hammer Bush on every perceived weakness. The funny part is that he apparently is so biased that he rants about strengths as if they were weaknesses.

The trick or mistake (decide for yourself if he misleads on purpose) Friedman uses is to connect two variables that should not be connected. This is the same mistake many folks make in regard to airline stocks. It is the same short-sighted view point. In review, the article I posted yesterday, reported that oil prices and airline stock prices trade together more often than not. The short-sighted view is that if oil prices go up, airlines will lose money.

Reality is that when the economy is strong, airlines fly more passengers; they charge more per seat enjoy dramatically higher gross revenues and buy considerably more fuel. The same is true for truckers and even individuals. We all consume more fuel at higher prices when we are making money. When the economy has been slow for a while, it takes a little time for the suppliers to catch up with the new demand. Therefore the oil price leads the airline index but again they mostly go up and down together.

Yesterday, I posed the following child’s riddle to illustrate the way folks are quick to connect variables incorrectly.

If a chicken and a half lays an egg and a half in a day and a half, how many eggs does one chicken lay in one day?

Friedman leaps forward to connect the falling dollar to falling real estate prices. He says: "If you see a continuing slide in the dollar...you could see a substantial, and painful, rise in interest rates." and "What Americans are counting on is having their homes retain and increase in value."

The implication is that the declining dollar is going to somehow devalue ones home. Wrong! When the dollar declines in value, your home appreciates in value.

Take the example of a wealthy individual who is thinking about buying a second home on the Mediterranean Sea or the Myrtle Beach Sea (don't laugh Europeans and Asians are buying ocean front condos at Myrtle Beach, S.C.). The price of a certain home in each location is the same. The buyer is already shopping around when the dollar declines 10% relative to the Euro. This fellow, American, Englishman or other nationality, will suddenly discover that he can save 10% on the Myrtle Beach property. He had better buy quickly because all "hot" markets adjust quickly. If the owner is smart, he will decide to keep some of the savings. For example, if I raise the price of my Myrtle Beach home by 5%, the buyer will still buy because he will still save 5%!

In the interest of full disclosure, my wife and I are in the process of retiring. We are in the process of selling 25 ocean front rental properties at Myrtle Beach.

Back to the bad connection, for 35 years, the dollar has fallen 7% per year on average, against the currencies of the developed world. Real estate prices have not fallen; they have risen for 35 years. (The chart I found quickly only goes back 35 years, see http://mwhodges.home.att.net/.)

The falling dollar is a simple phenomenon; a decline in a currency means a rich guy can consistently spend more than a poor guy. Someone of Friedman's ilk might respond, "Oh my, lions and tigers and bears, oh my, what if we spend all our wealth!" Bill Gates has the answer, how long will it take Bill Gates to spend all his money? Bill Gates has a personal trade deficit. He personally buys more than he sells. Are we all going to be better off if Bill becomes a hermit and spends no money? Are our interest rates going to sky rocket because he spends a lot? Bill is smart enough that if you try to charge him to much, he will cut back on how much he spends.

I saved the best for last!

Friedman says, "...and, we are importing too much capital..."
Wow! LOL!

He gives his reasons but there are no good reasons to whine because foreigners want to buy US Government Securities. Later on in the article he whines that Korea might stop buying dollars. Can you see another giant leap! His article implies that trade dollars will not be re-invested. Koreans are not buying dollars! Americans are using dollars to buy Samsung TV's. The Koreans simply prefer to "put their dollars in the bank to draw interest". As far as reserves held by Korea, I say, so what? If Korea buys Euros from France with dollars and France buys US Government Securities, I don't care. Like Greenspan has testified, these markets are arbitraged.

Reality is that Friedman is working over-time to prove that Bush is the wrong man at the wrong time. In trying to make the case, he connects economic variables in false ways and then expresses alarm at false conclusions.

The title to his article is SHRINKING DOLLAR: Global markets hitting us in pocketbook.

Totally false; the dollar has declined three consecutive years and the combined wealth of all Americans is currently sitting at an all-time record high. We are wealthier than we have ever been. The shrinking dollar is increasing the relative value of our assets. Friedman is anxious because a box of Belgian chocolates cost more now than four years ago. If the Belgian who sells chocolate wants to convert half a million dollars worth of Euros and use them to buy one of my three-bedroom ocean front condos, I am going to tell him, "Sorry, I need $559,900.00". Most Americans hold more value in real estate than we spend on Belgian chocolates.

AIR OVER OIL

Mike Taylor (see his info at taylortree) and I have had a little fun discussing airline stocks.

Below are two charts. The first shows AMR (American Airlines) prices twice. The green line is the price relative to the price of West Texas Crude Oil. The second chart shows WTIC and the WTIC relative to the AMR.




AIR over OIL (click on image to enlarge)

Note the price action of the two from 1994 to mid 1998. After oil spiked upward in 1994, AMR traded down until November. However, the AMR price went from $10 to $35 from November of 1994 to July of 1998. The WTIC run lasted from February 1994 until November of 1996. As you can see, there was more over-lap than divergence.

Now take a look at the bottoms in WTIC and AMR in early 2003. Since that time, both are up dramatically, with AMR up the greater percentage! I have not computed the r square but the two sets of data have a high level of correlation.

I am reminded of the question Papa John asked his kids and grandkids. If a chicken and a half lays an egg and a half in a day and a half, how many eggs does one chicken lay in one day? I invite you to comment with your answer.

Hint: to answer correctly you have to relate the correct variables.

In the case of Oil and Air, there is a common denominator. In a strong economy the air line business gradually turns strong and in a strong airline economy the cost of fuel goes up. In a weak economy the airline business is weak and the oil market is weak. As you can see from the charts, fuel leads the air lines.

Traders tend to miss this obvious relationship because they look at short term moves. On any particular day, if the oil market moves up sharply the whole stock market including air lines is usually weak. Day to day swings do not tell the whole story. It is common sense that fuel prices go up in a strong economy.

Trucking picks up earlier in the cycle than does air travel. In four years Yellow Freight (YELL) has risen from $15 to $60. YELL buys a lot of fuel. Its fuel costs have gone up dramatically in the past four years. We are talking truth hear about any commodity. The price of raw materials is only one part of the cost of a product. Look at the PPI and the CPI this very week. PPI is up more than CPI but company profits are soaring.

The investor who wants to make 10 baggers should look long-term and appreciate that air lines do well in the expansion phase of the economic cycle. Take a look at recent capex numbers and you will agree that we have moved into the expansion phase. The last time we went through an expansion phase, USAir bottomed at around $3 a share and peaked at over $65. I have to put around and over because I am posting from memory. It sure was a sweet ride.

I may buy USAir again if and when it makes it out of bankruptcy. For now, I own, CAL, DAL, NWAC and AMR. It would make me happy if UAL or USAir liquidate. I don't even think I would be hurt real bad if one of my "big four" is liquidated. The remaining players would be the survivors in a business that has extremely high operating and financial leverage. The money the survivors will make is enough to make your head spin.

OIL OVER AIR

OIL over AIR

KUDLOW OPTIMISM

Lawrence Kudlow is a former Reagan economic advisor, a syndicated columnist, and the host of CNBC’s Kudlow & Company.

Larry wrote an optimistic piece yesterday. He quickly received 50 odd comments. I couldn't resist the opportunity. The following is a copy of my response.

Amen Brother Kudlow! The nit pickers totally miss the law of substitution. Lower taxes on dividends suggest higher relative demand for stocks versus bonds. Expansion of Roth accounts suggests higher relative demand for stocks versus bonds. Reform of Social Security suggests higher relative demand for stocks versus bonds.

Americans were frightened into hoarding wealth in government debt. To avoid a deep recession, Mr. Bush and Mr. Greenspan provided the paper. America's wealth has never been higher. As confidence grows, billions will be shifted from bonds to stocks; bull market ahead!

The nit pickers do not understand that the falling dollar is the cure not the curse for the world economy. They do not understand that a declining dollar goes hand and hand with low long term rates. They do not even understand that the next risk will be that the world economy grows too strong; not to worry now as excess resources abound.

Those ready to bet against Mr. Bush passing Social Security Reform are making a big mistake. Some of the budget deals that will have to be made will be unfortunate but Mr. Bush has the long term interest of America at heart. An Amtrak line, a crop subsidy or even an army base or two may be "saved", but the reform of Social Security, a terrible drag on the American economy, must be fixed.

Your optimism is well placed. Mr. Bush is on a winning streak as is America. God bless the USA.

GOODYEAR TIVO GOOGLE REVIEW

GOODYEAR TIRE AND RUBBER (GT)
Goodyear Tire and Rubber announced a great quarter. This firm has traditionally done very well for several years after a manufacturing recession. This time is no different. The company has announced a refinancing of 3.3 Billion in debt. The savings will be substantial.

TIVO--AAPL
TIVO was up 18% today and up 28% in two days. I am still at a loss in a couple of accounts and just breaking even in my biggest position. Steven Kroll, an analyst who follows the stock, says Apple plans to make a take-over bid.

Over the past couple of years, TWX and CMCSA held talks with TIVO but the Chair was never interested in a sale. Recent developments such as the resignation of the company President suggests the company may be ready to deal.

The last company report showed a nice increase in subscribers. A new box with advanced features has been reviewed by analysts. The first reviews were a bit mixed but the TIVO to Go feature has potential to offer time shifting and place shifting of TV. This is revolutionary. TIVO is in a race against heavily capitalized players to lead the market.

Apple's high stock evaluation gives it the currency to offer "big bucks" for the company. Apple is in great need of a way to capitalize on the popularity of I-tunes. How can Apple get customers to use its Quick-Time media player? The big winners in media will offer consumers a player and media center for music and video. Buying TIVO will not give Apple the content it needs but it will give it the platform to deliver various content over the internet.

Motorola is partnering with Apple to offer an I-tune equipped cell phone. Motorola is a prime competitor of TIVO. A couple of weeks back, I came close to taking my tax loss in TIVO and forgetting about the stock. I held on for several reasons. The day I decided to hold, the stock was down to $3.40 and a popular high tech gadget web site started a TIVO DEATH WATCH. As is usually true, if popular media says death is imminent, it is a good time to buy. My guess is that the rumors are true. A deal may not get done but the parties are probably in serious negotiations. I would be surprised if the stock goes out at less than $7.00. The stock moved $.30 the day before the rumor surfaced.

GOOGLE MOVIES: GONE WITH THE WIND
Bonnie Butler was a spoiled child. She had everything a child could want; too bad Scarlet and Rhett couldn't get along. At the rate Google is adding features, we shall soon have more than we can imagine. It is clearly easy for Google to tweak its search window. Now if one starts a search with "movies:" one can put in an actors name, a movie title, a word, phrase or even a location and quickly get back the answer one seeks. I am sure the movie search drop-down will be added to the next version of the Google Tool bar. If you don't have it, you should down-load it for free.

toolbar

The autolink is proving to be neat. When you find a site that mentions a location, you can get a map immediately by clicking on the autolink button. Once you down-load the newest version, future improvements are added automatically. The old ways of doing things are Gone With the Wind.

GOOGLE TOOLBAR AND APPLE I-TUNE

Each day, I find the latest Google Toolbar to be more useful. It is feature rich. I use the popup blocker, the autofill, autolink, news site, and of course the many search features. When reading a book I have searched, it is neat to fast forward to the next section that has a reference to the topic I am researching. I still use MSFT's browser but all my search goes through Google.

Google and Yahoo are adding many features to the FoxFire browser. I expect to be using FoxFire before long but the feature rich Google Toolbar on any browser enhances productivity. The down-load is free and it installs quickly.

Google management has expressed disappointment in the adoption rate of the tool bar. It takes a good push to give many folks the momentum to make a change. Momentum gives MSFT a huge advantage in the coming software wars.

APPLE I-TUNES

A couple of days ago, to watch a certain media clip, I was forced to down-load the free Apple media player. Naturally, Apple took the opportunity to inform me that the player plays Apple I-tunes. Apple offered me a special deal. I declined the special offer but watched the clip and I now have three media players on my computer, Apple Quick Time, Real Media by RNWK and MSN from MSFT.

The Google battle with MSFT is similar with the Apple battle with MSFT. Folks who buy an i-pod will gravitate toward using the Apple media player. Indeed, some i-tune users will purchase a compatible Apple computer. The stakes are huge and content will be key. The only way I could watch the clip I wanted to see was through the Apple player. If I want to search library books, the only way is to search through Google. Apple is in a leading position with music down-loads and Google is leading in search.

The default search tool on Internet explorer is through MSN and the default search in the FoxFire browser is through Google. Yahoo is designing enhanced features for its version of FoxFire. I believe FoxFire, with the support of Google and Yahoo will give MSN a run for the money. The use of an independent browser, under-neath Google and Yahoo add-on features will take away much of the advantage that MSN gets from being a standard part of Windows.

The ultimate outcome of the media player battle is less certain. It seems that Apple, RNWK, and MSN will each need to partner with content providers. They each need to build a base of users. Otherwise, each provider might offer its own player. Each content provider could become a lot like a TV channel. With a base of users who select from available content, the media player could become the portals for viewing. Google and Yahoo would have a lot to say about either solution. I believe I read that AOL has its own player in development and no-doubt TWX has plenty of content.

For the time being, Google is opening more doors to more business than anyone else; Yahoo is second. In the case of the clip I watched, I found it through a Google blog site. I would not have needed the player without the Google site.

I have chosen not to invest in Apple. The stock has done well. With every cell phone provider preparing to offer music, I cannot see where Apple has the leverage that others see. On the other hand, Google is very far ahead of the pack in various aspects of the search business. I have trouble seeing others catching up. Yo ho, its the Google toolbar for me.

2 APPLES or 1 ORANGE

Old habits die hard but fundamental laws kill habits. Many of us love to eat apples but if the prices changed such that we could buy one apple or two oranges, on average we would eat more oranges. This example illustrates the law of substitution.

The law is so fundamental and usually so gradual that we ignore it. Even when there is a violate shift such as the recent run up in the price of oil, we are creatures of habit and it takes us a while to adjust. If the price differential remains in place, the law trumps the habit every time.

Consumers and businesses practice substitution every day. If the price of oil goes up, we consume more coal. Since it takes money and time to build a coal fired electricity plant, the dollars spent on coal versus oil goes through the famous J-curve. In other words, at first, relatively more is spent on oil because we buy almost the same amounts as before but we buy at a higher price. As new coal plants come on line, the relative amount spent on oil goes down.

BUY STOCKS NOT BONDS

Historically, pension plans have been heavily loaded with bonds. A number of popular ideas led to this situation. Theoretically pension funds are withdrawn and spent so the investments should be of short duration. Another thought has been that one could achieve diversification by holding growth stocks in ones taxable accounts and bonds inside retirement accounts. One of the foundations of this thought was that capital gains require lower tax payments than dividends.

A number of laws have been passed that have altered the relative value of stocks and bonds; including changes in tax rates and in pension laws. The market has started to adjust. For example, companies are increasing dividends at a fast pace. Old habits die hard and the adjustment is no where near complete.

The changes in laws are just as fundamental as the changes put in place in the early 80's that brought interest rates down from 21%. The Bush administration has proposed a number of changes that will pass and that will effect the relative value of stocks and bonds. A good example is the proposals to expand the use of the Roth IRA. The traditional pension plan was often totally paid out within 10 years of a persons retirement. A plan with a relatively short-term vision. Roth IRA's are often paid out over 70 years or more! Roth IRA's are a wonderful estate planning tool. More money is being moved to Roth IRA's everyday. The congress is currently entertaining the Bush proposals to expand the accounts and to even allow Roth 401-K's!

The key factor is a result of a trade-off. Traditional retirement accounts are built with pre-tax dollars. Investors are in effect encouraged to make contributions because the government "matches" about 30% of the contribution. The bad news about the old fashion IRA's is that withdrawals are forced and taxable. One can convert ones IRA to a Roth account, pay the current taxes due, leave the investments in the account to accumulate and to compound income tax free and owe no taxes on withdrawals!

If you understand the power of compounding money income tax free then you know how big a deal this can be!

It gets better!

One is allowed to name beneficiaries to ones account. The beneficiary gets the same benefit of receiving withdrawals from the accounts income tax free! Beneficiaries are forced to gradually withdraw the funds but the withdrawals are based on the life expectancy of the beneficiary.

To appreciate the "gift" that is being offered by this law, take a look at a few of the articles posted at "All Things Financial" which is written by JLP a fee only Financial Planner headquarter in Texas.

Link

I have not learned the correct procedure for posting links. If my attempt failed, you can find the articles at allthingsfinancial.blogspot.com.

The bottom line is incredible. One hundred thousand dollars invested in stocks earning 12% becomes 129 million in 60 years. The same account invested in bonds at 6% becomes 3.6 million!

Greenspan testified to congress that our country government needs to give individuals incentives to save. Allowing long-term accounts to grow at stock market rates, income tax free for long periods of time is a huge incentive.

SUPPLY MEETS DEMAND AT A PRICE

The law of substitution is nothing more than a corollary to the law of supply and demand. I hope you can see how laws passed and being passed are increasing the value of stocks relative to bonds.

Note that I did not mention Social Security Reform. The demand for stocks relative to bonds will increase even if Social Security is not reformed. If Social Security is reformed, it is estimated that by 2011 seventy billion more dollars per year will be flowing from bonds into stocks.

Finally, please remember that the stock market discounts or "predicts" future values. Now is the time to shift your investment emphasis from bonds to stocks. If you make the switch, you will soon have the money to buy 2 APPLES instead of 1.

STOCK OF THE WEEK

The best tool for improving investment returns is to keep score!

In the coming weeks, I will post a number of score cards. My hope is that you and I will benefit by learning more about strategies that work well and learning to avoid strategies that do not work well. Becoming a better investor is a journey. There is always room for improvement.

At least a few of the score cards will be in regard to mutual funds. Millions of dollars are spent annually on mutual fund sales fees and on mutual fund management fees. Many of you already know that mutual funds have historically under-performed the markets in which they invest. On the other hand, there are millions of investors who have become extremely wealthy by regularly and routinely investing in mutual funds.

In all cases, the wealthy investors could have and perhaps should have done better, but there are certainly no guarantees that any one of them would have done better. Many studies have documented the poor average relative performance of the actively managed mutual funds. For example, a Morningstar study as reported in "What Works on Wall Street" by James P. O'Shaughnessy, calculated that in the ten years ended September 30, 1995, equity funds with 10 year track records beating the Vanguard 500 index fund was 22%!

Seventy-Eight percent of these "professionally managed" mutual funds lost money relative to the "whole basket of stocks". Of the 22 percent that beat the "basket" more than half of those just barely beat the average. Only 10% of all funds beat the "basket" by 2% or more!

For many years, although I have done well investing in stocks, bonds and real estate, I have failed to keep or calculate precise scores. In recent weeks, I dug out detailed receipts for several years. The results are quite good. I will post them as another scorecard. In addition, I plan to do a regular column called "STOCK OF THE WEEK". When time permits, I will do more than one per week. I will track the performance over-time. I will note when either I or members of my family have invested real money in these stocks.

As always, the articles should not be considered purchase or sale recommendations. The purpose is to educate and entertain. Should you decide to invest money in any stock mentioned, I recommend that you invest no more than 4% of your portfolio in any one of these ideas. I believe many of the selected stocks will perform well. By tracking the results relative to the broad market averages, we all might learn to be better investors.

To that end, I have selected Sunrise Senior Living as the first STOCK OF THE WEEK. Much of the information presented was taken directly from the company's web page. I have also used CBS.MarketWatch.com and Morningstar.com as sources of financial information. While I do not claim to be an accountant or an analyst, I see value in the companies financial statements.

The selection of this company was made more on "gut feeling" than for any other reason. Call it reasoning if you like. One might expect a leader in assisted living services for senior citizens to do well if one expects life expectancy to increase. Numerous authoritative sources and my own experiences suggests that life expectancies will continue to increase. One of my dearest friends has lived in an assisted living facility for a number of years. He does his own laundry, drives his own car and goes out regularly. He has the right to eat three meals a day at the facility but, like many other residents, he jumps at an invitation to dine elsewhere. The facility says and my friend has come to accept that the average cost of food for all tenants works out to be about the same in the long run. The healthiest tenants get out more but having an open pre-paid dining facility for all tenants is a nice way to handle food. Guests pay modest prices to dine at the facility.

Sunrise Senior Living is the nation's largest provider of senior living services. The McLean, Va.-based Company employs more than 35,000 people. As of December 31, 2004, Sunrise operates 381 communities that are open in the United States, Canada, Germany and the United Kingdom with a combined capacity for approximately 43,000 residents. Sunrise also has 32 communities under construction in these countries with a combined capacity for approximately 2,900 residents.

SERVICES

Independent living is a lifestyle option for active seniors -- without the worries of household maintenance. Independent living may offer apartment-style or condo-style living.

Assisted living is ideal for seniors who need assistance with activities of daily living, including eating, bathing, dressing and medication management, but do not require 24-hour skilled nursing care. Working closely with residents, their family members and physicians, Sunrise staff members create individualized personal care plans intended to meet each resident´s specific needs and preferences.

Alzheimer's care is generally offered through the Sunrise Reminiscence program and is provided in secure, homelike environments delivered by staff members who are specially trained to understand and meet memory-impaired residents' unique needs.

Nursing and rehabilitative care is available to individuals who need 24-hour skilled nursing services, post-hospital or post-surgical care. Individualized care plans and regular health assessments are offered along with physical, occupational and speech therapies.

At Home Assisted Living is offered in eight markets and provides assisted living services for seniors in their own homes. In addition to assistance with activities of daily living, customers of the At Home program also have access to housekeeping, home care and meal services.

Hospice is available in most Sunrise communities through the use of a network of preferred providers who have agreed to abide by established best practices.

Short-term Stays provides service to seniors when family members are away or need a short break from caring for the senior in their life or for seniors needing assistance after a hospital visit or during an illness.

General amenities and services at most communities include dining options, activities, programs, transportation and housekeeping and are offered in a comfortable environment.

LOCATIONS

Located in 33 states and the District of Columbia. States include: AZ, AR, CA, CO, CT, DE, DC, FL, GA, IL, IN, KS, KY, LA, MD, MA, MI, MN, MO, NE, NJ, NM, NY, NC, ND, OH, OK, PA, SC, TN, TX, UT, VA and WA.

Operates in the United States, Canada, the United Kingdom and Germany

EXECUTIVES

Paul Klaassen
Founder, Chairman and CEO
Teresa Klaassen
Founder, Executive Vice President and Chief Cultural Officer
Tom Newell
President
Tiffany Tomasso
Chief Operating Officer
Brad Rush
Chief Investment Officer
John Gaul
General Counsel
Larry Hulse
Chief Financial Officer
Jeff Jasnoff
Senior Vice President for Human Resources
Ken Abod
Senior Vice President and Treasurer

HISTORY:

Founders Paul and Terry Klaassen developed and opened the first Sunrise community more than 23 years ago to create a senior living alternative that centered on the resident. A contrast to traditional senior living and long term care alternatives. The resident-centered model practiced by Sunrise focuses on each unique person and his or her needs and preferences.

1981 -- First Sunrise opens in Oakton, Virginia
1982 -- Sunrise's first training manual developed and includes Principles of Service
1985 -- Two more Sunrise communities open in Virginia
1988 -- First signature Victorian-styled mansion opens in Arlington, Virginia
1995 -- Sunrise's recognized Reminiscence Program for the memory impaired is developed
1999 -- First community outside the United States opens in the United Kingdom
2000 -- First community in Canada opens; Sunrise At Home launched
2001 -- Sunrise (NYSE:SRZ) listed on the New York Stock Exchange
2003 -- Marriott Senior Living Services acquired
2005 -- First community in Germany opens outside of Hamburg

The symbol is SRZ and the closing price Friday was $47.07. This is a fragmented business that is partially dependent upon government health care programs. It has not be a particularly profitable business for the past 10 years. Marriott tried its hand at the business but sold out to Sunrise in 2003. For the past couple of years, Sunrise has experienced slower growth and lower margins as it has worked to consolidate the Marriott locations into its system.

Genesis Health Care (GHCI) is a competitor of about equal size and Five Star Quality Care is growing quickly through acquisitions. Kevan H. Namazi author of "Assisted Living" says the average age of residents in assisted living centers is 84 years.

In 41 states, states allow Medicare to be used on assisted living costs. The average cost of assisted living is $1,800 month whereas the average cost of nursing home residency is $5,000 per month. Many folks have the preference of living at "home" for as long as they can so a number of programs have been started to offer what is referred to as res care. Sunrise operates a res care division.

The leading edge of baby boomers will turn 60 this year. My wife and I will turn 55. We have put our four-bedroom four and a half bath home up for sale. We plan to buy a one level cluster home. We will pay homeowners dues in order to avoid maintenance and yard work. We may spend as much as half our time at the beach or traveling elsewhere. The point is that baby boomers need to start planning for old age now. Marilyn and I can picture ourselves enjoying staying in an upscale assisted living condo or apartment when we are no longer ready to cook and clean house.

It seems there are a number of economies of scale in the business and a number of small proprietors have recently sold out. I expect this trend to continue.

There are things not to like. Several insiders sold shares last year, the price earnings ratio is high at about 25 times next years estimate and operating margins are trending down. The company pays no dividend. The company has good cash flow, excess cash and relatively low debt but I suspect it will buy additional facilities if it gets the chance.

I see this one as an attractive long-term investment. I am likely to buy shares within a month and will post a table to the web soon.

SNEAKY LITTLE RECESSIONS!

A regular reader sent the following question.

"I've been hearing that Germany, Italy, and even Japan are in a recession. But, when you look at the index charts of those countries...it looks like anything but. Germany, Italy, and Japan all look pretty strong recently in stock price performance. What gives?"


Thank you for the question. It was answered by an investor more than 100 years ago was asked his secret for making money in the stock market. He said it is easy, "I buy my straw hats in the winter."

The stocks of depressed economies are behaving exactly as one should expect. The stock market leads the economy. You don't have to take my word for it, take the word of the US Government. One of the components of the leading indicators published by the government is the stock market.

While the stock market looks ahead, bureaucrats look backward to determine if there is indeed a recession. The definition of recession is three consecutive quarterly declines in GDP. By the time most folks have heard that there is a recession the recession is over or almost over. The naïve public reads that the economy is in recession and sells at exactly the wrong time. As Warren Buffet or many another professionals have said, the time to buy is when others are too fearful to buy.

In addition to the timing and the psychological reasoning, business improves during a recession. Strong businesses have easy access to resources at low cost during a recession. These include all components of production, labor, raw materials and capital. When weak competitors go out of business, the strong competitors pick up new business and pricing power. The combination of low costs and high prices lead to improving profits. Indeed the survivors stand to make extra profits for a number of years.

You have read that I have purchased 4 of the legacy airlines for my family. The principle of buying them now is exactly the same as buying stocks during a recession. Indeed the airline business has been in a depression. Investors who put extra cash in the market in the 1930’s during the middle of the great depression made fortunes. Few can tell about it because most folks had no extra cash.

It is easy to see that the prospects for DAL, CAL, AMR, NWAC would all improve if UAL and or USAir liquidate. The risk is that if you buy DAL it might not survive. AMR and CAL are financially stronger than the other two. This is the reason they sell for higher multiples. For example, CAL sells at a price to sales ratio which is 60% higher than the DAL ratio! Can you believe that the CAL price to sales ratio is .08? In many companies, investors pay $2, $3 or much more for $1 of sales. With DAL investors are paying a nickel for a $1 of sales.

It is relatively easy to buy at the bottom. It only takes cash and a spirit of independence. You have to be able to say, I don't care that other folks are afraid of the airlines, I believe at least one of the four will prosper. In the previous cycle, USAir hit a low of maybe $3 before it went to $65.
The trick is selling enough near the tops to have the funds and confidence to buy at the bottom. One of these days, I post an investment cycle graph. I will ask my brother-in-law to do a few over-lays. One sine wave will be of the economy and another of the markets. Along the curves "events" will be posted. One of the "events" will be the peak in profits. The cycles are not precise but it is typically true that the time to get out of the market is when profits are approaching the peak. It is time to buy stocks when profits are weakest and time to sell when they are the strongest!

Again, one must look backwards to see the peak. When the peak is published, at least a month after it was hit, the chart looks great. The first data point on the down-trend is published approximately 4 months after the peak was reached. At this time, the economy is so good that investors have a hard time believing a recession is approaching. Many successful investors take their profits early. They do not want one of those sneaky little recessions to sneak up on them.

GOLD PARTS THE RED SEA!

The water turned red today. Most investment sectors are below sea level. The catalyst was Korea's announcement that the government plans to diversify its foreign reserve holdings. A $200 Billion shift.

Pimco picked up on the report and added its 200 cents. Proving once again that Big Bond Bears can move the whole market. Pimco notes that the trade gap last quarter was $164.7 Billion which means the US has to attract $1.8 Billion per day to pay for the goods.

This kind of talk is the biggest joke but the market takes it seriously. Since the market does then I must also. The fact remains that if the US buys 1.8 Billion Dollars net foreign goods each day, the US must pay 1.8 Billion Dollars, foreigners must receive 1.8 Billion Dollars and foreigners must then have 1.8 Billion Dollars that they need to invest or spend. Greenspan has told us this time and again. The word he uses is arbitrage. Investment banks use arbitrage constantly to maintain level markets.

Gold is the ultimate common denominator. The dollar price per ounce of gold must equal the dollar price divided by the currency price times the currency price per ounce of gold. Without putting in numbers the formula looks a little funky but here it is $/gold=$/FC*FC/gold, where FC is any particular countries currency.

It is mathematically impossible for gold to change in dollar value unless the dollar changes in relative value to at least one foreign currency. For the past few years, the US has run a large trade imbalance (on purpose to pull the world out of recession) and the result has been a decline in the relative value of the dollar. Gold has risen in dollar terms. As the dollar has declined relative to certain currencies, the holders of these foreign currencies have been able to buy US goods at a lower price. Sooner or later, the trade deficit "crisis" is solved. Note: nary a shot needed to be fired or any other action was needed for the "correction" to take place.

The fact that the US is still running a trade deficit means that the US is still in the process of exporting growth to other countries. Gradually the whole world will on average switch from a "recovery" phase to an expansion phase. When this happens, heavy duty capital goods will be in high demand. Big old things like power plants will need to be built. The US sells more than its fair share of capital goods. In a strong world wide market, the US will do well.

Many advisors are telling clients to jump on foreign stocks all the more. They are probably right in the short run. But probably for less time than they think. The market always anticipates future moves and is not priced on the current situation. In other words, when the big move comes, it will come quickly and surprise most investors.

As reported earlier, I went long gold on Friday and I added more to my position today. Gold is parting the red sea. The gold index is up better than 3% today while almost everything else is down. There are a few exceptions. The price of crude oil has soared; up over $2 per barrel. LVLT is the number one stock on the NASDAQ but it dropped so much in recent days that I probably should not mention this one. TXN is still my number one performing stock. It and just a few other high tech issues are up (JDSU is another example). The decline in the dollar should help TXN.

The put-call ratio is down hard today. This market move has a ways to go! Speculators in the past hot markets are about to get flooded, the red sea is closing in on them.

JAPAN OR BRIC'S

Much ink has been used in regard to "BRIC's". If you have not heard, BRIC is the current "hot" investment term. It stands for investments in the emerging markets of Brazil, Russia, India and China. Any time the media names an investment strategy, I grow leery of investing in the area.

Another widely reported fact is that Japan has dipped into yet another recession. The numbers are a little funky but the report has been widely distributed. It is common sense that Japan, with an energy dependent economy, would suffer under high oil prices.

I am reminded of the well reported popularity of "RVing" in the late 60's. Winnebago was in the news. All reports indicated that the majority of Americans would soon discover the joy of camping. Playboy magazine did a several page layout of the the biggest and best RV's. Of course, all this press was just before the energy crisis hit. The press helped push Winnebago higher for a time. Within two or three years, the stock hit $110 per share and dropped to $2 per share.

The Japanese market and the emerging markets have a very low correlation. The r square is only 37. In the past 4 years, the emerging markets have been "hot, hot, hot". The Japanese market has been weak. In recent weeks, the EFT's for several of the emerging markets have stalled out and EWJ, one of the Japan EFT's, has done likewise. With the news media talking up BRIC's and talking down Japan and yet with little price movement, one must assume that smart money is moving out of emerging markets and moving into Japan.

The story is much more complicated. Russia and Brazil are resource rich markets and India and China are resource consumers. Japan's market and the US market correlate at an even lower level (r square of only 33).

My guess is that the large cap US market will out-perform Japan and BRIC's for a while. In any event, I intend to avoid investing new money into BRIC's while the press is talking them up. They may make a run with the support of the press but when the market turns, speculators will need to jump out quickly.

Tying all the markets together, one can simply say that when long bond rates start to rise, emerging growth markets will feel the pain more so than others.

STRIKING GOLD--$49 OIL

The chart posted yesterday in regard to Texas Oil was well timed. This morning black gold is trading at over $49 per barrel.

Another well timed move was going long gold on Friday. The increase in the PPI and Greenspan's conundrum about the bond market made me realize that after a few weeks down it is time for gold to make another run. The XAU index is up 2.54% this morning. Not as tall as the energy index but at least it is moving big in the right direction. The Dow is down 55 points and the NASDAQ is down 14.

The indication given by the market is that US short interest rates are still low relative to inflation, the dollar is still too strong and even that long rates are high enough for now. The European community needs to stimulate their economies or the US needs to continue tightening short rates. With oil pushing high so early in the year, higher short US rates may be the best medicine.

One might make the argument that under the circumstances investors should raise cash levels. However, cash levels in the total economy are already quite high. On balance, stocks should do well even in the face of rising rates. The energy component of the S&P will pull it upward.

NEW YORK TIMES--WALL STREET JOURNAL

I continue to be impressed with the John Battelle's site. Good looks and great content. The big media companies have seen the hand writing on the wall. Dow Jones outbid NY Times for CBS.MarketWatch.com. NYT then paid up to purchase About.com.

As a Google share holder and admirer, it was nice to get a better understanding of the power of the adsense program. About was a dying site until it was optimized for the Google program.

Google insiders cashed in a few chips when the lock-up expired and the MSFT search marketing is well under-way. The competition is heating up. One of the most respected old-timers in the investment game stays away from stocks that are locked into head to head competitive battles. I may be a sucker but I still see the adsense program as revolutionary. It is simply amazing even a one man shop can affordably use the program to push advertisements directly to his prime target.

The price paid by NYT and Dow Jones show that I am not alone in seeing the power. Check out the full article.

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Link

DON'T MESS WITH TEXAS--OIL

West Texas Oil (click on graph to enlarge)

Texas Oil is running low. The price is running high. Trends keep trending until they don't. What is a fellow to do? (I cheated a little, the saying is that history repeats itself until it doesn't, but what is a fellow to do?)

On November 4th I wrote that one should consider buying heavy construction companies like Fluor (FLR). The idea was that someone other than Bechtel will build some power plants. The stock is up from $46 to $62.

On November 9th I suggest one should consider Cameco (CCJ). The idea was that uranium mines are set-up for a good run. The stock is up from $32 to $44; up big time in the past couple of years.

Now everybody is getting into the act; the act of building nuclear power plants. Russia is about to sign a deal with Iran. New Zealand is negotiating with farmers for land. Australia is digging coal like crazy but talking nuclear. And, Duke Power is looking for building sites in the Carolinas.

Twenty percent of all US electricity is nuclear electricity. It is cheap. At the current price of oil, nuclear is very cheap. The race is on to build nuclear plants.

China has taken the lead. China has completed several plants and is planning to construct many more (see earlier articles for details).

There are two competing technologies in this race. The new technology plants are about one fifth the size and can be built fast and cheap. The savings are a function of fewer safety systems. These type plants are being built in China. American engineers prefer the big models. They cost much more and take much longer to build. It will take years for American plants to be approved.

Now a days, we live in a global market. China is out front and the sooner they reduce their oil needs the sooner we will get price relief in America. China can't solve the energy problem alone. New coal plants which are being built in America will give us a little slack but the next then years could be rough on the energy pocket book. America is digging more coal than ever before (shipping a lot of it to Europe) and a few companies are getting serious about going after the massive tar pits of Canada. The oil drilling rig counts are high world wide. So far the faster we pedal the further behind we get.

The good news is that we are not nearly as deep in the hole as we were in the early 70's. Miles driven in SUV's is starting to decline and high mileage cars are back in vogue. We are a wealthy people and can live through a temporary price shock. Germany and Italy are in recession and Japan has probably dropped back into recession after just a short recovery. OPEC has lost much of its pricing power and does not want the world to go into recession. Gradually new supplies are coming on line. Conoco Phillips (COP) just made another deal with Venezuela.

THE MISSING LINK

In several retirement accounts reviewed recently, I was surprised by how much money is invested in bond funds. Even many of the stock funds in 401-K accounts are half breeds! Many of them have fancy names such as "life style accounts" or "asset allocation accounts". These are men dressed up in women's clothes or vice versa.

These "life" accounts often are forced to buy more bonds as the age of workers increases. It does not matter how expensive the bonds get, the managers have to buy! Greenspan said he simply cannot understand the the conundrum of low long-term bond yields. One part of the missing link is that investors are foolishly putting too many of their retirement assets into bonds. The accounts have held up well and not caused a "run-out" because there has in effect been a mini-bond bubble. Speculators were jumping on bonds big time a couple of weeks back, "borrowing short to lend long".

One of the things I know is that it will not matter if little nuclear plants or big nuclear plants are built, a lot of bonds will be issued to finance the plants. If Duke Power needs to borrow a few 100 billion or if China needs to borrow a trillion, they will pay the rate (lower the price) to what ever it takes. In the last nuclear building cycle, it took 14% or better. This time the rate peak may be only 8% or so a bond currently yielding 4.2% is going to get ripped in half. When rates take off, there will be a scramble to buy something else. A lot of folks are going to wonder what happened to their retirement accounts.

DON'T MESS WITH TEXAS BUT PLEASE DON'T MESS WITH MY RETIREMENT ACCOUNT!

ETHAN JAMES BLACKBURN

My new grandnephew!

Who cares about stocks or bonds when you have family? I have 5 grands; Ethan is my favorite! (A family joke made in honor of Papa John.)

CHANGES IN INVESTMENT OPTIONS ARE A WAY OF LIFE

Marilyn and I have enjoyed a labor of love, owning investment rental property at the beach has meant a lot of work and joy. Life goes on. We have sold 9 ocean front properties at Myrtle Beach SC and have 15 more to sell.

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Let us know if you would like to own a second home or a resort rental property. The rental properties are listed with a real estate agency. You can buy direct from us and save thousands. Visit our rental site at www.myrtlebeach4fun.com to learn more.

Those who wish to own an absolutely beautiful second home in the best location should give us a call. We offer a 10% share and you can save thousands of dollars by letting others pay 90% of the ownership costs. This property is not "investment" property. It may well appreciate substantially in value as the years go by but the purpose of owning will be for personal use only.

MUTUAL FUND FEES

Last week, I had a good discussion with a good fellow about his 401-K retirement account. I send him my thanks. I sincerely believe the changes he has made and is making will increase his account balance by hundreds of thousands of dollars over the next 20 years or so. My friend paid me a wonderful compliment by making the changes that I would make.

Old Man's Account
The most striking thing about the original allocation of the account was it was set up as an old man's account. It was set up as if the my friend planned to withdraw the majority of the funds in the next 5 to 10 years. I will come back to this allocation question at a later date. This posting is about mutual fund fees.

Mutual Fund Fees
One change my friend is making is to re-deploy investments in a couple of poorly performing mutual funds. Mutual funds in and of themselves are not bad things; I do not consider them to be an evil invention. Mutual fund companies simply offer a service. One can purchase the service or not.

Years ago, I decided to stop mowing my yard. I can mow the yard and can do a good job but I choose to pay a "professional" landscaping company to do the job. I don't own or maintain a lawn-mower, I don't go buy gas or oil but I do have to pay the landscaping company. I spend a lot more cash getting my yard mowed than the costs of owning and maintaining a lawn mower, but I save a lot of time and my yard looks good. If my yard looked worse than most of the yards in the neighborhood, I would fire the landscaping company.

The good news is that the landscaping company does not charge me the cost of providing the service plus a percentage of the total value of the house. The bad news is that mutual fund companies have typically added a lot of extra fees over the years and their main fee is a percentage of the total account value. In a small account these fess are fair. As the account grows, the cost of providing the services remain about the same but the fees generated grow and grow and grow. If my landscaper tried to charge me enough to cover his costs plus 1% of the value of my house, I would tell him to get lost.

The average person is not aware of the poor over-all investment performance of mutual funds. The average person is not aware of how high the total fees become. You don't take my word. The Security Exchange Commission (SEC) maintains a web site that includes lists of the types of fees charged. The site also includes a Mutual Fund Cost Calculator. The following is an excerpt from the site.

SEC

"A Word About Mutual Fund Fees and Expenses

As you might expect, fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858—an 18% difference. It takes only minutes to use the SEC's Mutual Fund Cost Calculator to compute how the costs of different mutual funds add up over time and eat into your returns. http://www.sec.gov/answers/mffees.htm"

As you can see from the SEC example, the fee expense is greater than the entire original investment in only 20 years! The total fees in 30 years would be approximately double the original investment and triple in about 36 years! Most folks own their retirement accounts for 60 years or more! Add a zero or two to the SEC example and you can see that we are talking about serious money!

When talking about retirement income, we need to be talking about serious money. If you retire at 55 with a one million dollar account and you annuitize it at 5% for 30 years, you can draw $5,367 per month or $64,000 per year. It sounds like a lot of money but it is not. In today's dollars $5,367 30 years from now is the equivalent of $1,800 dollars and after being retired 30 years it is the equivalent of only $650. In the example above even the $650 runs out by the time the age of 85 is reached. (My Mom is young, active and healthy at 81 years. I am thankful that she saved enough to retire comfortably. I wonder if she will.)

There are basically two problems here; accumulating enough for retirement and making the retirement account out-last the retiree. The amount we need to invest will depend on the return we achieve. For sake of this argument lets assume that we can do average. Average has never been a very hard number to hit. Many of us made a "C average" or better in school without working very hard. Lets assume we gradually buy shares in 40 of the big companies that are a part of the S&P 500 index and practice a buy and hold strategy. In other words, we will invest like Warren Buffet; we will buy stocks with cash in our accounts but we will seldom sell a stock. Using this strategy, we will incur very low fees.

Studies show that the average mutual fund that buys shares in S&P 500 companies, under-perform the index on average by the amount of the fees charged by the fund. The average fund charges total fees of more than 1%.

Finally lets use a 25 year old person as our saver, assume he will retire at 55 and live to be 85. How much money does he need to invest? Being conservative people, lets assume the market does less well than its historical average. Lets say the average stock only averages 10% return for the next 60 years. Then our person will need to invest $546 per month in mutual funds to reach the million dollar mark or $442 per month in the stock account. If this young person has $546 per month to invest and puts it into average stocks rather than the average fund the account will have grown to $1,234,664 by age 55.

Taking earnings only, the retiree will be able to take out 37% more per month! The absurdity of paying the fees grows when one examines the next 30 years. Although the law requires the withdrawal of some principle each year, to make the math easy, I assume that the retiree re-invests the principle and spends only the interest. The difference in earnings to the retiree comes to over $2,000,000.

$2,000,000.00

The big irony: most folks invest in mutual funds that have a history of performing below average because they are afraid that they cannot perform above average. However, the mathematical probability is extremely high that one will do much better than average simply by investing a regular amount each month. Mutual funds are a convenient way to accumulate relatively small sums. My problem with leaving large sums in mutual funds is quite simple. Why should anyone give away $2,000,000 of their retirement?

TIVO, NXTL, RHAPSODY, NFLX ADDING SUBSCRIBERS

Nextel continues to ge more than its fair share of new cell phone subscribers. The company has the low churn rate and the highest usage rate. The company forecasts slower growth next year when it will be merged with FON. In the meantime, Sprint won another award for reliability of service. Sprint is moving quickly to offer audio and video subscription services.

TIVO added about 700,000 subs this year. Less than 300,000 were full pay. Good progress overall and the stock has bounced. TIVO to Go gets mixed reviews. Motorola and others are offering competing products and the interface needs to be tweaked. Portable TV is coming fast.

Music services are ripe to explode. When high quality music boxes are built into cell phones, pdas and lap-tops, who will buy an analogue radio.

Netflix (NFLX) is doing well. Understanding that NFLX has an extremely flat and wide low cost distribution bell curve gives shareholders reasons to be optimistic. Blockbuster and other video stores are faced with challenges from two directions. So far, cable companies are stuck in a pay per view mode or a short tailed inconveniently timed distribution subscription. Cable companies do not have the capacity to offer the selection offered by NFLX.

I am one who tries to avoid pay per view cost structures. I pay $6.95 for unlimited music rather than a charge per song. Studies show that consumers pay extra to avoid the uncertainty of pay per use fees.

As YHOO and others begin to broadcast low cost media over the internet, the distribution tails will grow very wide. This process will take years. NFLX should continue to grow during this transition phase. Subscription based pricing models are at the mercy of the dumbest competitor in the business. The companies should play "Tit for Tat". Unfortunately Blockbuster is poorly structured and makes poor decisions. It has lowered its price to $14.95. NFLX has selection and service and is growing the business at the profitable rate of $17.95. How long will investors allow BBI to burn cash trying to leap ahead of NFLX? There is room for NFLX, BBI and WMT if profitable pricing is maintained.

Newspapers are losing subscribers. The New York Times bought About.com today. The Wall Street Journal bought CBS.MarketWatch a few months back. My family make a very nice profit on MKTW. The Times and Dow Jones have been criticized by investors for buying businesses that dilute earnings in the short run. Let me tell you, there is no long-run for traditional newspapers. When broadband speeds have doubled again, large screen prices have dropped 80% and online free services are plentiful, why would anyone pay for a newspaper? Down Jones and the Times are making moves required to suvive.

Maybe you think you will buy a newspaper routinely for the rest of your life. Remember there are economies of scale. The newspaperboy must be make more than double the price if he skips an average of one house out of two. I read more now than ever before but I read from paper less than ever before. Millions more dedicated folks write or produce news, art and commentary than ever before. Subscriptions will be a growing portion of our economy for years to come. However, the selection of materials available free or at low cost is going to be quite large.

HORSE TRADING?

Much has been made about Bush budget cuts being confined to to a small portion of the total budget. Spending is mandated or is considered off limits for about three fourths of the total budget.

To hear the whiners tell the story, Bush is left with nothing to do but make draconian cuts in social programs. The truth, in my humble opinion, is that Bush is simply preparing to do some "horse trading". If you are not familiar with horse trading, think of it is negotiating the best deal to trade your old car for a new one. To get the best deal, you must always at least threaten to do business with the dealer down the street.

Another truth, in my humble opinion, Bush is counting on growing out of the deficit. His tax cuts are stimulating the economy. Total government revenues are growing around 6%. All Bush has to do is hold spending increases to less than 6% to reduce the deficit. The strong economy we are enjoying is producing corporate profit increases, lower expenditures on unemployment benefits, higher payroll taxes, higher taxes on earnings, higher taxes on dividends and higher capital gains taxes.

Back to the horse trading. Republicans hold majorities in the house and senate. It takes only a majority to pass the budget, 51 votes in the senate. It takes 60 senate votes to pass social security reform. Bush needs to hold all republican votes and pick up 5 democrats or some other combination yielding a net gain of 5 votes.

The point is that if Bush needs to "save Amtrak" one more time in exchange for passing Social Security reform, Amtrak will be saved (at least in certain communities). If Bush needs to continue to pay farmers not to grow crops to pass Social Security reform, so be it (at least for certain crops in certain key states).

Steve Leesman of CNBC and others have correctly pointed out that relatively small cuts in the total federal budget are a big deal to the congressman who is getting his ox gored. The loss of a military base in certain home districts will determine if certain legislators are re-elected or fired.
Many democrats will vote against social security reform no matter what. Social security defines the democratic party in the democrats eyes as the "morally correct party". It does not matter that the system hurts the little guy more than the wealthy. They will argue the point all night long but while social security has helped a lot of people who needed help, it has taken money out of the pockets of the working middle and lower middle class and not given them ownership in their "savings". Paying out too much is about to catch up to reality. Millions have already retired with reduced income than they deserved.

Again the arguments about the efficiency of the system really do not matter. Bush has enormous power to push what he believes is best. Bush believes the young folks of today will be well served if they are allowed to keep a portion of their "savings". He believes the contry will be better off if resources are allocated by the free market. Bush needs to communicate reasonable arguments but in the end, the question will come down to which polititians will decide to trade a horse or two.

I know! Democracy is an ugly form of government. Serving on a church, charity or company board can be enough to turn one ones stomach inside-out. The old saying is true; sausage is very tasty but none of us want to watch it being made.

Effective government requires horse trading. Effective traders often end up with three fine stallions in exchange for a couple of piglets. There will always be inequities. Bush is holding the purse strings and will have to offer favors in return for key votes.

Texans know how to horse trade. Passing Social Security reform is a tough trade but I am betting on success. The stock market will do well when it is clear that social security reform will pass. That may be very late in the year. In the meantime, stocks are cheaper than bonds and bonds are cheaper than resort real estate. Therefore I am doing a little horse trading. I am selling beach properties and buying stocks.