Friday, February 04, 2005


This morning I purchased more American Airlines (AMR) and more Level 3 Communications (LVLT). With AT&T (T) being scooped up by SBC and with Quest making a bid for MCI it is clear that there must be value in "trunk" lines.

Some time back I wrote that LVLT is nothing more than a call option on Voice Over the Internet (VOIP) telephone service. The thesis is that voice, video and data will consume capacity at a rapid rate. The value of fibre-optic trunk lines will be enhanced when demand grows closer to capacity limits. The stock has already moved for a few days and it is a risky stock. The revenues could expand dramatically. This is another high operating leverage business. This type of business has to make a large amount to break even but then every dollar received afterward is almost all profit.

An interesting point is that both Quest and MCI went up in price on the take over bid. Some of this comes from the thought that Verizon (VZ) will buy one or the other or both. Another fact is that Quest and MCI are like AT&T and LVLT, the owners of considerable "trunk" lines. All four stocks were slaughtered after the bubble burst. Now all four are cheap enough to be take over targets.

What increased my optimism this morning? As usual the bad news was good news. This morning economist were disappointed at the jobs number. The US created only 146,000 new jobs last month. Economist had forecast more than 200,000 new jobs. The fact is that the economy is in great shape. The unemployment rate declined to 5.2% which is a very acceptable rate. The slow growth in jobs means the federal reserve does not need to raise short rates much more. Indeed the long-bond jumped in value this morning and is yielding about 4.4%.

The point is that the economy is not over heated, inflation is under control, interest rates are moderating and profits are strong. A favorable climate for business and stocks. Even the airlines might turn to the upside!

Productivity dipped a little last month but, wow, it has been fantastic for the past three years. Indeed, productivity has averaged 2.4 for the past ten years! By the rule of 72, a rate of 2.4% will double productivity in 30 years. This is extra good news for those of us who have retired or who will retire soon. It means in 30 years that one young fellow will be able to do the work of two of us old guys. It may not be intuitive but it means Social Security is not hurting nearly as badly as it looks. If the Bush plan goes through, there will be lots of Social Security millionaires and multimillionairs 30 or 40 years from now.

Jumping onto AMR or LVLT may be like jumping off the high dive; a little scary and a lot of fun. The high dive is not made for the weak of heart or for those who invest to preserve capital. Speculators should only invest a small portion of total assets into risky selections.

For more fun and entertainment, I purchased call options on the QQQQ this morning. The ones purchased last week have "covered the spread" and all options are "in the money". If what I am saying is Greek to you--good! Options are not really investments. Options are akin to lottery tickets. If you choose to buy lottery tickets, you should hope for a little excitement but you should not hope to win. If you do win a little pot you should not think that you are a lucky person and buy extra tickets as a result.

I have a lot of expectations for stocks and even a little hope for my options because of the strong bond market rally. There are big piles of money owned by folks who really do not like the stock market. However, these folks do not like locking into 4.4% yields for thirty years either. Put it another way, if rates continue to fall many companies will issue bonds to buy back their own stock. The companies will be able to boost their returns on equity with the stroke of a pen.

Buying stocks when earnings yields are 40% more than bond yields is swimming in a shallow pool. Diversify your holdings or buy Exchange Traded Funds but get in the water and have some fun.