Tuesday, March 08, 2005


On a day when the stock market is a sea of red, it is nice to have the gold hedge working. The XAU Gold Index is up 2.85% today. I put on the hedge February 23 and it has moved along with the stock market break out. The move, in 13 days, of 77% could disappear quickly; options are very volatile securities.

The most interesting action today is in Texas Instruments (TXN). TXN has been a great stock to own the last several weeks. The semi-conductors were sitting on two year bottoms with improving balance sheets and improving fundamentals during the hot, hot, hot time in energy stocks. The move so far, could turn out to be small in hind-sight. TXN announced slightly lower guidance yesterday and the stock was hammered in after market trading. By market opening, Bear Sterns for one, was recommending to buy the shares on weakness and the stock is holding at down around 68 cents per share. I hope to never forget the big move in semis in the early 1980's. You have never experienced fun until you have participated in a hot semi-conductor market.

The guidance was a little curious anyway. So what, sales of big screen TV's were a little weaker than usual during this normally slow time of the year. The explosion of digital screens is still about to happen. Again, there is a lot of red on the tape today. But NOK, TXN's biggest customer is up!

The most important moves today are the 70 plus basis point moves in the long bonds. The big move up in oil, the small move in the dollar and the big move in interest are inter-related. The recent strength in the US stock market is consistent with a very strong economy which is consistent with a firming dollar, weak long-term bonds strong oil prices.

I have participated in a number of recent discussions about soaring commodity prices. These discussions are all fine well and good but most of them miss the most important point which is, prices are up because business profits are so strong! This should be common sense but many folks get caught in the trap of overly sophisticated explanations.

Again, the answer is simple. If the price of oil were actually too high, people would stop buying so much! If it were too high, businesses would stop buying so much! My family has owned Yellow Freight (YELL) for maybe 15 of the last 20 years. We have consistently made money in the stock. The past three years or so have been extra sweet. The stock is trading near all-time record prices. Yellow buys a lot of diesel fuel but profits are at record levels. Don't tell me the price of oil is too high and don't tell Yellow Freight.

Certainly Yellow and I take care to buy at the lowest price. But give us the choice of buying gas for $1 a gallon during an economic recession or depression or paying $2.50 in an economic boom and we will both choose $2.50. I agree with many that the price of oil will continue to climb until nuclear power plants and other supplies come on line. The reason is that the economy is in a long-term boom.

In one of the discussions, a couple of participants blame the speculators for the high prices; no way. Texas is awash with wild-cat speculators drilling for oil. These speculators are putting millions on the line to find new sources of oil. I agree that speculators (all around the world) are involved in the oil spike, but their speculation will ultimately relieve price pressures not add to them.

The price is up because of very strong world-wide demand. For years, the government of China has had to restrict the usage of oil and electricity. A fifty million kilowatt power plant came on line a few months ago and power is still scarce. Fourteen nuclear power plants are in design or construction stages in China. A second fifty million kilowatt plant is scheduled to come on line in a month or two.

S&P 500 company profits are so strong that the trailing earrings yield, as reported by Barron's Online is 4.5%! Do you want to own a bond yielding 4.5% including a promise that it will never pay more than 4.5% or companies earning 4.5% with a history of always making more over the life-time of a long bond.

The gold hedge is working for a couple of reasons but the big one is that the world-wide economy is strong. Even countries like Germany and France are experiencing increasing industrial production in the face of high unemployment rates.