Wednesday, March 02, 2005


Market Moves on Small Decline in Oil

Yesterday, the market made a very broad based move up in conjunction with a small decline in the price of oil. Last week, I graphed the oil and airline sectors to show that oil and airlines move together in the mid to long-term. Yesterday, the energy sector was one of few moving down and the airline sector was up a whopping 4.79%! A big part of this move was a result of the agreement reached by CAL and union officials to cut $500 million in annual costs!

Oil is not about to tuck its tail and run away. Demand is still strong. However, the seeds of change have been planted and it is only a matter of time before prices will moderate.

One of the seeds planted and growing like a weed is the Smart Car. This European Micro Car is making an assault on America. Zap (ZAPZ) has worked a deal to distribute the cars in the US and orders have soared. Last week orders were for $55,000,000 up from $40,000,000 the week before. The Zap web site is I am not planning to buy shares or the vehicle but I do appreciate the fuel savings--still a trickle but growing quickly.

The Canadian version called the Smart ForTwo will be the smallest production car in America at 98 inches long. The car has a 40 horsepower engine and it gets 56 miles to the gallon. The Zap version has to be retrofitted to meet US standards and like any new and exciting product is dramatically over-priced. Since October, Canada has pre-sold 1200 cars at a base price of $13,400. This sounds reasonable until you remember this is an over-sized golf cart. My guess is that you can't buy a base priced model.

The point is that the market is adjusting quickly to the reality of tighter oil supplies. The big fuel savings will come from the completion of nuclear and coal fired power stations. Many are in various stages of design or construction. The "big daddy" nuclear stations will take 10 years or more to come on line.

The growth of Smart Car sales is important from the point of view of life style change. Americans moved from the farm to town and then to the suburbs. In Harry Dent's book, The Next Great Bubble Boom, a new trend is discussed. Harry calls it "to the exurbs/small towns". In many cases whole towns are being built where only Smart Cars can travel. In particular, the Smart Car is great for "retirement towns". Eighty year olds are comfortable driving a light weight Smart Car 20 to 35 miles an hour on streets with other Smart Cars. Smart Car is actually the Mercedes Benz brand but all the majors are producing or planning to produce similar vehicles.

In these communities, it is a short distance to every thing from the grocery stores to the office buildings. The fuel savings are more substantial from the fewer miles driven than from the savings per mile. With the advent of super high speed broadband internet connections, many companies find they can accommodate satellite offices in small towns and achieve substantial savings in total costs per employee.


For ages, there has been talk of the smart home, the smart car and the smart office. The technology is now available to make this happen and it is happening. Various products are already in the dramatic adoption phase. The costs of the technologies have gotten so low that it is now a matter of picking and choosing the end products.

Examples are everywhere. The TV is merging with the computer to make media centers. As many as 100 micro-computers are in the latest cars. The cost of a long-distance call that was about 50 cents per minute in today's dollars 20 years ago has dropped to zero!

Cars and other products are getting smarter all the time. The latest BMW is almost impossible to steer into a fishtale and if the sun is shining in one side and not the other, the air conditioning automatically adjusts. Nissan is working on "lane departure prevention". The latest Acura RL has been describe as a media center on wheels. Sensors are being embedded into roads which means car navigation systems can avoid traffic accidents, stalled vehicles or construction delays.

Many of the newest products seem to be "boy toys" but there are features coming that will save lives and dramatically enhance productivity. A car that won't swerve out of its lane, adjusts its speed with the traffic and knows where to turn, almost drives itself. To top it off, GPS navigation systems are coming down in price and adding features that provide quick payoffs.

Trucking companies now know immediately if a driver is going too fast, changing lanes too quickly or stopping at a beer hall. Insurance companies are offering major discounts to companies that adopt monitored safe driving. Even consumer auto insurance companies are getting into the act. Norwich Union is currently testing a GPS system that monitors everything from speed to braking habits to running yellow or red lights.

One may protest the invasion of privacy but if an insurance company offers my family a substantial discount for safe driving, I am ready to sign. My family has been very fortunate. Between our daughters, Marilyn and I, we drive 4 cars that have an average of 147,000 miles each. We have had no major accidents but three of us have gotten speeding tickets. We know better and would not mind having an additional financial incentive to reduce our speed.

Stock Market Boom Ahead.

I could make a very long list of other new technologies that are experiencing fast growth. High tech advances are everywhere. After the explosion of the 90's, a pause to consolidate was needed. All "booms" must come in waves. Part of the reason is that there is always a "chicken before the egg" cycle that must be followed. The internet grew dramatically using copper telephone wires. The second phase required installation of high speed cable and fibre-optic lines. The high speed lines have opened the doors to thousands of life changing innovations. In the past several years, companies have spent billions preparing to offer the next generation of products.

A similar cycle has played-out in the wireless market. What, maybe 100 years from long-distance one way voice radio transmissions to routine and common two way transmissions? Suddenly, the capacity is there to make two way video transmissions. The number of new portable communications devices coming to market is large. The Sony PSP is not a game machine! Yes, one can use it to play games with anyone anywhere, but one can also watch one of hundreds or "made for cell phone" news, weather or mini-series "shows". The monthly service fee for one "cell phone TV service" is $13 to $18 per month. The Sony PSP is also a remote TV camera that is wirelessly connected to the world.

Another huge technology that is being adopted at a fast pace is "shopping and payment systems". The self service touch screen is an important component. Fast food and grocery stores are two of the early adopters. Systems that allow customers to receive information and input maximum choice will change our lives.

What is the bottom line of all this innovation? Innovations only occur when there are people who have money to buy the products. I made this point to a 47 year old friend on the basketball court last night. He had to agree that he is moving into the time of his life when he should have the most disposable income ever. The "baby boom" after WWII occurred 59 to 46 years ago.

Our kids are grown, we are making money and we are ripe to spend. We may spend on Smart Cars or electronic medical implants (another booming market) but we will spend.

I try to always invest first and buy later. Sometimes I never get around to the buy part because it is too much fun hitting the invest part correctly. For example, when studying the cell phone market, I came to realize that Nextel (NXTL) had the best product. I bought the stock for any family at a time when it had a negative book value. We have made better than 7 times our money but never got around to buying a Nextel phone.

I suggest you would be wise to invest before this next tech boom. It only takes common sense to recognize which industries are being hurt and which are being helped. Those that are being hurt must innovate or die. I predict that a lot of small newspapers will die in the next several years. Ironically, hundreds of thousands of "online" "newspapers" will be started during the same time. Big resource rich companies with the sense to innovate, such as Dow Jones and NY Times, will withstand the onslaught by adapting. Dow Jones is down about 25% in recent months. It paid big bucks to buy CBS.MarketWatch.Com It will gradually figure out how to monetize its large customer base.

Pick and choose carefully but choose. Tend to choose the leaders in each sector. They are leading for a reason. Don't be afraid to ask for a portfolio review. One of the all-time best investors, Ben Graham, said, it is easier to attain satisfactory investment results than most people believe but it is far more difficult to produce superior results than most people believe. My wife knows how many years hours I have studied the markets. Working as an Account Executive for 10 years was a valuable experience that I don't recommend; the family and personal costs are high. It takes experience to recognize key indicators. I received a wonderful boom indicator yesterday. I would be happy to share ideas with you or assist you with a portfolio review.