WHAT I KNOW

A couple of regular readers have asked if yesterday's huge rally is the start of the BIG BULL I have been writing about. I don't know!

I know stocks are cheap relative to bonds and real estate.
I know public investors are as negative toward the market as they typically get before big rallies.
I know the FOMC hinted that rates have gone about as high as they need to go.
I know that bond market indicators show the probability of lower long rates in the months ahead.
I know that lower bond rates support higher stock prices.
I know that there is more oil in storage than at any other time in the history of the world.
I know that the law of supply and demand should bring oil prices down.
I know that the price of commodities tend to trade together, if oil goes down it is likely that aluminum will go down.
I know that lower commodity prices would dramatically decrease the cost of many companies, such as DELL, GT, CAL, F, GLW and WMT.
I know that current mortgage rates are causing a dramatic slow down in home sales.
I know that consumers have cut back significantly on discretionary spending, such as trips to the beach and amusements while at the beach.
I know that the interest rate ball has been kicked to the other mans court, Japan in particular is going to see a rise in their currency if they do not continue to take action.
I know that the Globalization of markets has dramatically reduced the risk of high inflation but has made the FOMC less powerful.
I know that corporate profits continue to surprise to the upside.
I know that a different kind of investment works in the second half of an economic cycle.
I know the evidence is clear that "first half" investments are dying.
I know the amount of spending on new communications technology is going to be huge over the next few years.
I know that Google has shown again that the Internet allows innovative companies to introduce win-win-win services; providing numerous benefits to consumers while giving the service provider a high profit margin.
I know that tax law changes typically occur at or near the start of phase one of the four stage real estate cycle and it is clear that phase 4 is over or nearly over.
I know many more things but there are many more things that I do not know; knowing what the market will do in the short run is one of the things I do not know.
However, I am very confident that, like the last 200 years on average, stocks will outperform most other investments over the next 30 years.
I know that the perception of most people is that stocks are more risky than bonds, while the evidence shows that over 30 years bonds are more risky than stocks.
I know that inflation will gnaw away the principle of CD's, Bonds, Insurance Equity and other fixed incomes.
I know that hiding gold talents in the ground is not the act of a wise person.

Over the past week or more, I have mentioned several times that when the public becomes very negative toward stocks, it is a good time to buy. The various bull-bear ratios have reached extreme levels and when the market moved up, public short selling went up dramatically. This reaction is a very positive sign. Although, I never recommend option buying, the risk of loss is very large, my family owns options on thousands of shares and yesterday was a lot of fun. Our QQQQ options do not expire until the third Friday in December. We are long stocks on margin. We expect to hold most, if not all of the stock positions, for the long haul. Our trigger finger will always stay close to the option sell button. We are excited about the market.

So many things could happen, good and bad. One possibility is that the congress could pass a law to allow drilling for oil along US coastlines and in ANWR. Trillions of dollars of assets would suddenly become available. Iran is under extreme pressure to "make a deal". The trouble is that surprise is what moves the market. I believe it will surprise most investors if the US allowed drilling or if Iran made a deal. I don't think the average person realizes the amount of effort expended over the past 5 years to set up a deal with Iran.

I do not know if the market will go up today but I know that conditions are ripe for a strong market in the months ahead.

I PREDICT 90% OF YOU WILL HAVE G-BUY IN 2 YEARS!

The number of free services given away by Google is growing rapidly. If a friend sends a friend a link to a free Google Spreadsheet, a free Calendar or a free Photo Album, the friend is likely to register for a free account to view the information sent by the friend. When a person logs onto his free Google Account, Calendar, Spreadsheet, Google Talk or Gmail, etc., he automatically logs into the other free services. Can you see how easy it will be for Google add Gbuy accounts? Everyone one who uses Gmail, Gmusic, or Gvideo will find it easy to use Gbuy.

The fee schedule is not public information but it is believed that there will be a cost associated with using Gbuy. Perhaps it is more important to note that Gbuy will give Google terabytes upon terabytes of information about what users buy. Google will easily direct advertisements of baby products to the persons who buy baby products.

The time saved by consumers will be enormous. Those who do not have babies will very seldom see an advertisement for baby products. Those who buy wine will automatically be exposed to much information about wine.

Investors who do not own Google stock are making a big mistake!

STAY POSITIVE

My thanks for the responses to recent emails. The one expressing depression about the stock market shows that readers, like the rest of the public, struggle to stay positive during a market correction. Of course, being positive when others are negative is a major part of being a successful investor.

The suggestion to buy Build-a-Bear, made by a good friend and frequent reader is an interesting idea. I do not like the idea but it is still an interesting one. Here is a company that appears to be attractively valued. For example, its price to sales, price to book and price to cash flow are all about half or less than industry norms. The company enjoys high margins and has been a rapid grower for several years.

On the other hand, it is just the opposite of the kind of company that I have said is likely to lead the next rally. It is the ultimate consumer discretionary item. Having been in Myrtle Beach for the past couple of weeks, I can tell you that consumers are cutting back on discretionary spending. The beach is relatively uncrowded and the lines are not long at the movie theaters or restaurants.

BBW has stated that this quarters earnings will fall to the low side of guidance. Recently one analyst lowered estimates for the whole year. As you may know, I don't place much faith in the estimates offered by analyst but down grades are not to be taken lightly; the numbers could be way off but the direction appears to be down.

This spring, insiders were dumping the stock. In the past few weeks, one board member has bought a few shares.

Since coming public, the stock has traded into the mid 30's a couple of times and down to the low 20's a couple of times. Right now, at $21.20 it is near the bottom of the range.

My thanks to my good friend for mentioning this stock. It is not one that I will buy but I enjoyed giving it the once over.

As a retail stock comparison, WMT has about the same price to cash flow. My bet is that a big company like WMT will out perform BBW over the next 5 years.

A WONDERFUL PROBLEM

The US economy is facing a wonderful problem; how high do interest rates need to go to prevent huge wage increases? The American worker is in the "cat bird" seat because of another wonderful problem; very high profit growth by American companies.

If there were two businesses, one with very high sales growth and the other with very high sales and very high profits, which would you rather own? Politicians have to find a straw man to beat up. One easy target is the Chinese. Therefore the argument is made ad infanitum that the Chinese are stealing from Americans. If it is not the Chinese it is the Mexican immigrants. Politicians constantly ask, how long can we continue to have a negative trade balance with the Chinese? They then attack the Chinese for manipulating their currency to make their goods too cheap. I say, "Thank you very much"!

Yesterday, Marilyn purchased a shirt for me to try out. It is a very nice shirt and she paid less than $7.00. Thirty years ago, a shirt like this would have cost $30 or more. China is the equivalent of that first business; the country has very high sales growth on very thin profit margins. The US is the equivalent of the second business, very high sales and very high profit margins. The reason the average American is wealthier today than ever before is because he benefits directly and indirectly from those high sales and high margins.

It is true that China and other developing countries tend to steal a lot of stuff. They do this primarily by ignoring intellectual property rights. For example, until recently, Chinese companies were making tons of "Viagra". It looked like Viagra, had the Viagra name on it and worked like Viagra. The work of administration "trade" negotiators has been and will continue to be reaching agreement for the Chinese government to enforce copyright laws. Those folks who visit China are always amazed that bootleg copies of American movies are on sale at very low prices by the time the shows hit American movie theaters.

Back to the big picture: American companies are making big profits off of international trade. So much profit that we can afford to run trade deficits for centuries as we have for the past century. It is ludicrous for folks to get all uptight about the current account deficit now when it has been negative for all but two or three years in my life. Indeed, when it moves to positive (in the early 70's and late 90's) a very tough world wide recession is not far behind.

The practical information for most folks to take away is that the FOMC is raising short term interest rates in an attempt to slow the HOT labor markets. Just this week, in the Piedmont Triad there have been announcements of new plants that will hire high skilled people at higher than average wages. Yesterday, it was announced that Honda will build a new plant in Indiana. To recruit good employees, companies have been raiding other companies. In the past few days, Google, MSFT and Yahoo have all run full page ads seeking top tech. talent.

The wage battles are spreading from industry to industry. Politicans do not like to talk about interest rate hikes in terms of fighting to keep wages from going too high. Instead, you hear about fighting inflation. Well, inflation is about as low right now as it has been in my 56 years. Inflation is quickly becoming old news. The price of oil hit $70.50 about a year ago and it is $72 this morning, soon it will be $55. Even if you do not believe that the price will soon be $55, the move from $70.50 to $72 in one year is a 2% increase. Also, inflation is a lagging indicator, which means the problem is last years problem.

The problem the FOMC has is to slow wage increases to a moderate pace without "killing" certain industries that are interest rate sensitive. US mortgage applications dropped by 6.3% last month. The combination of high oil prices and high interest rates are causing consumers to cut back on other spending. The FOMC is not in this fight alone. The central bankers of the world have joined the fight. The huge gains in auto sales and oil usage in China last month were a result of announced increases in regulated prices this month. The Germans are doing double duty, they are raising taxes and interest rates at the same time.

Very soon, about six months time, the talk will be when will the FOMC cut rates and how far will rates need to decline to prevent deflation. About 65% of gold demand is for jewelry. Just a couple of months ago, billions of citizens in developing nations were enjoying "boom times". Knowing how fickle these economies can be, billions of citzens were buying gold chains to wear around their necks. What a diference a few months can make? The stock markets of developing nations have been ravaged. The demand for gold chains is on life support. Another quarter point in the states, another 2% hike in Turkey a few more quarter points in Europe and, yes, even a hike or two in Japan may kill the demand for gold chains for many months to come.

In the meantime, the capital spending boom projected for the next few years can move forward with force. Billions and billons for new refineries in numerous locations, billions and billions for interstate high ways all across China and billions and billions for new communications equipment all around the globe.

A world wide economic boom after only a modest slowdown in housing, what a wonderful problem to have? Investors who take advantage will make fortunes.

WHOSE SIDE ARE YOU ON?

Indications are that the public stampede is away from stocks, however, additional stock buy back records have been set. Just in the last few days, corporations have purchased 20 Billion Dollars of stocks!

An interesting situation has developed in the bond market, without any further declines in value, will hit very strong momentum buy signals by July (my thanks to Don Hayes for the info). The table is being set for a major bull market move!

The oil now flowing thru Iraq has gotten very little attention. All the emotion and talk is being directed toward the Iran situation. Iran exports about 4 million barrels per day but they then import about 2.5 million barrels a day of finished products. Iraq pumped 700,000 barrels per day thru Turkey before the Gulf War. The growth in China during the month of May has gotten a lot of attention without the mention that this growth was spurred by the announcement of price increases to take effect in June. China and India (Iran and others) sell fuel to the public at a loss. Thus, the prices follow a plateau pattern. The recent increase in China of 12.5% is enough to destroy demand; if not, prices will rise again because the government is losing a lot of money off of each barrel sold.

The other oil factors making the news is a spill in a canal in Louisiana. This is a temporary problem getting far to much ink.

Corporations are buying billions of dollars of stock, reducing the supply. The law of supply and demand works. There is more oil in storage than ever before and billions of new barrels have been discovered in the past few months. Public wealth in America has never been greater and the shares of stock available to buy are going down. Prices are set to go up! After several years of fighting deflation by pumping up the money supply, Japan is sucking up money like never before. In the short run, this will damage the price of assets. However, the damage is already painful for those invested in emerging markets, small caps and commodities (with the exception of oil). Exploration stocks are under performing on a relative strength basis but the real pain will come later.

If you want to make a safe bet, buy Wal-Mart. It has rarely if ever sold at such a low price to cash flow, cheap, cheap, cheap for a company that continues to grow so fast.

LOOK OUT REAL ESTATE PHASE I of IV LOOMS LARGE

The real estate cycle takes about 18 to about 22 years. The cycle starts about the same time the government passes new real estate tax laws. The laws are usually passed to "simplify" the tax code. You may recall that the start of the last cycle began in 1987 just after the tax simplification laws were passed in 1986.

Mr. Paulson, the Bush nominee for Treasury Secretary, received a warm welcome at Senate hearings today. He should easily be confirmed. The speculation that his top priorities will be to simplify tax laws and reform Social Security and Medicare. A few weeks ago, the congress passed only a one year extension to the alternative minimum tax. The table is set.

IMPORTANT: The real estate market is 5 times the size of the stock market and stocks do not do well when real estate is in recession.

We are currently clearly into Phase IV of the real estate cycle. A wonderful opportunity lies ahead. Those who are ready will make extraordinary returns; millions will be made. Those who pay no heed will see negative returns. As a former Boy Scout, I am a firm believer in the motto: Be Prepared. Tell your Mom and Dad, brothers and sisters, and friends and neighbors, there is no need for them to suffer the kind of losses that happen near the end of Phase I.

MORE OF THE SAME

BP Oil just presented it's annual energy report. It shows that world wide demand grew only 1.2% in 2005. On the other hand, world wide demand for coal grew by 5%. The law of substitution is alive and well and continues to do its job in a powerful way. At current usage rates and using proven reserves, the US will run out of oil in 11 years, Saudi Arabia will run out in 81 years and the US will run out of coal in 240 years. Alarmist ignore the 240 years of coal and use the oil numbers to incite fear. A fear so strong that in the US, 39 new taxpayer subsidized ethanol plants will be built in the next two years. In two years, the US will produce more ethanol than is produced in Brazil, the other country where taxpayers are forced to buy fuel for others.

If Iowa was not the first state to hold a Presidential Election Caucus, the huge subsidies would never have passed and the market would have found a more efficient way to substitute; most likely the conversion of coal to liquid fuel. In any event, the US is not going to run out of oil in 11 years. The US has probably a trillion barrels of oil in non-proven reserves. Sooner or later the politics will get out of the way and this $70 trillion dollar resource (at current prices) will be tapped and sooner or later the economics will be right to convert coal to clean burning transportation fuel. Corn oil is not going to replace hydrocarbons. If all the land in America were used to grow corn, corn oil would not replace hydrocarbons. However, the price of potato chips will go up as a result of increasing usage of ethanol. Of course, Frito Corn Chips will also go up in price.

In the meantime, mergers continue, technology evolves and the talking heads obsess about interest rates and resource companies. This morning, it was Phelps Dodge that announced the purchase of two other companies and it was Microsoft that announced a new computer phone initiative. Iran continues to negotiate. Iran has reached final agreement as to some of the provisions of the incentive packaged offered. The coalition wants an answer on the final package by June 29 but Iran suggest it will be ready to answer in August. Who knows when the final deal will be done? Both sides have huge financial incentives to "make a deal". A risk premium of $15 to $20 per barrel will deflate in the weeks, months and years after a deal is done.

The upcoming Google release of Gbuy is going to increase the competition for the online sale of goods and services. Googlewill be more and more in the face of Ebay and Amazon. The integration of Froogle and Gbuy into the suite of accounts being developed byGooglewill give Googleservices a huge amount of exposure. The growth in online sales will accelerate for all three! as more and more folks appreciate the efficiency involved. Blender sales serve as a great example; more blenders are bought as wedding presents than for any other reason. What bride wants to load up wedding presents at the wedding? Who needs to go to the store to select the third blender they have purchased in June? The bride has already selected the blender she wants and the selection is available online. The purchase can be made online, delivered directly to the bride and both the buyer and bride save much.

I understand that the bottom line of the above two threads of thought are a repeat of what I have said time and time again. However, in the face of the powerful brokerage industry and the powerful news industry, investors tend to wimp out. Right now, there are several of the "beach investor group" who are in no rush to fund or add to their account. The fact that many a market indicator is screaming "BUY", investors are in no hurry. History shows time and again that the public waits until stocks have made a significant move before they enter the market. I can't remember the exact numbers, but I can tell you that if you miss the few best days in the market, your returns will be dramatically reduced.

The Presidential Election Cycle suggests that the next few months will be poor months in the market. However, stocks are too cheap to take the chance. Investors should buy now because the risk of a "melt-up" (I believe this is a Ken Fisher term) grows daily. As usual, it may take a surprising catalyst. The FOMC rate increase could come and go and the deal with Iran could be done or postponed before some "out of the blue" negative event (perhaps the collapse of a hedge fund) will show that the last interest rate increase has come and gone.

Another home builder reduced its earnings forecast. Yes, more of the same, but the decline in housing construction speaks volumes to the probability of a halt in interest rate increases and the probability of commodity price decreases. The table is being set for a major market move; I hope you take full advantage!

BAD NEWS DUE

A quick review of the history of markets shows that really bad news is due from somewhere. There are 50 easy examples available but I will present just a few. In 1981, when the worlds liquidity was being sucked up by central bankers, Latin American countries, including Mexico, went bankrupt, in 1997, when the worlds liquidity was being sucked up by the central bankers of the world, Asia nearly imploded, in 2001 when the worlds liquidity was being sucked up by the central bankers the technology bubble burst and in 1990-91, when the worlds liquidity was being sucked up by the central bankers, the world experienced the worst recession since the great depression and savings and loans that had loaned money on resort properties experienced massive defaults.

This time around, so far the possible candidates for implosion include emerging market economies or the bursting of the commodities price bubble. Gold went down 5 weeks in a row before stabilizing this week. Many an emerging market mutual fund in down 30% in 6 weeks. However, so far, there has not been an event of "crisis" proportion. Also, predicting the actual event is not a reasonable expectation. Predicting that there will be bad news after a massive move by the central bankers is easy enough.

The good folks at Gavekal.com point out that it could be Old Europe that takes a hit this cycle. Germany is one of those countries that relies on exports for economic strength and the irony is that the slow down in rapid growth in the third world may lower Germany's ability to export goods.

The size of the China "build-out" is often under appreciated. The fact that China is taking steps to slow the growth rate could lead to major consequences. It is an old story that folks should be careful what they wish for. The US current account deficit serves as a great straw man for politicians to use for making hay but the reality is that a growing deficit shows there is demand for US dollars to engage in world commerce. Again, look back in time and it is easy to see that the "balanced budget" near the end of the Clinton Administration foretold the looming recession.

Please do not misread the above. I believe the world has already entered a relatively mild economic slowdown. I do not believe a recession is likely.

The true leading indicators suggest only a modest slowdown. The most important point investors should take away is that now is the time to invest in late cycle stocks. It is time to sell early cycle stocks. Those who generally in the right sectors during the next few years will make a lot of money. Those who try to catch the falling knives of the first half of the cycle will get cut badly. BUY THE BULL. For more details, Write me

DON'T CRY WHEN YOU MISS THE BIG MOVE

Some folks who have "joined" our investment group have not yet funded or fully funded their account. They should not cry out loud when they miss the big market move. I will use my favorite investment again to illustrate what is happening in certain sectors. International airfares are at 6 year highs and will soon be at 20 year highs. Traffic is at all time record highs. Record traffic times record fares will lead to record profits. Not this quarter and not next but in the near future.

If I am correct, the pressures being exerted by the central banks of the world are going to pop the commodities price bubble (including the price of oil) without causing a severe economic slow down. The trend toward a global economy is just getting started. The net result could be a decline in cost to the airlines of 100's of millions of dollars per year, without a decline in revenues!

The retail brokerage firms can no longer ignore the earnings power. Two more firms jumped on the band wagon this week.

A regular reader wrote that he likes the moves made by GT to lower costs, he likes the broad based earnings power of ORCL and he believed Corning is ripe for accelerating business in the fiber cable sector. I agree on all counts. Notice that these are all business service plays. The moves by GT were to eliminate consumer brands, the expansion of ORCL is all business and the projected strength in Corning is a shift away from primarily consumer flat panel screens (though this business will do well as business demand grows) and to the fiber cable business that is sold to telecom and cable TV firms.

The old saw tells the whole story, "Invest when there is more money than fools and sell when there are more fools than money". Corporations have so much cash in hand that mergers and buybacks continue to set records; this mornings action was in the buy out of two oil companies. A few years ago, stocks were "the" water cooler topic. Last year, it was beach property. Next year it will be stocks again. BUY NOW! To join our investment group
write me

BUY HOTEL STOCKS--SELL BEACH CONDOS

In every stock group, there is see-saw action. A frequent reader who enjoyed a recent visit to Myrtle Beach, said he had never seen such little traffic at the beach in the summertime. Another reader asked why airplanes and hotels are full when people supposedly cannot afford to travel. The phenomenon is explained in Ecclesiastes; "To every thing there is a season".

For many years, I have used the food business as an easily understood business in this regard. There are times to buy restaurant stocks and times to buy grocery store stocks. Those who beat the diversify, diversify, diversify drums imply that you should buy the best restaurant stocks and the best grocery stocks at the same time, but this is not the way to make serious money. When consumers are flush with cash they go out to eat. When times are tight, they go to the grocery store. The restaurants are high beta stocks; they soar in price when business is good and crash when business is bad. Grocery stores are not as volatile but they fight very small margins. Any grocery store chain that expands too far from "home base" finds the extra distribution costs can take away all profits. Huge money is made by buying grocery store stocks at the right time and huge money is made by buying restaurant stocks at the right time. In the past five years, DRI has done well and Wal-Mart has not; the previous five years, Wal-Martwas the better stock to own.


How can Hotel stocks be on fire while beach condos are going begging? There are a couple of answers. One relates to business travel versus personal travel. About half way through the business cycle, companies start "spending money to make money". In the first half of the business cycle, businesses typically try to "save money to make money". The consumer does almost the opposite. Most consumers are still employed at the end of a recession. These folks suddenly find that the price of travel is low. Businesses are not renting rooms, interest rates are down and consumers find themselves flush with cash. Hotel rooms are bargains as are beach condos. Consumers hop in cars, drive to the beach and rent a beach house or condo.

As the business cycle progresses, fuel prices rise, interest rates rise and consumers get squeezed. About the same time, businesses which have repaired their balance sheet are in expansion mode. They are looking at how to expand business and they are looking for ways to retain top talent. Companies offer business trips to keep employees happy. When a company calls to schedule a "business meeting" they do not call XYZ Vacation Rentals. They call the big hotel chains that cater to the business traveler.

The second reason focuses on the current fuel "problem". While the price of gas has doubled, the price of a plane ticket has gone up by 50% or so. Put another way, when one drives his 6,000 pound SUV to the beach, 90% of the fuel is being used to move the vehicle and only 10% to move the passengers. When the consumer decides to fly, he typically calls a travel agency and books a package that includes accommodations. Again, the travel agency is likely to compare packages available from major chains and does not call XYZ Vacation Rentals to get a quote.

Over-built beach condos will go begging for the next several years while airlines and hotels will see rapid growth in revenues and even more rapid growth in profits. In the same way, major pharmaceutical companies will do well while generic drug companies will generally under perform. "To every thing there is a season". In the past 6 weeks, a number of emerging growth mutual funds are down 30%. Last night, market mavens suggested that these stocks are now cheap; wrong! Just as spring turns to summer and summer to autumn, markets change seasons too. If you folks will hang with me, we should be able to buy a beach condo or two at bargain basement prices and achieve a very high rate of return on our investment. We need to have the patience to wait about 5 years until the prices bottom!

As a side note, our Stock of the Week added Interstate Hotels,(IHR) last September. Interstate Hotels,(IHR) operates Sheraton, Hilton, Holiday Inn, Radisson and more. The return added to our portfolio to date is 76%.

GET 'YER GOOGLE

Last week the Wall Street Journal reported on the amount of
power taken up by search engines and Internet services in
general. According to the journal, “One large data center can consume
enough juice to power a small city of 30,000 to 40,000 people.”

And then there’s Google……….

To give you an idea of the company’s growth, and why we like it so much,
Google has a new development on the Columbia River which will eventually
comprise of three buildings the size of two football fields with twin cooling plants.

Note the following statistics quoted from last weeks New York Times writers, John Markoff and Saul Hansel.

“In March 2001, when (Google) was serving about 70 million
Web pages daily, it had 8,000 computers….By 2003 the number
had grown to 100,000.

“Today…the best guess is that Google now has more than
450,000 servers spread over at least 25 locations around the
world.”

And Google just keeps on going.

Google was trading at $388 yesterday, today (6/21) at 11am it’s at $395
Go, Go Google!

WRONG AGAIN AND AGAIN!

As usual the conventional wisdom on Wall Street is wrong again. Smart investors learn to "fade" the initial reaction to news; the first reaction by Wall Street Analyst is wrong more often than not. The announcement by China that it plans to stock a Strategic Petroleum Reserve sent oil prices higher today. The market does not appreciate the message that China is sending to Iran. The stated deadline for Iran to accept international incentives is only 9 days away. China, while not willing to publicly come out in support of sanctions on Iran, just sent another message that Iran cannot count on China to stand in the way of sanctions. As nations around the world build SPR's, the power is taken away from those who are willing to use oil as a political weapon. There has already been a huge build up of reserves around the globe. There is more oil in storage right now than ever before in the history of the world (there is more in tankers floating around on the ocean than ever before). No, we do not want to sanction Iran, but Iran's economy will collapse if sanctions are used. The world will find other ways to replace Iranian oil. Saudi Arabia reports that it has reduced production because supply is greater than demand. Production is growing from the Chevron pool found just last year in the Gulf of Mexico.

Morgan Stanley re-instituted coverage of CAL, AMR and JBLU this morning. Just as you would expect, from a sell side broker, the stock is being covered after it has run from $5 to $28 in four years. Individual investment brokers at major sell side houses such as Merrill Lynch cannot recommend a stock unless a company analyst has at least a neutral rating on the stock. No coverage means your broker at these firms cannot bring the stock to your attention. Last September, when CAL traded for $9, Morgan Stanley offered no coverage, now at $27 the company has put a neutral rating on the stock with a price target of $32. The company recommends that the stock only be purchased on "dips" of 10 to 15%. I can tell you with confidence that sometime in the next three years, Morgan Stanley will upgrade the stock to a buy. The problem is that this will happen after the company has had one or several strong quarters of high earnings growth.

The key to making money in all stocks is to buy before periods of high earnings growth show on the company books. It does not take a rocket scientist to realize that a company like CALthat is increasing revenues at the rate of 20% per year and one that is selling all the product it has the capacity to supply at higher and higher prices is going to see an increase in earnings. You should beat Wall Street to the punch and put serious money in CAL. Do it before a deal is made with Iran. The pressure on Iran has been building for almost 5 years. It should be no surprise when the combined forces of Europe, the USA, Russia and China are able to convince Iran that it is in its own best interest to "make a deal".

Big Computer Upgrade Cycle Getting Underway--Smart Investors to Prosper

The new Microsoft Live Messenger will require a "multimedia" PC; at least a Pentium 233 MHZ or faster machine. It will need 256 MB of Ram and it will take 50 MB of hard disk space just to load the program! Compatible equipment that will make the experience enjoyable will included super high speed broad band connections with high speed wireless routers. The computer on which I am typing, while only a few years old, is inadequate in this new media world.

Investors should buy selected technology shares aggressively. The market will lead the upgrade cycle. The current market rotation is largely about switching from value stock leadership to growth stock leadership.

Stocks are very attractively priced. They are so cheap that world wide merger activity will likely set an all time record this year. Corporations are flush with the cash produced by very high profit growth. Many are wisely buying competitors rather than building new capacity. The activity is in all sectors, from software to the oil patch. Oracle is a great example. This company has bought dozens of competitors over the past 5 years of tough times in the software business. When the upgrade cycle leaps into second gear, this company will be sitting in the cat bird seat.

WIN $100,AND POSSIBLY MAKE A FORTUNE TOO!

June 20 is the deadline to guess this quarters CAL earnings. The person who makes one guess and is closest to the actual results, wins $100. The person who makes two guesses and hits a winner will win $50 and the second place guesser will win $50.

I read an interesting institutional research report today. It stated that CAL should trade at over $70 per share by year end but that earnings for the quarter may be a little low at around $1.29 because of high fuel costs. (Last year, CAL made about $1.26 in the second quarter). My good friend, Lamar Jones, sent a note that Jim Cramer, the guy that will never ever recommend an airline stock, recommended CAL tonight. He said the recent moves by the Bush administration to support foreign ownership rights could make CAL a take over target.

I fear it is the other way around. Congress just blocked, at least for now, the Bush proposals. This means CAL could try to join the ranks of the big four by buying NWAC. CAL and NWAC are the two largest buyers of dreamliner 787 jets. These jets are much lighter and more fuel efficient than the jets they will replace. Remember the law of substitution? Boeing has substituted lighter composite plastic materials for much of the aluminum in the old planes: the planes save about 15% on fuel. These planes are ideal for the CAL strategy of direct flights to major international cities. NWAC has a similar strategy primarily covering pacific destinations.

The Airbus super jumbo is at least 6 months behind schedule. Besides, who wants to fly halfway around the world and still have to catch a second regional flight? This is great news for CAL and airlines in general. The longer it takes to add new capacity, the longer the carriers will be able to charge premium prices.

CAL and NWAC have complimentary route structures and bankruptcy has done the work to make NWAC a profitable merger candidate. If CAL can purchase by assuming debt, it may not hurt the price of CAL shares too badly in the short run and could help a lot in the long run.

On the oil front, there is much good news and much potential for even better news. Russia just opened a new field that will produce 250,000 barrels of light sweet per day by the end of the year. Oil "on the water" reached a new high last week. The gain for the week was 60 million barrels. There is more oil in tankers right now than there is oil in the SPR! Clearly, the world is prepared to sanction Iran if Iran will not come to terms. Iran has moved in the direction of accepting the incentives but has not agreed to suspend enrichment of uranium. Korea would like to get in on the incentives and made a lot of noise today by preparing to launch a long range missile.

A very important step has been taken by China. China just dramatically raised its banking reserves requirements from .5% to 8%! A very substantial increase. By making this move, China is cooperating with the US and Europe to tighten the screws on Iran. Ironically, I got an email today from a commodities pusher who suggest buying oil futures because of high demand growth in China. The move by China could slow oil demand growth in China and help Bernake stop raising rates in the US. Many folks think of high oil prices as inflationary. They are in fact deflationary. If you chart the sum of the fed funds rate plus 10% of the price of a barrel of oil against the inflation rate, you will see that high oil prices kill inflation. It is fundamental that price cures price.

There are many factors at play. The situation is complicated but then again it is simple. Almost all countries of the world want to halt terrorism. Afghanistan was small potatoes. The Iraq-Iran situation is big. It is neat to note that Libya is growing oil production faster than any other country. This once terrorist state is now in business; producing products and using the profits to expand its growing economy. They say there are hardly ever empty hotel rooms in Tripoli. Baghdad and Tehran have the potential of becoming key cities in the expansion of world trade.

I recently suggested to a good friend that he stop putting so much in his company 401-K. The tax structure in the US has changed dramatically since this program was started (primarily for the benefit of the brokerage companies). In the old days, high marginal tax brackets offered high incentives to deposit pretax monies to 401-K accounts. This was true even though the restrictive nature of the accounts dramatically reduce their utility. Now with lower marginal brackets and the risk that marginal brackets will later have to be raised, the tax benefits are not what they used to be. Investors can realize major tax benefits by investing in stocks and real estate. My point to my friend was that had he invested the same money in real estate for the past 20 years, his after tax equity would likely be many times the after tax equity he has built in the 401-K. Of course, one should probably make all contributions necessary to receive matching funds. A balanced approach is often best.

Put another way, while it is hard to average more than about 10% return on a 401-K account, it is very reasonable to expect to make 15% return on equity in leveraged real estate. The difference in 10% and 15% compounded for 50 years or more is absolutely huge. Investors need to think in terms of 50 years or more. The problem many folks face is not dying too soon but living too long. Couples who have lived to the ripe old age of 50 years must prepare to be around for another 50 years. The probability that one spouse will reach 100 is about 30%. By compounding at high returns, investors can enjoy helping others, including their children and grandchildren.

Make a quick guess and you may win $100. Make the right investment decisions and make a fortune for you, your family and your fellow man. Send your guess to me via email

MORE POSITIVE BUY SIGNALS

A number of stock market buy signals suggest you should put as much into the stock market as you can as quickly as you can.

The following is a quote from Sentiment Trader "The 4-week average of the American Association of Independent Investors ratio is now effectively at its most extreme level, a point that has equated to major market buy points in the past. The 3 month average return over the past 20 ears has been 7.1% with 95% of the weeks being positive (62 out of 65)".

The Sentiment Traderweb site shows other indicators that are not screaming "BUY" but several of my favorite indicators are strongly in the BUY camp. Right now, smart money confidence is up to 67% and dumb money confidence is down to 29%! Also the Rydex ratio is at about the same level it reached in March of 2003.

The above indicators are just a small piece of the investment puzzle. They mean little by themselves. However, valuations suggest that stocks are cheap relative to bonds and real estate. In the past, when Sentiment was as negative as indicated above and when valuations were this positive, there were some great moves ahead in the markets.

By the way, Marilyn, Courtney, Whitney, Julianna and I are enjoying the beauty of Myrtle Beach. We still have a few empty spots this summer. Please let us know if you would like to visit Myrtle. Happy Monday to All!

STOCK MARKET SIGNALS SCREAM BUY!

Some of the best intermediate term stock market signals are screaming BUY! I made aggressive buys the past few days. I added to the aggressive buys this morning. While I must warn and warn again that I do not know anyone who has a great track record of predicting what the market will do in a few months, I must also say that it is rare to get such strong signals.

I will never never never recommend to you to buy options. However, my feeling about the market is strong enough that I can report that I bought options in family accounts over the past few days. Making money in options requires being right in a relatively short period of time. A person can be right about the direction of the market in the right amount of time and still pay such a high premium that he still loses money on options. On the other hand, if you buy a basket of stocks and hold for several years, the odds are strongly in your favor to make a better than average rate of return.

My seemingly constant barrage of positive comments to you may lead you to believe that the majority of investors are "bullish". This is not the case. One consumer confidence ratio for stocks just hit 21%. The AAII survey just hit levels not usually seen except near market bottoms.

The Presidents popularity has just jumped into the range where stocks normally do very well. The majority of the people of the world now believe interest rates will go higher over the next year. This is in the face of an incredible surge in low cost production of products. The cost to manufacture most products is going down not up. At the same time, service businesses are using technology to lower costs.

One definition of inflation is too much money chasing too few goods. Today's economy is almost the reverse. Today, there are more than enough goods being produced to satisfy all needs. Many a store has opened to recycle "slightly used goods". There is no limit to the number of times an aluminum can can be recycled.

Those who are speculating in commodities should look back in time to see how we use less and less raw materials to produce more and more goods. Yes, the tremendous growth in Asian economies means the world needs to mine more copper but there is plenty of it in the ground. Fibre optic cable that is replacing copper cable is made from sand. I don't think we are going to run out of sand any time soon.

How many shares of CAL do you want to own when the price of oil drops from $70 per barrel to $50 per barrel? How many shares of GLW do you want to own when video's become the most common form of communication?

FRIENDLY SKIES

More planes will have more seats full this July than any other July in history. Five major carriers just increased fares $50 each way! This is the seventh system wide increase this year and it has not slowed demand.

I hope you all appreciate the investment significance. The recent slow down in the economy was putting fear in the hearts of many an investor. Certainly the airlines need several more strong years to repair their balance sheets. A severe downturn now would tough to survive. Today's fare increases shows that the airlines see much strength ahead.

I continue to believe that AMR and CAL will trade at more than $100 per share when the market realizes how strong the international travel market has become.

WOW! IS HISTORY ABOUT TO REPEAT?

Mid 1990's and mid 1980's the market transitioned from a consumer lead recovery to a business lead expansion. After the transition, the stock market was up 40% from January 2 to September 1, 1987. I don't remember the numbers but the market was up huge in 1996 to 2000. In each of the prior decades, the market went through a tough rotation before it took off. So far, the action most resembles what happened in the 1990's. Stocks, gold, real estate and about everything else suffered a couple of months before the last of the FOMC increases. Then about three weeks before the last increase, the market sniffed the end. The markets began to move. There was a bounce in metals, resources and energy stocks but when the rally hit second gear, it was new leadership that took off. In two weeks time, three important events will occur. The Iranian deadline will pass, the FOMC will meet and Google will launch GBuy. Most everyone has some sense of the importance of the first two events. However, the Google launch is in some ways the more important of the three. The new super network being built by Google is more powerful than most folks can imagine. Yes, MSFT and Yahoo are spending billions to construct similar networks but the Google network is way out in front. Many a corporation has all employees linked on a network but most cannot come close to doing all the things that the Google network will do. GBuy is a great example. Many folks think that GBuy is nothing more than a PayPal clone. These folks thought that GMail was nothing but a Yahoo clone. As you might guess, GBuy includes key features that make it much more powerful than PayPal. Billions of people the world over would like to reduce the amount of time wasted in reviewing non relevant advertisement. There is room for a huge savings. Do you get junk mail upon junk mail? Does it take you 30 minutes to watch 18 minutes of TV content? GBuy is going to save you and me hundreds of hours and advertisers billions of dollars. Yes, just like when GMail was launched, there will be those who fuss about losing their privacy. Let them fuss. For me, I prefer for Google computers to track which products and services I am willing to buy. As a trade off, I expect to watch videos, visit web sites, read the news, receive emails and play games without being constantly interrupted with information that I do not want. I would hate to guess how many feminine hygiene adverts I have seen in my life. More importantly, how much time I have wasted on these ads. Do you see how the above information about GBuy and the rotation in the 1990's relate? In the second half of the 1990's, spending to build out the internet was huge. Consumers and businesses bought routers, high powered computers, software, digital equipment and much more. The next round of spending is underway. The dream of the 1990's that the whole world would be linked by high speed fibre optic cable is going to be realized. In the near future, it will be common to see internet connected computer terminals all over the place. These terminals will not need to be fancy, just a keyboard and a screen. In many cases the keyboard will not be needed. Insert your flash memory card into a terminal and that terminal will know who you are and it will provide you with the exact information you need in a hurry. Wireless pocket computers will communicate with these terminals to provide an abundance of services that have not even been invented yet. Are you ready for round two of the internet bubble? Bubbles are a lot of fun if you are an early investor. Common sense says to buy when stocks are down. Now is the time to add funds to your stock investments. BUY THE BULL! If you have questions about the market, send me an email

REWARDS AHEAD

Jason Goepfert, of SentimentTrader.com, reports that Rydex Investors have given up on "big tech". They have sold down to 10% of total assets. Good news coming. It is hard to hold on during tough markets but those who buy near the bottom will receive rich rewards!

I love the Google Calendar and Spreadsheets. I can't wait to start using GBuy and GWrite. In a couple of years, the only computer a person will need "on the road" is a $19 USB flash drive!

THE TURN IS HERE

The oil report this morning is again that our cup runneth over. Gasoline supplies in the US increased more than 2 million barrels last week as did distillates (the source of heating oil and airplane fuel). Natural gas storage is nearly full and there are months to go before winter.

The turn is here. It is time to be invested!

FOLLOWING THE STRENGTH

Today we decided to cut our losses on Stock of the Week ACAT. Arctic Cat, manufactures and markets snowmobiles and ATVs We've held onto the stock for 6 months as it produced negative returns in the Stock of the Week portfolio. Although first quarter sales were up, ACAT has replaced last years 5% sales growth with consistent losses, with more expected throughouth the year.
Proceeds from the sale of ACATwere reinvested in Dell, the world's largest personal computer maker, know for high quality products with an attractive price point for the consumer.
Dellhas tripled its employment projections and landed service contracts with some major market players.
Dell is expected to offer a new desktop PC using a microprocessor from Advanced Micro Devices. We repsect Dell's manufacturing and conrol cost expertise as core strengths that will help this computer manufacturer be a long term growth stock with some hefty profits. Check it out and let us know what you think! Better yet, we'd love to talk to you about our Myrtle Beach Investors Group

TAKE THE OFFER

I offer $50 cash to the person who makes the closest guess of this quarters CAL earnings.

In the airline business, the first quarter is typically a losing quarter. The spring summer and fall is when the airlines make their money. It has now been almost five years since the business took the 9/11 blow. Costs have been cut and revenues have been growing. The following is the recent history of first and second quarter earnings at CAL:

first quarter second quarter
2003 -3.38 $1.01
2004 -2.35 -.42
2005 -2.79 1.26
2006 -.46 ???

The consensus estimate of Wall Street Analyst is $1.35.

I will not make a guess but I invite friends, family and investors to make their best guess. Only the winners name and guesstimate will be revealed.

There is no cost so you have nothing to lose. Send your estimate one time by email. Once you have made your guess you are not allowed to change the number. Send your response by June 20 to be a valid entry.

STOCKS: ATTRACTIVELY PRICED!

My favorite investment advisory service is produced by Don Hays A three day free trial is available at Hays Advisory. The cost is a couple of hundred per year or so, but well worth it.

Hays presents a number of measures that show psychology, valuation and monetary policy. Right now, valuation is screaming buy, buy, buy. The IBES valuation model shows stocks to be undervalued by 31.2%! On the other hand, as we all well know, monetary policy is throwing cold water on the market which in turn has put the psychology indicators strongly in the buy camp. The futures markets indicate that there is about a 75% chance that the FOMC will throw more cold water at the June 29th meeting. However, this could change in a hurry. More signs of slowing inflation or more weakness in the worlds economies could make the FOMC decide to hold rates where they are.

Look at bond market rates today and you will see that investors are paying no risk premium to lock in their funds for 10 to 20 years. The market says that interest rates are going down soon. Maybe not by June 29 but soon.

The following is a list of Hays indicators that are in the "green buy zone":

NYSE Volume relative to NASDQ Volume
Rydex Bulls to Bears Ratio
ARMS 10 day movement measure
ASII Bulls to Bears
OEX Put to Call
ISEE PUT to Call
Total Put to Call (historically high numbers)
26 Week Bond Momentum
Rule of 20
Inflation Indicators-Gold, Silver, Oil, Copper, Lumber

Again, the monetary numbers are not so good. A flat yield curve with little growth in money supply. This would be quickly cured should bonds continue last weeks rally.

The rule of 20 is a simple but powerful little gage. It is currently in a rare and beautiful spot. Here is the way it works, you subtract the ten year bond rate from 20 and compare to the S&P forward earnings yield. The spread is currently screaming BUY STOCKS!

Another way of presenting the data is that the 10 year bond is currently paying 4.97% while the average big stock is paying a 7.23% earnings yield. Sure, many folks, particularly in tax free accounts, might prefer 4.97% in cash over 6% projected capital gains. However, 7.23% tax advantaged is a big number over 4.97%. Rational long term investors must go for the 7.23%.

I hope the "old members" did not mind a repeat of things already said in the past few days. I repeated some things because I want to make it absolutely clear that there is a huge opportunity available. It is a rare day to see such wide gaps in valuation. There will be convergence. Either interest rates are going to go up very much or stock prices are going to go up very much. The current slow down in housing, autos and emerging country economies will not support many more interest rate increases. The third possibility is that interest rates will come down some and stocks will go up some. There is room for a lot of movement! My bet is on stocks, BUY THE BULL!

SECOND LEG

Another 100 million barrel field has been found. A few months ago, I wrote about the huge new find by Connoco. This week DNO, a Norwegian Company, announced its recent find to be over 100 million barrels.

Many folks do not believe me but I am confident that the price of oil is going to go down. The reason is simple economics. The price is ultimately set by the cost of the "marginal producer". The tar sands of Canada are producing huge profits at today's prices and production is steadily increasing. At a Coal to Liquid conference yesterday, it was reported that Coal to Liquid technology is now capable of producing fuel at $35 to $45 per barrel. This morning it was announced that Iraq has restarted pumping oil through Turkey. This will have the immediate effect of adding about 500,000 barrels per day to the current burgeoning supplies in storage. Crude is trading down about $.68 per barrel today. Iran has until June 29 to accept a deal.

The recent collapse in the price of Gold, Aluminum, Copper and Lumber is a great indication that the central banks of the world have gotten "on top of the curve". The great Stan Salvinson used to say that inflation is "bingo, bango, bongo". Bingo is the phase where employee wages go up too much, bango is the phase where commodities go up too much and bongo is the phase where interest rates go up too much. By the time you get to the interest rate phase, inflation is being pushed up by all three. However, the rise in interest rates slows down employment growth and commodity prices and then interest rates can follow the others down, before starting the cycle all over again.

The good new is that growth and technology stocks do well when it becomes clear that inflation is not out of control. The price of Gold, Silver, Copper, Lumber, Oil, wages and more are telling us that inflation is not out of control. Indeed, lumber is close to a five year low. Home builders will use less lumber, copper and other goods as the market takes a breather. Bonds will rally on the news that inflation is dying. Stocks will follow soon thereafter. Add to your investment account today and send me an email to take advantage of the coming BULL MARKET SECOND LEG!

THE LATEST DECLINE

This weekend I heard a couple of "talking heads" say that they see not signs of economic slowdown, are they blind? The latest big decline came in Malaysia where car sales fell 55% in May.

Speaking of CARS, I went to see the latest offering from Disney. It is the best of the 7 Pixar productions. It got off to a bit of a slow start at the box office, only $67 million the first week end. It will have legs. Adults and children will pass the word. A big firm down graded Disney this morning, based on valuation. The stock is down in pre-market trading. I am not concerned. This movie will ultimately take in several hundreds of millions of dollars. The cycle is right for big American Companies such as Disney.

SECTOR SELECTION IS 90% OF MAKING MONEY! GET OUT OF SMALL INTERNATIONAL EVEN AFTER THE MASSIVE DROP WE HAVE SEEN! For more details write me

THE WORD,"INFLATION"

This week, the word INFLATION is going to be in the news. Investors should realize that inflation is a lagging economic indicator. The price increases in oil prices and commodities,that happened last year, have been showing up in government inflation numbers this year. It is very important for investors to realize that inflation is being well contained by the central bankers of the world. A sharp turn has been made in commodity prices. The evidence showed up first in the stock markets of the Middle East, Dubai and Saudi markets are down about 50%. Now that the move has taken hold, it is showing up in other emerging international stock funds, in the price of gold, oil and other commodities and in the "flight to quality" moves of the "safe havens".

The last few days of June and the first few days of July are going to be interesting. The FOMC meeting and the deadline for the Iran deal fall together. Just before the congress goes home for the Fourth of July Holiday. From then until November, a lot of campaigning is about all the congress will do. Pension reform, immigration reform and other bills are pending. One can never count on congress meeting a deadline but the house-senate leadership says votes will be taken before the recess.

After, the last of the "bad inflation numbers" are reported this month, there should be good news between now and the election. The 4 year presidential cycle suggest that stocks will sell off before the election. The market likes a dead locked congress. It is interesting that the current congress is dead locked because of disputes among the Republican majority. Some market forecasters fear the take over of the house by the Democrats. I think the Republicans, with the help of lower oil prices and progress in Iran/Iraq, will pull out a rabbit and retain control. What does all this have to do with investing?

The point is that in a period of negative sentiment, fear of every possible problem is in the news. These are the times to buy, buy and buy some more. The negative sentiment abounds and includes a very low popularity rating for the President and the Congress. However, the market traditionally does very well when the popularity ratings improve to 35% and continues to do well until it reaches 50 to 55%. I am confident that gains will be made by the President and the Congress between now and the election. Therefore, I discount the four year cycle. If I am wrong, valuation should keep the market from falling much and the big rally will start after the election. In any event, I want to be fully invested when the rally starts. The next move is going to be LARGE. I hope you are fully invested when the BULL stampedes. Send me a note if you want to talk about it, better yet join our group

THE STATE OF INTERNATIONAL STOCK

Friday, I received an interesting email from John Mauldin. John is the author of Bullseye Investing and Just One Thing he does a excellent job of pulling together the thoughts of professional money managers.

Friday, Mauldin included comments about the state of the worlds many stock markets. he put together a list of 64 markets and not a single one was sitting on new highs. The worst of the worst were Dubai and Saudi Arabia, down 58.5% and 43.3% respectively. The US market as measured by the Dow Jones Industrial Average is only down 6.4%.

For a couple of months, I have encouraged you to sell international stock mutual funds, including any you might own in your IRA's or 401-K's. These markets have fallen so hard that various advisors, including BCA Research and Ned Davis Research suggest that there might be a bounce ahead.

I have said it before and I will say it again, when a rotation comes, you should buy relative strength. In other words, the US market by being down only 6.4% is showing a lot of strength. Money that is scrambling to get out of international funds is flowing to the relative safety of the US markets. My Dad served 6 years in the Navy during WWII. He was fond of saying that it takes time to turn around a battleship and once it turns it will likely go a long way before it turns again. I would not play the bounce.

Also note the huge decline in the stock markets of oil producing countries. The markets are forecasting a decline in oil prices. The "bounce" ahead should be good news for your account. I hope you have fully adjusted your asset allocation to reflect the turn in the business cycle. Please write or call (336-778-0543) if you want to discuss actions you can take that will make money for you over the next few years.

Some of the folks on our list have not opened accounts. I invite you join me in making plans to buy Myrtle Beach Real Estate at depressed prices. If you know of someone who might be interested, forward this email to them. The list will occasionally be pruned of those who have not "shown us the money".

MARKET SENTIMENT

We welcome two new investors. Both of these investors recently spent a few nights at Kingston Plantation, Myrtle Beach. It is easy to recruit new members. after they spend a few free nights at the beach. The good news is that membership has great value even if you never go to Myrtle Beach.

Ned Davis Research.

Ned Davis offers high powered research at www.ndr.com. It is expensive stuff ($25,000 per year for the full version and $4,800 per year for the abridged version) but all prices are relative.

On June 7, 2006 he posted an Institutional Hotline report on "Sentiment at Fidelity". I am not allowed to send out copies but I can share some of the thoughts presented.

Fidelity operates 41 sector funds. The Ned Davis report is that an unusually large amount of money has been put into energy and energy related funds. A large amount has also been invested in Gold funds. At the same time, growth funds are sitting at record low relative ownership!

Sometimes it is hard to know when to run with a stampede and when to be a "contrarian". Once a bottom is made and momentum takes over, one should never stand in the way. Stocks can run a long way past fair valuation and they can drop a long way below fair valuation. One should remember that the public is always wrong at the "extremes".

Over that the SentimentTrader web site, Jeff's focus is on "smart" investors and "dumb" investors. Boy have his numbers recently changed. Suddenly, smart investors are very confident and dumb investors are scared. About a month ago, the numbers were inverted. As many of you know, I prefer to be in the market at almost all times. I may switch from being very heavy in stocks to very heavy in bonds but I seldom hold a lot of cash. The long term evidence is that those who ride the "bucking bronco" all the time, generally do better than those who try to jump in and out of the market. Indeed, I have seen individuals hold back from investing when stocks are low and then jump in time and again near a market top.

Mark Hulbert runs a service that tracks the results of investment advisors. I have read his work for many years and time and time again, he has shown that it is a mistake to try to time the market. Friday, Gary Shilling was a guest on Kudlow and Co. Shilling projects that the US will be in a recession by year end. The fact that Shilling's opinion is far from the "blue chip" consensus opinion does not make it wrong. Indeed, John Maynard Keynes accurately stated that in questions of Economics, the majority is always wrong.

The majority believe that energy is the place to invest; wrong. The White House Economic Forecast which is consistent with the "blue chip consensus" follows:

2006 Real GNP 3.6% Inflation rate 2.9% Unemployment 4.7%
2007 Real GNP 2.9% Inflation rate 2.3% Unemployment 4.8%

Since the majority is wrong, what is the right answer? My forecast is between that of Gary Shilling and the majority. I believe GNP is going to slow considerably over the next few months (we will soon find out that it has already slowed since last quarter). However, it is a long way from 2.9% GNP to negative GNP. For just one quarter, we might see real GNP of 1% or so. Big housing companies have already seen 30% declines. Big cars, trucks and SUV's are in a sales slump. The US economy is not going to show strong growth with housing and autos in the tank. My guesstimates follow:


2006 Real GNP 3.0% Inflation rate 2.4% Unemployment 4.9%
2007 Real GNP 3.5% Inflation rate 1.8% Unemployment 4.7%

The above guesstimates hide the idea that the slowdown will be sharp and short. The key question for investors is what will be the lowest quarterly GNP number. Should GNP drop to 1% and should inflation rates respond, long bonds would see a huge market rally. All projections go out the window if the Iran/Iraq situation were to improve dramatically. The resulting decline in oil would boost GNP and lower inflation at the same time! The above projection also hides the boom I see by the second half of 2007. If GNP gets knocked down to 1% in 2006, it will have to make impressive progress in 2007 to reach an average of 3.5%.

The numbers from Ned Davis suggest growth stocks are out of favor and ready to take off. The projections for the economy suggest that one should avoid growth stocks and hunker down for the long pull. The other way that the majority could be wrong would be if a deal is made with Iran soon. The real GNP could jump to well above projected rates.

Are we all confused now? Like I said, I don't believe in trying to play the short term moves. I know the public is avoiding growth stocks like the plague and is piling onto energy and other value style stocks. My stock of the week web site has enjoyed great performance by buying good value. We are staying fully invested. In our largest accounts we have purchased T-Bonds on margin but other wise we are fully loaded in big names.

Welcome again to the new members. Those members who have not been to Myrtle should invite their golfing buddies and take a trip. I hope you will all remember to share this information with your friends, family and associates. If you have questions, let's talk

FULL SPEED AHEAD

June 9, several other major airlines matched fare increases and a new round of increases were started by AMR and NWAC on international flights.

Folks, airline fares are going up by more than the increase in fuel costs. Five to ten dollars per seat is a lot of money when you multiply hundreds of seats times thousands of planes times two to four flights per day times 365 days per year. Debt is being paid down. Balance sheets are being restored to health. A couple of days ago, Fitch upgraded AMR debt. AMR raised 400 million by selling more stock. I hope CAL does not issue more stock. Cash flows are improving rapidly. Soon, airlines will find that they can refinance debt at lower rates; further lowering costs and improving cash flow more.

The BIG BOOM in traffic growth is now about two years old. Last June, CAL set a record load factor. The load factor is not likely to go up much year over year this year because all the planes were full last year. However, customers are now resigned to fare increases. The airlines are staggering $5 to $10 rate increases in different markets every few weeks. They check to see that planes are still flying full and then hit the next market.

Many of you have read this story from me more than once but many of you are still skeptical. A lot of money flowed into accounts when CAL hit $30 a couple of weeks back but now with the price at $25 little new money is arriving. It is hard to invest when prices are down, human nature; the smart investor moves in aggressively when stocks are down.

I am afraid CAL is going to get a take over offer before the stock hits $35. If it does, the company will go out at $45 or so. If it can stay independent for the rest of the year, I believe it will trade much higher.

Now that the terrorist have been infiltrated, it is possible that geo-political progress will move more quickly. If the market gets a sniff that a deal is done with Iran, all bets are off. Oil could come down $25 a barrel in a few weeks and legacy airlines could double.

STRONG MARKET AHEAD

Two more sentiment indicators have given buy signals; the ratio of AAII Bulls to Bears and the SPY Liquidity indicator (thanks for the info from Hays Advisory and the SentimentTrader). It is time to load the boat full of stocks. Short term you may lose but history shows the market should be up strong over the next 9 months to a year. The bond market "highway patrol" has just raised the speed limit! On May 13, the thirty year bond traded at 5.33%. Today it is trading at 5.03%. I understand that .3% does not sound like much but add in the decline in stocks in recent weeks and stock to bond relative value is climbing. At 5.3%, the "fair" P/E ratio for the S&P 500 is 18.8%. At 5.03% the fair value is 19.8%. The projected earnings for this year puts the S&P P/E at 13.9%. Divide 19.8% by 13.9% and you get 1.42 . The stock market is currently undervalued by 42%!!

If you have money to add to your account, you should do so as soon as you can and keep on adding. You can also be a friend by telling a friend that the market is cheap. Warn your friend not to buy the "old" market leaders. A rotation is well underway. Some of the stocks that have not done much in the past five years are going to be market leaders over the next five years! Email me, I would be happy to explain the current important market situation .