Thursday, June 08, 2006


The life of Abu Musab Al-Zarqawi came to an abrupt end today. Good news for those who want to see an end to the killing of innocent civilians. When the Prime Minister of Iraq announced the news he also announced the appointment of the ministers of defense, interior and national security. Iraq is making progress toward the day when the local government can fully take over.

IMPORTANT NOTICE: The other Wicked Witch (inflation) is dying and investors should act now to make serious money.

The current market rotation is consistent with the death of inflation and those who position the bulk of their portfolio correctly will make a lot of money as the rotation progresses.

When it comes time to rotate out of one area and into another, the small investor has a huge advantage over institutional investors including high fee mutual funds. The big guys all try to get out the door at the same time! Who can they sell to if all are trying to get out?

A lot of bad information is distributed as the big institutions try to talk individual investors to buy what they are selling. The prices of the old hot groups get marked down but it is a mistake to buy what is falling hard during these times. One of the easy ways to get a read on the situation is to look at and buy relative strength. Yesterday, oil service stocks were down 4.77% in one day! The same day big pharma stocks were up .43% and airlines were up .46%. If oil service stocks had been even and big pharma had been up 5.2% pharma investors would be estatic. Being up .43% is hard to get excited about but strength during a rotation shows what the "big boys" are buying.

It is easy to dismiss the whole move as nothing but trading consistent with the decline in oil. However, it is much more than just oil. Headline inflation leads core inflation by 7 months and the correlation coefficient is .83% (info courtesy of Hayes Advisory). Seven months ago was peak momentum for headline inflation. For the past seven months, headline inflation has been in retreat. Next week, the numbers should show that core inflation has peaked. The numbers will be down-hill for several months thereafter. Look at what is happening to the price of gold! Look at what is happening to emerging nation stock funds! Even though I have warned readers time and again, I know some of you still have international small cap funds in your IRA's and 401-K's, IF YOU DO, SELL THEM NOW!

A plot of Exxon Mobile for the past 2 months shows that Exxon Mobileis down about 5.75%. During the same two months, GSK is up 8%. Those who are piling onto energy "because the price of gas is going to $4" are making a big mistake. The rumour is out that oil tankers are leaving the oil producing countries without knowing for sure who can take the oil. World wide, oil in storage is at record levels! Yesterday, the US numbers were incredible. Refinery production went up but capacity utilization went down! We have more production coming back on line than what we can use in the short term. Gasoline inventories are being misstated to fool the innocent. Last year, Gasoline in storage included the additives but this year, because the ethanol is mixed late in the cycle, it is not being counted as part of the gasoline supply. Adding the additives in means that gas in storage has gone up year over year. The law of supply and demand says that when supplies go up and demand goes down the price has to go down!

Another major discovery of oil was made in India this week. The funny thing is the way the news was reported. Much was made about the fact that it will take about 2 years to build the facilities to pump and transport the oil. What is news about that? Whenever a major field is found, it takes time to build the facilities. The big find by Chevron made a few months ago will come on faster than usual because it is close to infrastructure nearby. The bottom line is that more and more production is due to come on line because the industry has been drilling like crazy for the past couple of years. Why not? At $70 per barrel, there are huge profits to be made.

Market mavens try to explain the recent decline in the market as a "flight to quality"; treasury bond rates are in decline. The idea being that big money is hunkering down to survive the coming recession. My guesstimated date for the next recession was revised yesterday from 2009-2011 to 2011 to 2013. I project a much slower GNP this quarter and next but we have a lot of room for a slow down without having a recession. After the slow down, there will be time and room for another good economic run before capacity restraints hit again.

Last quarter the overall economy was on fire. Real GNP was about 5%. Adding on inflation of more than 2% and we get a nominal GNP of better than 7%!! No wonder gold was going up in price; nominal GNP was more than 2% higher than the long bond rate!

The slow down in GNP will allow the pressure to come off commodity prices and interest rates. An ideal environment is developing for technology stocks. Businesses have hired all the employable workers there are in the US. For the rest of the business cycle, businesses must invest in technology if they want to expand.

No doubt the economy was "too hot". The governments of the world have been working together to cool things off. Many a central bank has increased short rates (the European Central Bank is projected to raise rates again today). India and China have done their part recently by raising the lid on fuel prices to billions of citizens. These billions of consumers have been somewhat sheltered from the pain of higher oil prices. The combination of higher oil and higher interest throws a lot of cold water on the world economy.

Again, the US economy can experience a significant slow-down without a recession. The talking heads have recently brought up the word stagflation; what a joke! Even at this intermediate term peak, inflation is low and productivity is high. America is producing more and more goods with less and less labor. The wealth effect is still a very strong force and Americans today are more wealthy than ever before. Again, the talking heads weigh-in with comments about how the consumer can no longer use his house as an ATM machine. The rate of gain in house prices has cooled off to a normal pace. In "the old days" consumers would have been tickled to death if the value of their home went up 4% last year. Twelve percent gains were more fun but the big gains were in hot markets and were obviously unsustainable.


Many thanks for the great referral yesterday. The new member is excited about the plan. He visited Kingston Plantation last week and enjoyed the use of the beach front condo. He hopes to get make great buys on Myrtle Beach Real Estate when the time comes.

Several of you have the resources but not the will to add to your account right now. I understand that it is hard to buy when the market is down but common sense tells you that the time to buy is when the market is down. Use your common sense and add to the market now! Don't put so much money into 401-K mutual funds. The tax benefits do not make up for the under-performance. A 1% clip in performance compounded over the life time of a 401-K account gets to be a huge number. Besides, tax benefits are available in taxable accounts and in real estate investments. The flexibility that the individual investor has is a major advantage over high fee mutual fund accounts. Happy Thursday to all!