Tuesday, June 27, 2006


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!