Tuesday, June 20, 2006


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