Tuesday, August 14, 2007

Where did all the money go? BUY BUY BUY

Last week, I wrote about how the total foreclosures from the sub-prime mess are a drop in the bucket in relation to the entire economy. They are but the mid cycle turn is forcing a lot of drunks to sober up in a hurry.

The old saw about the Fed and the punch bowl is still a good way to look at these cycles. During the recession, it was the job of the FOMC to get the party started by spiking the punch bowl. The FOMC poured in so much "liquidity" that fed funds rates went down to 1%. For the past couple of years, the FOMC has had the job of trying to sober up the crowd. It has replaced the punch with hangover medicine. It tried to use strong coffee for a while but recently it has been awful tasting medicine.

The good news is that the patient is not on his death bed. The world economy is still strong but the slow down in the USA is finally having a sobering effect on the rest of the world. For example, recent numbers show a slowdown in industrial production in Euroland.

Year over year, the US Dollar Index is down about 5%. It is down much more against strong resource economies such as Canada and Australia. The cumulative effect of this decline has started to "hurt" the rest of the world. US imports are still growing but not like the past several years. The year over year growth in imports is around 3.8%, however, year over year export growth is running at 11.2%! When the industrial powerhouse of the world starts kicking butt and taking names, the rest of the world has to respond!

Most of the rest of the world's central bankers have joined the USA in attempting to bring the world economy in for a "soft landing". Economic landings are never close to perfect but so far this one is about as smooth as you will see. Even so, a reader wants to know how I can claim the sub-prime mess is such a small event when there have been billions of losses around the world.

Again, the total value of all sub-prime loans that are near foreclosure is only around 7 billion dollars. Most of this 7 billion is not lost. The value of the homes is probably at least 5 of the 7 billion. Still, my reader is correct that markets have moved to the tune of billions of dollars. ONE OF THESE MOVES HAS BEEN AN INCREASE IN THE VALUE OF GOVERNMENT BONDS TO THE TUNE OF BETTER THAN A TRILLION DOLLARS! The recent bull market has been in the government bond market!

Investors often forget the size of the government issued bond market. It is so large that the numbers numb our brains. If a 50 trillion dollar portfolio of bonds increases in value by 15%, the gain of 2.5 trillion dollars is more than we can imagine. The latest "crisis" is analogous to a cannonball splash by a 300 pound jock in Lake Michigan. If you are within a few feet of the deed, you get splashed pretty good; the ripples extend for long distances but, the total shock is minimal on the other side of the lake. In this imperfect analogy, skeptics will say that the Bank of England was forced to pump in reserves to settle foreign markets, to which I say, this too shall pass. We are looking at a massive loan to the system for a few days time. This lake is so big that the waves will settle down quickly and all will be forgotten soon.

Again, keep in mind that most of the loss in stocks was offset by a gain in bonds. There may have been a small amount of water splashed out the the lake but most of the water was simply moved around. Even after the recent declines, the lake is still full of water, we are still sitting on exciting gains. The year over year increase of the NASDAQ 100 (QQQQ) is up about 30%! We avoided the REIT index which is down 5%. We also avoided the BKS index which is down 9%. The Dow Jones transportation index is up about 20% while the gold bugs made about 2% in the XAU index. Our favorite stock is up about 650% from the 2003 low but it has not done anything for us lately.

The CAL super catalyst I see on the horizon is the required passage of the air traffic control bill by September 30. In the year 2000, congress changed the game in favor of the low cost carriers. As usual, the congress "fixed a problem" only to create a bigger one. Before 2000, the FAA controlled landing slots and landing schedules. Today, all the airlines try to land at about the same peak times. Hundreds of little planes carrying a few passengers each cause jumbo jets to circle airports but this is the way congress "leveled the playing field". With more and more passengers being delayed, congress will make an important adjustment. One method would be to charge premium fees for peak landing slots, let the market decide who will land at the busiest times.

In the event that common sense prevails, when this matter is settled, the big carriers like CAL will "win big". More importantly, the traveling public will be well served. Those who cannot afford a private jet will enjoy better landing times as a result of the large group getting fair treatment. Delays will be lessened, fuel will be saved, travel will be more enjoyable.


Stocks are very cheap relative to bonds! Bond rates may rise over the next few years but only as a result of a strong growing economy, producing great profits for business.

Insiders are BUYING! Corporate insiders are taking advantage of the current confusion in the market. They are buying like they did in March of 2003.

Psychological indicators say BUY, BUY, BUY! Indicators such as Put to Call and short selling by perpetually "wrong" investors say to buy with both fist.

The mid cycle turn is almost over. Fuel savings are being invested in technology! The airline business is a great example of this. In the past year, airlines reduced their fuel consumption by an average of 4.3%. They flew about 4% more passengers and about 7% more available seat miles but still reduced fuel consumption. In addition to the 4.3% savings, the price paid per gallon is down about 2.3% year over year. In case you didn't notice, the peak price on crude oil in July of 2007 was not accompanied with a new peak in product prices. The price of a gallon of gas is less today than it was before Memorial day week end. This process will continue; gasoline will be around $2.49 in a week or two. The law of substitution lives and breathes. High prices cure high prices. What did the airlines do with the fuel savings? They spent it on technology to increase future savings. In the case of CAL, the company purchased 10,000 copies of VISTA. The CAL ticketing system is a far cry from the one used just a few years ago. The company has taken hundreds of other steps to save fuel, including the sale of 10 old planes.

The American Consumer is also alive and well. The current slowdown is a minor bump in the road. Consumers are buying electronics. One example is that the whole world is quickly adopting GPS. In a few short years, we will all wonder how we did without pocket GPS locator's. Garmn has introduced the cheapest models yet.

Much has been made about the coming Google Phone. This is not one phone but one of many that will offer Google, Yahoo or MSFT search and Internet features. The point is that high speed Internet is going to be available 24/7 for a reasonable price. A price at which the savings of time will more than offset the extra costs. The extra costs will disappear as prices come down more and more.

A wise old bard once said that if you want to find an exciting product, find one that will save "A Busy American" time. The new Google Phone is all about saving time. The "Dick Tracy Watch" is no longer a pipe dream. Check your stock quotes on the road.

Yes, today was a tough day in the market. This is the nature of mid cycle corrections. Good stocks and bad will be taken down a notch. The key is to buy "relative strength". Stocks like CAL that are siting near the bottom are the ones you want to buy. If a stock holds steady while others are going down, the steady stock is the one with relative strength.

Tech is holding up well. A big move lies ahead!

BUY BUY BUY! Please forward this email to your best friends!