Thursday, September 20, 2007


Congress has failed to pass 12 of the 13 budget bills. The deadline of October 1st is also the date the debt ceiling runs out. Is there going to be a replay of the 1995 government shutdown? I don't think so. A very smelly compromise or two may be in the works.

One bill likely to pass will be the "Airline Passenger Bill of Rights and FAA Satellite Air Traffic Control and Airline Flight Path Correction Bill." No, Congress will come up with a shorter name but to "get the votes" the bill will include provisions to soothe the wounds of the unhappy. This bill will regulate payments and benefits granted to those who are stuck on the tarmac for hours on end. Of course, once the airlines get a bill passed to fund a new high tech satellite navigation system, the problem of being stuck on the tarmac will miraculously be solved. CAL has already spent at least $50,000,000 building a new hub in Cleveland to relieve the congestion at Newark. There is no question that the big carriers have been paying more than a fair share of the cost of FAA services. After the bill has passed, smaller planes will save a lot of money by avoiding taking a prime landing spot from one of the big carriers. Smaller airports will be utilized more by these smaller planes.

The airline industry and the traveling public will all be big winners when a compromise is reached. Among the losers will be the owners of homes that are in the direct flight path to the major airports. Part of the huge cost savings will be more direct flight paths near these airports. The savings will be in terms of money and time. Many a flight will cut 20 minutes off its landing time. Connecting flights will see improved scheduling. The cost of the system will be upwards of $50 billion but it will be well worth it. A compromise should be reached very soon.


Senator Grassley of Iowa is trying to steer Congress toward the elimination of the AMT along with making the 15% rate on capital gains taxes permanent. Grassley argues that Congress does not need to offset or score the loss of revenue from the AMT tax because the government has never expected or budgeted this income. Of course, Charlie Rangle and the rest of the Democrats are pushing other ideas. The idea that the democrats will fight the hardest for is the closing of the "loop holes" in regard to "carried interest." They know they have a "winner" in regard to attacking the taxes paid by hedge fund managers. The fact that a change in the law will not cause even a twitch in the tax revenue collected gauge does not matter. Many a business will have to be restructured to avoid the extra tax but, again, the amount of new taxes collected will be minuscule. Indeed, the normal, reasonable and rational decision of many an investor will be to avoid realizing the gain on investments once the tax rates go up. The free flow of capital is one of the things that makes the US economy dynamic and prosperous. The passage of extra taxes also includes a hidden "tax surcharge."

Senator Grassley needs 60 votes to get a bill through the Senate. The Democrats need the 60 votes to get a bill to the President but it needs 67 to over ride a veto. Congress currently "enjoys" a favorable rating of 27% of the citizens and the disapproval of 64%! I don't recall lower numbers. Do the Democrats really have the stomach for closing down the government? When the Republicans tried in 1995, they caught too much heat to handle.


Twenty five long years ago, when I was an investment broker with Merrill Lynch, an event happened two times that has not happened again until the day before yesterday. The up to down volume on the New York Stock Exchange was greater than 25 to 1. Such an event, according to The Sentiment Trader, has happened only seven times. In addition to the two times in August of 1982, it happened in 1950, 1951, 1957, and 1978. In most cases, the market jumped, then stumbled around for a week or two and then jumped again. In all seven cases the market was up strongly within three months and the average increase of the average big stock was 9.4%. If you appreciate how "heavy" is the S&P 500 or the Dow Jones Averages, they you appreciate that serious money was made during these historic moves.

The up to down volume this past Tuesday was better than 30 to 1!

One possible scenario is that the market will struggle for the next couple of weeks and then have another huge up day when Congress passes a reasonable compromise. Of course, when Congress lumps 12 massive appropriation bills into one grand package, all sorts of extra billion dollar earmarks get funded. Yes, I can already smell the stink of the compromises coming but the process of "muddling though" is as good as government gets. Government is a necessary evil, generally the less the better.


Google continues to charge ahead with innovative "solutions." The coming advertisement revenues from "rich media sources" is going to make the revenues from the current text ads look very small. Google is ready to patch together its innovative "gadget" ads with its current operations and with the DoubleClick system as soon as the closing of the purchase is complete.

Mobile ads are also ready to explode. INTC, TXN and others are making dramatic strides in reducing the battery power needed to operate sophisticated hand held, wireless computers. Those children born this year are going to live in a very different world than the one that you and I know.


After falling hard for 4 years, the value of the US Dollar is about to turn. As a general rule, the turn will mean that the performance of international investments will weaken and the performance of US investments will improve. Part of the reason that China has been growing at unprecedented rates has to do with the value of the US dollar. As the dollar and the yuan (which is pegged to the dollar) have fallen, the price of Chinese goods sold in Europe has fallen. The ECB is still in need of an increase in Euroland short term rates to slow the European economies. Job losses are going to be very large in Euroland unless they can reverse the growing advantage of the Chinese manufacturers. ECB rates are at 4% and the US Fed Funds rate was just reduced to 4.75%. Under the circumstances, one cannot expect the dollar to climb until the market is confident that either the spread is going to switch from a -.75% to a plus something.

Yes, I am saying the opposite of what the TV pundits repeat at least a few dozen times each day but history and common sense are on my side. The price of oil and gold is being pushed by fear of an "Iranian Event", by the falling dollar and by the belief that lower short term rates will stimulate the economy and thus the consumption of oil. Since 1978, Iran has been isolated from the rest of the world. Over the past couple of years, hundreds of deals have been made that will bring Iran out of isolation. The current situation is much like the negotiations to buy a business. Outsiders can often discover that negotiations for a takeover are in progress but only the insiders can make an highly accurate, educated guess as to weather the final deal can be closed. It would be a silly move for insiders to openly state their educated guess. If one suggests that a deal is close only to see it fall through, then the party has embarrassed himself with no potential gain. If sabers are rattled putting the prospects of a deal into great doubt, then a successful conclusion provides relief to all parties.

Iran has fastidiously maintained its right to develop the peaceful use of nuclear power. I believe Iran will develop said nuclear power after a deal is made that will reduce the threat to the rest of the world. Obviously, almost everyone would prefer that all nuclear weapons were destroyed. It has never been a comfort to know that Russia or India or Pakistan or others have the capacity to start a nuclear war. The deterrence of self destruction just does not seem very powerful when dealing with people who are willing to commit suicide to insure a trip to heaven. Still, I suspect that the final deal will give Iran the "supervised" right to develop nuclear energy.

Our French Friends have added a bit of pressure. I smell a compromise in the works but it has been more than a year since I first caught a slight scent in the air. Only time will tell but the combination of a few deals in Congress and a couple of deals in Iraq and Iran could make for a huge stock market rally before the November elections.