Thursday, September 20, 2007

UP and UP and Up

CAL earnings forecasts keep going up and up and up. The increases are only pennies at a time but the pennies are adding up in the face of record oil prices. The forward PE is now at 6.38%. What would this number be if a savings of $2 per share were to materialize?


The key point of the "black swan concept" is that a surprise can happen at any time from most any direction. The thing is that one can often see the potential for spotting a black swan in areas where the great majority see no possibility. So far, no one has been able to reasonably explain the "air attack" of Syria by Israel on September 6. Did Israel drop a bomb on nuclear supplies bond for Iran, explosive supplies bond for Iraq or was it just a reconnaissance plane that mysteriously dropped extra fuel tanks on the Turkey -Syria border?

In any event, rumblings continue about a potential deal in regard to Palestine and Israel. Don't hold your breath but don't be shocked if this is the "surprise" that ignites the next big move in the market. The odds of a particular event may be very small but the accumulated odds for one of many possible events is great. How many times have you heard someone say that such and such could not happen again in a million years?

My favorite once in a life time story is my golf story. I had a clear shot at the green except for one problem, a very small dogwood tree was directly in my way. It was at least 30 feet away and my partners told me to aim for the tree because I couldn't hit it in a million tries. My ball hit the tree dead center looped upward and landing exactly in the spot I had just hit it from. After a good laugh my partners said that that the shot was truly one in a million. They said to aim for the tree again. Yes, I did. I hit the tree the second time in a row. You had to be there to know how unlikely the shot was. I honestly believe that I could go to the spot and try a million times to hit that small sapling again and never succeed.


Even after the cut in the Fed Funds Rate, the psychology of the market place is still one of disbelief. Yes, there were huge inflows of funds to mutual funds but a large amount of this money flowed into "old news stocks." Money is flowing into international, energy, basic materials, gold and other inflation plays. WHY? Because people are doing what the "big boys" suggest. Goldman Sachs just announce an earnings jump of 70%! They make most of their money trading against the crowd. They are saying that oil is headed much higher. Believe them at your own peril.


The facts are that the CPI was up 2% year over year and down .1% in August. At the same time, the real, inflation adjusted earnings of the public, were up 4.4% year over year. Over my 57 years of life, there have seldom been better numbers. Even the price of gas has not gone up for close to two years. During the same time, the price of a very useful electronic map has fallen by thousands of percent.