Thursday, October 04, 2007

Laissez les bons temps rouler

The good times are here.

What if?

What if the congress passes tax legislation that lowers the marginal tax bracket of millions of Americans and raises the cost to burn fossil fuels?

At first, many people might be upset by the higher fuel taxes; but, what if?

What if the higher fuel taxes were to dampen demand such that in combination with new supplies that the price of gasoline tumbled? What if the news media started going gaga about the lower fuel prices and explained that the oil producers were in effect paying a portion of the tax increase for us? What if the fuel tax was only 10 cents per gallon the first year but scheduled to increase by 10 cents per gallon for the following 4 years but what if the price of gasoline were to fall by much more than 10 cents per gallon?

What if millions of Americans got an income tax rebate next spring because their marginal rates had fallen? What if there is a compromise included that "splits the difference" on the Bush capital gains taxes? Would billions of dollars of built up profits be realized such that investors would pay more in tax next year in order to avoid higher taxes the following year? Would the flood of extra revenue balance the federal budget?


This mornings announcement that unemployment claims increased by 17,000 was "good bad news". The probability that the FOMC will cut short term rates again increases each time there is economic news showing weakness in the economy. As you may recall, by the time the economy hits bottom, the stock market will be in full bore bull mode.

Larry Kudlow, of CNBC, is calling the current situation Goldilocks 2.0. He is closer to the truth than the bears who say a deflationary recession is here or near. He is closer to the truth than the bears who say that an inflationary spiral, brought on by the collapse of the dollar is here or near. In regard to the bulls who are stampeding into MEI (materials, energy and industrials), he rightly notes that there is risk in the area because so many investors are all in. Should the market in these areas correct, the correction could be steep as there is are few retail investors who are not already owners.

The slow down in housing construction is providing the extra funding for other areas. Manufactured goods exports could not grow at 16% if that level of business could not be cheaply funded. Further declines in interest rates will not cause the housing market to "snap back" in the sense of construction of new homes in already saturated areas but the lower rates will allow the housing market to gradually clear and it will provide funds for a huge increase in capital spending that is already on the drawing boards. There must now be more than 1,000 multi billion dollar projects planned. Many of them are power plants, oil field developments or refineries.


I spend little time watching Google's earnings forecast. Google carries a high PE and it will continue to do so for as long as its growth rate continues on a torrid pace. PE ratios are over emphasized by most investors. On the other hand, I pay close attention to the PE ratio of CAL. The difference is that the stock is so much out of favor in the market place that it is driven up by each increase in earnings forecast. In recent weeks, the estimates have been increased by 10 analyst or more. The range of estimates has grown as the more optimistic analyst have increased their numbers more than once. Credit Suisse is the most optimistic of all. Their estimate is $2.50 for the quarter while the low estimate is $1.87 and the mean has moved up to $2.14. The report will be made on October 19.

Yes, I am hoping for $2.60 or so.

It is also fun to witness how the game is played. The optimistic analyst seem to consistently lower their longer term forecast at the same time that they raise their near term number. I think part of the reason is so that if they miss, the miss does not look so bad. Another reason might be so they can once again issue a positive push to their stock by later having room to raise the next quarters estimate as the quarter end approaches.


I love the new found discipline in the industry. The response to the slower US economy continues to be the reduction of "local" capacity. When AMR announced the prepayment of $540 million of debt, they mentioned the release of liens against older aircraft. CAL has added to hub traffic at Cleveland but primarily for the purpose of staging all the more international traffic. LUV recently offered their highest paid pilots a buyout opportunity. USAir just cut back on Pittsburgh flights.

Several airlines, including CAL and AMR, have taken advantage of the international boom to sell older planes to isolated areas. CAL's planes went to Russia. CAL has added another flight to India and the company is preparing to add several more international flights as soon as its 787's begin to arrive.


Thanks for the early response to the question about carbon taxes. If you have not sent your number from 1 to 10 A ten will indicate your strong belief that congress will pass a carbon tax this year and pair this new tax with a decline in marginal rates. Please feel free to explain your response. For example, if you believe a carbon tax will be passed but that the revenues will be spent so indicate.


Strong wage growth, strong export growth, strong government revenues, strong technology expenditures, and strong business construction should more than over whelm the weak housing market. Through in a little success in Iran, Iraq and Israel and you have the makings of a sentiment shift. PE ratios could easily rise by several points. Many a stock could be up 50% or more in a year.