Friday, November 30, 2007


One of my favorite comparisons to make is between the stock market and the craps table. Right now, the news being pumped out daily is similar to the calls of the croupier at Las Vegas crap tables. The disciplined crap players avoid all the bets that are constantly promoted by the croupier. Only the "fish" get sucked into betting the "hard ways". The odds of making money on the best bet on a 6 or 8 are very close to 50/50 but a hard way 6 or 8 gives the "house" a 16.667% advantage.

Today, the talk, talk, talk is about financial stocks rallying after being beaten down. The talk is also about building stocks which completed and incredible run last year. Homebuilding stocks did not hardly slow down during the 2001 recession and went up many times in value from the 1990's bottom to last years top. Just because they fell a lot since then does not make them cheap.

I wrote about the coming blastoff this morning but must admit that the action today was more backing a filling. The "big boys" would like to sell a lot more "old cycle stuff" before pilling into the new leadership extra hard. The Treasury Secretary and the Chairman of the Central Bank were appointed by members of the "good old boys network". Paulson talked up the idea of new legislation to "save millions of homes". Of course, these millions of homes would not need to be saved if the public had not been talked into variable rates when interest rates were low. Furthermore, since millions have been scared out of decent variable rates into fixed rates at higher levels and since the big drop in short rates has occurred, the need for action to "save homes" has been diminished. When getting a mortgage, it is important to "lean against the prevailing wisdom" just like taking the contrary view when buying stocks. One must remember that the lender prefers to make fixed rate loans when rates are high and variable rate loans when rates are low.

Marilyn and I have had one variable rate loan for almost 20 years. It adjust every year to 2% above the 1 year treasury bill rate. There is no limit to the amount it can adjust. As a result the rate has been as high as 11% and as low as 3.25%. The payment has not changed much. The average rate has been very good because of the tight margin to the 1 year bill. At the time we took the loan out, fixed rates were around 8.5%, we have averaged far below an 8.5% rate. Based on what is happening in the money markets, it appears that by the time congress can pass a bill to "save homes" the variable rate rollovers will be quite reasonable. The one year treasury is now trading below 3%. Even a high spread of 3.5% would put the interest cost on a variable loan at 6.5% which is a very good deal, especially after the tax rebate.


The activity toward the mobile Internet is hot, heavy and fast. By opening up its system to all devices, Verizon has acknowledged the power of competition coming from the 700mz spectrum to be auctioned soon. Way back in 1956 the voice and data markets were fenced off from one another. AT&T was allowed to monopolize the voice business and IBM was granted almost as much freedom on the data side. It has taken 50 years to open up these markets. The cost of the first faxes to go over AT&T lines were extremely expensive. Today, we attach a big file to an email and send it for nothing.

This week Apple did a pre-announcement of its 3g network. It needed to do something to show that it has plans to "catch back up". While Apple products have been "cool", it is tough to buy an iPhone at 2g speed for 30% more than a Verizon phone with 3g speed. Verizon made another announcement, it will use a technology for its 4g speed that will work on GSM phones and on CDMA phones. Here again, Verizon is saying bring any device to our network. The concept being accepted by Verizon is that consumers will use cheap Internet connections from home, work and from Starbucks but will still want a cell phone for when needed. Verizon just said fine, we will allow dual band devices of any type on our network. Verizon wants the "phone business" even when it loses the "data business".

Google continues to go full steam ahead. As reader Lamar points out, the new Google Mobile Location Map is better than GPS in some aspects and like many other Google products it is free. While only 15% of all phones have GPS, many have a browser that can open Google. Google uses triangulation technology from cell towers to plot a fairly precise location of the user. Suddenly, all kinds of location based queries make sense. Google has also announced that it will indeed bid for 700mz spectrum. Google will spend billions of dollars to insure that the public can get to the Internet from mobile devices without paying cell phone rates. One of the big questions remaining is in regard to VoIP phone calls. A broad mobile Internet network could force current cell phone rates to drop by 70% or more!


Right in the middle of the mid cycle turn of the 1980's, the price of oil dropped like a dead duck. As I recall it was in January of 1986 when the price of oil fell from $28 per barrel to around $12 per barrel. It is in the best interest of Saudi Arabia for the price of oil to cause a little pain but not a lot of pain. Many countries in Europe are about to roll over to recession unless something gives. The Central Bankers of Europe are whining that they cannot lower rates because inflation is still high. The Saudis want to avoid a train wreck. If they increase oil production on December 5, which has been widely rumored, the fear of inflation as expressed time and again by so many Central Bankers will be diminished. They will all find it easier to lower interest rates.

The Bush Administration just announced that agreements have been reached with China in regard to various trade violations. Making these changes along with the increase in the value of the Yuan will serve to decrease the trade imbalance with China. Unfortunately, the main reason is that goods from China will cost us more. Not to worry, the most important import Americans receive from China is disinflation. The process of bringing millions of farmers to the city, to make low cost goods for export, is not nearly over. Productivity continues to improve at a rapid pace in China. The Chinese are following the path of South Korea in the 1990's and of America for decades. One way this productivity shows up is in the use of energy. China is making more goods while using less energy. Did you know that world wide the peak in per person oil consumption happened all the way back in 1979? This trend is so powerful that it is visible to the untrained eye. For example, the number of movie rental stores is falling daily. If you think about your own community you can recall former Blockbusters. The movie business is going online. Like I said this morning, retail online sales are running at an increase of about 24% year over year. This is a huge number. Park the car and buy online. It cost much less fuel for UPS go from three houses down to yours than it does for you to go to 6 stores in stop and go traffic.


I must say it time and again because I know I am fighting powerful interest. Interest that wants to sell you the wrong asset. The "bad news" of higher unemployment claims is the lagging indicator we needed to show that the FOMC needs to cut rates soon. Lower interest rates will boost the economy. I sold my bonds too early. I made a very nice profit but could have made much more. Just because I sold before the top does not mean that those of you who hold "balanced" mutual funds should not sell now. The ten year rate is hovering around 4%. Do you really expect these rates to go a lot lower? SELL "lifestyle funds", CD's and anything else that locks you into a rate for more than two or three years. We just hit an all time record divergence between stocks and bonds. Stocks are about 44% undervalued relative to bonds. BUY STOCKS!