Friday, November 02, 2007


The "big six" have agreed to language for the next round of UN sanctions against Iran. Iran is once again being given the chance to negotiate a settlement. Saudi Arabia has offered to join a consortium that would supply Iran and other Middle Eastern Countries with power grade uranium.

Progress toward peace continues. The deal between Turkey, Iraq and the USA to work jointly to stop the PKK is just one more step toward peace.

More than 1,000 years ago, one of the great bandits of all time lived in the mountains of this region. He lived well. He would pick a target country, rape, pillage and kill. He took his plunder back to the mountains and stayed until the furor over his actions had died. A few years later, he would carefully select another country to plunder.

There are two reasons that bandits have survived for 1,000's of years in this area. The first is because the hideouts in the mountains are remote and easy to defend. The second is because the attacked countries failed to unite against the terror.

The Kurds have had more than their share of problems. The people have maintained their identity even after Britain and France (?) partitioned their territory among several countries. Significant regions of Turkey, Iraq and Iran are predominately Kurdish territories. Ironically the Kurdish area of Iraq has been the most stable, peaceful and economically successful of the regions in Iraq. It is time to take on the bandits from the hills. The civil war between the Turks and the Kurds has continued since 1984. It is good news that the governments of Iraq, Turkey and the US have joined together. If Iran could be persuaded to cooperate, the end of conflict might come without much additional bloodshed. Unfortunately, the problem is similar to the problem in the mountainous regions of Afghanistan and Pakistan. For those who think it should be easy to find and kill the bandits of these mountains, I would remind them of the American Abortion Clinic Bandit, Rudolph, who hid out in the mountains of North Carolina for a few years. North Carolina mountains are about one third as difficult to scale as the mountains of the middle east.


The price of gold hit 27 year highs today while oil has pushed toward the highs of 1980. In China a man was killed after he broke the line for rationed fuel.

Over the coming weeks, China will continue to raise interest rates and to let its currency float upward. Economic and political forces require this action. The invisible hand of Adam Smith has not been repealed. Over time, politicians will get the message that current political scheme to convert food products to fuel is a harmful policy. Over time, the silliness of not using oil reserves will be obvious. Over time, the law of substitution will work.

In the short run, the question has become, how much of the current run up is hedging action against the possibility of war in Iran and how much of it is growth in final demand? The final blow off rallies are always extremely powerful. As you may recall, in 1999 and early 2000, tech stocks went 10 times as high as reason would have suggested. It is my belief that oil is currently in a blow off rally. The optimist in me says that the problem will be solved when Iran agrees to suspend production of nuclear materials while sitting at the bargaining table. The pessimist in me says that the hoarding of fuel will continue for several more months.

France has released 2 million barrels of oil from its strategic reserve. This turned out to be a drop in the bucket for the speculators to absorb. The straw that breaks the back of the oil surge will be bigger than the release of a few million barrels of reserves. Of course, a world wide recession would do the trick. I believe the governments of the world will keep the pressure on Iran until a deal is made. The next recession will be postponed for a few years and the powerful substitution process will finally be the big straw.


The Lieberman cap and trade bill has at least a slim chance of being passed. Such a bill would increase the price of clean fuels such as oil and natural gas because the use of coal would be in effect restricted. It has been reported that Pelosi is most interested in getting her energy bill through congress and that her team has been in negotiation with the presidents team. As you know, I prefer a carbon tax off set by cuts in other taxes.

The House has passed a one year patch to the AMT but it has not been funded yet. The House has also cut out about 20 Billion of extra spending. In other words, there is finally a little movement toward a compromise that would allow the Congress to leave town. There is still a lot of ground to cover. The best bet at this point in time is that no major deals will be made. The Congress will be forced to do a patch without raising other taxes by nearly as much.

The Senate has once again passed the SCHIP bill that will be once again vetoed. Bush is starting to have a lot of fun. He will once again get to hit this softball out of the park. Passing this bill without sending any appropriations bill to the President, 5 weeks into the fiscal year is an act of absurdity and an act of political suicide. Democrats might lose their majority if they do not get their act together. Dick Army summed the situation up well when he noted that the rich and the poor are meeting in the middle. There are some families who would be eligible for the new SCHIP rules while they would also be classified as rich enough to pay AMT taxes! What a farce?


It is a fact of life there are constant intersections between ones political beliefs and ones economic beliefs. I write my thoughts down in an attempt to clarify what I believe about the financial markets, the goal of these letters is to help me and you make better than average investment returns. None of us want politics to get in the way of that goal. I hope you will go along for the financial ride with me regardless of your political beliefs.

For a long time, I tried to write without openly stating my political beliefs; it was hard to do. For the past couple of years or so, I have openly expressed my political thoughts which are complex. My strong beliefs in individual responsibility, free trade, strong defense and limited government have lead me to a strong republican bias. At the same time, I am appalled by many of the actions of the republicans. I do not want to judge anyone but it seems that there is hatred in the hearts of many republicans. I do not want to "win" for the sake of "winning" but it seems that some republicans are willing to "do anything to win the spoils of war". Government is and will always be an ugly process. I believe in keeping government on a starvation diet because as we have seen in recent years, on both sides of the isle, politicians will gorge themselves and their friends on the spoils of political "wins".

When I answer polls, such as the one offered by Al, I typically disagree strongly with all candidates on a number of issues. My strong support of the two party system means that I must select the most important issues and go with the candidate that fits those issues best. I believe the polls would be improved if they ranked all 10 questions by order of importance. Anyway, for what its worth, I find myself becoming a Rudy Giuliani fan.


My perception is that Rudy would cut red tape, reduce excessive litigation, strengthen the dollar, protect the homeland, and lead the nation to solve the tough issues of the day such as tax reform, social security solvency and immigration. His success as Mayor of New York is perhaps one of the great political feats of all time. As with all candidates, his blemishes are obvious, but he believes in America and he clearly has an understanding of the sacrifices made and those that must be made to keep freedom alive.

It is most interesting to note that of all the Democratic contenders, Hillary comes out on top in every poll I take. like Rudy, Hillary is a closet centrist. She, like her husband, knows how to speak as a liberal without closing the door to more centrist policies if needed. As was proven during Bill's term, divided government tends to work best. The major accomplishments made by Bill happened after Republicans gained control of Congress. Rudy got the Democrats in New York to pass unbelievable reforms. Rudy and Hillary are pragmatic at their core. If allowed, Hillary would run the US into the left hand ditch and Rudy might run into the right hand ditch. Assuming that Democrats maintain control of congress, it is important to me that Rudy win over Hillary.

In my opinion, the drop off from Hillary to Obama or Edwards is severe. On the Republican side, several other candidates would do well as President as they would tame the urge of a Democratic Congress to steer into an economic ditch.


The war in Iraq is being mentioned less and less by the democratic contenders. With troops continued success and troops coming home, Iraq could become a republican issue. Iran is being mentioned often but a deal could remove that issue from the debate and the price of gasoline could easily trade for less than $2.40 per gallon by the election day.

The class warfare argument will fail if wage and employment gains continue on their current rapid pace. Today, the markets were surprised by the addition of 160,000 more jobs last month. The jump in jobs was taken as bad news because bond interest rates rose and the prospects of further rate cuts fell. However, by the end of the day the 10 year note traded at 4.32% and the market closed up. The bottom line is that Americans are seeing their net worth, incomes and standards of living rise. A long term record in regard to the real increase in disposable income was just broken. The price of goods, from hand held gadgets to pianos continues to fall.


Yes, an election year surge in public sentiment is about to happen. Congress is going to get out of town without doing major harm and then the roses will begin to bloom. If you want to make serious money in the stock market, Monday morning is the time to push a big stack of chips onto the table. BUY, BUY, BUY!