Thursday, December 13, 2007


I have been asked a few times in recent days if the "market has reached the bottom"? How does one know when a bottom has been reached?

Ed Yardeni has presented what I believe is a good bottom measuring stick. When mortgage rates were extremely low and credit was readily available, from 2003 to 2007, more than 5 million sub prime loans were made. RECENT DATA SHOW THAT MORE THAN HALF OF THESE LOANS HAVE BEEN PAID OFF. The great majority that have been paid off were paid off by refinancing to a fixed rate mortgage. The unsophisticated borrower was talked into taking out a variable rate loan when interest rates were low and they were talked into paying extra fees to convert to a fixed rate loan after interest rates went up. Freedom has been worth the blood of millions of Americans. It is a real shame for people to not educate themselves to take advantage of what freedom has to offer.

Take a look at the price of a building lot in your area and I believe you will find its value has increased by at least 100% in the past 6 years. Americans have once again set a new all time record for net worth. The net worth of Americans is now 58 Trillion Dollars. Government data this morning shows that the GNP this quarter is going to be better than what the gloom and doomers believe.


One regular reader mentioned the concept of perception versus reality this morning. Perception does move markets in the short run. The long run is what counts. Today, the public is confused. About half of all people in the USA believe the US economy is in recession. We are living through the greatest world wide boom in history but we do not know what to believe.


Another reader asks if DAL is making money. The answer is similar to the story of the other international carriers which lost lots of money in 2002, 2003 and 2004. Black ink has have returned to the the DAL bottom line. Of 28 analyst who follow the stock, the average expectation of earnings is $1.14 in 2007 and $1.37 in 2008. The $1.37 number is remarkably low. The crazy thing is that the forecast is for $.36 in the last quarter of 2007, .36 in the first quarter, $.37 in the second, and only $.42 in the third. I am willing to eat my shoe if the earnings spread between the second and third quarter is not more than $.05. DAL chucked a couple of billion dollars in annual costs by going through the bankruptcy process. The company is making money with fuel prices at unsustainable levels. If oil prices stay so high, all the more trips will be made by "sky bus". The price of oil will hasten or delay the date that big dollars flow to the bottom line but, in the long run, fuel prices are unrelated to airline profits. If they were then airlines would have made lots of money in 2002, 2003 and 2004 and would have lost money in 2006 and 2007.


The bottom was reached in airline stocks three years ago. The current dip has been brutal but that is all it is, a dip on the way to great profits. The average airline fare will be about double the price in three or four years. All the extra being paid will flow to the black bottom line.


So what! I will never forget how strong the consensus of opinion in regard to buying bonds during the early 1980's. Bonds had declined in value for the prior 10 years or so. People hated bonds. They had to be pushed hard to buy a true bond. Tying up money for 30 years was seen as foolishness. Those who "locked-in" government guaranteed rates of about 14% for thirty years saw the value of their bonds soar. Investors want to do what Goldman and Merrill do, buy what others are selling.