Wednesday, December 19, 2007


The evidence mounts that the turn is here. Wouldn't you know the mountain of cash held by consumers in short term accounts has grown to the incredible amount of 7 trillion dollars! The situation is like a boy scout campfire where every boy has a stack of wood and the scout master is about to go to sleep early. How big is this fire going to be?

Over the past year, oil producers have spent a record amount of money developing oil projects. In the coming year they have budgeted an 11% increase. Oil producers will spend $369 Billion dollars in 2008. At the same time, the new CAFE standards are already forcing reactions by the car companies. GM just increased prices by an average of $1,500 per car. Consumers will be pushed by higher prices on small cars to consider expensive hybrid vehicles. Hybrids will be worth buying one day but mandates by the government are part of the "game of government" where members of congress "held their buddies" instead of doing what is best for the people. Those with the dough get the ear of the legislators.

Credit spreads are falling. The time to buy stocks is when credit spreads peak. We just saw the peak. With billions being pumped into the market by the ECB, spreads are falling. It is tough to read the credit markets at this time of year because all kinds of banks and companies that operate with as little excess cash as possible like to dress the books a few days before the end of the year. Cash is king until it is put back to work in early January. This is part of the reason for the January effect. So far this year, seasonal patterns have been broken time and again. Here again is the reason I believe in investing for the long haul. Short term moves work until they don't.


As we round the turn, the rabbit is out of control. He is jumping all over the place and getting very tired. He is ready to take a long nap. This is a time when the tortuous starts to win. In the stock market game, the tortuous can start to win by staying in one place or by backing up less than the others in the race. Relative strength should be sought out over the coming weeks. The jack rabbits are getting lots of attention but they are going nowhere. The break out will be strong once it is recognized by the majority. Yes, cycle have been stretching out. It seems to be taking forever for this cycle to play out but one by one problems are being "fixed". Peace in Iraq, a budget in congress, mortgage relief, money relief, and energy developments are all improving situations. Believe it or not, there is even progress being made in our relations with Iran.


New home construction is down to the annual rate of less than 800,000 units. Of these, about 300,000 are in existing neighborhoods or on empty lots. A significant number of these are tear downs. Old homes in good locations are sometimes torn down to make room for McMansions. The key point is that new home sales exceed new home construction. The turn is here. Even though the naysayers are still whining about the months of supply that are on the market, that supply is on the way down. Once potential home buyers learn that the supply is starting to fall, the pace of inventory reduction will quicken. Before the 2008 election, the home market will be "healed".


BCA Research has posted a chart showing the interest earned on the mountain of cash. In recent months the mountain of cash has climbed rapidly but the interest earned on the cash has fallen. Scardy Cats no longer have the luxury of seeing real returns on their savings. Inflation is dying and so are money market rates.

Last Night on Kudlow and Company the economist that runs the Carpe Diem web site was a guest. I cannot recall his name right now but the site is an excellent resource. Last night, he presented a chart that shows the old Milton Friedman discovery that money supply leads inflation by about two years. Based on this chart, it is clear that inflation is on the way down.


The earnings from stocks go up automatically when the inflation rate goes down. THE TURN IS HERE. YES, I SHOULD HEDGE AND SAY THAT THE TURN IS NEAR. So far this year, I am like the boy who cried wolf. I have been seeing the turn on the way for a long time. But this wolf is like a freight train. We can hear the whistle blowing and the chug, chug, chug is loud as the train approaches a mountain peak. The fog is thick so we cannot see if it is ready to crest the top but we certainly do not want to try to catch up once it is headed down the mountain. BUY, BUY, BUY