Wednesday, December 12, 2007


On the 11th day of December, the congress has not passed a budget for the fiscal year that started October 1! A few hours ago, they kind of started over. The good news is that they will strip out about 10 Billion Dollars worth of ear marks. The bad news is that they will continue to pay off their "friends".

The limit being set for rich farmers is a maximum subsidy of $750,000 for full "timers" and $250,000 for part time farmers. Not a bad gig if you can get it. The same bill will force consumers to buy 36 Billion Barrels of bio-fuels per year. The United States Government owes about 800 Billion Barrels of easily mined Shale Oil. It is not politically correct to use this oil but instead we will throw out enormous quantities of pesticides, fertilizers and water while jacking up the price of food. Poor people will starve but the politicians will take credit for reducing the price of oil. The total amount of shale oil in the US is estimated to be around 2 trillion barrels but it would be much more economical to drill for another trillion or so barrels of conventional oil still in our territories. It is simply amazing that China is drilling for oil withing 100 miles of Florida but congress will not allow US companies to do the same. Throw the bums out! Reduce the size of the federal government! Eliminate the income tax! While you are at it, cut off CNN. The news media has brainwashed the world into believing that converting food stocks to fuel is a wise thing to do. Our school children are being brainwashed.


The buy indicators have seldom been stronger. Even being angry at congress correlates well to the time to buy. Other indicators that have reached inflection points include the stock/commodity ratios. One can see this best in terms of the euro and the yen. The CRB has fallen sharply in these currencies. The inflation/deflation ratio is also at a peak and ready to roll. I feel compelled to pound the table on the decline in inflation. When a phone call, email or text message is substituted for a physical action such as a personal visit, the decline in inflation is by a gigantic order of magnitude. When a click is made on line as a substitute for a trip to the mall, the savings is huge. The "old days teaching" about the power of the law of substitution was typically the description of what happens when the price of oranges goes up relative to the price of apples. Today, we must understand that a mouse click is often the substitute for an action that might have cost hours of time and dollars of expense.

Once the power of the law of substitution is understood, it becomes easy to understand why the FOMC prefers the personal income deflator as a measure of inflation. After this measure is adopted, the last step of understanding needed is that inflation is one of the most lagging of indicators. By the time inflation is at a peak, stocks are all ready at a bottom. The TV talking heads will whine for the next month or two that inflation is too high for the FOMC to cut interest rates any more. With the continuation of the productivity boom (the same increase in computer clicks as substitutes for expensive tasks), long term rates can stay reasonably low while non inflationary economic growth can continue.


One of the best buy signals was just shot into the air by Merrill Lynch and Morgan Stanley. These "retail brokerage firms" just predicted a recession in 2008. Keep in mind that the major function of "retail brokers" is to "distribute" the holdings of institutions to the public. Much of the time, when an institutional account wants to sell a large chunk of stock they are able to find another institution to buy, however, at major turning points, when most of the institutions want to sell the same stocks, the "retail boys" are hired. The way you get people to sell stocks and bonds at or near their highest prices in years is to tell them a recession is on the horizon. As always, the best stories start with an element of truth. It is true that the possibility of a recession is higher now than it has been for several years. However, the bottom of the stock market is typically made long before the bottom of the economy. Investors should always remember that stocks lead the economy and the economy leads inflation. It is true that stocks behave best during times of low inflation but as far as the business cycle goes, stocks and inflation are like points on a bicycle wheel, when stocks are down, inflation is up. In the bigger picture, inflation is relatively low and will stay relatively low because we are living through a time of innovation and free trade.


The worry warts and TV gurus tend to suggest that you buy international right now. They whine that foreign currency reserves are at record levels. They are thinking upside down. Who is ready to spend money, the man who has recently gotten wealthy or the man who has recently seen the value of his assets fall? Take India for example, the country has been growing its net foreign exchange assets at a rate of 25 to 30%. Russia has actually increased its international reserves by 9% in the last 8 weeks! You should think of these guys like sailors who have just gotten paid before being given leave in New York city. They have money in their pocket, American money!

For the past several years, foreigners were content to build up their US cash reserves. Making US dollars like never before allowed them to put a lot of money in the "US bank". They did not make high returns on it but they were too busy making more money that they did not worry much about the returns. However, when the flood of dollars started forcing the value of the dollar down, the value of these dollars dropped even faster than what was being earned as interest. Now there are too many dollars in the hands of too many people. The common but ridiculous concern of many pundits is that the foreigners will choose not to hold dollars any more. Who will they sell these dollars to? The fact is that the best option for the foreigners is to buy American with those dollars. America is the envy of the world when it comes to manufactured capital goods. This biggest category of exports from America grew at 27.4% over the past year!!!! Yes, the foreigners are getting tired of holding depreciating dollars, so they are buying everything from machine tools to computers. Of course, they will buy a lot of parts, software and services to run these products. Of course, Boeing airplanes at 100 million dollars a piece are the best examples of capital goods sales.


In addition to the massive foreign currency reserves held by India and Russia, reserves have jumped to unreal records all over the place. Places you would not even think of have massive reserves. For example, Ukraine reserves are an all time record, they have tons of American money that is depreciating in value, the turn is here, it is time for them to spend, spend, spend.

Apple computer is another place where there are mountains of reserves. Most everyone knows about the piles of cash held by Microsoft but Apple holds $15 Billion in cash and companies like Cisco, Oracle and Qualcom are stuffed with cash. Here again, chances are good that these behemoths will buy something. Some say that Google, which has pledged to bid at least 4.3 billion dollars for wireless spectrum, will not bid to win. Others believe Apple will join forces with Google to build a whole new network. Google, Microsoft and other tech companies are pushing hard to be allowed to use the "white space" between TV channels to send out high speed wireless broad band. Sprint has altered its WiMax plans as a result of Google's plans. Over the next 5 years or so, billions and billions and billions of dollars will be spent building wireless networks. GPS service will be one of the many growth services during this time. Here again, it is probably time to buy the stuff the big money firms will be buying. Apple and Google will continue to do well but if you can figure out who will reap the most benefit from omnipresent wireless broadband service, then you will make a killing.

Energy stocks will not be the big winners. Once again, this is a reserves story. For example, Anglo American has decided to spend $505 million dollars on a coal project. The project will start out producing 6 million tons of coal per year. This is by no means the biggest energy story around but the 250 million tons of reserves at this location will take 41 years to use up. In the US, shale gas project after project has come on line and will come on line over the next several years. The shale is hydraulically cracked so that the gas flows out more rapidly. New horizontal drilling is reducing the cost of recovery. Here again, once these wells are bored, they last for up to 40 years. There has already been a downward turn in the number of drilling rigs at work. Drilling is not done just for the fun of doing it. It is expensive. Wild caters must jump in and out of the business at the right time to avoid big losses. Because a number of major fields are now under development, the rational for drilling for relatively small potential plays no longer makes as much sense as it did just a year ago. About once a day a big well is completed somewhere. Wells in rich fields often produce several thousand barrels per day. In these situations, the infrastructure is often in place to carry the oil to market. The risk is small. Did you know that Brazil has found more oil in the past few years than in all the years before. The country doubled its reserves with its most recent discovery. China is drilling in Cuba and in Iran! Ford, Chrysler and GM have all closed down their truck factories to reduce unsold inventories. The energy bill that is likely to be passed before congress leaves town will mandate fleet sales of 35 miles per gallon! If a person replaces a 12 mile per gallon truck with a 35 mile per gallon car, he has increased his mileage by 291%!


Obama and Huckabee have moved up in the polls on the wind of change. Hillary and Romney have each been forced into the typical triangulation move. Hillary has started advertising that a vote for her is a vote to change the way things work in Washington. Romney gave his Mormon speech to try to move in on the religious base of Huckabee. It seems that democrats and republicans are ready for a new direction. It is still early in the political process. A year ago, I bet a friend $150 to his $50 that Hillary will not be the next president. My bet was looking like a loser a few weeks ago. With Opra helping to pull in crowds of 25,000 or more, Obama's campaign is energized. To date, Huckabee has run a poor man's campaign but his status as front runner has brought in contributions as well as attack ads. You may recall the triangulation moves by Bill Clinton against Bob Dole. Clinton was suddenly running as the most conservative democrat in years, he literally ran to the right of Bob Dole. Those on the far left are clearly afraid that Hillary will also turn into a conservative once elected. Those on the far right are afraid that Huckabee will be more of a "compassionate conservative" than was Bush. A month ago, it seemed likely that the final race would be a three way race between Hillary, Giuliani and Ron Paul as the libertarian candidate. That would have been interesting but perhaps no more interesting than an Obama, Huckabee slate. Ron Paul would probably not gain much nearly the traction against a Christian Conservative as he would against Giulani. New Hampshire is a whole different game than Iowa. Going out on a limb, I believe Huck and Obama will win in Iowa. If Iowa did not happen first, I would say that Hillary and Romney would get easy wins in New Hampshire. However, after strong wins by Obama and Huck in Iowa, the Hillary crowd will be forced to vote as democrats and Romney will be in a battle. The republican vote in New Hampshire could be a four way dead heat for all I know. Once again, Huckabee and Obama could show very strong in South Carolina. Big wins in just Iowa and South Carolina with decent showings in New Hampshire could be enough to put these guys in the "free news media" spot lights and mitigate the spending of their powerful opponents.

Hey, your investment returns will be effected by who is in the White House. Take a look at

In the mean time, BUY, BUY, BUY. The Nasdaq 100 is up 14.5% year over year and ready to rock and roll!