Thursday, January 24, 2008


Today will be the first day of bidding for the 700mhz spectrum to be auctioned by the federal government. This is the spectrum that will be made available when analogue TV signals go off the air next year. The big bidders are expected to be AT&T, Verizon and Google. There could be surprises as 214 bidders have put down the large deposits necessary to be qualified.

The stock market hates uncertainty. It is not clear whether Google will "bid to win" or not. In order to influence the FCC to rule that the spectrum should be an "open network", Google obligated itself to bid at least 4.x Billion Dollars. I don't remember the exact amount but the point is that that amount will not win. Google and the public has already won because at least a portion of the system must be open to all devices. Since this ruling was made, Verizon has agreed to open its network. As a result, the direction is to more choice and therefore more innovation in future connection devices. New high speed hand held phone-computers will be offered by numerous manufacturers. The daily life of many people will change dramatically once they are constantly connected to the rest of the world through the Internet.


Google has swung down in price due to the fear of the market that the company could choose to spend billions and billions of dollars to build a communications network to compete with the likes of AT&T. I do not know the answer to the question but I believe that Google will prosper on the open network of others or by setting up a competing network.


It is always hard to recommend high PE stocks. Such companies have to experience serious growth over a number of years to justify their high price. In this case, I believe Google is well positioned to continue its incredible run of fast growth. A good way to think about the potential for Google growth is to think of Google as General Motors way back in the days before the Interstate Highways were built. It was clear that more cars would be driven more miles after the highways were built and GM enjoyed many years of high profits in the 15 years or so after the highways were built.


Online video requires extraordinary bandwidths. One high definition movie takes more than 8 hours to download on the typical home connection. However, some homes are already connected to the "super highway". These homes can download the same movie in 3 minutes 15 seconds! Before the interstate highway system was built, the ability of companies to expand across the country was limited. In the same way, the market to all kinds of goods and products will open up as these new networks are built.

The Internet will morph into the Video Internet over time. Of course, the video rental business will be far more efficient and the price to rent a video will ultimately fall dramatically in real terms. But video rentals is just a drop in the bucket to the change that will occur. Universities have already made some 15,000 courses live on the web. The students do not have to come to class but can participate from any Internet location. Many professors now emphasis class participation for grading purposes without requiring students to be present. The professor might ask a question and expect chat style answers from all students. An automated system might tell the professor how many students answered correctly. The speed of covering material can be adapted instantaneously to the level of proficiency on display.

In the work place, meetings will be "attended" on line from any location. Indeed, the work warrior will pop in and out of multiple meetings as if he is in 5 places at once. Have you noticed the way teenagers communicate now a days? They don't actually call as much as they text message. The reason is that they can carry on multiple conversations at the same time through text messages.


I have made it abundantly clear that I expect mergers and huge profits for the major airlines and I have made it clear the kind of growth in advertising revenues Google will garner when the "new Internet" is in place. If you are not stretching to take advantage of these opportunities you are missing an obvious boat.

Because Google sells at such a high PE and because its growth rate will ultimately have to slow it eventually will get too big to grow so fast, I expect Google's net return to be substantially below its current growth rate. The company will get bigger and bigger but at a slower and slower rate. The PE will ultimately be reduced. My long term guess is that the company will give off average returns of 12 to 18% over the next 5 years and probably for many more years after. The problem is that these returns will come in a crazy and unpredictable pattern. The recent decline in the stock offers a great opportunity to pick it up while it is down but there is no way to know how long it will take before it soars again. On the other hand, a lot of uncertainty will go away as soon as the bidding for spectrum is complete.


Yesterday, the Dow Jones made giant turn. One problem is that big boys are still whipping around a lot of colorful lures trying to catch a few fish. As always, the news is all about the "wrong stuff". In the back ground, many a base has been built over the past 5 years for substantial stock price moves in the coming years. As usual many of the big winners will be stuff that still looks pretty dead right now. I am often asked to give list more stock selections in my e-letters but I do not like to do so. Those who ask for the names are those who want to be "the drum major". They want to make the decisions of what to buy and when to buy. I am guilty of wanting to be the "drum major". I believe that my study of the markets for the past 45 years gives me a reasonable hope to do better than the average investor. My prayers are not always answered as I wish but I am thankful for the opportunities that have been granted to me. I am confident in my "top down few of the economy". This old world is a complex creation that I will never fully understand but my understanding of the business and real estate cycles have been confirmed as correct on many occasions. Right now we are seeing a turn take place. One place that it is clearly happening is in the area of commodities. The peak for the cycle has passed. Now that this "battle ship" has turned, I expect it to go a long way.


This Sunday there will be a FairTax rally in Jacksonville Florida. During the South Carolina Primary there was a FairTax rally held in Columbia. About 8,000 people came out for the Columbia rally. I hope the Jacksonville rally will be much larger. It is going to take the will of the people to dramatically change the crazy quilt of tax laws that are "on the books". The US tax system is broken. Pretty soon the 2008 battle in regard to the alternative minimum tax will begin. Once again, millions of dollars will be spent by powerful lobbies to tweak the system a little here and a little there. In the next few months, American Citizens will spend more than $250 Billion attempting to comply with the current law. More than 90% of the tax returns will include substantial errors.

The politically powerful are united in their hatred of the FairTax. They do not want to lose the power and wealth the income tax diverts to lawyers, brokers and lobbyist. The club for growth spent at least $750,000 dollars of Romney supporters money to denigrate Mike Huckabee. Hucks campaign for the presidency has been wounded but hope lives on. For just a moment after McCain won in SC it appeared that he might be the virtual winner of the republican nomination. My main problem with McCain (I have many concerns on issues) is that he is not a man of vision. He would make a great secretary of defense because he understands military strategy but he has little vision or skill to lead the country economically.

The most recent polls show Romney is pulling ahead in Florida. The question for Romney remains how much money he will have to spend to secure a majority of the delegates. Others have tried to buy the nomination without nearly the success that Romney has enjoyed to date. For example, back in the days when 11 million dollars was a very large sum of money, John Connor from Texas spent 11 million dollars but only secured one delegate. WOW! Buying votes at 11 million dollars each is a bit excessive but Romney is almost in the same ball park. He has reportedly spent about 100 million, 25 million of his own to win 54 delegates. Huck has spent a tiny fraction to win 30 some delegates. Florida is winner take all for 57 delegates. The winner will have momentum but a good friend at church surprised me Sunday when he said that if Romney or McCain is the Republican Nominee then he will vote for Hillary.

Rudy is blowing his wad in Florida. The polls show that he has fallen behind McCain and Romney. In national polls, Huckabee is in second place behind McCain. One possible scenario is that Romney wins in Florida and Rudy is mortally wounded. Suddenly Romney, who has high negatives, would be the front runner. Where would the pro Rudy, anti Romney vote go? McCain would certainly get some of it but McCain has angered a lot of conservatives over a lot of issues over a lot of years. Hucks negatives were raised substantially by libel. Much of the negative stuff presented about him is a huge exaggeration at best. Still, Huck should win several southern states on February 5. It is possible that prior to February 5 that Romney will have a lead in the delegate count while polling third in most states. I don't think he is willing to spend a hundred million or so on the gamble that he can buy enough votes to win. Again, if money made the real difference Phil Graham and Nelson Rockefeller would both be among our former presidents.

The big point is that the eventual nominee must be able to beat Hillary for any of this to matter. I believe it will take a revolutionary economic proposal like the FairTax for the republicans to "pull off the upset". In the past few weeks, Bill has once again showed his mastery at political games. He has flipped Obama over and rubbed his tummy. He has also slapped him a few times with a rolled up newspaper. Dick Morris, one who despises the Clintons but knows them well, is correct in saying that Bill has served as a lightening rod for Hillary, he has sucked up tons of press coverage and he has made Obama look like a real rookie.

Hillary will bring out the vote, both democratic and republican. Bill has played the race card masterfully so far. If Hillary does not recruit Obama to be on the ticket, some blacks will stay home but no republican will get a much help from blacks or Hispanics. Single women will turn out for Hillary in droves. Huck got something like 47 percent of the black vote as Governor. His support of the FairTax could bring over a lot of the old Reagan Democrats. The FairTax gives the lower income two parent family a nice tax cut. It is widely believed, even among republican stalwarts, that the current system is widely accepted as excessively good to the wealthy. The fact is that the current system tries to subsidize every thing. Under the FairTax, if a person wants to give money to a church or charity he can or he can keep if if he wants and there are no tax consequences either way. On the other hand, if he spends the money or gives it to a church or charity that spends it (on a new product or service), the government gets its cut.

My belief is that the income tax has become so ridiculous (something like 59,000 pages of regulations) that many who receive subsidies would support the FairTax candidate, once the real facts about the FairTax have been brought to the consciousness of the public. The FairTax is easily demagogued but once the details are understood it is easy to become a strong supporter. It is my hope that the battle cry of the 2008 election becomes "Kill the IRS". I hope you will take the time to review the and the web sites and send a check of support.


The futures markets suggest that stocks will start off well this morning. Of course, futures are volatile and yesterday the futures suggested that the Dow would fall a few hundred points. Well it did but then it climbed about 600 points from the morning low. We must not get too excited yet because the FOMC is still "behind the curve". The fed funds rate is still at 3.5% while the two year note is at 1.8%. This means that bank lending is "being taxed". Banks basically borrow the money that they lend. It is difficult to borrow money at 3.5% and to lend it profitably when certain loans are pegged to certain market rates. If a bank loan rate happened to be the two year note plus 2 percent, the current loan rate would be 3.8% which is simply to close to 3.5% to be worth the risk.

The point is that while indicators show a high probability that the market will be up substantially within 6 months, these indicators are not reliable at all inside of 7 weeks. The best news I can give you is that many indicators that are highly reliable 6 to 12 months out have been in BUY, BUY, BUY mode for several months already. Conditions are ripe for a BULL MARKET RUN.