Monday, January 14, 2008


The "big boys" are engaging in a game of PHONY, BALONEY, WRITE DOWNS. This game is giving cover for "big money" to buy trillions of assets at discounted prices. The public is once again being duped into selling at the wrong time. Insiders are buying the stocks that the average Joe is selling.

In the meantime, several BUY, BUY, BUY INDICATORS HAVE REACHED EXTREME LEVELS. As always, all the indicators are not at extremes but a number of very strong buy indicators are present. We cannot look at the past and know for sure what will happen in the future but when extremes of the sort listed below have been reached in the past, the market has been up substantially over the next 6 to 12 months.


1) IBES VALUATION: Never in my 57 years has the stock/bond ratio been so lopsided. I was fortunate to take advantage of the opposite extreme in the early 1980's. My big purchase was in May of 1984 when I locked-in 13.75% state income tax free yields for 30 years. Today, the yield available is almost 10% below where it was back then. In November of 1986, I scored another huge success when I bought millions of dollars of tax free bonds that yielded about 9%. These were North Carolina tax free bonds and they appreciated dramatically over the next several years. Today, stocks are earning and average of 7.33% while the ten year bond is yielding 3.79%. AND BELIEVE IT OR NOT, THE PUBLIC CONTINUES TO BUY MUTUAL FUNDS INSIDE 401-K PLANS THAT ARE AT LEAST PARTIALLY LOCKING-IN 3.79% RETURNS FOR 10 YEARS!

Yes, it is true that the big phony baloney write downs are going to cause the 7.33% to drop but this will be a short term event. The phony write downs now will create trillions of dollars of write ups in the years ahead.

2) INSIDER BUYING: Insiders in the banking business are buying bank shares. I know executives who have moved 100% of their 401-K investments into their company bank shares. The Gambill Survey shows that the average executive in the 3,000 largest public companies have been buying the dips heavily. Each time the market has pulled back in the last 6 months or so the insiders are buying.

3) FLIGHT TO BLUE CHIPS AND BIG CAPS: In recent weeks, there has been an excessive flight to blue chip stocks and an excessive flight to big caps. In other words, the market has gotten very narrow as a result of fear. Again based on history, this move can only go so far until there is a break out in new leadership. A broad spectrum of stocks will participate in the coming big move. Little stocks and beaten down stocks will bounce!

4) DOLLAR EXTREME BUT TURNING: The value of the US dollar has finally made the turn relative to the British Pound and to the Yen. It has also made a double bottom against the Euro. Such a cheap dollar makes US goods cheap to the rest of the world. 5) WORLD ECONOMIC GROWTH OF 5%: While the fearful and those who wish to mislead talk and talk about a recession, the world economy is chugging along at a remarkable and steady speed. The three year record of growth has been a marvelous accomplishment. Billions of people are living better today than every before. The key point for us to consider is that this global revolution is not about to end. The new era of cell phone communication to the poorest of the poor is just beginning. Dirt poor farmers in Africa frequently save a whole days labor as a result of one cell phone call. Having tasted the benefits, there is no going back. Over the next several years, another billion and more people will "get connected" in ways that are not available at this writing. The "super highways" of the Internet are just now being built. The hand held devices that will be common 2 years from now will make the current cell phones look like Model T cars relative to Corvettes. The low price of the dollar means that the US will sell trillions of dollars worth of goods and the US will reabsorb some of the trillions of dollars exported in recent years.

5) INPUTS DOWN MARGINS UP: Two of the biggest cost to the economy are the cost of interest rates and the cost of fuel. The big daddy is the cost of interest and one of the extremes here is the ratio of the Fed Funds Rate to the T-Bill rate. The Fed Chair admitted two days ago that the FOMC is ready to lower rates as needed. Another extreme reading is the rate of the 2 year Treasury Note. In less than 6 months, the rate on the two year has dropped like a stone. The yield has reached levels that have been BUY, BUY, BUY POINTS IN THE PAST. GM just bought a stake in a company that reports that it can produce cellulose based ethanol at a savings of about $1 per gallon. This investment makes great sense whereas corn based ethanol makes none. There are several reasons to be optimistic about this new technology. One point is that the best estimates in favor of corn ethanol is that it takes one unit of energy input to get 1.3 units of output. The new technology uses the non food portion of plants and produces 7.7units of energy output for each 1 unit of input. As technology and discoveries bring the price of oil down, profit margins and or sales prices of goods will go down.

6) TECHNOLOGY AT EXTREMES: Not a day goes by without another incredible technology break through. Only the most amazing ones make the news but we are truly living through an age of innovation. Innovation cuts costs by increasing productivity which is the same as saying that it lowers inflation and increases standards of living. A few days ago, scientist announced that they have grown beating hearts from stem cells. Life expectations are ready to soar when this type of innovation is finally ready for consumption. It will take years to develop but a long list of significant innovations are already in the testing phase. For example, several "brands" of artificial blood are in various phases of testing. Oxycyte is one example of artificial blood that carries 50 times as much oxygen as real blood. Hemopure is a brand being developed by BioPure. Other brands include Oxygent and PolyHeme. In the meantime, several companies, including Medtronic, are testing their particular brand of artificial pancreases. Abbot, Insulet, DexCom and Smiths are 4 other companies testing machines that will improve the lives of diabetics.


Life is good but people need to experience a downturn or to at least to fear a down turn in order to keep moderate extremes to the other direction. By far, there were more houses built in the USA from 2003 to 2006 than in any other 4 year period. The market got ahead of itself because real estate was seen as a "no lose investment" by those who had enjoyed the huge run in values from 1992 to 2005. The majority of homes in America are worth more today than they were a year ago but the markets that were super hot have been hit very hard. The loses being reported by the big investors in home mortgages have been dramatically over stated.

Again, I am reminded of when Warren Buffet wrote down his investment in US Airways. He purchase preferred stock that paid a 9% cumulative dividend in the late 1980's and he wrote the stock off as a loss when it hit $4 in the early 1990's. A friend of mine and I got into a big argument in front of our poker buddies in regard to what this meant. I said, it showed what a huge buying opportunity existed in the markets. He said it showed the wheels were falling off the bus and that a huge global depression was on the way. I pointed out that Mr. Buffet was not selling the shares but simply writing the loss to his books in order to shelter huge gains he had made by selling shares in Solomon Brothers. Sure enough, in about 5 years or so, Warren had been paid the 9% cumulative dividend on the $20 price and then he sold these $4 shares at the new price, about $65 per share. The move from $4 to $65 was more than 1600%!

THE KEY POINT AGAIN IS THAT WE ARE LIVING IN A TIME OF FEAR, A FEAR THAT HAS BEEN CREATED BY FALSE NUMBERS. This fear is manifesting itself in a stimulus bidding war. Hillary has proposed a $100 Billion stimulus package. Obama did her one better while slyly reducing the price tag. He has proposed a $75 Billion dollar package that would give virtually every working person and every retired person an check for $250. He would send a second check if necessary.

The massive stimulus that is just around the corner is additional cuts in the Fed Funds rate. A 1% cut in interest rates in the USA is the equivalent of increasing the value of assets held by about 5.8 TRILLION DOLLARS! In other words, the Bush administration is holding the keys of control. The administration has held interest rates higher than they need to be. One part of the reason has been to have the economy showing weakness just at the point in time that the democrats were trying to pass a budget that included massive tax increases. In addition, the timing of the weakness fits with the timing of a number of key union contracts. For example, it is much harder for airline pilots to demand the recapture of past wage cuts if the industry is suffering. A third reason to keep interest rates high has already been partially explained above. On the one had, a crisis is a good thing when it is solved just before an election. On the other hand, a crisis is a good thing if it allows insiders to buy assets on the cheap.

You can become a "fat cat" if you will stretch to buy all you can when prices are low. By being in the market when the big bounce comes, you will cover ground very quickly in the first few days and weeks of the big rally. Then you will be in the position to compound your big gains well before the public is ready to come back to the market.


Last week, I wrote about how Huckabee has lead the way with McCain and Romney to play some smart political games. One of the early games played has been the "tag team game". Only a couple of months ago, Romney enjoyed large leads in the early states including Iowa, New Hampshire and Michigan and South Carolina while Rudy held the "big state" leads and thus the national lead. Huckabee and McCain played a smart game of "tag team". Huckabee concentrated on his "strong state" of Iowa while McCain concentrated on his "strong state" of New Hampshire. They each lambasted Romney for running millions of dollars worth of negative ads and they each won their first strong state. This morning I read a good article about Huck and McCain titled FRENEMIES: MCCAIN AND HUCKABEE. The article reports how the two of them held a joint town hall meeting in South Carolina where they civilly explained their differences. It was a "win-win" as they both were given great praise for informing the electorate in a straight forward, honest manner.

Some pundits now say the McCain will go on to win the nomination. I can not make that call. Huck and Romney are now at least semi-cooperating in their own game of tag team. Huck is ready and willing to come in third in Michigan if he can pull off a win in South Carolina and Romney is going all out for a win in Michigan. Even though McCain has enjoyed a great surge in support after his win in New Hampshire, I will be surprised if he pulls out a win in both Michigan and South Carolina. Indeed, even though recent polls show him with a slight lead in both states, my guess is that he will come in second in both. I believe Thompson will drop out after a third or fourth place showing in SC. Huckabee, McCain and Romney appear to be in a three way race to Florida where they will meet up with Rudy, who has spent a bundle trying to lock up this big state.

It is very interesting to see the "old money establishment" go after McCain and Huckabee. This "old money crowd" clearly would rather bit the bullet and accept McCain rather than Huck. Ironically, it is both McCain and Huck who have the potential for "saving the republicans". Both poll well with independents and they both get more switching from democrats than the other candidates. The "old money crowd" do not get that republicans and democrats alike are frustrated by seeing corporate leaders get fired for doing horrible work only to walk away with 200 million dollar severance packages. I believe in free markets but I can also spot a rigged crap table when I see one. The packages offered at major corporations are set by a small group of insiders and in most cases institutional insiders control the company votes. Few shareholders ever actually vote for or against the boards of directors.

I am a big fan of the FairTax. The "old money crowd" wants to maintain the current system of tax-lobby-pork. Those who pay the piper win the spoils. This "old money crowd" has been slamming Huckabee with any dirt they can dig because he is the one contender who supports doing away with the pork barrel. Negative and misleading articles have been published repeatedly in regard to the fair tax. Opponents, including Bush, use erroneous assumptions to present a false picture. Of course, Bush has not publicly entered the fray. The actual bill in congress is not perfect but it would be a substantial improvement to the current system. It would eliminate a lot of fraud and a lot of paper work. NO MORE TAX FORMS FOR THE MASSES AND NO MORE IRS! McCain hopes to do away with the pork barrel while maintaining the current system. As we have seen time and again, the income tax system provides fertile ground for graft, greed and corruption. If you have not reviewed the details, please take a look at I read The FairTax Book by Neal Boortz and Congressman John Linder this weekend. The economic benefits of a simpler, fairer system would be huge.


Over on the democratic side, fur is flying. It is a tricky game to point out the inexperience and inconsistency of Obama without sounding racist. Obama is a smart politician and a great speaker. However, the Clinton's are masters at this game. They have used black surrogates such as Shelia Jackson to support their efforts to "slam Obama while playing nice". A number of black leaders are angry at the games being played by the Clintons, however, the desire to win is strong and deep. I find it interesting that some say there is no way that either would accept the vice presidency of the other. After the one has lost, the next opportunity could be 8 years away if ever. I believe a Hillary-Obama ticket would be a very strong ticket. The most interesting race might be an Obama-Huckabee race. Both candidates aspire to left America up as opposed to pushing America to the left or the right.


As reported earlier, Continental has more money in the bank than the total value of all the shares. Last year, the company tucked away $300 million in its pension plans and still ended the year with $2.8 Billion in cash. This year the company has already announced another $60 million contribution to its pension plans. So far, UAUA has increased its fuel surcharge per flight from $10 to $25. Those of you who have run a business know that it does not matter what you pay for goods and supplies in the short run, the price you can charge for your product is a function of what the market will bear and it has no short term relationship to your costs. In other words, the demand for airline seats is still strong enough to support price increases. The constant concerns expressed about how the slowing economy might slow the demand for airline seats is over emphasized. While it is true that domestic traffic growth has slowed, international demand growth continues at a brisk pace. The current talk, talk, talk of airline consolidation misses the point that business travel booms during the prosperity phase of the economic cycle and businesses pay what ever the prevailing ticket prices. The economist calls this phenomenon elastic demand. The cost to fly the seat remains relatively fixed but the price the business traveler is willing to pay is very flexible. If you own airline stocks hold on with all your might because big profits are on the way!