Thursday, January 10, 2008


Before I talk about economics, politics and investments, let me say a word of thanks for your prayers for Jules. After two days of shots and lots of test, the doctors think it was just a virus. Her temperature is down and her Mom is thinking about pulling her from day school for the rest of the year as a test to see if she has simply been getting bug after bug from the other kids.


The three man race for President could be Clinton, Bloomberg and ?? McCain. Bloomberg continues to test the water in regard to a third party candidacy. The history of our country suggest that he would not win the race but that he would determine the winner. Bloomberg has the money to run if he wants but, I do not believe money is nearly as important as most. The list of those who had the money but failed include Phil Graham, Nelson Rockefeller and, perhaps, Mitt Romney. Rudy Guiliani just spent $3 million in New Hampshire while pretending to avoid the race. Huckabee spent 1.4 million and the vote totals between the two were not even close. If money made the difference, Romney would have won about 90% of the Iowa vote and about 75% of the New Hampshire vote.

By the way, the tax payer continues to support the John Edwards quest. After he lost in 2004, Edwards ran a poverty policy institute at the expense of the NC tax payer while he spent his time and effort in Iowa. He is currently spending US tax payers money but has little chance of winning. Only in America can a man with a net worth of about $20 Million get subsidies from the government to play political games.


Romney has pulled his ad campaign in South Carolina and Florida. Despite spending millions there, he is trailing Huckabee in the polls. Huckabee has a 12 point lead in South Carolina despite suffering a thousand cuts in the media by the big money wall street crowd. George Will and many others will not believe Huckabee has much of a chance unless he shows he can win outside the "bible belt".

Romney will spend very big in Michigan, the state where his father was a three term governor. The recent Michigan polls show big declines for Romney, Guliani and Thompson (one who will soon pack his bags for home) and a real surge for McCain, after his win in New Hampshire. Huckabee's support in Michigan has remained pretty steady. The big money wall street crowd cuts at Huckabee for his "populist" message. The spin machines are turning fast and loose. McCain won Michigan 8 years ago but the economic situation in Michigan means that Huckabee's Fair Tax position might resonate. Also, there is a large social conservative crowd in Michigan. No matter how much money Romney spends, he cannot take away his record, which includes passing a health care bill that included tax payer funded abortions. Who was it that said, tell the truth and you will not have to remember the lies? Even if Romney had a true change of heart in regard to dozens of positions, he sometimes suffers from even being able to remember exactly which side of an issue he is on.

My guess is that McCain will win in Michigan and, as long as Huckabee scores at least a strong third, Romney will be toast. I believe Huckabee will win in South Carolina, setting up:


As you know, it is my belief that no one can call a stock price in the short run and the current political situation is just as fluid. Never the less, I will venture out on a long limb to say that the Florida race will be between McCain, Rudy and Huck. No matter who wins, Huckabee, who currently leads the delegate count, will probably still be leading the delegate count by the time Super Tuesday, Febuary 5th, rolls around.


While McCain has been a senator forever, he is not loved by the big money crowd. His willingness to strike a deal with Kennedy or Fiengold does not make him a favorite of the social conservatives and by not voting for the Bush tax cuts, he angered both. Rudy, being from NY, is a big money guy. If the final race comes down to Rudy versus Hillary, the "fat cats" will once again have a winner. Karl Rove says that in New Hampshire Hillary won the beer drinkers and Obama won the white wine drinkers.

While no one knows what will happen, my current dream is for Hillary and Bloomberg to battle it out for the big money, big spending crowd and for Huckabee to win in a cake walk.


Bush has nothing to lose to go all out for peace in the Middle East. His unprecedented 9 day diplomatic trip shows that he his serious and hopeful to close a deal or two or three. He would like to negotiate a Palestinian state, a political reconciliation within Iraq and a peace accord between the USA and Iran. All three goals are closely connected. By the way, the source of some of this information is a subscription to Stratfor, a geo-political newsletter written by George Freeman.

al Qaeda IS DEAD!

Will no not dead but seriously wounded. Yesterday, the King of Saudi Arabia said that his country is on good speaking terms with Iran. The Saudis have drug their feet in accepting the government of Iraq but as Iraq continues to crawl forward as a "melting pot state" the Saudis know that Iran is the big threat to peace in the region. The Persians are now the "odd men out". Iran faces the choice of economic prosperity or ideological heartache. They say that the change in Tripoli and the rest of Libya over the past 10 years is hard to believe. During this time, Iran has gone the wrong way. With al Qaeda on the ropes and stability more and more assured in Iraq, Iran has little reason to continue to shoot itself in its economic foot.

Peace is breaking out in Iraq which could lead to a deal with Iran and a deal to create a Palestinian state. Bush has suggest a deal will be done by January of 2009. The history of the area is filled with one conquest after another for centuries. The invaders have included the Assyrians, the Babylonians, the Greeks, the Romans, the Turks and others. It may sound unlikely that a negotiated peace might be reached but conditions are ripe. The situation has been set such that all the major players, with the exception of the jihadist, would be winners.

Should the negotiations work, a huge peace dividend would accrue to all oil consumers. In New Hampshire, Bill Clinton struck a major blow for Hillary when, on the day before the vote, he called forth the inconsistency in Obama's rhetoric in regard to Iraq. Peace in the Middle East by itself will not be a big issue for American voters. Accompany this peace with a 25% drop in the price of a gallon of gas and Bush will have his legacy and the republicans will have a smoothed path back to the white house.


Yahoo, Google and Microsoft are running a three man race on the Internet. Facebook, Wiki and Apple are all trying to find a way to join these front runners. The front runners have a lot of power and a lot of momentum. The target being shot at by the "under dogs" is moving forward quickly. Microsoft just bought a Norwegian search company for 1.2 Billion Dollars but the big news from my point of view is that Yahoo will join Google in its mobile computing project. It now appears likely that two thirds of the searches will be done on the open networks advocated by Google. Over the next couple of years, many of us will experience a once in a lifetime paradigm shift. The invention of the telephone was a big deal. For the first time, people could easily communicate from long distance. The cell phone advanced communication is a major way but the cell phone call stops and starts. The wireless mobile computer will put people "in touch all the time". Life will never be the same again! Or will it?

We all should take time to be still. Quiet time is a blessing beyond measure. However, being connected via computer all the time will dramatically increase the amount of work that can be done and this extra productivity will increase the average standard of living. The productivity gains we have seen in the last 10 years have been amazing. As a result, more people have been lifted out of poverty in the past 10 years than in all the people in all the years prior (I do not have a reference for this point but strongly support its truth until proven wrong, in any event there are billions who are living better today than they were 10 years ago).

One of the measures of progress is seen in our more efficient use of resources. Year after year, we use fewer resources per dollar of production. This pattern is in "acceleration mode". It is interesting that our ability to "go small" is behind much of the progress. In 2008 many of us will carry very powerful computers in our pockets, computers that would have once required a room the size of a gym. In 2008, microbes will perform "jobs" for us. Some of these microbes will change cellulose, coal and oil into gas or fluid liquid fuels. Others will cure disease.


Another way that the world will go small in 2008 is in regard to the automobile. The Nano Car has been introduced in India. The price of $2,500 gets one a four door car with a 33 horse power, a 50 mile per gallon vehicle. Volkswagen, Hundai and Bajaj will also introduce super small cars this year, joining Nissan, BMW, Mercedes and others. Oil is down $2 per barrel this morning. This is the umpteenth time that the market has made a herky jerky big move down in the past 18 months. The fact is that the public is resigned to living with high oil prices, which means that their very actions will bring the price down.


Yesterday I got the strongest of strong contrarian buy signals. This is one I hate to report but, because one that I feel I must because of its educational value. Despite by best arguments to the contrary a couple of long term investors in airline stocks capitulated. As David Dreman and others who have written text on value investing says, the turn is called by capitulation. Giving up is hard to do but it is also hard to keep holding on after having lost a high percentage of ones investment. Like in all areas of investment, there are two sides to every "rule" and every "story". The greatest of investors always have a style that they stick to. Simple one word terms such as value or growth do not do the various styles justice but basically one might say that value investors buy on weakness and growth investors buy on strength. One big problem is that while growth investing and value investing each work best about half the time it is difficult to switch between styles. Switching can be done successfully and I continue to believe that big cap US growth stocks will out perform other "styles" over the next several years but even so the recent market collapse is offering a slew of value opportunities.

My current situation in airlines is very much like my situation in Goodyear Tire in 1991. Having tripled my money in Goodyear in the 1980s, I made the mistake of getting back into the stock too early on the way to the recession of 1990-91. I bought the stock heavily at $26 per share for a lot of clients. The recession of 1990-91 was much rougher than it needed to be. Like now, the FOMC took its time about loosening the money strings. Suddenly recently strong companies were in trouble. The Bank of New England was the most famous case; it went from strong bank in 1990 to bankruptcy in 1991. Suddenly there was panic in the market. Goodyear dropped and dropped more. In the 1980's I had ridden the stock from $26 to $78 so buying back in at $26 seemed reasonable but in seemingly short time the stock was at $14. At that price, despite my best efforts to persuade, several of my clients sold the stock. Ironically a couple of them moved to the "safety" of Phillip Morris at $80 per share. A little more than a year later, Goodyear Tire was at $80 (split adjusted) and Phillip Morris, the safest of the safe stocks, was down to $57.

No, even after the strong buy signal I received yesterday on the airlines, I still would not attempt to call a short term move. In a tough market, the least little thing will spook this bucking bronco again. Still, as I reported yesterday, the S&P 500 currently sits at a record low price relative to the 10 year treasury bond. It has been my experience that when something is as cheap as it has ever been, it is a good buy. No, I cannot guarantee that it will not go lower but as Lamar Jones wrote to me this morning, CAL is projected to throw off about $10 per share in cash flow in 2008! He notes that even if the estimate is wrong by half, the balance sheet will continue to improve. The company finished 2007 with 2.8 billion dollars in free cash. The market value of the whole company is substantially less. Does this not seem a little out of whack to you?

The airline numbers are the Boone Pickens numbers of the 1980's. In those days, Boone was able to find companies to buy and then he used the cash held by the companies to pay for the purchase. Let me say it again with just a little more detail. There are 98 million shares of CAL outstanding and the price per share is about $20. The product of these two numbers is almost 2 Billion Dollars. The company has unrestricted cash on hand of 2 Billion 800 Million Dollars. I an investor bought the company for less than $2.8 Billion, he would own all of the company and still have his $2.8 Billion in hand.


Union members at UAUA and AMR are putting up a big fight but one they cannot win. The airline market is no longer a government regulated oligopoly. Unions can win huge pay increases when consumers have no choice but when there is choice consumers will buy from the low cost producers. CAL won a union victory yesterday. The only two major carriers to increase capacity in 2007 were LUV and CAL which both have good relations with employees. Yesterday, LUV once again made moves away from cut throat pricing and moved toward the "hub and spoke" style of pricing as practiced by the majors. The discount model is dead. Seat prices and profits are set to climb. CAL has a pending application for a direct flight to Nigeria of all places. Angola is challenging South Africa as the economic African leader. Skybus has made the news for offering the first 10 seats per plane at $10 each. It's quickly deteriorating financial condition has not made nearly the news. Skybus does not fly direct to Nigeria and if it should decide to do so the seats will not go for $10 each.


The market is holding a sale. In some ways it is not nearly as big a sale as the 1982 sale but in relative terms it is the biggest every. I believe $1 added to a margin account today could easily be worth $3 within two years. Please do not wait to get excited about the market after the broad averages have moved up 30%! I understand that it is human nature to sell when fearful and to buy when greedy but logic can overcome emotion. The market is cheap and it is time to add all you can to your most leveraged positions.