Friday, February 08, 2008


The turn in airline stocks has been fun so far but what is up next? Will DAL and NWA reach a merger agreement? If they do will it be approved by the justice department? Will members of congress rant and rave to no great effect? Will the unions go along? And, what will be the fair price?

We know the market values DAL at $4.8 Billion and NWA at $4.3 Billion. We also know that DAL has been and continues to be the much larger carrier based on revenues. DAL revenues for 2006 were $17.1 Billion and NWA revenues were about $11 Billion. Are the stocks priced correctly?

If there is a merger, it is expected that it will be treated as a non taxable merger of equals. If this were done based on current stock price, 4.8/ 4.8 + 4.3 or 52.7% of the new shares would be issued to DAL holders. If the relative value were set by revenues then DAL holders would receive 17.1/17.1+11 or 60.8% of the new shares. Of course, one could argue for an allocation based on bottom line, enterprise values and many other numbers.

I believe the tendency of the public has been to bid up NWA and UAUA in anticipation of the buy out. On the other hand, CAL and DAL have certainly appreciated in recent weeks. Still, I like to use revenues whenever there is not a compelling reason not to do so.

My bottom line is that I like CAL, UAUA, DAL and AMR a lot. In my thinking NWA is the higher priced of the group. One might think that since DAL is the company doing the bidding, that it might pay too much for NWA. One could certainly make the case to buy shares in both DAL and NWA. The main point is that 30 years after deregulation, the prospects are good for successful mergers. Successful mergers will lead to both lower costs and increased revenues. One possible DAL - NWA scenario, might be that an old DAL flight that had a layover in Atlanta might have the lay over in Memphis and vice versus. The number of flights into Memphis may see a decrease and the number into Atlanta may see and increase or the size of the planes on a number of routes may be increased but the key point is that the planes leaving these airports are more likely to be fully occupied. One big full plane generates a ton of revenues!


Now that the probability of mergers has been covered well by the financial press, there is a risk of a fairly long period of sideways trading. While there is likely to be another pop in price just before any announcement, once the deal is public, arbitrageurs will buy the one and sell the other short to bring the stocks into line with the announced deal. Then there will be a long wait to see if the justice department will let the deal go through.

However, there are always several ways to look at this kind of situation. We know that CAL has expressed time and time again that they are enjoying running a tight ship and see no need to merge. Management has said that it is content to remain independent but that it may be forced to act in order to maintain its competitive position against the other "bigger boys".


I have become all the more confident that 2008 will be a year of recovery. The first quarter GNP numbers might give us all one more big scare but even negative numbers will not prove that a recession and especially a prolonged recession is here. While the bears continue to focus on the "sub prime crisis" (that has been cut down the middle by a dramatic fall in mortgage rate resets), the rest of the economy is rolling along at better than the "speed limit". Also, believe it or not, one of my reasons for optimism is the probability of a republican win in November!


George is a international affairs expert. We all have opinions but his is a more informed opinion than most. He notes that the pending nomination of McCain is already giving heart burn to the al Qaeda, the Taliban, the Iranians and the Russians. The pressure to make peace under terms available from Bush has just been increased. One of McCain's great lines is that when he looked into the eyes of Putin, all he saw were the letters KGB. McCain is respected across party lines (including the large number of independent voters) as being a man of his word. He has often said that he will get Osama. My personal opinion is that Osama is a blessing to us in the sense that he reminds us of the importance of staying militarily strong. We all know that if Poland, France, Britain and the US had maintained our military strength after WWI, we would never have had to fight WWII.

Hillary and Obama have been marching to the cadence of left, left, left. Their voting records in the Senate have become more and more liberal. Hillary had the 34th most liberal voting record in 2004. Last year, she had the 16th most liberal record, but she could not outdo Obama who has moved from the 16th slot to NUMBER ONE! Today, Hillary made a speech in which she said she would have the troops out of Iraq in 60 days. In other words, she has moved to the Obama position.

I grant you that after the nomination process is over, Hillary will emphasis doing all that is necessary to track down Osama. It is likely that before the November vote, troops levels in Iraq will be down and troop levels in Afghanistan will be up. With relative stability in Iraq, the emphasis of our military will be on "taking care of Osama".

The irony is that Afghanistan is no where near the treat of Iran. Afghanistan is a very poor nation controlled by a number of tribal chiefs. Sure, it would be nice to eliminate the training of terrorist but the technology and funding does not originate in Afghanistan. Eighty percent of the Afghans make their living by farming. The per capita GDP is about $800 per year. Iran is a different story. It's large population enjoys a per capita GDP of better than $12,000. This figure could easily be much higher if the country were not under economic sanctions. Iran owns the second largest conventional oil reserves but this is not the real reason the country is well off.

Another great irony is that the Mongol, Ghazan Khan, brought prosperity to Iran in 1,295 by LOWERING TAXES AND ENCOURAGING FREE TRADE WITH INDIA AND CHINA. The Persians were already well positioned to enjoy prosperity. They had always appreciated math, science and simply acquiring knowledge. The influx of goods and knowledge brought from China, India and Mongolia lead to a "rebirth of learning". In turn, this "Golden Age" occurred before and influenced the European Renaissance. While this age was called the "Golden Age of Islam", the center of it was in the old Persian Empire. Because Iran is a strategic land bridge between Asia and Europe, it was in effect a "melting pot of many cultures". As we all know, America has flourished as a result of being a "melting pot". In difference is that the American government is better! In the case of Iran, the country was conquered and reconquered over the centuries and after the Russians conceded to the Brits, the country adopted a constitutional monarchy. While the country managed to keep its language and pride its form of government just kept on changing. It has only been a Shi'a Theocracy for 30 years or so.

Millions of the people of Islam believe in an "inner spiritual jihad". A holy war within ones self to be a better person. The radical few believe in killing all who are not willing to convert to Islam. For some years, the territory of Iran included most of the territory of present day Afghanistan. The mountains of Afghanistan has been the "hideout" for "terrorist" for thousands of years. One of the most ruthless people in all of history was Mahmud of Ghazni. Ghazni is a city a few hundred miles to the south of the capital. It is not the most isolated place in Afghanistan by far but from 997 to 1,030, Mahmud used it as his home base. From there, he traveled far and wide to lay waste to the villages in India, Persia, and other neighboring territories. He was particularly fond of the "temple cities of India". He would kill men, women and children and make off with livestock, possessions and the temple gold. Occasionally tribes would band together to go after him but the mountains of Afghanistan gave him protection.


Huck will probably win the Kansas caucus today. Still, he is most likely still in the race as an audition to be Vice President or to set up the potential run against Romney in 4 years. Rush is not a big fan of Huck but today he said that McCain needs to select Huck as the VP and to get on with the process of healing the tear with conservatives. The point of the above story about Iran is that McCain will win a lot of democratic and independent votes because the terrorist are still active and because Iran is a serious threat. Without the sophisticated bombs provided by Iran, the war in Iraq would not have been nearly as bloody. McCain is the candidate to deal with this situation.

Huck's presence on the ticket will help McCain heal the party wounds and Huck will attract a different group of independent votes. Huckabee polls well with younger votes, with lower and middle class voters, with evangelicals and with those who are deeply concerned about educating children. Because McCain and Huck believe in a reasonable approach to immigration (after sealing off the borders), they will be able to win back a portion of the Hispanics who switched over in 2,006 to give democrats control of congress.


Should the Hillary -- Obama cat fight continue, McCain's chance of winning goes up. Hillary and Obama know this but neither is willing to step aside in favor of the other. The race is very close. History tells us that the party that fights long and hard to establish the nominee consistently loses the general election. When the election gets close, we are likely to hear time and again that in a time of war, it makes sense to elect a war hero. Hillary will continue to spew out her laundry list of problems to be solved by the government and I still have not figured out what Obama will do other than to retreat from the war.

The bad news is that the tribal codes of the peoples of the Middle East includes some form of "Badal", which is the right and obligation of vengeance. The big problem is that history gives reason after reason for vengeance. After all, it is true that the US backed Iraq in its war with Iran and that thousands of Iranians suffered attacks of poisonous gas. It is also true that followers of Muhammad destroyed the Roman army at the Battle of Yarmuck in 636 and they followed up this battle by crushing Christians in Palestine, Syria and Mesopotamia. By the way, many historians consider the Battle of Yarmuck to be one of the most important in the history of the world. Hundreds of years latter, the crusades were part of the response to this great battle. Did you ever hear about Goland Heights or the 6 day war? I bet you did not know that the Goland Heights were the vantage point for Khalid ibn al-Wald during the six day war called the Battle of Yarmuck!


We remember a few really good things about the days of old and then decide that life is getting tougher by the day. The stories abut the life of Ben Franklin is one of our great memories. Years ago, my favorite Ben Franklin story was about him being sent to bed hungry when he complained to his mother about the corn mush he and his 11 siblings were once again having for dinner. Today, when I tell that story, I like to mention that Ben created the idea of "paying it forward". He believed that if he gave a man in need a hundred dollars and made him promise to pay it to another good man in need that the hundred dollars might make its way into the hands of many good men before some scoundrel made off with it. Ben never got patents on his inventions because he saw these inventions as a public service to his fellow man. Ben was the only person to sign all four of the countries founding documents, including the Declaration of Independence and the Constitution. Ben lived a good life because he made life good.

Ben lived during a tough time. A time of disease and war. He left his sweetheart in the states and it took him 5 years to get back home. She had since married. Ben had an illegitimate son by an unknown mother. After his sweethearts husband ran off to never return Ben and his son moved in with her. He was eventually able to make her his common law wife but he was never able to talk her into going with him on his trips across the ocean. Once again, he spent more than 5 years playing politics in France, including the common practice of the day of flirting with the women. The evidence is strong that he never had sexual affairs but he did take heat for his life style and for helping his son gain a government position.

Worst of all, Ben probably never accepted Jesus as his savior. In his early days, Ben was a Deist. In latter years, he encouraged prayer at the start of each continental congress and he contributed to a Presbyterian Church in Philadelphia. Late in life, he admitted that he had never studied the "question of Jesus" but he said that he would find out the answer soon enough.

The Battle of Yarmuck is sometimes called the Battle of Lost Eyes because thousands of men lost an eye or two to the arrows that rained. In one decisive battle, Khalid asked for 400 men to save the day by going on a suicide mission. All 400 were killed or seriously wounded.

I sometimes forget just how good my life has been. I know that the policy of an eye for an eye leads to a lot of blindness. It is my hope that America rebuilds its military strength and uses this strength to avoid war.

The pressure is back on Iran, Iraq, the Taliban, al Qaeda, the Kurds, the Turks, Russia and others to play nice. Lets hope that America keeps the pressure on so that bigger wars can be avoided.