IS THE WORLD IS UPSIDE DOWN?

Last night a bible study group leader remarked that the world of crime has been turned upside down. He said that it used to be that government officials were out to catch and prosecute murderers, rapist and prostitutes but today governments are out to prosecute crimes against government such as income tax evasion, driving without an inspection sticker or without a renewed license plate. In the discussion that followed, it was mentioned that wrongs by those in power are not as serious as the wrongs of those outside of government. The prime example given was the Mayor of Detroit who had an affair and denied it under oath. The city settled a multi-million dollar claim but the Mayor still has his job. The name of Monica came to mind.

THE MORE THE WORLD CHANGES THE MORE IT STAYS THE SAME, OR NOT?

For 1,400 years from the time of Aristotle to the time of Copernicus, the most brilliant of scientist believed that the earth was the center of the universe. Copernicus was unwilling to publish his findings for three years because he was afraid that he would be convicted of heresy by the Catholic Church. Galileo, no shrinking violet, boldly proclaimed the "new truth", long before he put much serious study into the question. Eventually, he was tried and convicted by the Catholic Inquisition.


The good news is that Galileo got off easy. He was allowed to live in exile and thus he had the time to study the question and prove that the planets go around the sun.

THE TRUTH SHALL SET YOU FREE

Those in power often seek what is good for those in power. The truth seems to get pushed back like a coiled spring. The Catholic Church did not want to acknowledge the "new truth" about the relative importance of planets. Man always thinks that he is much bigger and more important than he really is. Yesterday, the US Senate failed to pass its latest Christmas Tree Bill. The US House and the President have agreed on a subsidy bill that is the Ben Bernanke equivalent of throwing hundred dollar bills out of helicopters. The "big and powerful" Harry Reid is fighting hard to load this "emergency spending bill" with all the goodies he can. After all, if the congress is going to buy votes, why not buy votes from veterans, retirees, small business owners, large business owners, tax accountants, lawyers, citizens in high tax states and a sundry others? Last nights vote failed by one so Harry practiced the political game of voting against his own bill so that he can load it up with more goodies. So far, 9 republicans have joined the "gravy train". What other goodies will be added to buy another republican vote? Of course, the eventual senate bill will never become law. The process is to get a different bill passed in order to negotiate the "prime goodies" in conference committee.

THE EARTH IS NOT ROUND!

To believe that the world was flat, people had to deny the obvious evidence to the contrary. The people believed because those in power told them what to believe and the public accepted that the smart and powerful men of the day must know of which they speak. Today, the world is not round but is instead upside down. The powerful people of the day, which includes those who control what is reported as "news" have decided that the earth is getting hot, as a result of what man has done. The evidence in support of this position has received wide distribution and it is repeated millions of times daily as truth. The fact is that the earth "leaks" natural methane into the atmosphere constantly and methane is many times more responsible for global warming than is carbon dioxide. The amount of natural "leakage" as measured by scientific notation is ten to the 28th power! This is from the ocean alone and does not count the natural decay of plant material outside the ocean.

I can tell you that the earth is not round a thousand times and you will not believe me. However, powerful vested interest have formed a "cartel" to profit from telling you that the earth is over heating. Temperature readings five miles into the atmosphere have not gone up for 10 years! China is currently experiencing the coldest winter in 50 years! Temperature readings at airports increase to reflect the constant increase of urbanization around airports! The level of methane in the atmosphere has declined in recent readings. Higher earth temperatures means a change in the trillions times trillions of chemical reactions that occur on this planet daily.

I believe in conserving resources and protecting our environment. I do not believe in allowing false claims to be used to enrich the powerful.

Today, there are too many people feeding off the government. It is time for reform.

MCCAIN AND HILLARY ARE IN THE MIDDLE!

To some extent, McCain's current status as front runner of the GOP is a fluke. Conservative voters split their vote between Thompson, Romney and Huckabee while McCain walked away with his key victory in South Carolina. On Super Tuesday, 62% of the republican voters in Missouri voted for the conservative candidates of Huckabee and Romney but McCain walked off with all 88 electoral votes. Many people believe that neither Romney or Huckabee can win but it would be interesting to see how either would stack up against McCain in a one on one contest in the states won by McCain. I suspect that even Thompson would have won a one on one contest.

I can still envision a Huckabee win if Romney were to suspend his candidacy while considering asking his delegates to vote for Huck. I cannot envision a Romney win because, after spending $35 million of his own money and another $55 million of friends and supporters, he won only a couple of primaries. His expenditure per delegate is around $300,000 each. He has a lot of money but others have tried but generally failed to buy the nomination.

ASSUME MCCAIN AND HILLARY

If we assume that the nominees will be McCain and Hillary, we can easily see where the "American Middle" is. The majority of Americans are for granting a path to citizenship for Hispanics currently living in America. The majority of Americans believe in government intervention to solve the "global warming crisis". The majority of Americans believe in limits to free speech as permitted by the McCain --Feingold legislation.

THE DIFFERENCES BETWEEN THE TWO COUNT THE MOST

While it pains me to know that even McCain has bought into the cap and trade game of soak the people for the benefit of the game players, there are certainly other areas where McCain is the clear choice over Hillary.

EDUCATION: McCain believes in improving schools by giving parents the right to move their kids out of weak schools and the right to move the government funding with them. Most Americans understand that the best products are those that are vetted by the free market. The right to the best education should not be a class warfare issue. All children should be allowed to select the school that serves their needs. Hillary offers the typical big government Christmas Tree of promising all things to all participants. Yes, the best teachers should be paid better, but government programs to pay all teachers more is like feather beds on railroad trains, the extra union train workers took their feather beds to work because they were paid to do nothing.

Hillary supports pre-school for all and this is a worthwhile area for debate. All children in America deserve a "head start", however, the funding for such programs should be made available only after hundreds of wasteful programs are scrapped. When America invest in the education of our kids, our return on investment should be high. The "melting pot blessing" that has been one key to the greatness of America begins in the public schools. Huckabee has shown that public schools "win" when they support the arts and sciences.

HEALTH CARE: Once again, McCain believes in the power of the right to choose. The power of the purse needs to be returned to the families of America. The doctor and the patient need to determine what treatments should be tried and cost must be an important factor. It is tempting to believe that government resources for health care expenditures are unlimited. The mandatory system proposed by Hillary will result in either massive cost increases for care or rationing. Socialist like to point out that other nations have national health care for the benefit of all citizens. Socialist do not like to be reminded that a dog in Canada can get an operation scheduled in a week but citizens often have to wait in line for months. In Sweden, some citizens report that they routinely are denied the right to talk to their health provider by phone. As a way to ration the doctors time, they only serve those who wait their turn at the office. The current system needs to be reformed but it does not need to be replaced with a government system.

TAXES: Here again reform is needed. Taxes do not need to be raised but the system needs to be simplified, there are too many feeding off the process. Jack Kemp, of Kemp-Roth fame, has signed on to assist McCain in developing a tax simplification act. The new plan will eliminate the alternative minimum tax that has been encroaching on the middle class. I doubt that the reforms will go far enough as democrats and republicans feed off the system. The emphasis of Hillary is to raise the tax on the rich as the way to make the system more fair. The emphasis of McCain will be help businesses create jobs by reducing the taxes on productivity (Huckabee's focus as well.)

WAR ON TERROR: Hillary has carefully worked to keep her options open. She wants to be able to run as the centrist candidate. Unfortunately for her, she is at risk of losing to Obama for being too centrist or she is at risk of winning the primary only to lose the general as a result of her moving too far to the left. The fact is that there are still thousands of bad guys who desire to blow up Americans. These bad guys are living in the mountains Pakistan with reduced numbers living in Afghanistan, Iraq and a number of other Middle Eastern Nations. McCain is the obvious choice for Commander in Chief. The comparison of the terrorist to Hitler is a joke to the socialist but Hitler's power was a built up gradually over many years. Even after he invaded Poland, no country was willing to face him. George Bush 41 deserves credit for freeing Kuwait from Iraq. Socialist and liberals write a lot of our history books but a fair telling 10 years from now will probably give George Bush 43 credit for saving millions of lives. Hillary and others are trying to make hay over McCain's willingness to have troops in Iraq for 100 years if necessary. McCain is correct that Americans are not upset because we still have troops in Germany 60 years after War War II. I will be overjoyed if my grand children serve our country in the Middle East during a time of peace.

OTHER STUFF: On Hillary's web site, you see little mention of the second amendment or the abortion issue. On the McCain site, you see statements in support of the right to bear arms and support for life. McCain also makes the pledge to nominate strict constructionist judges.

HUCKABEE IS NUMBER 1 BUT...

Huckabee is still my choice for President. He still has a shot at the nomination. However, conservatives will have solid reason to support McCain over Hillary or Obama. Hillary is even to the left of Obama on the heath care issue.

Again, Huckabee could still pull a rabbit out of his hat. The Rush-Hannity-Lars-etc crowd despise McCain. While these guys are not fans of Huck, they may encourage votes for Huck in a two man race. On their pet issue of immigration, Huck has a very strict proposal posted on his web site.

THE UPSIDE DOWN WORLD OF AIRLINES

Back in 2002 when I first pushed the purchase of CAL hard, the market cap of LUV was 13 Billion Dollars. At the time, the market value of all the major combined was about 4 Billion Dollars. I wrote that if one owned all of LUV that he should sell it, buy all the other carriers and put the extra 9 Billion in the bank. Back then, the airline world was upside down. Today, it still is.

The market value of LUV and the major carriers in Billions of Dollars is:

LUV 8.8
DAL 4.8
UAUA 4.3
NWA 4.3
AMR 3.8
CAL 2.8
LCC 1.4

The size of the carriers by billions of dollars in revenue is:

AMR 22.5
UAUA 17.8
DAL 17.1
CAL 13
LCC 11.5
NWA 11
LUV 9

As a general rule, it makes sense to pay a higher price for the company that has the highest sales. As you can see, the LUV buyer pays $8.80 for $9 worth of annual sales. The AMR buyer pays $4.30 for $22.50 in annual sales. The ranking from most expensive to least by this measures is as follows:

LUV .97
NWA .39
DAL .28
UAUA .24
CAL .21
AMR .17
LCC .12

Those who buy shares in LUV pay 8 times the price of those who buy shares in LCC. I grant that LCC has more than its share of problems as does AMR but by the time you get to CAL you have a well run airline available at a 78% discount to LUV. Back when I wrote about LUV being worth 13 Billion, I said the odds were that the majors would "catch" LUV somewhere in the middle. So far, LUV has dropped off 5 Billion in market value while the combination of the others is now worth 21 Billion. I still expect CAL, DAL, AMR, UAUA and NWA to each pass LUV in revenues within a few years even without merging with one another.

LUV IS IN THE HUNT!

One question being asked by analyst is ,"Will the grand old AMR carrier sit still while DAL scoops up NWA to become the biggest carrier and then sit still again to see CAL- UAUA take over first place while AMR drops to third?" An equally interesting question is, "What will LUV do?" The chairman has said that LUV is "in the hunt". LUV has been working hard to prepare for the switch to a hub and spoke system. There is no long a fast track growth path available for a point to point system.

It has been said that AMR has its eye on CAL. On the other hand, the CAL management is top notch and the firm desires to remain "in charge". LUV is not an attractive purchase candidate because it is high priced and boxed-in. LCC is basically a domestic carrier with lots of union problems. LCC is a member of the same "cartel" as UAUA. LCC tried to buy DAL before it exited bankruptcy. It would have been a highly profitable deal.

AFTER THE US CONSOLIDATION

After the US carriers are in a better bargaining position, the airline business could be open to international consolidation. The question will remain if consolidation is necessary given that the "cartel system" is allowing members to work closely together. The days of the old CAB regulations are long gone but the "cartel system" gives the carriers "oligopoly pricing power". In any event, you can expect to see higher fares. Increases in the coming years are going to make the $20 per trip fuel surcharge of last month and the $25 second bag charge of last week seem like small potatoes.

ENGEL'S LAW

In 1857, German Economist, Ernest Engel discovered that the elasticity of food is less than 1. What this means is that the more income you make, the less you are likely to spend on food in percentage terms. This is true for other basic necessities of life, such as heat, clothing and shelter. Engel noted that other goods such as furniture and transportation are "normal goods". In his mind a normal good is one that is bought in proportional amount as your income rises. In other words, the higher your income the nicer the car you are likely to own. Except in extreme cases, Engel would not have seen a car as a luxury good (in his day steam locomotives had transformed the world of transportation and cars were not invented yet but his principles apply to cars as well). The third category of goods according to Engel was luxury goods. These goods have an income that is greater than 1. In other words, a poor man may double his income and not buy his wife a diamond but if he doubles his income again he may buy her two or three or even a dozen.

The good news is that billions of relatively poor people are seeing their incomes rise above the poverty level. As such, they are finally enjoying what Americans have enjoyed for centuries. They are finally able to spend to own "normal goods" and even luxury goods to some extent. In the short run, the new demand has put pressure on the price of resources, but over time, the law of substitution brings down the price of resources. The world is going to continue the economic boom of the past 25 years. The difference during the second half of the business cycle is that it is AMERICAS TURN TO PROSPER! America currently offers the hottest technology at the lowest prices. It is our turn to export goods and services and that is what we are doing. The times are so strange that retailers in New York City are accepting Euros! The price of our dollar is so low that Europeans cannot buy enough from us. They sometimes find themselves in New York out of dollars but with Euros in hand. Put another way, America is the leading capital goods producer of the world and businesses are buying like never before!

"MYTHS OF THE RICH AND POOR--Why We Are Richer Than We Think" by W. Michael Cox and Richard Alm

Mark Perry of Carpe Diem fame posted a few charts and data from the above book. The book was written some years ago but its truth is growing with the economy. In my emails I have tried to get across the idea that inflation is part and parcel to productivity. The thing I like most about the Cox book is that it uses time as an inflation measuring stick. I have to run but let me encourage you to take a look at his numbers in detail. It is incredible to learn how many hours of work were required on average to pay for something 20 years ago that can be acquired for a few moments of work today. The text shows us Engel's law at work. American's keep working less and less for basic necessities but they feel stretched to make the payments on their boats, second homes and children's college tuition. American's tend to forget that their parents did not own the same variety of luxury goods. My ancestors canned beans, black berries and tomatoes. I am thankful that my wife and I "do not have the time to can food". On the one hand, some Americans try to do to much or to "give their kids too much" and on the other hand, other Americans sit on the couch watching TV while complaining about how tough times are. Read the "Myths of the Rich and Poor" to discover just how many benefits we enjoy.

BUY, BUY, BUY

The stock, bond and real estate markets are upside down. Thirty year fixed rate mortgages are available for 5.5% on homes that are selling for substantially less than the cost of production. Only a fool rents a home under these conditions.

THE TWO SIDES OF GOVERNMENT SAY BUY, BUY, BUY!

Government policy is divided into monetary policy and fiscal policy. The public typically believes government fiscal policy is upside down. Right now, government monetary policy and fiscal policy are both on stimulating the economy. You see, when the government spends more money that it takes in, that is an economic stimulus. It is easier to see from the opposite side, which is when the government increases taxes, you have less money in your pocket to spend.

For the 19 months leading up to last month, the FOMC held short term interest rates above the 10 year treasury rate. That is not normal. When the FOMC cut rates .75 and then followed by another .5 last week, the short rate "brake" was taken off the economy. At about the same time, Bush announced a 3.1 Trillion Dollar federal budget. The expenditure in this budget is greater than the income by 400 billion, as I recall. This is greater than the Christmas Tree package being cooked up by the Senate, which could exceed $200 Billion of give aways.

Perhaps the formula for growth is worth posting again. GDP=C+I+G+(X-M). What this formula tells us is that the sum of all the growth enjoyed by Americans is equal to the grow in consumption plus the growth in investment plus the growth in government spending plus the net growth of exports over imports. Guess what, the US economy is being goosed!

The consumer always spends, spends and spends what he has and personal income growth continues to soar. The yak, yak, yak about taped out consumers is horse hocky. Consumer debt relative to personal income and net worth have dropped significantly since 2003. As far as investment is concerned, businesses are spending heavily on new plant and equipment and, despite what you hear about failing infrastructure, governments across the land are building roads, bridges, bike paths and water treatment plants. There are 49 coal fired electrical plants planned or under construction in the USA. The $400 billion dollar federal deficit shows that the federal government is doing its share to reflate the economy. Finally the export boom in capital goods equipment is leaping forward at the same time that the total value of oil imports is falling.

With monetary and fiscal policy goosing the economy, the public is going to do their share. Even rental properties are now being refinanced. Mortgage rates have been lower only a couple of times in the past 50 years. THE NEWS MEDIA HAS THE STORY UPSIDE DOWN! IT IS NOT TIME TO HIDE IN A BEAR HOLE! BARGAINS ARE AVAILABLE.

While I do not believe anyone can "short time" the markets, I believe the market will be trucking well before the McCain tax simplification plan is made public. The public is sick and tired of the annual delayed patches to the AMT. I believe the congress is ready to cobble together a tax simplification that will keep the capital gains tax cuts in place for the "average man". As we learned in recent democratic debates the average man makes up to $250,000 per year. The politicians will not give up total control and make taxes too simple but a 1986 style tax reform is on its way! It very well could include a 50 cent per gallon gasoline tax tied to a reduction in income taxes. Mighty congress is on the way, the mighty congress will save the day! And the world will still be upside down.