Wednesday, February 06, 2008


Romney did not win delegates in the conservative south. He did pull enough Missouri votes away from Huckabee that this key state went to McCain. McCain is the likely republican nominee despite the fact that he is hated by Rush, Hannity and others. The great irony is that the main "sin" of McCain was his willingness to offer immigrants living in the US a path to citizenship. Our country is filled with citizens whose grandparents did not go through a formal immigration process. One of the many true tall tales is that many of the cowboys who participated in the great cattle drives immediately before the railroads reached the South West were illegal immigrants from Europe.

Anyway, Romney says he will keep going but he has spent $35 Million of his own money to gather less than 300 delegates. He has spent more than $117,000 per delegate! It is time for him to pack his bags.

Given the animosity Romney has displayed, it seems unlikely that he would endorse either of the remaining candidates. However, if he were to drop out, two of the states coming up for votes, Louisianan and Texas could move into the Huckabee camp. To date, the conservative vote has been split in every election but McCain was the lone "moderate" in the latest contest. The total delegate count lead enjoyed by McCain would not be there except for the split. For example, in South Carolina, Thompson took enough votes away from Huckabee to throw that state to McCain. Florida saw a three way split of conservatives and only a two way split of the "moderates".

Again, McCain is the probable nominee but I agree with Huckabee that if this is a two man race then it is a two man race between McCain and Huckabee. I simply do not believe that Romney is ready to spend another $35 Million to come in a distant second at best.


While some data keep showing economic weakness and while the pundits talk about the recession, a BOOM, BOOM, BOOMING economy is developing. Commercial and Industrial Loans are at the top of the chart. The chart pattern is similar to the pattern at the mid cycle turn in 1996. Just like the chart pattern on airline seat "bumps". Last year, more passengers were bumped than in any year since 1996. We all know what happened in the markets from 1996 to 2000!

In that previous cycle, we had the stimulus of preparation for Y2K. A ton of money was spent on computers upgrades. This time around, there are tons of computers being purchased to replace desktop computing tasks. The new paradigm is called "cloud computing". The reason the new hand held mobile computers will be so super powerful is because they will rely on "cloud computers" to hold data and do the heavy lifting. Texas Instruments just came out with technology that will increase battery life on hand helds by a factor of 10! I believe that body heat will eventually be adequate to power hand held computers! 98.6 will be all you need to stay in touch with more computing power than exist on the earth today.


Yesterday, a TV talking head once again blamed the current downturn on over burdened consumers. The fact is that the ratio of consumer debt to personal income peaked in 2003 and went down for the next 4 years. The good news is that the consumer is borrowing to spend again. In the last few months, the ratio has gone up a little, even though personal income grew at the annual rate of 5.2%. BOOM! If consumers incomes are up 5.2% and they are borrowing to spend, then total spending is growing by more than 5.2%. But if you really want to talk about spending, take a look at the purchase of capital goods by business. The smoothed figures show an annual increase of better than 18%!


For some reason, it is easy for the public to understand that a surge in productivity depresses unit labor costs but it is not easy for them to understand that this represents lower inflation. Whenever anyone starts talking about inflation, the conversation immediately shifts to a few well known areas of price inflation, such as health care, college education, food and fuel. The fact that food and fuel are "roller coaster" commodities that eventually roll back down the hill is lost in the debate. The fact is that the cost to produce goods is falling at the annual rate of 2%.


I have mentioned repeatedly that the Gambrill insider index shows strong buying by company insiders. Yesterday, I read a report from Argus Research that is offers even more revealing numbers. For the first time since I don't know when, insiders bought more stock than they sold last month. Insiders are granted thousands of shares as a part of their benefit package. Most insiders participate in routine divestiture programs. In other words, they routinely sell shares. In 1982, the market went down in the early months but certain groups started to turn as the year progressed. Insiders were buying like crazy. By the time the strong groups broke out, the hole market lifted. There was no catching up to the groups that had turned up early.


As reported, coal fired power plants are being built in China and the USA faster than ever before. A new coal plant opens up in one country or the other about every other day. Buffet has been buying railroad shares. The Mitsubishi Nuclear Plant Design has made it past one more step in the approval process. Nuclear power plants are being built around the world and they will soon be under construction in the USA.

Believe it or not, China's export growth has been slowed due to insufficient power supplies. China is suffering a lot of pain right now as a result of the coldest winter in 50 years. Ice storms have taken down power lines, clogged roads and depleted coal reserves.

The most silly thing is that Hillary, Obama and McCain are all ready to over tax and over regulate the production of energy in support of false "science" in regard to climate change. Based on measurements made 5 miles above the earths surface, where the measurements are not effected by the proximity of airports, parking lots and buildings, the temperature has not changed since 1998.

America has turned its education system into a factory that turns out homogenized group thinkers. In the meantime the opinion expressed by the Russian, Boris Marshalov, appears to be true. Boris visited the US Congress in the early 1900's. He listened to a couple of days of debate before saying, "Congress is very strange. A man gets up to speak, says nothing; nobody listens; when he sits down, everyone gets up to disagree with what he said."

The difference today is that the political parties win by repeating false statements until they are believed by the masses. On the republican side, the steady drum beat is that cutting taxes will raise revenue. On the democratic side, tax cuts only benefit the rich and global warming is going to destroy the planet. The fact about taxes is that they should be kept as low as possible because the government does a poor job of deciding how our money should be spent. Instead of spending Trillions of Dollars to fight global warming, we should spend far less and solve all sorts of other problems. If it were true that global warming is going to "kill us all" then instead of some complicated cap and trade scheme, we should simply change the way we tax people. We should increase the tax on fuel and provide the people with a reduction in their income tax. Every one in the world would lower their fuel consumption if the cost were to be increased.


Oil inventories are climbing; partly due to slower economic activity around the world. THE BOOM, BOOM, BOOM in America will lead to a BOOM, BOOM, BOOM in the strength of the US Dollar. Since oil is traded in dollars, an increase in the dollar represents an increase in the price of oil in all the countries that see a decline in currency relative to the dollar. In other words, it is finally time for American's to get a price break. This is the best of news for the legacy airlines.


From 1998 to October of 2002, CAL fell from $62 to $4.50, but the company survived the tragedy of 2011. The company rose like a Phoenix out ashes, it zoomed from $4.50 to $48 in 4 and a half years. Then as a result of politics and greed, the mid cycle correction turned into an unnecessary route. The FOMC held short rates higher than long rates for 19 consecutive months which was much longer than necessary. The public was fooled into thinking the "wheels were falling off the wagon". They sold trillions of dollars worth of assets as the story told by the media and the politicians worsened. Of course, the politicians came to the rescue just in time. The house has passed a stimulus package to "help the little guy" and the senate is expanding it to help even more "little guys". Even now, the Fed Funds Rate is well above the market derived 90 day t-bill rate. The good news is that the FOMC only has so much power. The high short rates have brought mortgage rates down to historical lows. The refinance index is jumping off the chart. The many who have common sense are taking advantage of low mortgage rates. My daughter took out a variable rate last year because long rates were high. Today, she can refinance at 5.5% for 30 years! Why not? Are borrowing side interest rate going to average less than 5.5% for the next 30 years?

The extra tightness of the FOMC brought CAL down from $48 to $20 in one year. However, the Phoenix rises again. In the past month, the stock has appreciated 43%. It trades today at $28.90 per share. As I have pointed out, when you buy a share of stock, your ownership includes more than the price you paid in cash. In other words, you get the airline for free. As Lamar Jones points out, the company will receive better than $10 per share in free cash flow next year. If you buy a share of a company for $28 and it generates $10 in cash for you the following year, the value of those shares seem likely to increase. Put another way, next year, the guy that pays $38 per share will also be getting ownership of the airline for free.

OIL is currently trading at $87 per barrel for the first time in a long time. At its last meeting, OPEC maintained its production even though the build-up for winter heating is already over. Yesterday, emails, TV pundits, newspapers and radio hosts spoke about the "oil problem" from one angle or another. I did not hear a single mention of the huge, elephant fields that have been discovered in recent years. The average investor has not even heard of Kazakhstan. Many have heard about the monster field found in Brazil but the mention of this field is usually accompanied by the mention that it will take several years to build the infrastructure.


Yesterday, I read a couple of discussion threads in regard to the UAUA $25 charge for the second bag. The consistent point being made was that the "stupid decision" would send travelers to the other airlines. The secret response of management is "Hallelujah". With demand from business exceeding the available supply, the move made by UAUA was designed to send the discount fare shopper to the other lines so that he can be replaced by a full fare customer or to at least convert him into a profitable customer. Chances are good that the other airlines will add the baggage charge very soon. Indeed, the discounters have already had similar extra charges. To what airline is this discount shopper going to run? If the seats are all full at CAL, he must keep looking.

Don't take me wrong. It is right for customers to shop around for the best deal. However, customers must also be realistic. Just because you used to be able to buy an ice cream cone for a nickel does not mean that no one buys ice cream cones for $3 today. Just because you used to be able to find an empty seat at a bargain price a few years ago does not mean that the seat is still available today.

The price of oil went down dramatically for a lot of years before it hit $10 a barrel in 1999. Once the bottom was made the price rose and rose some more. The price of an airline seat bottom only a few years ago. Now that prices are going up, you can expect the trend to continue for several more years.

It is looking a lot like Hillary -- McCain. There is not a quarters worth of difference between the two. Still, the American economy is resilient. Life seems tough but we are actually living in the best of times. BUY, BUY, BUY