IRAQ-IRAN TWO MORE STEPS FORWARD

The good folk at Strafor appreciate that the latest fight and cessation of fighting in Iraq were two steps forward in the Iraq-Iran situation. The attitudes and actions of Iran are no longer the key factor in stabilizing Iraq. The American people do not understand the nuances of progress. It is easy to read that 4,000 American soldiers have died and to conclude that the war is a mistake. Over the weekend, a couple of republican anti-war politicos from Pennsylvania threw there support to Obama. No one knows if the improving situation in Iraq will determine the outcome of the US elections because more and more folk have developed a tin ear. Still, family safety and security is the deep seated desire of all Americans.

SECURITY IS KEY

A couple of thousand years ago, the population of the city of Rome was roughly equal to the current population of Dallas Texas. The people of Rome lived on only 2% as much land (per cafe hayek web site). The two main reasons for the difference are security and transportation costs. The cities of old were densely populated because the people generally congregated behind walls or in close proximity to one another because they wanted to be safe. Many a city was populated by farmers who slept in the city at night but went out to the fields and vineyards by day. Before 911, the threat of attack from "outside the walls" had seemingly disappeared. The threat Americans have felt is the threat of harm from thugs and criminals. Moving to the suburbs has been the way to provide safety for ones family. Until congestion problems arose, the automobile provided the inexpensive means for the migration to the suburbs.

Julius Caesar was the first to tackle the problem of traffic congestion. Because Rome was so densely populated, Caesar passed laws similar to today's big city traffic laws. Carts were not permitted on the streets during certain hours of the day. Those who live 20 miles out of Dallas today can get to the Mavericks game in about the same amount of time that it took the citizen of Rome to get to the "games" at the Colosseum.

The government of Iraq, has started to demonstrate that it can and will provide security for its people. The government's actions of the past week demonstrated that the government is "in charge". The Iraqi elections scheduled in October are now all the more important. Iraqi militia groups need to work the ballot box to influence the direction the country will take. A successful election in October will be another step forward for the people of Iraq and it should take some of the steam out of the anti-war movement in America. The important question will be, "Is the world a safer place because a democracy has taken hold in the Middle East?". The most radical people of the Islam faith despise the concept of democracy and one of the aims of their "holy war" is to prevent democracy from taking place. People have been killed for voting! When the people of northern Iraq got a taste of the extremes imposed by the radicals, the people switched sides. In the past week, the people of southern Iraq have been faced with a similar problem. They have had to decide if they want to continue the insurgency and face bullets being fired at them from their fellow countrymen or do they want to "fight at the ballot box". It appears that the ballot box is winning!

TRANSPORTATION COSTS

A key reason Americans moved to the suburbs was lower transportation costs. The total transportation costs were lowered again when many businesses moved from center cities to the suburbs. Total transportation costs have soared in recent years but much of this increase has been the "congestion costs". The total cost of the commuting time wasted is in many cases higher than the cost of the actual transportation. Here again, attitudes are changing and the results are starting to show up in the marketplace. When one person decides to "catch the bus", the next person is behind one less vehicle on his way to work. The cost of transportation goes down for the bus rider and for the car driver who makes it to work in less time.

Total US oil product demand in the last 4 weeks was at the lowest level seen in 4 years. Some of this is a result of the economic slow down and some is the result of changes that will not be undone when the economy rebounds. The fellow who buys a high mileage vehicle will not trade it in as soon as the price of fuel declines a little. The person who moves to be close to schools and offices has made a commitment to lower his use of fuel.

SMART INVESTORS SEE OPPORTUNITY

The people at GaveKal research are among the smartest people around. Here are the words of Anatole Kaletsky written three weeks ago: "It feels to me that we are very near the point of total capitulation. ...friends and clients...seem to think the depression thesis is an established fact.... Meanwhile, the US figures still indicate nothing worse than a normal mid-cycle slowdown."

Anatole went on to discuss real estate prices: "It seems to me that US real estate prices are at most 5 to 10% away from a long-term bottom. In fact, a strong argument can be made that ... house prices in many parts of America have already hit unsustainable lows. ...it seems to me that the risks are mostly on the upside."

ROME AND SAN FRANCISCO

Many a city, including ancient Rome and modern day San Francisco practiced policies that irrationally drove up real estate prices for the benefit of the "establishment". In America, it has become quite common for cities to manipulate real estate price through zoning restrictions. Forcing large tracks to become green space, pushes the value of existing properties up. The big drop in real estate prices, as reported by the Case-Schiller Index, is partly a function of including cities in the index where zoning games have been played. When politicians artificially drive markets, markets ultimately find the way around the politicians. The unwinding of silly games is often painful.

The story in the "heartland" is different than the story of coastal, resort and "protected" cities. In the past year, Zillow reports that the average home in America fell by 3%, but, again, the average was hit hard by the steep drops in the aforementioned markets. In North Carolina, a state that saw significant declines in home values at beach and mountain resorts, home prices rose 4.5% during the past year. Over five years, the average home in America appreciated 40%; 110% over 10 years. In North Carolina, the five year appreciation was 31% and the 10 year was 68%. The bottom line is that high beta real estate plays perform like high beta stocks and the "news focus" is on the most volatile of markets. The result is a misleading story by the media and the opportunity for politicians to make speeches and to enact laws to "fix the big problems". The opportunity for investors is to make money off the false information.

Price maps of the whole country show that much of America saw increases in home values last year. Now, with mortgage rates at the levels seen during the boom days of 2004 and 2005, homes are more affordable than they have been in a long time. The affordability index has risen from 100 to 135 in just a couple of years. Yes, there are a lot of homes on the market, but, building has slowed and the months supply on the market will drop rapidly as the sales rate picks up.

GOOD DEALS AND GOOD TIMING

The timing of the helicopter money drop has been coordinated with the timing of the interest rate push. In the weeks ahead, families will find themselves with a few extra dollars from rebates, on top of a few extra dollars from mortgage resets and on top of a few extra dollars from wage hikes. The spending of the first few will stimulate the spending of the next few and it will not take long for service workers, such as real estate agents, to "catch the wave". Two steps forward in Iraq-Iran, accompanied by two steps forward in the economy will give Americans and incumbent politicians hope. Investors should keep in mind the example of the last real estate down turn. The yield curve inverted in 1989, the recession hit by late 1990 -- just at the start of the next big move in the stock market.

AIRLINES

I believe the deal being offered to DAL by NWA is to do the merger without settling the pilot listings. The previous deal offered NWA pilots $50 to $100 Thousand equity in the new company and 25 to 30% raises. The companies can agree to merge without offering these perks to the pilots and then let the pilots negotiate to get some or all of these perks as a part of settling the seniority questions.

Also keep in mind that world wide oil demand has been growing by less than 3.5 million barrels per day but that there are 7 million barrels of new production set to come on line in 2008 and another 7 million set to come on line in 2009. This is all before the development of the monster discoveries in Kazakhstan and Brazil. One extra barrel will bring the fuel price down by $30 per barrel or so. As can be seen in the recent price drop in gold from over $1000 to the $930 range, the turn in commodity prices appears to be happening. The spike in oil prices of the past couple of days was a result of the government of Iraq being strong enough to go after the "Iraqi Mafia" of Basra. This is kind of like when the US Government finally went after Capone, the end of the story was written as soon as Elliot Ness was hired. The Iranians can no longer depend on their "agents" in Basra to disrupt the anti-terrorism progress.

Fwd: Airlines

Subject: Airlines
To: Jack Miller



Jack,

Can you talk about your views again on airlines given the lastes situation w merger status, request for DOE to intervene on energy costs, etc? How low can airlines go? The PE is already so low.

Given the status of airlines, is it ever reasonable to move out into another beaten down sector to spread the risk?






A timely question as a new merger proposal was offered this afternoon.

I know of no other industry where one can buy shares for less than the cash on the books per share and no other industry that is sitting right on the business/consumer cycle turn in the way the airlines are. I understand that I sound like a broken record but what was true at $25 per share is all the more true at $18 per share. It is time to buy these stocks. The short term pain is over or almost over, the gains over the next several years will be substantial.

I do not know the details of the latest merger offer yet but I understand the terms are not as attractive to the pilots as the last offer. Soon, the pilots will have to make decisions. The CAL plan is like that of many other industries where the pilots share in increases in profits. The payout last year was a nice bonus. It will be a nice bonus in the coming years but it will not force the airlines to take the full hit during downturns.

There are less volatile "plays" available. As I have mentioned a few times, the Russell Small Cap Fund and other funds that hold shares in lots of regional and small banks will do well over then next couple of years. Banks are now enjoying the recent dramatic reduction in cost of funds. The Fed Funds Rate (which is the rate at which banks borrow short term funds from other banks) has fallen in 8 months from 5.25% to 2.25% and most of this drop happened since mid January. The important point to remember is that it is correct portfolio theory to increase volatility when stock prices are low. This is hard to do in practice but obviously stocks are lower than a few months ago when it would have been smart to have reduced volatility. It is the exactly wrong move to decrease risk at or near bottoms.

IRAQI SECURITY TAKING CHARGE

The three days of military-police action by the Iraqi Security Forces is another big step forward in the fight on terrorism. For the first time, the elected government is exercising control of its country. In the short run, the market is worried over the Basra oil pipeline. In the long run, the actions of the Shiite dominated government against radical Shiite forces is an indication that the radicals must attempt to achieve their objectives in the political arena or stand the risk of military destruction. It is always hard to be "on the side of war" but "When in the course of human events..." war is sometimes necessary. I grieve for each one of the 4,000 US soldiers killed in Iraq but how many more would have been killed if this war had been postponed? McCain's recent take is that even if invading Iraq was a mistake, al-Qaeda forces are there now and it would be a mistake to leave now. As Iraqi forces take control, the power of the US behind them gives them gravitas, a strong military reduces the amount of fighting needed. The local militias have been in cease fire mode for some time. They do not want to take on US forces. In the mean time, militia members have been involved in crimes against the state, including the theft of oil. The Iraqi government is forcing these militias to make a choice, fight on the battlefield or join in the building of a democratic government. GOOD NEWS!

MORTGAGE RATES BUMPING AGAINST HISTORIC LOWS

Mortgage rates as posted by Bankrate Monitor are 5.68% for 30 year fixed rate loans and 5.2% for 15 year fixed rate loans. A number of Credit Unions are offering significantly better deals. One NC Credit Union is offering to refi variable rate loans at 4.25%. These loans will reset at 2.5% above the one year treasury index with a maximum increase of 1% after two years. The maximum is capped at 9.25%. A whole lot of people qualify for a whole lot of house at 4.25%. It is a good speculation that the value of a house will rebound more than 4.25% per year for the next two year and more than 5.25% per year over the next two years. A rented house should offer substantial net returns. The result is that in many areas of the US, the best deals are getting scooped up. A friend of mine just got an incredible deal at a foreclosure auction. By the way, a large percentage of the foreclosures are being purchased by first time home buyers. The American public is pretty smart when it comes to home buying. Despite the recent sharp decline, many an American has been trained by his parents and the experience of his parents to buy for the long term. In today's markets, homes are priced well below replacement costs. Of course, the pain in the dramatically over built areas will last a while longer but even here houses are very cheap in terms of Euros.

AIRLINE WIRING

Why do you suppose so many airplanes are suddenly being inspected for wiring problems? Has there been a crash or two that suddenly makes the wiring in 25 year old planes suspect? No!

Have you read about the lengths that union members will go to "win"? The biggest fights were long ago in steel mills and at trucking firms, but there are airline employees who are willing to "play dirty". Do you suppose that AMR might have gotten a "bomb threat call" before suddenly canceling 300 or so scheduled flights at the last minute? Do you suppose that "bomb threat" could have been that an airline employee had crossed a few wires?

There is no way for me to confirm my suspicions but AMR has been trying to settle its union contracts in advance. At the same time, AMR unions have been asking for substantial wage increases. The employees feel that they deserve to regain wage rates given up to help AMR avoid bankruptcy. The problem the employees have is that airline industry is no longer a government protected oligopoly. The management that agrees to pay more in wages than the next airline will ultimately be forced to cut back on service, shrink the airline and, barring a change, file for bankruptcy. DAL and NWA which went through bankruptcy to reduce wages and CAL which negotiated lower wages without going through bankruptcy, all have wage costs substantially lower than AMR. The unions can push very hard if they like but they are not likely to "win" the return of past wages. Of course, should an airline employee get caught making a false "bomb threat call", he could spend the rest of his life in jail. It is true that the legacy carriers have enjoyed huge cash flows and that they are sitting on large sums of cash. It is also true that they need this cash to update fleets in order to compete with international carriers.

CHEAP, CHEAP, CHEAP

Carlo Magnifico has posted some great charts at stockcharts.com. One can easily eyeball 20 years of history on his charts. One example is the price of the Dow Jones Industrial Average relative to the price of gold. The ratio of the two swings to extremes in both directions. In 1995 the Dow was only 10 times the price of gold; by late 1999, the Dow traded at 42 times the price of gold; today, the Dow sells for only 13 times the price of gold. While it is true that the Dow got a little bit cheaper in 1995, we do not know that the Dow will get this cheap this time. The big turn in gold just last week indicates that the relative turn is here. The Dow is likely to appreciate to 40 times the price of gold over the next 5 years.

Last night on Kudlow and Company, an executive of Norfolk Southern Railroad mentioned that trains are fully loaded and carrying exports to ports. Of course, the exports include coal and corn but, surprise, surprise, also autos. US autos are cheap in terms of foreign currencies. The value of the US Dollar has certainly made the "full cycle". The ratio of gold to the US Dollar went from 1.2 times in 2001 to 13 times in 2008. This ratio is now back at levels not seen since the recession of 1991.

Many other ratios are "out of whack". The ratio of the Dow Transportation Index relative to the price of oil has gone from 21 in 1990 to 270 in 1998 and to 47 last week. Here again, the price of oil is not as "crazy" as it was in 1990 but it is not cheap. Oil is extremely expensive relative to natural gas but families pay only 6% of their disposable income for energy today, compared with 8% some 20 years ago. The Dow Industrial Average is "cheap" in terms of gold but also in terms of oil. In 1990, the Industrial:oil ratio was 62, it reached 812 in 1998 and it is now at 122. GM has also gone full cycle, trading at $18 per share in 1991, at $77 in 2000 and at $19 or so now. In 1991, the dollar was not nearly as cheap as it is now so the coming rebound should be huge.

DEMAND DESTRUCTION, CHEAP HOT DOGS AND SERIOUS PAIN

A couple of days ago, my wife and I decided to buy a hot dog for lunch but instead of driving 4 miles to our favorite stand, we decided to try the hot dogs at the local barbecue shack. The hot dogs were excellent. It took $3.19 gas to get us to try the local hot dogs, the next time, the local option will be automatic. Saving 8 miles to buy a hot dog is no big deal but how many millions of similar decisions are being made daily?

Last year the wholesale price of gas was at $2.41 at the start of the summer driving season and the retail price peaked at about $3.21. Today's wholesale price of $2.71 implies a retail price of $3.31 and the summer driving season is still a couple of months away. It appears likely that gas will be selling for $3.50 by summer.

On the other hand, how many others have found "good hot dogs close at hand"? I have seen a couple of smartfor2 cars in Clemmons. Demand destruction is taking place. The EIA figures show a significant increase in new production and attitudes are changing. Investors should remember that the price of all the oil is set by the price of that very last barrel. Once Brazil or Angola or Kazakhstan reduces its price for the last barrel to get it sold, the rest of the sellers will meet the price. In the past two days, the market for gold and oil has rebounded but neither has made new highs. The failure to keep the trend alive will result in a new trend. Take advantage!

A MISSTATEMENT

I am sorry for my last email. If I misspoke, it was just a misstatement, I am human, you know. I like others sometimes make mistakes, my memory of events from 22 years ago is not what it used to be. I remember the sniper fire from somewhere but the bullets flying overhead must have been from some other memory.

HEARING THE R-WORD

When you hear the word recession, chances are the worst of the down turn is over and the stock market is ready to soar. The R-Word Recession Index is a count of the average number of articles in the New York Times and the Washington Post. This index runs up high about the time historical data shows that the economy slowed 4 or 5 months ago, also about the time the stock market is ready to climb.

Dr. John Rutledge reports that one of his favorite economic indicators is the used car report posted at Manheim Consulting. This report shows that used car prices are falling. Indeed they are now down to the level last seen at the market turn in 2002-2003. This report works much like the Recession Index and much like the front cover of Business Week works. Business Week has already had its "Recession on the Front Cover Issue". This event is the "ringing of the bell". It means that the news will continue to be "bad" for a while but that stock prices will "climb the wall of worry".

Ford and GM ready for a big turn. Yes, Toyota sells more cars in the US than Chrysler (one of the supposedly "big three") and yes, Toyota will soon take Ford's spot as number 2. However, Toyota sells for $107 per share, not for $6 per share. Ford has offered all 54,000 employees pension fund buyouts. Ford hopes that 8,000 workers will accept. If they do, Ford will hire new workers at half the payroll cost. The dumping of the health care benefits on the Union will cut Ford's cost per car by $1,000. With the dollar at extreme lows, Ford can export cars at a nice profit. Over the next several years, Ford will continue to replace old workers with new at half the price. GM and Ford are making the cuts that will lead to higher profits. Capacity in the USA has been cut by 4 million units.

Mexico now restricts imports to 10 year old cars. You can see the price bubble on used cars that are 10 years old.

Over the past 15 years, the price of Ford shares fell by 63% while the price of TM shares rose by 246%. During that time, those who bought Ford at the right time in the cycle made money. Now is the time.

The R-Word is all over the place, screaming the word BUY to those who are listening carefully. Many other indicators are saying the worst of the slowdown is over. For example, the housing affordability index has jumped 30% in the past 8 months. The average family now has 130% of the income needed to buy the average house. Yesterday, the Case-Shiller home index made the news by reporting the biggest drop in home prices ever. Of the twenty cities included in the survey, Miami and Los Vegas homes dropped by 19% and Phoenix homes dropped 18%. The average of this 20 city index was an 11% drop. Down South, Atlanta saw declines of 4% and Charlotte saw an increase of 1.8%. People continue to move to North Carolina (a right to work state that has a steady flow of new job opportunities).

A technical indicator, the open interest on OEX PUTS is screaming BUY!

The asset value of America, including the net 57 Trillion Dollar Net Worth of Individuals is upwards of 200 Trillion Dollars. The recent paper write downs of a few hundred billion has made the news daily and has scared the public out of the markets, at low prices. These paper loses are the minor relative to the wealth of the nation, they are concentrated in just a few major brokers and most of these losses will disappear once the market rebounds. Of course, those who sell or who are forced to sell close to the bottom will have little chance of a quick full recovery.

Hearing the R-Word is a BUY SIGNAL, NOT A SELL SIGNAL.

NASDAQ TRAIN IS CHUGGING ALONG

The NASDAQ index was up 3% yesterday and it is swimming against the tide today. It takes a lot of strength to swim against the tide. This stock market move is strong. I hope you have piled all you can on board.

THE WORLD HAS CHANGED

There is an excellent series of interviews posted at The Christian Science Monitor. The world has changed. Fifty years ago, there were a billion people on the planet "living the good life" while there were several billion more on the edge of starvation. Today there are 5 billion people "living the good life" and only another billion or billion and a half facing starvation.

The key difference between now and then is that free trade "broke out". While it is also true that political freedom "broke out", China has demonstrated that political freedom does not have to immediately match economic freedom for the people to benefit greatly. Still, the key to both increased political and economic freedom has been the increase in free trade. Poor people around the world have been given the opportunity "to fish" rather than being given "free fish". In the case of China, once the government did away with collective farms and allowed individuals to own and operate their own farms, the economic growth has been incredible. The new farm owners cannot influence who runs the government but they do greatly influence their own standards of living.

BACKLASH IN AMERICA

America is experiencing backlash because formerly protected jobs have been exposed to free market competition, forcing many Americans to retrain for other jobs, many of which are even higher paid jobs. It has become more and more rare for a small group of workers to be dramatically over paid simply because they have artificial protection from competition. For example, the monopoly power of the UAW has finally been cracked wide open. Americans can now buy cars made in America without paying for crazy work rules and exorbitant worker benefits. The unions are not happy but cars are being made in Texas, Tennessee, South Carolina, Georgia and elsewhere while hundreds of thousands of former Michigan workers draw from fat pension buyouts.

HOW CAN WE REDUCE THE NUMBER OF WARS AND REACH THE OTHER BILLION POOR PEOPLE?

The democratic base has forced Hillary and Obama to repudiate free trade deals already on the books and to help stall pending trade deals. The fact is that both sides to trade are winners, otherwise the trade would not take place. I will not give the grocer ten cents for an egg unless I would rather have the egg and there is a price at which I will stop buying gasoline. The neat trick is that the risk of war is reduced when the people of a land are actively engaged in trade. The Chinese and the Saudis each hold millions of dollars of investments in the USA that would be damaged if these countries were to go to war against us. Why fight with your neighbors if they are willing to buy your goods?

The predominantly Shi'a country of Bahrain just made a nuclear energy deal with the USA. Suddenly, this "first cousin" to Iran has an economic interest in keeping the peace with the USA. Trade with Iran has been dramatically reduced as a result of its unwillingness to play by the rules as laid out by the UN. As a result, Iranians are seeing goods prices jump 20% on top of 20%.

Diplomacy is a complicated, multi-faceted game. Sometimes, the thing we have to offer in trade is nuclear energy support, however, most of the time we simply must be willing to buy the products made by the poorest of the poor. When we buy goods from the poor, we bless ourselves and the poor. A recent study showed that the most happy of all people are those who give to others. While "It is more blessed to give than to receive" it is amazing that the willingness to buy and sell from and to the poor of the world is the gift that keeps on giving. The world has changed but more change is needed.

A couple of weeks ago, at a United Methodist Missions Festival, a life time missionary, whose work is to be honored and praised, told me how "the rich are getting richer and the poor are getting poorer", the liberal mantra. Having seen been up close and personal with starving families, I understand why this missionary is willing to "covet the wealth of some" while drawing the conclusion that the poor are getting poorer. No one can deny that billions more people are wealthy today than at any other time in history and no one can deny that there are at least a billion people who are fighting starvation. The problem with the missionaries line of thinking is that even if we could redistribute the wealth evenly, we would not end poverty. What history has shown is that when wealth is confiscated from one and given to another, all reason for work is destroyed. A dependent relationship is quickly established and the number of poor grows to meet the supply of "free goods".

The world has changed but there is yet another billion people who need to be offered a price for whatever "fish" they are able to supply. When the USA trades a few ears of corn for a an hour of African labor, the trade is a benefit to the people of America but it is an answer to prayer in Africa. It may seem harsh but selling corn to Africans is much greater gift than giving corn to Africans. It is not anti-American for many American consumers to benefit and many African workers to benefit because one over paid American Auto Worker is bought-out of his union contract. The fact is that the overpaid worker in America can quickly find a job at a fair wage. The wages in America for highly skilled workers continues to climb. Americans do not need collectives to provide the labor for auto plants anymore than the Chinese needed collectives to provide the labor for farms.

DOES ALL OF THE ABOVE SAY SELL GM AND FORD?

NO! GM and Ford have gone through a period of radical change. Their costs have been cut dramatically and the value of the dollar is so low that people in the poorest of countries can now afford a used American made car. Shares in GM and Ford are "down the mountain" from where they once were but now that the turn is here, even US Auto stocks will see a big run.

This morning, the markets are "backing and filling". The big decline in energy and material stocks has attracted the attention of the "true believers in the commodities 'super cycle'". The big boys are pretty much out of energy stocks, institutional investors own only 5% of oil stocks and 95% of airline stocks. Still, as the market rotation continues, it will take a while for the turn to become obvious to the majority. Many will continue to buy energy and basic materials "on the dips" for years to come. Yesterday, the NASDAQ was up 3%. The energy stocks may go up over the next several years but they will not lead the Bull Market Stampede.

CAN YOU SEE IT NOW?

The turn is here. It has been here for a while but, only a couple of days ago, a couple of readers said they could not see the turn. Can you see it now?

In the past 5 days, bank stocks were up 14% while gold and silver stocks were down 15%. Retail stocks were up 13% while energy stocks were down 5.5%. The Russel 2x 2K was up 11.6% while materials were down 6%. The inventory of unsold homes has fallen three out of the last four months but last month sales of unsold homes rose by 3%. In other words, sales of homes have fallen in the past 4 months but, not as fast as the production of new homes fell; after 4 months of declining inventories, buyers in some markets decided they had better jump before the best bargains got away. Since the unsold supply of homes is a function of both the numerator (homes) and the denominator (sales per month), this ratio can change quickly. A jump in the purchase rate represents both a decrease in the numerator and an increase in the divisor. Of course, some folks who have been waiting to put their homes on the market will do so once they see home prices jumping. It may be many months before builders are adding much new supply because the value of current homes must rise substantially before the ratio of new home price to used home price is back in line.

THE TURN IS HERE

Monday, the ability of banks to buy deeply discounted mortgages was boosted by another 150 Billion Dollars. This was on top of the $200 Billion authorized by the FOMC last week. There is now solid support under the deeply discounted mortgage paper. The recovery in the price of trillions of dollars of paper is going to be substantial.

The total amount of "helicopter money" to be dropped as tax rebates pales in comparison to the money being offered to the banks by the FOMC. The total new lending by the FOMC is approximately ONE TRILLION DOLLARS and this is money that can be leveraged! Speaking of TRILLIONS OF DOLLARS, millions of variable rate loans, in excess of 20 trillion dollars worth, have been or will be "reset" at lower rates over the coming months. For example, loans tied to the commercial bank prime rates have fallen about 3% in the past 6 months. Should the annual savings average 2% on 20 trillion in loans, the reduction in cost would be better than 400 Billion Dollars. The rest of the world will see an even larger aggregate annual savings! You and most of your neighbors are likely to benefit far more from lower loan rates than from government tax rebates.

SHARE INVENTORIES

The supply of available shares in US companies has never seen the kind of reduction that has taken place over the past several years. During the credit crunch, it appeared that the stock buy-out and buy-back train had run out of steam but this powerful trend is not over. Deals are getting done. Firms are being purchased. Even the Sirius-XM radio deal appears ready to go and MSFT has locked its arms around YAHOO in a tremendous "bear hug". More importantly, corporate buy-backs are soaking up shares rapidly. Corporations are still cash rich. Even highly leveraged airlines have accumulated 10's of billions of dollars in unrestricted cash.

The gold and oil bubbles are leaking while foreigners are buying American. People from Canada to Europe to Brazil have discovered that condos on Florida beaches are going for half price in dollars and double half price in other currencies. The turn is here, grab all the bargains you can!

WHAT IS DIFFERENT THIS TIME? WHAT IS NOT?

There are many differences between the current financial mess and those of the past. This morning I would like to focus on one of the differences in regard to the housing market.

In the housing crunches going back through the 1980's, mortgage interest rates were no where near current rates. In the biggest crunch, the one in 1980, home sales declined about 28%, housing starts fell about 50% and home prices fell about 7%. Mortgage rates were still on the way up at the worst of this crunch, rising from around 15% in 1980 to 18.5% in mid 1982! During the current crunch, we have seen sales fall about 25%, home starts fall about 40% and prices fall about 10%, but the big decline have been concentrated in luxury second home markets and while mortgage rates bounced as high as 6.75% after the lows of 2003, they have since returned to the historic low area of 5.6%!

The payments on a $200,000 loan at 15% in 1980 would have been $2,529. Eighteen months later, the payments on the same loan reached $3,096. The 30 year fixed rate payment today would be $1,148. The same loan would cost $1,948 less than in 1982! Today, there are variable rate options with starter rates of 4.25% locked in for two years with a maximum increase of 1% after two years and a maximum possible rate of 9.25% over the life of the loan. At the starter rate, the payment on $200,000 would be $983 or 68% off the price of 1982. It is probable that the money saved at 4.25% and 5.25% for the first 4 years of this loan would forever more than offset the extra payment at 5.6%, but if you think you might live in the same home for a lot of years, locking into 5.6% would not be unwise.

The early 1980's were unusual times but the crunch of 1990-91story is similar. The peak of the drop in home prices of about 8% occurred around August 1990, about the same time as the peak in gold and oil prices. Sales and starts made their bottoms around January 1991 with a peak year over year decline in sales of 15% and a peak decline in starts of about 45%. Mortgage rates peaked at about 10% concurrent with the peak decline in sales and starts. The payment amount on a $200,000 loan in January of 1991 was around $1,750, 52% above the payment required today on a 30 year loan!

It is important to note that the peak in commodity and oil prices (and CPI) tends to occur concurrent with the peak decline in home sales and prices. However, a big decline in the price of gold started around August of 1990 in line with the turn in prices and 4 months prior to the bottom in sales and the bottom in housing starts.

ERRING ON THE SIDE OF CAUTION

Potential home buyers are currently erring on the side of caution. Buyers are waiting to see if the worst is over. The waiting bet is a bet on either lower house prices or lower interest rates or both. With help being provided to the markets by the FOMC, it is difficult to project significantly lower 30 year mortgage rates. Should the FOMC increase the money supply to bring down short rates, the higher the probability of long term inflation and thus the higher the probability of higher 30 year mortgage rates.

With mortgage rates already very close to historic lows, the buying power of the consumer has been pushed upward. It is hard to see lower home prices except in formerly overheated markets such as Florida, California, Arizona and Nevada because the flood of 2 million homes on the market is concentrated in these markets. In NC the price of the average home went up 2-3% in the past year. While 2-3% is not a large number, this was in the face of the worst of the crunch. NC home prices could easily jump 10% as soon as the "all clear is sounded".

WHAT IS NOT DIFFERENT?

In each prior case, when housing starts got to a year over year decline of 40% or more (this includes the 1970's), the stock market had made its turn and was on the way up! This is really no big surprise as lower interest rates, the "raw material of business" is the routine result of housing crunches. The back to back, double recession of 1980 and 1982 saw a "double dip" in the stock market but the market was on the way up when the low was made in 1980 and the market was up in less than a year after the second bottom in 1982. Indeed, one of the best ever times to buy stocks was at the bottom of the home building bust in 1982.

DID YOU NOTICE THE BIGGEST COMMODITY COLLAPSE IN 50 YEARS!

The CRB index of 19 commodities fell 8.3% last week! This was the biggest one week decline in this index in over 50 years of record keeping. This decline occurred while the PCE (the FOMC's favorite inflation gage) was running at below 2%! The big drop was bound to happen as the real money base which was growing at 0% in 2006 is now seeing "negative growth" of 3% in 2008. Unit labor costs are minus 2%! How can we square these numbers with the hype being dished out by financial reporters? Part of the answer is that the CPI is the measure used to "adjust the numbers" and the CPI is a poor way to measure inflation. As a result of the goofy use of the CPI index, real retail sales were slightly negative last month, however, as the collapsed prices of commodities works its way into the CPI numbers, adjusted retail sales will get a strong boost. With sales only slightly negative, a small decline in the CPI growth rate will produce sudden "strength" in the economy.

REAL STRENGTH

While the "phony inflation jump" makes consumer spending look weak, the value of oil imports is serving to camouflage the strength in capital goods. Take petroleum out of the trade figures and we discover that the US trade deficit fell from 42 Billion in 2005 to a current annual rate of 23 Billion. It is clear that the US dollar has fallen to a "clearing price". At current prices, more and more foreign investors will build more and more facilities in the USA. These investors will enjoy higher sales from the US while they also enjoy catching the rebound in the value of the dollar.

PLAYING AROUND WITH THE LEADING INDICATORS

Government bureaucrats have played around with the leading indicators and the result has been more hype. Much has been made of the fact that the leading indicators have fallen 5 months in a row. The facts are that the average work week is still strong, that vendor performance is only a little weak, that capital goods orders are booming and that unemployment (a lagging indicator) is still in check and at best the indications are for a weak slowdown not a major recession. The main take away for the investor is to note that the stock market is the number one leading indicator of economic strength and the internal market bottom make on January 21 has held. The market move since that date suggests that the worst of the economic slowdown will soon be behind us (stock prices will be well on the way up long before the weakest point in the economic cycle).

THE CHINA CONTRIBUTION

The elasticity of oil demand in China is extreme. From 1998 to 2004 the rate of economic growth in China went from 7.7% to 10% and the growth in demand for oil went from 2.5% to 16% (a 30% change in the economic growth rate resulted in a 640% increase in oil demand). Investors should remember that this sensitivity works in both directions. For example, when economic growth fell from 14% to 11% from 1993 to 1994, the growth in demand for oil fell from 12% to 2%. The most recent numbers from China suggest that the growth rate there will fall from last years rate of 11% to this years rate of about 7.5%. The USA has a much more stable economy and yet the last for weeks of data show an implied demand decline here of 3.2%. The current price of oil is causing demand destruction.

BIG GOVERNMENT OR BIG BUSINESS?

Given the choice of big government or big business, I would chose big business every time. Hillary and Obama continue to attack the big oil companies. The fact that big oil has made big profits in the past few years comes out as being "un-american" in the words of these politicians. Oil companies are an easy scape goat for the mistakes made by the congress. We live in a country that owns 50 years of natural gas supplies, not counting all the trillions of cubic feet a few miles off our coast lines. We live in a country blessed with 200 years worth of coal. We live in a country that owns owns about 3 trillion barrels of shale oil. We also live in a country where rich farmers are paid to grow corn to put into car engines.

WHO OWNS BIG OIL?

Shares of big oil owned in pension fund accounts--41%.
Shares of big oil owned in mutual funds--29.5%.
Shares of big oil owned by individual investors 23%.
Shares of big oil owned by institutional investors 5%.
Shares of big oil owned by corporate insiders 1.5%.

An attack on big oil is an attack on the retirement savings of Americans.

Institutional investors own 5% of big oil and 95% of airline shares! Which do you think is the better buy?

Eighty percent of the worlds oil reserves are owned by foreign governments. The Hillary solution, to tax big oil companies, is to tax those who control 1.6% of all supplies. If Hillary were to pay farmers to grow corn on 100% of all the farm land in America, we would only produce 12% of out needed supplies.

SILLY GOVERNMENT SOLUTIONS

CNW Marketing Research has produced the work to show the silliness of government solutions. Governments from New York to California have subsidized or mandated the use of hybrid cars. The research shows that the total cost of the lowest cost hybrid, the Honda Insight, is $2.94 per mile, cradle to grave. In contrast, the total cost of a Hummer III is $1.94 and the cost of a Ford Escort is $.57 per mile. The hybrid cost 5 times more than the Escort per mile and these costs convert into environmental savings. The cost of metal and chemical batteries is high in terms of dollars and in terms of damage to the environment.

At the same time that the American consumer is being hoisted on the environmental petard, we can use Google Earth to view new activity at Saudi Oil fields and the lack of activity in protected areas in North America. Even so, the US government auction of oil drilling rights in the Gulf of Mexico just set a new record. The government just accepted thousands of bids that totaled more than 3.6 Billion Dollars of revenues to state and federal governments.

Furthermore, the variety of research that is being done is amazing. One of the latest discoveries has boosted the efficiency of themo-electric conversion by 40%. The fact is that if just a fraction of the wasted heat in the world could be converted into electricity, the cost of produced energy would drop dramatically. Oil refineries have done a remarkable job of using excess heat from the refining process to "co-generate" the electricity needed to run the refineries. There are millions of other manufacturing processes where excess heat is not routinely captured. The average car in America converts only 16% of the energy spent to "work". The latest discovery is a material that can extract electricity from a room temperature environment and it works well up to 250 degrees.

Converting heat to electricity takes advantage of the law of conservation of energy; energy is never destroyed but it is simply moved from one area to another. Why pay to cool a sun soaked building if the excess heat can be converted to electricity?

TIME IS ON OUR SIDE

The solutions to the price of energy all take various lengths of time to have an effect, however, progress is cumulative. Past big declines in energy prices marked prior turns in financial, retail, housing and tech stocks. The market is showing a lot of green this morning while oil is only off 10% from all time highs. Further declines in the price of oil will bolster the markets all the more.

THE BIG HANG UP

I am writing several times a day because the "big hang up" is over! I must admit that it has been hard to "keep faith" in the normal business cycle for the past year or more as the market cycle backed up and stalled out. It made it seem like "something is different this time". In truth, something is different in each cycle. This time, the price of commodities hung tough and refused to go down. The level of world growth was something the world had never seen before. Who could possibly have predicted that a huge country the size of China would grow its GDP by better than 10% year after year even after pushing the price of fuel and materials to all time record highs.

The big wait is over! The price of commodities has finally turned. With gold, copper and other metals crashing down, the love of gold is going to feel like the curse of Midas. People who have piled-on and added-to will not be able to sell out fast enough. The economic cycle chart has taken a spin-ahead as the next expected events have already happen and started, a significant rally in bond prices and a rally in financial stocks (small banks that lend to small businesses will benefit the most -- buy the Russel 2000 in IRA accounts).

The next event is already scheduled, the pending $600 helicopter money drop; the result being a boom in consumer cyclical stocks. Consumers are about to be flush with money because of savings at the gas pump, savings on interest payments, the extra $600 and larger than average income tax refunds. Not to mention the extra net cash flow from rental properties.

Keith Hays reports that every single indicator followed by Hays Advisory is Bullish. Each of the following indicators have hit levels that produced average annual returns as follows:

AAII 21.75%
Gambill 22%
Eq. Put-Call 21.5%
Vix 16.2%
Arms 16.3%
T-bill 23.3%
Fed 18.8%
Cash 23%
Rule of 20 17%
IBES 30%
Double 90's 22%

The level of money market cash to money market plus equities has reached the current levels only two times in the past 35 years, in February of 2003 and in August of 1982! Talk about buying opportunities, this is a rare time indeed!

ALL THE WORRIES FADING AWAY FAST

For month after month, the market has worried about high inflation as evidenced by the soaring price of gold and oil. During the same months, the market has worried about the risk of recession as evidenced by the housing crunch. Well the inflation rate forecast of gold is suddenly calling for lower inflation and the housing crunch suddenly faces fixed rate loans of less than 5%! Like a major flood, the housing market cannot withstand the power of cheap money. If you have a house picked out to buy, you better get it now because the deep bargains will disappear rapidly.

BILLIONS OF DOLLARS OF MARKET VOLUME

The market is now in a rapid rotation. Market indexes are up this morning an average of better than 1% while basic materials and energy stocks are down better than 1%. The long awaited rotation is showing up loud and clear.

DIG DEEP AND ADD AT LEAST A FEW DOLLARS TO YOUR ACCOUNTS!

You must make hay while the sun is shinning and the sun is shinning bright. Certainly, there are false starts and retreats to every market but this market made an internal low on January 21 and it has since tested that low. There has also been a long list of significant events that have given support to the housing and financial markets. The FOMC drug their feet on lower loan rates from August 2007 to late January 2008. The big cuts made in January of 2008 should have been made earlier but add the 1.25% cut in late January to the .75% in march and the total recent cut from 4.5% to 2.5% is a massive stimulus to the economy. A 45% cut in interest rates on trillions of dollars of loans and future loans is massive relative to the helicopter money that is about to drop. The current situation is like finding a $45,000 car on sale for $25,000. The public will not be able to resist borrowing and spending next month. Many a tax filer will select a refund loan as soon as his taxes are filed and significant sums of disposable money will flow into consumers pockets starting April 15. The fact that this money will have to be paid back will be a worry for another time. Businesses that wish to sell to consumers must start building inventories now!

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PLAYING CATCH UP

Yesterday, a reader wrote to say he does not see how the airlines can make a profit with fuel prices going out the roof. A few hours after I got his email, DAL announced yet another $10 fare increase and the price of a barrel of oil dropped another $2. This makes the 5th week in a row that airlines have increased fares. My guesstimate of the percentage increase is too loose to put in writing but I suspect the increases in the past 5 weeks has gone most of the way toward catching the fare increase up to the cost increase. BESIDES, THE PRICE OF OIL IS ON THE WAY DOWN!

You may believe me to be the boy who cried wolf in regard to the price of oil. As such, you may not believe that this latest sharp drop is the start of anything big. However, the data back me up.

From 2002 to 2008, the production of "liquids" as reported by the IEA has grown from 76 million barrels per day to 87.6 million barrels per day, a 15% increase. During that same time, usage in the OECD nations has not grown. The main sources of new demand have been India and China where total use grew from 6 to 10 million barrels per day. The most recent numbers from the USA show that implied fuel demand averaged 20.3 million barrels per day in the latest 4 weeks and that is 3.2% below the levels from a year ago.

Phil Flynn, the senior commodities trader at Alaron Trading said yesterday, "The commodity bubble is bursting". Yesterday, the price of gold fell $59 per ounce and it has since retreated another $12 per ounce in international trading. US gasoline stocks have jumped to 236 million barrels which is 35 million barrels higher than supplies at the same time of year in 2003 and 2004. Last year, supplies at this juncture were 224 million barrels.

The demand decline of 3.2% in the US implies that the commodity bubble is bursting and/or the economic slow down is here. Call it a recession if you like, only time will tell if it actually is a time of negative economic growth. Recession or not, people are finding ways to cut back on oil consumption and new production is coming on line. As mentioned in prior postings, Wikipedia estimates that new liquids production will exceed 7 million barrels per day in both 2008 and 2009. If demand falls in the US by 3% and supply increases 7% what do you think will happen to the market price?

Another reader says that he has read that OPEC is cutting back, not increasing production. First of all, he is wrong about OPEC cutting back and, second, he implies that OPEC is the biggest factor to consider. OPEC countries including Iran, Qatar and Angola are increasing production and huge new fields will come on line in Kuwait and in Saudi Arabia this year. The build out in Angola is happening. In the past year, Angola has increased production by 300,000 barrels per day. OPEC held stated production constant last month even though cutbacks are normal at the end of winter.

On the second point, while OPEC has increased production from 26.5 million barrels per day in 2002 to 32 million barrels per day in 2008, the rest of the world has gone from 47 million to 51 million barrels per day. These numbers do not reflect the massive developments in progress in Canada, Brazil or Kazakhstan. While it is true that the big fields in Brazil and Kazakhstan will not come on line for a few more years, there are other billion dollar projects closer to completion. Of the former Soviet Union countries, Azerbaijan is one of the ones currently bringing production on line. Over the past two years, Azerbaijan has increased production by 400,000 barrels per day. China and Russia also have various projects in various phases of development. The sharp growth in Russian production has leveled off but billions of investment will bear fruit soon. Non OPEC production is 160% of OPEC production.

DAL LEADING THE PACK

Delta has taken the unusual step of increasing fares mid week, not once but twice. Yesterday, as soon as a couple more competitors finally matched DAL's previous mid week increase, DAL moved again. The bottom line is that international passengers are not likely to let a $10 or $100 ticket price increase prevent them from flying half way around the world. This morning, airline shares in China have moved "limit up". The fact is that international airlines are enjoying pricing power not seen since before the days of deregulation in 1978.

RECESSION

TV talking heads, in particular democratic politicians, are now consistently using the words "this recession". They say things like the FOMC had to act in order to prevent "this recession" from getting worse. This is the old, "say its true enough times and it will be true strategy". Many a democrat is elated over the prospects of recession as they believe a recession insures the election of a democratic president. If the democrats said "the housing recession" they would be correct, but, with commercial mortgage delinquency rates at record lows and with capital goods exports at record highs, are they sure we are in recession? With the world wide ratio of employed to unemployed at a new record level, is the world really suffering?

The massive drop in the gold price was to be expected by this point in the business cycle. Will all those, who screamed that the run up in gold was a forecast for high inflation to come, now call for a decline in inflation? Many will. Many will say that the decline in gold and oil means the recession is getting worse.

This morning, Lehman Brothers following the actions of JP Morgan last week, lowered its ratings on a number of airline stocks. Investors should remember that "sell side" research is even more unreliable than "buy side" research. Asking Lehman Brothers to estimate the value of a stock is like asking an auctioneer to estimate the value of a painting. The old saw is that the auctioneer will ask if you are buying or selling before giving his answer. I am a free market libertarian but I do not believe it should be legal for companies that make their living by trading stocks to issue "research reports" on those stocks.

TOUGH TIMES, CREDIT CRUNCHES NOR BUBBLES LAST FOREVER

The FOMC has held the fed funds rate at a significant premium to the t-bill rate for more than two years. The FOMC normally moves with the market. During Bernanke's entire term, he has held his foot on the economic brake. Even though the last cut was a massive 75 points out of 325 points, moving fed funds rate to 2.5% (a decline of 23%), the FOMC still did not catch up to the t-bill rate. As a result of the FOMC's tight policy, the 10 year treasury rate has fallen to near record lows. The 10 year bond traded at 3.3% yield yesterday. Since the yield on the 10 year is roughly equal to GDP plus inflation, we know that the actions of the FOMC are continuing to slow the economy, inflation or both. But we also know that the market is bigger than the FOMC and at some point those people who want or need to buy a home will realize that bargains are all around. Home prices in "non bubble" communities have fallen a little and financing costs have fallen a lot. The current fed funds rate is 47% below where it was 7 months ago!

Guess what else has recently fallen in value? The Euro! The pundits said the FOMC should not cut rates but should instead defend the dollar. The FOMC cut rates and the dollar held, it was the Euro that declined.

INFLATION IS DEAD, DEAD, DEAD

The long bond says inflation is dead. The price of gold says inflation is dead. Free trade and technology say inflation is dead. Women across America have been holding "gold parties". Women bring their old jewelry to a neighborhood party where it is weighed and sold. These women should get credit as rational investors. The price paid for melted jewelry has been higher than the EBay value of the whole pieces. Now that the decline has started, how low will gold go? Huge mutual funds hold mountains of gold that will be sold to the market if the public starts selling these funds. Gold and oil are joined at the hip. The spread between the two moves around a little but the two have about a 90% trading correlation.

The 30 year municipal bond rate was about 4.2% last year when the FF rate was at 5.25%. Yesterday the tax free rate was up to 5%. Why? Who wants to earn 5% tax free when quality stocks are on sale? Quality companies now pay dividends greater than the tax free rate on bonds.

With inflation dead and the cost of money low, the projected future income stream of a currently empty rent house is suddenly attractive relative to owning gold. The reason houses go up or down in value is the net present value of their income stream. If one buys a rent house at a rock bottom price, it may not even have to be rented to turn a profit when the market rebounds. An insured empty house is probably a better store of value than gold at this point. Rent the house even at a moderate rate and the rents are likely to cover the financing cost at today's rates.

While I admit that it was a long time ago when I first mentioned that consumers would use their windfall from lower oil prices to buy consumer goods, it is still going to happen. Keep in mind that this time the price of oil has gone so high that a significant decline will not force the collapse of alternative energy projects. As you may recall, Jimmie Carter promoted synfuel in the late 1970's but the technology made no sense once the price fell hard.

PLAYING CATCH UP

In the coming months, the FOMC will continue to play catch up because even the huge recent moves have been limited. The FOMC has added 200 billion here and there but the markets they are influencing are measured in trillions of dollars. To some extent, the "facilities" offered by the FOMC have been the equivalent of responding to a $200 request for grocery money with a $2 bill.

At some point, the market will take over from the FOMC. The huge decline in mortgage rates will result in the faster and faster absorption of excess houses.

DAL is leading the airlines in a game of fare catch up. DAL is in effect saying that it would rather lay off employees than to fly planes at an operating loss. This attitude puts enormous pressure on pilot unions to stop playing games. NWA pilots can come to terms or stay stuck at post bankruptcy pay grades. Assuming NWA pilots hold their ground, DAL and other airlines will ground planes and lay off workers as much as necessary to rationalize the business to the current economic climate. This environment will enhance the chances of a successful merger if a deal or deals can be worked out. As is most often the case, a great time to buy into an industries shares is when employees are being laid off. The willingness to layoff workers is a sign of willingness to make the tough decisions necessary to boost future profits.

"THE BRAVE NEW WORLD"

GaveKal Research will appreciate two of the events of the past day. The USA indicated support for adding the former Soviet State of Georgia to NATO and Pepsi purchased a juice company in Russia. I include these events at the end of this post as a simple reminder that we live in a "new time". A time when the unemployed man in Siberia might find new work at Pepsi. The hard thing for Americans to appreciate is that the hiring of a Siberian worker is good for workers in the USA. It is true but I will not beat this dead horse any more. Instead, I invite you to take a look at the decline in metals over the past two days. The turn is here!

I STAND BY GOOGLE

The pull back in Google from 7 and a small fraction to 4 and a small fraction has been a significant decline. All the while the business is growing by leaps and bounds with no sigh of let up. Indeed, the mobile business is moving so fast that it is emitting a buzzing sound. Mobile search results just jumped 20%. The new g-phones should make for a much more dramatic and long term jump.

The Google business model is a joy to behold. The key to it is that the cost to provide service is so low that Google can keep on offering more and more great services without charging a fee. This morning I mentioned how Google Transit is growing rapidly. Is it not amazing that a private company can provide the public service of all local transit routes, schedules and fares and post them on map that is available in thousands of locations, free of charge? The benefits of higher utilization, lower pollution, lower costs, and time saved inure to the citizens. This is a great example of Milton Friedman's suggestion that most government services should be provided by the private sector.

We will soon know who won the 19 billion dollar 700mz spectrum auction and by summer G-phones will hit the streets. The first phones may not compare well to the hype but they will boost the use of mobile services. The world will never be the same.

GOOGLE IS ON SALE AT 4 AND A FRACTION

Some months ago, I wrote that Google will ultimately sell at a much higher price but at a lower PE ratio. The problem of projecting the future is that we simply cannot imagine which direction change will take us. My bottom line is that Google is going increase revenues many times over the next 30 years and every time this stock dips it should be accumulated. A small investment for a grand child should grow into a small fortune, in particular if routine additions are made on dips.

TECHNOLOGY SOLUTIONS ARE MANDATORY

The current price of crude oil dictates that technological solutions be found, if we desire to continue or to improve our current life style. The good news is that more time, effort and money is being spent on developing technology than ever before. We live in a wealthy time when the citizens of many nations can afford to pay for research and development. For example, I am starting to wish I had a nickel for every plan there is to dramatically change the production of energy.

One of the technologies that is catching on quickly is hybrid power supplies. When you think about it, a hybrid system is the same strategy as has been employed by utility companies for decades. Power companies have offered night time power to industry and low cost street lighting because "the motor is running anyway". Hybrid technology is not confined to autos. Huge cranes that move cargo at docks are being converted to hybrids. Huge buses and trucks are being converted. The key point is that there is down time between productive work but "the motor is running anyway", so why not connect a generator to that motor to store the down time energy. Then, when it is time to move, let the stored energy supply extra electric motors to give the gas or diesel motor a boost. Like in the load leveling schemes of power companies, the size of the motor can be reduced and fuel can be saved.

There has been yet another discovery of enzymes that cheaply convert cellulose fibers to ethanol. This time, the enzymes were not genetically altered but simply harvested from existing enzymes in the Chesapeake Bay. In less than a year, demonstration plants will be built that will show the commercial value of the latest process.

COMPUTING POWER AND DATA, DATA, DATA

The tremendous growth in research and the steady decline in the cost of computing and storing data means that the "cloud computing trend" is just getting under way. In 1975 I worked out of the Dean's Office at the Bowman Gray School of Medicine. In those days, we had to be careful about running a few data analysis programs because we could slow the whole system down. There simply was not enough computing power to run all the hospital systems and do research at the same time. We had to schedule our runs in 30 minute intervals. Payroll and other "non-critical" tasks had to be run in "batches" during the wee hours of the morning.

Today, it is growing less and less efficient for a company to manage its own computing system. Off site data centers, run by the likes of IBM, can handle all the work of a big medical center hundreds of times over. This trend will continue and the cost of computing will continue to drop. In the case of Google, program designers totally ignore the cost of computing and data. The Google management understands that the cost per transaction is already so infinitesimal that it has no bearing on the product.

PUNDITS CONTINUE TO TALK HOUSING DOWN

Pundits continue to "look backward" at the housing market. They see the national over hang of houses and fall into the trap of believing that the average house price will fall much in the coming months. The fact remains that if we ignore the rust-belt states of Michigan, Indiana and Ohio and the super boom-bust states of Nevada, Florida and California, the average price of homes is not falling. Using average measures in this situation is like adding Gomer to a professional bowling team. One bad number brings the averages down a long way.

With Fannie and Freddie buying loans again and with Credit Unions making 4.25% variable rate loans, 4.9% 15 year fixed loans and 5.5% fixed rate loans, the housing market will improve in short order. We all know that when BBB- mortgage paper traded at 8 cents on the dollar last week, something had to happen. The price made no sense unless one appreciated the amount of loans held on supper high margin rates. When the margin calls came, the weakest player had to play the part of the canary in the coal mine. Once the FOMC stepped up, the pressure was relieved. It took a long time for the government to grant Freddie and Fannie more buying power. A game was played, an old firm was eaten by vultures but the pressure on the rest of us was relieved.

GOOGLE AND THE HOUSING CRISIS

What does Google have to do with the housing crisis? Not a lot. Google certainly offers a number of services that assist home owners, real estate professionals and financial parties. However, the big decline in the price of Google was only the indirect effect of tight money. Tight in the sense that a massive de-leveraging has been in process. The earnings and earning power of Google continues to grow. We have simply been in a time when of PE contraction. Investors have been unwilling to pay a premium for Google while facing declines in the housing area.

ATTITUDE SHIFT AHEAD

The "helicopter money drop" will begin in a month. Businesses need to build inventories to satisfy the temporary demand. Shays' law will kick-in and the economic surge will move ahead. BUY ALL THE STOCKS YOU CAN IN ANTICIPATION OF THE MOVE! IT IS A GOOD TIME TO ADD TO MANY STOCKS AND SMALL CAP VALUE STOCKS WILL LEAD THE CHARGE BUT BIG CAP GROWTH STOCKS LIKE GOOGLE ARE THE "SAFE" PLAYS.

TIME FOR A GAME OF HIDE AND SEEK?

Today, it looks like the market is pulling back from the big surge of yesterday. Looks can be deceiving, the market is playing a game of hide and seek.

The turn is here, basic materials stocks are down 4.3% and energy stocks are down 3.3%. This is consistent with the decline in gold of more than $60 per ounce.

I must repeat that there are dozens of indicators at historical levels that have produced average market returns of greater than 20% over the coming year. This average return will include the groups that will fall in price by 20% or more. A lot of companies and individuals will benefit from lower commodity prices, the key commodity being oil. One of the key beneficiaries of lower oil prices will be airlines.

AIRLINE PILOT MEDIATION?

NWA pilots have a lot to gain from the merger of NWA with DAL, including $50,000 to $100,000 per pilot in equity and pay increases of 25%. Since the two sets of pilots appear to be unable to resolve their differences, NWA pilots have proposed mediation of the dispute. I am a big fan of mediation. The bible says that people should resolve their differences on the way to court and mediation is often a great way to resolve disputes. There are many famous cases where a sharp "middle man" has been able to see both sides of an issue and to pull the parties to a satisfactory middle. A good mediator can sometimes use the wisdom of Solomon to convince the two parties that a live transaction is better than a dead baby. In any good trade, both parties win. If one party is afraid to be "bested" then both parties lose. The best deal may be very different than the first deal offered by either party. I am reminded of the time a friend of mine put up a business for sale and advised several competitors that he would take the best offer received by fax before 5 PM. A couple of competitors entered the auction. Before noon one party offered 5 million. The second bidder went to 7 million at about 2 o'clock. The first bidder was informed that he was "out" and he raised his price to 8.5 million. The second bidder said the price was too rich for him and declined to bid anymore. My friend was happy with the bid of 8.5 million and ready to accept at 5 pm, however, at 4:45 and new bid came in from a third party of 13.4 million. Needless to say, there was "great joy in Mudville" on that day. Even after the last bid, my friend was careful to inform the first bidder than he was "out". At 5 pm the 13.4 million was accepted.

The bottom line is that the merger is a win-win situation. I don't know that mediation will work but I am glad to know that the pilots are still searching for answers.

Some readers have sold airline stocks in recent weeks. Holding on through tough times is hard, but when the going gets tough, the tough gets going. If you are out, it is time to get back in, the bidding is just getting underway! The move up in airline shares today is hiding behind the big plunge in materials and energy stocks.

FREDDIE AND FANNIE ARE GOING ON A SPENDING SPREE!

The US Government has just given the two quasi government housing corporations a huge increase in their "lines of credit". They are now free to buy hundreds of millions of dollars of mortgage loans. This is their business purpose, each already owns billions of dollars of loans and their business is sound. Each corporation has been maxed out but now they are not.

BACK IN BUSINESS

Suddenly many a mortgage loan office is "back in business". There is once again a secondary market for home loans. Credit Unions are not the only game in town any more. Perhaps more importantly, holders of deeply discounted mortgages will enjoy seeing market values rise and the disappearance of margin calls.

MARKETS WILL CLEAR QUICKLY, THE BEST BARGAINS WILL NOT LAST LONG!

PUNDITS SQUIRM, GOLD FALLS, DOLLAR RALLIES

Once again, we learn that lower interest rates do not cause higher inflation. Day after day for months on end, including yesterday and today, the pundits have cried that lower interest rates will lead to the collapse of the dollar and to super inflation. The actions of the market have made them look wise but only because the low dollar has pushed for lower rates not because lower rates have pushed the dollar lower. Yesterday, rates were cut by 75 basis points out of a total of 325 basis points, this is one of the largest percentage drops if not the largest percentage drop in FF rates ever. What happened, the dollar rallied and gold has fallen about 5%!

The markets are still working their way around the BIG TURN. Can you see it? Do you also appreciate that the extra "facilities" offered by the FOMC to support trouble spots has not necessarily increased the money supply and inflation. The evidence suggests that the FOMC has to some extent "sterilized" these extra loans by calling in other loans. The key work of the FOMC is done in what is called open market transactions. The FOMC is constantly buying or selling t-bills to and from banks to soak up money or to send money to the markets.

SEVEN WEEKS

In all fairness to the FOMC, the correct level of short rates is a moving target and it does make sense to see the effect of prior cuts before moving too fast. The time from the last cut to this one seemed very long but largely because the FOMC was so far behind the curve all last fall and winter. The big monster cuts in late January followed by 75 of 325 is huge. The total decline in the discount rate from 6.25% to 2.5% is VERY, VERY BIG!

COMMON SENSE IS SCREAMING BUY!

There are dozens of indicators screaming BUY. Hopefully the loudest one is your own common sense. The federal government has put money on sale! There are millions and millions of business opportunities available today that made no sense to fund at 6.25% (+ the bank spread) that make all the sense in the world at 2.5% (+ the bank spread). Lower input costs make a number of "losers" profitable opportunities. By the same token, consumers who were facing dramatic increase in house payments have gotten relief. Many a variable rate loan that would have seen an interest rate rise if rates had stayed up will now see an interest rate decline. The cost to carry many a rent house has fallen, many a cash flow "alligator" has turned into a "woolly sheep" ready for shearing. Consumers will see lower credit card bills, lower house payment bills, lower car financing opportunities and more.

NOW IS THE TIME TO FIND THE FEW EXTRA DOLLARS TO INVEST THAT WILL MAKE A HUGE COMPOUNDED DIFFERENCE!

NO, MARKETS DO NOT GO STRAIGHT UP BUT HISTORY IS ON OUR SIDE. THE WORST OF THE CREDIT CRUNCH IS OVER, GOOD MARKETS ARE BECKONING!

YET ANOTHER INDICATOR SAYS, "BUY, BUY, BUY"

This time, it is a purely technical indicator that is screaming, "BUY, BUY, BUY". The indicator is detailed in an article by Mark Hulbert posted on MarketWatch.com. The indicator was among those recommended in Marty Zweig's 1986 book, "Winning on Wall Street". It is called the Double 9 to 1.

A 9 to 1 up-volume to down-volume day is a relatively rare occurrence. Two 9 to 1 days in close succession have proven to be a good sign of a major market turn. I have forgotten the researchers name but a study was done from 1942 to 2006 that shows the average annual gain after a double 9:1 has been about 22% whereas the time in between has resulted in an average of 4.5% returns (dividends not counted in either case). Yesterday, the market experienced a 9.5 to 1 day, as those pessimistic short sellers were caught with their pants down. The long buyer can lose 100% of his investment while the stubborn short selling can lose many times as much.

BY THE WAY

In country after country, from Algeria, to Canada, to Brazil, to Kazakhstan and beyond, total liquid fuel production (primarily oil and liquid natural gas) is showing steady increases. At the same time, there is more and more evidence of demand destruction. SkyBus just announced "significant" cut back on flights and DAL just announced reductions of 5%. What a difference between the "old airlines" and the "new". Unlike the "old airlines" the "new" simply are unwilling to fly at a loss. The price of the seats times the number of seats sold has to produce a profit or the flight will be reduced.

SEVEN WEEKS

The FOMC drug its feet for seven weeks between the last cut and yesterday 75 basis point cut. In the mean time the FOMC has tried to be cute about supplying money to selective big banks. Still, the total cut in the discount rate has been huge. The discount rate offered by the FED was at 6.25% in August of 2007, clearly far to high for the conditions that existed. Yesterday, the fed funds rate was cut to 2.25%. A dramatic cut in the cost of money. Money is on sale! The equivalent move in most anything would make consumers jump! For example, the mother thinking about buying a kid a bicycle might have hesitated at $62.50 for the bike in August. Today, the bike looks darn cheap at $22.50. The lower price of money will make all sorts of long term capital intensive purchases worth while. Businesses are taking advantage. Capital goods exports have climbed by 19%. Individuals will once again consider buying the big boat, the big RV or even the beach home.

CHINA IS TIGHTENING AT THE SAME TIME THE USA IS LOOSENING.

China just raised its reserve requirements for the 12th time in about one year. The reserve requirement in China is now up to the record level of 15.5%. The Yuan is rising. China will export less and consume more. China will continue to cut back its use of oil per dollar of generated GDP and it will buy more capital goods from the USA. Good markets ahead.

THE IRANIANS WORST NIGHTMARE

President Bush is giving the Iranians all the more to worry over. Sunni tribal leaders are turning out to be the best of US allies. They have helped cut back on violence in the region and the cost has been payment of just a few dollars per day per "soldier". As part of this "program" the US is arming these Iraqi "soldiers". The Iraqi government, so far, has not been willing to integrate great numbers of these "soldiers" into the regular Iraqi army but Iran is certainly aware of the military build-up of its Sunni neighbors. Iran needs to make a peace treaty soon or face Sunnis backed by US weapons. (Much of the above information came from George Freeman at Stratfor.com.) I am not suggesting that the US is preparing to invade Iran by proxy. I am saying that Iran is under extreme economic and political pressure to suspend funding of terrorist organizations.

URBAN DENSITY

One of the techniques consumers around the world are using to cut back on the use of oil is to move from the suburbs to the city. The slow real estate market has slowed the pace but the trend is in place. Urban living results in less pollution per person and significantly lower cost. Yesterday, one of my neighbors was very interested in my planed move to town. She mentioned that she and her husband have been shopping in the West End area of Winston-Salem. She is really drawn by the idea of her children being able to walk to local schools.

The price of midtown Manhattan condos seems to make the opposite point about cost but you have to appreciate the reason citizens are willing to pay so much. In real estate, location is key. If one were able to move a Manhattan condo to North Carolina, its value might fall from 1.5 million to 150,000. Manhattan condos appreciate in value because they eliminate long commutes. Highly paid people save a lot by working and living close to home.

Major cities are making great strides to promote "down-town living". Cities like Copenhagen have learned neat little tricks that make shared pedestrian streets similar to extra out door, shared, patios. As the sense of community grows and as more ways are found to share or lower costs and as a greater variety of sports, food and entertainment is attracted to down town areas, the growth trend accelerates. Health advocates note that the French live long lives perhaps because they are more likely to walk to and from. Another positive development is the result of Google Transit coming on line in more and more cities. Google has shown that if transit routes and schedules are easily available to all who have Internet access, including through mobile phones and PDA's, the ridership goes up significantly. Google can add only so many cities a month. In order to "do the best for the most", Google encourages those who want Google Transit to mount a local "city hall" campaign.

DUTCH DISEASE

Having discovered oil, the country of Ghana is very concerned about falling prey to the "Dutch Disease". Once Belgium discovered natural gas, the country started coasting; "Why world so hard if we are all going to get rich off our gas?" Over the years, Americans have learned to be careful about gratuitous foreign aid. Foreign aid is often nothing but a "Dutch Disease" curse; "Why should we work hard to earn a living if the Americans will give us the food we need?"

So far the best solution to world hunger has been to develop free trade with those countries that are willing to operate by rule of law. It helps a tiny few when corrupt leaders grab the spoils of developmental aid or of heavily taxed production. The best way for the leaders of a country to get rich is to develop the legal framework for individuals to trade products with others. Free trade should include relative freedom of immigration.

BAT MASTERSON VERSUS JOHN HANCOCK

Yesterday I demonstrated how some of our "American Heroes" are nothing more than common men who for what ever reason got a favorable telling in history. Again, can you imagine the Gene Barry "Bat Masterson" skinning 20 buffalo per day? All for the purpose of starving the Indians off their land? Would you have guessed that the only man know to be killed by Bat to be a competitor for a bar room "girl"? Bat was no doubt a character but a legend only created in the press.

On the other hand, many true American Heroes have almost been forgotten. John Hancock is famous for his signature on the Declaration of Independence and few of us know anything more about him. The fact is that he served two separate terms as our "President". During his term as President of the "Congress of the Confederation" he worked as many as 20 hours per day, 6 days a week, to raise the capital needed to fight the revolutionary war. Prior to the war, Hancock had worked tirelessly to build his Uncle's business and he thus made himself, perhaps, the wealthiest of all Americans at this time. He contributed most of his fortune to the "cause". He was by no means a perfect man but even those who disagreed with him, including John Adams, respected his hard work and his devotion to his neighbors and his country. He was generous to a fault and was loved by many a "common man". After the war, he served two terms as governor of Massachusetts before retiring to enjoy the benefits of his labor, however, when the people asked him to come back for one more term, he obliged and he died while serving the people.

WE LIVE IN A GREAT COUNTRY!

The Greek democracy was a great experiment. The framers of the US Constitution took the best of democratic principles from the English and from all the way back to the Greeks. Today, there are powerful men in powerful positions in America but there are also checks and balances. A recent invention, called the Internet, has given the public the power to be all the more informed and an informed public is the "kernel" of democracy. John Hancock supported the constitution after the bill of rights was negotiated. We now enjoy freedom. John Hancock correctly fought against "big government". In regard to the British, he said, "They have no right to put their hand in my pocket".

Walgreen just announced an expansion to its health clinic program. Today there are thousands of low cost clinics in America, staffed by nurse practitioners, where "primary care" is available. These practitioners are quick to refer serious illness to medical doctors. The purpose of telling this story here is to note that, given the opportunity, the free market will find the way to supply the needs of the consumer. Over the past 50 years or more, the cost of health care has soared much faster than the cost of other services as more and more of the care was funded by government payment or government dictated systems. It is my hope that the next administration will be able to return health care to the control of the individual who needs care and to once again offer Americans the option of seeking the kind of education that was acquired by John Hancock.

THE INDICATORS SAY BUY AMERICA

As I have suggested time and time again, the price of the US dollar is not so low because of low interest rates. Sure enough, the rates were cut by 75 of 325 points yesterday and the dollar bounced upward. The reason is that the FOMC is finally almost out of the way. The market t-bill rate is now at least back to 65% of the artificially imposed Fed Funds rate. It now makes sense to do business in America and businesses from all over the world now have great incentive to do business with and in America.

With so many BUY indicators "off the charts", we should need no more encouragement to buy aggressively. Yes, the past 6 months have been tough on the psyche but all the while the price to values has gotten better, BUY, BUY, BUY!