Wednesday, April 30, 2008


For the first time in a long while, I am seeing a significant amount of green on stock accounts. My congratulations to those who have added money to accounts while stocks have been down.

Some of the green is in technology stocks. What is more interesting is the green that is showing up in beaten down stocks. One account caught Ford just right and is up 43%. Another bought GM just before the good earnings announcement. Another bought IBM a couple of months back and the owner is surprised by the good performance and the increase in the dividend. A few accounts added to their Google positions while the stock was down. And, yes, the big bounce in airlines even produced some green in some accounts, DAL was up 14.6% yesterday, NWA up 22% and CAL up 3.5%. UP 22% IN ONE DAY WITH MORE TO COME!

Can you guess the name of the two biggest car companies in Russia? Russia has an abundance of natural resources. Russia produces more oil than Saudi Arabia. Russians are flush with a lot of US cash. American know-how is our biggest asset. Now that the US car companies have basically gotten the union monkeys off their backs, exports are booming. More GM and Ford cars are purchased in Russia than any other brands. Both companies are building cars in China. Some of the parts, including whole engines are being made in America!

There continues to be an argument on CNBC about "the recession or lack there of". The US economy is like a big lake with streams flowing in from all sides. The housing industry stream dried up and water from the lake has backed up into the stream bed. Still the lake level has gone up. The water flowing in from other areas has more than made up the difference. The latest GDP number is an increase of .6%. Not great but certainly not negative. The important investment point is that GM and Ford are going up not because their industry has been in recession but because the prospects for the future have improved dramatically. Just a year ago, the most expensive input to each car sold was the cost of health care for workers. Today, the unions have accepted that cost. US exports grew by 20% last year. So the water flowing into the lake from exports was unusually rapid. Indeed, the earnings announced by numerous companies have been dramatically higher than expected as the profits flowing in from overseas sales have been very robust.

By the way, Russia is not the only country blessed with natural resources. The US problem is not the lack of resources but the political will to use them. The majority of the congress has refused to authorize the use of our resources. The pipeline from Alaska is one of our resources valued at multi-billions of dollars. We should use it to the max. Next to ANWAR, there are three oil fields. Sourdough, Point Thompson and Flaxman. Sourdough, which was discovered in 1997, is estimated to hold 100 million barrels of recoverable oil. I have not looked up the numbers for Point Thomson or Flaxman yet, but it is likely that the three fields together hold only a drop in the bucket compared to ANWAR. While the Alaska pipeline was being fully utilized, it made no sense to spend millions to develop Sourdough, Point Thompson and Flaxman, now it does. The interesting thing is that a significant amount of oil will probably drain from ANWAR into Sourdough once the pumping starts. By the legal rule of capture, the US government (the people of the US) will not be entitled to recover leasing fees on this oil.

The way to understand the rule of capture is to think of a wild stallion on the open plains. The horse belongs to no one. If the horse is captured, it belongs to the person who captured it. In relation to oil property, the law is designed to protect both parties when there is a pool of oil on both sides of a legal border. If I own a piece of land next to yours and I strike a pool of oil that resides under both properties, you have the right to drill on your land to tap the same pool of oil. It makes a lot of sense for us to jointly share cost and income on the pool because an extraction race will lower the profits for both of us. If you, for any reason, decide not to drill, I have the right to keep on pumping all I can. Obviously if the pool is sloped like a swimming pool and if I am pumping from the deed end, then I may pump the whole pool dry. I would not owe you a dime.

If the environmentalist wish to avoid putting even a single drilling platform on the hundreds of thousands of acres of ANWAR, they could license the developers of Sourdough to do directional drilling. Directional drilling might tap a significant portion of the billions of barrels of oil in place without allowing the owner of Sourdough to claim all the benefit from drainage. The people of the USA would receive revenues for allowing the extraction, the extra oil would lower our dependence on foreign oil and the extra supply might push the price of all oil down. Again, all of the oil extracted due to drainage to other fields becomes the sole property of the owners of the other fields.


Over the next few years, there is a flood of oil coming to market. In 2005, the PE ratio on oil companies hit 14. The price of oil dipped in 2006 and oil stocks got whacked. Then the price rose and the price of oil stocks is again up around a 14 PE. The EP ratio is about 7%. Can you count on the earnings to grow by more than 7%? If demand destruction picks up the pace at the same time new supplies hit the market, the profit margins will fall a lot faster than the price of oil. The energy report just released showed another large build in inventories. This build appears to be a result of lower demand. The price per barrel is back below $115. It could go a lot lower.


The messages coming out of the Middle East are growing more interesting by the day. The al-Qaeda leadership is upset that Iran is not giving it credit for the 911 attacks. Al-Qaeda leaders are accusing the US and Iran to be in partnership against the Sunnis!

Meanwhile, the good folk at Strafor report that a draft of a peace agreement between Syria and Israel is under review. The rumor is that Syria will be allowed to re-enter Lebanon in exchange for insuring the peace. The Lebanese remember the time of Syrian "rule" as a time of prosperity. WOW!

It has not happened yet and "Peace in the Middle East" is a very old joke, but a series of events increases my hope daily. The nuclear plan that Iran presented to Russia may go nowhere but the Iranians are busy negotiating with India, China and Pakistan in regard to the proposed gas pipeline. There appears to be a high level of hope on both sides of a number of issues.


If there are no Middle East Peace Deals, the market is still ripe for a good run. However, a peace deal would ripple in all directions. Yesterday, US Marines took on the Taliban in Afghanistan; the militias in Iraq were under attack by from the Iraqi Army, by the US Army and by the cooperating Awakening Council Sunnis; the second US carrier parked a few miles off the coast of Iran. The pressure on Iran to make a deal is intense.

If one deal is made, several other deals are likely to fall into place. The probability of the election of leftist in America will be diminished. The US might just take a huge step back toward freedom! We even have a shot at being able to quit paying farmers to not grow food and to quit requiring each other to put greasy corn oil in our gasoline tanks. Sanity may be restored. The price of food will actually go down! Hungry people will not be punished by those who mistakenly hope to save a few pennies when they fill their tanks. Stock prices will soar!