Tuesday, April 08, 2008


Americans spend such a small proportion of their total income on food that we do not feel much impact from high food prices. As best I recall, Americans spend about 6% of their disposable income on food. In many nations, the average family spends 50% or more of their family budget on food. As a result, riots have broken out in protest of high prices.

At the same time, the Iranian proxy for war against Israel, Hizbollah, is being trained for the next war with Israel. About 300 Hizbollah "troopers" are traveling to Iran each month to receive training. Israel knows about the "troop build-up" and would like to "take them out" before they get too strong. The Hizbollah troops are trying to acquire more powerful weapons with which to fight Israel.

At the same time, the recent battles in Iraq have shown that the Shia militias that are supported by Iran are strong. Iran has demonstrated its influence over these groups. Iran is not happy that the "awakening council" sunni troops are gradually becoming a part of the Iraqi Army.

General Petraeus and Ambassador Crocker will testify before congress today. They will report progress and problems in Iraq.

Despite what you read or hear on the news, Iran and the US continue to talk. Progress has been made but that does not mean the risk of war, particularly between Lebanon and Israel, has been dramatically reduced. The risk of war between Iran and Israel is also real, to the extent that Iran is close to acquiring nuclear weapons.

The rest of the world is concerned. The public confidence index in the UK has reached an all time recorded low. This confidence index is an "economic index" but it is certainly influenced by geo-political problems.


The market is working hard to "cure" high food prices. The price of beef is falling. It requires 8 lbs of grain to produce one pound of beef, so when the people start to eat less meat, a lot of pressure comes off food prices. In the auto market, sales of gas guzzling trucks has fallen while sales of hybrid vehicles and sub compact vehicles is rising rapidly. The result is going to be a slow down in the demand for gasoline. Airplanes are being grounded. The $10 seats have disappeared. As a result of the disappearance of loss leader seats, the demand for air traffic is slowing. Gas guzzling planes are being grounded, the demand for jet fuel is falling. The price of lumber is way down from where it was two years ago. The demand for building residences has fallen, lower demand for building materials will continue to pressure prices.

Prices are being pushed down hard in many areas. The real PCE has been a negative number in recent weeks. The market is stabbing the inflation rate to death.


On the other side of the market, asset values discounted at dramatically lower interest rates have soared. The profit flow from Dow companies discounted at 3.5% ten year treasury rates makes the Dow Jones Industrials "worth" more the 20,000! As a result, the Smart Money Index has exploded upward. This index was at 5,000 in October. It dropped to 3,200 in January and has now made the round trip. The smart money saw the risk of depression, then saw the FOMC finally take dramatic action, then bought the market heavily.

We have even come from a short term over sold position to a short term over bought position. So, once again, the short term risk has risen. Still, the insider buying of the last 6 months has been a sight to behold. The executives 3,000 companies believe they have bought bargains.


Some of the current ratios are quite remarkable. My old friend at Merrill Lynch is a big fan of the t-bill to S&P dividend ratio. I am less a fan because the dividend payout has shrunk at many companies because capital gains are now treated better by the IRS. Still this ratio is probably at an all time record level. This is truly amazing, again, given that dividend payouts have shrunk. Those who are sitting with money in money market accounts should wake up. They can earn substantially higher tax advantaged yields.

I must run. My bottom line is that the long term prospects for stock prices has only been better a few times in my life. The short term is, as always a big question mark, but stocks are cheap enough that patient investors should be adding all the money they can.