Wednesday, April 09, 2008


Yesterday, the Israeli National Minister of Infrastructure made the front page when he said, "We'll destroy Iran if attacked". The world knows that Hizbollah, with the aid of Iran, has retrained and rebuilt its forces in Lebanon. Iran has announced the addition of 6,000 uranium enrichment centrifuges. The latest statement from the Israeli Minister indicates that Israel would consider an attack by Hizbollah as all the provocation Israel will need to bomb the Iranian nuclear facilities. This statement does not say that Israel is itching to go to war. Quite the contrary, the statement is a declaration that the terrorist attacks must stop as the potential repercussions are real.

The Rothschild family made one of the greatest fortunes of all time by practicing the strategy of "buying on the cannons and selling on the trumpets". This means that when the fear of war drove the markets to extremes, the Rothschild family took advantage and when the break out of peace drove the market to the opposite extreme, they took advantage again.

What is interesting today is that the saber rattling of yesterday and recent weeks has had little effect on the price of Gold or the price of the US Dollar. This implies that the risk of war with Iran has been fully discounted by the markets. After all, the price of gold on September 11, 2001 was only about 25% of the current price. At some point, there must either be a real war or a peak in the price of gold (assuming continued monetary restraint). A month or so ago, Gold was above $1,000 per ounce, at an all time record price. It has since fallen almost 10% from the high and a number of stockpiles are being sold off (including 13 Billion Dollars worth from the International Monetary Fund).

What a coincidence? Commodities ranging from beef, oil, gold, and lumber have or are falling in price. Could it be that the risk of war was never as great as was rumored? No matter if the threat is real or not, the Rothschild strategy is still appropriate. The fear of war has distorted the markets. Hoarding of gold and oil have been responsible for a significant portion of the price rise. Yes, the tremendous economic growth in China, India and other developing nations have been responsible for the greater portion of the move. No, the growth of China, etc. is not over. Yes, there is a slow down of growth that is taking the pressure off the prices. Yes, given a little time, new production of gold and oil will rise sufficient to supply the needs of China, etc. Markets do work.

Will there be peace? The October elections in Iraq are going to be an important event. The current infighting between the various Shia groups increases the clout of the Sunni minority. Iran certainly does not want the Sunnis to regain control. From the American experience, we know that reconciliation after civil strife can take many years to settle. From Middle Eastern History we know that the current struggle has been alive for hundreds and in some cases thousands of years. We also know that democracy can survive the worst of infighting.

The main point for investors is that the potential for war or the fear of war is not the reason to sell stocks. The great majority of the people of America have been decreasing their exposure to stocks. Their timing is wrong. The smart money is buying.


The S&P trailing price to earnings ratio is 18.8 times. This number is above the long term historical mean. The inverse (the earnings to price ratio) is 5.3%. The 10 year treasury bond yields only 3.54%. If you compare the trailing earnings only to those times when the 10 year bond yielded 3.54% or less, then you find that the trailing PE is far below the historical mean. Stocks are cheap! Would you rather have a 5.3% variable return that is likely to grow or would you rather lock yourself into a 10 year return of 3.54%?

While the S&P is cheap, there are stocks that are extremely cheap. The following is a comparison of one stock to the S &P numbers.

PE 5.27 compared to 18.8
Price to Sales of .15 compared to 2.6
Price to Book of 1.34 compared to 3.85
Price to Cash Flow 2.38 compared to 13.48
Prices to Free Cash Flow 3.02 compared to 28.27

What do the above numbers mean? The last number says that the current trends continue, the company will produce the price of each share in unrestricted cash in only 3.02 years, whereas it will take the average S&P company 28.27 years to produce so much free cash.

The price to cash flow of 2.38 says that some of the cash must be used to pay off debts owed but the total cash being produced is equal to the value of the company in only 2.38 years.

The price to book of 1.34 means that the price of each share is only 1.34 times the book value of the company (most companies hold depreciated assets that are worth lot of money but that are carried on their books as if they were not worth anything and most companies have an "ongoing enterprise" value that includes their "customer list" that may have zero book value).

The price to sales ratio of .15 says that the company is generating $6.67 worth of sales for each $1 of market value. This is a huge number. Many an old time investor will tell you that a company that has big sales should be able to find the way to increase its future profits.

The PE ratio of 5.27 times can be divided into one to show that the company is earning money at the rate of 18.9%. Not a bad return.

Put another way, the S&P sells for, respectively,

3.6, 17.3, 2.8, 5.66, 9.36 times the price of this stock. Why pay 17 times as much for a dollars worth of sales?

Because you are a frequent reader, I do not need to give you the name of the above company. I firmly believe this company will double and double again within the next two or three years. Last Friday night, I offered 6 card players a proposition bet. I offered $100 to $20 that this company would double in price in a year. Only two players took the bet. I guarantee you that the other 5 did not avoid the bet because they believe in the company. They avoided the bet because they do not trust anything at all about the stock market. Over the years, they have learned that the market seems to be totally illogical. These guys have all had successful careers. They have made a lot of money. They have not made good returns when investing in the markets.

Most people, who try to "beat the market" fail more often than not. Those of us who beat the market do not do so every time out. When the NCAA basketball tournament gets down to the final four, the odds of anyone team winning two games is never much better than 30%. In most cases, the best team has only slightly better than a double coin flip chance of being the champion. In the markets, the odds in the short run are never much better than 52/50. However, when the sentiment gets really bad, the public will sell no matter how low the price and the odds of strong gains over the next year become much better than 60/50.


This morning, Brain Wesbury made the point that the great depression was caused and then prolonged by the government trying to help too much. Latter today, Brian will testify before congress. He will say that the market is already well into a self healing process and the government has already made powerful moves to stimulate the economy. He will testify that the huge decline in the Fed Funds Rate is starting to produce results and that, given time, this decline is all the stimulus we need. Brian will not give the coming "helicopter money drop" much credit for the pending turn. Brian is right but the risk is that the politicians will not listen. We must always remember that before Hoover signed the trade restriction bill that was the catalyst of the great depression, more than 1,000 economist sent him a letter begging him to veto the bill. Politicians are currently talking about raising taxes and restricting trade. These are exactly the wrong moves needed economically but, unfortunately, these are the moves needed to win the democratic nomination for president.

Mortgage loan applications were up 5.4% last week. The housing market, the weakest sector of the economy, has been bouncing off of bottoms in various communities across the land. If you live in the formerly super hot markets such as Las Vegas, you should wait to buy. If you live in a "normal" community, the combination of low house price and low mortgage rate means that the best housing deals are disappearing fast.


There are reports that the DAL -- NWA deal will be announce by next week. Once that deal is underway, the next will be worked out. The airlines are serious about making money. They are prepared to consolidate in order to make the most of the boom that is occurring in international business travel. Furthermore, have you noticed the bounce off the bottom by Ford. Even the most beaten down of American companies is enjoying the benefit of the extremely low dollar!