Friday, May 02, 2008


In the old days, at the mid-cycle turn the US would get a runny nose, several other developed nations would come down with the flue and several developing nations would almost die. Countries, such as the USA, or international organizations would be forced to "doctor" the dying back to health. For the longest time, this slow down has been more than a runny nose for the USA while the rest of the world seemed to have taken an effective flu shot. Only recently has the data turned. Other nations are catching a cold just about the time the USA is showing signs of recovery.


Yesterday, US stocks had another great day.

Here are some of the numbers, NASDAQ 100 up 3.2%, Consumer Discretionary up 5.8%, Technology up 4.2%, Airlines up 5.6% (up 16.3% in 5 days, up 23.4% in 7 days), Banks up 4.4%, Broker Dealers up 4.6%, Semiconductors up 3.9%.

On the other hand, the price of wheat is down 40% from the peak! Yesterday, Energy down 2.2%, Oil Services Down 2.84%, Gold down 4.14% (down 21% from the peak) and the CRB was down 4.14%.

The poor countries of the world, where food expenditure is still a large percentage of the family budget, have been hit extremely hard by the run up in food costs. To fight this inflation, government authorities have tightened the money supply. Countries such as England and India are experiencing a slowdown and countries like China appear to be rolling over. In visual terms, the USA is the engine on a long roller coaster train, China is the caboose. The engine has come down the mountain and has already started climbing the next hill while China is just now on the downward slope.


Some TV pundits have been quick to suggest that the US economy cannot recover because the Michigan Survey of Consumer Sentiment is the lowest it has ever been. Don Hays points out that this survey has hit a number below 65 4 times since 1979 and in every case the average stock was up more than 20% one year later.

Other TV pundits (I admire Larry Kudlow but he needs to get off his "King Dollar" mantra) whine and complain about the weak dollar. They suggest the Bush administration should "do something" about the weakness. This is antithetical to the free market capitalism espoused by Kudlow. The fact is the price of the dollar is and should be set by the markets, just like the price of everything else.

Kudlow correctly is repulsed by government intervention in markets. The fact is that there are always unintended consequences when the government tries to regulate markets. For example, the French Revolution was ignited by the attempt of the king to regulate the price of food. The King put price controls on food in Paris. The vendors in Paris could not charge more than a certain price, which meant that the vendors could not afford to pay the farmers more than a certain price. The farmers kept their best produce for sale outside the regulated city market. They shipped poor quality and even over ripe (rotten) vegetables to the city. The hungry people rose up in revolt.

Anyway, data from the past 30 years show that after the dollar has fallen 10% year over year, the US stock market has on average gone up more than 20% over the next year.

Of course, high beta stocks are the ones you want to own when the above conditions exist. High beta stocks include small cap stocks, airline stocks, and high tech stocks. These are the kind of stocks that are likely to go up 50% when the average stock goes up 20%. Of course, there will be some stocks in these groups that will go up 100% or 200% by the time the average stock is up 20%. Obviously, the decline in energy and basic material stocks must be offset to get to an average of 20%. Therefore, very large groups of large and small stocks, including low beta stocks will go up more than 20% while the average stock is only up 20%. GREEN IS A BEAUTIFUL COLOR!


I do not understand 20% of what I read about Intel and other electronic stocks. As best as I can understand, Intel will put out chips over the next few years that cut the consumption of electricity while calculating at many times the prior speed. From the Gigaom website, I gather that Intel is expanding its product line. Intel has introduced a 10 gigabyte Ethernet adapter for less than $1,000. The Gigaom site calls this "blazing speed" at a price that will force the widespread adoption by enterprise networks. My understanding is that the Internet is ready to kick into another gear, which will make very powerful applications plausible. As I wrote last week, a technically savvy doctor says that the practice of medicine is ready to change dramatically as electronic monitors are swallowed, implanted or worn in volume and when doctors "view" the patients and the data without "seeing" the patient.


Yesterday, I wrote about how the Israelis claim to be able to produce solar electricity for 7 cents per kw. Leave it up to Scott Adams of Dilbert blog .fame to come up with a beautiful slant. He notes that the Israelis have extra incentive to be the first nation to eliminate its need for oil. He says the Israelis would enjoy destroying the entire Middle East Oil Industry. They still have a way to go but 7 cents for solar is substantial progress. It is estimated that the new standardized nuclear power plants can produce electricity for 4.2 cents per kilowatt. Of course, no matter how cheap electricity, the cost of making electricity mobile means that oil might still be competitive for transportation needs.

General Motors is covering all the bases while keeping a few key legislators fat and comfortable. Cars in America are being built to "flex standards" to help insulate US manufacturers from future competition. Sometimes we forget that the whole rational for trade agreements is to protect the politically connected. Even our free trade is not really free and has been manipulated by the politically powerful. Just because I have recommended the purchase of GM does not mean that I believe the company qualifies for saint hood.

GM has made investments in two cellulostic ethanol start-ups. One of the companies claims it will be able to produce ethanol from from trees, corn stalks and old tires for less than $1 per gallon using a thermo-chemical process. The other investment is in a company that has invented a new combined microbiological process. In other words, a number of steps have been eliminated and a mixture of microbes in one large container, adjusted by computer automation, will digest the raw materials. A university spin-off is starting field trials of methanogenic degradation. The idea here is to enhance the speed at which bacteria converts coal and heavy oil to gas. This is the process that I believe has the greatest potential. In any event, the building of "flex fuel cars" gives US cars manufacturers an advantage if government regulations can dictate which cars qualify to use new fuels.


This morning, once again the FOMC is pumping money into the banking system. The FOMC is determined to boost the US economy. Of course, all the politicians who voted for the $600 rebates are indebted to the FOMC for pumping in liquidity just as the checks begin to hit. The economy is going to boom and the politicians will take the credit between now and November (and for years to come). The public is hardly aware of how many billions of dollars have been pumped into the banking system by the FOMC.


The boost to the economy is a boost to the stock market. The futures contracts indicate that the Dow Jones Industrial Index will open up more than 100 points. The Nasdaq up 1%. While the oversold conditions are well on the way to becoming overbought conditions. I would not dare be a profit taker now. Now is the time to let your profits run and to add to positions. The average citizen is still angry with the average congress member. A full court press is on to take away that anger. This morning the job figures were much better than expected. There is no recession! There will be no recession in 2008! BUY, BUY, BUY!