Monday, May 19, 2008


If the stories of a tightening race in Oregon come true and if Hillary wins by another land slide in Kentucky, Obama is going to limp across the finish line. This is good news for those who have hope that the congress will be forced to avoid raising capital gains taxes in exchange for compromise on the AMT tax. The public will not understand if the congress sits on its hands after all three branches of government are controlled by democrats. Several democrats who won house seats in the past two years are fiscally conservative. A democratic sweep of three houses does not necessarily mean the US economy will be hammered by massive new, unfunded, government programs. Perhaps, if the democrats win a 60 plus majority in the Senate, all bets are off.


Back at the market ranch, the bears are stretching their arguments pretty thin. A common reprieve is that truckers are passing along higher fuel cost into everything we buy, thus inflation is about to soar. I cannot recall the exact numbers but the cost of the average product is primarily the cost of labor. The cost of transporting an individual item is a very minor portion of the total cost of that item, besides, the costs of shipping has already climbed along with the price of fuel. Future inflation implies higher costs in the future. It could happen but prices are high enough to cause people to stay home. More important than fuel, unit labor cost are going down! The cost of labor is going down because businesses continue to become more efficient. Part of this is automation and part of it is the science of management. American business managers are among the best in the world.

In a related phenomenon, the transportation index is on its all time high. The main reason is that big cap railroads such as CSX are on all time highs. Since the index is a cap weighted index, the decline in AMR shares is a non event relative to the climb in CSX shares. Mark Haynes, on CNBC has expressed confusion about why the index is hitting new highs. There are two reasons. The first, is the short term reason that railroads are about 10 times more fuel efficient than are truckers. The higher the price of fuel goes, the higher the price the big cap rails will trade. The second reason is the longer term rebound in the US economy. With the US dollar sitting near record low levels, US exports are soaring. These exports include bulk commodities such as coal and grain which are hauled by railroads. It is "normal" for transports to lead the market after a slow down or recession.


A big article in the Winston-Salem Journal this morning was about setting up huge, expensive CO2 filtering farms. The most respected of scientist keep proposing this sort of lame brain "solution" to our problems. Of course, these guys typically want to spend the governments money, not their own. These guys would be happy to serve as the paid consultants on these massive boondoggles.

In 1939, the US Department of the Interior said that the US oil supply would be exhausted within 13 years. This foolishness was prevalent before 1939 and it has continued to prevail in recent times. In 1885, 6 years after the Pico Canyon, CA oil strike, the US Geological Survey reported that there was "little or no chance" of oil being discovered in California. A few years later, the same agency said that the prospects for discovering oil were not good in Kansas or Texas!

In 1974, the USGS said that the US supply of natural gas had been reduced to 10 years. Last month, this same agency estimated that the amount oil and gas equivalents in the US portion of the Bakken formation (basically in North Dakota and Montana), is in excess of 300 billion barrels and that at current prices and with current technology 1% or about 3 billion barrels is recoverable. The American Gas Association offers their, perhaps biased, assessment that there is a 1,000 to 2,500 year supply in the USA. So far, it has been the doomsters not the boomsters who have made the most exaggerated estimates.

Walt Williams, an economics professor at GMU, reported interesting numbers in an article last week. He notes that 95% of the green house effect is from water vapor, that the earths temperature without the greenhouse effect would be very cold and that most of the variation in the earths temperature is the result of small variations in the sun's output. He goes on to note that natural wetlands produce more greenhouse gases than all human activity.

The opening of the Jamnagar, India refinery in July could be the mind changer. Suddenly, a lot of folks who have swallowed the peak oil gloom and doom scare, hook line and sinker, will begin to see that supplies are not running out. The Jamnagar refinery was built with profits in mind. India plans to export 100% of the petroleum products production. When a new refinery spits out 580,000 barrels of good stuff each day, the world may take notice.


I hope you are prepared to take advantage of the coming shift in sentiment. The stock market is gradually rising now in anticipation of the coming boom.

Recently, while facing the massive global warming consensus, I came close to believing that old men always lie. The problem is that I am a 58 year old man. I certainly do not want to call myself a liar, after all, the first law of scouts is, "A scout is trustworthy". I hope you believe in the boy scout law and in the scout motto, which is "Be Prepared". Those who take full advantage of the coming shift will make more money than they might have dreamed.