Monday, May 12, 2008


From the auto sales numbers posted at the Wall Street Journal, we discover a massive market switch. Three of the top selling vehicles, the F-Series Ford Trucks, the Silverado Chevy Series and the Dodge Ram Series have taken a hit on the chin. The number one selling vehicle is still the F-Series truck, however, the April number of 44,813 trucks was a decrease of 21% from last year. Ram sales were off 23.2% and Siverado sales were off 24.7%.

And, the winners were small and hybrid cars. Of the top 17 selling vehicles, the group that saw sales gains had total sales of 261,397 while the group that saw big declines in sales had total sales of 132,778. The "surplus" of high gas mileage vehicles over low gas mileage vehicles was 128,419. In category terms, Sales of large cars fell 31%, sales of large SUV's fell 29%, sales of mid-size SUV's fell 32.2%, sales of trucks (large and small) fell 17.4% and sales of small cars increased 7.1%. The two biggest percentage sales increases were seen by the Toyota Prius with a gain of 66% and the Chevy Malibu with a gain of 55%. The Camry and the Accord were among the 4 top selling models. Camry saw an increase of 5.6% to 40,016, 4,000 less than the F-Series and Accord saw an increase of 21% to 35,075 just 2,000 less than the Chevy Silverado. It has been widely reported that some dealers will not take big trucks and SUV's in on trade. With 770 vehicles in America per 1,000 people, it is clear that a lot of trucks are the third vehicle in a two driver family. These gas guzzlers are often being used as the vehicle of last resort.

If the 128,419 "surplus efficient vehicles" save 20 miles per gallon and if they are driven 1,000 miles per month, the monthly gas savings from one month works out to 6.4 million gallons. If a similar switch were made each month for the next 12 months, the reduction in gasoline consumption would grow to 76 million gallons per month. The annualized savings in the following year would be 912 million gallons, even if the switch over were to end after the 12th month. While I grant that my numbers are "loose", the point made is valid. The big turn in gasoline consumption should accumulate to a massive reduction over the years. The peak usage decline will only be reached in 7 to 8 years with the savings climbing sharply for the next 4 or 5 years.


If you are inclined to argue with the magnitude of the above numbers, please note that the turn was "confirmed" by the trade deficit numbers. The US trade deficit was expected to come in at around 61.7 billion dollars. The February numbers were adjusted downward and the March number was 58.2 billion dollars. Brian Wesbury calculates that the inflation adjusted trade deficit (by the way the GNP recession watch number is an inflation adjusted number), is down 12.8 billion dollars in the past year.

How can the trade deficit fall during a month of extremely higher oil prices? The demand for that oil has fallen.

In addition to the switch over in autos owned, there is an ongoing switch over in the number of miles driven. Many a suburban bus line has seen a jump in ridership of 60% or more but even ridership at large city systems is climbing rapidly. The NY Subway system saw an increase of 6.8% in February. The MBTA (Boston) hit a new record of 354 million riders, an increase of 6.2%. The Metro (Washington), after the largest fare increase in history, saw its ridership climb 6% in January, 4% in February and 2% in March. The LA system has seen an increase in ridership of 40% since 2000 with increases of 13 to 17% last month. Maryland's MARC lines have seen increases that range from 22% to 51%!

A chart posted by Mark Perry, of Carpe Diem fame, shows a major shift in driving habits. The miles driven in the past 12 months is about the same as the number of miles driven 3 years ago. His graph, produced from data available from the Federal Highway Administration, flattened out and rolled-over from 2005 to 2007 and it has been negative for at least 4 months in a row. In January, the number of miles driven fell 1.7% below the rate one year earlier. The number of miles driven on rural interstates fell 2.3%.


In America, there are about 770 cars for each 1,000 people. In China, there are about 10 cars for each 1,000 people. The alarmist believe that the world will run out of hydrocarbons because China will one day also have 770 cars per 1,000. The alarmist always want to hold all other things equal while extrapolating growth in one area far into the future. The reality is that the number of cars per person will likely decline in America long before the number of cars in China reaches our level. In China today the sales of two wheeled, motorized vehicles, far exceeds the sale of passenger vehicles. Indeed, the sale of electric two wheeled scooters is now slightly higher than two wheeled gas powered vehicles in China and the number of two wheeled gasoline powered vehicles is about three times the number of passenger units. Total motorized two wheel sales is more than 6 times passenger vehicle sales. If one counts scooters, China is rapidly gaining on America. If you only count passenger cars, Americans will buy 4 times as many cars as Chinese buy this year.

As noted above, even spread out Americans (who enjoy much more arable land per person than most) are flocking to mass transit. The new Greyhound "Bolt Buses" connect the cities of the Northwest Corridor with fast, comfortable and high speed transportation. Citizens of NY, Boston, Washington and Philadelphia, get extra leg room and free WIFI service at prices far below the cost of operating a car. The stigma of riding the bus is fading fast.

Yet another set of data show that a switch over is taking place. Even after US oil refineries have run at lower than "average" utilization rates for 6 months or so, gasoline supplies continue to hover well above five year averages. The excess capacity has shown up in crack spreads and refinery profits (large integrated oil companies made money anyway).


Lemmings all around are ready to follow Al Gore over a cliff. While the Polar Bear population has increased, the hysteria has grown. The world is at risk of significant pain, including hunger among many poor children, should the polar bear be declared an endangered species. While there has been the gradual realization that corn oil in gas tanks is a huge mistake, the environmental insanity continues. Jay Leno said it well the other night. He noted that those against drilling for oil in ANWAR say that it makes no sense to drill because it will take ten years to produce oil,... (pause for effect)...., which is the same thing they said 10 years ago.

Last night at dinner, a good friend said that what we need is more solar energy research. He simply does not realize how many billions of dollars have gone into what has been nothing but fantasy land to date. Billions have been spent on solar energy research and many billions more will be spent on research over the next 10 years. There is no need for government support of such research. The person or company that makes the critical break through will be entitled to his fair share of the billions of dollars of profits that will be made. It has shown time and again that private company research is far more productive than government research.

As a result of the billions of dollars already spent on solar research, solar energy now makes economic sense in a few applications. If the latest reports from Israel turn are true, a demonstration size plant will be producing solar electricity at the relatively attractive price of 7.5 cents per kilowatt in a couple of years. The trouble is that if we wait for the "silver bullet", hundreds of millions of people will starve before we can possibly ramp up enough solar energy. We must solve the short term problems in order to live long enough to solve the long term problems. We know where massive quantities of oil is, all we need is the common sense to go get it.

Massive subsidized solar energy projects are currently under construction, those massive subsidies have been the result of taking money away from better uses. We confiscate the earnings of Peter and give them to Paul each time the government tries to force a solution upon us.

Amadinejhad is coming close to shock therapy. Iran is sitting on an undeveloped field of over 30 billion barrels of oil. The country cannot develop this field because it is busy playing terror games. The country has built a "pride and joy" nuclear power plant but cannot start it because the country is not willing to abide peacefully with its neighbors. President Bush has been severely criticized for his "McKinley, Teddy Roosevelt" brand of foreign intervention but recent events show that he is on the right track. The recent "surge" in Basra, Iraq has worked. It took only 7 weeks for the Iraqi government to take control with only limited assistance from American troops. The revolution that Amadinejhad has supported is running into dead ends. The people of Iran are tired of the 20% inflation rates required for Amadinejhad to keep his "terror machine" maintained.

Though back channels, Bush has let Amadenijhad know that the US is ready to make public the degree to which Iran has been the sponsor of terrorist groups. Bush has demanded that Iran stop supplying various terrorist groups. Bush has implied that he is willing to send cruise missiles into the headquarter windows of the training camps in Iran. We all should remember the difference in Libya since Reagan dropped a smart bomb on Omar's bedroom.

Seven of Iran's Arabian neighbors will meet this week to discuss their plans for nuclear power. The recent treaty between the US and Russia makes it likely that nuclear fuel will be abundantly available for these countries which do not support terror. What does Amadenijhad want, low cost nuclear power or the ability to make nuclear bombs? The threat of a cruise missile in his bedroom window may make him think again.

Over in Europe, businesses are growing tired of the silliness imposed by the environmental Lemmings. Businesses are refusing to expand if they must comply with carbon dioxide rules, regulations and costs. The earths temperature is lower today than it was 10 years ago. The carbon dioxide we produce is necessary for the survival of our oceans and our plants. We should feed the planet all we can! We need to take more pollutants out of our fuels but CO2 is not a pollutant. There is a great need of a common sense shock.


NO world wide recession! The slowdown/recession in the USA is going to be over just about the time the Europeans fall into a slowdown/recession. My good friend Lamar is correct about the probability of "rolling" slowdowns/recessions. Having said that, perhaps the reason the dollar is gaining strength is more the result of the set-up for decline in Europe than the set-up for growth in the USA. Indeed, the inflation rate of 8.5% in China suggest that China may be forced to hit its economic brakes even harder than has Europe. China is certainly a long way from recession but it is in need of time to "catch up". A slow down in Europe would further slow export growth from China.

The unwillingness of the ECB to lower short rates suggest that long bond rates (and 30 year mortgage rates) might go lower still. Even so, rents in American are climbing and rents in Australia are jumping. The ratio of rent to home price in America is climbing out of the "great valley" rapidly. Many a home now sells for less than the rental value. Just slightly lower mortgage rates could cause a jump in home sales. Since housing markets work from the bottom up, the rise in rents will push the value of small homes up and the sellers of small homes will be able to afford larger homes.


To get to the home stretch, it is necessary to negotiate the big turn. A lot of crashes occur leading into and out of turns. If done just right, there is a lot of momentum coming off a turn. Ben Bernake has been giving the US all the juice it can handle. Bob Johnson, deputy CFO of the CFA Institute (a hat tip to Don Hays), has done a number of studies on what makes a market move. His big story is about an expansive FOMC versus a restrictive FOMC. For the 24 years from 1977 through 2000, his research shows that the S&P 500 increased at the average rate of 10.1% while the FOMC was restrictive and at the average rate of 18.5% while the FOMC was expansive. More importantly, he showed that small cap (high beta stocks), climbed 7.7% during restrictive phases and by 28.2% during expansive phases.

The FOMC has reduced the fed funds rate from 5.25% to 2%. Even during the collapse in housing, the real GDP has continued to grow. The latest number of .6% is small but it is positive and it is expected to be revised upward to around 1.1%. The numbers above shown that the US consumer is making substantial adjustments to their auto buying and driving habits. The gas money savings will be spent in other places. The person who decides to ride the WIFI connected Greyhound might just buy a new laptop computer with his car money.


When our country was just a babe, Alexander Hamilton and Thomas Jefferson won and lost a number of arguments with one another. Both men made substantial contributions to our country. We should all be thankful that Thomas Jefferson won the bulk of the political arguments. Hamilton basically wanted our President to be a King elected for life and he wanted our Senate to be a House of Lords. In other words, Hamilton was a devote of Thomas Hobbs who believed that the masses needed to be ruled by the elite; only the educated few have the wisdom necessary to rule for the benefit of all.

On the other extreme, Karl Marx wanted to do away with the elite altogether. Along the way, he disparaged the common man by suggesting that the common man needs false religious beliefs to act as an opiate to relieve his "pain".

Presidential candidate Barack Obama recently expressed sentiment or even a philosophy that has roots in both Hobbs and Marx. Obama's apparent belief that he can go sweet talk Amadenijhad and other supporters of terror into submission implies a supernatural ability. His words do not match up with great faith in the supernatural. His words about Pennsylvanians clinging to religion imply a lack of faith on his part.

All three contenders, for the presidency, are willing to confiscate billions of dollars from businesses to force them to reduce carbon dioxide. The cap and trade systems proposed will make the corn ethanol debacle look like a picnic. McCain talks about reducing earmarks while proposing that congress will be the arbiter of which multi-billion dollar industry can expand and which must contract.

It is my hope that Americans will "get religion" or get off their "addiction to religion" long enough to take action. We need to tell the politicians that we will not take it any more. The current farm bill under consideration will give your tax dollars to rich farmers to the tune of 45 cents for each gallon of ethanol that you are being forced to buy. The current bill will continue the practice of paying rich land holders to not grow food. The current bill will give 400 million dollars to competitors of those trying desperately to innovate in regard to cellulostic ethanol. The corn lobby is super strong because the law of the land is that Iowa is the first state to caucus for the presidential election. I have no animosity for the people of Iowa. My concern is that millions of poor people are going hungry due to the game of politics being played and millions of tax payers are being forced to make others wealthy.

My hope is that you make a lot of money in the market and that you tell congress to stop the insanity!