Friday, July 18, 2008

Buy Something!

Yesterday, I received three emails from regular readers and I appreciated them all. One included a great insight about CAL. The writer noted that the stock has bounced high on low volume. This shows that the "weak" holders are gone and the remaining holders are committed to the long haul; few of the remaining holders are willing to sell after a 50% bounce off the bottom. Of course, many of them bought at much higher prices and will at least wait to break even before selling. Others will hold on for the next ten good years ahead.

The current situation is the boy scout bonfire story all over again. Boy scout leaders, seeking to avoid the extreme embarrassment of a failed bonfire on summer camp visitors night, just might secretly soak the bonfire core with lighter fluid. Then, with just one match, the leader is able to quickly start a big fire. When all the sellers have vacated a stock, one little match can set it aflame. This is a highly charged situation. No scout leader would want to admit to using lighter fluid or to fail at lighting a fire. Few would admit to owning airline stocks but those who do are holding on for big gains.

A second email was about a deposit to an account. The email said to Buy Something! The sender understands the main point I have been making, that one can buy almost anything outside of the commodity area and make good money over the next several years. In this account we split the deposit into three depressed bank stocks, WB, BAC and BBT, and added a small amount to his airline position.

The third email was a complaint about my being a broken record in regard to the airlines. It noted that I recommended these stocks at much higher prices and recommended doubling-up half-way down. What can I say? I did recommend the stocks again and again and I still do. I have strongly recommended CAL since it was trading around $6 per share in 2002. CAL just reported an amazing quarter. With oil prices at ridiculously unsustainable levels, the company added about $500 million dollars to its net cash position! How much will it add when oil prices are down?

One of the reasons I write about the airlines so much is because the boom in international travel (still is in its infancy) is part and parcel to this new wonderful economic age that we have entered. A new age that is being totally mis-characterized by left leaning media.

The attitude of the left reflects the short term concerns of the average man, who does not "see the big picture". The huge run up in commodity prices, that is seen as a super negative each time we visit a gas pump, is actually the result of a world wide increase in prosperity. A temporary economic slow down and a temporary time of limited capacity are each masking the long term trend.

Jim O'Neil posted an article at a day or two ago that you should read. He reports that a Goldman Sachs study shows the world is currently adding 70 million people per year to the middle class. The study suggests that the number will increase to 90 million per year for the next 20 years! From the selfish point of view, these 1.4 billion people being lifted out of poverty will become customers for every thing from INTC computer chips to CAL plane tickets.

I have written a lot about international affairs and in particular about a pending deal with Iran because this deal will permit a large number of multi-billion dollar commercial transactions to follow and it will push this new international age of prosperity forward with speed. Americans have skills. Skills that are worth all the more when allowed to produce for the entire world. Unfortunately, silly government policies have resulted in massive waste as a result of misdirection in the development of skills.

The misdirection results in everything from the teaching of "fuzzy math" to excessive teaching of laws. The number of lawyers in America is extremely high relative to the number of doctors. There are over 200 law schools in America with over 150,000 students enrolled. There are 129 medical schools with total enrollment of 67,000 students. About three percent of all who apply to medical schools are accepted. Our government has allowed the AMA to restrict the number of doctors trained while allowing unlimited training of lawyers. Is it any wonder that medical costs and the number of law suits are going up?

Restrictions on producing oil and doctors produce the economically expected results, higher gasoline and higher medical costs. In each case, the restrictions give politicians power and reasons for lobbyist to come calling.

I often mention the Law of Comparative Advantage but I believe few people appreciate how free trade in combination with high skills provides great wealth for buyers and sellers. By restricting the number of doctors and thus driving up the amounts doctors can earn, we divert some of the best minds to lesser callings. HOLD THE EMAILS, I AM ENTITLED TO MY OPINION! The good news is that the market finds ways around problems. As a result of the restriction on doctors, there has been a dramatic increase in the number of Nurse Practitioners. People are being treated for minor ailments and for maintenance diseases by professionals who were not forced into excessive training. The genius who can invent the next super computer or nano cure for cancer will save a lot more in human capital than any family practitioner possibly can. By making basic care more available at lower prices, it may well be a nurse practitioner who saves the next little girl or boy genius from an untimely death. A free market encourages each individual to find his area of greatest comparative advantage and many others benefit from his decision.

American companies such as TXN and INTC produce incredible products. Products that you nor I would have a chance of developing, even if we had a million years to try. The development costs of these products are huge, however, the addition of 70 million new customers each year is resulting in tremendous economies of scale. These huge development costs are extremely small when allocated to billions of units. Suddenly, it has become true that poor people can afford the most sophisticated computers, cell phones and other communication devices. The left leaning media and politicians look at one end of this process and declare that the CEO is making an outrageous salary. The left falsely cries out that the rich are getting richer and the poor are getting poorer, but, you and I know that the poor benefit the most from new technology. The CEO only gets more of what he already has whereas the poor experience the opening of doors to a whole new world.

My 2 year old grand daughter amazes me in multiple ways. When her Daddy calls, she engages in "adult like" conversation. She tells him about her daily activities and asks him about his own. For two weeks, the two have talked at least twice a day by cell phone. When I was a child, the telephone was virtually off limits. Even as an adult my family and I played the game of calling for ourselves collect and then saying we would try again at a certain time in order to be picked up at an airport while saving the expense of a long distance telephone call. Living conditions have changed and are changing. Instant and constant mobile communication is just around the corner. Buy Something!

My specialty is a top down view of the world. I do not pretend to be a "stock picker", but I buy what fits my view of the world. I have a long term orientation. I am willing to sacrifice in the short run in order to win big in the long run. I understand that the real estate market is about 5 times the size of the equity markets and as such, the real estate market is the dog and the stock market is the wagging tail. The stock market can jump around but it must follow the dog. Three years ago, I did not believe that there was time for US officials to take the US into a slow down and have time for a significant recovery before the election. I was wrong. Because high risk mortgages were mixed into batches of low risk mortgages, the FOMC and the Treasury were able to quickly "bust the bubble" of a booming housing market. Seven years worth of slow down has been compressed into three years, with time for improvement before the election. As a result, there are wonderful buying opportunities. Now is the time to buy resort real estate. While prices and occupancy are low, largely due to high gasoline prices. A turn in the price of gasoline will increase the value of "destination properties". Now is the time to buy high beta stocks, including high tech, banks, consumer discretionary and airlines. The coming recovery in real estate, the happy dog, will be accompanied by stocks, the wagging tail. It is time to "Buy Something"!


The potential for good news is great. Whenever expectations are low, the potential for good news is great. One of the reasons the potential for good news is so great is because the US is doing a great job of fighting an asymmetric war. Some 200 or so years ago, a Frenchman (sorry, I can't remember his name) said that "War is too important to be left up to soldiers". Today, the US military command has evolved into the PhD brigade. General Petraeus has an IQ that is off the chart and his staff is smarter than he. It is fitting that the US is good at fighting an asymmetric war as our country won its independence by fighting such a war. The tables have turned. We have superior organization and firepower and it is al Qaeda and the Taliban that are the rag tag ambushers. It takes more than firepower to beat rag tag soldiers on their home turf.

Have you noticed how many of the leaders of al Qaeda and the Taliban are getting "bumped off"? In May of 2007 this tendency was obvious but the pace has picked up. Hardly a week goes by without the death of several leaders. The US clearly has multiple intelligence sources.

In Vietnam, the first thing we learned was not to salute our leaders. The logic was obvious but the habit would have been hard to break had the leaders not been so insistent. In Iraq, Afghanistan and Pakistan, someone is pointing a finger at tribal leaders. Indeed, in many cases, they are "painting" leaders with a laser beam of light so that a Predator can rain down a HelFire Missile directly on their heads. There are rumors circulating that the US is once again getting close to Osama bin Laden. One of the ancient Chinese stratagems on how to win a war was to kill the leaders. Can you imagine the change in the history books if Bush is able to get Osama?

The actual key to success in an asymmetric war is to draw on every possible avenue to multiply your resources. In Iraq this was done in dramatic fashion when Sunnies were successfully recruited to switch sides. Today, burka wearing women are assisting US and Iraqi troops by frisking potential women suicide bombers. It makes far more sense for the US to pay an Iraqi $300 per month than to risk a suicide bomb. These women have proven to be another great source of intelligence. For example, they have assisted in the discovery of many cashes of weapons. The left does not believe it but those weapons might have been used to bomb the US one day.

In the high mountains of Pakistan, Taliban leaders must be very careful to avoid death from a UAV missile or from fire from his own forces. During the American Revolution, the toughest part was when neighbor went against neighbor. In many an instance, neighbors were forced to pretend to be loyal to the British until the right opportunity came. Life is really tough if you are in battle but not 100% sure which side your buddy is on. The Saudis have contributed billions of oil dollars to "pay-off" combatants. No one knows how many tribal people are on "our payroll". The thing I like most about the T. Boone Pickens ad is that he notes that the annual cost of foreign oil is many times the cost of the war. It is a bit misleading but I still like it.


The US and Iran are preparing for a quasi US Embassy. US and Iranian negotiators will meet face to face this Saturday. Russia has just arrested a citizen for smuggling certain metals into Iran. If convicted he will be sentenced to a 7 year term for his first offense. Last week, the French announced that they will not assist Iran in building out its South Pars gas field. This week, the French have announced that they wish to assist (what has changed? has there been a negotiated break through?). Turkey and Syria have each offered to mediate talks between the US and Iran. Politicians from all over the world are smelling success and they want in on the credit.

Turkey continues to make strides toward becoming a part of the EU. Helping to mediate the peace agreement between Israel and Syria is one feather in their cap. Helping to mediate the deal between the UN-US and Iran would be a more beautiful feather. Iran has been forced to withdraw its support of terror in order to accept the package of incentives being offered.


Professional, volunteer soldiers have been putting their lives on the line in what they perceive to be a just war. Would you not guess that when Obama, one who would withdraw in defeat, makes a trip to the war zone that all three major network news anchors would tag along? Good men and women who are serving their country get little coverage but Obama gets huge coverage even though it has been shown that his plan to jerk our troops out by March of this year would have been a terrible mistake. The deaths of more than 4,100 Americans would have gone for naught and the insurgents from Afghanistan, Pakistan and Iran would have overwhelmed the democratic government of Iraq in short time. In a few years, bombs would be exploding in airports, train stations and public buildings around the world. As it is, peace is at hand. With a little luck, multiple peace agreements will be signed in the months ahead. When George Bush spoke of the axis of evil, who really believed he would sign peace treaties with North Korea, Syria and Iran during his term? Who believes it now? There is room for great news. Buy Something!

Many thanks for the emails. I thank you for reading and for responding. Please always remember that I write to you with the understanding that you will occasionally forward some of my work to others.