Monday, August 25, 2008


The top 33 stocks in the NASDAQ 100 are winners this year; not bad in a tough year. Of the top three stocks in the index, two are biotechnology stocks. Celgene is number 1 and Amgen is number 3. Qualcom at number 2 and Symatec at number 4 are the two hottest "regular technology stocks".

The recent announcement of successful "manufacturing" of blood cells, through stem cell technology stirs the imagination of what is to come. The life span of humans is likely to increase dramatically as progress continues. Some time ago, I wrote about the noted scientist who believes the first man to live to be 150 will die only 10 years before man is able to live to 1,000 years. In other words, when a major breakthrough to the aging process is discovered, it will lead to a series of discoveries.

I looked up a few symbols of stem cell companies. Most are burning up their capital quickly. ACTC, STEM, CUR, BMTI, OSIR, PYMX, and MNTH are all worth reading about but all all probably risky. Some of the more established companies include Biogen, Genentech, Genzyme, and ISIS Pharmaceuticals.

Among the companies in the NASDAQ that are down this year; Cisco, Apple, Amazon, Intel, Bidu, Ebay, Google and Garmen. These firms are likely to do well over time, but, when the swamp is being drained, boats are likely to find the bottom.

Even though the central bank of the USA is trying to restart the economic engine, other central bankers are trying to drain the inflation swamp. Countries that have inverted yield curves include the UK, Germany, Mexico and Australia. Inverted curves make bank loans hard to find. In the USA, banks are avoiding making loans as they try to liquefy their balance sheets. The 10-year note has fallen all the way to 3.8% but the 30 year mortgage is still at 6.4%.

Pretty soon, the credit crisis will go away and the 30 year mortgage will fall to only 1.5% more than the 10-year note. This is kind of a chicken before the egg situation. Lower mortgage rates will make a lot of homes worth more than their mortgage balance and an improving ratio will make the banks healthier to lower their spreads.

In the countries with inverted curves it cost more to lend than can be earned. In the UK for example, a 2 year deposit earns 4.95%, which is about a half percent more than a 30 year deposit. The mentality of most investors is, why tie up money for 30 years if you can make a higher rate for 2 years. From the bankers point of view, why make a risky loan if you can earn 4.95% with no risk.

The mentality is upside down. For example, the buyer of a 30 year treasury last year locked in 4.94%. He earned the 4.94% plus the appreciation in the bond which was an additional 7% (caused by the fall in the yield to 4.6%). The total return without leverage was about 12%. Total return was extremely high for those who used heavy leverage. I made the mistake of selling bonds last year for two reasons. I failed to realize that tainted mortgage paper would freeze up so much of the worlds economy and (2) that the determination of Bush to force Iran to stop funding terror would cause a spike in oil prices far above the price needed to rectify normal supply and demand.


There is always good news to be found. Good news is often bad news in disguise. The worst of economic downturns is normally over by the time wage rate increases slow. For example, the peak in wage increases in 1990 was well in advance of the market upturn. Same in 2001. This time, the peak in wage increases was late in 2006. The slowdown in wages foreshadows lower prices for lots of stuff and therefore higher share prices for lots of stocks.

The evidence is all around you. How low will the cost of shipping commodities go? The Baltic Dry Index hit $235,000 in June of 2008 but it was all the way down to $125,000 last week. Back in 2005, it got all the way down to $20,000 when the market only thought an economic slowdown was at hand. How far will steel prices fall? China is now trying to catch up will competitors. It has lowered local and export steel prices by 15% in a month. Last Friday, when Ben Bernanke predicted falling inflation rates, he did not go out on a limb. Declines in every thing from gold to shipping costs are well underway.

The public still believes that inflation is out of control but the truth is that 76% of all goods and services are averaging low inflation rates. Things like houses, cars, furnishings, clothing and electronic goods are cheaper now than last year. Energy and food costs are the exceptions, but the average person in the USA only spends 9.7% of his budget on energy and 13.8% on food. Most US citizens are living much better today that 6 years ago. They don't believe it because their attention is focused on high food and fuel prices. Disposable income went up on average 720% since 2002! Over 10 years, real employment went up 10.5% while real personal income went up 32%! They guy making $500 a week 10 years ago and $1000 a week last year might be "hurting" because his income has fallen to $950.

The above is a very key fact in regard to buying at the bottom. The psyche of the human mind is such that we will spend twice the amount of time or twice the money to save a nickel as we are will to earn a nickel (after tax). In tough times, we become even more foolish. We might work four times as hard to save than to earn. The risk reward ratio goes up as the price of stocks goes down but we freeze up!


There is a whole new arms race developing. The US has installed new antimissile defense systems in the Czech Republic, Poland and Israel while Russia has been flopping around trying to stick fingers in its leaking bucket. Russia has made a lot of noise, but, so far, it has not plugged any big holes.

Russia has contracted to sell more surplus natural gas to Europe than it owns. In the past, it has relied on forcing satellite countries to send their natural gas through Russia. Russia has in effect "earned" a transit fee. Russia has not been happy to see pipeline deals springing up all across the Middle East. It was all the more upset about pipelines taking oil out of Central Asian markets.

The invasion of Georgia was all about trying to take control of the Baku-Tbilisi-Ceyhan pipeline. Under diplomatic pressure, Russia backed off. It has not gained control of the pipeline, but it has encouraged Ukraine, Poland and others to be closer allies with the USA. Other pipelines continue to be constructed or planned. Kazakhstan currently sends most of its natural gas through Russia's system. However, Kazakhstan is in the process of converting an oid Soviet Union oil line into a gas pipeline to China. It is also cooperating with Turkmenistan to send even more gas to China and India. The World Bank has already approved funding for a gas pipeline that will go from Turkmenistan though Afghanistan and Pakistan and on to India and ultimately China. Countries are naturally investing in more than one way to send natural gas. Natural gas is relatively abundant but it is difficult to ship.

Russia is like a kid trying to hold the ocean back from his sand castle. Maybe a big kid with a bulldozer but the ocean still wins in the long run. Russia, like the USA, uses its military might to influence economic treaties.

Russia and India are jointly manufacturing the BrahMos Missile System. This system will deliver a 660 pound warhead 250 miles. The delivery is both fast and accurate, faster than the speed of a rifle bullet. The updated model is expected to travel at double the speed, making it hard to defend against. The 660 pounds can be a nuclear warhead. India has committed to 800 of these units at a price of 2.5 million dollars each. You can see why the US is installing antimissile systems in friendly countries. The Russian's hint at their readiness to sell these and other systems to Syria, Iran and North Korea. Countries such as India can get away with playing both sides of the fence by maintaining their membership in the NAM (Non Alliance Movement).

It has been reported that Condi Rice will recommend that the President withdraw the Russian 123 agreement from congress and that talks to admit Russian into the WTO be killed. Russia would be better off to peacefully sell nuclear fuel services rather than to belligerently sell natural gas. It is obviously hard for the old bear to learn new tricks, but Condi and Bush will put the bears feet to the fire. Russia stands to make and save trillions of dollars by being included in the Global Nuclear Energy Partnership.

The first set of stocks that come to mind are Boeing, Lockheed and Raytheon. Other defense stocks include NOC, SPAB, GR and GD. I don't plan to buy these but I can see why they might work.

I am still very hopeful for deals to be struck. There are so many multi-billion dollar deals pending that it seems likely that some kind of grand compromise will be worked out. The skeptic in me thinks that the breaks will start to come in the week after the democratic convention. Complicated stuff, but economically extremely powerful stuff. The technological advances in nuclear power are sufficient to bring the price of gasoline down to below $1 per gallon within the next 15 to 20 years. Very powerful economic stuff indeed.


Economist magazine reports that Australia's Eamon Sullivan swam 100 meters in the Olympic trials at the world record time of 47.05 seconds. This was 19 seconds faster than the world record that was set in 1905! One is left to wonder how it is possible for man to continue to get physically stronger. The world has changed. Sullivan lost in the finals! The Jamaican runner who won the 100m and the 200m was a streak of lightening relative to runners 50 years ago.

On the other hand, various tribes in the high mountains of Afghanistan and Pakistan have been fighting a civil war for more than 30 years. Indeed, two tribes, the Turis and Bangnash, have been at war with one another for over 300 years! The world has not changed so much after all.

Before 9-11-2001, it mattered little to the US if there was war in Afghanistan or Pakistan. Today, we understand that the buildup of Jihadist in these mountains is no longer just a local matter. In the area of Bajaur, Pakistan, more than 1,000 war deaths occurred within the past 30 days. Many of the combatants had rather be plotting ways to kill Americans. Despite the shake up in the government of Pakistan, government troops are going after the "bad guys". Only the hard core are sticking around to fight and winter is coming. This means that the heat from campfires will allow our infrared sensors to identify exact locations. How would you like to be camping through the winter in the Himalayan mountains while hearing the buzzing of Reapers above? Reapers armed with smart bombs and Helfire Missiles.

The amazing thing is that the military is running low on bandwidth. Sophisticated high resolution cameras in numerous UAVs are taxing US satellite power. One new satellite can proved many gigabytes of bandwidth but the cost is $4 billion per bird. My friends tell me the $4 billion should be spent feeding the hungry people of the world. They fail to appreciate that if all 6.5 billion people in the world were well fed starting tomorrow, there would be 8.3 billion people in the world in 5 years and not enough food to go around. Poverty is a problem that needs to be solved but avoiding the next World War has to be a top priority because we know how to prevent world wars, we still do not know how to prevent poverty.

Pretty soon, incredible new hand held computers will open a whole new world. Apple is selling iPhones in 27 countries. The bandwidth needs are going to be huge. I still hold a few shares of LVLT which is 21st on the list of NASDAQ performers this year. The big satellite companies like RTN are not a part of the QQQQ.


Obama is a smart man. He recognizes his biggest weakness in the Presidential race is in regard to Foreign Affairs. He has wisely chosen a vice-presidential running mate who is experienced. The problem is that Biden has shown naivety and poor judgment in regard to the Iranian situation. Iran was declared a state sponsor of terrorism in 1984. No other country has done more to support Islamic fanatics. Hundreds of thousands of innocent people have been killed as a result of Iranian support. The world knows this to be true. The 15 members of the UN Security Council voted unanimously to sanction Iran because it has supported terror. When the US Senate voted to declare the Iranian Revolutionary Guard Corps and the QUDS Force sponsors of terror, Biden voted no. This vote occurred in October of 2007. Biden either voted no for political reasons, trying to win leftest democratic votes, or he simply does not understand how serious the terrorist threat is.

It took a number of years of heavy doses of financial backing for a rag tag group of Islamic fanatics to be able to pull off the 9-11 style bombings that occurred in scores of nations around the world. The US took action and has so far avoided further incidence. The action needed is not complete. The Iraqi minister of defense says that it will be 2018 before Iraq's Air Force is ready to defend the country. By 2020, Iraq will have 376 sophisticated aircraft and fully trained personnel. The US is not going to sell its most sophisticated equipment to an unstable government. It makes no sense for us to risk the gains made by pulling out now. In the negotiated deal, the US will pull troops out of major cities by next summer and combat troops out by 2011, provided progress continues. There will be additional negotiations after January to determine how many aircraft and support personnel will remain after 2011.


In the short run, the energy "crisis" in the USA is being solved largely by the discovery of natural gas. The US is currently drilling an average of about 2,700 natural gas wells per month. The price of natural gas has fallen to less than half the price per BTU of oil. Every company, utility and consumer that can is burning natural gas in lieu of oil. All the while, the powerful law of substitution is working its magic.

Today's substitution example is Carbon Fiber. Carbon fiber usage is growing in all kinds of situations but one of the fastest is in aircraft construction. Airplanes are 15% lighter as a result of aluminum being replaced with supper strong, super light weight, carbon fiber materials. Toyota and other car companies are cranking up to do the same thing. If a cars weight is reduced by 600 pounds, the total pound miles saved during the life of the car are huge. Three companies that are involved in the carbon fiber business are ZOLT, GTI and EMN.


A core holding in this environment should be the QQQQ. This is the way to own 100 solid NASDAQ growth companies.

Negative yield curves are putting great pressure on the cost of materials, at the same time the users of materials are finding ways to produce more goods with less materials. Intel is my favorite example of a company that keeps on making faster and smaller computers. The next version will be much faster than the current models and use much less electricity. Low power use is critical in mobile applications. It does not get much better than this. One can buy the premier computer chip maker at a low price even though its cost of materials are falling like stones and the demand for its products is ready to explode.

The cost of hand held computers are working their way down the acceleration curve. For example, it is absolutely amazing that Apple iPods can now be sold in India. The average citizen of India would have to give several months wages to own an iPod. As the price falls and as the average income rises for billions of consumers, the demand for hand held computers is going to soar. Baidu, Google, Amazon, Apple, Intel, Level III and satellite makers should all see huge increases in businesses over the next several years.