Tuesday, August 12, 2008


The market has not had the traditional final slam, accompanied with a strong bond market rally, that is customary during a recession, but the US seems to have escaped without having an official recession. Productivity has already bounced; US wealth grew at the rate of 2.2% last quarter. Non durable goods new orders skyrocketed 32% in June. Job losses have occurred 7 months in a row but not large numbers. GDP continues to grow.

The expected rollover in commodity prices has hit with force. But, 10-year treasury rates have been relatively stable around 4%.

In the past month, the best leading indicator of the economy, the stock market, turned up. The S&P 500 is up 5.3% but this is with a drop in the second largest sector, Energy, of down 12.7%. The largest sector, financial stocks are up 8.3% in a month. Consumer cyclical stocks are flat for the month but up better than 9% during the past 5 days. The big turn is in small caps. The IWM was up 11.5% during the past month. 401-K investments should be in the Russel 2000 during the next year or two. US high beta stocks should do especially well during the early stage of economic expansion. INTC has taken off and it could provide leadership for months to come.

INTC is up 18% in a month. I don't know what chip is in the Kindle but sales are projected to climb. When an analyst upgraded AMZN the stock jumped about 10%. AMZN is expected to sell twice the number of Kindles this year as was previously thought. The implication is that computer chips will be in high demand. Kindle sales are being compared to the first year of the iPod. Years ago (1964), a young auto marketing manager was given the opportunity to promote the new Ford Mustang. He later wrote a book about how a businessman needs to recognize a winner and then run with it. The young man was Lee Iaccoca.

I am holding off on my purchase of a Kindle. It is usually wise to wait for the price of "new toys" to fall before jumping-in. AMZN has given no indication when a color version will be offered or if an upgraded model is on the way. Last fall, AMZN sold out at $399 each. In April, the unit came available at $349. Today, I drove to Barnes and Noble and paid $19.95 for a book could have been delivered in seconds for only $9.95. The reality is that those who buy a few books each year should consider a Kindle because is many times more efficient than are hard covered, physically delivered books.

Another reason to hold off on the purchase is that if I had the money to spend, I would buy shares in INTC or AMZN.

A stock in a totally different category that should be bought is GM. GM has fallen from $93.625 in 2000 to $10.76 today. A few weeks ago, the company was getting slammed by high gasoline prices. Acres of trucks are worth more this month than last. Further declines in fuel cost will help the stock. In the meantime, GM is looking under every stone to reduce costs and to increase the fuel economy of its fleet. I don't know the break even sales number for GM but I assure you it has declined dramatically.

Ford and GM are looking into the joint development of engines and power trains. Yes, these competitors are serious about lowering costs. GM just added a new option to its truck lines which is basically the substitution of aluminum for steel wherever possible, including the engine block. These trucks cost more but the public will pay more for the higher fuel efficiency. A 10% increase in fuel efficiency on American cars will save over 100 million gallons of fuel per year.


I can't find a US media source that has even hinted that the invasion of Georgia and the US, French, UK, and Canadian Armada underway to Iran are related. Of course, it would be impossible to prove that a US-Russian deal was made. In any event, it looks pretty obvious that one has. Russia wants the pipelines coming out of the oil rich Caspian Sea to connect up with Russian Pipelines that flow into Europe. The US and Europe wanted the pipeline to connect to pipelines from the Middle East that flow through Turkey. I believe the US agreed to only make mild protest against Russia's takeover of Georgia, in exchange for help with Iran. Europe is all for getting access to Middle Eastern Gas. The new pipelines from Algiers to Egypt and from Egypt to Turkey combined with the flow from Iraq will give Europe a second source of gas. Another pipeline is to be built to take gas from the Caspian Sea, through Kazakhstan, to China. Russia and China will not participate in the naval blockade of Iran but they will not strongly object either.

Back in early May, when Russia and the US signed a major 123 Agreement, the "fix was in". That was when Russia agreed to go along with sanctions on Iran. That was when I believe a deal was made in regard to Georgia.

The Armada is coming from all directions. The longest distance is from Norfolk, Virgina. The list of ships and the weapons involved is impressive. This will be the first instance of French Fighters going to action from a US carrier. Even a French nuclear submarine is involved. Iran once assumed that Russia would support it against any "act of war" by the USA. Should the blockade actually happen, a naval blockade is considered an "act of war" but the vote of the UN security council trumps international law. Obama sounds silly when he talks around calling Russia the invader but then suggests submitting the conflict in Georgia to the UN Security Council for resolution. Russia holds a veto over the council.

A few months ago, there was little hope of great progress on the war on terror anytime soon. From China to Sudan, there are still many terrorist cells. The richest supporter of terror is about to agree to terms or to see a change in leadership. All across Iran there are strikes and protest over living conditions. A naval blockade and the resulting absence of fuel and other needs will cause a rising up against the foolish policies of the current leadership. On the other hand, an agreement would mean a quick expansion of the oil and gas available to the world. Iran will sell trillions of dollars worth of fuel and road side bomb production will be dramatically reduced. Markets will do extremely well once face to face negotiations start. The Armada will be assembled by next week.


It is well known that hostilities in Iraq have greatly diminished. The attitude of many Americans is "the war is over, bring the troops home". The war is over because there are still US troops in country. There is still a political war being fought.

Basra has gotten tired of waiting for providential elections. Basra would like to become "a special administrative unit" like Kurdistan. At the same time, many incumbents keep putting off elections because they know they will not be re-elected. The constitution calls for elections in 2009. The US needs to remain in country until well after the elections are held. US troops are being reduced in the most stable parts of the country. In some provinces, four out of five troops are being withdrawn.

Most Americans see little reason for optimism right now. There is fear that Georgia will be the first of many nations to come under the iron thumb of Russia. Americans fear an energy shortage, a broken system of government, looming tax increases and a long list of other problems. A successful conclusion to the sanctions in Iran and a vote to allow drilling will be all that is needed to turn sentiment. The biggest factor in the price of stocks is the emotional attitude of investors. Stocks are priced low because investors are unhappy. The higher stocks rise the happier people will be. Investors only need to worry when every one is buying.

Markets have turned up, INTC has turned up and AMZN is leading the way!