Tuesday, August 12, 2008


UAL shares are up 10% today. The indication is that short sellers are caught in a squeeze. Those who think the fall in oil prices is temporary have bet big dollars that airlines are about to tumble. The higher the shares go the more the short sellers lose, without end.

Economic news is giving airlines other reasons to go up. Exports continue to boom. Exports were up 6.4 billion dollars while imports were up 4.0 billion dollars. Both increases are indications of growth, but the extra growth in exports implies strength in the US economy and in the US dollar.

Brian Wesbury estimates that, as a result of super strong export growth, up 21.1% in 12 months, second quarter GDP will be revised up from 1.9% growth to 3.0% growth. The next move for the FOMC is likely to be up.

The strength in the economy will allow the FOMC to focus on fighting inflation. Month after month, variable rate mortgages are rolling over at attractive rates. Once the FOMC returns to the fight against inflation, variable rate mortgages resets will be a higher but the irony is that 30 year fixed rates will trend down. In other words the yield curve will flatten. Productivity and lower commodity prices will combine to bring inflation rates down.

Productivity improvements are often so tiny that we hardly notice big shifts. For example, checkout lines at stores across the country have been speeding up as a result of significant growth in debit card use. Pin numbers are being punched in to terminals while the cashier is still ringing up the items. Instead of waiting for a check to be written or for cash and change to be counted, many a customer looks at the total and hits the yes button. Debit cards are quicker than credit cards where a receipt must be printed before it can be signed. The sum total of a second or two saved on trillions of transaction becomes a significant increase in productivity.

Sometimes, the productivity increases comes in big chunks. For example, the Walgreen's health care clinics are now offering sports exams for $25. This price is available because it is more cost efficient to run a team through the process at a Walgreen's health clinic than through a doctors office. Extended hours add to the convenience of the process.

Short sellers are being squeezed. Many of these players trade on momentum. Once they realize the turn has been made, many will cover their short positions and buy on the long side. Look for high flying stocks ahead!