Tuesday, September 16, 2008

Even Bankruptcy Not As Big as Oil

Even though Lehman stumbled into bankruptcy and even though AIG was chopped in half, the financial index did better than the energy index, by a small margin. The relative gain by financial stocks over the past couple of months is an important point for investors to note. One should buy relative strength and sell relative weakness, especially at major turns. Consumer cyclical stocks fell much less than and the transportation index was down less than half the energy decline. The tricky thing is that there was a flight to the safety of health care and consumer staples, but this will prove to be a short term event.

I cheated a little. Since BAC agreed to a 70% premium for Merrill, the financial index held up a little by the potential for takeovers and by short covering. BAC clearly got the nod from the FED before taking on another trillion dollars worth of mortgage backed paper (two trillion worth once the crisis is over). BAC will make a trillion off the deal, but, without the support of the FED, the bank would be making a 50-50 death wish bet. It is true that BAC has successfully raised new capital to cover its losses dollar for dollar but it used a chunk of that capital to buy Country Wide.


Computers are one of the things that provide direct links from financial stocks to oil stocks. An amazing statistic is that Google now uses more than 1% of the electricity produced in a number of countries!

Google has applied for patents on floating data ships. These barges would be located 3 to 10 miles off the coast, they would generate electricity from wave action and they would save billions of dollars in cooling cost and in property taxes.

Microsoft is studying the idea of placing data centers in Siberia. Japan is considering building a data center deep in an old coal mine. In 20 years, Google is likely to be using 10% of all electricity while the amount of energy used in transportation will have fallen.


Nancy Pelosi and company are running scared. Pelosi has gone from saying "there will never be a vote on drilling" to seeking a compromise. Even so, she is trying to pull off a slick trick. She now supports drilling provided that all the lease and royalty payments go toward alternative energy subsidies. This idea initially sounds good to a lot of people.

The problem is that it would take away the incentives and kill the drilling. No state would allow drilling, unless the state were to share in the revenues. Subsidies are a bad idea in and of themselves, but taking revenues from the states is nothing but an attempt to pass a drilling law without allowing for drilling. Unfortunately, long ago, the congress of the USA started ignoring the "necessary and proper rule". It is my hope that no compromise is reached as it is not "necessary or proper" for the federal government to pick winners and losers in the energy business.


Did I mention that nuclear power has caught a growth surge? Brazil now has plans to build one new nuclear power plant each year for the next 50 years! An existing plant in America just announced that it will seek the authority to expand its capacity.

Did I mention that plans are being made to produce 4,000 small nuclear plants on an assembly line? The best description for these plants is "nuclear batteries". Together, they will produce about as much energy as is currently produced by the 104 regular plants operating in America.


Joe Bidden earned an average of $245,000 per year for the past 5 years while he contributed an average of $370 per year to church and charity. On average, people, who earn from $100,000 to $200,000, give about $4,500 per year to church and charity (from Carpe Diem web). The attacks on Sarah Palin have slowed. The more we know, the better she looks relative to Bidden and Obama. It is starting to look like Pennsylvania will vote republican for the first time in 20 years. Palin and citizens of small towns all across Pennsylvania are clinging tightly to their guns and their religion.


The US has agreed to sell 1,000 smart bombs (the bunker buster variety) to Israel. The congress has 30 days to nix the deal, but, in the absence of a 50% negative vote, the deal is done. In the meantime, Henry Kissinger and other former heads of state have said that it is time to negotiate with Iran without any pre-conditions.

The 2 + 2 = 4 on this is that Iran is to be given a final chance to come to terms before Israel is turned loose. Again, I do not believe an attack will be necessary, but the odds have never been higher.

Iran had hoped for a clean bill of "nuclear health" by the IAEA. However, the report is that Iran has continued to prohibit the investigation of its nuclear bomb program. Bush, Obama and McCain are all committed to preventing Iran from acquiring nuclear bombs. Of course, if Bush does negotiate directly, Obama will take credit for positive results. Hopefully, the threat of the bunker busters is credible. Iran does not want to lose its nuclear refining capacity and live for another 30 years under sanctions. The final deal has been all but done for a long time. Hopefully the realistic threat of Israel in control of smart bombs will be enough to move the deal forward.

The congress has 14 days to pass a CR. The financial crisis and the Iranian crisis will probably be "solved" about the same time as the drilling problem is solved, shortly before the November elections.

I'll be out of the office all day. I'll check the market during the day and email late tomorrow night. You are facing a wonderful buying opportunity!