Wednesday, November 05, 2008


There was much great news posted today. Investors should be prepared for the arrival of good times.

1) For the 17th day in a row, credit market spreads improved. A huge stream of new money is making a difference and it ain't over yet. Central bankers in the EU will meet Thursday. It is anticipated that the UK and the EU will cut short interest rates by 100 basis points! Yield curve spreads have recently moved up as rapidly as they did in the fall of 2002, just before the consumer stock liftoff. The yield curve is prepared to push major economies toward 3 or even 4% real growth. There are growing indications that the China economy is in free fall from last years growth rate of 11%. Some say China will see flat growth in 2009, indicating that the developed world will need to be then engine to pull the worlds economic train in the months ahead. If Europe is going to help pull this train, it will have to cut short rates more than once.

2) The FCC has granted the Google, Microsoft, Yahoo, etc. request to free up the white space between TV channels for WiFi use. This is a major win for consumers. We can expect low cost mobile Internet access to be common in the months ahead. Now that out of print books can be offered for digital downloads, the pocket computer is going to quickly become common place. Who will pay road runner $45 per month for land line Internet when mobile Internet service will prove to be far more useful. The evolution will be similar to the way that more and more families do not bother to own a land line telephone. The combination of cell phone and WiFi modes will allow the per minute cost to fall. Cell carriers win when $30 per month customers are successful in reducing their cell minutes by using WiFi as much as possible. The efficient use of long distance bandwidth will save consumers and cell phone service provider trillions.

3) Scientist are finally starting to acknowledge that energy resources are endless. In the past, environmental extremist insisted on the old heat and pressure theory that oil was made hundreds of millions of years ago out of plant and dinosaur matter. To support funding for ethanol and wind mills they needed to believe that supplies of oil are running low. For 50 years or more, reputable scientist, including many Russian scientist, have believed that oil is constantly being "manufactured". The recent discovery that more than one jungle fungus (World War II veterans are very familiar with jungle rot fungus) efficiently converts dead plants into hydrocarbons, gives new life to the fact that oil is constantly being produced. Conservationist believe that abundant resources are not to be wasted. Never the less, abundant resources suggest that taxing one industry to pay subsidies to others is counter productive. We will all be better off if we allow the most efficient sources of clean energy to win in the market place. The acceptance that oil is constantly being produced will reduce some of the phony hype in regard to peak oil and global warming. As we all learned in 5th grade science, one should correctly define the problem so that we do not waste our time solving that which does not need to be solved. If we use our resources efficiently, we will automatically cut down on CO2 exhaust. The pending dramatic reduction printed books, magazines and newspapers is just one example of how we can dramatically reduce the use of trees for paper and increase their use for carbon sequestration.

4) Annualized rates of change for short and long interest rates, industrial metals, food, oil and capital goods type stocks strongly suggest that real estate and expansion phase stocks are ready for another turn at leadership. Great real estate deals are being made daily. A beach condo that I would very much like to own has fallen from $2.6 million dollars in 2005 to a list price of $685,000 last week.

The fly in the ointment is the persistent strength in the price of precious metals. Gold bugs have been spooked by geo-political risks highlighted by the invasion of Georgia by Russia and the unrelenting efforts of Iran to acquire nuclear weapons. Gold bugs also jumped back into gold when economic collapse seemed likely. These concerns will fade. Another more real concern has been the decline of short rates to below the inflation rate. Gold, a store the store of value, maintains its relationship to real dollars. Extra low interest rates have been partly the function of the massive pumping-in of reserves by the FOMC even though many of these reserves have not moved out of bank vaults. More importantly, real interest rates will rise as a result of falling inflation rates. The prices of bulk goods, such as coal, iron scrap, fertilizer and copper have fallen 60% or more in recent weeks. At the same time, unemployment has risen, capacity utilization has fallen and there is plenty of slack in our markets. Inflation expectations have fallen to below 1%. The bottom in US short rates was in March. The protracted period of low rates is doing its job. The Michigan Consumer Purchase Expectations Survey shows dramatically rising spending plans. Retailers will have a surprisingly good Thanksgiving, Christmas and New Years season. US short rates are ready to recover just when UK, EU, AU, Chinese and Indian rates are being cut.

Rising US rates relative to falling EU and other rates will continue to push the US dollar higher. Investors should continue to avoid international stocks with the exception of Japanese stocks. The Japanese will benefit greatly from lower commodity costs. The Yen has been volatile but the trend is up.

Buy your shares through discount brokers to dramatically cut your transaction costs and prepare for big gains. The attitude of the people of the world will be one of temporary euphoria between now and the inauguration. McCain just gave a most gracious concession speech. He has asked all Americans to rally round our president. I was glad that he mentioned the controversy created when his hero, Teddy Roosevelt, invited Booker T. Washington to dine at the White House. Americans often forget how republicans have been at the forefront of progress for blacks. It is commonly known that Abraham Lincoln was a republican but the actions of Teddy and many other republican leaders are frequently purposely overlooked or forgotten. Few recall that it was Dwight Eisenhower who integrated our military and ended separate but equal policies. It is often forgotten that republicans were the strong supporters of the Civil Rights Act. Even when the democrat Kennedy opened college doors it was a southern democrat governor who had been blocking the door. Republicans support freedom and individual responsibility. We are not in favor of discrimination. We favor respect, independence and character. We understand that government handouts are demeaning and counter productive. We understand that the poor are hurt by anti-market regulations against free trade and minimum wages. There has been an important break through in recent years, highly educated black women now earn more than other equally educated people. Many of these highly successful people will see the wisdom of republican philosophy when their wages are confiscated to be used for non productive political payoff schemes.

It is good to have a black President elect. The world now has another example of the strength of the USA. Obama just gave McCain great praise for his great service to his country. Tonight is a good night for America. The news media can finally let up on Bush bashing. The honeymoon for Obama will make for a few months of pleasant stories. Chances are that the most leftist of media will be the first to start bashing Obama. It all depends on how much he will practice what he preached in regard to reaching across the isle.

We must assume that centrist policies will percolate to the top while keeping ourselves prepared to fight radical proposals. With the decline in real estate values pretty much over, there are great opportunities to pass a few bills and take credit for the economic upturn. Good times await.

Chances are good that it will be democrats who are most disappointed by the Obama presidency. I will never forget giving support to the local conservative candidate only to see him slash support for local highways just after the election. When confronted on the question, he reminded his supporters that he had run on a platform to cut taxes. He cut taxe receipts that were supposed to flow to our community to build roads but he failed to cut tax rates paid on gasoline. Good republicans are not against all taxes. We support taxes when they are used for productive purposes such as the building of roads and supplying clean water.

The pending deal with Iraq will call for US support in Iraq for three more years. The bail out policies being put in place by Hank Paulson will be pretty much set before Obama is sworn-in. The Bush tax cuts will not expire for two more years and there is little support to raise taxes during the recession. There is little money available to support big spending plans. There will be a lot of economic healing before and soon after the inauguration, but big policy moves will require compromise with senate republicans. Prepare and position your portfolios for the big investment gains that await when the market place realizes that not a lot of change is pending. The "inflation tax rebates" over the next several years will be many times the tax rebates that will be doled out by the government.