Wednesday, December 10, 2008


The greatest investors of all time have been optimistic people. This optimism has worked as an investment strategy because 90% of the time one should be optimistic about equity investments. Who is smart enough and lucky enough to be out of the market for only the "right 10% of the time"? No one! Many a great investor never "goes to cash".

While most professional investors do not try to time the market, the public continues to try. Right now, the public is so negative on the market and the safety of money in the bank that US Treasury Bills are paying ZERO INTEREST!

Last year, T Boone Pickens spent millions of dollars on advertising, trying to convince the congress to pass a big windmill subsidy bill. In the ads, T Boone repeated the democratic campaign mantra that the greatest transfer of wealth in history was taking place. He said that the US was sending 700 Billion Dollars to oil producing nations which do not even like us. I bought a couple of steaks at the local market the other day from a butcher that I do not even know. Did I transfer wealth to the supermarket? Maybe a few pennies worth.

The $700 Billion was not a transfer of wealth. We got billions of barrels of oil and the sellers got paper. Right now, a much more incredible "transfer is going on". The nations who sold us oil are loaning them to us at a ZERO percent interest rate! Before long, many of these dollars will be spent to buy goods and services from US companies. After all, if you can't earn interest on your savings, you might want to buy something.


US corporations face a marginal tax rate of 35%. There is junk in the tax code that allows some portion of earnings to escape the 35% rate. Still, the 35% rate is higher than the rates in almost every other country. Ten years ago, during "boom" years, US tax rates were lower than those in scores of countries. If we want to increase employment in America, we should lower the tax rates on corporations. The fact of the matter is that these higher taxes are largely passed on to workers and consumers. Every time you buy your groceries, in addition to the sales tax that you see added on, you also pay the hidden corporate tax. Every employee earns less than he should as a result of the taxes on his employer. Democrats disparage this fact as "trickle down economics". The idea is that if the truth hurts, make it the butt of a cruel joke (at best and a lie at worst).

Sanity is returning to the compensation paid to top officers in scores of companies. As a part of a new law to lower tax rates, we can expect to have new regulations to make excessive compensation non tax deductible. The key change needed is lower taxes but the inclusion of compensation regulations is not a terrible thing, given that the "boys club" has gone off the deep end. I want government to be as non intrusive as possible, but monster companies can compensate employees far beyond market rates without a significant impact on corporate earnings. Boards of Directors are clearly "part of the old boy network problem".


During the past six months, there has been a massive transfer of wealth. The public, which accumulated equity positions over the prior 7 years or more, sold out at low prices because the wheels seem to be coming off the wagon. Some 35% of Americans now believe their FDIC insured savings are not "safe". People are fearfully taking money out of insured deposits and buying government bills. These folk need to understand that if the banking system collapses (which it is no where near doing), government t-bills will not be worth anything either. Of course, the price of gold is high, even during a time of deflation, because of fear. Many coin dealers are sold out. Gold would appreciate in value if the financial system collapsed but, over time, gold is a good investment only about 50% of the time.

Equity in stocks or real estate is a good investment about 90% of the time, gold about 50% and T-Bills about 5% of the time. Right now the public is buying t-bills that pay ZERO INTEREST! Whenever the public runs hard one direction, it is time to run hard the other direction. The public is selling second homes, rent homes, stock mutual funds and stocks. It is time to be optimistic and to buy equity with a vengeance. The Dow Jones Industrial average is up 15% from the bottom. Those who are totally out of the market have already missed the first 15% of the rally. The total of this long rally will be several hundred percent but the powerful compounded first dollars are the big ones.

Yesterday, I wrote about how the powerful science of Eugenics is starting to change the world. I did not receive a single response on this controversial topic. Readers have other more pressing matters on their minds. Many readers are like the general public, almost numb from the 40% decline in the average stock. The science of Eugenics is nothing but the hard blowing Schumpter gales of creative destruction. As a result of Eugenics, great quantities of scarce resources will be conserved. The demand for almost everything, including health care services will be reduced as the practice of Eugenics becomes more common. At the same time, the invisible hand of Adam Smith is supplying consumers around the world with massive amounts of buying power. The 3.3 Trillion Dollar annual savings on oil is massive but only a tiny part of the total stimulus the world is receiving. Yes, I am pulling a T-Boone here. The 3.3 Trillion Dollars represents a reduction of income for the oil producers and is thus a negative stimulus for the oil producers but I suspect you are on the receiving end of this trade. Unless you own large quantities of oil company shares, you are enjoying the benefit of lower prices. More importantly perhaps is the fact that American businesses are enjoying dramatically lower input costs. Finished goods prices are generally going up relative to input costs. This will show up as significant growth in profits a year from now. It is time to be very optimistic.