CHICKEN LITTLE SAYS, "THE DOLLAR IS FALLING, THE DOLLAR IS FALLING, THE DOLLAR IS FALLING"

While Chicken Little is crying about the falling dollar, the news media is playing the part of the Little Boy Who Cried Wolf. While the Chicken is squawking and the media is crying, the real Big Bad Wolf is about to eat Little Red Riding Hood. What is moving this market? Fear is the answer. Fear of a confrontation with Iran -- Fear of a democratically controlled House, Senate and Executive Branch.

One of the false beliefs held by many is that the falling dollar is making the price of oil go up. The price of oil is going up because the demand for oil is strong. It has nothing to do with the price of the dollar. The price of oil has gone up in every country. A major factor in the demand for oil is geopolitical risk. The "Iran situation" is coming to a head. Bush is determined to "solve" the Iranian problem during his term of office. Bush is threatening to put the "big squeeze" on the Iranian economy. If he successfully cuts off the Iranian central bank from the rest of the world, the pressure for a response from Iran will be great. The leaders will be forced to meet at the negotiating table, suffer a serious economic depression or strike back with "whatever". The option of cutting off oil is not a good option for Iran but I do not believe Iran should count on Russian or China or any other nation to force the USA to back off.

Another false belief is that the falling dollar is making the price of stocks fall. The truth is that there is no strong correlation between stock prices and the price of the dollar. To the extent that there is a connection, the fact that the dollar is below the bottom made during the mid 90's mid cycle correction means that the low dollar supports higher future prices as it did in that cycle. The factual relevant correlation is that the weak dollar has made US goods and services very attractively priced to the countries that have strong currencies. US exports are growing by leaps and bounds and foreign buyers are coming to America. While Chicken Little squawks, there is world wide economic strength mixed in with the weakness in the US housing market. Here again, the housing market gets a lot of exaggerated news coverage while the pending confrontation in Iran gets little notice. There is the potential for a lot of trouble ahead but the falling dollar is a symptom of the problem not the cause.

WHY HAVE STOCKS FALLEN?

Since the price stocks is nothing but the discounted future value, what has happened that makes the future less bright? The democratic enthusiasm for the most liberal of candidates and the bill passed by the democratic congress yesterday tells much of the the story. The congress passed a bill that would increase the taxes paid by the oil companies by 18 Billion Dollars. This industry paid 27.5 Billion in taxes last year but tax collectors always want more, more, more. The congress knows that more than half the American people will fall for the ruse that these taxes would be paid by the oil companies. You and I know that these taxes would, in the long run, be paid by consumers, and in the short run by the share holders, but we are in the minority.

If we were only talking about oil, the problem would not be big, however, the democrats (presidential nominees and current congress) propose tax increases and hidden tax increases on the great majority of the productive assets of the USA. It is a fundamental law of economics that the more you tax something the less of you have. The increases in taxes on production and profits will mean there will be less production and less profits. The current value of assets must fall if the net profit is to be reduced by higher taxes. Finally, if there is less production, you get back into another classic fundamental economic problem which is too much money chasing fewer goods; inflation. I said in the short run, the taxes would be paid by the shareholders. In the longer term, the companies would cut back on production just enough to raise prices just enough to get the companies back to a fair rate of return. Again, the consumer would ultimately pay the higher taxes.

HAS THE ELECTORATE REALLY MOVED THREE STEPS TO THE LEFT? FOR A LONG TIME LIBERALS HAVE FAILED TO TAKE THE WHITE HOUSE!

The partial record of liberals running for President follows:

1952 Adlai Stevenson
1956 Adlai Stevenson
1968 Hubert Humphrey
1972 George McGovern
1980 Ted Kennedy
1984 George McGovern
1988 Michael Dukakis
2000 Al Gore
2004 John Kerry

The democrats who won:

1960 John Kennedy
1964 Lyndon Johnson
1976 Jimmy Carter
1992 Bill Clinton
1996 Bill Clinton

The brief Kennedy-Johnson story is that unlike today's democrats Kennedy was a strong defense, low tax democrat who had the support of southern segregationist. Johnson was one of the most liberal senders of all time but he was elected only after serving the remainder of the Kennedy term. The point of this story is that the only democrats to have won the presidency in more than 30 years have been or have run as "southern centrist". Gore, a southern centrist who was gradually pulled over to the liberal side, won elections to the Senate and to the Vice-Presidency but lost when he ran for president as a liberal.

On the republican side, the winners were:

1952 Dwight Eisenhower
1956 Dwight Eisenhower
1968 Richard Nixon
1972 Richard Nixon
1980 Ronald Reagan
1984 Ronald Reagan
1988 George Bush
2000 George Bush 43
2004 George Bush 43

While the only democrat to win two terms was Bill Clinton, who ran to the right of Bob Dole in 1996, republicans had 4 presidents to serve two terms. Reagan was the only one to run and govern as a true conservative.

WHERE IS THE CENTER OF THE BELL CURVE OF THE ELECTORATE?

The center of the curve has moved one step to the left. George Bush barely won his campaign as a compassionate conservative against Gore, the southern centrist who had moved to the left. George Bush governed like a left wing democrat by passing big spending bills for education and prescription drugs, by offering a middle of the road proposal in regard to immigration, while still protecting his "rich" friends on Wall Street. Still, he only narrowly beat John Kerry who ran about half way between where Obama is and the center. The closeness of the last several elections shows that the parties have been putting up candidates that attract "middle voters". Again, this indicates that the middle has shifted to the left as we all know that candidates Gore and Kerry were lefties who came close against a right hander who swerved left.

Since Obama is far to the left, the question, will Obama win?, is a question of just how skewed the bell curve is. We know that McCain is to the left of all the other republican candidates and we know that Obama has the most liberal voting record in the Senate, so, it would seem that McCain will win the greater share of the "middle" voters. The problem for McCain is that there is not much middle left. There are always a certain percentage of voters who will vote democratic no matter and another percentage that will always vote republican.

The Iraq war and the big mistake of republicans in regard to immigration has energized the left to the point that there is not a lot of "middle" to fight over. George Bush won 40% of Hispanic voters when he ran for governor of Texas and his percentage went up in each succeeding election, but in 2006, Republicans were soundly defeated after cutting off "one arm of the body of the republican party". Yes, both the republican and democratic parties look like ugly reincarnations of Frankenstein. The democrats have a union arm, a trial lawyer arm, an atheist leg, a black leg, etc. Neither democrats or republicans can win as "purest". To quote William F. Buckley Jr., "I believe that compromise is genuinely necessary to sustain social relationships..."

McCAIN WALKED INTO THE ELEVATOR AND TURNED AROUND!

A few post ago, I wrote about "crowd psychology". We have all seen the western movie lynch mob. Good people often get caught living their lives based on "group dynamics". We know that the psychology of the crowd pushes stocks too low and too high. The psychology of crowds is a huge factor in politics, people desperately want to be among the "in-crowd".

If you remember the old elevator gage on Candid Camera, you know a lot about "group dynamics". Put a bunch of people on an elevator and have them all face the back, the elevator stops at the next floor and no one gets off but a new person steps on. The new person almost always can not stand to be the lone guy facing the "wrong" direction. If he starts out facing the front and if at the next stop the next person also faces the back, the odd man is psychologically compelled to turn around. It is very difficult to go against the crowd.

On both sides of the political isle each candidate is pushed very hard to say, "me too". During this campaign, all the democrats faced the back of the liberal elevator and all the republicans faced the back of the conservative elevator, with the one exception of McCain. Obama, for example, has frustrated the heck out of Hillary by being quick to say "me too". Obama and Hillary are for and against all the same stuff. The democratic race came down to a personality contest because the differences on policies were sliced very thin.

After McCain was shot down over Vietnam, he survived 5 years of Hell. It does not matter if Vietnam was the right war or the wrong war, McCain is owed a debt of gratitude by all Americans. While his service is to be honored, it is not a ticket to the Presidency even though it does show his resolve to do what is right.

The amazing thing that happened recently is that McCain survived the republican nomination process. A lot of things had to fall into place and he had to be lucky but he survived, despite the fact that in a number of incidences he refused to face the back of the elevator. McCain has gone against the crowd time and time again. He was a member of the gang of 14 who forced the vote on supreme court justices, he was a partner with Ted Kennedy on education and immigration reforms, he fought and voted against the "Bush Tax Cuts", he joined with Lieberman to propose a cap and trade environmental law, and, he joined with Senator Fiengold to pass campaign finance restrictions. While I generally disagree with him on the bulk of these matters, I respect his willingness to turn around to face the front, to do what he thinks is right no matter what the crowd thinks. Regardless of McCain's position on the issues mentioned, he is far, far to the right of Obama.

The key point is that "pure" liberals will vote for Obama and "pure" conservatives for McCain with the fight being for those in the ambivalent middle. The middle includes animals of all stripes, including economic conservatives who are very concerned about the war and Hispanic economic conservatives who feel betrayed by republicans. In McCain, republicans will nominate the candidate that has the best chance of winning the "terror-war" debate and he will regain some of the Hispanic support lost in 2006.

I have to run. But the market wants an answer to the Iranian question and to the political question. I believe the odds of a win by McCain are better than 55%. I am in the great minority on that belief. The success or failure in Iran and Iraq will influence the success or failure of McCain. The push of the FOMC to lower short rates at least one more time will also benefit McCain. A strong economy and foreign policy success will lead to a solution to the markets concern about "tax and spend, tax and spend.

The time to add money to stock accounts is when prices are low. Now is the time to dig deep!

IT AIN'T OVER UNTIL THE FAT LADY SINGS!

They say the opera ain't over until the fat lady sings but Hillary does not need to stick around to hear the last song. To win the nomination, Hillary needed big wins in the big delegate states of Ohio, Texas and Pennsylvania and that was before the super delegates started swinging over to Obama. The race in Ohio is tightening and her lead in Texas is gone! Miracles do happen but Hillary is going to need divine intervention to pull out a win.

A FUNNY THING HAPPENED ON THE WAY TO THE FORUM

Obama is the very good politician who, ironically, mastered the Bill Clinton play book. Obama has promised to spend massive amounts of money on all sorts of government programs. As a big city democrat it should be no surprise that in his eyes it should be the federal government building and supporting local trains, buses, subways and L ways. His biggest source of funding? Like Bill Clinton's, "the peace dividend". In Bill's case, the failure of Hillary's massive health care program and his reduction of military spending, allowed him to spend a lot of government money on a lot of domestic programs while making a lot of "friends". Bill was certainly not the first politician to "pay off" the people who voted him into office but he was certainly one of the most prolific. Hillary has been reluctant to show her tax returns because she would have to show how much money Bill has collected from "friends". It is sad to know that CEO's of corporations and successful politicians do not need to worry about what their tax bracket is, provided they continue to have close "friends" in high places.

One of the many ironies of Bills term in office is the fact that it was the enormous size of Hillary's health care plan that scared the congress over to republican control for the first time in 40 years and it was this switch that enabled Bill to become a President of great accomplishment. The republican congress and Bill lowered the capital gains tax, passed several major free trade reforms and passed welfare reform. Hillary ran into the tricky problem of trying to take credit for the economically successful Clinton years while having to run against most of his "republican" policies. It is easier for Obama to attack NAFTA and in his next breath express his support for free trade than it is for Hillary to do the same when she is on record for trying to take credit for this great accomplishment of her husband.

The impossible task for Obama is to spend "the peace dividend" several times over when there is no peace. Withdrawing from Iraq is not the route to peace but only the route to bigger war. The situation is similar to the days when Hitler "annexed" Austria with the tacit "permission" of Roosevelt. It is better to confront early and often rather than to wait for the war to become a World War.

THE NOOSE AROUND HIS NECK

The USA has plans to tighten the noose around Ahmadinejad's neck. The UN security council continues to drag its feet, giving Ahmadinejad every chance to "make a deal", even so the vote will likely take place next week and even Russia is ready to vote yes. Once these latest sanctions are imposed, the US is prepared to tighten the noose again by adding the Iranian central bank to the list of sanctioned banks. This will make international commerce for Iran very difficult and thus put severe pressure on the country leadership to "make a deal". The citizens are already unhappy with a weak economy, rationing of goods and high unemployment. If the second richest oil country is in bad economic shape during a time of $100 oil, the sanctions must be working.

NINE HUNDRED FORTY DOLLAR GOLD AND $100 OIL

Financial market observers continue to be totally confused by the contrast of the slowing world economy and booming commodity markets. Many observers are using the word stagflation to describe the current situation. They believe the economy is dying a slow death while inflation is out of hand, as is evidenced by the housing slump in the USA and the price of gold and oil. Part of what they miss is that inflation is a very late indicator which means that by the time inflation shows up, the economic slow down is over.

One of the commodities "trades being put on" is the stagflation trade which is to buy gold and to sell oil short. The idea being that inflation continues unabated, the price of gold will rise and if the economy slows the price of oil will drop. The opposite commodities trade is the "peace dividend trade" in which gold is sold short and oil is bought long. The idea here is that if a deal is made with Iran, the price of gold will fall like a stone while the world wide economy and the price of oil will strengthen.

The average fellow is not long one and short the other. The average fellow is afraid that the tightening of the noose on Ahmadinejad will cause a provocative response. If there is going to be an oil embargo or a war with Iran, it makes sense for gold and oil to be very high and for the dollar to be very low. There is no conundrum here! Here again, the extra cheap dollar is giving a strong boost to the US economy. Isn't the invisible hand of Adam Smith wonderful? How about the law of unintended consequences? We have the fear of war pushing the dollar down which is increasing US exports and boosting profits while causing others to fear an economic collapse because they see the dollar going down!

The timing is about right in terms of the business cycle. The Chinese Yuan hit a low in early 1995 about the same time as the dollar hit its low (the Chinese attempt to peg the Yuan to the dollar). By late in the year 2000, the Yuan had rallied from 75 to 110. It bottomed at 90 in 2005 and is now back to 103 and probably headed to 130 by the peak of the coming boom. Today, it took $1.50 to buy one Euro and at one point you could buy one for 78 cents! While the dollar has bounced along the bottom about a year, the Yuan has been rising, however, the dollar will catch up in a hurry and then some when a couple of things occur: when "a deal is made" with Iran or when US rates get so low that the US economy begins to soar.

BUY, BUY, BUY THE RUSSEL SMALL CAP VALUE INDEX!

The previous big declines in US short rates have given small banks the license to print money. After suffering for 19 months of yield curve inversion, small banks are about to enjoy an economic "sweet spot". They will enjoy steady loan demand from small businesses while enjoying low cost deposits. The Russel Small Cap Value Index is heavily loaded with small bank stocks and it is an option in most 401-K plans. The index has underperformed the market for a couple of years. I would be aggressive and move the bulk, if not all of my 401-K money to the index.

HEADS I WIN, TAILS NOBODY KNOWS

The Bush administration has no good reason to discuss how close we are to a deal with Iran. By keeping the negotiations on the "QT", if there is a deal, the Bush team wins but if not nobody knows the difference. With or without a deal, the demand for oil is about to "go elastic" as "stuff" starts to fall into place.

The "stuff" includes every thing from electric cars, hybrid electric cars, and "share cars" to extra oil from here there and everywhere. Big and steady improvements are being made in battery technology at the same time that large numbers of new power plants are being built. The beauty of a battery powered car is that it can give up electricity during peak load times and accept electricity during off peak times. While environmentalist do not like coal fired power plants, one plant is far more environmentally friendly than the 1000s of internal combustion cars it can replace. In the mean time, car companies are moving up the hybrid learning curve and down the cost curve very quickly. In 2004 there were 10,000 hybrids on the road in America and in 2008 there are over 80,000. Better batteries means more units will plug in to the grid and that engines will be smaller. With more than half of the worlds population now living in big cities, the electric models make sense for a lot of people. The "share a car" systems are growing quickly. The average city dweller who sells his car and joins a "share a car" program, reduces his annual auto mileage from over 5,000 to less than 400. City people can take the bus or subway to work but they need a car for the occasional evening outing.

Honda is the first to have started limited commercial production of a hydrogen powered fuel cell car. The most interesting part of their system is the "home hydrogen appliance". These appliances are hooked to the electrical grid and to a natural gas line. They use electricity during off peak time to convert natural gas into clean burning hydrogen. The hydrogen is used as the fuel for home and cars.

DOZENS OF NEW REFINERIES

Dozens of existing refineries are being built and dozens of older refineries are being expanded. It took a few years to get new oil fields developed but now that several are coming on line, the new refineries are being built to accommodate the extra crude.

THE BIG CRASH

At the turn of the mid cycle turn of the 1980's, oil did not decline in price, it crashed. I see a similar event on the horizon. A deal with Iran would certainly surprise the great majority. Just remember, the opera ain't over until the fat lady sings and the noose is around the skinny chickens neck!

ANOTHER 911?

During the upcoming general election campaign the question that will be repeatedly asked: "Are we safer today than before 911?" Asked in another way: "Is al-Qaeda capable of pulling off another major attack.

Obama talks about withdrawing from Iraq while putting more effort into Afghanistan. The problem with this strategy is that the battle being fought in Afghanistan is with the Taliban not al-Qaeda. The Taliban allowed al-Qaeda to operate training camps in Afghanistan before 911 but those training camps were put out of business when the first US bombs fell. Chasing akl-Qaeda out of Afghanistan was easy enough but eliminating the Taliban would require a large military action for a small benefit.

Go back in time about 19 years and we discover that with the Taliban was able to defeat Russia. Sure, the US helped by supplying arms (see Charlie Wilson's War), but it was the tenacity of a tribal people living in remote, mountainous terrain that won the war. Taliban tribesmen on horseback were able to prevail against Russian tanks and Heine Helicopters. US and NATO forces support the Afghanistan government forces but these forces at current levels have very little chance and, are not even making a sincere effort, to win control of the Afghanistan mountains.

Even if the US-Allied forces were to win control of the mountains of Afghanistan, al-Qaeda has crossed over the border into the mountains of Pakistan. Obama's emphasis on Afghanistan goes nowhere, unless he is prepared to send US troops into the mountains of Pakistan.

There is evidence that al-Qaeda forces have reorganized within the border of Pakistan. Part of the reason they have reformed in Pakistan is because they have been beaten back from Afghanistan and Iraq. Their military losses have been heavy and, most importantly, they have lost and continue to lose their top leaders. There is little evidence that this group has the ability to launch a 911 style attack. Were it not for the support of "national sponsors" this group would be of little concern to the rest of the world. Do we really believe that Obama is ready to invade an allied country? It makes good rhetoric to say that George Bush is fighting the wrong war but it is foolish to suggest that wiping out the tribes who live in these mountains is the top strategic US objective.

Iraq is strategically located between Iran and Syria and these three nations were, for a number of years, among the nations that openly backed terrorism. The most powerful country in the region, Iran, is a sponsor of terrorism and it is developing nuclear technology. It would be morally wrong to ignore this country's willingness to supply suicide-homicide bombs for the purpose of killing innocent men, women and children.

It is sad to say but, in order to make the people of the world, Americans included, willing to stand up to the terrorist, the "Weapons of Mass Destruction" part of the story must be emphasized. It is true that the prior government of Iraq used chemical weapons to kill thousands of people, it is true that Iran has pledged to wipe Israel off the map, and it is true that Iran has worked on nuclear weapons, but even if this were not true, the encouragement of those willing to blow up innocent people is the reason to confront these governments. In the case of Pakistan, the government is on the side of defeating terrorist. If the government of Pakistan was the sponsor of the terrorist, then Pakistan should be next on the list to confront. Obama's words that the war in Iraq has only served to distract us from the war in Afghanistan totally misses the mark. His words are nothing more than poll driven political rhetoric. Obama needs cover so that he can switch horses before the general election. During the primary, Obama is the left wing anti war, anti NAFTA candidate. When the general election starts, he will be the anti Osama bin Laden, free trade candidate.

The problem is that another 911 could happen. To prevent another 911, the USA and the rest of the world must confront states that support terrorist behavior. Americans would be elated for Osama to meet his doom but killing this one man is not the key to limiting the threat of terrorism. Iran is the biggest remaining piece to the stop terrorism puzzle. Countries such as Libya have turned 180 degrees. Let us hope and pray that the government of Iran can be turned as well!

ITS A BAD, BAD, BAD, BAD NEWS WORLD

Inflation is up and home prices are down, it is just a bad, bad, bad, bad news day. The market is up. Even before the "market" was up, most stocks were up. All kinds of little stocks are moving in the right direction.

THE HILL-OBAMA HORSE IS OUT OF THE BARN

Good news! The free trade horse is out of the barn and there is no way for Hill-Obama to put it back. The bad news is that they will severely damage the US economy if they are able to implement even a small portion of their protectionist ideas. The other good news is that even if elected, they will not be able to get much of what they have been proposing past the congress. There is political irony flowing in all directions.

You might recall that Abraham Lincoln, a republican, was "a champion of the people", the black slaves in particular. What you may not remember is that Lincoln was "the champion of big business" who said to heck with the prices paid by the little guy. When a government places a tariff (tax) on imported goods, the government raises the profits for that business but causes all the consumers to pay too much. Lincoln was the champion of equality who promoted inequality by his close ties with railroad barons and by his tax and spend policies.

In one of the all time biggest transfers of government wealth to the hands of the few, Lincoln slapped a 44% tariff on imported goods so that his administration could pay for the construction of privately owned railroads. History books are apt to mention the building of the transcontinental railroad as the crowing economic achievement of the Lincoln administration but the fact is that Lincoln was dead in 1862 many years before the railroad was completed and the "Golden Spike" driven in 1869 was only a publicity stunt. The spike was driven after the completion of the connection from Omaha Nebraska to Sacramento California, well short of the Pacific Ocean and very well short of the Atlantic.

The "gentleman" that made the most off the construction was Thomas Durant. The law passed by congress outlawed more than 10% ownership by any one person. Durant, who made his first fortune by smuggling cotton during the war, paid other people to hold shares for him in their names. He ultimately owned 50% of the Union Pacific. His list of tricks included putting oxbows into the routes because he was being paid by the government for each mile constructed. He also played dirty tricks to grab land that was then sold to the government at inflated prices. On other occasions, he let out false rumors of where the spur lines would go to give him a chance to buy shares in competing railroads that would ultimately receive the rights to these lines. In other words, Durant paid bureaucrats and congressmen to gain insider information. No one knows for sure how many congressmen looked the other way while Durant plied his corrupt trade but the Union Pacific went bankrupt a couple of times along the way.

Durant was not the only one who took advantage of the government. On more than one occasion, an eastern leg would purposely miss the connection to the western leg so that two tracks were built parallel to each other with the government stuck with the bill for both tracks. In another ploy, "agents" of railroads pretended to have the right of imminent domain to take land, it was sign it over for a little bit of money now or lose it in court with no compensation. By some accounts, Frank and Jesse James got into the train robbing business after their Mother was cheated out of the family farm. Another tragedy occurred when certain Indian Lands were taken. The Indians fought back but the railroads hired soldiers to kill tens of thousands of buffalo, demoralizing and starving the Indians. Still, the worst part of the story was the treatment of laborers. The US had just fought a war to free black slaves so it would not have been kosher to rely too much on "negro" labor. Since the work was hard and dangerous, other minorities were "recruited". The Irish and Mormon's were paid from $1 to $3 per day. The Chinese, many of whom were "Shanghaied" were lucky to receive 50 cents and a bowl of beans per day. To speed the tunneling through the mountains, a volatile compound called nitro-glycerin was introduced. No one knows how many Chinese were killed before the story was reported. From the governments point of view, the link-up of California to the east was worth whatever the cost, because a significant percentage of Californians wanted to succeed from the Union.

At any rate, Lincoln imposed the horrendous tax of 44% on all foreign goods for the purpose of building the transcontinental railroad. After the devastating war, the people needed to complete the long talked about "manifest destiny" of a United States from "sea to shining sea". As any student knows, new "taxes die hard" and we should know by now that any country that isolates itself from the rest of the world ultimately pays a dear price. By 1929, the size of tariffs had fallen from 44% to less than 8%. When the depression hit, big government republicans, Hawley and Smoot naturally thought that the problem could be solved by legislating a series of tariff increases. Uh Oh! this was exactly the wrong policy needed. Before the ink had dried on the final bill and well before the bill was signed into law, Canada and other nations retaliated. The bill was signed into law June 17, 1930 and a tough economic time was turned into The Great Depression.

CHAMPIONS OF THE PEOPLE

Dwight Eisenhower was the first "champion of the people" versus the historically "big business republicans". Ike was not liked by "conservative" republicans because he continued the democratic "new deal" tax and spend policies. Even the reduction of war spending did not keep Ike from adding to the government deficit. He continued to expand "domestic programs". The construction of the Interstate Highway System was basically a "new deal, make work, project". The most economically sound part of his administration was his trade policy. Ike followed the Roosevelt and Truman lead and by 1956 the success of his trade policy forced many to repudiate the failed policies of the past.

Over the years, a couple of good trade steps forward were always followed by at least one step backward. Along the way, big unions joined big business to fight for exorbitant profits and wages by "protected businesses", this, all at the expense of consumers who were forced to overpay for the goods and services offered by these "protected industries". In modern times, there have been three presidents who deserve the most credit for championing the cause of lower prices for the people. They were John F. Kennedy, Ronald Regan and Bill Clinton. The president, who was at the right place at the right time and who did the most for the people was Bill Clinton. During his term, in 1994 NAFTA and in 1995 the WTO came into being. NAFTA gets the most press but all members of the WTO are automatically granted most favored nation trade status with all other members.

THE REST OF THE STORY

As Paul Harvey would say, "Here is the rest of the story".

Moises Naim gives us a clue to the rest of the story in "Foreign Policy Magazine", where he reports that from 1983 to 2003, sixty-six percent of all tariff reductions were unilateral! In 1992 when the European Union lifted barriers to internal trade of goods and labor, the US was left with little option but to come up with our own expanded trading alliances. But, the root of the story goes back further. It is no coincidence that free trade agreements started happening after the Reagan tax cuts of 1981 and after the privatization of industry by Margaret Thatcher in England. Today, people worry about the weak dollar but are they willing to reduce corporate taxes? Why not?

UNILATERAL FREE TRADE IS GREAT! BILATERAL FREE TRADE IS EVEN BETTER!

The old business story is to make a good product and the world will beat a path to your door. This can and will happen in the country that allows free trade. The entrepreneur in a free country will be able to buy the raw materials he needs at the lowest price and he will be able to get the highest price available when he sells his finished products. In the event that another country imposes a tax on his raw materials or his finished goods, he will do fewer transactions with that country. The big mistake would be to retaliate for imposing the tax with counter taxes. The country that imposes the tax is the country that reduces its trade activity. Since it only makes sense to do profitable trades, the country that reduces its trade activity is the country that reduces its profits and ultimately its wealth.

With 66% of all tariff reductions from 1983 to 2003 being unilateral reductions, it is clear that world leaders have come to understand the truth of free trade, which is that the country that is harmed by tariffs is the country that applies them. In 2006, we enjoyed a world wide booming economy. The weighted average GDP growth in 2006 was better than 4%! This strong showing could not have been possible without trade. In 2006, global merchandise trade grew at the annual rate of 15%!

The horse is out of the barn and any country who would try to put it back would harm themselves. Trade is win-win or zero! A couple of weeks ago, Chavez of Venezuela made himself a laughing stock by threatened to suspend oil trade with the USA. Anyone with a lick of sense understands that trade is a two way street. We want to buy oil from Chavez and he wants to sell it to us. If he were to choose not to sell his oil, his country would be bankrupted in a few weeks.

OUCH!

It was almost 100 years to the day between the imposition of 44% tariffs by Lincoln and the passage of Kennedy's 1962 free trade policy. One might conclude that we learned our lesson from history. However, today, Hillary and Obama are running as protectionist and our congress still practices outrageous practices similar to those that made Thomas Durant a very wealthy man. Today, 5% of the congressional districts collect more than 50% of the total farm subsides paid!

Polls of economist show that 87.5% to 91% believe free trade benefits America. Polls of voters show that 60 to 65% believe that free trade hurts America. Among democrats, 80 to 85% of voters believe free trade hurts America. As a result, Hillary and Obama make misleading statements about trade. They have both expressed their belief in free trade but when campaigning in a state like Ohio that has lost manufacturing jobs, they both demagogue NAFTA. Since NAFTA was passed, the USA has added 27.5 million net new jobs. In the 15 years before and after NAFTA, about 3 million manufacturing jobs were lost. The fact is that industrial robots have permanently eliminated about 6 million jobs over the past 30 years.

NO NOT GOOD TIMES -- GREAT TIMES!

People naturally like to remember the "good old days". In the 1950's the average Mom was a "stay at home" Mom. Boomer's like to remember how nice it was for Mom to be home before and after school. My wife and I went the extra mile to make this happen for our own kids during the 1980's and 90's. The problem is that we had to work as hard as the Mom's of old. The average Mom in the 1950's worked in the home 52 hours per week and spent a lot more time in "volunteer" activities, such as keeping the nursery at Church on Sunday. Men, in the 50's, worked two and three jobs, their regular jobs and their "home" job. Many a home owner was a jack of all trades. My Dad was one who never stopped working. He maintained a tractor, raised a big vegetable garden, maintained the house and the list goes on and on. We used the same black and white TV for 25 years because he was an expert TV repairman. In addition to being an auto mechanic, he was a paint and body man too. He would come home after dark from a long day working on an anti-ballistic missile system only to start up his next home project.

When Hill-Obama talk about the decline of the middle class, they are playing to the crowd. The best measure of standard of living is the measure of ones time. How much work time does it take to buy a radio today relative to 10 years ago? Today, people think that they are more busy than ever before but the reality is that people do more of the things they "want to do" today. They drive their kids to the soccer match because they want to. The great majority of the people of the 50's were busy "earning a living". Most did not consider going rock climbing, golfing, biking or first Saturday Night Bridge.

CLIMBING THE WOW!

The market is climbing the "wall of worry". Each day it seems like there is bad news in the morning and higher stock prices in the afternoon. All the while, my confidence grows that our country will not be steered into the left hand ditch. The good common sense and accumulated knowledge of the American people will prevail!

BUYOUT FEVER

For a few months, it has seemed like the buyout fever had been cured. Take note, it is coming back. Several buyout bids have been made in recent weeks and several purchases have been negotiated. The MSFT -- YAHO deal and the DAL - NWA deals have gotten the most press but there have been many others.

Folks, financing is available. Loans are being made. Business is getting done. There is NO RECESSION!

The pump has been primed. Trillions of dollars on the sidelines is ready to flow.

U.S. SMALL CAP STOCKS TO DO WELL

After under-performing the market for a couple of years, small cap US stocks are likely to do well for a couple of years. It is time to switch you 401-K money to the Russel Small Cap Value Index!

MORE GOOD NEWS

Even though Hillary and Obama have proposed socialist policies in their attempts to win the democratic nomination, Ralph Nader has once again entered the race as an independent. The effect is to help keep Hill-Obama to the left. Had Nader not been a candidate 8 years ago, Gore would have beaten Bush. Now one can argue that the republican congress would not have allowed Gore to spend such big money as has Bush but the entry of Nader does tilt the odds a little bit toward McCain.

Obama's supporters certainly have enthusiasm but will "the mad in the middle" support Obama or McCain. The far right has threatened to stay home but, so far, McCain is being left with more freedom to try to capture "middle men" than Obama.

AIRLINE PILOTS

Even though NWA pilots will get 25% raises upon merger with DAL, they are still battling for the best seniority deal they can get with DAL pilots. I expect the issue to be resolved within a few days because the one time bonus and increased pay are calling.

BIG FINANCIAL POTENTIAL

This week offers a lot of potential for a financial turn around. A bailout of the mortgage insurance companies would cause a whole lot of mortgage backed securities to bounce in price. Banks, investment banks and insurance companies should see the first bounce but the ultimate ripples should be far and wide. The market has repeatedly had trouble negotiating the mid cycle turn because short term interest rates have had to be lowered to save the financial economy before the speculative fever has been run out of the commodities economy. The turn of the mortgage market will ultimately result in the turn in the price of gold and oil.

We have been here a few times in recent months but, this time, I believe we will get over the hump!

GO! MIDDLE MAN GO!

GO! GO! GO!

About 18 months ago, I bet a friend, giving him 3 to 1 odds that Hillary would not be the next president. At the time, I said I would almost make an even odds bet that she would not be the democratic nominee. Then I was surprised that no major player stepped up to give her a serious challenge. Al Gore apparently came close to making a run but, who can blame him of staying out of the race when he is enjoying huge profits by fanning the fears of environmental Armageddon. When the contest got down to two extreme liberals and Hillary, I thought I had lost my bet. I assumed she would win the nomination and be in good shape to win the support of moderates during the general election.

However, it turns out that, I underestimated the willingness of democrats to go left, go left, go left. For a long time, Hillary carefully chose her words such that she could still move toward the center for her general elections run. This was making me nervous because I felt that a moderate Hillary would have about a 50/50 shot at beating a moderate McCain. Here again, I found a new surprise. In recent weeks, Hillary has unsuccessfully tried to move to the left of Obama. It will never be known for sure but it appears that she could not win the democratic nomination by running as a centrist candidate. What was not clear early on was the amount of resentment the left wing has over the switch Bill Clinton made from democrat to "republican" for his second term. Clinton ultimately signed off on powerful and positive economic reforms, including welfare reform and free trade. He was even able to successfully run to the right of Bob Dole for his second term election. Bill's republican policies served the country well but Hillary has been forced to run against her own husbands record. By the way, Bush tried the Bill Clinton strategy in reverse. He attempted to dress up his conservative positions with a little bit of liberal sheep clothing. He passed democratic big spending programs such as "no child left behind" and "the prescription drug benefit" but ultimately got no credit from democrats and scorn from republicans for these poor substitutes for real reform.

Obama has done such a masterful job of keeping Hillary cornered that one has to respect his chances in the general election. What we are dealing with in regard to elections is the psychology of crowds, or according to Carl Jung the collective unconscious. Democrats are determined to elect a true liberal to the presidency and they intensely believe that they can win with a candidate from the extreme left. Gustave Le Bon was a student of crowd psychology back around the late 1800's in France. His book, La Psychologie des Foules is about how irrational crowd behavior can be. I can't remember the name of the researcher who did the study but it has been shown that if 7 of your friends say something is true, the odds are that you will decide to agree even if you know the something to be false. If 7 friends agree that "it is true" and if an 8th friend has not yet expressed his opinion, the odds jump to the 90% range that you will agree to the "false truth". Another way of saying this is that we really do want to avoid the potential of being ridiculed by our friends as the "odd man out". This is probably the reason the greatest inventions tend to be made by lonely individuals. People who had rather seek truth than to be told what is truth.

William Trotter talked about crowd psychology in terms of "heard instinct". Any student of the stock market is familiar with Bull and Bear Market Psychology. In a Bull Market, the crowd bids up the price of stocks far above their intrinsic worth and in a Bear Market, profits and value do not amount to a hill of beans. Right now, stocks earn an average of about 50% more than bonds but the public believes what they are being told by their friends in the media. This is sometimes referred to as the "halo effect"; if one teacher gives Johnny a good grade, the next teacher is more likely to grade him well and vice versa.

The current democratic nomination process has taken on a Bear Market "halo". No matter what the evidence shows, the war is going badly as is the economy. In the recent past, democrats have won and lost the presidency due to third party candidates. This time they are determined to nominate a candidate so far to the left that no Ralph Nader will rise up to siphon off votes primarily from democrats. That is the logical part of the current fervor for leftist positions, but, have the democrats moved so far to the left that they cannot hope to win the majority of "moderate" "independent minded" "middle of the road" voters?

Around 1966, a follow up to the study of "madding crowds" was done by William Schutz. His study showed that there are three stages to joining a crowd; inclusion, control and affection. In the last debate, when Hillary showed what seemed to be sincere affection for Obama, I almost fell on the floor. Obama has gradually moved Hillary from the centrist opponent to just another "me too liberal".

BIG PROBLEMS

There are big problems in the USA in need of a governmental nudge. Corporations should be required to submit executive pay packages for shareholder votes. Funding for universal preschool should be made available (perhaps by reducing government funding for 16 to 18 year olds). School choice should be the law of the land and funding should follow the student to the school of choice. Health care spending should be returned to the control of patients. Immigration reform should take control of our borders while allowing "competitive immigration"; we should welcome the most eager and most qualified to come to America. Corporate taxes need to be reduced in order to help consumers and in order to attract more jobs to America. Taxes on work and capital should be reduced dramatically and partially replaced with excise taxes on harmful activities such as burning dirty coal. Silly subsidies, such as payments for growing corn, should be eliminated. Social Security benefits should be indexed to wage inflation.

MARKET and ANTI MARKET SOLUTIONS

The Ambac re-cap will be a private transaction with no tax dollars going to bail out businesses, which is the right way to do business in America. Unfortunately, businesses are lobbying hard to add new "corporate" welfare programs. Duke Power, GE and others who stand to make billions off cap and trade systems, are eager for another big government program. Both McCain and Hill-Obama support these grand governmental schemes. All politicians find it hard to resist the mighty dollars available to those willing to support "corporate largess".

Another huge lobbying campaign is for companies to receive government funding for research and development. Believe you me that the company that is able to invent or discover the way to turn cellulose into fuel or a stem cell into a new heart will reap unimaginable rewards. Billions of dollars are being spent on all sorts of research; it makes absolutely no sense for politicians or bureaucrats with vested interest to pick or choose which projects should be funded. The idea that the government should give companies upfront bonuses for looking for profitable commercial processes is as silly as it gets. What a long way we have come from the days when Ben Franklin invented "stuff" as a public service to the current times when "pigs" want to feed at the government trough before sticking the royalty payments to consumers. By the way, there are tons of people who think they have great ideas worthy of research. When they can't find funding for their research they tend to blame the market place. The reality is that it may take some selling to find support in the market but the government is far more likely to turn down a good idea.

WANDERING AROUND ON EITHER SIDE OF COMMON SENSE

All is not lost because the mad crowd to the extreme left is almost matched by the size of the mad crowd to the extreme right. The political fight this fall will be to win the schizophrenic middle. Some in the middle will be for the republican strong position against terror while perhaps these same individuals might be against the republican position to reduce corporate taxes. Others, having a hard time making a choice, might be for the republican position for school choice while being for the democratic position for universal health care. Some will be swayed by the educated political skill of Obama and others by the educated military mind of McCain. We should all hope that neither party gains control of the house, senate and presidency because history has shown how wasteful one party control can be. It usually takes a very long time to repair the damage done by one sided legislation.

DIVIDED GOVERNMENT

The prospects for a divided government are the best they have been in a long time. The market is likely to begin to discount this improvement in the weeks ahead. The market had a very bad day the same day that the negative article broke in the NY Times was published. By Friday afternoon, it was clear that the article had no legs and that it had served to unite conservatives behind McCain. The market moved up Friday after the Ambac story broke but, the upturn for McCain might have smoothed the upward path.

In any event, I have taken a couple of Saturday hours to write because the market upside from here is great.

WHAT IF? WOW! WHAT IF?

Friday afternoon the story broke that Citibank, Wachovia Bank and others are in negotiations to re-capitalize Ambac, one of the mortgage loan insurance companies. The stock market went from down a little to up a lot in the last hour of trading. Is this Ambac story likely to be true? If so, what will the consequences be? WOW! The market is ready to move!

The story is likely to be true because it is in the best interest of the banks to snatch a share of ownership in this deeply discounted company while saving their own hide! Bank shares have fallen sharply but the mortgage insurers are down from the $80 area to the $10 area! Right now, banks hold billions of dollars worth of mortgage backed securities that have been written down to various levels of "cents on the dollar". This does not mean the assets are only worth "cents on the dollar". The reality is that the great majority of mortgages in America are being paid and will be paid at 100 cents on the dollar plus interest!

The insurance companies are, no doubt, the first line of defense. They are like cannon fodder on the battlefield and they will suffer each time an insured mortgage goes unpaid. However, the big decline in interest rates last month means the interest rate on most of these loans will remain near the original issue rate. Many a homeowner who has been frightened to death by the talk of soaring mortgage rates will be greatly relieved to discover that his rate is going to stay about the same.

Pundits who talk about the soaring foreclosure rate imply that the credit markets are in bad shape. On the corporate side, balance sheets have perhaps never been better. For the first time during my life, corporations are net savers! On the consumer side, consumer debt outstanding has come down as percentage of total assets for 4 years in a row. Bankruptcies are low, interest rates are low and employment is strong. To say that foreclosure rates are soaring is like saying that a rainy day after a prolonged drought is likely to make the dam break; lake levels rise quickly after the first rain but the size of the lake expands as the lake level rises so the second, third or fourth rains of equal amounts do not increase the water level as much as the first rain. The situation in the credit markets is that problem loans had gotten to very low levels so the recent problem did cause a big jump relative to the prior year but not a big percent in terms of total loans outstanding. To put it another way, during the recessions of 1973-74 and 1990-91 a lot of banks went belly-up but banks are in good shape this time around. Northern Rock Bank in England is the exception that proves the rule.

Yes, a lot of banks, hedge funds and insurance companies hold mortgage backed securities and there is little trading in this market. I submit that there is little trading because holders do not want to sell during a temporary down turn. If you were CEO of a bank holding securities that have a par value of $1,000 are paying interest on the $1,000 and are backed by insured mortgages that are by large measure being paid on time, would you be willing to sell for $600?

The recent whine has been that the two big mortgage insurance companies might lose their AAA rating which would limit the ability of banks to make new mortgage loans. The two big insurers, MBIA and Ambac, are solvent, they have the assets to honor their obligations. They do not have the assets necessary to maintain their AAA credit ratings. What if?

What if Citibank, WB and others were to invest enough cash into Ambac such that the AAA ratings would be secure. The billions of dollars worth of securities being held by these banks would appreciate back towards par value. The banks would once again be able to make loans to credit worthy borrowers who do not have 20% down payments available. Suddenly, pent up home demand would be released. Demand for homes would increase such that those struggling to pay would have greater incentive to do so and the option to sell would look more attractive as the price bubbled back up. Even the demand for foreclosed homes would be improved. In the past several months, 11 months supply of unsold homes has fallen to 7.5 months, even though the selling rate has been slow. In other words, the number of homes coming on the market has been less than the number of homes being sold. Speed up sales a little, and the unsold inventory will come down at a very fast pace and the "housing crunch" will be over. The psychology will have suddenly switched, on the buy side from "no need to buy in a hurry, home prices and interest rates are falling" to "we had better buy now while there are still bargains left". On the sale side, the psychology will switch to "lets wait to put our house on the market because prices are going up".

What if the pressure were suddenly off the FOMC to lower interest rates?

There is a strong possibility that a deal will be worked out this weekend to re-capitalize Ambac. A second group of banks, those who use MBIA as their insurance provider, will follow the Ambac lead. In other words, it is likely that the market will know that the mortgage credit crunch is over by next week and perhaps as early as Monday. With the credit crunch over, the rational for the FOMC to reduce short rates more will be "fini". The world wide economy is simply too strong for lower short interest rates if there is no longer a "housing crisis".

If the short interest rate cutting cycle is over, then the commodity surge is suddenly over. The price of gold, oil and other commodities should decline as soon as it is clear that the FOMC will once again focus on inflation. Once the price of gold turns, it will turn with a vengeance. Huge holdings of commodities have been sequestered as a result of commodities having become a "financial asset class". The gold ETF's must purchase gold in order to issue new shares in the fund. Once the shares are redeemed, the fund no longer has the funds to support the price of gold. Once this gold starts coming back on the market, the extra supply will reduce the price which will make more people sell shares of the funds. This feedback loop will not end until there has been a significant decline in commodity prices.

HIGHER REAL INTEREST RATES!

The steep drop in commodity prices will give the FOMC the ability to raise interest rates by doing nothing. The latest headline inflation rate of 4.3% combined with a fed funds rate of 3% leaves a real interest rate of negative 1.3%. People have been paid to hoard commodities. This is the reason you may have heard the stagflation word being bandied about. In the 1970's, the economy went through a prolonged and devastating period of higher and higher inflation rates and negative real rates. The fear is that we are now in or about to move into a similar period.

The fear is a reasonable fear to have if you listened to the latest Hillary -- Obama debate. The fiscal policies supported by Hill-Obama are essentially the same as the Johnson policies that got the prior wage-price spiral started. In fact, Hillary has even proposed a five year mortgage rate freeze which is similar to the ineffective Nixon responses to the problem. There is political risk of a return to stagflation, however, on the monetary side of the equation, we are no where near the failed policies of the 1970's. After Johnson decided to offer the nation both "guns and butter" by fighting the Vietnam war without funding the war with higher taxes, the FOMC "monetized the debt". This means the FOMC printed the money to pay for the war. Money is just like any other commodity, produce too much of the stuff and the value of the stuff must fall. By the end of the late 70's all money was "hot money", you needed to spend it today because it would buy less tomorrow. Good news: the FOMC has not been printing money to monetize the Iraq war. The money base has not grown hardly over the past 4 years.

Again, if Ambac and MBIA are re-capitalized, the housing mortgage market will quickly "return to normal". The housing crunch will be over and there will be no reason for the FOMC to increase the money supply or to cut short term interest rates. The psychological support for higher gold prices will be suddenly gone. Oil, gold and other commodities will lose a big chunk of inflation risk premium. Headline inflation will fall hard. Suddenly a 3% fed funds rate will represent a high real rate. High real rates will reduce the attraction of gold all the more. Oil and gold are routinely hedged by one another and they trade together. The decline in gold will be accompanied by a decline in the price of oil. The central bankers of the world will breath a sigh of relief as their job of holding down inflation will be much easier. Low inflation is on the other end of the stock market see-saw.

BUY, BUY, BUY!

OUT OF ONE POCKET AND INTO ANOTHER

When my wife and I operated our resort condo rental business, we bought a lot of furniture. The purchases were non events on our income statement. When we bought the furniture, we simply traded cash for furniture on our balance sheet. Following the federal law, we expensed the furniture over the seven years following the purchase. If our rental income stayed the same, the portion of the furniture expensed during the year showed up as a loss on our income statement.

Today, the pundits constantly focus on consumer spending to tell us if the economy is doing well or not. They like to tell how consumer spending is more than 70% of the annual GDP. The point is valid if kept in context but the big picture is much bigger indeed. When Duke Power builds a power plant, it does not show up as consumer spending. Power plants are like beach furniture. Power plants generate a lot of cost and a lot of revenue but it takes a lot of spending before there is a profit or loss to report.

National income is essentially equal to profits plus wages. But profits is a net number. It takes a lot of purchases of a lot of goods and a lot of sales of the final product to produce profits. Profits might be 5% of the amount of sales. When we typically see a figure for investment in the US accounts, we are usually looking at net investment which is an extremely small number relative to the investments made. Over long periods of time, net investment grows at about the same rate as profits are a percentage of sales. In the case of the furniture mentioned above, the furniture loses its value over time but the government allowed us to "get ahead" a little by allowing us to write off twice as much of the annualized value in the yearly years of ownership. Also, in the event the furniture lasted more than 7 years, we enjoyed the ownership of some used furniture without showing it as an asset with real value on our books. If we sold the fully depreciated furniture for any amount, the entire amount had to be reported as a taxable gain. In the USA there is a lot of value in fully depreciated plant and equipment. It often stays frozen in place in order to avoid capital gains taxes.

One point I am trying to make is that Americans have a net worth of 58 trillion dollars (much more in assets) but the pundits focus on the annual, double entry accounting, income of 14 trillion dollars. The fact that the 58 trillion is growing rapidly is dismissed as not newsworthy. Put another way, our condo rental business lost money year after year but the value of the condos went up year after year. The American people continue to enjoy a net increase in net worth even though they have been told that their house is falling in value.

OUT OF ONE POCKET AND INTO ANOTHER

People see the massive amounts of money flowing from pockets in the USA to the pockets of the oil producers and think the high price of oil means that there has been inflation. This flow of money is like the money my wife and I spent on furniture. We were not made less well off by our purchases. Buying the furniture allowed us to charge a good rental rate for a week at the beach. We profited or at least believed we would profit from the purchase of the furniture or we would not have bought it. Buying oil is the same. We only buy oil because we benefit more than it costs. If we did not, we would buy something else. If the price were really too high, we would buy a scooter, bicycle or shoe leather. The purchase of the oil did not create or destroy money. The oil seller traded one asset for another as did the purchaser. The seller is left with the choice of how to "spend" the money, but if all he does is trade it for another asset, then no inflation has occurred.

The current high price of oil is encouraging a lot of people to look at ways to produce more oil and it is encouraging a lot of other people to look at ways to use less. The real mind bending, counter intuitive and most important point is that it is not the spending that stimulates the economy but it is savings that does the trick!

THE COUNTER INTUITIVE MIND BENDER

The reason I went though the mess above about how the consumer is really a much smaller piece of the total economy than the consensus belief is because it is not consumer spending that stimulates the economy. Again, moving money from cash to oil is only an exchange of one asset for another. But, what happens when a hundred dollars are deposited into a five year certificate of deposit? The bank is allowed to lend about $92 of those dollars to another person. The person who deposited the $100 still has his $100 in the bank but the second person has $92 to invest.

The congress of the US just went through contortions of logic to explain why the "stimulus" package needed to go to the poor people who would spend it. The idea was to get the maximum "bang for the buck". When an individual, business or government borrows money to spend, they have increased the money supply and thus they have given the economy a short term boost and a long term financial obligation. They have also started a ripple effect whereby each dollar is re-deposited and re-lent an average of 5 times. Thus one dollar of new spending can become $5 of new spending. The fact that the government is likely to spend the first borrowed dollar unwisely, does not take away the stimulative effect of the remaining dollars.

THE GOOD NEWS

The good news is that dollars are still flowing in and out of banks. Because the world wide growth momentum is so strong, the FOMC held their feet on the economic brakes for 19 months. Six months ago, excess liquidity finally dried up and the FOMC began to gradually let up on the brakes. Six weeks ago, liquidity finally started showing up again as evidenced by the drop in LIBOR rates.

Despite what is being said by financial news reporters, the credit markets are not "frozen up". Loans outstanding are rising. Asset values are down and yet there is plenty of money available. The potential for a big bull market is strong.

The short term problem is that commodities are still getting all the "juice" from speculators. Gary Shilling has this part of the story nailed. Investment managers must show investments in "hot areas" on their books or the public will take their money elsewhere. The thing is that there are several million people now trapped in a barn that is about to catch fire. Investors will not be able to get out of the barn fast enough to save themselves from financial loss.

OUT OF ONE POCKET AND INTO ANOTHER

Once the money starts to flow out of the commodities pocket, where will it go? I believe big cap stocks that have technology franchises will be among the beneficiaries. Companies such as IBM and MSFT will enjoy strong business growth for the next several years and they will enjoy high price multiples for those earnings. The combination of higher PE's and higher profits will lead to much higher stock prices.

The 58 Trillion Dollars of American net worth could easily swell by 10 trillion in just a few years. This will not show up as new money or inflation. After the big run, the public will once again be ready and willing buyers. I hope you buy all you can now so that you can be a willing seller.

TECH, TECH, TECH STOCKS ARE CHEAP

It seems like a very long time ago when I wrote that energy stocks would pass the leadership torch to US big cap growth stocks. At the time, I encouraged readers to move their 401-K accounts out of small caps in favor of the S&P 500 index, which was the "good part" of the call. The S&P has outperformed the Russel 2000 for almost two years. The expectation that tech stocks would beat the energy stocks has been a mistake so far. Still, I had rather be early than late to the party and this party is just getting started.

The broad energy index was up 31% over the past 12 months whereas the technology index was flat. The last 5 weeks made up a significant part of that performance spread as oil prices bubbled up one more time. Those who have stayed with the energy sector have done well but the risk from here are high. Inventories in the US have been building for several weeks because the high price is destroying demand.

High inflation rates in China, India, Australia and many other countries are pushing government officials to consider tighter policies. The US is already on the "other side of the hump". US officials are providing both monetary and fiscal stimulus whereas many other countries are either holding the line or even making tightening moves. Tighter monetary and fiscal policies will slow the demand for oil and give producers time to bring the several new elephant fields on line.

China will remain the wild card as it continues in its hyper drive mode in preparation for the Olympics. No matter, the price of commodities always over and under shoots and huge investments are underway which will increase supply. Sooner or later the profits in the tech sector will lap the profits in the oil business.

AN ECONOMY SETTING UP FOR THE PENDING TECH BOOM

In the US, the yield curve is very bullish. The talk about the extreme problem of mortgage resets in the US has died. With the Fed Funds Rate at 3%, the resets problem is no longer a big deal. Low short rates have given business and individuals lower payments on floating rate loans and the opportunity to make reasonable "borrow and spend" decisions.

The numbers show a steady increase in commercial and industrial loans, in consumer loans and even in real estate loans. Clearly there is a bit of schizophrenia in the air. Sentiment surveys show that people are very concerned about the economy but at the same time they are generally confident about their own situation. People are complaining about all the jobs that have left America but most have the best job they have ever had.

HAPPINESS

Which person is most likely to be happy? The person who consistently makes more than $100,000 per year, the person that consistently makes about $60,000 per year or the person that made $40,000 two years ago, $45,000 last year and $50,000 this year? The answer is the third person. People want to know that they are making progress. The average employee at American Airlines makes $84,500 per year but he is not a happy person. AMR employees gave up wages to help the company survive and now they want the wages back. The employees at CAL make an average of $66,000 per year but, the company did well this year and the average employee got a bonus check of $4,500. The CAL employees tend to be happy.

HAPPY REPUBLICANS

In Greg Mankiw's posts about income and happiness, he reports that surveys have consistently shown, since 1972, that Republicans are happy relative to Democrats. Indeed, 45% of republicans report being very happy compared to only 30 percent of democrats. I think the reason is that democrats tend to believe either the USA is going down hill or that the "little guy" in America is being "left out". Republicans tend to believe in the Horatio Alger story, even the poorest republicans believe they can pull themselves up by their individual efforts. Democrats are more likely to believe that they need help to survive. As a result, many democrats are "trapped" by reliance on the assistance of others.

The story is told of a single mother in Boston who found a better job. Her old job paid $25,000 per year and the new paid $35,000. Unfortunately, she could not make ends meet after accepting the new job. Her new income reduced her rent subsidy, eliminated her free child care vouchers and disqualified her for the Earned Income Tax Credit. She was financially better off in the old job.

The other problem democrats have is that they tend to believe the rhetoric of the politicians and the constant drone of bad news. John Edwards was one who campaigned on the premise that the poor in America are getting more poor by the minute. The reality is that Americans in the bottom 20% of income brackets in 1991 got an average increase in income of 91% between 1991 and 2005. To be fair, I am thankful not to be among the bottom 20%, but the bottom 20% often routinely receive non reported income of one sort or another. My church offers groceries to several hundred people at no charge. I am glad to contribute and thankful that I do not need the assistance but I do grow tired of hearing about how badly we have it here in America.

The really sad thing is that the poor are routinely mislead in exchange for their vote. One of the common ploys is to suggest that middle class taxes will be lowered by raising the taxes on corporations. The reality is that the poorest of Americans pay no direct income taxes but they pay indirectly when they buy products. Companies are routinely demonized for making profits but we all know that without profits those businesses would not exist and the jobs they provide would not exist. The very large company, such as Exxon, has to earn a lot of money to pay the owners a fair return. As such, it makes a lot of profit and it pays a lot of taxes. Indeed, in each of the last 4 years Exxon has paid more income taxes than the combined total paid by 50% of all families in America. When the politician says that he will not raise taxes on the middle class but only on the wealthy, he surely understands that it will be the middle class that will be hurt the worst when they go to buy gasoline.

HAPPY TIMES ARE COMING

Sentiment surveys show an up-tick. Lots of little things are ready to add up to extra spendable income for the average person. The $600 checks will be in the mail soon. The new payment rates will go into effect on student loans in a few months. Floating rate loan payments have started to fall. Car companies are cranking up to offer rebates, low interest rate loans and zero interest rate loans. The elections are more than 8 months away so there is time for a lot of good things to happen.

One of the things I expect to happen is a breakout in the price of US stocks. Those people who are adding money to their accounts every month have been seeing a "lucky hit" every now and then. In some cases they have increased shares in a stock they already own and have brought their average purchase price down. In other cases, they have bought new stocks that have bounced off very low prices.

TAX CUTS

John McCain has pledged to cut the corporate tax rate from 35% to 25%. The Chairman of the House Ways and Means Committee has also pledged to cut the corporate income tax. A few months ago, the likelihood of tax decreases seemed slim. The case for lower corporate taxes is strong. The story of the miracle of Ireland is compelling. The economy of Ireland had suffered for a very long time before taxes were reformed. The rate was cut from 50% to 12.5%. Books have been written about the economic boom that followed. Today, Ireland is among the most wealthy of all nations and tax revenues are higher than they have ever been. Indeed, tax revenues have increased from 1.6% of GDP to 3.6% of GDP. The dramatic improvements in standards of living has made rich and poor alike very happy.

Ireland is one of 24 countries that has cut tax rates in the past 20 years or so. As a result, US corporate rates are the highest to be found. McCain understands that lower tax rates are needed in America in order to create the new jobs in America.

TECH, TECH, TECH

The primary reason the USA has benefited so greatly by the Technology Revolution is because our individual tax rates have attracted the best and the brightest. The smartest people are drawn to work in the USA. The USA has low individual tax rates and a steady influx of "brain power". Britain, which levies significantly higher taxes on high income people, has been suffering from a "brain drain". It only takes one word to tell the remarkable story of what it means to a country to encourage the best and the brightest to live and work in America: GOOGLE! All Americans are better off to have this profit making machine head quartered in our country.

Google is currently using the 100 million cell phone users in Japan as a test lab. So far, the most interesting discovery is that Internet mobile phone use will not be nearly as "location oriented" as once thought. The Japanese search for anything and everything on their phones just like we do on our lap tops. Once a person gets used to connecting to the Internet by phone, he is just as likely to connect while sitting on his home sofa as anywhere else.

The Japanese use emoji to speed up their cell phone conversations. Emoji are animated cartoons. There are over 600 "standards" so far. One can send the message to "please take the dog for a walk" by selecting the correct emoji with just a few key strokes.

Google is certainly not the only profitable high tech company. Wii and others have produced several more neat interfaces for computers. As you might expect, the Wii interfaces include things like skis, dance floors and snow boards.

TECH, TECH, TECH

Innovations are coming hard and fast. In the area of stem cells, cells have been adapted to produce insulin. The cure for diabetes is a matter of time. Heart surgeries are being done by thin robotic rods that require small entrance holes. Damaged hearts are being injected with stem cells and new muscle and veins are being grown. AE Biofuels, symbol AEBF, is preparing to build commercial ethanol plants where "cocktails of enzymes" will convert grass and cornstalks to fuel.


THOMAS EDISON ALL OVER AGAIN

It was about 100 years between the kite flying days of Ben Franklin and the invention days of Thomas Edison. In other words, electricity was around for a long time before the right genius came along to put it to use. A nice little bit of trivia is that Edison's first invention, at the age of 21, was an electronic voting machine. Deja vu!

The voting machine was invented in 1869 but electric lights in New York City were not common until around 1910 (if memory serves). It took a long time for electricity to reach the average man. It took the telephone 100 years to reach 90 percent of the market. Right now, 87% of the people in America have a cell phone. In just a few years, 90% of Americans will carry pocket sized super computer terminals.

Buy the chip makers, the software providers, the infrastructure companies and the service providers!

THE GOOD NEWS DOLLAR -- THE DOUBLE BANG FOR YOUR BUCK

Yesterday, I mentioned that the weak dollar is used as "the excuse" for all that ails. The reality is that the very low price of the dollar is cause for great optimism. Do you want to buy a dollar when it is over priced or when it is cheap?

Today, a flood of dollar buying is in evidence. US exports of manufactured goods just went up more than 13% over last year. Both foreign and domestic businesses must consider locating plants in America right now because it is cheaper to build a plant with US dollars than with Euro Dollars.

Investors in US stocks will get a double bang for their buck over the next several years. In 1996, when the dollar was almost as cheap as it is now, was at the start of the second half of the 90's business cycle. As the business cycle progressed, US stocks soared in value in dollar terms. In terms of other currencies, US stocks rocketed off the charts. History does not repeat but it certainly rhymes. Over the next several years, the odds are good that the dollar will bounce off this major low and as it does, the incentive for foreign investors to buy US assets will be great.

EXTREME PRICES

The flip side of the US dollar price is the corn price. At or near the end of each commodity cycle surge, the price of corn gets out of whack. In 1974 the price of corn traded at $4 per bushel, a year later the price was down to $2.50 and within three years corn traded at $1.80 per bushel. By the end of the 1970's, oil had once again soared in price and corn traded for $3.95. By 1982, the price had fallen back to $2.15 and by 1986 the price had fallen to $1.45. In 1996, at the mid cycle turn, corn traded at $5.50 per bushel and it fell to $1.90 per bushel by 1998. As recently as November of 2005 corn traded at $2 per bushel but in January it was trading around $5.40.

Tons of corn syrup go into tons and tons of food products. Coke and Pepsi use very large quantities in drinks and Pepsi sells corn chips to match. The volatility of the price of corn is the main reason that the government issues two sets of inflation figures. The core rate of inflation does not include food or energy. The price of food and energy goes down in real terms over time but they each spike up in 4 and a half and 9 year patterns.

The bond market is forecasting inflation of about 2%. The most recent CPI headline numbers show 4.3% inflation. The long term average is 4.1% but we live in a time of "disinflation" forces. The USA is set up to see very low inflation for the next several years, partly because as our dollar strengthens the price of foreign goods will fall.

FEAR OF INTEREST RATE CUTS

In case you are not aware, the dollar has not fallen in relative value for the past 6 months. Once the FOMC started cutting rates, the dollar stopped falling. The prospects for economic growth increase as US interest rates are cut and this makes the dollar more attractive to own. Pundits consistently state the relationship between interest rate cuts and the dollar strength upside down. They focus on the real short term effect of lower US rates causing money market investors to seek higher yields in other currencies.

When a few economic numbers were weak last week, the dollar bears come out of hiding, gold soared, oil soared and the pundits whined that the FOMC is between a rock and a hard place. They constant fear is that the economy is getting in worse shape so the FOMC needs to cut rates but the FOMC cannot afford to cut rates because that would cause a decline in the dollar.

One can look at a chart of Fed Funds Rates and the dollar and determine in about 5 seconds that the relationship is the other way around. The dollar fell and fell some more as the FOMC raised interest rates in the mid 90's cycle and in the mid 2000's cycle. Then, when the FOMC cut rates in 1996 and late in 2007, the dollar started to turn. By 2,000, the dollar had retraced its steps all the way back to the prior peak.

Are governments concerned about inflation? Sure they are! As the dollar climbs back up the mountain, the price of US corn (we only grew 100 million acres last year) will rise in price for the rest of the world. The price is ready to tumble in dollar terms.

Falling corn and oil prices in dollar terms will mean US interest rates can remain relatively low. Low interest rates means the value of assets are discounted at lower rates. The price of US assets is ready to soar!

READERS Q & A

THE FOLLOWING QUESTION AND COMMENT COMES FROM A REGULAR READER:

Can you comment on the recent surge in oil prices? I saw a note in the USA Today that a contributing factor is the low value of the dollar. Since oil is exchanged for dollars, a weak dollar requires more of them to buy oil. Why are we allowing the value of the dollar to fall so much?

Also, I heard someone say that this recession is different than recent recessions. The recession in the early 80's and 90's were caused by the Feds raising interest rates to moderate the economies. This person said the current recession is caused more by fundamental issues such as the credit crunch, oil, etc. Therefore it will take longer to get out of it. What do you think about that?

THE LOW DOLLAR

First of all, the dollar is the ready and handy excuse for all sorts of ills. In truth the dollar is only a medium of exchange, just a convenient tool to facilitate the exchange of goods. The dollar is a commodity, no different than a barrel of oil or a bushel of corn. The price is set by supply and demand. Short term traders constantly bet on the future price of a bushel of corn, a barrel of oil and a quantity of dollars. In the short run, the price of a bushel of corn might jump up or fall down for any number of reasons but the real variables that make for significant moves are how much corn is planted and how much is demanded. The price is also greatly influenced by the availability of substitutes. If the price of farm land gets too high in the corn belt of the Midwest, driving up the price of sweet corn syrup, more sugar beets and sugar cane will be grown in southern locals. The substitution effect is more powerful than is commonly understood. In the same way, the Japanese may decide to build an auto manufacturing plant in the USA if the value of the Japanese Yen is high relative to the price of the dollar.

In the old days, a gold dollar was a gold dollar and that was all. The value of that gold might go up or down relative to the value of a bushel of corn or a barrel of oil but the dollar was never anything more than $1. This concept is simple enough but it created huge problems, both before and after a "standard price" was set for an ounce of gold. The following is a list of some of the panics and depressions of the past:

the panic of 1819,
the panic and depression of 1832,
the panic of 1837,
the panic and 6 year depression of 1837-1843,
the panic of 1857,
the panic of 1873,
the world wide panic of 1893,
the presidential papers panic of 1893,
the panic of 1901 part I, part II and the stock market collapse,
the panic of 1907,
the panic and depression of 1929-1933

Speculators made and lost bundles during these volatile times. For example, in the panic of 1907, the average stock price fell by 50%.

There have been 8 or 9 post WWII recessions and the average depth of decline of stock prices and the percentage of people suffering from lost jobs and bankruptcies has been no where near the levels reached in earlier times.

Part of the problem of using gold or silver as the medium of exchange is that there are truly occasional supply shortages. In attempts to eliminate or to dampen the severity of the panics and depressions, governments would set a price at which they would exchange paper currency for gold or silver. When the price of of silver or gold was incorrectly priced by the governments, people would exchange all their paper currency for the one priced too cheap. A lot of "games" were played to try to solve the problems. In at least one incidence, England was forced to make silver coins smaller and smaller in their attempt to avoid running out of this "precious" commodity.

Over time, the fractional banking system took hold. The fractional reserve system developed because it solved a number of problems. Instead of charging a customer a fee to store his gold, the bank was able to lend a portion of each customers gold to others, earn an interest return and still have enough gold to pay off any one customer who asked. When central banks developed, which were operated by governments, the fractional system became the way a government could in effect grant itself its own "line of credit".

Today, dollars are "printed" as a result of purchases of government bonds issued by federal governments but they are also "printed" as the result of the process of lending and depositing by bank customers. To make the math simple, we can use a 10% reserve requirement. A bank with $1,000 on deposit and operating on a 20% reserve requirement, as dictated by the central bank, could grant a loan to a customer equal to $800. No matter how the $00 was spent, it would sooner or later make it back as deposits at banks. These banks might then make new loans equal to 80% of $800 or $640. This process could be repeated time and again such that theoretically the original $1,000 has become about $4,000 worth of loans. Of course, the total amount of money outstanding is influence by how quickly the loans are paid off. The combination of terms and reserve requirements in the USA today leads us to the situation where there is about $5 outstanding for each $1 held in reserves at central banks.

This is where the Archimedes principle kicks-in. Archimedes is the guy who discovered the power of leverage. His famous quote made around 200 BC was that with a long enough lever and a place to stand he could move the world. The leverage of the government is large. A tiny move in the bank reserve requirements can change the potential total money supply by at least 5 times the amount of deposits on hand. The percentage of reserves required is a very blunt and powerful tool, thus, the reserve requirements are not changed often. What is changed fairly regularly is the charge for borrowing reserves from the central bank. When the Federal Funds Rate is decreased, the door is opened for banks to make repetitive, profitable loans. When deposit rates are well below longer term fixed rates, banks have great incentive to lend money, accept more deposits and lend still more money.

HAVING CAKE AND EATING IT TOO

The President, Treasurer and Chairman of the FOMC must politically always hold to the line that they support a strong dollar. In reality there are advantages to having a weak dollar. As a result, our government, under republican and democratic administrations have practiced policies that cause the dollar to decline in value. This is a complicated topic but the old saying that if it walks like a duck and quakes like a duck, it must be a duck. The value of the US dollar has declined for hundreds of years. We talk about the falling dollar all the time when we talk about inflation.

Over the past 50 years, the government has paid an average of 5.4% on the 90 day treasury bills it issues. The government has paid an average of 5.4% on the money it borrowed in this fashion, or did it? During this 50 years, the average inflation rate has been 4.1%. The government paid 5.4% interest but paid back with dollars that had depreciated by 4.1%. The cost to the government of the borrowed money was 5.4% minus 4.1% or 1.2%, or was it? The government levied taxes on the 5.4% at an average rate of 18%. Thus the governments net cost was 5.4% times .82 minus 4.1% or .3%, or was it?

The reality is that the government actually makes money off seinorage, which is the difference between the value of money and the cost to produce it. If it cost a nickel to make a $100 bill, the difference between cost and value is 95 cents. If that hundred dollar bill is lost, burned up or worn out in a remote region of Siberia, the government has printed a piece of paper and sold it for $100. Even for dollars that are not destroyed, the government issued a peace of paper in exchange for canceled debt in the amount of $100 and the government pays no interest on that $100 for as long as it floats along. Since the dollar has just kept on declining in value for the past 50 years, one of these dollars kept in a piggy bank for 50 years will now buy 13 cents worth of goods.

All of the above amounts to saying that the dollar falls because the government wants it to fall. One of the "beneficial effects" of the falling dollar is that it serves to speed up the redistribution of stagnant wealth.

THERE IS GOLD TIED UP IN THAT REAL ESTATE

In the past 30 years or so, the world has enjoyed more than just a technological revolution. It has also enjoyed a financial revolution. The revolution is similar to the development of the fractional banking system. People around the world have come to realize that owning a fully paid for house is similar to the days when "money in the bank" literally meant gold on deposit. The gold paid no interest and yielded no profit. The value of gold over time only keeps up with inflation. In the example of the $1 in the piggy bank now buying only 13 cents worth of goods is the same thing as saying that a $1 worth of gold in the piggy bank 50 years ago would buy a dollars worth of goods today. Money tied up in real estate is money that could be put to more productive use. As you can appreciate, I am writing this statement at the worst of times. It takes people variable lengths of time to learn how to properly use credit and some never learn. There will always be people who borrow too much and there will always be skilled borrowers who hit tough and unpredictable situations. Still, we don't throw away our kitchen knife or skill saw because they have the potential to cut our fingers off.

The tough thing to learn is that the bankers, insurance companies, brokers and other "commercial borrowers" are in competition against you. This means that the best time to borrow is when it is toughest to do so. Banks do not want to loan money when there are mortgage pools selling for 30 cents on the dollar. The bank that buys a pool of mortgages for 30 cents and sees the repayment of 95 cents plus the full interest due on the 95 cents, makes a lot more money that loaning you money at 6% to buy a house. The fact that you might buy the house at a discount of 30% of next years value gives the bank no great joy.

Over the years, it has been interesting to watch insurance companies dramatically jack up the price of insurance on beach condos near the bottom of the market bottom. The excuse is always placed on a storm like Katrina that happened way back in 2005. The fact is that it is easier to accumulate large quantities of real estate at cheap prices if insurance rates are high during the worst of times.

THIS TIME IS DIFFERENT -- NOT REALLY!

In cycle after cycle the phrase is repeated that this time is different. Indeed, history does not really repeat it self but history does rhyme with itself. The readers friend says that the recessions of the 80's and 90's were the result of the Fed raising interest rates to moderate the economy. He went on to say that this recession is a result of fundamental issues such as the credit crunch, high oil prices, etc. I would like for your friend to show me another time in history where the FOMC held sort term interest rates higher than long term rates for 19 months in a row!

Central bankers and investment bankers cooperated to cause the credit crunch. Mixing weak loans with strong was done in a way to poison the whole barrel of loans in the short run. The US government went along with the strategies employed by investment bankers to sell polluted barrels of mortgages to any and all comers. Then, after the FOMC put the hammer down on interest rates over a period of 19 months and dried up pools of excess liquidity, the government rules dictated that the entire barrels of mortgages be treated as toxic waste. The great majority of paper in these barrels is "money good paper". Most of these mortgages will be paid in full along with the stipulated interest payments. Yes, this is "different" than last time. In 1989 the government put the hammer down and put a lot of banks and savings and loans out of business. The government established the Resolution Trust Corporation of America to buy up the "bad loans" and foreclosed properties. Those who bought properties at the depressed prices of that day made out like bandits.

This time is different in that the decline in real estate values has really not been much. Sure, there are pockets of misery but in more than half the cities of America the average home went up in value over the past 12 months.

THE HIGH OIL PRICE

The story of the high oil price is the opposite of the rest of this story. The primary reason the price of oil is so high is because of tremendous world wide economic growth. The price of oil has gone up because even at $100 per barrel there is still demand for oil. The fact that the dollar has fallen has made the price of oil go up less in terms of other currencies but even so the price of oil has gone up.

It is not unusual for it to take time for price to cure price. The demand for oil is inelastic (not flexible) in the short run. The guy that owns a new V-8 SUV is not willing to sell at a loss to reduce his demand for oil. However, given a little time, high oil prices cause aggressive exploration and aggressive conservation.

The second reason the price of oil has stayed high is political. Misguided souls have fought to "save the environment". The result has been that the cheapest available sources of new energy have been put off limits. The USA owns a trillion equivalent barrels of oil or so that is just off the coast. This oil could be accessed with no real long term environmental damage. By the same token, nuclear power plants could be built that would reduce our oil needs. Instead, trillions of tons of dirty coal are being mined. The railroads are having to add the second set of rails to the great coal fields of America. Another angle to the problem is that energy investors have had to build in the risk that they will be "assaulted" by the policies favored by Hillary and other democrats. Exxon Mobile just paid $30 Billion to the US treasury in taxes but Hillary wants more. If you are an XOM shareholder, do you want the company to spend 6 Billion on a new refinery that will need 30 years of profitable operation to make sense, if Hillary is prepared to change the rules after the plant is built?

The third reason oil prices are high is because of political risk in the producing countries. This risk is more perceive than real but the perceived risk has added as much as $20 to the price per barrel. The reason the risk is only a perceived risk is because the producers would be hurt badly by any disruption in production. It is in no ones long term interest to stop the flow. Chavez has threatened to shut down supplies but the country is already suffering through a "food crisis". Iran's official unemployment rate is 11% but, the real rate is probably at least 20%. Still as long as people believe the risk is high, they will respond accordingly.

GETTING OVER THE HUMP:

There is a lot of good news brewing for oil consumers. The timing of most of the good news is uncertain. Elephant oil discoveries that should have come on line by now have been delayed. The Caspian Sea has turned out to a tough environment for bringing a monster field on line. The super monster fields discovered in Brazil will take several more years to come on line, but in the mean time the total size of the find continues to be assessed and estimates of total size continue to be raised.

More immediate help will come from "a little more from here and a little more from there". Angola, Newfoundland, Ghana and a long list of other places will add production this year. Economics ultimately wins battles and the plan being hatched by Iran and Iraq to jointly develop fields along their borders shows the power of the profit dollar. It makes sense to jointly develop fields rather than to fight to suck out the most the fastest. The science of oil recovery requires pressures to be maintained. A new well in Iran might destroy the investment made in a well in Iraq and vice versa.

As long as people believe oil prices are going up, they will hoard supplies. However, over time, the belief that prices are going to go up will be the straw that allows us to get over the camels hump.

This time is different in that global economic growth has not slowed as much as one would expect by the time of the mid cycle turn. China has raised rate and increased reserve requirements again and again but it just reported an inflation rate of 7.1%. The government is allowing the Yuan to float up more quickly and the numbers are showing up in the US trade accounts. The US has seen extraordinary strength in exports of manufactured goods.

Yes, our dollar is now so cheap that our industrial production is strong even during a time of recession in housing and autos! In the old days, recessions in housing and in autos at the same time meant the rest of the economy was in sad shape.

HOW LONG TO GET OUT OF RECESSION?

For me, the more important question is when will the stock market soar? The stock market will appreciate well before the bottom of the economic cycle. Indeed, the US is still likely to avoid going into a full blown recession because the steep drop in interest rates has already started to work its magic. Problems are already being "solved". Another shoe could fall but the evidence suggests that old shoes are getting repaired. I believe it was AMBAC that just raised $2 Billion dollars. The big investment bankers have made deals with sovereign investment funds to give them the strength to hold and buy more of the deeply discounted mortgage pools. The big drop in rates means has taken 300 basis points off rate resets. Suddenly a number of homeowners who were expecting rate increases will see rate decreases.

As I have pointed out, the four legs to the investment stool all support higher stock prices. The answer to when the recession will end (if there is a recession) is that it will end about 3 months after the stock market soars.

HILLARY OUT -- CAN THE MOST LIBERAL SENATOR WIN THE GENERAL?

So far, this has been a most remarkable election. Among the amazing stories is that the most conservative republican candidates split the vote of the republican base and thus nominated the most moderate of the republican contenders. On the democratic side, the most moderate of contenders split what little moderate vote there was a few ways and no moderate ever won significant support. The democratic contest quickly became a battle among the most liberal contenders. John Edwards bashed the corporate world to an extreme and the final contest was between Hillary and Obama. The US Senator who scores as having the most liberal voting record has all but won this nomination. Another way of looking at this contest is that the anti war vote trumped the big government universal health care vote. Hillary is still in the contest but unless she can win both Texas and Ohio by strong margins on March 4, she is toast.

STOCKS ARE UNDERVALUED

So far, 2008 has been a time of political and other "noise" getting in the way of market success. Stocks are cheap. A major part of the reason stocks have gotten so so cheap has been attitude. Investors have hunkered down. As a result, a mountain of cash has been deposited to short term money market accounts. After adjusting for taxes and inflation, his money is earning negative returns and much of it will flow back into stocks after they have soared in value. In this time of fear, the public has become more concerned for the return of their money than the return on their money. As a result, the US economy is be de-levered. The velocity of money has slowed faster than the FOMC has been able to pump up growth in the money base. Investors should remember that the more cash the FOMC deposits behind the dam, the bigger the ultimate flood will be.

STEADY PROGRESS

If the situation in Iraq was going the wrong way, it would be realistic to believe that the anti war fervor would carry Obama to victory in the fall. However, the situation in Iraq continues to improve. Obama has suggested that the war in Iraq has diverted resources from the war against the terrorist in Afghanistan. The reality is that tens of thousands of terrorist came to Iraq to fight and to lose their lives. All the while the leadership has been being picked off one by one. Today, tens of thousands of insurgents have come to the realization that they have been on the wrong side. Thousands have returned home and thousands more have melted back into the mainstream population of Iraq. This is a dangerous situation in the short run but it is nothing more than the repeat of history.

LOYALIST IN AMERICA

When America, in 1776, declared its independence from the oppressive government of Great Britain, approximately 30 to 40% of the population of the colonies remained loyal to the crown. WOW! 700,000 to 900,000 people were opposed to breaking away as an independent country. You may remember the pictures in your 4th grade history book of the Tories who were tarred and feathered for not joining the cause, but you should be wise enough to discern that these pictures have been used to make the point that there were divisions among the American people while glossing over the magnitude of that division. People were not just tarred and feathered. Many individuals were murdered. Land and property was seized. In more than one incidence, groups that tried to remain neutral, which included groups of Germans, Quakers and Indians, were forced to take up arms against militias. In one incidence, more than 100 Indians were slaughtered. One of the reasons the estimates vary from 30 to 40% is because many loyalist understood that they had to talk in terms of freedom from oppression at least until the British Troops came.

The problem for many of these loyalist was that they "showed their stripes" after the British captured their city only to receive retribution once the city was lost or abandoned. You see, the British did not send enough troops to hold the territories they had captured. Does this sound familiar?

The British tried to do a "troop surge". They hired German soldiers; they successfully recruited blacks by promising freedom; they successful recruited Indians by promising "ownership of native lands"; and, they organized loyalist militia. One trouble the British ran into was that some of the recruits turned out to be enjoying the pay while serving as spies for the Continental Army. Again, does this not sound familiar? Another problem the British had was the help given to the colonies by the French and the Spanish. Even India chipped in by seeking its own independence which diverted British troops to India, where French troops supported India. In the case of Iraq, the combination of the Pakistani on the one side and NATO on the other has kept terrorist in the mountains of Afghanistan busy.

Those who oppose the Iraq war are quick to suggest that America has no business being in the middle of another countries civil war. This attitude leaves out a lot of points, including the fact that the terrorist have been hijacking and blowing up American airplanes for better than 30 years, America is not in Iraq just to help Iraq, we are also there to "take out" one more pillar of support for terror. The escalation from holding passengers for ransom to flying planes into inhabited sky scrapers is a result of allowing the "class bully to get away with the little kids lunch money". The class bully grows up to be the hardened criminal if he is not confronted early and often. It gets tougher and tougher to turn the tide as the "class bullies from Yemen join the ones from Libya and the ones from Iran, Saudi Arabia, Afghanistan, Syria, Egypt, etc. A telling story is that Iran stopped one program to build a nuclear bomb immediately after the US invaded Iraq. Another point is that Americans can never fully repay the debt we owe to those who helped us win freedom. Furthermore, it is our responsibility as good citizens of the world to help others.

Again, we forget just how tough it was for us to break away from oppression. At the end of the revolutionary war, 70,000 Americans moved to British North America (Canada). Another 7,000 or so went back "home" to Britain. Seventeen thousand settled on Caribbean Islands. Thirty-two thousand moved to Nova Scotia. Countless others, who had remained loyal to Britain to the end decided to stay here. From 1783 to 1796, many of these folks suffered through legal and illegal persecution. Some were able to regain property but others lost their families or their lives. Even many who fought against the British were accused of being loyalist by those who had seized their property while they were off fighting. In 1795, 12 years after the end of the war, the Jay Treaty was passed to return legal right to confiscated property. The legal battles continued for years after the treaty was made law.

Last week, the Iraqi government passed a budget, set up local elections to be held in October and passed legislation to allow members of minorities to serve in the government. In contrast to the American experience, the progress has been swift. We should remember that once the British had success in recruiting black slaves to serve the British army in exchange for freedom, George Washington had similar success. Promises were made to slaves and Indians by both sides. At the end of the war, the promises to the blacks and to the Indians were generally broken. The point is not to bash America but to say that the Iraqi's are doing well despite making a few mistakes along the way.

Another "complaint" is that the Iraqi war is a religious war between the Sunnis and the Shiites. Where is the news here? During the American Revolutionary War, the religious splits were in every direction. Anglicans tended to include a higher than average percentage of loyalist, Quakers tended to have a higher percentage who sought to remain neutral. Several new arms of protestant denominations were formed as the offshoot of divided congregations.

During the war, the number of British seaman swelled to 171,000. Of these a high but unknown number were "pressed" into service. These means that young men were kidnapped by "commissioned recruiters" or they were sold into service by their parents. These parents knew or should have known about the "cat of nine tails" including metal flesh tearing barbs that were used on seaman. The parents of Sunnis who have sent children on suicide-homicide bombing missions committed a more humanitarian act than did the parents of these British citizens. Sometime between 1760 and 1770, John Newton, who had been sold into service by his father, a British Navy Commander, wrote Amazing Grace. Newton had felt the whip of nine tails and he had applied it to others. This wonderful song, a blessing to millions, was partly a response to the atrocities committed by those who will do what ever it takes to win. Newton sank pretty low before writing the song and coming back to England to serve as a minister. His sinking low was the process of working his way up from a conscripted deck hand to the Captain of a slave ship. He was one of many who knew they were committing great sin while doing what was expected.

Another interesting side story to this tale is in regard to Canada. Just prior to the Declaration of Independence, Quebec was invited to join as the 14th colony and there was considerable support among the people. To seal the deal, Benedict Arnold lead the continental army into battle against British forces. Had Arnold prevailed at the Battle of Vanour Island, Quebec would be one of the United States of America.

OBAMA'S MILITARY PLAN

Obama plans to withdraw from Iraq within 16 months, no matter what. Many Americans , who think believe this war was a mistake, understand that pulling out unilaterally would embolden those who would blow up innocents. The great "silent majority" of Islam believe terror is wrong. Attitudes are gradually moving our way. The bullies need to be confronted. Surely the majority of Americans will reject Obama's plan.

Rejecting Obama's military plan will also be a rejection of his economic plan. The irony about his economic plan is that the actions he would take to "help the little guy" would serve to hurt the "little guy" in the long run. As we should have learned from our experience in the 1970's, when we dramatically increase the cost to do business and use the power of government to misallocate resources, we end up with a poorer nation.

DR. PHIL TO THE RESCUE

Phil Gramm has been speaking on behalf of McCain in regard to economic policies. Phil has his doctorate in economics and he clearly understands the truths discovered by Milton Friedman and George Stigler. These truths include the concept of limited government being best. John McCain has expressed his understanding that given the opportunity legislators will always be inclined to build brides to the most remote parts of their home states as long as they can use "other peoples money". The truth is that the money wasted on these "bridges to nowhere" pales in comparison to the sum of all the small amounts spent other ways.

RESPONSE TO EDUCATION REFORM

A number of readers responded to my post about the need for education reform. Apparently the big misunderstanding about school choice is about who it helps the most; which is the "children left behind". The example of Florida tells the story well. A number of measures show that the students who received vouchers to attend other schools got a "better" education. Test scores improved a little, drop out rates declined a little, students were slightly more likely to attend college and both parents and students were generally glad they made the move. What is often forgotten is that the schools threatened by the loss of students and those schools that actually lost students changed their programs in significant ways. The test scores at these schools went up a little, teaching practices changed, drop out rates were lower and student and parent attitudes tended to improve.

Drew Cary has posted another good video at reason.tv. He tells the story of conversion of an LA school to a charter school. Around the country one can find example after example of school improvement when more choice is available. McCain correctly believes that allowing the student and the funding for the student to move to the school chosen by the student will generally result in better educations.

BOOM, BOOM, BOOM

The kind of reform to education mentioned above does not require new taxes. America all ready spends a lot of money on education. All we need is to allow the free market to allocate those resources to the best use.

HOPE is a word repeated time and again by Obama. For me, the nomination of the Senator with the most liberal voting record gives me HOPE that moderate, sensible policies will be adopted in the years ahead. The stock market will respond well.

The total sum of expenditures of a McCain government will be small relative to the expenditures of an Obama government. Of course, congress will attempt to push the expenditures of either government higher. There is no end to the idiocy of congress. John Dingell, Chairman of the Commerce Committee made my point last week when he said, "the president's idea for 'improving' the (medicare prescription drug) program is to stick the beneficiaries with more of the bill". Duh! Why shouldn't the beneficiaries of a new "collective buying program" be the ones to pay for it.

The bottom line is that McCain will real in the "spend, spend, spend" congress, save the tax payers a lot of money and increase the asset value of American companies.

BUY, BUY, BUY

It is believed that Air France-KLM will buy shares in the new DAL-NWA airline. It is also believed that Lufthansa will buy shares in the new CAL-UAUA airline. Lufthansa and UAUA are members of the Star Alliance. The plan is that alliance partners will arrive and depart from the same terminals at major airports. For example, a massive renovation to London's Heathrow Airport will allow Star Alliance partners to share the same terminal. The benefits to passengers who arrive on Lufthansa planes and depart on CAL planes and vice versa are obvious. The airlines will save money while the passengers enjoy a better over all experience.

HAPPINESS IS A FUNCTION OF IMPROVEMENT

Studies show that once a basic level of comfort is achieved, wealth does not correlate to happiness. What does correlate to happiness is the increase of ones wealth. The funny thing is that we often fail to realize if there has been increased wealth or not. We are constantly being told that prices are going up. We might be tempted to retell the story that our parents paid $2,400 for a brand new deluxe car in 1956. In the telling, we forget that the car did not have air conditioning, anti skid brakes, rust protection, GPS, automatic transmission, automatic locks or cruise control.

Between now and the November elections, "times" will have improved. The public will be feeling better about themselves, the economy and the state of the world. Smart investors will buy now before the euphoria lifts the price of shares.

BREAKING OUT NEWS

Good numbers from Wal-Mart and HP, good news in regard to new capital for mortgage insurance companies, good economic news, good news from Cuba, good news from Venezuela, good news from Pakistan --- the market seems ready to respond to a long list of good news.

Some of the good news is about world wide economic strength. For example, in January, auto sales were up 41% in Brazil, Australia and Scotland announced record low unemployment rates, home prices jumped in Hawaii, residential sales jumped in Detroit and home prices in London went up for the first time in two or three years. In the USA, the production of high tech equipment jumped 18.7% over last years pace. As mentioned before, India announced the addition of 83 million cell phone subscribers since last year!

The international political news is generally breaking "our way". The passage of three key bills in Iraq means that political reconciliation between Shiites and Sunnis is moving forward. The votes in Pakistan show that democracy is on the march. The step down of Castro opens a door of hope to the people of Cuba.

Technologies such as femtocells are seeing rapid adoption. Femtocells is the packing of cell phones with a second band that automatically takes the phone signal over the Internet when ever the phone is in range of a wireless router. The reason this technology is going to be adopted quickly is because it saves the cell phone companies such a massive amount of money. What is so different now is that a great idea can be implemented so quickly. For example, a web site has been set up that allows those who find out that they have an STD to send an anonymous email to multiple sex partners. We do not condone the behavior that makes this necessary but we do hope that those who might have a disease learn that they should be check during the early phase of the disease.

Some of the new technologies are finding new avenues of support for additional research. A lab in South Korea has accepted a fee of $150,000 to clone a woman's dead dog. Amazing things are going to come from genetics labs over the next several years. The idea that the first person who lives to be 1,000 years old is likely to be born only 10 years after the first person to live to be 150 years is a mind bending concept. Once we know how to regenerate one "system" the next will not be far behind. It is already true that by pass heart patients when injected with their own stem cells, derived from extra fat cells, grow new heart muscle and new veins.

One of the new robots, is a submarine that draws power from the difference in warm and cold ocean water. It runs off an electric motor and keeps going for an undetermined amount of time. Scientist are getting a tremendous number of reading such as water temperature, salinity and plant life from these robots. Another new robot will be sold to the public this fall. It is a new Elmo doll that kicks interactivity up a whole new notch for a price of $59.99.

BAD NEWS

Yes, there is still a lot of bad news to be found. A refinery explosion in Texas has taken 75,000 barrels per day of product off the market. Home prices are still falling in former "hot spots" such as Miami, Phoenix and San Diego. Iraq is still flaring over 600 million cubic feet of gas per day and Russia, Nigeria and Iran all flare almost as much. Long term interest rates are ratcheting back up.

OH LONG TERM INTEREST RATES ARE RATCHETING UP!

This bad news is another case of bad news being good news. The rates are going up because economic activity is picking up. Those who have been waiting for the best loan rate before buying a home had better act quick! The BOOM, BOOM, BOOM is coming. ARE YOU READY?!

EVEN THE DISMAL TALK IS GOOD NEWS

Successful investors learn to go in the opposite direction indicated by the talk of the pundits. The best prices are always found just when people think the worst of times are on the way. The negative talk actually serves a real economic purpose. The ugliest of times are caused by high inflation rates and one of the cures to high inflation is dismal talk.

The inflation formula is as follows:

Inflation = the rate of money growth (%M) + the change in the velocity of money (%V) - the rate of product output growth (%Y).

The above formula is nothing more than the concept that inflation is always a monetary problem, that of too much money chasing too few goods.

For several years, leading up to last August, the growth in the money base was held down by central bankers. Month after month, the economies of the world continued to expand rapidly because the velocity of money soared. People and businesses around the world were borrowing and spending. Hot money flowed quickly from bank to customer, from customer to bank and back to another customer. All the while, inflation was kept very low because the tail end of the above formula was growing even more rapidly than the front end. The output of goods soared. The sum of money growth and velocity was high because the velocity was high but the output of goods offset the change in velocity. Indeed, the price of manufactured goods fell.

Over the past several months, the situation has taken a dramatic turn. The FOMC has pushed up the growth rate of money in order to offset the dramatic slow down of velocity. The rate of growth of production also slowed. It is a normal sequence at mid cycle turns for inflation to pop up a little as the slow down in production coincides with the sharp increase in money growth. It is normal for pundits to talk about stagflation at turns as it is common for real growth to show considerable weakness partly because real growth is reduced by the inflation rate. (the formula is V*M = P*Q which is also = real GDP * the GDP deflator).

Part of the reason the chair of the central banks have to talk so dismally and show so much concern is because they feel the need to talk the inflation rate down. In other words, they can reduce inflation by convincing the markets to slow down the velocity of money. Once inflation is brought under control, the sentiment will change quickly. Talking down inflation allows interest rates to be cut to the point that the future economy is dramatically stimulated. That is where we sit today. The time required for interest rate cuts to kick in has already occurred. In the short run, asset buyers have waited for the bottom in rates. The "big" purchase for the average person is a home. The cost of buying a home drops hard as the interest rates fall. If one can wait a few months to lock in a 30 year loan, one can save a bundle over the life of the loan. Multiply the savings many times for a power company, an oil company or any other company that needs to finance a new project. Time appears to have already run out on those who hoped to buy at the exact bottom. Long term mortgage rates are already lifting up a little.

The market is betting that the FOMC will have to cut interest rates at least one more time. However, there are signs in the international market that cuts already made are causing growth in economic activity. Eastern Europe for example appears to have already come in for a "soft landing". Growth in a number of Eastern European countries has fallen from double digits to single digits, inflation picked up for a while but now growth is re-accelerating and inflation is moderating. Growth in Western Europe has slowed but these economies are not weak. Indeed, the average unemployment rate in Europe is at 7.2% which is the lowest rate in decades. All the while, China's citizens have headed to the malls! The Chinese are quickly learning that it makes sense to spend some of their new wealth. In a number of markets, Hong Kong being a good example, home prices have started climbing again. The first cut in US rates was about 6 months ago. The bigger cuts came only a month ago but rate cuts are cumulative. As production picks up again, inflation will fall, per the formula, which means the real GDP will be higher than expected. This also means that corporate profits will be higher than expected.

REMEMBER, THE BEST STOCK MARKET BUYS ARE MADE WHEN MOST PEOPLE BELIEVE THE WHEELS ARE FALLING OFF THE WAGON. Today, 81% of democrats believe George Bush has done a poor job as president and 78% of republicans believe the democratic congressional leaders have done a poor job. When you get extreme ratings such as these, you can bet on a turn coming soon!

A NEW WORD, DECLINISM, WAS COINED IN 1988

Allen Dowd has written a number of articles about the belief Americans have that the country is falling apart. The US is seen by many as being a nation in decline. The new word, "declinism", was coined in 1988 as a result of the belief that Japan was supplanting the USA as the economic power house. Dowd says that each decade we have something else to worry about. The cold war occupied the nation for years while it was assumed that the Soviet Union was about to become the worlds new military super power. Others figured it was Germany not Japan that was going to become the economic power house. At other times it was believed that America had lost its standing in the world because our imperialistic policies failed in Vietnam. In more recent times, we have suffered a loss of support in the world because we took over Iraq "to get its oil" while failing to look after the victims of Katrina. The story goes that it is America's fault that the terrorist are blowing up innocents.

Gerald Baker rebuts with the fact that even after the expansion of the EU to include eastern bloc states, the growth of the US will make the US share of GDP twice the size of the EU by the year 2021. He notes that we have spend 100's of billions of dollars helping out the victims of Katrina, more than what has ever been done by any other nation to help those who were hit by any other natural disaster.

DECLINISM IS NOT NEW

In 1843 Thomas Carlyle, a Scottish Essayist used the term "dismal science" to describe the science of economics. Carlyle was brought up by strict Calvinist parents who expected him to become a preacher, before he lost his religion. His view of the world became pretty dismal when he saw the problems inherent in the laissez-fair form of capitalism that sprung up during the industrial revolution of the times. As we now know, when technology cuts the cost of manufacturing, jobs are initially lost. Carlyle was just 16 years old at the start of the Luddite movement. Ned Ludd was a man of action. If textile factories were going to be closed down as a result of water wheel powered looms, Ned said tear down the water wheels. It does seem natural to think that if water wheels reduce textile workers jobs that water wheels are a bad thing just as bad as a NAFTA trade agreement. The Luddite Movement was so strong that it took the British Army to stop it. Fifteen years after the start of the Luddite movement, the Reverend Thomas Malthus wrote the first of his 6 editions on "The Principle of Population". If you want to talk about "dismal science", read Malthus. He believed that the people of the earth are doomed to cycles of prosperity and famine. He believed that the population would always ultimately out grow the agricultural production necessary to feed the people. He saw no way out of starvation for millions of people. Malthus could not even imagine a rice plant producing 30 times as much rice as the plants of his day.

The story of "gloom and doom" goes on and on. The time of 1884 to 1914 is called the age of modernism. During this time, the concern was to try to figure out what was holding progress back. The German philosopher Nietzsche saw tragedy as an affirmation of life. War War I seemed to confirm that tragedy of one form or another would always come to end all eras of prosperity.

Yesterday, Mark Perry posted a link to an old Forbes article by Virginia Postrel. The article is titled, "The American Standard of Whining". She notes that the greatest proponent of free markets, Adam Smith, who wrote "The Wealth of Nations" in 1776 understood the need for news reporters to focus on "declinism". He wrote, "a continue series of prosperity would not give us near so much pleasure as an epic poem or a tragedy which make but one continued series of unhappy events." In other words, it seems to be human nature to want to hear and to repeat the "horror" story.

Today, we have people on both sides of the isle feeding off the public's voracious appetite for bad news. Pat Buchanan is one on the right who has made a few bucks by writing about how the US is becoming second rate. Hillary and Obama seem to be in a contest to tell how America has fallen in the eyes of the world. All three of these folk seem ready to end the prosperity brought about by free trade. One of the silliest things you will ever hear is the idea that the Chinese are unfairly manipulating their currency to take advantage of America. What these people apparently believe is that we are being duped because China is selling us stuff at too low of a price. Pat does not need to worry so about the power of the Chinese. No matter how economically strong they become, it will still make economic sense for them and for us to trade with them. Both countries will continue to benefit as long as we are willing to trade.

Allen Dowd does a good job of turning the thoughts of these folk upside down. He points out that from the foreigners point of view, "globalization is another word for Americanization". Here we are upset that English is only learned gradually by immigrants to the states when it has become the universal language of the world. We are upset about building factories in India when these factories actually represent the fact that the US dominates world commerce. A few examples mentioned by Dowd include the domination of the personal computer market by Dell and HP, the fact that 330 million PC's run MSFT operating systems and that Apple iTunes has displaced the Sony music download system in Japan! He goes on to mention Google's dominance in search and the 30,000 McDonald's restaurants outside the USA. Seventy percent of Coke is sold outside the US and Starbucks has stores in 39 countries. I considered posting a list of all the different international store brands owned by Wal-Mart but decided not to fill another page of text to make the point. Suffice it to say that there are 2,700 Wal-Mart Stores outside the USA and there are less than 30 countries that have a GDP larger than Wal-Mart sales. Obama likes to attack Wal-Mart but an objective study of the facts would probably show that Wal-Mart has brought more wealth to more people than any other organization in history.

NO ARMIES IN UTOPIA

George Washington initially believed that the USA did not need to maintain a standing army. Unfortunately the laws of nature require all species to be ready to defend themselves. The history of our country has been one of a "Stop and Go" military. We quickly forget the lessons of the past and are quick to lower our guard. The cost in treasure and lives has been enormous. We can only wonder how many lives were lost by the communication sent to Hitler from Franklin Roosevelt in 1938 that said, "the USA has no political involvements in Europe"? Britain and France have received the most criticism for trying to appease Hitler but the US was guilty as well. We let down our guard, informed Hitler that we would not stand up to his annexation of Austria and our actions ultimately cost millions of lives.

Less than 10 years ago, the US was enjoying a "peace dividend". We enjoyed a strong economy while not bothering to confront Islamic Extremist. The good news is that only a few hundred thousand lives have been lost in this war. The toll would have been much higher had the US not taken the preemptive steps necessary to confront the "bad guys".

American is blessed in so many ways. Our blessings include millions of well meaning educated people. Michelle Obama graduated from Princeton in 1987. Last week, she made a speech in which she said that "For the first time in my life, I am really proud of my country." WOW!

America is the land of the most charitable people in the world. We voluntarily give more to others per capita than any others. In addition to this individual giving, we have repeatedly donated the blood of our finest on behalf of the oppressed. The charitable giving is a measure of private donations but as a nation we spend billions of additional funds in service to our fellow world citizens. We catch a lot of grief and we certainly could do more but we need not beat ourselves up for not being perfect (even though we miss perfection by more than a few country miles). I am a proud American!

THE NEW PARADIGM

One of the TED lecture series notes that man has survived through cooperation. Surely we are competitive beings but the examples of man helping others is blossoming in ways that were unimaginable just a few years ago. People have spent millions of hours completing Wiki encyclopedias and millions of other hours sharing knowledge in other ways and without compensation. The speed of life has increased dramatically because we have found new ways to build trust in one another. EBAY's rating system is an example of how two total strangers can agree to a long distance transaction with confidence of being treated fairly.

Along the way, a backlash has developed. The NAFTA law signed by Bill Clinton contributed to a great surge of wealth in the USA and the much of the rest of the world. It is not unexpected for such a successful law to receive backlash. The Luddites of Britain were rebelling against machinery that was ushering a new age of prosperity but the dramatic increase in efficiency put some people out of work temporarily. It was the French who took off their wooden shoes, Sabots, and threw them in the gears of machinery in their attempts to destroy the industrial revolution. The French did not give up easily, they broke the Sabots that held railroad tracks in place during the strike of 1910 and only last year were the French laws changed to permit workers to be fired. It took unemployment rates of 22% to make workers willing to accept rational economic policies. The rapid pace of technology has caused the rapid destruction of jobs in America. The prosperity created by the new technology is allowing millions of people to find better jobs.

Twenty or so years ago, uneducated Americans were quick to condemn the hiring of Chinese at $2 per day to make Nike tennis shoes. The unintended consequence of the protest was to punish the Chinese workers by sending them back to their old jobs. The old jobs paid 75 cents per day. Today, $1 per day workers are finding $3 per day jobs and living far better than their parents lived.

One of the things that Americans need to understand is that we reduce the probability of war by trading with others. Milton Friedman was one of the greatest economist of all time. In 1962 in "Capitalism and Freedom", he wrote that political freedom follows economic freedom. One does not need to be a brilliant economist to understand that a hungry man is more likely to be aggressive toward his neighbors. Milton was famous for a lot of ideas. For example, he was the one who declared that there is no such thing as a free lunch. It has only been in recent years that this concept has been more fully understood. Today, millions and millions of micro loans are outstanding. The poorest of people are borrowing small sums of money to get an economic start. Because the people are required to pay the money back, the money is lent to those who have an idea about how to invest a small loan to get a return. A common example is a loan to buy a bicycle that might be used to haul products to a village market.

PAY IT FORWARD OR PAY IT BACK

The concept of paying forward has been around for a long time. Sociologist have found what they call general reciprocity in all sorts of religions and cultures. The concept was practiced among family members in ancient days, when grandpa helped his son, he expected nothing in return except similar treatment for his grandson. Among the Amish, the concept is routinely practiced when it is time to "raise a barn".

Today, many people are "barn raisers". People cooperate to build everything from community green ways to computer networks. It does not matter if one promises to pay it forward or to pay it back, the deed is not a free lunch. Still it certainly is nice that people today feel that they can afford to do a deed without the hope of getting back direct compensation.

DISMAL TALK BUT EVIDENCE OF GOOD WORKS

Yes there is still a lot of dismal talk all around but there is a lot of good stuff happening. One of the good things that is happening is that people all around the world are discovering that it is not a good thing to confiscate the property from the wealthy. Back in 1999, Russia had a 44% marginal income tax rate and the government took in about 100 million dollars per year. By 2001, the tax rates were collapsed into a flat 13% rate. Government tax revenues by 2005 reached 700 billion dollars; seven times the tax revenues were collected by charging one third of the tax rate! Who cares? The people of Russia care because the economic revival has been a blessing to the entire population. The people are living much better.

HOPE AND DISMAL TALK

Obama talks about hope and in the same breath talks about taxing more. Since the 1950's and 60's when Milton Friedman wrote about limited government being best, we have seen example after example where private systems serve the public best. It often takes years for free enterprise to remake the poor systems that develop as a result of government control. For example, the government monopoly granted to the telephone system of 1984 restricted the development of communications networks. Today we individually enjoy abundant streams of communication at a fraction of the old costs. We would not have the internet today if AT&T still had a monopoly. In like manner, it took 30 years for railroads to totally shake loose of the restrictions built up over years of excessive government control. Railroads are enjoying a building boom and the public has enjoyed lower cost over the past 30 years and they will enjoy lower costs over the next 30 years as a result of free markets. During a time of higher energy costs, it is easy to lose sight of the fact that railroad deregulation has helped to dramatically lower the real cost of electricity. Airlines are finally ready to spread their wings. FedEx and UPS has given us untold collective benefits.

The talk of change and hope implies forward movement but in this case it represents a reactionary movement. Many Americans dream about the "good old days" without remembering how tough those days were. Back in 1776, Adam Smith understood that people felt the need to tell about the wonderful days of old. Today, the average American believes that pollution has gotten to be a real problem. They simply cannot imagine walking down a street littered with horse manure while fighting off flies caring every thing from dung to typhoid fever. Did you ever notice the absence of horse manure in cowboy movies? Technology is taking us forward. Let's not fight it but use it. By using the new tools that have been provided, we can move toward Utopia. We will never get there but let's have fun on the journey! Even the dismal talk is good news because the market is ripe for rising up out of this swamp of despair!

WINSTON CHURCHILL TO THE RESCUE

With teacher unions in control of the US education system and with Obama and Hillary pushing socialist agenda, it is time to repeat the words of Winston-Churchill.

"The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery." Hillary and Obama profess to believe in capitalism. We must hope that they will move toward the middle for the general election and that they will meet their match by congress if elected.

The good news is that governments around the world are generally moving away from socialist policies. Ironically, it is the United States that operates a government controlled monopoly school system. Even so, the seeds of improvement have been planted in the US. Milwaukee will pay out over 100 million dollars in school vouchers this year. Sweden has shown that once the population enjoys the taste of school choice, it is hard to turn back. In the US, more and more charter schools are being attended. New York has made news by improving schools through choice and, indeed, improvements are showing up around the country. No less than 7 North Carolina High Schools made the Newsweek top 100 list. The list included 3 Greensboro schools, 2 from Raleigh and 2 from Charlotte. Chapel Hill almost made the list. NC has spent a lot of money while making education a priority. The government could save money and give satisfaction to citizens by offering more individual choice.

While Obama is to the left of Hillary on war, his willingness to push for charter schools and even for vouchers is unusual among democratic presidential candidates. His support reminds me of the philosophy of top management at Legg Mason, which is that economics wins in the long term. Politicians usually see the light but it often takes a long time. A wise old democrat once said that you are entitled to your own opinion but not to your own set of facts. Obama says the middle class is paying more in taxes while corporations are paying less. He needs to check his facts. Exxon, the firm that Hillary seems most "out to get", only paid 30 Billion Dollars in taxes! The sad thing is that common sense has been lost in the political shuffle. Common sense says that the right of individual choice is the solution to improved school performance and improved health care.

COMMON SENSE! WHERE?

Unfortunately, people like to be told what is common sense and what is not. One of my pet peeves, for 30 years or so, has been seat belt laws. I am like most other people in that I don't like to be forced into doing anything. On the other hand, I am all for saving lives and if one is going to be forced to surrender liberties to the state, it should be for a good reason such as saving lives. The problem is that mandatory seat belt laws have actually caused an increase in death rates!

This is one of those topics where it makes good political hay for the government to pump out statistics that say x number of lives have been saved. As usual, the best way to mislead is to start out with an element of truth. While it is true that the number of people killed in cars where the occupants wore seat belts has gone down, it is also true that the total number of deaths went down more in the countries without mandatory seat belt laws. The problem is that drivers who wear them tend to feel safe and to drive less carefully. The number of pedestrians, cyclist and passengers in other cars killed has gone up in countries where seat belts are required.

I have thrown out controversial words, not to wage a campaign to repeal mandatory seat belt laws, a more productive accident prevention campaign might be to encourage smart cars and smart highways. My point here is that, as lovers of freedom, Americans should strongly resist any new government mandates, with mandatory government health care being the prime example.

The billions and billions of dollars spent on seat belts over the last 30 years are like a drop in a barrel to what is proposed in regard to health care. A government funded health care program will cost trillions of dollars and many of those dollars will be wasted. If education and health care are rights, the citizens should have the right to choose how the funds should be spent.

In Vietnam, I used common sense when I accepted a position as a supply Sargent in relatively safe city of Da Nang. My alternative was to demand a position at an unknown and perhaps very dangerous location as company communications specialist. I quickly learned the ins and outs of Army Supply and soon became a valuable "employee" of my Captain. He came to know that by giving me leeway to trade what we could get for what we needed, we could get almost anything, including rib eye steaks, Thai beer, a ten ton air conditioner and a $750,000 crane. Our motor pool Sargent built extra jeeps and trucks from the scrap yard, the air force furnished all the lumber we could use, special forces offered AK-47's and "extra" munitions and the Navy had the best food around. Believe it or not, my ability to get all the red, green, yellow and white paint I wanted turned into a valuable currency. Those who knew how to work the system got what they wanted while those who waited for the proper paperwork to clear, waited and waited and waited. My view of government health care is wait, wait, wait.

Advocates of government mandated health care find systems with good health results and suggest similar systems for the US. Of course, every system includes trade offs and advocates suggest that a tweak here and there will improve the "other guys system" without adding much to the costs. Generally, the average person has no concept of the complications or the range of unintended consequences. We know from experience that socialist systems lead to inefficiencies and high costs. We know that markets allocate resources efficiently but often need sensible regulation. We also know that abundant information is key. The public will not pay too much for a service if they can easily see when a lower price is offered by others.

WII-REHABILITATION

One never knows where the market will take you. The game machine, WII, offers the latest health care solution. Patients who need to be rehabilitated after strokes, surgery, broken bones or combat injury no longer toil away at boring exercise routines. Now they play WII games. Bowling, golf or tennis include a lot of movement that is not boring. Patients who experience pain while doing rote exercise often forget about the pain while they try to win a match. I can hear the complaints about tax increases for the purpose of buying video games! Private enterprise can buy these games if they save time, effort and money.

GOOD NEWS ON TERROR

In the past week, Iraqi forces have captured 212 weapons caches. Over in Syria, a terrorist involved in air plane hijackings 30 years ago, Mungniyah, was blown away. It seems like a major terror leader or two are killed or captured each month.

To have found 212 weapons caches in one month must have required human intelligence, satellite reconnaissance and perhaps "electronic sniffers". It only takes a tiny trace, measured in parts per billion, for today's electronic equipment to track weapons.

The foot print of active terrorist cells continues to shrink. Countries no longer openly support terrorist. Of course, there could be any number of sleeper cells in any nation.

WAKE 86 DUKE 73 hehehe

DAL-NWA

The Economist.com site suggests that the airline combos will be DAL-NWA, CAL-UAUA, and AMR-LCC. Another report is that Air France-KLM will buy into DAL-NWA and that AMR will work out an expanded deal with British Airways. Air France-KLM is the largest carrier in the world but the combination of AMR and British Airways would be bigger.

The question arises, that if DAL-NWA is going to be a non cash, share swap, why would they need to sell a share to Air France-KLM? The answer has two parts. First of all, to fund the purchase of the new generation of fuel efficient planes. The second is that the boom in international air traffic is not from and two the points of old. The dramatic expansion of business includes relatively small cities around the world. The company that makes swimming pool parts in Clemmons, NC might have a "sister" facility in Montenegro. The flight to and from will probably involve a change over to another carrier. The range of new planes make direct flights to and from major cities common. One of my reasons to like CAL is because it continues to add long distance direct flights. However, cooperation with others carriers is the way to lock up the "other half" of flights to smaller cities.

Low cost discounters in the USA seem to be stuck at a 30% market share. Hubs provide the edge for the international carriers.

OBAMA -- HILLARY

Hillary is disliked as a person by 78% of republican voters. Obama is disliked by only 17% of republican votes. McCain is well liked and his service to the country is widely appreciated. The current surge by Obama is partly due to the polls that show him as winning against McCain. Democrats and Republicans know McCain and Hillary. Obama is the new face. Between now and the general election, Obama's negatives will go up as Americans get to know him better. Most political observers believe that the democratic nomination is now Obama's to lose. I still believe Hillary will win Texas, Ohio and Pennsylvania and that she has a better than even shot at winning the nomination. Obama will win Wisconsin Tuesday but the with big numbers out of big states, Hillary can retake the lead. Low and behold, the delegates pledged to John Edwards could put John in the cat bird seat!


By the way, 81% of democrats strongly disapprove of the job performance of George Bush. Only 7% of republicans believe Huckabee has a chance to win but 26% wish that he could win.

BOOM, BUST, BOOM

The US auto business has joined the US housing market in recession. Auto sales are down about 9% from last year. On the other hand, the steep decline in short term interest rates in the US is the equivalent to spiking the international punch bowl. Countries like China, Saudi Arabia and Hong Kong, which all have their currencies tied to the dollar, are seeing an inflationary boom, boom, boom.

The International Monetary Fund (IMF) projects that world economic growth will slow from 4.9% in 2007 to 4.1% in 2008, however, China's CPI just came in at 7.5%. Kuwait at 7%, Qatar at 14%! Oman just hiked government workers pay by 43% and gave the people a wheat subsidy. India keeps bumping up minimum wages for contract workers. Indians who contract to work in Bahrain must be paid at least $265 per month. The current rate for Indians in the UAE is at $170 per month but this rate is expected to increase to $230 soon. Qatar has such a labor shortage that it has set up training schools in other countries with jobs waiting for those who pass.

The fastest growing telecom market in the world is India. The country added 83 million mobile subscribers in 2007! The USA added 20 million and China added 76 million. India should pass the US in total subscribers by May of 2008. Current subscribers in China 534 million, in the US 257 million and in Russia 172 million. Pakistan added 26 million. The US is right at 90% market penetration. When India passes us by, the country will be at 25% market penetration.

THE BOOM, BOOM, BOOM WILL CONTINUE. The fear of recession is over done. The world wide boom is showing up in US production. Billions of hand held computers will be designed, built, sold and used in the next several years.

CHINA -- WORLD SUPER POWER!

The China miracle means that China will likely become the biggest economic power within 10 years. No need to worry!

The more developed China becomes, the more it will need products from the USA. In the old "ignorant days", people believed that a country could be an "Island to Itself". As I recall, Adam Smith published "The Wealth of Nations" in 1776. I believe it was not too many years later when David Ricardo gave us the law of comparative advantage. The simple summary of the work of Smith is: markets work! The Ricardo summary is: it pays to trade!

Even if China gains the technical know how to make all the stuff we make and even if China were able to make all the stuff we make cheaper than we can make it, it would still pay China to trade with us. China was a great nation a long time ago. One thousand years ago, China had technology that was not "invented" in Europe until centuries later. As I recall, around the late 1,200s, a new political regime took the country back into the "dark ages". Knowledge was purposely destroyed. Mao deserves credit for getting the health and basic welfare of the people lifted back on track about 60 years ago. The current miracle is likely to continue for some time. In any event, I do not see the people of China shooting themselves in the foot and deciding once again to become isolated. The fact is that no matter how good they become at any task, they will always be better at some task than others. It will always make sense for them to concentrate their energies and to trade with the US for the things that we do best.

BIG DAYS AHEAD.

Some important events will take place over then next two or three weeks. This coming Wednesday or Thursday could be a big day in the airline business. DAL and NWA boards will discuss merger on Wednesday. What will be will be!

ONLY THREE BIG AIRLINES

You probably do not recognize the names of the "big three" in the airline business, OneWorld, SkyTeam and Star Alliance. The law that prohibits foreign investors from owning more than a percentage of US carriers, encourages the "alliance" net works. New open skies agreements, like the one just made between Australia and the USA, also promotes alliances. These net works help international airlines reduce excessive competition. One difficulty of putting together domestic merger deals is that some mergers are likely to be among airlines that are members of different networks.

DAL, NWA and CAL are all members of the same network. This means that they generally work together to join flights at hubs rather than to compete on the same city pairs. Last week, when CAL announced its move from the Mexico city #1 terminal to the #2 terminal, the purpose was to move to the same terminal as the other SkyTeam members. Passengers can now transfer from CAL to DAL at Mexico City without having to travel within the airport from one terminal to the next.

Should the DAL-NWA deal go through, CAL will probably merge with UAUA. UAUA and US Airways are the two biggest US members of the Star Alliance. The Chair of UAUA has expressed a willingness to switch from the Star Alliance to SkyTeam in order to make a deal workable, the ultimate decision will be one of the most important ones made. It is said that AMR and British Airways are once again discussing closer ties. They currently cooperate as members of the OneWorld alliance. In any event, it is clear that the world is preparing to eventually get down to the "big three". The history of almost any business segment has been that the top three firms do well but the fourth often struggles. Today, there are a several hundred regional airlines. Most need to develop strong partnerships or perish. The days of the stand alone discounter are numbered.

CHAVEZ BLOW OFF

Hugo Chavez is a master politician who has pushed his luck to far. The people of Venezuela are paying the price. In the latest twist to this long story, Exxon did not back down from the confiscation of its Venezuelan assets. Exxon sued in various courts and billions of dollars of Venezuelan assets have been frozen, pending settlement of the dispute. The run up of oil prices for the past week is a result of Hugo's threat to suspend sales of oil to the USA. The problem for Hugo is that the USA does not need one drop of his oil. Oil is a fungible commodity. We can buy our oil from others. If Hugo refuses to sell to the USA, he will sell to others with his net reduced by the additional transportation expense. The USA will pay just a bit more and Venezuela will get just a bit less as a result of the extra shipping, the deal would be similar to having the USA contract with Spain for oil knowing that Spain would buy the oil from Venezuela. The current blow off in oil is the "Chavez Blow Off". James Williams, the "Energy Economist" notes that during this time of year, it is normal for oil inventories in the USA to fall as this is the peak heating season. The last few weeks, oil inventories have risen. While I have argued that there is no recession, I have also noted that a number of economies are growing slower. Slower growth means slower demand for oil and extra time for new production to come on line. The big new fields in Kazakhstan and in Brazil are truly monsters and they will be producing oil in a couple of years. Indeed, the next discovery in Brazil could put Brazil second in size to Saudi Arabia.

WHICH COUNTRY WILL CLIMB THE PROSPERITY TREE NEXT?

Spend some time at gapminder.org and you will enjoy seeing animated socio-economic graphs. They show the incredible progress that has been made in country after country over the past few decades. Still, 20% of all people currently live off of less than $1 per day. The old 80/20 rule still comes close to reality. Eighty percent of the people of the world enjoy only 26% of the income. Twenty percent enjoy 74% of the income. It is the break down of the bottom 80% that is most heart breaking. The bottom 20% receive only 2% of the world income. Many eat mud cakes to supplement a diet of grain.

Again, the good news is that great progress has been made. In the 1960's, poor nations and rich nations were separated by a wide gulf. Now there are usually overlaps. The richest people in the poorest of nations tend to be more wealthy than many of the people in the richest nations.

The progress can also be seen in terms of health. In 1960, 28% of all children born in Egypt died before they reached the age of 5. At the time, the average income was $1,000 per year. Today, 3.9% of all children born in Egypt die before they reach the age of 5. The current annual per capita income is $3,730. Note that the improvement in health is not necessarily in direct proportion to the improvement in income.

The improved health and incomes of the rest of the world is pushing all the people of the world to use resources more carefully. There is suddenly the need to do so. Given there is the need, the people of the world will come up with solutions. To put this problem in terms of America, back in the 1700's it made perfect sense to cut down whole trees and to use the logs to build homes. The work involved in slicing the trees into boards was not worth the effort. The walls of homes today have a 2" by 4" board every 16 inches. We have come a long way in regard to the use of lumber. Over the next 20 years, we will see dramatic new efficiencies in regard to the use of energy.

RAILROAD BOOM, BOOM, BOOM

Between now and then, the railroads are enjoying a building boom not seen in more than a century and a half. Coal fired electrical plants are being built at a rapid pace and trains are carrying huge amounts of coal. Also, the high cost of fuel is forcing tons of long distance freight to move from trucks to trains. Big money is being spent on rail infrastructure. This is true in America, China, India, Russia, Brazil and elsewhere. Once again, we can see big American companies like GE in the thick of things, but "it is different this time"!

SMART MONETARY AND FISCAL POLICIES

Despite my criticism of the FOMC in regard to helping to create the current economic mess, the fact is that a building boom does not have to be accompanied by rapid inflation and the dampening of the violate economic swings of the past show that the central bankers are doing better year after year. During the 1970's, an inflation spiral developed that decimated the savings and incomes of the people of the world. There was too much money chasing too few goods. To get a good deal, you had to buy quickly before the price jumped again. Under such an environment, workers were anxious to push up wages and companies were anxious to push up prices and the results sent people on a fixed income to the poor house. This time, with the exception of a relatively few commodities, there have been plenty of goods to go around. The price of manufactured goods in real terms has fallen and fallen some more. In a number of industries, there have been such an excessive amount of goods available that prices have fallen enough to put weak players out of business. The American textile industry is the prime example.

The goodness in regard to the current cycle is that the buyers of products, the many, are have been helped more than the makers of the products, the few, have been hurt. Indeed, the average American textile worker was not even hurt. The average former American textile worker makes far more money today than he made in his old job. A key point here is that you do not have to be a genius to work in a genetics lab.

The bottom line is that the world is in the middle of an economic boom like it has never seen before. Inflation has reared its ugly head in only a few areas where it has been compounded by policy mistakes. The big mistake has been in trying to use agricultural products for fuel. Never the less, quick progress is being made to correct the mistakes. Numerous breakthroughs will cause the reduction of the use of food stuffs as fuel. The price of corn in real terms will fall by more than half over the next several years. The very powerful law of substitution is gaining strength daily and lower priced alternatives will be used more and more and more.

WIFI AND OTHER TECHNOLOGIES TO THE RESCUE

The next big technology that will make a huge dent in the cost of lots of stuff is "Fixed-Mobile-Convergence" or FMC. Most people could get by very well with only one phone number. A dual band cell phone would do the trick. Walk into your house or office with a dual band cell phone and it would automatically switch to the equivalent of a portable land line phone. This technology has been possible for a long time but it will be adopted rapidly from here. Put another way, make the Internet browser work well on the phone and people will buy that phone. The i-Phone tells the story. The i-Phone user is about 20 times as likely to search the web by phone as are other cell phone users and the i-Phone is a slow connection. AT&T is pushing hard to roll out its 3G network nationwide. In the mean time, scores of phone builders are building their own versions of the g-Phone which will be designed specifically for use on the net. Suddenly, it is becoming more and more economical for people to spend their day connected to the Internet and the rest of the world by cell phone. More and more work is going to be performed outside the office. The cost of production is headed down!

CELL TOWER COMPANIES ARE IN A SCRAMBLE

Cell tower companies such as Crown Castle and AMT are in a scramble to provide more bandwidth at more locations. Share prices are up as are lease rates on towers. There are now about 200,000 towers in the USA and there are plans to build another 170,000 over the next 10 years. Many more "sub-stations" will be scattered around in church steeples and flag poles to fill in the gaps. The volume of traffic is going to multiply quickly. Smart highways and smart cars will be just one of the new "users". Lives will be saved when car cruise controls communicate with speed limit signs and with traffic computers. Less congestion, higher speeds and safety are all outputs available from having lanes dedicated to "robot cars only". Of course, restaurants, gas stations and other vendors will want much information to be available on GPS-phone systems. Road warriors will want to order their next Cracker Barrel meal from 20 miles out and Cracker Barrel will be happy to accept electronic prepayment. The "conversations between cars, coffee shops and bank accounts" will add all the more to the total bandwidth needed.

INTERNATIONAL TAX RATE CONVERGENCE

Instant and low cost long distant communications are contributing to tax rate convergence. Why pay high taxes in the USA if you can do the same work overseas and pay less?

Last year, Citicorp lowered its tax rate from 31.3% to 30.6% by moving more operations to countries with lower tax rates. McCain proposes corporate tax rates designed to halt the migration of US businesses to international locations. His plan is simple. He would reduce the corporate tax loop holes but lower the effective rates. Obama talks about ending the incentives for American companies to invest overseas. The vague words, "eliminate the incentives", are code for increasing tax rates. His plan must be to raise taxes quite a bit because he says he will pay for his long list of expensive promises.

Part of the reason people fall in love with democratic promises is because the belief has been planted that America is now economically behind a long list of other countries. Norway has been used as a prime example of a country that is doing more for the poor while being wealthier overall. Norway is a small country that discovered lots of oil. It has 7 Billion Barrels of Reserves. It produces 3 million barrels per day, uses half a million and exports 2.5 million. A couple of years ago, KPMG did a study and adjusted the disposable income by the cost of living to show that the people live like some of the poorest in Europe. This study probably over states the case but the point is that high income alone does not make ones life good. I did my own study in about 5 minutes by doing an Internet search. I found a listing of the "Big Mac Index". The reason I like this index is because it converts the cost of a Big Mac into dollar terms. By looking at prices in terms of dollars, one can see the relative value of a countries income. The price of a Big Mac in Norway is higher than in any country other than Iceland. It even is more expensive than in Switzerland. A relative of mine married a Norwegian woman. They go back to visit every couple of years. The story they tell is paying $18 each for two high balls and deciding that they had better quit drinking.

It is my hope that American will remain a bastion of economic freedom. On the other hand, it is smart for us to learn what works and does not work in other societies and to modify and adopt policies that help to solve our problems. I see two arguments in regard to health care and educational reform. One is in regard to funding and the other is in regard to freedom of choice. In my opinion, a system that forces the wealthy to pay something more than an equal share of cost is an area where compromise is needed. It is the freedom of choice that must be maintained and the funding must follow the choices made. For example, in education, the family should be permitted to chose the school and the government funding should flow to the school chosen. Over time, the system should include much segmentation, such that students might select from more than one math teacher, more than one music department, etc. The successful math program might pay its teachers double the salary of others and it might expand all across the nation while the ability of its students set new records. We will only know how well we can do when we allow all students to chose.

A CRAZY WORLD

Wouldn't you know that I started writing about how the airline business is in a stage of consolidation and ended by writing about how there needs to be more choice of schools. The common thread is that markets work to a point and that competition leads to improvements. The tricky part is that there is more than one kind of improvement. In the days before deregulation, airline travel and train travel were pleasant experiences, except that they were very expensive. Those who could afford to fly were treated well. Deregulation resulted in competition and cost cutting. Train engineers no longer get a full days pay for each 100 miles traveled (as much as 30 days pay for one 48 hour round trip from Florida to New York) and airline pilots no longer make 10 times the average wage for half the hours, but the planes are flying full and trains are hauling record amounts of freight. The total savings has been hundreds of times more than the reduction in wages. The quality of life has improved for the tens of millions of people who can now afford to visit their loved ones or to enjoy vacations. The lower cost of transported goods has raised millions of people out of poverty and has raised the standards of living for all others. The health care and education "industry" is in need of similar reforms. We can get a better return on our investment. Elections make a difference. This is the year to be engaged.

Do me a great favor and forward this message to a friend!

BUY THE BIG HOUSE NOW!

The super strength in US exports suggests that the fall in interest rates might be over. If you plan to "buy the big house" you need to get your motor running. As soon as it becomes clear that the FOMC is through cutting rates, the big bargains in the housing market will disappear quickly. They will disappear for two reasons; because fearful sellers will lose their fear and because it will take many months for builders to start new projects. Because builders have been hammered (:-) badly, they will not start building much until the current supply of unsold homes is reduced.

OBAMA CONTINUES TO GAIN MOMENTUM!

For a very long time, I have believed that Hillary will be the democratic nominee. The Clintons are still owed a lot of political favors. Sill, if Obama is able to go to the convention with a significant lead, I do not believe the super delegates will swing the vote to Hillary. Hillary win a chunk of delegates in Texas. She is currently leading the polls in the big states of Ohio and Pennsylvania. During the next 3 weeks, her weakest state of the "big three" is Ohio. Should Obama break through in Ohio, the race is over!

IF THE ECONOMY IS SO BAD, THEN WHY IS IT SO GOOD?

The US economy continues to show strength. How can we be in a recession if retail sales are strong, unemployment claims are mild and exports are booming?

Of course, a strong world economy combined with a weak dollar means that sales from America should continue. One of the boom, boom, boom businesses in America is the production of newly created health products. US companies, including one head quartered in Winston-Salem NC, are making human tissues grown in labs. There is some really exciting stuff being done.

I am sure you know that a salamander can regrow a broken let or tail. Did you know that if a 2 month old human fetus loses an arm, it grows it back? Did you know that a child, under the age of 5 is able to grow back a cut off finger tip? With the support of a new material, produced in an American lab, a 78 year old man was recently able to grow back a cut off finger tip. The material has also been used to heal diabetic ulcers. It is anticipated that it will help burn victims grow back skin.

Alan Russell has asked the question, "Why Can't We Grow New Body Parts?" and his answer is we can! In Winston-Salem, human bladders and other tissues are being grown in labs. By using the patients cells to grow the body parts, there is no problem with rejection. It turns out that stem cells can be harvested by performing liposuction on the patient. The stem cell debate use to be about how to harvest enough stem cells. In America, there are plenty of fat cells to harvest.

Over the past 50 years, around the world, longevity of humans has been increased. You ain't seen nothing yet. It is anticipated that within 20 years or so, huge gains will be made in repairing worn out body parts. It has already been shown that an injection of stem cells into a worn out heart can perform a rejuvenation miracle. What is next? Reputable scientist believe humans will soon be living to 135 years. In fact they believe people who are born today could possibly reach 1,000 years. The most interesting idea is that the person who lives to be 500 will be born only 10 years or so later than the first guy to live to be 150! There will be tremendous advances in knowledge during the last 50 years of this mans life!

The speed of technological change continues to follow a geometric growth pattern. We know this well through our observation of computer technology. In 1968, one dollar would buy one transistor. At the time, there were still a lot of vacuum tube TV's and radios still around. By 2002, $1 would buy 10 million transistors. I wonder how many the current dollar would buy?

FOMC HAS PROVIDED THE "BIG STIMULUS"

The big drop in US interest rates from 5.25% to 3% is a big deal. While the stimulus package passed by congress will goose the economy a little by the third quarter, the repayment of the borrowed money will start immediately such that the stimulus is really nothing more than the "broken window syndrome" or another instance of "robbing Peter to pay Paul". However the power of the big cut in interest rates has yet to be fully felt. A key point is that China, Saudi Arabia, Hong Kong and others rely on the FOMC to manage their monetary policy. The peg of other currencies to the dollar gives congressional members something else to whine about but the reality is that the links give the US all the more power. The big drop in rates will stimulate China just as much as the USA.

IT IS HARD TO HAVE A RECESSION IF ALL THE COUNTRIES LINKED TO THE USA ARE BEING GOOSED.

The price of oil keeps staying stubbornly high. The fundamental reason is that world demand remains strong. The goosing of the world economy through lower interest rates in the USA, has served to give oil market bulls the hope and even the expectation that oil prices will remain very high. Those waiting for a decline in the price are left watching the scramble to build new refineries and to develop new fields. Refinery construction is going on around the world, including in North America. In Port Arthur, Texas, Shell is in the process of renovations that will make its refinery the largest in the world. In the mean time, Total has announced that it will also expand its Port Arthur unit.

China is using more oil than ever before but it is also spending money on technology like there is no tomorrow. China will make the move to a fuel efficient economy in record time. In the digital age, the substitution of information transfer for physical activity is finding ever more ways to reduce the consumption of energy.

In the example used above in regard to transistors, the thing not mentioned is that the each one of the 10 million transistors bought in 2002 were far more efficient than the 1 purchased in 1968. Last week, Texas Instruments demonstrated technology that allows 10 times or 1 billion transistors to operate on less energy than was used by the one in 1968!

YES, YES, YES

We are living in exciting times. The world of tomorrow will be very different from the world of today. For those who dream of living good healthy lives of 150 years or more, the progress cannot happen fast enough. The rate of change is changing rapidly. Major innovation takes lots of time and the timing is unpredictable, but an injection of cells to repair a heart or the use of tissue to build a bladder are not science fiction. These technologies will be developed rapidly. Ten years from now, a lot of hearts will be repaired well before they are prime for a heart attack. A strong heart solves a lot of other health problems. Readers who are 30 years of age had better start investing for the long term!

BUY, BUY, BUY. The economy is already strong, innovation is remarkably strong and innovation drives growth!

AIR FRANCE-KLM IN ON THE DAL-NWA DEAL?

It has been reported that the big European Carrier, Air France-KLM will invest in the DAL-NWA merger in exchange for a seat on the board. DAL already has a marketing agreement with Air France-KLM. Since the big boom is in international travel, such mash ups will be common over the next several years.

When I was a kid, a major event was when my family went to Disney Land. It was a very long drive too. My wife and I took our kids to Disney World several times. Over the next several years, it will be the fast growing middle class of the rest of the world that will decide to visit the US. The extremely low relative value of the US dollar has already sparked a travel boom. The flood of traffic from Euro-Land to the US is so big that retailers in New York have posted signs, "Euro's Accepted".

Democrats have spoken loud and long against the free trade agreement that was passed during the Clinton administration, but the legislation still stands and other free trade agreements have been passed. This is good. The economic law of comparative advantage tells us that even if China could make every thing we make cheaper, it would still make sense for the Chinese to focus on their most productive skills and trade with us. The Chinese and many other nations now sit on a pile of dollars and our products are very cheap.

International trade is "on a roll". The growth in US manufactured goods is shooting off the charts. The reason DAL is likely to choose NWA as its merger partner is because NWA has a strong Pacific route structure and DAL has a strong Atlantic route structure. Some say that the deal will not pass the anti-trust busters, however, there is overlap in only 10 city pairs out of the 1,200 or so city pairs to which the carriers fly. This is one of the reasons that the DAL-NWA merger needs to go first. The overlap between CAL and UAUA is a little higher but it will be difficult for the trust busters to turn down a CAL-UAUA mash-up after letting the DAL-NWA deal through.

WHAT RECESSION?

Australia just hit its all time record low unemployment rate. Scotland is sitting on record low unemployment for as far back as the records go. Japan just surprised by announcing 3.2% GDP growth. In the USA retail sales announced today were extra strong. The interesting thing about retail sales in America was that prices were down about 2% with sales up almost 4%, which means the amount of goods sold increased by a huge 6%. THERE IS NO US RECESSION!

There is a recession in Michigan and there is a recession in the home building industry but there is no US recession. With mortgage rates near record lows, investors with good credit should snap up selected houses. The price of many homes will pop several percent as soon as sentiment turns. A house bought with a 20% down payment might give a 50% return on investment in a year or less.

GOOD NEWS FROM IRAQ

The Iraqi government just passed three major bills: 1) a $48 Billion Budget, 2) an amnesty bill for low and mid level Bathist Party members, and 3) provincial elections to be held on October 1. Democracy is taking hold! While there has been a bit of a counter surge in recent weeks, there is great peace relative to a year ago. Allowing Bathist to return to government jobs is another step in the healing process. The talks between Iran and Iraq are being held to show that the nations are cooperating to end suicide bombings. With oil production set to increase by 400,000 barrels per day this year, Iraq is going to see an increase in daily cash flow of about 28 Million Dollars per day, more than 10 Billion Extra Dollars per year. A wealthy and peaceful democracy in the middle of the Middle East has the potential to bring revolutionary change to a region that has been beset by wars for centuries.

EDUCATION REFORM!

I wrote the other day that the policies of the Nordic Welfare States have resulted in lower standards of living, high prices for goods and high taxes that are reallocated inefficiently. I also wrote that my daughter sees the daily tragedy of seeing kids come to school at the age of 5 or 6 without the benefit of pre-school classes. These kids are sometimes not even potty trained. Finally, I wrote about how John McCain supports school choice, whereby the government funding goes to the school chosen by the parents.

Sweden started a school choice program in 1992. It has been very successful. The program barely passed the legislature but it is now supported by the great majority of citizens. The reason is that the quality of education has improved dramatically. The system does not discriminate between public and private schools. If a private school wants to be eligible for public funding, it only has to agree to a few principles. The school must accept any student on a first-come-first-served basis, it must not charge any additional fees above what is paid by the state and it must meet certain educational standards.

The growth of independent schools has been steady but not huge. About 8% of students now attend independent schools. The key point is that innovations have occurred at both public and private schools. Many kids have stayed in their local public schools while seeing significant new opportunities. One very successful program has encouraged individual lesson plans and tutors such that a lot of kids learn a number of subjects at their own pace. It is amazing to remember that Thomas Jefferson learned at his own pace which included 15 hours per day of volunteer studying. People who are allowed to learn on their own, often discover just how much fun learning is. Ben Franklin, like Thomas Jefferson, was a polymath. These guys learned all that was know in certain subjects and proceeded to invent stuff for others to learn about.

Swedish kids must go to school until they are 16. If they want to continue for 4 additional years, they may do so at state expense. Only those that want to study for advanced degrees attend. I would like to see the USA pay for school starting at the age of 2 but then make school optional for the 16 year olds. It would be best for a lot of 16 year olds to go get a job as part of their learning experience. After working in a low skill, low pay environment, many would be ready to come back to school.

Internet connected computers should be used to assist with the concept of individualized learning. There needs to be a careful blend of student interaction with one another but with the ability to go through a math coarse just as fast as one can.

HEALTH CARE

One of the injustices of our current health care system is that the upper income worker gets maybe a $3,000 tax break and the lower income worker gets a $1,000 tax break for health care. The health care cost of the upper and lower income family is the same. Yesterday, I wrote about how only 15% of health care expenditures are controlled by the patients, which has lead to exorbitant increases in charges by almost all who bill for third party payments. The USA needs to do away with the corporate tax break for providing heath insurance and give an equal credit to all citizens. Furthermore, good health habits must be the emphasis of our health care plan. It is good policy to offer incentives to those who exercise regularly, eat and drink responsibly, avoid debilitating drugs and practice preventive care.

THE RUB

There is a definite rub between private and public health policy. The truth of the ages is that the best government is the least government. The Roman Government would probably still be around today had it not tried too hard to take care of the "social welfare". Today, I was surprised by the distance Obama is willing to travel to "buy votes". In Wisconsin, he proposed a 200 Billion Dollar government spending program accompanied by such wonderful "no cost" regulations such as a tripling of the minimum wage! How soon we forget! After the run up in the minimum wage in the late 60's and early 70's, unemployment rates and interest rates hit record levels. Ronald Reagan was able to run against the "misery index" which was the sum of the unemployment rate and short term interest rates.

The stimulus package just signed into law by Bush is at least relatively harmless. It does little good to borrow and spend $150 Billion in the short run just to have to pay it back over the next several years but a tripling of the minimum wage would knock a lot of people out of work, raise interest rates and send a lot of factories over seas.

THE BROKEN WINDOW FALLACY

In Economics there is a hypothetical situation that is called the broken window fallacy. The story goes as follows: a store owners son throws a baseball and inadvertently breaks the big front display window. Needless to say, the store owner is upset. He hires a glass company to replace the window for $200 and docks his sons part-time pay to recover the funds. The politician witnesses the whole affair and is a happy man. He notes that the economy has been stimulated. The glass company just did $200 worth of business, the son learned a lesson and the store owner was repaid. All is well that ends well!

What do you suppose the son thinks? It turns out that he had planned to take his girlfriend to prom. He was going to rent a tux, buy a corsage, spring for a couple of shakes and fries and buy gasoline to make the trip. The glass company is happy but how about the tux rental shop, the flower shop, the shake shop and the gasoline dealer? The politician saw the broken window and said it was good for business but he did not see the damage to the others.

The stimulus package just passed is the equivalent of the broken window. Some tax payers will get back a tiny portion of what they paid last year in taxes. Others who paid no income taxes will get back checks of the same amount. Twenty million people that paid no income tax will need to file a return or they will be skipped over. Others, who live on investment income and pay tax on that investment income, will not get a check. The incumbent politicians may win a few votes but sooner or later the bill will come due for the broken window. American tax payers will foot the bill but once again Americans will have received positive reinforcement for supporting the broken income tax system. Nope, the stimulus package is not really a stimulus package, however, the FOMC made its first interest rate cut some 7 months ago and history tells us that the stock market goes up an average of 19% within a year of the first cut. In other words, if history repeats, the market must recover the losses of the past 7 months and then go up another 19% within the next 5 months! WOW! If the pattern is going to hold, we are going to have to have a huge rally over then next 5 months.

It is not the time to own slow moving defensive issues such as consumer staples or utilities. In a bull market move of 20%, the high beta stocks might easily move 50% or more.


BUY, BUY, BUY, BUY!

By the way, many folk have put Obama into the win category. Hillary has a lock on Texas because she carries the Hispanic vote. She is also polling strong in Ohio and Pennsylvania. These big states and decent showings in a few others could put Hillary back into the lead without the support of the supper delegates. She also won in Florida and these votes might ultimately be counted. This one is not over. Independents and switch over republicans are voting for Obama. The problem for democrats is that a large number of single women or a large number of blacks may be upset enough to stay home on election day! Republicans have a similar problem but conservatives are likely to come out to vote against Hillary or Obama.

DAL-KO-XOM

Three stocks, three directions: Delta Airlines, Coke and Exxon.

The management at Delta Airlines went to the board of directors and volunteered to waive all "merger compensation". While the talks between the NWA and DAL unions are grinding along, it appears that the managements of the two airlines are ready to go. Having a deal in place with the unions is a brilliant move. The upcoming merger could be the smoothest ever between major air carriers.

In the mean time, Coke and Exxon have been pumping out the profits. Both of these companies are profit making machines. Indeed, the number one performing Dow stock for the past 30 years or so is Exxon. When making the comparison to other companies, it is assumed that one has plowed ones dividends back into the stock.

THE THREE DIRECTIONS

The stocks are going in three directions in regard to PE ratio. Investors often forget that the increase or decrease in the price of a stock is determined largely by the change in what the market is willing to pay for $1 worth of earnings. The current numbers are 25 per dollar for Coke, 11.5 times per dollar for Exxon and 3.2 per dollar for DAL. Now this does sound just a little bit crazy does it not. Why are investors willing to invest $25 in Coke to earn a $1 and only $11.50 in Exxon to earn a dollar when over the long haul Exxon has been the better stock to own? In the case of DAL, the company was able to shed most of its debt and dramatically reduce its operating expenses by going through the bankruptcy process last year. It is now a "lean and mean machine" so why does it only cost $3.20 to buy $1 worth of earnings?

Are the future prospects for Coke 2 times as good as the future prospects for Exxon and 8 times as good as the prospects for DAL? During the past two years, the PE ratio for KO has risen sharply, the ratio for Exxon has fallen a little and the ratio for DAL has dropped from infinity to a very low level.

RUNNING SCARED

The irony is that investors have been running to the "safety" of KO. For two years, there has been a constant drone among TV pundits of a pending recession. The pundits in cooperation with the actions of Bush administration and the actions of investment bankers have pushed the economy to the brink of recession. The more ominous the view of the potential recession, the more investors have crowded into the Coke shares. These crowd includes includes a ton of mutual fund managers who must stay invested in stocks of one kind or another.

Investors know that oil shares are sensitive to economic down turns and they know that airlines are super sensitive. Again, this is well reflected in the prices of the shares.

DON'T CLOSE THE BARN DOOR AFTER THE HORSE IS OUT

As you know, I do not believe the current slow down had to happen. It is largely the result of phony or exaggerated write downs of assets and an FOMC committee that cooperated with the profit needs of investment bankers and the political needs of politicians. The politicians continue to make moves to "solve the crisis". So, I missed the degree of down turn. Does that mean it is time to buy Coke now?

The bottom line is that the prospects for increased profits are higher for DAL than for Exxon and the prospects for increased profits by Exxon are higher than the prospects for Coke. In other words the PE's will at least be mean reverting. The current market PE is somewhere in the 14 times range. If these three companies were to maintain their current level of earnings over the next couple of years, it would be rational for the price of Coke to be cut by the ratio of 25 to 14, for Exxon's price to be increased by the ratio of 14 to 11.5 and for the price of DAL shares to be increased by the ratio of 14 to 3.2.

The neat trick is that should it become clear that the down turn is over, the PE ratios should see a flip flop. In an obviously strong economy, the most economically sensitive stock would take on the highest PE. Indeed, it is not unusual for airline PE's to soar to double the market PE during boom times.

The PE of DAL could easily move from 3.2 to 28 while the PE of Coke could easily fall from 25 to 12. In this scenario, with no change in earnings, the relative price movement would be a gain of 875% for DAL and and a loss of 52% for Coke. In my opinion, the gain of 875% for DAL is more likely than the decline of 52% for Coke.

EXXON VERSUS DAL

The big difference in prospects between DAL and Exxon is the difference in demand growth. In the case of Exxon, high price of products has started to bite in two directions. Democrats like to talk about how they will create millions of new "green jobs". These jobs are coming hard and fast, no matter what the democrats do. The jobs are coming from all kinds of directions. One technology that is getting a lot of play is called pyrolysis. This is where man mimics what happened to create coal and crude oil. Big chambers are filled with the waste products of forest harvesting and "cooked at high temperatures without access to oxygen ". Several companies have improved on the process in recent years. One of the innovations is to place the "cooker" near logging sites so that the only transportation is of the bio-crude to the refinery.

Investments in competing technologies are also coming from every direction. Companies such as GM and Dupont have invested in competing methods of using bacteria to eat fibers while excreting petroleum type products. At the same time, companies such as GM and Johnson Controls have invested heavily in new battery technology. The cost to weight and power to weight ratios are falling sharply. In an amazing development, geneticist are inserting various plant DNA into E. coli bacterium to find out which is the most productive at converting fibers to natural gases. So far, one team has increased the natural rate of production of hydrogen by 147%. It is anticipated that methane production might be increased by factors greater than 10,000 percent.

The bottom line is that a demand and supply shift is in the works for Exxon. Over at DAL the supply demand shift is going the other way. International demand for air travel is growing by leaps and bounds during the economic slowdown. Once the slowdown is over, airline seats will have to be rationed in the only way the market knows how to ration. If you plan to visit China for the Olympic Games, you should buy your tickets now!

BOOM, BOOM, BOOM!

TALKING COMPUTERS

Nuance Communications continues to make more and more computers listen and talk. The company just reported strong results. The companies products are showing up in all sorts of places, such as Ford cars and satellite radios. The company is not the only one to offer voice technology systems but it is a leader in the field. The "Star Trec" dream of wireless, two way, voice communications is just around the corner. Hand held processors are following Moore's law and should soon offer unbelievable computing power. The ability to command your car to "phone home" is a safety issue as well as a convenience issue. Consumers will pay extra to add this feature to their computer-cell phones.

POPULATION TRENDS

Much has been made about how the new extra low priced cars in India and China will spur the growth of auto usage. Much less has been made of common population trends around the world that are leading to lower use of autos. America is participating in this population shift. The people of the great plains and other rural areas are losing population. Cities are growing. One piece of evidence is that the price of condos in New York City increased 14% in value during the nation wide real estate slump of last year.

One of the major big city trends is the increased use of bicycles, electric city cars and pedestrian walkways. Many big cities now place bicycles in racks for free public use. Most are free of charge as long as they are not taken beyond designated areas. Another developing trend is that of integrating public transportation systems with other systems including private vehicles. In a number of instances, "last mile public transportation" is the key ingredient. Parking garages might be spaced outside central districts such that mass transit works well for the final leg of travel. Publicly owned City Cars sometimes are available for last mile usage. Congestion taxes are being used to discourage inter city traffic. In London, the one day cost to operate a low mileage vehicle within the central city has been increased to $49.00. In the mean time, streets are being retooled to provide more cycling and walking lanes; fewer cars and more foot traffic.

In America, there is still migration from the rust belt to the south. This migration obscures the competing trend toward inner city living but it is happening. An article in the WSJ yesterday, reported figures available from U-Haul that tell an interesting story. U-Haul does not like to pay people to move assets back to where they are needed most. It likes to find "customers" who will do the job for them. The current charge for a one way truck rental from Newark, NJ to Charlotte, NC is $2,116. The charge for a one way rental for the same sized truck from Charlotte to Newark is $311. The $311 is not profitable business but it sure beats paying the freight to haul the truck back to NJ.

The article included the migration out of and into states. The state that is losing the most people is Michigan. The state that enjoys the highest influx is North Carolina. This is the reason that home price values are still climbing in NC.

Charlotte is a totally different town today than it was 10, 20 and 30 years ago. Interstate highways to, from and around the city have been expanded again and again. The outlying small towns have become cities unto themselves. Still, the big change in just the past few years is the number of in town residences. Condo towers are challenging bank buildings for prime locations. Downtown living permits sports enthusiast to be "near the action". I wrote about Dover Elevator a week or so ago and it is a shame that none of my readers added money to their accounts to make the buy. The stock moved from 35 to $42 during a tough market. Only a twenty percent move but the trend is early.

THE IRANIAN DEAL

It is clear that more progress has been made toward a deal with Iran. For the first time, officials from Iran will come to visit the Iraqi government. Public talks between US and Iranian negotiators are also scheduled. A deal is as close as ever. Once made, about $20 worth of geopolitical risk premium will fall out of the price of oil. Due to slower economic growth, the EIA has lowered its oil demand forecast. Ample supplies will lead to lower demand for expensive corn fuel. This means there will be lower food prices and lower inflation. Lower inflation means real profits and real GNP will rise. BOOM, BOOM, BOOM!

STRONG WORLD WIDE ECONOMY

Even without a deal, the risk of recession is low. The TV pundits do not appreciate the economic stability brought about by the green revolution and the productivity boom. In the past, when agriculture was a major part of our economy, the boom and bust cycles were huge. In the old days, bad weather routinely wiped out thousands of farmers. Later it was manufacturing that lead to volatility. A down turn in the economy resulted in massive job losses. Today, we live in a service economy. During an economic slowdown, the teachers still teach, the tax accountants still compute taxes, the doctors still see patients and the lawyers don't get fired. We live in a time of not new jobs but new job categories. Annually, billions of dollars are being paid to geneticist. Soon and very soon, geneticist will "breed" a super "termite" that will convert yard waste, corn stalks, switch grass and tree bark into clean burning natural gas. We are going to need these resources because people will soon be living to 135 years or more.

Today, GM announced that it will offer buyouts to all 74,000 union employees. GM is "leaning-out". Robots do most of the car building now a days. The workers who accept a buyout deal will be in great financial shape and the company will save billions. Please shed no tears for the auto workers who will "retire" on handsome pensions at young ages.

The "gales of creative destruction" is a positive force that makes us strong. Markets work. In 1910 there were 109,000 Americans employed in the carriage and harness business, today, there are more than 900,000 auto mechanics. In 1920 there were more than 2 million Americans employed by rail roads. Today, while there are just over 200,000 Americans employed by rail roads, there are over 3.5 million commercial drivers and the number of engineers has grown from 38,000 to over 2 million. Totally new occupations included 92,000 professional athletes, 2.2 million computer programmers and operators and 500,000 webmasters (all created in the past 15 years). Those who would cry over the jobs being lost by the auto workers should be reminded of the letter from Martin Van Buren to Andrew Jackson in 1829. In this letter, the governor of New York asked for the Presidents protection of the canal system. He told the President that the Erie and other canals were vital to national security. He went on to say that these systems were being threatened by the new rail roads. Can you imagine the losses America would have suffered if Van Buren had gotten his way? Mules might still be pulling boats up and down a big ditch if Jackson had been a big government spender.

THE HEALTH CARE MESS

David Gratzer of the Manhattan Institute reports that in 1960 half of all health care expenditures were under the direct control of patients. Today only 15% of the total health care bill is under the control of the patients. The result has been out of control health care inflation. It was government regulatory attempts to make the system better that has made it such an issue. As usual, the political answer is to make matters even worse. I am reminded of the common practice in some firms where business travelers who dine together split the ticket equally. I learned my lesson the hard way when I was living in New York in 1982. I was living on a tight budget but went to dinner with business associates. The cost of cocktails in New York are about the price of a whole meal back home and these guys went on a binge. I sipped one drink and enjoyed the party until the bill came. My share was equal to my food budget for a whole week. The democratic plan is to keep the power of the purse in the hands of congress while funding that purse with confiscatory taxes on the most productive assets the country owns.

Mark Perry says that no matter what you buy, you would buy more and pay more if your out of pocket share were only 15% of the total price. If your company prepaid for your "consumption insurance with a 15% copay", you would enjoy a constant spending binge.

The US Health Care System is in dire need of reform but national health care is not the answer. National Health Care is the equivalent of outlawing UPS and FedEX and requiring all packages to be sent through the post office. What is needed is public data about pricing and performance and the movement of the power of the purse back to the consumer. If your company offers great insurance, that is a good thing, however, the funds should be placed under your control with the stipulation that money not spent ultimately adds to your retirement benefits. In other words, we need a dramatic expansion of health savings accounts.

OBAMA ON A ROLL

Obama is expected to win caucuses. He is also expected to win in states with significant black voters and relatively few Hispanic voters. As such, his recent victories were no surprise, however, pundits say that he has such strong momentum that he could possibly take a big state, such as Ohio, away from Hillary. Pennsylvania is the other state where Obama could break through and destroy the Hillary advantage of super delegate "insiders". On the other hand, the Clinton political machine is like a heavy duty V-8 engine. It is a powerful force. Obama is as smooth a politician as you will find but if forced to make a bet, I would still have to put my money on Hillary to win the democratic nomination. TradeSports has Obama as the clear favorite so I may be wrong.

McCain's Tuesday sweep did not seal the deal but his odds of winning the republican nomination must be up to 95% or higher. While the democrats have momentum on their side, it is hard to believe that the country is ready to veer so sharply to the left. The war on terror will surely swing a number of moderates and independents into the McCain camp. The democratic plan to spend billions on one size fits all government mandated health care while cutting back on our business efficiency, should cause other moderates and independents to fear an economic depression. The public has ample evidence that socialistic policies eventually kill the golden goose. The Soviet Union and Eastern Bloc certainly provides clear pictures and there are many other examples. The left use to praise the health care systems of the Nordic "welfare" states. Now a days, they do not dare mention these countries. The reason is that the average standards of living has fallen sharply relative to the rest of the world. Now it is once again true that the poor in these states are very poor. The people in these socialist countries face extremely high taxes and soaring inflation rates.

WE LIVE IN AN AGE OF TALKING COMPUTERS, SURELY WE CAN WORK OUT A HEALTH CARE PLAN WHERE INDIVIDUALS HAVE THE INCENTIVE TO ONLY BUY THE CARE THEY TRULY NEED!

BY THE WAY, THE NUMBERS CONTINUE TO SCREAM BUY, BUY, BUY, BUY. The National Associations of Independent Businesses just published numbers that were last seen at the market bottom in 1991!

FOUR LEGGED STOOL SAYS, BUY, BUY, BUY, BUY

Some readers lost faith in me because I screamed BUY, BUY, BUY before the latest crunch in the market. I had good reasons then and even better reasons now.

Don Hayes offers the best analogy and the best data to support a BUY, BUY, BUY, BUY call. Don is an old timer who has done well in the markets. He has developed a "mechanical market model" that gives rational buy-sell indications. Don says the market is like a 4 legged stool. The market can stand on three legs but it is great when all four legs give strong support.


Back when I was writing, BUY, BUY, BUY, BUY three of the stool legs were very strong. The fourth leg was the only one not screaming buy, but it was not screaming sell. Today, all four legs are strong. We are right in the middle of a great buying opportunity. The kind of opportunity that comes along just 5 to 10 times in a life time.

The four legs:

1) the solid stock market attitude leg. We all know the stock market is a roller coaster ride. Those who get on need to have great faith. The fact is that long term investors in the stock market consistently make more money than other investors. To do well, investors should "stay" in the market. Humans tend to think that they are smarter than they really are. A lot of people have tried to get out and into the market at the "right time". Most have failed miserably. Successful investors tend to have great faith in the capitalist system. This stool leg is screaming BUY

2) the second leg is valuation. There are a number of ways to measure stock value. The best one is called the "fed model". One simply takes the projected earnings of the S&P 500 divided by the price of the index and compares the results to the 10-year treasury bond yield. Currently, stocks are more cheap, relative to bonds, than at any time in my life. This leg is screaming BUY.

3) the third leg is monetary policy. This is the leg that has turned the most in recent weeks. The FOMC has made a dramatic shift over the past 6 months. The FOMC has opened up the lending window to the banks and it has dramatically lowered short interest rates. The decline of the fed funds rate from 5.25% to 3% is a major drop. Short term market timers are betting that this rate will have to fall to 2% before the economy recovers. I know that a heck of a lot of assets become profitable buys after the cost of money falls by such a large amount. It takes time for lower rates to build momentum but those short term market timers will jump on board with both feet once it is clear they are about to miss the boat. Put another way, banks were being "taxed" if they lent money 6 months ago. Today, banks can lend money and make money and commercial and industrial loans have grown 19% since last year. Don't tell me that we are in a recession after telling me that business loans are up 19%! The housing market has been very weak but even here the steep drop in interest rates means that the variable rate resets are no longer a huge problem. The average American can qualify for a much larger home loan today than he could 6 months ago. The monetary leg is screaming
BUY.

4) the fourth leg is the psychology leg. This leg oscillates more quickly than the others but it rarely goes to extreme readings across the board. To find "extreme" extremes, one must view the data from 2002, from 1991 and from 1982. Last year, this fourth leg screamed BUY very loudly but not as loud as the most recent numbers. The recent numbers for several of the indicators were more extreme than 2002 and 1991 and a couple went to 1982 levels. The bottom line here is that when the public is too fearful to buy stocks, it is time to go against them. This indicator is perhaps the most misused of the indicators. It can lead to a silly game of being negative all the time. After all, there are always some people saying BUY and others saying SELL. One cannot be contrary to all others. The key is to look for extreme readings. Today we have them. People are in a "negative funk". The polls show they dislike the president, the congress, the war, the big corporations, the tax laws, the news media, lawyers, doctors, the clergy and businessmen. The ratios of bulls to bears is at levels rarely seen. The psychology leg is screaming BUY.

SO SAD BUT SO FUNNY

There is a YouTube video with Merle Hazzard (a country western singer) and Art Laffer as the players. Art is one of my heroes. He is a straight talker and a rational economist. He and Milton Friedman have spoken out against the "games played" by the FOMC. They rightly suggest that the FOMC is the biggest cause of the boom and bust cycles we live through. In the current case, the FOMC held rates too high for too long. The FOMC set up the incumbent elected officials with the opportunity to "save the day" by passing a stimulus package. Of course, in the mean time, a whole lot of wealth has been transferred out of weak hands and into the hands of the strong.

The YouTube video makes the point well and it would really be a funny video if the sheep were not getting sheared. The good news is that the government officials are finally ready to "help". Rates have gone down and problems are being solved. A consortium of mortgage lenders are preparing to help all who are late on their mortgage payments a path to refinance. Pretty soon, mortgage securities that have been marked down to 60 cents or even 30 cents on the dollar will show up as "good money".

NUCLEAR CONCERNS

A couple of regular readers have written to say that the risk of war between Israel and Iran seems to be going up. The thought is that Israel can not afford to allow Iran to have nuclear weapons, given that Iran has threatened to eliminate Israel. History students know that the people of Israel have suffered though dozens of attempts to eliminate them from the earth.

There does not seem to be the same fear of Pakistan. Pakistan has nuclear weapons and the country is in the middle of a civil war . The Islamic terrorist in Pakistan routinely blow up the innocent in their attempt to disrupt the government. One might argue that Bush could have easily chosen Pakistan as the next country to invade after Afghanistan. The fact is that many of the terrorist who were being trained in Afghanistan went over the border into Pakistan after the US invasion. Did Bush seek Pakistan as its ally because Pakistan owns nukes?

Whack a Mole

For a lot of years, the world has been forced to play a game of Whack a Mole. The terrorist stuck up their heads in Libya and Reagan guided a cruise missile into Qaddafi's bed. Yemen, Saudi Arabia and others eventually got the message. Even Iran ceased the development of nuclear arms just after Bush invaded Iraq. In retrospect the beauty of the Iraq war has been that the terrorist came out of hideouts in a number of countries and met their destiny in Iraq. Now, the loss of support from the local people is forcing the terrorist to look for other venues. Suddenly the rouges of Pakistan are in the news.

General Ashfaq Kayani has been taking the fight to the insurgents. However, the political situation in Pakistan is not stable. The Generals are in control of the army and the nukes but the people desire a negotiated settlement between the tribes of the north and the rest of the country.

By the way, I recommend Charlie Wilson's War. Tom Hanks did his usual good job and the story of success and failure in Afghanistan is worth knowing. The people of Afghanistan, on horse back, prevailed against Russian tanks and helicopters. No military commander wants to invade the most mountainous regions of Pakistan and Afghanistan.

Secretary of Defense, Robert Gates, just returned from a NATO recruiting trip. He had little luck. The US is sending another 3,000 marines to Afghanistan while the US hopes that Canada will kept its 3,000 troops in action and that Australia will keep its 1,000 in the fight. Germany and many other NATO nations are sitting on the side lines. One has to wonder about the worth of NATO if the nations only fight with their words.

RUSSIA SHOWING SIGNS OF COOPERATION

The Soviet Union collapsed because of economic reasons. Today, Russia has bounced back from the low but it is certainly not the super power of old. Russia is too dependent on oil and gas revenue. The price of oil was in full retreat by 1986. By the time of the collapse of the Soviet Union, oil was down to around $12 per barrel. Russia knows that the US could pass laws that would dramatically reduce its consumption of oil. The US has great influence around the world because we are a mighty economic power. Our weapons technology certainly gives us power but it is the economic power that makes us strong. It takes economic strength to make the weapons affordable.

The bottom line for now is that we need US and world opinion to move in the direction that the terrorist killing of innocents needs to be met with force. In regard to nuclear weapons, we need to do what it takes to stop Iran from acquiring said weapons. A country that supports the blowing up of women and children as part of a "just cause" is simply not qualified to hold nuclear bombs. One reader says that Israel will take out the Iranian Nuclear facility before the first bomb is produced. He is probably correct. I hold to my belief that a settlement will be negotiated before that even occurs.

TRIPLE BOTTOM

The dollar has made a triple bottom against the Euro. With US exports supper strong, it stands to reason that the dollar must turn. All the while, US technology is moving forward by leaps and bounds. The world leaders in the field of semiconductors tell this story. Intel is introducing "phase change memory chips" that will ultimately make the hard drive obsolete. Over at Texas Instruments, the latest is a chip that uses one tenth the battery power. The combination of these two developments will lead to extremely powerful hand held computers that are constantly wirelessly connected to the rest of the world. With the dollar at current levels, the world will beat a path to our doors.

SILLY USE OF RESOURCES

It sometimes takes forever for logic to overtake tradition. The current annual expenditure by our government to make 80 million dollars worth of coins is up to 134 million dollars. Once again, we learn that government can just keep on doing stupid stuff that does not make business sense.

GOOD BUSINESS SENSE

Yesterday, I told a reader that if I had to put all my grand daughters money into one stock, I would choose Google. I believe CAL will make much higher returns over the three years but Google continues to win market share in the market of the future. Google is moving forward on a lot of fronts. The mobile network front is its most important move but the social web network is not too far behind.

The difference between Facebook, Myspace and Google is that Google is integrating social networking into the day to day life of sending emails, sending instant messages, making phone calls, browsing the web and personal home pages. For a specific example of what I am saying, take a look at the Google Reader. Once you have selected a few favorite web sites or news searches to routinely read, you will notice that you have the opportunity to share with your friends. For example, if I were to read a great article about raising children, all I would need to do is click the share button to send a link to my daughter.

Watching the development path of the Internet is better than watching the construction of a baseball stadium, building or super bridge. The Internet is being built quickly but the final design is still being determined.

The first of the Android enabled G-phones have not been impressive but the vital concept is that useful features will be available at the push of a single button. If you want maps, you push the map icon. If you want to search, you push the search icon.

A NY Times chart shows that 87% of the US population has a cell phone, 73% has a computer and 62% have Internet access. Convergence is on the way. Pretty soon, 95% or more will have a cell phone, computer and Internet access.

GREAT TIMES ARE AHEAD! THE NEXT LEG IS A BIG BULL MARKET LEG!

INVESTORS WANT TO KNOW!

Has the political center of the USA moved sharply to the left? INVESTORS WANT TO KNOW?

The far right continues to kick and scream about the movement of the republican party toward the center. More evidence showed up in the state of Washington Saturday. On the one hand, Huckabee won in Kansas and Louisiana but then for the first time ever Ron Paul got more than 20% of the vote; his score in Washington was 21 the last I saw. Afterward, Huckabee suggested that McCain might get pushed into selecting a "right wing conservative" for his VP. Huck has said that the VP slot is one where every competing candidate says noway until he is asked. Huck needs his "base" to get out and vote. He does not need them to sit back with the attitude that he has already "won the VP slot". I think he has a good chance at the VP and a very slim chance to "win it all" at the convention.


In the meantime, Hillary and Obama continue to fight hard to win the extreme left. Hillary's latest words sounded like she has moved to the Obama position on the Iraq war. Careful listeners notice that she actually pulled another Bill Clinton "it depends on what the definition of 'is' is". What she really said, is that she wants to "start" pulling the troops out of Iraq within 60 days of her election.

LEFT, LEFT, LEFT

To understand how far to the left Hillary and Obama have moved, one only needs to look at the bills they each introduced in regard to wages and income. Obama struck first. After his bill got no traction, Hillary came out with her own version and Obama joined as a cosponsor. Each of these bills would have taken the market out of pay decisions and replaced it with a mandated government formula. It would be up to the government to determine the relative value provided by workers. Of course, the big focus is the political "winner" of arguing that teachers are under paid. The argument is a winner because democrats have been successful in keeping teacher pay "boxed-in". If schools were subject to the rules of the market, the best teachers would earn far more than they do today. The problem (from the democratic point of view) is that the worst teachers would need to find another career.

SOCIALISM, SOCIALISM, SOCIALISM

The bottom line is that in trying to win the democratic nomination, the only candidates to have gotten any traction at all has been those with support from the extreme left. The policy of government determined wages is right out of the former Soviet Union play book. We can all remember the days of equality fostered by Soviet rules. We can also remember the long lines to buy blue jeans that were not seen as a priority by the central planners. Worst of all, the Soviets failed to even feed their people well. Billions of dollars were wasted trying to make farms efficient but had the US not had the extra wheat to sell, millions more would have starved to death. The lines in Moscow included the lines for rationed supplies of bread.

THE GINI INDEX

The Gini Index is a measure of rich versus poor within a country. To hear the lefties talk, including John Edwards and Hillary Clinton, in the US, the rich are getting richer and the poor are getting poorer. A check of Gini indexes and a check of the distribution curves of wealth show that the world has changed but not exactly in the ways suggested by Edwards and Clinton. Now, it is true that one can say that Russia, still has a fairly low Gini Index. For the most part, there are relatively few rich people in Russia relative to the number of poor people. This is despite the fact that after the break up of the Soviet Union a number of Russians did achieve great wealth. The Gini index measures the sums of wealth from the poorest to the wealthiest such that a few rich people do not tilt the scale dramatically.

One of the countries with the biggest change in the Gini Index is China. Fifty years ago, almost all Chinese people were very poor. The China Gini index was very low because almost all people suffered equally. Recent data show that China's Gini index has passed the US index! Billions of people are no longer living hand to mouth and many have grown to be quite wealthy, but there are still hundreds of millions of people who still live on less than $2 per day.

Based on the rhetoric of Edwards and Hillary, one would believe that it has been a horrible development that the Chinese are no longer equally poor. Relative to the poor in China the rich have gotten to very, very rich while the poor have continued to be poor. The billions of Chinese who no longer live on less than $2 per day do not see their newfound wealth as a disaster and, indeed, all the people of the country now have reasonable hope of future wealth. It is projected that several more 100 million Chinese will move up the economic ladder over the next decade. From the view point expressed by Hillary and Edwards, this will be a disaster because it means the poor in China will be all the more relatively poor.

THE BOTTOM LINE

So far, no country has been able to eradicate the status of being poor. Indeed, unless government routinely confiscates and redistributes all wealth there will always be 10% in the bottom decile of wealth. No matter how well these folk are doing, they will always be poor. In the comparison of outcomes in the "more economically free America" to the "more socialistic Europe", both highly developed economies, shows the results of "more freedom and less government intervention".

In Europe and America, the lowest 10% of income earners are almost to the penny "equally poor". However, as you go up the line, the middle class in Europe are only 73% as rich (again in terms of income) as the middle class in America. Looking only at the top 10%, the Europeans are only 61% as rich as Americans.

The fact that the rich in America do very well compared to the poor, gives fodder to the class warfare offered by Hillary and Edwards, but, would you rather be poor, middle class or rich in America or in Europe? The left would argue that for the poor it makes no difference but that would be the wrong response. People from all around the world would like to move to America, including people in all income classes. The difference is that the path out of poverty in America is a relatively smooth path. The overwhelming majority of those who would not be poor in America are no longer poor in a very short amount of time. Indeed the great majority of poor in America are those who practice destructive habits such as drug abuse, including nicotine, alcohol, marijuana and all sorts of pharmaceuticals. All the soup kitchens in the world and all the job training programs cannot put Humpty Dumpty together if he is busy smoking dope.

THE DEMOCRATIC MOVE TO THE RIGHT

As soon as the primary is over, the democratic nominee will move toward the center. Obama has a long way to go in regard to the war on terrorism. One can hear the advertisement now that contrast McCain's statement that a surge is needed and the statements of Obama declaring that the surge is a "failed strategy". Ironically, Obama has an easier path to the middle on several economic and social issues as he has gotten away with not being specific on many issues. In the area of health care, he has not made the mistake of supporting a mandatory health care plan.

Hillary has maintained a lot of waffle room in regard to the war on terror (both Hillary and Obama will emphasis that Osama's hideout is in Afghanistan, while the truth is that it is probably in Pakistan) but, she does support the government take over of health care.

An interesting fact is that the issue of heath care is losing its momentum because inflation in the basic cost of health care has rolled over. The cost of prescription drugs and medical supplies grew at 1.4% last year. At the same time, low cost medical clinics are opening across America. Back in the mid 1960's, a Duke University Professor lead the charge to create a "new layer of health care service". Program after program has since opened around the country that trains Physician Assistants and Nurse Practitioners. Like all new trends, it took a long time for rules and regulations to catch up with the new reality. My Aunt was a Nurse Practitioner for 30 years but now the retail establishments such as CVS and Wallgreens have figured out that having a clinic on sight can do wonders for drug sales and the risk and regulations have only improved in recent years.

(A good way of understanding this is to think of what has happened since the invention of the SegWay. This two wheeled upright scooter is a marvelous machine. It will eventually become a commonly used device. The battle for now continues in state after state to make it legal to ride it on sidewalks and public greenways. The invention is an old story but until there is a "break out" community, the struggle will continue to make it a reasonable travel alternative.)

Anyway, it is now legal in 27 states for Nurse Practitioners to operate limited care facilities without the direct supervision of an MD. The story is similar in regard to Physician Assistants. These practitioners have a limited set of health care treatments beyond which they must refer patients to MD's. The result is dramatically lower costs for the treatment of minor illness or the maintenance of long term debilitating diseases.

One of the thorns in the sides of the socialist left is that Wal-Mart is becoming a major part of the health care solution. The lefties have attacked Wal-Mart mercilessly but Wal-Mart will soon offer low cost care at over 1,500 in store clinics. Wal-Mart already offers some of the lowest cost prescriptions.

Hillary would have the government "control" the price of prescription drugs. This is a page out of the Richard Nixon Book! In the early 1970's Richard Nixon "controlled the price of domestic oil". The price of oil produced by US oil companies was capped at $4 per barrel. We know how well that worked out! One does not need a degree in economics to understand that if the government holds down the price by artificial means that you will eventually have to wait in long lines to get the product. Having to wait in a long line for life critical health care is far more devastating than long lines for gasoline.

If Hillary were to win, I believe she would once again fail to take over the health care system. During the primaries, the debate in each party is pushed to the extremes. In the republican party, immigration is the main issue that splinters the far right from the rest of the country. On the democratic side, the war and health care are the "splinter issues". Polls taken during the heat of these "one sided debates" do not tell the whole story. The bottom line is that independents and the "soft middle of both democrats and republicans" do not support the government take over of health care, the white flag in Iraq or the unfair treatment of immigrants who have lived and worked in America for decades.

The enthusiasm displayed by democrats has lead some pundits to believe democrats will make a clean sweep in November. It is actually the republicans who will capture the majority of the independents and the soft middle because it is the republicans that have moved toward the middle by supporting McCain. Only the democrats that have moved to the extreme left.

Hillary wins points with lefties when she proposes a freeze on mortgage rates for 5 years. But, many of those who might want to buy a home or refinance a home sometime in the next 10 years or so will decide to run away from this crazy tilt toward socialism. Hillary's policies would flatten out inequality of wealth in America, but at a much lower average level than we currently enjoy. Again, government control of mortgages at artificial rates will lead to a shortage of mortgages.

OOPSEE! DOES IT!

In the one case, that of Global Warming, there has been a substantial move to the left. Even the republican nominee is all set to "attack" this "problem". This too might help the republican party, at least in the short run. While there is the risk that such positions could cause a portion of the conservative base to stay home, the nomination of Hillary or Obama should energize the base. In other words, right wingers may come out to vote against Hillary even it they dislike the silly games being played about the climate. As a student of financial models, I can tell you that economist struggle to predict next week month or year. The climate is 100's of times more complex than finance. The weatherman is not accurate about next week, much less about next year. Did you know that scientist just discovered that the warming of the ocean actually decreases the incidence of hurricanes? The more we know for sure, the more it is sure that we don't know!

There is scientific backlash developing over the force feeding of the "global warming problem". Al Gore has recently been on his high horse again but the numbers simply do not support his recent contentions. From 2001 to 2008 there has been no global warming! Indeed, from the little spike made back in 1998, the global temperature has gone down. This does not take away the 8 tenths of one percent increase in temperatures that probably did happen from 1850 to 2001 but, at least in the short run, the facts are in the favor of the anti global warming crowd. I am beginning to wonder what "oopsee" will be discovered this time around.

When world wide temperatures dropped from 1991 to 1995, the "OOPSEE" was Mt. Pinatubo's eruption. It is probably true that the tremendous amount of fly ash deposited to the upper atmosphere by the eruption of Mt. Pinatubo did serve to reflect enough sun rays to cool down the planet. One of the ironies is that we could cool out planet simply by painting all the asphalt parking lots white, in order to bounce the sun's rays back into the universe. Still, is it not also ironic that the naturally occurring release of heat from the earths core is a part of God's system for cooling down the earth! One could only wish that the left could begin to perfect their sense of humor. God is way ahead of us all in this regard too!

USING RESOURCES WELL!

Fifty years ago, 100's of millions of people were close to starvation in a number of countries, including Mexico and India. The good news is that the Rockefeller Foundation decided to support a program to increase crop yields in Mexico. The results were fantastic but not fully accepted in Mexico. The really good news was that India did accept the proposals and India now is a rice exporter!

John Edwards went on and on about the "two Americas" but anyone who has the desire to achieve great future results in moving people out of poverty should look elsewhere. It is still true that if you want to catch brim, you must fish in a pond that is stocked with brim. The fact is that America is a major exporter of grain (less so because we waste grain in the production of alcohol for car engines) and India is a major exporter of grain and the really poor are those people living in countries that do not grow enough grain and that are not believe in trading with those that have excess.

EXCITING NEWS IN REGARD TO RESOURCES!

The despised little bitty E. coli bug is ready and willing to help save the day! The Nobel Prize winning scientist who is most responsible for the mapping of the human genome, J. Craig Venter, has "stitched together" chromosomes in his lab and inserted them into the E.coli bacteria. With just a little more effort, he should soon be able to produce E. coli strands that will convert coal and oil sludge to clean burning natural gas at 10,000 times the natural rate.

A lot of other work has already been done in the area of speeding up and improving natural processes. The work of Nourman Borlaug, another winner of a Nobel Prize, was the head honcho that started the green agricultural revolution. One of his achievements was to create a rice strand that put its energy into growing rice kernels rather than plant stems. The plant stems needed to be short to hold up the weight of the extra rice. Once he was able to increase the production of rice by 700%, the world has never been the same.

E. coli is proving to be a work horse. Dupont recently announced that the company will build a 100 million dollar plant that will use genetically modified E.coli germs to turn corn into propanediol, a necessary component of polyester fabric. Dupont is considering a plant to produce Butanol in a similar manner. In another case, a scientist has learned how to propagate the wood digesting bacteria found in termites. So far, he has been able to increase the production of ethanol by 50% by using these termite intestine bugs in the process. Of course, the goal is to find ways to digest the corn stalk, not just the corn kernels. Can you picture putting whole trees into a digester that spits out natural gas and water?

The work being done by Venter is the most exciting because he should be able to dramatically speed up the process. He just made a trip around the world on a sail boat in order to collect some of the many specimens of life that routinely digest plant life. His technique is expected to be to move the most voracious plant digesting genes into the body of the E.coli bacteria. If you are not familiar with the way this process works, may I suggest that you eat nothing but beans and cabbage for a couple of days. You should discover that you can dramatically increase the amount of natural gas that you produce.

One average, when conventional oil producers abandon the typical oil well, they have recovered only one third of the oil that is down that hole. How wonderful it will be to poor a mixture of bacteria down the whole which will eat the rest of the oil and send it up the shaft as clean burning natural gas.

THE NEXT BIG VOTE -- FEBRUARY 18

The big vote in Pakistan, scheduled for February 18 could be a world changing event. Pakistan is currently in the middle of a cease fire agreement between the government and the Taliban/al Qaeda forces. Even so, a few generals, in the strong Pakistani army were killed last week when their helicopter was hit by missile.

After the elections, will their be a big push to bring northern Pakistan under control of the government? Will there be a coalition of forces going after Osama Ben Laden before the November elections?

THE POLLING RESULTS ARE GETTING MORE INTERESTING BY THE DAY

Osam Ben Laden is suffering from lower an lower support in the polls. Indeed, the very idea of justifiable homicide bombings of the innocent is losing support. The minds of the Islamic people are moving in the right direction. When Iraq was able to produce videos that showed the use of children and mongoloid women as suicide bombers, the heart of the people were swayed. The pressure to change tactics is now coming from inside and outside the Islamic nations.

The positive results can be seen in the numbers. In Iraq, the production of oil and the production of electricity is climbing rapidly. In Iran, there have been protest against Amadenijad's policy from the bottom to the top. The potential for a McCain election is a seed of fear in the hearts of terrorist and Iranian and Pakistani leaders.

WORLD ECONOMIC GROWTH CONTINUES

The thing that gives me the most confidence about the future of America is the strength of growth in the rest of the world. American export growth is no less than remarkable. This should continue partly because the policies being espoused by the extreme left have little chance of passage. There will be marginal movement but no drastic changes and the trend to lower tax rates that started with Reagan is not over. Any major tax compromise with the Senate, will include a decrease in the corporate tax rate in America. In regard to new programs, I can see the passage of more help for children. The majority of Americans believe in health coverage for all children and the evidence is very strong that it is a very good investment for America to provide pre-schools. Educators to the right and left generally agree that children who come to school for the first time in publicly supported kindergartens cause major problems. Young children need to start their "education" early and they need exposure to other children and other adults. This is not to say that home schoolers fail. The problem is with those parents who do not care enough.

At any rate, I do not see a political move in the offing that will move the US off its growth path. Americans want reform of health care and education but not at the expense of wrecking the economy. We want to solve global warming with the least amount of disruption.

It only takes one Sally Clark for people to realize that government is sometimes our worst enemy. The Sally Clark story is that her child died of crib death syndrome, a 1 in 8,500 event. Three years later, her second child died of infant death syndrome. To add just a little insult to injury, the government prosecuted Sally for murder. She was convicted largely because a statistician testified that the probability of two such deaths was 8,500 times 8,500 or one chance in 73 million. The conviction was over turned on the second appeal. The reality is that we do not know what causes crib deaths but it is very likely that chances of a second one in the same family are no where near 1 in 73 million. How do we every pay Sally back for all the hardship she has faced? Having personally experienced the incompetence and irrationality of the government of South Carolina, I am especially resolute about the need to avoid giving more power to government than is absolutely necessary.

In the mean time, life moves on. One innovation after another is coming down the pike. A business innovation is in the works in regard to what is known as the Open-ID. MSFT, GOOG, IBM, and YAHO have all agreed to offer a universal Internet sign in feature. One of my pet peeves is having to remember pass words. Being able to sign in one time on a machine will make access to ones personal and business data much more available. Little things can save society billions of dollars and billions of hours. The public is still obsessed by the dangers of theft but this too shall pass. It certainly took some people a very long time to adopt the concept of a check (if memory serves, the first one was written in the mid 1600's). Today, a lot of people will send a check through the mail but they are afraid to let their credit card out of their sight.

MERGERS IN THE WORKS

US companies are making money, buying in shares and being bought up. YAHO is said to have rejected the advances of MSFT as being too cheap a purchase price. On the other hand, it appears that NWA and DAL are working toward what could be the smoothest airline merger of all time. The companies are negotiating with their unions on one "master contract". Should they win this contract in advance of a merger, the combining of the two companies could go very well and company cost could come down significantly.

In case you have not heard, I believe the major carriers will see significant revenue increases for at least three or four years.

LIFE IS GOOD

Life is good. We live in good times and better times are ahead. The news is negative but that is what sells. The reality is as good as it gets. The public falsely believes that it is only the developed world that is in good shape but in the last 30 years, the number of starving people has declined sharply, longevity has climbed dramatically (in particular in the developing world), the number of children per family has declined sharply and resources are being used more efficiently.

By the way, most people think that Japan leads in business efficiency but they actually rank 16th from the top. Which country is at the top? Duh! Would you believe the reason people around the world would like to come to America is because we are at the absolute top at converting a few dollars of sales into a dollars worth of profits. It is the freedom to make profits that makes the USA the best country for the people. Hillary, Edwards and moveon.org should get on board or move on!

BUY DAL AND NWA? or JUST DAL?

The turn in airline stocks has been fun so far but what is up next? Will DAL and NWA reach a merger agreement? If they do will it be approved by the justice department? Will members of congress rant and rave to no great effect? Will the unions go along? And, what will be the fair price?

We know the market values DAL at $4.8 Billion and NWA at $4.3 Billion. We also know that DAL has been and continues to be the much larger carrier based on revenues. DAL revenues for 2006 were $17.1 Billion and NWA revenues were about $11 Billion. Are the stocks priced correctly?


If there is a merger, it is expected that it will be treated as a non taxable merger of equals. If this were done based on current stock price, 4.8/ 4.8 + 4.3 or 52.7% of the new shares would be issued to DAL holders. If the relative value were set by revenues then DAL holders would receive 17.1/17.1+11 or 60.8% of the new shares. Of course, one could argue for an allocation based on bottom line, enterprise values and many other numbers.

I believe the tendency of the public has been to bid up NWA and UAUA in anticipation of the buy out. On the other hand, CAL and DAL have certainly appreciated in recent weeks. Still, I like to use revenues whenever there is not a compelling reason not to do so.

My bottom line is that I like CAL, UAUA, DAL and AMR a lot. In my thinking NWA is the higher priced of the group. One might think that since DAL is the company doing the bidding, that it might pay too much for NWA. One could certainly make the case to buy shares in both DAL and NWA. The main point is that 30 years after deregulation, the prospects are good for successful mergers. Successful mergers will lead to both lower costs and increased revenues. One possible DAL - NWA scenario, might be that an old DAL flight that had a layover in Atlanta might have the lay over in Memphis and vice versus. The number of flights into Memphis may see a decrease and the number into Atlanta may see and increase or the size of the planes on a number of routes may be increased but the key point is that the planes leaving these airports are more likely to be fully occupied. One big full plane generates a ton of revenues!

RISK OF SIDEWAYS TRADING

Now that the probability of mergers has been covered well by the financial press, there is a risk of a fairly long period of sideways trading. While there is likely to be another pop in price just before any announcement, once the deal is public, arbitrageurs will buy the one and sell the other short to bring the stocks into line with the announced deal. Then there will be a long wait to see if the justice department will let the deal go through.

However, there are always several ways to look at this kind of situation. We know that CAL has expressed time and time again that they are enjoying running a tight ship and see no need to merge. Management has said that it is content to remain independent but that it may be forced to act in order to maintain its competitive position against the other "bigger boys".

2008 A YEAR OF RECOVERY

I have become all the more confident that 2008 will be a year of recovery. The first quarter GNP numbers might give us all one more big scare but even negative numbers will not prove that a recession and especially a prolonged recession is here. While the bears continue to focus on the "sub prime crisis" (that has been cut down the middle by a dramatic fall in mortgage rate resets), the rest of the economy is rolling along at better than the "speed limit". Also, believe it or not, one of my reasons for optimism is the probability of a republican win in November!

GEORGE FREEMAN PREDICTS MCCAIN TO WIN!

George is a international affairs expert. We all have opinions but his is a more informed opinion than most. He notes that the pending nomination of McCain is already giving heart burn to the al Qaeda, the Taliban, the Iranians and the Russians. The pressure to make peace under terms available from Bush has just been increased. One of McCain's great lines is that when he looked into the eyes of Putin, all he saw were the letters KGB. McCain is respected across party lines (including the large number of independent voters) as being a man of his word. He has often said that he will get Osama. My personal opinion is that Osama is a blessing to us in the sense that he reminds us of the importance of staying militarily strong. We all know that if Poland, France, Britain and the US had maintained our military strength after WWI, we would never have had to fight WWII.

Hillary and Obama have been marching to the cadence of left, left, left. Their voting records in the Senate have become more and more liberal. Hillary had the 34th most liberal voting record in 2004. Last year, she had the 16th most liberal record, but she could not outdo Obama who has moved from the 16th slot to NUMBER ONE! Today, Hillary made a speech in which she said she would have the troops out of Iraq in 60 days. In other words, she has moved to the Obama position.

I grant you that after the nomination process is over, Hillary will emphasis doing all that is necessary to track down Osama. It is likely that before the November vote, troops levels in Iraq will be down and troop levels in Afghanistan will be up. With relative stability in Iraq, the emphasis of our military will be on "taking care of Osama".

The irony is that Afghanistan is no where near the treat of Iran. Afghanistan is a very poor nation controlled by a number of tribal chiefs. Sure, it would be nice to eliminate the training of terrorist but the technology and funding does not originate in Afghanistan. Eighty percent of the Afghans make their living by farming. The per capita GDP is about $800 per year. Iran is a different story. It's large population enjoys a per capita GDP of better than $12,000. This figure could easily be much higher if the country were not under economic sanctions. Iran owns the second largest conventional oil reserves but this is not the real reason the country is well off.

Another great irony is that the Mongol, Ghazan Khan, brought prosperity to Iran in 1,295 by LOWERING TAXES AND ENCOURAGING FREE TRADE WITH INDIA AND CHINA. The Persians were already well positioned to enjoy prosperity. They had always appreciated math, science and simply acquiring knowledge. The influx of goods and knowledge brought from China, India and Mongolia lead to a "rebirth of learning". In turn, this "Golden Age" occurred before and influenced the European Renaissance. While this age was called the "Golden Age of Islam", the center of it was in the old Persian Empire. Because Iran is a strategic land bridge between Asia and Europe, it was in effect a "melting pot of many cultures". As we all know, America has flourished as a result of being a "melting pot". In difference is that the American government is better! In the case of Iran, the country was conquered and reconquered over the centuries and after the Russians conceded to the Brits, the country adopted a constitutional monarchy. While the country managed to keep its language and pride its form of government just kept on changing. It has only been a Shi'a Theocracy for 30 years or so.

Millions of the people of Islam believe in an "inner spiritual jihad". A holy war within ones self to be a better person. The radical few believe in killing all who are not willing to convert to Islam. For some years, the territory of Iran included most of the territory of present day Afghanistan. The mountains of Afghanistan has been the "hideout" for "terrorist" for thousands of years. One of the most ruthless people in all of history was Mahmud of Ghazni. Ghazni is a city a few hundred miles to the south of the capital. It is not the most isolated place in Afghanistan by far but from 997 to 1,030, Mahmud used it as his home base. From there, he traveled far and wide to lay waste to the villages in India, Persia, and other neighboring territories. He was particularly fond of the "temple cities of India". He would kill men, women and children and make off with livestock, possessions and the temple gold. Occasionally tribes would band together to go after him but the mountains of Afghanistan gave him protection.

MCCAIN AND HUCK?

Huck will probably win the Kansas caucus today. Still, he is most likely still in the race as an audition to be Vice President or to set up the potential run against Romney in 4 years. Rush is not a big fan of Huck but today he said that McCain needs to select Huck as the VP and to get on with the process of healing the tear with conservatives. The point of the above story about Iran is that McCain will win a lot of democratic and independent votes because the terrorist are still active and because Iran is a serious threat. Without the sophisticated bombs provided by Iran, the war in Iraq would not have been nearly as bloody. McCain is the candidate to deal with this situation.

Huck's presence on the ticket will help McCain heal the party wounds and Huck will attract a different group of independent votes. Huckabee polls well with younger votes, with lower and middle class voters, with evangelicals and with those who are deeply concerned about educating children. Because McCain and Huck believe in a reasonable approach to immigration (after sealing off the borders), they will be able to win back a portion of the Hispanics who switched over in 2,006 to give democrats control of congress.

WHO WINS IN A CAT FIGHT?

Should the Hillary -- Obama cat fight continue, McCain's chance of winning goes up. Hillary and Obama know this but neither is willing to step aside in favor of the other. The race is very close. History tells us that the party that fights long and hard to establish the nominee consistently loses the general election. When the election gets close, we are likely to hear time and again that in a time of war, it makes sense to elect a war hero. Hillary will continue to spew out her laundry list of problems to be solved by the government and I still have not figured out what Obama will do other than to retreat from the war.

The bad news is that the tribal codes of the peoples of the Middle East includes some form of "Badal", which is the right and obligation of vengeance. The big problem is that history gives reason after reason for vengeance. After all, it is true that the US backed Iraq in its war with Iran and that thousands of Iranians suffered attacks of poisonous gas. It is also true that followers of Muhammad destroyed the Roman army at the Battle of Yarmuck in 636 and they followed up this battle by crushing Christians in Palestine, Syria and Mesopotamia. By the way, many historians consider the Battle of Yarmuck to be one of the most important in the history of the world. Hundreds of years latter, the crusades were part of the response to this great battle. Did you ever hear about Goland Heights or the 6 day war? I bet you did not know that the Goland Heights were the vantage point for Khalid ibn al-Wald during the six day war called the Battle of Yarmuck!

NOSTALGIA FOR THE "GOOD OLD DAYS"

We remember a few really good things about the days of old and then decide that life is getting tougher by the day. The stories abut the life of Ben Franklin is one of our great memories. Years ago, my favorite Ben Franklin story was about him being sent to bed hungry when he complained to his mother about the corn mush he and his 11 siblings were once again having for dinner. Today, when I tell that story, I like to mention that Ben created the idea of "paying it forward". He believed that if he gave a man in need a hundred dollars and made him promise to pay it to another good man in need that the hundred dollars might make its way into the hands of many good men before some scoundrel made off with it. Ben never got patents on his inventions because he saw these inventions as a public service to his fellow man. Ben was the only person to sign all four of the countries founding documents, including the Declaration of Independence and the Constitution. Ben lived a good life because he made life good.

Ben lived during a tough time. A time of disease and war. He left his sweetheart in the states and it took him 5 years to get back home. She had since married. Ben had an illegitimate son by an unknown mother. After his sweethearts husband ran off to never return Ben and his son moved in with her. He was eventually able to make her his common law wife but he was never able to talk her into going with him on his trips across the ocean. Once again, he spent more than 5 years playing politics in France, including the common practice of the day of flirting with the women. The evidence is strong that he never had sexual affairs but he did take heat for his life style and for helping his son gain a government position.

Worst of all, Ben probably never accepted Jesus as his savior. In his early days, Ben was a Deist. In latter years, he encouraged prayer at the start of each continental congress and he contributed to a Presbyterian Church in Philadelphia. Late in life, he admitted that he had never studied the "question of Jesus" but he said that he would find out the answer soon enough.

The Battle of Yarmuck is sometimes called the Battle of Lost Eyes because thousands of men lost an eye or two to the arrows that rained. In one decisive battle, Khalid asked for 400 men to save the day by going on a suicide mission. All 400 were killed or seriously wounded.

I sometimes forget just how good my life has been. I know that the policy of an eye for an eye leads to a lot of blindness. It is my hope that America rebuilds its military strength and uses this strength to avoid war.

The pressure is back on Iran, Iraq, the Taliban, al Qaeda, the Kurds, the Turks, Russia and others to play nice. Lets hope that America keeps the pressure on so that bigger wars can be avoided.

IS THE WORLD IS UPSIDE DOWN?

Last night a bible study group leader remarked that the world of crime has been turned upside down. He said that it used to be that government officials were out to catch and prosecute murderers, rapist and prostitutes but today governments are out to prosecute crimes against government such as income tax evasion, driving without an inspection sticker or without a renewed license plate. In the discussion that followed, it was mentioned that wrongs by those in power are not as serious as the wrongs of those outside of government. The prime example given was the Mayor of Detroit who had an affair and denied it under oath. The city settled a multi-million dollar claim but the Mayor still has his job. The name of Monica came to mind.

THE MORE THE WORLD CHANGES THE MORE IT STAYS THE SAME, OR NOT?

For 1,400 years from the time of Aristotle to the time of Copernicus, the most brilliant of scientist believed that the earth was the center of the universe. Copernicus was unwilling to publish his findings for three years because he was afraid that he would be convicted of heresy by the Catholic Church. Galileo, no shrinking violet, boldly proclaimed the "new truth", long before he put much serious study into the question. Eventually, he was tried and convicted by the Catholic Inquisition.


The good news is that Galileo got off easy. He was allowed to live in exile and thus he had the time to study the question and prove that the planets go around the sun.

THE TRUTH SHALL SET YOU FREE

Those in power often seek what is good for those in power. The truth seems to get pushed back like a coiled spring. The Catholic Church did not want to acknowledge the "new truth" about the relative importance of planets. Man always thinks that he is much bigger and more important than he really is. Yesterday, the US Senate failed to pass its latest Christmas Tree Bill. The US House and the President have agreed on a subsidy bill that is the Ben Bernanke equivalent of throwing hundred dollar bills out of helicopters. The "big and powerful" Harry Reid is fighting hard to load this "emergency spending bill" with all the goodies he can. After all, if the congress is going to buy votes, why not buy votes from veterans, retirees, small business owners, large business owners, tax accountants, lawyers, citizens in high tax states and a sundry others? Last nights vote failed by one so Harry practiced the political game of voting against his own bill so that he can load it up with more goodies. So far, 9 republicans have joined the "gravy train". What other goodies will be added to buy another republican vote? Of course, the eventual senate bill will never become law. The process is to get a different bill passed in order to negotiate the "prime goodies" in conference committee.

THE EARTH IS NOT ROUND!

To believe that the world was flat, people had to deny the obvious evidence to the contrary. The people believed because those in power told them what to believe and the public accepted that the smart and powerful men of the day must know of which they speak. Today, the world is not round but is instead upside down. The powerful people of the day, which includes those who control what is reported as "news" have decided that the earth is getting hot, as a result of what man has done. The evidence in support of this position has received wide distribution and it is repeated millions of times daily as truth. The fact is that the earth "leaks" natural methane into the atmosphere constantly and methane is many times more responsible for global warming than is carbon dioxide. The amount of natural "leakage" as measured by scientific notation is ten to the 28th power! This is from the ocean alone and does not count the natural decay of plant material outside the ocean.

I can tell you that the earth is not round a thousand times and you will not believe me. However, powerful vested interest have formed a "cartel" to profit from telling you that the earth is over heating. Temperature readings five miles into the atmosphere have not gone up for 10 years! China is currently experiencing the coldest winter in 50 years! Temperature readings at airports increase to reflect the constant increase of urbanization around airports! The level of methane in the atmosphere has declined in recent readings. Higher earth temperatures means a change in the trillions times trillions of chemical reactions that occur on this planet daily.

I believe in conserving resources and protecting our environment. I do not believe in allowing false claims to be used to enrich the powerful.

Today, there are too many people feeding off the government. It is time for reform.

MCCAIN AND HILLARY ARE IN THE MIDDLE!

To some extent, McCain's current status as front runner of the GOP is a fluke. Conservative voters split their vote between Thompson, Romney and Huckabee while McCain walked away with his key victory in South Carolina. On Super Tuesday, 62% of the republican voters in Missouri voted for the conservative candidates of Huckabee and Romney but McCain walked off with all 88 electoral votes. Many people believe that neither Romney or Huckabee can win but it would be interesting to see how either would stack up against McCain in a one on one contest in the states won by McCain. I suspect that even Thompson would have won a one on one contest.

I can still envision a Huckabee win if Romney were to suspend his candidacy while considering asking his delegates to vote for Huck. I cannot envision a Romney win because, after spending $35 million of his own money and another $55 million of friends and supporters, he won only a couple of primaries. His expenditure per delegate is around $300,000 each. He has a lot of money but others have tried but generally failed to buy the nomination.

ASSUME MCCAIN AND HILLARY

If we assume that the nominees will be McCain and Hillary, we can easily see where the "American Middle" is. The majority of Americans are for granting a path to citizenship for Hispanics currently living in America. The majority of Americans believe in government intervention to solve the "global warming crisis". The majority of Americans believe in limits to free speech as permitted by the McCain --Feingold legislation.

THE DIFFERENCES BETWEEN THE TWO COUNT THE MOST

While it pains me to know that even McCain has bought into the cap and trade game of soak the people for the benefit of the game players, there are certainly other areas where McCain is the clear choice over Hillary.

EDUCATION: McCain believes in improving schools by giving parents the right to move their kids out of weak schools and the right to move the government funding with them. Most Americans understand that the best products are those that are vetted by the free market. The right to the best education should not be a class warfare issue. All children should be allowed to select the school that serves their needs. Hillary offers the typical big government Christmas Tree of promising all things to all participants. Yes, the best teachers should be paid better, but government programs to pay all teachers more is like feather beds on railroad trains, the extra union train workers took their feather beds to work because they were paid to do nothing.

Hillary supports pre-school for all and this is a worthwhile area for debate. All children in America deserve a "head start", however, the funding for such programs should be made available only after hundreds of wasteful programs are scrapped. When America invest in the education of our kids, our return on investment should be high. The "melting pot blessing" that has been one key to the greatness of America begins in the public schools. Huckabee has shown that public schools "win" when they support the arts and sciences.

HEALTH CARE: Once again, McCain believes in the power of the right to choose. The power of the purse needs to be returned to the families of America. The doctor and the patient need to determine what treatments should be tried and cost must be an important factor. It is tempting to believe that government resources for health care expenditures are unlimited. The mandatory system proposed by Hillary will result in either massive cost increases for care or rationing. Socialist like to point out that other nations have national health care for the benefit of all citizens. Socialist do not like to be reminded that a dog in Canada can get an operation scheduled in a week but citizens often have to wait in line for months. In Sweden, some citizens report that they routinely are denied the right to talk to their health provider by phone. As a way to ration the doctors time, they only serve those who wait their turn at the office. The current system needs to be reformed but it does not need to be replaced with a government system.

TAXES: Here again reform is needed. Taxes do not need to be raised but the system needs to be simplified, there are too many feeding off the process. Jack Kemp, of Kemp-Roth fame, has signed on to assist McCain in developing a tax simplification act. The new plan will eliminate the alternative minimum tax that has been encroaching on the middle class. I doubt that the reforms will go far enough as democrats and republicans feed off the system. The emphasis of Hillary is to raise the tax on the rich as the way to make the system more fair. The emphasis of McCain will be help businesses create jobs by reducing the taxes on productivity (Huckabee's focus as well.)

WAR ON TERROR: Hillary has carefully worked to keep her options open. She wants to be able to run as the centrist candidate. Unfortunately for her, she is at risk of losing to Obama for being too centrist or she is at risk of winning the primary only to lose the general as a result of her moving too far to the left. The fact is that there are still thousands of bad guys who desire to blow up Americans. These bad guys are living in the mountains Pakistan with reduced numbers living in Afghanistan, Iraq and a number of other Middle Eastern Nations. McCain is the obvious choice for Commander in Chief. The comparison of the terrorist to Hitler is a joke to the socialist but Hitler's power was a built up gradually over many years. Even after he invaded Poland, no country was willing to face him. George Bush 41 deserves credit for freeing Kuwait from Iraq. Socialist and liberals write a lot of our history books but a fair telling 10 years from now will probably give George Bush 43 credit for saving millions of lives. Hillary and others are trying to make hay over McCain's willingness to have troops in Iraq for 100 years if necessary. McCain is correct that Americans are not upset because we still have troops in Germany 60 years after War War II. I will be overjoyed if my grand children serve our country in the Middle East during a time of peace.

OTHER STUFF: On Hillary's web site, you see little mention of the second amendment or the abortion issue. On the McCain site, you see statements in support of the right to bear arms and support for life. McCain also makes the pledge to nominate strict constructionist judges.

HUCKABEE IS NUMBER 1 BUT...

Huckabee is still my choice for President. He still has a shot at the nomination. However, conservatives will have solid reason to support McCain over Hillary or Obama. Hillary is even to the left of Obama on the heath care issue.

Again, Huckabee could still pull a rabbit out of his hat. The Rush-Hannity-Lars-etc crowd despise McCain. While these guys are not fans of Huck, they may encourage votes for Huck in a two man race. On their pet issue of immigration, Huck has a very strict proposal posted on his web site.

THE UPSIDE DOWN WORLD OF AIRLINES

Back in 2002 when I first pushed the purchase of CAL hard, the market cap of LUV was 13 Billion Dollars. At the time, the market value of all the major combined was about 4 Billion Dollars. I wrote that if one owned all of LUV that he should sell it, buy all the other carriers and put the extra 9 Billion in the bank. Back then, the airline world was upside down. Today, it still is.

The market value of LUV and the major carriers in Billions of Dollars is:

LUV 8.8
DAL 4.8
UAUA 4.3
NWA 4.3
AMR 3.8
CAL 2.8
LCC 1.4

The size of the carriers by billions of dollars in revenue is:

AMR 22.5
UAUA 17.8
DAL 17.1
CAL 13
LCC 11.5
NWA 11
LUV 9

As a general rule, it makes sense to pay a higher price for the company that has the highest sales. As you can see, the LUV buyer pays $8.80 for $9 worth of annual sales. The AMR buyer pays $4.30 for $22.50 in annual sales. The ranking from most expensive to least by this measures is as follows:

LUV .97
NWA .39
DAL .28
UAUA .24
CAL .21
AMR .17
LCC .12

Those who buy shares in LUV pay 8 times the price of those who buy shares in LCC. I grant that LCC has more than its share of problems as does AMR but by the time you get to CAL you have a well run airline available at a 78% discount to LUV. Back when I wrote about LUV being worth 13 Billion, I said the odds were that the majors would "catch" LUV somewhere in the middle. So far, LUV has dropped off 5 Billion in market value while the combination of the others is now worth 21 Billion. I still expect CAL, DAL, AMR, UAUA and NWA to each pass LUV in revenues within a few years even without merging with one another.

LUV IS IN THE HUNT!

One question being asked by analyst is ,"Will the grand old AMR carrier sit still while DAL scoops up NWA to become the biggest carrier and then sit still again to see CAL- UAUA take over first place while AMR drops to third?" An equally interesting question is, "What will LUV do?" The chairman has said that LUV is "in the hunt". LUV has been working hard to prepare for the switch to a hub and spoke system. There is no long a fast track growth path available for a point to point system.

It has been said that AMR has its eye on CAL. On the other hand, the CAL management is top notch and the firm desires to remain "in charge". LUV is not an attractive purchase candidate because it is high priced and boxed-in. LCC is basically a domestic carrier with lots of union problems. LCC is a member of the same "cartel" as UAUA. LCC tried to buy DAL before it exited bankruptcy. It would have been a highly profitable deal.

AFTER THE US CONSOLIDATION

After the US carriers are in a better bargaining position, the airline business could be open to international consolidation. The question will remain if consolidation is necessary given that the "cartel system" is allowing members to work closely together. The days of the old CAB regulations are long gone but the "cartel system" gives the carriers "oligopoly pricing power". In any event, you can expect to see higher fares. Increases in the coming years are going to make the $20 per trip fuel surcharge of last month and the $25 second bag charge of last week seem like small potatoes.

ENGEL'S LAW

In 1857, German Economist, Ernest Engel discovered that the elasticity of food is less than 1. What this means is that the more income you make, the less you are likely to spend on food in percentage terms. This is true for other basic necessities of life, such as heat, clothing and shelter. Engel noted that other goods such as furniture and transportation are "normal goods". In his mind a normal good is one that is bought in proportional amount as your income rises. In other words, the higher your income the nicer the car you are likely to own. Except in extreme cases, Engel would not have seen a car as a luxury good (in his day steam locomotives had transformed the world of transportation and cars were not invented yet but his principles apply to cars as well). The third category of goods according to Engel was luxury goods. These goods have an income that is greater than 1. In other words, a poor man may double his income and not buy his wife a diamond but if he doubles his income again he may buy her two or three or even a dozen.

The good news is that billions of relatively poor people are seeing their incomes rise above the poverty level. As such, they are finally enjoying what Americans have enjoyed for centuries. They are finally able to spend to own "normal goods" and even luxury goods to some extent. In the short run, the new demand has put pressure on the price of resources, but over time, the law of substitution brings down the price of resources. The world is going to continue the economic boom of the past 25 years. The difference during the second half of the business cycle is that it is AMERICAS TURN TO PROSPER! America currently offers the hottest technology at the lowest prices. It is our turn to export goods and services and that is what we are doing. The times are so strange that retailers in New York City are accepting Euros! The price of our dollar is so low that Europeans cannot buy enough from us. They sometimes find themselves in New York out of dollars but with Euros in hand. Put another way, America is the leading capital goods producer of the world and businesses are buying like never before!

"MYTHS OF THE RICH AND POOR--Why We Are Richer Than We Think" by W. Michael Cox and Richard Alm

Mark Perry of Carpe Diem fame posted a few charts and data from the above book. The book was written some years ago but its truth is growing with the economy. In my emails I have tried to get across the idea that inflation is part and parcel to productivity. The thing I like most about the Cox book is that it uses time as an inflation measuring stick. I have to run but let me encourage you to take a look at his numbers in detail. It is incredible to learn how many hours of work were required on average to pay for something 20 years ago that can be acquired for a few moments of work today. The text shows us Engel's law at work. American's keep working less and less for basic necessities but they feel stretched to make the payments on their boats, second homes and children's college tuition. American's tend to forget that their parents did not own the same variety of luxury goods. My ancestors canned beans, black berries and tomatoes. I am thankful that my wife and I "do not have the time to can food". On the one hand, some Americans try to do to much or to "give their kids too much" and on the other hand, other Americans sit on the couch watching TV while complaining about how tough times are. Read the "Myths of the Rich and Poor" to discover just how many benefits we enjoy.

BUY, BUY, BUY

The stock, bond and real estate markets are upside down. Thirty year fixed rate mortgages are available for 5.5% on homes that are selling for substantially less than the cost of production. Only a fool rents a home under these conditions.

THE TWO SIDES OF GOVERNMENT SAY BUY, BUY, BUY!

Government policy is divided into monetary policy and fiscal policy. The public typically believes government fiscal policy is upside down. Right now, government monetary policy and fiscal policy are both on stimulating the economy. You see, when the government spends more money that it takes in, that is an economic stimulus. It is easier to see from the opposite side, which is when the government increases taxes, you have less money in your pocket to spend.

For the 19 months leading up to last month, the FOMC held short term interest rates above the 10 year treasury rate. That is not normal. When the FOMC cut rates .75 and then followed by another .5 last week, the short rate "brake" was taken off the economy. At about the same time, Bush announced a 3.1 Trillion Dollar federal budget. The expenditure in this budget is greater than the income by 400 billion, as I recall. This is greater than the Christmas Tree package being cooked up by the Senate, which could exceed $200 Billion of give aways.

Perhaps the formula for growth is worth posting again. GDP=C+I+G+(X-M). What this formula tells us is that the sum of all the growth enjoyed by Americans is equal to the grow in consumption plus the growth in investment plus the growth in government spending plus the net growth of exports over imports. Guess what, the US economy is being goosed!

The consumer always spends, spends and spends what he has and personal income growth continues to soar. The yak, yak, yak about taped out consumers is horse hocky. Consumer debt relative to personal income and net worth have dropped significantly since 2003. As far as investment is concerned, businesses are spending heavily on new plant and equipment and, despite what you hear about failing infrastructure, governments across the land are building roads, bridges, bike paths and water treatment plants. There are 49 coal fired electrical plants planned or under construction in the USA. The $400 billion dollar federal deficit shows that the federal government is doing its share to reflate the economy. Finally the export boom in capital goods equipment is leaping forward at the same time that the total value of oil imports is falling.

With monetary and fiscal policy goosing the economy, the public is going to do their share. Even rental properties are now being refinanced. Mortgage rates have been lower only a couple of times in the past 50 years. THE NEWS MEDIA HAS THE STORY UPSIDE DOWN! IT IS NOT TIME TO HIDE IN A BEAR HOLE! BARGAINS ARE AVAILABLE.

While I do not believe anyone can "short time" the markets, I believe the market will be trucking well before the McCain tax simplification plan is made public. The public is sick and tired of the annual delayed patches to the AMT. I believe the congress is ready to cobble together a tax simplification that will keep the capital gains tax cuts in place for the "average man". As we learned in recent democratic debates the average man makes up to $250,000 per year. The politicians will not give up total control and make taxes too simple but a 1986 style tax reform is on its way! It very well could include a 50 cent per gallon gasoline tax tied to a reduction in income taxes. Mighty congress is on the way, the mighty congress will save the day! And the world will still be upside down.

ROMNEY OUT BUT IS IT OVER?

Romney did not win delegates in the conservative south. He did pull enough Missouri votes away from Huckabee that this key state went to McCain. McCain is the likely republican nominee despite the fact that he is hated by Rush, Hannity and others. The great irony is that the main "sin" of McCain was his willingness to offer immigrants living in the US a path to citizenship. Our country is filled with citizens whose grandparents did not go through a formal immigration process. One of the many true tall tales is that many of the cowboys who participated in the great cattle drives immediately before the railroads reached the South West were illegal immigrants from Europe.

Anyway, Romney says he will keep going but he has spent $35 Million of his own money to gather less than 300 delegates. He has spent more than $117,000 per delegate! It is time for him to pack his bags.


Given the animosity Romney has displayed, it seems unlikely that he would endorse either of the remaining candidates. However, if he were to drop out, two of the states coming up for votes, Louisianan and Texas could move into the Huckabee camp. To date, the conservative vote has been split in every election but McCain was the lone "moderate" in the latest contest. The total delegate count lead enjoyed by McCain would not be there except for the split. For example, in South Carolina, Thompson took enough votes away from Huckabee to throw that state to McCain. Florida saw a three way split of conservatives and only a two way split of the "moderates".

Again, McCain is the probable nominee but I agree with Huckabee that if this is a two man race then it is a two man race between McCain and Huckabee. I simply do not believe that Romney is ready to spend another $35 Million to come in a distant second at best.

BOOM BOOM BOOM!

While some data keep showing economic weakness and while the pundits talk about the recession, a BOOM, BOOM, BOOMING economy is developing. Commercial and Industrial Loans are at the top of the chart. The chart pattern is similar to the pattern at the mid cycle turn in 1996. Just like the chart pattern on airline seat "bumps". Last year, more passengers were bumped than in any year since 1996. We all know what happened in the markets from 1996 to 2000!

In that previous cycle, we had the stimulus of preparation for Y2K. A ton of money was spent on computers upgrades. This time around, there are tons of computers being purchased to replace desktop computing tasks. The new paradigm is called "cloud computing". The reason the new hand held mobile computers will be so super powerful is because they will rely on "cloud computers" to hold data and do the heavy lifting. Texas Instruments just came out with technology that will increase battery life on hand helds by a factor of 10! I believe that body heat will eventually be adequate to power hand held computers! 98.6 will be all you need to stay in touch with more computing power than exist on the earth today.

CONSUMER DEBT

Yesterday, a TV talking head once again blamed the current downturn on over burdened consumers. The fact is that the ratio of consumer debt to personal income peaked in 2003 and went down for the next 4 years. The good news is that the consumer is borrowing to spend again. In the last few months, the ratio has gone up a little, even though personal income grew at the annual rate of 5.2%. BOOM! If consumers incomes are up 5.2% and they are borrowing to spend, then total spending is growing by more than 5.2%. But if you really want to talk about spending, take a look at the purchase of capital goods by business. The smoothed figures show an annual increase of better than 18%!

PRODUCTIVITY SURGE--LOW UNIT LABOR COSTS

For some reason, it is easy for the public to understand that a surge in productivity depresses unit labor costs but it is not easy for them to understand that this represents lower inflation. Whenever anyone starts talking about inflation, the conversation immediately shifts to a few well known areas of price inflation, such as health care, college education, food and fuel. The fact that food and fuel are "roller coaster" commodities that eventually roll back down the hill is lost in the debate. The fact is that the cost to produce goods is falling at the annual rate of 2%.

INSIDERS BUY, BUY, BUY

I have mentioned repeatedly that the Gambrill insider index shows strong buying by company insiders. Yesterday, I read a report from Argus Research that is offers even more revealing numbers. For the first time since I don't know when, insiders bought more stock than they sold last month. Insiders are granted thousands of shares as a part of their benefit package. Most insiders participate in routine divestiture programs. In other words, they routinely sell shares. In 1982, the market went down in the early months but certain groups started to turn as the year progressed. Insiders were buying like crazy. By the time the strong groups broke out, the hole market lifted. There was no catching up to the groups that had turned up early.

POWER NEEDED FOR NEW JOBS

As reported, coal fired power plants are being built in China and the USA faster than ever before. A new coal plant opens up in one country or the other about every other day. Buffet has been buying railroad shares. The Mitsubishi Nuclear Plant Design has made it past one more step in the approval process. Nuclear power plants are being built around the world and they will soon be under construction in the USA.

Believe it or not, China's export growth has been slowed due to insufficient power supplies. China is suffering a lot of pain right now as a result of the coldest winter in 50 years. Ice storms have taken down power lines, clogged roads and depleted coal reserves.

The most silly thing is that Hillary, Obama and McCain are all ready to over tax and over regulate the production of energy in support of false "science" in regard to climate change. Based on measurements made 5 miles above the earths surface, where the measurements are not effected by the proximity of airports, parking lots and buildings, the temperature has not changed since 1998.

America has turned its education system into a factory that turns out homogenized group thinkers. In the meantime the opinion expressed by the Russian, Boris Marshalov, appears to be true. Boris visited the US Congress in the early 1900's. He listened to a couple of days of debate before saying, "Congress is very strange. A man gets up to speak, says nothing; nobody listens; when he sits down, everyone gets up to disagree with what he said."

The difference today is that the political parties win by repeating false statements until they are believed by the masses. On the republican side, the steady drum beat is that cutting taxes will raise revenue. On the democratic side, tax cuts only benefit the rich and global warming is going to destroy the planet. The fact about taxes is that they should be kept as low as possible because the government does a poor job of deciding how our money should be spent. Instead of spending Trillions of Dollars to fight global warming, we should spend far less and solve all sorts of other problems. If it were true that global warming is going to "kill us all" then instead of some complicated cap and trade scheme, we should simply change the way we tax people. We should increase the tax on fuel and provide the people with a reduction in their income tax. Every one in the world would lower their fuel consumption if the cost were to be increased.

OIL INVENTORIES CLIMBING

Oil inventories are climbing; partly due to slower economic activity around the world. THE BOOM, BOOM, BOOM in America will lead to a BOOM, BOOM, BOOM in the strength of the US Dollar. Since oil is traded in dollars, an increase in the dollar represents an increase in the price of oil in all the countries that see a decline in currency relative to the dollar. In other words, it is finally time for American's to get a price break. This is the best of news for the legacy airlines.

A PHOENIX RISES OUT OF THE DUST

From 1998 to October of 2002, CAL fell from $62 to $4.50, but the company survived the tragedy of 2011. The company rose like a Phoenix out ashes, it zoomed from $4.50 to $48 in 4 and a half years. Then as a result of politics and greed, the mid cycle correction turned into an unnecessary route. The FOMC held short rates higher than long rates for 19 consecutive months which was much longer than necessary. The public was fooled into thinking the "wheels were falling off the wagon". They sold trillions of dollars worth of assets as the story told by the media and the politicians worsened. Of course, the politicians came to the rescue just in time. The house has passed a stimulus package to "help the little guy" and the senate is expanding it to help even more "little guys". Even now, the Fed Funds Rate is well above the market derived 90 day t-bill rate. The good news is that the FOMC only has so much power. The high short rates have brought mortgage rates down to historical lows. The refinance index is jumping off the chart. The many who have common sense are taking advantage of low mortgage rates. My daughter took out a variable rate last year because long rates were high. Today, she can refinance at 5.5% for 30 years! Why not? Are borrowing side interest rate going to average less than 5.5% for the next 30 years?

The extra tightness of the FOMC brought CAL down from $48 to $20 in one year. However, the Phoenix rises again. In the past month, the stock has appreciated 43%. It trades today at $28.90 per share. As I have pointed out, when you buy a share of stock, your ownership includes more than the price you paid in cash. In other words, you get the airline for free. As Lamar Jones points out, the company will receive better than $10 per share in free cash flow next year. If you buy a share of a company for $28 and it generates $10 in cash for you the following year, the value of those shares seem likely to increase. Put another way, next year, the guy that pays $38 per share will also be getting ownership of the airline for free.

OIL is currently trading at $87 per barrel for the first time in a long time. At its last meeting, OPEC maintained its production even though the build-up for winter heating is already over. Yesterday, emails, TV pundits, newspapers and radio hosts spoke about the "oil problem" from one angle or another. I did not hear a single mention of the huge, elephant fields that have been discovered in recent years. The average investor has not even heard of Kazakhstan. Many have heard about the monster field found in Brazil but the mention of this field is usually accompanied by the mention that it will take several years to build the infrastructure.

GET OFF MY AIRPLANE

Yesterday, I read a couple of discussion threads in regard to the UAUA $25 charge for the second bag. The consistent point being made was that the "stupid decision" would send travelers to the other airlines. The secret response of management is "Hallelujah". With demand from business exceeding the available supply, the move made by UAUA was designed to send the discount fare shopper to the other lines so that he can be replaced by a full fare customer or to at least convert him into a profitable customer. Chances are good that the other airlines will add the baggage charge very soon. Indeed, the discounters have already had similar extra charges. To what airline is this discount shopper going to run? If the seats are all full at CAL, he must keep looking.

Don't take me wrong. It is right for customers to shop around for the best deal. However, customers must also be realistic. Just because you used to be able to buy an ice cream cone for a nickel does not mean that no one buys ice cream cones for $3 today. Just because you used to be able to find an empty seat at a bargain price a few years ago does not mean that the seat is still available today.

The price of oil went down dramatically for a lot of years before it hit $10 a barrel in 1999. Once the bottom was made the price rose and rose some more. The price of an airline seat bottom only a few years ago. Now that prices are going up, you can expect the trend to continue for several more years.

It is looking a lot like Hillary -- McCain. There is not a quarters worth of difference between the two. Still, the American economy is resilient. Life seems tough but we are actually living in the best of times. BUY, BUY, BUY

UAUA -- CHASING THE "BAD CUSTOMERS" AWAY!

Reporters have speculated about the Best Buy policy of "chasing away the bad customers" for many years. Marilyn and I have experience with this policy. Years ago, we got a Best Buy Credit Card but we practiced our personal policy of paying no interest. In those days, we primarily used a Visa Card during the month but paid it off in full before interest was added. When Best Buy offered the lowest price on an appliance with no interest due if paid within 2 years, we bought the appliance, refused the pressure to buy the extended warranty and then were careful to write a check in full for the purchase price after 23 months. Best Buy sent us a notice that our credit at Best Buy had been suspended.

As many of you know, in the retail trade now a days, companies often make more off the financing and more off the extended warranties than they do off the sale. Some customers consistently pay triple the price for extended warranties and, even 21% interest for financing. Retailers do well to break even on the goods, or to even offer "loss leader specials" to those who willingly pay for these other services at ridiculous rates.


AIRLINES ARE PURGING THE LOSERS!

For some time, I have pointed out that airlines make high returns during the 3 to 5 years of prosperity that comes near the end of the business cycle. During this time, commercial travelers fill the seats without shopping for weeks to get the best deal. The casual traveler is "pushed out". Who wants to fly a million people on their once in a blue moon vacation at deeply discounted rates when there are 100,000 experienced fliers available to make an average of 10 trips each without shopping high and low for the lowest fare?

The experienced travelers become members of frequent flier programs. As such, they are loyal to their carrier or carriers of choice and they do not need their hand held every step of the way. They know how to use a kiosk to check in, they know how to travel light and they are willing to pay a little more in exchange for the better seats and services.

UAUA just instituted a $25 second bag charge for those who are not "members of the club". Reporters such as Herb Greenberg immediately started whining. He sees this as a dumb policy that might run away some customers. He does not understand that it is wise to chase marginally profitable customers away during the times when highly profitable customers are looking for seats.

Despite all the yak, yak, yak, about recession or the possibility of recession driving away demand, the major carriers once again set record load factors in January. The demand for air travel picks up during the second half of the business cycle and we are there. Company after company is looking to restructure its business to take advantage of "globalization". You do not suddenly decide to use a company in India without sending a number of company representatives to "check out the business landscape". On the other hand, if you are a frequent traveler to India, you may feel very comfortable bringing grandma over to have her cataract surgery done at a 70% discount. Once India or China or other places become familiar, it is no big deal to visit frequently.

The new rate card at UAUA includes $25 for the second bag and $100 for the third and fourth bag. Here again, why haul these bags for less when commercial shipping space is in high demand? Again, the prosperity phase is a time of high demand for international cargo. When the business passenger climbs returns to his "frequent business home" he does not even need to pack a toothbrush. All of "his luggage space" can be sold to Fed Ex or others.

I have made the current airline situation as clear as I can. If you do not have an over weight position in airlines, I believe you are missing an easy trade.

GOOGLE--MSFT--YAHOO

Google is the king of search. Google has a 56.3% market share in search. The share of others is:
Yahoo 17.7%
MSN (et al) 13.8%
AOL 4.7%
ASK 2.2%
And AT&T and lots of others with the rest scattered between them.

This service cost almost nothing to provide and the cost is getting cheaper by the minute. The profit margins are huge. In effect one click of one add pays for thousands of searches and the volume of searches continues to expand rapidly.

Google has built monster data centers which are well connected by super highway data cables. The Google system is big on redundancy with much data backed up 6 times or more. If a computer or even an entire data center goes down, other computers or data centers automatically perform the duties required until repairs are done.

WHY YAHOO--MSFT NOW?

MSFT tried to negotiate a deal with YAHOO several times in the past. When a deal could not be closed, MSFT spent a lot of money on one attempt after another to build a competitive system. As you can see from the numbers above, MSFT has not come close to catching up with GOOG. Indeed, so far, it has not even caught up with YAHOO. So far, Google has been the Ford Motor of 1908 to 1919. Ford started getting ahead of everyone else when it introduced standardized parts in 1908. Ford was able to offer the lowest priced vehicle. It was not fancy but it did the job and was affordable. When Ford invented the assembly line in 1914, the company was able to really leave all other car companies in the dust. During the mid cycle correction from 1919 to 1921, Buick, Oldsmobile, and Pontiac were merged into a strong competitor. When Ford made the mistakes of sticking to limited choice and cash on purchase, GM took the opening to the bank. GM offered colors, options, trade-ins and financing. GM passed Ford as if Ford was sitting still (as it was). Who would pay $700 cash for a black straight drive Ford when one could pay $70 down for a beautiful automatic Olds? Millions who still relied on a horse and buggy suddenly had all the more reason to give the car a try.

The Internet is going through a similar transition. The computer of tomorrow will make the desk top of today look as silly as a horse and buggy on an interstate highway. There is no evidence that Google is going to make the mistake of sticking to the "old". Indeed, Microsoft has a much bigger percentage PC market share than did Ford and it is Microsoft that waited too long to recognize the "new world". Google is leading the way to the mobile Internet which will make the current Internet the equivalent of the horse and buggy.

YAHOO saw the light long before MSFT but YAHOO took the wrong approach. Yahoo held the mind set too long that it should gather up all the content and hold the Internet user as a hostage on its sites. As we have seen from YouTube, the creative power of the masses is great. Videos shot by armatures have gotten massive play. The "long tail theory" has proven to be reality.

LONG TAILS

In the "old days", a library, music store or video rental store could house so many thousand items and cover 90% of the demand. Indeed in the "really old days", three TV channels offered 100% of TV programming. Today, every day, millions of different "programs" are watched. The bell shaped population curve is still reality but it is now a very flat curve with extremely long tails. While there are still certain shows or events, such as the Super Bowl, that will garner millions of views, the sum of the viewings of all the other stuff is greater than the sum of the few most popular items. The most interesting thing is how the long tail theory gives new life to stuff that has no new production costs. In terms of TV, it cost the cable company virtually nothing to offer very old re-runs on TV Land and yet it advertises just as often on those channels. The audience does not have to be large to turn a profit. The advent of the Internet means that thousands of these shows are available on demand. An audience of one is a profitable audience.

YAHOO MOBILE

MSFT spent huge sums and worked hard to try to be the king of the hand held computer. It has spent fortune after fortune trying to force its way into the hand held device leadership spot. MSFT does sell (at loss leader prices) a lot of "Smart Phone" software. However, Nokia has about a 50% market share using Symbian Programming and Google is leading a massive effort to develop an open source competitor. YAHOO has fought to get its "Mobile Internet Software Package" onto major networks. It has enjoyed some success. The combination of MSFT and YAHOO is being considered now because the "New Mobile Internet" is just getting started. Google will have a difficult time maintaining a 56.3% search market share when the world goes mobile, or will it?

MOOT QUESTION

This new pie is the biggest one yet. The power of the Internet connected hand held computer is still under estimated. Even Captain Kirk did not use the "Internet Connected Computer" any where near its potential. The Star Trek Computer responded when asked but in Science Fiction, the computer that does stuff without being prompted always turns into a monster. We fear the unknown.

The reality is that the Internet connected mobile computer will do thousands of task for us daily. The value of items such as personal calendars will become 100 times more useful. When a person gets a ready answer from the question, "computer, what is on my calendar Thursday afternoon?" making and keeping appointments will become as "easy as pie". The computer might know to remind you 30 minutes in advance of a meeting across town and only 5 minutes in advance of a meeting down the hall. The computer might also automatically notify you when the other party to the meeting has failed to leave on time. There is an endless variety of situations where the mobile computer will be a blessing.

This computing pie is going to be huge. Today, the grand total of hours spent "in-touch with the Internet" is a very tiny fraction of the hours of connection in the near future. There is enough business for MSFT, YAHOO and GOOG. My bet is that Google continues to lead, however, it would not be a bad idea to own both. MSFT has the cash flow from software sales to buy its way into a significant role.

OUTSIDE CHALLENGES

Wiki, FaceBook, MySpace, NewsCorp and thousands of others are working hard to capture the flag. Google is the king of the mountain and Google has a wide moat built around the mountain. I am still amazed at how many services Google can offer free of charge in exchange for advertising space. With the cost of computing power and storage space continuing to fall, the volume of services provided is growing by leaps and bonds. Once a group of people start collaborating on Google Documents for Free instead of buying Microsoft Software, it will take a might crowbar to dislodge them.

The Internet is still evolving. The social networks such as FaceBook and MySpace have enjoyed great and virtually instant success. All the old "ford companies" are having to adopt the new features. Google is very active in building social network features into all sorts of programs. We ain't seen nothing yet.

THE AIRLINES AND THE INTERNET

The airlines are benefiting greatly because the Internet is making it possible for large and small businesses to "go international". As a result of high demand, the airlines are chasing away marginally profitable customers. They are moving assets away from marginally profitable routes. They are adding routes to places far and wide where people will flock to direct the direct service which has heretofore not been available. Google has shown that it can offer services in volume at very low cost per service. As a result, Google is not chasing any customers away. It is making tactical and strategic decisions as to where it should go to collect the greatest number of customers. With cost low and margins high, it does not need to worry about short term profits.

ADVERTISING REVENUES

I keep reading discussions about just how big mobile advertising revenues will be. The range offered is generally from 5 Billion to 19 Billion annually by 2011. I think this way of looking at the situation is a short sighted view. The mobile computer is going to become a necessity. It's use will influence every step we take. By individual choice, it will allow our spouses, co-workers, bosses and others to know where we are and what is on our schedule. The potential is for the boss to know everything there is to know about our work habits. Again, we are frightened by the fear of the unknown. Today we cannot say exactly how the mobile computer will be used, but we can already see that this new technology is being adopted rapidly and we can surely appreciate that our current devices are the steam powered cars that preceded the Model-T.

CASH, CASH AND MORE CASH

My daughter, Whitney, just received a letter from the NC State Employees Credit Union that holds her mortgage. Her loan is a variable rate loan that floats every two years. The rate is 2.5% above the 1 year treasury bill index. The current rate on this index is 2.3% which means that with no change in rates, her loan will be adjusted to 4.8% (probably rounded to the nearest 8th) at its next adjustment date which is 14 months from now. The credit union has lowered its initial rate to new borrowers because the credit union has CASH, CASH AND MORE CASH. The credit union wants to make some loans. The new borrowers will pay .75% more up front but they will save 1.00% for two years. It is a good deal to give up $75 per $100,000 in order to save $200.

The credit union wants to be fair to those who secured loans within the past two years. Therefore, it has offered to modify loan agreements in exchange for the .75% up front. Money, money and more money everywhere.


The public is running scared. The public has refused to add money to stock accounts but are instead piling up funds in "safe accounts". They are about to miss on a great opportunity. One of the reasons the public is running scared is that they believe the housing-mortgage market has "frozen up". The fact is that money is available for "traditional" home loans, the kind where a down payment is required.

Friday, I suggested to my brother that he should start several more new houses. He agrees that his houses are once again very affordable. The big decline in interest rates has lowered the mortgage payments by 15% and in some cases by 20%, THERE IS A 20% OFF HOUSE SALE! The fact that there are a lot of unsold condos at Miami Beach is not the end of the world but not even a beep in the history books.

MORGAN STANLEY AIRLINE UPGRADE

Morgan Stanley is reported to have upgraded "all of the airlines" this morning. As you know, I begin to get nervous when the "big boys" make bold announcements, but the numbers from CAL for the month of January were a continuation of progress, occupancy up and non-oil costs down! The media made a big deal out of the fact that OPEC did not bend to the will of George Bush and increase oil production. Once again, the truth is not in the story written. This is the time of year when OPEC considers reductions in production because the heavy use winter season is over. The spring and fall are low use periods and even the heavy driving season is weak relative to the heavy heating season in the northern hemisphere. China is suffering through the coldest winter in 50 years and shortages in electricity but this too shall soon pass.

It took a long time for the turn to come in airlines. I have admitted that I thought the turn would be relatively easy. If you are among those of us who stuck it out, congratulations. The airline profits will be strong for the next several years. If there is going to be mergers, they need to happen quickly. The Bush administration would likely support consolidation but a strong economy or a new president are enemies to consolidation. DAL still has its sights on NWA, which would create the largest airline in the world. The pundits say the deal will come within two weeks or not at all. This sounds like "pressure hype" but there is an element of truth. The problem is that CAL, DAL and NWA are all members of the strongest international alliance. If there is to be a merger, CAL would prefer to combine with NWA. The loser will be left to take UAUA to the dance. UAUA is the bigger airline but it is also the most difficult partner.

PROFITS, TAXES, PROFITS, TAXES.

Exxon reported profits of 40.6 Billion Dollars. The company made such big profits because they took the tremendous risk of finding oil in places like Angola and Venezuela. Venezuela nationalized Exxon's property. Both Venezuela and Exxon lost money on the nationalization. The fact is that Exxon has the skill to extract difficult oil and Venezuela owns difficult oil. Production in Venezuela has fallen for the past several years and the people are suffering through an economic disaster. In the mean time, Exxon is criticized for making huge profits. Mark Perry notes that Google reveals that the ratio of post about Exxon profits exceed the post about Exxon taxes is 33 to 1. The fact is that Exxon paid $30 Billion in taxes. The fact that this money came out of consumers pockets at the gas pump is the fault of those who imposed the high taxes, it is not the fault of Exxon. Anyway, the sum of income taxes paid by half of all the people in America was less than the taxes paid by Exxon! Furthermore, 50% of the people paid 3% of their income in taxes and Exxon paid 41%. It is easy to bash the big American corporation but that does not make the bashing correct. Had the taxes been dramatically lower, the American people would have paid substantially less for their gasoline. Companies are always going to invest up to the point of unsatisfactory returns. Lower taxes would have lead to more investment, more production and lower oil prices. The total price of oil would have been reduced by the lower taxes and by the increased supply.

GARMIN TOUCHSCREEN PHONE

While Motorola is reported to be in a scrabble to exit the mobile handset business, it is rumored that Dell will buy the spin-off and then join with Google to sell a new mobile supper computer. Garmin has an "i-phone clone" for sale. Of course, its strength is in its GPS mapping system but it has a lot of "bells and whistles" including the touchscreen (haptics) features similar to the i-phone. It is further reported that Apple will soon announce an i-phone of faster speed, lower prices and advanced features.

Billions and billions and billions of hand-held, Internet, computers will be sold over the next 5 years. The best products will jump out the door. So far, Nokia is winning this race. Nokia has set new records for rolling out a product and having it adopted by the masses. No matter who wins the hardware race, the big winners will be the companies that use the devices to sell trillions and trillions and trillions of dollars worth of services.

MISTER SOFTY AND YAHOO

MSFT has offered a 40% premium to YAHOO shareholders. "They" say the bid will be raised. It is said that Google has tricks to play. For example, Google might offer to subcontract with Yahoo to provide its search services. The offered contract to give Yahoo huge profits and to leave MSFT mired in the mud it has been stuck in for the past 10 years.

MSFT is a very profitable and a very powerful company. MSFT missed the online market turn big time but it has since spent billions to carve out a niche. The addition of Yahoo would make MSFT and Google the "big two". Due to anti trust considerations, it would seem that opportunity would exist for others to join forces to create the third big player. This all assumes that the anti trust people will let MSFT buy Yahoo and it assumes that Google will be unsuccessful in derailing the deal.

In any event, mobile search is going to be huge. Mobile search will morph into a lot more than search. Once the computer knows that you like to stop at XYZ gasoline station and when it learns from your car computer that your gas tank is low, your hand held will remind you of the low tank and the low price of gasoline in the area. The convenience store-gasoline station will pay fees to also inform you that your favorite beverage is "on sale".

No one can forecast the future accurately. Who knows how powerful the mobile Internet will be? Those who say the potentials created by the Interstate Highway system bought land at strategic exits and they made fortunes. Sure, a lot of construction companies and car companies prospered greatly from Interstate Highways, but the big money was made by those who "provided Interstate services". The INTERNET INTERSTATE IS UNDER CONSTRUCTION! The faster and easier the international communications, the more sense it makes to "arbitrage labor cost". As reported earlier, the total employment cost of a data entry clerk in America is about $34,000 per year and the cost in India is about $1,900 per year. "THE END IS NOT NIGH!"

CASH, CASH AND MORE CASH! Cash for home loans, cash for hand held computers, cash for businesses to borrow profitably!

THIS VALLEY IS NOT BIG ENOUGH FOR THE THREE OF US!

I have little time to write but I feel that I must take the time to tell you that the valley we are in is over flowing.

Our train has sped down the mountain with stocks leading the way. The second section of the train holds the economy and the third section holds interest rates. The mountain was steep enough and the valley floor long enough such that when the first section hit the valley, the economy and the interest rate sections were still coming down. Suddenly the middle of this train is in the valley and the stock market end is already climbing the next mountain. It is being pushed up by the momentum of the interest rate car.

Once again, I must remind you that interest rates and commodities trade together. Thus, it stands to reason that oil prices are falling almost as hard as interest rates. The economy is the here and now except that the data we get is always old. The economy has slowed but that is old news. Stocks lead the the economy and interest rates. By the time the data show that lower interest rates have boosted the economy, the stock market will be over the top of the first row of mountains that we are climbing.

The past two days have started with terrible economic data only to see stocks shrug the bad news off. This is the nature of Bull Markets. Some will tell you that this is only a Bear Market Rally. This folks do not appreciate the power of lower interest rates. The decline from 4.25% to 3% in a few days represents a "reflation" for 75 Trillion Dollars worth of assets. 1.25% is 30% of 4.25%. The economic stimulus of 30% applied to 75 Trillion Dollars is almost like an economic gain of 22 Trillion Dollars.

If you are not adding money to your accounts as rapidly as you can, you are missing out on the kind of market strength that is normally seen about every 8 or 9 years.

BUY, BUY, BUY!