IRAQ-IRAN TWO MORE STEPS FORWARD

The good folk at Strafor appreciate that the latest fight and cessation of fighting in Iraq were two steps forward in the Iraq-Iran situation. The attitudes and actions of Iran are no longer the key factor in stabilizing Iraq. The American people do not understand the nuances of progress. It is easy to read that 4,000 American soldiers have died and to conclude that the war is a mistake. Over the weekend, a couple of republican anti-war politicos from Pennsylvania threw there support to Obama. No one knows if the improving situation in Iraq will determine the outcome of the US elections because more and more folk have developed a tin ear. Still, family safety and security is the deep seated desire of all Americans.

SECURITY IS KEY

A couple of thousand years ago, the population of the city of Rome was roughly equal to the current population of Dallas Texas. The people of Rome lived on only 2% as much land (per cafe hayek web site). The two main reasons for the difference are security and transportation costs. The cities of old were densely populated because the people generally congregated behind walls or in close proximity to one another because they wanted to be safe. Many a city was populated by farmers who slept in the city at night but went out to the fields and vineyards by day. Before 911, the threat of attack from "outside the walls" had seemingly disappeared. The threat Americans have felt is the threat of harm from thugs and criminals. Moving to the suburbs has been the way to provide safety for ones family. Until congestion problems arose, the automobile provided the inexpensive means for the migration to the suburbs.

Julius Caesar was the first to tackle the problem of traffic congestion. Because Rome was so densely populated, Caesar passed laws similar to today's big city traffic laws. Carts were not permitted on the streets during certain hours of the day. Those who live 20 miles out of Dallas today can get to the Mavericks game in about the same amount of time that it took the citizen of Rome to get to the "games" at the Colosseum.

The government of Iraq, has started to demonstrate that it can and will provide security for its people. The government's actions of the past week demonstrated that the government is "in charge". The Iraqi elections scheduled in October are now all the more important. Iraqi militia groups need to work the ballot box to influence the direction the country will take. A successful election in October will be another step forward for the people of Iraq and it should take some of the steam out of the anti-war movement in America. The important question will be, "Is the world a safer place because a democracy has taken hold in the Middle East?". The most radical people of the Islam faith despise the concept of democracy and one of the aims of their "holy war" is to prevent democracy from taking place. People have been killed for voting! When the people of northern Iraq got a taste of the extremes imposed by the radicals, the people switched sides. In the past week, the people of southern Iraq have been faced with a similar problem. They have had to decide if they want to continue the insurgency and face bullets being fired at them from their fellow countrymen or do they want to "fight at the ballot box". It appears that the ballot box is winning!

TRANSPORTATION COSTS

A key reason Americans moved to the suburbs was lower transportation costs. The total transportation costs were lowered again when many businesses moved from center cities to the suburbs. Total transportation costs have soared in recent years but much of this increase has been the "congestion costs". The total cost of the commuting time wasted is in many cases higher than the cost of the actual transportation. Here again, attitudes are changing and the results are starting to show up in the marketplace. When one person decides to "catch the bus", the next person is behind one less vehicle on his way to work. The cost of transportation goes down for the bus rider and for the car driver who makes it to work in less time.

Total US oil product demand in the last 4 weeks was at the lowest level seen in 4 years. Some of this is a result of the economic slow down and some is the result of changes that will not be undone when the economy rebounds. The fellow who buys a high mileage vehicle will not trade it in as soon as the price of fuel declines a little. The person who moves to be close to schools and offices has made a commitment to lower his use of fuel.

SMART INVESTORS SEE OPPORTUNITY

The people at GaveKal research are among the smartest people around. Here are the words of Anatole Kaletsky written three weeks ago: "It feels to me that we are very near the point of total capitulation. ...friends and clients...seem to think the depression thesis is an established fact.... Meanwhile, the US figures still indicate nothing worse than a normal mid-cycle slowdown."

Anatole went on to discuss real estate prices: "It seems to me that US real estate prices are at most 5 to 10% away from a long-term bottom. In fact, a strong argument can be made that ... house prices in many parts of America have already hit unsustainable lows. ...it seems to me that the risks are mostly on the upside."

ROME AND SAN FRANCISCO

Many a city, including ancient Rome and modern day San Francisco practiced policies that irrationally drove up real estate prices for the benefit of the "establishment". In America, it has become quite common for cities to manipulate real estate price through zoning restrictions. Forcing large tracks to become green space, pushes the value of existing properties up. The big drop in real estate prices, as reported by the Case-Schiller Index, is partly a function of including cities in the index where zoning games have been played. When politicians artificially drive markets, markets ultimately find the way around the politicians. The unwinding of silly games is often painful.

The story in the "heartland" is different than the story of coastal, resort and "protected" cities. In the past year, Zillow reports that the average home in America fell by 3%, but, again, the average was hit hard by the steep drops in the aforementioned markets. In North Carolina, a state that saw significant declines in home values at beach and mountain resorts, home prices rose 4.5% during the past year. Over five years, the average home in America appreciated 40%; 110% over 10 years. In North Carolina, the five year appreciation was 31% and the 10 year was 68%. The bottom line is that high beta real estate plays perform like high beta stocks and the "news focus" is on the most volatile of markets. The result is a misleading story by the media and the opportunity for politicians to make speeches and to enact laws to "fix the big problems". The opportunity for investors is to make money off the false information.

Price maps of the whole country show that much of America saw increases in home values last year. Now, with mortgage rates at the levels seen during the boom days of 2004 and 2005, homes are more affordable than they have been in a long time. The affordability index has risen from 100 to 135 in just a couple of years. Yes, there are a lot of homes on the market, but, building has slowed and the months supply on the market will drop rapidly as the sales rate picks up.

GOOD DEALS AND GOOD TIMING

The timing of the helicopter money drop has been coordinated with the timing of the interest rate push. In the weeks ahead, families will find themselves with a few extra dollars from rebates, on top of a few extra dollars from mortgage resets and on top of a few extra dollars from wage hikes. The spending of the first few will stimulate the spending of the next few and it will not take long for service workers, such as real estate agents, to "catch the wave". Two steps forward in Iraq-Iran, accompanied by two steps forward in the economy will give Americans and incumbent politicians hope. Investors should keep in mind the example of the last real estate down turn. The yield curve inverted in 1989, the recession hit by late 1990 -- just at the start of the next big move in the stock market.

AIRLINES

I believe the deal being offered to DAL by NWA is to do the merger without settling the pilot listings. The previous deal offered NWA pilots $50 to $100 Thousand equity in the new company and 25 to 30% raises. The companies can agree to merge without offering these perks to the pilots and then let the pilots negotiate to get some or all of these perks as a part of settling the seniority questions.

Also keep in mind that world wide oil demand has been growing by less than 3.5 million barrels per day but that there are 7 million barrels of new production set to come on line in 2008 and another 7 million set to come on line in 2009. This is all before the development of the monster discoveries in Kazakhstan and Brazil. One extra barrel will bring the fuel price down by $30 per barrel or so. As can be seen in the recent price drop in gold from over $1000 to the $930 range, the turn in commodity prices appears to be happening. The spike in oil prices of the past couple of days was a result of the government of Iraq being strong enough to go after the "Iraqi Mafia" of Basra. This is kind of like when the US Government finally went after Capone, the end of the story was written as soon as Elliot Ness was hired. The Iranians can no longer depend on their "agents" in Basra to disrupt the anti-terrorism progress.

Fwd: Airlines

Subject: Airlines
To: Jack Miller



Jack,

Can you talk about your views again on airlines given the lastes situation w merger status, request for DOE to intervene on energy costs, etc? How low can airlines go? The PE is already so low.

Given the status of airlines, is it ever reasonable to move out into another beaten down sector to spread the risk?






A timely question as a new merger proposal was offered this afternoon.

I know of no other industry where one can buy shares for less than the cash on the books per share and no other industry that is sitting right on the business/consumer cycle turn in the way the airlines are. I understand that I sound like a broken record but what was true at $25 per share is all the more true at $18 per share. It is time to buy these stocks. The short term pain is over or almost over, the gains over the next several years will be substantial.

I do not know the details of the latest merger offer yet but I understand the terms are not as attractive to the pilots as the last offer. Soon, the pilots will have to make decisions. The CAL plan is like that of many other industries where the pilots share in increases in profits. The payout last year was a nice bonus. It will be a nice bonus in the coming years but it will not force the airlines to take the full hit during downturns.

There are less volatile "plays" available. As I have mentioned a few times, the Russell Small Cap Fund and other funds that hold shares in lots of regional and small banks will do well over then next couple of years. Banks are now enjoying the recent dramatic reduction in cost of funds. The Fed Funds Rate (which is the rate at which banks borrow short term funds from other banks) has fallen in 8 months from 5.25% to 2.25% and most of this drop happened since mid January. The important point to remember is that it is correct portfolio theory to increase volatility when stock prices are low. This is hard to do in practice but obviously stocks are lower than a few months ago when it would have been smart to have reduced volatility. It is the exactly wrong move to decrease risk at or near bottoms.

IRAQI SECURITY TAKING CHARGE

The three days of military-police action by the Iraqi Security Forces is another big step forward in the fight on terrorism. For the first time, the elected government is exercising control of its country. In the short run, the market is worried over the Basra oil pipeline. In the long run, the actions of the Shiite dominated government against radical Shiite forces is an indication that the radicals must attempt to achieve their objectives in the political arena or stand the risk of military destruction. It is always hard to be "on the side of war" but "When in the course of human events..." war is sometimes necessary. I grieve for each one of the 4,000 US soldiers killed in Iraq but how many more would have been killed if this war had been postponed? McCain's recent take is that even if invading Iraq was a mistake, al-Qaeda forces are there now and it would be a mistake to leave now. As Iraqi forces take control, the power of the US behind them gives them gravitas, a strong military reduces the amount of fighting needed. The local militias have been in cease fire mode for some time. They do not want to take on US forces. In the mean time, militia members have been involved in crimes against the state, including the theft of oil. The Iraqi government is forcing these militias to make a choice, fight on the battlefield or join in the building of a democratic government. GOOD NEWS!

MORTGAGE RATES BUMPING AGAINST HISTORIC LOWS

Mortgage rates as posted by Bankrate Monitor are 5.68% for 30 year fixed rate loans and 5.2% for 15 year fixed rate loans. A number of Credit Unions are offering significantly better deals. One NC Credit Union is offering to refi variable rate loans at 4.25%. These loans will reset at 2.5% above the one year treasury index with a maximum increase of 1% after two years. The maximum is capped at 9.25%. A whole lot of people qualify for a whole lot of house at 4.25%. It is a good speculation that the value of a house will rebound more than 4.25% per year for the next two year and more than 5.25% per year over the next two years. A rented house should offer substantial net returns. The result is that in many areas of the US, the best deals are getting scooped up. A friend of mine just got an incredible deal at a foreclosure auction. By the way, a large percentage of the foreclosures are being purchased by first time home buyers. The American public is pretty smart when it comes to home buying. Despite the recent sharp decline, many an American has been trained by his parents and the experience of his parents to buy for the long term. In today's markets, homes are priced well below replacement costs. Of course, the pain in the dramatically over built areas will last a while longer but even here houses are very cheap in terms of Euros.

AIRLINE WIRING

Why do you suppose so many airplanes are suddenly being inspected for wiring problems? Has there been a crash or two that suddenly makes the wiring in 25 year old planes suspect? No!

Have you read about the lengths that union members will go to "win"? The biggest fights were long ago in steel mills and at trucking firms, but there are airline employees who are willing to "play dirty". Do you suppose that AMR might have gotten a "bomb threat call" before suddenly canceling 300 or so scheduled flights at the last minute? Do you suppose that "bomb threat" could have been that an airline employee had crossed a few wires?

There is no way for me to confirm my suspicions but AMR has been trying to settle its union contracts in advance. At the same time, AMR unions have been asking for substantial wage increases. The employees feel that they deserve to regain wage rates given up to help AMR avoid bankruptcy. The problem the employees have is that airline industry is no longer a government protected oligopoly. The management that agrees to pay more in wages than the next airline will ultimately be forced to cut back on service, shrink the airline and, barring a change, file for bankruptcy. DAL and NWA which went through bankruptcy to reduce wages and CAL which negotiated lower wages without going through bankruptcy, all have wage costs substantially lower than AMR. The unions can push very hard if they like but they are not likely to "win" the return of past wages. Of course, should an airline employee get caught making a false "bomb threat call", he could spend the rest of his life in jail. It is true that the legacy carriers have enjoyed huge cash flows and that they are sitting on large sums of cash. It is also true that they need this cash to update fleets in order to compete with international carriers.

CHEAP, CHEAP, CHEAP

Carlo Magnifico has posted some great charts at stockcharts.com. One can easily eyeball 20 years of history on his charts. One example is the price of the Dow Jones Industrial Average relative to the price of gold. The ratio of the two swings to extremes in both directions. In 1995 the Dow was only 10 times the price of gold; by late 1999, the Dow traded at 42 times the price of gold; today, the Dow sells for only 13 times the price of gold. While it is true that the Dow got a little bit cheaper in 1995, we do not know that the Dow will get this cheap this time. The big turn in gold just last week indicates that the relative turn is here. The Dow is likely to appreciate to 40 times the price of gold over the next 5 years.

Last night on Kudlow and Company, an executive of Norfolk Southern Railroad mentioned that trains are fully loaded and carrying exports to ports. Of course, the exports include coal and corn but, surprise, surprise, also autos. US autos are cheap in terms of foreign currencies. The value of the US Dollar has certainly made the "full cycle". The ratio of gold to the US Dollar went from 1.2 times in 2001 to 13 times in 2008. This ratio is now back at levels not seen since the recession of 1991.

Many other ratios are "out of whack". The ratio of the Dow Transportation Index relative to the price of oil has gone from 21 in 1990 to 270 in 1998 and to 47 last week. Here again, the price of oil is not as "crazy" as it was in 1990 but it is not cheap. Oil is extremely expensive relative to natural gas but families pay only 6% of their disposable income for energy today, compared with 8% some 20 years ago. The Dow Industrial Average is "cheap" in terms of gold but also in terms of oil. In 1990, the Industrial:oil ratio was 62, it reached 812 in 1998 and it is now at 122. GM has also gone full cycle, trading at $18 per share in 1991, at $77 in 2000 and at $19 or so now. In 1991, the dollar was not nearly as cheap as it is now so the coming rebound should be huge.

DEMAND DESTRUCTION, CHEAP HOT DOGS AND SERIOUS PAIN

A couple of days ago, my wife and I decided to buy a hot dog for lunch but instead of driving 4 miles to our favorite stand, we decided to try the hot dogs at the local barbecue shack. The hot dogs were excellent. It took $3.19 gas to get us to try the local hot dogs, the next time, the local option will be automatic. Saving 8 miles to buy a hot dog is no big deal but how many millions of similar decisions are being made daily?

Last year the wholesale price of gas was at $2.41 at the start of the summer driving season and the retail price peaked at about $3.21. Today's wholesale price of $2.71 implies a retail price of $3.31 and the summer driving season is still a couple of months away. It appears likely that gas will be selling for $3.50 by summer.

On the other hand, how many others have found "good hot dogs close at hand"? I have seen a couple of smartfor2 cars in Clemmons. Demand destruction is taking place. The EIA figures show a significant increase in new production and attitudes are changing. Investors should remember that the price of all the oil is set by the price of that very last barrel. Once Brazil or Angola or Kazakhstan reduces its price for the last barrel to get it sold, the rest of the sellers will meet the price. In the past two days, the market for gold and oil has rebounded but neither has made new highs. The failure to keep the trend alive will result in a new trend. Take advantage!

A MISSTATEMENT

I am sorry for my last email. If I misspoke, it was just a misstatement, I am human, you know. I like others sometimes make mistakes, my memory of events from 22 years ago is not what it used to be. I remember the sniper fire from somewhere but the bullets flying overhead must have been from some other memory.

HEARING THE R-WORD

When you hear the word recession, chances are the worst of the down turn is over and the stock market is ready to soar. The R-Word Recession Index is a count of the average number of articles in the New York Times and the Washington Post. This index runs up high about the time historical data shows that the economy slowed 4 or 5 months ago, also about the time the stock market is ready to climb.

Dr. John Rutledge reports that one of his favorite economic indicators is the used car report posted at Manheim Consulting. This report shows that used car prices are falling. Indeed they are now down to the level last seen at the market turn in 2002-2003. This report works much like the Recession Index and much like the front cover of Business Week works. Business Week has already had its "Recession on the Front Cover Issue". This event is the "ringing of the bell". It means that the news will continue to be "bad" for a while but that stock prices will "climb the wall of worry".

Ford and GM ready for a big turn. Yes, Toyota sells more cars in the US than Chrysler (one of the supposedly "big three") and yes, Toyota will soon take Ford's spot as number 2. However, Toyota sells for $107 per share, not for $6 per share. Ford has offered all 54,000 employees pension fund buyouts. Ford hopes that 8,000 workers will accept. If they do, Ford will hire new workers at half the payroll cost. The dumping of the health care benefits on the Union will cut Ford's cost per car by $1,000. With the dollar at extreme lows, Ford can export cars at a nice profit. Over the next several years, Ford will continue to replace old workers with new at half the price. GM and Ford are making the cuts that will lead to higher profits. Capacity in the USA has been cut by 4 million units.

Mexico now restricts imports to 10 year old cars. You can see the price bubble on used cars that are 10 years old.

Over the past 15 years, the price of Ford shares fell by 63% while the price of TM shares rose by 246%. During that time, those who bought Ford at the right time in the cycle made money. Now is the time.

The R-Word is all over the place, screaming the word BUY to those who are listening carefully. Many other indicators are saying the worst of the slowdown is over. For example, the housing affordability index has jumped 30% in the past 8 months. The average family now has 130% of the income needed to buy the average house. Yesterday, the Case-Shiller home index made the news by reporting the biggest drop in home prices ever. Of the twenty cities included in the survey, Miami and Los Vegas homes dropped by 19% and Phoenix homes dropped 18%. The average of this 20 city index was an 11% drop. Down South, Atlanta saw declines of 4% and Charlotte saw an increase of 1.8%. People continue to move to North Carolina (a right to work state that has a steady flow of new job opportunities).

A technical indicator, the open interest on OEX PUTS is screaming BUY!

The asset value of America, including the net 57 Trillion Dollar Net Worth of Individuals is upwards of 200 Trillion Dollars. The recent paper write downs of a few hundred billion has made the news daily and has scared the public out of the markets, at low prices. These paper loses are the minor relative to the wealth of the nation, they are concentrated in just a few major brokers and most of these losses will disappear once the market rebounds. Of course, those who sell or who are forced to sell close to the bottom will have little chance of a quick full recovery.

Hearing the R-Word is a BUY SIGNAL, NOT A SELL SIGNAL.

NASDAQ TRAIN IS CHUGGING ALONG

The NASDAQ index was up 3% yesterday and it is swimming against the tide today. It takes a lot of strength to swim against the tide. This stock market move is strong. I hope you have piled all you can on board.

THE WORLD HAS CHANGED

There is an excellent series of interviews posted at The Christian Science Monitor. The world has changed. Fifty years ago, there were a billion people on the planet "living the good life" while there were several billion more on the edge of starvation. Today there are 5 billion people "living the good life" and only another billion or billion and a half facing starvation.

The key difference between now and then is that free trade "broke out". While it is also true that political freedom "broke out", China has demonstrated that political freedom does not have to immediately match economic freedom for the people to benefit greatly. Still, the key to both increased political and economic freedom has been the increase in free trade. Poor people around the world have been given the opportunity "to fish" rather than being given "free fish". In the case of China, once the government did away with collective farms and allowed individuals to own and operate their own farms, the economic growth has been incredible. The new farm owners cannot influence who runs the government but they do greatly influence their own standards of living.

BACKLASH IN AMERICA

America is experiencing backlash because formerly protected jobs have been exposed to free market competition, forcing many Americans to retrain for other jobs, many of which are even higher paid jobs. It has become more and more rare for a small group of workers to be dramatically over paid simply because they have artificial protection from competition. For example, the monopoly power of the UAW has finally been cracked wide open. Americans can now buy cars made in America without paying for crazy work rules and exorbitant worker benefits. The unions are not happy but cars are being made in Texas, Tennessee, South Carolina, Georgia and elsewhere while hundreds of thousands of former Michigan workers draw from fat pension buyouts.

HOW CAN WE REDUCE THE NUMBER OF WARS AND REACH THE OTHER BILLION POOR PEOPLE?

The democratic base has forced Hillary and Obama to repudiate free trade deals already on the books and to help stall pending trade deals. The fact is that both sides to trade are winners, otherwise the trade would not take place. I will not give the grocer ten cents for an egg unless I would rather have the egg and there is a price at which I will stop buying gasoline. The neat trick is that the risk of war is reduced when the people of a land are actively engaged in trade. The Chinese and the Saudis each hold millions of dollars of investments in the USA that would be damaged if these countries were to go to war against us. Why fight with your neighbors if they are willing to buy your goods?

The predominantly Shi'a country of Bahrain just made a nuclear energy deal with the USA. Suddenly, this "first cousin" to Iran has an economic interest in keeping the peace with the USA. Trade with Iran has been dramatically reduced as a result of its unwillingness to play by the rules as laid out by the UN. As a result, Iranians are seeing goods prices jump 20% on top of 20%.

Diplomacy is a complicated, multi-faceted game. Sometimes, the thing we have to offer in trade is nuclear energy support, however, most of the time we simply must be willing to buy the products made by the poorest of the poor. When we buy goods from the poor, we bless ourselves and the poor. A recent study showed that the most happy of all people are those who give to others. While "It is more blessed to give than to receive" it is amazing that the willingness to buy and sell from and to the poor of the world is the gift that keeps on giving. The world has changed but more change is needed.

A couple of weeks ago, at a United Methodist Missions Festival, a life time missionary, whose work is to be honored and praised, told me how "the rich are getting richer and the poor are getting poorer", the liberal mantra. Having seen been up close and personal with starving families, I understand why this missionary is willing to "covet the wealth of some" while drawing the conclusion that the poor are getting poorer. No one can deny that billions more people are wealthy today than at any other time in history and no one can deny that there are at least a billion people who are fighting starvation. The problem with the missionaries line of thinking is that even if we could redistribute the wealth evenly, we would not end poverty. What history has shown is that when wealth is confiscated from one and given to another, all reason for work is destroyed. A dependent relationship is quickly established and the number of poor grows to meet the supply of "free goods".

The world has changed but there is yet another billion people who need to be offered a price for whatever "fish" they are able to supply. When the USA trades a few ears of corn for a an hour of African labor, the trade is a benefit to the people of America but it is an answer to prayer in Africa. It may seem harsh but selling corn to Africans is much greater gift than giving corn to Africans. It is not anti-American for many American consumers to benefit and many African workers to benefit because one over paid American Auto Worker is bought-out of his union contract. The fact is that the overpaid worker in America can quickly find a job at a fair wage. The wages in America for highly skilled workers continues to climb. Americans do not need collectives to provide the labor for auto plants anymore than the Chinese needed collectives to provide the labor for farms.

DOES ALL OF THE ABOVE SAY SELL GM AND FORD?

NO! GM and Ford have gone through a period of radical change. Their costs have been cut dramatically and the value of the dollar is so low that people in the poorest of countries can now afford a used American made car. Shares in GM and Ford are "down the mountain" from where they once were but now that the turn is here, even US Auto stocks will see a big run.

This morning, the markets are "backing and filling". The big decline in energy and material stocks has attracted the attention of the "true believers in the commodities 'super cycle'". The big boys are pretty much out of energy stocks, institutional investors own only 5% of oil stocks and 95% of airline stocks. Still, as the market rotation continues, it will take a while for the turn to become obvious to the majority. Many will continue to buy energy and basic materials "on the dips" for years to come. Yesterday, the NASDAQ was up 3%. The energy stocks may go up over the next several years but they will not lead the Bull Market Stampede.

CAN YOU SEE IT NOW?

The turn is here. It has been here for a while but, only a couple of days ago, a couple of readers said they could not see the turn. Can you see it now?

In the past 5 days, bank stocks were up 14% while gold and silver stocks were down 15%. Retail stocks were up 13% while energy stocks were down 5.5%. The Russel 2x 2K was up 11.6% while materials were down 6%. The inventory of unsold homes has fallen three out of the last four months but last month sales of unsold homes rose by 3%. In other words, sales of homes have fallen in the past 4 months but, not as fast as the production of new homes fell; after 4 months of declining inventories, buyers in some markets decided they had better jump before the best bargains got away. Since the unsold supply of homes is a function of both the numerator (homes) and the denominator (sales per month), this ratio can change quickly. A jump in the purchase rate represents both a decrease in the numerator and an increase in the divisor. Of course, some folks who have been waiting to put their homes on the market will do so once they see home prices jumping. It may be many months before builders are adding much new supply because the value of current homes must rise substantially before the ratio of new home price to used home price is back in line.

THE TURN IS HERE

Monday, the ability of banks to buy deeply discounted mortgages was boosted by another 150 Billion Dollars. This was on top of the $200 Billion authorized by the FOMC last week. There is now solid support under the deeply discounted mortgage paper. The recovery in the price of trillions of dollars of paper is going to be substantial.

The total amount of "helicopter money" to be dropped as tax rebates pales in comparison to the money being offered to the banks by the FOMC. The total new lending by the FOMC is approximately ONE TRILLION DOLLARS and this is money that can be leveraged! Speaking of TRILLIONS OF DOLLARS, millions of variable rate loans, in excess of 20 trillion dollars worth, have been or will be "reset" at lower rates over the coming months. For example, loans tied to the commercial bank prime rates have fallen about 3% in the past 6 months. Should the annual savings average 2% on 20 trillion in loans, the reduction in cost would be better than 400 Billion Dollars. The rest of the world will see an even larger aggregate annual savings! You and most of your neighbors are likely to benefit far more from lower loan rates than from government tax rebates.

SHARE INVENTORIES

The supply of available shares in US companies has never seen the kind of reduction that has taken place over the past several years. During the credit crunch, it appeared that the stock buy-out and buy-back train had run out of steam but this powerful trend is not over. Deals are getting done. Firms are being purchased. Even the Sirius-XM radio deal appears ready to go and MSFT has locked its arms around YAHOO in a tremendous "bear hug". More importantly, corporate buy-backs are soaking up shares rapidly. Corporations are still cash rich. Even highly leveraged airlines have accumulated 10's of billions of dollars in unrestricted cash.

The gold and oil bubbles are leaking while foreigners are buying American. People from Canada to Europe to Brazil have discovered that condos on Florida beaches are going for half price in dollars and double half price in other currencies. The turn is here, grab all the bargains you can!

WHAT IS DIFFERENT THIS TIME? WHAT IS NOT?

There are many differences between the current financial mess and those of the past. This morning I would like to focus on one of the differences in regard to the housing market.

In the housing crunches going back through the 1980's, mortgage interest rates were no where near current rates. In the biggest crunch, the one in 1980, home sales declined about 28%, housing starts fell about 50% and home prices fell about 7%. Mortgage rates were still on the way up at the worst of this crunch, rising from around 15% in 1980 to 18.5% in mid 1982! During the current crunch, we have seen sales fall about 25%, home starts fall about 40% and prices fall about 10%, but the big decline have been concentrated in luxury second home markets and while mortgage rates bounced as high as 6.75% after the lows of 2003, they have since returned to the historic low area of 5.6%!

The payments on a $200,000 loan at 15% in 1980 would have been $2,529. Eighteen months later, the payments on the same loan reached $3,096. The 30 year fixed rate payment today would be $1,148. The same loan would cost $1,948 less than in 1982! Today, there are variable rate options with starter rates of 4.25% locked in for two years with a maximum increase of 1% after two years and a maximum possible rate of 9.25% over the life of the loan. At the starter rate, the payment on $200,000 would be $983 or 68% off the price of 1982. It is probable that the money saved at 4.25% and 5.25% for the first 4 years of this loan would forever more than offset the extra payment at 5.6%, but if you think you might live in the same home for a lot of years, locking into 5.6% would not be unwise.

The early 1980's were unusual times but the crunch of 1990-91story is similar. The peak of the drop in home prices of about 8% occurred around August 1990, about the same time as the peak in gold and oil prices. Sales and starts made their bottoms around January 1991 with a peak year over year decline in sales of 15% and a peak decline in starts of about 45%. Mortgage rates peaked at about 10% concurrent with the peak decline in sales and starts. The payment amount on a $200,000 loan in January of 1991 was around $1,750, 52% above the payment required today on a 30 year loan!

It is important to note that the peak in commodity and oil prices (and CPI) tends to occur concurrent with the peak decline in home sales and prices. However, a big decline in the price of gold started around August of 1990 in line with the turn in prices and 4 months prior to the bottom in sales and the bottom in housing starts.

ERRING ON THE SIDE OF CAUTION

Potential home buyers are currently erring on the side of caution. Buyers are waiting to see if the worst is over. The waiting bet is a bet on either lower house prices or lower interest rates or both. With help being provided to the markets by the FOMC, it is difficult to project significantly lower 30 year mortgage rates. Should the FOMC increase the money supply to bring down short rates, the higher the probability of long term inflation and thus the higher the probability of higher 30 year mortgage rates.

With mortgage rates already very close to historic lows, the buying power of the consumer has been pushed upward. It is hard to see lower home prices except in formerly overheated markets such as Florida, California, Arizona and Nevada because the flood of 2 million homes on the market is concentrated in these markets. In NC the price of the average home went up 2-3% in the past year. While 2-3% is not a large number, this was in the face of the worst of the crunch. NC home prices could easily jump 10% as soon as the "all clear is sounded".

WHAT IS NOT DIFFERENT?

In each prior case, when housing starts got to a year over year decline of 40% or more (this includes the 1970's), the stock market had made its turn and was on the way up! This is really no big surprise as lower interest rates, the "raw material of business" is the routine result of housing crunches. The back to back, double recession of 1980 and 1982 saw a "double dip" in the stock market but the market was on the way up when the low was made in 1980 and the market was up in less than a year after the second bottom in 1982. Indeed, one of the best ever times to buy stocks was at the bottom of the home building bust in 1982.

DID YOU NOTICE THE BIGGEST COMMODITY COLLAPSE IN 50 YEARS!

The CRB index of 19 commodities fell 8.3% last week! This was the biggest one week decline in this index in over 50 years of record keeping. This decline occurred while the PCE (the FOMC's favorite inflation gage) was running at below 2%! The big drop was bound to happen as the real money base which was growing at 0% in 2006 is now seeing "negative growth" of 3% in 2008. Unit labor costs are minus 2%! How can we square these numbers with the hype being dished out by financial reporters? Part of the answer is that the CPI is the measure used to "adjust the numbers" and the CPI is a poor way to measure inflation. As a result of the goofy use of the CPI index, real retail sales were slightly negative last month, however, as the collapsed prices of commodities works its way into the CPI numbers, adjusted retail sales will get a strong boost. With sales only slightly negative, a small decline in the CPI growth rate will produce sudden "strength" in the economy.

REAL STRENGTH

While the "phony inflation jump" makes consumer spending look weak, the value of oil imports is serving to camouflage the strength in capital goods. Take petroleum out of the trade figures and we discover that the US trade deficit fell from 42 Billion in 2005 to a current annual rate of 23 Billion. It is clear that the US dollar has fallen to a "clearing price". At current prices, more and more foreign investors will build more and more facilities in the USA. These investors will enjoy higher sales from the US while they also enjoy catching the rebound in the value of the dollar.

PLAYING AROUND WITH THE LEADING INDICATORS

Government bureaucrats have played around with the leading indicators and the result has been more hype. Much has been made of the fact that the leading indicators have fallen 5 months in a row. The facts are that the average work week is still strong, that vendor performance is only a little weak, that capital goods orders are booming and that unemployment (a lagging indicator) is still in check and at best the indications are for a weak slowdown not a major recession. The main take away for the investor is to note that the stock market is the number one leading indicator of economic strength and the internal market bottom make on January 21 has held. The market move since that date suggests that the worst of the economic slowdown will soon be behind us (stock prices will be well on the way up long before the weakest point in the economic cycle).

THE CHINA CONTRIBUTION

The elasticity of oil demand in China is extreme. From 1998 to 2004 the rate of economic growth in China went from 7.7% to 10% and the growth in demand for oil went from 2.5% to 16% (a 30% change in the economic growth rate resulted in a 640% increase in oil demand). Investors should remember that this sensitivity works in both directions. For example, when economic growth fell from 14% to 11% from 1993 to 1994, the growth in demand for oil fell from 12% to 2%. The most recent numbers from China suggest that the growth rate there will fall from last years rate of 11% to this years rate of about 7.5%. The USA has a much more stable economy and yet the last for weeks of data show an implied demand decline here of 3.2%. The current price of oil is causing demand destruction.

BIG GOVERNMENT OR BIG BUSINESS?

Given the choice of big government or big business, I would chose big business every time. Hillary and Obama continue to attack the big oil companies. The fact that big oil has made big profits in the past few years comes out as being "un-american" in the words of these politicians. Oil companies are an easy scape goat for the mistakes made by the congress. We live in a country that owns 50 years of natural gas supplies, not counting all the trillions of cubic feet a few miles off our coast lines. We live in a country blessed with 200 years worth of coal. We live in a country that owns owns about 3 trillion barrels of shale oil. We also live in a country where rich farmers are paid to grow corn to put into car engines.

WHO OWNS BIG OIL?

Shares of big oil owned in pension fund accounts--41%.
Shares of big oil owned in mutual funds--29.5%.
Shares of big oil owned by individual investors 23%.
Shares of big oil owned by institutional investors 5%.
Shares of big oil owned by corporate insiders 1.5%.

An attack on big oil is an attack on the retirement savings of Americans.

Institutional investors own 5% of big oil and 95% of airline shares! Which do you think is the better buy?

Eighty percent of the worlds oil reserves are owned by foreign governments. The Hillary solution, to tax big oil companies, is to tax those who control 1.6% of all supplies. If Hillary were to pay farmers to grow corn on 100% of all the farm land in America, we would only produce 12% of out needed supplies.

SILLY GOVERNMENT SOLUTIONS

CNW Marketing Research has produced the work to show the silliness of government solutions. Governments from New York to California have subsidized or mandated the use of hybrid cars. The research shows that the total cost of the lowest cost hybrid, the Honda Insight, is $2.94 per mile, cradle to grave. In contrast, the total cost of a Hummer III is $1.94 and the cost of a Ford Escort is $.57 per mile. The hybrid cost 5 times more than the Escort per mile and these costs convert into environmental savings. The cost of metal and chemical batteries is high in terms of dollars and in terms of damage to the environment.

At the same time that the American consumer is being hoisted on the environmental petard, we can use Google Earth to view new activity at Saudi Oil fields and the lack of activity in protected areas in North America. Even so, the US government auction of oil drilling rights in the Gulf of Mexico just set a new record. The government just accepted thousands of bids that totaled more than 3.6 Billion Dollars of revenues to state and federal governments.

Furthermore, the variety of research that is being done is amazing. One of the latest discoveries has boosted the efficiency of themo-electric conversion by 40%. The fact is that if just a fraction of the wasted heat in the world could be converted into electricity, the cost of produced energy would drop dramatically. Oil refineries have done a remarkable job of using excess heat from the refining process to "co-generate" the electricity needed to run the refineries. There are millions of other manufacturing processes where excess heat is not routinely captured. The average car in America converts only 16% of the energy spent to "work". The latest discovery is a material that can extract electricity from a room temperature environment and it works well up to 250 degrees.

Converting heat to electricity takes advantage of the law of conservation of energy; energy is never destroyed but it is simply moved from one area to another. Why pay to cool a sun soaked building if the excess heat can be converted to electricity?

TIME IS ON OUR SIDE

The solutions to the price of energy all take various lengths of time to have an effect, however, progress is cumulative. Past big declines in energy prices marked prior turns in financial, retail, housing and tech stocks. The market is showing a lot of green this morning while oil is only off 10% from all time highs. Further declines in the price of oil will bolster the markets all the more.

THE BIG HANG UP

I am writing several times a day because the "big hang up" is over! I must admit that it has been hard to "keep faith" in the normal business cycle for the past year or more as the market cycle backed up and stalled out. It made it seem like "something is different this time". In truth, something is different in each cycle. This time, the price of commodities hung tough and refused to go down. The level of world growth was something the world had never seen before. Who could possibly have predicted that a huge country the size of China would grow its GDP by better than 10% year after year even after pushing the price of fuel and materials to all time record highs.

The big wait is over! The price of commodities has finally turned. With gold, copper and other metals crashing down, the love of gold is going to feel like the curse of Midas. People who have piled-on and added-to will not be able to sell out fast enough. The economic cycle chart has taken a spin-ahead as the next expected events have already happen and started, a significant rally in bond prices and a rally in financial stocks (small banks that lend to small businesses will benefit the most -- buy the Russel 2000 in IRA accounts).

The next event is already scheduled, the pending $600 helicopter money drop; the result being a boom in consumer cyclical stocks. Consumers are about to be flush with money because of savings at the gas pump, savings on interest payments, the extra $600 and larger than average income tax refunds. Not to mention the extra net cash flow from rental properties.

Keith Hays reports that every single indicator followed by Hays Advisory is Bullish. Each of the following indicators have hit levels that produced average annual returns as follows:

AAII 21.75%
Gambill 22%
Eq. Put-Call 21.5%
Vix 16.2%
Arms 16.3%
T-bill 23.3%
Fed 18.8%
Cash 23%
Rule of 20 17%
IBES 30%
Double 90's 22%

The level of money market cash to money market plus equities has reached the current levels only two times in the past 35 years, in February of 2003 and in August of 1982! Talk about buying opportunities, this is a rare time indeed!

ALL THE WORRIES FADING AWAY FAST

For month after month, the market has worried about high inflation as evidenced by the soaring price of gold and oil. During the same months, the market has worried about the risk of recession as evidenced by the housing crunch. Well the inflation rate forecast of gold is suddenly calling for lower inflation and the housing crunch suddenly faces fixed rate loans of less than 5%! Like a major flood, the housing market cannot withstand the power of cheap money. If you have a house picked out to buy, you better get it now because the deep bargains will disappear rapidly.

BILLIONS OF DOLLARS OF MARKET VOLUME

The market is now in a rapid rotation. Market indexes are up this morning an average of better than 1% while basic materials and energy stocks are down better than 1%. The long awaited rotation is showing up loud and clear.

DIG DEEP AND ADD AT LEAST A FEW DOLLARS TO YOUR ACCOUNTS!

You must make hay while the sun is shinning and the sun is shinning bright. Certainly, there are false starts and retreats to every market but this market made an internal low on January 21 and it has since tested that low. There has also been a long list of significant events that have given support to the housing and financial markets. The FOMC drug their feet on lower loan rates from August 2007 to late January 2008. The big cuts made in January of 2008 should have been made earlier but add the 1.25% cut in late January to the .75% in march and the total recent cut from 4.5% to 2.5% is a massive stimulus to the economy. A 45% cut in interest rates on trillions of dollars of loans and future loans is massive relative to the helicopter money that is about to drop. The current situation is like finding a $45,000 car on sale for $25,000. The public will not be able to resist borrowing and spending next month. Many a tax filer will select a refund loan as soon as his taxes are filed and significant sums of disposable money will flow into consumers pockets starting April 15. The fact that this money will have to be paid back will be a worry for another time. Businesses that wish to sell to consumers must start building inventories now!

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PLAYING CATCH UP

Yesterday, a reader wrote to say he does not see how the airlines can make a profit with fuel prices going out the roof. A few hours after I got his email, DAL announced yet another $10 fare increase and the price of a barrel of oil dropped another $2. This makes the 5th week in a row that airlines have increased fares. My guesstimate of the percentage increase is too loose to put in writing but I suspect the increases in the past 5 weeks has gone most of the way toward catching the fare increase up to the cost increase. BESIDES, THE PRICE OF OIL IS ON THE WAY DOWN!

You may believe me to be the boy who cried wolf in regard to the price of oil. As such, you may not believe that this latest sharp drop is the start of anything big. However, the data back me up.

From 2002 to 2008, the production of "liquids" as reported by the IEA has grown from 76 million barrels per day to 87.6 million barrels per day, a 15% increase. During that same time, usage in the OECD nations has not grown. The main sources of new demand have been India and China where total use grew from 6 to 10 million barrels per day. The most recent numbers from the USA show that implied fuel demand averaged 20.3 million barrels per day in the latest 4 weeks and that is 3.2% below the levels from a year ago.

Phil Flynn, the senior commodities trader at Alaron Trading said yesterday, "The commodity bubble is bursting". Yesterday, the price of gold fell $59 per ounce and it has since retreated another $12 per ounce in international trading. US gasoline stocks have jumped to 236 million barrels which is 35 million barrels higher than supplies at the same time of year in 2003 and 2004. Last year, supplies at this juncture were 224 million barrels.

The demand decline of 3.2% in the US implies that the commodity bubble is bursting and/or the economic slow down is here. Call it a recession if you like, only time will tell if it actually is a time of negative economic growth. Recession or not, people are finding ways to cut back on oil consumption and new production is coming on line. As mentioned in prior postings, Wikipedia estimates that new liquids production will exceed 7 million barrels per day in both 2008 and 2009. If demand falls in the US by 3% and supply increases 7% what do you think will happen to the market price?

Another reader says that he has read that OPEC is cutting back, not increasing production. First of all, he is wrong about OPEC cutting back and, second, he implies that OPEC is the biggest factor to consider. OPEC countries including Iran, Qatar and Angola are increasing production and huge new fields will come on line in Kuwait and in Saudi Arabia this year. The build out in Angola is happening. In the past year, Angola has increased production by 300,000 barrels per day. OPEC held stated production constant last month even though cutbacks are normal at the end of winter.

On the second point, while OPEC has increased production from 26.5 million barrels per day in 2002 to 32 million barrels per day in 2008, the rest of the world has gone from 47 million to 51 million barrels per day. These numbers do not reflect the massive developments in progress in Canada, Brazil or Kazakhstan. While it is true that the big fields in Brazil and Kazakhstan will not come on line for a few more years, there are other billion dollar projects closer to completion. Of the former Soviet Union countries, Azerbaijan is one of the ones currently bringing production on line. Over the past two years, Azerbaijan has increased production by 400,000 barrels per day. China and Russia also have various projects in various phases of development. The sharp growth in Russian production has leveled off but billions of investment will bear fruit soon. Non OPEC production is 160% of OPEC production.

DAL LEADING THE PACK

Delta has taken the unusual step of increasing fares mid week, not once but twice. Yesterday, as soon as a couple more competitors finally matched DAL's previous mid week increase, DAL moved again. The bottom line is that international passengers are not likely to let a $10 or $100 ticket price increase prevent them from flying half way around the world. This morning, airline shares in China have moved "limit up". The fact is that international airlines are enjoying pricing power not seen since before the days of deregulation in 1978.

RECESSION

TV talking heads, in particular democratic politicians, are now consistently using the words "this recession". They say things like the FOMC had to act in order to prevent "this recession" from getting worse. This is the old, "say its true enough times and it will be true strategy". Many a democrat is elated over the prospects of recession as they believe a recession insures the election of a democratic president. If the democrats said "the housing recession" they would be correct, but, with commercial mortgage delinquency rates at record lows and with capital goods exports at record highs, are they sure we are in recession? With the world wide ratio of employed to unemployed at a new record level, is the world really suffering?

The massive drop in the gold price was to be expected by this point in the business cycle. Will all those, who screamed that the run up in gold was a forecast for high inflation to come, now call for a decline in inflation? Many will. Many will say that the decline in gold and oil means the recession is getting worse.

This morning, Lehman Brothers following the actions of JP Morgan last week, lowered its ratings on a number of airline stocks. Investors should remember that "sell side" research is even more unreliable than "buy side" research. Asking Lehman Brothers to estimate the value of a stock is like asking an auctioneer to estimate the value of a painting. The old saw is that the auctioneer will ask if you are buying or selling before giving his answer. I am a free market libertarian but I do not believe it should be legal for companies that make their living by trading stocks to issue "research reports" on those stocks.

TOUGH TIMES, CREDIT CRUNCHES NOR BUBBLES LAST FOREVER

The FOMC has held the fed funds rate at a significant premium to the t-bill rate for more than two years. The FOMC normally moves with the market. During Bernanke's entire term, he has held his foot on the economic brake. Even though the last cut was a massive 75 points out of 325 points, moving fed funds rate to 2.5% (a decline of 23%), the FOMC still did not catch up to the t-bill rate. As a result of the FOMC's tight policy, the 10 year treasury rate has fallen to near record lows. The 10 year bond traded at 3.3% yield yesterday. Since the yield on the 10 year is roughly equal to GDP plus inflation, we know that the actions of the FOMC are continuing to slow the economy, inflation or both. But we also know that the market is bigger than the FOMC and at some point those people who want or need to buy a home will realize that bargains are all around. Home prices in "non bubble" communities have fallen a little and financing costs have fallen a lot. The current fed funds rate is 47% below where it was 7 months ago!

Guess what else has recently fallen in value? The Euro! The pundits said the FOMC should not cut rates but should instead defend the dollar. The FOMC cut rates and the dollar held, it was the Euro that declined.

INFLATION IS DEAD, DEAD, DEAD

The long bond says inflation is dead. The price of gold says inflation is dead. Free trade and technology say inflation is dead. Women across America have been holding "gold parties". Women bring their old jewelry to a neighborhood party where it is weighed and sold. These women should get credit as rational investors. The price paid for melted jewelry has been higher than the EBay value of the whole pieces. Now that the decline has started, how low will gold go? Huge mutual funds hold mountains of gold that will be sold to the market if the public starts selling these funds. Gold and oil are joined at the hip. The spread between the two moves around a little but the two have about a 90% trading correlation.

The 30 year municipal bond rate was about 4.2% last year when the FF rate was at 5.25%. Yesterday the tax free rate was up to 5%. Why? Who wants to earn 5% tax free when quality stocks are on sale? Quality companies now pay dividends greater than the tax free rate on bonds.

With inflation dead and the cost of money low, the projected future income stream of a currently empty rent house is suddenly attractive relative to owning gold. The reason houses go up or down in value is the net present value of their income stream. If one buys a rent house at a rock bottom price, it may not even have to be rented to turn a profit when the market rebounds. An insured empty house is probably a better store of value than gold at this point. Rent the house even at a moderate rate and the rents are likely to cover the financing cost at today's rates.

While I admit that it was a long time ago when I first mentioned that consumers would use their windfall from lower oil prices to buy consumer goods, it is still going to happen. Keep in mind that this time the price of oil has gone so high that a significant decline will not force the collapse of alternative energy projects. As you may recall, Jimmie Carter promoted synfuel in the late 1970's but the technology made no sense once the price fell hard.

PLAYING CATCH UP

In the coming months, the FOMC will continue to play catch up because even the huge recent moves have been limited. The FOMC has added 200 billion here and there but the markets they are influencing are measured in trillions of dollars. To some extent, the "facilities" offered by the FOMC have been the equivalent of responding to a $200 request for grocery money with a $2 bill.

At some point, the market will take over from the FOMC. The huge decline in mortgage rates will result in the faster and faster absorption of excess houses.

DAL is leading the airlines in a game of fare catch up. DAL is in effect saying that it would rather lay off employees than to fly planes at an operating loss. This attitude puts enormous pressure on pilot unions to stop playing games. NWA pilots can come to terms or stay stuck at post bankruptcy pay grades. Assuming NWA pilots hold their ground, DAL and other airlines will ground planes and lay off workers as much as necessary to rationalize the business to the current economic climate. This environment will enhance the chances of a successful merger if a deal or deals can be worked out. As is most often the case, a great time to buy into an industries shares is when employees are being laid off. The willingness to layoff workers is a sign of willingness to make the tough decisions necessary to boost future profits.

"THE BRAVE NEW WORLD"

GaveKal Research will appreciate two of the events of the past day. The USA indicated support for adding the former Soviet State of Georgia to NATO and Pepsi purchased a juice company in Russia. I include these events at the end of this post as a simple reminder that we live in a "new time". A time when the unemployed man in Siberia might find new work at Pepsi. The hard thing for Americans to appreciate is that the hiring of a Siberian worker is good for workers in the USA. It is true but I will not beat this dead horse any more. Instead, I invite you to take a look at the decline in metals over the past two days. The turn is here!

I STAND BY GOOGLE

The pull back in Google from 7 and a small fraction to 4 and a small fraction has been a significant decline. All the while the business is growing by leaps and bounds with no sigh of let up. Indeed, the mobile business is moving so fast that it is emitting a buzzing sound. Mobile search results just jumped 20%. The new g-phones should make for a much more dramatic and long term jump.

The Google business model is a joy to behold. The key to it is that the cost to provide service is so low that Google can keep on offering more and more great services without charging a fee. This morning I mentioned how Google Transit is growing rapidly. Is it not amazing that a private company can provide the public service of all local transit routes, schedules and fares and post them on map that is available in thousands of locations, free of charge? The benefits of higher utilization, lower pollution, lower costs, and time saved inure to the citizens. This is a great example of Milton Friedman's suggestion that most government services should be provided by the private sector.

We will soon know who won the 19 billion dollar 700mz spectrum auction and by summer G-phones will hit the streets. The first phones may not compare well to the hype but they will boost the use of mobile services. The world will never be the same.

GOOGLE IS ON SALE AT 4 AND A FRACTION

Some months ago, I wrote that Google will ultimately sell at a much higher price but at a lower PE ratio. The problem of projecting the future is that we simply cannot imagine which direction change will take us. My bottom line is that Google is going increase revenues many times over the next 30 years and every time this stock dips it should be accumulated. A small investment for a grand child should grow into a small fortune, in particular if routine additions are made on dips.

TECHNOLOGY SOLUTIONS ARE MANDATORY

The current price of crude oil dictates that technological solutions be found, if we desire to continue or to improve our current life style. The good news is that more time, effort and money is being spent on developing technology than ever before. We live in a wealthy time when the citizens of many nations can afford to pay for research and development. For example, I am starting to wish I had a nickel for every plan there is to dramatically change the production of energy.

One of the technologies that is catching on quickly is hybrid power supplies. When you think about it, a hybrid system is the same strategy as has been employed by utility companies for decades. Power companies have offered night time power to industry and low cost street lighting because "the motor is running anyway". Hybrid technology is not confined to autos. Huge cranes that move cargo at docks are being converted to hybrids. Huge buses and trucks are being converted. The key point is that there is down time between productive work but "the motor is running anyway", so why not connect a generator to that motor to store the down time energy. Then, when it is time to move, let the stored energy supply extra electric motors to give the gas or diesel motor a boost. Like in the load leveling schemes of power companies, the size of the motor can be reduced and fuel can be saved.

There has been yet another discovery of enzymes that cheaply convert cellulose fibers to ethanol. This time, the enzymes were not genetically altered but simply harvested from existing enzymes in the Chesapeake Bay. In less than a year, demonstration plants will be built that will show the commercial value of the latest process.

COMPUTING POWER AND DATA, DATA, DATA

The tremendous growth in research and the steady decline in the cost of computing and storing data means that the "cloud computing trend" is just getting under way. In 1975 I worked out of the Dean's Office at the Bowman Gray School of Medicine. In those days, we had to be careful about running a few data analysis programs because we could slow the whole system down. There simply was not enough computing power to run all the hospital systems and do research at the same time. We had to schedule our runs in 30 minute intervals. Payroll and other "non-critical" tasks had to be run in "batches" during the wee hours of the morning.

Today, it is growing less and less efficient for a company to manage its own computing system. Off site data centers, run by the likes of IBM, can handle all the work of a big medical center hundreds of times over. This trend will continue and the cost of computing will continue to drop. In the case of Google, program designers totally ignore the cost of computing and data. The Google management understands that the cost per transaction is already so infinitesimal that it has no bearing on the product.

PUNDITS CONTINUE TO TALK HOUSING DOWN

Pundits continue to "look backward" at the housing market. They see the national over hang of houses and fall into the trap of believing that the average house price will fall much in the coming months. The fact remains that if we ignore the rust-belt states of Michigan, Indiana and Ohio and the super boom-bust states of Nevada, Florida and California, the average price of homes is not falling. Using average measures in this situation is like adding Gomer to a professional bowling team. One bad number brings the averages down a long way.

With Fannie and Freddie buying loans again and with Credit Unions making 4.25% variable rate loans, 4.9% 15 year fixed loans and 5.5% fixed rate loans, the housing market will improve in short order. We all know that when BBB- mortgage paper traded at 8 cents on the dollar last week, something had to happen. The price made no sense unless one appreciated the amount of loans held on supper high margin rates. When the margin calls came, the weakest player had to play the part of the canary in the coal mine. Once the FOMC stepped up, the pressure was relieved. It took a long time for the government to grant Freddie and Fannie more buying power. A game was played, an old firm was eaten by vultures but the pressure on the rest of us was relieved.

GOOGLE AND THE HOUSING CRISIS

What does Google have to do with the housing crisis? Not a lot. Google certainly offers a number of services that assist home owners, real estate professionals and financial parties. However, the big decline in the price of Google was only the indirect effect of tight money. Tight in the sense that a massive de-leveraging has been in process. The earnings and earning power of Google continues to grow. We have simply been in a time when of PE contraction. Investors have been unwilling to pay a premium for Google while facing declines in the housing area.

ATTITUDE SHIFT AHEAD

The "helicopter money drop" will begin in a month. Businesses need to build inventories to satisfy the temporary demand. Shays' law will kick-in and the economic surge will move ahead. BUY ALL THE STOCKS YOU CAN IN ANTICIPATION OF THE MOVE! IT IS A GOOD TIME TO ADD TO MANY STOCKS AND SMALL CAP VALUE STOCKS WILL LEAD THE CHARGE BUT BIG CAP GROWTH STOCKS LIKE GOOGLE ARE THE "SAFE" PLAYS.

TIME FOR A GAME OF HIDE AND SEEK?

Today, it looks like the market is pulling back from the big surge of yesterday. Looks can be deceiving, the market is playing a game of hide and seek.

The turn is here, basic materials stocks are down 4.3% and energy stocks are down 3.3%. This is consistent with the decline in gold of more than $60 per ounce.

I must repeat that there are dozens of indicators at historical levels that have produced average market returns of greater than 20% over the coming year. This average return will include the groups that will fall in price by 20% or more. A lot of companies and individuals will benefit from lower commodity prices, the key commodity being oil. One of the key beneficiaries of lower oil prices will be airlines.

AIRLINE PILOT MEDIATION?

NWA pilots have a lot to gain from the merger of NWA with DAL, including $50,000 to $100,000 per pilot in equity and pay increases of 25%. Since the two sets of pilots appear to be unable to resolve their differences, NWA pilots have proposed mediation of the dispute. I am a big fan of mediation. The bible says that people should resolve their differences on the way to court and mediation is often a great way to resolve disputes. There are many famous cases where a sharp "middle man" has been able to see both sides of an issue and to pull the parties to a satisfactory middle. A good mediator can sometimes use the wisdom of Solomon to convince the two parties that a live transaction is better than a dead baby. In any good trade, both parties win. If one party is afraid to be "bested" then both parties lose. The best deal may be very different than the first deal offered by either party. I am reminded of the time a friend of mine put up a business for sale and advised several competitors that he would take the best offer received by fax before 5 PM. A couple of competitors entered the auction. Before noon one party offered 5 million. The second bidder went to 7 million at about 2 o'clock. The first bidder was informed that he was "out" and he raised his price to 8.5 million. The second bidder said the price was too rich for him and declined to bid anymore. My friend was happy with the bid of 8.5 million and ready to accept at 5 pm, however, at 4:45 and new bid came in from a third party of 13.4 million. Needless to say, there was "great joy in Mudville" on that day. Even after the last bid, my friend was careful to inform the first bidder than he was "out". At 5 pm the 13.4 million was accepted.

The bottom line is that the merger is a win-win situation. I don't know that mediation will work but I am glad to know that the pilots are still searching for answers.

Some readers have sold airline stocks in recent weeks. Holding on through tough times is hard, but when the going gets tough, the tough gets going. If you are out, it is time to get back in, the bidding is just getting underway! The move up in airline shares today is hiding behind the big plunge in materials and energy stocks.

FREDDIE AND FANNIE ARE GOING ON A SPENDING SPREE!

The US Government has just given the two quasi government housing corporations a huge increase in their "lines of credit". They are now free to buy hundreds of millions of dollars of mortgage loans. This is their business purpose, each already owns billions of dollars of loans and their business is sound. Each corporation has been maxed out but now they are not.

BACK IN BUSINESS

Suddenly many a mortgage loan office is "back in business". There is once again a secondary market for home loans. Credit Unions are not the only game in town any more. Perhaps more importantly, holders of deeply discounted mortgages will enjoy seeing market values rise and the disappearance of margin calls.

MARKETS WILL CLEAR QUICKLY, THE BEST BARGAINS WILL NOT LAST LONG!

PUNDITS SQUIRM, GOLD FALLS, DOLLAR RALLIES

Once again, we learn that lower interest rates do not cause higher inflation. Day after day for months on end, including yesterday and today, the pundits have cried that lower interest rates will lead to the collapse of the dollar and to super inflation. The actions of the market have made them look wise but only because the low dollar has pushed for lower rates not because lower rates have pushed the dollar lower. Yesterday, rates were cut by 75 basis points out of a total of 325 basis points, this is one of the largest percentage drops if not the largest percentage drop in FF rates ever. What happened, the dollar rallied and gold has fallen about 5%!

The markets are still working their way around the BIG TURN. Can you see it? Do you also appreciate that the extra "facilities" offered by the FOMC to support trouble spots has not necessarily increased the money supply and inflation. The evidence suggests that the FOMC has to some extent "sterilized" these extra loans by calling in other loans. The key work of the FOMC is done in what is called open market transactions. The FOMC is constantly buying or selling t-bills to and from banks to soak up money or to send money to the markets.

SEVEN WEEKS

In all fairness to the FOMC, the correct level of short rates is a moving target and it does make sense to see the effect of prior cuts before moving too fast. The time from the last cut to this one seemed very long but largely because the FOMC was so far behind the curve all last fall and winter. The big monster cuts in late January followed by 75 of 325 is huge. The total decline in the discount rate from 6.25% to 2.5% is VERY, VERY BIG!

COMMON SENSE IS SCREAMING BUY!

There are dozens of indicators screaming BUY. Hopefully the loudest one is your own common sense. The federal government has put money on sale! There are millions and millions of business opportunities available today that made no sense to fund at 6.25% (+ the bank spread) that make all the sense in the world at 2.5% (+ the bank spread). Lower input costs make a number of "losers" profitable opportunities. By the same token, consumers who were facing dramatic increase in house payments have gotten relief. Many a variable rate loan that would have seen an interest rate rise if rates had stayed up will now see an interest rate decline. The cost to carry many a rent house has fallen, many a cash flow "alligator" has turned into a "woolly sheep" ready for shearing. Consumers will see lower credit card bills, lower house payment bills, lower car financing opportunities and more.

NOW IS THE TIME TO FIND THE FEW EXTRA DOLLARS TO INVEST THAT WILL MAKE A HUGE COMPOUNDED DIFFERENCE!

NO, MARKETS DO NOT GO STRAIGHT UP BUT HISTORY IS ON OUR SIDE. THE WORST OF THE CREDIT CRUNCH IS OVER, GOOD MARKETS ARE BECKONING!

YET ANOTHER INDICATOR SAYS, "BUY, BUY, BUY"

This time, it is a purely technical indicator that is screaming, "BUY, BUY, BUY". The indicator is detailed in an article by Mark Hulbert posted on MarketWatch.com. The indicator was among those recommended in Marty Zweig's 1986 book, "Winning on Wall Street". It is called the Double 9 to 1.

A 9 to 1 up-volume to down-volume day is a relatively rare occurrence. Two 9 to 1 days in close succession have proven to be a good sign of a major market turn. I have forgotten the researchers name but a study was done from 1942 to 2006 that shows the average annual gain after a double 9:1 has been about 22% whereas the time in between has resulted in an average of 4.5% returns (dividends not counted in either case). Yesterday, the market experienced a 9.5 to 1 day, as those pessimistic short sellers were caught with their pants down. The long buyer can lose 100% of his investment while the stubborn short selling can lose many times as much.

BY THE WAY

In country after country, from Algeria, to Canada, to Brazil, to Kazakhstan and beyond, total liquid fuel production (primarily oil and liquid natural gas) is showing steady increases. At the same time, there is more and more evidence of demand destruction. SkyBus just announced "significant" cut back on flights and DAL just announced reductions of 5%. What a difference between the "old airlines" and the "new". Unlike the "old airlines" the "new" simply are unwilling to fly at a loss. The price of the seats times the number of seats sold has to produce a profit or the flight will be reduced.

SEVEN WEEKS

The FOMC drug its feet for seven weeks between the last cut and yesterday 75 basis point cut. In the mean time the FOMC has tried to be cute about supplying money to selective big banks. Still, the total cut in the discount rate has been huge. The discount rate offered by the FED was at 6.25% in August of 2007, clearly far to high for the conditions that existed. Yesterday, the fed funds rate was cut to 2.25%. A dramatic cut in the cost of money. Money is on sale! The equivalent move in most anything would make consumers jump! For example, the mother thinking about buying a kid a bicycle might have hesitated at $62.50 for the bike in August. Today, the bike looks darn cheap at $22.50. The lower price of money will make all sorts of long term capital intensive purchases worth while. Businesses are taking advantage. Capital goods exports have climbed by 19%. Individuals will once again consider buying the big boat, the big RV or even the beach home.

CHINA IS TIGHTENING AT THE SAME TIME THE USA IS LOOSENING.

China just raised its reserve requirements for the 12th time in about one year. The reserve requirement in China is now up to the record level of 15.5%. The Yuan is rising. China will export less and consume more. China will continue to cut back its use of oil per dollar of generated GDP and it will buy more capital goods from the USA. Good markets ahead.

THE IRANIANS WORST NIGHTMARE

President Bush is giving the Iranians all the more to worry over. Sunni tribal leaders are turning out to be the best of US allies. They have helped cut back on violence in the region and the cost has been payment of just a few dollars per day per "soldier". As part of this "program" the US is arming these Iraqi "soldiers". The Iraqi government, so far, has not been willing to integrate great numbers of these "soldiers" into the regular Iraqi army but Iran is certainly aware of the military build-up of its Sunni neighbors. Iran needs to make a peace treaty soon or face Sunnis backed by US weapons. (Much of the above information came from George Freeman at Stratfor.com.) I am not suggesting that the US is preparing to invade Iran by proxy. I am saying that Iran is under extreme economic and political pressure to suspend funding of terrorist organizations.

URBAN DENSITY

One of the techniques consumers around the world are using to cut back on the use of oil is to move from the suburbs to the city. The slow real estate market has slowed the pace but the trend is in place. Urban living results in less pollution per person and significantly lower cost. Yesterday, one of my neighbors was very interested in my planed move to town. She mentioned that she and her husband have been shopping in the West End area of Winston-Salem. She is really drawn by the idea of her children being able to walk to local schools.

The price of midtown Manhattan condos seems to make the opposite point about cost but you have to appreciate the reason citizens are willing to pay so much. In real estate, location is key. If one were able to move a Manhattan condo to North Carolina, its value might fall from 1.5 million to 150,000. Manhattan condos appreciate in value because they eliminate long commutes. Highly paid people save a lot by working and living close to home.

Major cities are making great strides to promote "down-town living". Cities like Copenhagen have learned neat little tricks that make shared pedestrian streets similar to extra out door, shared, patios. As the sense of community grows and as more ways are found to share or lower costs and as a greater variety of sports, food and entertainment is attracted to down town areas, the growth trend accelerates. Health advocates note that the French live long lives perhaps because they are more likely to walk to and from. Another positive development is the result of Google Transit coming on line in more and more cities. Google has shown that if transit routes and schedules are easily available to all who have Internet access, including through mobile phones and PDA's, the ridership goes up significantly. Google can add only so many cities a month. In order to "do the best for the most", Google encourages those who want Google Transit to mount a local "city hall" campaign.

DUTCH DISEASE

Having discovered oil, the country of Ghana is very concerned about falling prey to the "Dutch Disease". Once Belgium discovered natural gas, the country started coasting; "Why world so hard if we are all going to get rich off our gas?" Over the years, Americans have learned to be careful about gratuitous foreign aid. Foreign aid is often nothing but a "Dutch Disease" curse; "Why should we work hard to earn a living if the Americans will give us the food we need?"

So far the best solution to world hunger has been to develop free trade with those countries that are willing to operate by rule of law. It helps a tiny few when corrupt leaders grab the spoils of developmental aid or of heavily taxed production. The best way for the leaders of a country to get rich is to develop the legal framework for individuals to trade products with others. Free trade should include relative freedom of immigration.

BAT MASTERSON VERSUS JOHN HANCOCK

Yesterday I demonstrated how some of our "American Heroes" are nothing more than common men who for what ever reason got a favorable telling in history. Again, can you imagine the Gene Barry "Bat Masterson" skinning 20 buffalo per day? All for the purpose of starving the Indians off their land? Would you have guessed that the only man know to be killed by Bat to be a competitor for a bar room "girl"? Bat was no doubt a character but a legend only created in the press.

On the other hand, many true American Heroes have almost been forgotten. John Hancock is famous for his signature on the Declaration of Independence and few of us know anything more about him. The fact is that he served two separate terms as our "President". During his term as President of the "Congress of the Confederation" he worked as many as 20 hours per day, 6 days a week, to raise the capital needed to fight the revolutionary war. Prior to the war, Hancock had worked tirelessly to build his Uncle's business and he thus made himself, perhaps, the wealthiest of all Americans at this time. He contributed most of his fortune to the "cause". He was by no means a perfect man but even those who disagreed with him, including John Adams, respected his hard work and his devotion to his neighbors and his country. He was generous to a fault and was loved by many a "common man". After the war, he served two terms as governor of Massachusetts before retiring to enjoy the benefits of his labor, however, when the people asked him to come back for one more term, he obliged and he died while serving the people.

WE LIVE IN A GREAT COUNTRY!

The Greek democracy was a great experiment. The framers of the US Constitution took the best of democratic principles from the English and from all the way back to the Greeks. Today, there are powerful men in powerful positions in America but there are also checks and balances. A recent invention, called the Internet, has given the public the power to be all the more informed and an informed public is the "kernel" of democracy. John Hancock supported the constitution after the bill of rights was negotiated. We now enjoy freedom. John Hancock correctly fought against "big government". In regard to the British, he said, "They have no right to put their hand in my pocket".

Walgreen just announced an expansion to its health clinic program. Today there are thousands of low cost clinics in America, staffed by nurse practitioners, where "primary care" is available. These practitioners are quick to refer serious illness to medical doctors. The purpose of telling this story here is to note that, given the opportunity, the free market will find the way to supply the needs of the consumer. Over the past 50 years or more, the cost of health care has soared much faster than the cost of other services as more and more of the care was funded by government payment or government dictated systems. It is my hope that the next administration will be able to return health care to the control of the individual who needs care and to once again offer Americans the option of seeking the kind of education that was acquired by John Hancock.

THE INDICATORS SAY BUY AMERICA

As I have suggested time and time again, the price of the US dollar is not so low because of low interest rates. Sure enough, the rates were cut by 75 of 325 points yesterday and the dollar bounced upward. The reason is that the FOMC is finally almost out of the way. The market t-bill rate is now at least back to 65% of the artificially imposed Fed Funds rate. It now makes sense to do business in America and businesses from all over the world now have great incentive to do business with and in America.

With so many BUY indicators "off the charts", we should need no more encouragement to buy aggressively. Yes, the past 6 months have been tough on the psyche but all the while the price to values has gotten better, BUY, BUY, BUY!

MY HEROES HAVE ALL BEEN COWBOYS

The telling and retelling of the big cattle drives and gunfights out west have given us a long list of "heroes". Some of these "heroes" were rough characters that were cleaned up in the telling and retelling. The "Bat" Masterson story is a prime example. William Barclay Masterson an immigrant from Canada got his start as a buffalo skinner, a "mule skinner" and a buffalo hunter. The sad part of this story is that the buffalo hunters of the day were assassins paid by the railroads. In the attempt to avoid Indian trouble, the railroads paid to have tens of thousands of buffalo's killed. The killing was far in excess of any need for meat. The hides were purchased, partly just to make the enterprise of killing off the food of the Indians look legit.

After skinning as many as 20 buffalo a day, Masterson worked his way up to a "mule skinner". In other words he was a wagon driver. As such, his occupation was once listed as a teamster. After skinning and hauling a lot of buffalo, many of which were killed by Wyatt Earp, Bat acquired good excellent shooting skills with a "Shapes Buffalo Cannon". He also regularly practiced his 6-gun drawing skills and become a "fast draw". While still a young man, he got into a gun fight over a saloon girl. His opponent and the saloon girl was killed and Bat was shot in the pelvis. From that point forward he carried his famous cane.

Bat's list of jobs is long because he moved from one to the next. Because he felt mistreated by a US Marshall, he ran for sheriff of Ford county. He actually did catch a few bank robbers, before mishandling other matters and losing the next election. Bat was in Tombstone a few days before the famous gunfight at the OK Corral. Later, when the state of Arizona tried to extradite Doc Holliday it may have been Bat who had the idea to arrest Doc on a number of trumped up charges, let him out on bale and then to constantly postpone the local trial. Doc was never extradited because he was never tried on the local charges.

After his time as sheriff, Bat wandered from town to town while making his living as a gambler and Faro dealer. In 1889 he was involved in an election ballot box stuffing scandal and soon after he purchased a theater and married the beautiful lead actress. As a theater owner, he got involved in promoting boxing matches and traveled from territory to territory as a promoter. He was successful partly because he developed skills as a sport writer. He had a knack for making a small story into a huge tail. In one famous case, in order to hold a boxing match in Texas, he influenced Judge Roy Bean to hold the match just across the border in Mexico.

Bat got to know Teddy Roosevelt and was appointed a political patronage position that lasted from 1908 to 1912. He spent the remaining years as a writer for the New York Telegraph where the legends of the west were raised to new levels.

Can you picture Gene Barry as a buffalo skinner, teamster, or buffalo "hunter"? If you have watched the TV show, you have undoubtedly gotten a false impression of "the man". Bat drank liquor like a fish in water and was known to stagger down the street after a late poker game. You can read all about Bat on several web sites, including the Wikipedia site. A quote you will find on a number of them is, "it was Bat's art of self promotion more than any actual accomplishments that likely added to his notoriety".

Again, while it was true that he had a "fast" gun, he is known to have killed just the one man in a bar fight over the girl. The speculation over where he got his "big" money includes his connection with the railroads. Some stories indicate that he was one of the first Pinkerton railroad agents but this was at most a very short period of time in his life.

AMERICANS LOVE BIG HEROES

Between now and the election Ben Bernanke is likely to be promoted as the latest "Great American Hero". After holding his foot on the brake so long that the economic engine ran out of gas, Ben was slow to react and allowed a relatively minor problem escalate into a crisis. All during the "crash" Ben ignored the law that allows the FOMC to open the discount window to the broker dealers. Only after Bear Sterns was in deep do did Ben act and when he did he flung open the window to JP Morgan so that it could gobble up assets at pennies on the dollar. The cut throat competition between the "big boys" goes back for centuries and old man JP would be proud to know that Jamie Diamond was able to follow in his foot steeps, "stealing the assets of the competition".

Big Ben comes off as the savior of the US economy. By the time the election rolls around, a number of voters will decide to support republicans because of the risk that a democratic president might shuck Ben for another "new" fed chairman.

It is difficult to speak out against a hero. It is easy to come across as a naysayer or even a crack pot. As all good investors know, investors run in crowds or herds. The old Candid Camera elevator gag is a good illustration. Candid Camera put 8 people on an elevator facing the back. When the elevator stopped at the next floor, where one person was waiting to get on, the pressure on the new person proved to be incredible. If he faced the front, one or two of the others would give him ugly looks over their shoulders. The "stooge" often faced the back immediately or after one of the ugly looks. If not by then, at the next stop one or two more people would get on and fact the back. In almost all cases, the stooge would turn to the back.

Yes, I am thankful that the FOMC has finally opened the discount window. I am also thankful that window borrowings are being "sterilized". In Fed Speak, "sterilized" means that the FOMC is not printing the money to loan. Instead, the FOMC is loaning money directly to the parties that are in the most need while buying back in the same amount of loans from those who are in better financial shape. In other words, extra high inflation is not going to be the outcome of the FOMC's current actions.

LOW INVENTORIES EQUAL HIGH INFLATION

Inflation is nothing more than a ratio of money to goods. The fear has been that the fed is printing to much money. The reality is that the short term fear of recession has caused businesses to hold off on production. The fear of business is that they will make a lot of goods that must be financially carried during a long down turn. By keeping inventories low, prices are pushed up. If you only have three widgets in stock, you are not willing to bargain much even if the widget is a high priced and high margined item.

There are two sides to the extra low level of inventories. On the one hand, short term inflation is created. On the other hand, the economy must expand rapidly to rebuild inventories. One exception is the housing industry but even here the level of new construction is now below the level of absorption. With the number of homes on the market gradually starting to go down, the pace of sales will jump when buyers realize that they must buy or miss the best bargains.

LAGGING, LAGGING, LAGGING

It is a critical point for investors to understand that inflation is a lagging indicator. The above epistle on low inventories is part of the dynamic involved. Inflation goes up as businesses pair back production in fear of recession. Once the fear goes away, the production of "extra goods" brings down the price.

PLENTY OF TIME - ANOTHER BLESSING AND CURSE

There is plenty of time to promote Ben as the "successful economic savior". The big cuts in interest rates, which were delayed until late January, happened in time to boost the economy about the same time that the $600 "helicopter dollars" will fall from the sky. The economy will be doing fine by the summer and extra fine by the fall. Incumbent democrat and republicans went along with the "helicopter dollars". The timing will be good for incumbents and perhaps good enough to give McCain all the boost he needs. If the economy is in "recovery" there will be a natural inclination to not "change horses in the middle of the stream".

Gene Barry, Bat Masterson and Ben Bernanke are "good guys". Bat was a colorful figure. TV nor movies can capture all the rich detail of a personality. Over then next few months, we will get the "TV" version of Ben Bernanke. The economy has been saved. Bush, Paulson, Bernanke and the congress will all share the credit. Investors who buy now will reap a portion of the financial benefit. The common investor has no chance to beat JP Morgan but we can all go along for the ride!

MANUFACTURING RECESSION--NO!

In times of trouble, we seem to be like the cowboy that knows there must be an Indian behind every rock. The question, since industrial production declined last month, does that not prove a recession is starting. NO, NOT NECESSARILY.

Brian Wesbury has answered this very question on his web site today. He notes that the 6 month change in production has dropped to a negative number 4 times since the last recession. The current decline is accompanied by a very low inventory to sales ratio. While it is clear that business managers are being very cautious, it is also clear that it would not take much of an attitude or much of a sales increase to cause businesses to attempt to crank up inventories. Once the turn is here, businesses might have to work hard just to stock up.

High tech equipment production grew by 17% last month! Many a business is spending to cut costs. Again, we come full circle to oil demand. In the USA, oil demand is off more than a million barrels per day from the peak in 2005. Companies and individuals are finding ways to reduce consumption. There are literally millions of projects underway in the USA to reduce consumption. There are millions of more projects underway in China, etc. Goods production is soaring if you focus on those goods that serve as substitutes for oil consumption.

THE POLITICAL QUESTION

The question remains as to what strategy will be used by the republican administration to hold the presidency. Success in Iraq could be the welcome advantage. Should the economy improve as a result of a settlement with Iran, the advantage would go to the republicans. In regard to the pressure from democrats to raise taxes, they will face an uphill fight if the economy stays weak. The fear of higher taxes is a part of the reason the economy is weak. We have a chicken or egg problem to solve.

The political bottom line is that citizens "vote their pocketbook". Therefore, it is in the administrations best interest for a clear turn to happen. One more big cut in interest rates, tomorrow, may be all that is needed to kill a few birds with one stone.

WHOLESALE GASOLINE DOWN 21 CENTS PER GALLON!

What do we make of the steep drop in oil per barrel and in cents per gallon today? Oil is down $5.50 per barrel and the wholesale price of gasoline is down $.21!

For a number of months, I have suggested that commodities have been in a bubble. I suggested that at some point a flood of money would pull out of commodities and that this money would make its way into high tech stocks. One problem has been that oil has been propped up by the geopolitical risk that the feud between Iran and the US might result in a cut off of oil flow from Iran or even from the middle east. As a result of this fear, China, the USA and other countries have been actively filling strategic oil reserves even at the cost of $110 per barrel.

Last week, we saw a significant move that suggest that Iran wants to come to the bargaining table with the USA. The price of oil hardly budged. This week, there is great fear that a significant recession is at hand, the price of oil is falling hard.

While I still believe that the geopolitical question has a strong influence, the actual demand for oil is trumping the demand for "protection against events". The total amounts being added to strategic reserves are small relative to usage. Never-the-less, the total amounts in reserve have become significant. An oil embargo would be no fun but, during a recession, total demand could decline enough to significantly reduce the risk from embargo. It is estimated that there is about 3 million barrels per day of excess capacity now. This is less than the net amount of oil exported by Iran. An economic slow down could easily push excess capacity up to 8 or even 10 million barrels per day. As of last week, gasoline inventories in the USA sat at a 16 year high, going back to just after the recession of 1990-91. The big decline today suggests that the market believes there will be an additional jump in gasoline inventories announced Wednesday.

The most recent retail sales report showed a steep decline in gasoline sales. It is clear that the current price is destructing demand.

SKIPPING OVER THE INTERSTATE HIGHWAY SYSTEM

I think it is significant that Vietnam has launched its own communications satellite, long before traditional infrastructure has been built. The developing world is learning quickly that the way to grow an economy in today's market is to grow the communications (Internet) network. Around the world, lessons are being taught and meetings are being held via communications terminals. At current prices, all companies and all individuals must ask the question, "Do I really need to be there"?

The irony has been and will continue to be that global communications make it all the more necessary for international travel to occur. The demand for international travel continues to show up in the revenue and earnings report of international airlines. At the same time, the fuel price crunch has dictated that planes must be flown at full capacity.

RECESSION?

The sentiment indicates that we are already in the middle of a tough recession and the swoon in stocks supports that belief. On the other hand, the economic numbers still show world wide growth and even growth in the USA. The majority of market observers now believe that we are in a recession but I believe John Maynard Keynes was correct that in economic matters the majority is always wrong.

IS THE TURN HERE?

As expressed many times, I see signs of the big turn all around. The problem in seeing the turn is that it begins as a turn of relative performance. If big pharma goes down in price, the turn has started if wage intensive health care providers goes down in price more. If small banks go down in price, the turn has already started if investment bankers go down more. If tech stocks go down in price, the turn is already here if energy stocks go down more. The turn is here is if US stocks go down less than international stocks.

The most obvious example of the "reverse turn" I can give is when tech stocks were hitting outrageous prices in 1999 while oil stocks were dragged along the bottom. When the market fell sharply in 2000, oil stocks went down but nothing at all like the high tech stocks. By the time the public, who sold out in droves, came back to the market, the oil stocks were already soaring and they looked too expensive to buy.

FED CUT

Some folk believe the FOMC will cut as much as 100 points tomorrow. This is another one of those no one knows questions. What is easy to surmise is that what ever the size of the cut, interest rate will have come a long way down from the 5.25% level of just a few months ago. A cut from 3% to 2% is a huge cut. It is enough to encourage a lot of small businessmen to take a chance. Small business is where the "rubber meets the road". A lot of people are in a depressed state of mind right now. However, there are a large number of small business owners who are enjoying the benefits of the low dollar. NC is one of the states that has come full circle. A state in which textiles and furniture production was hit hard by competition. NC is back high on the list of exporting states. Our export growth is very strong. I can't find my notes at this moment but as I recall, NC exports more value than all but 4 other states. The price of a home in NC is cheap compared with prices in many northern states and NC is enjoying strong migration. Business is expanding in NC.

Since 1960, the growth in number of employees engaged in manufacturing in the USA is almost zero. During this time, the production of goods has increase 450%. In this new world, automation allows us to do more with less. The USA has decreased its use of fuel in manufacturing. Our use of oil in the manufacturing process has gone down for 35 years or more. The example of Vietnam shows how other countries are not just following our lead but are jumping ahead. The successful person of the next generation will in all likelihood be a person who has embraced the Internet. The growing church will be the church that uses Internet technology. The successful business will also be likely to have embraced technology. In the case of a country, Internet communication will be a critical component of economic freedom and success.

ELASTIC DEMAND FOR OIL

We have long know that the demand for oil is "inflexible" in the short run and "flexible" in the long run. The answer to the question, will the price of an airline ticket be raised enough to offset the price increase of oil is a resounding yes over time. Knowing that a few monster oil fields are expected to come on line over the next several years, it is my belief that today's big fall in oil prices is the start of a long decline, but who can call short term moves?

By the way, in my area, retail gasoline is already depressed relative to the wholesale price. Should the normal spreads prevail, the 21 cent decline in wholesale prices will only convert to a 12 cents decline in retail prices. In other words, the wholesale price at $2.47 should give us an average retail price of $3.07, not good but since I just put $72 worth in my car at $3.18 per gallon, I am thankful for the decline and can only hope that it will continue.

READERS WANT TO KNOW

A number of readers who have been hit hard by this market are asking lots of questions. This is a scary time. Times have been worse but the old joke is true, that if your neighbor loses his job times are tough but if you lose your job there is a recession. The value of a lot of different asset classes have fallen in recent weeks. The big declines have cause a number of coiled springs to be pushed close to their limits. The eventual result will be a strong rebound. However, no one knows how long the springs will remain coiled.

One reader wants to verify that I believe JP Morgan-Chase is a good buy. I believe there are thousands of good buys available right now and JP Morgan is among them. However, I believe the normal rotation in finance will be to the small bank. Small banks should benefit greatly from the, once again, steep yield curve. By tomorrow, banks should be able to borrow for 2% while lending at much more than double that rate. With the current value of the US dollar extremely cheap, one can count on local and international businesses to expand in America. In my BMW example, where the company is laying off 7.5% of its German workforce while planning to increase its US workforce by 50% over 4 years, the key is that the new BMW presence will increase the number of parts and supplies purchased in America. Many companies will get a boost from the new business and many will need to borrow money to expand. Multiply this one transaction by tens of thousands and the result will be a booming business for small banks. Small banks generally have little or no exposure to the "sub-prime" mess.

Another reader wants to know about margin calls. The way the brokers report loan balances is confusing. The bottom line is that if you own $10,000 worth of stocks, the maximum loan you can have outstanding is $7,500. Most firms restrict lending a little more than allowed by law and only permit a maximum loan of $7,000. If the equity in the account falls below 30%, the broker demands a deposit to bring the equity balance back to the 30% level. If a deposit is not made, then shares of stock must be sold.

HIGH POWERED DOLLARS

At or near bottoms, margin dollars become very high powered dollars. With perfect knowledge, one would borrow and buy all one possibly could right at a market bottom and he would then leverage all the way to the market top. The total return on invested capital would be extremely high. Of course, the problem is that no one knows where the bottoms are.

Here again, we know that the market is as cheap or about as cheap as it has ever been by a number of measures. For example, the equity put to call ration was not at an extreme on October 10, 2002 right at the market bottom. Today, this measure is even more extreme than it was back then. Today, there are several measures that are at or beyond levels not even seen in the fall of 1982.

Knowing that the FOMC has released massive financing to banks and broker-dealers does not force these firms to purchase assets. However, with tons of assets selling at depressed prices, a lot of assets will be purchase in the belief that these are being bought at or near the bottom. As soon as a few assets are "just missed", after another firm makes the purchase, the fear of missing the best buys will over come the fear of buying only to see lower prices still.

HIGHER TICKET PRICES

If the latest round of fare hikes stick, the price of long haul domestic tickets will have increase by $120 since December 18, 2007. The concern of the market is that the higher ticket prices will cause travels to stay home. Of course, current oil prices have forced the airlines to act. One of the actions taken by some airlines has been to reduce the number of flights. CAL has been the exception. CAL has added to capacity while filling a high number of seats and while increasing the yield per seat.

The continued expansion of the "business" economy, means that demand remains firm in the airline business. This is obviously so or the $120 of fare increases could not have been pushed through. While the opening of the discount window by the FOMC has no direct effect on the airlines, the opening implies that the economy will be stronger in the near future. The airlines should benefit greatly because high usage rates implies that ticket prices will remain firm no matter what happens to the price of fuel. BUY, BUY, BUY!

Re: THE RICH GET RICHER AGAIN

On 3/17/08, Lamar Jones wrote:
Current events remind me of the 80's with the S&L crisis. I cannot forget the sweetheart deal BofA got in Texas. In fact that is what started the good ride for McColl and the old NCNB.

I must confess that the fear is very strong and every time we all ask, "Is this the next Great Depression?". I do not believe that is the situation but I can certainly not blame the weak of heart ( I was once a "professional" and remember the doom and gloom the day of the '87 crash....never forget it. It was also one of the best buying opportunities both short term and long term!)


BTW- did you not predict the current real estate mess?

My problem is that I predicted that there would be a mid cycle slow down, a rebound and then a great real estate mess. As we know, if this is only a mid cycle slow down it is one of the biggest on record.

This cycle has been "different" in that during the 2001 recession, real estate did not get slammed. Instead, real estate was super strong because excessive world wide savings pushed interest rates to historic lows. As expected, the 2001 recession was a manufacturing recession but normally manufacturing recession are tough enough to ultimately drag real estate into the same ditch.

With baby boomers still at prime buying ages, it has been difficult to determine how strong the rebound buying will become after the current crunch is over. The question on everyone's mind is, "IS THIS THE BIG ONE"? The fact is, with variable rate mortgages are about as cheap now as they have ever been, it is natural to assume that bargain hunters will clear the market. The sales prices are low enough to make buying to rent an attractive business model.

You are certainly right about the sweet NCNB deal. Big banks become super big when they buy competitors at deep discounts. As always, the government "goes along" with these deals to "save us all".

In regard to the aftermath of 1987, I was fortunate enough to be able to buy heavily in the days after the crash. The returns over the next year were fantastic, all the way up until the invasion at the start of the Gulf War. Like it has been said, "This too shall pass".

On Mon, Mar 17, 2008 at 7:36 AM, Jack Miller wrote:

In a deal reminiscent of the deals of old, JP Morgan - Chase just bought Bear Stearns for $2 per share. The purchase was made with a loan from the Fed! The Bear Stearns office building is worth $2 per share but Bear Stearns did not have what JP had, access to the Fed. This problem has been fixed but, as the saying goes, too little too late for Bear Stearns.

THE CALVARY TO THE RESCUE!

Sunday, the FOMC took the unusual action of flinging the discount window wide open. The rate was cut a quarter percent but the significant action was to open the window to firms like Bear Stearns. Of course, when Bear Stearns collapsed, the topic of discussion immediately become "who is next?". The rank smell of fear which has been in the air is suddenly suffocating. It can be seen on the face of small investor and large, but, would Bear Stearns have been sold if it had had the backing of the Fed? No way! The FOMC is now accepting all sorts of paper at the discount window. I have not studied the balance sheet of Bear and I do not have an inside view but I am confident that if Bear Stearns had been allowed to swap triple A paper for T-Bills at the window, the T-Bills would have provided Bear the liquidity to stay solvent long enough for the value of the triple A paper to recover enough. No, I don't know how much would have been enough for Bear but I know that there is much paper trading at deep discounts to par that will ultimately be paid off at par. I simply do not see a collapse coming in the housing market. With world wide unemployment rates near record low levels, the great majority of people are going to make the payments on their homes and foreclosed homes will be absorbed by the market. Indeed, there are plenty of indications that the worst of the housing crisis is over.

In the case of Bear Stearns, JP Morgan and the FOMC rode to the rescue. The FOMC provided the artillery to save the ranch from the Indians and then turned the keys over to JP. Again, this deal is reminiscent of the deals done by the old man JP Morgan, more than 100 years ago. THE RICH HAVE ONCE AGAIN SNARED A BIG CHUNK OF ASSETS AT CENTS ON THE DOLLAR. Shares in Bear Stearns traded at $150 not so long ago and for $60 in recent weeks.

SMART MONEY

The JP Morgan deal for Bear Stearns is one of three indications of SMART MONEY BUYING that I will mention here. The second is the Smart Money Index as reported by Hayes Advisory. The smart money buying index made a major bottom on or about January 21 at an index value of 3,400. It has since climbed to 5,200! in just two months time! The ratio of smart buying to emotional buying has jumped by a larger percentage as buying by the emotional public has collapsed. This is a classic situation near a market bottom, where the public sales at low prices and the smart money buys at low prices.

The third indicator is the Gambrill Insider Buying Index. This index is computed by studying the government required reports from 3,000 public companies. Purchases by executives and directors must be reported to the federal government. This indicator is "smoking". Executives at 3,000 firms are making a clear statement that they believe their stocks are cheap.

DIGGING DEEP IS HARD

Like always, when the market seems to be in free fall, it is hard to dig deep into pockets to buy at low prices. Women shoppers do better than men at this game. Women love to buy bargains. When there is a "going out of business sale", most of us are pleased to pick up goods at deep discounts. Stock market sales occur when people are afraid that prices will go much lower still. At a going out of business sale, there is the temptation to wait until prices are marked down again; 70% off might be changed to 80% off tomorrow. Of course, the risk is that the item you have your eye on is taken by someone else. Those who miss the 70% off deal are inclined to look around for the next sale to start. Those who miss the last sale end up paying retail.

Think about what would happen at a going out of business sale if a bank were to offer 100% financing on the 70% off goods? The wholesale buyer would "take it all". In recent weeks, the "smart money" is snapping up bargains. Will the buying pace be stepped up now that the FOMC has offered virtually unlimited financing?

In the case of Bear Stearns, JP bought at 99% off the price of 60 days ago and did so with 100% financing. What a deal?

NOT A LEVEL PLAYING FIELD

No, you do not qualify for the JP Morgan deal. You simply cannot make the kind of money JP Morgan can make. Still, you can tag along for the ride. The insiders are buying, they are digging deep. They understand that "panics are short". With many goods available at 70% off, they are not waiting to find out if 80% off will be available. If they buy at 70% off and have to ride through 80% off, so be it.

ONCE AGAIN, THE RICH ARE GETTING RICHER. WILL YOU JOIN THEM? BUY, BUY, BUY!

STRONG MARKETS--PAUSE

The commercial real estate market is strong. This market is enjoying rising rents and decreasing vacancies; what is not to like? On the other hand, new construction has slowed. There are at least two reasons, one is to wait to see if there really is going to be a tough recession. The second is that with stock prices on sale, the pace of spending money on share buybacks has once again quickened. It is silly to build a new business if you can buy shares in your existing business at a "below the mean" price. Even so, high employment around the globe and the low dollar implies that US businesses should expand to meet high profit demand.

Share buy backs are strong and broker dealers and banks have just been granted expanded access to the Fed. To understand the situation, assume for a moment that the Fed chairman called you yesterday and said that he would give you cash at 3.25% in exchange for holding the deed to your house. Say your house is valued at $300,000 and you are aware of a foreclosure close down the street available at the deeply discounted price of $200,000. After using $200,000 of the cash to buy the home, you could then take the deed to the FOMC and get another $200,000 in cash. The aggressive person who had such a deal available would soon own a few dozen houses, 100% financed by the FOMC at 3.25%. A less aggressive person would buy one house at $200,000 and offer to resell it for a higher price at a higher interest rate. A lot of people might be attracted to a $300,000 house priced at $250,000 with 5% financing available. Again, once this less aggressive investor has "flipped" the first home, he would be in the market to submit the deed to raise the money to do another. This all sounds crazy but the FOMC has basically given banks and broker-dealers the power to buy a lot of $300,000 paper that is selling for only $200,000. Tomorrow, when the FOMC cuts the rate, say to 2.5%, the discounted paper will be even more attractive.

Those who are expecting a collapse in the housing market from here do not appreciate the power of the FOMC. The FOMC has been slow to act, it should have cut rates hard back in August or at least by last October. Instead, the FOMC played along with "taking out one of the big boys". Now the congress and the next president will have all the backing it needs for regulation reform of the banking and brokerage system. Between now and them, the market will clear. The FOMC has access to all the money needed to stop the forced selling of assets. As of yesterday, the FOMC made a huge chunk of money available to broker-dealers and banks. There are still a lot of hedge funds and others caught in the "sub-prime mess" but the banks and broker-dealers have the cash to buy out the weak ones.

The markets are still going to be volatile, but the situation is different today than it was on Friday. After the market crashed on October 19, 1987, the FOMC immediately flung open the discount window. Within a couple of weeks the market had not only stabilized but it had started its next big climb. The wall of worry has grown tall in this cycle. The market will climb this wall of worry, including the political and geo-political concerns. No one can call tops or bottoms, but many buy indicators are at levels seldom seen if ever.

My guess at GNP is about 1.5% this quarter and 4% by the third quarter. No recession. Tough markets. Fear. Confusion. World wide strength. Strong US exports. Strong commercial real estate. Temporary slow down.

Buy the Russel Small Cap Value Index. Small banks are once again enjoying a positive yield curve. The FOMC will probably cut short rates by at least 50 basis points tomorrow. Lending is once again a profitable business.

THE RICH GET RICHER AGAIN

In a deal reminiscent of the deals of old, JP Morgan - Chase just bought Bear Stearns for $2 per share. The purchase was made with a loan from the Fed! The Bear Stearns office building is worth $2 per share but Bear Stearns did not have what JP had, access to the Fed. This problem has been fixed but, as the saying goes, too little too late for Bear Stearns.

THE CALVARY TO THE RESCUE!

Sunday, the FOMC took the unusual action of flinging the discount window wide open. The rate was cut a quarter percent but the significant action was to open the window to firms like Bear Stearns. Of course, when Bear Stearns collapsed, the topic of discussion immediately become "who is next?". The rank smell of fear which has been in the air is suddenly suffocating. It can be seen on the face of small investor and large, but, would Bear Stearns have been sold if it had had the backing of the Fed? No way! The FOMC is now accepting all sorts of paper at the discount window. I have not studied the balance sheet of Bear and I do not have an inside view but I am confident that if Bear Stearns had been allowed to swap triple A paper for T-Bills at the window, the T-Bills would have provided Bear the liquidity to stay solvent long enough for the value of the triple A paper to recover enough. No, I don't know how much would have been enough for Bear but I know that there is much paper trading at deep discounts to par that will ultimately be paid off at par. I simply do not see a collapse coming in the housing market. With world wide unemployment rates near record low levels, the great majority of people are going to make the payments on their homes and foreclosed homes will be absorbed by the market. Indeed, there are plenty of indications that the worst of the housing crisis is over.

In the case of Bear Stearns, JP Morgan and the FOMC rode to the rescue. The FOMC provided the artillery to save the ranch from the Indians and then turned the keys over to JP. Again, this deal is reminiscent of the deals done by the old man JP Morgan, more than 100 years ago. THE RICH HAVE ONCE AGAIN SNARED A BIG CHUNK OF ASSETS AT CENTS ON THE DOLLAR. Shares in Bear Stearns traded at $150 not so long ago and for $60 in recent weeks.

SMART MONEY

The JP Morgan deal for Bear Stearns is one of three indications of SMART MONEY BUYING that I will mention here. The second is the Smart Money Index as reported by Hayes Advisory. The smart money buying index made a major bottom on or about January 21 at an index value of 3,400. It has since climbed to 5,200! in just two months time! The ratio of smart buying to emotional buying has jumped by a larger percentage as buying by the emotional public has collapsed. This is a classic situation near a market bottom, where the public sales at low prices and the smart money buys at low prices.

The third indicator is the Gambrill Insider Buying Index. This index is computed by studying the government required reports from 3,000 public companies. Purchases by executives and directors must be reported to the federal government. This indicator is "smoking". Executives at 3,000 firms are making a clear statement that they believe their stocks are cheap.

DIGGING DEEP IS HARD

Like always, when the market seems to be in free fall, it is hard to dig deep into pockets to buy at low prices. Women shoppers do better than men at this game. Women love to buy bargains. When there is a "going out of business sale", most of us are pleased to pick up goods at deep discounts. Stock market sales occur when people are afraid that prices will go much lower still. At a going out of business sale, there is the temptation to wait until prices are marked down again; 70% off might be changed to 80% off tomorrow. Of course, the risk is that the item you have your eye on is taken by someone else. Those who miss the 70% off deal are inclined to look around for the next sale to start. Those who miss the last sale end up paying retail.

Think about what would happen at a going out of business sale if a bank were to offer 100% financing on the 70% off goods? The wholesale buyer would "take it all". In recent weeks, the "smart money" is snapping up bargains. Will the buying pace be stepped up now that the FOMC has offered virtually unlimited financing?

In the case of Bear Stearns, JP bought at 99% off the price of 60 days ago and did so with 100% financing. What a deal?

NOT A LEVEL PLAYING FIELD

No, you do not qualify for the JP Morgan deal. You simply cannot make the kind of money JP Morgan can make. Still, you can tag along for the ride. The insiders are buying, they are digging deep. They understand that "panics are short". With many goods available at 70% off, they are not waiting to find out if 80% off will be available. If they buy at 70% off and have to ride through 80% off, so be it.

ONCE AGAIN, THE RICH ARE GETTING RICHER. WILL YOU JOIN THEM? BUY, BUY, BUY!

BUY, BUY, BUY --- EVIDENCE MOUNTS

For a long time, pundits have been saying that lower FOMC rates will boost inflation, causing the economic slowdown to become a time of stagflation. The pundits are confusing long term and short term effects. Lower interest rates are part and parcel to lower cost and to an increase in production of goods--more goods is another way of saying more supply, prices are a function of supply and demand. During a slow down or recession, demand falls. If the government makes stupid moves, slower demand can spiral into slower production, fewer supplies and therefore rising prices. By Shays Law, we know that new supply creates its own demand. In other words, put people to work and they will have the money to buy goods and put other people to work.

This morning, the CPI numbers show that inflation is not out of control. The CPI index is lower than where it was two years ago. Furthermore, the posted numbers mislead. Take the grocery shopper who wants to buy some bread as the example. The price of wheat has risen enough to boost the price of wheat bread. If this shopper decides not to buy wheat bread but decides to buy some potato rolls instead, has there been any inflation for this shopper? She has stayed within her grocery budget and bought bread to feed her family.

EURO BUBBLE READY TO BURST

Over the past several years, the value of the Euro has risen to incredible heights relative to the dollar. In the same way that housing in America soared in value until the bubble burst, the Euro has soared in value and the bubble is like a very tightly stretched balloon. This balloon will soon spring a leak. It may not deflate as hard and fast as housing did but it will deflate. Where is the air going to go? Chances are that the US dollar will catch the outflow.

ONE OF THE PHONY NUMBERS

The public has willingly feasted on a diet of phony numbers for a long time. One of the "big lies" that has been repeated time and again is that the middle class in America has been suffering. The truth is that Americans are able to trade fewer hours of work to buy most things than they have been able to in the past. The emphasis of the nay sayers has been on numbers that distort reality. Instead of using individual numbers, the nay sayers report median family income without adjusting for family size. Obviously, a family of 4 can live well on less than a family of 5. Another old bugaboo is the immigration game. When poor Hispanics come to America, the US poverty rate typically goes up because many of the immigrants work for low wages. These poor Hispanics might be living twice as well in America while also allowing existing Americans to live better though the lower cost of goods. Everyone was a winner, with everyone doing better but the average wage went down and the poverty rate went up.

The results of not understanding reality is that "do gooders" what to make charitable gifts to those in need and they then break their arms to pat themselves on their own backs. I believe in Charity but I also believe in "teaching a man to fish and trading my skills for cheap fish". The most efficient form of aid is to pay people to do work and allow them to send part of their pay to their families back home. In many cases, Charity has served to trap the poor in poverty or it has gone to the rich leaders of corrupt economies. Allowing individuals to earn money that can be sent to poor family members insures that "financial aid" is allocated to those who really are in need.

ILLEGAL CHRISTIANS

In the Soviet Union, Christians were declared to be criminals because they engaged in illegal activities. In America, we have suddenly declared people who came to America 60 years ago to pick lettuce to be criminals.

The good news is that this economic and political problem is among the long list of problems that are on the way to being solved. Recent polls show that immigration is 7th on the list of priorities for votes. In the up-coming elections, immigration will once again be a political football to be kicked up and down the field but with the presidential candidates from both parties believing in rational reforms, the issue is on its way to being solved. The resolution of this issue will boost countries growth and prosperity.

EYES NOT ON THE BALL

Demario James Atwater, 21 years of age, was convicted of felony breaking and entering in 2005 and he was given a suspended sentence. Last year, he was convicted of illegal possession of a firearm. He was given a suspended sentence. During the time that zealots were demagoguing the immigration issue, fusing about people who had moved to America to work, Demario was one of many to commit serious crimes and to receive no justice. Our focus on the wrong ball was a disservice to Demario, to Eva Carson, to the family of Eva Carson, to all North Carolinians and to all Americans. Demario should have been locked up for his own protection. Now he faces a trial for murder.

ALL IS NOT RIGHT IN THIS WORLD

We have a very long list of reasons to be thankful. Economically, times are good. This world is not nearly a perfect place but in many ways it is not nearly as horrible as it is often made out to be. Americans need to work at discerning what is good and what is bad. We must hope and pray that we can avoid evil. The "big boys" have "talked" a lot of investors into selling at the wrong time. The public has sold billions of dollars worth of stocks and real estate during the last 6 months. The evidence is clear that the "smart money" is buying.

The CPI numbers this morning show that the "wheels have not fallen off the economic wagon". There is room for the FOMC to stop practicing Russian or Chinese style central planning. The FOMC can lower the FED Funds rate to the market rate without causing high inflation. The rates should be down to 2.25 or 2.5% by Wednesday. Such interest rate levels will increase the economic value of assets. Short term calls are always little more than 50/50 propositions but a long list of short-term and long-term market indicators say that now is the time to BUY, BUY, BUY!

HOW HIGH? HOW LOW?

Late in 1999 one could buy 42.3 ounces of gold or use the same amount of dollars to buy "one share of the Dow Jones Industrials". Today, gold hit $1,000 per ounce, up from $252 per ounce in 1999. At today's price, the "trade" is less than 12 ounces of gold for one share of the Dow. In other words in relative terms, the Dow has decreased in value. Einstein said that if one sits on a hot stove for just a second, it will seem like an hour but an hour sitting next to a pretty girl will seem like just a second. Those who have been sitting with gold are happy campers but the hour is almost up.

On the other hand, gold could still be "cheap". At the height of the stagflation bubble in 1980, it only took 1.29 ounces of gold to buy "a Dow share". By the same token, those who bought bonds in 1980 have seen their value rise from $44 to $118. Bonds are very expensive in historical terms. The most recent action by the FOMC appears to be pushing bonds back to their recent peaks. The 30 year fixed mortgage dipped down to around 5.5% in 2004, 2005 and again last month. Since then it climbed quickly to 6.2% but in the last few days the rate has been falling rapidly. Should this rate hit the 5.5% area again, homeowners should refinance the maximum they can for the maximum term. For the next 30 years, they will enjoy paying a low rate.

One of the reasons that rates are set to climb is that the great "buying panic" by the public will soon be over. At the height of the stock market bubble in 2000, the public ownership of government t-bills and bonds was falling at the annual rate of 9%. The public sold the great majority of their bond holdings (cd's through intermediaries) and bought tech stocks. The opposite track has been taking place the last few years. Public holdings of federal instruments has grown at an average compounded rate of better than 5% for more than 5 years. The public is holding mountains of short term securities.

THE BUSH ADMINISTRATION STALL TACTICS

The Bush administration continues to find ways to stall the economic turn while appearing to be actively engaged in "solving problems". The 150 Billion or so stimulus package has been well discussed as a "political stunt". The package will stimulate the economy for a quarter or two before the election but this "helicopter money" will be added to the debt that Americans must repay. The 150 Billion sounds like a lot of money but it is only about 1% of one years worth of "US income". This one percent "bonus" is like the husband that comes home to the wife to say that his boss has granted him a 1% Easter Bonus but it must be repaid next year. Wow! what a powerful stimulus. Still, it will hit soon after the last of the FOMC rate cuts and will therefore be perceived as a powerful blessing bestowed on the little people by the politicians.

The market reaction to the FOMC's action earlier this week was a 400 point move in the Dow. All this over a $200 Billion loan commitment by the FOMC. OK, this $200 Billion is in addition to the $150 Billion to the public. This $200 Billion is a short term loan to the banks and brokerage companies. Since it is a low interest rate loan that will have a multiplier effect, it may be a little more powerful than the stimulus package but it is still peanuts relative to the total economy. The bottom line is that the Bush administration has left us sitting on the hot stove. The market rate on 90 day t-bills is 1.45% and the FED funds rate is still 3%! It is well past the time to bring rates in line with the market but, instead, the "insiders and the insider pundits and the unknowing" have all heaped praise on the "rifle shot" taken by the FED, which apparently was just another way to stall. Who among us would say that it is logical for banks to borrow from one another at 3% when the market rates are 1.45%?

The big cannon shot will be bringing bank borrowing rates down close to market rates. For now, trillions of dollars of loans are being priced by "state regulators". Here we are in a "free economy" that is being overly controlled for political purposes.

As you know, it is my belief that the big objective for Bush is to make a deal or two in the Middle East before his term expires. His "other objective" is to keep the presidency in republican control. The failure of congress to authorize drilling for oil in America will cost democratic votes if the oil market is in "crisis mode". Huge new supplies or oil have been discovered but bringing those supplies on line has been slowed. There is a lot of blame to spread around as both democrats and republicans have failed to go after the "low hanging fruit" of easy oil reserves in America. At the same time, we tax productive assets heavily but do not fully tax products that hurt our country.

Some changes are coming. In addition to huge new oil fields, for the first time in a very long time, nuclear power plants are being designed and constructed at a rapid pace. Some environmentalist have seen the folly of using food products for fuel and some of these have come to be proponents of low emission nuclear power. One nuclear power plant produces more power than thousands of windmills.

HOME PRICES IN LONDON

Some would say that the housing down turn in the US is spreading. The facts are that price appreciation around the world is still strong. Those who bought homes in China, India and many other places in recent years are very pleased. In London, prices increased by only 2% over the last year. A slowdown in appreciation but not a serious problem. Home prices in America have not fallen anywhere near as much as is commonly believed. Indeed, most houses have increased in value substantially above their values of three years ago.

REGULATED MARKETS

A YouTube video tells the story of Lynsey McCree, a Canadian who just had a brain tumor operation. When his Canadian doctor suspected a problem, he ordered an MRI. The earliest available date was four months away. Instead of waiting for the "free" MRI, McCree had one done in Buffalo NY. When the MRI showed a tumor, McCree discovered that the "free" operation could be scheduled after 3 months. McCree had the operation 8 days later in Buffalo. His life was saved. His American "time line" from start to finish was 4 and one half weeks, his Canadian "time line" was over 8 months. Had he waited in Canada, he would have probably been dead soon before or after his operation was done.

HOW HIGH? HOW LOW?

When people come to believe they are smarter than markets, services are priced incorrectly. The result is a shortage of supply or waste. The effect of intervention in the energy markets has restricted drilling, limited construction of power plants, and wasted natural resources, including top soil. The intervention of government in health care has caused prices to soar in America and supply to be limited in other countries. The intervention of the FOMC in the financial markets has caused the "stop and go" of markets that has enriched the powerful while hurting the "little guy". Of course, all the politicians help all the "little guys-small businesses and consumers".

Next week, the FOMC is expected to lower rates by at least one half of one percent. Powerful medicine! The 200 billion dollar swap offered this week is small potatoes compared to lower cost for millions of people and businesses on trillions of dollars worth of current and future loans. Many pundits are screaming NO, NO, NO to further rate cuts. They are caught in the trap of not understanding the price of the US dollar. Here again, we have people who are theoretically proponents of free markets asking for the federal government to intervene in currency markets. If they do, it will only cause a temporary ripple. The price of the dollar is seeking the appropriate level and this price is influenced by 1,000's of pieces of info. I believe the dollar is low for several reasons; 1) that this is the natural time in the business cycle for the dollar to be low, 2) that there is risk of war with Iran, and 3) that US tax rates have gone up relative to tax rates in the rest of the world. The key point to be made is that lower US interest rates will not cause the dollar to go lower (except perhaps as a short term reaction). The growth rate of the US economy will increase after rates are lower. As the economy grows, the demand for US dollars will increase. The US dollar is considerably lower today than it was at the mid cycle turns in 1980 and 1990. Historically, a great time to buy stocks has been when the dollar is sitting on new all time lows.

The case of BMW tells the whole story. BMW has announced layoffs of 7.5% of its workforce in Germany. BMW has also announced plans to increase employment in the USA by 50% between now and 2012. BMW can buy and build in America for much less than it can in Germany. The low price of the dollar is serving its natural exchange roll which moves production to the most profitable place. When BMW increases its work force in America, all kinds of parts suppliers will increase their work force in America. The move is under way to "import" the fast growth of the rest of the world to the USA.

The increased production of goods in America is a deflationary event. When the supply of goods goes up, the price goes down.

The bottom line is we are looking at good news ahead. The shame is that politicians are playing games. Broker dealers and banks that contributed to the problems are now the recipients of 200 billion dollars of low cost loans. The rich get richer! Will the FOMC cut enough next week to end the "squeeze play"? No one knows for sure. Bush would like for the FOMC to "hit the gas" just about the time a deal is made, but who knows if a middle east deal will materialize. If it does or if it does not, the squeeze play is almost over. With mortgage rates down sharply, home sales are going to climb. The $200 Billion and other cumulative actions of the FOMC will take effect. The mountains of cash on the sidelines will be put to work rapidly, as soon as the fear of recession converts to the fear of missing "THE BULL".

FED SAYS BUY, BUY, BUY

The war of words and no words continues in regard to Iran. Moderates in Iran continue to suggest that it is time for Iran to come to the bargaining table, while the actual negotiators talk and then shush, shush and then talk. The dance between the US and Iran continues to be a hurky-jerky two step. One of the latest actions of psychologically defiance by Iran was to issue a commemorative stamp for a fallen Hezbollah terrorist. Last month, Imad Mughniyeah, implicated in a dozen or more terrorist plots over a long career, was killed by a car bomb in Syria. The Iranian stamp once again shows the support Iran gives to terrorist. Clearly the gold and oil markets fear that the war of words is going to escalate into something much larger.

FED SAYS "HERE IS THE CASH YOU NEED TO BUY, BUY, BUY"

The FED is priming the pump. In the old days, priming the pump was the commonly used analogy for the actions of the FED to put new money into the banking system. If you have ever pumped water by hand, you know that the pump must be "charged", a bucket of water had to be poured into the pump to provide the "downside weight" for pushing the fresh water out of the well. The FED has primed the pump again and again in recent days and the "big news" this morning is that the FED has doubled the amount of money it is moving through the discount window and it is offering longer term lending. By force feeding primary lenders, the FED is increasing the cash available up and down the line. Banks are flush with money and ready and willing to lend.

BOOM, BOOM, BOOM

If one ignores the financial press and instead takes a good look at the financial numbers, some show that the US is in an economic boom. Total loan growth in the US is running at 10% above last year. Business and commercial loans are up 21%! Even consumers, "who have lost confidence in the system", are spending money. Again, what would you expect to see during a time when the FOMC has expanded the monetary base by more than 20%! This 20% plus growth rate was prior to the most recent actions. The sad news is that the very crowd that created the financial crisis is benefiting first from the new liquidity.

THE WORLD IS AWASH IN GOODS AND SAVINGS

The big irony is that while the financial press is focused on the problems in the credit markets, of which there are many, the real problem for some time has been excessive savings and how to manage excessive savings. The reason home prices in the US soared was because excessive savings pushed interest rates down to record lows. The failure of developing people to spend their new wealth left the money available to Americans at extremely attractive rates. Money is once again available at very low rates and indeed we are living in a very rare time when real interest rates are negative!

The world is producing goods like never before while using fewer people. In the US, the total number of people employed in manufacturing climbed for a couple of hundred years or so until 1980. Since 1980, the number of people employed in manufacturing has fallen and the rate of decline has increased in recent years. This is not a bad thing, it is called productivity. In the long term it is always a good thing to do more work with less effort. History tells us that increased productivity does cause short term problems. The easy example is the time of the Luddites. This group attacked and destroyed water wheel powered looms in Britain because these efficient devices replaced the "home work" of millions of women. Weaving cloth on a hand loom was a labor intensive task. Suddenly, water powered looms, could do the work of tens of thousands of women and the world changed for the better. Today, we are handling the increased productivity better, the unemployment rates around the world are going down at the same time that manufacturing employment is going down. We live in a better world! For example, Canada is currently enjoying its lowest unemployment rate in 33 years.

Keep in mind that in the last century the US went from a nation of 70% farmers to 2% farmers. The disappearance of millions of farm jobs was not a bad thing in the long run. In the last 20 years, millions of manufacturing jobs have been eliminated. While the press decries the loss of manufacturing jobs in the USA, the reality is that China has eliminated more manufacturing jobs than any other nation. During the republican primary in Michigan, Mitt Romney talked about bringing the jobs back to Michigan while John McCain "talked straight" about the fact that those "old jobs" were never coming back. The good news is that we now have resources available to perform more important work. For example, the number of jobs in research labs is expanding quickly.

Again, it is a good thing that goods continue to be made more and more efficiently. The prosperity provided by more efficient production is also a good thing. The short term problem is for the new holders of wealth to learn that sitting on piles of cash is not the most economically rational act. US citizens can buy only so many goods, including elective surgeries and second homes, before the rest of the world must learn to use "trade their cash" for goods and services. When they learn, we will all see a real economic boom.

BUY, BUY, BUY

Today, both the short term and long term buy signals are screaming. I don't like short term signals because they are not as reliable as long term signals. Still, it is good that both are screaming BUY!

Again, we are seeing "smart money" buying and "dumb money 'panic' selling". The level of buying by insiders has seldom been as strong or as sustained. Each time the market makes a significant dip, volume increases. The pessimist looks at this as selling but for each sell trade there is an equal and opposite buy trade. The smart money is on the buy side.

HYPE IS NOT ENOUGH

The media hype about resource stocks has not been sufficient to prevent the turn and even though it is camouflaged well, the turn is here. One can see the turn in stocks such as Freeport McMoran (FCX). This gold and copper mining stock traded at 120 in October but has fallen to 96. No, this is not the worst performance in the market but it shows that price is at a level that threatens to cure price. The boom will mean that Chinese and others increase their use of commodities but stock prices look ahead to a future time of excess commodities. The actions of the FOMC to inject funds without lowing interest rates shows that the FOMC is prepared to dig deeper into its tool bag to solve the liquidity problem without abandoning the fight against inflation. By the way, despite what you hear, inflation is still pretty moderate. The GDP deflator is lower today than it was in 2005 and 2006. The blow off in oil is no fun to live through but the forces of supply and demand will eventually trump the forces of fear and greed.

GRIND, GRIND, GRIND

When the going gets tough, the tough get going.

SMALL CAPS SOAR

The Russel Small Cap Index jumped forward yesterday, almost a 5% move in one day. It appears that my call to move 401-K money to the small cap value index was well timed. After waiting so long for other calls to work, it is nice to have such an immediate response. Of course, even a stopped clock gets the time right twice a day.

IF, IF, IF

Market participants have been playing multiple games of IF. If there is a recession, airline traffic will suffer. If there is a war, the safe play is in gold and oil. If there is a democratic congress and president, taxes and inflation rates are going up and up some more. What are the answers to these questions?

There is always a recession somewhere. Recessions tend to roll through the world from one industry and one country to another. For a recession to be declared, there must be more than a few industries suffering. The pain in one area must spread to other areas before the average industry is in contraction. Because we live in an unusual time of excessive savings, the piles of money repeatedly has driven interest rates to very low levels. Low interest rates make assets, such as houses, easy to buy at higher prices. With the demographics just right for houses and with prices soaring, there was a very long term housing boom that peaked in 2005 and that has corrected very sharply since. However, we still have baby boomers and echo boomers at prime ages to buy homes and second homes and interest rates are once again down to very low levels. So, while there has been a serious recession in the housing business, conditions are ripe for a turn. All the while, the recession in housing has been accompanied by a world wide economic boom. Even the construction industry in the USA is not in much of a recession if you add commercial construction to housing construction. The commercial construction boom has largely offset the down fall in housing construction. Two more nuclear power plants were announced yesterday. These two, to be built for Progressive Energy in Florida, will cost about 14 Billion Dollars and are planned to be finished in 2016 and 2017. The cost of these two plants is the same as the cost of 100,000 $140,000 homes. Yes, this is future construction but the example is given to show the magnitude of construction that is underway. China just approved the construction of 6 more nuclear power plants. There is about one coal fired electric plant per day opening somewhere in the world right now. Coal fired plants cost less than a third of the price of nuclear plants so each day we have the equivalent of 16,000 single family homes being completed.

The world economy is so strong that US exports are soaring. The latest "disappointing" figures showed an increase of US exports of better than 16%! The actions of the FOMC and cooperating central bankers in Canada and Europe yesterday, will make all the more money available for lending. No, the numbers reported yesterday were not inaccurate, business and commercial loans have increased at the annual rate of 21% before these actions taken by the FOMC! Yes, there is always a recession in some industry somewhere but the world is currently enjoying an economic boom. A big IF was removed yesterday, the money has been made available to support the US housing industry.

IF THERE IS A WAR

There is always a war going on somewhere in the world. I have forgotten the current count but I believe the number of current wars is in the double digits. Believe it or not, the US has gone to extraordinary extremes to prevent a war with Iran while trying to end the age of government sponsored terrorism. Thirty or so years ago, the terrorist modus operandi was to hijack a plane and hold the passengers hostage until some leader or group of soldiers were released from captivity. Over time, the strategy morphed into a willingness to blow up innocent people in markets and on planes. One of the big events in this cycle was the blow up of a plane in the early 1980's. The terrorist in this case were traced back to Libya and the US eventually bombed Libya. The good news is that one country after another has stopped overtly supporting terrorist and by all accounts many have stopped all support of terrorist activity. Unfortunately, the strongest military power and most strategically located nation in the region, Iran, has not stopped financing and training terrorist. Coalition troops are engaged on all sides of Iran, in Afghanistan, Iraq and Pakistan, but, so far, coalition forces have not been willing to attack Iran.

Over the past 30 years, economic sanctions against Iran have been gradually tightened. Over an even longer time, the USA has applied economic pressure to Cuba to little effect. There is a big difference. In the case of Iran, Russian and China have joined the rest of the UN Security Council (Indonesia abstained) to sanction Iran. Iran is carrying the weight of the whole world on its shoulders.

The price of gold and oil says that there is a serious risk of war with Iran. Iran has expressed its desired to wipe Israel off the map and there is no way that Israel is going to sit still while Iran develops a nuclear bomb. The good news is that the higher the perceived probability of war, the higher the cooperation of the UN Security council. For that reason, those in power, such as Bush, have the incentive to talk tough in public while trying to get to the negotiating table in private. My opinion is that war with Iran can be avoided but I am a retired investor in NC who has no political experience: who will listen to me?

Still, as an observer, I can see the two steps forward and one back progress. The steep decline in violence in Iraq is a very good sign but, 42 civilians were killed yesterday and 4 US soldiers? The thing is that the market will "know" if a deal has been made before the deal is announced. Stocks will soar in value long before a deal is sighed.

IF THERE IS A RECESSION AIRLINE TRAFFIC WILL SUFFER

Week after week, month after month and year after year the market has shown that international air traffic is growing rapidly. This growth has happened concurrently with the increase in the price of oil. Part of the reason the price of oil is up is because the demand for air travel is so high. What is particularly significant is that yields are increasing. It is one thing to say that traffic is up 6% but quite another to say that the average ticket price is up 5%. The combination of the two shows the market is very strong. If the business were selling shoes, it would be great to sell more shoes but even better to sell all the shoes at a higher price.

The US has been through two quarters of slow growth. Most recessions last from 6 to 9 months. Economically speaking we are in the 6th inning of a 9 inning game. Share prices lead the economy by 6 to 9 months. The market breathe turned negative back around June of 2007, 9 months ago. Yesterdays great response to the FOMC action shows how nervous the market is. There is a ton of money sitting on the sidelines and great fear of missing the next big "BULL". With public sentiment about as bad as you will ever see it, the "active players" are as jumpy as you will see them. The "active crowd" is trying to "catch the bottom". No one is good at "catching bottoms" but there are lots of people who continue to try. Once this crowd perceives that the bottom has already been made, there will be a stampede into stocks.

TURN, TURN, TURN

It has now been about two years since I wrote that health care was due for an internal turn. I wrote about how the labor intensive side was on one end of the health care see saw. I expected companies such as United Health Care, Humana and Well Point to suffer and for the big pharmaceutical companies to gradually start out performing. Yesterdays action confirmed that the turn is finally upon us. My proxies have been PFE and UHN. Just a few months ago, the relative performance since my first writing was still upside down from my call, UNH was up 5% over the prior 20 or so months while PFE was down 13% (not counting dividends which almost brought the total returns in line). After yesterdays moves, UNH is down 35% while PFE is down 18% over the prior two years. Through in a high dividend from PFE and you can see that the relative performance has now turned substantially in PFE's favor.

The new trend is here, big PHARMA should out perform "provider care" over the next several years. You can buy PFE now with great confidence that the returns will compound at higher than average rates for several years. Throw in the nice dividend and you will see substantial returns.

For at least 6 months after the turn, US SMALL CAPS will out perform most sectors. After a turn, you want to be in high beta stocks. Small banks are very heavily represented in the Russel Value Index. Small banks are now enjoying a positive yield curve after 19 months of fighting the FED. Earnings will surprise the market over the next several quarters.

BUY, BUY, BUY!

THE QUESTION THAT IS STARTING TO BE ASKED BY PEOPLE WITH MASSIVE AMOUNTS OF MONEY ON THE SIDELINES IS WHAT IF THERE IS NO RECESSION OR WHAT IF THE RECESSION IS ALREADY OVER!

WE WANT TO TALK

Just after the UN voted to approve the third round of sanctions against Iran, Iranian officials and EU officials have each said they would like to talk. The trial balloon that has once again been floated is to allow a consortium of countries, including Iran, to enrich uranium on Iranian soil under UN supervision. The UN would have the right of inspection of any facility on short notice.

There is light at the end of the tunnel. This has been a very long tunnel, so far. The US continues to accuse Iran of training and supplying terrorist, so it is not like the two sides are all set to make nice. Still the willingness to talk is important and the talks imply that the door to a deal has the potential to be opened.

FIRST IN -- FIRST OUT

One of the accounting methods for inventory is first-in, first-out. I view the airline shares as being stock market inventory. More than a year ago, in January of 2007, the airline shares made a top. Continental traded at more than $52 per share. On January 8 of 2008, these same shares put in a bottom at $17.84 per share.

The most recent financial reports show that CAL is experiencing traffic growth and most important yield growth. I have a meeting to attend so I must cut this short. Let me simply state that whenever any company in any industry is increasing its unit volume while increasing its price per unit the company is enjoying the ingredients of profit growth. While it is true that fuel cost have continued to increase, it is also true that fuel price surcharges have been added, regardless of whether there is a recession or not. Again, the combination of rising unit volume with rising price per unit is a healthy business environment. CAL shares were among the first to dive but they will also be among the first to soar!

Former chairman, Bethune says that DAL should declare victory and announce the merger of DAL-NWA. The pilots can negotiate whatever deal they can, after the merger has been announced. The offer on the table, which included $50,000 to $100,000 equity to each pilot and pay increases of 25% to NWA pilots is going to be difficult for the pilots to top.

ANOTHER TURN MADE

The cost for local governments to borrow in the "Muni Market" has come back to planet earth. This is one more sign that the credit markets are "getting over" the "sub-prime poison".

GOVERNMENT REGULATION STRIKES AGAIN!

Once again, the good congress in its attempts to "protect the public", has shot the public in the foot. Millions of dollars have been lost due to the excessive write downs in the credit markets. The big companies that have written assets down to cents on the dollar will recover. Those people who sold assets at depressed prices are victims of over government regulation. Company management simply cannot risk jail time for making improper estimates. As a result, they are missing badly on the "conservative side". The good news is that the write up of these assets over the months and years ahead will yield steady earnings increases for the firms that hold these assets.

NEGATIVE REAL INTEREST RATES

Rare times indeed! There were a few months soon after the recession of 90-91when real interest rates were in negative territory. Prior to that, one has to go back to the inflation days of 79 to find negative interest rates. Investors should remember the "unknown truth" that inflation, which is partly a response to fewer goods being produced during a slowdown, is a late cycle phenomenon. The boost in inflation that comes along just as the economy is in a slow down is a sigh that the worst is over, the turn is here. Stocks will increase in value long before the numbers show the economy has turned. Commodity prices normally turn down with interest rates but, my contention is that gold and oil are being held up by geopolitical tensions. Core inflation rates are as high as they have been in some time but even the core rate will fall once the froth comes off the headline numbers.

THE XENOPHOBIC PUBLIC

When asked to rank the GDP of the European Union, the USA, Japan Germany and China, the public misses badly. They list China, the USA, European Union, Japan and Germany (which is part of the European Union). The correct ranking is: 1) European Union, 2) USA, 3) Japan, 4) Germany, 5) China, 6) UK, 7) France. The problem is the hysteria about China and India. The common belief is that these countries are going to "take over the world". The USA is going to lose its place as number one. It is a real shame for a country known as the melting pot of the world to be Xenophobic. "Those people are ...." is the refrain we hear. America is rich because of the input of peoples from all corners of the globe. The more we observe, the more clear it becomes that the education of children in the USA leaves a lot to be desired. I believe that China could easily pass the US and the EU to become the "biggest economy" with the next 50 years. I hope the USA never has as many people as are currently living in China but I hope the people in China enjoy a standard of living that is on a par with ours. In 50 years, I expect to see people of all nations working less time to acquire all the comforts we enjoy today.

BE A PATRIOTIC AMERICAN

One can be a Patriotic American without believing America is perfect. America is a land with serious problems that need solutions. We simply need to be careful not to create big problems out of solutions.

Greg Mankiw has blogged about the "three strikes and out law" in California. Before getting to Greg's point let me note that America has a much higher percentage of our population in prison than does the average nation by far. We treat our prisoners better than most other nations. Under these "favorable conditions", doing a "hitch in jail" is not such a terrible thing. Those who struggle to live a decent life "on the outside" may even feel comfortable and safe in jail. Greg notes that the three strikes law in California definitely influences the behavior of two time offenders. One of the ways is that the third offense is "ratcheted up". The attitude of some is, "if I am going away for a long time, I might as well 'get my money's worth'". Armed robbery or even murder rates are higher as the third offense. Another fact is that California "exports" two time offenders to other states. In other words, criminals shop for the lowest jail to crime ratio. The purse snatcher who faces a long mandatory sentence for the third offense might move to another state where the risk/reward ratio is not so harsh.

Yes, America as a land individual responsibility grants to its citizens great freedoms. What a blessing?! We have much to say grace over! At the same time, our nation takes away freedoms in order to make us socially responsible for one another and our freedoms are in a constant state of flux. The wisdom of the framers of our constitution never fades. The framers designed a federalist system of government and would certainly be amazed to see the power accumulated in Washington but, the system works. There are far too many people feeding off government, democrats and republicans, rich and poor, young and old. In this election year, it is my hope that Americans will study the issues and vote their convictions. We live in a great country and have the responsibility to do our part to keep it great.

HEADED FOR THE BEACH

My oldest turned 30 yesterday, my youngest is engaged to be married in October and my grand daughter will be two on the 25th. It is time for a family celebration at the beach. The reports that DAL pilots are in talks with NWA pilots and that Iranian officials are in talks with US officials give me hope that good news will hit while I'm gone. Again, we live in a great country and there are many reasons for us to be optimistic. Have a great week end!

FUNDAMENTALS -- BAH HUMBUG!

For a long time, I have been writing about how "far off" we have gotten from the "fundamentals". A regular reader just sent an article from the Wall Street Journal that shows how silly the "peak oil argument" is. The article relates how the world has used only 1 trillion of the 12 to 16 trillions of barrels of oil under the earths surface. As techniques are improved, more of this oil will be recoverable.

One of the things I have written about is the move toward electric and hybrid electric vehicles. Economically these vehicles make no sense what so ever (they hold promise based on the hope that mass production will bring down costs but the current cost is extreme). It is a good argument that the coal burned to produce electricity for a car cost less than the cost of oil burned in a car but batteries are expensive. The capital cost of electrics and hybrid electrics is still too high. Dramatic improvements have been made but even $100 oil requires a "casting off of fundamentals" for one to "go electric".

As I wrote the other day, there is a lot of activity in this area. Every major car company is building or planning to build some sort of electric vehicle. These plans have been made primarily for psychological (public relation) reasons. "Green mania" has taken hold. Elementary school kids around the globe have been taught that the world will end because of greedy, dirty men. Cities, such as New York, have mandated "green taxis". If a car company wants to feed off the government trough, and now a days virtually every company feeds off the government trough, it must be part of the "green in-crowd".

Batteries are horrible for the environment. A mandate to cut emissions in California is a mandate to push pollution to some place else. Yes, I do envision the time when batteries will help shave the peak loads at power plants at low enough cost to make battery power competitive. However, the reason most cars are powered by gasoline is because nature has provided substantial quantities of cheap oil. It took thousands of years for this oil to be produced. Using competing technologies while there are trillions of barrels of the "good stuff" still available is a psychological answer to a political question. It is not an answer to a rational economic question.

ON THE EDGE OF WAR OR A COLLAPSE IN OIL PRICES?

Why is the treat of war between Columbia and Venezuela, between Israel and Hezbollah, and between Iran and the US all surfacing now?

The price of gold and the price of oil suggest that conflict is ready to start. From "The Oil Drum" we find the following, "I was struck by just how fast the US has built gasoline inventories. ... The last time gasoline inventories stood at this level was in 1994."

Are gasoline supplies jumping because US demand is slowing rapidly or because the oil companies are preparing for a shut down of tanker traffic?

Bush jaw boned OPEC and won a reprieve. Normally at this time of year, OPEC cuts production as the winter heating season is over. Bush publicly lobbied for an increase in production and expressed disappointment at OPEC's decision to maintain production, but both sides got what they wanted; Bush kept production running and OPEC was able to stand up to Bush. The $4 jump in price will be short lived, unless conflict really is about to begin.

In the meantime, Iran is once again holding meetings with the USA in regard to "solving" the insurgency in Iraq. Iran is still funding terror and supplying bombs. Hezbollah is still active in Lebanon. Condi Rice is pushing Israel and Palestine officials to renew peace talks. All of these things are connected. Iran is the key to a lot of "stuff".

For two or three years, I have written that I expect significant "progress" before the 2008 elections. Nothing has happened to change my view. Bush has a deadline to meet. He will succeed or fail before he leaves office. Real success implies a "deal" well before the November elections.

Columbia has made good progress against FARC, the "terrorist of the South". Venezuela has the air power to give Columbia a difficult time. Does Venezuela dare to attack Columbia? If so, would the US respond? Oil is up $4 per barrel despite slowing demand and high inventories. Politically, Chavez and Amadenijad are weak because both nations have suffered severe economic hardship as a result of anti American policies. Will the people support armed conflict? The US would not need to invade either nation to cut back their exports. Bush has continued to add to the US SPR even after the price hit $100.

I do not believe war is about to break out. However, I believe that the US would be hurt less than Venezuela or Iran if there is a war. It is the strength of the US military that protects us from the necessity of war. The consensus view is that the US military has been stretched thin, but the reality is that the "shock and awe" used against Iraq is available from carriers in the South and in the Middle East. War is not likely because the US is prepared to wage war if necessary. The government of Columbia has the legitimate right to take on the menace of FARC and Iran has no right to sponsor Hezbollah and other terrorist organizations.

FURTHERMORE

After writing about the "fundamentals", I found a post about a bio-fuels stock, VSE. It has fallen from its peak price of $21.47 to $7.75. I would not touch the shares with a ten foot pole.

While the constant stream of media stories has been about alternative energy, big research money has also been spent on improving technology for hydro carbon extraction and use. There has been significant progress. For example, a new method has been discovered to convert tons of radioactive nuclear waste into harmless and manageable substances. Even more interesting is all the laboratory success in learning how to dramatically increase the speed at which deep earth hydro carbons are converted to clean burning natural gas.

The fundamentals are that gold and commodities are priced up partly because of fear. Warren Buffet once said that in the short run the market is a voting machine and in the long run it is a weighing machine. In other words, psychology can push stocks in the short run but in the long run it is the fundamentals that count. Knowing this "fundamental truth", we simply must be willing to hold for the long run (if we only knew how long the anxiety and the opportunity would be reduced).

THE FOUR LEGGED STOOL

The following reader comments show that psychology is weighing down the market:

"Interesting that in the last 20 odd years, the Fed has pumped the system with liquidity and each of those times we have run smack into some type of bubble. You would remember better than I the bubbles of the 80's but we had the tech bubble in the 90's and then the liquidity ran dry and now they are pumping the system and the money, so they say, is flooding into oil and commodities. When the music stops this time and it will, the money will rush out and I think the tidal move out will be as almost as ugly as the tech deflation. It probably will not happen with Bush in the White House."

"When Warren Buffet says we are in a recession, people listen. The fundamental measures do not matter in my opinion, the psychology is the reality right now."

Readers who quote Warren should remember that he was the one to say that the key to making money in the market is to buy when others are fearful.

Readers should also remember that the strongest buy signal is when the market is supported by the "four legged stool" and one of those legs is skeptical psychology.

The readers comments are consistent with the comments of OPEC members who, under pressure from Bush to increase production, maintained production. The spokesman said that the current price is not consistent with the fundamentals. He is right in many ways. The fundamentals include oil prices well above the equivalent price of natural gas (although the extra cold winter has caused this gap to tighten) and increasing inventories in the US for 7 weeks in a row as a clear result of slowing demand in a slowing economy. What is not included is the fundamental that Iran is being backed into a corner or that Venezuela has chosen to rattle sabers next to Columbia. It is fundamental to me that the price of gold and oil includes an extended risk premium at a time when the country with the second largest reserves in the middle east is under extreme pressure.

Another fundamental is that major investments of all kinds are about to produce fruit, therefore, it is time for the powerful to "create the psychology" needed to unload massive quantities of investments. Investors should always remember that the rich and powerful own or have friends who own media outlets.

A GOOD POKER PLAYER

A good poker player is not terribly upset when he gets caught running a bluff. A good player does not bluff often and he tries to win his bluffs, but, getting caught only serves as the "advertisement" needed to induce callers against really powerful hands. What do you think about George Bush and ethanol? Do you really believe this "good old boy, Texan" really supports converting corn to oil? I don't have access to the Karl Rove play book but I find it interesting that after a few years of silly spending on corn oil, there are suddenly a couple of hundred more coal fired electricity plants and 30 nuclear power plants in various stages of development. Do you think it is possible that Bush has been willing to give the environmental crowd enough rope to hang themselves with?

There is no doubt that the fundamentals will eventually support alternative energy in a major way, but the capital spending binge of the railroads suggests that replacing coal and oil is going to take a "super invention or two".

It is interesting that a lot of alternative energy technologies "work" while oil is trading at over $100 per barrel. For example, the GM partner that uses enzymes to digest every thing from corn stalks to tires claims it can produce at the wholesale equivalent of $1 per gallon of gasoline. I expect that price to be a bit of an exaggeration but it is interesting that that is about the cost of extracting oil from abundant supplies of tar sands in Canada.

The last two "elephant fields" including the monster in Brazil, will be expensive to develop as far as oil fields go, still, the wholesale per gallon cost from either will be significantly less than $1. So, the fundamentals tell us that even with a lot of oil and coal around that is cheaper than ethanol, wind, and solar, we choose to spend large amounts of government money on ethanol, wind and solar.

In other words, if we want to talk about government, there is a huge gap between fundamentals and spending. As far as the markets are concerned, prices of stocks have been pushed down by psychology and prices of gold and oil have been pushed up by psychology but psychology can only push so hard. The other three legs of the investment stool are supporting prices.

If you want to play the game of "how bad can things get?", we still have a very long way to go to the absolute bottom. I can't remember the exact number but I believe price earnings ratios went to around 5 or 6 near the bottom in 1982. On this measure, stocks are still double where they could go and of course the bottom in 1982 was nothing like the bottom during the great depression.

On the other hand, the prime interest rate in 1981 or 1982 was at 21%. Stock prices were facing powerful head winds.

BACK TO MY FAVORITE EXAMPLE

In the past couple of days, British Airways and American Airlines each announced traffic increases of better than 5%. China announced increases of better than 8%. Both British Airways and American are dealing with labor negotiations but their numbers show that the fundamentals of the business are not causing the low share prices. Here you have an industry sitting on the edge of its "bubble cycle" while the share prices are low. The companies are making money even in the face of unrealistic and unsustainable fuel prices. So, yes, prices are out of line with fundamentals. What an opportunity!

THE BIG SQUEEZE

People around the world are feeling the squeeze of higher food and energy prices. The short term and largely phony financial numbers make the situation look worse than it is but, that said, the squeeze is real and it is being felt. BCA Financial reports that US consumers are now paying 56% of disposable income for "necessities"; food, energy, medical and financial payments. With the poorest countries of the world growing the fastest, Moises Naim, Foreign Policy Magazine, has asked the question, "Can we afford a middle class?"

The irony is that great prosperity is causing the angst this time around. In the "old days", Thomas Malthus had good data to support the concept that the world would periodically suffer very large food crunches in which millions of people would starve during the worst of times. Today, there are only a few areas left in the world which are in a constant battle to grow enough food. The problem today, a growing middle class which has pushed up the price of food for everyone. Moises offers the following statistical summary: the total world population has grown by about 1 billion people over the past 12 years, during that same 12 years the size of the "middle class" has grown by 1.8 Billion people. Since the middle class consumes several times as much production as do the poor, the demand for food and other goods has exploded.

Poor people eat lots of grains. Middle class people feed much more grain to animals and then they consume meat. It takes about 8 pounds of grain to produce one pound of beef. Meat consumption on the planet has doubled in the past 20 years. The production of grain required to produce that meat has also doubled. Recently, we enjoyed saying, "So What? we now produce crops far more efficiently". Eight times the amount of rice is grown per acre than what was grown just a few years ago! The more recent problem is that countries around the world have been led by "group think" and misguided "junk science" to practice silly strategies such as using food supplies as fuel for vehicles. Group think causes us to leave oil in the ground while feeding our cars corn oil.

The good news is that even the most brain washed people eventually "wake up to reality". Paul Krugman just wrote in the NY Times that ethanol is "bad for the economy, bad for consumers and bad for the planet". I have forgotten the persons name, but one of the leading proponents of ethanol some years ago, is now a member of the "Clean and Safe Organization" that is promoting the renaissance of nuclear power. There are now 30 nuclear plants on USA drawing boards. Nuclear power plants produce very little greenhouse gases and the power can be used as a substitute for oil, leaving our corn and soy beans as food.

Based on the numerous announcements of auto companies around the world, the type of auto that is going to see an explosion of growth is the electric and the electric hybrid. Even many of the new hybrids will be plug-in models. At the same time, the pace of construction of coal and nuclear power plants is ready to kick into third gear. The beauty of the plug-in hybrids is that they are part of the "off-peak" or "load shaving" system. Once started, it makes sense to run coal and nuclear plants 24/7. Thus, the cost of electricity at night is very cheap and very expensive at peak hours. By charging car batteries at night and by leaving them plugged into the grid during the day, infrequently used cars could actually earn an income as a "power shaving device". It might even make sense for hybrid engines to be run at peak power times just to supply energy to the grid.

The competition for alternative energy solutions is moving forward quickly. All the competing solutions will help expose the silliness of using food products as fuel. The food squeeze is on but it will not last. The worst is upon us because the past couple of years of tighter interest rates has done its intended job to slow production. Since inflation is a measure of money chasing goods, the slow down of goods leads to a "J Curve" effect where inflation is high in the short run.

FROM RUSSIA WITH LOVE

Russia has once again asked Iran to comply with UN resolutions. Iran is stubbornly resisting but the weight of the world is getting to heavy, Iran is feeling the squeeze. Turning Iran away from the sponsorship of terror is going to be an important time in history. The various terror groups spread out around the world will wither away on the vine after the roots of this terror sponsor are pulled up.

THE BIG SQUEEZE IS ON BUT THE RECOIL WILL BE SUBSTANTIAL

To each action there is an equal and opposite reaction. The pressure being put on the markets today will result in a recoil reaction in the near future. Get ready! Get Set! Go!

IT'S A BIRD, IT'S A PLANE, IT'S A PREDATOR FIRING A MISSILE!

The USA has been demonstrating good intelligence lately. Every few weeks, an al-Qaeda leader is being torched. The bad guys are not even seeing the damage coming their way. One was taken out by a car bomb but the others are being hit from the sky. A couple of days ago, the hit was from a Predator drone, launched in cooperation with the Pakistani government and fired in the hills of Pakistan. The report this morning was of a strike in Somalia. The nationalities of those biting the dust has included a Saudi Arabian and an Egyptian.

In Iraq, the US lost the least number of soldiers in the month of January, 29. A significant loss but at about the rate of death per 1,000 in America. The death in America from guns is more than 2,500 per month and the death from auto accidents is over 3,500 per month. Should more tears be shed for the soldiers who die trying to rid the world of terrorist or for the drunk teenager and his victims in a head-on collision?

Civilian deaths in Iraq were up 36% last month. Even though the war is "going well". Hundreds of innocent people are being blown up by terrorist in various parts of the world. Several of the leaders and hundreds of their followers died last month.

In some cases, critics attack both the war and the USA. I can't remember where I read that a professor asked his students for a 6 word US slogan. The winner was "Our Worst Critics Prefer to Stay".

GOLD AND OIL

The price of gold and oil remains caught in the grips of geopolitical risk, putting downward pressure on the price of stocks. The long awaited "event" in Iran is almost upon us. The "bad news" of Iran is not likely to take the market much lower. Turns are showing up. Have you noticed that the housing stock index has bounced 20% off the bottom? Have you noticed that there is a new buyout every day or so? This morning it was Diebold under the gun of UTX. How about the continuation of insider buying? Insiders have bought a ton and a half of stocks at each of the market dips for the past 6 months. Mark Dodson of Hayes Advisors reports that the ISEE Sentiment has reached an all time record buy call. Iran is about to go under water for the third time. This latest set of sanctions do not appear to be so tough but, with unemployment above 20%, there is unrest in the body politic. The third time should be the charm.
TECHNOLOGY ALL OVER THE PLACE

NC State is starting an advanced transportation center where initial efforts will be focused on the most efficient hybrid vehicle. Down the road a few miles, Duke University is installing 2,500 wireless routers which will blanket the 6 million square feet campus with high speed Internet service. The revolution in digital downloads continues around the country. Apple has moved up to the number 2 spot, behind Wal-Mart and just ahead of Best Buy and Amazon. Over in Afghanistan, the Taliban is trying to get the cell towers turned off at night. They are tired of having their stealthily moves tracked by cell phone connection pings. Advances in the area of nano-technology also continue at a hurried pace. The discovery of tubes that reflect 100 times less than the black ink on this page holds the promise of a number of commercial possibilities. Another of the fascinating technology races is in regard to hydrocarbon eating bacteria. Demonstration plants are being built that use competing techniques to "chew-up" every thing from old tires and trash to coal or oil tars. Several researchers believe their technology will produce clean burning fuels for less than $1 per equivalent wholesale gallon of gasoline, while reducing pollution. If correct, the current price of gasoline is about double what it will be in a few years. Of course, the risk of investing in these technologies is that as the latest elephant oil fields come on line, the price of gasoline could drop below $1.50 per gallon.

All of these competing forces must stay ahead of the progress being made in the area of solar power. A massive solar power plant is scheduled to go on line by 2011 in Arizona. This one focuses the sunlight onto water tubes and the hot water drives turbines, nothing real fancy, but it works!

GOOD TIMES -- WORLD WIDE

Even this old "skeptical republican" enjoyed the "Four Block World" post last week. It shows that drivers who want to go forward should use the letter D and those who want to go backward should use the letter R and that voters who want to go forward should use the letter R while those who want to go backwards should use the letter D.

Most of the rest of the world, is moving forward. The miracle in Hong Kong, as illustrated on the Carpe Diem site, is a good example. The per capita income has increased from $2,000 to $30,000 since WWII. Sixty percent of the citizens pay zero income tax. The top 8% pay 57% of all the tax. How does one convince the richest of the land to pay such a disproportionate share of the taxes? The country has lowered both individual and corporate tax rates. The city-states low tax policies have created an economic boom that has lasted for many years. The story is not over, rates are being cut again. The corporate is about to be lowered to 16.5%, just 1.5% higher than the 15% flat rate on individuals. In addition, there is no extra tax imposed on dividends, interest or capital gains.

Oh, you say Hong Kong is a special situation? I guess Russia is as well. Since cutting income rates to a flat 13.5% rate in 2001, the economy has boomed. What about Iceland, Ireland, and 20 other nations? Are all of these economic success stories "special situations"? The reality is that the risk of higher taxes in America is hurting our economy. Why would an international company consider building a solar panel factory in America if its production is going to be sold around the world? Why pay higher taxes here when the plant can be built elsewhere?

THE OBAMA CURSE

A review of Obama's policies reveals that he supports legislation that would dictate that America spend trillions of dollars "helping the poor of the world" and at the same time he is opposed to US free trade agreements. This is the international equivalent of the old welfare scheme where people were kept in poverty by the "helping hand" that was seeking votes not solutions. In the past 20 years, billions of people have seen a dramatic rise in their real incomes as a result of "free" trade. Those who have benefited live all around the globe, including the many "Wal-Mart Shoppers" in the USA. It is a hard lesson to learn but feeding a man a fish each day is not being kind to the man. Teach a man to fish and buy a portion of his daily catch is "right" strategy.

On the other hand, if the man is willing to strap explosive charges onto his friends, spouse or children in order to blow up his "enemies" then it is appropriate to fire him up with a Hel-cat missile. It is good to know that 140 plus terrorist leaders have been blown away "from a distance"!