Home sales fell 2.7% in August; not great news but not unusual. Home buyers have always liked getting settled well before the start of the school year. Home sales August 2009 were up 3.4% over home sales August 2008, so, while the headlines say there was a decline, the rebound continues. The rebound can be seen in the depletion of inventories. New home inventories are at the lowest level in...
Several readers have asked me about the recession talk in the news. They sometimes have mentioned the Dorfman article that suggest one of the worst recessions ever is on the way. My opinion is that a recession is unlikely.
My key reason is that total compensation will rise about $500 billion in 2007. Furthermore, the inflation that Ben Bernanke is worried over is the "wage-price spiral inflation" that can take over during the economic boom of the prosperity phase of an economy. Bernanke is holding the fed funds rate about 75 basis points above the t-bill rate because he is trying to keep wages from rising too fast!
Of course, Ben thinks he has the fed funds rate at the perfect level right now. He is prepared to lower rates more if there are more economic problems and he is ready to stand pat if it appears the turn has been made.
A number of signs suggest that the turn is here. It took only a hint that Merrill would hire a new CEO and the stock soared. I do not recommend investment banks as an investment right now but it would be amazing for Merrill and Citi to replace their CEO's while suffering such a short period of pain.
By the way, the big write downs were probably political moves. One almost has to express sympathy for Charlie, Nancy and Harry. Here they were ready to tax carried interest as the source of funding to eliminate another bad tax, the AMT tax, when the carried interest profits disappeared! Wow, I know I sound like the greatest cynic of all time but it is amazing how "bad" the economy has gotten just about the time the congress is ready to raise all sorts of taxes. Of course, this might simply be a chicken before the egg story. The quote about cynics that comes to mind is that "diplomats are honest, well respected people who are hired to go lie for the best interest of their country".
Believe it or not, Bush is playing a strong game of poker and he holds the winning hand. He has Iran backing away almost as fast as Mrs. Pelosi. Congress is going to go way past its deadlines without finding the way to push through much in the way of new taxes. When the congress packs up and goes home (probably after coming back after Thanksgiving) the market should see a relief rally. The decks are being cleared. 2008 is going to be a good year for investors. NO RECESSION IN SIGHT!
A regular reader writes:
"The airlines seem to be hurting an otherwise beautiful portfolio. Gas prices continue to rise. What do you think? Do you still think airlines will go up soon?"
The first week of October, my wife and I made our annual trek to Blowing Rock, NC. We enjoy visiting the mountains this week because "Art in the Park" is held in Blowing Rock and because the mirror image of the maple trees around Bass Lake is as pretty a picture as you will see. This year, the leaves had not turned. Our walk around Bass Lake was still one of the highlights of the year but the leaves were mostly green.
The following week, I could hardly wait to go camping at Table Rock. If you have not been to Table Rock, you have missed one of the prettiest views in NC. The peak at Table Rock is only 1 mile from the state operated parking lot and picnic area, but the views of the NC highlands extend in all directions, including a full view all the way up Linville Gorge. Once again, I had a great trip and the views were gorgeous but the leaves were still mostly green.
We are now into the first week of November and the leaves are turning fast. Earlier this morning, the temperature hit 32 degrees. You can bet your boots that the green oak trees in our area are finally about to change colors. Yes, I do believe the leaves will turn and I believe they will fall off the trees.
PRICE IS PREDICTABLE BUT NOT AS PREDICTABLE AS AUTUMN LEAVES
This fall, the price of oil has been more stubborn than the leaves. Will the price turn? The timing is certainly less certain but yes, the price will turn.
The reason investors who have short term outlooks do not do well is that they switch out of winning positions to avoid short term pain. The temptation is simply too great to follow the crowd, even when common sense says the crowd is wrong. No one likes to feel like they are the only ones losing money. Studies show time and again that there is an inverse relationship between the frequency of trading and investment returns. Successful investors tend to identify trends early and they tend to sell too early. Successful investors do not try to catch every trend. It only takes a few 10 baggers to accumulate great wealth.
STRAIGHT FORWARD MATH IS OFTEN A KEY TO SUCCESS
Many things in life that must ultimately follow the laws of math even though the math seems to be broken in the short run. The typical mathematical formula does not include a function for the emotion factor. Two of my favorite quotes from one of the greatest economist of all time, John Maynard Keynes, are: "The market can stay irrational longer than you can stay solvent", and "In economics, the majority is always wrong." The oil market currently fits both quotations. The greed factor is in full force in the oil market at the same time the fear factor is killing the dollar. The combination has pushed oil and the dollar to extreme levels.
Lets look at an economic formula to see if math is working in our favor.
Income = Consumption + Investment + Government Spending + Exports - Imports
The USA just reported GNP growth (income growth) of almost 4% for two quarters in a row. How can the US economy grow so rapidly in the middle of a housing slump that has knocked 1% off the growth rate? The answer is that all of the above components of income are contributing.
Consumption, by Shays Law, feeds on itself. The 3.8% real growth in GNP last quarter means that the average American experienced growth in income equal to 3.8% after accounting for inflation! In America, one thing you can count on is that if Americans experience a rise in income, they will spend more. The reason we call Americans "consumers" is because that is what they do.
In regard to investment, US assets have gotten very cheap relative to assets in the rest of the world. In particular, Europeans can now build a factory in the US for 35% less than the cost a few years ago. As a result, the drop off in residential construction has been almost totally offset by growth in business construction and the purchase of business equipment has held up well even in the face of a credit crunch.
In regard to government, the obvious statement is that we do not have to worry about a drop off in spending. It even appears that Congress will cut the AMT tax without raising other taxes as much.
Finally, we get to the big change that has occurred over the last year or so, export growth is exploding upward while import growth has collapsed. While anything can happen in the future, those who claim the US economy is currently in a recession are simply wrong. It is impossible for the income side of the equation to go down if all of the right hand side elements are going up.
Why is export growth exploding? Foreigners, who hold more US dollars than at any other time in history are experience the equivalent of the Jimmy Carter days. Back in the late 1970's, it made no sense to save ones money for future consumption. By the time one saved $1,000 to buy a refrigerator including compounded interest, the price of the refrigerator had gone to $1,500. Today, the citizens of the world, including US citizens are enjoying low inflation rates. However, the dollar has fallen relative to other currencies. Foreigners who hold dollars are missing the boat if they continue to hold the dollars instead of buying US goods or assets with those dollars.
THE BIG TURN
Yes, the big turn has already hit US trade but the US dollar has continued to fall. Those who buy the dollar now are similar to those who bought oil stocks in 1999. Oil stocks did not go up immediately but they looked better and better as we moved to the other end of the fear and greed rope. This is where psychology trumps math in the short run. The reserves of US dollars held by foreigners has never been a higher number and these holders are sick and tired of losing money. The "old money Europeans" who hold at least a portion of their wealth in US dollars have seen the value of those dollars fall by better than 35%. What would you do if your bank sent you a statement month after month that showed your savings account had earned 4% interest but the principle value had fallen by 5%? If your savings are losing value, you might as well buy something with them.
AIRLINES ARE MAKING MONEY
A major fact is that airlines are making money. One of the common half truths expressed by the financial media is to imply that if costs go up then profits must go down. A similar half truth is the notion that if a producers selling price goes down he will suffer profit declines. This kind of thinking would suggest that the huge profit growth experienced by Dell Computer in the 1990's was impossible. The fact is that as the price of computers fell, Dell sold more while maintaining or even increasing its profit margins. In the case of airlines, the industry lost a lot of money in 2003, 2004, 2005 and 2006 but it made a lot of money in 2007. The compounded fuel cost increase was very substantial but the profits did not start rolling in until after the price of fuel was very high.
One of many facts in favor of airline stocks is that airlines are a lot like buses with wings, the higher the price of fuel, the more economical it is to ride the bus. The fuel expended per mile per passenger is higher in a car than it is in a buss or a plane.
The real key to profits is the elasticity of demand versus the elasticity of supply. JAL airlines told the "elasticity story" in its most recent report. It seems that there is so much demand from Japanese business travelers that consumers are getting priced out of the market. JAL is still waiting for delivery of its huge order of new planes. When demand is great and supply is restricted, what can a business do? Around the world, the price of airline tickets are going up. JAL just joined the party with its announcement of a huge jump in profits.
The following are other interesting facts.
1) The world wide order backlog for new planes has never been any where near current levels.
2) Both Boeing and Airbus have experienced delays in bringing new planes to market.
3) China, India, and other developing nations have dibs on the great majority of planes to be delivered over the next couple of years.
4) US airlines are flying many planes that are 35 years of age with no hope of replacing these planes for 5 years.
5) These planes are gradually being retired, reducing the capacity of the carriers.
6) Many 50 to 100 seat planes are being added to the US system but these are being used primarily to feed traffic to international hubs.
7) For three years running, US carriers have set new records for full seats.
8) Another word for elasticity is flexibility and airlines have no flexibility in regard to adding enough seats to fill demand.
9) The only area of flexibility left is in setting seat prices.
10) After making 30 or so price increases of $5 per ticket over the past three years, the most recent increase was a $10 per ticket increase. Fuel prices are being passed along.
LETS SEE WHAT HAPPENS NEXT TUESDAY
Next Tuesday, December oil contracts expire. By Tuesday, those speculators who put on short positions some months ago must deliver the oil. Now that the oil futures market has returned to backwardization, there is no incentive for big oil companies to store extra oil. They can simply wait to buy real liquid oil for substantially less than the price offered by futures contracts. As a result, excess inventories have been bled off. Over the past couple of years, world wide excess capacity has grown from a very tight 1 million barrels per day to 3 million barrels per day, which is admittedly still tight relative to daily consumption of 82 million barrels per day.
HOW MUCH EXCESS CAPACITY IS ENOUGH?
Major development projects will be completed in just a few months with even bigger projects to be completed the next year and the next. If excess capacity were up to 4 million barrels per day would the risk premium fall?
The fear of conflict in Iran will ultimately go away, one way or another. When it does, oil could fall as much as $30 per barrel in a hurry. One of the ways that the risk premium could go away is already in the works. A year ago, big oil companies stored all the oil they could because they were being paid well to do so and the fear of supply disruptions was high. Today, when oil is available on the market for less than the price of a futures contract and the excess supply of three million barrels is enough to offset a significant disruption. The incentive to store oil is fading quickly. More and more stored oil is going to be released. More and more strategic oil reserves around the world are going to be capped off. As far as I know, France is the only country so far to actually use strategic reserves but other reserves are full or close to being full.
Warren Buffet has said that in the short run the market works like a voting booth and in the long run it operates like a weighing machine. Right now the speculators are voting for $100 oil but the weight of the supply and demand evidence is that oil should fall to $60 or less.
Airlines are selling at very low prices relative to projected earnings. Analyst have consistently under estimated airline earnings for at least 8 quarters. Each future increase in earnings will likely be met with increases in the price of the stocks.
I predict a "major positive event" will occur within three months. This event could be anything from intervention in the currency markets by the US government to agreement in the middle east to a Palestinian state. The good news will be a surprise. Chances are good that airline stocks will appreciate in value before the news is public.
RIDE THE BUCKING BRONCO
This is once again a Ken Fisher moment. The market is trying to buck you off the best horse. Hold on for a great ride!
The see-saws are moving. When merger mania and hyper leveraged transactions ended, the big investment banks dropped. Regular banking activity is ready to boom. Business construction has largely taken the place of residential housing and the construction loans are being handled through "normal" banking transactions.
See-saws are all over the place. Exxon Mobile, at the king of the hill, has taken a hit. While the price of oil has moved from 82 to 95 the price of the stock moved from 92 to 95 and then back to 92. Believe it or not, the average price the consumer has paid for a gallon of gas this year is less than the average at the same time last year. The oil companies are having a more and more difficult time of passing through the higher prices of oil, demand destruction has occurred. Refining margins have collapsed. The traditional see-saw, oil on one end and high tech on the other is in evidence.
If you don't believe these two segments see and saw, take a look at the past blow off peaks. During 1999, when the tech bubble was fully extended, the price of a barrel of oil was $12. During the oil record setting days of 1980, technology stocks were at selling at decade low PE ratios, Business Week's front cover was about the death of tech. The current boom in tech is well underway, tech stocks are up an average of better than 30% year over year. Even Microsoft, which had been stagnate for years, is moving up sharply relative to oil stocks.
Yesterday, the US Dollar rose on the same day that interest rates were cut. The pundits suggest this was because the FOMC cut only a quarter when they could have cut a half. The fact is that the US economy is very strong and growing and there is reason to buy dollars. The GNP grew 3.85% the last quarter, this is the inflation adjusted rate of growth and it is well above the long term trend. Real disposable income growth was off the chart. The "see" has already "sawed" in regard to export and import growth, in the past year, US growth in manufactured exports was over 16% and imports of goods grew by less than 3%. The see-saw in export-imports will lead to the turn in the dollar (assuming Congress fails to override the Bush veto of the billion dollar tax increases offered by Congress).
NO USED PIANOS PLEASE
In response to my piano story yesterday, I got feedback from a friend who just sold her baby grand. Her kids are almost grown and she needed the space for other things. She confirmed my story. The value of all but the very best of used pianos has fallen dramatically. Charities, churches and auction houses often refuse pianos. I feel compelled to reiterate this situation because it is the crux of the disinflation story and since writing the story I heard two more TV pundits talking about how the government inflation numbers are false. TV pundits, like "news" reporters, fall into the trap of telling half truths because only those who tell exciting stories get more air time. One pundit mentioned this morning that if you have children headed toward college then you understand that the inflation rate is still very high.
Sorry Charlie, the full price of college tuition is paid by only the very few. The great majority of students get very substantial discounts in one way or another. At my alma mater, UNC-CH, the top 10% of the students now get a totally free ride! By jacking up the price, the perceived benefit of the scholarships are greater. When a top student has the opportunity to accept the $100,000 scholarship from one school or the $80,000 scholarship from the other, he is inclined to take the free ride at the $100,000 school. Under such circumstances, the price at the $80,000 school is apt to rise quickly to the $100,000 price.
College tuition and the price of a hospital operation are just two of the misleading numbers people use to say that inflation rates posted by the government are false. Both are misleading because almost no one pays the full tuition cost and almost no one pays the posted hospital operation price. If the price of an operation soars from $20,000 to $40,000, was the inflation rate 100%? What if a number of new programs were offered to allow large discounts to those who have no insurance? What if the large insurance companies went from a 20% discount to a 50% discount? In other words, if the Medicaid reimbursement rate went from $7,000 to $9,000 and if the private pay persons best negotiated rate went from $15,000 to $22,000 and the insurance reimbursement rate went from $17,000 to $25,000 then the real inflation rate was a weighted average of the various payment rates. When the government agrees to pay x percent of the total price, there is strong incentive for the price to be raised.
The same phenomenon happens in private industry all the time. For example, airline seat pricing follows a similar pattern. One legacy airline might raise prices and wait to see who follows. Chances are, the price increases are rolled back on 70% of the routes due to competition from low cost carriers. Then many of the highest priced seats are offered "on sale." The net increase is often only a tiny fraction of initially announced price increase. There were something like 17 across-the-board ticket price increases in 2006 and 9 so far in 2007 but the average price of an airplane ticket per mile flown is still about 15% below the price available in the year 2000. The point is that one cannot look at the head line numbers to determine the rate of inflation.
TV pundits who like to obsess over the price of oil fail to consider the efficiency of the US economy. We use a tiny fraction of the oil we used 30 years ago to do any particular task. In the "old days" huge quantities of oil were used in "non-transportation" pursuits. Today, the problem to be addressed is to convert transportation away from the use of liquid fuels. That process will take time but the market will make the switch smoothly if the politicians will stay out of the way. As usual politicians shoot the smooth process in the foot by such things as silly regulations. They might enact CAFE standards to try to force the issue, but mandating high mileage cars takes away the incentive from the consumer to make the more fundamental changes needed. Why ride the buss or move closer to town if the price of fuel is held down through regulations? In other words, we need to let the see-saw in this area as it does daily in all other non restricted areas.
INTERNATIONAL - DOMESTIC, SMALL - LARGE
The science of constructing an investment portfolio is a complicated process. The good news is that one does not need to understand the science of the internal combustion engine to drive a car well and one does not need to understand all the give and take involved in portfolio construction in order to invest well. Indeed, the person who thinks he is the best is often the person who has the biggest wreck or the one who goes out too far out on a financial limb.
As we move toward the end of an economic cycle, it will become more and more important to buy big companies. However, there is no rush to go all "big" right now. As a general rule, buying "big" adds a defensive element to a portfolio. Indeed it is intuitive to think that buying growth rather than value adds an aggressive element to a portfolio. Such cross currents can easily confuse even the "experts". As I have often stated, about 90% of performance is a result of asset allocation. Stock picking can be fun, exciting, highly profitable and very humbling but not at all a necessary investment skill. Indeed, most people would be better off using the dart board approach to stock selection. THE REASON THIS IS TRUE IS THAT STOCKS ARE SOLD THROUGH THE NEWS MEDIA AND IF A STOCK IS IN THE NEWS IT IS NOT THE BEST ONE TO BUY!
It is easy to conform to the opinion of others, the good news is that the herd is typically right during the first couple of years of the prosperity phase. Right now, one does not have to go it alone to make serious money.
At the current time, if an investor wants to try the dart board approach now, I suggest that he limit his dart board to big cap US companies. I say this knowing that over the long haul, small stocks beat large stocks and international growth beats US growth. I doubt that my message is clear because it is time to be very aggressive in the defensive area of "big cap".
When one end of a see-saw goes up, the other end must go down. The difference between see-saw movement and stock market movement is in order of magnitude and in terms of relativity. If oil stocks go up 20% over the next 4 years while tech stocks go up 100%, then there was a see and saw. Big oil integrated oil is "big cap value", the QQQ index is big cap growth. My forecast is that the QQQ will outperform big oil considerably over the next few years.
IT TAKES MONEY TO GROW A BUSINESS
Anyone with experience running a small business knows that the reason so many small businesses go out of business is because of inadequate cash. New business owners often incorrectly assume that profits are the key to success. Of course, in the very long run, a business needs to turn a profit. Having run a resort rental business, I can tell you that cash is king. Year after year, for decades we experienced tough cash flow and negative profits. The good news was that the value of the properties appreciated dramatically while all the rents and then some went to pay all the expenses.
Now that the economic mid cycle turn is here, the availability of financing is tighter. Starting a small business will be harder than it was over the past 5 years. Venture capital will be more and more dear. Funding will be available to profitable businesses but they will need solid balance sheets.
The reason to favor large caps in the current environment is that large caps tend to be "self funding." The current run up in Microsoft (most all of my friends own Microsoft through their ownership of the Q's) makes the point well. Microsoft has accumulated billions of dollars of cash and has all the more cash flowing-in. The coming build out of the mobile Internet (it will be an ongoing renovation over the next 50 years) will require huge amounts of money. Big companies which have the cash to move on opportunities have the advantage.
The smartest of the smart will continue to bring forth innovations. Facebook is an example of innovation capturing imagination and making the founder a multi-billionaire quickly. However, the only way for you to own a piece of Facebook right now is for you to own a piece of Microsoft. At the same time, Google is making big move after big move to compete directly with Facebook. It is my belief that churches, businesses and other organizations will soon adopt the Facebook "method of communication." Programs like Facebook and Myspace started as "virtual homes for teenagers" but are proving to be a valuable productivity tool for business. A number of businesses offer password protected communities of users. Email will eventually be relatively passe'.
The battle for dominance in all the the fast growth areas is ongoing. Millions of innovations fail to catch-on. Now is not the time to try to find the next Google, Yahoo, Myspace or Facebook. These companies have a head start on systems that have room to grow. As you all know by now, I believe Google's location specific mobile platform adds will be the most profitable of all time. Besides, by the time Facebook shares are available to you directly, they will cost an arm and a leg.
BIG PHARMA
Since a number of my readers work for big pharmaceutical companies, I must mention that the good times are upon you. The see saw of healthcare is swinging back into your direction. The momentum will grow at a gradual pace during the early part of the prosperity phase but like a see saw the speed will increase right to the apogee of the move. Within a few years, the compounded returns will be better than most "expert" expectations.
BUY, BUY, BUY!
The following response is to reader emails.
Resort real estate prices peaked in 1985 and again in 2005. After the peak in 1985, investors still had the opportunity to sell at slightly higher nominal prices in 1987. The loss incurred by owners from 1985 to 1987 was an opportunity loss, they could have made great returns in stocks while they were stuck waiting for the "last bounce" in real estate prices.
Today, we are in a similar "in between time". The peak in resort prices was in the spring of 2005 but the declines since that time have been relatively small in most cases.
The fact is that there are major forces playing a game of tug of war in regard to housing.
On one side:
1) residential housing is over built, and
2) the supply of empty homes has never been greater, and
3) the news media is having a field day reporting various real estate "problems", and
4) a couple of million "owners" of homes have no equity, and
5) we are near the end of the 17 to 22 year (18.3 year average) real estate cycle, and
6) the final down turn in the real estate market is "kicked off" by simplification of the tax laws.
On the other side:
1) their are more people of prime age to purchase a second home than ever before, and
2) mortgage rates have fallen over the past several weeks and are back to levels seldom seen in my life time, and
3) income and wealth is soaring, and
4) despite the current high price of oil, the percentage of income needed for the necessities of food, clothing and fuel has fallen dramatically over the past 27 years and the sharp declines continue, and
5) as a result of open trade and technological innovation, the people of the world are enjoying an "unknown level of prosperity", and
6) tax compromise that would eliminate interest expense deductions could take another year or two to come to reality, and
7) the past three economic cycles have been stretched and there are signs that this one will be the longest on record, and
8) the real estate bounce after the peak in 1985 reached its secondary peak in August of 1987 but well after the "big economic turn", and
9) the big economic turn of this decade is still an ongoing event,
10) the bounce in real estate could be significant given that next year will be the "year of prosperity" as the country moves through the presidential election cycle.
After the 1985 peak, it took better than 5 years to reach the next trough. The peak of "walking away" from resort property did not occur until early in 1991. Adding 5 years to the 2005 peak gets us to 2010 but, again, this cycle appears to be on its way to the longest in history. The real estate cycle has been measured for hundreds of years as a 17 to 22 year cycle. Adding 22 years to 1991 would project 2013 as the year of the next trough. As you may recall, Harry Dent, who has written a number of books detailing the demographics of the real estate cycle, has already updated his "Next Great Bubble Boom" from the Greatest Boom in History : 2005 to 2009 to: the Greatest Boom in History: 2005 to 2021. Since that rewrite, the cycle has been slow to progress.
One can argue that the business cycle has been tamed. Those who made that argument in the late 1960's rue the day. The second recession of the 1970's, the 1973 recession was one of the worst. More financial institutions went out of business in 1973 than in any other year in history.
The bottom line is that investors should avoid buying resort property for at least 3 more years. My family sold a lot of property in 2004 and 2005 and we should have sold more. We are prepared to lower our offering prices at the beach aggressively if the coming year of prosperity does not flow over to beach home prices. We expect to be totally sold out before the presidential election.
The big crunch is in the last year of the real estate cycle. In 1990, the average return on equity in commercial real estate was negative 40%! The numbers for resort properties is not available but it was probably worse. Those who choose to speculate on the current downturn may do well to buy resort property today and to sell in in less than a year. I believe the risk is too great relative to the potential reward.
Thank you all for asking questions. I hope the above is the information and opinion that will help you.
With the Dow down 342 points, I feel compelled to sent out a pep talk.
You do not own the Dow. The big drop in the Dow is coming from "roll over" stocks. Big oil is having to pay high prices but can't raise its selling price to compensate. Big finance, no longer able to raise the funds to do company buyouts, is suffering the heartburn from prior deals. All the while, Microsoft, one of the biggies of the big cap growth stocks, has made the turn.
This bucking bronco is doing its best to buck off the weak riders. It is time to load up this pack horse with so much weight that he can't even buck anymore. BUY, BUY, BUY!
The mid cycle stock market "bottom" is near. I know how silly that sounds with the broad averages still near all time record levels but it is just the way this cycle is working out. The big fall in the Dow and the market averages will be composed of "old cycle stocks" falling off. The NASDAQ will continue to out perform and then suddenly the US Dollar will start to climb. When the climb in the dollar gets going, the flood of investments will start coming home. Those who are loaded up in international stocks will feel pain and gradually decide that China is fun no more. Foreign investors will join the party. It is going to be a grand old party. Today's drop is big enough to have follow through in the days ahead but don't try to take advantage of short term moves. The next big move to the upside is going to break through long dated resistance. You do not want to be on the wrong side of the next move.
Those who shorted oil futures will eventually prove to be very right but very early. Those who are short must find oil to deliver. They are not having fun. Once the level of futures contracts comes back out of the stratosphere, the oil markets will return to rationality. It is pretty amazing that there has been such incredible levels of speculation that even Exxon Mobil can make no money off the refining of oil to gasoline, the crack spread is too low to cover the cost.
In the past, when I wrote about China's plan to build 40 nuclear power plants, my readers seemed to yawn. Last week, when I reported that China will build an average of one new coal fired electricity plant per week for the next 10 years, at least a couple of readers were impressed. The fact that the Chinese are using electric train engines to haul the coal was icing on the cake. At least one reader found a few extra dollars and purchased shares in GE. In case you are not aware, GE makes train engines, turbine blades for power plants and airplane engines. The company also is one of the top corporate tax managers. The failure of Congress to reform taxes does not hurt GE because it uses every technique know to man to reduce its tax burden. The same reader just took a huge profit on Baidu. He may have sold this one early but you never go broke taking profits.
A new coal train is under construction in Wyoming. The USA will build 150 coal fired power plants over the next 10 years. Yes, I believe a carbon tax should be passed as a way to reduce the tax burden on income and as a way to increase the costs of burning the dirtiest of fuels, however, the energy demands of the world are huge. The passage of a carbon tax would increase the mix of nuclear plants while reducing the mix of coal plants. A lot of coal plants would still be built but the incentive to use clean coal technology would or at least should be a part of the carbon tax law.
It appears that most of these issues could be left as fodder for electioneering purposes. It appears that Charlie Rangel will go along with the suspension of the pay-go rules so that a one year patch to the AMT can go through without the passage of much of the democratic tax plan. In other words, the economy is too strong to be hurt by minor changes to the tax code. THE MOST RECENT YEAR OVER YEAR GROWTH IN PERSONAL DISPOSABLE INCOME WAS OVER 7%! With no additional declines in the price of gasoline, the American consumer is ready to spend, spend, spend.
The Don Hayes group presented a neat chart today (subscription required). It shows the change in wealth by averaging the change in average home price with the change in stock market value. Of course, it showed a huge drop from 2000 through most of 2002. Since 2002, prosperity has returned to America. Even the recent decline in home prices has been off set by the climb in stock prices.
The site uses the story of the Chinese Piano to make a powerful point. The price of new pianos, available from China has fallen so much that there is no longer a market for used pianos. Auction houses, churches and charities have stopped accepting pianos. One auction house recently worked 15 minutes to get a $20 bid just so they would not have to pay to remove the piano. Those who continue to focus on oil and gold to suggest that inflation is still raging tend to ignore the price of goods such as pianos. The common comment by inflation hawks is that the price of the things they buy, including food and energy continue to cost more. The fact is that the average American spent 6.3% of his disposable income on energy in 1980 and this percentage has fallen consistently in all the years hence. The number is now down to 4.2%. In regard to food, the decline has been far greater. If memory serves, the decline was from around 18% to the current level of about 6%. The percentage spent on recreation is close to the mirror image of the food expenditures.
Never before has a piano or thousands of other goods been so affordable. We live in good times. The news is bad but the times are good. BUY, BUY, BUY!
TWO REPORTS TODAY BECAUSE THE BIG TURN IS HERE!
Many investors are holding back because they fear the economy is entering a recession. For me, the economic question is, "Are we in the late stages of the mid cycle contraction or are we in the early expansion phase that follows the mid cycle correction?"
I could easily argue either case because in the late contraction phase the bond market rallies and in the early stage of expansion technology stocks lead the way up. The key point is that there is almost always an overlap in the bond market rally and in the move in stocks. For example, during the 80's mid cycle turn, the bond market rallied from June of 1984 until November of 1986. The stock market rally was slow to crank up but did well in 1985, not bad in 1986 and then exploded up in 1987.
The overlap is already here. The bond market has rallied for months. Indeed the current rally started all the way back in July of 2006. The excitement is in the stock market. The big move by Microsoft today shows that the next economic phase of expansion is underway.
The fly in the ointment has been the price of oil. In the typical cycle, the peak in commodity prices would occur just before the big up turn in stocks. The current blow off in oil makes it look too early for the big upturn in US growth stocks but the weight of the evidence is that the big turn is already here. The blow off in oil is just that. Oil option speculators are making such high returns that they are now giddy with delight. This is a sign of a top. As always, I must state that tops are impossible to call. They are much tougher to call than bottoms which are also almost impossible to call. Yes the infinite is even bigger than we think!
Just because the big turn is here, it does not mean that stocks will go up in a straight line. There is still much uncertainty about tax laws that congress would like to pass. The majority in Congress are hungry for new dollars to spend. The democrats in control desire to shift the automatic tax increase of the AMT to other taxes. The fact is that the government has done well without these new taxes. The 20 million or so taxpayers who have not been subject to AMT will not know the difference if the AMT was repealed. The game of substituting other taxes increases for these tax increases is nothing more than the power hungry wanting more power.
The good news is that the Bush veto will hold. Only minor tax increases will pass this year. I still believe there is a tiny chance that a major reform will be negotiated, but the more probable scenario is that this Congress will leave town as one of the many "do nothings". There has been thousands of hours of talk but so far no accomplishments. Gridlock at the federal level is often a good thing.
Given the likelyhood of no major damage to the economy, large US companies are in the sweet spot. Foreign investors will buy American once the dollar turns. Small profits will be amplified into big profits. There are BIG MARKET PROFITS AHEAD!
It is fun to own the Q's during this turn. Almost every day, a different stock leads the way to higher prices. Today, Microsoft will lead several of the Q's higher. Wow! Microsoft has finally made the turn! Microsoft dramatically outperformed the market from 1986 until 2000. Microsoft is one of those "almost super rich stocks for me". I came very close to "loading the boat" with it in 1986 and would have made 10's of millions of dollars had I done so. Since 2000, the stock has dramatically underperformed. The turn is here.
After beating the estimates and raising the guidance after the market closed yesterday, the stock is up better than 11% in pre-market trading. Of course, companies like Dell, Intel and HP will be pulled along for a nice ride. The boom, boom, boom of the world economy means that billions of computers will sold during the coming prosperity phase of the business cycle. As we all know, it costs Microsoft virtually nothing to make another copy of VISTA. Billions of copies will be sold. Of course, even more billions of smart phones and games will be sold.
TURN, TURN, TURN
This morning on CNBC, John Snow repeated one of the great false beliefs of the TV pundits. Those, with the mind set that a recession is surely near, find it easy to suggest that the consumer is about to stop spending because he is no longer able to use his home as an "ATM Machine". We have been hearing this garbage for three years or more and it has not happened yet. It will not happen because it never was the case. You cannot stop doing something if you never started doing it in the first place. Even at the peak of the home refinancing binge, only 9% of home borrowing went to make other purchases, such as SUV, and most of these purchases would have been made anyway. The home was wisely used to lower the cost of financing but in only a relatively few cases was it used to expand financing beyond the buyers capacity to repay.
The sub prime story also continues to be used to suggest things that are simply not true. Of those who bought homes with no money down, 85% of them will keep making the payments and they will have been converted from renters to owners. Of the other 15%, the opportunity to own has not turned into the blessing that it could have been but a renter who temporarily "owns a home" with no money invested will lose no equity when he loses his deed. When politicians cry about the poor people who are losing their homes, they imply that consumers are losing billions in equity to greedy and evil hedge fun managers. What really happened was that these aggressive investors borrowed money at very cheap rates of interest to benefit by lending these funds to poor credit risk buyers. The aggressive investors made out like bandits during the good times. If you borrow $95,000 at 1% interest and lend $100,000 at 4.5% (including your $5,000 equity) your annual net interest income is $3,550 or 71% return on equity. Those who are losing their $5,000 equity right now have in most cases had several years of $3,550 net earnings on that same $5,000.
The bottom line is that this story is being used to put fear into the hearts of investors when it is time to be an aggressive investor.
SO FAR, I HAVE BEEN PARTIALLY WRONG ABOUT OIL
The price of gasoline has come down as I suggested it would but the raw commodity has not yet rolled over. Who would have guessed that after 8 to 10 increases in interest rates and after 8 to 10 increases in reserve requirements, that China would continue to grow so fast? The good folks at GAVEKAL research wrote a good book titled "THE END IS NOT NEAR" but who really believed those guys? The GNP of China has once again grown by better than 11%. Where is the clearing price? Of course, if I could predict the precise answer to that question, given that no one else can, I would be a multi-billionaire. We really should think of China like a great growth stock. The current price of shares is very high but there is still great potential for growth. Still, given my belief that the US dollar is about to climb and that within 4 or 5 years high returns will be found in fewer and fewer of the biggest companies around, I am not excited about investments in China right now.
A major oil supply company executive says that there are plentiful supplies of oil. In the liquid market, he can buy all he wants and then some. He says financial speculators are jumping on all news of potential international conflict and bidding up the price. He points out that the skirmishes between Turkey and Kurdistan are not even close to where the oil flows.
We are now at such an extreme level that the break will be like the bursting of a damn. The speculators will not be able to get off the long side fast enough. It is my belief that a deal with Iran is brewing. Once a deal is made, about $30 per barrel in risk premium will fall out of the price.
Keep in mind, the turn in Microsoft is a part of the same process of the turn in oil. The substitution effect includes enormous spending on electronics as a way to reduce dependence on oil. The USA and many other countries have dramatically reduced our use of oil over many years. China is investing heavily to reduce its dependence. Some of these investments will take years to complete but many others are already producing results. Indeed, China is in the process of building 30 nuclear power plants which will replace oil in many a manufacturing process. In the USA, oil usage declined .7% during a year of dramatic export growth. Pundits who say there is no evidence of reduced demand are not looking at the total picture.
The good news is that the world has been hit by the blows of higher oil and taken the punch well. One key ingredient has been the success of economic science. The central bankers have not dried up all the money to stop inflation and thus thrown the world into recession. Instead, money has been available and it has been used to "go around" the "oil problem". Billions of dollars are being spent on billions of projects from coating windows with film to sun powered algae farms.
Those who use high gasoline prices as an example in their constant complaints about inflation do not want to acknowledge that the cost of manufactured goods continues to come down. When China buys oil at ever higher prices but produces end products for less than their prior prices, the net result is not inflation.
CHINA MUST SLOW DOWN
Sooner or later, growth in China must slow. The combination of the rising Yuan with higher interest rates and higher reserve requirements will ultimately do the job. A slow down in growth from 11% to 6% would be a huge event. The China stock markets could be hit very hard by such an event. Always remember that the price of shares is set by the value of the future earnings discounted to present value. If growth slows, future earnings slows and prices fall.
BUY USA, BUY USA, BUY USA GO MICROSOFT GO!
Time is running out on Iran. A long list of new sanctions will be imposed on Iran today. Any company that does any business with the Iranian Revolutionary Guard will face repercussions from the US. I believe a deal is near.
Time is running out on Congress. Hank Paulson says that the tax refunds due 50 million Americans will be delayed next year if the congress does not pass the AMT patch by November 7. Rangel will present his list of tax increases tomorrow. The bill as written will go nowhere. Could this game of chicken end with no AMT patch? I doubt it.
Time is running out on terrorists in Iraq. The death rate in Iraq continues to fall. The citizens of Iraq are no longer willing to harbor terrorists. Even the Kurds are showing signs of helping with the PKK problem. The government needs to compromise on energy revenue distributions and a few other things and many more American troops will be withdrawn.
Time is running out on the commodities bubble. A Texas energy economist estimates that $30 of the price of oil is risk premium. Just the hint of a settlement agreement with Iran could cause the price of oil to plunge.
The FOMC will meet next Wednesday. Financial Futures contracts suggest there will be another 25 basis point cut. Recent data suggest the cut will be 50 basis points.
This business cycle has been a record breaker. No one would have predicted a strong economy in the face of $90 oil. Lower oil prices, lower interest rates and relative peace in the Middle East would be a powerful market stimulator. Hold on to your hat! BUY, BUY, BUY
Big money turns are happening all around the world. For example, Cisco just purchased a WiMax company. Up until now, Cisco was not a player in the WiMax market and did not feel the need to be there. The problem for Cisco is that WiMax is proving to be the key to the rapid coverage of huge areas of Brazil, India, China and other developing nations. The growth in telecoms and Internet services in developing countries is huge and quick because there is no competition from a previously built fixed wire system.
The standardization of WiMax protocols is causing the system to spread at a rapid pace even in the USA. Sprint and ClearWire are just two of the early USA leaders. Google has inked a partnership deal with these guys and because Google has purchased billions of dollars of fiber optic capacity and telephone nodes, the speculation continues that Google could build out a nationwide WiMax supplemented Internet/Phone system in a hurry. My guess is that the next big Google move will be to start a VOIP system. Much of the system is already in place. Adding the 700mz TV spectrum, the stuff that goes through walls, would give Google the ability to cover the whole country quickly. The big phone companies are dug in deep and a country wide network would cost billions so several partners may be involved. Even Apple has expressed an interest in buying spectrum. Google will attempt to remain the software provider and let others sell the hardware and the service.
Since Google became public, the stock has risen from $85 to $650+. During that time, Apple has gone up twice as much. I believe Apple is over valued but it certainly has momentum. I continue to hold shares in accounts and inside QQQQ, QLD and other funds. If I had enough money to buy all of Apple, I would buy Google instead and invest the other half in something else. This statement may sound silly but I have used this logic to great advantage in the past. For example, when I suggested buying CAL at $6 per share, I wrote that LUV at $17 per share was dramatically over priced. I said that if I had the money to buy all of LUV that I would buy CAL, AMR, UAUA, DAL and NWA instead and invest the remaining 9 Billion Dollars elsewhere. Since that time, LUV has gone nowhere and CAL has gone up from $6 to $36. Even today, those who do not understand the situation are over paying for LUV while the growth in international traffic is huge.
Back to the big mobile turn, Google's purchase of Jaiku shows us once again just how much change is in store. Jaiku has the potential to automate everything from your address book to your photo album. It is kind of a Twitter on steroids. Give your teenage child a Jaiku phone and you will know his location, to whom he is talking, see the world from his camera lens and keep records of all his activities. It sounds like a spooky big brother deal but those who like it are crazy about it. Coworkers have found Jaiku to be a huge time saver; notes and contacts are automatically shared across the network. Husbands who stop for groceries access the list prepared by their spouse and automatically leave the message that the shopping has been done. Put a Jaiku on a child and he will not get lost for long.
The big turn in the Internet is that it will go mobile big time over the next several years. Buy the QQQQ's and hang on for the ride. Ideas are coming hard and fast. I did not buy more VM Ware when it was spun off from EMC but I have enjoyed the ride since EMC still owns 86% of the stock. It is impossible to see which of the big firms will produce the next winner. Ebay is babying another fascinating purchase and Amazon is selling high dollar goods rapidly while the pundits keep talking about the consumer being tapped out.
BIG, BIG, BIG TURN AHEAD
Understanding what most others do not understand is the path to BIG MONEY. The REALLY BIG MONEY TURN is close at hand but most investors expect the dollar to continue to fall.
The really big money turn is that the value of the US Dollar relative to most other world currencies is about to climb rapidly. The brief history of the dollar is that it was very weak in 1986 and again in 1995 just before those mid cycle turns, once the dollar turned, it climbed and climbed and climbed some more. In the latest cycle, it peaked in the year 2000 just as the average American went "all-in" during the Internet bubble. Since that time, the dollar has fallen and fallen some more and it is now at about the same level as it was in 1995. In the year 2000, one could buy a Euro with a dollar and get back about 20 cents in change. Today, one needs $1.42 to buy one Euro. The consequences are huge. The reason US manufactured exports grew at the huge rate of 16.1% over the past year is because our goods are now very cheap. If you do not believe that the dollar is down, take a trip to London and be sure not to forget your American Express Card. The exception has been the Japanese Yen. Japan is the other major exporter of capital goods. China, on the other hand is at the other end of the see saw. China is the ultimate labor intensive goods producer. Even so, in the past year, the Chinese Yuan has appreciated against the dollar.
How many .27 basis point interest rate moves are enough to slow this country down? The Chinese government is tightening the screws. The coming slowdown in China will not be a bust. Still, if growth were to be cut by half or two thirds, the demand for commodities will be curtailed. The big turn in commodity prices is at hand. Prices will not collapse but the relative performance of high tech companies which use commodities will far out do the performance of the resource companies.
THE BIG TURN
The dramatic slowdown in the US housing market, which has taken down the price of lumber and which is pushing down of the price of other materials, is giving US Central bankers the motivation to cut short term interest rates. A cut in short term interest rates will stimulate the US economy. The strong growth in the US will increase the demand for dollars. As the dollar increases in value, it will create its own demand for more dollars because foreign investors are paid a bonus when US investments go up in dollar terms. The US and Japan make the most sophisticated capital goods products. Now that the recovery is over, it is capital goods producers that will benefit from future economic growth.
During the past 5 years, the carry trade has been a big winner for the big investment banks and the hedge funds. These investors borrowed Yen at very low rates of interest and swapped for other currencies in order to earn higher rates. The problem is that the big turn is also here in regard to the Yen. The Yen is the other currency that will appreciate dramatically over the coming years. The big turmoil in the financial markets for the past couple of months have been the result of the unwinding of the carry trade. The sub-prime mess is not nearly as big a problem as is perceived. Indeed, the largest of all mortgage lenders, Country Wide, announced today that it will provide refinancing for sub-prime loans.
Let me put it this way, on my way around Winston-Salem today I counted dozens of commercial projects underway. The construction includes everything from office buildings, manufacturing facilities, health care facilities, bridges, roads and restaurants. Yes, housing construction has fallen 48% !!!! since the peak of January 2006, however, even now housing construction is about double the units that were built during the 1993 slump! Adjust for size and features and the down turn is not nearly as big as it looks. About 35% of new houses being built today have three car garages, extra baths and even home theaters. I visited a three-bedroom three-bath Parade of Homes property this past Saturday and was surprised to see that it had three car garages on either side. In my book, it takes a boy with toys to want a 6 car garage home. Now, do not tell me that a recession is at hand. Housing construction has fallen dramatically but the current 6 and a fraction % home mortgage rate makes homes far more affordable than the last time oil prices were at $80 per barrel, at that time mortgages were priced at 15%! With more people at the prime age to upgrade to a larger home, I expect the housing market to turn up strong within a few months. TURN, TURN, TURN, TO EVERY THING THERE IS A SEASON!
THE BOTTOM LINE IS that investors should recognize that the coming turn in the dollar will mean that US stocks will generally out perform international stocks. It is time to under weight international stocks. The second half of the business cycle is a time when big cap growth will generally out perform small cap value. By the end of the cycle, the big mutual funds will be crowded into fewer and fewer big cap stocks. In other words you can get a jump on the crowd by buying IBM and GE. You will not make as much with these in the short run but they will keep on moving up for several years.
YES WHAT I WROTE YESTERDAY ABOUT AT LEAST TWO US PIPELINES IS TRUE
There is now enough new tar sand oil flowing from Canada that two pipelines that historically carried oil from the Gulf Coast to the mid west have been reversed. This situation will continue until the large refinery in Illinois and the large refinery in Indiana are upgraded, the permits have already been approved! If the new refinery planned for South Dakota is constructed, it will be fed by yet a new pipeline from Canada. This new Canadian oil will be a significant factor among many that will cause the turn around in the price of oil.
OPEC having pledged to increase production by 500,000 barrels per day effective November 1 has jumped the gun. High oil prices are apparently causing cartel members to cheat by several hundred thousand barrels per day. In addition, production increases keep coming from Angola, Canada, Brazil and a large number of places that are hard to spell or hard to find on a map. Another place where the pipeline flow is being reversed is between Kenya and Uganda. Once again this is probably a temporary condition. After big discoveries in Uganda, several of which are just across the border from Kenya, Kenya is eager to get in on the goodies. A Canadian major has just signed contracts to explore the area. A few billion barrels here and there and you eventually get to that marginal price break.
The cross currents are incredible. The US congress is about ready to give up on its latest and craziest energy bill. Yes, if the bill were to pass, the wealthiest of corn farmers would get about 100 million dollars more in subsidies. This time the subsides would be paid for by increasing the tax on oil companies. Duh! we need more oil so lets tax the production of it more? The good news is this bill is another that cannot get past a Bush veto. In the meantime, the UAE government has issued $2 Billion in bonds in order to help with its purchase of Canada's Prime West Energy. The turn is certainly here when a middle eastern country is borrowing money to buy oil assets! I suppose the bonds were sold at a discount to avoid the payment of interest but the move is still significant.
PROGRESS IN IRAN
It is hard to see the progress toward a solution to the Iranian "problem". However, the US, Russia and Iran are currently doing a triple tango. The US has signaled that it will delay the construction of the European Missile Defense System if Russia will help stop the Iranian Nukes. Russia has signaled Iran that it will support Iran militarily if Iran will stop making the hard dangerous stuff. The leadership of Iran has done the a two step. The grand leader has undercut the power of the public leader. Stay tuned. A settlement would reduce the oil risk premium by $10 to $20 per barrel!
THE TURKS AND THE KURDS ARE OUR FRIENDS.
The war in Turkey is now 23 years long. More than 30,000 Turks have been killed. Most Americans do not even know about the war. I suspect that the recent big public brouhaha was carefully timed for political and economic reasons but this does not matter. The key point is that peace is finally a possibility. The semi-autonomous region of Kurdistan is enjoying relative peace and prosperity. Oil producers from around the world are beating a path to the countries door. The leaders of Iraq have quickly "outlawed" the rebel PKK factions that have been fighting the Turks. Iraq will join the Turks in putting down the rebellion. Of course, some of the Kurds within Turkey will continue the fight but the pressure to end the madness is coming from all sides. Turkey and Kurdistan are both middle east success stories. Turkey has a large and growing economy. In a show of support, the US has given Turkey several surplus war ships.
By the way, the source of much of the international information is Stratfor. You should sign up for a trial subscription if you are interested in international affairs. Some of the tech information is from GigOM which is a free Internet service.
CONGRESS CONGRESS CONGRESS
The democratic congress continues to find itself in a very deep hole. The problems keep piling up. Yesterday, Hank Paulson wrote a letter saying how important it is to get the AMT fix done promptly. If Congress does not act very soon, about $75 Billion of tax refunds to the public will be delayed. The cut off for reprogramming IRS computers is upon us. Last year, a few refunds were delayed and the recipients were not happy. The problem is that there are currently about 20 million people effected by the AMT for the very first time. In addition, there are other tax breaks that must be extended as a part of the same bill. Trent Lott and John Kyle are starting to have lots of fun while pushing democrats to act.
The latest proposal is to allow the democrats to suspend their pay-go rules, provided that they will give Republicans equal amounts of tax breaks. In other words, the democrats can patch the AMT for one year to the tune of about $65 Billion if $65 Billion of the Bush tax cuts are extended. Oh what a tangled web?
Democrats have vowed to try to pass the SCHIP $35 Billion increase one more time. The interesting thing is that if they are successful, they will need to find about $100 Billion of tax increases to offset the combination of the AMT and the SCHIP! Oh what a tangled web?
The pending bills include approximately 13,000 earmarks. The total value of these earmarks is around $9 Billion Dollars. This is enough money to double fund SCHIP this year. It really seems that the democratic congress is between a very hard rock and very hard place. As a person who believes that free trade is the foundation of prosperity, it pains me to know that the subsidies for wealth corn farmers is the reason that other nations refuse to purchase our agricultural products. I can't blame the other nations but the actions of republicans and democrats in congress to hurt the nation in exchange for political contributions from the special interest is shameful.
Believe it or not, the federal budget that should have been passed well before the start of the fiscal year on October 1, may be passed as an omnibus bill around November 16; not the way to run a railroad! The process for passing an omnibus bill is for a relatively small group of people to sit down and edit thousands of pages in the matter of a few days. The final vote will be made by 535 people who have not even read the final product. Shameful indeed.
Good News Good News Good News
I do not want to end on a negative note so here are a few pieces of good news.
1) The moderate leader Bhutto is still alive. We will all know that change is in the air if this woman is elected to lead Pakistan.
2) Real wages in the USA have increased at an average of 3.7% for the past two years. Let the good times roll! The prosperity phase of the business cycle is at hand!
3) While there will be lots of "bad economic news" surfacing over the next few weeks, this "bad news" is good news as it will confirm that "Big Ben" will cut US interest rates again. The average return of the average stock has been 19% in the year after the last 8 first interest rate cuts. That 19% figure hides the rotation effect. Many stocks will rise 50% or more over the next year.
4) CAL signed contracts today that will save the company another 100 million per year. UAUA soared on great earnings and on its progress toward outsourcing high cost service. UAUA is also one of the airlines that is considering selling its frequent flier program.
BUY, BUY, BUY!
Today's news is that the earnings improvement in the airline business continues. Today's good report by AMR followed the prior good numbers delivered by DAL and NWA. AMR's profits are up from 6 cents per share last year to 74 cents this year. Projections are for continued improvement even though the company is projecting higher fuel costs.
AMR has decided not to prebook all the middle seats. The idea is to provide space for those who might be hit by canceled flights. In other words, AMR will voluntarily shrink its capacity. This action will lead to further price increases and an improvement in the travel experience of the passengers. In the meantime, purely domestic carriers, such as Southwest Airlines are getting hit especially hard by higher fuel prices. Thus, LUV will lead a series of fare increases. The average fare is still 11% below the 2000 peak. Adjusted for inflation, fares are 24% below the prior peak. With continued growth in demand, you can expect significant fare increases over the coming years. International carriers, such as CAL, have already raised ticket prices on long flights to offset higher fuel. International carriers have used contract carriers to go toe to toe with domestic carriers. They are able to match price while providing continuing service to other destinations and while offering better perks such as airport clubs and frequent flier programs. Last week, AMR lead a round of fare increases on non domestic flights and this week LUV is the leader on the next round of bumps.
Today, analysts have used the numbers reported by AMR, DAL and NWA to adjust their CAL estimates. The biggest adjustment came from the most positive analyst at Credit Suisse. The result is a penny lower consensus of $2.17 and a reduction for 2008 to just below $5. The reduction to next year is part of the "game" of letting this improving industry build on its track record of beating analyst estimates. In an earlier report I detailed the high average percentage "beat" by CAL.
Over at Legg Mason, Bill Miller continues to manage a few billion dollars well. One of his funds is better has an allocation of better than 7% in airline stocks. He owns all the majors with the exception of CAL. As you know, I believe getting the sector right is 90% of stock market performance. I am confident that Bill's fund will do well.
FENCES, FENCES AND MORE FENCES
The Great Wall of China was built to keep out the bad guys. The Berlin Wall was built to keep in the good guys. The proposed Mexican Wall will be to keep out the good guys. Only the Great Wall was constructed with common sense in mind but the world has changed just a little over the centuries. Thousands of daily airline flights "over the top of the wall" make today's fence the least wise of all.
TECHNOLOGY TO THE RESCUE
A mad rush is on to develop a new electronic fence. Boeing will report results in a few weeks. The push is to develop a new border security plan before the final compromise budget bills are passed by the congress. It is estimated that this electronic fence will cost about 8 billion bucks, double what has been budgeted for a standard fence that would not cover the entire border. I expect the final version to ultimately cost 6 or more times as much but what is a few billion to the federal government?
Mark my words, Congress knows that with public approval ratings hitting near or in the single digits, the pressure is on congress to pass all 12 of the appropriations bills. Because the must do something about the AMT, I expect that they will be willing to compromise with Bush to pass significant measures.
One of the potential "big wins" will be a last minute compromise on immigration reform. It seems like a long shot now but something big is coming down the pike. The fiscal year began on October 1 and even now Charlie Rangel, John Dingle and others are dragging their feet while the bureaucrats who report to Hank Paulson are engaged daily in negotiations with the staffs of congressional leaders.
FENCES MIGHT FALL! The Mexican Wall might be good news in the sense that we sometimes must swallow "silly pills" to get the good stuff done. As you know, the compromise I like is the joining the proposed 10/25% flat tax with a 50/50 cent carbon/gasoline tax.
Congress has the option of leaving town as a "do nothing congress" with their tails between their legs or as the congress that saved the world from global warming, the congress that save the middle class from the evil AMT and, perhaps even the congress that saved the nation from the horrors of Mexican workers and terrorist sneaking across the border.
No matter what the outcome in congress and no matter the current negative focus of the media, the world economy is on a roll that will pick up the pace in the coming year. IN CASE YOU HAVE NOT HEARD, WAGES HAVE GROWN AT BETTER THAN 8% OVER THE PAST TWO YEARS WHILE UNEMPLOYMENT IS RUNNING AT BELOW 5%.
When talk of Jimmy Carter days surfaced on Fox TV, Brit Hume dryly asked if Jimmy Carter was the President who left us with mortgage rates of 21%, inflation rates of 14% and unemployment rates of 9%? When the interviewer asked Mr. Carter what he would have done differently he said he would have sent another helicopter into Iran during the hostage crisis. Folks, by next summer, the majority of Americans will have begun to recognize that "times are good". The change in sentiment will give stock PE ratios a boost.
BUY, BUY, BUY!
At the turn of the twentieth century, about 70% of all Americans live on a farm. Today, 2% live on farms. In China, there are a billion people ready to leave the farm if work can be found. What will all those people do?
The poor are not concentrated in China. In Asia and Africa there are billions of people who live off the equivalent of $2 per day. Suddenly, the cell phone is changing their lives. Poor "peasant farmers" now scrap together $20 or so to purchase a used cell phone. They pay a high per minute usage charge, but they are extremely frugal with their minutes. Indeed, they prepay for a few minutes or even for just a few seconds of time. They make very short phone calls or they send abbreviated text messages.
When I was in the 7th to 10th grades, I stayed after school for extracurricular activities such as football practice. When practice was over, I would start walking toward home which was four miles from school. Before starting to walk, I would send a "flash" message to my home. In those days, the pay phone across from the school required a nickel to make a 3 minute local call. To save the nickel, my siblings or I would call our home (party line) number and let the phone ring less than one complete ring and then we would hang up. Since the call was not completed, our nickel would come back. In later years, a prearrange "flash definition" might mean that a family member was leaving the Atlanta airport which meant it was almost time to drive to the Greensboro airport to pick up the traveler. A "flash" would also be sent upon arrival back at college.
Going to such extremes to save a nickel on a local call or a dollar and a half on a long distance call seems silly today but the $1.50 long distance call was equal to three hot, dirty and hard hours in the tobacco fields for the older kids and 6 hours of handing up by the younger kids. My oh my how do things change!? When my Dad was a boy, he worked in the tobacco fields for 12 cents per day. It is hard to believe but true that millions of Americans were as poor in the 1930's as billions of Africans are today. I am thankful that the "flash" has come to Asia -- Africa.
Business Week magazine reports that the cell phone is literally saving lives. It is also having a huge impact on the economies of the poorest of nations. One very short message might save a peasant farmer a 20 mile walk to a market or it might encourage him to head to the market where his particular goods might be in short supply. Phone transfers are even being used to send money. Cell phone communication beats banging on a drum any day of the week. Usage is surging and profits are substantial! While each phone generates only a few dollars of revenue per year, the total revenues are substantial because there are billions of phones. The number of cell phones in under developed nations just went over the 3 billion mark and the 5 billion mark is expected to be reached in 7 or 8 years.
WE ARE LIVING THROUGH EXTRAORDINARY TIMES!
Those who believe a mile US economic slow down is going to turn into a world wide recession or depression are ignoring the most tremendous "boom" in world history. While this boom has resulted in a temporary strain on the worlds resources, it has also resulted in enormous benefits from free trade. The productivity gains in many cases are by factors that are almost beyond belief. Can you imagine a three letter text message saving you a 20 mile walk through a rain forest?
The citizens of the USA are benefiting greatly. The demand for our goods and services is soaring. The annualized rate of growth of US services is currently running at better than 13%! The rate of growth in exports of goods is running at better than 16%! Jobs in America are plentiful and unfortunately a large number of excellent but "illegal citizens" are in the process of being thrown out of work in America. I am still hopeful that Congress will pass an immigration reform bill before essentially closing down for the 2008 elections before Thanksgiving. So far, the only "progress" being made is to fund a $3 billion fence that will not do diddle squat.
Exports from America will continue to soar because the world economy is super strong but all the while the really big growth in jobs and incomes will occur over seas. It is hard to believe but America is no longer the land of the free. Today, the USA taxes American businesses at higher rates than do foreign governments. One problem is that in America, we tax business profits when they are made and then we tax them again when the owners of the business shift money from one pocket to the other through the payout of dividends.
TAKE ADVANTAGE OF THE WORLD WIDE BOOM!
All of those billions of phones require computer chips, communications networks and knowledge to operate them. Powerful rifle shot ads will be "pushed" through billions of phones and Google will send a substantial number of these ads. Hardware, software, educational facilities and airlines are just a few areas that will see benefits from the massive build-out that is underway. Google has opted to partially fund a new under the Pacific fiber optic cable in exchange for wholesale priced usage. The name for the number of bytes of information that will be sent is some thing like Tera bytes. The total amount of information being sent and received will grow at exponential rates for many years to come.
BEARS, BEARS AND MORE BEARS!
Stock Market Bears are more than plentiful. One of today's problems is that market players, myself included, tend to look back at history to discover a "similar time to the current time"; there has never been a time like this. Even the industrial revolution does not compare. It took a few hundred years for the industrial revolution to creep all the way around the world and it never did make it all the way. The information revolution has spread like wild fire. The powerful thing is that it is a powerful dis-inflationary force. I think the bears would have an easier time understanding if they would focus on the huge productivity gains instead of on the inflation of food and energy. Food is now a very small part of GNP and the amount of energy used per dollar of GNP has fallen dramatically. As I have said before, the stone age did not end because man ran out of rocks but because he learned to use metals to his advantage. In the same way, we will never run out of oil. Indeed, the planet earth is a carbon sink that is experiencing net growth in resources daily.
ONE BULL AND ONE BEAR REACH THE SAME CONCLUSION!
Bill Gross is the most famous bond investor on the planet; bond investors are by nature pessimistic. Don Hayes is an optimistic and successful growth stock investor. Both men believe that short term and long term interest rates are going to fall over the next year or so. Bill says that the Fed Funds Rate will drop to 3.5 to 3.75% because the USA will experience an economic slowdown. Don Hayes offers the same interest rate forecast but his reasons are largely what I have detailed above; strong gains in productivity and low prices because of technological advances and free trade.
I am mostly in the Don Hayes camp because I believe the stock market will soar by 30% or so over the next year. However, I am not convinced that interest rates will fall so hard. I see low inflation but also very strong economic growth. Certainly, the current quarter will be a bit below trend as the "hit of the credit market freeze-up" and the housing building slump will have an effect. However, by the second and third quarters of next year, we just might see 5% real growth. Even if inflation is down to 1.25% or so, the long bond will likely be trading at 6.25% or better. Such "high rates" might even become a part of the Wall of Worry that the stock market will climb.
BUY BUY BUY GROWTH STOCKS, SELL SELL SELL BONDS!
It may be patriotic to BUY AMERICAN, but it is fair to buy from the low cost producer. By doing so, the poorest of the poor will get earn food for their families and Americans will spend their time more productively. It was psychologically hard for American families to leave the farm and today it is psychologically hard to believe that America does not need manufacturing jobs. The fact is that goods are plentiful for a fair price. Be happy that you do not have to "flash" a phone call to save a penny and be kind to those who must!
Many thanks to those who respond to my emails. It is humbling to know that you took the time to read my words.
INFLATION:
I have used the example of newspapers and magazines to show that some prices are falling from something to zero; I could have used long distance phone calls, transferring money or maps instead. I personally read many articles from many magazines online without buying a subscription to those magazines. I use a map that plots where I am, calculates the distance and time to my destination and talks me through the turns. Using today's technology, the distribution costs of these services is almost zero. Therefore, the publisher can offer the services in exchange for goodwill or for advertising space.
At least one reader believes inflation is a lot worse than I. This reader still subscribes to his local paper and he notes that his cost of food has soared. One issue this raises is that we each have our own personal inflation rate; the national numbers are the average for all consumers. The consumer who is an early adopter may have inflated his costs when he waited in line all day to buy one of the first iPhones. He paid a high price in time and money. Another consumer can buy today for a substantially lower price. In very short order, the first iPhones are going to be relatively obsolete. They access the internet at a very slow speed relative to what is already available on other networks and extremely slow relative to networks that will be built over the next several years. The price of the next great innovation may be sold at a much higher price but that will not be an inflated price. The fact is that the price of new inventions start high and typically fall and fall some more. The first Xerox machines were leased because few businesses had $100,000 to spend.
Food is important to all of us. Very poor people spend the great majority of their income on food. The sharp run up in the price of food in recent months has caused many very poor people to go hungry. In America, the percentage of incomes spent on food has fallen for as long as charts can be found. I recall a chart from a year or so ago that compared spending on recreation to spending on food. The chart made a big X. The average American spends less than 6% of his income on food. He spends many times as much on recreation. Broad measures of inflation capture the price of all ski lift tickets purchased and the price of all hamburgers purchased.
The typical reaction to the preceding statement is to say, "Oh, so those who can afford a ski lift ticket are the ones who are not seeing inflation." In fact, for the great majority of people, this is exactly wrong. It has been the cost of services, most often purchased by the wealthy, that have gone up the most in price. The inflation rate for a college education, for a heart operation or indeed for a ski lift ticket, have all climbed many times more than the price of a hamburger. One of the wags at GAVEKAL Research quips that "it has never been so expensive to be rich."
Biased people can "mine the numbers" to always show that inflation is better or worse than it really is. We all know that one can prove anything with statistics. The all time best and most consistently correct inflation forecast has been supplied by the bond market. The FOMC likes to look at the implied 5 year and 10 year inflation estimates derived from the spreads on 5 year and 10 year TIPS bonds versus standard 5 and 10 year bonds. Old timers like to rely more on the structure of the treasury market. In other words the willingness of investors to buy 5 year treasuries paying 4.6% says a lot about the markets inflation expectations. Don Hayes uses the 10 year treasury rate chart, to plot inflation a few months into the future. The stats are that this method gives off an r square close to 90! In case you have not noticed, the ten year bond has stayed in a tight range for several years and is currently closer to the bottom of that range than to the top. The inflation risk in today's market is very moderate.
SLOW DOWN OR ECONOMIC RECESSION?
Many a coincidental indicator shows that the world economy is slowing down. Weak economies are most often accompanied by declines in inflation rates. As I noted yesterday, even the decline in interest rates that occurs during slow downs or recessions is by definition a lowering of inflation rates. The USA holds the trump card! Many pundits have "talked-up" their international portfolios. The common theme has been that the world economies have been stronger than the US economy and the stock markets have out performed. The key words in the prior sentence are "have been". Smart investors do not invest in what has been but in what is likely to be. What is likely is that the economy that has the strongest currency is actually "set-up" to suffer the worst during the slow down.
2000 EXAMPLE
In the year 2000, the US dollar was very strong. In 2000 and 2001 the USA was the only major country to suffer through a recession. Yes, 9/11 influenced the US economy but the economic down turn was well before September of 2001. Right now, numbers are starting to flow showing a slow down in Europe. The weak US dollar is a wonderful blessing in these circumstances. US businesses can easily compete with others because the exchange rates with many other nations gives us a strong boost. The great news is that the slow down will lower short interest rates more. We might easily see another 50 basis point cut by the FOMC before year end and with new great prospects for strong growth in the USA we could see the dollar climb out the roof. The big money is made by buying near a currency bottom, just like buying a stock near the bottom.
WHICH STOCKS?
This morning I read a story about a German oil drilling company that has hit another oil gusher in Libya. The company, RWE, has moved from $19 to $88 over the past 5 years. Late last year, it briefly traded above $90 per share. The price had settled back down to about $80 before the gusher was hit. I hope you can how the fact that the price is lower now than it was last year is a signal. The time to buy this stock was 5 years ago. The exact best time to sell the stock was last year when it was trading above $90. The momentum is gone. Those who moved from energy to technology when this stock was at $90 have done well.
The total investment process required to "catch up to the new price of oil" still has many years to play-out. We know many things about the way this process will be completed. For example, we know that Shell and the Saudi will spend $7 billion to more than double the capacity of the Port Arthur, Texas refinery and we know that Kuwait has increased its budget on its new refinery to over $14 billion. We expect that the Port Arthur upgrade to be completed in 2010 and we expect the Kuwait refinery to start-up in 2012. Others refineries will start-up before and after each of the above. While it takes a lot of faith to spend $14 billion on a refinery that will not start until after scores of others have been completed, it does not require faith that the price of oil will stay above $50 per barrel.
The existing Port Arthur refinery has paid for itself many times over at much lower after inflation adjusted prices. It was started way back in the Spindle Top days. It has refined billions of gallons of oil and it is being expanded so that it can refine even billions more over the next many, many years. The investment is being made because the investors expect to make better than a 15% gross return on their investment. They can do that even including a forecast of oil falling back below $50 per barrel. Long term investors can certainly buy oil drilling stocks, hold for decades and make solid returns. However, with the crowd pushing oil stocks hard, you should expect to see these stocks under-perform the market for the next 5 to 10 years. Innovative companies, the ones that are generally finding ways to do things while using only small amounts of energy will do well. Transportation companies that consume large quantities of fuel will also do well.
BANKRUPTCY AT AMERICAN AIRLINES?
After I wrote that AMR faces tough union negotiations in the weeks and months ahead, one reader mentioned that a pilot friend believes AMR is about to be forced into bankruptcy. I strongly disagree. AMR made it though a very difficult time, after 9/11 without filing bankruptcy. Since that time, the company has dramatically reduced its costs and dramatically improved its balance sheet. It has even survived the spike in fuel prices and it will earn at least 65 cents per share this quarter after paying an average of $2.11 per gallon of jet fuel. A few pennies decline in the price of fuel, not due to a recession but due to growing supplies and demand destruction, would boost earnings by perhaps dollars per share.
The big argument being made by the pilots union is that they gave up 30 percent of their pay when it was necessary to save the company from bankruptcy and they now expect to get this pay back. There are at least a couple of big ugly flies in the soup! After AMR pilots "volunteered" to cut their pay, other pilots at other carriers gave up an even higher percentage of pay. In several cases, such as DAL and NWA, the negotiations to reduce costs were held while the companies were in bankruptcy. In the case of CAL, the total give-backs of all union employees were more than a billion dollars per year. The other big fly is that even after the give backs, the AMR pilots are very well paid. So, what you have is a situation where the pilots want 30% raises that cannot be supported by the current market.
It so happens that just this morning the GM -- UAW deal was completed. Thirty years ago, it would have been incredulous to suggest that one day GM workers would give up their company paid health benefits or to accept a contract with no annual cost of living increases. American consumers can rejoice. We have been paying an average of $1,500 in healthcare benefits each time we have bought and American car. Many who can not afford health insurance have paid for it for others.
It is a totally new, global, world in which we live. AMR pilots face the same problem as the GM workers. The fastest growing airlines, which are not based in the USA, expect to dramatically increase their flights to and from the USA. Without doing the searching to prove the point, I am confident in saying that the senior pilots in China do not earn $170,000 per year for 30 hours of work per week. $5,500 per hour plus benefits is not a bad gig but only a very small percentage of the worlds pilots get that rate. Ironically, if the public were willing to trust highly reliable electronic systems, which are much more dependable than the average pilot, the pilots would be not needed at all. Ouch! Believe it or not, in the not too distant future, the competition for travel will include 100% auto pilot crafts. Of course, the politicians would have to stand aside for this to happen and when it does happen it will start with small planes at remote locations.
THE NEAR FUTURE
The new satellite based air traffic control system will be a blessing. It will cost a lot of money but the investment will cut the operating cost of the carriers while, most importantly, reducing the time in the air for tens of thousands of flights daily. Millions of people will save hours daily after the plan is fully implemented. As usual, when the government is the provider of a service, politics get involved and one result is a huge amount of waste. It is only common sense for a 10 passenger jet to have a financial incentive to give up a prime landing spot at a major airport for the benefit of a 300 passenger jet. Giving up this slot should be based on the micro-economics of the situation. In other words, the price of the landing spot should be determined by the market, so that some operators would voluntarily choose smaller airports. Only the individuals involved can determine how important it is to land at the major airport. The government imposed system is the equivalent of Soviet Union system of deciding how many pairs of blue jeans the country should make.
THE IMPORTANT POINT FOR INVESTORS
Investors need to avoid taking one small data point and drawing harmful general conclusions. The core facts are that airlines are operating at record capacity and making money at the start of the prosperity phase of the business cycle. The solid growth in the revenues of these highly levered companies is leading to spectacular growth in earnings. Here in the middle of the mid cycle correction, it was "big news", a couple of days ago, when AMR announced that revenues for the quarter would grow at only 3 to 4%! When a business with very high operating leverage grows revenues by 3%, profits might rise 20%!
What will be the story a year from now? Will the unions still be fighting for a 30% raise that is not going to happen? Are these employees frustrated? Certainly! Do they really expect to make 30% more than their friends at other carriers? Most do not.
BAD NEWS IS GOOD NEWS
The "news" this morning was "bad." Orders of durable goods declined. Duh! Housing starts are way down so there are not as many furnaces or hot water heaters being purchased. The down tick is the "bad news" needed to push interest rates lower and inflation down more. Yes, this is circular logic but that is why they call it a business cycle.
Just remember that interest rates and commodity prices tend to move together. Right on cue, oil supplies recovered a bit this morning and oil prices slipped. The process is slow but sure.
HANG IN, HOLD ON, BUY ALL YOU CAN!
Thanks again for the feedback.
The following is yet another snippet of history to show that now is a good time to BUY, BUY, BUY.
A decline or near decline in the price of the average house is a rare phenomenon. Right now, it is interesting to notice that the cost of new construction, including a lot in a good location continues to rise, even while folks belly ache about a fall in the value of homes. One of the tenets of economics is that "clearing prices" are reached. Yes, the supply of unsold homes on the market is large, especially when looked at in terms of months needed to clear the inventory at the current sales pace. The problem with this popular measure (especially popular with those making the bear case) is the "double leverage" involved. Other numbers show that building permits and starts have fallen dramatically. On the demand side, the numbers show that mortgage applications are already on the rise. In just the past two or three weeks, the bears have said again and again that mortgages are not available.
I am trying to make two points here: 1) that the housing "debacle" is not as bad as it is perceived to be, and 2) the housing debacle has not killed the bull market in stocks.
The following are the 5 times during my life that housing prices were flat or negative over a full year and the increase in the S&P 500 over the next year.
September 1982 44%
November 1990 33%
July 1992 15%
February 1993 8%
April 1995 39%
ON AVERAGE, LARGE CAP STOCKS INCREASED 27.8% IN VALUE IN THE YEAR AFTER HOUSING PRICES WERE FLAT. WOW!
I like the last entry the best because April of 1995 was right at our previous mid cycle turn. The most recent pattern is in my opinion the one that will be most closely followed in this cycle.
STRONG DOLLAR RESULTS
The financial news media is always in search of the next headline. The recent one has been the fall in the US Dollar. Here again, I like the pattern set in April of 1995, when the dollar bottomed just as the pundits were saying that housing was killing the economy.
There are logical reasons why the bottom in the housing market coincides with the bottom in the dollar. Canadians are currently in a state of euphoria over the value of the Loonie. For the first time in 31 years, Canadians can trade a Loonie for a dollar and get back change. For a number of years, Americans could trade a US Dollar for a Loonie and get a quarter or more in change. This is big news for Myrtle Beach and many other coastal communities. When I was a kid, Myrtle Beach had Canadian Day Parades. These celebrations were held during the early spring, when it was still too cold for Americans to consider Myrtle Beach as a vacation destination. Florida resorts are also celebrating the return of the Loons!
The Euro Dollar has also appreciated substantially. The European can trade for a dollar and get more than 40 cents change. Just a few years ago, Americans could trade for a Euro Dollar and get about 20 cents change.
In April of 1995, the winds of change were blowing as they are now. Many a European and Canadian will make out very well by purchasing a US home now. The European might use one million Euros to buy a $1.4 million luxury home in the states. The price of this home will appreciate substantially as soon as the market clears. Even if it were to only hold its value, the return would be 40% to the European if he held the home until the US Dollar and the Euro Dollar reach parity again. While there is no guarantee that parity will ever be reached again, the history of the move after the mid cycle correction of 1994 says that it will.
OIL PRICE TO RISE IN EUROPE!
Should the US dollar strengthen, the price of oil in terms of Euro Dollars will soar. The law of substitution, which is already going 90 miles per hour in 3rd gear, will hit overdrive. No one knows where new supply smashes into new demand but it is clear that that there is going to be a collision between millions of small cars and scores of super large oil refineries. In Port Arthur, Texas, Shell and Saudi Arabia will more than double output about a year after the first of the Vietnamese super refineries comes on line.
Just in recent weeks, wholesale traders in the US have been reluctant to hold inventories of oil as the amount of natural gas in storage is near record levels, gas producers are being forced to slow down or shut down production and the price of natural gas is down to 47% of the price of oil in BTU terms. Of course, natural gas storage capacity is not enough to supply all our winter time needs with natural gas but a mild winter could see a steady decline in the price of heating oil. Any facility set up to burn gas or oil will go with the less expensive gas until supplies are diminished.
GLOBAL WARMING IN THE NEWS
Ken Fisher notes that when the financial press cannot find negative economic statistics to whine about, they write about global warming or Paris Hilton. Ken avoids making this a political point but in truth it is. The steady push in most media outlets is anti-Bush, anti-business, anti-war and pro-government "solutions". Of course, the exceptions to the rule, such as talk radio outlets and Fox News, prove the rule. Pretty soon, the stock markets should benefit from a change in sentiment. A "Feel Good Factor" is going to emerge. We have moved into the prosperity phase of the business cycle. During this phase, real wages and incomes of the average citizen will rise to the point that the constantly negative "news" will not sell well. As Andy Warhol taught us many years ago, the "news" is a reflection of the feelings of the people. During a time when the "bad news" does not sell, "good news" will be more prominent. Of course, the market top will come after the public has received a steady diet of "good news".
My "good news" for you today is that the process of building a market top is just getting started. Keep a close watch and you will notice a very gradual shift in the news. Also keep in mind that the kinds of advertising that you will see will also change. You will see lots of ads for companies like Boeing that are making all the planes they can make. Of course, the right time to buy shares in this company was several years ago. It will not go down in price for many years to come but its upward price momentum has already peaked. It takes a long time for the "big boys" to distribute their holdings to the public. Of course, the media outlets that sell these large corporate ads will be the outlets that survive. Do you think it coincidence that positive "news" articles and corporate ads will accompany one another, or soon before or after?
Yes, be a skeptic but be a wealthy skeptic. A fun market is headed our way.
POLITICS IMPORTANT
No one knows the ultimate outcome of the current fight for budget and campaign dollars. Funds are flowing in all directions. Powerful "special" interests are playing hard ball. In this crazy but necessary game of horse trading, many in power are willing to vote to spend billions annually for years to come on all sorts of wasteful schemes, provided they "win" the goodies they want for themselves. Senator Grassley, a Republican from Iowa, is one of the current key power players. I do not believe Grassley is for a $35 Billion add on to a disruptive health care plan, but he is willing to vote for it to establish a strong bargaining chip. Almost everyone in the House and Senate would agree that health care reform is needed but none of them would honestly say that the $35 billion dollar would be their personal first step.
Again, I have good news. So far, Congress has been unable to pass much of anything. This is good news for America and good news for the markets. As we have seen time and again, lots of bad legislation passes when one party is in control. Bush will veto the worst of the spending. Unfortunately, to get a dose of his own sugar, he will swallow some bitter medicine. Still, all in all, the compromises reached will not harm the economy badly. As a general rule, the economy will do very well for as long as the government stays out of the way.
BUY, BUY, BUY the fight will be over in a few weeks and members of congress will go home to take credit their "wins". That is one of the good things about a good compromise, all can claim to have won. These wins will become part of the "FELL GOOD" cycle discussed above. When corporations, the news media and the congress combines to tell the "good story", it will be natural for the masses to "FEEL GOOD". BUY, BUY, BUY!
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