BIG STOCK MARKET PROFITS AHEAD

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 The 20 million or so taxpayers who have not been subject to AMT will not know the difference if the AMT was repealed.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!

ROUNDING THE BIG CURVE, WE ARE IN THE TURN

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!

SELL, SELL, SELL!

Greenspan talks from both sides of his mouth but he is probably right about long term interest rates. LONG BONDS SHOULD BE SOLD!

Some of you own long term bonds hidden inside of various mutual funds. Some of these funds automatically buy more bonds the older you get. SELL, SELL, SELL.


Look at in terms of the US Dollar versus the Euro. Back in 2000, a great time to sell stocks and to buy bonds, the US Dollar would buy the same as $1.17 Euros. Today, a dollar will buy the same as $.72 Euros. It is not time to take a vacation in Europe! The relative costs has gone up better than 60%! Of course, with the value added and carbon taxes added, it costs about 23% more to travel to Europe than it first appears. If you want to conserve wealth and energy, stay home.

I do not believe the pattern we are about to follow is like prior times when inflation was out of control and long rates went up and up and up. On the other hand, it is not wise to own long bonds while thousands of billion dollar industrial projects are underway around the world. The demand for money is real. Some of these projects are close to the time when they will reverse their current effects. For example, the cracking unit was just installed on the first of the new super refineries in Vietnam. For the next 18 months, a lot of resources will be devoted to finishing the construction. Then, when it cranks up early in 2009, it will supply two thirds of all the fuel used in the whole country. When the second unit is finished, a couple of more years out, Vietnam will be a finished oil product exporter.

Investors must always keep in mind that inflation is a result of too much money relative to the amount of goods available. In the 1970's, it was assumed that the "oil shock" had to cause inflation. As we have just experienced over the past 5 years, oil can go up and up and up without causing the overall inflation rate to go crazy. For years, the demand for oil has increased dramatically in Asia but the prices of the products flowing from Asia has gone down. Have you noticed the price of a GPS mapping device lately? Pretty soon, owning an electronic map will be affordable by almost every one in the entire world. Now don't tell me how awful the inflation rate is. The iPhone has dropped 25% in price only a few months after its introduction.

So, long bond rates are not going to go out the roof, as implied by Greenspan. However, there will be pressure on interest rates while the infrastructure is built to "catch up to the demand". My friend and former colleague at Merrill Lynch made a forecast in the early 1980's. He said that the business cycle was going to be tamed. I believe Ben Bernanke will not take the Fed Funds rates up and down the ladder as was done by Greenspan. Shortly after Greenspan was made Chairman of the FOMC, he took short rates up sharply and the crash of 1987 hit. The Dow Jones Average went down and down some more, then on October 19, it went down 23% in one day. The little 10% dip we had last month was not enough to cry over.

The problem in the short run is that the market may be initially disappointed with tomorrow's rate cut. It took a number of years after the 1995 rate cuts for the dollar to recover against the Euro. The ECB is still holding rates at 4% so Ben will not likely match that rate any time soon. We also have Congress to worry about. The leaders of congress want so badly to install a carbon tax system that will raise the level of lobbying to new all time levels. Already, billions have been spent trying to influence the outcome. Of course, those companies that have room to reduce carbon emissions would love to be subsidized for providing the service. Just like corn farmers, who would turn down the payments from the "government of the people."

As usual, good intentions have hurt us all with unintended consequences. Had the environmentalists not fought the management of the forest and had the government not paid land owners to not grow crops, many more acres of forest would exist and the world would be a cooler place. The democrats in congress have a "mandate" from the misinformed to raise taxes in order to "improve" health care and the environment and to end the war in Iraq. Bush has the upper hand except in regard to the expiration of the tax cuts passed in 2001 and 2003. Economically, raising taxes and spending inefficiently will keep the US from achieving its potential. Our country is so strong that we can take a tax hit and keep on ticking. As we are moving into the prosperity phase of the business cycle, we can afford a lot. Still, we should not waste what we have.

The ECB is under great pressure to "normalize" their interest rates, which is another way of saying that they need to bring them in line with US rates. The export growth from the US is adding to our total GDP but Euroland will suffer a huge trade deficit if they do not adjust. As is evidenced by the bank collapse this past weekend, Euroland is also suffering from the sub prime mess.

Until the adjustments are made, the dollar will fall, oil in US dollar terms will go up and gold in dollar terms will go up. Even so, inflation rates are falling so it is possible for the ECB to hold rates and for the US rates to fall more than I expect they will. Like I have said, I believe the swings are going to be less violent than in the past. Therefore, I expect Ben to make a cut but for the ECB to increase rates. Growth will slow for a quarter or two, as the consumer who has listened to the news has been frightened. Those who pay little attention to the news are as happy as can be. Their paychecks are rising, they are buying stuff they could never afford before and enjoying the good life. Their retirement accounts have risen in value year after year for 5 years in a row and the value of their homes has doubled in a relatively short period of time.

BUY, BUY, BUY, STOCKS, STOCKS, STOCKS

SELL, SELL, SELL, BONDS, BONDS, BONDS.

THE POWER, POWER, POWER OF LEVERAGE

A few moments ago, CAL was up 46 cents or 1.42%. In margin accounts, the equity was up 2.84%. The January '09 $35 call option was up 8.82%. The December '07 $35 call option was up 12.73%.

The risk of losing money is difficult to quantify but it is safe to say that the risk of a 100% loss of principle is very high for the December '07 call option but very low for the non-margined stock.

The higher the risk, the greater the potential reward. This basic economic reality must be faced by each individual. The major problem concerning acceptable levels of risk is that individual attitudes about risk change dramatically at just the exact wrong time. When stocks are going wild, the perceived risk tends to fall dramatically when the real risk is in fact rising rapidly. Modern portfolio theory includes the concept that money managers should "take money off the table" each time relative prices of holding rise. If you study the actions of "professional mutual fund managers", "professional hedge fund managers", brokers and especially individuals, you find that people follow crowds and not logic. The higher the prices go, the more inclined people are to take risks. Right now, the "psychology of the market" is very negative. It has been at worse levels before but not at such negative levels with stocks so near the all time highs. This tells me that stocks are likely to go much higher. Fundamentally, stocks are cheap. It is indeed an unusual time for stocks to offer earnings yields much higher than yields on bonds. Finally, we have monetary policy turning very positive toward stocks. The above three, psychology, fundamentals and monetary conditions are the three legs to the Don Hayes investment stool. Don has been pounding the table, telling his readers to get into the market, 100%. He is a tough old buzzard who has followed the market for better than 40 years. He does not try to out guess the market in regard to short term moves but he climbs aboard and holds on for dear life when these indicators are all screaming BUY, BUY, BUY!

Again, I would not be at all surprised if Congress were to fail to pass the budget before October 1. I would not be at all surprised if the auto unions do not reach a settlement for a couple of weeks beyond today's contract expiration. I would not be at all surprised if congress must pass a continuing resolution to keep the government running. I would not be at all surprised if a big fight is fought over every thing from troops in Iraq to eliminating the alternative minimum tax while raising the tax on stock market gains. All of these things are a part of the WOW! (Wall of Worry). The market must have a WOW to climb. We have one in place. It is evident by the sentiment figures. Congress and the president both get very low readings in opinion polls. They need to do something! The President's ratings have bounced a little. Congress is down at a rock bottom level of 29% approval rating. I even believe the odds are good that an immigration compromise will once again be voted upon. A court has put a stay on booting millions of hard working emigrants out of the country. These folk are paying social security taxes but their social security numbers do not clearly match with their identities. The country will be hurt if these people are forced to leave. The pressure is once again on Congress to do the right thing. The next couple of weeks could be very choppy. The move by the FOMC on September 18, no matter what it is, will not solve all these political questions. The Democrats will push hard for a cap and trade carbon tax. They will not call it a tax but the effect of it will raise the cost of fuel to all American individuals and most businesses and it will increase the revenues of the government.

The next few weeks will be full of political rhetoric. When it is all said and done, I believe the power of the Bush veto will force reasonable compromise. Congress cannot over power the president without 60 votes in the Senate. A number of Republicans are tired of the war in Iraq but most will continue to support the president.

The next couple of weeks could be a roller coaster ride but as soon as the market sniffs that Bush will hold firm, the market could take off before the final deals are complete. Those who are speculating on China stocks might want to consider trading for US growth stocks.

Have a great weekend and be sure to tell your friends that the big mid cycle turn is upon us!

BUY, BUY, BUY

A year from now, don't say I did not tell you to BUY, BUY, BUY. I know I sound like a broken record but conditions are ripe for a three year market boom. Those who have significant amounts of money in money market accounts today will rue the day.

PE RATIO AT 12 YEAR LOW

One mistake often made by novice investors is to focus too much on certain fundamental indicators. The PE Ratio is one of the numbers that is widely followed into blind dark alleys. Companies that reach the peak of their earnings cycles typically trade at very low PE ratios. Looking at PE ratios can be much like driving a car by looking in the rear view mirror. Take housing stocks as an example, two years ago the entire group was on a multi-year profit run and the stocks sold at 5 times earnings of less. The stocks are much better buys today even though earnings have collapsed. These stocks traded down because their estimated earnings over the next five years is low. Energy stocks are trading in a similar pattern. They are trading at low PE ratios. The world wide boom will keep upward pressure on oil prices but sooner or latter profits will decline after oil prices go lower. These are highly leveraged situations. Profits will decline at a higher percentage rate than will revenues.


Still, PE Ratios do provide a picture of history and we can learn from history if we are willing to invest the effort. Right now, one thing we can say about the average stock is that it is selling at the lowest PE ratio in 12 years. Twelve years ago, in 1995, we were working our way through a mid cycle correction, right before the big boom, boom, boom of the second half of the decade. In 1995, sentiment of the market place was sour. Today, the average investor actually believes we are close to a recession even when GNP is estimated to be growing at 4% or better. I expect the sub prime mess to slow growth a little but I also expect business construction and sales to pick up most of the slack. Market indicators show that inflation is slowing while real growth is hanging in quite well.

Pundits have argued that we are at the top of a profit boom. They wave-off the 13.5% profit increase of the last quarter by noting that this quarter was number 20 in a row of double digit profit growth. They see this profit as being similar to a gambler who rolls 20 straight 7's. A common mistake among gamblers is called the gamblers fallacy, in which the prior rolls supposedly change the odds on the future rolls. They would say that the odds of another seven are incredibly low because the odds of rolling 21 sevens is a row is in the neighborhood of a trillion to 1. I would strongly disagree. Indeed, if someone has rolled 20 sevens in a row, I would be inclined to bet the next roll is a seven. The real odds with a fair set of dice are 1 chance in 6 of rolling a seven, however, if someone has rolled 20 in a row he must be rolling a loaded set of dice.

This is the situation with the world economy today, the dice are loaded! Numerous technologies that did not exist 10 years ago have loaded the dice in our economic favor. Last year at Christmas, a homemaker and her husband agreed to try to live for one year without buying anything made in China. They have had to do without a lot of goods and in other cases they have had to pay as much as 15 times the price!

TECHNOLOGY KEEPS ON KEEPING ON

You know the story, technology is changing our world for the better. A recent story I enjoyed was about ocean going submarine robots. Scientists from around the globe are participating in deep ocean exploration from the comforts of their offices and homes. They take turns controlling an ocean robot that is exploring the deepest waters ever viewed by man. They spend hours videoing sea life and structures that have never been seen before.

One of the things that Al Gore and friends seem to miss is the size and scope of the earth's water cycle. One tree can release over 200 gallons of water vapor in a day. The human body is about 65% water. Water is the most common element on the planet. The cartoon page this past Sunday featured water. Given unbiased information, ten year old kids can appreciate that the earth and the water cycle are much bigger and more powerful than all the humans on the planet. Water is the only element on earth that is found in all three states of being, gas, liquid and solid. It is a resource that must be protected but it is also a resource that is to be used. Water is "automatically" recycled. It is entirely possible that you drank water molecules today that were previously drunk by an Egyptians some 5,000 years ago.

NO, NO, NO!

I have not lowered my target price for CAL to the 40's. Indeed, the purpose of buying options that only break even at $43 per share is because I believe the stock will go much higher. Buying options is a loser's game. It is a fool's game. Still, please don't make me out to be a total idiot. I would not buy the right to buy a stock at $43 if I thought it was not going much higher!

In 2005 and 2006, I wrote that I planned to "ride the bucking bronco" through the mid cycle correction. I said that the risk of being out of the market was greater than the risk of being in it. Now that the correction is in the sight of all market participants, some are ready to declare a recession is near and others simply want to sit in cash as they wait to see what happens next, BIG MISTAKE! Chances are that the next move of more than 5% is a move of 30% to the upside. The big splash has probably already hit the pond. The ripples are still in evidence and there is fear of another even bigger splash. However, the world economy is too strong for this splash to hurt much more. Central bankers have unleashed their money machines. MZM (the monetary base) was about flat 2 years ago, at the real start of this slowdown. In recent months, MZM has been growing at better than 9%! Money is available, sentiment is ripe and stocks are cheaper than at any time since 1995! BUY, BUY, BUY!

TECHNICAL REASON TO BUY, BUY, BUY

I am not a great fan of technical trading but I do watch technical indicators to help with my long term perspective. By the same token, traditional fundamental analysis can also be very misleading. The best buys I have ever made were based on a good top down view of the world. Most of the best buys were washed out stocks where the conventional wisdom saw no hope of recovery. The stocks typically were not attractive from a technical or fundamental perspective. The P/E ratio on a washed out stock is often infinite. A good example, of course, CAL which traded at $4 a few years ago and which had no earnings or net assets. Still, technical indicators have a place in ones investment tool bag.

Jamie Baker upgraded CAL to his market focus list today. He has posted a 12 month price target of $37. He gives fundamental reasons why CAL should do well as a company but he also mentioned the old down 30 in 31 airline rule. This rule has worked for airlines because they are cyclical momentum plays. The rule says that if an airline drops 30% within 31 days, it will rally strongly over the next 6 months.

The rule sounds like an old wives tale, but it has worked rather well. I'll always remember the time a smart investor friend told my poker buddies that US Airways was a goner. He and I had a heated argument and I invested all I had available at $6 as soon as the stock started moving up. Many years later the company did file bankruptcy but the stock was trading at $4 when my friend and I argued and the stock zoomed to $65 per share over the next few years. Folks, if you ride one stock hard on margin over such a move you will make a fortune.

CAL has moved from $4 to $54 and back down to $26 in five years. The second leg of the move is ready to roar. No one can say that the carry trade unwinding is over. Liquidity problems are still all around. The bottoming process may take a while longer. However, there is a real probability that the world economy will slow enough to take the pressure off oil prices. Should CAL save 10 cents per gallon, without reducing revenues, it will make almost $2 extra per share. WOW! What if it were to save 50 cents per gallon?

The top down view is that the world has never seen such strong demand for international air travel. As far as the eye can see, the growth in China, India, et. al. will increase demand for travel. Check the web and you will find an article about how China has decided to limit the number of new airline start ups. Under new code sharing agreements and new ticketing agreements, it becomes more and more important for airlines to have partnership deals. The little guys are going to get squeezed by the majors.

BUY, BUY, BUY!

BUYING, BUYING, BUYING

I send my many thanks to those of you who have added funds to your accounts in the past month. This action shows the mentality of greatness. Doing what is hard to do is a good thing in all areas of life and it is certainly a characteristic of disciplined, rational and successful investors. In family accounts, in the past several days, we have increased our exposure to levels I cannot recommend to my readers. I have increased to these levels of exposure while knowing that it will be at least another 45 days before the Congress passes the new bills and budgets. The potential acts of Congress hang over our heads like the sword of Damocles (sp?). The unwinding of the carry trade is still in progress.

However, the market is currently dramatically over sold. Yes, it could get worse but the chances of a bounce have increased. The statistics are compelling: (the following numbers flow through from the Hays Advisory Service)

Both the NYSE and the NASDAQ 21 day moving averages are over sold more than any time in recorded history (these numbers go back to 1940).

The total put/call ratio is at its 6th highest all time record level (data through 1965).

THE BIG DIFFERENCE

The big elephant in the room is the question, "What is different this time?"

The answer is that stocks are still relatively cheap. As Keith Hayes points out, many have compared what is going on now to the crash of 1987 and the credit crunch of 1989. He also notes that in each of those cases, stocks were not relatively cheap.

Is it time for the world economy to slow down a bit? Yes. The world has never seen a boom like the one of the past several years. Having a country the size of China grow at the annual rate of 11.5% is an incredible event. The fact that this just happened after 20 years of rapid growth is amazing.

How does the world go from too fast to just right? This is the $64,000 question. It is especially difficult when the public and the congress are frustrated by seeing lots of people get very rich off the cycle. The fact that the poorest of the poor have gained by a greater percentage than have the rich does not ease the envy. Christianity is just one of many religions that teach not to covet they neighbors wealth. This is yet one more teaching that is easy to break. The situation is that Americans, including many members of congress are ready and willing to "shrink the economic pie" provided the remaining pie will be distributed more equally.

The current down turn is partly nothing more than a warning to politicians to keep their "hands off". Raising taxes becomes far less appealing when facing an economic crisis. If the economy is weak, the idea of lowering taxes to strengthen the economy gains credibility.

"THE MAGNITUDE OF THE HANGOVER IS COMMENSURATE WITH THE MAGNITUDE OF THE BINGE"

Warren Buffet has been credited with the above saying. The housing binge was a big binge and by 2005 beach houses were jumping at annual rates of 30% or even more. It has now been about three years since the FOMC started started adding weight to the other side of the see saw. The FOMC acted 17 times and eventually stacked 5.25% interest weights on the "other end". In the past year, other central bankers have stacked more and more interest weights on the same end. The cumulative effect of these moves has finally tilted the see saw. Now, these same central bankers are scrambling hard to balance the see saw. They have now straddled the middle. They are piling big chunks of cash on the other end. This morning, the FOMC put 5 billion on just after Japan and Australia added a total of 3 or 4 billion.

Have you ever tried to balance a see saw in the middle? If you have a heavy kid on one end and a light weight kid on the other, you must move toward the light weight kid until the see saw starts to move. Then when it does move, you have to shift some of your weight to the other end. Only with practice and skill can you settle in the middle. On the other hand, circus acrobats can pull off the trick time and time again.

The central bankers of the world are real professionals. They have practiced this craft for many years and the evidence of high skill is clear. The economic cycles have gotten smoother and smoother. If you want to see some vicious stock charts you should view the records of the "panic years". I don't remember the details but as best I recall one of the big crunches was in 1907.

For those of you who are adding money regularly, I will continue to buy more and more. Your biggest gains will come from the more recent additions. For those of you who are not adding, I will hold positions, except to satisfy any margin calls if any. For family accounts, I will continue to add aggressively to airlines.

Most of you have substantial assets in 401-K accounts that will not be heavily withdrawn for many years. These funds should be allocated 100% toward equities (my non-professional and freely given opinion). For those of you willing to speculate, you should tell me you are willing to sell some of your winning positions to add to your aggressive positions.

The coming "bounce" is going to last a few years. You need to "catch" the beginning.

NO PAIN -- NO GAIN!

As any life coach, sports coach or philosopher will tell you, there is no gain without pain. I hope my relationship with you all will be strengthened as a result of us all having had to endure some pain together. Pain is "good". It is not an "evil" thing. We can only experience great joy as a result of enduring pain. I am so very grateful for my friends and family who have been enduring this market correction with me. They willingly share their pain with me. We will rejoice together when this ordeal is over.

THROWING THE BABIES OUT WITH THE BATH WATER

The smell of fear is in the market. The babies are being thrown out with the bath water.

At times like these it is easy to make emotional, irrational decisions. It is a time when one should stretch to buy all one can but one feels like one is trying to catch falling knives. To make the big money on the way up, one has to be willing to hold on during the tough times.

All the great investors tell the story that the time to buy is when there is "fear in the market", "blood in the streets", "capitulation in the air". That is where we are today. The media talks and talks about the sub prime housing market. The fact is that the total loss in the housing market will be a small number. More people are able to afford a second home today than ever before in history. The demographics are compelling. There are more people at prime age to buy a second home than ever before in history. Ironically, the real problem is that the world economy is a little too strong for its own good. With the world economy strong, even Japan, which is filled with old people, is growing again. This growth means that 1% loans are going the way of the dodo bird. As speculators around the globe are searching far and wide to raise cash to pay back prior loans made, they punish one asset class after another. Smart money is holding in even though no one can say how long this repricing will last. When it is all said and done, the deep bottoms made in many a stock will not even be noticeable on a long term chart. Remember, only long term investors make money, traders generally lose.

No, I did not believe this mid cycle correction would be so tough. I was wrong. The time to tell me I was wrong was many months ago. My family accounts have taken major hits because they are highly levered. I don't mind the wild roller coaster ride because our accounts are for the long haul. Of course, I would love to be in only during the climb but, all the people I have know who truly are out during declines of this type are also out for most of the up moves.

Again, the vast majority of investors do not understand that the sub prime mess is being over hyped. Most do not understand that the really big move is in the delivering of the carry trade. One does not need to understand these details to know that one should buy more when prices are low, or at least hold on to what you have. Indeed, the time to add to riskier positions is after a major down turn. The riskier positions have fallen the most but the ones that survive will give off incredible returns on the way up.

The hurricane headed into the gulf is very old news. Every year there are hurricanes. During normal times, the billions of dollars of market moves are not determined by a relatively minor investment risk. Sure, Katrina was a very expensive storm, however, in the grand scheme of the total oil market, it had an effect on a relatively small portion of total production.

Again, the irony is that the prospect of higher interest rates in Japan is a sign that commodity prices will ultimately decline and that the economy is strong enough to handle the sub prime mess and then some. The one thing that commodity prices hate is high real interest rates. Back when real interest rates were low, it made sense to hold gold. Gold gives off no income but if the price of real money is negative then gold appreciates in relative terms. Norway followed through with an interest rate increase today. Yes, finally central bankers have rates at levels where they hurt speculators. Are you a speculator or an American Investor?

In personal accounts, I have sold some of my winners to buy more of my favorite stock. When the turn comes, I expect to enjoy a great ride. I hope you will ride the Ken Fisher bucking bronco with me. People like Rothschild, Getty and Baruch made so much money during panics that they were able to make a lasting difference in the world. Baruch made so much that he basically under-wrote the US State Department in his latter years. The great-great grandson of Rothschild was in the news not too long ago.

No we cannot all be Rothschilds but we can have enough common sense to keep our heads when others are losing theirs. Be calm my friends. There have been hundreds of market situations worse than this one in the past 50 years. The FOMC still has a loaded six gun. It raised short interest rates 17 times to reach 5.25%. If necessary, rates can quickly be dropped and the strength in the Yen can be short circuited with no notice!