NFL Football in Every City in America

In 1954, the congress decreed that health insurance is an especially desirable thing. A law was passed allowing companies to deduct health care insurance premiums as an expense against income even while allowing workers to receive healthcare income tax free.  About 10 years later, President Johnson pushed through dramatic expansions of the same basic concept.

What if the congress and President Johnson had stated that America is a nation of football fans and we need to support football? What if they decided to subsidized professional football instead of health insurance? What if the congress had passed laws allowing companies to deduct the cost of NFL tickets while allowing employees to receive tickets tax free?

Some of the likely results would have been:   

1) The NFL would have enjoyed huge growth rates because many people who don't care all that much for professional football would have accepted $100 tax free tickets in lieu of $100 in taxable income.

2) Cities all across America would have requested teams and built massive football stadiums.

3) The quality of the football played would be effected in a number of ways. The increase in the number of teams would have spread the best players over more teams. On the other hand, Americas great passion for football would have caused many more young people to "major in football".

4) Millions of young men would spend billions of more hours working out. Body building food supplements would be in even greater demand.  

5) Sunday attendance at church would likely suffer? Millions of more hours would be spent watching and talking about football.

6) College football programs would be all the more important as the training grounds for professional players, but some college fans would be too burned out to attend college games. Many more people would spend their entire weekend attending football games: Friday Night to see prospects, Saturday at College, Sunday at the pros.

7) Football would grow as a percentage of our total economy.  

8) Before long, professional baseball, basketball, tennis, golf and soccer enthusiasts would be yearning for "reform". The pressure would be great on the congress to include other sports in the program.

9) Ticket prices would be artificially high.

10) Groups of self employed and retired individuals and families might "opt out". There might be 46 million people choosing not to attend NFL games.

11) To get everybody covered, very powerful lobbies, supported by teams almost every major city in America, might push to make the ticket programs mandatory.

To paraphrase William, "Oh what a tangled mess we make, when government solutions we first take".  

In reality, professional sports teams in America have been granted "government protection". True competition has been declared illegal. Thus, ticket prices are high and player salaries are incredible. Three year, $50 million dollar contracts are mind boggling.

Rightfully, Americans have difficulty making sense out of the nonsensical. We want our representatives to fix the healthcare mess. Few Americans have the knowledge or inclination to connect all the dots. Unfortunately, power hungry legislators have all the incentive they need to take advantage of an unsophisticated public.

The good news is that the congress has already gone to such spending extremes that the people have taken notice. A backlash is in progress. Blanch Lincoln and a couple of other senate democrats, who are worried over re-election prospects, have voted to tone the bill down. Blue Dog democrats in the house are resisting pressure from Pelosi. Harry Reid of Nevada has pushed back against the tax burden being pushed upon the states.

Never-the-less, the thirst for power is a powerful force. Ultimately, Olympia Snow, will sign-on to a toned down healthcare bill, giving democrats the 60 votes they need.  

Real reform would be to get rid of the laws that are driving up the price. Tort reform, nationwide insurance competition, taking the hand cuffs off nurse practitioners and increasing the number of education slots for doctors would all help drive down the cost of healthcare. Many current plans are crazy. Some people are being given "more football tickets" than they can possibly use. Healthcare benefits should not be deductible by corporations and simultaneously be tax free to employees. The bill that Senator Snow will sign will include at least a few steps in the right direction along with many steps in the wrong direction.  

We really don't need NFL teams in every city in America.    

The Hunger - Corruption Connection

Here is a Wikipedia map of corruption. Dark red being the most corrupt and green being the least.

If this map were compared to a map of per capita GDP there would be a strong correlation.

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Big Government

When government gets too big, economic growth slows.  Here is the Rahn Curve, developed by Richard Rahn.

Even during the just ending world wide recession, Americans enjoyed more income than almost everyone else.  However...

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Early Education

"Preschool activists consider Georgia and Oklahoma model states because they have long running, fully implemented, universal preschool programs that proponents consider to be high quality…. The real-world evidence demonstrates that, at the same time [these] preschool programs have been massively expanded and their quality… has supposedly improved, the test scores of children in Oklahoma have eroded significantly compared to the national average. And while Georgia’s reading gap narrowed, its math gap stagnated or widened."  Adam Schaeffer--Cato Institute

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Me: Economic Libertarian-Social Moderate; Obama: Statist (fascist)

In political belief assessment surveys (see chart above), I score as an economic libertarian and as a small government left leaning social moderate.  In this secular world, the combination of my beliefs in economic freedom and religious tolerance lead me to conclude that our government should return to the free market system that served our country well during its early years; government should only poke its nose into personal matters when necessary.

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Americans Spend More on Healthcare. So What?

A doctor who supports the monster healthcare "reform" package notes that Americans spend more on healthcare than other people. The following response says, "So What?"


The good doctor provides us with another example of picking statistics to fit ones mind set. The following statistics, pulled from a Wikipedia table, were found with the search "GDP by Sector". Americans spend .9% of their income on agricultural products, 20.4% on goods and 78.5% on services. Citizens of the European Union spend 2.1% on agricultural products, 27.3% on goods and 70.5% on services. Europe is not a bad place to live but, the average American is economically better off than the average European. Taking a look at places where you would probably not want to live, we find: the citizens of Sudan spend 35.5% of their income on agricultural products, 24.8% on goods and 39.7% on services, the people of Cameroon spend 45.2% on agricultural products, 16.1% on goods and 38.7% on services, and the people of Laos spend 43.4% on agricultural products, 30.6% on goods and 26% on services. Americans spend a much smaller portion...

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What Else Did Sadamn Hide? When Will Corruption End?

As Gomer Pyle liked to say, "Surprise, Surprise, Surprise!".  Who knew that Saddam Hussein hid his air force in Serbia of all places?  Here is a link to a New York Times article about 19 hidden Russian fighter jets.  link  What other weapons did Saddam hide?  If he was able to hide fighter jets, then he certainly might have hidden some of the "weapons of mass destruction" he was known to have.

Was the congress steam rolled into voting for the war in Iraq?...

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Cash for Clunkers -- The Investment Fallacy

The cash for clunkers program is the height of liberal group think gone wild. Our deeply in debt government is borrowing money to buy vehicles that still have economic value only to destroy them. The program is a modern version of the broken window fallacy; the belief that an economy is stimulated by the destruction of property. Of course, if a hurricane destroys houses, many of them will be rebuilt and many a home builder will make good profits. This is nothing but a transfer of wealth from one person to another. This is the second bailout for our auto industry this year. Here is a video of a vehicle, one with new tires for heaven's sake, being destroyed.

Video

In other craziness, the draft of the health reform bill is a complicated mess of over 1,000 pages. Hopefully, independently minded citizens will vote against those who support government gone wild. The good news is that the people are showing that they will vote against the supporters of this madness.

The Investment Fallacy

From the investment point of view, the current idiocy is wonderful. Markets historically climb walls of worry, during a time of discontinuity. Americans are upset with the massive waste they are seeing to the point of taking their eye off the investment ball. We have entered a new and powerful business cycle. A time of low interest rates and high profit margins is leading to a share price recovery and a pending economic boom.

A couple of weeks ago, a fellow said he sees no signs of economic recovery. This is a bit like not being able to see the wonderful views from the mountaintop while still on the valley floor. There is no place to go but up! The signs are everywhere. Today's best example is the fact that the oil to natural gas ratio has zoomed right past the extreme peak it reached as the economy started its recovery from the last real estate recession, the one in 1990-91.

Economically, what does it mean that the price of oil relative to the price of natural gas is off the chart? Who cares?!

I am reminded of the old joke in which the patient says, "Doc, it hurts when I raise my arm" and the Doc says, "Then don't raise your arm"! There is much I could say about the slack in the industrials, materials and mining sectors demonstrated by the low demand for natural gas (a slow down in fertilizer being made to throw on valuable crop land to grow corn to make a poor substitute for gasoline, for example), but the important point is that such a sharp peak in oil versus natural gas portends a boom in the high tech markets.

Another great sign of pending recovery is the rapidly rising prices of mortgage debt. The easy way to see this increase is to notice the price of Fannie Mae and Freddie Mack shares. Of course, the rising value of mortgages is great news for the banks that hold large amounts of mortgages. They will report these gains as pure profit, having written down the mortgages to the previous lows.

So, don't get caught-up in a powerful pity party. Yes, our two party political system is producing the results predicted by George Washington's prescient farewell address. We have serious problems that need to be fixed. What we currently have is a classic case of not defining the problem before trying to fix it. We are having a national debate on health care when we should be having a national debate on how to fix the business-government partnership of greed and its attendant corruption.

The fat cats are making hay while the pity party participants are reading about home foreclosures but not stepping up to the auction to get the best deals they will see in their entire lives! Goldman Sachs is making billions in the stock market while the pity party participants are sticking what little liquid cash they have into a lock-box called the 401-K!

A Chicken in Every Pot -- A Bank in Every Pocket

Herbert Hoover promised "continued prosperity" during his 1928 presidential campaign.  His handlers advertised "A chicken in every pot and a car in every garage".  The slogan quickly became a joke, but a painful one.  

In the latest presidential campaign, Obama promised "Change", but, so far, the changes are not the ones advertised.  Perhaps, Obama's slogan should have been, "A computer and a bank in every pocket."    

Every day, there are another dozen good reasons to put a computer in your pocket.  The battle for portable GPS navigation systems is a case in point.  One vendor has offered its software and service, including turn by turn directions, for $10 per month; another vendor played oneupmanship by offering software and service for a one time payment of $100 before the third vendor came to the party with a one time price of $70.  At $70, the cost/benefit ratio is compelling for hundreds of millions of people and the price will continue to fall!      

The music business is one of many other businesses traveling the same road.  Apple's iTune "store" now accounts for 25% of all music sold and Apple is building a 1 billion dollar server farm in Maiden, NC!  All the major music companies are switching to Internet 2.0 systems-- offering free software and low priced music through pocket computers.  

The "gales of creative destruction" have never produced such sustained wind speeds.  Every job and every life has been or will be changed in multiple ways by these winds.  The "ride" is like sailing in gale force winds; great fun for most but scary for others.    

Without spending time thinking or talking about it, we have all been life long participants in social networks.  Today, these relationships are being digitized.  For example, travel to a store to buy a video game is being replaced with the act of joining a social network where one can play against friends for a moment, an hour or a day.  There are specific digital social networks for almost every activity, from prayer groups to motorcycle clubs to praying motorcyclist.  Employers and college recruiters increasingly make decisions only after reviewing ones "social network body of work".  Historically, applications for jobs or school entrance have been quite detailed, but nothing like the total amount of information people are sharing via social networks.  Believe it or not, the sooner you start building your "social network portfolio", the better off you will be! Think bout it in terms of your digital resume.    

Many of these digital networks are independent from one another, however, the trend is for them to be linked.  Once a person signs in to his "home base network", Facebook, Tweeter, Picasa, Reader, Blogger or whatever, he is automatically signed into all his networks.  Under this process, the person who wants to switch from blogging to viewing friend and family photos does not need to log-in separately.        

In late May of 2008, when Obama was locking up the democratic nomination, the S and P 500 traded at 1425.  The market discounts future events by an average of 6 months and late May was 6 months before election of Obama, which implied massive increases in government taxing and spending activities.  On March 6, 2009, the day after Obama officially announced that health care reform would be his top, the index traded at 683.  Today,  August 24, 2009, the index trades at 1035.  There are many cross currents at work here but the "Obama market decline" of  52% is without precedent.  Furthermore, the market "knew" that the most onerous provisions of Obama's proposals would not pass the day they were announced.  The climb over the past 6 months has been spectacular.  The average dollar invested on March 6, 2009 has grown to $1.51!  Again, the market discounts many things but the numbers posted are for real.

During the years of Internet 1.0, "Online banking!" was the frequent response to: "What is the Internet going to do for me"?  Today, many people use ATM networks to withdraw funds from their accounts, but there seems to be as many bank branches as ever.  Internet 2.0 offers the opportunity for you to put your bank in your pocket, for deposits and withdrawals.  Invest with knowledge and care and you will put a lot of money in your pocket.  

Internet 2.0 has years to run.  Over the next several years, one institution after another is going to metamorphose from an "independent social network" to an "online connected social network".  To avoid the "out of sight, out of mind -- kiss of death", most plain vanilla web sites are going to become interactive.  One small example of why web sites and institutions must connect is the calendar.  If an institution wants its events to be automatically posted to its members calendars, it must be "socially connected".  Consumers will increasingly subscribe to calendar links.  A subscribing consumer will never have to enter the date and time of a meeting or event again.  If the meeting time is changed or postponed, the change will be made by one person for the benefit of many people.

You face a nice opportunity.  You can make use of Internet 2.0 to play video games, to connect socially, to reduce the strains of every day work and life or to laugh all the way to the bank.  Those who invested early and often in Internet 1.0 made multiple fortunes.  Internet 2.0 is going to be more pervasive and powerful than we can hardly imagine.  

Bio-engineered Teeth!

Yesterday, in response to the cash for clunker program and the dying post office monopoly, I wrote the following: In 1911, Thomas Dixon completed "The Root of All Evil", his third novel in a trilogy that attacked populist socialism. History does not actually repeat itself but it certainly does rhyme with itself. Today, US citizens are collectively borrowing billions of dollars and raising future tax requirements by billions of dollars to buy old autos from individuals for $4,500 each. It is wonderful and ironic that "The Root of All Evil" can almost instantly be downloaded onto an Amazon Kindle for only 99 cents or onto a Sony Reader for FREE! Once again, FREEDOM will triumph over socialism! The "Group Think Socialist" incorrectly believe that the purchase of the clunkers will help the environment. In fact, this car buying subsidy will increase the number of miles driven and the gasoline burned for many years to come. On the other hand, the total savings, including environmental savings, from electronic delivery of news and mail will be enormous. (visit http://stocksorbonds.blogspot.com to read the entire article) Today, I call forth the ghost of Thomas Dixon in response to socialized medicine. There will never be enough money to provide all the health care we would like. We cannot repeal the law of scarce resources. We can only hope to make the most of the resources we have. If one objectively looks at the trillions of dollars that have been lost and the environmental damage that has been done because of the US Postal Service Monopoly, one must appreciate the silliness of proposing increased government control of health care. (The postal service monopoly would have lasted many more decades if the AT&T monopoly continued.) Our socialist leaning, power hungry, elected officials want to direct the spending of trillions of dollars. Their latest "land grab" is to fix the health care "crisis". The "crisis" that they have created in reality and in perception by throwing money at a financially busted Medicare and Medicaid system and by repeating the mantra that 45 million Americans are uninsured. In the meantime, publicly funded and privately funded research is rapidly discovering health miracles. For the first time, scientist have bio-engineered an organ, a mouse tooth. In only 45 days, they can now grow a tooth from a few cells extracted, engineered and replanted. Before long, growing other replacement organs will be achieved. Yes, eventually, even the human heart. That is, unless the government gets in the way. People are healthier today because the knowledge of good sanitation practices has been spread and because we have discovered treatments and cures for diseases. In preparation for "going back to school", millions of children are getting physical check-ups. Many of them are being seen by nurse practitioners and their parents are paying about one third the "doctor rate". The price of quality medical care will fall if the market is allowed to work. From the investment angle, we should note that at the bottom of the recession, the ten year growth in manufacturing jobs in America was negative 3.7% and the ten year growth in Health Care jobs was 2.4%. Home Health Care jobs increased by 5% and auto manufacturing jobs fell by 6.7% (Pew Research). For long term growth, it is clear that heath care growth will exceed manufacturing growth, but growth and profits often diverge. Ford Motor shares have increased about 500% since hitting bottom. The rebound in auto sales will continue even after the cash for clunker deal is over. During the past three years, the fleet of cars on the road has aged and it will be replaced. Manufacturing jobs in America have declined for one reason only, labor priced itself out of the market. As a result, Ford and others have been forced to jettisoned labor and to substitute capital. The classic rules of economics do not go away. Monopolies, including labor cartels, are seldom "natural", markets adjust. The auto situation is one of higher sales with lower costs, which means fat profits. In a few months, shares of GM and Chrysler will come to market. Brokers will be pushing those shares. The time to buy is now. It will be years before grown teeth will be a service delivered at a profit. If you know of a good way for investors to participate in health care delivery, I'm all ears. In the meantime, I will encourage investors to purchase Ford and other consumer cyclical stocks. The recession is over; the world did not end. The in-trade betting is that the congress will not find the votes to raise the massive amount of taxes that their health care proposals would require. Indeed, the in-trade odds that the massive cap and trade tax proposal in any form is less than 50/50 for passage. The future is bright because innovations are flowing forth. Government imposed monopolies and oligopolies stifle innovation. The change from $3 per minute long distance calls to free long distance calls would never have happened if the AT&T monopoly had been allowed to stand and the price of postage today would probably be double. Sure the change has not been all fun and games. Change is naturally hated by most of us. It is difficult to move outside of our comfort zones, but it is important to keep moving in the right directions as best we can. Keep in mind that in today's dollars those $3 phone calls are the equivalent of perhaps $10 or more. Jack

SEE - SAW, SEE - SAW, SEE - SAW

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 BIG CRASH BETWEEN AMT AND SCHIP

Dick Army gave me a chuckle this morning. He noted that the AMT was invented by Democrats in their attempt to tax the rich and the SCHIP program was invented to give healthcare to the poor. Today, the problem is that the most recent expansion to the SCHIP program would make some people eligible for both the AMT and the SCHIP! Government madness gone wild!

REPLACING FALSE REVENUES

Again, my concern is that people might buy into the concept of raising taxes in order to replace lost AMT revenues. How can the AMT revenues be lost if they were never collected and were never intended to be collected from the 20 million or so families that will be caught in the AMT trap for the first time this year?

The best way to "patch the AMT" is to suspend the pay-go rules. Government revenues are growing by leaps and bounds, no need to add new taxes now.

HAPPY, HAPPY, HAPPY

It does not take a new high on the Dow Jones Industrial average to make me happy, but it sure does not hurt. After talking about the mid cycle turn for more than a year, I look forward to changing the main topic of these missives. The mid cycle turn will soon be talked about in the past tense.

In 1969,with the Vietnam war was staring me in the face, I got a firsthand perspective of a "scarce resource economy." President Johnson had practiced the strategy of "guns and butter" and the central bank went along with his attempt to have super prosperity while fighting the war with one hand tied behind his back. Then Nixon and Ford fought the ensuing inflation wars with silly price controls. Many people who remember the "Whip Inflation Now" buttons of the Ford administration do not recall that Nixon also tried to use government mandates to hold down prices. Jimmy Carter gave up the fight and by 1980 the markets had witnessed 11 years of commodity markets offering a greater return than offered by the stock market.

The new head of the FOMC, Paul Volcker deserves much of the credit for "Whipping Inflation." Ronald Reagan should get the rest of the credit. President Reagan and Paul Volcker were willing to make the hard choices necessary.

The war in Iraq is a back yard brawl relative to the Vietnam War. Some 56,000 Americans died in Vietnam compared to some 3,800 in Iraq. Human life is most precious but the facts are still the facts. While there are parallels between the 1969 to 1980 time and today's markets, the prior period did not include the benefits of globalization and technological advance that we have today. Indeed, while it was Nixon who broke the ice with China, in or around 1972, the economic revolution in China and the rest of the under developed world has all happened during the past 20 years.

This commodity cycle is only seven years old. When the 1969 to 1980 cycle turned, it turned sharply. To date, this turn has been a slow turn and one that few have even noticed. With oil and gold sitting near all time high nominal prices, many market followers would laugh at me for saying that the turn is under way, but it is. One can see the turn by looking at the broad CRB index but the best place to see the turn is in the stock market. There has been a decisive turn in the market; growth is out performing value and this did not start yesterday. Indeed, growth has out performed value since July. If you plot the IVW index versus the IVE index you will see what I am talking about. Or you can simply look at a long term chart of the NASDAQ 100! This index has broken through resistance that goes all the way back to 2002, before 9/11/2001.

YES, I AM HAPPY, HAPPY, HAPPY. I HOPE YOU ARE TOO. THE PENDING DECISIONS OF CONGRESS SEEM TO BE HANGING OVER OUR HEADS LIKE THE SWORD OF DAMOCLES BUT I BELIEVE THIS IS ONLY A LAYER ON THE WALL OF WORRY THAT WILL BE CLIMBED! IT WILL NOT BE A SMOOTH CLIMB SO HANG ON TO YOUR HATS AND TO THE SADDLE HORN AT THE SAME TIME!

FOLLOW UP TO GOVERNMENT FUNDING

My statement that the government has more than enough revenue has been challenged. I stand by my belief while offering only a few statements in support of my position. When Art Laffer defends the Laffer curve, he evokes the memory of the 14th century Muslim Philosopher, Ibn Khadun, who wrote "at the beginning of the dynasty, taxation yields a small revenue from small assessments, at the end of the dynasty, taxation yields a small revenue from large assessments." I look at it this way, if your goal is to end prosperity then tax it to death. People are willing to pay very high taxes to "insure the common good" but today there is little that the government can offer to do inefficiently that private enterprise cannot do more efficiently.

The current situation is that government revenues are better than 18.5% of GNP which is higher than average. This has been accomplished with lower tax rates. If the US were to lower corporate rates, as so many other countries have done, jobs and investment in the USA would grow. Citizens need to remember that politicians must "fix problems" in order to collect campaign contributions. We must also appreciate that the politicians are "too smart to fix all the problems." Indeed, to really do well financially, they must create problems that will need to be fixed later. A king for a day could fix the AMT, immigration reform, healthcare reform and energy reform. Democracy has proven to offer longer term stability precisely because we must "muddle through", reach broad consensus and fix our problems slowly. In the process, we must always remember that whenever possible, problems should be fixed by private enterprise solutions. The healthcare system should not be a system of lobby fighting lobbies and more lobbies. A good system would be one in which the patient and the doctor decides what care is worthwhile.

I have not verified the following but it sounds like truth. A Canadian claims that the current waiting list for a human to have a hip replacement is three years long. He says that the waiting time for a dog, not covered under the government system is one week.

THANKS FOR THE REMINDER

I left out traffic congestion as one of the externalities of one person per car. Again, I do not agree that car owners should be forced out of their cars and into multi-passenger vehicles. If the tax on fuel is set to include the real total costs, individual decisions will work together as a market to find the best solutions.

BUY, BUY, BUY!

WHAT HAPPENED TO THE AIRLINES YESTERDAY?

Yesterday, I received a fair question. What happened to the airlines? One fellow was kind enough to note that his Google and Garmin are at record highs but he is in the hole on more than half of his airline shares. I took a look and his QLD has done quite well also but then I have to admit that I have been aggressive on CAL, aggressive for good long term reasons.

The casual observer thinks that airline shares were down hard because of a modest tweaking of guidance at AMR. AMR reports that non fuel costs will be slightly higher this quarter and that revenue growth will be slightly slower. Sure enough, some analysts cut AMR's estimates from as much as $1.04 per share to $.66 per share. This was a bit much, especially considering that the company corrected the figures a bit later in the day to say that cost per mile would come in at $11.98 versus the $12.06 that the analysts were using. Even so, the cost figures were up and the spread between AMR's cost and the costs at CAL, NWA and DAL has grown.


WHAT IS THE REAL DEAL?

It has become clear that Congress is going to practice a game of "rope-a-dope", also called Chinese Water Torture. As we all know, it is difficult for congress to complete a budget on time. The US fiscal year begins on October 1 and none of the 12 budget bills have been passed. There is little budget discipline to be seen anywhere in the process. For example, the Senate is just about through hammering out the defense appropriations bill and it is loaded with about 300 amendments that do not relate to defense in any real way.

The old "Christmas Tree" game is being played. In this game, one member agrees to support the goodies wanted by another member and another and another until they can cobble together a voting block and attach what has traditionally been called "pork" or "pork barrel spending" to bills that "must" pass. Today Congress calls pork barrel spending "ear marks". Politicians from both sides of the aisle work very hard at "winning these goodies" for their home states or districts. Get a large enough group together and a real government boondoggle will be passed.

A good example of a boondoggle is the corn ethanol subsidies. By agreeing to build 200 small refineries in 200 different counties across the country, enough votes were added to the farm belt votes and to the "environment-at-all-costs crowd" to pass the very wasteful ethanol fuel program.

The way the "rope-a-dope" strategy is going to work is that Congress will drag out the budget process until the November 16 adjournment date and perhaps even into a "recall" session in December. Congress will send Bush bills for him to veto. Then they will send him a continuation bill. Even the continuation bill will not be "clean". If the government gets closed down for a day or night, they will act again but try to blame Bush for the closure. All the while, horse trading will continue; a vote for this will be traded for a vote against that. Of course, subsidized "health care for the children" and attempts to cut off funding for the troops will be trotted out again and again.

In case you are too young to remember, "rope-a-dope" was the strategy used in a famous boxing match 30 or so years ago. The one fighter covered up and allowed the other to hit at his arms and gloves. The blows were largely reflected by arms and gloves and eventually the hitter wore himself out. Congress is going to try to wear Bush out. Bush will have to veto spending deals that include "goodies" for all the districts before the budget is finally passed. The Democrats hope that they can gradually offer the right combination of "goodies" so that they can peel away enough votes to over turn a Bush veto.

The "heath care for poor children bill" has lots of supporters even though it extends Medicaid to families making $85,000 per year and even though it adds to the mess of Medicare and Medicaid. The strategy of the Democrats is like a sacrifice pawn move in chess - by loading the health care system up with inefficiencies it is believed that the whole system can be scrapped in exchange for a comprehensive government plan.

Hillary's latest plan is far better than the one she attempted to pass more than 10 years ago but it is still a "take-from-some-to-give-to-others government confiscation". In her plan, those who are young and those who take care of themselves are forced to over pay in order to subsidize those who are slothful.

The analogy is constantly drawn to the area of auto insurance. It is said that just like all drivers are required to carry auto insurance, we must all be forced to buy a certain kind of health insurance. I agree that a lot of folks drive up the cost of medical care by not carrying insurance and then going to the "free" emergency rooms to get very expensive care for non-emergencies.

However, the analogy to auto insurance only works to a point. Individuals can choose to carry only liability auto insurance and even then only a base level is required by law. More importantly, those who drive carefully pay much less than those who are repeatedly caught speeding or violating other traffic laws. In the Hillary plan, the young guy who eats properly and exercises pays far more than his fair price while obesity is subsidized.

HOW DOES THIS DRIP, DRIP, DRIP CONGRESS EFFECT THE AIRLINE BUSINESS?

Both the house and the senate passed bills to fund an important upgrade to the air traffic control system. Of course, as usual, the Democrat majority passed a bill that would increase taxes and one that would continue to force the major airlines to pay for an extra large share of the system. Like the subsidized heath care for the obese, they would give the corporate jet fleets a major break; small jets now pay only 3% of the cost of running air traffic control systems but they consume 16% of the services provided. In one way this is no big deal but when day after day thousands of passengers are delayed, routinely by 30 minutes or more and sometimes by several hours or even days, as a result of waiting on small jets to clear, the problem is real. As always, when the government sets the price, great harm is done to some while others are given great gifts. The Soviet Union fell apart for the very reason that central planning is wasteful; markets are the most efficient means to set price.

Charging set rates for FAA services is similar to what has happened in NC to the highway system. In the old days, all the gasoline tax dollars were used to build roads. In order to have great roads, NC citizens went along with one of the highest gasoline tax rates in the country. Many years ago, Governor Hunt, who had preschool education as a priority, started finding ways to take money from the highway trust fund. The annual "withdrawal" is now around $175 million per year. Not a huge amount in terms of state government but enough to service the debt to build about $3.5 billion worth of roads.

Over the years, NC roads have suffered and the current governor is pushing to build toll roads. Of course one idea behind toll roads is that of a user fee. Another idea is that politicians tend to want to raise revenues (taxes) and they can because the government knows how to spend money better than the market place.

COLLECTIVE WISDOM IS GREAT, WHEN APPLIED CORRECTLY

The old saw that a camel is a horse designed by a committee contains truth about collective wisdom; folly follies when "group think" wins. On the other hand, the wisdom of the crowd has been proven time and time again in markets all around the world. Markets are not perfect but they are far more perfect than are "group think" asset allocations.

The following is an example to show the wisdom of the crowd. If a large number of people are asked a question about which they know little they will tend to offer an average answer that is better than the one derived at by a committee. Specifically, if 10 to 1000 city folk at the fair are asked to guess the weight of an large animal, it does not matter if it is an elephant or a jersey cow, the average guess will be very close to the right answer. The more people that guess, on average, the closer the average guess to the actual weight. However, ask a group of 10, 20, 30, or more to get together to choose one best guess and the wisdom of the crowd goes away. The dominate members of the group pull the group toward their guess rather than toward an average estimate.

THE BOTTOM LINE

Congress has passed continuation funding for the current air traffic control system. Three months worth! The huge sums of money spent lobbying Congress for the past several months is simply not enough! Give the passengers sitting on the tarmac three more months to soften them up! In the mean time, AMR and its unions will have their own little slug fest. AMR is the only major line to have made it through 9/11 without filing bankruptcy. The AMR pilots took big cuts in pay to "save the airline". After bankruptcy, DAL, NWA and even UAUA have lower cost structures in place. The pilots are in the unenviable position of asking for their wages back even though they are already earning more than most other pilots. They are asking for wage increases of more than 30%. I doubt they will get more than 10 or 12% but the fight is on. The lowering of guidance by AMR yesterday was probably related to the negotiations ahead. This is one of those times when the airlines are accounting for every expense they can find.

CAL just put an extra $50,000,000 into its pension plan. As I recall, the accounting on pension deposits is a complicated mess but all in all I suspect that CAL was able to lower its current earnings by some portion of this addition and the prior ones made.

LOOK AT THE CASH

The cash hordes being built by the major carriers tells my story. Until sentiment turns and the "feel good factor" boosts these stock prices, the "accounting game" can hide a lot of stuff but the billions in unrestricted cash says a lot. One might guess that these cash hordes will be used to fend off a hostile takeover but we all know that financing the purchase of a company is much easier if the company to be acquired holds lots of cash. One might argue that the cash will be used to buy new planes but in reality planes are usually leased or acquired with long term financing.

A couple of weeks back, Alaska Air announced a share buy back. It seems that the wisdom of the stock buy back might finally be spreading to the airline business. The pay negotiated at AMR will effect all the other carriers but once a deal is done, a share buy back announcement by any major carrier could be the catalysts to sentiment change. CAL is currently selling at around 7 times trailing earnings and 5.7 times forward earnings; boost these numbers to the market average and you get a jump in share price from $30 to $80 lickity split.

Of course, the change in sentiment is not the whole story. A buy back of shares will increase the earnings per share. The normal roll over that will take place in the oil market over the next few years will also result in higher earnings per share.

NEW CAPACITY

CAL has quickly added a lot of flights to its new hub. Many of these flights are on "feeder sized" planes. The big jets will still be used to leave the hub for profitable long haul flights.

If you do not appreciate just how much growth there is in international business, take a look at the recent action by Google. Google will partner to put a new communications cable beneath the Pacific Ocean. Google will gain access at cost rather than the current extra high Pacific rates. These rates have been pushed up because demand is great relative to available space. A fellow on one of the business shows said it well last night. He notes that just because the world has been blessed to be able to bring a few hundred million Chinese out of poverty over the past 20 years it does not mean that we should forget about the 2 billion others. He says the globalization story is still in the early stages. There is no doubt that air traffic is growing most rapidly within the borders of China and India but US International Carriers will get a fair share of the traffic that spills out to the rest of the world.

PATIENCE, PATIENCE, PATIENCE

Being of virtue is tough. Patience was never my strong suit. However, in regard to market moves, I have had to learn to wait, wait, wait, wait, wait and wait some more. The current situation takes my memory all the way back to the summers of 1982 and 1974. In each case, waiting for the market to make its big move was like waiting for paint to dry. The 1974 time was more exciting than the summer of 1982 but not in a good way. In 1982, most of the shares I purchased just sat there. They did not keep going down much but it seemed that the start of the "big bull" would never come.

This time we have had a number of fits and starts. For example, it was late July of 2006 when value lost its momentum to growth and when small lost its momentum to large. Even so, value stocks and small stocks keep making surges. Our QLD has made us happy but the last dip was large and the recent very strong run has just now put us back close to a new high. An upside break out from here would probably run-up another 15% pretty quick but who can time the market? We are left with the charge to be patient. Congress will eventually get its work done and the odds are good that no major new taxes will be passed. The drain to the markets will not be great enough to kill this bull.

BAD NEWS IS GOOD NEWS!

One thing that will help you be patient is to recognize that right now, bad economic news is actually good news! With T-Bills trading at 3.75%, it seems that the FOMC will need to cut the Fed Funds Rate by another 50 basis points pretty soon. Big Ben and company many feel the need for cover. Bad economic news would do the trick. If personal spending slows or if there is an increase in unemployment claims, the FOMC may have all the ammunition it needs to give the patient another high powered electrical jolt.

INFLATION PHOOEY!

One of the funny things is how short sighted prognosticators can jump to the long term view at just the wrong time. We all understand that those who want to be negative can always find a reason to do so. In the case of lower interest rates, the negative always jump on the risk of higher future inflation. While it is true that if interest rates are too low for too long, the economy is likely to overheat and there is likely to be inflation, but that process does not happen in days, weeks or even months. The immediate effect of lower interest rates IS LOWER INFLATION!

The decline in the cost of money from 5.25% to 3.75% is a tremendous price reduction. For many a business, it is like a 28% cut in the cost of raw materials. TV pundits seem to love to talk about the decline in home prices and inflation in the same breath. Again, those who are looking for "bad numbers" can find them or they can make them up. When the price of gasoline was rising, inflation was terrible. Now, with the price of gasoline back down to $2.62, it is the price of oil that is the problem.

The facts of life today include that each and every day a large number of people stop paying for certain magazines and newspapers. These folks have found that the Internet provides all the news they need. The marginal cost of this Internet news source is ZERO! The price of the newspaper falls from 50 cents to ZERO! The law of substitution lives and breathes. The bottom line is that publishing a newspaper online is far more economic that physically printing a newspaper. My old boss, the President of Legg Mason Wood Walker was fond of saying, "In the long run, economics wins!"

GRANDMA and GRANDKIDS

Put all of Grandma's CD's into just a few big stocks such as GE, MSFT and WB and she will do well. She will no longer be on a fixed income as her profits will grow over time.

Be sure that the grandkids own Google in what I call an ABC portfolio. My only grand child owns APPL, BIOGEN, CAL, Dell, Etrade, Google and Sprint. We plan for her to own the rest of the alphabet before too long. We pay no mutual fund fees and no commissions except for the initial purchase. The educational value for her to own small quantities of so many companies is worth more than the millions she will eventually earn. We live in freedom! We are blessed beyond measure! Praise the Lord!