NEGOTIATE, NEGOTIATE, NEGOTIATE

THREE SETS OF MAJOR NEGOTIATIONS ARE UNDER WAY

Condi Rice has been involved in negotiations concerning the "two state solution" in the Middle East for several years. She is preparing to hold a big pow wow with representatives of several Middle Eastern Countries. We know that big pow wows are not held to negotiate an agreement but to announce agreements that have already been reached. It seems unlikely that great progress has been made, but we should know more by November 14th.

We should all say an extra prayer or two for peace in the Middle East. Many of the battles in this part of the world have their roots in battles fought centuries ago. Some say there will never be relative peace in this part of the world but the truth is that peace has broken out in large parts of this area. Several countries in the area are progressing rapidly up the economic scale. One lesson from history is that well fed prosperous people are not as likely to initiate war with their neighbors. One of my reasons for believing so strongly in free trade is that neighbors who trade seldom go to war.


Negotiation Number 2

The negotiations continue between Iran and the International Atomic Energy folk. I never can remember the full name of the agency that is in the thick of the negotiations or even the head of the negotiations but progress has been made. Under the latest sanctions, the pressure on Iran to "make a deal" has increased. There is room for compromise. Russia, which is the supplier of nuclear equipment to Iran, does not have any desire for Iran to have nuclear weapon capability. Even China is too close to Iran for comfort. Over in North Korea, the USA will supervise the dismantling of the nuclear facilities. The world is a safer place when rouge governments are kept from having nuclear weapons. On September 6, 2007, Israel bombed the start of facilities in Syria. While the USA would prefer to reach a negotiated settlement, there is no doubt that either the USA or Israel will bomb the Iranian nuclear facilities before nuclear bomb capability is reached. As usual, an aerial campaign has limitations and the Iranian facilities have been spread out and hardened. I do not believe the situation will require bombing because I believe the Iranians have more to gain by negotiating peace. Scores of major projects, including projects to build out Iranian oil fields, will start soon after a compromise is reached. The USA has no problem with Iran use of uranium for the production of electricity. Russia has offered to supply the fuel for the plants. Countries such as Pakistan and India, which have nuclear capabilities, make leaders in Iran jealous but adding additional nuclear bombs in Iran does not solve other problems. Negotiations between the USA and India in regard to nuclear capacities are in progress.

Negotiation Number 3

The Bush administration is apparently focusing its budget and tax negotiations with Nancy Pelosi. Nancy has become know in the House of Representatives as the "Committee of One." She does not support the proposals made by Charlie Rangel's Ways and Means Committee. The word is that she especially desires to pass an energy bill this session. The problem is that the democratic solution to energy is the piling on of wasteful incentives. Hillary, for one, has openly declared war on oil company profits, saying that she will use these profits to fund alternative energy sources. As we know from Econ 101, the market will automatically find the most efficient resource allocation. Again, the current energy bill in Congress is an add on of CAFE standards, additional payments to farmers and other programs that actually harm the long term progress toward energy independence. For example, when the government forces people to buy cars that use less gas, they encourage people to drive more miles. A regulated price does not produce the same results as a free market price. Indeed, one of the seeds of the current problem is the price controls on US oil that were in place during the late 60's or early 70's. Can you imagine that at the time it was thought to be good policy to hold the price of US drilled oil to $4 per barrel!!

A statement was just released from the United Nations saying that the use of corn for fuel is a crime against humanity. I think I heard the official say that the 100 bushels required to make 13 gallons of ethanol is enough to feed a starving child for one year. The exact numbers do not matter because the point is valid; children are starving because wealthy people are paying to convert human food stocks to auto fuel.

WHAT IS CONGRESS WAITING TO DO?

One month after the start of the 2008 fiscal year, Congress has yet to submit a single budget bill to Bush. Obviously, there is still hope for a significant break through of some kind. It could be that democrats believe that they will ultimately force through the budget busting SCHIP bill (it was passed once again by the Senate late yesterday). Once Bush is defeated once, the logic goes, he will be weak and Congress can then steam roll through other measures. I doubt that the SCHIP will pass in its current form.

The more likely scenario is that a major compromise is still a possibility. The budget negotiations have been in progress for many months. Hank Paulson left his job at Goldman, one in which he reportedly earned about $200 million per year, in order to pass the real "mother of all tax bills." This would be a repeat of the big Regan (Kemp-Roth) compromise. As you may recall, in that case, Don Regan left a similarly powerful job as Chair of Merrill Lynch to negotiate what was the "mother of all tax bills" at the time.

As I have mentioned, based on the very powerful real estate market cycle, we are over due for a massive tax reform bill. Mike Huckabee is moving up on the right. He has become a dark horse possibility for the republican presidential nomination. He has proposed the eliminating the IRS. He would substitute a consumption tax. The Regan tax revolution began about 26 years ago. It has taken a lot of work and a lot of compromise to reach the point where a move to a relatively flat tax would not be risky or potentially too disruptive. The Ryan proposal, 10% tax on the first $100,000 of income and 25% on all over $100,000, with standard deductions but no itemized deductions, is a doable compromise. It would do away with the AMT while producing tax revenues equal to the current law. Of course, democrats would insist on a third bracket for the rich and tax payers would be given the option to take itemized deductions by filing under the current system. Huckabee has a great idea but the risk of a massive conversion is too great. The wisdom of the framers of the constitution is always most apparent when the boldest and most risky ideas gain momentum.

In the current political climate, a great compromise seems impossible. On the other hand, democrats know that despite their massive lead in the polls, that they are vulnerable. The "big issue" that brought them into power has turned. Progress in Iraq continues. The death rate has collapsed. It is too early to know for sure but it appears that the war will be a positive for republicans by the time the election rolls around. The left is not happy with the democratic leadership. No real progress has been made since the last election. Without compromise, there will be no progress. The best of government policy has always been a result of "ruling from the middle." Negotiators have no reason to suggest a deal is close or not. There is nothing to be won by coming close and there is much to be lost if expectations are raised immediately before all deals fall through. In any event, a budget compromise of significant magnitude must be reached. If you want to see a massive dump the incumbents movement, just let Congress try to leave town after only passing a "continuing resolution budget."

TOTAL WORLD MARKET FUNDS

A reader wants to know more about the "total world market funds" that I mentioned yesterday.

There are a number of funds that track the "total" world market. The word total might be inappropriate because there are always a few very small markets excluded. Vanguard is the market leader in very low cost index funds.

PLEASE NOTE: The US dollar is as cheap as it has ever been relative to the Euro and it is also very cheap relative to many other currencies. Even the Yuan has appreciated against the dollar during the past year. As such, I am a strong proponent of "buy the USA" right now. In particular I believe there are bubbles in the Chinese markets. As such, the "safe" way to invest right now is to focus on American stocks. Those who promote diversification on top of diversification disagree with concentrating on investments in any country but even most of these guys would say that if you are going to invest in only one country the USA would be the one.

Once again, I tell you that I am an aggressive investor. It is arrogant for anyone to believe that they are "smarter than the market" in the short run but history shows that there are those who can beat the market in the long run. I have made my share of mistakes but my record is strong. Over the next several years, the USA could prove to be the very best place to have all of ones funds.

OFFENSE AND DEFENSE

In any endeavor, it is easy to get caught up focusing on offense. A church friend of mine just reminded me of this truth when he told me about all the big gains he is enjoying. He named a number of high beta stocks he owns that have soared in recent weeks. I cautioned him and will caution you: remember to play defense.

How does one play defense in the stock market?

Most people would answer the above question with talk about bond allocations, cash allocations or portfolio diversification stories. All good answers but not answers that lead to championship results. If you play not to lose, you will have a hard time winning any championship. The more powerful answer is that one should buy the bigger companies when one is trying to keep running up the score without risking multiple interceptions. The offensive move is to buy the smaller stocks in the country that has the advantage. The problem is that the best time for small stocks, the years immediately after a major recession, has already come and gone during this cycle. Some small stocks will do very well during the years ahead but the proportion will shrink.

Near the end of the 1960's cycle, successful investors piled onto only 50 stocks, these were know as the "Nifty Fifty". At the end of the tech bubble of the 1990's, relatively few stocks had extreme valuations. Companies such as AOL were priced as if they would never stop their rapid growth.

Today, the big bubble is in China. Who knows how high a mountain will be climbed? I missed the big move but will not compound the mistake by "getting in near the top."

The bottom line is that the writer of this letter is currently very aggressive while buying many "defensive stocks." Once again, this is a different definition of defensive stocks that the popular definition. I am not buying consumer staples. I am not saying a recession is near. I am saying that big cap growth stocks, such as the top 100 stocks at the NASDAQ, are likely to do well over the next several years. Yes, I still have a massive overweight in the airline area and not even I can call this investment defensive. My overweight is in the "best of breed", CAL, and it is in American stocks but the company is highly leveraged in a volatile business. Investors should always seek out volatility in the "good times." Of course, volatility is a pocketbook breaker in "tough times."

Small international stocks are among the most volatile but, because I believe we are within 3 or 4 years of "tough" times, it is time to overweight the relatively safe haven of the USA and it is time to under weight international.

LEFT OF HILLARY

I continue to be amazed at how all the democratic candidates have run to the left of Hillary. Hillary has been able to run toward the center and has become the "most attractive of the liberals". Investors should pay attention to the coming election. The potential for moving the markets is great.

Got to run! Have a great weekend.

TIME RUNNING OUT

Time is running out on Iran. A long list of new sanctions will be imposed on Iran today. Any company that does any business with the Iranian Revolutionary Guard will face repercussions from the US. I believe a deal is near.

Time is running out on Congress. Hank Paulson says that the tax refunds due 50 million Americans will be delayed next year if the congress does not pass the AMT patch by November 7. Rangel will present his list of tax increases tomorrow. The bill as written will go nowhere. Could this game of chicken end with no AMT patch? I doubt it.


Time is running out on terrorists in Iraq. The death rate in Iraq continues to fall. The citizens of Iraq are no longer willing to harbor terrorists. Even the Kurds are showing signs of helping with the PKK problem. The government needs to compromise on energy revenue distributions and a few other things and many more American troops will be withdrawn.

Time is running out on the commodities bubble. A Texas energy economist estimates that $30 of the price of oil is risk premium. Just the hint of a settlement agreement with Iran could cause the price of oil to plunge.

The FOMC will meet next Wednesday. Financial Futures contracts suggest there will be another 25 basis point cut. Recent data suggest the cut will be 50 basis points.

This business cycle has been a record breaker. No one would have predicted a strong economy in the face of $90 oil. Lower oil prices, lower interest rates and relative peace in the Middle East would be a powerful market stimulator. Hold on to your hat! BUY, BUY, BUY

THE BIG $$$$$ TURNS ARE HERE!

Big money turns are happening all around the world. For example, Cisco just purchased a WiMax company. Up until now, Cisco was not a player in the WiMax market and did not feel the need to be there. The problem for Cisco is that WiMax is proving to be the key to the rapid coverage of huge areas of Brazil, India, China and other developing nations. The growth in telecoms and Internet services in developing countries is huge and quick because there is no competition from a previously built fixed wire system.

The standardization of WiMax protocols is causing the system to spread at a rapid pace even in the USA. Sprint and ClearWire are just two of the early USA leaders. Google has inked a partnership deal with these guys and because Google has purchased billions of dollars of fiber optic capacity and telephone nodes, the speculation continues that Google could build out a nationwide WiMax supplemented Internet/Phone system in a hurry. My guess is that the next big Google move will be to start a VOIP system. Much of the system is already in place. Adding the 700mz TV spectrum, the stuff that goes through walls, would give Google the ability to cover the whole country quickly. The big phone companies are dug in deep and a country wide network would cost billions so several partners may be involved. Even Apple has expressed an interest in buying spectrum. Google will attempt to remain the software provider and let others sell the hardware and the service.


Since Google became public, the stock has risen from $85 to $650+. During that time, Apple has gone up twice as much. I believe Apple is over valued but it certainly has momentum. I continue to hold shares in accounts and inside QQQQ, QLD and other funds. If I had enough money to buy all of Apple, I would buy Google instead and invest the other half in something else. This statement may sound silly but I have used this logic to great advantage in the past. For example, when I suggested buying CAL at $6 per share, I wrote that LUV at $17 per share was dramatically over priced. I said that if I had the money to buy all of LUV that I would buy CAL, AMR, UAUA, DAL and NWA instead and invest the remaining 9 Billion Dollars elsewhere. Since that time, LUV has gone nowhere and CAL has gone up from $6 to $36. Even today, those who do not understand the situation are over paying for LUV while the growth in international traffic is huge.

Back to the big mobile turn, Google's purchase of Jaiku shows us once again just how much change is in store. Jaiku has the potential to automate everything from your address book to your photo album. It is kind of a Twitter on steroids. Give your teenage child a Jaiku phone and you will know his location, to whom he is talking, see the world from his camera lens and keep records of all his activities. It sounds like a spooky big brother deal but those who like it are crazy about it. Coworkers have found Jaiku to be a huge time saver; notes and contacts are automatically shared across the network. Husbands who stop for groceries access the list prepared by their spouse and automatically leave the message that the shopping has been done. Put a Jaiku on a child and he will not get lost for long.

The big turn in the Internet is that it will go mobile big time over the next several years. Buy the QQQQ's and hang on for the ride. Ideas are coming hard and fast. I did not buy more VM Ware when it was spun off from EMC but I have enjoyed the ride since EMC still owns 86% of the stock. It is impossible to see which of the big firms will produce the next winner. Ebay is babying another fascinating purchase and Amazon is selling high dollar goods rapidly while the pundits keep talking about the consumer being tapped out.

BIG, BIG, BIG TURN AHEAD

Understanding what most others do not understand is the path to BIG MONEY. The REALLY BIG MONEY TURN is close at hand but most investors expect the dollar to continue to fall.

The really big money turn is that the value of the US Dollar relative to most other world currencies is about to climb rapidly. The brief history of the dollar is that it was very weak in 1986 and again in 1995 just before those mid cycle turns, once the dollar turned, it climbed and climbed and climbed some more. In the latest cycle, it peaked in the year 2000 just as the average American went "all-in" during the Internet bubble. Since that time, the dollar has fallen and fallen some more and it is now at about the same level as it was in 1995. In the year 2000, one could buy a Euro with a dollar and get back about 20 cents in change. Today, one needs $1.42 to buy one Euro. The consequences are huge. The reason US manufactured exports grew at the huge rate of 16.1% over the past year is because our goods are now very cheap. If you do not believe that the dollar is down, take a trip to London and be sure not to forget your American Express Card. The exception has been the Japanese Yen. Japan is the other major exporter of capital goods. China, on the other hand is at the other end of the see saw. China is the ultimate labor intensive goods producer. Even so, in the past year, the Chinese Yuan has appreciated against the dollar.

How many .27 basis point interest rate moves are enough to slow this country down? The Chinese government is tightening the screws. The coming slowdown in China will not be a bust. Still, if growth were to be cut by half or two thirds, the demand for commodities will be curtailed. The big turn in commodity prices is at hand. Prices will not collapse but the relative performance of high tech companies which use commodities will far out do the performance of the resource companies.

THE BIG TURN

The dramatic slowdown in the US housing market, which has taken down the price of lumber and which is pushing down of the price of other materials, is giving US Central bankers the motivation to cut short term interest rates. A cut in short term interest rates will stimulate the US economy. The strong growth in the US will increase the demand for dollars. As the dollar increases in value, it will create its own demand for more dollars because foreign investors are paid a bonus when US investments go up in dollar terms. The US and Japan make the most sophisticated capital goods products. Now that the recovery is over, it is capital goods producers that will benefit from future economic growth.

During the past 5 years, the carry trade has been a big winner for the big investment banks and the hedge funds. These investors borrowed Yen at very low rates of interest and swapped for other currencies in order to earn higher rates. The problem is that the big turn is also here in regard to the Yen. The Yen is the other currency that will appreciate dramatically over the coming years. The big turmoil in the financial markets for the past couple of months have been the result of the unwinding of the carry trade. The sub-prime mess is not nearly as big a problem as is perceived. Indeed, the largest of all mortgage lenders, Country Wide, announced today that it will provide refinancing for sub-prime loans.

Let me put it this way, on my way around Winston-Salem today I counted dozens of commercial projects underway. The construction includes everything from office buildings, manufacturing facilities, health care facilities, bridges, roads and restaurants. Yes, housing construction has fallen 48% !!!! since the peak of January 2006, however, even now housing construction is about double the units that were built during the 1993 slump! Adjust for size and features and the down turn is not nearly as big as it looks. About 35% of new houses being built today have three car garages, extra baths and even home theaters. I visited a three-bedroom three-bath Parade of Homes property this past Saturday and was surprised to see that it had three car garages on either side. In my book, it takes a boy with toys to want a 6 car garage home. Now, do not tell me that a recession is at hand. Housing construction has fallen dramatically but the current 6 and a fraction % home mortgage rate makes homes far more affordable than the last time oil prices were at $80 per barrel, at that time mortgages were priced at 15%! With more people at the prime age to upgrade to a larger home, I expect the housing market to turn up strong within a few months. TURN, TURN, TURN, TO EVERY THING THERE IS A SEASON!

THE BOTTOM LINE IS that investors should recognize that the coming turn in the dollar will mean that US stocks will generally out perform international stocks. It is time to under weight international stocks. The second half of the business cycle is a time when big cap growth will generally out perform small cap value. By the end of the cycle, the big mutual funds will be crowded into fewer and fewer big cap stocks. In other words you can get a jump on the crowd by buying IBM and GE. You will not make as much with these in the short run but they will keep on moving up for several years.

YES WHAT I WROTE YESTERDAY ABOUT AT LEAST TWO US PIPELINES IS TRUE

There is now enough new tar sand oil flowing from Canada that two pipelines that historically carried oil from the Gulf Coast to the mid west have been reversed. This situation will continue until the large refinery in Illinois and the large refinery in Indiana are upgraded, the permits have already been approved! If the new refinery planned for South Dakota is constructed, it will be fed by yet a new pipeline from Canada. This new Canadian oil will be a significant factor among many that will cause the turn around in the price of oil.

OPEC having pledged to increase production by 500,000 barrels per day effective November 1 has jumped the gun. High oil prices are apparently causing cartel members to cheat by several hundred thousand barrels per day. In addition, production increases keep coming from Angola, Canada, Brazil and a large number of places that are hard to spell or hard to find on a map. Another place where the pipeline flow is being reversed is between Kenya and Uganda. Once again this is probably a temporary condition. After big discoveries in Uganda, several of which are just across the border from Kenya, Kenya is eager to get in on the goodies. A Canadian major has just signed contracts to explore the area. A few billion barrels here and there and you eventually get to that marginal price break.

The cross currents are incredible. The US congress is about ready to give up on its latest and craziest energy bill. Yes, if the bill were to pass, the wealthiest of corn farmers would get about 100 million dollars more in subsidies. This time the subsides would be paid for by increasing the tax on oil companies. Duh! we need more oil so lets tax the production of it more? The good news is this bill is another that cannot get past a Bush veto. In the meantime, the UAE government has issued $2 Billion in bonds in order to help with its purchase of Canada's Prime West Energy. The turn is certainly here when a middle eastern country is borrowing money to buy oil assets! I suppose the bonds were sold at a discount to avoid the payment of interest but the move is still significant.

PROGRESS IN IRAN

It is hard to see the progress toward a solution to the Iranian "problem". However, the US, Russia and Iran are currently doing a triple tango. The US has signaled that it will delay the construction of the European Missile Defense System if Russia will help stop the Iranian Nukes. Russia has signaled Iran that it will support Iran militarily if Iran will stop making the hard dangerous stuff. The leadership of Iran has done the a two step. The grand leader has undercut the power of the public leader. Stay tuned. A settlement would reduce the oil risk premium by $10 to $20 per barrel!

THE TURKS AND THE KURDS ARE OUR FRIENDS.

The war in Turkey is now 23 years long. More than 30,000 Turks have been killed. Most Americans do not even know about the war. I suspect that the recent big public brouhaha was carefully timed for political and economic reasons but this does not matter. The key point is that peace is finally a possibility. The semi-autonomous region of Kurdistan is enjoying relative peace and prosperity. Oil producers from around the world are beating a path to the countries door. The leaders of Iraq have quickly "outlawed" the rebel PKK factions that have been fighting the Turks. Iraq will join the Turks in putting down the rebellion. Of course, some of the Kurds within Turkey will continue the fight but the pressure to end the madness is coming from all sides. Turkey and Kurdistan are both middle east success stories. Turkey has a large and growing economy. In a show of support, the US has given Turkey several surplus war ships.

By the way, the source of much of the international information is Stratfor. You should sign up for a trial subscription if you are interested in international affairs. Some of the tech information is from GigOM which is a free Internet service.

CONGRESS CONGRESS CONGRESS

The democratic congress continues to find itself in a very deep hole. The problems keep piling up. Yesterday, Hank Paulson wrote a letter saying how important it is to get the AMT fix done promptly. If Congress does not act very soon, about $75 Billion of tax refunds to the public will be delayed. The cut off for reprogramming IRS computers is upon us. Last year, a few refunds were delayed and the recipients were not happy. The problem is that there are currently about 20 million people effected by the AMT for the very first time. In addition, there are other tax breaks that must be extended as a part of the same bill. Trent Lott and John Kyle are starting to have lots of fun while pushing democrats to act.

The latest proposal is to allow the democrats to suspend their pay-go rules, provided that they will give Republicans equal amounts of tax breaks. In other words, the democrats can patch the AMT for one year to the tune of about $65 Billion if $65 Billion of the Bush tax cuts are extended. Oh what a tangled web?

Democrats have vowed to try to pass the SCHIP $35 Billion increase one more time. The interesting thing is that if they are successful, they will need to find about $100 Billion of tax increases to offset the combination of the AMT and the SCHIP! Oh what a tangled web?

The pending bills include approximately 13,000 earmarks. The total value of these earmarks is around $9 Billion Dollars. This is enough money to double fund SCHIP this year. It really seems that the democratic congress is between a very hard rock and very hard place. As a person who believes that free trade is the foundation of prosperity, it pains me to know that the subsidies for wealth corn farmers is the reason that other nations refuse to purchase our agricultural products. I can't blame the other nations but the actions of republicans and democrats in congress to hurt the nation in exchange for political contributions from the special interest is shameful.

Believe it or not, the federal budget that should have been passed well before the start of the fiscal year on October 1, may be passed as an omnibus bill around November 16; not the way to run a railroad! The process for passing an omnibus bill is for a relatively small group of people to sit down and edit thousands of pages in the matter of a few days. The final vote will be made by 535 people who have not even read the final product. Shameful indeed.

Good News Good News Good News

I do not want to end on a negative note so here are a few pieces of good news.

1) The moderate leader Bhutto is still alive. We will all know that change is in the air if this woman is elected to lead Pakistan.

2) Real wages in the USA have increased at an average of 3.7% for the past two years. Let the good times roll! The prosperity phase of the business cycle is at hand!

3) While there will be lots of "bad economic news" surfacing over the next few weeks, this "bad news" is good news as it will confirm that "Big Ben" will cut US interest rates again. The average return of the average stock has been 19% in the year after the last 8 first interest rate cuts. That 19% figure hides the rotation effect. Many stocks will rise 50% or more over the next year.

4) CAL signed contracts today that will save the company another 100 million per year. UAUA soared on great earnings and on its progress toward outsourcing high cost service. UAUA is also one of the airlines that is considering selling its frequent flier program.

BUY, BUY, BUY!

HOLD YOUR NOSE, I SMELL A STINKING COMPROMISE AND A VERY BIG BULL

Congress has failed to pass 12 of the 13 budget bills. The deadline of October 1st is also the date the debt ceiling runs out. Is there going to be a replay of the 1995 government shutdown? I don't think so. A very smelly compromise or two may be in the works.

One bill likely to pass will be the "Airline Passenger Bill of Rights and FAA Satellite Air Traffic Control and Airline Flight Path Correction Bill." No, Congress will come up with a shorter name but to "get the votes" the bill will include provisions to soothe the wounds of the unhappy. This bill will regulate payments and benefits granted to those who are stuck on the tarmac for hours on end. Of course, once the airlines get a bill passed to fund a new high tech satellite navigation system, the problem of being stuck on the tarmac will miraculously be solved. CAL has already spent at least $50,000,000 building a new hub in Cleveland to relieve the congestion at Newark. There is no question that the big carriers have been paying more than a fair share of the cost of FAA services. After the bill has passed, smaller planes will save a lot of money by avoiding taking a prime landing spot from one of the big carriers. Smaller airports will be utilized more by these smaller planes.


The airline industry and the traveling public will all be big winners when a compromise is reached. Among the losers will be the owners of homes that are in the direct flight path to the major airports. Part of the huge cost savings will be more direct flight paths near these airports. The savings will be in terms of money and time. Many a flight will cut 20 minutes off its landing time. Connecting flights will see improved scheduling. The cost of the system will be upwards of $50 billion but it will be well worth it. A compromise should be reached very soon.

ALTERNATIVE MINIMUM TAX

Senator Grassley of Iowa is trying to steer Congress toward the elimination of the AMT along with making the 15% rate on capital gains taxes permanent. Grassley argues that Congress does not need to offset or score the loss of revenue from the AMT tax because the government has never expected or budgeted this income. Of course, Charlie Rangle and the rest of the Democrats are pushing other ideas. The idea that the democrats will fight the hardest for is the closing of the "loop holes" in regard to "carried interest." They know they have a "winner" in regard to attacking the taxes paid by hedge fund managers. The fact that a change in the law will not cause even a twitch in the tax revenue collected gauge does not matter. Many a business will have to be restructured to avoid the extra tax but, again, the amount of new taxes collected will be minuscule. Indeed, the normal, reasonable and rational decision of many an investor will be to avoid realizing the gain on investments once the tax rates go up. The free flow of capital is one of the things that makes the US economy dynamic and prosperous. The passage of extra taxes also includes a hidden "tax surcharge."

Senator Grassley needs 60 votes to get a bill through the Senate. The Democrats need the 60 votes to get a bill to the President but it needs 67 to over ride a veto. Congress currently "enjoys" a favorable rating of 27% of the citizens and the disapproval of 64%! I don't recall lower numbers. Do the Democrats really have the stomach for closing down the government? When the Republicans tried in 1995, they caught too much heat to handle.

BIG BULL MARKET!

Twenty five long years ago, when I was an investment broker with Merrill Lynch, an event happened two times that has not happened again until the day before yesterday. The up to down volume on the New York Stock Exchange was greater than 25 to 1. Such an event, according to The Sentiment Trader, has happened only seven times. In addition to the two times in August of 1982, it happened in 1950, 1951, 1957, and 1978. In most cases, the market jumped, then stumbled around for a week or two and then jumped again. In all seven cases the market was up strongly within three months and the average increase of the average big stock was 9.4%. If you appreciate how "heavy" is the S&P 500 or the Dow Jones Averages, they you appreciate that serious money was made during these historic moves.

The up to down volume this past Tuesday was better than 30 to 1!

One possible scenario is that the market will struggle for the next couple of weeks and then have another huge up day when Congress passes a reasonable compromise. Of course, when Congress lumps 12 massive appropriation bills into one grand package, all sorts of extra billion dollar earmarks get funded. Yes, I can already smell the stink of the compromises coming but the process of "muddling though" is as good as government gets. Government is a necessary evil, generally the less the better.

GOOGLE ADVERTISING REVENUES TO SOAR!

Google continues to charge ahead with innovative "solutions." The coming advertisement revenues from "rich media sources" is going to make the revenues from the current text ads look very small. Google is ready to patch together its innovative "gadget" ads with its current operations and with the DoubleClick system as soon as the closing of the purchase is complete.

Mobile ads are also ready to explode. INTC, TXN and others are making dramatic strides in reducing the battery power needed to operate sophisticated hand held, wireless computers. Those children born this year are going to live in a very different world than the one that you and I know.

STRONG DOLLAR AHEAD!

After falling hard for 4 years, the value of the US Dollar is about to turn. As a general rule, the turn will mean that the performance of international investments will weaken and the performance of US investments will improve. Part of the reason that China has been growing at unprecedented rates has to do with the value of the US dollar. As the dollar and the yuan (which is pegged to the dollar) have fallen, the price of Chinese goods sold in Europe has fallen. The ECB is still in need of an increase in Euroland short term rates to slow the European economies. Job losses are going to be very large in Euroland unless they can reverse the growing advantage of the Chinese manufacturers. ECB rates are at 4% and the US Fed Funds rate was just reduced to 4.75%. Under the circumstances, one cannot expect the dollar to climb until the market is confident that either the spread is going to switch from a -.75% to a plus something.

Yes, I am saying the opposite of what the TV pundits repeat at least a few dozen times each day but history and common sense are on my side. The price of oil and gold is being pushed by fear of an "Iranian Event", by the falling dollar and by the belief that lower short term rates will stimulate the economy and thus the consumption of oil. Since 1978, Iran has been isolated from the rest of the world. Over the past couple of years, hundreds of deals have been made that will bring Iran out of isolation. The current situation is much like the negotiations to buy a business. Outsiders can often discover that negotiations for a takeover are in progress but only the insiders can make an highly accurate, educated guess as to weather the final deal can be closed. It would be a silly move for insiders to openly state their educated guess. If one suggests that a deal is close only to see it fall through, then the party has embarrassed himself with no potential gain. If sabers are rattled putting the prospects of a deal into great doubt, then a successful conclusion provides relief to all parties.

Iran has fastidiously maintained its right to develop the peaceful use of nuclear power. I believe Iran will develop said nuclear power after a deal is made that will reduce the threat to the rest of the world. Obviously, almost everyone would prefer that all nuclear weapons were destroyed. It has never been a comfort to know that Russia or India or Pakistan or others have the capacity to start a nuclear war. The deterrence of self destruction just does not seem very powerful when dealing with people who are willing to commit suicide to insure a trip to heaven. Still, I suspect that the final deal will give Iran the "supervised" right to develop nuclear energy.

Our French Friends have added a bit of pressure. I smell a compromise in the works but it has been more than a year since I first caught a slight scent in the air. Only time will tell but the combination of a few deals in Congress and a couple of deals in Iraq and Iran could make for a huge stock market rally before the November elections.

DO NOT TAKE THE RISK OF BEING OUT OF THIS MARKET! A SMALL SPARK COULD CAUSE A MARKET EXPLOSION!

LOVE IT, LOVE IT, LOVE IT

The rest of the world followed the USA lead over night; markets around the world soared! The part I love the most is that at least half the talk is about the boom in oil and gold. A lot of money is pouring into the "tired end" of the market while the "jump" in the "other end" is just getting under way. Part of the reason is that many investors falsely believe that inflation is about to soar.

Yesterday a reader sent an article that suggested investors should hide out in bonds until the "worst" is over. My SELL, SELL, SELL on bonds is looking pretty good right now; bonds have fallen while stocks have soared. Economics professor, James Hamilton, issued a follow up study yesterday that suggests that the whole curve shifts down when the Fed Funds Rate is cut. Oops! Not this time! My belief is that even the good professor tends to get the cart before the horse. In the past, central bankers waited too long to cut short rates; the economy has often reached "free fall" before the start of the rate cuts. The first move in rates is never enough to float a falling lead hot air balloon, it is only enough to slow the fall. After the second cut or two, it is only common sense for long rates to go up, stimulating an economy is positive for future real growth and for future inflation.


The great news is that inflation continues to be very well behaved. The massive purchases of raw materials in Asia continues to be converted into lower priced goods around the world. The dramatic fall in the US dollar continues to "put the wood" to the seat of the pants of all the other industrialized nations. Exports from the USA and from China (which pegs its currency to the US Dollar) are soaring. You won't read this hardly any where else but, Bush has made some great chess moves in recent months. He has sacrificed a pawn or two in order to set up the democrats. If you were a democrat senator right now, what bill would you propose and expect to get signed into law?

The big push by democrats to "bring the troops home now" has failed in its purpose while pushing the democratic presidential candidates to take left wing positions that will not help them in the general election. The American people want to be safe from terror. Bringing the troops home in the middle of the war is not the winning position. The latest attempt to disrupt the war, forcing the troops to spend a lot of "down time" is unraveling.

On the energy front, the "big oil" man, Bush, has forced the environmentalist to admit that ethanol is not the answer. Bush caved into the democratic game of "paying off corn farmers." By doing so, he helped start the back lash to wasteful subsidies for bio-fuels. Many folk on both sides of the isle have started to understand that it would consume far too many food resources to replace even a small portion of our energy needs. Even the carbon sequestering schemes are starting to be seen as just more government boondoggle. The fact of the matter is that the most effective scheme for sequestering carbon is managed forest growth. New growth sequesters carbon much faster than old growth. China is now moving hard in the direction the USA headed over 100 years ago. The USA has reforested millions of hectares. The fear of environmental activist, those who want to leave the forest alone even if it means the occasional fire burns a few billion acres, has impeded the process but common sense prevails over the long haul.

The wealthy are always attacked by the left but, of course, wealth allows the "right thing" to be done. The poorest of the poor continue to use up the forest. Countries like Bangladesh are down to 7% forest coverage. A country like China, which moved rapidly from the poorest of the poor to a developing nation, can now afford to join the USA in its reforestation program. Of course, much more could have been done in the USA. The USA continues to pay farmers not to grow crops on land that could be growing trees. Like I have said before, an acre of forest sequesters more carbon annually than what can be saved through the growth of ethanol in 50 years. As usual, people (particularly democrat people) tend to try to do for nature what nature will do for itself. It is hard to do better than God!

With the price of oil at all time highs, as a democrat senator, would you fight for carbon taxes when the science continues to show that many of the schemes to cut carbon dioxide are proving to be inefficient boondoggles? Would you push for tax increases in the middle of a housing recession and credit crunch?

The tide is turning. Senator Obama just proposed a tax cut for the middle class. No doubt, he would pay for it by eliminating slapping shackles on the rest of the economy but at least it is a mention by a democrat that taxes need to be kept low. One of the economic things least understood by the democrats is corporate taxation. The bulk of the taxes paid by corporations are passed directly through to consumers. The big company is easy for democrats to attack but the attacks hurt the "little people" the most. Today, corporate taxes in the USA are high relative to the rest of the world. The same politicians who complain about jobs being lost to competitors overseas are willing to make the situation worse. Countries in Western Europe, Eastern Europe, Asia, Africa and South America have lowered corporate taxes. The manufacturing boom in Eastern Europe, for example, is not an accident. Tax policies do matter and the general principal holds that individuals make better decisions than the government in regard to how to spend the peoples money. There is waste all around; waste committed by individuals, governments and businesses. Schumpter won the "battle" with Galbraith long ago. Even totalitarian regimes do well when they allow the people economic freedom; the Chinese do not have a bill of rights but they are buying homes and buying and selling goods.

WHERE DO WE GO FROM HERE?

Ben Bernanke has demonstrated his understanding that the price of oil will ultimately take care of itself. The economic train does not need to be slowed to a crawl in order to halt inflation. Inflation is always a problem in the balance of goods and money, but given the opportunity the market will find substitution goods if the money is available. The big oil energy projects are still under construction but price does cure price. Much of the current run up is a continuation of speculation. It has always been true that market tops are much harder to see than market bottoms. The topping process is one where momentum is lost and where relative declines occur long before there are actual nominal declines. From 2005 to 2006, the price of oil clearly went up. From the peak in 2006 to the peak in 2007 there has been no real increase. The momentum is gone even though the dollar has fallen to record lows. The dollar is about to turn and go up for the next 5 years or so. All the while, new energy supplies will come on line. Let me put it this way, who would have ever guessed that Russia would sign contracts to supply China and Korea with electricity?

The invisible hand of Adam Smith has been at work and it will continue to work its magic. Is it not just wonderful how the slack in the housing market comes just as construction of refineries, power plants and industrial facilities is gathering steam? Is it not neat that the build out of WiMax net works will occur just as Intel and many others are ready to supply the world with incredibly cheap chips that will dramatically change the way we communicate?

Once again, the price of a computer chip, this time made incredibly small by nano-technology, will drop by thousands of percent. Those who focus on oil to say that inflation is terrible have simply not considered the growth in computer chip sales relative to oil sales. Over the past 30 years, the people of the USA have used less and less oil per person. Sure the nominal price has gone up but the total increase in dollars spent on oil lost its momentum long ago. At the same time, the number of silicon chips purchased has gone up many thousands if not millions of times. The price of these chips has fallen and fallen and fallen some more and are ready to fall once again.

Huge quantities of chips will be sold in coming years. All the ways these chips will be used to boost productivity are not known and not knowable. One known and easy example is the huge savings from avoiding the wrong turn. When GPS is everywhere, a few trillion wrong turns will be avoided each year. Yes, GPS will serve as a substitute for trillions of gallons of fuel.

BUY CONSUMER CYCLICALS, BUY TECHNOLOGY, BUY TRADITIONAL BANKS, BUY INDUSTRIALS, BUY TRANSPORTATION!

MAKE MONEY ALONG WITH THE REST OF THE WORLD!

SELL LONG BONDS, AVOID GOLD, SELL COMMODITIES, AVOID OIL STOCKS, AVOID MATERIALS, AVOID UTILITIES.