BUY GM?

A few days ago, in response to Random Roger's blog about HP, Roger and I had a good email exchange. In it I suggested that I would rather buy GM than HP. I should have posted the comment before today.

Kerkorian is tendering for GM shares at $31 per share. Like I keep saying, you ought to be buying US stocks before they are bought up by the big players. It is indeed a rare situation for the S&P earnings to be higher than the yield on the long bond; not future earnings but trailing earnings! If it were only projected earnings, one might dismiss the gap as over-optimism by the analysts. The actual situation is that the analyst are consistently under-estimating S&P earnings. In January the consensus forecast was for 7 or 8% growth in the first quarter. The final number appears to be about 18%!

Buy the big bull boom bubble before the bust. The market has four above average years ahead. Siegel and others suggest that the stock market will only average about 8 or 9% which is 4 or 5% above the long bond rate. This has been the historical average spread. There is also a long history of stocks earning 11% or better. There is room for a boom. Population trends are more important that is perceived by most money managers. Even if Siegel is right, 8 or 9% is better than other alternatives (resort real estate is doing much better but there is risk that this long run will end).

The 2% Solution

Money managers generally believe the FOMC will be in a neutral stance when the Fed Funds rate is 2% above the inflation rate. The trick is that raising short rates and declining inflation rates can cut like a pair of scissors.

An increase in short rates is designed to slow future inflation. However, my favorite indicators of future inflation are flashing "no problem" signals. For example, the average work week has declined for the past several months. Also, vendor performance is as good as it has been in years. The rate on TIPS is only 1.6% and the rate on 10 year bonds is only 4.2%. The curve is forecasting real GNP of only 2%.

The possibility of a 10 year bond at 3.5% or lower has increased in recent weeks. A nice rally in the bond market may continue for several months. My family will continue to hold stocks. If the bond market rally continues, stocks will eventually leap. The total return on stocks over the next year or two should beat the total return on bonds handily. The next several months may be a different story.

It is hard to be bullish on bonds in the face of the real estate boom. The demand to borrow money for second homes is huge. For long rates to stay low in the face of this incredible real estate market, the dis-inflationary pressures of free trade and technology must be even stronger than is commonly perceived.

A 2% real short rate may be what money managers expect to see, but we may get there with less inflation than is expected. The unemployment claims and payroll numbers later this week will be important indicators of what comes next.

Continental Airlines

Continental Airlines

My family added to our Continental holdings recently, making it our largest holding. Continental is an award winning airline and it is flying more flights with higher load factors. The company set all time records during the month of April.

The fastest growth is coming in the regional operations, Continental Express. Capacity grew by 13.4% this April and traffic increased by 15.5%!

The next 4 years should be years of strong business demand. Money will be made when business seats are being used at close to maximum capacity.

THE LAST TIME!

The last time the real earnings yield on the S&P 500 was greater than the yield on the long treasury bond was in 1982. The explosion in stock prices, small stocks by June and S&P by late August, was a sight to behold. The good Lord willing, I expect to see a similar explosion this year.

The last time the S&P earnings yield approached the long bond yield was around 1995. You may recall that the market from 1995 to 2000 was quite good.

The last time we had the big inflation scare was in October of 1995. The PPI core rate of inflation approached the CPI core rate of inflation. Cries were heard throughout the land but stocks went up.

The last time economic conditions were most similar to now was in 1995, however, they were also many similarities back in 1986. The signs of slower growth turned out to be welcome. Inflation cooled and stocks did well.

One simple rule to make money is to stay fully invested from the middle of the decade to near the end of the decade. This decade looks to be playing out the same pattern.

GOOD DAY!

Having recently built large positions in CAL and AMR, today was a good market day. My family has gone airborne in a hurry. A few months ago we owned zero airline stocks. Now our largest position is CAL and AMR is not far down the list. These positions have even passed our Goodyear position in total size.

Chances of making money are good on a day when your largest position goes up 9.23%! AMR did not do badly; it went up 3.57%. We also got a good lift from Goodyear, up 2.63%. We also own a good chunk of Google which was up 1.75%. AMTD and GSK were also good performers.

Today, the FOMC increased interest rates by .25% as was expected. The chorus of worry warts was heard throughout the land.

The worry warts are crying one moment about inflation, the next about a slowing economy and some even bring up the term stagflation! The exclamation mark is there because we are not anywhere near stagflation. This term was used during the Carter administration to describe an economy that experienced double digit inflation and slow economic growth. Our current economy is enjoying steady economic growth and low inflation; almost the opposite of stagflation.

Invest in stocks and do not worry about zigging and zagging economic reports. The FOMC is correctly bringing short rates up to a reasonable level. The FOMC is no longer worried about the deflation risk that was present after September 11, 2001. Rates are now near the correct level as the core rate of inflation is slightly over 2%. The yield curve is forecasting a moderate slow down of GNP. Yes, Greenspan has been tapping the brakes for 8 quarters in a row. It is a mistake to fight the FED but the fed is not pushing for a big slow down. Quarter point moves are taps on the brakes and nothing more.

Reported corporate profits are very strong. The US government is enjoying large gains in tax revenues. The US economy is growing its way out of its fiscal deficit.

BUY THE BIG BULL BOOM BUBBLE BEFORE THE NEXT BUST! You have four or five years to make serious money! We hope you to have many a GOOD DAY!

Vance Publishing's W&WP magazine - April 2005 Feature

Vance Publishing's W&WP magazine - April 2005 Feature

Housing BOOM Continues!

What a BOOM! the cabinet industry has had sales growth of 107 months in a row. Many of the increases were double digit increases.

My wife and I recently spent thousands of dollars retrofitting beach condos with new cabinets. We also spent a chunk of money at carpet stores and at home improvement centers such as Lowe's and Home Depot.

Mortgage rates have recently dropped back to the low rates of last year. The end of the BOOM is hard to forecast because millions of baby boomers are just approaching the prime age to buy a second home. Second home sales are soaring. Last week, another high rise in Myrtle Beach was sold out on the first day offered.

Buyers are putting their names on lists to be included in the "lottery". One fellow's number last week was 43. He now has a pre-construction contract to buy a three bedroom three bath ocean front condo for $589,000. He intends to "flip" it before the closing date. Another fellow had number 221. There were only 160 condos in the building so this fellow and at least 60 others are eager to buy in the next building offered. Ocean front condos in the adjacent area sold for about $390,000 a year ago.

I do not know the exact square footage of the condos offered last week but I assume the heated space is less than 1600. The cost per square foot works out to about $368. In my neighborhood in Clemons NC. costs are also rising quickly. Builders report that the cost of everything from bricks to nails has jumped. The current quote for new homes is between $125 and $130 per square foot.

My wife and I have beach condos and our personal home on the market. If we sell them all, we hope to travel for the next couple of years. In the past several days, we raised the price on our personal home by $14,000 and the beach homes by substantially more.

One hundred and seven months of strong growth in the cabinet industry is an incredible number. If Marilyn and I sell our home and condos before the end of the boom, we will not look back with tears.

Net Sense: Intermix is just the start - Internet Services - Internet - Opinion

Net Sense: Intermix is just the start - Internet Services - Internet - Opinion

Spitzer may get my vote! He is now going after adware firms that "secretly install spyware on millions of home computers". He is accusing firms of "deceptive business practices" and "trespass under New York common law".

This action makes me say "where is the NC Attorney General?" It is amazing how much effort has gone into shutting down Napster and other file sharing programs relative to the amount of effort spent to shut down spammers, hackers and others who abuse the internet.

Two cheers for Mr. Spitzer. It always seems to be true that there are plenty of laws available to help society but lax enforcement of them.