WAR AND PROSPERITY--BUY ON THE CANNONS, SELL ON THE TRUMPETS

Yesterday, the Israeli National Minister of Infrastructure made the front page when he said, "We'll destroy Iran if attacked". The world knows that Hizbollah, with the aid of Iran, has retrained and rebuilt its forces in Lebanon. Iran has announced the addition of 6,000 uranium enrichment centrifuges. The latest statement from the Israeli Minister indicates that Israel would consider an attack by Hizbollah as all the provocation Israel will need to bomb the Iranian nuclear facilities. This statement does not say that Israel is itching to go to war. Quite the contrary, the statement is a declaration that the terrorist attacks must stop as the potential repercussions are real.

The Rothschild family made one of the greatest fortunes of all time by practicing the strategy of "buying on the cannons and selling on the trumpets". This means that when the fear of war drove the markets to extremes, the Rothschild family took advantage and when the break out of peace drove the market to the opposite extreme, they took advantage again.

What is interesting today is that the saber rattling of yesterday and recent weeks has had little effect on the price of Gold or the price of the US Dollar. This implies that the risk of war with Iran has been fully discounted by the markets. After all, the price of gold on September 11, 2001 was only about 25% of the current price. At some point, there must either be a real war or a peak in the price of gold (assuming continued monetary restraint). A month or so ago, Gold was above $1,000 per ounce, at an all time record price. It has since fallen almost 10% from the high and a number of stockpiles are being sold off (including 13 Billion Dollars worth from the International Monetary Fund).

What a coincidence? Commodities ranging from beef, oil, gold, and lumber have or are falling in price. Could it be that the risk of war was never as great as was rumored? No matter if the threat is real or not, the Rothschild strategy is still appropriate. The fear of war has distorted the markets. Hoarding of gold and oil have been responsible for a significant portion of the price rise. Yes, the tremendous economic growth in China, India and other developing nations have been responsible for the greater portion of the move. No, the growth of China, etc. is not over. Yes, there is a slow down of growth that is taking the pressure off the prices. Yes, given a little time, new production of gold and oil will rise sufficient to supply the needs of China, etc. Markets do work.

Will there be peace? The October elections in Iraq are going to be an important event. The current infighting between the various Shia groups increases the clout of the Sunni minority. Iran certainly does not want the Sunnis to regain control. From the American experience, we know that reconciliation after civil strife can take many years to settle. From Middle Eastern History we know that the current struggle has been alive for hundreds and in some cases thousands of years. We also know that democracy can survive the worst of infighting.

The main point for investors is that the potential for war or the fear of war is not the reason to sell stocks. The great majority of the people of America have been decreasing their exposure to stocks. Their timing is wrong. The smart money is buying.

WHAT A BARGAIN?

The S&P trailing price to earnings ratio is 18.8 times. This number is above the long term historical mean. The inverse (the earnings to price ratio) is 5.3%. The 10 year treasury bond yields only 3.54%. If you compare the trailing earnings only to those times when the 10 year bond yielded 3.54% or less, then you find that the trailing PE is far below the historical mean. Stocks are cheap! Would you rather have a 5.3% variable return that is likely to grow or would you rather lock yourself into a 10 year return of 3.54%?

While the S&P is cheap, there are stocks that are extremely cheap. The following is a comparison of one stock to the S &P numbers.

PE 5.27 compared to 18.8
Price to Sales of .15 compared to 2.6
Price to Book of 1.34 compared to 3.85
Price to Cash Flow 2.38 compared to 13.48
Prices to Free Cash Flow 3.02 compared to 28.27

What do the above numbers mean? The last number says that the current trends continue, the company will produce the price of each share in unrestricted cash in only 3.02 years, whereas it will take the average S&P company 28.27 years to produce so much free cash.

The price to cash flow of 2.38 says that some of the cash must be used to pay off debts owed but the total cash being produced is equal to the value of the company in only 2.38 years.

The price to book of 1.34 means that the price of each share is only 1.34 times the book value of the company (most companies hold depreciated assets that are worth lot of money but that are carried on their books as if they were not worth anything and most companies have an "ongoing enterprise" value that includes their "customer list" that may have zero book value).

The price to sales ratio of .15 says that the company is generating $6.67 worth of sales for each $1 of market value. This is a huge number. Many an old time investor will tell you that a company that has big sales should be able to find the way to increase its future profits.

The PE ratio of 5.27 times can be divided into one to show that the company is earning money at the rate of 18.9%. Not a bad return.

Put another way, the S&P sells for, respectively,

3.6, 17.3, 2.8, 5.66, 9.36 times the price of this stock. Why pay 17 times as much for a dollars worth of sales?



Because you are a frequent reader, I do not need to give you the name of the above company. I firmly believe this company will double and double again within the next two or three years. Last Friday night, I offered 6 card players a proposition bet. I offered $100 to $20 that this company would double in price in a year. Only two players took the bet. I guarantee you that the other 5 did not avoid the bet because they believe in the company. They avoided the bet because they do not trust anything at all about the stock market. Over the years, they have learned that the market seems to be totally illogical. These guys have all had successful careers. They have made a lot of money. They have not made good returns when investing in the markets.

Most people, who try to "beat the market" fail more often than not. Those of us who beat the market do not do so every time out. When the NCAA basketball tournament gets down to the final four, the odds of anyone team winning two games is never much better than 30%. In most cases, the best team has only slightly better than a double coin flip chance of being the champion. In the markets, the odds in the short run are never much better than 52/50. However, when the sentiment gets really bad, the public will sell no matter how low the price and the odds of strong gains over the next year become much better than 60/50.

I'M FROM THE GOVERNMENT AND I'M HERE TO HELP

This morning, Brain Wesbury made the point that the great depression was caused and then prolonged by the government trying to help too much. Latter today, Brian will testify before congress. He will say that the market is already well into a self healing process and the government has already made powerful moves to stimulate the economy. He will testify that the huge decline in the Fed Funds Rate is starting to produce results and that, given time, this decline is all the stimulus we need. Brian will not give the coming "helicopter money drop" much credit for the pending turn. Brian is right but the risk is that the politicians will not listen. We must always remember that before Hoover signed the trade restriction bill that was the catalyst of the great depression, more than 1,000 economist sent him a letter begging him to veto the bill. Politicians are currently talking about raising taxes and restricting trade. These are exactly the wrong moves needed economically but, unfortunately, these are the moves needed to win the democratic nomination for president.

Mortgage loan applications were up 5.4% last week. The housing market, the weakest sector of the economy, has been bouncing off of bottoms in various communities across the land. If you live in the formerly super hot markets such as Las Vegas, you should wait to buy. If you live in a "normal" community, the combination of low house price and low mortgage rate means that the best housing deals are disappearing fast.

BY THE WAY

There are reports that the DAL -- NWA deal will be announce by next week. Once that deal is underway, the next will be worked out. The airlines are serious about making money. They are prepared to consolidate in order to make the most of the boom that is occurring in international business travel. Furthermore, have you noticed the bounce off the bottom by Ford. Even the most beaten down of American companies is enjoying the benefit of the extremely low dollar!

RIOTS OVER FOOD PRICES--DANGER OF WAR

Americans spend such a small proportion of their total income on food that we do not feel much impact from high food prices. As best I recall, Americans spend about 6% of their disposable income on food. In many nations, the average family spends 50% or more of their family budget on food. As a result, riots have broken out in protest of high prices.

At the same time, the Iranian proxy for war against Israel, Hizbollah, is being trained for the next war with Israel. About 300 Hizbollah "troopers" are traveling to Iran each month to receive training. Israel knows about the "troop build-up" and would like to "take them out" before they get too strong. The Hizbollah troops are trying to acquire more powerful weapons with which to fight Israel.

At the same time, the recent battles in Iraq have shown that the Shia militias that are supported by Iran are strong. Iran has demonstrated its influence over these groups. Iran is not happy that the "awakening council" sunni troops are gradually becoming a part of the Iraqi Army.

General Petraeus and Ambassador Crocker will testify before congress today. They will report progress and problems in Iraq.

Despite what you read or hear on the news, Iran and the US continue to talk. Progress has been made but that does not mean the risk of war, particularly between Lebanon and Israel, has been dramatically reduced. The risk of war between Iran and Israel is also real, to the extent that Iran is close to acquiring nuclear weapons.

The rest of the world is concerned. The public confidence index in the UK has reached an all time recorded low. This confidence index is an "economic index" but it is certainly influenced by geo-political problems.

WHAT CAN BE DONE

The market is working hard to "cure" high food prices. The price of beef is falling. It requires 8 lbs of grain to produce one pound of beef, so when the people start to eat less meat, a lot of pressure comes off food prices. In the auto market, sales of gas guzzling trucks has fallen while sales of hybrid vehicles and sub compact vehicles is rising rapidly. The result is going to be a slow down in the demand for gasoline. Airplanes are being grounded. The $10 seats have disappeared. As a result of the disappearance of loss leader seats, the demand for air traffic is slowing. Gas guzzling planes are being grounded, the demand for jet fuel is falling. The price of lumber is way down from where it was two years ago. The demand for building residences has fallen, lower demand for building materials will continue to pressure prices.

Prices are being pushed down hard in many areas. The real PCE has been a negative number in recent weeks. The market is stabbing the inflation rate to death.

THE OTHER SIDE OF THE MARKET

On the other side of the market, asset values discounted at dramatically lower interest rates have soared. The profit flow from Dow companies discounted at 3.5% ten year treasury rates makes the Dow Jones Industrials "worth" more the 20,000! As a result, the Smart Money Index has exploded upward. This index was at 5,000 in October. It dropped to 3,200 in January and has now made the round trip. The smart money saw the risk of depression, then saw the FOMC finally take dramatic action, then bought the market heavily.

We have even come from a short term over sold position to a short term over bought position. So, once again, the short term risk has risen. Still, the insider buying of the last 6 months has been a sight to behold. The executives 3,000 companies believe they have bought bargains.

REMARKABLE RATIOS

Some of the current ratios are quite remarkable. My old friend at Merrill Lynch is a big fan of the t-bill to S&P dividend ratio. I am less a fan because the dividend payout has shrunk at many companies because capital gains are now treated better by the IRS. Still this ratio is probably at an all time record level. This is truly amazing, again, given that dividend payouts have shrunk. Those who are sitting with money in money market accounts should wake up. They can earn substantially higher tax advantaged yields.

I must run. My bottom line is that the long term prospects for stock prices has only been better a few times in my life. The short term is, as always a big question mark, but stocks are cheap enough that patient investors should be adding all the money they can.

BILLY CLANTON IS GETTING LONELY DOWN BY THE OK CORRAL

In the most famous gunfight of the old west, Wyatt, Virgil and Morgan Earp, with Doc Holiday at their side toting a sawed off double barreled shot gun, took on "the cowboys" which included Frank and Tom Mclaury and Ike and Billy Clanton. Frank, Tom and Billy were killed but Ike saved his own life by raising his arms high showing he was not armed. He ran though the middle of the gun play unharmed. Both sides agree that Wyatt Earp pushed him to the side and said for him to arm himself and join the fight or to get out of the way.

The story of the OK Corral has been told and retold by both sides. The Mclaurys and the Clantons were sons of wealthy ranchers and the local county sheriff was a close friend. One of several important questions that remain unanswered, "Was Tom Mclaury armed?". The Earps were accused of murder and investigated by a "grand jury" but never indicted. Tom had turned in his pistol at a saloon but could have carried a concealed weapon (as did Doc Holiday and others) and Virgil Earp testified that he saw Tom shoot over his horse and that he also saw him reaching for a riffle. The Earps testified to their belief that the "cowboy" friendly sheriff removed Tom's pistol from the evidence. Anyone who has seen politics as practiced by various sheriffs throughout history know that it is entirely possible for the sheriff to have tampered with the evidence.

The Earps were heroes for the first couple of days after the fight but the local saloon owners and shop keepers were turned to the side of the wealthy ranchers. The shop keepers feared the loss of business and the saloons where the cowboys gathered to retell the story from their point of view were the popular ones. We will never know if Tom Mclaury was armed or not but we know that the story that he was not was used to whip up the sentiment against the Earps and we know that Virgil and Morgan were shot "in the back" (Virgil lost the use of his left arm and Morgan was killed) in the months that followed the shootout. After the back shooting, Wyatt made his famous ride of revenge. He and a few friends, including Doc Holiday hunted down and killed most of the remaining cowboys, including the famous Johnny Ringo.

ARMY DAYS

I will spare you the details of my "army stories" but in one there is a close parallel to the OK CORRAL story. I was an eye witness to a situation in which a young Sargent "handled a difficult problem well". On a cold rainy day, he wrapped a young private in his poncho to prevent him from striking an officer. The private got off with a mild reprimand instead of being placed in the stockade to await court martial. Within a couple of days a very different story had spread. Suddenly there were dozens of eye witnesses who saw the Sargent use the poncho in an attempt to suffocate or strangle the Sargent. I was within three feet of the event and heard the conversation and saw the reactions clearly. I rebutted the stories with the truth that it was the private who had initiated the confrontation and that the poncho had simply been used to prevent the private from doing harm to the officer and to himself. The troops did not want to hear the truth and, to this day, the great majority surely believe the privates side of the story. Ironically the hotheaded private did not deny swinging at the officer and bragged that he would do it again if the situation arose again.

Virgil Earp gained experience as an army officer during the civil war. He was the marshal, sworn in to uphold the law. I do not believe the Earps murdered Tom Mclaury. The fact that Ike Clanton ran through the middle of the fight with his arms held high was never disputed and the fact that he lived to tell about it shows the Earps did not kill at random. Even though the popular sentiment turned against the Earps, the jury saw insufficient evidence for a murder trial. Some cops are crooked and all cops make mistakes but they are like the rest of us, innocent until proven guilty.

THE IRANIAN PARALLEL

Could the Gunfight at the OK Corral been prevented? It is possible the Earps could have saved several lives, including that of Morgan Earp by taking a different approach. Perhaps they could have recruited a couple of dozen armed men to go help them disarm the offenders, or, perhaps, the Earps could have made the saloon off limits until the offenders turned in their guns. On the other hand, disarmament without reconciliation might have only postponed the inevitable.

In the case of Iran, Amadenijhad must be feeling pretty lonely down by the OK Corral. The US has recruited a large group that is asking Amadenijhad to disarm. Amadenijhad is cut off from the saloon, he cannot come into town to get a drink. His bankers are cut off from the rest of the world. He can still sell oil but putting the cash received to good use is becoming difficult. Inflation in his country is running at 30% or better. He has few friends.

Last week, Secretary of Defense, Gates, visited Oman. Oman has done a few deals with Amadenijad. The Sultan of Oman does not believe the sanctions against Iran can be effective and history is mostly on his side. Boycotts are hard to enforce and easy to withstand. Cuba has withstood 45 years of US boycotts. On the other hand, the nuclear missiles were removed from Cuba about 45 years ago and, since then, the "rest of the world" has not joined the US in boycotting Cuba. In the case of Iran, the policy is that a friend of our enemy needs to be very careful in order to avoid becoming our enemy. The UN sanction resolutions against Iran have been unanimous votes with the exception of one abstention.

Iran is flailing around trying to deal with the isolation while sticking with their nuclear program. Iran has asked OPEC to stop pricing oil in terms of dollars. The idea is to try to get way from holding so many dollars but there is no way. No matter what currency is used to set the price of oil, the sellers will have to accept dollars if they want to sell oil or they will have to allow speculators a substantial spread for converting dollars to other currencies.

For as long as Iran is holding up at the OK Corral, the US does not have to be in any hurry to have a shoot out, provided Iran is not about to complete nuclear bombs! In the mean time, the Iranians become all the more isolated. When a country like Oman makes a deal or two with Iran, they get a one on one "sales" call. The central bank has been declared the financier of terrorism so transactions are subject to legal disruption. Companies and nations are generally avoiding doing business with Iran. Of course, the normal trade in oil continues but it is particularly difficult for Iran to purchase goods like computers that could possibly be used in nuclear arms production.

Over in Iraq, al-Sadr is being isolated because his militias have been supported by Iran. While Sadr controls 30 seats in the Iraqi Parliament, he is being threatened with the loss of political power. His party will be banned from the October elections if the militias do not put down their arms. Yesterday, Iranian officials once again offered to sit down with US negotiators so that Iran could "help" with "Iraqi problems".

The US continues to look for a cessation of Iranian support for "our enemies" in Afghanistan, Iraq, Lebanon, the West Bank, Gaza and elsewhere. The attitude of the US is that we don't mind having the Clantons sequestered at the OK Corral because we at least know they are not out rustling cattle. A key point is that Iran cannot afford for any of its bombs to be used to attack peaceful nations. One attack on another nation, proven to have come from Iran would give the world all the reason it needs to blow up the nuclear facilities in Iran.

NO ONE KNOWS FOR SURE

No one knows the extent to which the "Clanton Cowboys" were just rowdy fun loving guys as opposed to thief's and rustlers. When Big Nosed Kate got angry with Doc Holiday and accused him of being involved in a stage coach robbery, the story stuck even though Kate admitted she lied. Ike Clanton was caught rustling several years after Earp's ride of revenge. Was he "forced" into a life of crime? The "Clanton Gang" violated the law on more than one occasion. Burning down a store in town was dismissed by the sheriff as a drunk out of control and a civil matter.

President Bush has been in a position similar to that of the Earps. The bad guys kept committing crimes but were largely ignored by "old sheriff Clinton". After Bush's entry into Iraq, he was a hero for a short while. The more the story is retold, the more it becomes "true" that the "marshal went too far". Iran has retaliated more discreetly than the Clantons. For many years, (at least as far back as 1,000 years), terrorist have known how to make a significant strike and then to lay low for a long time until the anger subsides. They understand that the "good guys" are too powerful to fight in a fair fight. They survive by practicing a game of hit and hide. However, the terrorist are not as likely to attack in America as long as substantial numbers of troops are stationed in Iraq, Kuwait and Afghanistan.

I believe the Earps could have waited the fight out. Sooner or later the Clantons would have wanted to stop hanging out in the corral. The would have eventually followed the law of no guns within town limits in order to hang out at one of the saloons. I know I am in the minority but I support the Bush approach in Iraq and Iran. Mistakes have been made and progress has been slow but the support of terrorism has been dramatically diminished.

It may be that Amadenijad is the Islamic version of Johnny Ringo. Maybe he wants to pick a fight just to show off. The UN security council voted 14 to 0 to isolate Iran. People all over the world desire to live in peace. I believe Iran will ultimately be allowed to develop the peaceful use of nuclear power. This is as far as the compromise can go. We cannot allow Amadenijad to carry a nuclear weapon. We cannot allow him to fund Hezbollah, Taliban and other Shia and, yes, even Sunni Terrorist.

It is cause for great concern that the presidential nomination process has spent countless hours debating NAFTA while the potential of major war, including the possibility of nuclear war gets little mention. The good news is that while none of us fully understand the nuances of international diplomacy and while the majority believe the invasion of Iraq was a mistake, the majority accepts the need for troops in the Middle East. The link between maintaining troops and preventing a US attack is not easily appreciated but the idea that there might be a link is sufficient reason for many Americans to err on the side of caution.

BY THE WAY

NWA and DAL might merge in a holding company structure where the pilots will not need to immediately resolve their seniority disputes in advance. The sentiment for owning airlines is very low. The great majority of people are bemoaning late flights, lost luggage and poor service. The reality is that the number of people flying just hit a peak never seen before. After string of small carrier bankruptcies, the availability of extra cheap seats is falling. Pundits are starting to suggest that even the legacy carriers will quickly burn through their 19 Billion Dollar Cash Hoard. NOT GONNA HAPPEN! The failure of the deep discounters is a good thing for the other carriers. Profits will rise as a result of higher ticket prices. As has been demonstrated again and again, the legacy carriers will ground planes before they will continue losing flights.

"10 SEATS" CONSUME THE SAME OIL

A regular reader believes that the number of people flying is going to go down; because of the recession and because of the higher ticket prices. She is absolutely right. The picky point that we may escape without having an official recession is not important. The economic slowdown, recession or not, will cause a reduction in air travel. The higher ticket prices will also cause some people to "stay home".

The fact is that the cost to fly in America has dropped like a stone from 1978 to now. It was all one smooth decline as there were a number of booms and busts along the way, but the price of a ticket dropped in real terms to a tiny fraction of the ticket prices of 30 years ago. Another fact is that the bottom has been reached. SKYBUS offered "$10 seats". SKYBUS is gone and the $10 seat will not likely be seen again.

I put the $10 in quotes because only the first few passengers got the $10 rate and by the time all fees and taxes were added the total price was typically several times $10. Still, the airline business is not like the Google Advertising Business. Google has a cost to deliver an add that is so small that it is practical to call it zero. By sending out trillions of zero costs ads, Google is able to make money when only a very small percentage of ads work. The cost of the $10 seats at SKYBUS were loss leader seats even if the airline had the lowest cost structure of any. The $10 seat consumes the same amount of fuel as the $1,000 seat and it is insufficient to support the lowest salaried pilot.

My daughter and future son-in-law will leave LA tonight at 10PM and arrive back in NC at 9AM on Sunday morning. The cost per seat will be about $300. Their original plan was to leave Sunday, spend fewer hours traveling and to save almost 90%. Had they not gotten the "$10 seats" they probably would not have made this trip. So they provide anecdotal evidence that my reader is right on target. The total number of trips is going to be reduced. The total amount of fuel burned is going to be reduced. The number of used aircraft available for purchase is going to increase. The number of available landing slots is going to increase. The delays due to over crowding will be reduced. Most important of all, the ticket prices offered will be reset to more than cover the costs of service. There will be no more losses to be made up by increasing the volume.

I am writing this on a Saturday morning not because airline shares will jump on Monday morning but because the conditions for profits are almost as good as they ever get. Indeed, the over sold condition of just a week or two ago is no longer the case. The market had a very good week this past week. The average stock went up by better than 4%. If that rate were to continue for 52 weeks the total return in one year would be 208%. It ain't gonna happen, but conditions are ripe for average stock price gains of 30% or more.

With the whole world becoming more aware of the degree to which Iran is paying terrorist, there is good reason for the market to be gun-shy. It is an amazing thing that terrorist are essentially on the payroll of the Iranian government. Extremist in a number of countries (and the big problem is that we do not know just how many) are drawing "salaries" of $200 to $300 per month. Three hundred dollars per month is "good money" in the Middle East. On the other side, America is paying about that amount per month to more than 80,000 Sunnis who have joined in the fight on our side. When the Swiss recently made a deal to buy more oil from Iran, it is easy to see why the US and a number of allies were upset. The Europeans are anxiously being forced to build an anti-ballistic missile system at great cost to protect themselves against this rouge nation. Thousands of innocent people are being bombed from Lebanon to Israel to Madrid to New York to India and to Russia (just to name a few) and Iran has bombers on its payroll.

The terrorism problem is not going to quietly go away. The US is currently practicing the Elliott Ness strategy. Ness went after Al Capone by hitting his sources of revenue. He could not capture and convict all the hoodlums (including Judges and elected officials) who were on Capone's payroll but he was able to disrupt the flow of profits and to "follow the money". Ultimately he convicted Al Capone of income tax evasion. Capone did not "get what he deserved" unless you consider the syphilis he contracted an act of retribution. The US has brought the UN to the point of declaring the Iranian Central Bank the "financier of terror". The US has "followed the money" back to Iran.

Boycotts are extremely difficult to enforce. Iran is still pulling in 100's of millions of dollars per day in oil revenues. What it will take to bring a cessation to state sponsored terrorism is a difficult question. Should this rouge nation become a nuclear power, it is likely that Saudi Arabia and other neighbors will feel the necessity to respond in kind. The wisdom of Barney Fife comes to bear, we should "nip it, nip it in the bud".

The world knows that only a crazy man would use a nuclear bomb. The crazy man would die along with the rest of his countrymen. The planet might or might not survive. In America we hold TV "debates" that focus on all sorts of "important issues". We devote hours on end trying to come up with solutions for the poor in America. The fact is that the poor in America are extremely rich relative to 3 billion or so poor people around the globe. We attempt to ease our guilt for being rich by looking for ways to redistribute our wealth. As a result, the average "poor person" in America is able to spend 194% of his income year after year after year. I am not against helping the poor. I am for protecting the rich and the poor from criminals.

The terrorism problem is far more important than all the "poor versus rich" problems combined. On the other hand, the world is well aware that Iran is sponsoring terrorism and the UN Security Council has voted several times to impose economic sanctions and to offer incentives to Iran for abandoning its nuclear ambitions. Iran is holding firm to its nuclear course because the only way it can continue to dream about taking back the lands it once controlled (all the way through Spain) is to have the nuclear weapons as the back up threat. While the reality is that Iran has little chance of even wiping out the tiny little country of Israel even after acquiring nuclear weapons, it makes no sense to let them get in the position to try.

The Iranian threat is so obvious that it has brought together the US, Russia, China, Europe and Japan. A couple of weeks back, China turned over intelligence materials to the UN showing the degree to which Iran has worked on nuclear weapons. During War War II, it took the cooperation of Russia and the US to squeeze Germany. Today, all the major powers are cooperating. The bottom line is that the threat is very real, that it must be dealt with and that with a lot of determination and persistence, Iran will ultimately be forced to reach a peaceful accord (by the current government or a new one).

So, there are problems in the world. No news in that. The real and to some degree rational fear of conflict has resulted in the use of gold and oil as a hedge. The US dollar has sunk to extreme lows as a result of this fear, but a coiled spring can only be pushed so far. This spring has been pushed to the point that a break out of conflict would cause a relief rally in the dollar. As always, the fear is worse than the pain. If you were ever naughty as a child and were told to wait while the teacher went for his or her paddle, you know how terrible the fear that rises up into your inner being. Getting the whipping over turns out to be a great relief. The US dollar is so cheap that American companies are bringing back jobs from over seas. The big decline in profits that comes near the end of an economic slow down are upon us. Earnings announcements in April will cause all those who invest based on volatile short term estimates and PE ratios to whine and moan but the value of the US dollar is so low that business after business is going to see profits soar over the next 4 years or so.

I do not think there will be a direct conflict with Iran. When the Iraqi soldiers moved into Basra last week, the response of the rouge militias was strong, but the fight was called off quickly. The Iranian supported militias have no interest in taking on the US forces. Iran certainly does not want to give the US the excuse to invade and the US certainly does not have the political support to or the reason to invade for as long as the terrorism is "contained" and the economic and political pressure is pushing Iran toward compromise.

WHAT DOES THIS ALL HAVE TO DO WITH $10 SEAT PRICES?

Everything and nothing.

Thirty years into deregulation, the airline industry has finally rationalized its pricing structure. There is no longer room for low cost start ups to pick off lucrative routes from bloated, high cost, mainline carriers. As a result, business is back to "normal". Airplanes are only being flown when they can be flown profitably. Nothing that happens in Iran will cause domestic operators to turn the clock back. In the days before globalization, bombs killing children and innocents in the Middle East were no big deal to Americans. Going back a few hundred years, Native Americans did not know about the invention of gun power and did not care. Today, we must care. Unchecked, the terrorist will strike in cities and towns across America. Unchecked, Iran has ambitious not too different than those of Hitler. Hundreds of millions of Islamic people believe in a spiritual jihad. It is only a radical few that believe in killing all infidels. International air traffic has doubled and doubled again in recent years. The growth path is set for another quick doubling. It has been many years since the TWA flight was blown up and even many years since 9/11/2001. The terrorist have not surrendered. Many came out of hiding to die in Iraq. Many others, some on the Iranian payroll and some not, are hiding out in the mountains of Pakistan and Afghanistan, some in Lebanon, some in Gaza, some in Bahrain, some in Egypt, some in Germany, some in America, etc.

Even Obama has backed off on the idea of pulling all troops out of Iraq. No matter who the president, the war on terrorism must continue until all state sponsorship is gone. The Bush doctrine that those who harbor terrorism are against us must be pushed until all states go after outlaw groups. Criminals will always be in our midst but it is immoral to not protect ourselves as best we can.

By fighting the fight, we deter crimes. The terrorist know that if a bomb blows up an airplane, building or rail station anywhere in the world and if it can be shown that that bomb was purchased with state money or if it can be shown that the perpetrators were trained by a state, that state is at risk of becoming the next Iraq. Because the risk of take over is real, the probability of bombings has been dramatically reduced. Companies such as CAL and DAL can thus continue to dramatically expand international, highly profitable, routes. The rationalization of the US domestic market will allow companies like CAL and DAL to fly profitable routes within the US and to feed the international routes with highly profitable traffic. The most successful of discount airlines, LUV, has thrown in the towel and has joined the ranks of the "big boys".

It is a new day in the airline business. It only took about 10,950 days to reach. Actually, probably more than double that number as the pricing structure was way out of whack during many years of regulated markets.

Yes, the train business got there first. The transportation index is up 26% in recent weeks. The trains were deregulated about the same time as the airlines. The airlines are many times more levered and many times more volatile. The trains will continue to do well but they do not have nearly as tight a coiled spring. INVESTMENT OPPORTUNITIES LIKE THIS ONE DO NOT COME ALONG OFTEN!

ONLY ONCE IN A LIFETIME INVESTMENT OPPORTUNITY!

SKYBUS is ceasing operations. For the first time in 30 years, there has been a steady stream of bankrupted discount airlines. The business has finally turned. Since the airline industry was deregulated in 1978, the bone yards have been filled with quite a number of hub and spoke carriers. The names include the former Titans of the industry, TWA and Pan American. The list also includes many other major carriers such as Eastern and Braniff. Other carriers that survived only after going through bankruptcy reorganization include the likes of DAL, NWA, CAL, and UAUA. Several carriers have gone through bankruptcy more than once and sometimes they have emerged as part of new entities. Piedmont Airlines became a part of US Airways which was latter purchased out of bankruptcy by US West. The causal observer will read about the four carriers that have gone bankrupt in the past week or two and conclude that nothing is new. The observation would be dead wrong.

What is new is that the hub and spoke carriers are putting the point to point discounters out. The competition is falling like flies. Each time a competitor falls, the demand for fuel goes down at the same time that the demand for a seat goes up. My great grandpa was fond of saying that the time to get into the chicken business is when everyone else is getting out. Grandpa understood that the price of chicken feed would go down and the price of chicken would go up soon after a lot of people quit the business.

My daughter flew to LA this weekend partly because she and her fiancee were able to purchase extraordinarily cheap tickets. Now that SKYBUS has flown its last flight, what do you suppose her one way ticket back home will cost relative to the price she expected? She is caught in an unusual circumstance but she and others will think twice about flying on the cheapest carrier in the future.

CASH ON THE BOOKS

I have already mentioned that CAL and DAL are two of the carriers that have more cash in the bank than the value of all shares outstanding. The professor who taught Warren Buffet at Columbia University lived during the time when one could occasionally find companies that could be bought for less than their cash value. Since then, the markets have lived through the Go-Go Years and the Technology Bubble. If you are less than 60 years old, you have never seen true value investing at work. Today, there is truly a rare opportunity available. One can buy CAL or DAL at a price below cash in the bank value at a time when the pressure is coming off fuel costs and when pressure is on ticket prices.

The current situation is like the discount movie is being run in reverse. For the past 30 years, discounters have expanded into market after market. If CAL was flying profitable route from city x to city y, the discounter could enter the market and fly full planes at substantially lower ticket prices and turn a substantial profit. CAL might match the new low price but with its higher overhead, it could not push the invader out of the market. CAL might have to lose money on certain flights to maintain its feeder traffic system to its hubs. Profits had to come from the long haul flights, particularly international flights, where the discounter would not or could not go. This picture changed dramatically three years ago when the overhead costs at the legacy carriers was slashed. CAL cut a billion dollars a year in labor costs and realized another billion dollars of savings through technological advances. Most importantly, the legacy carriers contracted with non unionized airlines to match the discounters on the feeder routes. By providing the planes, fuel and other services to the contract carriers, the legacy carriers have given the contract carriers the ability to go toe to toe with the discounters and turn a profit. Since contract carrier passengers earn frequent flier miles on the legacy carriers and because they receive other perks, such as the use of Club Facilities, they have every reason to fly the contract carriers rather than the discount carriers. When this movie is run forward, we see a huge drop in ticket prices each time a discounter enters a market dominated by a legacy carrier. Running this movie backward, we see the discounter being chased away from one market after another and a subsequent jump in the ticket price.

Investors have been disappointed by the failure of DAL and NWA pilots to agree to a merger deal. One could still come to pass, but it does not really matter. There is more than one way to "consolidate or to rationalize" the industry. With the small to medium sized carriers dropping like flies, the "big boys" are going to be able to fly profitable routes.

The current US economic slow down is already old news. By the time the story of economic slowdown or recession is being told daily during prime time, the slow down or recession has historically been already over or nearly so. Friday's payroll numbers tell the story well, a long term chart of the unemployment rate shows that by the time the unemployment rate rises 1.1% the stock market takes off and the recession is soon declared to have happened. Of course the official announcement of the recession is all the more disconcerting to the investing public. The stock market continues to rise while the public bemoans the fact that times are terrible.

The stock market made an inter-day bottom on January 21 and it later tested the bottom. Now, we have day after day of bad news but by the end of the day and the end of the week the market is up. The market backs and fills, partly because of the still unsettled situation with Iran, but on balance it goes up.

BETTER SERVICE, SHORTER LINES, HIGHER TICKET PRICES AND LOWER COSTS

It was only a few months ago when airplanes were constantly being forced to wait and wait and wait to land or to takeoff. There was simply too many flights to handle. The current scaling back of flights is a good thing in many ways. The remaining flights will be more likely to be on time and the cost in fuel and time spent waiting will be reduced. The experience for the passengers will be improved. The ticket prices will be higher but the passengers will be willing. Financiers will think long and hard before bank rolling the next new attempt to start a new discount carrier. Existing carriers will gobble up the best of the terminals and landing slots being turned lose by the failing carriers. If Grandpa was around, he would surely suggest that the best time to get into the airline business is when others are getting out.

Last week, the two most significant oil and gas discoveries were in Quebec and the Gulf of Mexico. The find in Quebec is estimated to be at least 4 trillion cubic feet of gas and the find in the Gulf is believed to be at least 500 million barrels. The last discovery in Brazil has not yet been probed enough to make an estimate but the prior discovery was 5 to 8 billion barrels of oil. The invention of new technology has created a shale gas field stampede. There is a frenzy of activity in shale fields in Texas, Pennsylvania, Montana and North Dakota. These shale fields were once believed to be too expensive and too risky to explore. One recent well in Montana that cost almost 4 million dollars to drill hit a pool that will yield at least 700,000 barrels. Sure, a conventional well would have cost only a million dollars to drill but the oil found is probably worth much more than $70 million dollars. An upcoming geological survey is expected to report that the recoverable reserves in the shale field that covers most of North Dakota, much of Montana and significant portions of two Canadian provinces, are between 150 and 500 Trillion Cubic Meters of natural gas!

You do not need to believe that the price of fuel is going to come down to make the case for buying airline stocks. However, if you believe the price will come down, you should quadruple your estimate of profits to be realized by the airlines.

ASK AROUND!

I would appreciate your trying to find another pair of companies like CAL and DAL that can be purchased for less than cash value. Ask around. If you know an investment broker, banker or advisor, tell them you are interested in buying at an extremely low price to sales ratio, price to book ratio and price to cash ratio. I would love to see the list!

APPLE AND WAL-MART ON THE MOVE

Apple and Wal-Mart are two of the all time great growth stocks. Both stocks are on the move, again. Over the past 6 months, Wal-Mart is up 22% while Apple is down 4% but over the past month Apple is up 25% while WMT is up only 10%. Pick a long time frame and you can understand how the Walton Family became the richest in the world, however, in the last 5 years, WMT is up only 2% while Apple is up 1,996%!

Apple is currently hot because the store shelves of the old 2G iPhone have been depleted. The expectation is that the 3G model is about to arrive. Another reason for the heat is that iTunes just took over Wal-Mart as the number one seller of music.

While it might be easy to conclude that Wal-Mart is "old school" and Apple represents the "new economy", the past is known but the future is not. We only get to guess at the future.

WHAT IS BIGGER THAN A CELL PHONE BUT SMALLER THAN A LAPTOP?

We know that scores of new wireless computer devices are in various stages of design. We know that high speed networks are in various stages of construction. We know that substantial traffic growth is occurring in streaming video. We know that Qualcomm is offering mobile video services in more markets. We know that Google's new "phone" software is likely to be available on scores of new devices but we do not know what services will be required to qualify "for the brand name". We know that RIMM has out performed Apple by 2 and a half times over the past 5 years. The RIMM performance tells us that businesses have and will invest large sums of capital to wirelessly connect their employees.

Google, at 535% appreciation since going public, has increased its value at only about 10% as much as RIMM. Qualcomm, one of the huge leaders of the prior boom has only seen 144% appreciation in 5 years. INTC is up 25% over 5 years while the big cap drug stock PFE is down over every period for the past 5 years, including down 34% for the entire term. Wachovia bank is in the same boat as PFE but to be fair to these two companies it should be mentioned that they have each paid out substantial dividends over the years and that their current yields are 9.8% (WB) and 6.1%.

HIGH PRICED GROWTH DOES NOT ALWAYS LEAD TO HIGH PROFITS.

Every dog has its day. John Maynard Keynes, one of the most successful investors of all time, had an interesting way of looking at stocks. He compared buying stocks to guessing which of 30 beautiful women would win a beauty contest. The winner of the guessing game was not the person adept at identifying beauty but rather the person who identified the taste of the guessers. Apple is believed to be beautiful by the many whereas the public opinion of Wal-Mart, PFE or WB is not what it used to be. In the case of Ford Motor, the opinion has gotten so low that jokes are being made about the company.

The problem is that Keynes was a rare person in a former time. Today, we do not know of people who can accurately predict the "taste of the guessers". Warren Buffet has showed time and again that the path to investment success today is to buy for the longer haul. Buffet would not consider buying AAPL because the price discounts high growth way into the future. You have to be pretty darn sure that AAPL will continue to grow very fast for a very long time if you want to buy it for a hold or you have to guess when to jump off the moving train if you what to buy for a short term trade.

Steve Jobs has without doubt done a good job of building the Apple brand. I still have trouble seeing extremely high profit growth for the hardware side of Apple accompanied with rapidly falling prices and substantial competition from all corners of the globe. OOPS! I must confess. My 2 year old grand daughter owns a few shares of AAPL and it is my hope that she holds them for all of her life.

Wachovia Bank, Ford, Wal-Mart, Pfizer

I feel very comfortable buying into the old dogs listed above. I believe these stocks are cheap relative to their earnings potential. I believe the public disdain for them is a contrarian signal that screams the word BUY. One of the old pros of the newsletter business (I'm having a senior moment and cannot remember his name), just made a contrarian airline call. Here again, I am confident that patient investors will do well. I have less confidence in AAPL at a time when it is one of the top performers.

THROWING DARTS WILL WORK

The turn in the transportation index tells me that good economic times are just around the corner. Preceding and during these good times, almost all stocks will "work". Lagging indicators, such as the decline in jobs, are also screaming that it is time to be 100% invested in stocks.

Gold, oil and the dollar continue to gyrate in sych with the news out of Iran/Iraq. Amadenijhad is determined to build nuclear power while Nato is gearing up to build an anti-ballistic missile system. Meanwhile the Iraqi government continues to try to consolidate its power. In the short run, the jumping around of gold, oil and the dollar are like the Keynes beauty contest. In the long run, the actual real supply and demand will reset prices. While the potential for conflict in Iran is real, it is not likely to come to all out war. The build-out of high speed "phone networks" is happening in the US no matter what is happening in Iran. The market upturn will not be sunk by the short term gyrations caused by the potential conflict with Iran. As the people of Iran fall further behind in the availability of Apple iPhones and goods and services at low prices from Wal-Mart, the pressure will intensify to cooperate with the UN and the US.

BUGS, BUGS AND MORE BUGS

Back in 1977 Carl Woese came up with our "modern classification of cell structure". Some 20 years later, William Whitman and others at the University of Georgia calculated the approximate number of "bugs" on the planet. Woese came up with three basic cell structures, Whitman came up with a number of approximately 5 million, trillion, trillion or 5x10 to the 30th power! Researchers in Denmark have since found over 4,000 species in a single gram of dirt.

We all learned or at least had the opportunity to learn in elementary school about the cycle of life. We learned about how nitrogen is absorbed by living plants and given back in decaying plants. We learned about the roles of ammonia, methane, oxygen and carbon dioxide in dirt and in the ocean. As is often true, the more we learn the more we realize how much more we have yet to learn. For example, the amount of carbon stored in the 5,000,000,000,000,000,000,000,000,000,000 "bugs" is about the same amount of carbon stored in all the plant life on our planet, including all the algae in the ocean.

Folks, humans are a lot smaller than most of us seem to think. While we are certainly bigger than a bug, together the bugs can keep up.

We have learned that most bacteria pose no threat to life but instead are a necessary part of life. About 93% of all bacteria live under ground or under water. We purposefully use "bugs" to process foods, such as low lactose milk and cheese, to process our sewage, to extract metals such as gold, cobalt and copper, to synthesis organic compounds and for thousands of other purposes. Now that we are beginning to realize how many different bugs there are, we know that there must be 1,000's of more ways in which we could harness "bugs" to work for us.

One class of "bugs" are called methanogens. Various species of these bugs use different materials and processes to accomplish the same task. Some can crack water molecules, some crack coal, some use light as an energy source and we simply do not know what other neat tricks are performed. One thing that we know is that huge quantities of materials lie on our ocean floors that are in various stages of chemical-biological "conversion". We know that massive quantities of these compounds can and are easily being converted into clean burning methane (natural gas). The Al Gore crowd likes to talk about renewable energy sources. This crowd is coming close to convincing us to spend trillions of dollars trying to out do Mother Nature (many of these folks do not believe in God so in kindness we reduce their challenge to besting only Mother Nature). It makes great sense to work with Mother Nature instead of trying to challenge her. No mater who leads the band, the final result will be about the same. There is simply no reason to pull the wagon up the hill when Mother Nature is ready and willing to do the work for us.

One of the great triumphs of man has been to speed up Mother Natures techniques in regard to plant and animal growth, breeding and selection. The result has been a massive increase in the production of food per acre. We can do the same thing in regard to energy. Mother Nature is constantly at work renewing our supply of hydrocarbon fuels. We simply need to fertilize and enhance natural energy processes in a manner similar to the way we have enhanced the natural process of growing food.

The laws of economics are already hard at work on the problem. People in wealthy countries (of course this includes the wealthiest country of all) are devoting capital, time and resources at unprecedented scale to the "energy problem". Politicians and pundits are quick to remark that we need to attack the problem on the scale of the Manhattan Project. These fools have no idea what they are saying. We are attacking the problem from all angles at a scale that makes the Manhattan Project look like the science project of a single 6th grade student. This week, scientist at MIT founded a new company to take advantage of their latest improvement to solar energy.

CAUTION, CAUTION, CAUTION!

It seems that hardly a day goes by without the discovery of something that makes solar energy production cheaper or more efficient. The MIT discovery will lower the cost of production by the massive amount of 27%. SO WHAT! This is like saying that Papa Johns has lowered the cost of its family special from $150 to $109, while Pizza Hut is offering a $15 special with a $15 fuel surcharge attached. The reason for the excitement about solar is that people are extrapolating the last 5 years of oil price increases ten or twenty years into the future. With the oil price over $100 per barrel, while solar is down to $1.60 per kilowatt it is easy to assume that the two shall meet in the middle in the not too distant future. With more than 13 of the earths 14 trillion barrels of oil still in the ground, and with drilling performance the best in 25 years, it is common sense to appreciate that the current price of oil is yet another bubble. Those who buy solar energy stocks at super high PE ratios will see a plunge in their asset values when it becomes obvious that government subsidies of solar will die when the cost of oil goes down. A fellow who has remodeled homes for the past 45 years says one of his "big winners" was tearing out the solar heating panels added to homes during the Jimmy Carter years.

NO NEED TO REINVENT THE WHEEL

While it makes sense to build anaerobic chambers to test the abilities of various methanogen "bugs" (many of these bugs work best where oxygen is not present), we probably do not need to build gigantic facilities. The advent of horizontal drilling has given us access to trillions of cubic feet of natural gas but, more importantly, access to the means of "fertilizing" the natural process of "bug digestion of carbon". The right mix of enzymes poured into the right holes could easily increase the pace of digestion by a thousand times (not my estimate but that of noble prize winners). Why send men deep into hazardous coal mines if a slurry of several trillion bugs can enjoy converting dirty coal to clean methane?

As always it is great fun to watch men when they flop around like fish out of water. Australia has spent a ton of money and resources on a vaccination program that helps reduce the amount of flatulence produced by ruminant animals. Most of the methane gas coming from these animals is burped. If a car could be equipped with an extra stomach like that found in cows and other ruminants, a car would produce its own gas. We do not have to look far to find lots of unique bugs. Various animals hold thousands of bugs that have developed the ability to digest the plants that grow in various locals.

And, yes, cars are among the least efficient users of energy. Only about 15% of the energy used in an auto is converted into the mechanical energy needed to push the vehicle. Without a doubt, we need to and we will become more efficient in our use of transportation fuel. We have made tremendous progress in the industrial use of fuel. We have made tremendous progress in the home heating use of fuel. We have made great progress in our use of fuel to transport goods (most of our goods are transported very cheaply on trains or very, very, very cheaply on water). We have made little progress in our use of fuel to transport people and we can easily do much more to increase the efficiency of heating our homes and businesses.

The Al Gore crowd is willing to cause tremendous damage to the income and wealth of billions of people in order to solve a temporary problem. The fact is that if the problem were real, massive numbers of people would be willing to stop living in the suburbs 20 miles from work. People would quickly agree to ride mass transit if solving the problem were worth the effort. With the exception of relatively small un-captured externalities, the cost of driving a vehicle is captured in the price paid by the public. One of the factors the global warming crowd is not willing to consider is that the cost of walking to work does significant environmental damage, indeed perhaps more than riding in a vehicle.

A person who walks to work burns calories. To replace those calories, he must eat or drink. The cost (in terms of money and in terms of the environment) of a glass of milk for a walker is probably almost as much as the cost of the fuel needed to move a vehicle the same distance. A short trip by two people in a car is probably less costly than the cost of two glasses of milk. When the Al Gore crowd talks about the externalities of one system, they often conveniently overlook the externalities of their favored system. One fact is that trillions and trillions of tonnes of coal have been burned as a result of the "success" of delaying the construction of very low emission nuclear power plants.

We still have a lot to learn. Al Gore nor I can come close to guessing the future but, given that 5,000,000,000,000,000,000,000,000,000,000 bugs are hard at work completing the life cycle for us, I suspect that bugs will continue to renew our un-renewable energy sources for a long time to come.