CHINA TELLS THE WHOLE STORY

China's industrial production is growing at the annualized rate of 16.2%! One might argue that this growth rate simply cannot continue. The problem with the argument is that the growth rate has averaged more than 16% for more than a decade. As recently as May 2004 the growth rate was around 19%.

The above numbers are incredible until compared with the inflation rate. The CPI has been declining for the past year and the annual rate is now around 1.7%! Investors simply do not have benchmarks for comparison purposes. If one asked most investors today if it were possible to have 16% growth for 10 years and 1.7% inflation they would say no; but the numbers are real.

One of the things demonstrated by the numbers is that rapid growth does not equate to high inflation rates. From memory, China has also experienced productivity rates in excess of 17% annually. China has also lost millions of manufacturing jobs as factories have supplanted the "cottage industry" of yesteryear.

The whole story is that the world wide economy is experiencing non inflationary growth; an ideal scenario for stock investors. The intermediate portion of the story is that even China is experiencing a slow down. Again, the numbers show that industrial production growth is slowing and the inflation rate is on the way down.

Another very important thing to understand about China is that it is moving up the energy curve. In 1910 America, 27% of all agriculture was devoted to growing food for the horses used in agriculture and transportation. Yes, more than one fourth of all the cultivated land was used to "feed" the system and electricity existed only on Wall Street and in a few other places. Today, America uses more power from electricity than from any other source. All the cars in America do not produce as much power as do our electrical power plants. The percentage of those employed in agriculture has dropped from 90% to 3%. China will make the same move in fewer years. China is building coal and nuclear power plants.

Many folks have repeated that the US economy is now a service economy. The reality is that we grow more food than ever before and we produce more goods than ever before. We are a manufacturing power house. The US is simply much more efficient than ever before. The Chinese are not nearly as efficient but, again, the country is experiencing productivity gains in excess of 17%.

Moving up the energy curve quickly is allowing the Chinese to quickly adopt electric motors, phones, computers, internet, lasers, microwaves and the many other tools that improve efficiency and standards of living. Having watched family members cook on a wood fired stove and then an electric range for years, I still marvel when I reheat my "dogie bag" leftovers in a minute or two in a microwave. My dinner tonight was leftovers from the Olive Garden and I cooked it myself in a minute and 30 seconds. The Chinese are skipping from biomass stoves to microwaves. They are skipping the building of land line telephones and going straight to cellular and WIFI.

Edison patented the electric light bulb around 1882 and the IGBT was patented in 1982. The electric light offered incredible savings over gas powered lamps. Most of us have no idea (I have a faint idea) of what the IGBT (Insulated Gate Bipolar Transistor)is. The thing I understand best about it is about to change our lives as much as the light bulb did in the last century. There are going to be many applications but the one that has been written about the most is the GM "skateboard" car frame. The key point is that the IGBT makes it possible to put an electric motor the size of a coffee can next to a car wheel that is more powerful than the big block V-8 engines of today. Another point is that in the same way we stopped feeding horses 27% of our agriculture for transportation, we will stop feeding our cars gasoline.

By building nuclear power plants, China will largely skip the generations of gasoline burning cars. Granted, we are probably 10 years away from mass production of the "skateboard". However, the precise and powerful motors are already showing up in manufacturing plants. They are already in hybrid cars, trains, machine tools and robots.

At the same time, that computers are using more and more tiny bits of power to perform trillions of task for us daily, machines are using larger and larger compacted kilowatts of power to perform the heavy lifting tasks we require.

The world economy is enjoying a revolution. It is more than the information revolution that is frequently discussed. The revolution is creating productivity, profits and wealth. It is up to you to get your share.

Invest in stocks. Long-term investors should focus the majority of their funds on stocks. Folks with a short-term view will encourage you to hold bonds for safety. However, those with a 20 year or longer investment horizon are safer in stocks. Certainly investors should own their home and they should keep 3 to 6 months of income available for emergencies. Holding 20 to 30 percent in foreign stocks is not a bad idea but it is not necessary to invest in countries or areas that you do not understand. It would be better to invest 100% in America than to make mistakes in foreign holdings.

Many a writer will tell you that stocks are too high as is evidenced by current PE ratios. However, any stock that has a fast growth rate relative to the inflation rate can support a high PE ratio. Today, we have a strong worldwide growth. The growth had started to push up prices but the recent restraint, which has largely been a restraint of energy supplies, has reduced the risk of an over heated economy. Global inflation rates are trending down, long bonds are reflecting the low inflation and stocks are becoming more and more undervalued. BUY THE BULL!

MONEY SUPPLY UP UP AND AWAY!

For ten of the the past 12 weeks, M3 money supply has grown. Drop, drop, fiz, fiz O! what a relief it is!

The tightening money supply has been causing heartburn across the investment land. The stock market has gone up anyway. Now the money supply is expanding again. Where will the "extra" money flow?

The dramatic climb in resort real estate values slowed this summer. The brakes appear to be coming off. Stocks, which have been trapped by massive over-head resistance, are on the verge of a significant break-out. It will be very interesting to see if the bond market leads or drags. Our bond market frame of reference causes us to think that long-rates must go up. However, core inflation rates of 1% are not apart of the frame of reference for investors. It appears that core rates may drop to 1%!

The market can turn on a dime but the current high price of fuel is biting around the world. You might guess that France would be the first country to squeeze the oil companies. Two majors in France have lowered prices by a couple of cents per litter under pressure from the government. No wonder the country has such anemic growth. Businesses are forced to take the loss when the market changes. Every business must be allowed to charge the market price or shortages will surely develop.

The French solution is a long-run catastrophe. Never-the-less, it demonstrates that demand is going to be restrained as a result of the current price. India and Indonesia, two other countries with socialistic principles, have lowered their subsidies thus increasing the price of oil to millions. The cost of fuel in many European countries has increased from around $4 to $6!

Evidence is mounting that growth in many countries has started to slow. Japan is making the news for coming out of its deflationary spiral but many a European country is at risk of deflation. Shortages in China add to the potential slow down.

I am almost convinced that bonds will lead the markets to higher ground; at least at first. Last night, I found it interesting that two members of my bible study group had car pooled with folks attending other meetings. The two meetings let out 30 minutes apart. The point is that folks are going out of their way to reduce gasoline consumption.

Only a few weeks ago, my wife and I agreed that there were just as many big Suvs in the parking lot as ever before. The high prices have hit home. Consumers are cutting back. At the Olive Garden this weekend, we ate an hour earlier than usual but Marilyn was surprised when we were seated immediately. She asked the waiter if the slowdown was a result of gasoline prices and he waxed on about the sharp decline in business.

The slow down could lead to a 3 to 3.5% 10 year note! High dividend stocks would suddenly be all the more attractive. Yes, the money supply is moving up. Good news for the price of assets. Bonds may lead because of world wide slowing growth. Stocks are already cheap relative to bonds. Should the price of bonds go up, the Bull will not be contained. When the market breaks out, those who have hesitated to buy the second home may rethink their decision.

BUY THE BULL! STOCKS DO WELL DURING SLOW GROWTH ECONOMIES! FOR THE ADVENTUROUS, BUY A BEACH PROPERTY AND THE ODDS ARE GOOD YOU WILL BE ABLE TO FLIP IT NEXT SPRING. A RISKY GAME BUT THE LEVERAGE MAKES THE POTENTIAL RISK AND THE POTENTIAL REWARD VERY LARGE!

AGGRESSIVE INVESTORS WHO ARE IN FOR THE VERY LONG HAUL SHOULD EVEN CONSIDER USING LEVERAGE IN STOCK PORTFOLIOS. CAUTION! CAUTION! CAUTION! NOTHING IN THIS BLOG IS WRITTEN AS A RECOMMENDATION! LEVERAGE IS LIKE TRAVELING DOWN THE AUTOBAHN AT 90 MILES PER HOUR. IT IS ONLY FUN IF YOU REALLY KNOW HOW TO DRIVE AND IF YOU DO NOT MAKE MISTAKES. THOSE WHO CONSIDER LEVERAGE SHOULD PERHAPS DO NO MORE THAN 30% AND THEY MUST BE "LONG-HAUL" INVESTORS USING DISCOUNT MARGIN RATES!

GOOD GOOGLE GULP

Congratulations to my good friend for taking another good Google Gulp last week. She averaged up. The stock is up again today.

EBAY has also taken a big gulp. 4 Billion Dollars for Skype. Several of the account holders I communicate with regularly are considering adding to their EBAY holdings. EBAY is generating the cash from its core business to expand. The price paid for Skype is large but when EBAY purchased PayPal the story was the same. The purchase will initially be mildly dilutive to earnings but the potential is large. Does it not make common sense that a shopper would often jump at the chance to talk to the seller before making a bid?

As a small business owner for the past 19 years and as a stock broker for the prior 10 years, I would have loved for good prospects to have given me a call. I would have been happy to pay a fee for each lead. I disagree with folks who say that EBAY and GOOG are getting away from their core businesses. They are simply adding convenient ways for customers to use their existing services.

GOOG and EBAY will continue to compete more directly. GOOG and EBAY will introduce free internet web calls to millions of people. The revenue potential is huge. I love it. It is so neat to talk about free calls and huge revenues!

Meg (EBAY chairwomen) points out that the big dollar dealers such as those selling autos often need to talk to the bidder and the dealer would surely be happy to pay for the call. The pricing plan will be interesting. The listing and auction fees may cover the costs of calls on small items. On large items, the dealers may offer "teaser ads" to generate thousands of leads and they will pay per call.

Yes, a person, who uses Skype or Google Talk to make free internet calls, might easily be converted to a person who pays a small fee to make other calls. Yes, the likelihood is that these users will adopt the free service as their local and long-distance VoIP phone service.

My friend, the one who averaged up, at least thinks she appreciates the power of Google. The mobil applications are perhaps the most powerful. A driver does a three letter search, "gas". Google knows where this driver is and knows his buying and search habits. Google immediately displays a map showing all the gas stations within a certain radius. The brand and price is also given. If the driver has excluded EXXON from his preferences, he sees all the other stations but not EXXON stations. The driver might query further to learn if the station is a convenience store with Moon Pies in stock. Now don't tell me that this information is not powerful. Good advertising works because it reduces the price of goods and services. Knowledge is power.

What if the driver does a search for "pizza"? The information supplied by Google might include a 2 for one special at "Tony's". Don't tell me that Tony would not be happy to pay an advertising fee for this extremely relevant posting. Tony would happily pay a fee if the driver hits the call button to request a take-out order or to make a reservation. The driver might be excited to get his name on the waiting list while he is 10 minutes away from the restaurant. When the table is ready, Tony does not need a beeper system, he can simply send a reply over the Google IM.

One of many other neat things is that Google remembers that this particular driver calls Tony's frequently. This knowledge opens up many marketing avenues to Tony and builds the calling list for the driver. Don't you hate it when you want to call a place but you have forgotten to write down the number?

Google and associates are experimenting with city wide WIFI, power-line broadband, dual band cell phones and other techniques that will grant low cost broadband internet access to mobil citizens. Couch potatoes will certainly enjoy multimillion on demand TV and movies. Conference calling will also finally start to live up to its promises.

GOOD GOOGLE GULP! This buyer also purchased AMR, INTC, and GM last week. The GMdividend is about 6% and is 85% income tax free. The company is in for some rough times but it has been through them before.

STOCKS ARE CHEAP RELATIVE TO BONDS, REAL ESTATE AND MONEY MARKETS. THE S&P 500 PE RATIO IS REASONABLE IN RELATION TO INFLATION PROSPECTS.

Google + SKYPE = LOW INFLATION! Please note, it is not the savings on the phone call that drives down inflation (it helps but is only a small part of the savings). The driver who saves 10 cents per gallon on 20 gallons has saved much more than the value of the gas. The shopper who avoids the second trip to the store because of a Google list saves time and energy. STOCKS DO WELL DURING PERIODS OF LOW TO MODERATE INFLATION. FOLKS WHO ARE FOCUSED ON THE PRICE OF OIL ARE MISSING THE INFLATION STORY.

FOLKS SEEM TO HAVE FORGOTTEN THE FIRST LAW OF THERMO-DYNAMICS "ENERGY IS ALWAYS CONSERVED"! Our demand for energy is insatiable but energy never goes away! It is constantly recycled. DO THE Google GULP--YOU WILL SAVE MORE THAN YOU SPEND!

INFLECTION POINTS ARE ALL AROUND

Now is the time that it is easy to see both sides of many an argument. The reason is that inflection points are all around.

Greenspan has raised short rates until one person might argue that fed policy is tight enough to slow the economy. While the other person might argue that real interest rates are only slightly positive and indeed are low enough to encourage risk taking.

The unemployment rate has come down to 4.9%. This is at least close to full employment. Full employment is sometimes called the natural rate or the rate at which tight labor markets do not cause excessive inflation. The natural rate, like the appropriate fed funds rate is a moving target. Even if Greenspan were to know precisely the correct fed funds rate today, his action to move the rate to that level would ripple through the economy and bounce back to change the correct rate.

A local plant manager reports that his company is short three supervisors. His company is having a difficult time finding trained, experienced personnel. I like anecdotal evidence. One must be careful not to extrapolate too much from one little story but often the anecdotal evidence is more reliable than government data that is often revised dramatically after it is first reported. The revisions may occur one month later but can occur years later.

Several months ago, I caught some flak over my comments that the increases in Fed Funds Rate were actually an indication that the economy is strong. I reported the market would likely go up in the face of rising rates. One fellow challenged me to look at the long-term history to see that when short rates go up, the market does poorly. The fact is that history only repeats itself until it doesn't. It is true that short rate changes were reasonably good market indicators for decades. However it is also true the relationship has not held for about 15 years. The r square has been very weak for at least 10 years.

The market is more sophisticated now-a-days. For example, the relationship of the long bond rate to the earnings yield was not tight at all until the late 60's. The idea that increasing short rates can lower long rates seems counter intuitive. The reality is pretty straight forward; the fed increases short rates to lower future inflation and the long bond is basically the sum of the economies growth and the future inflation rate. Therefore, if the fed successfully slows inflation, it very well might lower long bond yields.

There has been much talk about the effect Katrina will have on the economy. The answer depends on the ultimate total reaction to the storm. There are many cross currents. For example, the closing of the NO port has increased the cost of steel, rubber, and other shipped goods. Those worried about inflation are horrified. The price of gasoline is another cause for concern but consumers cut consumption 4% during the labor day week end. This means fewer trips were made. Some of the trips cut might have been everything from a vacation to the beach to dinner at a restaurant. The effect has been interesting and powerful. The crude oil price has dropped like a rock. The massive borrowing and spending on reconstruction will like prove ultimately to cause the inflation rate to be a little higher and economic growth to be a little higher. In the short run, output and consumption will be slowed but Americans and indeed people from around the world are digging deep into their pockets to spend for the victims.

The bottom line is that calling turns in the business cycle precisely is nearly impossible. However, prior to Katrina, resource utilization in America was tightening. Yesterday, I reported data provided by Ed Hyman of ISI Group that showed inflation to be under control. I believe the FOMC has been right on the money to raise short rates in small increments for these past many months. The small changes have given the economy the chance to adjust. Indeed, the stock market has gone up and long rates have been flat to down during this period. The bond market and the stock market have projected moderate inflation ahead. PE ratios have contracted even in the face strong earnings growth. The market has gotten cheaper. It has been discounting the risk of higher inflation as the expansion progresses.

In July the YOY% change in the price of personal computers was negative 16.3%! During the same year, a number of new services have been made available on computers that make them far more productive than before. The laws of supply and demand tell us that if we can buy a better product for a lower price, the number of purchases will go up. In the next few years, millions and millions of dual processor computers will be purchased. Many of the wild dreams about the future of computing are going to be realized in the next few years. The adoption of new technologies has historically been a great time to be a stock market investor. It is time to invest because the next leg to the BIG BULL MARKET IS NEAR!

BE THE BULL!

It is time to Be the Bull! Join the stampede that is about to resume.

For weeks, the market has looked for signs that inflation is not going to be a like a monster rising up out of the sea. The pre-Katrina evidence is here.

The Beige Book has confirmed a slowing of the economy. Average unemployment claims have risen for the past 4 weeks. The employment cost index year over year percentage change is dropping like a stone. Greenspan's favorite measure of inflation, the Consumer Price Deflator has headed down. Inflation around the world is subsiding and, indeed, Japan continues to experience deflation.

The sources I am using for this report include Economy.com and a report from Ed Hyman of the ISI group. Ed has been one of my most favorite prognosticator for many years. Economy.com appropriately uses the monikor "The Dismal Science". But one should remember that bad news is often good news for the stock market.

A lot of folks who are whining about inflation forget to mention the 16.3% drop in the average price of the average computer. Dell is a super efficient manufacturing and distribution company. It operates at about a 60% gross margin. The stock has been having a difficult time because retail prices continue to drop like a stone. But computers do not furnish the only incredible numbers.

Many folks have bought houses in the past year and paid a 5% interest rate on 80% of the funding. The value of the houses have gone up 10%. Ed Hyman produces a great chart that deflate mortgages by home sale prices to show a record low in "real mortgage rates". Home buyers are being paid 5% to borrow money! I know, you think it is a housing bubble and that the price of a house will crash one day. In 1952 my parents were appalled to have to pay $2,000 for a two bedroom house. Years later the house was expanded and the cost to add two rooms and a bath were over $3,000. Had my parents rented the house instead of buying it, the current annual rent would be several times the total cost of the home.

No matter how much your friendly broker, neighbor or relative likes to whine about the price of gas, inflation is not bad at all. Indeed, there is considerable evidence that the spike in commodity prices is ready to subside. It does not matter, the total inflation number is a weighted average and the price of much of what we buy is not going up much. Consider dairy products and cars. Dairy products are down 3.2% since last year. The major car companies have cut prices to the employee discount rate.

If you have not noticed, unions are on the run. The AFL-CIO is no more. Northwest airlines resumed negotiations with the mechanics union today with the opening salvo that they need to lay off two thirds.

A decent push in the S&P could cause the shorts to scramble. The forward PE for the S&P 500 is about 15. While not particularly low by historical standards, one must remember 15 is a low number relative to core inflation of 1.8%. Believe it or not, it is a realistic probability that the 10 year government bond total return will be upwards of 15% over the next year! If the 10 year bond were to manage a 15% return, the S&P 500 could easily produce a 25% return.

With the impact of Katrina in mind, Greenspan and company may skip a quarter point move. I hope he does not. In the longer term Katrina rebuilding will provide serious stimulus to the economy and it will add to the inflation rate. Barry and others may say that Katrina will not prove to be a stimulus but the rebuilding is like any massive project where billions are borrowed and spent. No, it would not make sense to tear down an entire city just to borrow and spend but now that the destruction is real, we will borrow and spend to rebuild. One more quarter point move would convince the market that Greenspan and company are serious about "nipping demand pull inflation in the bud". Another quarter point would cause an outcry of "pain" but long bond rates and long mortgage rates would decline, inflation would be declared dead and the stock market would enjoy about a 30% move over the next 4 to 6 months!

BUY THE BULL! BE THE BULL! ONE SHOULD NEVER EXPECT TO CALL SHORT TERM MOVES IN THE MARKET. HOWEVER, ONE SHOULD BE ABLE TO IDENTIFY WHAT IS UNDERPRICED RELATIVE TO OTHER INVESTMENTS. STOCKS ARE CURRENTLY UNDERPRICED.

NOTE: HOMES AND BONDS ARE NOT AS EXPENSIVE AS THEY APPEAR. BONDS ARE NEAR HISTORIC HIGHS BUT INFLATION IS NEAR HISTORIC LOWS. NEW HOME BUYERS ARE LOCKING IN PAYMENTS FOR 30 YEARS THAT WILL PROVE TO BE WELL UNDER AVERAGE RENTS FOR THIRTY YEARS. STILL STOCKS ARE CHEAP RELATIVE TO BONDS AND REAL ESTATE.

TECH STOCKS IN LIFT OFF MODE

Strong mid quarter estimates for TXN has helped lift tech stocks around the world. Japan is having a good day (tonight).

It has been widely reported that Mr. Russell of the Dow Theory Letter has turned at least temporarily bullish. His record is one of the best. He likes the new high posted by the utility index. He expects other indices to follow.

I like the flight to quality aspect of the utility index, the very nice two year treasury run and the relatively heavy big stock versus NASDAQ trading. The ratio of big to small trading is as high as I can recall!

Furthermore, put call ratios, Bull to Bear ratios, stock to bond yield ratios, and other fundamental and sentiment indicators are either screaming "BUY". Some are only talking loud and indicators such as these are sometimes early or even more out of whack but the anecdotal evidence supports the "BUY" scream. One of the classic indicators happened to a friend of mine last Friday. He had a client call to say he could not take it any more. He said to sell it all. My friend tried to reason but one cannot reason with raw emotion. The entire diversified account was sold last Friday (the next market day, Tuesday, was a triple digit up day). This story is the same as countless others that have "called" market bottoms. Is it not amazing how negative US citizens have become during a time of great prosperity? Nothing a 300 point move in the S&P wouldn't fix.

The legacy airline stocks are up against the energy wall while enjoying the highest load factors in years. The situation with DAL and NWAC is very tricky. Bankruptcy would increase the chance that these carriers will survive long-term. Bankruptcy would allow them to dispose of significant pension liabilities in addition to the expected reduction in labor costs. Ironically, CAL, AMR and other stronger carriers would just as soon see these guys limp along selling off assets rather than preparing to come out of bankruptcy as strong competitors. The pilots and other employees are crazy not to save their jobs and their pensions but the problem is that all cannot be saved. Still, saving the carrier and keeping the pensions in force would be the wise choice.

The wall of worry for the airlines is huge. When the upmove finally comes, the surviving carriers will make a fortune. My family has its largest investments in the stronger members of the group. CAL is by far our favorite.

If I were to find a pile of extra cash, I would consider the purchase of GLW, DELL, HPQ, and INTC right now. Corning is selling flat panel monitor screens like hot cakes and the fibre-optic business has several great years ahead. Consumers who begin to stream GOOGLE and YAHOO TV are going to want multimedia computers. The pocket TV's of past years are not the same as the new TV's that are coming to a pocket near you. The TXN DLP technology is another booming business.

Is TECH on a major breakout? If it is, you surely do not want to miss the fun!

GOOGLE TV

SiliconBeat: On Vint Cerf, Google, dark fiber and video

GOOGLE IPTV. I know, Google calls the service video.google.com. I have downloaded the Google viewer and watched a few short clips. The potential is huge; virtually unlimited video available on demand.

The linked SiliconBeat article helps the reader appreciate why Google is raising $4 Billion more cash. It is not just VZ, SBC and BLS who are spending billions installing high speed cable. The key revelation in the article is that by owning its own fibre network, Google expects to deliver high speed video to the home for next to nothing. The costs will be so low that Google will serve up full length TV shows and movies to the consumer for "free". Certainly, there will be a charge for the recent movies, hot shows and popular sports content, as dictated by the content providers. However, most content will be provided in exchange for a share of advertising revenue. Would you like to stop paying your cable TV bill and your ISP bill and your phone bill? If you missed your favorite game or show, would you like to see it at your first convenient time? Would you like to watch the news after dinner?

The concept of the long distribution tail is a part of what makes this work. There are literally millions and millions of hours of video available that thousands and thousands of people would like to watch at a convenient time. Only recently has it been true that more time is spent watching non-network TV than network shows. The big audiences watch the popular shows but all the little audiences add up to more hours watched. After Google and Yahoo make millions of hours of other content available, the number of hours spent watching the major network shows will decline dramatically in relation to total viewing; no wonder Viacom is upset with Google.

Content owners would be foolish not to allow Google to serve up video. Content owners will receive advertising revenues off shows that have been canned. In an earlier blog, I used the example of William Boyd. His family owns the entire collection of Hop-a-Long Cassidy. I would love to watch these old westerns again. If Google makes them available and distributes them for a small share of the advertising revenue, why shouldn't the Boyd family be willing to share?

Much more variety will be available. Cooks will have innumerable cooking shows to watch when they like. Sports fanatics will be in hog heaven.

In a few accounts, I have sold NFLX and TIVO. NFLX at more than 100% long-term profit and TIVO at about a 20% short-term loss. If Google is building a high speed video serving network and if INTC is making media computers that will do all the TIVO functions, it is hard to see how TIVO can compete. TIVO could eventually be purchased by Comcast to make a rival network. However, consumers have shown an affinity for Google search. If one can search Google to find a wide variety of shows and play them on demand, does one need a TIVO box? Google understands Moor's law; the cost of storing and distributing digital content is dropping like a stone. Within two or three years, Google will be able to store millions of hours of content and serve it up for one or two cents per hour!

Content is important. Perhaps Yahoo has enough deals in place to make a lot of content exclusive. However, it seems that most producers would want the widest distribution possible. Most providers will offer several choices. For example, ESPN might offer many events for advertising revenues only. It might offer other events at a monthly subscription rate or on a pay per view basis and it might offer special events on a pay per view basis only. We have seen satellite radio companies pay big for the exclusive rights to NASCAR, Baseball, Howard Stern and others. One could argue that similar TV deals already exist and will be continued. However, there is a major difference with the Google model; it will be easy to charge per show and still pick up advertising dollars. The question becomes how will the providers maximize their revenues? Even if NFL football renews a particular deal with ABC, would the NFL not want to allow re-run viewing for additional revenue? Viewers will vote with their mouse (remote control). It seems entirely possible that Google will offer high speed internet, phone, internet TV, web hosting, email, news and more for "free". Can you see yourself ordering a product or a service with just one click of your remote control?

Lamar Jones, CPA, Registered Investment Advisor and good friend, is concerned that folks might resist allowing Google to learn every detail of our lives. Google has shown sensitivity to this concern and allows folks to "hide". On the other hand, it is the consumer who benefits.

I want Google to learn what I like to watch, read, listen to and buy. I want Google to know my favorite actors, my music taste and the products I buy. I want to be able to hit a button to pause my show, hit another to order a pizza and hit another to resume watching. I will not object if when I get ready to click the button for a Papa John's Pizza if the TV screen shows a extra special offer available from Dominos. I do not mind viewing advertisements about things I am considering for purchase. I love to watch classic movies but I hate to spend three hours watching a movie that has been cut to one hour and 30 minutes with the last hour being composed of 20 minutes of show and 40 minutes of ads. I am very used to watching Bloomberg or CNBC while reading the text during the show. Advertising does not have to be obtrusive to be effective.

The word is getting out that Google is going to be much, much more than a search engine. Seventeen more companies have signed on to the secondary offering syndicate. Google will have no problem raising $4 Billion dollars. The stock has moved up several percentage points in the past few days. Viacom, News Corp, Disney and others are not going to roll over and play dead. This market is competitive. It is also huge. Analyst who have questioned how big Google revenues can get have probably not factored in a significant portion of TV advertising revenues.

The US economy has entered the "growth boom phase". This is the phase after the economic recovery that is also called the expansion phase. Inflation and interest rates tend to rise during this phase. In this particular cycle, I expect inflation to be relatively moderate for several reasons. One of them is because the convergence of services will put many providers up against significant competition. Another very important reason is the millions and millions of valuable, relevant, timely, contextual advertisements that will be delivered.

For many a year, marketing 101 has included a standard debate as to whether advertising raises or lowers the price of goods and services. My answer is unequivocal. On average, advertising lowers prices. If any business engages in a poorly structured advertising campaign such that his margin costs exceed his marginal revenues, he is going to pay for the mistake. Advertising is designed to increase total sales and advertising needs to be suspended when its cost is greater than its benefit. Google performs an incredible service for the buyer and the seller by increasing the efficiency of the advertising. The consumer can buy the best product at the best price only by knowing the deal is available. The producer can lower price and increase sales by only paying for effective advertisements.

The expansion phase is typically a time for the strong; only the strong survive. The expansion phase is the time time to invest in BIG CAP GROWTH STOCKS. Note that rather than push toward an IPO, Skype has shopped for a "Big Daddy Warbucks" takeover. Enough people were burned in the previous hot IPO market that companies simply cannot command the high premiums of the past. This is one of the reasons that earnings continue to surprise on the upside. Existing companies are generating excess cash and many are using part of this cash to buy back shares. It is going to be interesting to see if Vonage can fetch big bucks at a time when the majors are jumping into its business.

I will read as much as I can to get a better handle on the Google time table. I suppose, each time Google adds a high speed route to its network, it is able to lower its transmission cost. When Google adds a line, it will carry its own traffic plus the overloads of other providers. Each time Google carries this overload traffic, it will in effect earn a credit toward payments to others. The situation is a bit like a country that allows private toll roads to be built and the bigger trucking companies decide to build their own private roads.

Other providers (most do not own any toll roads) are building their video networks around a projected cost of about 10 cents per video hour served. Google is building based on about a 1 or 2 cent per video hour served. The small player will not be able to compete with Google on price. Google has been paying the current higher costs but of course search and email have not used nearly the bandwidth required by Google Talk and Google Video. I don't know the numbers but I'm sure 100,000 emails would costs less to send than one full length movie. AS Google builds out the network, it will immediately enjoy the savings on current activities.

Google is the General Motors of 1922 to 1929; AOL is the Ford Motor of 1914; ABC could turn out to be the Nissan Wagon Works of 1912. Actually, I believe the networks will adapt and survive. However, the number of people who will sit down at exactly 6:30 to watch the evening news including 12 minutes of 30 in non-relevant advertising is about to see a dramatic decline.

IMPORTANT NOTE: YHOO and GOOG are going after this market extremely hard but each with their own approach. I am a Google nut but my family also owns YHOO . Comcast has been the top cable TV company. However, the value of any particular city franchise seems to have eroded. Philadelphia, Chicago, Corpus Cristy and many other cities offer or plan to offer city wide broadband connections. These will enhance the value of Google search but will devastate the value of the local cable franchise. In cities where SBC, VZ or others begin to offer IPTV, the value of cable franchises will be diminished. Cable companies will be able to discontinue the payment to the cities for the franchise but the loss of revenues should exceed the savings by a wide margin. Comcast and TWX own much programming and content. These assets may be enhanced in value. On the other hand, if all the high school football games in the entire country were televised, even on a delayed telecast, how many total hours of viewing might be switched from a TWX movie or show to the local game of the week? My attitude is to avoid the major phone and cable companies.