WHAT I KNOW

A couple of regular readers have asked if yesterday's huge rally is the start of the BIG BULL I have been writing about. I don't know!

I know stocks are cheap relative to bonds and real estate.
I know public investors are as negative toward the market as they typically get before big rallies.
I know the FOMC hinted that rates have gone about as high as they need to go.
I know that bond market indicators show the probability of lower long rates in the months ahead.
I know that lower bond rates support higher stock prices.
I know that there is more oil in storage than at any other time in the history of the world.
I know that the law of supply and demand should bring oil prices down.
I know that the price of commodities tend to trade together, if oil goes down it is likely that aluminum will go down.
I know that lower commodity prices would dramatically decrease the cost of many companies, such as DELL, GT, CAL, F, GLW and WMT.
I know that current mortgage rates are causing a dramatic slow down in home sales.
I know that consumers have cut back significantly on discretionary spending, such as trips to the beach and amusements while at the beach.
I know that the interest rate ball has been kicked to the other mans court, Japan in particular is going to see a rise in their currency if they do not continue to take action.
I know that the Globalization of markets has dramatically reduced the risk of high inflation but has made the FOMC less powerful.
I know that corporate profits continue to surprise to the upside.
I know that a different kind of investment works in the second half of an economic cycle.
I know the evidence is clear that "first half" investments are dying.
I know the amount of spending on new communications technology is going to be huge over the next few years.
I know that Google has shown again that the Internet allows innovative companies to introduce win-win-win services; providing numerous benefits to consumers while giving the service provider a high profit margin.
I know that tax law changes typically occur at or near the start of phase one of the four stage real estate cycle and it is clear that phase 4 is over or nearly over.
I know many more things but there are many more things that I do not know; knowing what the market will do in the short run is one of the things I do not know.
However, I am very confident that, like the last 200 years on average, stocks will outperform most other investments over the next 30 years.
I know that the perception of most people is that stocks are more risky than bonds, while the evidence shows that over 30 years bonds are more risky than stocks.
I know that inflation will gnaw away the principle of CD's, Bonds, Insurance Equity and other fixed incomes.
I know that hiding gold talents in the ground is not the act of a wise person.

Over the past week or more, I have mentioned several times that when the public becomes very negative toward stocks, it is a good time to buy. The various bull-bear ratios have reached extreme levels and when the market moved up, public short selling went up dramatically. This reaction is a very positive sign. Although, I never recommend option buying, the risk of loss is very large, my family owns options on thousands of shares and yesterday was a lot of fun. Our QQQQ options do not expire until the third Friday in December. We are long stocks on margin. We expect to hold most, if not all of the stock positions, for the long haul. Our trigger finger will always stay close to the option sell button. We are excited about the market.

So many things could happen, good and bad. One possibility is that the congress could pass a law to allow drilling for oil along US coastlines and in ANWR. Trillions of dollars of assets would suddenly become available. Iran is under extreme pressure to "make a deal". The trouble is that surprise is what moves the market. I believe it will surprise most investors if the US allowed drilling or if Iran made a deal. I don't think the average person realizes the amount of effort expended over the past 5 years to set up a deal with Iran.

I do not know if the market will go up today but I know that conditions are ripe for a strong market in the months ahead.

I PREDICT 90% OF YOU WILL HAVE G-BUY IN 2 YEARS!

The number of free services given away by Google is growing rapidly. If a friend sends a friend a link to a free Google Spreadsheet, a free Calendar or a free Photo Album, the friend is likely to register for a free account to view the information sent by the friend. When a person logs onto his free Google Account, Calendar, Spreadsheet, Google Talk or Gmail, etc., he automatically logs into the other free services. Can you see how easy it will be for Google add Gbuy accounts? Everyone one who uses Gmail, Gmusic, or Gvideo will find it easy to use Gbuy.

The fee schedule is not public information but it is believed that there will be a cost associated with using Gbuy. Perhaps it is more important to note that Gbuy will give Google terabytes upon terabytes of information about what users buy. Google will easily direct advertisements of baby products to the persons who buy baby products.

The time saved by consumers will be enormous. Those who do not have babies will very seldom see an advertisement for baby products. Those who buy wine will automatically be exposed to much information about wine.

Investors who do not own Google stock are making a big mistake!

STAY POSITIVE

My thanks for the responses to recent emails. The one expressing depression about the stock market shows that readers, like the rest of the public, struggle to stay positive during a market correction. Of course, being positive when others are negative is a major part of being a successful investor.

The suggestion to buy Build-a-Bear, made by a good friend and frequent reader is an interesting idea. I do not like the idea but it is still an interesting one. Here is a company that appears to be attractively valued. For example, its price to sales, price to book and price to cash flow are all about half or less than industry norms. The company enjoys high margins and has been a rapid grower for several years.

On the other hand, it is just the opposite of the kind of company that I have said is likely to lead the next rally. It is the ultimate consumer discretionary item. Having been in Myrtle Beach for the past couple of weeks, I can tell you that consumers are cutting back on discretionary spending. The beach is relatively uncrowded and the lines are not long at the movie theaters or restaurants.

BBW has stated that this quarters earnings will fall to the low side of guidance. Recently one analyst lowered estimates for the whole year. As you may know, I don't place much faith in the estimates offered by analyst but down grades are not to be taken lightly; the numbers could be way off but the direction appears to be down.

This spring, insiders were dumping the stock. In the past few weeks, one board member has bought a few shares.

Since coming public, the stock has traded into the mid 30's a couple of times and down to the low 20's a couple of times. Right now, at $21.20 it is near the bottom of the range.

My thanks to my good friend for mentioning this stock. It is not one that I will buy but I enjoyed giving it the once over.

As a retail stock comparison, WMT has about the same price to cash flow. My bet is that a big company like WMT will out perform BBW over the next 5 years.

A WONDERFUL PROBLEM

The US economy is facing a wonderful problem; how high do interest rates need to go to prevent huge wage increases? The American worker is in the "cat bird" seat because of another wonderful problem; very high profit growth by American companies.

If there were two businesses, one with very high sales growth and the other with very high sales and very high profits, which would you rather own? Politicians have to find a straw man to beat up. One easy target is the Chinese. Therefore the argument is made ad infanitum that the Chinese are stealing from Americans. If it is not the Chinese it is the Mexican immigrants. Politicians constantly ask, how long can we continue to have a negative trade balance with the Chinese? They then attack the Chinese for manipulating their currency to make their goods too cheap. I say, "Thank you very much"!

Yesterday, Marilyn purchased a shirt for me to try out. It is a very nice shirt and she paid less than $7.00. Thirty years ago, a shirt like this would have cost $30 or more. China is the equivalent of that first business; the country has very high sales growth on very thin profit margins. The US is the equivalent of the second business, very high sales and very high profit margins. The reason the average American is wealthier today than ever before is because he benefits directly and indirectly from those high sales and high margins.

It is true that China and other developing countries tend to steal a lot of stuff. They do this primarily by ignoring intellectual property rights. For example, until recently, Chinese companies were making tons of "Viagra". It looked like Viagra, had the Viagra name on it and worked like Viagra. The work of administration "trade" negotiators has been and will continue to be reaching agreement for the Chinese government to enforce copyright laws. Those folks who visit China are always amazed that bootleg copies of American movies are on sale at very low prices by the time the shows hit American movie theaters.

Back to the big picture: American companies are making big profits off of international trade. So much profit that we can afford to run trade deficits for centuries as we have for the past century. It is ludicrous for folks to get all uptight about the current account deficit now when it has been negative for all but two or three years in my life. Indeed, when it moves to positive (in the early 70's and late 90's) a very tough world wide recession is not far behind.

The practical information for most folks to take away is that the FOMC is raising short term interest rates in an attempt to slow the HOT labor markets. Just this week, in the Piedmont Triad there have been announcements of new plants that will hire high skilled people at higher than average wages. Yesterday, it was announced that Honda will build a new plant in Indiana. To recruit good employees, companies have been raiding other companies. In the past few days, Google, MSFT and Yahoo have all run full page ads seeking top tech. talent.

The wage battles are spreading from industry to industry. Politicans do not like to talk about interest rate hikes in terms of fighting to keep wages from going too high. Instead, you hear about fighting inflation. Well, inflation is about as low right now as it has been in my 56 years. Inflation is quickly becoming old news. The price of oil hit $70.50 about a year ago and it is $72 this morning, soon it will be $55. Even if you do not believe that the price will soon be $55, the move from $70.50 to $72 in one year is a 2% increase. Also, inflation is a lagging indicator, which means the problem is last years problem.

The problem the FOMC has is to slow wage increases to a moderate pace without "killing" certain industries that are interest rate sensitive. US mortgage applications dropped by 6.3% last month. The combination of high oil prices and high interest rates are causing consumers to cut back on other spending. The FOMC is not in this fight alone. The central bankers of the world have joined the fight. The huge gains in auto sales and oil usage in China last month were a result of announced increases in regulated prices this month. The Germans are doing double duty, they are raising taxes and interest rates at the same time.

Very soon, about six months time, the talk will be when will the FOMC cut rates and how far will rates need to decline to prevent deflation. About 65% of gold demand is for jewelry. Just a couple of months ago, billions of citizens in developing nations were enjoying "boom times". Knowing how fickle these economies can be, billions of citzens were buying gold chains to wear around their necks. What a diference a few months can make? The stock markets of developing nations have been ravaged. The demand for gold chains is on life support. Another quarter point in the states, another 2% hike in Turkey a few more quarter points in Europe and, yes, even a hike or two in Japan may kill the demand for gold chains for many months to come.

In the meantime, the capital spending boom projected for the next few years can move forward with force. Billions and billons for new refineries in numerous locations, billions and billions for interstate high ways all across China and billions and billions for new communications equipment all around the globe.

A world wide economic boom after only a modest slowdown in housing, what a wonderful problem to have? Investors who take advantage will make fortunes.

WHOSE SIDE ARE YOU ON?

Indications are that the public stampede is away from stocks, however, additional stock buy back records have been set. Just in the last few days, corporations have purchased 20 Billion Dollars of stocks!

An interesting situation has developed in the bond market, without any further declines in value, will hit very strong momentum buy signals by July (my thanks to Don Hayes for the info). The table is being set for a major bull market move!

The oil now flowing thru Iraq has gotten very little attention. All the emotion and talk is being directed toward the Iran situation. Iran exports about 4 million barrels per day but they then import about 2.5 million barrels a day of finished products. Iraq pumped 700,000 barrels per day thru Turkey before the Gulf War. The growth in China during the month of May has gotten a lot of attention without the mention that this growth was spurred by the announcement of price increases to take effect in June. China and India (Iran and others) sell fuel to the public at a loss. Thus, the prices follow a plateau pattern. The recent increase in China of 12.5% is enough to destroy demand; if not, prices will rise again because the government is losing a lot of money off of each barrel sold.

The other oil factors making the news is a spill in a canal in Louisiana. This is a temporary problem getting far to much ink.

Corporations are buying billions of dollars of stock, reducing the supply. The law of supply and demand works. There is more oil in storage than ever before and billions of new barrels have been discovered in the past few months. Public wealth in America has never been greater and the shares of stock available to buy are going down. Prices are set to go up! After several years of fighting deflation by pumping up the money supply, Japan is sucking up money like never before. In the short run, this will damage the price of assets. However, the damage is already painful for those invested in emerging markets, small caps and commodities (with the exception of oil). Exploration stocks are under performing on a relative strength basis but the real pain will come later.

If you want to make a safe bet, buy Wal-Mart. It has rarely if ever sold at such a low price to cash flow, cheap, cheap, cheap for a company that continues to grow so fast.

LOOK OUT REAL ESTATE PHASE I of IV LOOMS LARGE

The real estate cycle takes about 18 to about 22 years. The cycle starts about the same time the government passes new real estate tax laws. The laws are usually passed to "simplify" the tax code. You may recall that the start of the last cycle began in 1987 just after the tax simplification laws were passed in 1986.

Mr. Paulson, the Bush nominee for Treasury Secretary, received a warm welcome at Senate hearings today. He should easily be confirmed. The speculation that his top priorities will be to simplify tax laws and reform Social Security and Medicare. A few weeks ago, the congress passed only a one year extension to the alternative minimum tax. The table is set.

IMPORTANT: The real estate market is 5 times the size of the stock market and stocks do not do well when real estate is in recession.

We are currently clearly into Phase IV of the real estate cycle. A wonderful opportunity lies ahead. Those who are ready will make extraordinary returns; millions will be made. Those who pay no heed will see negative returns. As a former Boy Scout, I am a firm believer in the motto: Be Prepared. Tell your Mom and Dad, brothers and sisters, and friends and neighbors, there is no need for them to suffer the kind of losses that happen near the end of Phase I.

MORE OF THE SAME

BP Oil just presented it's annual energy report. It shows that world wide demand grew only 1.2% in 2005. On the other hand, world wide demand for coal grew by 5%. The law of substitution is alive and well and continues to do its job in a powerful way. At current usage rates and using proven reserves, the US will run out of oil in 11 years, Saudi Arabia will run out in 81 years and the US will run out of coal in 240 years. Alarmist ignore the 240 years of coal and use the oil numbers to incite fear. A fear so strong that in the US, 39 new taxpayer subsidized ethanol plants will be built in the next two years. In two years, the US will produce more ethanol than is produced in Brazil, the other country where taxpayers are forced to buy fuel for others.

If Iowa was not the first state to hold a Presidential Election Caucus, the huge subsidies would never have passed and the market would have found a more efficient way to substitute; most likely the conversion of coal to liquid fuel. In any event, the US is not going to run out of oil in 11 years. The US has probably a trillion barrels of oil in non-proven reserves. Sooner or later the politics will get out of the way and this $70 trillion dollar resource (at current prices) will be tapped and sooner or later the economics will be right to convert coal to clean burning transportation fuel. Corn oil is not going to replace hydrocarbons. If all the land in America were used to grow corn, corn oil would not replace hydrocarbons. However, the price of potato chips will go up as a result of increasing usage of ethanol. Of course, Frito Corn Chips will also go up in price.

In the meantime, mergers continue, technology evolves and the talking heads obsess about interest rates and resource companies. This morning, it was Phelps Dodge that announced the purchase of two other companies and it was Microsoft that announced a new computer phone initiative. Iran continues to negotiate. Iran has reached final agreement as to some of the provisions of the incentive packaged offered. The coalition wants an answer on the final package by June 29 but Iran suggest it will be ready to answer in August. Who knows when the final deal will be done? Both sides have huge financial incentives to "make a deal". A risk premium of $15 to $20 per barrel will deflate in the weeks, months and years after a deal is done.

The upcoming Google release of Gbuy is going to increase the competition for the online sale of goods and services. Googlewill be more and more in the face of Ebay and Amazon. The integration of Froogle and Gbuy into the suite of accounts being developed byGooglewill give Googleservices a huge amount of exposure. The growth in online sales will accelerate for all three! as more and more folks appreciate the efficiency involved. Blender sales serve as a great example; more blenders are bought as wedding presents than for any other reason. What bride wants to load up wedding presents at the wedding? Who needs to go to the store to select the third blender they have purchased in June? The bride has already selected the blender she wants and the selection is available online. The purchase can be made online, delivered directly to the bride and both the buyer and bride save much.

I understand that the bottom line of the above two threads of thought are a repeat of what I have said time and time again. However, in the face of the powerful brokerage industry and the powerful news industry, investors tend to wimp out. Right now, there are several of the "beach investor group" who are in no rush to fund or add to their account. The fact that many a market indicator is screaming "BUY", investors are in no hurry. History shows time and again that the public waits until stocks have made a significant move before they enter the market. I can't remember the exact numbers, but I can tell you that if you miss the few best days in the market, your returns will be dramatically reduced.

The Presidential Election Cycle suggests that the next few months will be poor months in the market. However, stocks are too cheap to take the chance. Investors should buy now because the risk of a "melt-up" (I believe this is a Ken Fisher term) grows daily. As usual, it may take a surprising catalyst. The FOMC rate increase could come and go and the deal with Iran could be done or postponed before some "out of the blue" negative event (perhaps the collapse of a hedge fund) will show that the last interest rate increase has come and gone.

Another home builder reduced its earnings forecast. Yes, more of the same, but the decline in housing construction speaks volumes to the probability of a halt in interest rate increases and the probability of commodity price decreases. The table is being set for a major market move; I hope you take full advantage!