Monday, October 31, 2005 U.S. U.S.

September and October represent the first back to back spending declines by American consumers since the recession of 1990! The news should give the FOMC a lot to think about.

It will not bother me if the FOMC tightens a bit too much at first and has to back-track later. "Nipping inflation in the bud" is extremely important. A wage-price spiral is the last thing our country needs.

The reality is that inflation is not very bad but there are a lot of folks who are focused on short-term problems. The perception of inflation can lead to more inflation so raising short rates a little too much can serve "the greater purpose".

David Altig Director of research at the Federal Reserve Bank of Cleveland,and David Taylor/ a hedgefund manager support my theories.

I have spoken with confidence that the price of oil is going to come down. However, I have never been sure that there will not be at least one more solid surge to test the nerves of the market. Another quarter or half point by the FOMC may be more than enough to level out supply and demand for oil until new supplies are available.

Reuters Business Channel |

Reuters Business Channel |

Upside down and backwards again. The strike against Royal Dutch in Amsterdam may cause fuel prices to soar and crude prices to drop!

Today's sharp drop in crude may have related to the the strike but then again the airlines did so well that it appears that jet fuel is coming down as much as crude.

Perhaps even more telling is that Eurpean nations are currently willing to take a strike to bring down labor costs. German, French and English strikers have been met with strong management resistance in recent months. Coal mines have been shuttered, the French have accepted longer work weeks and Germany has elected a more conservative government.

America may enjoy the availabilty of the Amsterdam crude that may be reoffered on the world market. The decline in foreign currency reserves suggest that the decline in oil prices is not over.

Today was a great day for CAL, AMR and LCC and a rough day in the oil patch. The answer to the question, which sector will be hitting peak earnings 5 years from now seems obvious. One should buy stocks based on projected future earnings not based on current earnings.

Om Malik’s Broadband Blog — » Are Bandwidth Mergers Enough?

Om Malik’s Broadband Blog — » Are Bandwidth Mergers Enough?

Om Malik is one of my favorite bloggers. He covers Google and other broad band companies nicely. The link below is to his most recent article about LVLT. He makes it sound as if companies like Comcast and Google will build their own fiber networks even when a company like LVLT is sitting on the nest egg. I suspect that LVLT will be taken over at some point. Everything Om relates shows that the demand is growing rapidly.

Tonight, NBC announced that its nightly news will be available on demand over the internet anytime after 10 pm. I would have liked for the announcement to have been that it will be available starting at 7 but this is the first of many such announcements. Being able to search old news programs will extend their usage and value.

Sending a 30 minute newscast over the internet is on the order of sending 500 thousand emails. SBC did not buy AT&T and VZ did not buy MCI for the long distance business (a dying business). These companies were bought to secure the networks. I do not own LVLT as I am concentrated in 8 stocks. However, if I were not willing to put so many eggs in one basket, LVLT would be in my basket.

To me, this is a story of the survivor living to thrive. There is such a small difference between the last of the bankrupted firms in a down-turn and the one that made it. CAL and NWAC are great examples. The two firms were not so different before NWAC went belly up. Now there is a world of difference. My family lost money on NWAC but has already made up the loss on CAL, with a lot more room to go.

LVLT by taking over the Williams network, LVLT has out lived the patience of a well to do company. Williams as I recall is a profitable oil pipeline company that built a fiber network along its right of ways. I remember that CSX railroad and others tried to take advantage of their right of ways. It is like the consolidation in cell phones, where too many players could not make money but the survivors did well.

LVLT and WilTel together can cut cost and increase revenue with no capital costs. When LVLT catches some traffic it will be able to hold it for longer distances and the same when WilTel catches traffic. The bargaining position is strengthened. Comcast, QCOM, Google, AOL or others may come to call.

There is much overlap in the two networks. The reason it makes so much sense for LVLTto acquire is that the takeover cost of one carrier was in competition with the other. LVLT may have paid up a little but now it is in the position of being the only provider available in these markets.

No one seems to have the maps of the QCOM, Google, Comcast or other networks. I am sure each firm is guarding the maps well. Of course, MCI and AT&T were bought because of the size and capacity of their networks. Google understands that Moore's law works in regard to traffic costs in addition to storage costs and computing cost. Google is flying ahead as if the costs will be virtually nil in a few years.

Traffic growth is going to be huge, traffic costs is going to be very small relative to advertising revenues. The jury is still out on the question of will there continue to be monthly usage fees (would you enjoy not getting a phone or internet bill?).


I don't care who you are, if you ever say something will never happen, you are never going to be right. When Jim Cramer, wrote in his book that one should never own an airline, I became convinced that airlines were approaching a wonderful time. A few weeks ago when Jim, continued to reiterate that he would never own an airline, my resolve was increased.

The example that I like to use of never saying never is when the fellow told me in 1981 when the prime rate was at 21% that it would never reach 6% again. I bet the fellow $1,000 of my money to $10 of his that the prime would reach 6%. On the day it hit 6% in 1986, I showed up at his house and bet him that down town real estate was ready to make a tremendous comeback. He knew I was there to mention our bet and fell into the trap again of saying that down town real estate would never be as strong as it was in the past. Not long ago when I said that the per barrel price of oil would eventually drop below $30 another fellow said it will never happen. He is already rethinking his position.

Thank you Jim Cramer. Like many who are willing to make short term calls, I expected you to capitulate on the call some day. I was surprised at how quickly you did change your mind but then it is also interesting to see how quickly JP Morgan, Lehman and other big houses have changed their tune.

It is hard to resist buying into an industry that has righted itself 29 years after its regulatory protection was broken. Indeed it has been a rough 29 years. Now the good years are starting. Like a phoenix rising up out of ashes, the surviving carriers will make boat loads of money. By the time UAL, DAL, NWAC all emerge from bankruptcy as significantly smaller carriers, AMR, DAL and LCC will have picked up valuable routes and gates.

The age of shopping only for the lowest priced seat is gone. Folks now need to latch onto available seats or they may have to go to Timbuktu before circling back to their destination.

Again, not to pick on Jim Cramer but he often proves that no one is always right and he needs to learn that never is a very long time. In about 5 years, many folks will look back and say that they thought about buying CAL when it was selling at a price to sales ratio of .08 but just could not bring themselves to pull the trigger; what a shame!

Friday, October 28, 2005


Good economic news is often bad news for the stock market and vice versa. Many things are "up-side down" when it comes to news. For example, peak oil stock earnings right now suggest that earnings can only get worse in future years. Peak refinery profits will lead a competitor to build a new refinery and suddenly profit margins will decline. Yesterday, Trinidad announced the start of of a large methanol refinery. Methanol is used mostly in solvents and paints. The important point is that natural gas in Trinidad is now being exported to the USA as methanol, thus reducing the demand for natural gas in the USA.

The economic statistics gathered by the conference board include leading, coincidental and lagging economic indicators. The "bad" economic news is that these indicators are going down. The leading year over year change in the leading indicators is approaching zero fast. Coincidental indicators are headed down to the 2% area which implies the GNP is slowing to a 2% growth rate. Even lagging indicators have turned down.

These weak or "bad" indicators for the economy are potentially great news for the stock market. The indicators suggest that the FOMC will stop raising short term interest rates soon. Companies generally have an easier time making profits when interest rates are low.

Today, the "good news" was that real GNP grew at a 3.8% annual rate this past quarter. This is a strong number. It was boosted by a low GNP deflator number. According to the government figures inflation even in the face of rising energy prices was relatively low. Indeed, the largest component of inflation, labor costs, were up at an annual rate of 2.2%. Those who argue that energy costs show that inflation is out the roof must recalculate; crude has dropped 15% and inflation is therefore negative in the past month.

The favorite inflation indicator used by Chairman Greenspan is the core PCE deflator which indeed was negative last month. One of may favorite inflation indicators is to divide the CRB Futures Contract by the 10-Year Treasury Futures Contract. By this measure, inflation is projected at 2.9%. However, there are a number of indications that CRB Futures are topping out and ready to head down at a rapid pace.

NOW I'M TALKING GOOD NEWS FOR STOCKS AND BONDS! If indeed CRB Futures trade down, the markets could see a significant bond market rally and an even more powerful stock market rally. The 10-Year bond is currently at a high rate relative to its average of the past two years. It is at a low real rate if you, as many folks do, use the CPI as a deflator. If you use Greenspan's favorite, the PCED, real bond rates are extremely high.

Folks the world is not black and white. There are opinions on all sides of the inflation question. Barry Ritholtz has made it his quest in recent weeks to prove that the government numbers are flawed and that inflation is much worse than what is reported by the government and what is indicated by the market.

Investors who are seeking alpha, above market performance, are in effect attempting to be smarter than the market. I and other make that attempt often. It can be a humbling experience because there is always important information that the market knows that any one individual investor does not know. I do not believe in the Efficient Market Hypothesis but I do believe that if you can't see why the market believes something then you don't have all the information you need to attempt to achieve alpha.

Blogger's are selective about which data they present. Barry has been able to pull out much data to show inflation is worse than the 10 year treasury and the 10 year TIPS suggest. I think folks misunderstand the deflator concept. Perhaps I misunderstand as well. The way I see it is that if a person stops taking the daily news paper because he now reads so much of his news on the internet the deflator is effected. The person might have been paying for broad band internet, a newspaper and long distance telephone charges. After a time, if he stops taking the newspaper and switches his phone to VoIP with unlimited long distance free of charge, then this fellow just sent the deflator down. If his newspaper cost him $180 per year and his long distance bill cost him $240 a year, his "personal--personal consumption deflator " has just seen a $420 drop in consumption. If his personal consumption was $30,000 annually prior to the decline, his personal-PCED declined at 1.4% annual rate.

Most folks think of inflation as being the price of something going up or down. The big decline is when you stop consuming an item because you have substituted something else. The law of substitution is powerful and pervasive. I always remember an old timer who contracted for a new house but then raised Cain when plastic plumbing pipes were being installed. He wanted the "real thing". He wanted copper pipes. One key point here is that new products are often not only cheaper to purchase but they are often better and much cheaper to install. It takes skill and tools to sweat a copper pipe joint. It takes a little glue to connect pvc joints.

Folks the ultimate good news for stock investors is the negativity of others. The time to "go all in" in the market is when the majority of folks are upset about something. Tell me who is not upset this week; Democrat, Republican, Conservative, Liberal, Iraq supporter, Iraq non-supporter, Bush fan, Bush critique, stock holder, worker, etc. The reality is that the economy is growing, wealth is being created, crime is down, education and welfare spending is up and baby boomers are in their peak earnings, saving and spending age bracket.

As one old timer used to say, "Times is GOOD!"

As a political aside, let me suggest to you that Bush is again managing expectations. All the "bad news" just happens to be hitting one year before and one year after the elections. Mark my words, a year from now, oil prices will be down, stock prices will be up, seniors will be receiving drugs at subsidized prices, the supreme court nominee will be working, inflation will be tame, the budget deficit will be improving, the dollar will be strong and Bush will be on the campaign trail. Please check the history on this one, but I believe Bush has the very real chance of being the only president to ever gain congressional seats in two off year elections!

With a few more seats, Bush could be in the position of rationalizing the social security system! With a few more minority votes, Bush will have broken the back of the welfare dependency status of the Jesse Jackson crowd. Opportunity and freedom exist for all in this great country. NOW I"M TALKING ABOUT REALLY GOOD NEWS!

Wednesday, October 26, 2005


During the past 28 days, the S&P energy sector is down 3%, the utilities sector is down 4%, the technology sector is dead even and the consumer staple sector is up 3%. These are numbers one should expect half way through a business cycle. Among the strong stocks during the second half of the business cyclewill be the steady earning companies that are either out of debt or steadily paying down debt.

Companies that rely on financing will be hurt when long rates start to rise (the ten year is near a multimonth high today). In recent weeks, the homebuilders and REIT's have taken it on the chin. The economy is currently slowing a little. Consumer confidence was smacked by high gas prices. Should spending continue to slow enough to bump claims for unemployment and should the fed continue to raise short rates, the word recession will be mentioned often. The word recession has a chilling effect on the actions of consumers and investors. The word reminds me of the contest between the wind and the sun to take a mans coat off; no matter how hard the wind blew, the more firm the mans hold on the coat. The sun smiled on the man and he took the coat off immediately.

The reason the FOMC always seems to over shoot is that the sun shines brightly until the FOMC finally gets on top of the curve, then suddenly the cold wind blows. Investors and consumers run for cover. The good news is that long rates drop when the FOMC makes it to the top. The decline in long rates then makes stocks compelling investments.

Based on current inflation rates, one can easily argue that ten year rates should be at least a point or even two higher. The problem is that the most recent inflation numbers have already been partly mitigated by declining energy costs. It is impossible to call if the next bump in short rates will convince the markets that inflation is not a problem. The next bump could easily send the dollar up, gold down and long rates down. Historically, the market starts to move up at the next to last bump in short rates.

If you are in the right stocks, the timing of the exact bottom is not very important. My family remains over weight in the airline stocks. We own financials, tech, internet, rail roads and more but we are loaded up on CAL, AMR and LCC. Google is perhaps our second largest holding.

In the coming weeks, we are likely to add more consumer staples and pretty soon we will be investing heavily in pharmas. The family currently owns MRK and PFE. These beat down companies will do well after the projected run in staples.

Today was an interesting market day. The drop in oil took down the energy sectors hard while the slamming of the bond market held the lid on everything else. Even the airlines struggled in the face of crude oil down $1.60.

Only 6% of US refining capacity is still shut in! Gulf production is still off 60% but crude is not the problem; supplies jumped 4 billion barrels. Heating oil and natural gas will be expensive all winter but crude oil prices and gasoline prices should continue to fall. I figure airlines will be moving well by the time crude hits $55.

Other "late cycle" stocks should be owned. It gets a bit tricky in the techology area. Traditional late cycle stocks would include mainframe computers and software such as IBM and Oracle. This cycle it is going to be interesting to see how quickly businesses adobt thin client technologies. SUNW may be sitting at the right place at the right time.

Sentiment, money, valuation are all lining up favorably for stocks. I expect a 30% year over year move but can't tell you when it will start. I know traders and investors are eager for the "BIG BULL" to run. A lot of money will climb on when the rally breaks through the trading range of about 2 years. History shows that long sideways trading is usually followed by a blow out year. It could start any day now!


The following is a list of items from a screen shot of Google Base. It was copied from seweso's blog:

"Course Schedules
Events and Activities
News and Articles
People Profiles
Reference Articles
Wanted Ads"

This is just a small list. Google Base. will allow each user to post in a "standard category" or he may create his own category.

I sold shares in EBAY today to buy more Google. EBAY is a power house company with a natural monopoly in autions. The problem for me is that more and more of EBAY "stores" are not really auctions but just list of inventory. It seems to me that folks will opt for free inventory posting versus the EBAY listing.

One can argue all day that EBAY has a payment system set up and an anti fraud system in place. Indeed the "trust me" features in EBAY are of great comfort to buyers. However, I believe huge amounts of posting will be done in Google Base if the posting is free. It will become natural to do a search from a browser rather than to go to EBAYto do a search.

To me, it is like looking up a phone number in a phone book versus typing a search into a browser. Why not let the computer do the work in a fraction of the time?

One blogger suggest that AOL has a few search features that are better than Googles features. The thing that makes Google powerful is the simplicity of searching for everything from the same spot. Revenues went up better than 100% year over year and the public will now be invited to supply reams of new content; more growth to come!

Om Malik’s Broadband Blog — » Anaheim’s Earthlink WiFi Plan

Om Malik’s Broadband Blog — » Anaheim’s Earthlink WiFi Plan

Anaheim, CA has become yet another city planning a WiFi network. Earthlink is going hard after this business. Comcast is reported to have invested in Bel Air Networks which is another company proposing WiFi networks.

Have you noticed that NT keeps edging up in price? Do you suppose these systems are using a lot of NT equipment? JNPR has been volatile but CISCO remains as dead money. CISCO is making a huge push into India and China.

When the tech market finally takes off, I would jump on the leaders hard and heavy. If every large and small town in America goes wireless, we are talking about a lot of equipment. Companies such as GLW will supply the fiber to carry the traffic after it hits the receivers.

John Battelle's Searchblog: New Google Travel Teaser

John Battelle's Searchblog: New Google Travel Teaser

It is amazing at how simple and how smart a search can be. When one searches for two cities, Google assumes you would like to know about transportation between the two cities. The return is scroll down boxes to put in departure and return dates and search links to Expedia, Hotwire and Orbitz.

Try this feature. Can you see a day coming when you will never need to go to a specialized site first. For example, if you want to search for homes for sale, you will find millions catalogued at Google. You will be able to sort by multiple factors such as location and price. Finding what you need will be easy. There will be no need for the person looking for a bicycle in San Francisco to first go to a San Francisco classified advertising site. One will simply search for a bicycle in San Francisco.



This morning CNBC reporters Becky Quick, Mark Haines and others demonstrated a lack of understanding in regard to Google Print. No wonder the public is confused, even the financial reporters do not study their subject before blathering on.

Google Printdoes not allow anyone to read copyrighted books. Google Printis simply an electronic card catalogue that allows users to find information about books. For example, if you want to find a book that mentions elephants you can find a long list by searching Google. Just like in a card catalogue, you might see a sentance or two with the word elephant used. This is to supply context. The sentance might be about the elephant in the room or the elephant in jungle. Clearly the potential reader needs to know the context in order to know which book to read.

The Wall Street Journal posted an article this morning about the Google Printbenefit to the world. The benefits are huge. Consumers will be able to find books from libraries or stores as a result of searching Google Print. The publishers and authors will benefit by making money and society will benefit because having information available is valuable.

We are talking about changes here that are on the order of the Gutenberg Press and the discovery of paper. In the 25 to 75 years after the invention of the Gutenberg Press, there was an explosion of invention, discovery and sharing of information. The changes were the spark to the protestant reformation and to the industrial revolution.

Google Printis here to stay. MSFT and Yahoo are now scanning books into similar services. The "old line" wealth media owners can fight in the courts for a while but they don't expect to win. They are simply willing to play "dirty" to give themselves a chance to catch-up. Consumers should be on the side of Google. Who amongst us wants to continue to be force fed advertisements and to pay high fees for services that can be supplied more efficiently by companies such as Google ,Yahoo, EBAY, AMZN and the AOL division of TWX. It is the companies such as TWX, Viacomn and News Corp that are most conflicted. It is hard to keep one foot in the "new world" while standing with the "old world" in opposition to the new world.

The market is more powerful than any one of these players. If Google. is somehow stopped, another internet firm will blaze new trails. Years from now, we will be amazed to think that "in the old days" one had to travel to a library to check out a book. In the new days, consumers will still buy books and authors and publishers will still be paid.

Tuesday, October 25, 2005

Om Malik’s Broadband Blog — » A Little Off This GoogleBase

Google Base is “Google's database into which you can add all types of content. We’ll host your content and make it searchable online for free.”

The above definition was posted by Om Malik. Om is not so excited about “Google Base as others have offered on line data base products. This reminds me of so many things that Google does; it is not the first but it produces a good product that can be used free of charge by the masses.

In an earlier post I mentioned the power of communication. Last night I reread a chapter by Jeremy Siegel that tells about how the Chinese discovered many things but then lost the knowledge in later years. Within 75 years of the invention of the printing press, there were scientific discoveries happening all over the world. Can you imagine how much knowledge has been lost or destroyed? Google is helping billions of people find information that is as good as lost.

Go Google Go! The world needs free dissemination of information to all people!

John Battelle's Searchblog: (Or...All Your Base Are Belong To Google)

WOW! BASE.GOOGLE.COM! This fires up the imagination for all sorts of things--ebay-google, craigslist-google, calendar-google and much much more.

The ramifications of a common, searchable data base is huge and mind boggling. If you have not read Jeremy Siegel's book, "The Future for Investors", I recommend it. His comparison of Google to the Gutenberg Press around 1455 or the discovery of paper around 100 helps one understand the power of sharing information.

A searchable data base that grows exponentially would be fantastic!

The Peridot Capitalist: The Google Numbers

The Peridot Capitalist: The Google Numbers

makes a great point. Google grew more than twice as fast as Yahoo and sales at a lower multiple. Granted these are high PE ratios, 41 and 47 respectively, however, when your revenues go up more than 100% in a year 41 seems like a pretty reasonable PE. Go Google

The Peridot Capitalist--UNH and PHARMAS

The Peridot Capitalist

Chad noticed a 21% premium increase by United Healthcare. He suggests that UNH will increase its earnings at a double digit pace for as long as Washington does not pass healthcare reform.

My daughter has owned UNH for more than 20 years. She has made 150 times her original investment. Therefore we are biased and want to believe the good record will continue for ever.

However, it is my belief that it is finally time to buy the big pharmas. Load up now. It may take a few months to see good profits but great profits will be made over the next several years.

Traditionally, there is an inverse relationship between the buyers and sellers of prescription drugs. My daughter will continue to hold UNH because it is an outstanding company. However, new money, if and when any arrives, will be invested in pharmas and not in cost containment vehicles.

This cycle may be different but, historically, the expansion phase of the economy has been a tough time for many sectors. It has usually been a good time for consumer staples and pharmas.
Vitaliy Katsenelson and Bullbearings join me in anticipation of big growth in these investment areas.

Google's Still Got It--Business Week Review of GOOGLE

Ben Elgin's compared Google search to the others for several weeks and concludes that "Google's Still Got it". The others are adding features and best Google in a small number of searches. Overall, one can find information through Googlethat is difficult to find with the others.

The above explains the 37% market share and the huge growth in profits. If one searches via Google, one is likely to click on advertised sites presented by Google.

AOL earns 300 million a year off of Google searches. AOL has tough choices to make in the near future. MSFT must be willing to pay big to swing AOL to MSFT search. More and more news sources are going to be available through Google. The number of blogs is growing by 70,000 per day!

I believe in the theory that the wide tail distribution is a win for Google. Again, the theory is that although the mass media gets the most viewings, the total of all the viewings is larger for the millions and millions of small news and blog sites. People are interested in many special areas that simply cannot be covered by the mass media.

I believe it is good for America to have free wide distribution of information. For example, Americans should be interested in going to see their local high school or college football game rather than watching a pro team from a far off city on TV. The mass media has sold us the pro team. The free distribution of info will allow us to follow our local teams in much detail. (By the way, the women's soccer team at UNC is undefeated 11-0 so far this year and I am glad to be able to follow this team via the enternet.)

The areas where AOL search is better than Google search is where AOL adds information from its private cache of magazine feeds. Again, AOL has an important decision to make; should it open the magazine feeds up to Google to maximize advertising revenue or should it hold onto the information with the hopes of increasing its search market share? I believe the answer is clear and a little bit complicated.

AOL needs to open its vast content to be searched but it must also post a subscription option for even more detailed information on the subject. In other words, a Google search for Barry Bonds should include a recent picture posted in one of the AOL magazines. However, AOL should expect a small subscription fee to have access to all pages of the magazine. It might work in a similar way to Google Print. One can search the book on Google Print but one cannot read the whole book.

The world is changing. Systems will continue to evolve. However, I don't see anyone knocking EBAY off the hill as the top auction site and I don't see anyone taking the search lead away from Google.

In each case, there is much more to being number one in any business than what is visible to the naked eye. Yahoo and Google will be going head to head for a long time. AOL and MSFT need to be careful or they will go down in history as also rans.

» Google Reader first look | Between the Lines |

ZDNet basically gives a two thumbs up on the beta version of GReader. I have played with it a little but need more time to become hooked. For now, I enjoy the Google sidebar.

Serge dropped by the Web 2.0 conference a couple of days ago. When asked about building the equivalent of Microsoft Office, he suggested that Google will build a lot of useful interfaces that accomplish the same tasks but in a more flexible way.

I do most of my writing on this blog. As the Google tools mature, I suspect it will be silly to take the time to load a word processor.

When Google announced its open source IM client, Google Talk, I suggested the presure would mount on the big three to open up there systems to cross talk. The announcement that MSFT and Yahoo will mashup first was a bit of a surprise because of the reported talks between AOL and MSFT. Now the pressure is on AOL. AOL has 56% of the IM business to Google's .05%! It is amazing how responsive the "big boys" are becoming.

The mashup of Yahoo and MSFT is a big event. Should AOL mashup with Yahoo and MSFT, the land line phone business would take a huge hit. It will be interesting to see if SKYPE, GOOG, Gismo and others will go open source while AOL, Yahoo and MSFT try to corrale the market.

Another huge question relates to SIP. IF GOOG is able to offer free out bound calls, the big walls between users will come tumbling down. I know I am not the only consumer around who desires to have one IM client open while communicating with folks using various vendors.

IM will be much bigger than email when one can communicate with everyone. The phone feature adds to the power. I find that many "converstations" are best handled by messaging (voice messaging would be very nice). Other conversations are best handled with a call. Many a converstation starts as an IM and switches back and forth as constraints and needs dictate.

If you don't have a Gmail account yet, email me and I'll send you an invite. The reader works is integrated with your email account.


After studying hard in the spring of 1982, I received my broker’s license in the summer of 1982. I bought as much stock as I could before the “break out”. By some measures, stocks are as cheap today as they were in July of 1982. Take a look at the Dow chart below. We are set up for a rally that could be almost as powerful as what happened between August of 1982 and June of 1983. The small stock rally was quite explosive and peaked in June of 1983. Large caps did quite well later in the decade.

Buy the Bull!


MENAFN - Middle East North Africa . Financial Network News: UAE building $4 billion refinery

The number of new refineries continues to climb. This latest one is a large one. It will be built in the United Arab Emirates.

Again, it will take time for the new refineries to come on line but investors should remember that the stock market invests in the future. Stocks values are based on what they will earn over the next 10 years and has little to do with what they earned the last 10 years.

When capacity catches up with demand, margins go down. Today, crude and gasoline prices dropped again. Demand declined about 3.2% from the prior year. Prices are set by the last gallon to be purchased. Crude at $55 per barrel could be very exciting.

Much is being said about oil politics:

According to the Los Angeles Times, there are 148 oil refineries in the US today compared to 324 in 1981. Since then, overproduction of gasoline, oil company mergers, and environmental rules have forced smaller operations out of business(The Week, October 14, 2005, Vol 5, Iss 229, pp 20.)
Why No New REfineries in 29 Years?
Oil Drum
The Watt: Energy News
Energy Politics
Sound Oil Policy


American Air parent posts loss as fuel bill mounts - Airlines - Transportation - Earnings

AMR's fuel bill went up $230 million dollars for the quarter. The company lost $95 million for the quarter. The reason we purchased this stock in our Stock of the Week portfolio is because we think the profits will be quite large when the fuel costs are reduced.

A friend asked me how I can be so confident that fuel cost are going down. My answer is that once the oil price increased to over $20 per barrel, it became profitable to mine tar sands and to convert coal to diesel. The planet still has 200 years worth of coal and tar sands to use.

The only question for me is, how long will it take for new supplies to exceed new demand. World wide demand has been growing at 1.6% per year. There is evidence that this rate of growth is going to slow. The current price is causing significant usage shifts. New supplies are available, the question about increasing supplies is more of a question about increasing refining capacity. Most of the new refineries planned or under construction will take until 2008 to complete. Inhancements in Austraila and a new GTL refinery in China will come on line soon. Other incremental improvements will gradually make a difference.

College Sports Fans Flock to Internet Through CSTV; #1 College Sports Online Destination Breaks Records For Page Views, Subscriptions, Overall Growth;

The end is beginning! TV is changing. There are two types of internet TV. The IPTV is a complicated system being pushed by the cell phone companies. TV over IP is easy to use and is starting to catch hold on the internet.

CSTV has a broadband package available for college football. The business is booming. Investors might want to avoid owning cable TV stocks and land line telephone stocks now that the internet is competing fiercely with those businesses.

Monday, October 24, 2005 - Microsoft, Yahoo Plan Instant-Message Pact - Microsoft, Yahoo Plan Instant-Message Pact

WhenGoogle announced its open source instant messaging service, I wrote that the presure was on the other players to allow "cross talk". As you might guess, the big players are still trying to protect turf. MSFT and YAHO are expected to announce the first mash-up. These guys are not going to an open standard but they are allowing access to the proprietary system of each.

The situation is still crazy. It is like having a Sprint phone and not being able to call anyone who has a Cingular phone.

The pressure is now on AOL. AOL. has the largest market share. I personally will not use anything but an open system; because that is the way it should be.


It is so tough to swallow the idea that a large company like Google can continue to grow so fast. Morningstar likes McGraw Hill. In other words it likes companies that are willing to sue Google to try to hold market share. Several "old line" media companies are trying to protect subscription revenue. The market place says why pay high dollars for subscriptions to information that is provided on the web free of charge.

The big, Fortune 500, companies are discovering the efficiency of Google advertising. Why should these companies pay McGraw Hill and the like exorbitant prices when the public is reading the news on the internet?

Many years ago, law suits were filed when cassette tape recorders became widely available. The courts ruled that consumer can make copies of copyrighted materials for personal use. There have been a number of other cases that allow the cataloging of information so that consumers can find the information they need. This cataloguing does not hurt the publishers but instead it helps them and it helps the consuming public.

The law suits may slow Google down a little but more and more consumers are discovering they can find what they want quickly by using a Google search. The publishers who are making their content available for search are making money. Consumers are finding the extra content to be valuable. The amount of information on the net is going to continue to expand at a rapid pace. It will be nice when books, magazines and videos can be searched quickly.

CRACK SPREADS READY TO FALL! (no link as subscription is required) posts the price of heating oil versus crude to show that the crack spread is huge. The laws of economics will not let this situation last long term. This winter is going to tough. Heating oil and natural gas will both still be at high prices this winter but probably not as high as current prices. Again, the laws of economics and the simple fact that various refineries will restart soon mean that the crack spread will narrow sharply. This means the retail price of heating oil is going to drop faster than the wholesale price over the next few months.

The crack spread is tricky to figure because wholesale prices are posted in price per barrel and retail prices are posted in price per gallon. Also, the calculation is usually based on the 3-2-1 formula for converting 3 barrels of crude into two barrels of heating oil and one barrel of gasoline. This formula changes a little based on the set of the refinery and the relative sweetness of the crude.

The calculation is not the important point. The reality is that the price of oil, metals and a number of CRB items were causing an inflation scare. As these prices decline, the rational for focusing on core inflation will become apparent. The jump in price of crude from $59 to $71 is fast becoming irrelevant because it was a short term blip. It costs consumers a significant sum of money in the short run but it caused many to park their SUV and to drive the family "little car". Demand for gasoline is down 4%! This is a huge number. Annual growth for many years has averaged only 1.2%. We are now using at the rate of 4 years ago!

As the oil price falls, are you making money? The rotation is out of oil and into transportation and technology. I suspect there will be a bounce in oil but rather than play the bounce, I would go for the longer term plays. Non bankrupted legacy carriers such as CAL and AMR, out of bankruptcy carriers such as LCC and technology stocks. One can also seek safe haven and good profits in consumer staples such as WMT.


Current Value of the
SOW Portfolio: $106,008.56
Simple Return: 18.98%
S & P 500 Value : $102,518.78
Simple Return: -.89%
Treasury Bond Value : $98,700.51
Simple Return: -1.26%

Individual Stocks continue to outperform equal investments in the S & P 500 (-.89%)and the TLT Treasury Bond index (-1.26%).

This week Kupsky recommends Honda Motor Co. Take a look at her research and be sure to check out other Stocks of the Week to see if it's a pick to include in your portfolio.

Past performance does not guarantee future performance. We make no recommendations!
Please call or write if you have questions about how to make money in stocks, bonds and real estate. You can reach me during office hours at 336-778-0543 or write me

Friday, October 21, 2005


The Big Picture shares a glimpse of the short interest ratio vs. the S&P 500 Take a look!

The chart shows that the shorts are starting to cover, thus putting upward pressure on the price of stocks. With oil dropping and the FOMC near the end of a long tightening round, what is not to like? The market is poised for take off. I used the words take off because CAL, AMR and LCC should do well as the price of airline fuel declines.

Some say that the refining bottle neck will not go away soon. I say if the price of crude continues to fall and the crack spread stays the same then the price of aviation fuel will fall. Furthermore, the crack spread will eventually narrow as refining capacity makes it back on line.

The evidence suggest that the shorts own oil stocks and are shorting other areas. Therefore they are getting pounded in both directions. These guys are facing a tough choice, to sell their oil stocks or cover their shorts. It appears that some folks are doing both. GO BULL!


WTRG Economics hosts a great chart explaining oil rig activity and it's relationship to oil prices. What do you think?

Internet Sharks

The Economist posts a great visual regarding the internet sharks:


In January the price of jet fuel was $1.19 in the Gulf of Mexico region, $1.24 in New York and $1.25 in Rotterdam. This past wednesday the price was $1.93 in Rotterdam, $2.07 at New York ports of call and $2.52 in the Gulf.

CAL made its 4th quarter forcast based on an average cost of fuel of $2.05. A number of analyst laughed. At the time, they assumed the cost would average around $2.35 per gallon. CAL will consume about 165 million gallons in the quarter. Assuming the average turns out to be half way between the Rotterdam price and the NY price or $2 per gallon, the analyst's projections were off by $.35 cents per gallon or $56 million for the quarter.

That was based on prices two days ago. Since that time prices have dropped another 5%. Pretty soon the savings of $56 million may become serious money. Indeed, the savings may reach more than a $1 per share for the quarter! Should CAL make it though 2006 and year $4 per share in 2007 we should be talking about a $40 stock.

The current CAL price is up .47 at 12.03; a 4% one day move. More to come! My young daughter, Whitney, purchased shares in CAL, AMR, and LCC this morning. Her Google gains gave her the confidenct to make the purchase. I love for young folks to participate in the wonderful world of capitalism. One's love for free enterprise and democracy grows when one learns to appreciate the ups and downs of the markets. It is not all fun but it is mostly fun. With the right attitude, young folks have an excellent chance of doing a lot of good in this old world. Knowing this young laddy like I do, I know she will help a lot of folks in her life. Making some nice profits off the airlines will help her in her lifes work. Go Google, Go CAL, Go AMR, Go LCC and Go Whitney!

The Courier-Mail: Labor to offer tax breaks for green cars [20oct05]

The Courier-Mail: Labor to offer tax breaks for green cars [20oct05]

The Australian government is offering $2,000 tax credits for purchasing alternative-fuel cars. In addition to paying for hybrids, the government is considering paying for conversions to gaseous fuels. India is leading the way, offerning fill up stations with compressed gas.

The point again is that demand is adjusting to high petroleum prices. After trading down sharpely in the US on Thursday, crude continued to trade down later in Asian markets. Demand is historically slack in November and December.

One of the reasons I am interested in fuel is because of my families investment in CAL. Continental Airlines will use 416 million gallons of fuel in the fourth quarter. A decline in price of $50 cents per gallon would improve the quarter report by $208 million dollars. I'm keeping my fingers and toes crossed as we also have investments in AMR and LCC.

Thursday, October 20, 2005


The BIG BULL is pawing the ground and snorting up a storm. The last time the fundamentals were so powerful for stocks was in the summer of 1982! Folks, we have not seen these prices in 23 years!

On top of the tremendous relative values we have the majority running for cover. One fellows mother just sold all her stocks and put a half a million bucks in fannie mae notes! A broker friend reports that one of his clients just sold out to retreat to treasury bills! Perhaps the best indicator is that Robert Prector is talking about a market crash again.

Meanwhile, analyst such as Elaine Garzarrelli, who looks at fundimental relationships, says the market is undervalued by 30 to 40%! It is always interesting the way the market scares the most in the sectors that will do well for the next 5 years or more. Today, PFE reported good earnings but lowered next years forecast by a few pennies. The stock was hammered. Defensive stocks should do very well in the coming economic expansion. PFE is buy, buy, buy--no matter if Kramer likes it or not.

Right now, there is a rotation occuring. The oil price is in a topping out phase. New supplies will come on line to drop the price all the way below $40 per barrel. It may take two or three years but the time to buy energy stocks was 6 years ago in 1999. Large blocks of big energy stocks are being traded as the market rotates out of this sector. The sector is helping to pull down the whole market. Please note that the earnings for the energy stocks were at rock bottom in 1999 when it was time to buy those stocks. The earnings for the pharmas are near the bottom now and 5 years from now will be soaring. Buy now!

Tuesday, October 18, 2005


A reader mentioned plans to buy Delta Airlines and I almost screamed no! It is foolish to invest in a company that has filed bankruptcy when it has far greater liabilities than assets. The likely hood is that bond holders will get only a fraction of their investment back. Unsecured creditors will get even less. Common stock holders will probably get zero!

Airlines such as USAir, the new symbol is LCC, is an entirely different story. The companies cost were cut deeply by the judge, the debts were dramatically reduced and the company has operating cash to use.

AMR and CAL are different too. They cut cost enough that they do not need to file bankruptcy. CAL made 80 cents per share this past quarter. Eighty cents per share profit would be no big deal except for the tremendous cost of fuel. The recent decline in fuel will reduce costs by millions of dollars for the next quarter.

If any of you own DAL or NWAC, I suggest you sale immediately. My family did not believe either firm would file bankruptcy and we lost money on each of these stocks but our profits on AMR, CAL and LCC have made up the difference and more. We expect good results for the next several years. Anything is possible, but the odds of making money by owning shares of stocks that are currently in banktuptcy are slim.

Many times you hear the story of the bankrupted company that rises like a Phonix out of ashes. This indeed happens but typically the "old shareholders" make zero and the "new shareholders" make a bundle. Take the case of K-Mart as an example. The "old shareholders" lost. The bond holders became the "new shareholders" and did very well.

Ryland Group tops forecasts, raises outlook - Home Construction - Manufacturing - Earnings

Ryland Group tops forecasts, raises outlook - Home Construction - Manufacturing - Earnings

Strong earnings continue to be the norm for 2005. Ryland homes beat estimates by 10 cents per share! This stock has dropped in just a few weeks from the low 80s to the low 60s. Should the price of oil fall more, the homebuilding stocks could be strong performers.

The S&P 500 is now throwing off an earnings yield of almost 7.25%! The public is blindly missing a buying opportunity.

CAL made 80 cents a share while paying out extremely high prices for fuel. The buying opportunity of a life time is in stocks like AMR and CAL. When do you get the chance to buy the best in the business at 80% off?

The market was down today because of the decline in oil stocks. The energy index lead the way down. The S&P sector was down 4.64%! The natural gas index was down 3.8%! The oil services index was down 4.68%! If you do not own oil stocks, this was very good news.

Remember that the see-saw is a common phenomenon in the market. When someone says food stocks were up today, it is important to know if the conversation is about grocery stores or restaurants as these are two of many groups that trade like a see-saw.

High tech did well today. The Nasdaq 100 was down .74% during the day and in after market trading a number of stocks did well. For example, MOT announced excellent results and has traded up about 2% after the market closed.

Ken Fisher made another great point in Forbes. He relates that big cap growth stocks do well startging about a year after a flat yield curve. This idea is consistent with what one would expect about the time the business cycle switches from a consumer led recovery to a business lead expansion.

I will not play the housing sector at this point even though I believe it will retest this summers highs. A friend asked me if I would buy Bank America or Home Depot. Both stocks have attractive valuations but neither excites me. I suggested that WMT is a similar big cap, out of favor play, but in a more defensive area that should do well in a rising interest rate economic expansion.

The last sentence of the above paragraph is a tricky one. With the FOMC pushing up short interest rates and the oil working with the rates to drag the economy down, it is very possible that long-term rates will come down before going up. The problem is that if you buy bonds and the economy remains strong, you would likely lose money during an economic expansion. On the other hand, if you buy stocks and hold for the next few years, you will make money. You may lose for a little while but when the BULL CHARGES you will participate in the great rally to come.

Folks, it is a rare event to have stocks so cheap relative to bonds and real estate. The current down draft may run a little while more but the opportunity is real. The broad averages will likely be up 45% over the next 2 to 3 years. The top performing groups will likely be up close to 100%. The top performing stocks will likely be up over 400%!

Monday, October 17, 2005

BBC ON THIS DAY | 13 | 1992: Thousands of miners to lose their jobs

BBC ON THIS DAY | 13 | 1992: Thousands of miners to lose their jobs

The UK has gradually gone from 1 million coal miners 60 years ago to 12,000 today. Now another 31 inefficient mines will be closed. The rationalization process is no fun to entrenched workers in entrenched industries. America has shown that many new jobs will be created when non-productive jobs are eliminated. The whole country is better off.

Germany has not gotten it yet. Germany continues to subsidize its coal mines. Germany is throwing money down a rat hole and the unemployment rate continues to hover above 10%.

The new conservative chancellor may or may not make progress as she faces strong political opposition. In the mean time, those who continue to cry "the sky is falling" can take solace in the fact that there is coal being left in the ground in the UK because the current price does not make it profitable to dig in the deep mines.

Ironically, coal is being converted to liquid fuel (primarily synthetic diesel) more than any time since Hitler ran his panzer tanks off goal gas. The cost to convert continues to come down. In addition to operating plants in South Africa and China, plants are being built in Qatar by several major oil companies. Industrial processes around the globe are using various technologies to cut petroleum use.

The example I have repeated several times is that of Shaw Carpet Mills. For years, the company paid land fill operators to bury flawed products. Recently the company was able to perfect technique similar to the conversion technique of coal to liquid. The company has been able to dramatically cut its energy bill and it no longer has the landfill charges. The exciting news is that the gasification process allows polutants to be removed.

What a blessing in disguise for the thousands of miners who have lost their jobs. Many will find cleaner, safer and more satisfying jobs. The UK will reduce its energy costs and have the resourses to spend on productive activities.

The Internet Stock Blog » Is This the Killer App for Pay-Per-Call? (GOOG, BLS, SBC, VZ)

The Internet Stock Blog » Is This the Killer App for Pay-Per-Call? (GOOG, BLS, SBC, VZ)

Wow! I have often figured the "yellow pages" to be a dying breed. It is logical that folks will look up numbers on the internet rather than by pulling out a ten pound relic. I had not thought of the "killer app" method of collecting for the look ups.

If you dial 1-800-Free411 you may have to hear a short add but you get the number for free. Imagaine the day when folks do not call numbers but speak the name of the caller into the phone or the computer. Suppose you say phone; Dominos Pizza. The screen might come up with a coupon for Dominos and or for Papa Johns, etc. Certainly Papa Johns would pay dearly for each call recieved to actually order a pizza.

I agree with the Internet Stock Blog, this methodology should be great for the likes of Google, Skype, Gizmo, Yahoo, MSFT, AOL, et. al. It could be very bad news for VZ, SBC, BLS, et. al.

The ramifications of all the changes coming to phones and media are huge. Those that hit it right are going to make serious money. Those who hold old stocks because they have owned them for a long time, may end up holding buggy whip certificates.

John Battelle's Searchblog

John Battelle's Searchblog

I like John's poker analogy. AOL is the flop; MSFT and GOOG are in a biding and bluffing war. The price will not be cheap. YHOO or CMCSA could try to draw out and steal the pot.

MSFT may offer more cash but AOL stands to lose if MSFT cannot bring in the eyeballs the way GOOG can. AOL advertising revenues have been zooming since they opened up their web portal. The reason is that GOOG is bringing the traffic.

GOOG announces earnings on October 20. The price action in the MSFT and GOOG suggest that the winning bidder is going to have to pay big. GOOG has even offered a split deal with CMCSA to make the deal easier to swallow.

It is interesting that TWX has not traded significantly higher. The market knows that TV over IP may hurt the cable companies. I have changed directions a little. Will millions of folks pay $1.99 to watch last nights show? I have anticipated subscriptions. I figured one might pay $4.95 per month to see all CBS shows. At $1.99 per pop, the content revenues could be huge. A cartoon for a $1?

It seems that TWX may be worth more than the current price. I have seen analyst list the TWX components and sum to a total of around $22 per share. The advertising value may make the company worth more.

The mashup that makes the most sense is GOOG--AOL. AIM and Google Talk could go head to head easily against Yahoo--MSFT. Yahoo has a large stable of content, AOL needs GOOG to be able to go head to head with YAHO.

Xinhua - English

Xinhua - English

Vietnam has added to the growing list of oil refineries under construction. Vienam has been exporting oil and importing finished products. Its new 2.5 Billion Dollar refinery will be the right size to eliminate its needs for imports.

Just another look at the market at work. The current price of oil and finished products is high enough to spur production and refinement. Note, the article did not talk about a completion date but I suspect it will take more than two years to build. Asia Asia

The new refinery story continues. In India, one company is building a new refinery and another is expanding an exhisting refinary.

My point continues to be that the law of supply and demand is going to move the price of oil back to an average level. Because the oil supply demand curve meets in a spider web fashion, when the price finally drops it will drop lower than than all expectations.

The timing is the difficult part. A refinery annouced today may take two or three years to build. The quick reaction is in demand destruction. Demand has been destructed in many a place. Folks are riding buses, scooters and bikes. Small cars are selling and many a SUV is parked.

Much of the demand will come back as the price of gasoline settles back down. New refineries are needed. Several are being modified or built to handle the sour Saudi crude that is in abundant supply.


The Contrary Investor ( is a great service for those who have about $100 to spend. The above chart shows why there is such confusion about the current CPI. Five percent of components are going down in price while most components have increased close to 2.5%. At the same time, a few items have increased at greater than 30%. The good news is that those items that have been increasing at 30% or more have since been dropping at almost 30% or more on an annualized rate. Therefore, the "core rate" numbers offer the best information in regard to inflation.


Australian expects oil price to decline

I agree with Australian Treasurer, Peter Costello that oil pirces will decline. The place where we disagree is in how low they will go once the supplies are increased. He says we will never see oil at $20 or $30 a barrel again. I say oil from tar sands is profitable at $30 per barrel and there are tons of it available.

David Lynch talks about oil production peaks in the following articleNaturally, we are not going to go directly back to $30. It will take time for the new supplies to be developed. Also, China, which has reduced its usage of oil in the past twelve months, will increase its use over the next many years on average. India will also increase its usage but India has planned a new refinery that will cost half a billion dollars.

Of course the construction of refineries do not argue for reduced prices but the construction of sour crude refineries shows that $30 oil is a reasonable target. Saudi Arabia is footing a big chunk of the bill to build and to expand sour crude refineries. This oil can be refined for less than the cost of tar pit oil.

The results of the vote in Iraq will be known next week. There is a good posibility that an Iraqi refinery will be built soon!

Seeing families going to the polls in Iraq was a moving experience. It is no easy task forming a democracy. The Iraqi people want and deserve the right to run their country. The constitution calls for the sharing of the oil wealth. With a constitution in place, the wind may largely go out of the insurgents sails. God Bless America and God Bless Free Enterprise!


There are many good inflation gages around. The one above is frequently posted at the Macroblog site. My favorite is to plot the futures contract on the long bond by the futures contract on the CRB. The reason I like the futures is that it makes sharpe peaks and valley's at turning points. Right now has made a pretty sharpe peak at around 2.9%. The next move appears to be down.

GOOD NEWS FOR STOCKS! Stocks do well during times of moderate inflation. Some bloggers are currently obsessed with the appearance of high inflation. However, the sharp run up caused by the hurricanes will be followed by the sharpe drop afterward. For example, gasoline prices have declined 28% in recent weeks.

The more important thing to note is the pessimism caused by the high oil prices and other bad news. The pessimism has reached levels that have pushed the market down like a coiled spring. I have been talking about the BULL MARKET for a good while. I cannot say that the BIG BULL IS HERE. HOWEVER, I AM CONFIDENT THAT THE TIME IS NEAR.

Sunday, October 16, 2005


Clean and quirky cars to dominate Tokyo show | Tech News on ZDNet

It seems to me that the best idea to come out of the Tokyo Motor Show is the Mazda Hybrid. This car runs on gas, hydrogen or electricity. The idea is to use hydrogen when available. In the next decade, it is anticipated that the zero emission hydrogen fuel cell will be in mass production. One problem is the chicken or the egg problem of developing a network of refueling stations.

The Mazda Hybrid is a neat solution. It would use hydrogen as often as possible but owners would not have to worry about making trips to places where hydrogen is not yet available.

By the way, if you don't believe oil will every return to $40 per barrel, then you don't believe in the law of substitution or the ingenuity of markets. I do believe. Thirty years ago, we used oil for many industrial processes and even to produce much of our electtricity. Today, we use more available and lower cost fuels to supply these needs. Now that oil has ratcheted up another knotch, oil will be replaced as the primary fuel for transportation as well.

Change takes time. Oil prices started the steep incline almost three years ago. Since that time, China has gone from annual increases in the use of oil at 14% reduced to zero! That number is correct, China will acutally use less oil this month than it did in October of 2004. Other very populous regions, such as Indonesia and India, have recently cut consumer subsidies. The G20 nations met this week and agreed to find ways to conserve energy.

The new democracy of Iraq, having agreed on a formula for the sharing of the oil wealth, will likely more than double production over the next few years. Hydrogen cars (alternative fuels), conservation and new production will eventually take the price of oil back below $40 per barrel. Airlines that have cut other costs will see profits hitting the bottom line when fuel costs go down. One should buy in anticipation. The major beneficiaries of lower oil will include CAL and AMR!
Hybrids Hit the Showrooms
Tokyo Motor Show
Mazda SENKU.


Rutland Herald: Rutland Vermont News & Information


Vermont Castings reports sales of wood stoves, up 50%! Since the 1920's, America has reforested 80 million acres of trees, halleluia! Our coutry reduced pollution by turning away from the buring of wood for fuel. It is much smarter to burn coal or nuclear fuel inside a controlled power plant than to light millions of fireplaces each day.

One point here is that folks are taking extraordinary folks to reduce the consumption of gas and oil. The action highlights again the false savings pushed upon the country by those who understand the environment but not economics.

Economics is the science of scarce resources. The reality is that the price of scarce resources makes the market use these resources in a rational way. Yes, some goods are public goods and some goods are private goods. Clean air is a public good. There should be a cost imposed on private indivuduals who "consume" our clean air.

The answer is not to fight nuclear power plants or oil refineries. When we prohibit the production of low cost electricity, folks will be forced to turn to wood stoves and other extremely dirty and extremly inefficient sources of energy.

The good news is that wood stoves are not the only substitutions taking place. For example, Chevron has started construction on its gas to liquid plant in India. When carbons such as coal and gas are converted to liquid, pollutants can be filtered as a part of the process.

We need to permit the construction of refineries. As good citizens of the planet earth, we must insist on the production and burning of clean fuels. The air in the USA is cleaner now than 5 years ago but more progress is needed. We will not get there by taking the backward step of burning wood instead of building refineries.
Fireplace Lowdown
Preventative Action

Wednesday, October 12, 2005 Australia & New Zealand Australia & New Zealand

It is interesting to hear folks say silly stuff. For example, many folks think the major airlines have been foolish for not hedging their fuel costs. The attitude is a bit like asking the 50 year old widow whose husband recently dropped dead of a heart attack why she did not buy a 5 million dollar life insurance policy the week before he died.

It is true that after the price of a commodity spikes to new levels, users tend to start hoarding. While the price was very low, the users saw no benefit in hoarding. Of course, this pattern is exactly opposite of rationality. If you can buy very cheap, before a substantial increase in price you are ahead of the game. However, commodities tend to revert to the mean price.

In 1999 oil was too cheap. The drilling industry suffered. Oil traded as low as $12 per barrel. The industry recovery took a very long time. Oil finally traded around $18 per barrel by 2002. For about 10 years, it would have been foolish to hedge. Once the price jumped to $60 per barrel the thought ran wild of why don't we hedge against additional increases. There is a financial cost to hedging so the $60 hedger only "wins" if oil trades consistently above $62 during the duration of his hedge.

Again, the oil price will eventually trade below the mean price. Because the supply demand curve for oil follows the unstable coweb pattern similar to the pattern for farm products, no one can estimate the mean price very well. Even the best in the business can only wildly guess at the future price.

When volatility is high the risk is high and the cost of "insurance" is high. The price of volatile commodities will decline just as rapidly as the recent increases.

Bloomberg reports that the price of copper dropped today. While one day does not make a trend, the world wide stock markets are suggesting slower growth ahead. The combination of slightly higher long bond rates and declining stock prices suggest that inflation is going to consume a slightly larger portion of nominal growth and that growth is going to slow.

It may take another bump or two in the fed funds rate to turn the pattern around. Another bump or two in cooperation with bumps in other nations (South Korea raised rates a couple of days ago), should be enough to slow inflation, rally the bond market and set stocks on fire. I am tempted to suggest ten year bonds at 4.45%.

With the slowing of the hot economies (such as Australia, China, and New Zealand), the potential exhist that ten year rates will decline below the fed funds rate. Should this happen, in addition to making a profitable bond trade, the investor should be able to catch the exact market bottom. In other words the news of the inverted yield curve could cause a wave of panic selling.

As usual, one should guard against getting too cute. Short term moves are impossible to call. Intermediate term moves are easier and long term moves are no problem. From here, long term investors should be in stocks, intermediate term investors should be as much as 70% stocks and short term investors should stick with money market accounts. Top Worldwide Top Worldwide

Bloomberg reports that Australian Employment Unexpectedly Declined by 42,300. This is the first decline for this booming economy in 10 years. Resource rich Australia has benefited from the super growth of China.

This is the kind of bad news that is very good news. The US stock market needs this and additional indications that the world economy is not growing too fast. The world needs a little breathing room for resources to catch up with demand.

There are many indications that demand growth is slowing. When the evidence becomes over whelming, the Federal Open Market Committee (FOMC) will stop raising short rates. The counter movement today was in the ten year bond rate. The rate is pusing 4.5%, not a high rate but the increase shows that growth, inflation or both are still possibly too strong for comfort.

Chart of the Day -

Chart of the Day -

Today's Chart of the Day is a good one. It shows the strong relationship between the Fed Funds rate of change and the S&P earnings rate of change.

In the mid 1980's and again in the mid 1990's the earnings growth peaked but the stock market rallied because the Fed Funds stopped going up. Does this situation have a familiar feel to it?

S&P earnings growth has been unusually strong for the past couple of years. The growth rate is unsustainable. However, the leveling off of earnings is likely to be accompanied by a leveling off in Fed Funds.

Remember, the market does not need interest rates to go down. Should the Fed signal that it will likely stop raising rates anytime in the near future, this market is primed for a super jump.

Again, the current earnings rate on stocks is better than 7%. The rate on 10 year bonds is less than 4.5%. Stocks can climb in value by 35% or more and still be at attractive evaluations relative to bonds!

Many active traders are now sitting in a net short position! They are actually betting on the market going down. Betting on a down market has historically been a very tough bet to win. I can't remember the exact odds but the one year odds are about 70/30. Even the daily odds are something like 53/47 against.

The good news for investors is that those who are betting against the market today will buy massive amounts of stock when the market takes off. At first they must buy back the stock they have sold short, then to recover their losses they will feel the urge to buy extra stock on margin on the way up.

The reason the moves off of bottoms is often so volatile is because short sellers are at great risk when the market starts to rise. They must eventually buy back the shorted shares, no matter high high they go or how many times the shares are split.

It is time to prepare to be aggressive buyers. The market needs only a small catalyst to start the stampede. A move large enough to spooke the short sellers is all we need to be off and running.