Friday, November 30, 2007


One of my favorite comparisons to make is between the stock market and the craps table. Right now, the news being pumped out daily is similar to the calls of the croupier at Las Vegas crap tables. The disciplined crap players avoid all the bets that are constantly promoted by the croupier. Only the "fish" get sucked into betting the "hard ways". The odds of making money on the best bet on a 6 or 8 are very close to 50/50 but a hard way 6 or 8 gives the "house" a 16.667% advantage.

Today, the talk, talk, talk is about financial stocks rallying after being beaten down. The talk is also about building stocks which completed and incredible run last year. Homebuilding stocks did not hardly slow down during the 2001 recession and went up many times in value from the 1990's bottom to last years top. Just because they fell a lot since then does not make them cheap.

I wrote about the coming blastoff this morning but must admit that the action today was more backing a filling. The "big boys" would like to sell a lot more "old cycle stuff" before pilling into the new leadership extra hard. The Treasury Secretary and the Chairman of the Central Bank were appointed by members of the "good old boys network". Paulson talked up the idea of new legislation to "save millions of homes". Of course, these millions of homes would not need to be saved if the public had not been talked into variable rates when interest rates were low. Furthermore, since millions have been scared out of decent variable rates into fixed rates at higher levels and since the big drop in short rates has occurred, the need for action to "save homes" has been diminished. When getting a mortgage, it is important to "lean against the prevailing wisdom" just like taking the contrary view when buying stocks. One must remember that the lender prefers to make fixed rate loans when rates are high and variable rate loans when rates are low.

Marilyn and I have had one variable rate loan for almost 20 years. It adjust every year to 2% above the 1 year treasury bill rate. There is no limit to the amount it can adjust. As a result the rate has been as high as 11% and as low as 3.25%. The payment has not changed much. The average rate has been very good because of the tight margin to the 1 year bill. At the time we took the loan out, fixed rates were around 8.5%, we have averaged far below an 8.5% rate. Based on what is happening in the money markets, it appears that by the time congress can pass a bill to "save homes" the variable rate rollovers will be quite reasonable. The one year treasury is now trading below 3%. Even a high spread of 3.5% would put the interest cost on a variable loan at 6.5% which is a very good deal, especially after the tax rebate.


The activity toward the mobile Internet is hot, heavy and fast. By opening up its system to all devices, Verizon has acknowledged the power of competition coming from the 700mz spectrum to be auctioned soon. Way back in 1956 the voice and data markets were fenced off from one another. AT&T was allowed to monopolize the voice business and IBM was granted almost as much freedom on the data side. It has taken 50 years to open up these markets. The cost of the first faxes to go over AT&T lines were extremely expensive. Today, we attach a big file to an email and send it for nothing.

This week Apple did a pre-announcement of its 3g network. It needed to do something to show that it has plans to "catch back up". While Apple products have been "cool", it is tough to buy an iPhone at 2g speed for 30% more than a Verizon phone with 3g speed. Verizon made another announcement, it will use a technology for its 4g speed that will work on GSM phones and on CDMA phones. Here again, Verizon is saying bring any device to our network. The concept being accepted by Verizon is that consumers will use cheap Internet connections from home, work and from Starbucks but will still want a cell phone for when needed. Verizon just said fine, we will allow dual band devices of any type on our network. Verizon wants the "phone business" even when it loses the "data business".

Google continues to go full steam ahead. As reader Lamar points out, the new Google Mobile Location Map is better than GPS in some aspects and like many other Google products it is free. While only 15% of all phones have GPS, many have a browser that can open Google. Google uses triangulation technology from cell towers to plot a fairly precise location of the user. Suddenly, all kinds of location based queries make sense. Google has also announced that it will indeed bid for 700mz spectrum. Google will spend billions of dollars to insure that the public can get to the Internet from mobile devices without paying cell phone rates. One of the big questions remaining is in regard to VoIP phone calls. A broad mobile Internet network could force current cell phone rates to drop by 70% or more!


Right in the middle of the mid cycle turn of the 1980's, the price of oil dropped like a dead duck. As I recall it was in January of 1986 when the price of oil fell from $28 per barrel to around $12 per barrel. It is in the best interest of Saudi Arabia for the price of oil to cause a little pain but not a lot of pain. Many countries in Europe are about to roll over to recession unless something gives. The Central Bankers of Europe are whining that they cannot lower rates because inflation is still high. The Saudis want to avoid a train wreck. If they increase oil production on December 5, which has been widely rumored, the fear of inflation as expressed time and again by so many Central Bankers will be diminished. They will all find it easier to lower interest rates.

The Bush Administration just announced that agreements have been reached with China in regard to various trade violations. Making these changes along with the increase in the value of the Yuan will serve to decrease the trade imbalance with China. Unfortunately, the main reason is that goods from China will cost us more. Not to worry, the most important import Americans receive from China is disinflation. The process of bringing millions of farmers to the city, to make low cost goods for export, is not nearly over. Productivity continues to improve at a rapid pace in China. The Chinese are following the path of South Korea in the 1990's and of America for decades. One way this productivity shows up is in the use of energy. China is making more goods while using less energy. Did you know that world wide the peak in per person oil consumption happened all the way back in 1979? This trend is so powerful that it is visible to the untrained eye. For example, the number of movie rental stores is falling daily. If you think about your own community you can recall former Blockbusters. The movie business is going online. Like I said this morning, retail online sales are running at an increase of about 24% year over year. This is a huge number. Park the car and buy online. It cost much less fuel for UPS go from three houses down to yours than it does for you to go to 6 stores in stop and go traffic.


I must say it time and again because I know I am fighting powerful interest. Interest that wants to sell you the wrong asset. The "bad news" of higher unemployment claims is the lagging indicator we needed to show that the FOMC needs to cut rates soon. Lower interest rates will boost the economy. I sold my bonds too early. I made a very nice profit but could have made much more. Just because I sold before the top does not mean that those of you who hold "balanced" mutual funds should not sell now. The ten year rate is hovering around 4%. Do you really expect these rates to go a lot lower? SELL "lifestyle funds", CD's and anything else that locks you into a rate for more than two or three years. We just hit an all time record divergence between stocks and bonds. Stocks are about 44% undervalued relative to bonds. BUY STOCKS!

10, 9, 8, 7, OOPS....6, 5, 4, OOPS....3, 2, 1 BLASTOFF

Summer before last, I wrote that I had decided to "ride through the mid cycle correction". I reported that I had purchased bonds in my most aggressive accounts to provide a little cushion but I would hold my stocks. Since that time, the price of bonds has soared and the mid cycle correction has taken three times as long. The market moved up prior to the correction so the average stock has only done a round trip, making new highs before getting hit hard.

In hindsight, I should have sold all stocks, used all money to buy bonds and only switched back to stocks three days ago. Of course, with perfect hindsight the market would trade as "smooth as glass" because all of us would have perfect vision. The good news is that the mid cycle turn has finally been negotiated. While there could still be fallout from companies hurt the most by the draw down of liquidity in the past, the present loosening by the FOMC will gradually solve most ills. Those companies that have been contemplating drastic actions to survive can now see that all they need to do now is hang in there for a little longer. The situation is like the lady that swam the 22 miles between a California Island and the mainland coast only to quit in the fog about 50 yards from shore. Had she only know how close she was, she would surely have found the strength to complete the task.


Prior big drops in interest rates at mid cycle turns show the power of interest rates. Interest dropped hard from August 1984 until October 1986. The market climb started soon after the first drop and continued through the summer of 1987. The interest rate decline beginning in February of 1995 continued until the first FOMC response in February of 1996 and the market climbed until March of 2000. The decline that started in August of 2007 is gathering momentum. Big Ben seems to be ready to follow the 90 day t-bill down which implies a cut of at least 100 basis points even if the flight to quality ceases and the 90 day rate bounces 50 basis points. Ben will probably not do all 100 points at the next meeting but the market is ready for all the relief it can get as soon as it can get it. Congress now has a self imposed deadline of December 14 to complete the budget. Negotiations over recent days indicate that the congress will actually cut taxes! Surprise, surprise, surprise, a democratic congress forced to cut taxes!


There are literally hundreds of indicators that the economy has made the turn. Some of my favorite ones have been posted by Don Hayes. To provide order, I will include Don's indicators among others, including a few from Brian Wesbury and a few from Martin Capital.

The ratio of the CRB futures index to the Bond Futures index dropped from April 1996 to November 1998. This big "drop in inflation" was during the fun days of the 1990's BIG BULL. This indicator peaked in May. The decline in sensitive metals such as copper, aluminum and zinc has been underway for a while, over the past several days it appears that the oil is starting to get flushed down the same hole. Last week, traders were doing their best to push oil over 100, now they are holding on for dear life at $89. In the previous oil crunch, it took a massive discovery of oil in Alaska before the tide was turned. This time the most massive of discoveries was in Brazil. It will take a few years for the new oil to flow from Brazil but, so far, without the oil from Brazil, non OPEC producers have increased production by a couple of million barrels per day since 2003. Much more will come on line over the next few years.

Construction Spending bottomed in 1995 long before the big move in stocks. Despite the reports you hear in the news about the housing market taking several more years to get going again, the momentum in construction spending has already turned. Current monthly home sales are greater than home sales at the bottom in 1995. Recent declines in mortgage rates combined with wage increases have made millions of homes affordable to millions of consumers.

WAGES AND BENEFITS: The 12 month increase in wages and benefits just set a new all time record. The increase in total compensation in one year was $475 Billion. Yes, almost a half a trillion dollars in additional pay. It is highly likely that this $475 Billion will be paid again next year and the next and the next. At a time when readers are sending me stories about predictions of bankruptcy and disaster, unemployment is low and pay is high. Despite what politicians like to say, the average person in America has benefited greatly by the combination of free trade, technology and immigration. The big money made in this country is the money made as wages. About 70% of our GNP is paid in salaries, wages and benefits.

INSIDER BUYING: Company executives are buying shares at levels not seen since the summer of 2002, right before the big, big move. This is a strong indicator. I cannot remember the exact details of this indicator but it is rare for the insiders to buy so heavily and when they do the market is set for a BLASTOFF!

LEADING INDICATORS: In December of 1995 the leading indicators went negative and TV talking heads said a recession was near. All the problems of the world were hashed over on talk shows and in news letters. At the time, lagging indicators, such as inflation were still high so they too were discussed ad infinitum. The scary topic of stagflation raised its ugly head. Does this sound very familiar? The leading indicators went negative in September of 2007 while the lagging index was still at 3.7, down significantly from the 5.8 reading in December of 1995.

THE BIG FIX BY THE BIG HERO: In case you have not noticed, the Central Bankers play the game of seeking cover for their foot dragging by citing lagging inflation indicators. By dragging their feet, they increase their importance while allowing their investment banking friends to position themselves for the next great profitable market. The 90 day t-bill has shown that the FOMC needed to cut interest rates for months. If the FOMC allowed the fed funds rate to float with the t-bill, it would seldom need to act. The situation is like that of congress, if the congress set a few rules and allowed the free market to work, the congress would only need to meet a few weeks each year. The congress must purposely create big problems if they want to earn big dollars when it is time to fix them. There are all kinds of tricks used. For example, legislation that never expires or legislation that does. The two recent examples being the AMT and the Capital Gains Tax. The AMT was passed in 1969, as I recall, and was not indexed to inflation on purpose. Thus its bite grows and grows and grows relative to the economy. In 2003, major tax cuts were passed, including the reduction of capital gains taxes but these were all set to expire in 2010. Again, a train wreck was set up that will have to be fixed.

CONSUMER SENTIMENT: Bottomed in November 1995 just as the big move in stocks was ready to start. Recent consumer sentiment numbers were below the levels seen in 1995 but retail sales have lifted off. There is a chart on the Carpe Diem site that shows the left off in Internet retail sales. Consumers are leaving the gas in their tanks and buying on line. On line sales are running at about 24% higher than a year ago!

NET EXPORTS SOARING: The biggest factor in the increase of last quarters GNP from the solid number of 3.8% to the fantastic number of 4.9% was soaring exports. Exports jumped by the biggest increase since 1996! Again, do you recall the great fun it was to be in the market in 1996 or did you wait until the big run was half over before you jumped in?

SMALL TO LARGE TO SMALL TO LARGE CAPS: About 18 months ago, I strongly encouraged readers to move their 401-K's out of small cap funds and into big cap funds. A good call. The small stock rally was huge from 2002 for several years and it died slowly in 2006. Big stocks have out performed small stocks since that time. Over the next few weeks, small stocks will probably out perform large stocks, however, one would need to be nimble to take advantage. On lift off, the more speculative stocks, including "white chips" and small stocks will do well. However, we are now in the second half of the economic cycle. The further we go into the second half the more concentrated the best performance. Within two or three years, it will be only the biggest of companies and the most defensive of stocks that will be holding up. I suspect the drug stocks will be included in the final big run that could last two or three years after the initial surge. When I called the mid cycle correction, I did so because the normal cycle is slightly over 9 years. The market lift off on October 10, 2002 is now more than 5 years old. We may have 5 more years in the cycle.

The first half rally has taken the S&P, the Russel 2000 and the Dow back to new highs. Even the NASDAQ fully recovered if you forget about that last crazy bubble spike in 1999. The NASDAQ 100 is composed of big stocks. It will continue to do well during the second half.

ECB BANKERS PLAYING THE SAME OLD SONG: The European central bankers are talking about the lagging inflation indicator. This is almost like Nero fiddling while Rome burned. The "economy of Europe" is getting slammed hard by the steep climb in the euro relative to the dollar. Arthur Laffer made the point well on Kudlow and Company last night when he asked Larry if he would buy all of Europe for $1. Of course, if recent trends were to continue, in a surprisingly short amount of time, Europe would be able to buy America for only one Euro. There is a limit to how low the dollar can go and as was mentioned earlier, US export growth is now on a parallel with the growth that occurred in 1996.

LIFTOFF: So far, the countdown has been interrupted several times. Last night, Big Ben started the countdown again. The FOMC meets on December 11. OPEC meets on December 5. OPEC does not want Europe to fall into a recession ditch. Current trends would put Europe in the ditch in 6 months or less. The US could be dragged into the same ditch unless there is relief. Lower oil prices would help. Lower prices for oil and for money take a while to boost the economy but, of course, stock markets would anticipate the resulting economic boom.

3, 2, 1 ......BLASTOFF!

Wednesday, November 28, 2007


This morning I did not do enough home work before writing about Global Flooding. I read somewhere, can't find it now, that 300 to 400 people are killed each year by meteors. I have been called to account. At least one reader has found a source that says that there has been no recorded death by meteor. My only excuse for my error is that I don't really believe there will be global flooding as a crisis that must be attacked now lest we all die. I believe in the promise God made to Noah.

Humans are smaller than we think but we have great responsibilities. One of those responsibilities is for us to allow others to be free.

Passing laws to force some people to put corn oil in his car while forcing another people to go hungry is the among the worst of policies. By not doing my homework, I have pulled an "Al Gore". I have over stated my case in regard to Global Flooding. The truth is that there is more that we don't know about our universe than we do know.


It appears that some of the worst parts of the pending energy bill has been defeated. Taxes will not be raised by significant amounts. It appears likely that the political compromise brewing will reduce the "damage being done to the environmental cause". Congress is likely to pass new mileage standards, once again, giving us all a good feeling about how we are helping to "save the planet" without making the hard choices, but power plants will not be forced to mis-allocate resources.

While the current crop of politicians seems to have little will power, the economic conditions are still ripe for the substitution of consumption taxes for income taxes. The AMT still has not been fixed or even patched. If it is not fixed, the US income tax system will automatically evolve into a flat tax. The pain of higher taxes on the middle class would be too great so close to the next election. It is still possible that a compromise will be reached within two weeks.

We are all guilty of changing our minds. It is my hope that the American Public will learn to demand the best service from our politicians. We do not need bridges to nowhere, subsides to not grow crops or ridiculous mandates.

It is important for investors to understand the basics. In a similar vein, we all need to know enough enough basic science such that we do not allow politicians to seed the country on wild goose chases. In the 1970's the USA wasted billions of dollars on synfuel project subsides. Thirty years later, we waste billions of dollars annually on corn alcohol. The science of economics tell us that if we let the free market work, alternatives will be automatically substituted for hydrocarbon fuels when the price is right. Yes, the total cost, including pollution costs must be factored-in. An independent commission should be established to determine the relative pollution costs of each source. The congress should get an up or down vote only. Powerful industry groups would lobby hard but the final result would be an open and above board answer for perhaps a five year term.


If you don't believe the turn is upon us, do a search for a zinc chart. The price of economically sensitive industrial metals is not the only sign of the turn. The big decline in long bond interest rates is the big daddy of signs. Inflation is dead, long live the inflation of stocks.


Scientists say that the earth was formed some 4.5 Billion years ago as a hot accretion of rocks and dust. There was no little or no water or oxygen on the planet. In 1944, Otto Schmidt noticed the obvious. He noticed that if the earth were about 60% smaller is size, eliminating the oceans, the continents would fit together like a jig saw puzzle. The planet started as a hot ball of materials and some 1.5 billion or more years ago it expanded as water was added to the mix. The process continues to this day.

Any fourth grade science teacher can tell you how to set out a magnet wrapped in white paper for a couple of days in order to collect "mini asteroids". It is no secret that hundreds of thousands of meteors are being absorbed into the earths atmosphere daily. Many an elementary kid can tell you that the largest star in our neighborhood, the Pistol Star, is more than 100 times the size of our sun but it cannot be see because of all the cosmic dust trapped in the Milky Way. Most of the meteors hitting the earth are absorbed at the atmospheric level but a very small percentage are defined as meteorites when they survive the trip through the atmosphere and make it to the earth. While we think of this as a rare event, it is not. Indeed, 300 to 400 people are killed each year as a result of being hit by a meteorite.

Where did all the water come from?

In recent years, NASA has been able to confirm that a large number of comets through off water that has the same properties of water that is here on earth. It has long been known that comets throw off water vapor, when the "Linear Comet" burned it self out near the sun, NASA was able to determine its composition. Asteroids and comets that constantly hit the planet earth are known to contain water.

The Global Warming crowd has a few things upside down. Some 2 billion years ago, the earth was so hot that it burned up all the oxygen it could find. Today, 60% of the surface of the earth is covered in water and even though the "big spray" was long ago, the earth continues to expand in both land mass and in water mass. The 55,000 tones of meteors absorbed daily are a small drop in the big bucket earth but one can collect a lot of drops in 4.5 billion years. The long term evidence is that the earth is continuing to cool.

One of the conundrums the global warming crowd runs into is that their tidal measures of sea level differ from satellite measures. Satellites confirm that sea levels are rising, by even more than the earth based systems would indicate. The volume of water on the earth is growing! The size of the earth is growing by 1 to 3 millimeters per year. An inch every 8 to 25 years.


The USA is currently "hydro cracking" at the rate of 4 million metric tons per year. One of the primary reasons to crack water into hydrogen and oxygen is to boost the energy output we get from hydrocarbon materials. The least expensive conversion is with the use of natural gas but petroleum and coal are the most common fuels used. Thick gooey tar and dirty coal can cleaned up and made useful by the process of cracking water molecules so that hydrogen can be mixed with hydrogen to make coal liquid and to make goo usable.

If the USA wants to save itself from the "hands of OPEC" and save the world from GLOBAL FLOODING (Oh My, Lions and Tigers and Bears), then all it has to do is increase our rate of hydro cracking. Increase the rate from 4 million metric tons per year to 20 and we no longer need to import oil from OPEC. Increase the rate to 37 million metric tons and even Canada will be forced to find other sources of tax revenues.


The green crowd dreams of the day when windmills will be used to crack all the hydrogen we need. Their dreams are wilder than those of Don Quixote. We can all chase windmills all day long but the USA has enough coal to supply our energy needs for 200 years or so. Coal is dirty but cheap. Even after spending big money to convert coal into clean liquid, it is still cheap.


When I was in the 4th grade, I was taught that nine planets circle the sun. Today, we no longer count Pluto as a planet and we add about 5,000 minor planets to the count each month. There are more than 400,000 minor planets. The point of mentioning the Pistol Star and 400,000 planets is that it is human nature for man to make himself out to be so much bigger than he really is. We like to believe we are in control of the earth and, even, the universe. We are very tiny specs of dust. If you were to paint a wall in your home with a scaled picture of the Pistol Star the Sun would be about the size of a golf ball and the earth would be too small to see.

The earth is not about to run out of hydrocarbons and it is not about to burn up from excess heat. All the while, humans run around trying to find ways to save the planet. I applaud all rational efforts to "save the planet". We indeed need to continue to reforest millions of hectares and we need to burn clean fuels.


A fundamental economic law is that taxes reduce the activity taxed. The USA needs to make an important shift in taxation. We need to reduce taxes on income and increase taxes on consumption. If politician were willing to give up control of the purse strings, the "global problems" would be solved. Those who burn dirty fuels should be taxed more than those who avoid burning dirty fuels. By offsetting a tax decrease on income with an increase on tax on dirty fuels, the people of the USA would see an increase in income and a decrease in pollution (no more global warming, global flooding and no more money wasted turning good corn into weak alcohol).


Verizon made a major shift yesterday. Verizon is opening up its network. Hallelujah!

The big mobile build out is gathering steam. Over the next five years it will become very common for people to be connected by multiple devices to a net work that is growing exponentially. Computers are morphing into many forms. The features being added to GPS devices are increasing their computing and communication capacity while more and more "non-computer" devices are being connected to the Internet. Verizon just confirmed that the "phone function" of the cell phone is quickly declining in importance relative to the "Internet connected computer function". The big Verizon competitor, AT&T went the other way by trying to lock up the Apple I-pod. Apple and AT&T would love to build a network of proprietary products that must use AT&T's cell network. Who really wants to pay for AT&T's network if they have a free WIFI connection handy? I do not know the break down but I am confident that most of the people working at the local coffee shop are connected through WIFI and not expensive phone networks.

I mentioned the Nokia N810 the other day as being a neat product. It is not at cell phone. I believe the Nokia N95 is the cell phone version of the N810. The point is that I will pay zero in additional monthly fees to use my N810 as an Internet phone. Verizon wants to secure the cell phone piece of your business. If you want to buy a dual band device so that you can use the Internet as often as possible, Verizon says fine, but when you cannot connect through WIFI, make your connection through our network.


Without getting deep into details, I must mention that the net present value of the stock market keeps jumping each time interest rates fall. Yesterday, I mentioned that the big decline in interest rates is making houses more affordable. Lower interest rates provide stocks a double whammy: 1) by lowering the cost of doing business, lower interest rates tend to increase profit margins, and 2) by lowering the returns on alternative investments, lower interest rates increase the Net Present Value of a companies shares.


Tuesday, November 27, 2007


The turn around in the airlines came about as a result of strong demand. Strong demand will cure the ailments of most any business. There is a huge contrast between the airline demand story and many other concurrent demand stores. For example, the hand gadget business has seen an explosion of demand but this demand is a result of an abundant supply at ever lower prices.

Take a look at the latest Nokia tablet computer, the N810. This hand held device comes with 2 gigabytes of memory and is expandable to 8 gigabytes with the insertion of a relatively small memory card. The device is more powerful than the computer on my desk at about 20% of the price. It comes ready to communicate through WIFI and Bluetooth. It works well as a VoIP phone, as a music server and as a GPS navigator. The suggested retail price is $479. The price of last years model, the N800 has fallen to around $225 while Amazon offers the N810 for $449. The value of mobility is demonstrated by the number of users at the local Panera Bread or Starbucks.

Gadget makers find a price level that the public will pay and then add as many features at that price will support. A couple of years ago, a one dimensional GPS device sold for $600 or more. Today, the price of the GPS has come down but, one can look at the GPS in the N810 as a gift. It cost nothing because $449 is perceived as a more than fair price for a powerful WIFI mobile computer. Because the price is perceived as more than fair, gadgets are jumping off the shelves. Apple, to sell its share, must stay ahead of the pack. There are many major players, including Google, who are trying to offer the best products at the lowest prices. The demand for gadgets will continue to be strong because the price has fallen to a level that makes the devices great substitutes. Who will buy a paper map after experiencing the benefit of having ones location constantly updated on an electronic map with many other advanced features available.

To make profits selling hand held gadgets, the producers must be among the fastest "guys on the treadmill". The number of devices sold is going to continue to increase rapidly but the only way to keep the price high is to quickly innovate with advanced features. No producer can afford much inventory because the value of the old gadgets collapses as soon as the next vendors wares hit the shelves (cyberspace shelves). Again, the N800 did not start out as a $225 device. The price has been cut in half only because there are better alternative products.

The demand for gadgets has risen due to a sharp decline in the price per gadget but the demand for airline seats has risen despite a sharp increase in the price per seat. This price increase has been repeated many times over the past 4 years. This morning DAL announced yet another fare increase. An increase in demand while new supply is restricted is ideal condition for increased profits. The number of seats being sold has increased while the price per seat has risen. Even the price charged by the deep discounters has generally increased over the past four years. The supply of available seats is relatively fixed. The concurrent rise in demand for oil has increased the cost of the seat but this cost pressure has been offset by a dramatic decrease in the cost of labor. The cost of labor has been reduced by two factors, lower negotiated wages and benefits and a dramatic increase in productivity. Now a days, passengers frequently buy their tickets, check-in and change itineraries at computer kiosk without the participation of airline employees.

Over the past four years, day after day, "TV talking heads" have suggested that the airlines are suffering as a result of high fuel prices. The public has been "trained" that an increase in the price of oil means a decrease in the price of airline stocks. Of course, anyone can take a look at the price of airlines of AMR or CAL and see that the price of the stocks has gone up with the price of oil and one can look at the income statements to see that prior losses have been turned to profits as the price of oil increased.

Today, the airline market faces a couple of big questions. 1) Will the world economy slow to the point that it decreases demand for airline seats enough to cause a reduction in the price of seats? 2) Will the supply of airplanes finally catch up enough to cause the price of seats to decline?

Without question, economic growth in certain industries has slowed. At the same time, broad measures of economic growth such as the GNP of the USA has shown great strength. The growth rate of the last quarter was initially believed to be about 3.8% but it is now expected to be revised to 4.5% or higher. This is real growth after inflation!

The world economy will slow some. However, areas that have slowed are ready to accelerate again.

The big drag on the US economy has been in the area of housing and many predict that it will take a long time before the housing market recovers. However, the cost of houses is greatly influenced by the cost of financing which is falling hard and fast. The 10 years treasury bond traded at 3.8% yesterday. A 1% drop in the mortgage rate reduces the payment on a $500,000 loan by more than $300 per month. Of course, the $300 often is translated into more house, not smaller payments. Suddenly the buyer can afford a $560,000 house for the same payment. In a good market, it is the same house, same payment but the mortgage is $560,000 not $500,000.

The big decline in interest rates is not over. The FOMC and the ECB, to name two, have been dragging their feet. They have had cover to emphasis inflation risk because the price of oil has stayed high. The number one best inflation indicator is the interest rates offered by long term notes and bonds. The recent fall of the 10 year note to 3.8% says that inflation is likely to fall in the coming months. As interest rates fall, the likelihood of a housing rebound increases.

The decline in the price of gadgets and the world boom in airline traffic are part and parcel to the same phenomenon. Yesterday, reporters ran themselves in circles trying to explain the significant increase in shoppers with reports that the average purchase per shopper had declined. For two years in a row, big screen TV's were being carried out of stores at 5 o'clock in the morning on Black Friday. More were being carried out this year but the price per screen had fallen again.

Reporters are also in a tizzy about the massive number of new planes on order. New 40 Billion Dollar orders seem to be coming one right after the other. Reporters tend to ignore the fact that the orders now being placed are for delivery in 2014. The companies ordering billions of dollars of new planes believe that demand is going to continue to soar. If they could get their hands on new planes now, they could fly them profitably. It is going to be 5 years or so before increased capacity results in tight profit margins.


Over the past few weeks, good and bad stocks have been sucked into a black hole. Novice investors will see the lower prices on past leaders and "buy the dips". The turn in leadership is a process. Once the "new bull market" starts, those who have bought into old leaders will not recognize their error until months have passed. In 1982, I bought Deere and Company and rode it for a strong move through the recovery phase of the economic cycle. By the mid 1980's the market fell in love with the stock and bought it heavily during the turn. It under performed for the next several years. Last week, one of the big investment houses put a strong buy rating on Deere. This is the same old story. The stock has done well over the past 5 years. The number of acres of corn planted this past year was at an all time record. The increase in acres planted cannot go up from here. Even the UN is now discouraging the use of food stocks for fuel. It is not time to buy Deere and Company or other "first half stocks".


The markets are now offering the best buying opportunity in a very long time. The average stock is now cheaper than at any time since 1995. Many stocks are in the 1982 cheap range. Opportunity knocks. Add money to your account every month because money added at or near a bottom often doubles again and again on the way up.

Tuesday, November 20, 2007


It is not clear if Bernanke and company will cut rates in December. If they don't the next rate cut could come in Euro land. Money is extremely tight in Europe. The rate on short money is only 4% but Americans need to trade $1.48 per Euro before they can invest in the country. BCA Research uses a combined index of the Euro and the exchange rate to show that the Euroland economy is suffering from tight money. A slow down in Europe will slow demand and thus move the world down the price curve for goods. The world is connected like never before. Slower growth in Europe will spread to trading partners and lower interest rates will be needed to spur economic growth.

The US congress got out of town without doing anything. It must come back after Thanksgiving to set the budget for the fiscal year that started October 1. The leadership will try once again to pass left leaning laws, many of which would be harmful to the many in order to help the few. Unless "a grand compromise is reached", the congress will be one of the biggest "do nothings" of all time.

The markets should react well when it is clear that a good compromise has been reached or when it is clear that not much will be changed. I see no way for the congress to leave town again without striking down the annual automatic increases of Alternative Minimum Tax. Getting out from under this law should provide a relief rally.


Although it cannot only be said in a round about way, the executive branch of the government can influence the timing of central bank cuts. The politicians feet are being held to the fire by high oil prices and high interest rates. Euro land bankers must hold onto high rates for extra time because when the dollar turns up, the cost of oil to Euro land will automatically go up. So far, Americans have felt the brunt of high oil prices. Once the dollar starts to rise, the price of oil in Euro terms will tend to rise.


In the past year, there have been over 11,000 earmarks inserted into bills. The total of this "extra spending", if they were all to pass, would be over 300 Billion Dollars. The American people have been fooled into accepting high tax rates. The good news is that there are signs that "special projects" are going to be cut back hard. This congress receives one of the lowest favorability ratings ever. Bush is certainly not the most popular president of all time. He spent a lot of money giving drugs to seniors and paying schools to focus on struggling students. Whenever politicians spend tax dollars to do what the private market could do better, the waste eventually becomes apparent. Today, the most liberal of politicians will tell you that the "No Child Left Behind Program" has produced less than satisfactory results relative to the money spent. Hopefully, the next program will allow individual choice (free markets) to correct the "factory floor approach" to education.

The US is going to struggle to keep up with the rest of the world if we don't start using our resources more wisely. The failure of this congress to pass bills, such as the farm bill loaded with special interest payments, is a great sign that the turn is here.



A regular reader has noted that based on seasonal patterns we are in the "good times". The past 10 days or so have been no fun but I agree with the premise of the reader. The old "Santa Claus Rally" is almost upon us. During the fifty-one years from 1954 through 2004 the market went up 54.9% of the time three days before the Thanksgiving Day Holiday. The following list is of the percentage of gains starting with 3 days before Thanksgiving and ending the last trading day of the year.

54.9, 58.8 , 64.7, 60.8, 68.6, 58.8, 54.9, 49 (last day of November) (average of 58.81% last 8 trading days of November)
49, 51, 60.8, 56.9, 41.2, 49, 54.9, 47.1, 47.1, 43.1, 47.1, 56.9, 47.1, 45.1, 47.1, 58.8, Christmas Day, 72.6 , 54.9, 66.7, 68.6.

The average number of gains for the month of December was 53.25%. Note the big Santa Claus Rally at the end of the year. The last four trading days the market goes up an average of 65.7% of the time!

Throw in the first two days in January and Santa brings an average rally of 1.5%, not bad for 6 days work. The Santa Claus Rally in the NASDAQ is even more impressive. Here are the numbers for the last 4 trading days of December and the first 4 trading days of January. 72.7, 51.5, 72.7, 84.9, 51.5, 78.8, 60.6, 66.7. The average for the 8 days is 67.4%!

The coming year will be the 8th year of the decade. The historical average return over the past 120 years has been 18.5% with 10 years up and 2 down. Next year will also be a presidential election year in which the average return has been 6.7%. Because the gains do not include dividends, they look smaller than they are.

One point that must be made is that there are hundreds of seasonal patterns. Those who try to take advantage of too many of them become speculators rather than investors. Investors have a history of success and speculators win some and lose some. One of the problems is that the more you dice the time frames, the more powerful the more volatile the numbers and the less reliable the market signal. The facts before and after "Black Monday", October 19, 1987 show some of the problems of relying too heavily on seasonality. The Dow Jones Average dropped over 26%, as best as I recall, the NASDAQ fell even more. If you average NASDAQ returns by day of the week from 1971 to 1989, you find the following percentages of up days, 41.1, 51.1, 62.7, 64.2, 67.3. In other words, the NASDAQ was down 58.9% of the time on Mondays while being up 67.3% of the time on Fridays. After 1987 something changed. The average weekday returns starting in 1990 have been 52.8, 52.5, 57.6, 55.2, 55.2. In the old days, the market did well toward the end of the week and in the new days the best day was Wednesday. One take away is that seasonal factors tend to work well until they become widely known. If lots of traders know that the NASDAQ does especially well during the 8 days surrounding New Years, then some of them will buy a day early, causing the pattern to increase to a 9 day rally. One reason the Santa Claus rally had staying power for many years was because investors with tax losses to take used to have to sell at least 5 days prior to year end for trades to be recorded. Nowadays, trades are cleared in two days. The January buying was once a function of pension money going to work but nowadays the deposit of money to pensions is less concentrated. Santa Claus will likely come because the sentiment numbers are currently as bad as they have been since 2002. The best time to load the boat with stocks in recent years was in the summer and fall of 2002, when the market was very "washed out". All sorts of high probability indicators, such as insider buying percentages, say that we are faced with a great buying opportunity. I have been wrong about how quickly the "turn" would be here but it is still on its way.


The signs of a big turn are showing up around the globe. The hint of a slowdown in Canada caused the Looney to fall, piles of copper inventories has caused the price of copper to fall, Goldman Sachs is talking up the potential for recession, features of the Energy Policy Act of 2005 are starting to "kick-in" and many more.


Three clean coal power plants were recently canceled in Florida. During the last 18 months, the list of US plant rejections or cancellations has grown to 20. For those who did not already know, politicians are pushing for the energy solutions that will benefit their local people the most. The clean coal plants cut CO2 emissions by 90% but if the energy "crisis" were solved, the subsidies desired for "special projects" would go out the window. A US company just won a contract to build a couple of clean coal power plants in India and a Norwegian company just committed to invest 4.2 Billion Dollars in a Singapore solar Energy development project. Thailand, Indonesia, and Vietnam have each agreed to build nuclear power plants. At an Asian conference, a number of announcements were made in regard to energy alternatives and matched by commitments to reforest 10 million hectares ( 24.7 million acres of trees will use natures hand to sequester trillions of tones of carbon).

There is no need to subsidize solar, wind, clean coal, bio-fuels or any other energy alternatives. The market will do what it needs to do such that supply will meet demand. Companies do not invest $4.2 Billion without expecting substantial returns. The current price of oil is high enough to promote all the alternatives we need. Politicians need to adjust a few rules and then get out of the way. The biggest adjustment needed is for the price of externalities to be paid by the various methods. If coal pollutes the most, it should be taxed the most but a commission needs to establish a fair system of energy taxation and the congress should get an up or down vote. This process has worked to solve divisive issues in the past. The American people have wasted dollars and the environment as a result of the failure of politicians to act on behalf of the whole.


Jobs and lives have been lost in America due to the failure of our politicians. For example, year after year there have been deaths in coal mines and deaths from breathing polluted air. On the other hand, there have been no deaths in the construction or operation of US nuclear plants (I cannot site my source but if you don't believe I encourage you to research). One can argue that wars have been fought as a result of failed energy policy.


By the way, the profits made by airlines continue to surprise on the upside. One German and one British carrier announced big numbers this morning. Gordon Bethune, the highly respected retired chair of Continental is talking up the problems in the business but you have to remember that he is being paid to try to put merger deals together. Once again, Goldman is negative on the economy and on the airlines. Goldman makes more trading stocks than probably any other firm in the world. They buy when others are selling as good as anyone can. Their "research" is as bad as the rest of the sell side crowd but they make money on their trades. Airlines go up and they say buy, airlines go down and the say hold or sell. Right now they are talking about recession and suggesting airlines be held or sold. I say, BUY, BUY, BUY. I expect to make high returns off shares I purchased at much higher prices. SANTA CLAUS IS COMING!

Monday, November 19, 2007


The Chinese government has given the countries banks an ultimatum, "No more loan growth this year"! Banks have been told that October 31 was the high point. I'm starting to wonder if Jimmie Carter has taken control of the Chinese economy. Gas lines, odd and even license plate days for cars and now we have credit controls.

If you remember the credit card controls imposed by Jimmie Carter, you remember the days of malaise. Ronald Regan was able to get a lot of political mileage by creating the "misery index". This index, computed by adding the unemployment rate to the inflation rate topped out in June of 1980 at 21.98%. To be fair to Jimmie Carter, the index hit 17.68% during the Ford term and Ford's response was Whip Inflation Now buttons. The BusinessWeek Magazine dated November 26, 2007 includes an article titled, "Stagflation Lite", the article is about stagflation in the current US economy. What a joke?

When Ronald Reagan took the price controls off oil, the free market did its thing and solved the "energy crisis". The price of a barrel of domestically produced oil soared but exploration flourished and power plants started switching from fuel oil to coal. It took 6 years for the price of imported oil to fall from record levels to $9 per barrel! You would think that the US would have learned the lesson of avoiding government manipulation of supply, demand and price. This time around, the government has spent billions of dollars in subsidies to corn farmers while billions of barrels of oil lie within easy reach. The most sad fact is that billions of pounds of fertilizer, pesticides, and coal dust have been dumped into the environment as a result of government policy.

Eventually, the politicians of this age will learn that the market should be as free as possible so that the most efficient solutions can be found. The WIN buttons and credit controls of Ford and Carter did not repeal the law of supply and demand.


When Carter slapped on partial credit controls, they certainly did have an effect. In short order, a recession was at hand. Indeed, the US "enjoyed" back to back recessions in 1980 and 1982. The recessions were worse than they needed to be. Had the slowdown been caused by allowing the price of "things" to reach their natural level, some very worthwhile loans would have been made. When a government rules that no loans can be made at any price, the good deals get thrown out with the bad.

China is not anywhere near a recession. The GNP has recently grown by an incredible 11%. The economy is overheated. Reserve requirements and interest rates have each been raised multiple times in the past couple of years in the hopes of cooling down the economy. Once again, the world has seen a demonstration of why the government should set the frame work and allow the free market to function. Americans have believed that the Chinese have been hurting America by pegging their currency to ours. The fact is that if anyone was hurt it was the Chinese. They are the ones who have sold and sold and sold goods to us for extra low prices. Had interest rates and currencies been allowed to float, the growth in China might have been more moderate but also more sustainable.

The government of China is working hard to be ready to showcase the country during the 2008 Olympic Games. I am reminded of getting ready for a Christmas party to be held at my house. The closer we get to the date of the party the more frantic the activity at the house. There might be a big let down after the party but there is little chance of a great slow down before the party. The credit controls were set to last only 3 months. I expect the growth rate in China will slow to 5 or 6%. Many a country would love to experience such a level of "slow growth".


Eisenstein taught us about relativity. Eisenstein was "the master" of the physical world but late in life he applied his thoughts to other areas, including religion. The thing that was missed by Ford, Carter and the Chinese is that interest rates are relative.

The prime rate is currently at a higher level than the rate of growth in corporate debt. This was not the case during the days of Nixon, Ford and Carter. As you may recall, prior to Nixon, the US embarked on the "great society program" of Lyndon Johnson. Johnson attempted to do the impossible. He tried to fight the Vietnam War and dramatically expand spending on domestic programs without paying for the programs with increased taxes or increased interest rates. The inflation explosion of the 1970's was a direct result of the Johnson administration and the price control response of the Nixon administration. Ford and Carter continued to battle inflation by artificial measures, including price controls.

Paul Volcker and Ronald Reagan took the country back to its roots. Volcker allowed the free market to work in regard to interest rates and Reagan allowed the price of goods to float. The prime rate stayed well above the growth rate of corporate debt for most of the years since and US corporations now have, on average, the best balance sheets in more than a life time. Believe it or not, US corporations are net savers! Consumers have gone the other direction but once again because of government policy. Consumers are paid by Uncle Sam to finance as much money as they can against a home and second home. The influence of the depression babies has waned. The great majority of the baby boomers have learned to take advantage of the home loan subsidy and the Y generation knows nothing else. Citizens of the US are approaching the extreme opposite extreme that lived in the 1950's. In the 1950's, many a family lived in a small shack or trailer while they saved for the day when they might buy a home. The clearing "price" was reached in 2003 when even poor credit risk citizens were allowed to buy homes with no money down.

The people of China need the availability of credit. Young people always need credit and the Chinese population is relatively young. However, the situation in China is extremely volatile. The median age of the population is rising quickly as a result of restrictions on births. Agricultural economies are savers by necessity but 100's of millions of Chinese are leaving the farm and becoming urban consumers. As is typical of government controlled economies, individual needs of consumers and businesses cannot be anticipated and filled as well by fiat as they could be in a free economy. As was demonstrated by Johnson, Nixon, Ford and Carter, even a "free economy" can be hijacked by restrictive government policy.

Like Johnson, Nixon, Ford and Carter, the Chinese administrators have refused to allow interest rates to rise above corporate growth rates. The inflation spiral that we witnessed in America was about to be repeated in China. The move by China to cut off credit growth is not the Whip Inflation Now button of Ford. The Chinese are taking a meat cleaver to a bone-in chicken and the chicken does not have a chance.


We do not know how this story will end but a few events seem likely. Hot money is likely to leave China to be invested elsewhere. A good candidate for those investment dollars is the USA because US assets are as cheap as they have been in 12 years. The crunch to Chinese based stock markets is likely to be a significant "correction". The Chinese people are all the more likely to spend some of their new found wealth as the turn away from putting all they can into soaring Chinese stocks. Of course, the wealth effect could offset some of the spending as losing money on investments is always a depressing event. The Chinese government could use the slow down to allow the Yuan to float more freely. The Yuan has been allowed to rise about 10% against the dollar over the past year. All those investments in US Treasuries, have lost value in the past year. If you remember the Carter days you know it is no fun to get paid on savings at less than half the rate of inflation. The Chinese people are in the boat of having lots of savings but watching those savings decline in value. The "in country" inflation rate has been around 6% which is less than the GNP growth but if I recall correctly the amount China has saved in US Dollars is in Trillions of Depreciating Dollars! (The wealthy oil countries are complaining about the same problem but it is false to believe that pricing oil in Euro Dollars would have a positive effect. If a have only hundred dollar bills and a store says it will not take hundreds, you will have to go get your money changed but you will still buy the same goods at the same price.)


The forces of "the turn" are natural economic forces. Like other natural laws, these are powerful forces. Like the locks in a canal, the water will only go so low until it is time for the doors to let the big ship slide through. The Chinese and oil barons hold trillions of US dollars. They have an excess supply. The law of supply and demand has caused the price of those dollars to fall. Hit the dumbest of mules with a two by four enough times and he will learn to move. People are not dumb as mules but they deal with "mindsets". In John 9, John told the story of Jesus. When Jesus performed miracles on the Sabbath day, some people were amazed at the miracles and others were amazed that the rules against work on the Sabbath had been broken. When the depression babies witnessed their children buying homes on credit, they thought they had lost their minds. Later when the undisciplined file for bankruptcy to avoid excessive debt it is easy for the those who remember the depression to say, "I told you so". The old saw is true that the only constant is change. When it is time for the leaves to change, there is not much you can do other than enjoy the view or worry that winter is on the way. The change over from small cap value to large cap growth is well under way. You cannot stop it. You can enjoy it or not but you cannot stop it and neither can the Chinese.

"News" and "Brief Comment"

GM is offering 60 month zero interest loans on various models. "Where there is a will there is a way".

Hillary has a secret file on Obama. "No news here, the pattern of the past is upon us, cases of FBI files in the bedroom?"

Thirty-year mortgage rates off .6 from the peak. "Just a little bit more and 10 months worth of unsold homes will disappear in a hurry."

Prices of goods continue to fall, core CPI low. "Inflation is present in 'rich man services" such as tuition at top universities and elective surgeries. Inflation is down in 'every man goods', electronics, home furnishings, clothing, and communication services".

Signs of slower growth around the globe. New unemployment claims rise in USA. "Peter Dag offers a good list of 'connected economic variables'. The list is composed of three groups that 'trade together'. The first group is 1) Stock Market 2) Money Supply 3) Yield Curve 4) Dollar. The second group is 1) ISM Indexes 2) Inventories 3) other Coincidental Economic Indicators. Group three includes 1) Commodities 2) Inflation 3) Interest rates. Because each business cycle only rhymes with the prior cycle and is different in any number of ways, one cannot expect the groups to 'trade' exactly the same each time. Besides, if there were perfect correlations there would be no business cycle. One of the things that can be said about the cycle is that by the time interest rates are in 'full retreat' it is time for the stock market bottom. The mid cycle interest breaks came in September of 1984, in November of 1995 and June of 2007. These were the breaking points of treasury bills which normally precedes the first cut in the Fed Funds Rate. For example, the November 95 break in t-bills was followed by the first cut in Fed Funds in February of 1996. By the time of the November 1996 election, the stock market had soared. One might note that the stock market did well in 1995 and 1996 but there was a huge rotation in the type of stocks that soared. Charts of broad indexes hardly show a bump during the mid 1990's turn. The turn this cycle is a bit more like the 1980's turn but even if it is more like the 1970's turn, the big growth stocks will ultimately gain strength. In all cases, stocks joined bonds in the rally long before commodities hit the next bottom. The peak in industrial metals occurred in April of this year. Stocks will outperform commodities for the next couple of years or more.


This time may be like the 1970's in terms of the need for massive construction. In the long run, economics always wins. A mega watt of power now costs about $60 when produced with natural gas. A coal mega watt only cost about $20. A mega watt of nuclear power cost only $4. The difference between this time and the 1970's is that the world markets are much more free than then. As a result, the price of oil has been allowed to rise to its market level. In the 1970's, price controls held down the price until the pressure was too great. The artificially low price encouraged excessive consumption and discouraged exploration. The law of substitution was not allowed to work.

If you really believe in inflation, please tell me how much higher the price of oil will go. It is currently trading at $94, do you really believe the direction is up substantially from here?

Yes, $4 nuclear power will "elbow out" coal and natural gas power eventually. The only question is "How long will it take"? So far, I have not found a completion schedule for coal or nuclear power plants or for refineries. I have read that China is completing coal electricity plants at the average rate of one per week and that it will complete 40 nuclear plants within the next 10 years.

One of the "great upside downs" is that profit growth will slow during the next several years while growth stocks out perform. Small stocks that grow the fastest over long periods of time will grow slower during the time for growth stocks. The slow down in world growth will be the "pause" that allows "infrastructure to catch up". Many a new energy project will come on line over the next several years. Profits will still be made but growth will be hard fought and the little guys of the world will get squeezed -- except for those who bring forward exciting new innovations.

Out of the turn gates, the little and the big will jump. The big will continue to climb. Buy now, the jump will be fast and hard.

Saturday, November 17, 2007


I copied and pasted the following from a post on Bill Rempel's blog.

Because I buy long-term and Bill buys short-term, his conclusions of what to buy are almost exactly the opposite of mine. As I have recounted on many occasions, I can find a large number of long-term traders who have gotten very wealthy in the markets but I have a hard time finding short-term traders who make and keep lots of money in the markets. Many short term traders are "in the business". They often earn their living off of commissions. Bill is one smart fellow and I very much enjoy his blog.

Rotational combines component rotation and asset class rotation to hold a small basket of ETFs or ETNs, selecting the handful with the most momentum from a representative sampling of classes and components.

Throughout this article, when I refer to momentum, I am referring to an exponentially smoothed measure based solely on price movement.

I may or may not make notes about the macro implications of trends in these categories. If I do, they will appear below each category's list of members. Noting the existence of a theme behind the trend does not necessarily mean I agree with the theme. It is important to remember that these themes are unimportant to the execution of the plan. The plan is strictly mechanical in nature, and these notes are merely postulations about the possible reasons behind the price movements.

Every member of this category that has a valid smoothed momentum measurement has positive momentum. As a group, every member of this category has increased in momentum over the last four weeks. The biggest momentum gainer is also the current momentum leader.

Treasuries 20+ Yrs (TLT), +2.9
Emerging Mkt Debt (ESD), +2.6
Treasuries _7-10 Yrs (IEF), +1.9
Low-Grade Corporate (HYG), +1.5
Mortgage Backed Securities (MBB), +1.3
Treasuries _1-3 Yrs (SHY), +1.1
High-Grade Corporate (LQD), +0.8
International Treasury (BWX), too new for measurement

Click the link above for the full post on Bill Rempel's blog.

Friday, November 16, 2007


These unusual times beg the questions, how low? and how high?

How high will profits go? Corporate profits have been running at around 9.2% of GNP! One would expect profits to slow by this point in the economic cycle but this one is a doozie. At the peak before the mid cycle turn in the 1990's, profits peaked at around 7.5% of GNP.

How low will interest rates go? The ten year bond is trading around 4.16%. The 90 day t-bill is trading around 3.33%. Such low interest rates will encourage all kinds of economic activity, or will they. Recent numbers suggest rates will go lower still. In the mean time, the flood of effects continues. For example, the Brits are taking their holidays in Las Vegas and other US destinations. The Brits are showing Americans in New York how to go on a shopping spree. The traditionally tight Canadians are even showing Americans a thing or two.

How high will the Yen go? The carry trade is unwinding. The spread between the lending rates in Japan and the earnings rate in the US has collapsed. A lot of "free money" was available for as long as the Yen stayed steady. Now the turn has come. Expect a shift away from emerging growth stocks in the months ahead. Japanese and American stocks will outperform many a developing nation stock over the next several years.

How low will the % of bulls go and how high will the % of bears go? The average investor is now bearish on the market. Time to buy stocks aggressively.

How slow will the money base go and how fast will the total money supply grow? One of the frequent misstatements made on the financial shows and in the financial press is in regard to the money supply. Numerous guests say that the government is printing too much money while others suggest that the government should restrict the printing of money because the price of gold is too high. Those who remember the contributing factors to the great depression are not eager for the government to repeat the mistake of moving interest rates higher to fight the rise in gold prices. On the other hand, those who remember the 70's do not want the printing presses to run so wild that interest rates go to 21%. The good news is that the government has reduced the rate of printing to well below economic growth. The government presses are not printing too much money. Instead, the public is running scared. Cash is being hoarded. There are signs economic activity is slowing as a result of fear. It appears that the FOMC will need to cut rates at least one more time to jump start the next cycle. By the way, a chart of the money base and MZM looks very much like 1996, just at the start of the "second half boom of the 1990's". MZM is growing rapidly. There is room for the FOMC to cut rates before year end, most likely at its December 11 meeting.

How high will the insider buying charts go? Executives at thousands of companies are buying shares.

How high will the unsold inventory of homes go? In the mid cycle turn year of 1995 the ratio hit 7.2%. This cycle we have already hit 10%. The confidence of "public bears" has grown. "Public bears" are saying things on TV that you don't often hear, the possibility of the worst recession in years (even public bears try to avoid using the word depression as it is unspoken public policy not to incite panic). Dramatically lower new home construction will contribute to a quick drop in this ratio once the turn hits the home market. Many a potential home buyer is now waiting for the "smoke to clear".

How low will the GDP deflator go? The most recent reading was one of the lowest in 60 years. Inflation is dead. On the other hand, the most recent CPI index showed headline inflation running at 3.1%, much too hot for Bernanke and crowd. The headline number misses a lot of stuff. For example, if 1% of the public stops paying for the newspaper, the deflator captures this lower spending level. I like deflators because measuring the price actually paid for any service is tricky. Those buying a new car today are likely to include nice features such as satellite radio or a GPS mapping system. The total price of the car may have been higher than the previous car but a car with a GPS map is a much superior car to one without. The total savings, over the 17 year average life of a car, achieved by including a GPS system might be many times the price of the GPS; the savings could possibly be as much as the price of the whole car! Going the wrong direction for 10 miles is certainly not a productive pursuit and such actions do harm to ones standard of living.

How low will the stock market go? How high will the stock market go? The current market is a tough market. The great majority of stocks have gone down in price. A very few highly visible stocks have gone up and up some more. The advance decline lines show the accumulation of more and more stocks going down and net new lows have swamped net new highs. Novice investors pay too much attention to what the Dow, S&P and NASDAQ did and assume the broad market is up or down as indicated. The Dow Jones Industrial Average is composed of a total of 30 stocks. Because most indexes are capitalization weighted, the price movement of a few big stocks determines the movement of the index even when the majority of the stocks move in the opposite direction. One important change in recent days has been the recognition that higher oil prices hurts refinery margins. It is no longer automatic that when the price of oil goes up that the price of oil stocks goes up.

How high will the relative NASDAQ volume go? Those who are "still actively trading" this market have piled into the AAPL's and Google's of the world. The current market is not a healthy one but the patient will jump out of bed as soon as it gets the next transfusion. Betting that the patient dies would be a losing bet. Within 6 months there will be lots of people asking, How high will this market go?

How low will the CRB go? The commodities index hit peaks in April and May of 2007, fell substantially and then tested those peaks in late October. The test failed well below the old peaks. In general, the world supply of materials is growing fast enough to meet the demand. The next leg in commodity prices will be down. Gold and oil (and to a lesser degree silver) have successfully tested the old highs but the turn has been made in wheat, beef, aluminum, copper, steel scrap, lumber, and computer chips (to name a few).

How low will the politicians go? Since the democrats took over congress a year ago, they have included 11,351 pork barrel spending projects in legislation. The extra spending has added about 300 Billion Dollars to the federal deficit. Prior to the take over, republicans were setting their own spending records. Is it any wonder that public support for congress is near an all time low? A few weeks ago, I said I could only see a few ways congress could "get out of town for Thanksgiving". They have chosen to quietly leave after having passed only two of 12 appropriations bills. They will come back for a two week December session. Investors Business Daily enjoyed poking fun at the attempts to pull out of Iraq in defeat even after it is clear the surge has worked. One IBD article says that at the current rate of passage, the last budget bill will not be passed until the year is over.

How high will the pending legislative compromise reach? When the conservatives were in charge of initiating legislation, there was no room for compromise. The bills republicans introduced were to the right of Bush. In the current situation, the great middle could pass a grand compromise. The left is being pulled hard toward the middle. So far, the left has fought over silly stuff in their attempt to stay as left as possible. Bush and the congress may still give us a before Christmas surprise. The alternative will be the meek passage of a few bills with a minor compromise over the "last $20 Billion". Will this congress "do nothing or something"? In any event, it will not be long before the exciting talk about the "Santa Claus Rally" and the "January Effect". Buy your stocks before the hype pushes them up.

How high will the Chinese reach to solve their fuel problem? On the steps of Mongolia a synfuel plant is 95% complete. Next year, the first of several coal to liquid plants will start production in China. Efficiency has been added to the Karrick process being used by using excess electricity during the night. The Chinese leader says that the plant will be profitable for as long as oil sells for $35 or more. The last US plant to process coal into other products (primarily grease and paraffin) was closed in 1873, long before various more efficient processes were developed in the early 1900's. Jimmy Carter pushed through synfuel subsidies in the 1970's that were similar to the ethanol subsides of today, all about votes and not about common sense. At the current price of oil, plentiful coal starts to look all the more attractive. The race is on to build better batteries or to convert the coal to liquid. The Chinese have been able to use a number of processes without paying royalties because a number of old patents have expired. The government just instituted a "slow down" mandate to give current plants under construction to prove their viability. In the USA, there is a trial, demonstration plant, now under construction in Utah. One of the new techniques eliminates the production of CO2!

How big high will air fares go? The SkyTeam alliance was just expanded by the addition of the largest airline in China. CAL will fly twice daily from Huston and from New York to London, Heathrow. China Southern will terminate a number of flights at the same concourse used by CAL and other SkyTeam members. Each SkyTeam member can earn commissions by selling one ticket that terminates in the final destination. It is a false premise that the new open skies agreements will lead to ruinous competition. In case after case, partnerships have developed to "feed one another". The big growth in air traffic is coming from developing nations. The USA will get half the growth to and from the USA by insisting on doing so. We will see years of increased traffic. BUY, BUY, BUY!

Thursday, November 15, 2007


Europe is "rolling over". Old money is learning new tricks.

The Euro is estimated to be over priced by 25%. Can an efficient market be over priced by 25%? Certainly! The smell of fear often leads to irrational behavior.

There are basically two types of money, "safe money" and "aggressive money". The problem the world markets have been dealing with is that "safe money" no longer seems to be "safe". "Safe money" is no longer a "sure thing". Yesterday, the "sub prime slime" showed up in a GE money market fund. GE is offering the holders of this "safe money" account 96 cents on the dollar. "Safe money" is typically left lying around in money market accounts even while the owner knows he could be earning much higher returns. High returns are not the point of safe money. Those who leave money in these accounts are concerned about the return of their money not the return on it. If you are rich enough, accepting the losses due to taxes and inflation on substantial sums is not seen as a big deal, losing principle month after month and year after year grows into a disaster.

Wealthy folk who have had safe money accounts in Europe and America have seen their American money fall in relative value by 35% or more. Those who had equal amounts in Europe and America made as much in Europe as they lost in America but losing is still no fun. Aggressive investors saw similar results but they moved quickly to correct the problem. Indeed, the most aggressive investors jumped to China to rack up substantial gains last year. One of the differences in safe money and aggressive money is that safe money is relatively slow. Another name for aggressive money is "hot money", because it moves quickly.

After five years of seeing the value of American safe money fall in value relative to safe money in Europe the flow of safe money from America and to Europe has gradually increased. The sub prime mess served as a catalyst to change a steady flow to a flood. It does not matter that some European banks took big losses on sub prime paper. The fear of loss caused money to" flow to where it has been being treated best". The dollar has fallen as a result of fear of additional loss in value. The selling of dollars reached the panic phase but has at least leveled off for now. The fundamentals do not matter to those who smell the stench of fear. After David slew Goliath, the Philistines sheathed their swords and ran away from farmers using garden tools and sling shots as weapons. Fear has rolled through several US real estate markets. Some resort properties have sold for less than half price because some people want out no matter what.


One group which has picked up on the "cheapness" of US assets has been the Canadians. Those who winter or vacationed on the southern coasts have noted the powerful combination of falling real estate prices and the rising Looney. Many are taking advantage of this double whammy. The flow back this way is just a trickle so far but the pace will quicken. The buying power of other currencies has also shown up in the export - import numbers. US manufactured goods exports increased by 16.1% over the past year!

In just a few days, weeks or months, I expect the flow of funds flood to fully reverse. The aggressive money will lead the way but once the Euro Central Bank follows the US lead with lower interest rates, the flood will include the return of tons of safe money. The bottom line is that the relative values of currencies is such a complex issue that the funds flows are reduced to momentum plays for the great majority of participants. The further a currency falls, the more eager the participants to sell. No one wants to get in front of a moving freight train. There is a train about to leave the station and you should make sure you are aboard.


Warren Buffet deserves respect for his investment acumen. He has made billions by investing wisely. Yesterday, he testified before congress in favor of raising estate taxes. What a crying shame? The effect of high estate taxes is a reduction in the net revenue to the US treasury. High estate taxes cause distortions and inefficiencies. High estate taxes are harmful to all Americans. Class warfare may be politically smart but it is not sound economics and it is not fair economics.

Part of the joke is that Warrens 70 Billion Dollar Estate will pay little in taxes. Estate tax laws are always written such that lawyers and accountants can drive big estates through the massive loop holes. It is the moderately wealthy, often a farmer or small business owner, who gets zapped by estate taxes. Many a small business is sold to people like Warren when the families must sell to settle estates.

One of the ways estates taxes are avoided is by holding assets until death in order to receive a stepped up basis. The great grandson of a farmer may inherit land that has appreciate over a few generations from $10,000 to $10,000,000. Under the rules promoted by Buffet, the increase in the value is never taxed as a gain because the grandson receives the property at its current value. The US government receives no revenue on the increase in value. On the other hand, a few lawyers, accountants and insurance salesmen take a whack out of the proceeds and a charity or two might get a nice slice. The farm is likely to be sold not to pay the government but to pay all the other fees involved.

Billions, if not trillions of dollars are locked up in assets for decades in order to avoid confiscatory taxes of around 45%. The revenues to the government would rise dramatically if all gains were taxed at reasonable rates. A 15% tax on accumulated gains would raise huge amounts of money for the government while encouraging owners to find the highest and best use for those assets.

Taxes on the "little guy" could be lowered if the government were to collect from the rich instead of forcing the rich to make high priced lawyers all the more wealthy. The automatic response to the above sentence by the average citizen is along the lines of "it will be a cold day in hell before the little guy sees a tax break". It has been show that people are willing to ignore or even refute facts that are counter to their established beliefs. The fact is that tax rates on the "little guy" have been brought down dramatically as a result of lower taxes on the rich. Before the cuts made by John Kennedy, marginal tax rates on the wealthy were 90%. Before the cuts made by Ronald Reagan, marginal rates on the wealthy were 70%. Back in the days of Kennedy, the income tax game was similar to the current estate tax game, the marginal rate was high but no one paid the marginal rate.

Instead of looking up and getting into the exact numbers which would show the dramatic decline in tax rates for the average citizen, let me offer the fact that the top earners today pay a higher percentage of the taxes than ever before. For example, thirty nine percent of all income taxes paid are paid by 1% of the tax payers. Indeed, the bottom 50% of wage earners pay very little in income taxes. While it is true that the social security tax has increased over the years, it is the rich who are paying a higher percentage of their income in taxes. The high rates with built in loop holes have been replaced with moderate but collectible rates. The moderate wage earner pays more in social security taxes than he does in income taxes. On average, we will get his social security taxes back and then some.


The congress faces a quilt of absolutely crazy laws. If no action is taken, the estate tax exemption goes to about $4 million in 2009. For the year of 2010, the estate tax has been repealed. In the year 2011, the law is reinstated with a 1


The list of stock market buy signals continues to lengthen. When ever the spread between the rate on corporate bonds is high relative to treasury bonds, a big move in the stock market is pending. That is the situation today. Socks can go lower first but a short term decline, if it happens, will not negate the success of the buy signal. Good buy signals are for net moves of 20% or more over 6 to 12 months.


The signs of lower interest rates are also plentiful. For example the slowing German economy is a result of the fall in the dollar. Germany prospers as a strong exporter. The currency swing means that Germany needs lower interest rates. Bernanke said yesterday that he is watching head line inflation. Once the pending decline in food and oil begins, Bernanke will have no reason not to lower rates.


Millions of Iraqi refugees are moving back home. Peace is breaking out. The Mehdi Army has laid down its arms and is working hard to become a political force. The good folk at STRATFOR reported yesterday that there has been a significant thaw in US-Iran relations. PEACE IS AT HAND!


My family is staying at home for Thanksgiving. This will make two Thanksgivings at home in 19 years. Various family members have given various reasons for staying at home but I must wonder if gasoline prices were an underlying factor. If so, we are clearly in the same boat with many Americans. It is estimated that airline travel will be up 4% over the holidays but gasoline demand will be down about .6%. A point that I cannot make enough is that people are substituting email, phone calls, web postings and instant messages for gasoline. The savings are huge, inflation is dead!


Wednesday, November 14, 2007


Delta issued a response to the "merger letter". The company has formed a committee to investigate the best candidates for merger and it has hired business and legal consultants.


This report contains no news. It has long been known that Delta is "in the hunt". Later in the day, the president of DAL issued a statement that there are no talks in progress between DAL and UAUA.

CAL jumped $2.75 per share before cooling off this afternoon. It is still up about half as much. The old saw about buying the rumor can be profitable but extreme caution is warranted. CAL has large option positions outstanding with only a week to go before a chunk of them expire. By pushing up the stock on a rumor, the "big boys" can sell call options at nice profits. The stock is likely to trade very close to the "median option strike price" on next Friday, the third Friday of the month. Betting on the $30 strike would be a risky bet but that would be my guess. Of course, if you were quick on the draw with a penchant for gambling, you would have bought put options while the stock was up $2.75 this afternoon. The insiders have the huge advantage in this short term game. The president of the company might be very willing to cooperate to hype the stock a little to help out his investment banker.

Those with a long term perspective don't need to worry about the short term hype. The growth in air traffic is real. About 95% of CAL is currently owned by institutional investors, the stocks are in the news and the process of selling these shares to the public has begun. Those who are first to jump in will do very well, they will "tell the neighbors", the neighbors will make money too, at least for a while.


Several readers have asked me about the recession talk in the news. They sometimes have mentioned the Dorfman article that suggest one of the worst recessions ever is on the way. My opinion is that a recession is unlikely.

My key reason is that total compensation will rise about $500 billion in 2007. Furthermore, the inflation that Ben Bernanke is worried over is the "wage-price spiral inflation" that can take over during the economic boom of the prosperity phase of an economy. Bernanke is holding the fed funds rate about 75 basis points above the t-bill rate because he is trying to keep wages from rising too fast!

Of course, Ben thinks he has the fed funds rate at the perfect level right now. He is prepared to lower rates more if there are more economic problems and he is ready to stand pat if it appears the turn has been made.

A number of signs suggest that the turn is here. It took only a hint that Merrill would hire a new CEO and the stock soared. I do not recommend investment banks as an investment right now but it would be amazing for Merrill and Citi to replace their CEO's while suffering such a short period of pain.

By the way, the big write downs were probably political moves. One almost has to express sympathy for Charlie, Nancy and Harry. Here they were ready to tax carried interest as the source of funding to eliminate another bad tax, the AMT tax, when the carried interest profits disappeared! Wow, I know I sound like the greatest cynic of all time but it is amazing how "bad" the economy has gotten just about the time the congress is ready to raise all sorts of taxes. Of course, this might simply be a chicken before the egg story. The quote about cynics that comes to mind is that "diplomats are honest, well respected people who are hired to go lie for the best interest of their country".

Believe it or not, Bush is playing a strong game of poker and he holds the winning hand. He has Iran backing away almost as fast as Mrs. Pelosi. Congress is going to go way past its deadlines without finding the way to push through much in the way of new taxes. When the congress packs up and goes home (probably after coming back after Thanksgiving) the market should see a relief rally. The decks are being cleared. 2008 is going to be a good year for investors. NO RECESSION IN SIGHT!


A jump in airline stocks around 1 o'clock caused me to search the news. The Wall Street Journal put out a story at 1:11 that a hedge fund with ownership in Delta and United is pushing for a merger of the two. The company estimates the annual operating savings to be over $585 million. The company went on to suggest that a combination of CAL and NWA would also reap large rewards.

Because CAL is on a solid growth path, the management of CAL is happy to stay independent. However, if any other major combination goes through, CAL would probably act quickly to protect its turf.

Besides, I suspect that the $585 million savings is a bit of an exaggeration. All the major carriers have wrung out at least that much fat over the past several years. I expect cost to change direction and go up over the next several years. The good news is that revenues will go up faster than costs.

Record orders for new aircraft were once again set at the Dubai Air Show. These orders are for delivery in 2014. It is going to be a long time before capacity catches up with international demand. High demand and restricted supply will lead to high ticket prices and high profits. Mergers are not a necessary part of this story.

Please note that the hedge funds are pushing for a merger of equals trade, one where no cash is required. The surviving company will simply issue x number of new shares in trade for the outstanding shares of the company being bought. This type of combination is nice in regard to the tax angles. The risk are: 1) an incorrect relative pricing and, 2) a clash of cultures between the two carriers.

Again, the bump in prices was a result of speculation. It is nice to know that the investment community is now very interested in airlines. A few years ago, the consensus was that no one has or will ever make money buying airlines. We have reached the 90 degree turn but by the time this cycle is over the thought will have turned 180 degrees. Everyone will wonder why they had not bought airlines before.


Bear Sterns has stated that the worst of the sub prime crisis is over. A number of stocks impacted by this "mess" have bounced. Some say that firms such as Country Wide, Northern Rock and E-Trade will never recover. "They" may be right; these three companies and others may be taken over. My take is that those who keep looking for a major disaster can find "reasons to believe". The global warming crowd is a case in point. The science is not nearly as clear as the doom crowd would have us believe but those who believe in big government programs have financial incentive to believe. This is the same kind of phenomenon we get with Goldman stock recommendations, the recommendations are almost always wrong but, time after time, the company makes money on its trading activities. The company clearly does not follow its public advice. One of the reasons it is clearly time to buy airline stocks is that Goldman went from buy to neutral last week (just before the turn).


My 20 month old grand daughter, Jules, has a stock portfolio. We call it her ABC mutual fund because we intend to buy A through Z before starting over. The fund is all about education. We want this young lady to be a patriotic citizen, one who understands that people help other people when they make good products and sell them for reasonable prices. We want her to learn to have a long term view, to pay as little as possible in fees and we want her to get tons of company literature in the mail. Her first 6 stocks were AAPL, BIIB, CAL, DAL, ETFC, and GOOG. Her returns to date are 83%, 58%, -24%, -9%, -68% and plus 39%. Her average return is 13.1%. If we had skipped the E-Trade, her average return would have been 29.4%.

The management at E-Trade has strongly stated that the firm is well capitalized. Over the past two days, it appears that the "vultures" have started covering their shorts. In a few months, it is going to be clear to the world that the sub prime mess was not nearly as big a deal as it was perceived to be.

There are several indications that the worst of the housing related problems are over.

1) Reported pending home sales were higher than expected.
2) Lumber prices, after dropping for more than a year, have turned up.
3) The maximum write downs reported by the big holders of "sub prime slime" is less than half of one quarters banking profits.
4) The winners made what the losers lost. Companies such as Goldman Sachs made money on the short side of leveraged transactions.

A well know fact is worth repeating here; recessions do not occur during times of strong wage and job growth. Of course, near the end of a strong boom, when wage and job growth have been strong for an extended period, central banks find it necessary to raise interest rates to kill off inflation. The US Central bank has recently lowered interest rates twice, even while wage growth has boomed. The reason our central bank can lower rates during a time of rising employment and rising wages is because other factors are holding down the inflation rate. The naive focus on the price of gas while those in the know realize that the cost of a text message substituted for a trip represents a huge drop in inflation. The change in core PPI reported this morning was ZERO!


The following are a few of the key "hours on the economic cycle clock".

Down turn in commodity prices -- 5 O'clock.
Bonds rise stocks rotate -- 7.
Mid-cycle stock bottom -- 8.
Technology stocks peak -- 9.
Transportation stocks peak -- 10:30.
Market peak -- 2.

In this cycle 5 O'clock matches up to April of 2007, which was the date of the peak in industrial metals used in manufacturing.
Bonds have risen and the rotation in stocks has been taking two steps forward and one backward for many months.
Contrary to what the "inflationistas" predicted, bonds have risen to extreme highs. Seven o'clock has come and gone.
The market made a bottom and then came back and tested the bottom. Bottoms can only be called in hindsight but it appears that the "worst is over". Companies such as Bear Sterns have bounced off their lows. Unlike a regular clock, the economic clock can go backwards for a little while. It sure looks like we have passed 8 o'clock.
Technology stocks enjoyed a great run, got whacked and then took off again. AT least part of the crowd is playing in the after 8 o'clock cycle.

By the way, the peak in momentum will not mean the tech sector dies at 9 o'clock. The market boom, which will last until about 2 PM, will include lots of stocks and lots of sectors. Some sectors will do much better than others but many will participate.

Every economic cycle is different. This one has been distorted by the incredible growth in China, India and other emerging markets. This fantastic growth has not repealed the business cycle. Oil and gold have held up long after the turn in industrial metals. "Oil Inflation" was pushed into agricultural commodities when food stocks were inadvisedly used to produce fuel. The Chinese recognized the mistake some time ago and cut back on the production of ethanol. The Chinese are adding coal fired power plants at the rate of one per week so that corn can be used to feed hungry people. The turn appears to have come to agricultural commodities. It is too early to say for sure as the latest move down could be just a dip. The congress of the US just passed a farm bill that to expand payments to farmers even while farmers enjoy record revenues and profits. High prices have lead to increased production. As soon as a few more countries stop wasting food crops on fuel, the price of agricultural commodities will fall.

The potential for a big move is here. Declining demand for oil is being met with jerky growth in new supplies. A long list of "elephant oil fields" are under development. US demand for oil fell .6% in 2006. While US demand was growing during the first half of 2007, it has declined in recent weeks. The price of oil is destructing demand. It appears that the US will end the second year in a row with slightly less demand. Again, the flow direction of pipelines between the mid west and the gulf coast have been reversed. The increase in production from Canada has replaced imports from other countries. China has once again raised bank reserve requirements. Moderately slower growth in China could be the catalyst for billions of barrels of hoarded oil to flow back on the market. As noted in previous emails, now that the futures market is in backwardization, the incentive to store oil has been reduced and US inventories have been drawn down a touch. Still, the world wide total of oil in storage is still near all time record levels. Peace, which appears to be breaking out in the middle east, will take away about $20 to $30 per barrel in risk premium.


The Jules fund is basically a buy and hold fund. It is what is commonly known as a coffee can portfolio, large fortunes have been made using the "coffee can technique". She pays zero annual fees, zero hidden fees and virtually no brokerage fees. She has taken a hit on her ETFC shares but 20 plus years ago her mother took a bad hit on a stock that was later bought by UNH and that has grown to more than 130 times her original investment.

I believe ETFC will survive. If it does not, it will probably be purchased by a big bank. Wachovia recently added AG Edwards to its brood of brokerage companies. I disagree strongly with the fellow who recently said with great emotion that the business uses a flawed model. There is big money to be made in the Internet brokerage business. The irony here is that ETFC has suffered because it attempted to diversify away its risks. It is the lending business, not the brokerage business that hurt ETFC.

Like I said earlier, I believe the worst is over. Aggressive investors with extra money available should buy ETFC. It will likely take great patience to make big money. If a take over occurs, the price may be well below the old high but probably at least double the current price.