Friday, December 21, 2007


Brian Wesbury is right on target about a number of things. His work is available on the web, free of charge. He is a bit too hawkish as far as inflation is concerned but he is right that the US economy, with the exception of the housing market is on a big time roll. Yes, we all know that there was a housing bubble. Bubbles develop for a reason. Builders have been aware that the demographics are as good as they every have been for housing. Baby boomers are at the "move up, second home time" and echo boomers are at the "first home time". With productivity keeping interest rates very low, a lot of house can be bought for only a little money. At the same time, many of those who are 59.5 years of age have learned about the disadvantages of 401-K's and IRA accounts. With more and more people reaching the understanding that their tax rates will be higher in future years, more and more people are taking advantage of the "401-C". They are buying the bigger home or the second home and getting the benefit of income tax deductions while enjoying the "present benefit".

The constant news about the collapsing housing market is mostly hot air. More homes will sell in 2008 than in all years except 2004, 5 and 6. Sales will be down from the peak but sales will still be strong. Wesbury take the housing slow down out of the GNP numbers to show that the rest of the economy grew at about 6.5% this past quarter. The numbers already available for the 4th quarter show that there will be slower growth this quarter but no where near the negative growth that would mark the start of a recession.


Corporations are operating under the burdensome regulations put in place after Enron blew up. As a result, corporations have been forced to err on the side of extreme caution. As a result, mortgage pools that will ultimately pay off more than 95 cents on the dollar are being carried on the books at less than 40 cents on the dollar and pools that will pay off 75 cents or more on the dollar are being carried at less than 25 cents on the dollar. Don't hold me to these exact numbers (no one knows the exact numbers) but the point is that billions of dollars of write downs are happening that will result in billions of dollars or write ups next year.

The mistake investors will make is to focus on the ups and downs of the big financial stocks. Yes the Merrill's of the world will probably bounce but the time to buy these stocks was more than 5 years ago. Just because a stock has tumble 40% from its high does not make it cheap. If a stock has appreciated 400% over 5 years then a 40% decline leaves it at a high level.

Companies such as Microsoft, Ford and Wal-Mart have given low returns for 5 years. They are not bouncing around getting a lot of attention now but the cycle continues to move forward. As the over heated Asian markets cool, money will gradually find a home in big American companies.


For more than eighteen months, I have written that during the second half of the business cycle that commodities will roll over, that money being spent on high priced gasoline will be spent on consumer electronics, that American stocks will out perform international stocks and that large stocks will out perform small stocks. Despite delay after delay, I still believe these things to be true. I believe in the power of the law of substitution. I also believe that logic wins in the long run.

Tax loss selling is logical but pretty much over. The last few days of the year and the first few days of January should see a bounce in the stocks that have been hit hardest by tax loss selling.

Corn based ethanol is illogical. A University of Illinois professor has detailed the advantages of tropical maize plants over corn plants. To produce the big sugar bearing ears of corn, the plants must be fertilized heavily. Hundreds of square miles of water in the Gulf of Mexico have now become a "dead sea". Fertilizer runoff from the mid west has killed sea life up and down the coast near the mouth of the Mississippi. The tropical maize stalk holds 25% more sugar than a corn plant but requires much less fertilizer and produces much less side effects. Yes, sugar cane is an even better crop but Florida and Louisiana does not have the ear of the congress. Corn is being converted into fuel because of the political power of the corn farmers. But, what is said before is true, the law of substitution works and logic wins in the very long term. The key is that Americans need to "get the word". The average American has been brain washed by the "say it enough times and its true" mantra. The sad thing is that politicians on both sides of the isle win political games by exaggerating the truth. It is the job of Americans to discern the truth as best they can before the next election.


By understanding that the "housing credit crunch" is largely a man made exaggeration, you can appreciate that the current recession hysteria is just that. You can understand that the US economy is in the middle of a major boom. We are enjoying huge productivity gains, huge increases in personal wealth, huge increases in personal income, that are partially masked by a short term decline in home construction. In recent weeks, more new homes have been bought than have been built. Between now and the election, the housing fog will clear and the majority of Americans will suddenly come to the realization that big money is being made in real estate and in the stock market. BOOM, BOOM, BOOM!


Dick Morris believes that the Michigan will be the critical primary for republicans. He sees the moderate republican race to be between Rudy and John and he sees the conservative race to be between Mike and Mitt. He sees Mike as the champion of the social conservatives and Mitt to be the champion of the economic conservatives. Right now, the race in Michigan is a three way race between Mike, Mitt and Rudy with John in distant fourth. I believe the top four will survive Michigan but that only two or three contenders will leave Florida in good shape to score a win on Super Tuesday, February 5.

Obama is one of the smoothest politicians ever but despite his best efforts, the democratic race is still Hillary's to lose. Should Obama pull off a win in Iowa, Edwards voters, who are among the "anybody but Hillary crowd", will rally around Obama but Hillary has too many connections in too many states to lose easily.


In the republican race, the second choice of many voters is looming large. If Thompson drops out, who will benefit the most. If Rudy continues to fall, who will benefit the most. The betting sites still give Rudy the odds. The daily tracking polls show that Rudy is still falling. Should current trends continue, it will soon be a three man race between Mike, Mitt and John. The irony is that the dramatic improvement in Iraq has hurt Rudy and John relative to Mike and Mitt. The democrats made political hay off of Iraq in 2006 but now must rely on the economy for fodder. Between now and the election, many more people will understand that the surge worked and the economic boom will be in clear view. Under those circumstances, the odds favor a republican president and republican gains in both the house and senate.


Economic slow downs are inevitable. Incumbent politicians have some control over the timing of slow downs and the executive branch has the most power. The mid cycle correction we have just experienced did not need to be as severe as it was but, if you must have a slow down, incumbent politicians want to make things look very bad before "they fix the problems". The problems of this cycle are all being solved. On the other hand, the immigration problem has been left hanging because the most conservative of republicans believe they have a winning political issue as do the most liberal of democrats. It appears to me that the liberals are winning the game here. The percentage of Hispanics voting republican has fallen and will fall again. The right wing things they are right and are willing to shoot themselves in the foot to prove it.

Expect the final vote to be close. In the meantime, buy stocks. Day after day mouse clicks are being substituted for every thing from newspaper production to travel. The speed of a complicated response to a mouse click is as amazing as the concept of billions of stars. While we are incapable of fully understanding the power of the Internet that we use daily, we can surely understand that it cost us less to click on a word than to look the word up at the library. We are living through a marvelous time!

Thursday, December 20, 2007


After Lufthansa purchased 19% of JetBlue, one wonders what is next. The Chair of LUV says he is prepared to write a big check. He anticipates consolidation and he expects to be a buyer.

In the meantime, the cash infusion at JetBlue has not solved its problems. JetBlue was late in the game. The deregulation of airlines that happened in 1978 is basically over and done. After deregulation, companies like LUV cherry picked the best routes. They were able to muscle their way to growth because they did not have the heavy cost structures of the "legacy carriers". Today, the "legacy carriers" do not have the heavy cost structures of the "old legacy carriers". Today, the legacy carriers use feeder companies to go toe to toe with the discount carriers but these toe to toe flights give the customer additional benefits. Those who wish to connect or to pick up legacy carrier mileage or to make use of airport club facilities need to book with the feeder flights of the legacy carriers. JetBlue jumped in late a couple of years ago and appeared to be ready to become the next LUV only to find that the profitable model has changed once again.

While the LUV Chair talks about writing a check, the majority of the consolidation so far has been through code sharing agreements. These agreements allow the companies on both ends of long international flights to gain local market share while sharing the international revenue. In domestic markets, the little guys are starting to have a very tough time, but even so they have not welcomed take overs. MidWest fought long and hard to remain independent. It was able to stay semi-independent by allowing Northwest to become an investor. The deal between Lufthansa and JetBlue is a similar attempt by JetBlue to maintain itself as an independent entity.

When these deals are made, flight patterns change. Resources are reallocated so as to limit direct competition with ones "partners". No one would be surprised to see certain MidWest and Northwest routes to be altered after the deal was done. Because each of the legacy carriers is a member of an "alliance", routes are less and less likely to overlap one another.


After congress refused to allow the market to properly price landing rights, the regulation alternative route has moved forward. In the heaviest of markets, such as the New York area, the transportation secretary is working with the industry to limit congestion at peak times. The reported news in this area is all about how the government is granting the use of military air space during holidays. The more important point is that flights in and out of the area will be limited by regulation. When the availability of a product is cut back, the price goes up. For months we have known that over booking and delays in the New York area had to be fixed. In one way or another, the public has to pay the full cost of the service offered. The congress continues to allow the wealthy owners of 20 million dollar jets a cut rate price to land in New York. There is going to be a reduction of service in this area in the short run and in the long run there will be new slots available but at higher prices.


Hillary is still odds on to win the democratic nomination. A lot of ink has suggested that her campaign is in trouble but her national polling numbers have remained pretty steady. Obama may be slightly ahead in Iowa but Iowa is a small drop in a big bucket and a small win in the state will not provide a great deal of momentum. In my opinion, Hillary has been able to run to the right of Obama and Edwards without tying herself down too far to the left. By the time of the general election, she will sound like she is a centrist candidate and may even be able to pull off the trick of Bill Clinton who ran to the right of Bob Dole.

On the republican side, there is a real free for all in the works. New York limousine's for the girl friend and third wife of Giuliani seem to have turned the tide. Giuliani's numbers have been in free fall. The interesting thing is to note who is catching his leaking support. The Huckabee boom was the big winner early. Once Huck jumped into the lead in Iowa, the big media guns started blasting and Huck's momentum has slowed. In the most recent polls, McCain has been the beneficiary. Because Thompson has been on a steady swoon from right after the date of his announcement, Huck, McCain and Romney have all been gaining some ground.

While it is no surprise for South Carolina to support the preacher Huck and the military man McCain, the most interesting turn is happening in Florida. With half of Florida populated by retired people from Jersey and New York, it seems reasonable for Giuliani to enjoy a lead there, however, both Huck and Romney are seeing a major surge of support.

Romney has reportedly spent 10's of millions of dollars in Iowa and New Hampshire. Huck has an 8 point lead in Iowa. McCain is surging in New Hampshire but Romney is almost "playing at home" and is hanging onto a 9 point lead with much of McCain's surge coming at the expense of Giuliani. Huck is likely to win in South Carolina. Again, the Florida numbers are most interesting, it appears that Huck will pass Giuliani in a dramatic fashion, a combo of a surge and a collapse.

Huck would be in great shape with wins in Iowa, South Carolina and Florida, and third place in New Hampshire, Michigan and Nevada. On the other hand, second in Iowa and Florida along with wins in New Hampshire, Michigan and Nevada by Romney could make this a two man race. Romney and Giuliani still have the money edge, McCain has a loyal following and Huck has momentum. I believe that a good percentage of Thompson's supporters are among the anybody but Giuliani crowd. Should Thompson drop out or continue to lose support, I expect Huck will be the prime beneficiary. FAITH FAMILY FREEDOM!

Wednesday, December 19, 2007


The evidence mounts that the turn is here. Wouldn't you know the mountain of cash held by consumers in short term accounts has grown to the incredible amount of 7 trillion dollars! The situation is like a boy scout campfire where every boy has a stack of wood and the scout master is about to go to sleep early. How big is this fire going to be?

Over the past year, oil producers have spent a record amount of money developing oil projects. In the coming year they have budgeted an 11% increase. Oil producers will spend $369 Billion dollars in 2008. At the same time, the new CAFE standards are already forcing reactions by the car companies. GM just increased prices by an average of $1,500 per car. Consumers will be pushed by higher prices on small cars to consider expensive hybrid vehicles. Hybrids will be worth buying one day but mandates by the government are part of the "game of government" where members of congress "held their buddies" instead of doing what is best for the people. Those with the dough get the ear of the legislators.

Credit spreads are falling. The time to buy stocks is when credit spreads peak. We just saw the peak. With billions being pumped into the market by the ECB, spreads are falling. It is tough to read the credit markets at this time of year because all kinds of banks and companies that operate with as little excess cash as possible like to dress the books a few days before the end of the year. Cash is king until it is put back to work in early January. This is part of the reason for the January effect. So far this year, seasonal patterns have been broken time and again. Here again is the reason I believe in investing for the long haul. Short term moves work until they don't.


As we round the turn, the rabbit is out of control. He is jumping all over the place and getting very tired. He is ready to take a long nap. This is a time when the tortuous starts to win. In the stock market game, the tortuous can start to win by staying in one place or by backing up less than the others in the race. Relative strength should be sought out over the coming weeks. The jack rabbits are getting lots of attention but they are going nowhere. The break out will be strong once it is recognized by the majority. Yes, cycle have been stretching out. It seems to be taking forever for this cycle to play out but one by one problems are being "fixed". Peace in Iraq, a budget in congress, mortgage relief, money relief, and energy developments are all improving situations. Believe it or not, there is even progress being made in our relations with Iran.


New home construction is down to the annual rate of less than 800,000 units. Of these, about 300,000 are in existing neighborhoods or on empty lots. A significant number of these are tear downs. Old homes in good locations are sometimes torn down to make room for McMansions. The key point is that new home sales exceed new home construction. The turn is here. Even though the naysayers are still whining about the months of supply that are on the market, that supply is on the way down. Once potential home buyers learn that the supply is starting to fall, the pace of inventory reduction will quicken. Before the 2008 election, the home market will be "healed".


BCA Research has posted a chart showing the interest earned on the mountain of cash. In recent months the mountain of cash has climbed rapidly but the interest earned on the cash has fallen. Scardy Cats no longer have the luxury of seeing real returns on their savings. Inflation is dying and so are money market rates.

Last Night on Kudlow and Company the economist that runs the Carpe Diem web site was a guest. I cannot recall his name right now but the site is an excellent resource. Last night, he presented a chart that shows the old Milton Friedman discovery that money supply leads inflation by about two years. Based on this chart, it is clear that inflation is on the way down.


The earnings from stocks go up automatically when the inflation rate goes down. THE TURN IS HERE. YES, I SHOULD HEDGE AND SAY THAT THE TURN IS NEAR. So far this year, I am like the boy who cried wolf. I have been seeing the turn on the way for a long time. But this wolf is like a freight train. We can hear the whistle blowing and the chug, chug, chug is loud as the train approaches a mountain peak. The fog is thick so we cannot see if it is ready to crest the top but we certainly do not want to try to catch up once it is headed down the mountain. BUY, BUY, BUY

Tuesday, December 18, 2007


After a tough year in which more stocks are down than up, there is a lot of tax selling taking place. While It does often make sense to harvest tax benefits one must be very careful not to make big mistakes by tax selling right at a turn in the market.

The temptation to sell the biggest loser can result in selling a stock that is going to bounce big just when the bounce is about to take place. Under tax selling rules, you create a wash sell violation if you buy a stock back within 30 days of selling it.

At the turn, the stocks that have suffered the most are likely to be the ones that bounce the most. Here again, caution should be employed. Some of the sectors that did very well during the recovery phase will be the dogs of the second half of the business cycle. A stock that has dropped 40% in recent weeks may have already started its second half days of under performance. Keep in mind that at the start of the second half, most stocks will do at least OK for a time, however, the further we go into the second half, the smaller the breath of the market will be. In other words, toward the end of the business cycle, it will be primarily big companies that are doing best.

The good news for now is that Congress has largely at least temporarily given up on passing a long series of tax increases. The battle between the administration and congress is coming to a close without major damage. The central bankers have started force feeding money into the system. With the treat of fiscal policy problems out of the way, the central bankers face a less onerous task. The talk will continue about the threat of inflation, but inflation, which is a lagging indicator, will continue to grow at a slower and slower pace. The big "ethanol" food crunch will take a smaller bite out of food production in the coming months. Countries such as China have recognized the mistake of turning food into fuel. The Chinese government is now giving incentives to increase fuel production in other ways. The energy bill just passed by the congress does mandate the use of bio fuels but the big increase is mandated to come from non corn crop sources.

Lower inflation will allow the FOMC to supply ample money to the system. For the first time in a long time, we have a GO! from psychology, a GO! from valuation and a GO! from monetary policy. "Huston, all systems are GO! 10, 9, 8, 7, 6, 5, 4 ........"

Monday, December 17, 2007


I have posted a few interesting charts to a Facebook page. I hope you will take a look. The link is:


No, I am not talking about Morton Salt today. The value of the US dollar has reached the level where money is being poured into the USA. Indeed, the dollar has actually bounced off the bottom. For example, it currently sits at a 7 week high against the Euro. Meanwhile, Euroland is sitting on the lowest economic output it has experienced in 2 years. If there is going to be a recession, it will likely start in Euroland.

It used to be that we talked about Western Europe and Eastern Europe. Now, many of the old Western European countries outsource their labor intensive jobs to former Eastern European countries. A number of Eastern European countries are now members of NATO and they share the common Euro currency. As a result of the tremendous growth in the poorest of the eastern countries, Euroland has enjoyed above average world growth and the Euro has climbed a price mountain. It has reached the peak and started to descend the other side.

My guess is that President Bush's State of the Union address in January, he will propose corporate tax cuts to bring the US economy back into competition with Euroland tax rates. Since the consumer pays the majority of corporate taxes, in the form of higher prices, lower corporate taxes would be a welcome relief to shareholders and consumers alike.

Many Americans do not know that the USA is the "big manufacturer of capital goods". The public has been beaten over the head with story after story about jobs going over seas to the point that Americans now believe that we are only a service economy nation. As always, a story with an element of truth is an easy story to "sell". The growth of GDP in America and around the world is the service economy. Developed nations have gone through 4 different stages. The US was almost 90% and agricultural economy, way back when. Then we became the manufacturer to the world and most jobs were manufacturing jobs. That phase ended by 1950. By 1950, more people worked in non-manufacturing jobs than not, in America. For the next 35 years, it was the service business that grew the fastest.

During this stage of development, the story was sold that "service jobs are low paid jobs, such as hamburger flippers at McDonald's". Again, an element of truth was exaggerated and the public was mislead into thinking that moving to a service economy was a bad thing. The truth is that the highest pay is in service work. Doctors, lawyers, professors, securities analyst, sales professionals, baseball players, computer programmers, physicians assistance, chiropractors, psychologist, surgeons, dentist and the list goes on and on, are among the highest paid people.


In recent years, the growth in the US economy has moved toward a subsection of service that is best described as the knowledge sector. There is now a whole industry at work for the purpose of acquiring knowledge and selling the results. For the past few years, I have focused on the computer tech side of this industry but I see a time coming when the bio tech side of this revolution is going to be the exciting play.


As a result of the cheap dollar, we have been seeing some small drizzly storms turn into floods. For example, even though the growth in the USA has been in other areas for a very long time, we are still a manufacturing titan. In particular, we are the leading capital goods producer. Capital goods, as the name implies, require "big money financing". The USA has a comparative advantage in the manufacturing of capital goods. Of all the manufacturing jobs, capital goods jobs are the highest paid but still the cost of labor is not a big portion of the final cost of these products. Indeed, in many cases, industrial robots are often used to cut the manufacturing cost of capital goods products.

The biggest sector of exports of goods from America is capital goods. In the past year, capital goods exports have soared at the rate of better than 27%! The drizzle of dollars coming back to America is starting to look like a flood.


What will be the next major health care break through? Can we even imagine what it will be? When it comes, how much will billions of people pay for this life changing product? One possible example is a new memory drug. For many years, researchers have made progress on understanding the memory process. Years ago, fruit flies and snails were helped to achieve "photographic memories". These creatures are too small and too simple to remember a lot but the ones with improved memories did not need to see something twice.

Now, you many think that the memory drugs being developed are primarily for those who have developed Alzheimer's disease but this is not the real target audience. Suppose you could take a daily pill and never again forget someones name, would you buy the pills?

The answer to the question above, Will poor people buy billions of drugs?, is that poor people will buy trillions and trillions and wealthy people will buy zillions.


I posted a few diagrams on my Facebook page, including one showing the prosperity phase. We are moving into a time when "the little guy makes extra money". When everyone has a job, the life of the "little guy" is sweet. He can stay in the job he has and get nice raises or he can trade up to higher paying jobs. The extra dollars received are high powered dollars. They are discretionary dollars without a home. At first, a few of these dollars might be added to savings but when the future starts to look extra bright, why save for a rainy day. As the cycle progresses, consumers with extra dollars start to jump on all the "cool stuff". This is not your run of the mill extra stuff. It is not just new toys but every thing from tummy tucks to home theaters.


In the major developed nations, including the USA, most of Euroland and Japan, the average population age is rising. In country after country, large groups of people are in the baby boom category. Many of these folk are currently in a hunker down mode trying to build up their retirement reserves. When it becomes clear that "prosperity is here", look for billions of wealthy people to be ready to buy what they "need".

The bio tech area has been largely dead money for a number of years. The public went so crazy over this sector, during the mid 1990's that the hangover still hurts. The public has sold stocks and sold stocks in this area. I see a turn coming.


The daily financial news talk is all about the financial sector. One talking head after another tells about how Citi has dropped x percent from its peak. The financial "news" anchors ask one professional after another if it is time to buy financials. The answer does not really matter. The point is that the best investments are not into what is being talked about. For example, the best time to buy the oil stocks was in 1999 or 2000 when no one was concerned about the price of oil.


Bjorn Lomborg has given the global warming crowd a poke in the eye. He keeps coming back to give them a kick in the behind. Bjorn, the founder of the Copenhagen Consensus and the author of "The Skeptical Environmentalist" does not deny global warming. However, he suggest that we should do spend our money where it will do the most good for the most people. Given the facts, group after group, has compared the cost-benefit ratio of the Kyoto agreement to thousands of other problems and the consistent finding is that the global warming problem is a "bad problem" on which to spend time, effort and energy.

In the coming years, private industry will discover a number of great medicines. The world is changing fast. Did you know that many experts believe that a baby born today will live 135 years?

This will happen because "good drugs" will be discovered. As one who has always struggled to remember names, I would pay a tidy sum for a "brain Viagra drug". What new medicine would you like to see? It is estimated that 28 million HIV carriers could be saved for 27 Billion Dollars. Should we spend two trillion dollars trying to prevent the earth from warming a degree or should we save 28 million people and then use the remaining 1 trillion nine hundred and seventy two billion dollars left to attack other problems? Even if the earth warms a degree over the next 100 years, the damage in today's dollars will be small relative to the 28 million HIV carriers that could be saved now. With only 13 billion dollars, it is estimated that half of all the malaria cases in the world could be prevented within 3 years.


Innovation thrives on wealth. If there had been no wealth to buy it, the Apple IPhone would never have made it to market. The world is awash in wealth like never before and this is at the start of the prosperity phase of the business cycle. You are likely to live to see some things that you currently believe to be impossible. You have already lived to see the records of Babe Ruth fall. When the juiced youth of today grow up, Barry Bonds record will be a joke. While I do not condone the use of steroids, I do not believe that improving physical capabilities is a bad thing. One might argue that God did not intend for man to live 135 years or to have the capacity to smack a thousand home runs but one can also argue that longevity and ability are gifts from God.


High on the Bjorn Lomborg list of problems that have attractive cost benefit payoffs is the problem or lack of free trade. In the USA we constantly shoot ourselves in the foot in regard to free trade. We are the bread basket of the world but we subsidize our farmers which makes their products not eligible for the world market. In the long run, everyone wins from free trade.

Last night I viewed an online video called "Milton Friedman's Pencil". I hope you will take the time to find it and view it. The bottom line of the story is that the cooperation and coordination of thousands of people is required to make a pencil. These activities are directed by the free hand of Adam Smith.

The point of bringing up free trade today is to emphasize again that we live in global age where even the poorest of people are acquiring wealth to spend. Good health is a priority even for the poorest of the poor. Give them a few extra bucks and invent a pill or procedure that will solve a health problem and the money will flow.

It is time to buy, buy, buy the companies that will soon bring to market health care innovations. A lot of people are at the jump off point to old age. They will buy everything from new eye lenses to new knees to new memory pills.

Saturday, December 15, 2007


Americans are selling stocks at the wrong time. According to AMG Data Services, in the month of November, the public cash out a net of 12.8 Billion Dollars of equity mutual funds and they bought 7.6 Billion Dollars worth of bond funds. WHY? BECAUSE THEY HAVE BEEN BRAIN WASHED INTO BELIEVING THERE IS A RECESSION HERE OR ON THE WAY!

In truth, the economy is breaking out on the "high side". Recent figures show:

1) retail sales are booming,
2) industrial production growth is very strong,
3) bank loans to business are soaring,
4) wages are soaring,
5) employment growth continues even with the unemployment rate at 4.7%,
6) tax receipts are soaring.

Mark Perry, an economist that writes the carpe diem blog, notes that industrial production normally turns down several months before a recession starts. As I reported earlier, the USA is the monster nation in regard to the manufacturing of capital goods and capital goods exports grew better than 27% in the past year. No recession in sight!


Consumers are enjoying plentiful jobs and wage increases. The USA has enjoyed 51 consecutive quarters of job increases and we are just entering the prosperity phase of the business cycle. In the years ahead, consumers will buy big ticket items. The home market may take a while to catch on fire again but you can expect to see a lot of new cars, boats and big screen TV's. Health product sales are also seeing a sharp rise. You can expect to see a lot of people electing to have elective surgery such as Lasik eye care.


IBM and Google have joined in a game changing new technology. About a 60 to 100 years ago, there were thousands of small electricity plants scattered all across the country. Even small farms might operate a small generator. Once the big power companies ramped up to scale and built the transmission lines it made all the sense in the world for the little plants to shut down. The law of comparative advantage says that a dairy farmer should spend his time taking care of cows, not tending to small scale generators.

Today, there are thousands of data centers across the country. Yahoo, Amazon, Google and Microsoft operate massive data centers that are linked by super high speed networks and that are backed up at multiple sites. Few people know for sure how many data centers Google operates but this past year they added 4 new super centers at a cost of 600 million dollars each. These centers have the power to do stuff that smaller data centers cannot do. IBM and Google have teamed up to offer super fast computer services to universities and businesses all across the country.

It is difficult to describe the power being offered. These centers are called "cloud computers". A company in California might use hundreds or even thousands of computers that are "out there in the clouds somewhere". One of the keys to "cloud computing", according to a BusinessWeek article, is the MapReduce program that is at the core of Google's system. This program splits one task into hundreds or even thousands of mini tasks. When you hit a button to search for a keyword, the response of several computers is compiled into a list and shot back you in milliseconds. The power of today's computers is as awesome as knowing that there are trillions of stars.

Investors should know that IBM is a "second half business cycle stock". They should also note that a lot of small data centers will bite the dust over the next several years as more and more companies take advantage of the economies of large scale.


Two of the most successful "new kids on the block" have been VM Ware and Wikipedia. Microsoft is cranking up its virtual computing software 6 months ahead of schedule in its attempt to stem the growth of VM. Wikipedia has seen compounding traffic growth and is in the process of developing a search engine to compete with Google. Google has countered with a new "knol" (for knowledge) program. One and all will be encouraged to write a "nol" about any subject and share the advertising revenues with Google. Even those who have been loyal but non paid contributors to Wikipedia may want to cash in on a Google revenues stream.


Google continues to add apps for Apple products. The most recent Google program added to the iPhone is the Picasa photo sharing app. In the meantime, polls reviews and polls are very favorable toward Macintosh Computers. The operating system wins praise from users. The problem is that both Google and Apple are in the news and as popular as can be. They both are priced at better than 50 times trailing earnings. The stock returns could easily be below average until the next great product proves to be yet another hit. One stumble could send prices down hard.

In the phone segment, Nokia continues to roll out phones with nice features. The new WiFi enabled Nokia phones have hotspot@home software. This means the phone automatically switches to a free call Internet based phone when it is in reach of a wireless router. Those who want high speed Internet on their phone should avoid the Apple IPhone for now. The offerings of "ultra mobile" computers is getting all the more interesting. Samsung's QIU-XP is one of the top ranked tablet computers that includes phone features.


I understand that Merck is making its third attempt at getting approval for an over the counter statin drug. I know very little about this business but my initial reaction is that an awful lot of people take a small dose for year after year. It seems reasonable that they be allowed to buy over the counter or at least like the English system of directly from a pharmacist. Comments are welcome.


With Southwest and JetBlue changing from discount carriers to "members of oligopolies", the new times are here in the airline business. The only reason LUV and JBLU are changing their stripes is because going it alone with price being the big draw is no longer a profitable business model. The turn is here. In the old days, before deregulation in 1978, the "big boys were protected by regulations". Deregulation put a long list of airlines out of business, including Pan American, TWA and Eastern. LUV went from nothing to super big. By 2002, the market value of LUV was 4 times as much as the other top airlines combined. Since 2002, LUV's share price has gone from $17 to $13 while the price of CAL went up 500%.

LUV was recently forced to change their business model to the "legacy carrier model". JBLU has also suffered recent setbacks and it joined the "legacy carrier model" this week. The number of partnership deals is growing by leaps and bounds. Only airlines with extra special circumstances can prosper as "go it alone carriers". Most of the "partnership deals" being made are code sharing agreements of one type or another. Singapore just announced a flight from China to Houston. I do not know the details of this agreement but while the public is likely to see the flight as competition to CAL, the public does not realized that the US trade agreement calls for an equal sharing of passenger growth between the two countries. Put another way, it does not matter who brings in lots of passengers to a major CAL hub, many of them are likely to leave Houston on a CAL plane. When all is said and done, fares will rise as a result of these "partnership agreements".


The dollar rallied this week. It now only takes $1.44 to buy a Euro that was pushing $1.50 just a few days earlier. At the same time, the international stocks, especially developing nation stocks took a hit. The BRIC index was down better than 4% on Friday. The turn is here. It sure did take longer to arrive than I thought it would but it is here.


Friday, December 14, 2007


Nancy Pelosi has declared victory! The house got what they wanted, an increase in CAFE standards and an increase in the mandated use of bio fuels. I may have missed the declaration of victory by the Bush administration. The administration got what it wanted, the elimination of tax increases and the elimination of forced alternatives to the power companies. This is the nature of politics. The special interest won subsidies and campaign contributions while the worst of the provisions were scaled back. Forty one votes in the Senate held off the most onerous of the prior bills provisions.

The CAFE standards will force a reduction in the use of gasoline. The CAFE standards are not the solution to the problem but they will serve as a band aid until the solutions are put in place. Since the CAFE standards will slow the bleeding, they will remove some of the pressure to find the final solution. Still the reduction in demand will be real and fuel prices will decline just in time for the election.


The big inflation numbers hit the level reached in 1995. As you know, the last mid cycle turn happened to hit in the middle of the 1990's. Since inflation is a lagging indicator, it is no surprise that the inflation numbers are high at this mid cycle turn. Airline fares were among the the big increases last month. Fares increased by 2.6%. No, they will not go up by 2.6% every month of the year but monthly increases compound prior increases. If fares were to continue to rise at the current rate, the annual rate the simple average rate would be 31.2% . No, I do not believe the rate one year from now will be more than 7 or 10% higher than today's fares but whatever the increase, much of the new money will flow to the bottom line.


Bernanke has taken a lot of grief for moving too slow, but, as noted before, monetary policy is sometimes used to influence fiscal policy. This is one of those dirty little secrets that no one in power has any reason to admit. The game of power politics is played by both sides. The fact remains that the second half of the business cycle requires the FOMC to play a tough game of defense to fight off inflation. The second half, when unemployment remains low and when most productive capacity is in use, the pressure on prices will remain. The good news today is that there is one more reason for the FOMC to "let up". The deal on the energy bill has been made. The power play is almost over. The congress also passed a one week continuing resolution after a budget deal was reached. Bush will get something like 50 to 70 billion to fund the war and the democrats will be allowed to spend about 7 Billion as "emergency spending". This means they will break pay go rules twice, once to pass the AMT and once to spend 7 Billion on pet projects.



Now and then we see game changing events. Sometimes we do not recognize these events until they are over. Sometimes, events that are perceived to be "game changers" fade into history as 15 minutes of fame.

Last year, when JetBlue suddenly went from a fast growing discount air carrier to a carrier with problems, it looked like just another story in a long line of "problem stories" in the airline business. Since that time, Southwest Air, by far the most successful of the discount carriers, has started changing its operating model to one in line with the major carriers. In other words, the discount airline business has enjoyed its 15 minutes of fame (it lasted about 25 years but still just a flash in history), but deep discounting is dead.

Yes, I have heard about SkyBus. SkyBus is offering flights for as little as $10. The problem is that the major airlines have revamped operations to the point that in one way or another they are able to match the discounts while giving other benefits. Those who fly frequently are in effect paid to fly on the major airlines or their subsidiaries.

Yesterday, JetBlue sold 19% of the company to Lufthansa. JetBlue sold out cheap. The 300 million purchase was at a 16% premium to the most recent price of the stock but still at a discount to the high flying days of yesteryear. There has been a "paradigm shift". To be successful, airlines have to avoid putting too much capacity on their routes. The discount model was to go find a route with heavy traffic and "win with low price". As any business should know, all sides lose when a price war is fought.

Yesterday, I mentioned the word oligopoly. The rules under which the airlines operate allow them to form "mini oligopolies". The deal just pulled off by Lufthansa illustrates the point. Lufthansa already is a partner with US Airways and United. All three of these major airlines are members of the Star Alliance. Suddenly, JetBlue is going to be careful about avoiding competing with US Airways and with United. Partners do not take business from other partners. In like manner, US Airways and United now have reason not to compete directly with JetBlue.

A reader points out that I might have been showing a little bit of "irrational exuberance" when I said that fares will double in 4 years. He is probably correct. Some fares will more than double but the average fare will be held down. Still, during the late stages of the business cycle, big business will not hesitate to pay double or even quadruple the current fare to get their people to the deal table on time. The "road warriors of business" are highly paid people and they will not put up with being jammed in a small coach seat on international flights. It is one of the ironies of the business that the number of seats per plane loses out to seat size on the routes of highest demand. The bigger the seats, the bigger the fare partly because the bigger the seats the fewer the seats. United and others are currently adding "lay down" seats on long haul planes.


In the lab, scientist have been able to "fertilize" microorganisms that have the sole function of eating oil and spewing out natural gas. The result is that the natural process is faster by at least 1000 times. I believe this discovery is the equivalent of the day the first Indian purposely placed a fish in the ground with his maize seeds. Since that first fish, the amount of corn grown on an acre of ground has been increased by a factor in the 100's. At a time when politicians and citizens are in love with converting food crops to fuel, we leave 83% of heavy oil in the ground. I am talking about oil wells that have been discovered and "pumped dry". There are certainly trillions of barrels of oil that is still in the ground (the "t" is not a misprint).

Clean burning natural gas is being constantly produced deep within the earth. The USA has been expanding its "harvesting" of natural gas being produced from the trillions of barrels of shale oil in the rocky mountain area of the USA. The push to convert plant life to gas is a far more complex process than to convert hydrocarbons to gas. Can you envision the day when liquid fertilizer is poured into coal mines and clean gas comes out some pipes? I can!

Learning how to scale this process will take years. This is not a quick fix but it is likely to be a game changer. It is silly for the US to waste billions of dollars on projects "targeted by congress and the president". The company that brings the best technology to market is going to reap rewards. The incentive to innovate is already present.


During the prosperity phase, for the next 4 years or so, health care innovations will get rewarded. I ask for input from you to help us all discover what these innovations will be. One reader has written about a robotic surgery company. I need to study this one. I was initially put off because of its price but these machines are revolutionizing delicate heart surgery. The leading edge of the baby boomers are getting old. A 65 year old man uses 7 times the drugs of a 45 year old man. A 65 year old many typically has savings to spend whereas a 45 year old man is probably paying college tuition.

Bausch and Lomb sells a new eye surgery robot. It is able to replace an eye lens through an incredible tiny slit. A person can have his lens replaced on one day and be back at work on the next. I don't know the precise numbers but my educated guess is that 75 year old people are at least 100 times more likely to have cataracts than are 55 year old people.

Did you know that reputable scientist say that a child born today is likely to live to be 135 years of age. In David Andrews latest book he mentions that one of the big mistakes of investors is to assume a short life after retirement. At least one member of a healthy couple at the age 65 will live another 30 years. A lot of heart surgery and lot of cataract surgeries will be done in the coming years (unless a drug is produced that will cure a lot of heart problems).


The prosperity phase is the time when new, very expensive drugs, are readily bought. The drug industry has been pounded hard over the past several years but its time is coming. A lot of my readers are in the industry and they know 1,000,000 times more than I about the pipelines and details of specific drugs. I hope they will respond with comments to the extent that they can. I do not look for inside information or for trade secrets.


I have harped on the innovations that are in the works in regard to mobile computing. Google constantly reminds me of the early 60's when the Xerox process was already invented and the factors were already under construction but the machines were few and far between. Those who got on the high priced horse and rode it for dear life made a lot of money. We are just now into the "innovation pays" part of the business cycle. Yes, innovation can pay off at any time and we have already seen dramatic cost cuts as a result of innovation during this cycle. However, the big bucks are to be won in the next few years.


A lot has been made about how many engineers are graduating from Chinese "Universities". The fact is that many of these engineers are graduating from 6 month courses. I will be the first to tell you that there are millions of very smart people in China but America continues to bring forth many of the great innovations. Ironically, some of the top scientist in America are from China. One of the reasons I get so upset about Americas failure to resolve the immigration crisis is that immigration has always been one of the open secrets to our great success.

In any event, we are still the innovators of the world. Investors who find the "next hot technology" will do well. My word of caution is that jumping on what is already hot can lead to dramatic loss if the hot technology is topped by an even better innovation.


Facebook is a potential game changer. Google faces a serious challenge from FaceBook. I recently opened an account just to see what all the fuss is about. I can see huge potential for businesses, churches and all other groups or organizations to make use of this innovation. The more I use Facebook, the less I will use Google. Those who own shares in Google have to be at least concerned about a price ratio in the 50's when there are new technologies around. Don't get me wrong, I am still a huge Google fan. My point is that you have to look at the whole picture.


The policies of our government include a positive subsidy for buying a bigger house and a negative subsidy for buying eye surgery. We tend to fuss about the high cost of health care but don't mention taking away the tax break for buying an extra couple of bedrooms and baths. There are billions of non productive assets being created in America because of silly tax policies. One of the laws of economics is that bad money is substituted for the good. This works until the need for change is recognized by a significant majority. This is similar to the rule that price cures price, the price of oil can only go up so much until people find alternatives, the subsidy for extra large houses can only go so far until you have the irony of John Edwards campaigning as a champion of the poor while building a 28,000 square foot home.


One trend that is in the early stage is the move to downsize downtown. Marilyn and I plan to move to downtown Winston-Salem in a few months. We will join millions of other retirees across the country who are buying smaller places that are within walking distance of downtown amenities. I urge you to use caution before buying the "big house in the suburbs". Several tax bills have been introduced into the house ways and means committee that would cut or eliminate some of the subsidy for home ownership.


Thank you once again for reading. Please remember to recommend my free letters to your friends. My goal is to help people. I need your help to find those who might benefit from reading my views. Thanks ever so much!

Thursday, December 13, 2007


CAL is siting on its 52 week low despite the tremendous turn around story. Seldom do you get the chance to buy a stock at less than half the market PE ratio when it is about to move into the best of times for its business. Fares will go up and up as business travelers "crowd out" the casual flier.

In a filing with the SEC the company reports that "demand is strong" and that advance bookings are well ahead of the same time last year. CAL honors the price of advance bookings. Therefore, with fares going up multiple times each year, regular passengers are booking further in advance. Advance bookings make the task of maximizing yield much easier. For years, Marilyn and I gave very significant discounts to repeat customers who booked their beach condos early. The beach condo business is a first cousin to the airline business. We were able to dramatically raise our rental rates during the "prosperity phases of the business cycles. I do not have the precise numbers available but Marilyn and I still laugh about how psychologically tough it was when our weekly rate for a big condo went above $1,000. One of our partners said that we would never be able to rent the condos for $1,000 per week. A few years later we rented the same units for $3,500 per week. This is what is about to happen in the airline business. A flight from NY to Huston has gone round trip from $400 to $2,000 at the peak all the way down to $150 if you searched the internet and now back to $400. This fare will go back to around $2,000 per seat at the peak of demand.

Airline seats, like condos, are wasting assets. Once the plane takes off with an empty seat, the revenue has been lost forever. If a furniture store misses a sale, it still holds the inventory for the next sucker to come along. The airline business is tough in the sense that the full price of the product is lost if not sold. On the other hand, during times of peak demand, that seat is a one of a kind master piece. If the customer at the furniture finds his chosen purchase is sold out, another piece can be ordered. The furniture does not have the same type of time and place utility as the airline seat. When supply is limited, the high bidder gets the seat and the other fellow stays home or takes three legs and a full day to make a 3 hour flight.

CAL reports that fuel cost have increased 13 cents since its October forecast. The new estimate is $2.48 cents per gallon. A top analyst reports that fare increases on international flights has totally off set the additional fuel costs. Earnings for the next quarter will be down because domestic fares are determined by discount domestic carriers. Please note today's purchase of 20+ percent of JetBlue. The domestic carriers are scrambling for international partners. The domestic carrier with no long haul flights to feed is going to have a very difficult time in the years ahead.


I have run but the consolidation continues. Deals are getting done such that "oligopolies" are being legally formed. JetBlue is just the latest example. CAL partners with 227 other airlines. AMR just made a deal with the big Israeli airline. A lot of cities will be connected to Tel Aviv though this partnership. AMR will share in the traffic generated. The international boom is just getting started. CAL gets 47% of its revenues from over seas!



I have been asked a few times in recent days if the "market has reached the bottom"? How does one know when a bottom has been reached?

Ed Yardeni has presented what I believe is a good bottom measuring stick. When mortgage rates were extremely low and credit was readily available, from 2003 to 2007, more than 5 million sub prime loans were made. RECENT DATA SHOW THAT MORE THAN HALF OF THESE LOANS HAVE BEEN PAID OFF. The great majority that have been paid off were paid off by refinancing to a fixed rate mortgage. The unsophisticated borrower was talked into taking out a variable rate loan when interest rates were low and they were talked into paying extra fees to convert to a fixed rate loan after interest rates went up. Freedom has been worth the blood of millions of Americans. It is a real shame for people to not educate themselves to take advantage of what freedom has to offer.

Take a look at the price of a building lot in your area and I believe you will find its value has increased by at least 100% in the past 6 years. Americans have once again set a new all time record for net worth. The net worth of Americans is now 58 Trillion Dollars. Government data this morning shows that the GNP this quarter is going to be better than what the gloom and doomers believe.


One regular reader mentioned the concept of perception versus reality this morning. Perception does move markets in the short run. The long run is what counts. Today, the public is confused. About half of all people in the USA believe the US economy is in recession. We are living through the greatest world wide boom in history but we do not know what to believe.


Another reader asks if DAL is making money. The answer is similar to the story of the other international carriers which lost lots of money in 2002, 2003 and 2004. Black ink has have returned to the the DAL bottom line. Of 28 analyst who follow the stock, the average expectation of earnings is $1.14 in 2007 and $1.37 in 2008. The $1.37 number is remarkably low. The crazy thing is that the forecast is for $.36 in the last quarter of 2007, .36 in the first quarter, $.37 in the second, and only $.42 in the third. I am willing to eat my shoe if the earnings spread between the second and third quarter is not more than $.05. DAL chucked a couple of billion dollars in annual costs by going through the bankruptcy process. The company is making money with fuel prices at unsustainable levels. If oil prices stay so high, all the more trips will be made by "sky bus". The price of oil will hasten or delay the date that big dollars flow to the bottom line but, in the long run, fuel prices are unrelated to airline profits. If they were then airlines would have made lots of money in 2002, 2003 and 2004 and would have lost money in 2006 and 2007.


The bottom was reached in airline stocks three years ago. The current dip has been brutal but that is all it is, a dip on the way to great profits. The average airline fare will be about double the price in three or four years. All the extra being paid will flow to the black bottom line.


So what! I will never forget how strong the consensus of opinion in regard to buying bonds during the early 1980's. Bonds had declined in value for the prior 10 years or so. People hated bonds. They had to be pushed hard to buy a true bond. Tying up money for 30 years was seen as foolishness. Those who "locked-in" government guaranteed rates of about 14% for thirty years saw the value of their bonds soar. Investors want to do what Goldman and Merrill do, buy what others are selling.


Enduring this long drawn out mid cycle correction has been no fun. I am thankful that it is finally coming to the end. I believe it was more than a year ago that I wrote about how the word recession would come up often when the turn was upon us. At the time, I had no idea it would take so long.

In the past several days, "big houses" such as Merrill Lynch and Morgan Stanley have called for a recession just ahead. Whether there is or is not is not the important point. I do not believe there will be an official recession as the definition has historically been two consecutive quarters of negative GDP. In the most recent quarter, we saw growth of 4.9%. Growth in the current quarter will probably fall to about 2% but again, even if it goes negative investors should remember that stocks typically go up before recessions are known to have been. In my humble opinion, the current political game being played by the congress and the president is the fly in the ointment. The congress simply refuses to pass the budget without several tax increases and Bush has refused to accept a budget that includes tax increases. The congress is likely to pass a one week continuing resolution but even so the budget needs to be passed this week.

Here again, the exact compromise reached is not so important to the markets as is just moving forward. The one thing markets hate the worst is uncertainty. As always, it is the waiting that is worse than the problem. I believe the 5+1 nations are purposely playing a game of "good cop--bad cop" with Iran. The Chinese and the Russians have alternated in the role of good cop and the US, France, England and Germany have taken turns being the worst of the bad cops. While the 5+1 take forever to decide what the next round of sanctions will be, Iran is left to stew but then is given a bone by Russia or China. The methods being used are nothing more than the "carrot and stick" approach.

I have followed the actions of the "big boy investment banks" long enough to know that they tend to make out like bandits during the toughest of times. Indeed, Merrill Lynch does a lot of advertising during the tough times because accounts move when they are down in price. Of course, I am not accusing Merrill Lynch, Morgan Stanley or any others of doing illegal acts. It is simply an observation that Goldman in particular is good at buying big when the markets are low. When ever the "big boys" are talking about recession, you can bet your boots that their trading desks are buying a lot of stocks.

8,000,000 SHARE OF CAL

Yesterday, more than 8 million shares of CAL were purchased. This volume was about double the norm. While I do not believe that anyone can pick exact bottoms well, the action yesterday looked an awful lot like a "blow off" or "capitulation". Wouldn't you know that Merrill raised its 2008 price target for oil to $90 per barrel yesterday. This $10 increase is to come in the first year of significant new supplies coming on line and the first year of significant conservation. The number of rigs drilling for oil went up dramatically from 2002 until recent months. Now that a number of large reserves have been discovered, the drilling activity to decline. Development wells will still be drilled, one right after the other, but these wells are in know oil fields. These wells are not looking for a needle in a hay stack. The drillers already know the oil is there. My memory tells me that there are only about 340 active rigs in Saudi Arabia. There are about 1,400 in the USA. Here again, the Saudis are not searching far and wide for oil but steadily drilling in known fields.


CAL is a very cheap stock. The analyst who now assume that the economy will be slow next year and that the price of oil will stay at extreme levels have typically reduced CAL's projected earnings to around $3.75 during 2008. The stock is selling for less than 7 times earnings. It is selling at only .2 times sales, 2 times book, and 2 times cash flow. Cheap, cheap, cheap.

The contrast to a stock like Apple makes one almost dizzy. Apple trades at 49 times earnings, 7 times sales, 12 times book, and 42 times cash flow. Google has interesting numbers as well. It trades at 56 times earnings, 15 times sales, 11 times book and also at 42 times cash flow.

Some 25 or 30 years ago, I got a good chuckle when Peter Lynch said that a stock with a PE of 40 would be worth something by the time Cher became a grand mother. I bet Warren Buffet would not buy a stock trading at 49 times projected earnings even if you held a gun to his head.

The key numbers that bring some rationality to the prices of these stocks are the profit margins and sales growth. CAL has a profit margin of 3.35% and a sales growth rate of about 8%. Apple enjoys a profit margin of 14.5% and sales growth of 24%. Google is the prize of the bunch. It enjoys at profit margin of 26% and it is growing sales at the rate of 60% compounded or better year after year!

The key question in regard to these companies is, "do they enjoy a moat" in Morningstar terms or in Warren Buffet terms, "do they have a sustainable competitive advantage"? A tricky question but if I had to choose one of the three for having the most powerful competition, I would choose Apple. Companies like Texas Instruments, Nokia, Samsung and Motorola are constantly bringing out new and better phones. Staying on the top of the phone heap is going to require constant innovation.

Google faces lots of complex challenges on lots of fronts. For example, Google only has about 28% market share in Russia. One of the reasons it has struggled in Russia is because credit cards are not very common. Google has lots of "little" issues to tackle. Still, I believe mobile search will be more than half of Google business in just a few years. Google is going to more than double its revenues on desk top computers while it brings on phone revenues of several times the size.

CAL has built a substantial "moat". Forty seven percent of its flights are international flights. Many of these flights are the only direct flight available. The flights are on the newest fleet among its competitors with planes that get 15 to 40% better mileage. The company has the most sophisticated reservation system in the business. Customers at 227 airlines buy one ticket that includes the CAL leg or legs of their flights. CAL has the reputation among the high dollar business travelers as the best in the business. The moat CAL has built around its Liberty New Jersey Hub is most impressive of all. CAL operates the only true international hub in the New York area.


I have always been up front about my long term approach. I started buying CAL when it was around $6 a share in 2002 and it has been a good investment. I still project it as a $150 stock before this cycle is over. I certainly wish I had know it was going to trade dramatically lower during 2007 but the exact path the stock takes on the way to $150 per share is not so important. Yesterday, the FOMC, which has been dragging its feet, waiting on congress, announced new measures to provide liquidity to the banking system. In someways the new measures do not amount to much but are a way for the Bush administration to be able to say, "we did our part". The pressure is still on the congress to act. On the other hand, the new program will pump $20 Billion of reserves into a banking system that only has $44 Billion of free reserves. Free reserves are powerful dollars.

Still, the FOMC must eventually take the brakes off and let the Fed Funds rate float down to the 90 day t-bill rate. Of course, the t-bill rate is not a static number but right now the FOMC could cut fed funds by 100 points and still be well above this market rate.


In prior letters I told you that company insiders have been buying heavily. This is one of the strongest indications that stocks will be a lot higher in 6 to 18 months. Today, Goldman Sachs announced a new $30 Billion Fund. Goldman and partners have raised a lot of money so that Goldman can work its magic. I am sure that Goldman will earn fees as the manager but that a chunk of the money belongs to Goldman. THINK ABOUT WHAT JUST HAPPENED! Goldman was busy doing IPO's a few months ago. It was earning big fees by bringing selected companies to market. Now it is focusing on the "buy side". It will use the $30 Billion to do leveraged buyouts. The total value of the companies it will buy will be huge. If we assume that the company will put up an average of 10% in cash, (probably less than 5%), the $30 Billion would buy $300 Billion dollars worth of stocks.

BUY LOW SELL HIGH. You many not have money available to add to your account right now, so it may seem difficult to buy low. The truth is that stocks go up and up and up over time. A few years from now, the "correction of 2007" will look like a dimple on stock charts. The compounding effect will take over and boost all accounts that hang-in through the tough times.

Wednesday, December 12, 2007


On the 11th day of December, the congress has not passed a budget for the fiscal year that started October 1! A few hours ago, they kind of started over. The good news is that they will strip out about 10 Billion Dollars worth of ear marks. The bad news is that they will continue to pay off their "friends".

The limit being set for rich farmers is a maximum subsidy of $750,000 for full "timers" and $250,000 for part time farmers. Not a bad gig if you can get it. The same bill will force consumers to buy 36 Billion Barrels of bio-fuels per year. The United States Government owes about 800 Billion Barrels of easily mined Shale Oil. It is not politically correct to use this oil but instead we will throw out enormous quantities of pesticides, fertilizers and water while jacking up the price of food. Poor people will starve but the politicians will take credit for reducing the price of oil. The total amount of shale oil in the US is estimated to be around 2 trillion barrels but it would be much more economical to drill for another trillion or so barrels of conventional oil still in our territories. It is simply amazing that China is drilling for oil withing 100 miles of Florida but congress will not allow US companies to do the same. Throw the bums out! Reduce the size of the federal government! Eliminate the income tax! While you are at it, cut off CNN. The news media has brainwashed the world into believing that converting food stocks to fuel is a wise thing to do. Our school children are being brainwashed.


The buy indicators have seldom been stronger. Even being angry at congress correlates well to the time to buy. Other indicators that have reached inflection points include the stock/commodity ratios. One can see this best in terms of the euro and the yen. The CRB has fallen sharply in these currencies. The inflation/deflation ratio is also at a peak and ready to roll. I feel compelled to pound the table on the decline in inflation. When a phone call, email or text message is substituted for a physical action such as a personal visit, the decline in inflation is by a gigantic order of magnitude. When a click is made on line as a substitute for a trip to the mall, the savings is huge. The "old days teaching" about the power of the law of substitution was typically the description of what happens when the price of oranges goes up relative to the price of apples. Today, we must understand that a mouse click is often the substitute for an action that might have cost hours of time and dollars of expense.

Once the power of the law of substitution is understood, it becomes easy to understand why the FOMC prefers the personal income deflator as a measure of inflation. After this measure is adopted, the last step of understanding needed is that inflation is one of the most lagging of indicators. By the time inflation is at a peak, stocks are all ready at a bottom. The TV talking heads will whine for the next month or two that inflation is too high for the FOMC to cut interest rates any more. With the continuation of the productivity boom (the same increase in computer clicks as substitutes for expensive tasks), long term rates can stay reasonably low while non inflationary economic growth can continue.


One of the best buy signals was just shot into the air by Merrill Lynch and Morgan Stanley. These "retail brokerage firms" just predicted a recession in 2008. Keep in mind that the major function of "retail brokers" is to "distribute" the holdings of institutions to the public. Much of the time, when an institutional account wants to sell a large chunk of stock they are able to find another institution to buy, however, at major turning points, when most of the institutions want to sell the same stocks, the "retail boys" are hired. The way you get people to sell stocks and bonds at or near their highest prices in years is to tell them a recession is on the horizon. As always, the best stories start with an element of truth. It is true that the possibility of a recession is higher now than it has been for several years. However, the bottom of the stock market is typically made long before the bottom of the economy. Investors should always remember that stocks lead the economy and the economy leads inflation. It is true that stocks behave best during times of low inflation but as far as the business cycle goes, stocks and inflation are like points on a bicycle wheel, when stocks are down, inflation is up. In the bigger picture, inflation is relatively low and will stay relatively low because we are living through a time of innovation and free trade.


The worry warts and TV gurus tend to suggest that you buy international right now. They whine that foreign currency reserves are at record levels. They are thinking upside down. Who is ready to spend money, the man who has recently gotten wealthy or the man who has recently seen the value of his assets fall? Take India for example, the country has been growing its net foreign exchange assets at a rate of 25 to 30%. Russia has actually increased its international reserves by 9% in the last 8 weeks! You should think of these guys like sailors who have just gotten paid before being given leave in New York city. They have money in their pocket, American money!

For the past several years, foreigners were content to build up their US cash reserves. Making US dollars like never before allowed them to put a lot of money in the "US bank". They did not make high returns on it but they were too busy making more money that they did not worry much about the returns. However, when the flood of dollars started forcing the value of the dollar down, the value of these dollars dropped even faster than what was being earned as interest. Now there are too many dollars in the hands of too many people. The common but ridiculous concern of many pundits is that the foreigners will choose not to hold dollars any more. Who will they sell these dollars to? The fact is that the best option for the foreigners is to buy American with those dollars. America is the envy of the world when it comes to manufactured capital goods. This biggest category of exports from America grew at 27.4% over the past year!!!! Yes, the foreigners are getting tired of holding depreciating dollars, so they are buying everything from machine tools to computers. Of course, they will buy a lot of parts, software and services to run these products. Of course, Boeing airplanes at 100 million dollars a piece are the best examples of capital goods sales.


In addition to the massive foreign currency reserves held by India and Russia, reserves have jumped to unreal records all over the place. Places you would not even think of have massive reserves. For example, Ukraine reserves are an all time record, they have tons of American money that is depreciating in value, the turn is here, it is time for them to spend, spend, spend.

Apple computer is another place where there are mountains of reserves. Most everyone knows about the piles of cash held by Microsoft but Apple holds $15 Billion in cash and companies like Cisco, Oracle and Qualcom are stuffed with cash. Here again, chances are good that these behemoths will buy something. Some say that Google, which has pledged to bid at least 4.3 billion dollars for wireless spectrum, will not bid to win. Others believe Apple will join forces with Google to build a whole new network. Google, Microsoft and other tech companies are pushing hard to be allowed to use the "white space" between TV channels to send out high speed wireless broad band. Sprint has altered its WiMax plans as a result of Google's plans. Over the next 5 years or so, billions and billions and billions of dollars will be spent building wireless networks. GPS service will be one of the many growth services during this time. Here again, it is probably time to buy the stuff the big money firms will be buying. Apple and Google will continue to do well but if you can figure out who will reap the most benefit from omnipresent wireless broadband service, then you will make a killing.

Energy stocks will not be the big winners. Once again, this is a reserves story. For example, Anglo American has decided to spend $505 million dollars on a coal project. The project will start out producing 6 million tons of coal per year. This is by no means the biggest energy story around but the 250 million tons of reserves at this location will take 41 years to use up. In the US, shale gas project after project has come on line and will come on line over the next several years. The shale is hydraulically cracked so that the gas flows out more rapidly. New horizontal drilling is reducing the cost of recovery. Here again, once these wells are bored, they last for up to 40 years. There has already been a downward turn in the number of drilling rigs at work. Drilling is not done just for the fun of doing it. It is expensive. Wild caters must jump in and out of the business at the right time to avoid big losses. Because a number of major fields are now under development, the rational for drilling for relatively small potential plays no longer makes as much sense as it did just a year ago. About once a day a big well is completed somewhere. Wells in rich fields often produce several thousand barrels per day. In these situations, the infrastructure is often in place to carry the oil to market. The risk is small. Did you know that Brazil has found more oil in the past few years than in all the years before. The country doubled its reserves with its most recent discovery. China is drilling in Cuba and in Iran! Ford, Chrysler and GM have all closed down their truck factories to reduce unsold inventories. The energy bill that is likely to be passed before congress leaves town will mandate fleet sales of 35 miles per gallon! If a person replaces a 12 mile per gallon truck with a 35 mile per gallon car, he has increased his mileage by 291%!


Obama and Huckabee have moved up in the polls on the wind of change. Hillary and Romney have each been forced into the typical triangulation move. Hillary has started advertising that a vote for her is a vote to change the way things work in Washington. Romney gave his Mormon speech to try to move in on the religious base of Huckabee. It seems that democrats and republicans are ready for a new direction. It is still early in the political process. A year ago, I bet a friend $150 to his $50 that Hillary will not be the next president. My bet was looking like a loser a few weeks ago. With Opra helping to pull in crowds of 25,000 or more, Obama's campaign is energized. To date, Huckabee has run a poor man's campaign but his status as front runner has brought in contributions as well as attack ads. You may recall the triangulation moves by Bill Clinton against Bob Dole. Clinton was suddenly running as the most conservative democrat in years, he literally ran to the right of Bob Dole. Those on the far left are clearly afraid that Hillary will also turn into a conservative once elected. Those on the far right are afraid that Huckabee will be more of a "compassionate conservative" than was Bush. A month ago, it seemed likely that the final race would be a three way race between Hillary, Giuliani and Ron Paul as the libertarian candidate. That would have been interesting but perhaps no more interesting than an Obama, Huckabee slate. Ron Paul would probably not gain much nearly the traction against a Christian Conservative as he would against Giulani. New Hampshire is a whole different game than Iowa. Going out on a limb, I believe Huck and Obama will win in Iowa. If Iowa did not happen first, I would say that Hillary and Romney would get easy wins in New Hampshire. However, after strong wins by Obama and Huck in Iowa, the Hillary crowd will be forced to vote as democrats and Romney will be in a battle. The republican vote in New Hampshire could be a four way dead heat for all I know. Once again, Huckabee and Obama could show very strong in South Carolina. Big wins in just Iowa and South Carolina with decent showings in New Hampshire could be enough to put these guys in the "free news media" spot lights and mitigate the spending of their powerful opponents.

Hey, your investment returns will be effected by who is in the White House. Take a look at

In the mean time, BUY, BUY, BUY. The Nasdaq 100 is up 14.5% year over year and ready to rock and roll!

Monday, December 10, 2007


Since I have been writing about the big turn that comes midway through the economic cycle, I have seen a lot of other turns or turn around situations. I think I starting to sound like John the Baptist who preached that the people should turn around or repent.


In the land of politics, it is beginning to look like the US will elect the first woman, the first black or the first preacher to be president. Maybe it will be the first Mormon or perhaps the first to have had three wives. Obama and Huckabee have surged ahead in the Iowa polls and Opra seems to be making a difference. I have heard that Obama will not say the pledge of allegiance to the flag because it has the word God in it. If true, a contest between the first black and the first preacher would be all the more interesting.


In biblical days, people were taxed based on what they had. Now a days, people are taxed on what they make. Huckabee wants to tax what people consume. I wonder what my old Sunday School Teacher, Howard Barnes, thinks about Huckabee. Howard, a history professor at Winston-Salem State University, used to admit to being politically slightly to the left of center. In return, I admitted to being slightly right of center. The only reason either of us could claim to be so close to center was that our political beliefs were somewhat tempered by our religious beliefs. Treating another person as you would like to be treated can certainly blow a hole in ones political inclinations.

Howard was as fiscally conservative as they come. He never owed any money on the small car that he drove for 20 years or more. He believed that the US is a nation of consumers and he understood that this constant consumption "made the money go 'round". A kindred spirit who taught in the class next door to ours, kept a bumper sticker on her car suggesting that we all live simply so that others can simply live.

The key that makes the consumption tax palatable is the PREBATE.

The way the prebate works is that the government would send a check to every citizen in America on the first day of the month. The check would be in an amount equal to the poverty level times the consumption tax rate. It would automatically be indexed for inflation as the poverty rate goes up each year. In 2005, the prebate would have been $183 per adult plus $63 per child. In other words, a couple with two children would have received a check from Uncle Sam for $492, assuming the consumption tax had been set at 23%. The key point of the prebate is that it eliminates the regressivity of the consumption tax. In fact, the poor family that lives cheaply, buying used goods and groceries in lieu of restaurant meals would actually receive a "tax bonus", their taxes owed would be less than the check they received.


The idea of changing the tax system causes high anxiety. People are adverse to change, even deep in their hearts they believe the change is good. This is the very reason that polls currently show that people have low confidence, we are living through a time of great change. The change is good but it upsets normal. It is the same phenomenon when cars starting replacing horse and buggies.

Last night, my wife and I drove past a horse farm. The air was filled with the stench of horse manure. It made me think of the days of horrible pollution. A hundred years ago, one could not walk the streets of a major city without smelling manure. Go back another hundred years or two and major cities had no infrastructure to accept human or animal waste. The streets and sidewalks were often the sources of insects and disease.

We are living during a time of change. Last quarter, productivity in America increased at the rate of 6.3%. People are working less to have more. At my Sunday School class party, a topic of discussion was the loss of writing skills in America. The premise given was that because "kids" are text messaging abbreviated words, they are not learning to write as they were required to in "the old days". I beg to differ. In the "old days", parents just about had to hog tie a kid to make him sit still long enough to write a thank you note. Writing a letter to a distant cousin was a battle to be fought. Now a days, kids voluntarily routinely communicate in writing to "friends" down the street and around the world. During our discussion, one parent told about his teenage daughters text message request. It confused him so his texted response was, where r u?. Her reply was down stairs. Last week at the Winston-Salem Children's Museum, my 20 month old sat at a "Little Tykes Computer Station" and clicked the mouse button to complete sentences in a story. Before long, she will be typing in words to complete the stories. The point is that the Information Age is going to continue to move in the direction of more people communicating about more stuff. This ability to communicate saves us time, energy and resources.

A wise old wag said that the only constant is change. We are living in a time of rapid change. It is up to each of us to find ways to use this technology for our own benefit and benefit we will. Even those who are slow to accept the changes are benefiting. Despite all the hype about Wal-Mart putting small retailers out of business and paying sweat shop wages the facts are that the price of manufactured goods has been falling off and on for the past 30 years. Those who want the government to have the power to decide who wins and who loses like to laugh at the idea of trickle-down economics. The words may have been chosen poorly but the world changes constantly at the margins. There is something called the Unifying Valuation Principle at work all the time. The following is a simplification of this process.

In simple terms, the growth of an economy, GDP, must roughly equal the rate of return available on investments. The return on investments is split into two parts, "fixed" rates available from credit instruments and variable rates available from equity instruments. The weighted return from these two sources must roughly equal the rate of growth in the economy. The complications come from population growth, productivity growth and inflation. In the absence of productivity growth, the real GDP would grow by average investment rate plus the population growth rate. Inflation is the big monkey wrench that confuses us all from time to time. Even the smartest and most educated get confused about inflation from time to time.


The FOMC's real job is to try to allow GNP to reach its maximum potential growth. There is frequently a gap between the GNP growth rate and its potential growth rate. In simple terms, the FOMC must raise short term interest rates above the inflation rate when the economy is suffering from over heating and the FOMC must lower short term interest rates below the inflation rate when the economy is suffering because productive resources are idle.

Wow! What is the FOMC to do when inflation is so low that it is difficult to lower interest rates enough to "push" the economy forward?

When most people look at inflation, they are like the 7 blind men describing an elephant after touching one part or another. It is easy to have a mioptic view of inflation. The better way to look at inflation is to look at it in terms of standard of living. I use a tired old example because it was a revelation to me in 1982. After I my first cell phone was installed, the most frequent call I got was from my wife. She typically called to ask me to stop at the grocery store on the way home to pick up a missing ingredient for dinner. My first emotions were anger and frustration. I had paid $2,200 for a cell phone and it was being used to send me to the grocery store. However, I soon realized that it was much better to stop on the way home than to go back to the store after arriving at home. My standard of living improved because I saved the extra time, energy and cost of stopping at the store versus going back to the store. In one form of another, that transaction has now occurred trillions of times. Now that the wirelessly connected pocket computer is ready to surge through the product life cycle, the savings are going to be multiplied many times over.


Before Greenspan retired as Chair of the FOMC, he expressed confusion as to how the long bond rate could remain so low. The answer is in the sentences I wrote above; the growth of an economy, GDP, must roughly equal the rate of return available on investments. The return on investments is split into two parts, "fixed" rates available from credit instruments and variable rates available from equity instruments. The weighted return from these two sources must roughly equal the rate of growth in the economy.

When productivity is high, inflation rates tend to be very low and businesses tend to make lots of money. If GNP is equal to the weighted average of the returns on bonds and the returns produced by business and if the returns achieved by business is very high then the rates on bonds must make up the slack. The math is simple, if A = B + C, if C goes up with no change in A then B must go down.


The divergence between bonds and stocks has not been bigger at any time in your life. Based on the earnings to price ratio, stocks are currently earning an average of better than 7.1% return but the 10 year bond keeps dipping down to 3.8% return. This is a huge spread. The simple average of the two comes out to 5.45%, which is not too far from the GNP growth rate of last quarter which was 4.8%. Most investors continue to make the mistake of owning a lot of 3.8% investments. They own these inside of retirement accounts which will not be touched for many years. These accounts should be of the longest duration and yet they are frequently filled with short term fixed rate investments.


Those of you who desire to improve your gas mileage might drive a little slower, inflate your tires a little more, avoid jack rabbit starts and change your oil and air filters more often. If all these moves are made to improve the mileage on a 6,000 pound SUV, the gains will pale in comparison to the change available by selling the SUV and replacing it with a 3,000 pound sedan. Even when driving the sedan, about 95% of the gasoline will be consumed to move the vehicle, the passenger only accounts for 5%.

The gasoline savings achieved by switching from a 15 MPG vehicle to a 23 MPG vehicle would be 53%. Those who spend lots of time trying to hit the right stock with a small portion of their assets are like the guy who pumps up his tires to save gas. After accounting for the extra time and effort, his savings will be small at best. The investor who moves a chunk of assets out of dead money home equity or slow moving credit money to stock market equity will experience a difference similar to the gasoline saved by switching from and SUV to a sedan.


I know I am repetitive and I know I ramble around all over the place but the economic world fits together like a jigsaw puzzle. As you should already know, Douglas R. Andrew is one of my favorite financial authors. His latest book, "The Last Chance Millionaire, It's not too late to become wealthy", tells the "dead money story" in detail. Americans are responding. A large percentage of Americans are paying off "dumb debt" such as credit card debt and taking on "smart debt" such as home mortgage debt. Last week, right in the middle of mountains of hype about the "housing crisis in American", the refi rate jumped again. Americans are once again being smart about tying up dollars in low return housing equity. The great irony is that the "gloom and doom crowd", which is a group of people that are always able to find the negative side of good, have used the explosion of "smart credit" to make the case that debt levels are so high that the world is going to fall apart. They conveniently ignore the huge decline in corporate and government debt and they erroneously imply that the housing debt is being used to support massive levels of consumer spending.


Have you noticed that the best of hype starts out with a dash of truth? Yes, a few people have used home equity to go on spending sprees. The great majority have not.


The use of a little truth to influence others is growing more common by the moment. Examples are all over the place. Yesterday, I read a Wall Street Journal article headlined with "Closed-End Funds Sale". The article talks about how many closed-end funds are currently selling at a discount to net asset value and that tax selling has caused a lot of stocks to be hit extra hard as the year comes to a close. The logical conclusion of this combination of events would be to buy shares of funds specializing in stocks that have been beaten down in value. Instead, after building a house built on truth, the article proposed the purchase of bond funds, total return funds, municipal bond funds, and international stock funds. "Buy at a discount but buy those assets that are at their highest values in years"!


Douglas Andrew and a long list of CPA's and tax advisors have convinced the American people to take full advantage of the gift given by Uncle Sam to those who borrow against their home. Do all good things come to an end? I say no. At the same time, I say the home mortgage deduction is dying. It no longer serves the purpose for which it was intended. Those who own a $500,000 fully paid for house are financial fools but on the other hand, it is foolish for government policy to be to send an annual check of about $11,000 to the fellow who chooses to borrow $500,000 against his home. It is even more foolish for the government to send this same fellow another check for $11,000 per year because he owns an ocean front home at the beach. The real irony drips when this fellow complains because a Hispanic kid who has lived in America all his life is granted in state tuition to go to college. In this "tax payers eyes" it is unfair for the Hispanic kid to pay the local cost of school tuition but fair for the wealthy to get paid $22,000 per year in housing subsidies.


One of my favorite historical characters is Doc Holiday. The story is told that after he tricked Wyatt Earp into believing he was too weak to "ride" and into giving him a deputy marshals badge, Doc killed Johnny Ringo in a the quick draw duel where Wyatt would have surely met his death. When Doc gave back the marshals badge to Wyatt, he said there are limits to my hypocrisy.

I like the fair tax (HR 25, s1025). It would abolish the IRS, help the poor and help us all. It would eliminate the home mortgage deduction. No longer would people buy three big houses just because the tax laws make them worth more. In my opinion, it is hard to find a "good subsidy". If a good is worth having the market will produce just about the right quantity of those goods. If a good is made only because the government mandates or subsidizes the good, too much of that good is produced. Those who buy the subsidized good are not the ones to be blamed.

Right now, the government subsidizes the home mortgage. The home mortgage sells at a 30% discount to value because the government pays 30% of the bill. Home mortgages are on sale. As a result, you should buy as much of this product as you can afford but, of course, you should only buy if the benefits exceed the costs. Keep in mind that each time you finance there are costs. This means that you should borrow the maximum you can when you borrow and then you should pay off as slow as you can. "Option loans" where one can pay only interest have gotten a lot of bad press because sub prime borrowers were encouraged to use them but to get the maximum check from Uncle Sam each year, one should closely consider interest only home mortgage loans.


Please notice that I did not say that this is the time to try to take advantage of deeply discounted homes and second homes. If you are about to buy a home or second home, you should certainly borrow the maximum allowed, however, you only increase your safety, and long term wealth by "investing the difference". As far as buying the "big house" now, I really do believe the home mortgage deduction is dying. No matter if Huckabee is elected or not, passing the full blown version of the fair tax is iffy at best. I believe a more likely event will be a dramatic simplification of the income tax combined with an extra tax on carbon (an energy consumption tax). Each time income tax simplifications are passed, like in 1969 or in 1986, real estate takes a hit. There are powerful economic forces at work here. With more and more millions of Americans taking full advantage of the interest rate deduction, the more and more likely it is that the government must adjust the tax system. Even if the congress does nothing, current law and inflation eventually kills the mortgage deduction. The maximum deduction is set on individual loan totals of $1.1 million. Only a few years ago, this limit seemed large but today it is not unusual for a individual to owe more than the sum of $1.1 million on his home and second home. If you do not owe $1.1 million dollars against a home and second home then there are lots of people making more than you who are paying less taxes than you pay.


Many of those who are most concerned about inequality are all for more government subsidy. Once a society starts down the subsidy road there is no end to the regulations required to reach "fairness". If the decision is made to subsidize home mortgages, what should be the maximum subsidy and should it cover second homes? If we decide to subsidize corn fuel, should the subsidy end once a farmer gets $200,000 from the government? If the corn fuel is so good, then why should we not subsidize all the corn we can grow?

Look at what has happened in China and in Venezuela. Both countries have been going through a dramatic change in government. In the case of Venezuela, the government keeps taking over more and more of the economy. More and more industry and more and more decisions are being dictated by the government. The good news is that the country has been making great strides toward "fairness", inequality is being stamped out. The bad news is that the country is on its way to the poor house. The people are going to all end up being equally poor. It is no accident that Chavez admires Castro and that the people of Cuba are equally poor.

China is on the same path but going in the opposite direction. More and more economic freedom is being given. For the first time, the people are being allowed to buy shares in companies. The country is enjoying a boom like no other in history. The bad news is that inequality of wealth is going in the opposite direction of Venezuela. The number of multimillionaires in China is growing by leaps and bounds. The rich are becoming very rich. The good news is that the dramatic growth in country wealth is filtering down to the masses. Hundreds of millions of people who were extremely poor just a few years ago are seeing huge percentage jumps in their income.


A time of change is a time of turn, turn around and repentance.

The mid cycle turn being upon us means that the prosperity phase of the business cycle is upon America.

This time of technological innovation and of free international trade means that the average cost of all things is actually going down. We often miss this because we fail to consider that the cost of a trip to the grocery store and trillions of other similar events has been reduced to the cost of at phone call, text message or click of a mouse.

This time at the end of the real estate cycle means that tax laws are due for over haul. To make the 1986 law palatable, certain investment advantages were grandfathered. If you believe the tax advantage for home mortgages will not be changed, you should start taking maximum advantage as soon as possible. If you believe the tax advantage will be eliminated but grandfathered, you should set your self up now for maximum advantage. In all of this, you should remember that tax reform tends to temporarily kill the value of homes, in particular the value of resort homes (in the real estate recessions after the 1969 and 1986 tax reforms banks and savings and loans went bankrupt as a resort of countless homes being worth less than mortgage balances).

Liquid home equity is often the key component to financial security. The person who owns a house but has no money is not as secure as a person who owns a house and also has $100,000 in liquid investments, even though he owes $100,000 against his home.

If you do not have liquid assets, it is time to turn your assets around. There is no good reason not to do so!