Wednesday, April 30, 2008


The market is enjoying the prospects of "sustainable economic growth".

Trillions of dollars on the sidelines are looking for a home. The weeks ahead should be exciting.


For the first time in a long while, I am seeing a significant amount of green on stock accounts. My congratulations to those who have added money to accounts while stocks have been down.

Some of the green is in technology stocks. What is more interesting is the green that is showing up in beaten down stocks. One account caught Ford just right and is up 43%. Another bought GM just before the good earnings announcement. Another bought IBM a couple of months back and the owner is surprised by the good performance and the increase in the dividend. A few accounts added to their Google positions while the stock was down. And, yes, the big bounce in airlines even produced some green in some accounts, DAL was up 14.6% yesterday, NWA up 22% and CAL up 3.5%. UP 22% IN ONE DAY WITH MORE TO COME!

Can you guess the name of the two biggest car companies in Russia? Russia has an abundance of natural resources. Russia produces more oil than Saudi Arabia. Russians are flush with a lot of US cash. American know-how is our biggest asset. Now that the US car companies have basically gotten the union monkeys off their backs, exports are booming. More GM and Ford cars are purchased in Russia than any other brands. Both companies are building cars in China. Some of the parts, including whole engines are being made in America!

There continues to be an argument on CNBC about "the recession or lack there of". The US economy is like a big lake with streams flowing in from all sides. The housing industry stream dried up and water from the lake has backed up into the stream bed. Still the lake level has gone up. The water flowing in from other areas has more than made up the difference. The latest GDP number is an increase of .6%. Not great but certainly not negative. The important investment point is that GM and Ford are going up not because their industry has been in recession but because the prospects for the future have improved dramatically. Just a year ago, the most expensive input to each car sold was the cost of health care for workers. Today, the unions have accepted that cost. US exports grew by 20% last year. So the water flowing into the lake from exports was unusually rapid. Indeed, the earnings announced by numerous companies have been dramatically higher than expected as the profits flowing in from overseas sales have been very robust.

By the way, Russia is not the only country blessed with natural resources. The US problem is not the lack of resources but the political will to use them. The majority of the congress has refused to authorize the use of our resources. The pipeline from Alaska is one of our resources valued at multi-billions of dollars. We should use it to the max. Next to ANWAR, there are three oil fields. Sourdough, Point Thompson and Flaxman. Sourdough, which was discovered in 1997, is estimated to hold 100 million barrels of recoverable oil. I have not looked up the numbers for Point Thomson or Flaxman yet, but it is likely that the three fields together hold only a drop in the bucket compared to ANWAR. While the Alaska pipeline was being fully utilized, it made no sense to spend millions to develop Sourdough, Point Thompson and Flaxman, now it does. The interesting thing is that a significant amount of oil will probably drain from ANWAR into Sourdough once the pumping starts. By the legal rule of capture, the US government (the people of the US) will not be entitled to recover leasing fees on this oil.

The way to understand the rule of capture is to think of a wild stallion on the open plains. The horse belongs to no one. If the horse is captured, it belongs to the person who captured it. In relation to oil property, the law is designed to protect both parties when there is a pool of oil on both sides of a legal border. If I own a piece of land next to yours and I strike a pool of oil that resides under both properties, you have the right to drill on your land to tap the same pool of oil. It makes a lot of sense for us to jointly share cost and income on the pool because an extraction race will lower the profits for both of us. If you, for any reason, decide not to drill, I have the right to keep on pumping all I can. Obviously if the pool is sloped like a swimming pool and if I am pumping from the deed end, then I may pump the whole pool dry. I would not owe you a dime.

If the environmentalist wish to avoid putting even a single drilling platform on the hundreds of thousands of acres of ANWAR, they could license the developers of Sourdough to do directional drilling. Directional drilling might tap a significant portion of the billions of barrels of oil in place without allowing the owner of Sourdough to claim all the benefit from drainage. The people of the USA would receive revenues for allowing the extraction, the extra oil would lower our dependence on foreign oil and the extra supply might push the price of all oil down. Again, all of the oil extracted due to drainage to other fields becomes the sole property of the owners of the other fields.


Over the next few years, there is a flood of oil coming to market. In 2005, the PE ratio on oil companies hit 14. The price of oil dipped in 2006 and oil stocks got whacked. Then the price rose and the price of oil stocks is again up around a 14 PE. The EP ratio is about 7%. Can you count on the earnings to grow by more than 7%? If demand destruction picks up the pace at the same time new supplies hit the market, the profit margins will fall a lot faster than the price of oil. The energy report just released showed another large build in inventories. This build appears to be a result of lower demand. The price per barrel is back below $115. It could go a lot lower.


The messages coming out of the Middle East are growing more interesting by the day. The al-Qaeda leadership is upset that Iran is not giving it credit for the 911 attacks. Al-Qaeda leaders are accusing the US and Iran to be in partnership against the Sunnis!

Meanwhile, the good folk at Strafor report that a draft of a peace agreement between Syria and Israel is under review. The rumor is that Syria will be allowed to re-enter Lebanon in exchange for insuring the peace. The Lebanese remember the time of Syrian "rule" as a time of prosperity. WOW!

It has not happened yet and "Peace in the Middle East" is a very old joke, but a series of events increases my hope daily. The nuclear plan that Iran presented to Russia may go nowhere but the Iranians are busy negotiating with India, China and Pakistan in regard to the proposed gas pipeline. There appears to be a high level of hope on both sides of a number of issues.


If there are no Middle East Peace Deals, the market is still ripe for a good run. However, a peace deal would ripple in all directions. Yesterday, US Marines took on the Taliban in Afghanistan; the militias in Iraq were under attack by from the Iraqi Army, by the US Army and by the cooperating Awakening Council Sunnis; the second US carrier parked a few miles off the coast of Iran. The pressure on Iran to make a deal is intense.

If one deal is made, several other deals are likely to fall into place. The probability of the election of leftist in America will be diminished. The US might just take a huge step back toward freedom! We even have a shot at being able to quit paying farmers to not grow food and to quit requiring each other to put greasy corn oil in our gasoline tanks. Sanity may be restored. The price of food will actually go down! Hungry people will not be punished by those who mistakenly hope to save a few pennies when they fill their tanks. Stock prices will soar!

Tuesday, April 29, 2008


I just caught a blurb on TV that energy demand was down by a one month record. The big turn is still happening even though it is still hard to see. The rate of change in the decline of the US dollar slowed months ago. Even so, the last dip a couple of weeks back hit an even lower low and the price of oil has since hit a higher high. The momentum has certainly turned. Central banks around the world have been forced into a fight with inflation. Growth is being sacrificed in order to tame rising food cost which represent a high proportion of consumer spending in the poorer of nations.

One of the most powerful ways to fight inflation is to substitute grain for meat. A poor man can save about 85% on his food bill by eating rice and beans instead of meat. The substitution of grain for meat is happening, which means there will be a decline in the animals on the planet. This year there will be both an increase in production of grain and a decline in the demand. GM just announced the closing of another truck/suv plant. Small cars are being substituted for gas guzzlers. The price of commodities will fall.


A few years ago, only a crazy man would have drilled a four mile long gas well. Today, wheat farmers in North Dakota earn revenues from pipes that run up to 4 miles below their farms. Hydraulic pressure is repeatedly applied along the four miles to fracture oil and gas bearing rocks. There are literally trillions of barrels of oil and oil equivalents under ground looking for a way to get out. The increases in production in Montana and North Dakota continue. The same technology is being applied to another massive field in Pennsylvania and West Virginia.

This morning, the major airline stocks are headed up. NWA is up 14% and DAL is up 9%. Airline stocks are bouncing up and down inversely to the price of oil in the short run. The long term move is up and up some more.

Monday, April 28, 2008


Iran is in discussions with Russia in regard to solving the "nuke crisis"!

This is potentially the kind of face saving deal I have talked about. It will be much easier for Russian and Iran to arrive at a satisfactory deal than for the US and Iran to arrive at the same deal. I nor you nor the rest of the world should care who gets the credit.

Of course, to benefit his legacy, Bush very much wants the deal to be reached on his watch. Of course, to benefit his election, McCain very much wants the deal to be reached before the November vote.

There are a lot of threads weaving their way through the Middle East. The promotion of General Petraeus to the Middle East Command is a signal that the worst of the Iraqi engagement is over and it is time to raise the stakes for the terrorist hiding in the hills. The talks between Syria and Israel suggest that a Lebanon -- Hezbollah deal might be in the works. The battle with the al-Sadr militias indicate that Iraq is ready to move forward politically. The tiny little Gaza problem is a nasty little flea that will not go away (not for a few thousand years). Still, it is only a small problem if the rest of the "stuff" can be worked out. The pipeline from Iran, through Pakistan and to India is a win-win-win as are other energy deals that are ready to go.

While I hate the idea of using food as a political tool, the hunger for food is significantly more powerful than the hunger for cheap oil. Politicians around the world are feeling the heat for high grain prices. In the USA, a Texas legislator has asked the Bush administration to cut the ethanol mandates to avoid the early slaughter of beef cows. The map which shows which countries have had food protest or riots covers more than half the world.

Americans who spend a 12% or less of their family budget on food, are under pressure. Billions of people who spend more than 50% of their family budget on food are pushing the point of taking up arms. Iran is experiencing very high inflation rates and protest marches. The leaders need to make a deal!


Credit Suisse downgraded CAL and upgraded LCC based on the probability of merger between UAUA now that CAL has said it is not interested in a merger with UAUA. The report goes on about other winners and loser but it never even mentions the idea that AMR, CAL and BA are applying for the same transatlantic antitrust immunity that was recently won by DAL-NWA-KLM-AirFrance.

When the market ignores such powerful information, it is clear that the mindset is extremely negative. Of course, with CAL selling at such a large discount to its cash holdings, we already knew the market mindset is extremely negative. The realization that an opportunity is being missed will make for a big swing in this stock.


Kerkorian is bidding $8.50 for a 5% share of Ford. Mars is bidding to buy all of Wrigley. Verizon's net income is up 9.8%. It is spring time and the roses are blooming early.

The initial response to the CAL decision has been mostly negative. There is talk that AMR and US Airways will be the "winners". To some extent, this is true but if AMR, CAL and BA are successful in getting antitrust approval for transatlantic flights, they will be the winners.


The most significant recent event in the airline business was when the most important members of the SkyTeam Alliance won antitrust immunity. DAL, NWA and KLM-AirFrance are now authorized to share cost, revenues and profits on transatlantic flights. CAL, which is currently a member of the SkyTeam Alliance, did not seek or was not invited to join the application for antitrust immunity.

SKYTEAM and the Star Network (includes United) are the largest of the international alliances and the ONEWORLD ALLIANCE (includes AMR and BA) is number 3. AMR and British Airways have tried and failed to win antitrust immunity in the past. The open skies agreement between the US and Europe is opening up both markets. AMR, BA, and CAL will seek antitrust permission with the knowledge that the larger alliance has been successful. The grant of immunity to DAL-NWA-KLM-AirFrance makes it odds on that AMR-BA-CAL will succeed. The odds of a merger between UAUA and USAirways have increased. The carriers are a good fit. These two tried to merge some years ago but were denied permission by the justice department.


The increase in the number of city pairs is still the big prize sought by these airlines. If your final destination is London's Heathrow Airport, It is rational to fly from Houston to Newark on a Continental flight if Continental or one of its partners offers a continuation to Heathrow. Still, a simple example shows other savings that might be expected from an antitrust agreement. Lets say that AMR, BA and CAL all have a morning flight from Heathrow to New York and that each flight has been running 1/3 rd empty. Under a sharing agreement, it would make sense for one of the planes to stay behind. All the passengers would get to the destination and all three airlines would share the same revenues while cutting their cost by almost one third. The third plane could be repositioned to an new route where the profits are better, creating another long list of city pairs, or if the third plane is an old gas guzzler, the decision could be to park the plane until business conditions improve.

Again, I believe the market will applaud the management and board of CAL for deciding not to merge. Why pay for the headaches of dealing with the culture of UAUA when the alternative of forming a relatively simple partnership is available?

Sunday, April 27, 2008


The price of computing has fallen dramatically. The price of computing is falling dramatically. The price of computing will fall dramatically.

Jean-Baptiste Say, a French Businessman who died in 1832, argued that the greater supply of a product, the lower the relative price and thus the greater the demand. Say would have argued against $600 rebates to the public, but for lower taxes on businesses that produce goods. Today, "supply side" economist like to succinctly say, Supply creates its own demand.

Say's Law is certainly applicable today in regard to computing. The price of computing power for many applications has dropped to zero or almost zero! Companies such as FaceBook, Amazon, Microsoft, IBM, Yahoo, Comcast and Google are offering access to powerful "cloud computers" free of charge or nearly free of charge. As the price falls, demand soars, and the demand for free computing is a bit like free ice cream at the circus. I've never seen free ice cream at a circus but I suspect that even the elephants had better not get in the way.

As a result of high demand, IBM, Google, et. al, have become major users of electricity. A few years ago, Google determined that it spends more on electricity to operate a server than it cost to buy one. As such, Google let it be known that it would buy only the more efficient machines.

Google also attacked power consumption from the other direction. It has located its server farms only in areas where electricity is cheap and it has supported a new solar energy company that builds a standardized sun capturing array that is scalable and cheap to install. It is my belief that even the smartest of people are currently suffering from Amara's Law in regard to solar energy. Amara, an engineering PhD and the founder of Institute for the Future, suggested that we tend to over estimate a technology in the short run and underestimate it in the long run. So far, solar energy is too expensive. Governments subsidize it because it is seen as a wonderful clean solution to our energy needs. It will one day live up to the hype, but that one day is still many years away and today only .07% of all electricity produced in the US is solar. There will be a dramatic increase in the supply of electricity as a result of 90 or so new nuclear power plants over the next 20 years but, the increase in supply of electricity will still struggle to keep up with the demand generated by free computing.

Perhaps, I suffer from Amara's Law in regard to computing technology. It does seem to take forever for new computing technology to produce results. Still, I am sure that life will be lived very differently ten years from now.

What is working in regard to computers is a dramatic reduction in the use of power. It is estimated that the power plants themselves can increase efficiency by 7%. Still, 7% is a small number relative to what is happening at the "server farms". IBM is operating servers at room temperature, eliminating the need for air conditioned rooms. This is possible due to continuing improvements in power consumption per chip. Intel just produced a chip that consumes 3 watts of power that will replace a chip that consumers 32 watts.

My point is not that electricity usage will go down. Indeed, I expect the demand for electricity to continue to rise. The point is that the cost of computing is going to continue to fall dramatically such that all the more services will be available for free. More free services will mean a continuation in the purchase and installation of servers and the gear that will connect these machines. GLW is going to sell a lot of fiber optic cable.


It is impossible to know just how many servers are being installed around the globe. It is known that this email is automatically backed up on 6 Google servers but only Google knows exactly where. The indications are that all the major "players" are keeping their numbers well hidden from their competitors. Many service providers have come to understand the Google approach. The winning strategy is to offer thousands of hosting services with massive computing power free of charge because the cost is falling rapidly and the incidental revenue will more than pay for the future cost.

Since I failed to make notes in regard to a recent blog about what 4G speed will do for medical doctors, I cannot offer a link to the blog. The blog was written by a doctor who believes the science of medicine is in for revolutionary change. He says that billions of tiny implantable sensors will be in constant communication with medical server-robots. The diabetic and his doctor will know about a change in status in an instant. If a patient fails to take a pill, the server-robot will know. The revolution is even more powerful than just better information. A heart patient may receive a minor electrical jolt as needed and directed by the server-robot. Of course, the high definition capabilities of 4G will allow the M.D. to view the patient at any location. The 30 minute trip to the doctor will be replaced by the 5 minute video communication.

A couple of years ago, I wrote that IBM is a late cycle stock. I suggested it will do relatively better as the second half of this business cycle progresses. The "rest of the world" is currently sitting on trillions of US dollars and the "rest of the world" needs cheap computing power. American companies will supply the bulk of it. BUY, BUY, BUY!


The management at CAL has long expressed its preference to remain independent. Management has often reported that airline mergers are difficult. Still, the announcement of a deal between DAL and NWA seemed to have pushed CAL into a corner, perhaps not.

Over the weekend, the management reported to the board its findings in regard to the "new airline landscape". Management recommended to remain independent and the board voted to follow the recommendation. CAL will ground 15 more of its older and less fuel efficient aircraft. The company is determined to fly only profitable routes. At the same time, smaller carries are falling like dominoes. Another "business only" carrier filed for bankruptcy this weekend. Each time a competitor falls, the higher the future bounce for the remaining carriers. Like my Great Grandpa said, the time to get into the chicken business is when others are getting out. He noted that the price of chicken feed would go down at the same time that the price of eggs would go up. Bankrupted carriers lower the amount of fuel being used while eliminating the availability of the deeply discounted alternative seat. The price of the "last seat" is the one that makes a huge difference in the profit or loss of an airline.

Perhaps, CAL is only waiting for a better deal or for a bid from UAUA. UAUA has been bleeding heavily since the last big run up in fuel costs. Analysts now estimate that UAUA will lose over $7 per share in 2008. The loss at AMR is expected to be $5.15 per share. The projected loss of $2.04 at CAL looks great relative to the others. First quarter numbers are even more lopsided, CAL lost 86 cents compared to more than $4 each for the other two. CAL is still producing positive cash flow, the airline is getting stronger while the public reads about losses. My expectation is that the loss will not be nearly so high because ticket prices have already been raised.


David Sarnoff, of NBC fame, postulated that the value of a network was proportional to the number of viewers. This broadcasting network law works for airlines as well. For example, Southwest Airlines has been the largest airline in the USA for a number of years when looked at from a market capitalization point of view. It has also been the largest in terms of passengers. The problem that LUV has is that its growth potential is close to maxing out as it is a point to point carrier. LUV really does not benefit as much from the network effect as described below. LUV is not an attractive merger candidate. The merger of DAL - NWA will dramatically increase the size of the DAL network.


Robert Metcalf, of Ethernet fame, took the Sarnoff law to a whole new level. He noted that there is a network effect in broadcasting information. The fact that a person who watches NBC TV in his home town is more likely to watch NBC while visiting another town is just a fraction of the network benefit. The value can be seen easily by considering the fax machine. One fax machine as a zero net worth. It is only when a fax machine can communicate with another that it has value and it is very valuable if it can communicate cheaply with businesses all around the world. As the number of fax machines increase, Metcalf postulated that the value of the network grows at an exponential rate. He said the value of the network is the square of the number of "nodes".


In February of 2001, David Reed posted an article in the Harvard Business Review that pointed out how great the number of new pair connections increases as a network grows. His formula for pair connections is N(N-1) divided by 2. As you can see, after N has grown to a large number, the addition of one more "node" creates a very large number of new connected pairs.

Friday, I wrote that the merger of DAL and NWA is a powerful event because of the very large number of new city pairs. The merger opens the door to 6,000 new combined routes. Assuming these two carriers can smoothly integrate numerous components (which is no easy trick), the new DAL will be a very powerful airline. This result or even the fear of it is putting all the more pressure on the weakest of its competitors. CAL is currently the strongest of the majors in several ways. It has the youngest fleet, the best relations with employees, the most extensive code sharing system and the most advanced computer technology. CAL is going to survive and then prosper. It remains to be seen if it is waiting for a better deal to be had in regard to UAUA or another carrier. My Dad was famous for walking away from a deal if he could not get his terms. It was often the case that there was a lot of movement toward his terms after he walked away.

When the DAL - NWA was announced, the CAL share price went down. The market ran from the risk that CAL would pay too much for UAUA and from the fact that oil prices hit another peak about that time. Tomorrow, there very well might be a relief rally in CAL shares. Besides, investors should remember the "mass transit effect" of higher fuel prices. In the short run, high fuel prices hurt airlines, railroads and bus lines. In the long run, the higher the price of fuel, the more sense it makes to load a truck onto a railroad flat car and for travelers to leave their cars parked.

The public has been sold a lot of upside down thinking. The public is constantly told by the media that an increase in interest rates will make bond interest rates go up. The truth is that an increase in the short term interest rate is the same as applying the brakes to the economy and a slower economy will generally lead to higher bond prices and lower long term mortgage rates. The same is true in relation to the value of the US dollar. The public is told that higher short term interest rates will strengthen the dollar but, once again, it is a question of short term or long term. In the long run, the dollar is strengthen when the economy becomes strong and the economy becomes strong after short rates act as a stimulus. It is easy to get the cart before the horse. A strong economy will result in higher short rates and a higher dollar but it is the strong economy that is pushing the rates up not the higher rates pushing up the economy. Over the past couple of weeks or so, market based short term interest rates have started to rise as has the US dollar and the price of oil. The indication is that the economy is stronger than most people think. In a strong economy the demand for air travel is going to be strong.

Folks, it is very rare for a public company to sell at an almost 50% discount to its cash in the bank when the company is producing positive cash flow quarter after quarter. You can buy CAL today at a tiny fraction of its long term value. My trust in the management has never been higher.

Friday, April 25, 2008


ExpressJet, which flies planes for the benefit for CAL, received a buyout offer from SKYWEST today. Latter in the day, the word was out again that AMR and CAL are having "alliance talks". Long ago, UAUA tried to merge with American West and also with US Airways. The combined companies complement UAUA.

It seems a bit of a stretch for CAL and AMR to merge but the best negotiators always have more than one set of options. If you plan to buy a Ford, it is wise to know what the Chevy would cost.


Thursday, the Euro plunged relative to the US Dollar. Friday, it fell some more. At the same time, there has been a major turn in the short end of the treasury market. The 2 year note has seen a huge jump in yields. With 7 Trillion Dollars sitting on the sidelines in the USA, there is the potential for a flood. Money could flow into the stock market, a hundred billion dollars a month, for the next 3 years in a row and still only get back to normal.


The Sunnis have agreed to rejoin the Iraqi government, al-Sadr is backing away from mischief, the IAEA is going back to Iran next week for additional talks and one of the Taliban tribes is making nice with the government of Pakistan. The US is once again showing off evidence that Iranian made weapons are showing up in Iraq. Over in Malaysia, Iran is being kicked out of a conference for violating UN sanctions. The other nations of Islam are cooperating to bring Iran into negotiations.


The average person does not believe it but the truth is that commodities prices go down over time. Over time, we learn to use cheap, cheap, cheap in the place of what is dear. We use plastic plumbing pipes instead of copper and our aluminum coke cans contain a tiny fraction of the amount of metal that was in our earlier steel cans. As regular readers know, my favorite example is that walls that were once made of solid wood are now made of very cheap material pressed between sheets of heavy paper. And speaking of paper, we now routinely read LCD screens as a substitute for paper. I wonder how many hundreds of thousands of pages I have read on the monitor I am viewing at this moment. The marginal cost of this "paper" is close to zero.

A commodity index posted by Paul Caslin shows that commodities prices dropped in real terms from 120 in 1862 to 20 by 1999. The rebound over the past 9 years is still noting but a bounce within the longer term down trend. Russia has decided to make a massive substitution for hydrocarbons. Russia has increased it planned nuclear power plants to 42 by 2020, up from 35 and with 7 already under construction.

Many other huge substitutions are underway. At the bequest of our Secretary of Defense, Robert Gates boys with joy sticks are being substituted for pilots in airplanes. Mr. Gates has lambasted the US Air Force for not moving to UAV's at a faster pace. He notes the pattern of doing things the old way. Unmanned aircraft can stay aloft for many hours per flight, there is no point at which pilot fatigue sets-in. If the "pilot's" shift is over, he turns his joy stick over to the guy in the next booth (perhaps located in Florida or in Oklahoma). No hazardous duty pay for this airman! Of course, the biggest savings is in human life. This is a great example of doing a job better while consuming fewer valuable resources. One question that will never be answered precisely is how many soldiers lives have been saved because the enemy is discouraged by the knowledge that he is being watched?


With the price of food and gasoline having spiked, the "news" media is going on and on. The price of rice has made the national headlines. Go back 100 years and the price of rice was a significant component of the average USA family budget. Today, it is at best a footnote. Today, the average family spends more on dance lessons in a week than they spend on rice in a year. At the same time, the prices of other goods are falling sharply. The following example is the price of a good that did not exist 5 years ago, one that you are not likely to use in the next few years but one that is likely to save your life or the life of a family member in the near future.

In 2003, the first sequencing of the human genome was completed at a cost of 300 million dollars. By last year, the cost had fallen to about 1 million dollars. By the end of this year, it is expected to cost less than $5,000. In the very near future, medical care will be tailored to each individuals genetic make-up. Google is supporting the building of a data base that will help scientist spot the potential for cancer and other diseases long before the diseases actually present themselves. How much would you pay to have your cancer cured before you got sick? Does $5,000 sound reasonable? How about $4,000? How about $3,000?

It is likely that the cost of "pre-treatment" will be only a tiny fraction of the current treatment costs. For example, in the case of breast cancer, the radical mastectomy may be replaced by the injection of a few stem cells.


On the other hand, it will take a lot of progress for man to create a cheap replacement for hydrocarbons that were "manufactured" in a long natural process. There has been an extreme amount of "news" coverage for Solar and Wind Energy. The facts are that from 2002 through 2006 the percentage of electricity made in the US from Solar Energy increased from .064 percent to .070 percent. During the same years, the amount produced from fossil fuels went from 83.894% to 85.307%. The increase in Wind power went from .105% to .258%.

The hype has damaged the US economy. Instead of drilling in ANWAR to tap what is known to be a huge reservoir of cheap fuel, we have spent billions and billions of dollars on inefficient schemes. Think about how much sense it makes to leave billions of dollars in the ground while spending billions on inefficient games. The state of California has passed a law to subsidize one million solar rooftops at a cost of 2.9 Billion Dollars. How Silly! Tons and tons of resources will be diverted into systems that are inefficient by more than half. Spend as much drilling of the coast of the USA and Trillions of dollars of fuel will be recovered. This is the equivalent of a major league coach starting a mediocre high school player. Why would anyone lose the game on purpose? Of course, we know the answer when it comes to a politician who wants to win the popular vote of a brain washed public.


The US Congress has passed CAFE standards that require cars to get 31.5 miles to the gallon by 2015. China requires 43 mpg by 2009! Europe and Japan require 48.9 by 2016. I do not believe these mandates are necessary but they show that conservation will dramatically cut the per person use of gasoline over the next several years. If the US car companies did not have such strong ties to congress, the switch to smaller vehicles would be even more dramatic. Do you thing the monster buses going through town with a few passengers make sense? Does it really make sense that one cannot invite his neighbor to share in the cost of gas to and from work, without exposing oneself to massive liability? Clearly the government regulations, paid for by the auto companies, deter the efficient cost of local travel.

On the production side, Canada just doubled its known reserves of natural gas. It is highly probable that recoverable reserves will double and double again now that new recovery technologies are being introduced to field after field. In the Bakken formation, estimates range as high as 500 billion barrels of oil, on the USA side! The US Government list these reserves at under 4 billion barrels. The difference is in the amount that are considered economically recoverable. As technological improvements march forward, and particularly if the price of oil stays high, a huge amount of these reserves will be moved to the recoverable category.

The current limit of reserves is a bit like the former "cap on the mile". No one could run a mile in less than 4 minutes and it was a common view that no one ever would. Roger Banister believed it could be done and he did it in 1954. Since then, John Walker has run a sub 4 minute mile 129 times. Steve Scott broke John's record and ran under 4 minutes 136 times. In Rome in 1998 Hicham El Guerrouj set the current record by running a mile in 3 minutes 43 seconds. A 40 year old Irishman has broken the 4 minute mile as have 4 high school students. The impossible is now relatively common.


The consolidation of DAL and NWA marks a major turn in the airline business. The consolidation is significant from several points of view. The most significant point is that antitrust immunity has already been granted to the Sky Team alliance that includes domestic and international airlines. The results will be significant new service for the public and price rationalization for the carriers. The number of seats sold at a loss is going to drop. The top ticket prices will not necessarily rise, the key is that the average ticket price will rise. The situation reminds me of what Dr. Janeway, Dean of the Bowman Gray School of Medicine told me when I went to work for him in 1975. He said that although the medical school was a non profit organization, it was like all businesses in the sense that it has to turn a profit in order to increase the services it can provide to the public. He said, if the school does not make a profit, people will die. The airline business must be allowed to make a fair profit.

Perhaps the way to explain the power of the consolidation is to note the difference in city pairs served. The new DAL will serve only 400 destinations but it will serve 6,000 city pairs. A striking example of a new city pair will be New York -- Tokyo! Northwest has the landing slot available in Tokyo and it once offered service from JFK. The service was pulled when Northwest could not consistently fill the planes. Northwest simply did not have enough routes into and out of JFK to justify the continuation to Tokyo. JKF is a DAL hub. The new combination will make the New York to Tokyo a highly profitable route. The reason is not a higher ticket price per seat but a higher load factor.

Right now, there is a big time squeeze on the 50 seat jet operators. The major carriers have a strategy in place that will ultimately make their "express service" operators just as profitable as the mainline routes. There are over 1,600 companies that operate 50 seat planes. You can expect to see a dramatic decline in the number of these carriers. It may sound like dirty pool but the fact is that one can often buy a ticket through a major and fly from podunk to hub to destination for less than the ticket price from hub to destination. The individual ticket from podunk to hub may be pretty cheap on the independent line, but any price paid is still an add-on to the total trip cost. For the passenger that only wants to fly from podunk to hub, the contract carrier will usually match the price.

It has taken the 30 years since deregulation for the majors to be in the position to beat the pricing offered by the discounters. Now that they can do it, they are being tough business operators (ruthless is a fair description). The consolidation of DAL - NWA will give the surviving carrier thousands of more opportunities to offer combined routes at prices less than the current price of separate flights. Drop the number of discounters from 1,600 to 600 and you can expect the majors to enjoy being able to rebuild solid businesses, including the purchase of modern fuel efficient aircraft.


The last time the dollar got close to current levels was in 1995. The US market will not likely have as big a bull market run as it had from 1995 to 2000, but it might! Last night on Kudlow and Company, Jim Awad suggested that the profits for 2008 could really be huge if the US economy recovers. He based his suggestion on the fact that the average report so far shows and increase in profits of 11% for non-financial companies. I agree with Jim, profits are rising during a time of zero GDP growth. Profits normally fall during recessions. It appears that there will be no recession in 2008. The numbers were too strong before the turn in the dollar!

Thursday, April 24, 2008


Common sense dictates that we do a better job of taking care of good old planet Earth. This does not mean that we should provide subsides for rich corn farmers or to mandate the use of corn in cars. Is it too much to ask the public and the politicians to use a little common sense?

The following is a list of the hype that accompanied the first Earth Day. It was copied from the Washington Policy Center Web.

  • "...civilization will end within 15 or 30 years unless immediate action is taken against problems facing mankind," biologist George Wald, Harvard University, April 19, 1970.

  • By 1995, "...somewhere between 75 and 85 percent of all the species of living animals will be extinct." Sen. Gaylord Nelson, quoting Dr. S. Dillon Ripley, Look magazine, April 1970.

  • Because of increased dust, cloud cover and water vapor "...the planet will cool, the water vapor will fall and freeze, and a new Ice Age will be born," Newsweek magazine, January 26, 1970.

  • The world will be "...eleven degrees colder in the year 2000. This is about twice what it would take to put us into an ice age," Kenneth Watt, speaking at Swarthmore University, April 19, 1970.

  • "We are in an environmental crisis which threatens the survival of this nation, and of the world as a suitable place of human habitation," biologist Barry Commoner, University of Washington, writing in the journal Environment, April 1970.

  • "Man must stop pollution and conserve his resources, not merely to enhance existence but to save the race from the intolerable deteriorations and possible extinction," The New York Times editorial, April 20, 1970.

  • "By 1985, air pollution will have reduced the amount of sunlight reaching earth by one half..." Life magazine, January 1970.

  • "Population will inevitably and completely outstrip whatever small increases in food supplies we make," Paul Ehrlich, interview in Mademoiselle magazine, April 1970.

  • "...air certainly going to take hundreds of thousands of lives in the next few years alone," Paul Ehrlich, interview in Mademoiselle magazine, April 1970.

  • Ehrlich also predicted that in 1973, 200,000 Americans would die from air pollution, and that by 1980 the life expectancy of Americans would be 42 years.

  • "It is already too late to avoid mass starvation," Earth Day organizer Denis Hayes, The Living Wilderness, Spring 1970.

  • "By the year 2000...the entire world, with the exception of Western Europe, North America and Australia, will be in famine," Peter Gunter, North Texas State University, The Living Wilderness, Spring 1970.


My friend, Bob, won the prize today for the best comment. He posted a link to the lame suggestion by the corn belt Senator Grassy. Here is the comment and link.

The only discouraging thing for me is what i hear coming out of politicians mouths.

With the latest this lame quote from Iowa's Sen. Chuck Grassley, just one example.

I have said that it is morally wrong for us to put scarce food supplies into car engines. Grassley says it is equally wrong for the Chinese to eat meat! The crazy part is that, since we gain zero net fuel with ethanol, our fuel cost are not benefiting from ethanol but our policy really does cause some people to starve to death.

By the way, the Senior Economist at S&P forecast oil at $91 per barrel by year end. He follows the forecast by saying he could be off plus or minus $50 per barrel. He makes me feel better about my misses. It is natural to notice the plus side of his forecast at $141 per barrel. Of course, you might expect that I was quick to notice the minus side. I don't if he really means it but the low side of his forecast is $41. His forecast is based on the fact that the US economy is in a recession. I still do not believe that we are technically in a recession but, in any event, the slow down should lead to lower oil prices. The numbers from Germany this morning show that Europe could fall into a recession. As my friend Lamar mentioned, we might see a rolling recession similar to what happened in the early 80's. By the time Europe is in recession, the US will be in a strong recovery. China is standing on the brakes (bank reserves at a record 16%) but, so far, the strong double digit growth continues.

I have mentioned a number of oil and natural gas fields that will come on line this year and the next. Since, the Thunder Horse mega project is not due to produce until the the end of 2008, I don't believe I have mentioned it. With only 9 months to go, this massive project in the Gulf of Mexico is growing in importance. It will initially produce 250,000 barrels per day. Folks that is only 30 million dollars worth per day and only $11 billion worth a year. At full production, it will do four times as much. Now don't tell me there is not incentive to drill deep. The sad fact continues to be that the estimates of reserves along the east and west coast make Thunder Horse look like down right puny.

Many thanks for the other comments. It seems that the price of fuel is the big drag right now.


There are piles of easy money laying around. Stocks like PFE, BAC and WB have little down side and lots of long term upside. Ed Yardeni notes that US savings deposits are at the record high of over 4 Trillion Dollars! Money market funds now hold another 1.1 Trillion Dollars. Institutional Money Market Accounts hold another 2.2 Trillion Dollars. The sum of 6.3 Trillion is an all time record of money laying around. The yield on these deposits averages about 1.1%. The yield on the three stocks mentioned is better than 6%. WB and BAC just wrote down assets to the tune of billions of dollars and these assets will create extra large profits for these firms over then next several years. In the case of PFE, about a billion people can afford drugs today that could not afford them 10 years ago. The profits of the pharmaceutical companies over the next 20 years is going to be mind blowing.


With 13% of companies having reported earnings, the doomers have been proven wrong. Profits are running double digits ahead of expectations. Even the losses of the financial group have been substantially lower than expected.


Please send me an email. I really would like to know the reason for the gloom and doom. Is it all about the price of gasoline? Is it stock prices and gasoline? Is it the fear of a new president and congress?


A cause for short term optimism can be found in new oil production. In the Bakken Formation in Montana and North Dakota there were 250 producing wells in 2004. Today there are 900. Production has jumped from 15,000 barrels per day to 75,000. Only a tiny portion of this formation has been explored. Those who believe that Peak Oil is just around the corner discount this new production as being insufficient to make a real difference. The fact is that the price of oil is high enough to make sophisticated new fracturing techniques highly profitable. Horizontal wells are being drilled and hydraulic pressure is being used to make multiple fractures along the path of the well. There could be as much as 500 billion barrels of oil in this massive formation. Anyone that tells you he knows different is projecting his mind set.

Next month, the Saudis will start 300,000 barrels per day of new production at a new field. The Saudis have produced 109 Billion Barrels of oil which is about 1 of 7 of their discovered reserves. They own more that is yet to be discovered. Those who believe the world will soon fall into a great depression because oil is running out are badly mistaken.

There are any number of reasons to be optimistic for the long term. Have you heard about the plan to grown meat in vitro?


Scientist believe that stem cells can be used to grow beef, chicken, pork, etc. In my home town of Winston-Salem, human tissue is being grown in down town labs. The tissues are being used to make replacement bladders. Growing a bladder, liver or kidney in a lab has to be more complicated than growing a steak!

Some scientist believe production will start within 5 years. This sounds like scary science fiction, but the potential savings are incredible. It currently takes 7 or 8 pounds of feed to add a pound to a beef cow. Since only something like 60% of the beef cow is used for food products, the feed per pound of meat is over 13 pounds! Expensive whole grains are fed to beef cows for a few weeks immediately prior to slaughter. Can you understand why the price of meat has temporarily fallen? The farmers can not afford the grain.

A few tons of resources are used to make every one of those Trillions of McDonald's burgers. While the time forecasts might be overly optimistic, I believe the projected result. Just imagine how much more low cost food would be available if the efficiency of growing meat could be increased by several hundred percent!


At the Next Big Future website, there are a number of excellent articles about nuclear power (I think I saw the in vitro meat story there as well). The nuclear summary is that there are 15 nuclear plant applications pending in the USA. The Watts Bar Unit, under construction in Tennessee, is expected to produce electricity at a cost of 4.4 cents per kilowatt. The spread between the current cost of oil produced electricity and nuclear produced electricity is huge. As a result, it is projected that the USA will have 34 plants on the drawing boards by 2010. In the rest of the world, there are 35 reactors currently under construction with completion dates around 2012 or 2013. Ninety-one reactors are projected to be complete by 2016. I need to do a little home work, but I bet each of these nuclear reactors will serve as the substitute for millions of barrels of oil.


The history of the world shows that innovations occur when and only when there are people around who can afford to be the guinea pigs. Columbus would not have discovered America had he not found a patron. We would not have microwave ovens today had there not been people willing to pay $10,000 for the first to be built. Today, there are billions of people who can afford the latest and the greatest. Companies can afford to spend a 100 million making a new drug or other product, knowing that the rewards from a successful product will be huge.

The Next Big Future site has a few pictures of the new electric and hybrid-electric motor cycles. They make absolutely no common sense today but that $10,000 microwave was pretty silly too. The point is to show the extremes to which the private market will go to solve a problem. Billions have been spent to develop advanced fuel cells, batteries and capacitors. Week after week progress is announced. The situation is similar to the time when Thomas Edison tried 10,000 filaments for the electric light bulb, he knew the technology would work, he simply had to increase the efficiency. We know how to convert sunlight directly into electricity, 10's of thousands of "Edisons" are working on the problem.

I believe the internal combustion engine will be around for many years to come. I see no reason why the little 650-1000cc engines used in Japan should not become common place in US cities. It is silly to drive a 6,000 pound SUV back and forth to work, but eventually, we will not drive to work.


The piles of money lying around make it cheap for companies to innovate. The cost of capital is an important ingredient in the cost of research. Trillions of dollars will be spent on electronic devices for the purpose of using resources more efficiently. The gains being made in the electronic area are incredible. Intel is making a chip that operates on less than 10% of the electricity of prior chips! Piles and piles of money lying around is going to lead to innovation and to higher asset prices. The low cost of money is very bullish for everything from house prices to in vitro meat!

Wednesday, April 23, 2008


The most recent signal to Iran came from Hillary Clinton. She said that a nuclear attack of Israel by Iran would result in the obliteration of Iran. In the meantime, Russia is having trouble getting parts for the Iranian nuclear electricity plant delivered (yeah right) (one of the rare combinations where two positive words work together to make a double positive or negative). At the same time, the Shia in Basra and in Sadr city who looked to Iran for support are on the run. An Iraqi commander says Iraqi forces are almost in total control of Basra.

Of course, we must verify the reports coming from either side of the battlefield before believing them but the weight of the evidence suggests that the Iraqi government is having success knocking the the militias out. Over in Kuwait, the "news" is that Condi Rice was not able to get a firm commitment of Iraqi financial support from other Arab states. Condi basically ignored the Iranian minister who was present at the meeting. At the end of the day, Kuwait said it would review the amounts owed and take the request under consideration.

The ultimate question remains, how long will Iran and the US go at it before a deal is made? No one knows.

As far as the oil market is concerned, speculators have the market cornered at about $116 per barrel and users are not willing to buy one drop more than necessary at that price (according to James Williams, "The Energy Economist"). Mr. Williams equates the situation as similar to going to the market to buy bananas and finding them at $50 per pound. The bananas are not bought but that does not mean there were no bananas at the market.

The USA is currently using only 80% or so of its refining capacity. The demand for finished product is not strong at the current price. It makes sense for the refiners to spend a little extra time doing maintenance. They can restart prior to when the summer time driving needs kick in. Of course, the refiners and the consumers can only hope that they will save a few bucks by waiting to buy. It is clear that demand is being destructed at the current price.

A series of polls, done by, show that a threshold has been crossed. A majority of people plan to buy a smaller more fuel efficient car if the price of gasoline stays above $3.50. Indeed, the Bush administration was just able to raise the fuel efficiency requirements demanded of the auto industry. Is this not the biggest joke? The law currently requires the average auto sold to get 27.5 miles to the gallon and the average truck to get 22 miles to the gallon. Based on the current mix of cars being sold, the average car gets 31.3 mpg and the average truck gets 23.1 mpg. The government is raising it mandates because the consumer is willing to exceed the current mandate. By the way, the average truck and the large SUV's based on the truck frames are sitting on the car lots. For the first time in many years, small car sales are the only area of growth in the car business. Indeed, for the first time in years, more cars are being sold than are trucks (includes SUV's). Hybrid sales are very strong on the mistaken belief that they save. In the early days, hybrids were purchased by the few willing to pay a few thousand extra to help reduce global warming. Today the average buyer does so because he thinks the fuel savings will make up the extra few thousand in costs. Unfortunately for these buyers, they are not likely to ever recover their investment. One can buy a Chevy Malibu that gets 32 miles to the gallon. The price is about $6,000 less than the similar hybrid model and the difference in fuel savings is small. The comparison between a hybrid Honda and a non hybrid Honda yields a similar truth.

Will Iran make a deal with Bush or with his successor? I believe the Bush deal will be the preferred deal over the McCain deal and I believe the odds have increased that McCain will be the next president. Bill Clinton was a member of the Southern Democratic Council of Governors (name may not be exactly right) before he ran for office. Jimmy Carter was governor of Georgia. These two are the only democrat presidential contenders to win in a very long time. In all the other years, the democratic candidate ran to the far left of center. Al Gore came the closest to a win. He is from the southern state of Tennessee but his platform was the typical democratic platform. Obama has run almost to the left of McGovern.

Hillary is suddenly running to the right of Obama. Recently, when asked about increasing capital gains taxes, in the face of a recession, she said she would raise the taxes from 15% to 20% if at all. Obama ignored the point about the recession and pledged to raise taxes no matter what. He said he would raise the capital gains tax from 15% to 28%. In the same session, he said he would raise the payroll tax and that he would not raise taxes on the middle class. This is all similar to the pandering statements about free trade. Democrats want capital account surpluses and trade account surpluses at the same time because they believe the "low class democratic voters are too dumb to know we can't have both". The win in PA by Hillary was from the vote of the more conservative democrats. It is common knowledge, even among the common folk that raising taxes during an economic slow down or recession is the exactly wrong economic strategy. Hillary left herself wiggle room by saying she would raise to 20% if at all. Obama, once again, went for the far left vote. Raise taxes to be fair, even if we are all fairly poor!

My thanks to Hillary for the signal to Iran. Of the two democrats, it is clear that Hillary has the better understanding of economic and foreign relation matters. Of the democrats, she would be the better president. Her solid win in PA, gives her a ray of hope but it is still unlikely that she can over take Obama in the popular vote or in the delegate count. On the other hand, a win in Indiana and a close vote in NC could be momentum builders. She has an excellent chance of winning in places like Kentucky and West Virgina.

With the pressure mounting, Iran continues to make tiny baby steps toward a solution while maintaining a straight face. The Iranians will met with the IAEA to explain the evidence that the country has had a program to make nuclear bombs. The USA has asked India to ask Iran to explain a few things before going forward with energy deals. India says that Iran should work through the IAEA. In other words, countries that want to buy energy from Iran must walk a tight rope. India does not want to wake-up on the wrong side of the USA but it does not want to miss out on energy deals.

Iraq is likely to increase oil production in the months ahead, to hold successful elections in October and to see a decrease in the number of terrorist bombings. The increase in oil revenues should give the economy a boost. It is certainly too early for Bush to crow loudly but there is an excellent chance that the Bush term will turn out to be like the Truman term. Truman was not popular while in office (though more popular than Bush) but after his term he has been lauded for being one of the "great" presidents.

Since our current economic problems are tangled up in the price of oil, it is still possible that a deal will be made with Iran before the election, that the price of oil will fall and that the economy will be recognized for its current hidden strength. An improvement in the international situation could boost the US dollar substantially and further depress the price of oil.

Again, a key to a strong economy is the average weekly wage and the USA is enjoying more than a 3% over the past year. By the next quarter, it is possible that the news media will tell us that a recession never happened. I must admit that a down turn in the auto market on top of a down turn in the housing market would have been a sure guarantee of a deep recession "in the old days". Again, the average person simply does not realize how rich we are all becoming. The billions of people who have come out of severe poverty in the past 30 years understand. Those of us who have seen only a steady drip of prosperity do not always recognize just how nice it is to be able to afford things like the cell telephone. In our busy lives (made busy by our own desire to take kids to dance or music lessons that perhaps we would have like to have had as children), we forget how much time we save by making and receiving calls. Our ability to communicate by email in an instant allows us to stay in touch with "too many family and friends". Staying in touch with family and fiends, to the current level, is a luxury that we could not afford in the past.

The people of Iran are currently suffering through inflation rates reported to be 40% or more. How important is it to the Iranians to have control of nuclear fuel production? The rest of the world says the risk exceeds the benefits. The rest of the world is willing for Iran to have nuclear power plants, provided the fuel is made by a consortium of nations that will guarantee that only energy fuel will be made. Iran is receiving lots of signals and given back a few of its own. Let us all hope and pray that a deal can be reached. It is probable that other problems in the area will be solved once the nuclear question is out of the way.



When the federal government cooperated in "saving the banking system" by killing Bear Sterns, it created a lot of mistrust. As David Kotok has noted, banks continue to hoard cash. Instead of lending funds to one another at the fed funds rate, many banks are quoting higher rates in order to reduce the amount of over night lending that they do.

The run on Bear Sterns occurred because the "sharks in the water" smelled blood. The remaining banks do not want to appear weak because they know that there could be the next Bear Sterns.

I am reminded of days at Merrill Lynch. My branch manager practiced the coal mine canary method of assuring a hard working sales force. Brokers are highly paid salesmen. My average earnings during the 1980's was around $280,000 per year. Still, my job was threatened a couple of times along the way. The way the canary system works is that ever so often the manager picks out one of the brokers who is near the bottom of the list of producers and fires him. He then hires a few trainees with hopes to find one good producer to replace the fired individual. In the meantime, three or four brokers who barely missed being fired work long and hard hours to get off the bottom of the list. The scramble becomes all the more intense if one of the trainees climbs above those who are near the bottom.

Now that the majority of mortgage loans have already reset, the increase in the foreclosure rate is slowing. There is already a dribble of write ups starting to occur as homes are sold or refinanced. The sales pace is slow relative to the past few years but still around 5 million units per year. As bank balance sheets are repaired, the fear of being the low bank on the list will gradually subside. In the meantime, good mortgage terms are available. Banks can and must make healthy lending deals and they are. In particular, commercial lending is still strong. The boom in US exports is causing an increase in US investment.

Politicians whine about foreign investment and, in almost the same breath, about trade deficits. Politically it may make sense for them to "have it both ways" but it is economically impossible to experience capital account surpluses and trade account surpluses. One of the questions we need to ask ourselves is would we rather have the Chinese lend us money at very low interest rates or buy more raw materials in order to produce more low priced goods? Do we want trade deficits or capital account deficits?

Equity is defined as assets minus liabilities. Working capital is the difference in current assets and current liabilities and, while it may sound good to have working capital that is equal to assets as a result of having no liabilities, this is not the formula for profit maximization. To maximize profits, a company and even a nation should take on debts that cost less than the returns available. If one can borrow at the fed funds rate of 2.5% and lend that money at a net price of 5%, then the profit of 2.5% was created out of thin air. The USA makes a lot of money by being in debt. No politician will try to explain that reality to you but it would not be wise for the US government to pay off all its debts. Our net interest cost is well below our earnings on those borrowed funds.

Today, extra large profits are available to thousands of businesses. Funds are available for the lending needed to expanded business and expanded profits. The banks are not maximizing their returns right now as they "protect" themselves from the federal sharks, but they are lending on very solid projects. The banks are taking care to spill no blood in the water but they are feeding well and building their strength. The market will not reward the gradual dribble of write ups anywhere near the way it punished the write downs but, over time, a great percentage of the losses will be recovered as an addition to normal profit margins.



The market move,about 8% off the March lows, has caused some of the short term stock market indicators to back away from screaming the word BUY. However, stocks have become an even cheaper asset class.

It has been a few years since stocks first became very cheap relative to real estate and to bonds but they keep getting cheaper still. Stocks became very cheap relative to gold over the past 5 years. The crazy market in commodities has now made stocks unusually cheap relative to every thing from rice to oil. Stocks are very cheap. Rice is now priced at many times the cost of production and production can and will be increased. Millions of acres of good land lies fallow because we no longer need to use all available land to produce all the food we need. With prices out the roof, more food will be grown this year than in any other year in the history of the planet. Those who are speculating on the price of rice and other grains have sold stocks short. The common play of short term traders is to buy one thing and to sell another. This is a form of hedging, even though it is an imperfect hedge. The point is to buy the thing that goes up the most. If they are wrong and all prices fall, they figure to recoup some or all of their losses on the short sale.

The see saw is tilted to the extreme. The end to the speculation in rice will be when the rice is sold and the money is used to cover the short. It may seem weird but the price of many stocks will go up when the price of commodities comes down. Commodities and interest rates are normally strongly correlated. Right now there is a huge divergence. Either a slowing economy is going to cause commodity prices to fall or a booming economy is going to cause interest rates to rise. Perhaps, there will be a simultaneous move of commodities down and interest rates up, but that would certainly be unusual. Little by little, one can see leaks in the commodity price spiral. For example, South Korea suddenly has more LNG than it needs. At the same time, US refiners are meeting product needs with run rates hovering around 80%! It appears likely that the commodities bubble is about to bust.

The last run up in stocks has even slowed down the insider buying trend. Insider buying of recent months has been extremely heavy, at the same time that the public has sold and sold out. Huge numbers of small investors are now largely out of the market and they feel relieved; no more worries for them. Of course, as history has shown us time and again, these same small investors will come into more and more money as time moves forward. Some of it will come from work earnings, some from inheritance, some from the savings achieved as the real cost of goods and services declines over time. At some point, with stocks having soared and with all the news and pundits suggesting that the good times will last for a long, long time, these small investors will steadily add funds to the market at much higher prices.

Professor of Economics, Don Boudreaux, likes to tell about the prosperity pool. I like to think of prosperity as a light misty rain. It is so light that you do not think you need an umbrella but if you stay outside very long, you cannot avoid getting wet. Prosperity drips down upon us just a little bit at a time. We hardly even notice the drops coming down. Some of the drops hit us directly, others indirectly and others hit only other people but, we all get wet. At first, we expect the wealthy to be our guinea pigs. They must dole out the high dollars to buy the first cars that park themselves. Once the technology is perfected, the price will fall and the new "toy" will be available on many more models. Then, to our surprise, the technology will become very useful and even productive. At some point in the future, we will look back and laugh about the time when we had to park 10 blocks down the street and to walk to work from there.

Visitors to Wal-Mart get wet faster than those who frequent other stores. At every visit to Wal-Mart, people buy things for less than the time before. It might be an MP-3 player that cost the same as last years model but this one holds 100 times as much. You might buy a digital camera and save thousands of pictures for free, as opposed to the old guy who continues to send off for prints at more than 50 cents each. His cost for a hard print is infinitely more than the cost of a digital image and his annual expenditure on film is extremely high relative to the number of good shots he gets. The digital user might make a thousand shots before deciding to pay for one print.

I can go on line, view my daughter's and my wife's photo albums and view several thousand snap shots of my grand daughter and scores of short videos. The daily life of my grand daughter is being documented for only a fraction of the money Marilyn and I spent on the relatively few pictures we have of our daughter. Prosperity just keeps on landing on me, Thank You Lord!

Day after day, new and better stuff is available to us all at lower real prices. In the Don Boudreaux post I borrowed from yesterday, Don included the following:

Frances and Joseph Gies, in Life in a Medieval Village, of the roofs of pre-industrial cottages:
Roofs were thatched, as from ancient times, with straw, broom or heather, or in marsh country reeds or rushes. . . . Thatched roofs had formidable drawbacks; they rotted from alternations of wet and dry, and harbored a menagerie of mice, rats, hornets, wasps, spiders, and birds; and above all they caught fire. Yet even in London they prevailed.

We have a hard time imagining what it would be like to have to deal with rats, hornets, wasp, spiders and birds in our roofs. With no screens in windows, fresh air in the summer was fresh with flies. Can you imagine the smell of the air around the people and animals of the old times? The rate of death from fires has gone down and down and down!


A major reason for the angst of the public is the thought that their homes are falling in value. Even the fall from the peak, if any, has been a small number compared to the prior years of appreciation, still the news media implies that all houses are falling dramatically, so it must be true. Yesterday, the official government statistics showed that houses fell in all regions of the country with the biggest decline of 9.2% being in the Pacific region. The North East "escaped" the "slaughter" with a decline of 1.3%. Houses in the Pacific region went up a few hundred percent over the prior 5 years so what is the big stink about? The non-weighted average decline of 6 regions was 3.4%. So, did the average house fall 3.4% in value over the last year? No, according to this same government report, the average price of the average home sold increased in value by .6%. Now I grant you that a .6% increase is not much but include this figure in the average of the past 5 years and the average house has gone up an average of something like 6% per year compounded!

To feel all down and out about house prices right now is like being upset halfway through a sports season when your team record falls from 14 and 1 to 14 and 2. Sure the loss hurts emotionally but, would it be any fun if everyones team won every game every year? There is no joy without sorrow!

By the way, the above government figures are fascinating. And, it is also fascinating to note how the press jumps on the most biased numbers. The Shilling numbers include several of the previously hot, hot, hot markets to show that the housing market is much worse than indicated by the above government numbers. How can it be that the average sales price is up across the nation but down in all regions?

There is migration out of the most expensive markets. The most expensive markets are the least healthy. Not a lot of sales are taking place there. However, in growing areas, such as North Carolina, homes are selling relatively better and at increasing prices. For example, in the Winston-Salem market, prices were up 2.4% over the past year. There are many more markets like Winston-Salem than there are markets like Las Vegas.


The decline in houses in the previously "hot markets" is the cure not the disease. It was emotional buying that drove the prices of the houses in the hot markets to irrational levels. This emotional buying caused the construction of more units than were needed. The correction is bringing common sense back to these markets. Yes, the prices will over shoot on the way back down but the rental values and projected future values will build a price floor. Keep in mind that the are lots of people who need to buy a house at a good price, furthermore, with mortgage loans near all time lows, houses are very affordable. The decline in price is a loss for the seller but a win for the buyer. Another major indication that the housing market is much better than we have been lead to believe is that a third of all homes purchased in the past month were second homes. People across the country are rich enough to afford a second home and they are confident enough in the long term to buy a second home today. Prosperity is raining down like "Manna from Heaven"!


In the same way that rice and oil are loved beyond all reason, airline stocks are hated beyond all reason. What will the catalyst be that will turn this situation around?

Under the stress of extremely high and unsustainable fuel prices, CAL lost 80 million dollars last quarter but raised ticket prices by substantially more than that for the coming quarter. During the same quarter, UAUA which operates an old, fuel guzzling fleet, lost $537 million which was the result of an increase in fuel costs of $516 million during the quarter. Unlike CAL, UAUA was not able to make up half of its higher fuel bills with other savings and revenues. As a result, UAUA announced that it will lay off 1,000 workers and ground 30 of 450 planes. It will reduce capacity by 9% by the end of the year, which is on top of a 5% or so reduction last year. I am reminded of the old joke where the patient bends his arm and says, doc, "it hurts when I do that" and the doc says, "then don't do that". The good news is that UAUA is not willing to keep on flying just to "keep market share". The UAUA average ticket price has gone up by $150 round trip in 9 increases done over the past 3 months. The reduction in capacity will allow all the airlines to increase ticket prices once again. The management of DAL has suggested that the industry still needs increases of 10 to 15% to break even.

The loss of 80 million dollars at CAL has resulted in a loss of market value of about 500 million dollars; total insanity! Today, the entire value of all the shares works out to 1.69 billion dollars. The firm currently holds about 3 billion dollars in cash and the 80 million dollars was a "paper loss", the companies cash balance grew by a couple of hundred million last quarter.

UAUA is the much larger airline. Without looking up the exact numbers, I can tell you that UAUA has about double the revenues of CAL. Yet, the market value of the company has fallen like a rock. The value of all shares is now 1.61 billion dollars. The management of UAUA has been ready to sell for a couple of years. With the DAL - NWA deal moving forward, CAL suddenly finds itself in the "cat bird seat". In addition to being the higher capitalized company, CAL now has more to offer the employees of UAUA. The UAUA employees are surely concerned about the possibility of UAUA bankruptcy. Here again, UAUA has tons of cash on hand. It is a solvent enterprise. The earnings will recover as ticket prices begin to catch up with fuel prices. Still, the environment is ripe for consolidation and UAUA would hate to see CAL and AMR team up. UAUA does not want to be the "last girl at the dance".


I have noted that some of the short term oscillators are not currently screaming BUY, BUY, BUY. I have also noted that stocks keep getting cheaper relative to other asset classes. I want to be clear that longer term indicators suggest the market is still a screaming BUY. One of the things we can all easily do is check the sentiment. I am certain that if you poll your friends about the market, most of them will not even want to talk much about it. During the good times, you will note that everyone loves to talk about stocks. The old front cover of Business Week Indicator is alive and well. Last month, right at the bottom of the market, the front cover was, in bold red, the word RECESSION.


While I rail against the silly extremes of the environmentalist, I believe we should be good stewards of this old planet. The prophet Ezekiel in chapter 34 verse 18 asks us, "Is it not enough for you to feed on the green pasture? Must you trample the rest with your feet? Is it not enough for you to drink pure water? Must you also muddy the rest with your feet?"

My thinking is that the environmentalist need to spend some time on a farm. They need to learn that the good earth must be managed. The good earth does not supply us with a bountiful harvest. We must put forth the effort to use the good earth to produce the bountiful harvest. An abundant supply of fertilizer was put on this planet but it was not put to good use for most of the planets existence. It would be silly to not dig up potash in order to "save the environment". Our common sense tells us to dig up the potash so that we can feed ourselves. Our politicians should stop playing games with the lives of hungry people. We should drill for oil and put our corn back on the food market. Yes, as demanded by the market, we will substitute other energy for oil. We need not abandon rich supplies in order to do in a few years what can be done over decades. The market drips prosperity upon us, we do not need a benevolent government to force us to go the long way around.


I can only hope that I will rise to the occasion and do my share to stop the insanity. I hope you will forward these words to others. We need our politicians to get the message. They need to turn away from the government intervention that is causing wide spread hunger. With trillions of barrels of oil available for the drilling, it is immoral to use our food supply as fuel.

Tuesday, April 22, 2008


During the great tulip bulb craze, some 500 years ago, the price of tulip bulbs rose to levels that are still unbelievable. The bulbs turned out to be worthless, but, during the craze, everyone just had to own the most colorful new varieties.

At least with today's oil bubble, there was a foundation built on true need. Some time ago, the foundation was left behind and the current price is based on one irrational thought piled onto another. Wouldn't you know, that the bubble would be bubbling so strong on Earth Day?

The following paragraphs were copied from the Cafe Hayek blog:

So, on this Earth Day, I offer you here my essay, inspired by the work of Julian Simon, entitled "Cleaned by Capitalism." Here are the central paragraphs:
Before refrigeration, people ran enormous risks of ingesting deadly bacteria whenever they ate meat or dairy products. Refrigeration has dramatically reduced the bacteria pollution that constantly haunted our pre-twentieth-century forebears.
We wear clean clothes; our ancestors wore foul clothes. Pre-industrial humans had no washers, dryers, or sanitary laundry detergent. Clothes were worn day after day without being washed. And when they were washed, the detergent was often made of urine.
Our bodies today are much cleaner. Sanitary soap is dirt cheap (so to speak), as is clean water from household taps. The result is that, unlike our ancestors, we moderns bathe frequently. Not only was soap a luxury until just a few generations ago, but because nearly all of our pre-industrial ancestors could afford nothing larger than minuscule cottages, there were no bathrooms (and certainly no running water). Baths, when taken, were taken in nearby streams, rivers, or ponds, often the same bodies of water used by the farm animals. Forget about shampoo, clean towels, toothpaste, mouthwash, and toilet tissue.
The interiors of our homes are immaculate...


The fact is that we live in a "cleaner world". We enjoy a cleaner world because we can afford to spend great effort to reduce pollution. The most recent problem has been that the extreme left has redefined pollution to include the air we breath out of our lungs, which happens to be the clean air needed by our plants. If the left were sincere about the "pending world ending disaster" and about reducing carbon dioxide they would get very serious about reducing the population on the planet. Pretty soon, we would have forced sterilization, forced abortions, euthanasia, child lotteries and who knows what other "population control programs" forced upon us.

The fact is that we have not reached the self sustaining limits to what this old earth can bear. The more carbon dioxide we produce, the more plankton we nourish. The evidence for man made global warming is shaky at best, yet we have caused hundreds of thousands of women and children to literally starve to death and hundreds of millions more to go hungry while we put food products in our fuel tanks.

Oil is currently caught in the vice grips of supply and demand. The old adage that price cures price does not fail. The reason the US refineries are running at only 80% of capacity is because there is too much gasoline in storage. The speculation that is pushing the price of crude to irrational levels will not hold. Mad crowds can chase bubbles a long way, but sanity wins in the long run.


Joseph Ellis wrote one of my favorite economy/market books, "Ahead of the Curve". In it, he shows that consumer spending is the important leading indicator. Furthermore, consumers tend to spend most of what they make. Americans save little, outside of retirement accounts. Much of what Americans save is the sweat equity they put into their homes, which does not show up in savings.

The good news is that paychecks are rising. This means personal consumption expenditures will rise.

An increase in paychecks is a function of pay per hour and the number of hours worked. It is important to measure the total weekly pay as the number of hours worked tends to jump once an economy starts to recover. Businesses do not like to lay off workers. Instead, it is common to lower a factory schedule from 40 to 36 hours rather than to lay off 10% of the workforce. When you currently hear doomers whine that Americans are "under employed" they are saying that even though the unemployment rate is low, the slack shows up in the number of hours worked. One thing the doomers miss is that the number of hours worked in American has gone down a little simply because Americans are wealthy enough that they prefer not to work so much.

In the 15 days ended April 18, the average paycheck went up 3.1%. NO RECESSION IN THESE NUMBERS!


Stock prices fell in anticipation of the "coming recession". In the past few weeks, stock prices have begun to rebound as more investors look at their own situation and realize they are not in a recession. Take out the real estate markets that overheated and the rest of the country is even enjoying seeing home prices increase. The latest numbers for the Piedmont Triad show that the average home in our market went up 2.1% in value in the past year. Again, NO RECESSION IN THESE NUMBERS.


The major carriers have successful raised fares 9 of the last 13 tries, a total increase of $150 round trip on many flights. The prices on the most competitive routes have hardly budged, which is the reason so many of the small carriers are bankrupt or close to being bankrupt. The individual numbers are interesting.

In the last quarter reported, CAL's fuel cost went up by 364 million dollars. It's profits swung from a gain of 102 million to a loss of 80 million. The total swing was exactly one half of the fuel increase. So, the company made up, $182 million dollars, half of the increase through other savings or through fare increases. However, most of these fare increases did not take effect until late in the quarter or even after the end of the quarter.

In the current quarter, a much higher percentage of the fuel increase will be covered by fare increases. Furthermore, this quarter and the next are normally much more profitable than the other quarters. With 3 billion dollars in the bank, CAL is not at risk of burning off its assets, indeed, the cash in the bank went up by a couple of hundred million even though the accounting profits showed a loss of $80 million.

On the other hand, S&P put CAL and UAUA on its credit watch list. There is the risk that the debt securities of these firms get down graded if one decides to pay to much to buy the other. Of course, while it is possible that UAUA will buy US Airways and that AMR will buy CAL, the more likely event will be that CAL and UAUA agree to a stock swap similar to the structure of the DAL - NWA deal.


Rising payrolls in combination with high fuel prices will lead to continued strong demand for air travel. At the same time, economic growth will flow to ways to avoid excessive fuel costs. In other words, it becomes all the more important to seek out the low cost producer around the globe. It is a mistake to think of high fuel costs as the reason not to produce a product over seas.

Some time ago, I reported some powerful transportation numbers. It is really amazing how little it cost to transport 1,000 pounds of product a mile on a train. Once you get it in your mind that the rail transportation cost is nothing when compared to the production cost savings of the most efficient producer, then it is time to look at the cost of shipping half way around the world. The fuel spent floating a boat is basically zero and once you get that boat moving it cost very little fuel per pound to keep it moving. The cost to move 1,000 pounds of product by boat is a tiny fraction of the cost of transporting that same product by train!

Besides, the cost of transporting fuel to a location can cost almost as much as the cost of transporting the product from a location. In other words, a company making a profitable product before his fuel costs go up needs to find a lower cost way of making the product. Chances are good that his industrial cost of fuel is higher than the transportation cost.

Higher fuel cost may tip a product from the profit to the loss category, such as when a country passes rules that raise the cost of electricity. Jobs will go to the area where the total costs, including the cost of electricity are lowest. The producer is forced to look at alternatives when his cost are too high. He just might discover that his product can be made in China for much less. He might also discover that the bulk shipping cost per unit is lower than his extra manufacturing cost per unit. Upon making such a discovery, chances are good that he finds himself on an airplane headed to China.


Part of the reason the inflation numbers are unusually high right now is because China is standing on the brakes. The bank reserve requirements in China have been moved up to an astounding 16%, forcing a slow down in the velocity of money. Insert the increase into the Fisher GDP equation and we know something has to give. If GDP = M x V = P x Q, then a slowdown in V means without an increase in M the GDP growth must slow. If GDP growth slows, then Q is likely to slow. When a company slows down the amount of production, it slows down the products that have the least demand. Once the company finds itself making only the products that are in highest demand, it discovers it can raise its price and still sell all it is making. For this reason, inflation is a late cycle phenomenon. Once the inflation rate gets bad, it is ironic that the profit rebound is near. Not because profits are high during times of high inflation but because the high inflation is an indication that the cycle is turning.

The above scenario is nothing more than an upside down J-curve effect. In other words, the first move is along the short end of the J. After the initial move, a significant turn is made and the long end of the J is dead ahead. Using profits as the example, profits were under pressure causing the company to cut back on production and thus adding to the pressure on profits. However, once the prices are raised on the remaining production, the profits soar. Once the business starts growing again, the profits continue to increase on the old volume and on the new volumes created.


UAUA was hit hard by fuel prices last quarter. CAL continues to put up better than average numbers because the firm has a younger and more fuel efficient fleet. UAUA, DAL, AMR and NWA are all gradually parking a few of their oldest planes. Like the manufacturer above, these companies are reducing capacity by cutting out the losing options. The remaining flights are in high demand and subject to price increases.

The down stroke of the J curve has proven to be a long one for the airlines. The good news is that once the turn is made, the long end of this J is going to seemingly go on forever.

My friend and fellow expatriate from Merrill Lynch made an excellent point yesterday. He suggested that the world might see the kind of rolling recession that we saw in the late 70's and early 80's. I see this as a strong possibility if you substitute the word slow down for recession. The 50% drop in the China stock market suggest to me that the Chinese economy is going to slow dramatically, just about the time that the US economy is in full recovery. However, a dramatic slowdown in an economy that grew at better than 11% last quarter does not imply negative growth. China could slow to half its previous growth rate and still put pressure on oil demand. Still, a world wide slow down of growth will do wonders for allowing new oil production catch up with new oil demand. The change in the change or second derivative is a highly levered figure.


The timing of the merger request of DAL and NWA could not be much better. The loss of $4 per share by UAUA is enough to scare the pants off those who would argue against mergers. In the past, Eastern Air as a prime example, airline employees over played their hands. The unions had the power to not budge on wage givebacks, mergers or work rule changes. They did not budge and the companies folded up shop. The highest paying jobs were lost when the flights were replaced by deep discounters.

During the latest round, DAL, NWA, UAUA, AMR and CAL employees all took pay cuts to save the companies. The managements of DAL, NWA, CAL and UAUA have all pledged not to ask for additional pay cuts as part of merger transactions. In other words, the best way the unions have of keeping wages up is to offer the airlines a route to higher profitability. DAL pilots have already agreed to more flexible rules in order to make the merger work.


With payroll numbers showing strength, with many a housing market starting to turn up and with the elections near, the airlines must get their deals done as quickly as they can. The next reports from the airlines will be under the pressure of higher fuel prices not fully covered by fare increases. By the next quarter, fares could easily cover. Also, at some point, the fuel bubble will burst. Of course, the bursting of the fuel bubble will be initially reported and perceived as a the negative event of an economy that is really getting bad. The most successful investors buy on bad news!

Monday, April 21, 2008


After the January melt-down, the stock market has had a nice little run. I would not be surprised to see a pull back in the cards as the uncertainty of the next FOMC move is bandied about before month end. If a pull back does come, it is likely to be accompanied by bad economic news which would serve to cause a correction in the crazy oil market.

I understand that wealthy Chinese and Russians are buying luxury cars. Still, I do not believe the current price of rice, corn and oil are sustainable. If the price stays at this level, I just might buy a moped. I would certainly buy a tiny city car as my second car if one were available. In the short run, a fall in consumption will come from decisions to stay home.

Chip stocks did well today. The more we stay home, the more we will use computer chips.


When putting together a difficult jigsaw puzzle one must persevere until "over the hump". Once the hump is reached, the finish comes at a faster and faster pace. Suddenly there is the obvious hole for the odd piece that one has tried to put in dozens of places. The Middle East Puzzle is starting to come together!

In one very interesting turn of events, the Iraqi government, the Iranian government and the Americans all find themselves on the same side trying to eliminate the threat of al-Sadr. (I never can get the guys name right but we all know of the cleric from Sadr City, if his name was John, he would be called John al-Sadr). Anyway, the fellow has threatened an all out war against the Iraqi government if the government does not stop rounding up his militiamen and taking their weapons away. The government ignores the threat, the US ignores the threat and the Iranians ignore the threat. Today, the Iraqi government got the endorsement of a regional council of Middle Eastern Governments. Condi Rice is encouraging these governments to support Iraq. They have committed to open embassies in Iraq and they may forgive debts owed by Iraq. With elections scheduled for October, Iraq is close to functioning as an independent, democratic state!

The UN nuclear negotiators are once again in Iran and the US has signed a nuclear agreement with the United Arab Emigrants. The concept of having a regional consortium to produce the nuclear materials for nuclear power plants is gaining momentum. And, believe it or not there are indications that Syria and Israel are close to terms in regard to Lebanon. Iran is threatening to cancel contracts with Shell Oil if certain projects do not get underway but what other oil company wants to take over a project in a country that is under economic sanctions? Since any bank transactions with Iran are now "risky business", Iran is under severe pressure to help find the middle ground. Yesterday, an Iranian, who has lived in America for the past 15 years, and I were able to agree that the Iranian situation is a battle between two hard headed men. I did not express my view that the Bush view point is going to win.

I just received a telephone call from Hillary. In the recorded message she said she wants to end the special tax breaks for the oil companies so that the money can be used to come up with alternative energy sources. Wow, what a concept, raise the price of gasoline so that politicians can decide who gets the extra money. What would be next, that the government mandates that strawberries be put in my gas tank? Millions of acres of oil fields off the coast from main to Cuba and we are still intent on raising taxes so that the government can allocate research dollars to "friends". Off the coast, near Santa Barbara, CA an oil seep releases about 40 tons of methane per day, about 19 tons of other gases and it creates a petroleum slick for miles. Tar balls wash up on the beaches but the environmentalist do not want to consume this oil. Instead, Al Gore and his friends make millions of dollars leading the charge in the wrong direction. The thing is that we can do both, we can build wind mills and consume the easy stuff without killing the environment.

By the way, the seep off the coast of California is just one of many that show that oil is still being "manufactured" deep below the surface. Oil wells that should have been empty, 20 years ago continue to produce. Scientist have reproduced many biological processes that produce one form of oil or another. One of the things that scientist have not been able to replicate is the production by the "bugs" that have been found at super deep volcano vents. The problem is that while these hardy bugs live in super hot water, we have not yet been able to get them to survive decompression. This bugs live under great pressure and in extremely hot water. Nature is more powerful than we seem to appreciate.

As the pieces fall into place in the Middle East, Iran is holding onto a few pieces. It will be interesting to see how much pomp and circumstance will accompany the insertion of these final pieces. I wish I could provide a time line. The good news is that every nation is ready because all of them win. The only problem is the psychological problem. How can the deal be structured so that the major players save face? It is like the problem many democrats have. As champions of fairness, they are willing to shrink the economic pie provided everyone gets a more similar sized piece. The ordinary folk would be happy getting a larger piece even if some rich dude got an extremely large piece. Which would the ordinary citizen of Iran prefer, economic prosperity for the nation as it exist today or suffering economically while winning the battle to increase the countries influence over its neighbors?


In recent weeks, the price of oil has gone up because it has been going up. The buy now before it goes higher strategy has become its own self fulfilling prophesy. No one knows how long a mania or bubble will last. The famous tulip bulb bubble about 500 years ago lasted a number of years past all reason. Today, there are powerful forces pushing the other way. Would you believe moped scooter sales from Australia to the US were up 400% last year? For the first time in many years, US car sales are higher than US light truck sales (which includes SUV's). Indeed, car sales have stalled as many people wait for the new high mileage vehicles. The success of the smartfortwo in the US is the harbinger of things to come. The Fiat 500 has been voted the car of the year in a few European countries. The Volkswagen UP is expected to achieve 94 miles to the gallon!


Toyota and several other Japanese companies are gearing up to produce city cars that get better than 60 miles per gallon. Leave it up to the Germans to spend the engineering money to take the 60 up to 94! Ford Motor is building the Fiesta in the US specifically for export to China. Ford is also building a huge plant in China. The Chinese have come up with an interesting innovation. They are building little cars at breakneck speed. They inspect the cars and ship the "seconds" to places like Brazil and offer them at deeply discounted prices. The first quality cars are kept in country so that the company can build its reputation as building fine cars. Countries like Brazil have historically imported a lot of three year old American made vehicles as they come off lease. US car sales are down so far this year, not as much as light trucks but still down. Selling big cars and trucks into a $3.60 gasoline market is going to be a difficult trick. Again, the public is ready to buy small. Each time a family in India gets its first car, even though it gets 55 miles or better to the gallon, the pressure to reduce the number of gas guzzlers on the road is increased. Modern cars last 17 years on average. However, as the mileage driven in small cars ramps up, the "duration" of cars becomes like the duration of a bond. If one buys a 30 year bond today, he gets his money back in an average of 16 years or so. The family that owns an SUV and a new 94 mile per gallon UP, will drive the UP as often as they can.

The UP will not be on the market for a couple more years. Some say that Americans will never end their love affair with the car. I say that it will become "cool" to drive an UP around town and to travel by bus to the resort destination of ones choice. City cars will ultimately be robotic taxis.

The completion of the puzzle in the Middle East is going to take the short term pressure off. Peak oil enthusiast believe the world is close to its end. The truth is that the world needs a little time to adjust to an age of prosperity in what are now the poorest corners of the globe. We can all ride in cars. We simply need to use our resources wisely.