Thursday, July 31, 2008

US Dollar Elevator -- GOING UP! (revised)

Since 1995, the "US Dollar Elevator" has been from the ground floor to the top floor and all the way back to the sub-basement.

In March of 1995, the US Dollar Index hit and extreme low of 81.69. In January of 2002, the US Dollar index hit 120.24.

On April 22, 2008, the US Dollar Index hit an all time low of 71.32, a 41% decrease from the prior peak.

Since April of 2008, the US Dollar Index has been working its way through a bottoming process. The Index is around 73.3 today.

The next big move is all the way back to the 120 level.


The counter balance to the US Dollar Index Elevator is the US exports Elevator.

The US export elevator has gone out the top of the building. Last month the jump was 9%! Those who have suggested that the US has been in a recession since 2007 have had to contend with very strong export numbers. The US economy grew 1.9% last quarter as strong exports more than off set declines in other areas. The US has become so wealthy that even housing construction and auto production are relatively small portions of our total economy.

The US Dollar will rise out of the sub-basement as the export elevator comes back to a reasonable level, or will it? During the "prosperity phase" of the Juglar Business Cycle, we can expect economies from around the world to purchase US capital goods. Computer networks are going to expand rapidly for the next 5 years or so. The US export machine is just getting cranked up!

One of the "trap-statistics" Keynesian big spenders (mostly democrats) use to encourage misguided policies such as minimum wage laws, $600 tax rebates and high taxes on productive assets, is the false number that consumers account for about 70% of the economy. The reality is, since business investment is calculated as net new investment and consumer spending is a grand total, business spending is actually about the same size as consumer spending. Government spending is the least important except that it has grown to be so large and because it is the least efficient spender of the three.

Duh! Over time, businesses only spend the net money they get from consumers and consumers only spend the net money they get from business. It really cannot be that consumers spend more than businesses. Just like supply must equal demand, production and consumption are two sides of the same coin. The "trade" between the business and the consumer is a bit like the silliness of blaming speculators for the price of oil, is it the guy who is buying the contract or the one who is selling the contract who is driving the price? A couple of days ago a Sheik complained about how speculators are driving the price of oil down :-). Is it the consumer who drives an SUV who is driving up the price of oil or the gas station that charges what the market will bear? The problem the oil companies have right now is that a growing number of consumers are parking SUV's and filling up one gallon scooter tanks. While I'm ranting, let me mention that price gouging and speculative manipulation or generally nothing more than easy, convenient, evil scape goats. You cannot gasoline price gouge the fellow who is willing to pedal his bike.

During the next several years, pent up US Dollars held by Asian producers of consumer products and oil producers will be "returned" to the US in the form of capital goods purchases. The dollar will rise as the demand for US goods stays strong. Ironically, strong US sales and the dollar will come close to riding the same elevator up.

Economic Slowdown

First we have to get through the rotating slow down. Countries around the world, yesterday it was India and Romania, are raising interest rates to fight inflation. Higher interest rates are slowing the world wide demand for goods (oil included). Mexico is one of many economies that are getting slammed hard by higher prices. Even US central bankers are now starting to tilt toward short rate increases to fight inflation.

Higher interest rates make holding money more profitable than holding goods. During the past 21 days, the S&P Energy Stock Index is down 12.6% while the S&P Financial Stock Index is up 7.5%. As any long term observer would expect, this turn in prices comes at a time of huge reported earnings by the energy stocks and huge losses reported by the financial stocks. The mid-cycle rotation is underway.


Hank Paulson could have started-up the covered bond market at any time to help turn the housing market, but he waited until the congress passed his proposed reforms to Freddie Mac and Fannie Mae. To be fair, it was the passage of the bill that gave the Treasury Secretary the power to eventually set higher capital requirements for these GSIs. The higher capital requirements will level the playing field between the GSIs and commercial banks.

The republican house passed reforms to correct the GSI problems two years ago but the reforms died in the Senate. This time, the congress had little choice but to pass the reforms offered by Paulson. With approval ratings at 9%, congress had to pass the housing bail out bill, the Bush administration went along with the pork barrel payoffs to local community leaders, in exchange for the Paulson reforms.

Bush could have released the executive hold on energy months or years ago but, he waited until oil demand was falling and until new oil supplies were coming on line and until a deal with Iran was close. Wow! What a magic trick! Bush opened his mouth and the value of billions of barrels of oil fell by $20 each! Knowing when to open your mouth is a valuable trick.

Now the congress is in a box. Between now and the elections, the congress will be forced to vote for or against energy legislation. It remains to be seen how much pressure will be applied or how much pressure the congress can stand. For example, a Continuing Resolution must pass by September 30 or the government will shut down. When Newt Gingrich forced a shut down in 1995, Bill Clinton was able to put the full blame on congress. If the minority party insists on a vote on energy or no CR, would the public blame the democrats or the republicans? The risk are high because the bulk of the media is on the democrat side. Still, it is the democrats who refuse to vote on oil and they are the ones who are once again far behind on passing budget bills that are past due as of September 30.

Political Games and More Games

In recent weeks, democrat leaders have tried to pass bills about a hundred bills without allowing debate, amendment or a source of funding. Tom Coburn has become the Dr. No of the senate. He has stopped even minor bills from passing by unanimous consent. Harry Reid has tried but failed to out maneuver him. Other republicans have joined the cause. If a source of funding had to be identified for every bill, billions of dollars of wasteful spending would be cut. Right now, republicans have forced the senate train to a dead stop. The senate is not being allowed to move on to other legislation until after a vote on drilling. Over in the house, the vote to adjourn passed by a one vote margin. Eleven democrats joined is saying a vote on drilling should be made before legislators leave for the August recess.

The risk is that nothing much will happen for the next three weeks, no vote to drill and no progress with Iran. On the other hand, if a deal could be worked out in the Senate (a group of five democrats and five republicans keep working on getting a filibuster proof agreement), Bush could even call back the house from vacation. It appears democrats are prepared to go to their convention and to blame republicans for the the failure to pass an energy bill that includes anti-speculation legislation and massive funding for windmills.

The risk in Iran is obvious. Several Iranian officials have talked in glowing terms about the change coming to America (our opponents can't wait for an Obama presidency). It is a risky strategy but some Iranian leaders hope to stall until the end of the Bush administration.

After the firing of test rockets by Iran, European leaders have become all the more willing to hit Iran with harsh sanctions. Immediately after the tests, the US installed a missile defense system in the Chezk Republic. Russia was not happy. The world wants the Iran matter settled quickly. The deadline for a response from Iran is Saturday and the market apparently slightly anticipates a positive response, oil is trading down a little more today.

A few weeks ago, the heated words being thrown from and to Iran this week would have sent oil prices soaring. As always the price is set by supply and demand, but a few weeks ago a lot of folks were willing to pay big money to store extra oil as they perceived the risks of an Iranian oil cutoff to be high. Today, there is a growing understanding that the severe pain will be caused by the cutoff off gasoline to Iran. The score is 85 million suppled each day to 85 million demanded each day. The bad guys can shut down a couple of million barrels but the good guys have easy access to 3 million more without tapping SPRs.

Troops in Iraq

There were only 5 US combat deaths in Iraq in July. Iranian leaders who believe in many of the teachings of Jesus Christ, like to point to instances when Americans do not follow these teachings. Iranian leaders note that since the 9/11/2001 attacks that killed less than 4,000 people, almost 100,000 Americans have been killed by gunshot. The 100,000 does not include the 4,100 killed in Iraq. I mention these numbers because 5 deaths are terrible but also relatively small. Another 4 soldiers were killed in Iraq in July due to accidents. Everyday, you and I meet a driver who is talking on the phone and weaving along the road. More than 4,000 Americans were killed in auto accidents during July.

Bush reduced troop tours from 15 months to 12 months today. Yesterday in East Baghdad a Hezbollah leader was fingered and captured. The occasional bomb continues to go off but the good news continues to flow from Iraq. Oil exports just hit a new 5 year high at 2.43 million barrels per day (probably more than Iran's) and many a community has seen electricity, water and other services restored.

Don't Forget the Paradox of Thrift!

In recent news, the $500 billion deficit was "good news". We must always remember the paradox of thrift. In micro-economics we learned that it is "good" for an individual to save. Then, in macro-economics we learned that if everyone suddenly starts to save then net savings go down! We need people who are willing to borrow money to buy a house if we want the value of our house to go up. If everyone saves and none buy, then the value of our assets go down. Sometimes we really need government to take up the spending chore. The public has tightened down a bit. It is a good thing for the government to run a deficit when the economy is slow. The tax increases proposed by Obama would be exactly the wrong medicine for the economic conditions.

Stocks eventually suffer when the government pays down too hard on debt. Debt is a sharp knife in the kitchen, an indispensable tool but one that must be used carefully.

After the Gulf War, Bill Clinton used the peace dividend on domestic programs. It was a fun ride. Once the government built began taking in a surplus the economy went into the tank. The switch from military to domestic spending also emboldened Jihadist around the globe.

Today, Jihadist are being corralled in tighter and less strategic locations. Osam bin Laden and his friends have less and less opportunity to do serious damage as they hang out together in the high mountains of the Middle East. Democrats talk about the cost of the war but this time they talk about spending more on programs by raising taxes on the rich. They do not want to open up the can of worms that the 9-11 attack came after years of reduced military spending. It is surprising that 40 year old plus women support McCain. Women are generally anti-war but they very much desire security. McCain is clearly the "safe" candidate.

While the end of combat in Iraq will reduce the spending there, the mountains of the Middle East do need more attention as do areas of Africa. The wonderful news is that as nations join the Global Nuclear Energy Partnership, they commit to helping eliminate terrorism. None GNEP nations have contributed billions of dollars to organizations all the way around from Hezbollah to Hamas. In the new paradigm, the cheapest source of energy will be cut off from countries that support terror.

The US Dollar is GOING UP! In times of war, inflation tends to get out of hand and gold is hoarded. The cost of storing gold is like the cost of storing oil, it only makes sense if the price is going to outstrip inflation. Inflation rates are ready to roll over. The price of oil is going to feed through to the core inflation rate on the way down, the same way it did on the way up. A lot of investors are going to gradually grow tired of holding gold as global terror and inflation rates fall. Jump on the elevator for a fun ride. Buy financial, consumer cyclical, technology and industrial stocks (which includes transportation). Pharmaceutics are also a good play.

Wednesday, July 30, 2008

Deadline Looms Large

In a speech this morning, Iran's supreme leader, Ayatollah Ali Khamenei said that Iran will not take a single step back in regard to its "just" nuclear power program. Khamenei said that the arrogant super powers would take a step forward. The implication being that the demands of the UN + 1 would be increased.

There was a quick response of disappointment from Italy and then a few moments ago a US spokesperson confirmed that the "just" laws of the UN would be enforced and the dead line is firm. In the two weeks after the last meeting, Rice and others have warned of "dire consequences" should Iran fail to respond. Iran is being asked to answer a single question with a yes or a no. So far, Iran has stalled.

The bluff being made by Khamenei is that Iran can split China and or Russia away from the UN coalition. Will Russia and China support the severe sanctions proposed by the US and Europe?

Germany just danced around the sanction rules by agreeing to build natural gas equipment for Iran and shipping the completed structure to Iran in one piece. On the other hand, it is well known that Pepsi and Coke among others have received exceptions for providing food products. The past sanctions have included a few holes. The difference in the proposed sanctions and the current ones will be a naval blockade. Iran, with more oil reserves than all but two countries in the world, is about to suffer a severe gasoline shortage. The enforcement and response to severe sanctions are a serious matter.

In a Tuesday meeting, Obama expressed his opinion that Israel will attack Iran if the sanctions do not work. One always must look for the wiggle room in political statements. Obama did not say which sanctions. The third round of sanctions are in force, if Iran does not respond by Saturday, the negotiators have said a fourth round will be forthcoming. If the pattern of the past holds, the US will immediately impose new US sanctions and the UN sanctions will follow.

Another deal was just made between the US and Israel. Israel acquired a new sophisticated radar system from the US, one designed to protect the country against the latest missile technology of Iran, and the US acquired the promise that Israel will not attack. The details are not known so, once again, there is wiggle room. The statement by Obama could be read to imply that an attack by Israel is imminent but it is not.

Key Point For Investors

Investors must look forward. The market will move up before a deal is complete. Furthermore, by the time the negotiators agree to sit at a public table, the "fix" will be in. My memory for details has failed but one of the greatest negotiators of all time once admitted that he never sat down at the table until after he knew the terms of the deal. Time is running out. The 123 deal between Russia and the US was submitted to congress on May 13. The congress has only 90 session days to consider the deal. The deal becomes law if not considered. The deal will need to be on the top of the pile when the congress returns from the August break. Khamenei's bluff will be called. He wants to split Russia from the 5+1 but Russia will make trillions of dollars off nuclear power if the deal goes though. In recent weeks, Russia has agreed to supply China with nuclear fuel and it has joined in a Kazakhstan pipeline that will bring natural gas to China. The relationships of the world powers are certainly more important than deals with Iran.

Iran faces harsh consequences if it does not respond by Saturday. The talks are in a frantic stage. The push back yesterday was from Amadenijhad. Today, the supreme leader rejoined the conversation. By talking over the top of the negotiations, he in effect asked Bush to push our negotiators to make some move. Of course the details of these talks are top secret. Very few people have the "need to know" details.

In the past hour, airline stocks have responded to the harsh words. The airlines are a supper sensitive gage to the progress of the negotiations. Again, it is the common belief that oil prices dropped from $147 to $123 because Bush issued an executive order to allow OCS drilling. The reality is that this executive order did nothing. The congressional hold on drilling was in place before and after the executive release. The timing of the order was the key point. The timing was done to coincide with new supplies coming on line and with progress in the talks with Iran. OCS drilling is a worthy objective but it is a minor objective compared with the deal with Iran.

One possible scenario is that the US dollar will strengthen sharply when the last hurdle to a deal is cleared. Should the dollar retrace its decline of the past few years, the price of oil would fall to about $70 on that issue alone. I suspect the full dollar re-tracement will take at least a year, however, the supply demand situation is such that $70 could come true even without a full re-tracement.

As a group, the major airlines lost only $150 million this past quarter, ignoring one time special items. This performance is many times better than the fears expressed by market pundits just a few weeks ago. Since then the price of oil has fallen 15%.

This afternoon the price of oil has jumped. The story reported on CNBC is that the jump is a result of the Presidents threat to veto the house speculation bill. Sure! A bill that is still in committee that Bush is obviously against, a bill that would do little but add a bit of volatility to the oil markets, has caused the price of millions of barrels of oil to jump $3! The above paragraphs give you the bulk of the real story. If there is a sign of progress before Saturday, the markets will do well. Again, the deal is a multi-trillion dollar deal. None of us should expect it to be completed easily.

Odds are good that more dickering will be required next week. Are the democrats trying to find out about the success or failure of talks with Iran before deciding to vote on OCS drilling? They really do not want to vote but they fear they must! The Deadline Looms Large!

$$$$ Markets are Moving $$$$ Polls Are Tightening

Markets Moving

This morning, stocks are moving up. Housing, auto, and financial shares are enjoying the ride. Now that housing "solutions" have been provided, the market focus is back on energy. It has become clear that the congress is going to be forced to vote on energy matters more than once between now and the election. Congress will be forced to vote on off-shore drilling; congress will be forced to vote on the nuclear power agreement with India; and, congress will be forced to accept or to vote on the nuclear power agreement with Russia. If a deal is made with Iran, congress will be forced to vote on a 123 nuclear power agreement with Iran.

Should a peace deal be negotiated with Iran, which will include a 123 agreement, those who oppose the war against terror and nuclear power will be in an awkward position. Voting for the agreement will in effect be an endorsement of the whole Bush strategy in Iraq and the rest of the Middle East. So far, democratic congressional leaders have protected Obama from having to vote on energy matters.

Passing a peace deal with Iran, that takes the production of nuclear fuel out of Iran's control will be hard to vote against. With the prospects of passage being strong, the price of oil could easily trade down to the $70 or $80 range prior to the final vote. Can you imagine a vote against the deal under such circumstances?

Polls Are Moving

Obama leads McCain by a surprisingly low margin. John Kerry lead Bush by a larger margin at this point in 2004. Flip Michigan and Ohio and McCain has the lead. The Gallup Poll of likely voters already has McCain in the lead.

Both parties are fighting over "Reagan Democrats". These middle class white voters tend to be catholics located in the rust belt. They are feeling economic pain. Many jobs in Ohio and Michigan have been lost to automation. Democrats have tried to blame these losses on NAFTA but "facts are stubborn" (John Adams?). My logical arguments, such as the fact that China has lost more jobs to automation than has America, are not persuasive. The family that is hurting wants a friend who is willing to cry in their beer with them.

Both McCain and Obama are political professionals. They each play the game very well. However, in the political game, the best do not appear to be the most polished. The best have an Andy Griffin or Sam Ervin quality. Even today, Bush, our President for the past 8 years, is seen, by many, as a dullard. Obama is a bit too smooth for his own good. McCain has used his "straight talk" to gain credibility. When one of his advisers, Phil Graham, said the recession is a mental recession, McCain was quick to disavow the comments and Graham resigned. McCain knows that he must be sympathetic to the concerns of the down trodden. Larry Kudlow keeps asking the question, why does McCain trash big business. McCain understands that the rust belt, union, middle class view of big business is on par with Kudlow's view of big government. We vote for the person who shares our views. McCain has a disdain for big government that draws Kudlow to his side and he has a disdain for "big business" (corruption, excess pay, excess profits) that draws "Reagan Democrats" to his side.

McCain should bash excessive profits all he needs provided he is for economic policies that will create huge excessive profits; profits that are ultimately shared by all Americans. McCain is correctly in favor of reducing US corporate tax rates to the levels of tax in Europe (and the rest of the world). We cannot expect companies to locate in America and to produce jobs in America if they get better tax treatment in Europe. While it is difficult for the middle class rust belt voter, who has lived in a highly unionized environment, to appreciate the connection between low tax rates and job increases, McCain will not be able to create jobs for these folks unless he is elected. While McCain is not likely to lose many business votes to the left by saying corporate executives make too much money, he may gain a substantial number of "middle voters".

Obama also understands the importance of the rust belt vote. Tim Kaine, Governor of Virgina is reportedly one of the front runners for his running mate. Pundits suggest this selection is about trying to win Virginia, a state that, with the exception of Lyndon Johnson, has voted for the republican candidate for many years. The more important consideration is that as a Catholic, Kaine could help Obama hold the rust belt states.

Only a few thousand votes in Ohio could have produced President Kerry. The talk about McCain's VP keeps bouncing around the rust belt. Tom Ridge of Pennsylvania has been frequently mentioned but McCain is down 7 points in PA and Ridge might not do much for McCain in Ohio or Michigan. The winner of two of three, out of PA, MI, and OH is the likely president. Romney, a favorite son of Michigan, is the odds on favorite. The former governor of Massachusetts has demonstrated an ability to win the middle to the middle left of voters. He also has the ability to raise huge campaign funds. Believe it or not, Romney became the favorite of the far right as the last great chance to dethrone McCain in the primary. He is not a favorite of the Christian coalition. He is certainly not my personal favorite but the investment question winning. Because we are coming into the start of a new real estate cycle and the start of the business phase of the economic cycle, the economy will do well regardless of who is President. The paradox is that McCain's moves to eliminate pork will mean that the markets will do less well during the early years of a McCain Presidency than they would under an Obama Presidency.


Based on my articles about the coming "surge" in nuclear power, one might be tempted to buy uranium miners. That would probably be a mistake. The 45 nuclear power plants to be built in Russia, under the 123 Agreement, will be designed to almost fully burn nuclear waste fuel. Twenty years ago, only 4% of nuclear fuel was burned. Today a lot of plants can burn 5% and new technology from Tobisha will burn 6%, in existing plants. The new plants will burn more than 65%! All the waste fuel that has been stored for the past 30 years suddenly becomes feed stock for these plants; something a true environmentalist should love.

McCain is for nuclear power while Obama has carefully constructed a "for it under certain circumstances position". Obama can be for it if the political mode swings his way. Get ready for a big swing. I predict that Obama will vote for nuclear power between now and the election.

The US Government just made a 7 billion dollar grant to help the US catch up with Russia in regard to burning "waste" fuel. It will take 15 years. In the mean time, Russia has agreed to earn a few trillion bucks by taking in waste fuel from the rest of the world. The needed ratio of "low burn" to "high burn" plants is about 10 to 1. India has a fast breeder reactor under construction now. If Obama and other democrats vote down the agreement with India, India will simply buy its fuel from Russia, Australia or Canada. The deal that has been made with India does not obligate them to use US technology. They would like to but they don't have to. Can you see the predicament the democrats will face? Vote against nuclear and lose business to Russia?

By the way, the 7th largest uranium mine in the world sits idle in Virginia. The people of America are growing tired of paying 700 billion dollars per year for foreign oil when we have resources available in the US!

The deal offered to Iran is not just the best deal in town, it is the only deal in town. The situation is like that of a huge freight train that has pulled out of the station, it is only going 10 miles per hour but it is gaining momentum. Iran must get on board or it will miss the train. They cannot wait for the Russian train or the Chinese train or the European train of the Indian train or the Japanese train. The train pulling out of the station is all of these and more.

The Markets are Moving and the Polls are Tightening $$$

The markets are "smelling" the future. Stocks have started to rise, while the average person knows very little about the "New Age", a time of game changing low cost energy and a time of relative world peace. A short time ago, a common fear was that democrats will raise taxes in order to fund massive government programs. My bet is that McCain is our next President. My bet is that Tom Coburn will continue to force the Senate to show how it will pay for new programs. My bet is that the tax payers will stop paying 35% of the cost of unreliable wind mills and they will drive past ethanol stations in protest of the low fuel mileage. Yes, it will take years for nuclear plants to be finished but Thunder Horse is coming on line now, wells in Iraq are coming on line now, wells in Iran are ready to start pumping again, 30 Trillion Cubic Feet of Gas has started to flow from under Dallas-Fort Worth, etc. Buy stocks now because it only takes a tiny percentage of the knowing to push up prices long before the magnitude of the "peaceful use of nuclear power deals" is appreciated by the public.

Covered Bonds to the Housing Rescue

Last week, Hank Paulson, the Bank of America, Citibank, JP Morgan-Chase and Wells Fargo kicked off a new home mortgage financing plan. More than two hundred years ago, the USA and Europe followed different forks in the mortgage market road. The US went the route of having banks sell million dollar packages of mortgages. Banks issued mortgages and then got rid of them. They may or may not have kept a servicing contract. Under this plan, homeowners send their payment to the servicer, who takes a small fee and sends the balance to the owner of the mortgage. Fannie Mae and Freddie Mac, quasi-government companies have purchased about half of all US mortgages. Under such a plan, the very large pools of mortgages are sliced and diced in many ways to make pieces that can then be resold to mutual funds and other investors.

Under the European plan, the banks hold the mortgages they issue. The customers deal with one bank while making the loan and while paying the loan. If a customer is having difficulty making the payment, he has the ear of his local banker to bend.

To finance mortgages, banks may issue "covered bonds". These bonds are backed by mortgages but, the bond buyers get a straight forward product that is not directly dependent on timely payments. Furthermore the buyers do not own a complicated investment. While the holder of a mortgage receives a stream of payments of ever changing amounts of interest and principle, the holder of a bond receives interest payments only and his principle balance remains constant until paid back. The complications of mortgage payment cash flows are properly left for the banks to handle.

Under the rules laid out by Paulson, only 80% loan to value, standard mortgages will be used as collateral. The banks will pay the interest on the bonds out of total cash flow. The grade of each bond will be determined by the health of the individual bank. Should the bank fail, the bond holder will most likely recover 100% as they will have a senior claim on the banks assets, including the mortgages that support the bonds.

I like the plan. The European covered bond market is a 3.2 trillion dollar market. The system works well. One of the consequences is a change in the relationship of customers to banks. Many a customer will like dealing with their local banker when they get their loan but also when they buy longer dated fixed income investments. The banks are not required to match bond maturities to mortgage maturities. Banks might use 30 year mortgages as the collateral for 5 and 10 year notes. It takes an actuary with a high speed computer to track and manage the cash flows but that is the business banks are in.

The Housing Turn

Housing sales typically turn up well before the "national bottom" in the housing market. Even well before the national bottom in housing starts. In this particular cycle, Michigan and Nevada show how certain markets can distort national averages. Michigan is the rust belt state of the rust belt. The price of the average home in Detroit has fallen from $97,800 in 2003 to $19,400 in May of 2008! The price of second homes in Las Vegas soared to incredible heights by 2005 but have since collapsed by more than 50%. The housing market in many communities is soft but nothing at all like Detroit or Las Vegas.

Using the 1973-1974 downturn, housing sales turned in January of 1974. The national average price of homes did not begin to appreciate until a year later. During the early 1980's downturn, the peak price of oil and the bottom of housing sales both occurred in March of 1980. House prices did not start to rise until January of 1982. The people that bought bargains from 1974 to 1975 made extremely high returns because they were able to scoop fully leveraged assets. Many a $100,000 house with a $100,000 mortgage bounced to a $120,000 house with a $100,000 mortgage in just a year or two. Those who paid a dollar to assume the payments turned a dollar into $20,000.

During this cycle, the turn in oil prices was delayed by conflicts in the Middle East and by the failure of congress to encourage energy production. One result is that country after country is slamming on the economic brake. The following are the recent increases in short term interest rates, India .5%, Pakistan 1%, Columbia .5% to 7 year high, South Africa 6 increases in 1 year, Russia 1%, Israel .25%, Philippine .5%, Brazil .75%. This slamming of the brakes is bringing down demand for oil, bringing down the demand for money, bringing down the demand for housing, bringing down inflation. Lower bond rates will result from lower inflation. Lower bond rates will lead to lower mortgage rates and increase demand for houses.

Covered Bonds to the Rescue

In the USA, short term money market investments have reached record levels. There are about 6 trillion dollars sitting in low-rate short-term accounts. Most of these money market investments are not held by local banks. Under the new plan, many a bank customer will be easily convinced to move funds from a 1.5% money market account to a 5% 7-year covered bond. In recent months, the bank that made a 6.5% mortgage loan had to "have the cash" to make the loan. With the frozen-up mortgage market, he was stuck with the loans he made and had no safe way to finance more. Please note that the 20% safety margin is put up by the home buyer. The bank does not deplete its capital by making mortgage loans the ratio of bonds to mortgage is 1 to 1. One hundred percent of the loans can be used as collateral.

Should banks move 20% of the money market funds over the next 5 years, they will have freed up more than a trillion dollars for the mortgage market. Houses are once again very affordable. The payment on a 6.5% mortgage is within the means of many potential buyers. Should tight short term rates bring down inflation, the mortgage rates could reach 50 year lows. The rebound in the housing market could be quite strong.

The housing market is not turning on a dime but it is turning. Of the 20 cities in the latest Case-Schiller Survey, 7 markets showed price increases. Hank Paulson has won a major victory for free enterprise; the big banks will no longer face so much competition from the government backed enterprises. Unfortunately, Fannie and Freddie were only crippled, not put out of business. Theoretically Paulson holds the power to put them out within the next 18 months but these government backed corporations do serve another political purpose. Politicians from both sides of the isle like keeping a few "goodies" in reserve and these government corporations are ideal for patronage job placements.

When Frederic Bastiat wrote The Petition of the Candle Maker (I think in the early 1800's), he wrote about the silliness of trade protection. Still, I think it appropriate to mention his petition in regard to the mortgage market. Bastiat suggested that all shutters, blinds, curtains, skylights, holes and chinks be closed because the Sun was causing harm to local candle stick makers. Democrats would renegotiate trade deals because China sells stuff to cheap. Democrats would block the Sun if it was in the best interest of their lobbies. It is appropriate that the government stay out of the mortgage market. The government, like the Sun, is just too powerful.

Tuesday, July 29, 2008

$5 Million Well Spent

A "buzzer" rained down pain in Pakistan yesterday. The Long War Journal says, a US Predator drone either fired a Hellfire Missile or it spotted for a precision guided artillery strike. Six of the bad guys bit the dust. Three of these were Taliban leaders and three were foreign insurgents. Abu Khabab was the big prize. The US "Rewards for Justice" bounty was $5 million. Khabab was of Egyptian descent and was an expert in biological and chemical weapons.

In recent months, there have been at least 6 occasions of US strikes within Pakistan. It takes intelligence within the community to know when and where to strike. The war in Iraq was won by paying local citizens to help kick the bad guys out. A similar process is now underway in the mountains of Pakistan. The Saudis are helping to fund the payments. Should a deal be made with Iran, then low and behold, the Saudis and the Iranians will be on the same side in the war on terror, as will the USA!

It is my belief that 1,000's of American lives will be saved by the demise of al Qaeda leaders. Five Million seems a fare price to take out one who has trained thousands of insurgents who have killed 100's of American soldiers and thousands of innocent civilians.


Mop-up operations are underway in Iraq. Bombs continue to occasionally explode but the bad guys are being mopped-up or they are "high tailing it out of there". There is evidence that Iran is allowing insurgents being chased out of Iraq to travel across Iran and into the mountains of Afghanistan/Pakistan. The vice-president of Iran says that a lot of problems will be solved soon after serious negotiations between the US and Iran are begun. He says Iran can help with problems in Pakistan, Afghanistan, Lebanon, Palestine and with the price of oil. In case you have not noticed, serious negotiations have been in progress for a long time.

Condoleezza Rice is about to set a new record for travel by a Secretary of State. This week, she will visit Pakistan, China, Israel and Italy. She is playing several 3-D chess matches at the same time. Diplomacy here, there and everywhere. She and the Bush administration have enlisted a lot of help. Russia and China are for allowing Iran to join the Shanghai Cooperative Council but not right now. When China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan meet, the Iran delegation is allowed to attend but only as a provisional member. The recent natural gas deal between China, Russia and Kazakhstan gave Iran just one more dose of heart burn. Iran is getting pounded from all sides. The Saudis recently offered to buy 2.4 billion dollars worth of Russian Arms, provided, Russia agrees to limit its support for Iran. As best as I can determine, Iranian oil exports have fallen from 4+ million barrels per day to 2.5 million barrels per day. The world has replaced the decrease and is still well supplied. US consumption of gasoline has fallen by the largest percentage ever.

One of Iran's "friends", Libya expressed a willingness to limit oil production a couple of months ago in support of Iran. A couple of days ago, Libya announced a new oil discovery that will produce at least 50,000 barrels per day by 2010. Americans who scream for energy independence must come to realize that even the bad guys will keep selling oil to us. We need strategic reserves and we should drill to produce as much as we can but we should continue to trade what we have for what we need.

No, it does not make sense to leave billions of barrels in the ground. Our SPR of 700 million barrels, in addition to millions of barrels stored by commercial users, is about right. Leaving 10 billion barrels in ANWR is pointless, especially since the price of the nuclear alternative continues to decline.


In the old days, the USA and Russia were in an arms race. Breeder reactors were used to make some electricity plus some plutonium for use in nuclear bombs. In this new age, burner reactors are being used to produce electricity and to turn excess plutonium into even more electricity. All sorts of new nuclear technologies are under development. The old reactors originally burned 4% of the nuclear fuel. Those reactors have been boosted to 5% and will soon be boosted to 6% but new designs will burn 65% and will take the 94% waste from the old reators and burn 65% of that "waste fuel" as well! Based on these new technologies, world wide annual consumption of uranium will be reduced from 64,000 tons to 3,200 tons! There are 5.5 million tons of discovered reserves on our planet. There are probably at least as many more that are undiscovered. In addition, it is know that there are 4 to 4.6 billion tons of uranium in ocean water. The Next Big Future web site reports that Japan has harvested from the ocean but the cost of earth mined uranium is much cheaper. With or without the uranium from the ocean, we have the energy to last thousands of years.


I get a big kick out of democrats who say that it is senseless to drill for oil in Alaska because the production will be small relative to total usage and because it will take years to produce. When the score is tied, 85 to 85, a 1 point foul shot is all that is needed to win the game.

World supply is about 85 million barrels per day and world demand is about 85 million barrels per day at today's price. To win this game, we do not need to find another 85 million barrels per day. If we add a million barrels per day from Alaska, the new supply will be 86 million barrels per day. The new demand will be 86 million barrels per day at a lower price. No one knows how much lower but OPEC leaders believe $78 oil is in the near future. How long are we going to leave Michael on the bench?

The high price of oil has boosted demand for uranium. Tio Rino and others are making massive investments to increase production. USA production of nuclear power produces the equivalent of 3.5 million barrels of oil per day. We import about 11 million barrels per day. Those who desire to be totally energy independent should support 3 times the number of nuclear power plants that we have today (104 US working plants).


The "normal" drop in commodity prices is past due. For example, there was a steep fall in the price of oil from March of 1980 to September of 1982 before the stock market soared. The price of oil went down during the bulk of the years of slowdown. The price continued to fall after the stock market took-off. This time, the slowdown is long in the tooth and oil prices only recently began to fall. The perceived risk of war with Iran and the failure of the congress to use common sense has held off the sharp decline.

The market is responding. Dozens of countries are raising short term interest rates to snuff out the inflation of high food and fuel. Do a Google News Search on the words "central bank" and you will see how widespread the move, nations on all continents, developed and non developed, resource rich and resource poor, countries of all stripes are tightening down. Under normal circumstances, high short rates would cause commodity prices to fall, bonds to rise and stocks to rotate. This time, energy and related stocks are being propped up by the same forces that believe there is a long term energy crisis. There is one in Iran.

The citizens of Iran are having to wait in long lines to procure gasoline. Everyday, Amadinejhad tries to move the UN-Iran negotiations forward without suspending the production of nuclear fuel. It took North Korea a long time to suspend its nuclear activities. The country is in sad shape but it has a bright future. Trade relations are already being rebuilt and negotiations are in progress that will bring North Korea out of the cold. Iran has until Saturday to respond. I believe the two sides are very close to agreement. Once there is agreement, a lot of connected events will take place; lower oil, lower inflation, improved investment performance.


Harry Reid has angered the extreme left by suggesting it is finally time to allow Blue Dog Democrats the chance to vote for drilling before the elections. Reid's idea is to offer drilling in certain areas. The lefties say they don't care if the score is tied 85 to 85. They had rather lose the energy game than to lose the election. This is the same crowd that would rather lose the war in Iraq than lose the election.

Holding back oil production is like preventing water from flowing over a dam. Brazil has discovered about 40 billion barrels in deep waters while the US has made 80% of its waters off limits. We can buy from Brazil or we can drill for ourselves. A vote to drill is likely to occur next week. I bet the price of oil will fall by $15 per barrel within a week of a decent drilling proposal.

Monday, July 28, 2008

The Future, This Week and Next, as Suggested by Congress, Iran and Iraq

What we know about the future is a reflection of the past. Things have happened that we know will influence what will happen.

Housing and Banking:

The house and the senate have passed a housing bill. This bill will be signed by the President this week. This bill will help build the floor that has already been developing in the housing market. Inventories of unsold homes have reached the lowest levels in years. This low level of inventories is hiding behind the fact that sales, as a result of negative sentiment, are slow. Houses are, once again, very affordable and the price of the average home will be higher three months from now. The timing of the actions of our politicians is just as one would expect, just as the market is ready to turn and just a few months before the election, the compromise has been reached that will "solve" the housing and banking crisis. Mortgage backed securities owned by banks are set to rebound in value. The housing market appears to be much like the market that turned sharply in 1991.

The Scramble For Gasoline:

With new supplies coming on line at the fastest pace in several years, the price of gasoline is ready to take a dip. Based on wholesale prices reached last week, the retail price should be down to the $3.62 area in a few days, two weeks at the outside. On the other hand, Iran is in the hunt for gasoline supplies. The country is importing as much as it can because it has been given until August 2 to make a direct response to the peace offer on the table. Should the deal go south, the US/UN has said that the 4th round of sanctions will be a cut off in gasoline supplies. A practice naval operation to cut off supplies is in progress.

China just went through a dramatic surge in its demand for oil but the only rational explanation for the large bump was to fill storage facilities. Businesses, farmers, and governments around the world have stored large emergency supplies; the sum of these supplies is known to be well above 4 billion barrels. These supplies will "leak back into the market" as the parties gradually become aware that the short term "crisis" is over.

The Cooking Deal:

A few weeks ago, a pending cut-off of imports to Iran, in effect a naval blockade, would have caused the price of gold and crude oil to soar and the value of the US dollar to fall. This past week, the opposite happened. The cut off of gasoline to Iran will simply mean there is more for the rest of us to use. Of course, the situation will remain volatile until a deal is announced but, the deal being cooked is like twice baked potatoes; the cooking is done but there is still rehashing to be accomplished and a presentation to be made.

Iran has already agreed to suspend its production of uranium, provided one of the new international production consortium is located in Iran. At each sticking point in the negotiations, the leaders of Iran scream that they will not give up their sovereign right to enrich uranium; no matter the details of the rest of the agreement, the Iranian leaders will have "saved face" when the deal includes uranium refinement on Iranian soil.

The parties have been engaged for quite a long time. This past week, a number of forces in Iraq which have had the prior backing of Iran were "taken out". Cache after cache of Iranian weapons are being found week after week. The evidence suggests that Iran is cooperating with Iraq to "mop up" the opposing forces. The number of "incidents" happening each week has fallen from around 1,500 in the weeks soon after the surge to around 250 two weeks ago. This past week, Syria cooperated with Lebanese forces in actions against Hizbollah, a group that, in the past has received support from Iran via Syria.

Obama continues to try to divert attention from the success in the main theater to the tribes in the high mountains of Pakistan and Afghanistan. "Bandits" have lived in these high mountains for more than 1,000 years (much longer, I'm sure but one of the most famous of all "bandits" lived there about 1,000 years ago). Obama talks about strategic value. Once Iran is on board with Pakistan and Afghanistan, the "bandits" of these mountains will be of little strategic importance. The men who boarded the planes on 9-11 were not from tribal villages. They were men of the world, several with University educations. It was oil money that supported 9-11, Iran has oil money, the "bandits" of the mountains have none.

Big Troop Withdrawals in 2010:

The Iraqi government and the US government are close to reaching a deal that will call for major troop withdrawals in 2010. The deal will include terms for a long term commitment of a reduced force. As a political issue, the improvement in Iraq cannot continue to be ignored or even denied. As the "mopping up" continues over the coming weeks, unheard of things will happen. For example, embassies from Sunni states will open in Iraq and it is even possible that commercial air traffic will begin.

Big Turns Taking Place, Or Two Ships Passing in the Night:

The Russian stock market just saw a 6% dive. As expected, resource rich economies will suffer as the prices of commodities rolls over. It is interesting that the "big cloud" computer companies, such as Amazon and Google, are rumored to be ready to build data centers in Siberia. Why not? Cloud computers need cheap electricity and they produce a lot of heat. Siberia has cheap resources and it needs heat!

Google is using so much electricity that it needs its own nuclear power plant. The lifetime cost of running a Google server is now much more than the cost to buy it. The recent completion of an undersea data cable from Russia to Japan can carry 640 Gigabytes Per Second! Google has more than 30 data centers. One was recently built in Lenoir NC at a cost of 600 million bucks. Six hundred million bucks times 30 is 18 billion bucks. People keep talking about a recession while companies like Google keep building new facilities. The "recession wash tub" continues to slosh around but the US economy is not in recession. The UK is much closer to recession than is the US.

In the "old days", you probably bought software on a CD. Today, your computer is probably routinely updated by Internet download. Big companies are contracting with firms such as Amazon and Google to keep the CD and the computer and to run the companies "off site" IT department. The efficiencies are enormous. The average company has no reason to hire an IT department when it can contract for services at a fraction of the costs. In effect, Russia and the rest of the world can benefit when Russia "ships" electrons around the world by fiber optic cable instead of shipping oil around the world. The cost of shipping energy by electronic cable is a tiny fraction of the cost of shipping it any other way.

Congress, Congress, Congress:

Over the past several months congress has gone in circle after circle after circle. Harry Reid and Nancy Pelosi have, so far, been successful in not allowing congress to vote for or against off-shore drilling. Along the way, Tom Coburn, Republican Senator from Oklahoma, has insisted that the Senate stop passing multi-billion dollar bills without debate or the opportunity of amendment. Tom has made a few people mad along the way, as a lot of pork is normally passed by "unanimous consent" but, Tom has held his ground. This week, Harry Reid, having packaged up a number of "sweet deals", will try to shove 35 bills down Tom's throat. It is going to be interesting, will the pork buy the congress again or will the politicians stand their ground in an pre-election battle? Over in the house, speaker, John Boehner has asked republicans to vote against adjournment if a vote on drilling does not take place.

For the congress to take any credit for lowering oil prices, they really need to vote before the deal with Iran is concluded. It is my hope and prayer that a nasty compromise will not be reached. "Feeders" from both parties are eager for a compromise deal to include mandates for flex fuels or wind mill subsidies or other "goodies". This at a time when the public in ever greater numbers are driving past ethanol stations to get the "good stuff". Gasoline mixed with 10% ethanol is producing reductions in gasoline mileage of 3 to 4%. One can afford to pay 12 to 14 cents more for the "good stuff" to break even. Throw in long term maintenance costs and ethanol should be avoided. If the oil drilling bill includes mandates or subsides for 85% ethanol flex-fuel, no thanks!

Past, Present and Future:

Bryan Caplan's book, "The Myth of the Rational Voter" is worth another mention. I have written about how pervasive pessimism has reduced the PE ratio of stocks. Bryan writes about how pervasive pessimism produces unexpected attitudes by voters. These attitudes are wound around the tendency of voters to "over estimate the severity of economic problems and to underestimate the past, present and future performance of the economy". Sometimes, pessimism can be turned to advantage. The pessimist can easily be converted from one who believes in the coming environmental disaster to one who believes in the coming economic disaster.

The majority believes, pessimistically, that the price of oil is going to continue to soar. Many believe the situation will be one of desperation in a few years, as wars and more wars are fought over food and energy. Four dollar a gallon gasoline has swung the great middle from a focus on environmental concerns to economic concerns. The situation is beautiful for McCain and a number of republican representatives. The energy issue has turned into the key issue of the coming election. The opposition to the most economic of energy sources, by democrats, has put them on the wrong political side of the issue.

Again, it does not matter that the votes are based on false beliefs. The public believes that energy costs are at record levels. The reality is that the average person spends less on energy and food than he did at the peaks of the past. The public believes that energy supplies are running out, even when it is known that oil production will jump by more than 3 million barrels per day in both 2008 and 2009. The public believes that energy supplies will run out in the near future, even though there are virtually limitless amounts of nuclear fuel available (the sun is a nuclear power plant and there are thousands of years of uranium fuel on the earth). The already negotiated treaties between various countries, including a major treaty between Russia and the USA, is resulting in the rapid construction of scores of nuclear power plants. Nuclear electricity will be used as a substitute for other sources.

The Robotic Car:

Robotic cars have already shown the ability to navigate city streets. The next step, already planned, will be to declare 100 or so blocks of an inter-city or two off limits to all but robotic taxis. To travel within these areas, one will "call for a robo-taxi". All of these cars will be designed for fuel economy. Work out the kinks in a small area and then expand the area. Work out the kinks in an expanded area and the next thing you know cities across the country will opt for electric robotic city cars. Why would any city dweller own a car, including the obligation to insure it and to park it, when he can use one whenever he wants for a fraction of the cost? For best results, the "robotic taxi companies should be privately owned".

As always, we look at the future through a clouded glass. Getting from here to there or there or there will include some unexpected turns and a surprising final destination. However, if one knows that the cost of electricity produced by nuclear fuel is less than that produced by carbon sources and if one knows that the cost of nuclear is going down, then it is clear that abundant nuclear power is in our future.

Will the congress pack up and go home by August 8 without passing an energy bill? Will legislators with a 9% approval rating dare? How many more pieces are there to the "Middle East Piece Deal"? Another big piece of this puzzle, the deal for troops in Iraq, next to Iran, for years to come, is said to be all but agreed. Will the Iranian people, sitting on massive reserves of oil, accept being forced to live without gasoline? (Iran has a couple of small refineries but UN forces can put the hurt on the Iranian economy if necessary.) A deal will get done, which will include the responsibility of all signors to assist in the reduction of terrorism.

The future is bright. We try to make it dim but, contrary data is flying around the world at speeds thought impossible just a few years ago. We are living through wave after wave of innovation.

As a last example of these incredible times, Russia and Kazakhstan are, in partnership, sending natural gas to China! This is a win, win, win commercial transaction with a new republic connecting two emerging market based economies. When the deal is finished with Iran, Russia, Iran and the USA win, along with a few hundred other countries.

We are on the edge of great things. Pay attention. Our grandchildren will read about these times on their electronic readers in the years to come.

Thursday, July 24, 2008

Easy Times For Emerging Growth Over

During the second half of the Juglar Business Cycle, the emerging growth countries suffer at the expense of US companies. US companies are benefiting from the weak dollar. Prices of US stocks will go up by the nominal increase plus the increase in currency value.

I have a more than a full plate of activities scheduled for the next few days. Keep on buying US stocks! US stocks are still cheap.

Wednesday, July 23, 2008

The Most Important Airline Question

A regular reader purchased CAL yesterday, before the $4 per share move. Naturally his friends are now curious about airline stocks. One friend asked the the following key question.

Do you know the percentage of airline travel that is business vs. leisure?

The question is almost a bulls eye in regard to the upcoming boom in airline shares. I cannot recall the percentage (a detailed search of my emails over the past 8 years would probably reveal the answer), but the key point is that the major airlines make their profits from business travelers. The main thing they do with individuals is to fill up empty seats to recover costs.

Major airlines make their money during the second half of the Juglar 9-Year Business cycle. It is during this time that demand is high and high demand is wonderful for an extremely leveraged business (airlines are extremely leveraged from the operating point of view and from the financial point of view). The price of the last seat sold pushes up the price of every other seat on the plane. Take a look at the 1991 to 2000 cycle to see the full cycle play out. After the recession of 1990-1991, consumer stocks took off and the "normal" business cycle was underway. Airlines did OK. Then, in 1995, the economy went through its normal mid-cycle correction. As it came out of this correction, the airlines soared for three years.

When it is time for business travel to take place, the cost of the ticket is a relatively small consideration. The value of the business to be achieved might be 10,000 times as much as the cost of the trip. Of course, business trips do not have equal value but during the second half of the Juglar Cycle, the value of most trips is more than the value placed on the majority of leisure trips. As a result, leisure seat sales are diminished and $79 seats are frequently sold for $399.

The very tricky part of the current cycle is that the 18.3 year real estate cycle trough has hit during the mid cycle correction of the 9-Year Juglar Business Cycle. The good news is that the down turn will not be as long or as deep as it would have been if the 18.3 year, Long Cycle, had hit at the end of the 9-year cycle. The real estate cycle tends to be 17 to 22 years long but the smoothed curve is 18.3 years. Since it was 11 years from the bottom in 1991 bottom to the 2002 bottom, it appeared that this real estate cycle would be of the long variety. In 2005, it appeared that there was not enough time to have a real estate caused stock market trough and a recovery prior to the 2008 elections. As a result, I made the mistake of selling my bonds and holding on to my airline stocks, that was a 3 million dollar mistake. As we know now, the Secretary of the Treasury "engineered" a very swift run from top to bottom.

As Chairman of Goldman Sachs, Paulson was able to use the eagerness of congress, to give anybody and everybody in any and every location a home loan, as a tool for "infecting" "safe" mortgage backed securities with "dirty paper". After Paulson became the Secretary of Treasury, it was easy for him, in cooperation with the FOMC to bring about a crash in the mortgage markets. Along the way, an arch old enemy of Paulson, at Bear Stearns, was reduced from a billionaire to a 10 millionaire. Today, the congress passed legislation which will increase the power of the treasury and the FOMC over the mortgage market, Paulson has scored a win, win, win for the "big boys". In only two and a half years, the housing market went from a top to a bottom. The top made in 1985 took almost 6 years to make it to the 1991 bottom. One should never bet against the treasury secretary or the FOMC but to bet with them you must first figure out up they are up to. Now that the "fix is in", the markets can show considerable recovery well before the election.

Each day, Obama pushes his hoax in regard to the importance of the war in Afghanistan forward. The reality is that there are no al Qaeda bases in Afghanistan (any more) and Iran was the big spending rich oil country that gave much of the support to terrorist. Obama is doing a good job of "selling goods" but he will be forced to change his position again as the events on the ground change.

If you do a poll about belief in business cycles, a number of people will respond negatively. If you further inquire about cycles in general, a slightly higher number will acknowledge belief in cycles. If you ask if they believe the days in summer are longer than the days in winter, they will say of course.

From May 5, to June 2, 2008 we experienced a Blue Moon. In other words, we experienced an "extra" moon cycle during the spring. This is not such an unusual event. It happens every 2.73 years but, when it happens, few people even notice.

The 18.3 year (Long) real estate cycle and even the 9-year (Juglar) business cycle are discounted by investors who have short term outlooks and short term memories. Since the 9-year cycle is composed of two separate (Kitchen) inventory cycles and since the second cycle is substantially different from the first, the average investor does not put the cycles to good use. We have circled around to the importance of the business phase of the Juglar Cycle. It is the second half of the Juglar Cycle when business spending goes berserk.

Think about what is about to happen in regard to the hand held computer. The Amazon Kindle, the Apple iPhone, the Google Android are just three examples but the business application of these and other products will drive the markets. Today, one can buy a book for half the retail price and start reading it a few seconds after ordering it from Amazon. Service technicians have had this capability for a long time but the cost is now so cheap that Amazon can offer the downloads for free. One can subscribe to a bulky newspaper and the price charged is considerable than even the cost of physical delivery. The speed of connections is jumping. The average number of times a person accesses the Internet per day is getting ready to grow exponentially for several years. Companies such as Cisco are going to sell billions of new routers and companies such as INTC are going to sell billions of chips.

My grand daughter and I are headed to the beach in a couple of minutes. I will cut this short. The summary is that we are at the start of a new 18.3-year real estate cycle and we are about to start the second half of a 9-year Juglar Cycle. This means that almost any US stock will work out well. During the late stages of the Juglar Cycle, it will be the big cap US growth stocks leading the way. The emerging growth shares will struggle the most. The steep decline in commodity prices could cause a pull back but it will be energy, basic materials, utilities and consumer staples that take a hit during such a pull back. The business cycle stocks, every thing from the big IBM's and GE's to the INTC's and airlines will do well.

Life is Precious!

Yesterday, Courtney learned that the baby she has carried for 12 weeks passed away four weeks ago. She will have surgery tomorrow. She and Jonathan, strong of faith, are doing well.

Thirty-one years ago, Marilyn and I lost a little one between the birth of Courtney and Whitney. While we can't understand the whys or the whatfors, we know that God knows what is best. We take what is given to us with thanksgiving and praise. We allow ourselves to kid Whitney that she got lucky :-) and we look forward to the days to come.

Our Judaic-Christian Heritage, from the days of Abraham, has been one that values life. We sometimes choose to send our young men and women into battle but only when we believe the net result will be lives saved. We do not strap on bombs and explode them in the middle of innocent crowds.

For the next few days, I will continue to monitor the markets but I will not open individual accounts. I encourage you to "Buy Something".

From May 5 to June 2, 2008 we enjoyed a Blue Moon. Blue Moon's are not so rare as is commonly believed. They occur every 2.72 years because 12 lunar months are 11 days shorter than our calendar year. Some people say they don't believe in cycles. These people have never paid much attention to the sun, the moon and the stars.

Today, we sit at an unusual time. We are at or near the bottom of the Juglar Mid Cycle Correction, which happens on average every 9 years and we are also at or near the bottom of the Long Cycle. The Long Cycle is the real estate cycle that averages 18.3 years from bottom to bottom or top to top. The failure of the Bank of New England the first week of January 1991 was about 10 days prior to the 1991 bottom and the failure of IndyMac, about two weeks ago, will probably prove to be about 10 days prior to the 2008 bottom. Under these circumstances, it is hard for an investor to go wrong.

The important thing for investors is to not try to catch the exact bottom. The UN Security Council in cooperation with many other nations has proposed a massive peace agreement with Iran. Iran has been given until August 2 to respond to the latest proposals. The deal will not be done on August 2 but the market is "smelling" future success. Markets tend to go up 3 to 9 months prior to events. By the time the public knows about an event, the market has fully discounted it.

You nor I know how close the Iranians are to making a deal. It does not matter. The economic cycle is powerful. It will roll forward. I hope you take advantage. Life is precious, live it to the fullest!

Tuesday, July 22, 2008


In 10 days, Democrats plan to head for home without allowing an up or down vote on offshore drilling. Pelosi and Reid are standing their ground, for now. With T. Boone hammering away that we spend 4 times as much on foreign oil each year as we spend on the Iraqi war, McCain is within striking distance of Obama. He is dead even in at least one poll but behind 3 or 4 points on average. The news media is in love with Obama, the news media produces many of the polls. The race is tighter than it looks.

A number of moderate democrats would vote for drilling if given the opportunity, it is the common sense thing to do. Energy is likely to be the deciding issue this November. Reid and Pelosi are playing a high risk game of chicken. Surely their plan is to work toward a grand compromise, giving incumbents the opportunity to do something. Incumbents are generally safe but voters will "vote the bums out" if there is no action before November. By the way, the current wholesale price of gas implies a retail price of about $3.70 within a week or two.

CAL jumped $4 per share today! With both Congressional and Iranian negotiations basically on hold, it seems unrealistic to expect the sharp drops in the price of oil to continue short term. However, there has been a stock market shift. Consumer cyclical stocks, financial stocks and airline stocks soared again today. Bank losses have pretty much been written off and airlines did not lose nearly as much as was projected. The price of many things continue to drop, giving consumers spending power. Even stable oil prices could be enough to allow airline stocks to creep higher. CAL has bounced 100% in only 5 days! As noted before, in the face of extreme oil prices, CAL added $500 million to its cash reserves in the last quarter. High oil prices are causing SUVs and small planes to be parked. The cut back in travel is real but the bus, subway and commercial plane are the mass transit winners.

Real Estate is the biggest winner of all. The person who takes over the payment on a $500,000 beach condo, that has a $500,000 mortgage attached will start out with zero equity. However, that property will be worth about $1,500,000 in 15 years. During those 15 years, the rents might pay off $200,000 of the mortgage. The equity will have gone from zero to $1,200,000 with no money down. Of course, the buyer must be prepared to subsidize the rent payments for the first few years.


What's Next?

The normal sequence from here is a sharp decline in commodity prices, a decline in inflation expectations, a decline in mortgage rates and the continued rotation from energy, utilities and basic materials. The ability of Wachovia to hold the bottom without seeking new capital indicates that the bottom in banks has been made. The drag from energy and related stocks may drag broad market indexes down but the bottom in a number of sectors will likely hold.

I will continue to steal a few moments to write over the next few days but company is coming. We have many activities planned. While I am "out of commission" be sure to buy all the non energy stocks you can. Take a look at Amazon. The Kindle reader seems to be gaining momentum. Books are delivered to these devices electronically with total savings ranging from 50 to 90%. The price has fallen to $349. The next generation will probably hold twice as many books and sell for half the price but real savings are being realized by heavy readers.

Oil Down $4 CAL Up $3, More to Come!

For two years, I have been talking about the straw that breaks the camel's back. This camel was tough to break because enough oil had to be stored before Iran could be told to take a hike. The current situation is that the world is well supplied and we do not need Iranian oil. The world wide economic slowdown will cause the demand to fall even more, and the price to fall even more.

Since there has been no agreement with Iran, a lot can still happen but oil usage is not about to climb back to the peak made back in 2005. Those who have purchased scooters or high mileage cars are not going to give them up. They will be joined by others looking to save some dough.

Iran has been given two weeks to "get serious". One irony is that Iran has reported two very large oil discoveries. As I recall, the first was around 750 million barrels and the latest was 500 million barrels. These could be moral boosting stories but, true or not, Iran's oil production could be easily doubled within 5 years of making a deal.

What we currently have is the hoax of peak oil production and the reality of peak oil demand. After the demand peak around 1980, it took 17 years to reach the same level of demand again. By the time it was reached, there were plenty of capped wells available to handle the first 15 million or so barrels of new demand. The huge billion dollar drilling ships tend to keep on drilling year after year. Discoveries are capped and developed only after demand rises.

If you have buying power, BUY SOMETHING! I will be back home next week. I will check the accounts once back home but the sharp drop in oil prices is feeding the buying power of accounts that own airlines.

Got to Run. The decline in oil will not be straight down but it has a long way to go. BUY, BUY, BUY!

Monday, July 21, 2008

Operation Brimstone -- OOOPS!

I mistakenly wrote that Operation Brimstone included 15,000 ships instead of 15,000 sailors. The armada is still impressive. French planes will be deployed from a US carrier and the armada will include several ships that are loaded with cruise missiles. This will be the first US maneuver that includes participation by Brazil. These maneuvers will be conducted off the coast of North Carolina. The purpose will be to train for enforcing a petroleum products embargo against Iran. Iran produces crude oil but has little refining capacity.

After Saturday's meeting of negotiators, Condoleezza Rice met with diplomats from six nations to discuss the upcoming sanctions and their enforcement. There is no rush to war here. The training maneuvers end on July 31 two days prior to the deadline for a response from Iran. George Bush still has 6 months to make life miserable in Iran and six months to help pass UN sanctions. Leftist bloggers continue to state that Bush can hardly wait for the conflict to begin. The reality is that the strategy of Chinese water torture is being played out. The UN/USA coalition is gradually dripping on Iran. The sanctions have been gradually tightened for 29 years. The pace is much faster this year than in the past but Iran is being given every opportunity to negotiate. Iran has much to gain by negotiating peace.


Today, Mexico and Malaysia announced soaring inflation rates. Mexico bumped up short rates and Malaysia will be forced to follow as inflation hit 27 year highs. High inflation means high short rates and high short rates means economic slowdown. Economic slowdown is consistent with falling commodity prices, today the price of corn fell 3%. This market cycle has been a slow mover but it continues to move forward. Stock prices have historically bottomed 6 to 9 months before economic bottoms. In other words, stock prices go up right when it seems the wheels are falling off the economic bus.

The primary distorting factor to this cycle has been the drive to force Iran and other countries to stop supporting terror. The irony is that the left keeps slamming Bush for wanting to invade Iran while his approach has been to surround Iran in order to produce the desired results without a "major war". Had the USA started by attacking Iran directly, the pain experienced by the whole world would have been many times as great. Iran sits on the Straight of Hormuz and it took a lot of preparation to be in the position of being able to impose an embargo on Iran without causing a huge disruption in available oil supplies. It took a lot of years to set aside sufficient reserves and to develop replacement supplies. The rapid growth in China, India and other developing nations has made the task all the more complicated. Never-the-less, the plan laid out long ago is coming together. The timing is just right for playing tough with Iran. During a world wide economic slowdown, Iran understands that its oil is no longer critical. The situation is that the rest of the world can do without Iran's oil much better than Iran can get along without refined oil.

Operation Brimstone is the Sword of Damocles, the height of Chinese Water Torture. The leaders of Iran must decide their next negotiating step while knowing an embargo is being practiced, one that includes an aircraft carrier, a nuclear sub, numerous cruise missile carriers and small craft designed to operate in the shallow waters of the Persian Gulf. The Iranians know that this force has the capacity to dish out a lot of economic pain. The time for Iran to make a deal is before they are in a crippled position.

Today there was hardly a mention of Iran in the news. Obama's sweet treatment by major news carriers sucked all the air out of the room. The most common reason given for the $2 bump in oil prices was the hurricane in the Gulf of Mexico. The majority of investors will be greatly surprised at the ultimate significance of a peace deal with Iran. There are good times ahead but few people know this. Take advantage. Buy leveraged, depressed assets such as resort beach property!

Rice and Bush, Serious as a Heart Attack, Operation Brimstone to Rattle Some Bones

After Iran avoided a direct answer to UN nuclear proposals Saturday, Rice responded that it is time to get serious. It just so happens that Operation Brimstone will take place over the next 10 days. Operation Brimstone is a joint naval exercise that involves 15,000 ships from the USA, France, the UK and Brazil. Many of the "ships" are small craft with crews trained to operate in shallow waters like those of the Persian Gulf. This operation has been planned for many months. It is not clear the extent to which the operation is an exercise (a practice run) or the actual enforcement of UN sanctions. Rice stated that Iran has two weeks to give a serious response or to face a fourth round of sanctions.

A month ago, an action such as Operation Brimstone would have caused the price of oil to jump at least $4 or $5 per barrel. Today, the price went up $2; this in the face of last weeks report showing a decline in demand in the US of 3.5 to 4.5%. The refinery utilization rate is down from 91% last year to 89.5% this year but actual consumption has fallen from 21.5 million barrels per day to 19.8% million barrels per day. The API (American Petroleum Institute) reports that oil demand is the lowest in 5 years and the recent drop in gasoline demand is the most significant decline in 17 years. Those who recall the recession of 1991 might remember that the price of oil dropped by half during this recession. It is true that 99.999% of Americans have never heard of Operation Brimstone but more than a few oil futures traders know about it. I will be surprised if oil goes up much more as the news dribbles out because of the plentiful and growing supply.

Iran is in a box that has been built by the UN/US. The world can get by without Iranian oil much better than Iran can get by without refined oil. The 15,000 ships could prevent refined products from reaching Iran. Some business men in Iran have described UN sanctions as a hardship but not a noose. They say their cost of goods has increased 30% but goods are still available. Will Operation Brimstone result in a serious shortage of oil in Iran? Did the French really send a submarine to participate in a naval exercise with the UK, the USA and Brazil? I will write more about Operation Brimstone over the next 10 days.


Over at the Long War Journal, Bill Roggio reports that the Mahdi Army is still under attack in Iraq. The Mahdi Army was trained in Iran and, in the past, was supported by Iran. Today, Iraqi forces with US air support are putting intelligence to good use. Day after day, arms caches are being discovered and combatants are being captured or killed. It is quite possible that Iran is providing some of the information that is making the Iraqi operations so successful. In any event, almost every day a small victory is scored against these insurgents. Obama's plan to begin the withdrawal of US troops only makes sense because of the great success achieved after Obama voted against the surge.


Countries all around the world are battling very high rates of inflation. The main tool being used to fight the inflation is tighter money (higher short interest rates). Most of this inflation is of a very temporary nature. One way to think of it is "small car inflation".

Car dealers in America are calling up people who purchased fuel efficient cars at any time in the past several years. The owners are being offered premium prices for their fuel efficient cars, because the dealers can resell them at a profit. On Ebay, 5 year old Metros are selling for more than their original retail price. Car dealers have big time pricing power! for fuel efficient cars. Car dealers are selling small cars at premium prices while big trucks sit. Inflation is reported because the price of the sold vehicles is high compared to the previous price of the same models. The price of SUV's is almost irrelevant because few are being sold. When one thinks about inflation, one should think in terms of a weighted average. Of the cars being sold, most are being sold at very high mark ups. In the past, I have talked about this in terms of airline tickets. Low fare flights have been eliminated but the price of continuing flights has soared. The recorded inflation is extreme. The inflation rate will fall significantly when canceled flights are resumed. GNP= PxQ and in an economic slowdown, businesses cut back on the production of what was originally marginally profitable. They continue to produce the goods and serviceds that are profitable, with less competition, they can frequently raise the price right in the middle of the down turn.

The fact that inflation is a lagging indicator is a great thing to know during times like these. The high inflation rates say that the cycle is ready to turn. High inflation is most devastating to non resource rich emerging growth economies at first and then to resource rich economies next. In other words, a country as large as Russia has been making out like bandits as a result of high resource prices. As the world adjusts and the profits from oil begins to fall, the emerging growth countries will be left with slower growth and lower margins.


One of the facts often ignored by liberal media is that the US exports more goods than any other country with the sometimes exception of Germany. Today, the low US dollar is pushing US exports out the door while Germany is hitting a strong Euro wall. Germany just announced that it will bring another car manufacturing line to America.

The US GDP is likely to have approached 3% this quarter. If the liberal media were to report reality instead of bias, it would be widely known that we are in an unusually strong economy even in the middle of a housing, banking and auto recession. The other day, when Bush said the economy is still strong, MSNBC anchors made his statements into a big joke. The housing recession has been no fun but, so far, there has been no general recession. The slow down in Europe has increased the chance of recession there but a sharp decline in energy prices would give the majority of economies a big boost.

Democratic leaders continue to try to blame high oil prices on speculators. Republicans are being forced to vote on trading curbs. The public is looking for relief. Common sense should win this argument. Even though the liberal left is in charge of our elementary schools, most people understand the basics of supply and demand. Even those who believe speculators are the cause of high prices tend to be in favor of adding to domestic supplies. The USA exports more goods and services than any other country but, unfortunately, we prefer to hoard our oil reserves while paying top dollar for imported oil.

Operation Brimstone should rattle some bones. Tight petroleum supplies in Iran could quickly produce gasoline lines if smuggling operations are cut off. When Condoleezza Rice responded Sunday that it was time for Iran to get serious, I wondered which card would be played by the UN/US next. Operation Brimstone has been planned for many months. The fourth round of sanctions have certainly already been planned for months. Iran needs to respond or its economy will wither on the vine.

Democratic leaders have quietly supported the ratcheting up of pressure on Iran (they must appear to be socialist to keep the campaign funds flowing). Funds have been allocated to encourage political dissent in Iran. The leaders of Iran are under great pressure. The only way out of the box is to make a deal. Oil prices will remain high until the congress makes a deal on drilling or until Iran makes a deal or both. My bet is that congress will blink before leaving for home around August 8. Which incumbent wants to go home to run for reelection with $4 gasoline still at the pump? Iran is going to face a full embargo if necessary. It is in Iran's best interest to "make a deal".

Pharma Sparks Starting to Fly

Merger activity is picking up in the big pharma sector. With stocks such as PFE yielding around 7%, dividends have supported the shares. Now, the weak dollar is causing the earnings to pop and one company is going after another.


So many stock groups, including pharmacy companies have struggled against the pending doom of big government. With congress in the control of democrats, the risk to drug companies is considerable. Drug companies must spend small fortunes time and again before succeeding in making a large fortune.

One of the fairy tales often told that supports democratic spending is the one about consumers accounting for 70% of the GDP. I and many others have repeated this false notion for two reasons. First of all, it seems to be an innocent number and second is because of the way government numbers are reported. Liberal media politicians have succeeded in making us all believe that the way to prosperity is to encourage more spending. The $600 rebates created more federal debt. Obama wants to do them again.

In the past, I have presented the national income formula as Y=C+I+G+(Net Exports). The problem is that the I and the G are like exports, net numbers. Consumer consumption is not so complicated. Add up what all consumers spend and you easily arrive at one large number, but how much do companies invest? how much does government spend? The numbers used to insert into the formula are the net investment numbers and net government spending. A lot of "canceling out" occurs in the process. This morning the Market Oracle web site notes what I call the see-saw effect of algebraic formulas, if Y stays the same, then if G goes up, either C or I or both must go down. Democrats seem to think that G could go up to 100% of Y and still be good for the people. Castro tried this approach and we know the results there. The government owes all the houses but lets the citizens use them "free of charge". Who needs central air conditioning in the warm balmy climate of Cuba anyway?


Obama did not just luck into the democratic nomination. Look at his current position on going after terrorist in Afghanistan and you would think he has always been a military hawk. The man is trying to take McCain's issues away. If he succeeds, the perception is that democrats will devastate the drug business, but, in the natural economic cycle, the next 10 years should be good ones for the drug industry. LANNY DAVIS IS ALSO SMART. Lanny is a true blue Clinton professional politician. He notes that Obama is only ahead 4% or so with three months to go. Lanny says democrats should be worried. Lanny understands that democratic presidential candidates tend to be quarter horses versus republican thoroughbreds. A quarter horse is a fine horse and a winner in short distance races. Thoroughbreds are "top end" breeds. They run like the wind once they have warmed up. The winner will win by only a nose.

Obama faded in the last stages of the nomination campaign. McCain has not showed us much so far. Obama is smooth. He is to be admired for his skills. The question is, will substance win over style or vice versus. Obama's policies are the wrong medicine. The key to having a high Y in the formula is to realize that consumers and businesses spend more wisely than do governments. Consumers and businesses spend for "pure" reasons relative to government. When the government pays $350 per $1,000 for wind mill construction, it does not matter to the spender if the investment makes sense for the country. The $350 is going to a "friend". This is the equivalent of the King paying his brother to build wind mills.

One of McCain's strengths is his fight against pork barrel spending. The people have seen that democratic and republican lead congresses cannot resist excessive spending. The most positive thing McCain has to offer is his insistence that spending be justified. Under a McCain presidency, drug companies will be allowed to search for cures and to profit if they are successful.

Sunday, July 20, 2008

The Pelosi Hoax Versus The Real Hoax

Nancy Pelosi declared the proposals to drill for oil a "big hoax". Afterward, knowing it had majority support, she refused to allow the house to vote on the measure. The common complaint of democrats is that it may take 20 years to produce some of the oil from the Outer Continental Shelf (OCS). That was a big part of the argument about ANWR 10 years ago. Oil and gas are seeping into the ocean only a short distance from existing oil infrastructure in Santa Barbara CA. This oil could be brought on line within a year to 18 months. There was an oil spill in Santa Barbara in 1969. The amount of oil seeping out each year is greater than the amount of the oil spill but the "environmentalist" would rather waste the oil and pollute the California coast than let an oil company process it. Every four years, this oil "leak" is greater than the Exxon Valdez oil tanker spill. Too bad that Pelosi cannot be sued for contributing to this massive pollution.

The magnitude of our energy needs is under appreciated. Annual US energy consumption is measured by the quadrillion BTUs. Percentages can be used to bring the numbers down to understandable levels. The government numbers from 2006 are as follows: coal 21%, natural gas 22.5%, petroleum 40.2%, nuclear 8.2%, biomass 3.2% (includes ethanol and all wood sources of 2.1%), geothermal .34%, hydro 2.8%, wind .258% and solar .07%.

Can you see the hoax in these numbers? Congress has spent billions of dollars of taxpayer money on wind and solar projects to get .328% of our energy. The left would have you believe that wind, solar and ethanol will save the day but despite a $.51 subsidy per gallon, ethanol produces considerably less than 1.1% (other biomass such as manure accounts for a significant portion of the 1.1%) of our energy. The total sums spent to subsidize these sources are huge relative to the amounts produced.

The Investment Tax Credit for wind power construction has been 35%! This is not a tax deduction but a gift. US taxpayers should own 35% of the wind power plants but we get zero return on our investment. The power produced is sold at the same rates as other power but there is an additional bonus paid. This is the Production Tax Credit. This credit is equal to 1.9 cents per kilowatt, for power that sells for around 6.5 cents per kilowatt.


The end of the subsidy road is in sight. With wind energy producing such a tiny portion of US power needs, the total Production Tax Credit cost was 2.6 Billion Dollars last year. However, due to the rebate of $350 per $1,000 invested on construction, the amount of wind power went up by more than 25% the past two years in a row. We simply cannot afford to pay investors 1.9 cents per kilowatt if wind becomes a larger percentage of our production. The Production Tax Credits have expired but democrats are trying to renew them. The problem is that they have no source for funding. The reinstatement of Production Tax Credits, at a time of growing production as a result of Investment Tax Credits, could lead to a massive hole in the budget.

Of course, politicians from both sides must promote an all source solution. The only way to get congress to reduce restrictions on drilling and nuclear is to include payoffs to numerous other parties. Tax credits will probably be passed but they will be reduced. T. Boone Pickens is as about as republican as one can be but he is certainly willing to feed at the democratic sponsored tax credit trough.


Speculators are getting all of the blame for high oil prices and none of the credit for the good stuff they have accomplished. Mexico is willing to invest heavily in future production because of the assurance of return. This return has been guaranteed by speculators willing to buy 10-year forward contracts at high prices. The speculators have allowed Mexico to lay off its financial risks. High prices in future markets now, help lower prices in the future.


Alan Greenspan sold a lot of books by including left leaning truthful statements such as the Iraq war is about oil. Of course, war is an economic beast. Anyone who says the Iraq war is not about oil is a liar. Anyone who says it is not about much more than oil is also a liar. When on nation owns something of value, it is human nature for someone else to want it. The people of the US have enjoyed living in a country that spans a whole continent. We are isolated from border disputes because our borders with Mexico and Canada are stable and our other borders go to the edge of oceans. Other nations, such as the Soviet Union has seen its borders drawn and redrawn. The war between Iraq and Iran in 1980 to 1988 and the take over of Kuwait were all about changing borders.

The Iraq war is about much more than oil but it is not an attempt to change the borders of any nation. It is also about nuclear power. The cost of electricity production by nuclear power is falling rapidly during a time of higher coal, oil and corn prices. Russia, the US, Europe, Japan, Australia and many other nations have agreed to a new plan which will make nuclear power available to many nations. There is a scramble in progress to join this coalition. The nuclear agreements are important because all nations need a low cost source of power. The great news is that access to this energy is being used as a tool to win the big prize. The war in Iraq is all about PEACE! The people of all nations should be free of terrorist.

The USA, in cooperation with the UN Security Council and many other nations, to encourage peace. As noted before, General Petraeus is the "Doctor General" who is using all resources available. Bush and the UN are hammering away at Iran's nuclear ambitions while Petraeus is recruiting Sunnies and Shittes one and all to the cause. Sunnies have just rejoined the Iraq government after winning appointments to several positions. Money talks. Al Sadr has been given the opportunity to convert his militia to a political party, but he is a marginalized player. The Pakistani government has been signing peace deals with tribal Taliban leaders. The deals require the Taliban to refuse to harbor those who would attack Afghanistan from Pakistan. Many of these deals have been broken but games of "tit for tat" continue to teach the "bad guys" that there is a price to be paid for deceipt.


Iran has refused to suspend production of uranium but Amadenijhad claims progress was made in recent talks. Various leaders from our side have let Amadenijhad know that more sanctions are coming unless progress continues and the UN has given Amadenijhad 2 weeks to respond to our proposal. This whole process seems to be slower than molasses but this is a multi-trillion dollar deal. I was once involved in a negotiation between NC Baptist Hospital and the Bowman Gray School of Medicine that had been off and on for years. I spent the summer of 1977 helping complete the final deal. There were many considerations involved but the total amount of cash that ultimately changed hands was only $9,500 per year for three years. The thing that allowed the negations to be completed that summer was the recognition by both parties would benefit from making a deal. This is the situation in Iran, all sides will win!

SOFA is Close

In November of 2007, Maliki and Bush agreed to complete a Strategic Operations Force Agreement by the end of July 2008. Here again, both parties want US troops to remain in Iraq until peace is assured. The devil is in the details. The USA has just agreed to set goals that if achieved will result in the automatic withdrawal of forces. This is a tricky route to take as it gives some incentives to not make progress. With democrats pushing for set withdrawal dates, Bush has once again had to fight the war and fight democrats but Bush has been determined to succeed and he will. He will not leave office without setting up the continued presence needed to secure the new Iraqi democracy. It is interesting to note that progress was made in the negotiations with Iraq when Bush hinted that he would emphasis Afghanistan success in the months ahead. If the US were to pull out of Iraq and emphasize Afghanistan, the insurgents would return to Iraq. What is needed is to fully secure Iraq while continuing to give Pakistan time to gain its footing.


The French Nuclear Energy firm, AREVA, continues to increase its access to nuclear fuel and it has won more contracts to build reactors in several countries. Any company, including Shaw Industries, that is involved in the production or construction of nuclear power plants should be a consideration for your investment dollars.

Bush has the timing of the deal with Iran just right. There is growing pressure on congress to eliminate restrictions on drilling and on nuclear power just before a deal will be completed. As it becomes more and more clear that democrats must go along with drill, drill, drill, or face the wrath of voters, Obama, Pelosi and others will begin to waffle. Again, both sides will be forced to accept compromise. Probably this week, the congress will pass a compromise housing bill. The bill will give Hank Paulson what he wants in regard to Fannie and Freddie and it will give the congress its housing slush funds. Here again, the timing is good. The housing market is already in the process of turning, there will be plenty of news reports that it has turned soon after the housing bill has passed. The time to buy real estate and in particular resort real estate is now!

The real hoax is in regard to the limit to the energy we have on earth. Doomers won the huge wind farm, solar and ethanol subsidies by convincing the majority that we are running out of fuel. The truth is that we have hundreds of years worth of fossil fuels yet to use and we have 10,000 years worth of nuclear power to use. Besides, the earth is a carbon sink. It is constantly storing carbon in trees, in soil and in the ocean. Those who believe in doom see no future. The future is bright. Our real energy comes from the sun and there are no signs that it will cease to give anytime soon.