DELTA STATEMENT NO BIG DEAL

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

NOT NEWS

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


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

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

AIRLINE MERGERS BEING PUSHED

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

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


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

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

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

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

GREAT NEWS IS BAD NEWS TO THE FEARFUL

I cannot resist pointing out yet another false "BAD NEWS" story.

The headlines about a major increase in fairs by Southwest Airlines have been along the lines of "SOUTHWEST TO GO COMPETE FOR BUSINESS TRAVELERS".

The headlines and the articles imply that the move by LUV to dramatically raise prices to business travelers is bad news for companies such as CAL. The fact is that after the change, business travelers will average higher ticket prices on both airlines.


Southwest recently offered about 8 prices for the same seats on its typical flight. Under the new scheme, the same seats will be offered at 15 different prices. Frequent fliers who pay extra will be given the best seat locations available and "a free cocktail". Wow! How nice of them to give away free drinks.

The price increase is starting out at $10 to $30 per seat. After the new plan has been in operation for a while, do you think it might be easy to increase some of the fairs more? Do you think that higher fares at LUV will give the legacy carriers a reason to lower fares or to raise them?

The market is fearful that Congress will not settle major issues by the November 16 deadline. The funding for the new air traffic control system has already been deferred to next year. The nation needs the new system and it should be paid for by the users. The congress will fight this battle next year but in the mean time the airlines will keep on flying full planes and they will keep on raising fares as necessary to offset fuel price increases. The very old fleet of US planes cannot haul more people, when demand exceeds supply the price goes up. The news media did LUV the favor of avoiding saying that business fares are jumping but the fact is that they are.

BUY, BUY, BUY. Add money if you can and buy more stock!

COLD WEATHER HAS HIT NC, THE LEAVES ARE TURNING COLORS

A regular reader writes:

"The airlines seem to be hurting an otherwise beautiful portfolio. Gas prices continue to rise. What do you think? Do you still think airlines will go up soon?"

The first week of October, my wife and I made our annual trek to Blowing Rock, NC. We enjoy visiting the mountains this week because "Art in the Park" is held in Blowing Rock and because the mirror image of the maple trees around Bass Lake is as pretty a picture as you will see. This year, the leaves had not turned. Our walk around Bass Lake was still one of the highlights of the year but the leaves were mostly green.


The following week, I could hardly wait to go camping at Table Rock. If you have not been to Table Rock, you have missed one of the prettiest views in NC. The peak at Table Rock is only 1 mile from the state operated parking lot and picnic area, but the views of the NC highlands extend in all directions, including a full view all the way up Linville Gorge. Once again, I had a great trip and the views were gorgeous but the leaves were still mostly green.

We are now into the first week of November and the leaves are turning fast. Earlier this morning, the temperature hit 32 degrees. You can bet your boots that the green oak trees in our area are finally about to change colors. Yes, I do believe the leaves will turn and I believe they will fall off the trees.

PRICE IS PREDICTABLE BUT NOT AS PREDICTABLE AS AUTUMN LEAVES

This fall, the price of oil has been more stubborn than the leaves. Will the price turn? The timing is certainly less certain but yes, the price will turn.

The reason investors who have short term outlooks do not do well is that they switch out of winning positions to avoid short term pain. The temptation is simply too great to follow the crowd, even when common sense says the crowd is wrong. No one likes to feel like they are the only ones losing money. Studies show time and again that there is an inverse relationship between the frequency of trading and investment returns. Successful investors tend to identify trends early and they tend to sell too early. Successful investors do not try to catch every trend. It only takes a few 10 baggers to accumulate great wealth.

STRAIGHT FORWARD MATH IS OFTEN A KEY TO SUCCESS

Many things in life that must ultimately follow the laws of math even though the math seems to be broken in the short run. The typical mathematical formula does not include a function for the emotion factor. Two of my favorite quotes from one of the greatest economist of all time, John Maynard Keynes, are: "The market can stay irrational longer than you can stay solvent", and "In economics, the majority is always wrong." The oil market currently fits both quotations. The greed factor is in full force in the oil market at the same time the fear factor is killing the dollar. The combination has pushed oil and the dollar to extreme levels.

Lets look at an economic formula to see if math is working in our favor.

Income = Consumption + Investment + Government Spending + Exports - Imports

The USA just reported GNP growth (income growth) of almost 4% for two quarters in a row. How can the US economy grow so rapidly in the middle of a housing slump that has knocked 1% off the growth rate? The answer is that all of the above components of income are contributing.

Consumption, by Shays Law, feeds on itself. The 3.8% real growth in GNP last quarter means that the average American experienced growth in income equal to 3.8% after accounting for inflation! In America, one thing you can count on is that if Americans experience a rise in income, they will spend more. The reason we call Americans "consumers" is because that is what they do.

In regard to investment, US assets have gotten very cheap relative to assets in the rest of the world. In particular, Europeans can now build a factory in the US for 35% less than the cost a few years ago. As a result, the drop off in residential construction has been almost totally offset by growth in business construction and the purchase of business equipment has held up well even in the face of a credit crunch.

In regard to government, the obvious statement is that we do not have to worry about a drop off in spending. It even appears that Congress will cut the AMT tax without raising other taxes as much.

Finally, we get to the big change that has occurred over the last year or so, export growth is exploding upward while import growth has collapsed. While anything can happen in the future, those who claim the US economy is currently in a recession are simply wrong. It is impossible for the income side of the equation to go down if all of the right hand side elements are going up.

Why is export growth exploding? Foreigners, who hold more US dollars than at any other time in history are experience the equivalent of the Jimmy Carter days. Back in the late 1970's, it made no sense to save ones money for future consumption. By the time one saved $1,000 to buy a refrigerator including compounded interest, the price of the refrigerator had gone to $1,500. Today, the citizens of the world, including US citizens are enjoying low inflation rates. However, the dollar has fallen relative to other currencies. Foreigners who hold dollars are missing the boat if they continue to hold the dollars instead of buying US goods or assets with those dollars.

THE BIG TURN

Yes, the big turn has already hit US trade but the US dollar has continued to fall. Those who buy the dollar now are similar to those who bought oil stocks in 1999. Oil stocks did not go up immediately but they looked better and better as we moved to the other end of the fear and greed rope. This is where psychology trumps math in the short run. The reserves of US dollars held by foreigners has never been a higher number and these holders are sick and tired of losing money. The "old money Europeans" who hold at least a portion of their wealth in US dollars have seen the value of those dollars fall by better than 35%. What would you do if your bank sent you a statement month after month that showed your savings account had earned 4% interest but the principle value had fallen by 5%? If your savings are losing value, you might as well buy something with them.

AIRLINES ARE MAKING MONEY

A major fact is that airlines are making money. One of the common half truths expressed by the financial media is to imply that if costs go up then profits must go down. A similar half truth is the notion that if a producers selling price goes down he will suffer profit declines. This kind of thinking would suggest that the huge profit growth experienced by Dell Computer in the 1990's was impossible. The fact is that as the price of computers fell, Dell sold more while maintaining or even increasing its profit margins. In the case of airlines, the industry lost a lot of money in 2003, 2004, 2005 and 2006 but it made a lot of money in 2007. The compounded fuel cost increase was very substantial but the profits did not start rolling in until after the price of fuel was very high.

One of many facts in favor of airline stocks is that airlines are a lot like buses with wings, the higher the price of fuel, the more economical it is to ride the bus. The fuel expended per mile per passenger is higher in a car than it is in a buss or a plane.

The real key to profits is the elasticity of demand versus the elasticity of supply. JAL airlines told the "elasticity story" in its most recent report. It seems that there is so much demand from Japanese business travelers that consumers are getting priced out of the market. JAL is still waiting for delivery of its huge order of new planes. When demand is great and supply is restricted, what can a business do? Around the world, the price of airline tickets are going up. JAL just joined the party with its announcement of a huge jump in profits.

The following are other interesting facts.

1) The world wide order backlog for new planes has never been any where near current levels.
2) Both Boeing and Airbus have experienced delays in bringing new planes to market.
3) China, India, and other developing nations have dibs on the great majority of planes to be delivered over the next couple of years.
4) US airlines are flying many planes that are 35 years of age with no hope of replacing these planes for 5 years.
5) These planes are gradually being retired, reducing the capacity of the carriers.
6) Many 50 to 100 seat planes are being added to the US system but these are being used primarily to feed traffic to international hubs.
7) For three years running, US carriers have set new records for full seats.
8) Another word for elasticity is flexibility and airlines have no flexibility in regard to adding enough seats to fill demand.
9) The only area of flexibility left is in setting seat prices.
10) After making 30 or so price increases of $5 per ticket over the past three years, the most recent increase was a $10 per ticket increase. Fuel prices are being passed along.

LETS SEE WHAT HAPPENS NEXT TUESDAY

Next Tuesday, December oil contracts expire. By Tuesday, those speculators who put on short positions some months ago must deliver the oil. Now that the oil futures market has returned to backwardization, there is no incentive for big oil companies to store extra oil. They can simply wait to buy real liquid oil for substantially less than the price offered by futures contracts. As a result, excess inventories have been bled off. Over the past couple of years, world wide excess capacity has grown from a very tight 1 million barrels per day to 3 million barrels per day, which is admittedly still tight relative to daily consumption of 82 million barrels per day.

HOW MUCH EXCESS CAPACITY IS ENOUGH?

Major development projects will be completed in just a few months with even bigger projects to be completed the next year and the next. If excess capacity were up to 4 million barrels per day would the risk premium fall?

The fear of conflict in Iran will ultimately go away, one way or another. When it does, oil could fall as much as $30 per barrel in a hurry. One of the ways that the risk premium could go away is already in the works. A year ago, big oil companies stored all the oil they could because they were being paid well to do so and the fear of supply disruptions was high. Today, when oil is available on the market for less than the price of a futures contract and the excess supply of three million barrels is enough to offset a significant disruption. The incentive to store oil is fading quickly. More and more stored oil is going to be released. More and more strategic oil reserves around the world are going to be capped off. As far as I know, France is the only country so far to actually use strategic reserves but other reserves are full or close to being full.

Warren Buffet has said that in the short run the market works like a voting booth and in the long run it operates like a weighing machine. Right now the speculators are voting for $100 oil but the weight of the supply and demand evidence is that oil should fall to $60 or less.

Airlines are selling at very low prices relative to projected earnings. Analyst have consistently under estimated airline earnings for at least 8 quarters. Each future increase in earnings will likely be met with increases in the price of the stocks.

I predict a "major positive event" will occur within three months. This event could be anything from intervention in the currency markets by the US government to agreement in the middle east to a Palestinian state. The good news will be a surprise. Chances are good that airline stocks will appreciate in value before the news is public.

RIDE THE BUCKING BRONCO

This is once again a Ken Fisher moment. The market is trying to buck you off the best horse. Hold on for a great ride!

SEE - SAW, SEE - SAW, SEE - SAW

The see-saws are moving. When merger mania and hyper leveraged transactions ended, the big investment banks dropped. Regular banking activity is ready to boom. Business construction has largely taken the place of residential housing and the construction loans are being handled through "normal" banking transactions.

See-saws are all over the place. Exxon Mobile, at the king of the hill, has taken a hit. While the price of oil has moved from 82 to 95 the price of the stock moved from 92 to 95 and then back to 92. Believe it or not, the average price the consumer has paid for a gallon of gas this year is less than the average at the same time last year. The oil companies are having a more and more difficult time of passing through the higher prices of oil, demand destruction has occurred. Refining margins have collapsed. The traditional see-saw, oil on one end and high tech on the other is in evidence.

If you don't believe these two segments see and saw, take a look at the past blow off peaks. During 1999, when the tech bubble was fully extended, the price of a barrel of oil was $12. During the oil record setting days of 1980, technology stocks were at selling at decade low PE ratios, Business Week's front cover was about the death of tech. The current boom in tech is well underway, tech stocks are up an average of better than 30% year over year. Even Microsoft, which had been stagnate for years, is moving up sharply relative to oil stocks.


Yesterday, the US Dollar rose on the same day that interest rates were cut. The pundits suggest this was because the FOMC cut only a quarter when they could have cut a half. The fact is that the US economy is very strong and growing and there is reason to buy dollars. The GNP grew 3.85% the last quarter, this is the inflation adjusted rate of growth and it is well above the long term trend. Real disposable income growth was off the chart. The "see" has already "sawed" in regard to export and import growth, in the past year, US growth in manufactured exports was over 16% and imports of goods grew by less than 3%. The see-saw in export-imports will lead to the turn in the dollar (assuming Congress fails to override the Bush veto of the billion dollar tax increases offered by Congress).

NO USED PIANOS PLEASE

In response to my piano story yesterday, I got feedback from a friend who just sold her baby grand. Her kids are almost grown and she needed the space for other things. She confirmed my story. The value of all but the very best of used pianos has fallen dramatically. Charities, churches and auction houses often refuse pianos. I feel compelled to reiterate this situation because it is the crux of the disinflation story and since writing the story I heard two more TV pundits talking about how the government inflation numbers are false. TV pundits, like "news" reporters, fall into the trap of telling half truths because only those who tell exciting stories get more air time. One pundit mentioned this morning that if you have children headed toward college then you understand that the inflation rate is still very high.

Sorry Charlie, the full price of college tuition is paid by only the very few. The great majority of students get very substantial discounts in one way or another. At my alma mater, UNC-CH, the top 10% of the students now get a totally free ride! By jacking up the price, the perceived benefit of the scholarships are greater. When a top student has the opportunity to accept the $100,000 scholarship from one school or the $80,000 scholarship from the other, he is inclined to take the free ride at the $100,000 school. Under such circumstances, the price at the $80,000 school is apt to rise quickly to the $100,000 price.

College tuition and the price of a hospital operation are just two of the misleading numbers people use to say that inflation rates posted by the government are false. Both are misleading because almost no one pays the full tuition cost and almost no one pays the posted hospital operation price. If the price of an operation soars from $20,000 to $40,000, was the inflation rate 100%? What if a number of new programs were offered to allow large discounts to those who have no insurance? What if the large insurance companies went from a 20% discount to a 50% discount? In other words, if the Medicaid reimbursement rate went from $7,000 to $9,000 and if the private pay persons best negotiated rate went from $15,000 to $22,000 and the insurance reimbursement rate went from $17,000 to $25,000 then the real inflation rate was a weighted average of the various payment rates. When the government agrees to pay x percent of the total price, there is strong incentive for the price to be raised.

The same phenomenon happens in private industry all the time. For example, airline seat pricing follows a similar pattern. One legacy airline might raise prices and wait to see who follows. Chances are, the price increases are rolled back on 70% of the routes due to competition from low cost carriers. Then many of the highest priced seats are offered "on sale." The net increase is often only a tiny fraction of initially announced price increase. There were something like 17 across-the-board ticket price increases in 2006 and 9 so far in 2007 but the average price of an airplane ticket per mile flown is still about 15% below the price available in the year 2000. The point is that one cannot look at the head line numbers to determine the rate of inflation.

TV pundits who like to obsess over the price of oil fail to consider the efficiency of the US economy. We use a tiny fraction of the oil we used 30 years ago to do any particular task. In the "old days" huge quantities of oil were used in "non-transportation" pursuits. Today, the problem to be addressed is to convert transportation away from the use of liquid fuels. That process will take time but the market will make the switch smoothly if the politicians will stay out of the way. As usual politicians shoot the smooth process in the foot by such things as silly regulations. They might enact CAFE standards to try to force the issue, but mandating high mileage cars takes away the incentive from the consumer to make the more fundamental changes needed. Why ride the buss or move closer to town if the price of fuel is held down through regulations? In other words, we need to let the see-saw in this area as it does daily in all other non restricted areas.

INTERNATIONAL - DOMESTIC, SMALL - LARGE

The science of constructing an investment portfolio is a complicated process. The good news is that one does not need to understand the science of the internal combustion engine to drive a car well and one does not need to understand all the give and take involved in portfolio construction in order to invest well. Indeed, the person who thinks he is the best is often the person who has the biggest wreck or the one who goes out too far out on a financial limb.

As we move toward the end of an economic cycle, it will become more and more important to buy big companies. However, there is no rush to go all "big" right now. As a general rule, buying "big" adds a defensive element to a portfolio. Indeed it is intuitive to think that buying growth rather than value adds an aggressive element to a portfolio. Such cross currents can easily confuse even the "experts". As I have often stated, about 90% of performance is a result of asset allocation. Stock picking can be fun, exciting, highly profitable and very humbling but not at all a necessary investment skill. Indeed, most people would be better off using the dart board approach to stock selection. THE REASON THIS IS TRUE IS THAT STOCKS ARE SOLD THROUGH THE NEWS MEDIA AND IF A STOCK IS IN THE NEWS IT IS NOT THE BEST ONE TO BUY!

It is easy to conform to the opinion of others, the good news is that the herd is typically right during the first couple of years of the prosperity phase. Right now, one does not have to go it alone to make serious money.

At the current time, if an investor wants to try the dart board approach now, I suggest that he limit his dart board to big cap US companies. I say this knowing that over the long haul, small stocks beat large stocks and international growth beats US growth. I doubt that my message is clear because it is time to be very aggressive in the defensive area of "big cap".

When one end of a see-saw goes up, the other end must go down. The difference between see-saw movement and stock market movement is in order of magnitude and in terms of relativity. If oil stocks go up 20% over the next 4 years while tech stocks go up 100%, then there was a see and saw. Big oil integrated oil is "big cap value", the QQQ index is big cap growth. My forecast is that the QQQ will outperform big oil considerably over the next few years.

IT TAKES MONEY TO GROW A BUSINESS

Anyone with experience running a small business knows that the reason so many small businesses go out of business is because of inadequate cash. New business owners often incorrectly assume that profits are the key to success. Of course, in the very long run, a business needs to turn a profit. Having run a resort rental business, I can tell you that cash is king. Year after year, for decades we experienced tough cash flow and negative profits. The good news was that the value of the properties appreciated dramatically while all the rents and then some went to pay all the expenses.

Now that the economic mid cycle turn is here, the availability of financing is tighter. Starting a small business will be harder than it was over the past 5 years. Venture capital will be more and more dear. Funding will be available to profitable businesses but they will need solid balance sheets.

The reason to favor large caps in the current environment is that large caps tend to be "self funding." The current run up in Microsoft (most all of my friends own Microsoft through their ownership of the Q's) makes the point well. Microsoft has accumulated billions of dollars of cash and has all the more cash flowing-in. The coming build out of the mobile Internet (it will be an ongoing renovation over the next 50 years) will require huge amounts of money. Big companies which have the cash to move on opportunities have the advantage.

The smartest of the smart will continue to bring forth innovations. Facebook is an example of innovation capturing imagination and making the founder a multi-billionaire quickly. However, the only way for you to own a piece of Facebook right now is for you to own a piece of Microsoft. At the same time, Google is making big move after big move to compete directly with Facebook. It is my belief that churches, businesses and other organizations will soon adopt the Facebook "method of communication." Programs like Facebook and Myspace started as "virtual homes for teenagers" but are proving to be a valuable productivity tool for business. A number of businesses offer password protected communities of users. Email will eventually be relatively passe'.

The battle for dominance in all the the fast growth areas is ongoing. Millions of innovations fail to catch-on. Now is not the time to try to find the next Google, Yahoo, Myspace or Facebook. These companies have a head start on systems that have room to grow. As you all know by now, I believe Google's location specific mobile platform adds will be the most profitable of all time. Besides, by the time Facebook shares are available to you directly, they will cost an arm and a leg.

BIG PHARMA

Since a number of my readers work for big pharmaceutical companies, I must mention that the good times are upon you. The see saw of healthcare is swinging back into your direction. The momentum will grow at a gradual pace during the early part of the prosperity phase but like a see saw the speed will increase right to the apogee of the move. Within a few years, the compounded returns will be better than most "expert" expectations.

BUY, BUY, BUY!

NEGOTIATE, NEGOTIATE, NEGOTIATE

THREE SETS OF MAJOR NEGOTIATIONS ARE UNDER WAY

Condi Rice has been involved in negotiations concerning the "two state solution" in the Middle East for several years. She is preparing to hold a big pow wow with representatives of several Middle Eastern Countries. We know that big pow wows are not held to negotiate an agreement but to announce agreements that have already been reached. It seems unlikely that great progress has been made, but we should know more by November 14th.

We should all say an extra prayer or two for peace in the Middle East. Many of the battles in this part of the world have their roots in battles fought centuries ago. Some say there will never be relative peace in this part of the world but the truth is that peace has broken out in large parts of this area. Several countries in the area are progressing rapidly up the economic scale. One lesson from history is that well fed prosperous people are not as likely to initiate war with their neighbors. One of my reasons for believing so strongly in free trade is that neighbors who trade seldom go to war.


Negotiation Number 2

The negotiations continue between Iran and the International Atomic Energy folk. I never can remember the full name of the agency that is in the thick of the negotiations or even the head of the negotiations but progress has been made. Under the latest sanctions, the pressure on Iran to "make a deal" has increased. There is room for compromise. Russia, which is the supplier of nuclear equipment to Iran, does not have any desire for Iran to have nuclear weapon capability. Even China is too close to Iran for comfort. Over in North Korea, the USA will supervise the dismantling of the nuclear facilities. The world is a safer place when rouge governments are kept from having nuclear weapons. On September 6, 2007, Israel bombed the start of facilities in Syria. While the USA would prefer to reach a negotiated settlement, there is no doubt that either the USA or Israel will bomb the Iranian nuclear facilities before nuclear bomb capability is reached. As usual, an aerial campaign has limitations and the Iranian facilities have been spread out and hardened. I do not believe the situation will require bombing because I believe the Iranians have more to gain by negotiating peace. Scores of major projects, including projects to build out Iranian oil fields, will start soon after a compromise is reached. The USA has no problem with Iran use of uranium for the production of electricity. Russia has offered to supply the fuel for the plants. Countries such as Pakistan and India, which have nuclear capabilities, make leaders in Iran jealous but adding additional nuclear bombs in Iran does not solve other problems. Negotiations between the USA and India in regard to nuclear capacities are in progress.

Negotiation Number 3

The Bush administration is apparently focusing its budget and tax negotiations with Nancy Pelosi. Nancy has become know in the House of Representatives as the "Committee of One." She does not support the proposals made by Charlie Rangel's Ways and Means Committee. The word is that she especially desires to pass an energy bill this session. The problem is that the democratic solution to energy is the piling on of wasteful incentives. Hillary, for one, has openly declared war on oil company profits, saying that she will use these profits to fund alternative energy sources. As we know from Econ 101, the market will automatically find the most efficient resource allocation. Again, the current energy bill in Congress is an add on of CAFE standards, additional payments to farmers and other programs that actually harm the long term progress toward energy independence. For example, when the government forces people to buy cars that use less gas, they encourage people to drive more miles. A regulated price does not produce the same results as a free market price. Indeed, one of the seeds of the current problem is the price controls on US oil that were in place during the late 60's or early 70's. Can you imagine that at the time it was thought to be good policy to hold the price of US drilled oil to $4 per barrel!!

A statement was just released from the United Nations saying that the use of corn for fuel is a crime against humanity. I think I heard the official say that the 100 bushels required to make 13 gallons of ethanol is enough to feed a starving child for one year. The exact numbers do not matter because the point is valid; children are starving because wealthy people are paying to convert human food stocks to auto fuel.

WHAT IS CONGRESS WAITING TO DO?

One month after the start of the 2008 fiscal year, Congress has yet to submit a single budget bill to Bush. Obviously, there is still hope for a significant break through of some kind. It could be that democrats believe that they will ultimately force through the budget busting SCHIP bill (it was passed once again by the Senate late yesterday). Once Bush is defeated once, the logic goes, he will be weak and Congress can then steam roll through other measures. I doubt that the SCHIP will pass in its current form.

The more likely scenario is that a major compromise is still a possibility. The budget negotiations have been in progress for many months. Hank Paulson left his job at Goldman, one in which he reportedly earned about $200 million per year, in order to pass the real "mother of all tax bills." This would be a repeat of the big Regan (Kemp-Roth) compromise. As you may recall, in that case, Don Regan left a similarly powerful job as Chair of Merrill Lynch to negotiate what was the "mother of all tax bills" at the time.

As I have mentioned, based on the very powerful real estate market cycle, we are over due for a massive tax reform bill. Mike Huckabee is moving up on the right. He has become a dark horse possibility for the republican presidential nomination. He has proposed the eliminating the IRS. He would substitute a consumption tax. The Regan tax revolution began about 26 years ago. It has taken a lot of work and a lot of compromise to reach the point where a move to a relatively flat tax would not be risky or potentially too disruptive. The Ryan proposal, 10% tax on the first $100,000 of income and 25% on all over $100,000, with standard deductions but no itemized deductions, is a doable compromise. It would do away with the AMT while producing tax revenues equal to the current law. Of course, democrats would insist on a third bracket for the rich and tax payers would be given the option to take itemized deductions by filing under the current system. Huckabee has a great idea but the risk of a massive conversion is too great. The wisdom of the framers of the constitution is always most apparent when the boldest and most risky ideas gain momentum.

In the current political climate, a great compromise seems impossible. On the other hand, democrats know that despite their massive lead in the polls, that they are vulnerable. The "big issue" that brought them into power has turned. Progress in Iraq continues. The death rate has collapsed. It is too early to know for sure but it appears that the war will be a positive for republicans by the time the election rolls around. The left is not happy with the democratic leadership. No real progress has been made since the last election. Without compromise, there will be no progress. The best of government policy has always been a result of "ruling from the middle." Negotiators have no reason to suggest a deal is close or not. There is nothing to be won by coming close and there is much to be lost if expectations are raised immediately before all deals fall through. In any event, a budget compromise of significant magnitude must be reached. If you want to see a massive dump the incumbents movement, just let Congress try to leave town after only passing a "continuing resolution budget."

TOTAL WORLD MARKET FUNDS

A reader wants to know more about the "total world market funds" that I mentioned yesterday.

There are a number of funds that track the "total" world market. The word total might be inappropriate because there are always a few very small markets excluded. Vanguard is the market leader in very low cost index funds.

PLEASE NOTE: The US dollar is as cheap as it has ever been relative to the Euro and it is also very cheap relative to many other currencies. Even the Yuan has appreciated against the dollar during the past year. As such, I am a strong proponent of "buy the USA" right now. In particular I believe there are bubbles in the Chinese markets. As such, the "safe" way to invest right now is to focus on American stocks. Those who promote diversification on top of diversification disagree with concentrating on investments in any country but even most of these guys would say that if you are going to invest in only one country the USA would be the one.

Once again, I tell you that I am an aggressive investor. It is arrogant for anyone to believe that they are "smarter than the market" in the short run but history shows that there are those who can beat the market in the long run. I have made my share of mistakes but my record is strong. Over the next several years, the USA could prove to be the very best place to have all of ones funds.

OFFENSE AND DEFENSE

In any endeavor, it is easy to get caught up focusing on offense. A church friend of mine just reminded me of this truth when he told me about all the big gains he is enjoying. He named a number of high beta stocks he owns that have soared in recent weeks. I cautioned him and will caution you: remember to play defense.

How does one play defense in the stock market?

Most people would answer the above question with talk about bond allocations, cash allocations or portfolio diversification stories. All good answers but not answers that lead to championship results. If you play not to lose, you will have a hard time winning any championship. The more powerful answer is that one should buy the bigger companies when one is trying to keep running up the score without risking multiple interceptions. The offensive move is to buy the smaller stocks in the country that has the advantage. The problem is that the best time for small stocks, the years immediately after a major recession, has already come and gone during this cycle. Some small stocks will do very well during the years ahead but the proportion will shrink.

Near the end of the 1960's cycle, successful investors piled onto only 50 stocks, these were know as the "Nifty Fifty". At the end of the tech bubble of the 1990's, relatively few stocks had extreme valuations. Companies such as AOL were priced as if they would never stop their rapid growth.

Today, the big bubble is in China. Who knows how high a mountain will be climbed? I missed the big move but will not compound the mistake by "getting in near the top."

The bottom line is that the writer of this letter is currently very aggressive while buying many "defensive stocks." Once again, this is a different definition of defensive stocks that the popular definition. I am not buying consumer staples. I am not saying a recession is near. I am saying that big cap growth stocks, such as the top 100 stocks at the NASDAQ, are likely to do well over the next several years. Yes, I still have a massive overweight in the airline area and not even I can call this investment defensive. My overweight is in the "best of breed", CAL, and it is in American stocks but the company is highly leveraged in a volatile business. Investors should always seek out volatility in the "good times." Of course, volatility is a pocketbook breaker in "tough times."

Small international stocks are among the most volatile but, because I believe we are within 3 or 4 years of "tough" times, it is time to overweight the relatively safe haven of the USA and it is time to under weight international.

LEFT OF HILLARY

I continue to be amazed at how all the democratic candidates have run to the left of Hillary. Hillary has been able to run toward the center and has become the "most attractive of the liberals". Investors should pay attention to the coming election. The potential for moving the markets is great.

Got to run! Have a great weekend.

THE BIG $$$$$ TURNS ARE HERE!

Big money turns are happening all around the world. For example, Cisco just purchased a WiMax company. Up until now, Cisco was not a player in the WiMax market and did not feel the need to be there. The problem for Cisco is that WiMax is proving to be the key to the rapid coverage of huge areas of Brazil, India, China and other developing nations. The growth in telecoms and Internet services in developing countries is huge and quick because there is no competition from a previously built fixed wire system.

The standardization of WiMax protocols is causing the system to spread at a rapid pace even in the USA. Sprint and ClearWire are just two of the early USA leaders. Google has inked a partnership deal with these guys and because Google has purchased billions of dollars of fiber optic capacity and telephone nodes, the speculation continues that Google could build out a nationwide WiMax supplemented Internet/Phone system in a hurry. My guess is that the next big Google move will be to start a VOIP system. Much of the system is already in place. Adding the 700mz TV spectrum, the stuff that goes through walls, would give Google the ability to cover the whole country quickly. The big phone companies are dug in deep and a country wide network would cost billions so several partners may be involved. Even Apple has expressed an interest in buying spectrum. Google will attempt to remain the software provider and let others sell the hardware and the service.


Since Google became public, the stock has risen from $85 to $650+. During that time, Apple has gone up twice as much. I believe Apple is over valued but it certainly has momentum. I continue to hold shares in accounts and inside QQQQ, QLD and other funds. If I had enough money to buy all of Apple, I would buy Google instead and invest the other half in something else. This statement may sound silly but I have used this logic to great advantage in the past. For example, when I suggested buying CAL at $6 per share, I wrote that LUV at $17 per share was dramatically over priced. I said that if I had the money to buy all of LUV that I would buy CAL, AMR, UAUA, DAL and NWA instead and invest the remaining 9 Billion Dollars elsewhere. Since that time, LUV has gone nowhere and CAL has gone up from $6 to $36. Even today, those who do not understand the situation are over paying for LUV while the growth in international traffic is huge.

Back to the big mobile turn, Google's purchase of Jaiku shows us once again just how much change is in store. Jaiku has the potential to automate everything from your address book to your photo album. It is kind of a Twitter on steroids. Give your teenage child a Jaiku phone and you will know his location, to whom he is talking, see the world from his camera lens and keep records of all his activities. It sounds like a spooky big brother deal but those who like it are crazy about it. Coworkers have found Jaiku to be a huge time saver; notes and contacts are automatically shared across the network. Husbands who stop for groceries access the list prepared by their spouse and automatically leave the message that the shopping has been done. Put a Jaiku on a child and he will not get lost for long.

The big turn in the Internet is that it will go mobile big time over the next several years. Buy the QQQQ's and hang on for the ride. Ideas are coming hard and fast. I did not buy more VM Ware when it was spun off from EMC but I have enjoyed the ride since EMC still owns 86% of the stock. It is impossible to see which of the big firms will produce the next winner. Ebay is babying another fascinating purchase and Amazon is selling high dollar goods rapidly while the pundits keep talking about the consumer being tapped out.

BIG, BIG, BIG TURN AHEAD

Understanding what most others do not understand is the path to BIG MONEY. The REALLY BIG MONEY TURN is close at hand but most investors expect the dollar to continue to fall.

The really big money turn is that the value of the US Dollar relative to most other world currencies is about to climb rapidly. The brief history of the dollar is that it was very weak in 1986 and again in 1995 just before those mid cycle turns, once the dollar turned, it climbed and climbed and climbed some more. In the latest cycle, it peaked in the year 2000 just as the average American went "all-in" during the Internet bubble. Since that time, the dollar has fallen and fallen some more and it is now at about the same level as it was in 1995. In the year 2000, one could buy a Euro with a dollar and get back about 20 cents in change. Today, one needs $1.42 to buy one Euro. The consequences are huge. The reason US manufactured exports grew at the huge rate of 16.1% over the past year is because our goods are now very cheap. If you do not believe that the dollar is down, take a trip to London and be sure not to forget your American Express Card. The exception has been the Japanese Yen. Japan is the other major exporter of capital goods. China, on the other hand is at the other end of the see saw. China is the ultimate labor intensive goods producer. Even so, in the past year, the Chinese Yuan has appreciated against the dollar.

How many .27 basis point interest rate moves are enough to slow this country down? The Chinese government is tightening the screws. The coming slowdown in China will not be a bust. Still, if growth were to be cut by half or two thirds, the demand for commodities will be curtailed. The big turn in commodity prices is at hand. Prices will not collapse but the relative performance of high tech companies which use commodities will far out do the performance of the resource companies.

THE BIG TURN

The dramatic slowdown in the US housing market, which has taken down the price of lumber and which is pushing down of the price of other materials, is giving US Central bankers the motivation to cut short term interest rates. A cut in short term interest rates will stimulate the US economy. The strong growth in the US will increase the demand for dollars. As the dollar increases in value, it will create its own demand for more dollars because foreign investors are paid a bonus when US investments go up in dollar terms. The US and Japan make the most sophisticated capital goods products. Now that the recovery is over, it is capital goods producers that will benefit from future economic growth.

During the past 5 years, the carry trade has been a big winner for the big investment banks and the hedge funds. These investors borrowed Yen at very low rates of interest and swapped for other currencies in order to earn higher rates. The problem is that the big turn is also here in regard to the Yen. The Yen is the other currency that will appreciate dramatically over the coming years. The big turmoil in the financial markets for the past couple of months have been the result of the unwinding of the carry trade. The sub-prime mess is not nearly as big a problem as is perceived. Indeed, the largest of all mortgage lenders, Country Wide, announced today that it will provide refinancing for sub-prime loans.

Let me put it this way, on my way around Winston-Salem today I counted dozens of commercial projects underway. The construction includes everything from office buildings, manufacturing facilities, health care facilities, bridges, roads and restaurants. Yes, housing construction has fallen 48% !!!! since the peak of January 2006, however, even now housing construction is about double the units that were built during the 1993 slump! Adjust for size and features and the down turn is not nearly as big as it looks. About 35% of new houses being built today have three car garages, extra baths and even home theaters. I visited a three-bedroom three-bath Parade of Homes property this past Saturday and was surprised to see that it had three car garages on either side. In my book, it takes a boy with toys to want a 6 car garage home. Now, do not tell me that a recession is at hand. Housing construction has fallen dramatically but the current 6 and a fraction % home mortgage rate makes homes far more affordable than the last time oil prices were at $80 per barrel, at that time mortgages were priced at 15%! With more people at the prime age to upgrade to a larger home, I expect the housing market to turn up strong within a few months. TURN, TURN, TURN, TO EVERY THING THERE IS A SEASON!

THE BOTTOM LINE IS that investors should recognize that the coming turn in the dollar will mean that US stocks will generally out perform international stocks. It is time to under weight international stocks. The second half of the business cycle is a time when big cap growth will generally out perform small cap value. By the end of the cycle, the big mutual funds will be crowded into fewer and fewer big cap stocks. In other words you can get a jump on the crowd by buying IBM and GE. You will not make as much with these in the short run but they will keep on moving up for several years.

YES WHAT I WROTE YESTERDAY ABOUT AT LEAST TWO US PIPELINES IS TRUE

There is now enough new tar sand oil flowing from Canada that two pipelines that historically carried oil from the Gulf Coast to the mid west have been reversed. This situation will continue until the large refinery in Illinois and the large refinery in Indiana are upgraded, the permits have already been approved! If the new refinery planned for South Dakota is constructed, it will be fed by yet a new pipeline from Canada. This new Canadian oil will be a significant factor among many that will cause the turn around in the price of oil.

OPEC having pledged to increase production by 500,000 barrels per day effective November 1 has jumped the gun. High oil prices are apparently causing cartel members to cheat by several hundred thousand barrels per day. In addition, production increases keep coming from Angola, Canada, Brazil and a large number of places that are hard to spell or hard to find on a map. Another place where the pipeline flow is being reversed is between Kenya and Uganda. Once again this is probably a temporary condition. After big discoveries in Uganda, several of which are just across the border from Kenya, Kenya is eager to get in on the goodies. A Canadian major has just signed contracts to explore the area. A few billion barrels here and there and you eventually get to that marginal price break.

The cross currents are incredible. The US congress is about ready to give up on its latest and craziest energy bill. Yes, if the bill were to pass, the wealthiest of corn farmers would get about 100 million dollars more in subsidies. This time the subsides would be paid for by increasing the tax on oil companies. Duh! we need more oil so lets tax the production of it more? The good news is this bill is another that cannot get past a Bush veto. In the meantime, the UAE government has issued $2 Billion in bonds in order to help with its purchase of Canada's Prime West Energy. The turn is certainly here when a middle eastern country is borrowing money to buy oil assets! I suppose the bonds were sold at a discount to avoid the payment of interest but the move is still significant.

PROGRESS IN IRAN

It is hard to see the progress toward a solution to the Iranian "problem". However, the US, Russia and Iran are currently doing a triple tango. The US has signaled that it will delay the construction of the European Missile Defense System if Russia will help stop the Iranian Nukes. Russia has signaled Iran that it will support Iran militarily if Iran will stop making the hard dangerous stuff. The leadership of Iran has done the a two step. The grand leader has undercut the power of the public leader. Stay tuned. A settlement would reduce the oil risk premium by $10 to $20 per barrel!

THE TURKS AND THE KURDS ARE OUR FRIENDS.

The war in Turkey is now 23 years long. More than 30,000 Turks have been killed. Most Americans do not even know about the war. I suspect that the recent big public brouhaha was carefully timed for political and economic reasons but this does not matter. The key point is that peace is finally a possibility. The semi-autonomous region of Kurdistan is enjoying relative peace and prosperity. Oil producers from around the world are beating a path to the countries door. The leaders of Iraq have quickly "outlawed" the rebel PKK factions that have been fighting the Turks. Iraq will join the Turks in putting down the rebellion. Of course, some of the Kurds within Turkey will continue the fight but the pressure to end the madness is coming from all sides. Turkey and Kurdistan are both middle east success stories. Turkey has a large and growing economy. In a show of support, the US has given Turkey several surplus war ships.

By the way, the source of much of the international information is Stratfor. You should sign up for a trial subscription if you are interested in international affairs. Some of the tech information is from GigOM which is a free Internet service.

CONGRESS CONGRESS CONGRESS

The democratic congress continues to find itself in a very deep hole. The problems keep piling up. Yesterday, Hank Paulson wrote a letter saying how important it is to get the AMT fix done promptly. If Congress does not act very soon, about $75 Billion of tax refunds to the public will be delayed. The cut off for reprogramming IRS computers is upon us. Last year, a few refunds were delayed and the recipients were not happy. The problem is that there are currently about 20 million people effected by the AMT for the very first time. In addition, there are other tax breaks that must be extended as a part of the same bill. Trent Lott and John Kyle are starting to have lots of fun while pushing democrats to act.

The latest proposal is to allow the democrats to suspend their pay-go rules, provided that they will give Republicans equal amounts of tax breaks. In other words, the democrats can patch the AMT for one year to the tune of about $65 Billion if $65 Billion of the Bush tax cuts are extended. Oh what a tangled web?

Democrats have vowed to try to pass the SCHIP $35 Billion increase one more time. The interesting thing is that if they are successful, they will need to find about $100 Billion of tax increases to offset the combination of the AMT and the SCHIP! Oh what a tangled web?

The pending bills include approximately 13,000 earmarks. The total value of these earmarks is around $9 Billion Dollars. This is enough money to double fund SCHIP this year. It really seems that the democratic congress is between a very hard rock and very hard place. As a person who believes that free trade is the foundation of prosperity, it pains me to know that the subsidies for wealth corn farmers is the reason that other nations refuse to purchase our agricultural products. I can't blame the other nations but the actions of republicans and democrats in congress to hurt the nation in exchange for political contributions from the special interest is shameful.

Believe it or not, the federal budget that should have been passed well before the start of the fiscal year on October 1, may be passed as an omnibus bill around November 16; not the way to run a railroad! The process for passing an omnibus bill is for a relatively small group of people to sit down and edit thousands of pages in the matter of a few days. The final vote will be made by 535 people who have not even read the final product. Shameful indeed.

Good News Good News Good News

I do not want to end on a negative note so here are a few pieces of good news.

1) The moderate leader Bhutto is still alive. We will all know that change is in the air if this woman is elected to lead Pakistan.

2) Real wages in the USA have increased at an average of 3.7% for the past two years. Let the good times roll! The prosperity phase of the business cycle is at hand!

3) While there will be lots of "bad economic news" surfacing over the next few weeks, this "bad news" is good news as it will confirm that "Big Ben" will cut US interest rates again. The average return of the average stock has been 19% in the year after the last 8 first interest rate cuts. That 19% figure hides the rotation effect. Many stocks will rise 50% or more over the next year.

4) CAL signed contracts today that will save the company another 100 million per year. UAUA soared on great earnings and on its progress toward outsourcing high cost service. UAUA is also one of the airlines that is considering selling its frequent flier program.

BUY, BUY, BUY!

CAL EARNINGS

CAL increased revenues per seat mile by 6% while cost per seat mile went up 3.1%. One never knows how the market will react (some folks are always disappointed with good numbers) but from my perspective the net yield gain was a home run.

The cost per mile was an especially good number given that fuel cost went up 4.3% and fuel use went up 4.9%. The company is clearly keeping a lid on non fuel costs. Even the 4.9% increase in fuel use was less than the traffic increase so once again the company is doing a great job to control costs.

The reported earnings, $2.15, were reduced by a 10 cents charge for pension contributions. Adjusting the number to $2.25 makes it 21% higher than the forecast of just two months ago and better than a 70% increase over the prior year quarter!

LONG BOND

Long term interest rates are falling. The 10 year bond is trading around 4.5%! What inflation? With the average wage up better than 8% over the past two years and with inflation dying, prosperity is breaking out. Consumers are paying down debt and buying more stuff all at the same time!

BUY, BUY, BUY!

FENCES, FENCES AND MORE FENCES

Today's news is that the earnings improvement in the airline business continues. Today's good report by AMR followed the prior good numbers delivered by DAL and NWA. AMR's profits are up from 6 cents per share last year to 74 cents this year. Projections are for continued improvement even though the company is projecting higher fuel costs.

AMR has decided not to prebook all the middle seats. The idea is to provide space for those who might be hit by canceled flights. In other words, AMR will voluntarily shrink its capacity. This action will lead to further price increases and an improvement in the travel experience of the passengers. In the meantime, purely domestic carriers, such as Southwest Airlines are getting hit especially hard by higher fuel prices. Thus, LUV will lead a series of fare increases. The average fare is still 11% below the 2000 peak. Adjusted for inflation, fares are 24% below the prior peak. With continued growth in demand, you can expect significant fare increases over the coming years. International carriers, such as CAL, have already raised ticket prices on long flights to offset higher fuel. International carriers have used contract carriers to go toe to toe with domestic carriers. They are able to match price while providing continuing service to other destinations and while offering better perks such as airport clubs and frequent flier programs. Last week, AMR lead a round of fare increases on non domestic flights and this week LUV is the leader on the next round of bumps.


Today, analysts have used the numbers reported by AMR, DAL and NWA to adjust their CAL estimates. The biggest adjustment came from the most positive analyst at Credit Suisse. The result is a penny lower consensus of $2.17 and a reduction for 2008 to just below $5. The reduction to next year is part of the "game" of letting this improving industry build on its track record of beating analyst estimates. In an earlier report I detailed the high average percentage "beat" by CAL.

Over at Legg Mason, Bill Miller continues to manage a few billion dollars well. One of his funds is better has an allocation of better than 7% in airline stocks. He owns all the majors with the exception of CAL. As you know, I believe getting the sector right is 90% of stock market performance. I am confident that Bill's fund will do well.

FENCES, FENCES AND MORE FENCES

The Great Wall of China was built to keep out the bad guys. The Berlin Wall was built to keep in the good guys. The proposed Mexican Wall will be to keep out the good guys. Only the Great Wall was constructed with common sense in mind but the world has changed just a little over the centuries. Thousands of daily airline flights "over the top of the wall" make today's fence the least wise of all.

TECHNOLOGY TO THE RESCUE

A mad rush is on to develop a new electronic fence. Boeing will report results in a few weeks. The push is to develop a new border security plan before the final compromise budget bills are passed by the congress. It is estimated that this electronic fence will cost about 8 billion bucks, double what has been budgeted for a standard fence that would not cover the entire border. I expect the final version to ultimately cost 6 or more times as much but what is a few billion to the federal government?

Mark my words, Congress knows that with public approval ratings hitting near or in the single digits, the pressure is on congress to pass all 12 of the appropriations bills. Because the must do something about the AMT, I expect that they will be willing to compromise with Bush to pass significant measures.

One of the potential "big wins" will be a last minute compromise on immigration reform. It seems like a long shot now but something big is coming down the pike. The fiscal year began on October 1 and even now Charlie Rangel, John Dingle and others are dragging their feet while the bureaucrats who report to Hank Paulson are engaged daily in negotiations with the staffs of congressional leaders.

FENCES MIGHT FALL! The Mexican Wall might be good news in the sense that we sometimes must swallow "silly pills" to get the good stuff done. As you know, the compromise I like is the joining the proposed 10/25% flat tax with a 50/50 cent carbon/gasoline tax.

Congress has the option of leaving town as a "do nothing congress" with their tails between their legs or as the congress that saved the world from global warming, the congress that save the middle class from the evil AMT and, perhaps even the congress that saved the nation from the horrors of Mexican workers and terrorist sneaking across the border.

No matter what the outcome in congress and no matter the current negative focus of the media, the world economy is on a roll that will pick up the pace in the coming year. IN CASE YOU HAVE NOT HEARD, WAGES HAVE GROWN AT BETTER THAN 8% OVER THE PAST TWO YEARS WHILE UNEMPLOYMENT IS RUNNING AT BELOW 5%.

When talk of Jimmy Carter days surfaced on Fox TV, Brit Hume dryly asked if Jimmy Carter was the President who left us with mortgage rates of 21%, inflation rates of 14% and unemployment rates of 9%? When the interviewer asked Mr. Carter what he would have done differently he said he would have sent another helicopter into Iran during the hostage crisis. Folks, by next summer, the majority of Americans will have begun to recognize that "times are good". The change in sentiment will give stock PE ratios a boost.

BUY, BUY, BUY!

BLOW OFF RALLIES -- HUGE PROFITS

The blow off rally in oil, gold and currencies has been blamed on every thing from hurricanes to a potential battle between the Turks and the Kurds. Blow off rallies come near the end of a major run. They can last a good while and exact tops are impossible to call; exact bottoms are easier but still impossible. :) In any event, huge projects are in the works; projects that will ultimately send the prices across the "spider web" curve. Over the past 5 years or so, the dollar has dropped to a clearing price level. Total US export growth in the past year was better than 12% and manufactured goods exports grew by better than 16%. Imports growth was in the 3% range! All the while, finished goods prices jumped by 4.5%! If you want to see a slew of earnings surprises, combine 16% export growth with price increases of 4.5%; a powerful combination for profits.



I read a few numbers late last night and did not write them down but the following are close approximations. In the last year, the dollar has dropped something like 12% against the Euro and 5.5% against the Chinese Yuan. It was not so long ago that Europeans had to spend 1.2 Euros to get on US dollar. Today, they spend a Euro and get back 42 pence in change! Those who worry over the trade imbalance are worried about a problem already solved.



CAL will hold its earnings web conference Thursday morning. Google and many others earnings reports will follow. The CAL estimates have been increased many times over the past couple of months. The low end of the range is now up to $1.87, the high end at $2.50 with the median at $2.17 (up from $2.14 a few days ago). I will not be surprised by $2.60.



Warning: should Congress reach a compromise carbon tax bill, one that would fund the FAA through an increase in the tax on jet fuel, the initial reaction of the market might be negative. Keep in mind that the higher the price of fuel the more sense to riding the bus or the air-bus. The average price of the average CAL ticket works out to less than 12 cents per mile as the crow flies. An increase in the fuel tax in combination with new anti congestion rules will clear a path for quicker landings. The higher price of fuel will make the "air-bus" savings per passenger larger.



By the way, I spent a great weekend at Table Rock, which is at the south end of Linville Gorge. It was a beautiful weekend. Our "Old Goats Patrol" made up of former scout masters enjoyed good times, great food, great views and a fun time at the "old liars campfire." I am behind on individual emails but following the market closely. The over bought enthusiasm is already at least halfway cured. This little correction should be over soon. BUY, BUY, BUY for the long term.

OUCH, OUCH, OUCH

Many people who live south of the Sahara desert are suffering. Many of the poorest of the African nations have no food and no education. Attempts to feed the poor have not lead to great success but in a number of countries education is starting to make a difference. I am told that some of the hardest workers in North Carolina are refugees from the poorest of African countries. I don't know much about the situation but I am thankful that the Methodist Church contributes to educational facilities in the area.

The people of Iran and Venezuela are also suffering but for totally different reasons. The leaders in each of these countries are willing to cause their people to suffer in exchange for "world influence." There are food shortages in Venezuela, gasoline shortages in Iran and the loss of freedoms in both countries. Each country is rich in natural resources but, they consistently fail to maximize their returns from their resources. Oil production has gone down in each country as they are unwilling to offer fair compensation to exploration and development companies.

The UN has passed two sets of sanctions against Iran and, as a result of pressure from China and Russia, has decided to wait until November before considering tougher measures. Rather than allow the citizens of Iran to have gasoline, Iran has spent billions to arm various waring factions. In the latest move, Iran has threatened to arm Iraqi insurgents with Surface to Air Missiles that would put US helicopters at great risk. On the other hand, it has been reported that the US is considering "surgical air strikes" against targets in Iran that support, train or supply Iraqi insurgents.

Saber rattling has pushed up the price of gold and oil. In May, when a barrel of oil sold in the mid to high 70's price range, the retail price of gasoline hit the $3.20 range. This price was a demand for gasoline driven price. Yesterday, a barrel of oil was selling for better than $80, the price of gas was being cut to the $2.60 range. Based on the price of gasoline, the price of oil should be around $57 per barrel. If Congress can time the passage of carbon taxes just right, they can get a lot of credit with the voters when the price falls before the elections.

Next year, daily refinery capacity will increase by 1.5 million barrels per day. Last year, there was less oil used in the USA than in the year before. Increases in crude supply will come from many parts of the world with three of the largest increases coming from Angola, Iraq and Canada.

Yes, Iraq will put significant resources back on line by next year. Yesterday, the Iraqi army arrested 75 insurgents, discovered a car bomb factory and blew up 18 bombs. The month of September saw a significant decline in both civilian and military deaths. Yesterday, the Senate of the USA passed additional war funding of $150 billion and the House is expected to pass a similar bill today, appropriations will be passed within the next 47 days. Most importantly, thousands of Iraqi citizens are joining the fight on the side of the central government. Having thousands of Sunni's join on the government side is huge. The fight is not over but the continuation of current trends should cause the insurgents to scurry back to Afghanistan. If you do not believe the fight is going well, review the answers by the Democratic Presidential contenders at the last debate. John Edwards was the first to state that he would not guarantee that the troops would be withdrawn soon after his election. The contenders do not want to be the anti war candidate in the face of potential victory.

A major point is that Iran is feeling growing pressure to "make a deal" as it becomes clear that the war in Iraq can be won without the assistance of Iran. An oil supply deal has already been struck between Iraq and Syria. Iran will become all the more isolated if a deal is not made soon. Once a deal is made, a large number of contracts will go forward to develop oil fields in Iran and Iraq.

The handwriting is once again on the Persian Wall. The Democrats in Congress can take partial credit for the "good news" by passing a number of bills that Bush will sign. Right wing conservatives have been marginalized. They are still against this and against that but the democrats have the votes to pass legislation without them. Bush and the Democrats will ultimately pass mostly centrist measures. "Good Times" will be the order of the day as the elections approach.

STOCKS, STOCKS, STOCKS

In 25 of the past 27 fourth quarters of the year, the Dow Jones Averages went up. Today, the market got of to a great fourth quarter start. A nice gain in CAL was reduced late in the day as the market waited for September results. They were reported after the market closed and they looked good to me but some bulls on the stock were looking for better numbers. Again, I liked the numbers.

CAL achieved:
1) the fifth best ever on time performance,
2) the best ever flight completion record,
3) record mainline and record consolidated load factors,
4) a consolidated traffic increase of 5.6% (more than 12% on the highly profitable transatlantic flights),
5) an increase in Revenue Per Available Seat Mile (RASM of 4.5 to 5.5%).

My back-of-the-envelope calculations tell me that total revenues grew by 11% which is a very large number relative to a trailing PE of 8 and a forward PE of 6.5. Even with high fuel prices, Cost Per Available Seat Mile has not climbed as fast as RASM. Margins are going in the right direction.

The action in AMR added excitement to the airline sector. AMR announced that it will prepay $545 million worth of long term debt and it projects its interest expense to have fallen by $130 million dollars this year. I don't recall that CAL has made similar announcements but, last year the company added more than $1 billion cash even after funding the pension plans and after paying down debt by a few hundred million. CASH FLOW, CASH FLOW AND MORE CASH FLOW, WE LIKE CASH FLOW!

GRMN took a hit because Nokia purchased a GSM company. Yes, maps are going to be an important feature on cell phones. GRMN has been a hot stock, one that I am not willing to turn loose of just because the competition is heating up. The growth in this area will be so large that money can be made by a number of players.

FROM OUCH, OUCH, OUCH TO A OK!

There are still more than 1 billion Chinese with annual incomes of $300 or less. For the most part, China and Wal-Mart bashing will continue to be empty rhetoric. Those who want the lowest price will continue to shop at Wal-Mart. More and more of the poor of the world will be blessed as more and more Wal-Marts are built. Times are good and getting better. In another 10 years or so, most of the billions of Chinese will be on their way to relative prosperity. The buyers of the goods will have done themselves a favor while helping the poor. THAT IS A OK BY ME! BUY, BUY, BUY!

WHAT HAPPENED TO THE AIRLINES YESTERDAY?

Yesterday, I received a fair question. What happened to the airlines? One fellow was kind enough to note that his Google and Garmin are at record highs but he is in the hole on more than half of his airline shares. I took a look and his QLD has done quite well also but then I have to admit that I have been aggressive on CAL, aggressive for good long term reasons.

The casual observer thinks that airline shares were down hard because of a modest tweaking of guidance at AMR. AMR reports that non fuel costs will be slightly higher this quarter and that revenue growth will be slightly slower. Sure enough, some analysts cut AMR's estimates from as much as $1.04 per share to $.66 per share. This was a bit much, especially considering that the company corrected the figures a bit later in the day to say that cost per mile would come in at $11.98 versus the $12.06 that the analysts were using. Even so, the cost figures were up and the spread between AMR's cost and the costs at CAL, NWA and DAL has grown.


WHAT IS THE REAL DEAL?

It has become clear that Congress is going to practice a game of "rope-a-dope", also called Chinese Water Torture. As we all know, it is difficult for congress to complete a budget on time. The US fiscal year begins on October 1 and none of the 12 budget bills have been passed. There is little budget discipline to be seen anywhere in the process. For example, the Senate is just about through hammering out the defense appropriations bill and it is loaded with about 300 amendments that do not relate to defense in any real way.

The old "Christmas Tree" game is being played. In this game, one member agrees to support the goodies wanted by another member and another and another until they can cobble together a voting block and attach what has traditionally been called "pork" or "pork barrel spending" to bills that "must" pass. Today Congress calls pork barrel spending "ear marks". Politicians from both sides of the aisle work very hard at "winning these goodies" for their home states or districts. Get a large enough group together and a real government boondoggle will be passed.

A good example of a boondoggle is the corn ethanol subsidies. By agreeing to build 200 small refineries in 200 different counties across the country, enough votes were added to the farm belt votes and to the "environment-at-all-costs crowd" to pass the very wasteful ethanol fuel program.

The way the "rope-a-dope" strategy is going to work is that Congress will drag out the budget process until the November 16 adjournment date and perhaps even into a "recall" session in December. Congress will send Bush bills for him to veto. Then they will send him a continuation bill. Even the continuation bill will not be "clean". If the government gets closed down for a day or night, they will act again but try to blame Bush for the closure. All the while, horse trading will continue; a vote for this will be traded for a vote against that. Of course, subsidized "health care for the children" and attempts to cut off funding for the troops will be trotted out again and again.

In case you are too young to remember, "rope-a-dope" was the strategy used in a famous boxing match 30 or so years ago. The one fighter covered up and allowed the other to hit at his arms and gloves. The blows were largely reflected by arms and gloves and eventually the hitter wore himself out. Congress is going to try to wear Bush out. Bush will have to veto spending deals that include "goodies" for all the districts before the budget is finally passed. The Democrats hope that they can gradually offer the right combination of "goodies" so that they can peel away enough votes to over turn a Bush veto.

The "heath care for poor children bill" has lots of supporters even though it extends Medicaid to families making $85,000 per year and even though it adds to the mess of Medicare and Medicaid. The strategy of the Democrats is like a sacrifice pawn move in chess - by loading the health care system up with inefficiencies it is believed that the whole system can be scrapped in exchange for a comprehensive government plan.

Hillary's latest plan is far better than the one she attempted to pass more than 10 years ago but it is still a "take-from-some-to-give-to-others government confiscation". In her plan, those who are young and those who take care of themselves are forced to over pay in order to subsidize those who are slothful.

The analogy is constantly drawn to the area of auto insurance. It is said that just like all drivers are required to carry auto insurance, we must all be forced to buy a certain kind of health insurance. I agree that a lot of folks drive up the cost of medical care by not carrying insurance and then going to the "free" emergency rooms to get very expensive care for non-emergencies.

However, the analogy to auto insurance only works to a point. Individuals can choose to carry only liability auto insurance and even then only a base level is required by law. More importantly, those who drive carefully pay much less than those who are repeatedly caught speeding or violating other traffic laws. In the Hillary plan, the young guy who eats properly and exercises pays far more than his fair price while obesity is subsidized.

HOW DOES THIS DRIP, DRIP, DRIP CONGRESS EFFECT THE AIRLINE BUSINESS?

Both the house and the senate passed bills to fund an important upgrade to the air traffic control system. Of course, as usual, the Democrat majority passed a bill that would increase taxes and one that would continue to force the major airlines to pay for an extra large share of the system. Like the subsidized heath care for the obese, they would give the corporate jet fleets a major break; small jets now pay only 3% of the cost of running air traffic control systems but they consume 16% of the services provided. In one way this is no big deal but when day after day thousands of passengers are delayed, routinely by 30 minutes or more and sometimes by several hours or even days, as a result of waiting on small jets to clear, the problem is real. As always, when the government sets the price, great harm is done to some while others are given great gifts. The Soviet Union fell apart for the very reason that central planning is wasteful; markets are the most efficient means to set price.

Charging set rates for FAA services is similar to what has happened in NC to the highway system. In the old days, all the gasoline tax dollars were used to build roads. In order to have great roads, NC citizens went along with one of the highest gasoline tax rates in the country. Many years ago, Governor Hunt, who had preschool education as a priority, started finding ways to take money from the highway trust fund. The annual "withdrawal" is now around $175 million per year. Not a huge amount in terms of state government but enough to service the debt to build about $3.5 billion worth of roads.

Over the years, NC roads have suffered and the current governor is pushing to build toll roads. Of course one idea behind toll roads is that of a user fee. Another idea is that politicians tend to want to raise revenues (taxes) and they can because the government knows how to spend money better than the market place.

COLLECTIVE WISDOM IS GREAT, WHEN APPLIED CORRECTLY

The old saw that a camel is a horse designed by a committee contains truth about collective wisdom; folly follies when "group think" wins. On the other hand, the wisdom of the crowd has been proven time and time again in markets all around the world. Markets are not perfect but they are far more perfect than are "group think" asset allocations.

The following is an example to show the wisdom of the crowd. If a large number of people are asked a question about which they know little they will tend to offer an average answer that is better than the one derived at by a committee. Specifically, if 10 to 1000 city folk at the fair are asked to guess the weight of an large animal, it does not matter if it is an elephant or a jersey cow, the average guess will be very close to the right answer. The more people that guess, on average, the closer the average guess to the actual weight. However, ask a group of 10, 20, 30, or more to get together to choose one best guess and the wisdom of the crowd goes away. The dominate members of the group pull the group toward their guess rather than toward an average estimate.

THE BOTTOM LINE

Congress has passed continuation funding for the current air traffic control system. Three months worth! The huge sums of money spent lobbying Congress for the past several months is simply not enough! Give the passengers sitting on the tarmac three more months to soften them up! In the mean time, AMR and its unions will have their own little slug fest. AMR is the only major line to have made it through 9/11 without filing bankruptcy. The AMR pilots took big cuts in pay to "save the airline". After bankruptcy, DAL, NWA and even UAUA have lower cost structures in place. The pilots are in the unenviable position of asking for their wages back even though they are already earning more than most other pilots. They are asking for wage increases of more than 30%. I doubt they will get more than 10 or 12% but the fight is on. The lowering of guidance by AMR yesterday was probably related to the negotiations ahead. This is one of those times when the airlines are accounting for every expense they can find.

CAL just put an extra $50,000,000 into its pension plan. As I recall, the accounting on pension deposits is a complicated mess but all in all I suspect that CAL was able to lower its current earnings by some portion of this addition and the prior ones made.

LOOK AT THE CASH

The cash hordes being built by the major carriers tells my story. Until sentiment turns and the "feel good factor" boosts these stock prices, the "accounting game" can hide a lot of stuff but the billions in unrestricted cash says a lot. One might guess that these cash hordes will be used to fend off a hostile takeover but we all know that financing the purchase of a company is much easier if the company to be acquired holds lots of cash. One might argue that the cash will be used to buy new planes but in reality planes are usually leased or acquired with long term financing.

A couple of weeks back, Alaska Air announced a share buy back. It seems that the wisdom of the stock buy back might finally be spreading to the airline business. The pay negotiated at AMR will effect all the other carriers but once a deal is done, a share buy back announcement by any major carrier could be the catalysts to sentiment change. CAL is currently selling at around 7 times trailing earnings and 5.7 times forward earnings; boost these numbers to the market average and you get a jump in share price from $30 to $80 lickity split.

Of course, the change in sentiment is not the whole story. A buy back of shares will increase the earnings per share. The normal roll over that will take place in the oil market over the next few years will also result in higher earnings per share.

NEW CAPACITY

CAL has quickly added a lot of flights to its new hub. Many of these flights are on "feeder sized" planes. The big jets will still be used to leave the hub for profitable long haul flights.

If you do not appreciate just how much growth there is in international business, take a look at the recent action by Google. Google will partner to put a new communications cable beneath the Pacific Ocean. Google will gain access at cost rather than the current extra high Pacific rates. These rates have been pushed up because demand is great relative to available space. A fellow on one of the business shows said it well last night. He notes that just because the world has been blessed to be able to bring a few hundred million Chinese out of poverty over the past 20 years it does not mean that we should forget about the 2 billion others. He says the globalization story is still in the early stages. There is no doubt that air traffic is growing most rapidly within the borders of China and India but US International Carriers will get a fair share of the traffic that spills out to the rest of the world.

PATIENCE, PATIENCE, PATIENCE

Being of virtue is tough. Patience was never my strong suit. However, in regard to market moves, I have had to learn to wait, wait, wait, wait, wait and wait some more. The current situation takes my memory all the way back to the summers of 1982 and 1974. In each case, waiting for the market to make its big move was like waiting for paint to dry. The 1974 time was more exciting than the summer of 1982 but not in a good way. In 1982, most of the shares I purchased just sat there. They did not keep going down much but it seemed that the start of the "big bull" would never come.

This time we have had a number of fits and starts. For example, it was late July of 2006 when value lost its momentum to growth and when small lost its momentum to large. Even so, value stocks and small stocks keep making surges. Our QLD has made us happy but the last dip was large and the recent very strong run has just now put us back close to a new high. An upside break out from here would probably run-up another 15% pretty quick but who can time the market? We are left with the charge to be patient. Congress will eventually get its work done and the odds are good that no major new taxes will be passed. The drain to the markets will not be great enough to kill this bull.

BAD NEWS IS GOOD NEWS!

One thing that will help you be patient is to recognize that right now, bad economic news is actually good news! With T-Bills trading at 3.75%, it seems that the FOMC will need to cut the Fed Funds Rate by another 50 basis points pretty soon. Big Ben and company many feel the need for cover. Bad economic news would do the trick. If personal spending slows or if there is an increase in unemployment claims, the FOMC may have all the ammunition it needs to give the patient another high powered electrical jolt.

INFLATION PHOOEY!

One of the funny things is how short sighted prognosticators can jump to the long term view at just the wrong time. We all understand that those who want to be negative can always find a reason to do so. In the case of lower interest rates, the negative always jump on the risk of higher future inflation. While it is true that if interest rates are too low for too long, the economy is likely to overheat and there is likely to be inflation, but that process does not happen in days, weeks or even months. The immediate effect of lower interest rates IS LOWER INFLATION!

The decline in the cost of money from 5.25% to 3.75% is a tremendous price reduction. For many a business, it is like a 28% cut in the cost of raw materials. TV pundits seem to love to talk about the decline in home prices and inflation in the same breath. Again, those who are looking for "bad numbers" can find them or they can make them up. When the price of gasoline was rising, inflation was terrible. Now, with the price of gasoline back down to $2.62, it is the price of oil that is the problem.

The facts of life today include that each and every day a large number of people stop paying for certain magazines and newspapers. These folks have found that the Internet provides all the news they need. The marginal cost of this Internet news source is ZERO! The price of the newspaper falls from 50 cents to ZERO! The law of substitution lives and breathes. The bottom line is that publishing a newspaper online is far more economic that physically printing a newspaper. My old boss, the President of Legg Mason Wood Walker was fond of saying, "In the long run, economics wins!"

GRANDMA and GRANDKIDS

Put all of Grandma's CD's into just a few big stocks such as GE, MSFT and WB and she will do well. She will no longer be on a fixed income as her profits will grow over time.

Be sure that the grandkids own Google in what I call an ABC portfolio. My only grand child owns APPL, BIOGEN, CAL, Dell, Etrade, Google and Sprint. We plan for her to own the rest of the alphabet before too long. We pay no mutual fund fees and no commissions except for the initial purchase. The educational value for her to own small quantities of so many companies is worth more than the millions she will eventually earn. We live in freedom! We are blessed beyond measure! Praise the Lord!

HISTORY SAYS BUY, BUY, BUY

The following is yet another snippet of history to show that now is a good time to BUY, BUY, BUY.

A decline or near decline in the price of the average house is a rare phenomenon. Right now, it is interesting to notice that the cost of new construction, including a lot in a good location continues to rise, even while folks belly ache about a fall in the value of homes. One of the tenets of economics is that "clearing prices" are reached. Yes, the supply of unsold homes on the market is large, especially when looked at in terms of months needed to clear the inventory at the current sales pace. The problem with this popular measure (especially popular with those making the bear case) is the "double leverage" involved. Other numbers show that building permits and starts have fallen dramatically. On the demand side, the numbers show that mortgage applications are already on the rise. In just the past two or three weeks, the bears have said again and again that mortgages are not available.

I am trying to make two points here: 1) that the housing "debacle" is not as bad as it is perceived to be, and 2) the housing debacle has not killed the bull market in stocks.


The following are the 5 times during my life that housing prices were flat or negative over a full year and the increase in the S&P 500 over the next year.

September 1982 44%
November 1990 33%
July 1992 15%
February 1993 8%
April 1995 39%

ON AVERAGE, LARGE CAP STOCKS INCREASED 27.8% IN VALUE IN THE YEAR AFTER HOUSING PRICES WERE FLAT. WOW!

I like the last entry the best because April of 1995 was right at our previous mid cycle turn. The most recent pattern is in my opinion the one that will be most closely followed in this cycle.

STRONG DOLLAR RESULTS

The financial news media is always in search of the next headline. The recent one has been the fall in the US Dollar. Here again, I like the pattern set in April of 1995, when the dollar bottomed just as the pundits were saying that housing was killing the economy.

There are logical reasons why the bottom in the housing market coincides with the bottom in the dollar. Canadians are currently in a state of euphoria over the value of the Loonie. For the first time in 31 years, Canadians can trade a Loonie for a dollar and get back change. For a number of years, Americans could trade a US Dollar for a Loonie and get a quarter or more in change. This is big news for Myrtle Beach and many other coastal communities. When I was a kid, Myrtle Beach had Canadian Day Parades. These celebrations were held during the early spring, when it was still too cold for Americans to consider Myrtle Beach as a vacation destination. Florida resorts are also celebrating the return of the Loons!

The Euro Dollar has also appreciated substantially. The European can trade for a dollar and get more than 40 cents change. Just a few years ago, Americans could trade for a Euro Dollar and get about 20 cents change.

In April of 1995, the winds of change were blowing as they are now. Many a European and Canadian will make out very well by purchasing a US home now. The European might use one million Euros to buy a $1.4 million luxury home in the states. The price of this home will appreciate substantially as soon as the market clears. Even if it were to only hold its value, the return would be 40% to the European if he held the home until the US Dollar and the Euro Dollar reach parity again. While there is no guarantee that parity will ever be reached again, the history of the move after the mid cycle correction of 1994 says that it will.

OIL PRICE TO RISE IN EUROPE!

Should the US dollar strengthen, the price of oil in terms of Euro Dollars will soar. The law of substitution, which is already going 90 miles per hour in 3rd gear, will hit overdrive. No one knows where new supply smashes into new demand but it is clear that that there is going to be a collision between millions of small cars and scores of super large oil refineries. In Port Arthur, Texas, Shell and Saudi Arabia will more than double output about a year after the first of the Vietnamese super refineries comes on line.

Just in recent weeks, wholesale traders in the US have been reluctant to hold inventories of oil as the amount of natural gas in storage is near record levels, gas producers are being forced to slow down or shut down production and the price of natural gas is down to 47% of the price of oil in BTU terms. Of course, natural gas storage capacity is not enough to supply all our winter time needs with natural gas but a mild winter could see a steady decline in the price of heating oil. Any facility set up to burn gas or oil will go with the less expensive gas until supplies are diminished.

GLOBAL WARMING IN THE NEWS

Ken Fisher notes that when the financial press cannot find negative economic statistics to whine about, they write about global warming or Paris Hilton. Ken avoids making this a political point but in truth it is. The steady push in most media outlets is anti-Bush, anti-business, anti-war and pro-government "solutions". Of course, the exceptions to the rule, such as talk radio outlets and Fox News, prove the rule. Pretty soon, the stock markets should benefit from a change in sentiment. A "Feel Good Factor" is going to emerge. We have moved into the prosperity phase of the business cycle. During this phase, real wages and incomes of the average citizen will rise to the point that the constantly negative "news" will not sell well. As Andy Warhol taught us many years ago, the "news" is a reflection of the feelings of the people. During a time when the "bad news" does not sell, "good news" will be more prominent. Of course, the market top will come after the public has received a steady diet of "good news".

My "good news" for you today is that the process of building a market top is just getting started. Keep a close watch and you will notice a very gradual shift in the news. Also keep in mind that the kinds of advertising that you will see will also change. You will see lots of ads for companies like Boeing that are making all the planes they can make. Of course, the right time to buy shares in this company was several years ago. It will not go down in price for many years to come but its upward price momentum has already peaked. It takes a long time for the "big boys" to distribute their holdings to the public. Of course, the media outlets that sell these large corporate ads will be the outlets that survive. Do you think it coincidence that positive "news" articles and corporate ads will accompany one another, or soon before or after?

Yes, be a skeptic but be a wealthy skeptic. A fun market is headed our way.

POLITICS IMPORTANT

No one knows the ultimate outcome of the current fight for budget and campaign dollars. Funds are flowing in all directions. Powerful "special" interests are playing hard ball. In this crazy but necessary game of horse trading, many in power are willing to vote to spend billions annually for years to come on all sorts of wasteful schemes, provided they "win" the goodies they want for themselves. Senator Grassley, a Republican from Iowa, is one of the current key power players. I do not believe Grassley is for a $35 Billion add on to a disruptive health care plan, but he is willing to vote for it to establish a strong bargaining chip. Almost everyone in the House and Senate would agree that health care reform is needed but none of them would honestly say that the $35 billion dollar would be their personal first step.

Again, I have good news. So far, Congress has been unable to pass much of anything. This is good news for America and good news for the markets. As we have seen time and again, lots of bad legislation passes when one party is in control. Bush will veto the worst of the spending. Unfortunately, to get a dose of his own sugar, he will swallow some bitter medicine. Still, all in all, the compromises reached will not harm the economy badly. As a general rule, the economy will do very well for as long as the government stays out of the way.

BUY, BUY, BUY the fight will be over in a few weeks and members of congress will go home to take credit their "wins". That is one of the good things about a good compromise, all can claim to have won. These wins will become part of the "FELL GOOD" cycle discussed above. When corporations, the news media and the congress combines to tell the "good story", it will be natural for the masses to "FEEL GOOD". BUY, BUY, BUY!