THE BIG HANG UP

I am writing several times a day because the "big hang up" is over! I must admit that it has been hard to "keep faith" in the normal business cycle for the past year or more as the market cycle backed up and stalled out. It made it seem like "something is different this time". In truth, something is different in each cycle. This time, the price of commodities hung tough and refused to go down. The level of world growth was something the world had never seen before. Who could possibly have predicted that a huge country the size of China would grow its GDP by better than 10% year after year even after pushing the price of fuel and materials to all time record highs.

The big wait is over! The price of commodities has finally turned. With gold, copper and other metals crashing down, the love of gold is going to feel like the curse of Midas. People who have piled-on and added-to will not be able to sell out fast enough. The economic cycle chart has taken a spin-ahead as the next expected events have already happen and started, a significant rally in bond prices and a rally in financial stocks (small banks that lend to small businesses will benefit the most -- buy the Russel 2000 in IRA accounts).

The next event is already scheduled, the pending $600 helicopter money drop; the result being a boom in consumer cyclical stocks. Consumers are about to be flush with money because of savings at the gas pump, savings on interest payments, the extra $600 and larger than average income tax refunds. Not to mention the extra net cash flow from rental properties.

Keith Hays reports that every single indicator followed by Hays Advisory is Bullish. Each of the following indicators have hit levels that produced average annual returns as follows:

AAII 21.75%
Gambill 22%
Eq. Put-Call 21.5%
Vix 16.2%
Arms 16.3%
T-bill 23.3%
Fed 18.8%
Cash 23%
Rule of 20 17%
IBES 30%
Double 90's 22%

The level of money market cash to money market plus equities has reached the current levels only two times in the past 35 years, in February of 2003 and in August of 1982! Talk about buying opportunities, this is a rare time indeed!

ALL THE WORRIES FADING AWAY FAST

For month after month, the market has worried about high inflation as evidenced by the soaring price of gold and oil. During the same months, the market has worried about the risk of recession as evidenced by the housing crunch. Well the inflation rate forecast of gold is suddenly calling for lower inflation and the housing crunch suddenly faces fixed rate loans of less than 5%! Like a major flood, the housing market cannot withstand the power of cheap money. If you have a house picked out to buy, you better get it now because the deep bargains will disappear rapidly.

BILLIONS OF DOLLARS OF MARKET VOLUME

The market is now in a rapid rotation. Market indexes are up this morning an average of better than 1% while basic materials and energy stocks are down better than 1%. The long awaited rotation is showing up loud and clear.

DIG DEEP AND ADD AT LEAST A FEW DOLLARS TO YOUR ACCOUNTS!

You must make hay while the sun is shinning and the sun is shinning bright. Certainly, there are false starts and retreats to every market but this market made an internal low on January 21 and it has since tested that low. There has also been a long list of significant events that have given support to the housing and financial markets. The FOMC drug their feet on lower loan rates from August 2007 to late January 2008. The big cuts made in January of 2008 should have been made earlier but add the 1.25% cut in late January to the .75% in march and the total recent cut from 4.5% to 2.5% is a massive stimulus to the economy. A 45% cut in interest rates on trillions of dollars of loans and future loans is massive relative to the helicopter money that is about to drop. The current situation is like finding a $45,000 car on sale for $25,000. The public will not be able to resist borrowing and spending next month. Many a tax filer will select a refund loan as soon as his taxes are filed and significant sums of disposable money will flow into consumers pockets starting April 15. The fact that this money will have to be paid back will be a worry for another time. Businesses that wish to sell to consumers must start building inventories now!

BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY BUY 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PLAYING CATCH UP

Yesterday, a reader wrote to say he does not see how the airlines can make a profit with fuel prices going out the roof. A few hours after I got his email, DAL announced yet another $10 fare increase and the price of a barrel of oil dropped another $2. This makes the 5th week in a row that airlines have increased fares. My guesstimate of the percentage increase is too loose to put in writing but I suspect the increases in the past 5 weeks has gone most of the way toward catching the fare increase up to the cost increase. BESIDES, THE PRICE OF OIL IS ON THE WAY DOWN!

You may believe me to be the boy who cried wolf in regard to the price of oil. As such, you may not believe that this latest sharp drop is the start of anything big. However, the data back me up.

From 2002 to 2008, the production of "liquids" as reported by the IEA has grown from 76 million barrels per day to 87.6 million barrels per day, a 15% increase. During that same time, usage in the OECD nations has not grown. The main sources of new demand have been India and China where total use grew from 6 to 10 million barrels per day. The most recent numbers from the USA show that implied fuel demand averaged 20.3 million barrels per day in the latest 4 weeks and that is 3.2% below the levels from a year ago.

Phil Flynn, the senior commodities trader at Alaron Trading said yesterday, "The commodity bubble is bursting". Yesterday, the price of gold fell $59 per ounce and it has since retreated another $12 per ounce in international trading. US gasoline stocks have jumped to 236 million barrels which is 35 million barrels higher than supplies at the same time of year in 2003 and 2004. Last year, supplies at this juncture were 224 million barrels.

The demand decline of 3.2% in the US implies that the commodity bubble is bursting and/or the economic slow down is here. Call it a recession if you like, only time will tell if it actually is a time of negative economic growth. Recession or not, people are finding ways to cut back on oil consumption and new production is coming on line. As mentioned in prior postings, Wikipedia estimates that new liquids production will exceed 7 million barrels per day in both 2008 and 2009. If demand falls in the US by 3% and supply increases 7% what do you think will happen to the market price?

Another reader says that he has read that OPEC is cutting back, not increasing production. First of all, he is wrong about OPEC cutting back and, second, he implies that OPEC is the biggest factor to consider. OPEC countries including Iran, Qatar and Angola are increasing production and huge new fields will come on line in Kuwait and in Saudi Arabia this year. The build out in Angola is happening. In the past year, Angola has increased production by 300,000 barrels per day. OPEC held stated production constant last month even though cutbacks are normal at the end of winter.

On the second point, while OPEC has increased production from 26.5 million barrels per day in 2002 to 32 million barrels per day in 2008, the rest of the world has gone from 47 million to 51 million barrels per day. These numbers do not reflect the massive developments in progress in Canada, Brazil or Kazakhstan. While it is true that the big fields in Brazil and Kazakhstan will not come on line for a few more years, there are other billion dollar projects closer to completion. Of the former Soviet Union countries, Azerbaijan is one of the ones currently bringing production on line. Over the past two years, Azerbaijan has increased production by 400,000 barrels per day. China and Russia also have various projects in various phases of development. The sharp growth in Russian production has leveled off but billions of investment will bear fruit soon. Non OPEC production is 160% of OPEC production.

DAL LEADING THE PACK

Delta has taken the unusual step of increasing fares mid week, not once but twice. Yesterday, as soon as a couple more competitors finally matched DAL's previous mid week increase, DAL moved again. The bottom line is that international passengers are not likely to let a $10 or $100 ticket price increase prevent them from flying half way around the world. This morning, airline shares in China have moved "limit up". The fact is that international airlines are enjoying pricing power not seen since before the days of deregulation in 1978.

RECESSION

TV talking heads, in particular democratic politicians, are now consistently using the words "this recession". They say things like the FOMC had to act in order to prevent "this recession" from getting worse. This is the old, "say its true enough times and it will be true strategy". Many a democrat is elated over the prospects of recession as they believe a recession insures the election of a democratic president. If the democrats said "the housing recession" they would be correct, but, with commercial mortgage delinquency rates at record lows and with capital goods exports at record highs, are they sure we are in recession? With the world wide ratio of employed to unemployed at a new record level, is the world really suffering?

The massive drop in the gold price was to be expected by this point in the business cycle. Will all those, who screamed that the run up in gold was a forecast for high inflation to come, now call for a decline in inflation? Many will. Many will say that the decline in gold and oil means the recession is getting worse.

This morning, Lehman Brothers following the actions of JP Morgan last week, lowered its ratings on a number of airline stocks. Investors should remember that "sell side" research is even more unreliable than "buy side" research. Asking Lehman Brothers to estimate the value of a stock is like asking an auctioneer to estimate the value of a painting. The old saw is that the auctioneer will ask if you are buying or selling before giving his answer. I am a free market libertarian but I do not believe it should be legal for companies that make their living by trading stocks to issue "research reports" on those stocks.

TOUGH TIMES, CREDIT CRUNCHES NOR BUBBLES LAST FOREVER

The FOMC has held the fed funds rate at a significant premium to the t-bill rate for more than two years. The FOMC normally moves with the market. During Bernanke's entire term, he has held his foot on the economic brake. Even though the last cut was a massive 75 points out of 325 points, moving fed funds rate to 2.5% (a decline of 23%), the FOMC still did not catch up to the t-bill rate. As a result of the FOMC's tight policy, the 10 year treasury rate has fallen to near record lows. The 10 year bond traded at 3.3% yield yesterday. Since the yield on the 10 year is roughly equal to GDP plus inflation, we know that the actions of the FOMC are continuing to slow the economy, inflation or both. But we also know that the market is bigger than the FOMC and at some point those people who want or need to buy a home will realize that bargains are all around. Home prices in "non bubble" communities have fallen a little and financing costs have fallen a lot. The current fed funds rate is 47% below where it was 7 months ago!

Guess what else has recently fallen in value? The Euro! The pundits said the FOMC should not cut rates but should instead defend the dollar. The FOMC cut rates and the dollar held, it was the Euro that declined.

INFLATION IS DEAD, DEAD, DEAD

The long bond says inflation is dead. The price of gold says inflation is dead. Free trade and technology say inflation is dead. Women across America have been holding "gold parties". Women bring their old jewelry to a neighborhood party where it is weighed and sold. These women should get credit as rational investors. The price paid for melted jewelry has been higher than the EBay value of the whole pieces. Now that the decline has started, how low will gold go? Huge mutual funds hold mountains of gold that will be sold to the market if the public starts selling these funds. Gold and oil are joined at the hip. The spread between the two moves around a little but the two have about a 90% trading correlation.

The 30 year municipal bond rate was about 4.2% last year when the FF rate was at 5.25%. Yesterday the tax free rate was up to 5%. Why? Who wants to earn 5% tax free when quality stocks are on sale? Quality companies now pay dividends greater than the tax free rate on bonds.

With inflation dead and the cost of money low, the projected future income stream of a currently empty rent house is suddenly attractive relative to owning gold. The reason houses go up or down in value is the net present value of their income stream. If one buys a rent house at a rock bottom price, it may not even have to be rented to turn a profit when the market rebounds. An insured empty house is probably a better store of value than gold at this point. Rent the house even at a moderate rate and the rents are likely to cover the financing cost at today's rates.

While I admit that it was a long time ago when I first mentioned that consumers would use their windfall from lower oil prices to buy consumer goods, it is still going to happen. Keep in mind that this time the price of oil has gone so high that a significant decline will not force the collapse of alternative energy projects. As you may recall, Jimmie Carter promoted synfuel in the late 1970's but the technology made no sense once the price fell hard.

PLAYING CATCH UP

In the coming months, the FOMC will continue to play catch up because even the huge recent moves have been limited. The FOMC has added 200 billion here and there but the markets they are influencing are measured in trillions of dollars. To some extent, the "facilities" offered by the FOMC have been the equivalent of responding to a $200 request for grocery money with a $2 bill.

At some point, the market will take over from the FOMC. The huge decline in mortgage rates will result in the faster and faster absorption of excess houses.

DAL is leading the airlines in a game of fare catch up. DAL is in effect saying that it would rather lay off employees than to fly planes at an operating loss. This attitude puts enormous pressure on pilot unions to stop playing games. NWA pilots can come to terms or stay stuck at post bankruptcy pay grades. Assuming NWA pilots hold their ground, DAL and other airlines will ground planes and lay off workers as much as necessary to rationalize the business to the current economic climate. This environment will enhance the chances of a successful merger if a deal or deals can be worked out. As is most often the case, a great time to buy into an industries shares is when employees are being laid off. The willingness to layoff workers is a sign of willingness to make the tough decisions necessary to boost future profits.

"THE BRAVE NEW WORLD"

GaveKal Research will appreciate two of the events of the past day. The USA indicated support for adding the former Soviet State of Georgia to NATO and Pepsi purchased a juice company in Russia. I include these events at the end of this post as a simple reminder that we live in a "new time". A time when the unemployed man in Siberia might find new work at Pepsi. The hard thing for Americans to appreciate is that the hiring of a Siberian worker is good for workers in the USA. It is true but I will not beat this dead horse any more. Instead, I invite you to take a look at the decline in metals over the past two days. The turn is here!

I STAND BY GOOGLE

The pull back in Google from 7 and a small fraction to 4 and a small fraction has been a significant decline. All the while the business is growing by leaps and bounds with no sigh of let up. Indeed, the mobile business is moving so fast that it is emitting a buzzing sound. Mobile search results just jumped 20%. The new g-phones should make for a much more dramatic and long term jump.

The Google business model is a joy to behold. The key to it is that the cost to provide service is so low that Google can keep on offering more and more great services without charging a fee. This morning I mentioned how Google Transit is growing rapidly. Is it not amazing that a private company can provide the public service of all local transit routes, schedules and fares and post them on map that is available in thousands of locations, free of charge? The benefits of higher utilization, lower pollution, lower costs, and time saved inure to the citizens. This is a great example of Milton Friedman's suggestion that most government services should be provided by the private sector.

We will soon know who won the 19 billion dollar 700mz spectrum auction and by summer G-phones will hit the streets. The first phones may not compare well to the hype but they will boost the use of mobile services. The world will never be the same.

GOOGLE IS ON SALE AT 4 AND A FRACTION

Some months ago, I wrote that Google will ultimately sell at a much higher price but at a lower PE ratio. The problem of projecting the future is that we simply cannot imagine which direction change will take us. My bottom line is that Google is going increase revenues many times over the next 30 years and every time this stock dips it should be accumulated. A small investment for a grand child should grow into a small fortune, in particular if routine additions are made on dips.

TECHNOLOGY SOLUTIONS ARE MANDATORY

The current price of crude oil dictates that technological solutions be found, if we desire to continue or to improve our current life style. The good news is that more time, effort and money is being spent on developing technology than ever before. We live in a wealthy time when the citizens of many nations can afford to pay for research and development. For example, I am starting to wish I had a nickel for every plan there is to dramatically change the production of energy.

One of the technologies that is catching on quickly is hybrid power supplies. When you think about it, a hybrid system is the same strategy as has been employed by utility companies for decades. Power companies have offered night time power to industry and low cost street lighting because "the motor is running anyway". Hybrid technology is not confined to autos. Huge cranes that move cargo at docks are being converted to hybrids. Huge buses and trucks are being converted. The key point is that there is down time between productive work but "the motor is running anyway", so why not connect a generator to that motor to store the down time energy. Then, when it is time to move, let the stored energy supply extra electric motors to give the gas or diesel motor a boost. Like in the load leveling schemes of power companies, the size of the motor can be reduced and fuel can be saved.

There has been yet another discovery of enzymes that cheaply convert cellulose fibers to ethanol. This time, the enzymes were not genetically altered but simply harvested from existing enzymes in the Chesapeake Bay. In less than a year, demonstration plants will be built that will show the commercial value of the latest process.

COMPUTING POWER AND DATA, DATA, DATA

The tremendous growth in research and the steady decline in the cost of computing and storing data means that the "cloud computing trend" is just getting under way. In 1975 I worked out of the Dean's Office at the Bowman Gray School of Medicine. In those days, we had to be careful about running a few data analysis programs because we could slow the whole system down. There simply was not enough computing power to run all the hospital systems and do research at the same time. We had to schedule our runs in 30 minute intervals. Payroll and other "non-critical" tasks had to be run in "batches" during the wee hours of the morning.

Today, it is growing less and less efficient for a company to manage its own computing system. Off site data centers, run by the likes of IBM, can handle all the work of a big medical center hundreds of times over. This trend will continue and the cost of computing will continue to drop. In the case of Google, program designers totally ignore the cost of computing and data. The Google management understands that the cost per transaction is already so infinitesimal that it has no bearing on the product.

PUNDITS CONTINUE TO TALK HOUSING DOWN

Pundits continue to "look backward" at the housing market. They see the national over hang of houses and fall into the trap of believing that the average house price will fall much in the coming months. The fact remains that if we ignore the rust-belt states of Michigan, Indiana and Ohio and the super boom-bust states of Nevada, Florida and California, the average price of homes is not falling. Using average measures in this situation is like adding Gomer to a professional bowling team. One bad number brings the averages down a long way.

With Fannie and Freddie buying loans again and with Credit Unions making 4.25% variable rate loans, 4.9% 15 year fixed loans and 5.5% fixed rate loans, the housing market will improve in short order. We all know that when BBB- mortgage paper traded at 8 cents on the dollar last week, something had to happen. The price made no sense unless one appreciated the amount of loans held on supper high margin rates. When the margin calls came, the weakest player had to play the part of the canary in the coal mine. Once the FOMC stepped up, the pressure was relieved. It took a long time for the government to grant Freddie and Fannie more buying power. A game was played, an old firm was eaten by vultures but the pressure on the rest of us was relieved.

GOOGLE AND THE HOUSING CRISIS

What does Google have to do with the housing crisis? Not a lot. Google certainly offers a number of services that assist home owners, real estate professionals and financial parties. However, the big decline in the price of Google was only the indirect effect of tight money. Tight in the sense that a massive de-leveraging has been in process. The earnings and earning power of Google continues to grow. We have simply been in a time when of PE contraction. Investors have been unwilling to pay a premium for Google while facing declines in the housing area.

ATTITUDE SHIFT AHEAD

The "helicopter money drop" will begin in a month. Businesses need to build inventories to satisfy the temporary demand. Shays' law will kick-in and the economic surge will move ahead. BUY ALL THE STOCKS YOU CAN IN ANTICIPATION OF THE MOVE! IT IS A GOOD TIME TO ADD TO MANY STOCKS AND SMALL CAP VALUE STOCKS WILL LEAD THE CHARGE BUT BIG CAP GROWTH STOCKS LIKE GOOGLE ARE THE "SAFE" PLAYS.

TIME FOR A GAME OF HIDE AND SEEK?

Today, it looks like the market is pulling back from the big surge of yesterday. Looks can be deceiving, the market is playing a game of hide and seek.

The turn is here, basic materials stocks are down 4.3% and energy stocks are down 3.3%. This is consistent with the decline in gold of more than $60 per ounce.

I must repeat that there are dozens of indicators at historical levels that have produced average market returns of greater than 20% over the coming year. This average return will include the groups that will fall in price by 20% or more. A lot of companies and individuals will benefit from lower commodity prices, the key commodity being oil. One of the key beneficiaries of lower oil prices will be airlines.

AIRLINE PILOT MEDIATION?

NWA pilots have a lot to gain from the merger of NWA with DAL, including $50,000 to $100,000 per pilot in equity and pay increases of 25%. Since the two sets of pilots appear to be unable to resolve their differences, NWA pilots have proposed mediation of the dispute. I am a big fan of mediation. The bible says that people should resolve their differences on the way to court and mediation is often a great way to resolve disputes. There are many famous cases where a sharp "middle man" has been able to see both sides of an issue and to pull the parties to a satisfactory middle. A good mediator can sometimes use the wisdom of Solomon to convince the two parties that a live transaction is better than a dead baby. In any good trade, both parties win. If one party is afraid to be "bested" then both parties lose. The best deal may be very different than the first deal offered by either party. I am reminded of the time a friend of mine put up a business for sale and advised several competitors that he would take the best offer received by fax before 5 PM. A couple of competitors entered the auction. Before noon one party offered 5 million. The second bidder went to 7 million at about 2 o'clock. The first bidder was informed that he was "out" and he raised his price to 8.5 million. The second bidder said the price was too rich for him and declined to bid anymore. My friend was happy with the bid of 8.5 million and ready to accept at 5 pm, however, at 4:45 and new bid came in from a third party of 13.4 million. Needless to say, there was "great joy in Mudville" on that day. Even after the last bid, my friend was careful to inform the first bidder than he was "out". At 5 pm the 13.4 million was accepted.

The bottom line is that the merger is a win-win situation. I don't know that mediation will work but I am glad to know that the pilots are still searching for answers.

Some readers have sold airline stocks in recent weeks. Holding on through tough times is hard, but when the going gets tough, the tough gets going. If you are out, it is time to get back in, the bidding is just getting underway! The move up in airline shares today is hiding behind the big plunge in materials and energy stocks.

FREDDIE AND FANNIE ARE GOING ON A SPENDING SPREE!

The US Government has just given the two quasi government housing corporations a huge increase in their "lines of credit". They are now free to buy hundreds of millions of dollars of mortgage loans. This is their business purpose, each already owns billions of dollars of loans and their business is sound. Each corporation has been maxed out but now they are not.

BACK IN BUSINESS

Suddenly many a mortgage loan office is "back in business". There is once again a secondary market for home loans. Credit Unions are not the only game in town any more. Perhaps more importantly, holders of deeply discounted mortgages will enjoy seeing market values rise and the disappearance of margin calls.

MARKETS WILL CLEAR QUICKLY, THE BEST BARGAINS WILL NOT LAST LONG!

PUNDITS SQUIRM, GOLD FALLS, DOLLAR RALLIES

Once again, we learn that lower interest rates do not cause higher inflation. Day after day for months on end, including yesterday and today, the pundits have cried that lower interest rates will lead to the collapse of the dollar and to super inflation. The actions of the market have made them look wise but only because the low dollar has pushed for lower rates not because lower rates have pushed the dollar lower. Yesterday, rates were cut by 75 basis points out of a total of 325 basis points, this is one of the largest percentage drops if not the largest percentage drop in FF rates ever. What happened, the dollar rallied and gold has fallen about 5%!

The markets are still working their way around the BIG TURN. Can you see it? Do you also appreciate that the extra "facilities" offered by the FOMC to support trouble spots has not necessarily increased the money supply and inflation. The evidence suggests that the FOMC has to some extent "sterilized" these extra loans by calling in other loans. The key work of the FOMC is done in what is called open market transactions. The FOMC is constantly buying or selling t-bills to and from banks to soak up money or to send money to the markets.

SEVEN WEEKS

In all fairness to the FOMC, the correct level of short rates is a moving target and it does make sense to see the effect of prior cuts before moving too fast. The time from the last cut to this one seemed very long but largely because the FOMC was so far behind the curve all last fall and winter. The big monster cuts in late January followed by 75 of 325 is huge. The total decline in the discount rate from 6.25% to 2.5% is VERY, VERY BIG!

COMMON SENSE IS SCREAMING BUY!

There are dozens of indicators screaming BUY. Hopefully the loudest one is your own common sense. The federal government has put money on sale! There are millions and millions of business opportunities available today that made no sense to fund at 6.25% (+ the bank spread) that make all the sense in the world at 2.5% (+ the bank spread). Lower input costs make a number of "losers" profitable opportunities. By the same token, consumers who were facing dramatic increase in house payments have gotten relief. Many a variable rate loan that would have seen an interest rate rise if rates had stayed up will now see an interest rate decline. The cost to carry many a rent house has fallen, many a cash flow "alligator" has turned into a "woolly sheep" ready for shearing. Consumers will see lower credit card bills, lower house payment bills, lower car financing opportunities and more.

NOW IS THE TIME TO FIND THE FEW EXTRA DOLLARS TO INVEST THAT WILL MAKE A HUGE COMPOUNDED DIFFERENCE!

NO, MARKETS DO NOT GO STRAIGHT UP BUT HISTORY IS ON OUR SIDE. THE WORST OF THE CREDIT CRUNCH IS OVER, GOOD MARKETS ARE BECKONING!

YET ANOTHER INDICATOR SAYS, "BUY, BUY, BUY"

This time, it is a purely technical indicator that is screaming, "BUY, BUY, BUY". The indicator is detailed in an article by Mark Hulbert posted on MarketWatch.com. The indicator was among those recommended in Marty Zweig's 1986 book, "Winning on Wall Street". It is called the Double 9 to 1.

A 9 to 1 up-volume to down-volume day is a relatively rare occurrence. Two 9 to 1 days in close succession have proven to be a good sign of a major market turn. I have forgotten the researchers name but a study was done from 1942 to 2006 that shows the average annual gain after a double 9:1 has been about 22% whereas the time in between has resulted in an average of 4.5% returns (dividends not counted in either case). Yesterday, the market experienced a 9.5 to 1 day, as those pessimistic short sellers were caught with their pants down. The long buyer can lose 100% of his investment while the stubborn short selling can lose many times as much.

BY THE WAY

In country after country, from Algeria, to Canada, to Brazil, to Kazakhstan and beyond, total liquid fuel production (primarily oil and liquid natural gas) is showing steady increases. At the same time, there is more and more evidence of demand destruction. SkyBus just announced "significant" cut back on flights and DAL just announced reductions of 5%. What a difference between the "old airlines" and the "new". Unlike the "old airlines" the "new" simply are unwilling to fly at a loss. The price of the seats times the number of seats sold has to produce a profit or the flight will be reduced.

SEVEN WEEKS

The FOMC drug its feet for seven weeks between the last cut and yesterday 75 basis point cut. In the mean time the FOMC has tried to be cute about supplying money to selective big banks. Still, the total cut in the discount rate has been huge. The discount rate offered by the FED was at 6.25% in August of 2007, clearly far to high for the conditions that existed. Yesterday, the fed funds rate was cut to 2.25%. A dramatic cut in the cost of money. Money is on sale! The equivalent move in most anything would make consumers jump! For example, the mother thinking about buying a kid a bicycle might have hesitated at $62.50 for the bike in August. Today, the bike looks darn cheap at $22.50. The lower price of money will make all sorts of long term capital intensive purchases worth while. Businesses are taking advantage. Capital goods exports have climbed by 19%. Individuals will once again consider buying the big boat, the big RV or even the beach home.

CHINA IS TIGHTENING AT THE SAME TIME THE USA IS LOOSENING.

China just raised its reserve requirements for the 12th time in about one year. The reserve requirement in China is now up to the record level of 15.5%. The Yuan is rising. China will export less and consume more. China will continue to cut back its use of oil per dollar of generated GDP and it will buy more capital goods from the USA. Good markets ahead.

THE IRANIANS WORST NIGHTMARE

President Bush is giving the Iranians all the more to worry over. Sunni tribal leaders are turning out to be the best of US allies. They have helped cut back on violence in the region and the cost has been payment of just a few dollars per day per "soldier". As part of this "program" the US is arming these Iraqi "soldiers". The Iraqi government, so far, has not been willing to integrate great numbers of these "soldiers" into the regular Iraqi army but Iran is certainly aware of the military build-up of its Sunni neighbors. Iran needs to make a peace treaty soon or face Sunnis backed by US weapons. (Much of the above information came from George Freeman at Stratfor.com.) I am not suggesting that the US is preparing to invade Iran by proxy. I am saying that Iran is under extreme economic and political pressure to suspend funding of terrorist organizations.

URBAN DENSITY

One of the techniques consumers around the world are using to cut back on the use of oil is to move from the suburbs to the city. The slow real estate market has slowed the pace but the trend is in place. Urban living results in less pollution per person and significantly lower cost. Yesterday, one of my neighbors was very interested in my planed move to town. She mentioned that she and her husband have been shopping in the West End area of Winston-Salem. She is really drawn by the idea of her children being able to walk to local schools.

The price of midtown Manhattan condos seems to make the opposite point about cost but you have to appreciate the reason citizens are willing to pay so much. In real estate, location is key. If one were able to move a Manhattan condo to North Carolina, its value might fall from 1.5 million to 150,000. Manhattan condos appreciate in value because they eliminate long commutes. Highly paid people save a lot by working and living close to home.

Major cities are making great strides to promote "down-town living". Cities like Copenhagen have learned neat little tricks that make shared pedestrian streets similar to extra out door, shared, patios. As the sense of community grows and as more ways are found to share or lower costs and as a greater variety of sports, food and entertainment is attracted to down town areas, the growth trend accelerates. Health advocates note that the French live long lives perhaps because they are more likely to walk to and from. Another positive development is the result of Google Transit coming on line in more and more cities. Google has shown that if transit routes and schedules are easily available to all who have Internet access, including through mobile phones and PDA's, the ridership goes up significantly. Google can add only so many cities a month. In order to "do the best for the most", Google encourages those who want Google Transit to mount a local "city hall" campaign.

DUTCH DISEASE

Having discovered oil, the country of Ghana is very concerned about falling prey to the "Dutch Disease". Once Belgium discovered natural gas, the country started coasting; "Why world so hard if we are all going to get rich off our gas?" Over the years, Americans have learned to be careful about gratuitous foreign aid. Foreign aid is often nothing but a "Dutch Disease" curse; "Why should we work hard to earn a living if the Americans will give us the food we need?"

So far the best solution to world hunger has been to develop free trade with those countries that are willing to operate by rule of law. It helps a tiny few when corrupt leaders grab the spoils of developmental aid or of heavily taxed production. The best way for the leaders of a country to get rich is to develop the legal framework for individuals to trade products with others. Free trade should include relative freedom of immigration.

BAT MASTERSON VERSUS JOHN HANCOCK

Yesterday I demonstrated how some of our "American Heroes" are nothing more than common men who for what ever reason got a favorable telling in history. Again, can you imagine the Gene Barry "Bat Masterson" skinning 20 buffalo per day? All for the purpose of starving the Indians off their land? Would you have guessed that the only man know to be killed by Bat to be a competitor for a bar room "girl"? Bat was no doubt a character but a legend only created in the press.

On the other hand, many true American Heroes have almost been forgotten. John Hancock is famous for his signature on the Declaration of Independence and few of us know anything more about him. The fact is that he served two separate terms as our "President". During his term as President of the "Congress of the Confederation" he worked as many as 20 hours per day, 6 days a week, to raise the capital needed to fight the revolutionary war. Prior to the war, Hancock had worked tirelessly to build his Uncle's business and he thus made himself, perhaps, the wealthiest of all Americans at this time. He contributed most of his fortune to the "cause". He was by no means a perfect man but even those who disagreed with him, including John Adams, respected his hard work and his devotion to his neighbors and his country. He was generous to a fault and was loved by many a "common man". After the war, he served two terms as governor of Massachusetts before retiring to enjoy the benefits of his labor, however, when the people asked him to come back for one more term, he obliged and he died while serving the people.

WE LIVE IN A GREAT COUNTRY!

The Greek democracy was a great experiment. The framers of the US Constitution took the best of democratic principles from the English and from all the way back to the Greeks. Today, there are powerful men in powerful positions in America but there are also checks and balances. A recent invention, called the Internet, has given the public the power to be all the more informed and an informed public is the "kernel" of democracy. John Hancock supported the constitution after the bill of rights was negotiated. We now enjoy freedom. John Hancock correctly fought against "big government". In regard to the British, he said, "They have no right to put their hand in my pocket".

Walgreen just announced an expansion to its health clinic program. Today there are thousands of low cost clinics in America, staffed by nurse practitioners, where "primary care" is available. These practitioners are quick to refer serious illness to medical doctors. The purpose of telling this story here is to note that, given the opportunity, the free market will find the way to supply the needs of the consumer. Over the past 50 years or more, the cost of health care has soared much faster than the cost of other services as more and more of the care was funded by government payment or government dictated systems. It is my hope that the next administration will be able to return health care to the control of the individual who needs care and to once again offer Americans the option of seeking the kind of education that was acquired by John Hancock.

THE INDICATORS SAY BUY AMERICA

As I have suggested time and time again, the price of the US dollar is not so low because of low interest rates. Sure enough, the rates were cut by 75 of 325 points yesterday and the dollar bounced upward. The reason is that the FOMC is finally almost out of the way. The market t-bill rate is now at least back to 65% of the artificially imposed Fed Funds rate. It now makes sense to do business in America and businesses from all over the world now have great incentive to do business with and in America.

With so many BUY indicators "off the charts", we should need no more encouragement to buy aggressively. Yes, the past 6 months have been tough on the psyche but all the while the price to values has gotten better, BUY, BUY, BUY!