HEADED FOR THE HOME STRETCH

After a few days in the mountains, I am running late. Just time for a brief comment.

The signs are clear that we are almost through the big turn. Aluminum prices tell the story. The roll over of commodity prices is underway, simultaneously with the take off of late cycle stocks.

A word of caution. I am also getting short term signals of speculative fever. The market is over bought, the bulls to bears has shot up, the NASDAQ volume has jumped relative to the NYSE volume and put call ratios have fallen. I will not try to sell anything in the hopes of buying it back at a lower price because I believe the stocks that will be hit the hardest are the ones I don't want to own even after any pull back.

There is definitely fever in some of the high tech areas. Some of these stocks will have to double sales several times over the next 10 years in order to justify current prices. I expect strong growth and strong competition in this area.

Yes, my favorite tech stock continues to be Google. I pounded the table in 2004 and bought all I could at 85. Of course, none of my readers were interested at the time. As the stock went up, accounts were opened and I bought the stock again and again at higher and higher prices. By 2005, a lot of new accounts were opened and it took a good while for the latest buyers to appreciate their purchase. With the stock now over $600 per share (a 7.2 bagger on my original purchase), it is still cheap relative to the "hot stuff".

CAL

CAL is now the most popular airline among the analyst. As a contrarian, I would normally feel very uncomfortable owning the most popular stock but the key point here is that institutional ownership is still 95% with 14% of the shares short. I suspect that a significant portion of the shorts are buy public speculators. It will take a number of years and a lot of publicity for a significant ownership to be distributed to the public. The current short squeeze is fun to watch. The short interest was at 18% not long ago. The stock is moving up while the institutional ownership remains fairly constant. A sentiment change could see the public only begin to buy shares heavily at twice the current price.

Family accounts remain "all in". GO, GO, GO!

Last chance to enter your guesstimate. What are the odds of the passage of a carbon tax to offset the Alternative Minimum Tax?

MONEY DOES NOT GROW ON TREES

For a long time, it has been widely known that the educational system in America has been hijacked. The curriculum at the grade school level through high school no longer includes teaches the most basic truths. As a result, more and more adults live life with a mind set that is based on false premises . In terms of economics, the situation has gotten so bad that the schools might as well be teaching that money grows on trees.

House and Senate energy bills have been stalled for many weeks. The powerful Democrat from Michigan, Dingle, helped the senate pass a bill that is somewhat friendly to the auto business. The house bill is not so friendly. A battle has been fought in regard to who will sit on the conference committee. Of course, Dingle has nominated himself but other leaders desire to stack the committee with those who would support forced mileage regulations. The democratic leadership, and in particular the Senate Majority leader Harry Reid and the Speaker of the House, are basically socialist. They believe that central planning by the government is the way to "solve problems". They believe that the primary role of government is to take from the wealthy to give to the poor. Of course, if any person or group spends his wealth, future wealth is reduced.


At first, it is hard to understand how people can hold the attitude that the government is the answer when the record is one of failure. Socialistic schemes tend to help some people at the expense of others for a while but eventually the mis-allocation of resources results in damage to both the wealthy and the poor. The collapse of the Soviet Union did not just happen. Central planning failed. Many of the people who started out poor received a temporary break only to be thrown into real poverty. Free markets allocate resources well but government allocation leads to corruption (lobbying for earmarks) and ultimate disaster. Eventually, one can only hope that the "smart people" who "know" what is best for the rich and the poor will learn that the wisdom of the many is greater than the wisdom of the few. Given the opportunity, markets solve economic problems. Regulations should be kept to a minimum because all they do is get in the way of the final "answer". Trying to force a solution on a market works for a while but at some point the unintended consequences kill the goose.

It would seem that a lesson would have been learned after the most recent case of forced mileage standards. The congress tried to force people out of big cars and into little ones. The people did not want to be forced so they bought trucks instead of cars. After years of trying to force the issue, there are more gas guzzling SUV's on the roads than there were ever gas guzzling cars. The central planners would tried to force a government solution only made the problem worse. A similar series of events has occurred at the airports. The congress tried to force the big carriers to pay an unfair portion of the air traffic control system. They "succeeded" but the unintended consequences included the bankruptcy of several major carriers and then to having travelers sit in planes for hours while they circle the airport or sit on the tarmac.

WOE IS ME!

The day before yesterday, the Wall Street Journal published a poll showing the majority of the people in America believe that free trade hurts Americans. It takes a whole lot of biased reporting in the "news" to convince people that basic truths are false. In case you have not heard, if a wheat farmer in Nebraska and an orange farmer in Chile are willing to trade some of their crops, both the wheat farmer and the orange farmer will benefit. Bread is the staff of life but what would life be like with no oranges?

Our children are not being taught the basics or they are being "re-programed" by a biased media. While I am concerned for the long term well being of our country, I take solace in the good news about our system of government, which is that it takes a solid majority to stay on a "stupid path". Our system includes many checks and balances. The framers of the constitution did a good job of setting up mind fields for those who would force through major change.

I must admit that the odds of passage of "my solution", a carbon tax offset by reductions to marginal tax brackets, has dropped. Key leaders in the democratic party are making an all out push to force new CAFE (auto mileage regulations) into law. The democratic leadership has shown the willingness to do "end around runs" to get what they want. Historically, competing bills passed by the house and senate have been reconciled by conference committee. The outcome of each conference is influenced heavily by the leaders who appoint the committee. Recently, the ox has been in the ditch with no progress being made to get bills passed bills to conference. The leadership has done an end run by taking parts of the house bill and parts of the senate bill and combining them into a new bill. The new bill, identical bill, was then introduced and passed in both the house and senate. In other words, some of the power of the chairs of the standing committees has been usurped.

The treat on the table now is to do an end run with the energy bill. Dingle knows he is out numbered so he has been dragging his feet before going to conference. He has tried to gain an advance agreement to protect the auto industry. As an alternative to CAFE standards, Dingle has asked for comment on his version of a carbon tax bill. Yesterday, Reid indicated that he will bypass Dingle if he must. There is huge potential cost to Reid for continuing to jam things through congress, turning your fellow party members who chair powerful committees into enemies is no way to win the majority leader popularity contest. Reid is not the first to rule the Senate with an iron hand. Such tactics work for as long as they work but if there is a failure all will know who is to blame.

So, what happens next. We all know that if a final bill includes new CAFE standards, the President will veto. In the mean time, Hank Paulson, Secretary of the Treasury, has been talking to the House Ways and Means Committee. Once again, we must appreciate the wisdom of the framers. The Senate is where most legislative power lies except that tax bills must originate in the House Ways and Means Committee. Once again, we see that even if Americans are brain washed, the country cannot go off on crazy tangents without first reaching a compromise between the well educated.

MONEY DOES NOT GROW ON TREES

While it is certainly true that both the republican and the democratic members of the Ways and Means committee hold biased positions, they at least understand that money does not grow on trees. These members are at the heart of every battle to gore one mans ox in order to feed another mans ox. They understand the pain caused by distorted revenue collection policies. According to reports, yesterday, Hank tried to negotiate a reduction in corporate taxes. In case you have not heard, America is losing jobs and investments to over seas markets because our corporate tax rates are high and getting higher relative to other nations corporate taxes. Taxes on corporations in the US were set at 40% some years ago but over the past 25 years the rates in other nations have come down dramatically. As always, the markets find a way around problems. The solution to high taxes in America has been to shift more and more production over seas.

When Hank hit a brick wall at the committee, he made the recommendation that the committee once again pass just a one year patch to the AMT. Members of this committee, including Charlie Rangle, very much want to "fix" this silly law. It is never fully enforced but the annual patch grows larger. The recommendation by the Secretary is a bargaining position. He has in effect said that unless you give the President a good reason to go along with a change in the law, there will be no change.

The whole story comes back again and again to the fact that out tax code is complicated and out of sync. The USA needs tax reform. The majority leader is trying to force through an energy bill that will raise taxes on oil companies so that more money can be thrown as "incentives" to alternative sources of energy. As with all corporate tax bills, the public is stuck with the bigger portion of the tab. The difference between raising taxes on oil in order to raise money to subsidize alternatives and raising taxes on oil and giving the revenue back to the public in fair measure is that the first system leaves control in the hands of congress. Congress wants to decide who gets the tax breaks. If the gasoline taxes are raised, the public will not need the wisdom of the congress to decide to lower their fossil fuel consumption. They will choose how to spend the money and while much will be wasted, much less will be wasted than if congress decides.

The laws of economics tell us that artificial incentives are not needed because the least costly source will be selected by the market. The externalities must be taken into consideration. Every day, governments all across America and all around the world deal with externalities. For example, fire engines need to make a lot of noise to get to a fire quickly. The noise is a benefit for some and a detriment for others. Rules or regulations are necessary, but the rules should not force choices that are better made by markets. As a general rule, individuals must decide how close they want to live to a fire station.

Theoretically we live in a free country. To keep the country free, we need for our children to be taught basic truths. Money does not grow on trees! Trades are only consummated if both parties believe they will benefit. Big Brother cannot protect us all from each other. Each individual must be given equal opportunity. It is wrong to confiscate the wealth of one so that it can be spent by another. Religion needs to be "covered" in our schools. Separation of church and state does not require for the church or state to pretend that the other does not exist.

EASY OUT OR HOME RUN?

Even though the odds of tax reform in the near term seems to have fallen, I am not in a state of despair. Either major compromises between Bush and the Congress will be reached or only relatively modest changes will be passed. The idea of a carbon tax to support simplification of the tax law will be either an easy out or a home run.

In either case, the stock market is set up for a good run. The only fly in the ointment would be if democrats are able to muster a veto proof majority. They will continue to try to break the ice with the law about heath care insurance for children. The law is a silly, piece meal approach to health care reform but it is difficult for members to vote against a small government boondoggle for children's health. The two democrats from NC who voted against the bill are under going a good dose of arm twisting. I remain confident that the very unpopular Bush (31% favorability rating) will hold his veto proof margins against a very, very unpopular congress (24% rating). The passage of the 450 BILLION DOLLAR defense appropriations bill without cut backs to the troops shows that Bush still has the upper hand.

Laissez les bons temps rouler

The good times are here.

What if?

What if the congress passes tax legislation that lowers the marginal tax bracket of millions of Americans and raises the cost to burn fossil fuels?

At first, many people might be upset by the higher fuel taxes; but, what if?

What if the higher fuel taxes were to dampen demand such that in combination with new supplies that the price of gasoline tumbled? What if the news media started going gaga about the lower fuel prices and explained that the oil producers were in effect paying a portion of the tax increase for us? What if the fuel tax was only 10 cents per gallon the first year but scheduled to increase by 10 cents per gallon for the following 4 years but what if the price of gasoline were to fall by much more than 10 cents per gallon?

What if millions of Americans got an income tax rebate next spring because their marginal rates had fallen? What if there is a compromise included that "splits the difference" on the Bush capital gains taxes? Would billions of dollars of built up profits be realized such that investors would pay more in tax next year in order to avoid higher taxes the following year? Would the flood of extra revenue balance the federal budget?

BAD NEWS IS GOOD NEWS

This mornings announcement that unemployment claims increased by 17,000 was "good bad news". The probability that the FOMC will cut short term rates again increases each time there is economic news showing weakness in the economy. As you may recall, by the time the economy hits bottom, the stock market will be in full bore bull mode.

Larry Kudlow, of CNBC, is calling the current situation Goldilocks 2.0. He is closer to the truth than the bears who say a deflationary recession is here or near. He is closer to the truth than the bears who say that an inflationary spiral, brought on by the collapse of the dollar is here or near. In regard to the bulls who are stampeding into MEI (materials, energy and industrials), he rightly notes that there is risk in the area because so many investors are all in. Should the market in these areas correct, the correction could be steep as there is are few retail investors who are not already owners.

The slow down in housing construction is providing the extra funding for other areas. Manufactured goods exports could not grow at 16% if that level of business could not be cheaply funded. Further declines in interest rates will not cause the housing market to "snap back" in the sense of construction of new homes in already saturated areas but the lower rates will allow the housing market to gradually clear and it will provide funds for a huge increase in capital spending that is already on the drawing boards. There must now be more than 1,000 multi billion dollar projects planned. Many of them are power plants, oil field developments or refineries.

EARNINGS

I spend little time watching Google's earnings forecast. Google carries a high PE and it will continue to do so for as long as its growth rate continues on a torrid pace. PE ratios are over emphasized by most investors. On the other hand, I pay close attention to the PE ratio of CAL. The difference is that the stock is so much out of favor in the market place that it is driven up by each increase in earnings forecast. In recent weeks, the estimates have been increased by 10 analyst or more. The range of estimates has grown as the more optimistic analyst have increased their numbers more than once. Credit Suisse is the most optimistic of all. Their estimate is $2.50 for the quarter while the low estimate is $1.87 and the mean has moved up to $2.14. The report will be made on October 19.

Yes, I am hoping for $2.60 or so.

It is also fun to witness how the game is played. The optimistic analyst seem to consistently lower their longer term forecast at the same time that they raise their near term number. I think part of the reason is so that if they miss, the miss does not look so bad. Another reason might be so they can once again issue a positive push to their stock by later having room to raise the next quarters estimate as the quarter end approaches.

DISCIPLINE, DISCIPLINE, DISCIPLINE

I love the new found discipline in the industry. The response to the slower US economy continues to be the reduction of "local" capacity. When AMR announced the prepayment of $540 million of debt, they mentioned the release of liens against older aircraft. CAL has added to hub traffic at Cleveland but primarily for the purpose of staging all the more international traffic. LUV recently offered their highest paid pilots a buyout opportunity. USAir just cut back on Pittsburgh flights.

Several airlines, including CAL and AMR, have taken advantage of the international boom to sell older planes to isolated areas. CAL's planes went to Russia. CAL has added another flight to India and the company is preparing to add several more international flights as soon as its 787's begin to arrive.

MANY THANKS

Thanks for the early response to the question about carbon taxes. If you have not sent your number from 1 to 10 A ten will indicate your strong belief that congress will pass a carbon tax this year and pair this new tax with a decline in marginal rates. Please feel free to explain your response. For example, if you believe a carbon tax will be passed but that the revenues will be spent so indicate.

LET THE GOOD TIMES ROLL

Strong wage growth, strong export growth, strong government revenues, strong technology expenditures, and strong business construction should more than over whelm the weak housing market. Through in a little success in Iran, Iraq and Israel and you have the makings of a sentiment shift. PE ratios could easily rise by several points. Many a stock could be up 50% or more in a year.

AGAINST THE WALL IN LEFT FIELD?

Please tell me what you think. A few days ago, I wrote about carbon tax bills that are floating through Congress. I stated my opinion that Bush and Congress will meet in the middle to fix the Alternative Minimum Tax and help the environment at the same time. On a scale from 1 to 10, please let me know what you think. If you think a deal is certain, one that will result in higher taxes on fossil fuels, largely offset by tax reductions elsewhere, please send me a 10. If you think such a deal in the 2007 Congress is impossible send me a big zero. If your best guess is somewhere in between please respond accordingly. I will send the results of this "poll" only to those who respond.

Perhaps I am out in left field with my back to the wall, this might turn out to be an easy out or a home run! I have not read or heard of others making my argument.


One school of thought by strategists on both sides of the isle is that Democrats will wait until after the elections to make their big push for higher taxes. It does not seem to me that they have been all that shy so far. Also, there are lots of "goodies" in store for those who are willing to compromise now. The $495 BILLION defense appropriations bill that was just sent to conference, includes funding for all kinds of pet MULTI-BILLION DOLLAR military projects plus an extra $4 BILLION to police our Mexican Border. THREE BILLION of the FOUR is designated for the building of a 700 mile long fence. If this fence is ever built, it will do little to solve the problem and it will cost much more than THREE BILLION DOLLARS. One reason the cost will be much higher is cities along the border will fight it. The land for the fence will have to be taken through court proceedings. The government has the right of imminent domain but there will be costly battles fought. Besides, even if the fence is built it will not help solve the problem. Building such a fence is a great example of cutting off ones nose to spite ones face. To add insult to injury it is estimated that 4 or 5 red states will swing to blue if these misguided soles do not back off with the hate speech that surrounds the issue. Oh yes, the hate speech is disguised but the Hispanics can feel it in the air. The $495 BILLION DEFENSE BILL, which includes funding for lots of jobs in lots of congressional districts will not be sent to the President all by itself. The members who want the "goodies therein" will have to vote for a few bitter pills. Bush will ultimately accept a number of bitter pills to get a lot of other "stuff" passed.

ELECTIONS

The online betting services put the odds at 60% that the Democrats will sweep the House, Senate and Presidency in the 2008 elections. It could happen but the race for the Presidency has historically been a very close race. Neither Bill Clinton nor George Bush ever won the majority of votes. If Giuliani is the Republican nominee, conservatives threaten to back a third party candidate, throwing the race to the Democrats. Hillary is the odds on favorite to be the Democrat nominee; the right wing will ultimately go all out for the Republican nominee in order to defeat Hillary. Of course, Romney expects the right wing to fall in behind a Mormon if he is the nominee. It might be a close call as to what conservatives hate the most, abortions or Mormons! Yes, I know, it is not right to lump all Democrats or all Conservatives into one category but it sure can be fun.

It appears to me that Hillary has the nomination wrapped up. However, while Giuliani is well ahead in the national polls, Romney is leading the way in the early states. Romney has a nice lead in NH, IA, NV and MI. Giuliani is well ahead in SC and FL. Romney has wisely spent his money advertising in the early states. Giuliani has built on his national polling lead. My guess is that Giuliani wins but anything can happen.

Despite what the news media portrays, there is a large group of voters that believe the nations security is the most important issue. Most of these folk believe the Iraqi war will save American lives in the long run, many others do not believe but they want to believe. Based on recent success, in particular the recruitment of tens of thousands of Sunni's to the government side of the battle, the war could actually be a net plus for the Republican party by election time. Giuliani gains the most from improvements in Iraq because he is seen as the tough candidate who has worked at helping keep Americans safe from terrorism.

Another reason that conservatives will ultimately fall in line behind the Republican nominee is because they have fought a very long fight to "win" the Supreme Court and they will not throw this victory away lightly. Giuliani believes in reducing abortions as much as possible while leaving women with the right to choose. I profess to be a Christian Conservative but I am also a pragmatic libertarian economist. It is truth that most juries would not send a woman to jail for committing an abortion and it is wrong to pass laws that you are not willing to enforce. Abortions and drunkenness should both be discouraged but our experience has shown that the "cure of prohibition" is much worse than the disease.

The question posed comes down to the attitude of Congress. Will the conservatives hold-on to the immigration issue, which is a big winner for them in a number of congressional districts but which could easily cost them the Presidency and the Supreme Court? Are the Democrats so confident of a sweep that they will play "rope-a-dope" for the rest of the Bush term? Will incumbents risk alienating the public by continuing to be a "do nothing congress"?

Keep in mind that Democrats would likely pay a huge price if they were to fail to pass the 12 appropriations bills and the budget. The big game is between the Democrats and Bush. As we have all learned, divided government is almost always best. With Democrats in control of both houses of Congress, the Republican nominee has a much better shot than is currently commonly perceived. If you want to make a little money, sell the 60% contract at Trade Sports. In just a few months the public will begin to realize that the odds of a Democratic president are not much better than 50%.

The tougher bet is in regard to the new tax structure. Based on the real estate cycle, it is time for major income tax over haul. The real estate cycle has lasted an average of 18.3 years for centuries but this one has been one of the longer ones. The last three major peaks in residential sales momentum were in 1968, 1985 and 2005. The Reagan tax simplification was passed with an effective date of sometime near August 14, 1986, as best as I can recall. So, we have had 20 years between the last two peaks of the market but we are in the 21st year since the tax reform. I mention the prior cycle because the tax reform in that cycle was parceled out in small increments year after year with the biggest reforms not too long before the great recession of 1973-74. Several of the current bills being floated are clearly "anti real estate bills". One would eliminated many of the tax advantages of second home ownership and another would reduce the interest deduction for homes larger than a certain size.

Bush hopes any compromise will include making his reductions to the capital gains taxes permanent. The Democrats will go along only if rich pay more. Right now, the top 50% of tax payers pay better than 95% of all the income taxes paid. Because the current contest is for the nomination, the Presidential contenders are making a bigger deal out of soaking the rich than what they would actually try to accomplish once in office. So again, the deal that congress can make now might even be much better than the deal they could get with a Democrat in the White House. Putting the politics aside, the last thing our economy needs is confiscatory taxes. The fight is going to be interesting to watch!

Thanks in advance for sending me your estimate!

JOBS, JOBS, JOBS

At the turn of the twentieth century, about 70% of all Americans live on a farm. Today, 2% live on farms. In China, there are a billion people ready to leave the farm if work can be found. What will all those people do?

The poor are not concentrated in China. In Asia and Africa there are billions of people who live off the equivalent of $2 per day. Suddenly, the cell phone is changing their lives. Poor "peasant farmers" now scrap together $20 or so to purchase a used cell phone. They pay a high per minute usage charge, but they are extremely frugal with their minutes. Indeed, they prepay for a few minutes or even for just a few seconds of time. They make very short phone calls or they send abbreviated text messages.

When I was in the 7th to 10th grades, I stayed after school for extracurricular activities such as football practice. When practice was over, I would start walking toward home which was four miles from school. Before starting to walk, I would send a "flash" message to my home. In those days, the pay phone across from the school required a nickel to make a 3 minute local call. To save the nickel, my siblings or I would call our home (party line) number and let the phone ring less than one complete ring and then we would hang up. Since the call was not completed, our nickel would come back. In later years, a prearrange "flash definition" might mean that a family member was leaving the Atlanta airport which meant it was almost time to drive to the Greensboro airport to pick up the traveler. A "flash" would also be sent upon arrival back at college.

Going to such extremes to save a nickel on a local call or a dollar and a half on a long distance call seems silly today but the $1.50 long distance call was equal to three hot, dirty and hard hours in the tobacco fields for the older kids and 6 hours of handing up by the younger kids. My oh my how do things change!? When my Dad was a boy, he worked in the tobacco fields for 12 cents per day. It is hard to believe but true that millions of Americans were as poor in the 1930's as billions of Africans are today. I am thankful that the "flash" has come to Asia -- Africa.

Business Week magazine reports that the cell phone is literally saving lives. It is also having a huge impact on the economies of the poorest of nations. One very short message might save a peasant farmer a 20 mile walk to a market or it might encourage him to head to the market where his particular goods might be in short supply. Phone transfers are even being used to send money. Cell phone communication beats banging on a drum any day of the week. Usage is surging and profits are substantial! While each phone generates only a few dollars of revenue per year, the total revenues are substantial because there are billions of phones. The number of cell phones in under developed nations just went over the 3 billion mark and the 5 billion mark is expected to be reached in 7 or 8 years.

WE ARE LIVING THROUGH EXTRAORDINARY TIMES!

Those who believe a mile US economic slow down is going to turn into a world wide recession or depression are ignoring the most tremendous "boom" in world history. While this boom has resulted in a temporary strain on the worlds resources, it has also resulted in enormous benefits from free trade. The productivity gains in many cases are by factors that are almost beyond belief. Can you imagine a three letter text message saving you a 20 mile walk through a rain forest?

The citizens of the USA are benefiting greatly. The demand for our goods and services is soaring. The annualized rate of growth of US services is currently running at better than 13%! The rate of growth in exports of goods is running at better than 16%! Jobs in America are plentiful and unfortunately a large number of excellent but "illegal citizens" are in the process of being thrown out of work in America. I am still hopeful that Congress will pass an immigration reform bill before essentially closing down for the 2008 elections before Thanksgiving. So far, the only "progress" being made is to fund a $3 billion fence that will not do diddle squat.

Exports from America will continue to soar because the world economy is super strong but all the while the really big growth in jobs and incomes will occur over seas. It is hard to believe but America is no longer the land of the free. Today, the USA taxes American businesses at higher rates than do foreign governments. One problem is that in America, we tax business profits when they are made and then we tax them again when the owners of the business shift money from one pocket to the other through the payout of dividends.

TAKE ADVANTAGE OF THE WORLD WIDE BOOM!

All of those billions of phones require computer chips, communications networks and knowledge to operate them. Powerful rifle shot ads will be "pushed" through billions of phones and Google will send a substantial number of these ads. Hardware, software, educational facilities and airlines are just a few areas that will see benefits from the massive build-out that is underway. Google has opted to partially fund a new under the Pacific fiber optic cable in exchange for wholesale priced usage. The name for the number of bytes of information that will be sent is some thing like Tera bytes. The total amount of information being sent and received will grow at exponential rates for many years to come.

BEARS, BEARS AND MORE BEARS!

Stock Market Bears are more than plentiful. One of today's problems is that market players, myself included, tend to look back at history to discover a "similar time to the current time"; there has never been a time like this. Even the industrial revolution does not compare. It took a few hundred years for the industrial revolution to creep all the way around the world and it never did make it all the way. The information revolution has spread like wild fire. The powerful thing is that it is a powerful dis-inflationary force. I think the bears would have an easier time understanding if they would focus on the huge productivity gains instead of on the inflation of food and energy. Food is now a very small part of GNP and the amount of energy used per dollar of GNP has fallen dramatically. As I have said before, the stone age did not end because man ran out of rocks but because he learned to use metals to his advantage. In the same way, we will never run out of oil. Indeed, the planet earth is a carbon sink that is experiencing net growth in resources daily.

ONE BULL AND ONE BEAR REACH THE SAME CONCLUSION!

Bill Gross is the most famous bond investor on the planet; bond investors are by nature pessimistic. Don Hayes is an optimistic and successful growth stock investor. Both men believe that short term and long term interest rates are going to fall over the next year or so. Bill says that the Fed Funds Rate will drop to 3.5 to 3.75% because the USA will experience an economic slowdown. Don Hayes offers the same interest rate forecast but his reasons are largely what I have detailed above; strong gains in productivity and low prices because of technological advances and free trade.

I am mostly in the Don Hayes camp because I believe the stock market will soar by 30% or so over the next year. However, I am not convinced that interest rates will fall so hard. I see low inflation but also very strong economic growth. Certainly, the current quarter will be a bit below trend as the "hit of the credit market freeze-up" and the housing building slump will have an effect. However, by the second and third quarters of next year, we just might see 5% real growth. Even if inflation is down to 1.25% or so, the long bond will likely be trading at 6.25% or better. Such "high rates" might even become a part of the Wall of Worry that the stock market will climb.

BUY BUY BUY GROWTH STOCKS, SELL SELL SELL BONDS!

It may be patriotic to BUY AMERICAN, but it is fair to buy from the low cost producer. By doing so, the poorest of the poor will get earn food for their families and Americans will spend their time more productively. It was psychologically hard for American families to leave the farm and today it is psychologically hard to believe that America does not need manufacturing jobs. The fact is that goods are plentiful for a fair price. Be happy that you do not have to "flash" a phone call to save a penny and be kind to those who must!

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!

HAPPY, HAPPY, HAPPY

It does not take a new high on the Dow Jones Industrial average to make me happy, but it sure does not hurt. After talking about the mid cycle turn for more than a year, I look forward to changing the main topic of these missives. The mid cycle turn will soon be talked about in the past tense.

In 1969,with the Vietnam war was staring me in the face, I got a firsthand perspective of a "scarce resource economy." President Johnson had practiced the strategy of "guns and butter" and the central bank went along with his attempt to have super prosperity while fighting the war with one hand tied behind his back. Then Nixon and Ford fought the ensuing inflation wars with silly price controls. Many people who remember the "Whip Inflation Now" buttons of the Ford administration do not recall that Nixon also tried to use government mandates to hold down prices. Jimmy Carter gave up the fight and by 1980 the markets had witnessed 11 years of commodity markets offering a greater return than offered by the stock market.

The new head of the FOMC, Paul Volcker deserves much of the credit for "Whipping Inflation." Ronald Reagan should get the rest of the credit. President Reagan and Paul Volcker were willing to make the hard choices necessary.

The war in Iraq is a back yard brawl relative to the Vietnam War. Some 56,000 Americans died in Vietnam compared to some 3,800 in Iraq. Human life is most precious but the facts are still the facts. While there are parallels between the 1969 to 1980 time and today's markets, the prior period did not include the benefits of globalization and technological advance that we have today. Indeed, while it was Nixon who broke the ice with China, in or around 1972, the economic revolution in China and the rest of the under developed world has all happened during the past 20 years.

This commodity cycle is only seven years old. When the 1969 to 1980 cycle turned, it turned sharply. To date, this turn has been a slow turn and one that few have even noticed. With oil and gold sitting near all time high nominal prices, many market followers would laugh at me for saying that the turn is under way, but it is. One can see the turn by looking at the broad CRB index but the best place to see the turn is in the stock market. There has been a decisive turn in the market; growth is out performing value and this did not start yesterday. Indeed, growth has out performed value since July. If you plot the IVW index versus the IVE index you will see what I am talking about. Or you can simply look at a long term chart of the NASDAQ 100! This index has broken through resistance that goes all the way back to 2002, before 9/11/2001.

YES, I AM HAPPY, HAPPY, HAPPY. I HOPE YOU ARE TOO. THE PENDING DECISIONS OF CONGRESS SEEM TO BE HANGING OVER OUR HEADS LIKE THE SWORD OF DAMOCLES BUT I BELIEVE THIS IS ONLY A LAYER ON THE WALL OF WORRY THAT WILL BE CLIMBED! IT WILL NOT BE A SMOOTH CLIMB SO HANG ON TO YOUR HATS AND TO THE SADDLE HORN AT THE SAME TIME!

FOLLOW UP TO GOVERNMENT FUNDING

My statement that the government has more than enough revenue has been challenged. I stand by my belief while offering only a few statements in support of my position. When Art Laffer defends the Laffer curve, he evokes the memory of the 14th century Muslim Philosopher, Ibn Khadun, who wrote "at the beginning of the dynasty, taxation yields a small revenue from small assessments, at the end of the dynasty, taxation yields a small revenue from large assessments." I look at it this way, if your goal is to end prosperity then tax it to death. People are willing to pay very high taxes to "insure the common good" but today there is little that the government can offer to do inefficiently that private enterprise cannot do more efficiently.

The current situation is that government revenues are better than 18.5% of GNP which is higher than average. This has been accomplished with lower tax rates. If the US were to lower corporate rates, as so many other countries have done, jobs and investment in the USA would grow. Citizens need to remember that politicians must "fix problems" in order to collect campaign contributions. We must also appreciate that the politicians are "too smart to fix all the problems." Indeed, to really do well financially, they must create problems that will need to be fixed later. A king for a day could fix the AMT, immigration reform, healthcare reform and energy reform. Democracy has proven to offer longer term stability precisely because we must "muddle through", reach broad consensus and fix our problems slowly. In the process, we must always remember that whenever possible, problems should be fixed by private enterprise solutions. The healthcare system should not be a system of lobby fighting lobbies and more lobbies. A good system would be one in which the patient and the doctor decides what care is worthwhile.

I have not verified the following but it sounds like truth. A Canadian claims that the current waiting list for a human to have a hip replacement is three years long. He says that the waiting time for a dog, not covered under the government system is one week.

THANKS FOR THE REMINDER

I left out traffic congestion as one of the externalities of one person per car. Again, I do not agree that car owners should be forced out of their cars and into multi-passenger vehicles. If the tax on fuel is set to include the real total costs, individual decisions will work together as a market to find the best solutions.

BUY, BUY, BUY!