US Troops Are Coming Home!

The US and Iraq have agreed to set some goals for when US troops will be pulled out. They will be coming home with their heads held high.

The war on terrorism is far from over in one sense, in another it has been won!

Buy Something!

Yesterday, I received three emails from regular readers and I appreciated them all. One included a great insight about CAL. The writer noted that the stock has bounced high on low volume. This shows that the "weak" holders are gone and the remaining holders are committed to the long haul; few of the remaining holders are willing to sell after a 50% bounce off the bottom. Of course, many of them bought at much higher prices and will at least wait to break even before selling. Others will hold on for the next ten good years ahead.

The current situation is the boy scout bonfire story all over again. Boy scout leaders, seeking to avoid the extreme embarrassment of a failed bonfire on summer camp visitors night, just might secretly soak the bonfire core with lighter fluid. Then, with just one match, the leader is able to quickly start a big fire. When all the sellers have vacated a stock, one little match can set it aflame. This is a highly charged situation. No scout leader would want to admit to using lighter fluid or to fail at lighting a fire. Few would admit to owning airline stocks but those who do are holding on for big gains.


A second email was about a deposit to an account. The email said to Buy Something! The sender understands the main point I have been making, that one can buy almost anything outside of the commodity area and make good money over the next several years. In this account we split the deposit into three depressed bank stocks, WB, BAC and BBT, and added a small amount to his airline position.

The third email was a complaint about my being a broken record in regard to the airlines. It noted that I recommended these stocks at much higher prices and recommended doubling-up half-way down. What can I say? I did recommend the stocks again and again and I still do. I have strongly recommended CAL since it was trading around $6 per share in 2002. CAL just reported an amazing quarter. With oil prices at ridiculously unsustainable levels, the company added about $500 million dollars to its net cash position! How much will it add when oil prices are down?

One of the reasons I write about the airlines so much is because the boom in international travel (still is in its infancy) is part and parcel to this new wonderful economic age that we have entered. A new age that is being totally mis-characterized by left leaning media.

The attitude of the left reflects the short term concerns of the average man, who does not "see the big picture". The huge run up in commodity prices, that is seen as a super negative each time we visit a gas pump, is actually the result of a world wide increase in prosperity. A temporary economic slow down and a temporary time of limited capacity are each masking the long term trend.

Jim O'Neil posted an article at FT.com a day or two ago that you should read. He reports that a Goldman Sachs study shows the world is currently adding 70 million people per year to the middle class. The study suggests that the number will increase to 90 million per year for the next 20 years! From the selfish point of view, these 1.4 billion people being lifted out of poverty will become customers for every thing from INTC computer chips to CAL plane tickets.

I have written a lot about international affairs and in particular about a pending deal with Iran because this deal will permit a large number of multi-billion dollar commercial transactions to follow and it will push this new international age of prosperity forward with speed. Americans have skills. Skills that are worth all the more when allowed to produce for the entire world. Unfortunately, silly government policies have resulted in massive waste as a result of misdirection in the development of skills.

The misdirection results in everything from the teaching of "fuzzy math" to excessive teaching of laws. The number of lawyers in America is extremely high relative to the number of doctors. There are over 200 law schools in America with over 150,000 students enrolled. There are 129 medical schools with total enrollment of 67,000 students. About three percent of all who apply to medical schools are accepted. Our government has allowed the AMA to restrict the number of doctors trained while allowing unlimited training of lawyers. Is it any wonder that medical costs and the number of law suits are going up?

Restrictions on producing oil and doctors produce the economically expected results, higher gasoline and higher medical costs. In each case, the restrictions give politicians power and reasons for lobbyist to come calling.

I often mention the Law of Comparative Advantage but I believe few people appreciate how free trade in combination with high skills provides great wealth for buyers and sellers. By restricting the number of doctors and thus driving up the amounts doctors can earn, we divert some of the best minds to lesser callings. HOLD THE EMAILS, I AM ENTITLED TO MY OPINION! The good news is that the market finds ways around problems. As a result of the restriction on doctors, there has been a dramatic increase in the number of Nurse Practitioners. People are being treated for minor ailments and for maintenance diseases by professionals who were not forced into excessive training. The genius who can invent the next super computer or nano cure for cancer will save a lot more in human capital than any family practitioner possibly can. By making basic care more available at lower prices, it may well be a nurse practitioner who saves the next little girl or boy genius from an untimely death. A free market encourages each individual to find his area of greatest comparative advantage and many others benefit from his decision.

American companies such as TXN and INTC produce incredible products. Products that you nor I would have a chance of developing, even if we had a million years to try. The development costs of these products are huge, however, the addition of 70 million new customers each year is resulting in tremendous economies of scale. These huge development costs are extremely small when allocated to billions of units. Suddenly, it has become true that poor people can afford the most sophisticated computers, cell phones and other communication devices. The left leaning media and politicians look at one end of this process and declare that the CEO is making an outrageous salary. The left falsely cries out that the rich are getting richer and the poor are getting poorer, but, you and I know that the poor benefit the most from new technology. The CEO only gets more of what he already has whereas the poor experience the opening of doors to a whole new world.

My 2 year old grand daughter amazes me in multiple ways. When her Daddy calls, she engages in "adult like" conversation. She tells him about her daily activities and asks him about his own. For two weeks, the two have talked at least twice a day by cell phone. When I was a child, the telephone was virtually off limits. Even as an adult my family and I played the game of calling for ourselves collect and then saying we would try again at a certain time in order to be picked up at an airport while saving the expense of a long distance telephone call. Living conditions have changed and are changing. Instant and constant mobile communication is just around the corner. Buy Something!

My specialty is a top down view of the world. I do not pretend to be a "stock picker", but I buy what fits my view of the world. I have a long term orientation. I am willing to sacrifice in the short run in order to win big in the long run. I understand that the real estate market is about 5 times the size of the equity markets and as such, the real estate market is the dog and the stock market is the wagging tail. The stock market can jump around but it must follow the dog. Three years ago, I did not believe that there was time for US officials to take the US into a slow down and have time for a significant recovery before the election. I was wrong. Because high risk mortgages were mixed into batches of low risk mortgages, the FOMC and the Treasury were able to quickly "bust the bubble" of a booming housing market. Seven years worth of slow down has been compressed into three years, with time for improvement before the election. As a result, there are wonderful buying opportunities. Now is the time to buy resort real estate. While prices and occupancy are low, largely due to high gasoline prices. A turn in the price of gasoline will increase the value of "destination properties". Now is the time to buy high beta stocks, including high tech, banks, consumer discretionary and airlines. The coming recovery in real estate, the happy dog, will be accompanied by stocks, the wagging tail. It is time to "Buy Something"!

GOOD NEWS ALL OVER THE PLACE

The potential for good news is great. Whenever expectations are low, the potential for good news is great. One of the reasons the potential for good news is so great is because the US is doing a great job of fighting an asymmetric war. Some 200 or so years ago, a Frenchman (sorry, I can't remember his name) said that "War is too important to be left up to soldiers". Today, the US military command has evolved into the PhD brigade. General Petraeus has an IQ that is off the chart and his staff is smarter than he. It is fitting that the US is good at fighting an asymmetric war as our country won its independence by fighting such a war. The tables have turned. We have superior organization and firepower and it is al Qaeda and the Taliban that are the rag tag ambushers. It takes more than firepower to beat rag tag soldiers on their home turf.

Have you noticed how many of the leaders of al Qaeda and the Taliban are getting "bumped off"? In May of 2007 this tendency was obvious but the pace has picked up. Hardly a week goes by without the death of several leaders. The US clearly has multiple intelligence sources.

In Vietnam, the first thing we learned was not to salute our leaders. The logic was obvious but the habit would have been hard to break had the leaders not been so insistent. In Iraq, Afghanistan and Pakistan, someone is pointing a finger at tribal leaders. Indeed, in many cases, they are "painting" leaders with a laser beam of light so that a Predator can rain down a HelFire Missile directly on their heads. There are rumors circulating that the US is once again getting close to Osama bin Laden. One of the ancient Chinese stratagems on how to win a war was to kill the leaders. Can you imagine the change in the history books if Bush is able to get Osama?

The actual key to success in an asymmetric war is to draw on every possible avenue to multiply your resources. In Iraq this was done in dramatic fashion when Sunnies were successfully recruited to switch sides. Today, burka wearing women are assisting US and Iraqi troops by frisking potential women suicide bombers. It makes far more sense for the US to pay an Iraqi $300 per month than to risk a suicide bomb. These women have proven to be another great source of intelligence. For example, they have assisted in the discovery of many cashes of weapons. The left does not believe it but those weapons might have been used to bomb the US one day.

In the high mountains of Pakistan, Taliban leaders must be very careful to avoid death from a UAV missile or from fire from his own forces. During the American Revolution, the toughest part was when neighbor went against neighbor. In many an instance, neighbors were forced to pretend to be loyal to the British until the right opportunity came. Life is really tough if you are in battle but not 100% sure which side your buddy is on. The Saudis have contributed billions of oil dollars to "pay-off" combatants. No one knows how many tribal people are on "our payroll". The thing I like most about the T. Boone Pickens ad is that he notes that the annual cost of foreign oil is many times the cost of the war. It is a bit misleading but I still like it.

OUTSIDE TERROR SUPPORT IS DYING

The US and Iran are preparing for a quasi US Embassy. US and Iranian negotiators will meet face to face this Saturday. Russia has just arrested a citizen for smuggling certain metals into Iran. If convicted he will be sentenced to a 7 year term for his first offense. Last week, the French announced that they will not assist Iran in building out its South Pars gas field. This week, the French have announced that they wish to assist (what has changed? has there been a negotiated break through?). Turkey and Syria have each offered to mediate talks between the US and Iran. Politicians from all over the world are smelling success and they want in on the credit.

Turkey continues to make strides toward becoming a part of the EU. Helping to mediate the peace agreement between Israel and Syria is one feather in their cap. Helping to mediate the deal between the UN-US and Iran would be a more beautiful feather. Iran has been forced to withdraw its support of terror in order to accept the package of incentives being offered.

US SUPPORT

Professional, volunteer soldiers have been putting their lives on the line in what they perceive to be a just war. Would you not guess that when Obama, one who would withdraw in defeat, makes a trip to the war zone that all three major network news anchors would tag along? Good men and women who are serving their country get little coverage but Obama gets huge coverage even though it has been shown that his plan to jerk our troops out by March of this year would have been a terrible mistake. The deaths of more than 4,100 Americans would have gone for naught and the insurgents from Afghanistan, Pakistan and Iran would have overwhelmed the democratic government of Iraq in short time. In a few years, bombs would be exploding in airports, train stations and public buildings around the world. As it is, peace is at hand. With a little luck, multiple peace agreements will be signed in the months ahead. When George Bush spoke of the axis of evil, who really believed he would sign peace treaties with North Korea, Syria and Iran during his term? Who believes it now? There is room for great news. Buy Something!



Many thanks for the emails. I thank you for reading and for responding. Please always remember that I write to you with the understanding that you will occasionally forward some of my work to others.

Double Up to Catch Up!

The Bush administration is pulling out all stops. The interior department just released 2.5 million acres of Alaska for drilling. This land is a small piece of the old Naval Petroleum Reserve. There is much more land and oil reserves available. The area released is estimated to contain 8 billion barrels of oil. It will cost much more to develop this area than it would to develop ANWR but it is politically available.

CAL was up 38% yesterday and 8% more today. AMR was up 14% around 3:30. Using the game of black jack as an analogy, the deck is "rich". It is time to double your bets. We are getting into the phase where good news is great for the market and even bad news will not stop the "surge". Airlines have not bleed nearly as badly as the price of the stocks or the price of oil would indicate. Red ink will turn black long before oil prices get back to last years profitable levels.


The democratic congress and Obama are on record that "we cannot drill our way out of this energy mess". They are also on record in support of massive government expenditures on expensive and unproven energy programs, such as ethanol, solar and wind. I wish I had one thousandth of the money that has been wasted on windmills. Today, Al Gore made the ridiculous proposal to "go green" in just 10 years while we waste billions more on windmills, solar and bio-fuels. Oops, I often forget that the waste is not in millions or billion but in trillions! The proposals to replace just the natural gas portion of our electricity production with windmills would cost 41 Trillion Dollars. The production cost of the oil in ANWR is probably less than $30 per barrel. Our country can save a trillion dollars by drilling in ANWR or waste about 25% of 41 Trillion or about 10 Trillion Dollars building ugly, noisy bird killing windmills that would drive up the cost of concrete and steel to who knows what levels. If the tax payers were not being forced to support building wind mills, there would be very few windmills under construction.

Voters will soon see the results of the drilling that has taking place in recent years. The net increase in production in 2008 and again in 2009, even after assuming a high depletion rate, will be more than 3 million barrels of new production each year. The increase in June, July and August is over 1.4 million barrels per day. The Mega Projects Site at Wikipedia shows 14 million barrels per day of new production without giving much credit for Brazil or any credit for a number of potential increases such as from the area just released by the Department of the Interior. Of course, with much of Europe moving quickly toward an economic recession, demand destruction is part of the reason for falling oil prices. As a result there is a huge market rotation underway.

Keep in mind that while margin is very expensive on the way down, it can turn 100% gains into almost 500% gains on the way up. The person who was wise enough to buy CAL two days ago and who used his 38% gains yesterday to buy more shares this morning has made about 87% return in two days! The deck is stacked. The potential for big wins is high. Remember that the 2.5 million acres could have been released a week ago, a month ago, a year ago or 15 years ago. It was released just at the point in time where many will give the release the credit for the drop in prices. If a deal is in the works in Iran, prices are going to fall, finalizing a "done deal" might take 6 weeks or even two months, so the big decline in oil will easily be credited to the new drilling area in the short run. The market is smelling something, such as a major deal. It is not smelling the 2.5 million acres because it was there for the taking at any time. It is not even smelling the new oil from Thunder Horse or from Saudi Arabia because those production increases have been a long time coming. The public will connect the decline in prices to the new drilling proposals, this will put all the more pressure on Congress to pass an OCS bill.

The same political trick is being played by both sides. Bush is making announcements to increase domestic drilling just before a deal in Iran is signed. Obama has been trying to convert his mistake of calling for surrender in Iraq last year into a well timed withdrawal of troops proposal, consistent with a victory. He continues to push for action in Afghanistan because any person who has followed the war knows that Afghanistan still must be "finished". Obama is totally wrong in suggesting that the war in Afghanistan is strategically more important than the war in Iraq but those who have a democratic mind set will hear his words, see the coming shift to Afghanistan and give him credit for good international judgment.

One thing often lost in the discussions about Afghanistan is that there are 3 million or so combatants in the high mountains of Pakistan. Does Obama or McCain propose starting a third war? The war in Afghanistan cannot be won easily and it cannot be won without fighting in Pakistan. Pakistan is an ally but the mountains of Pakistan is like multiple hornets nests in high trees The strategic importance of this isolated,resource poor region is no where near as great as Iran or Iraq. Besides, the successful conclusion of the "deal with Iran" would help pull the rug of support out from under some of these combatants. All signors to the "master" 123 nuclear agreement must pledge to help end terrorism. After Iran is settled, it will be appropriate for world leaders to work more earnestly for a political settlement in Pakistan.

One does not have to win every battle to win a war. Wars typically end when one side realizes it is whipped. Despite a massive insurgency from dozens of nations, the US and Iraqi Army are "mopping up" in Iraq. The majority of the provinces have been turned over to Iraqi forces, with back up support and air support available from the US. It is important for the insurgents who have largely departed for the mountains of Pakistan to know that there will be a continued US presence in Iraq for at least another couple of years. We certainly do not want to leave Iraq to the three million insurgents ready to swoop down from Pakistan.

The Jihadist are well aware that Iran is now talking directly to the USA. The psychological pressure of this action is intense. When a soldier is on the battlefield, he does not want to stick around after he learns his leaders are negotiating a "surrender". Of course the deal with Iran will not be couched in terms of defeat or surrender but you can appreciate the effect on moral. Once Cornwallis and Lee surrendered, a few combatants in each war continued to fight for a time, but most soldiers were glad to lay down arms. Iran is the "bully" on the block but the leadership is tired of living under 29 years of tightening sanctions.

Twenty years ago, Columbia was the home of drug lords. Today, Columbia is a solid US ally. Democrats have shamefully refused to sign a free trade deal with Columbia. The only reason is to avoid angering union supporters. The trade deal should be signed because it would provide significant benefits to the citizens of USA and Columbia. We should fully embrace the countries that embrace us.

Today, Afghanistan is the home of drug lords. An international coalition of nations will support doing much more to solve the problem in Afghanistan as soon as a deal is done with Iran. In the mean time, it would be wise for voters and investors to note that a deal with Iran has been the prime objective of the US supported war between Iraq and Iran and the more recent wars in Iraq and in Afghanistan. We are getting close to reaching this long sought objective.

Double your bets because the deck is rich. The Bush administration waited to just the right moment to announce the release of 2.5 million acres of rich oil lands. Again, the price of oil has not fallen $16 per barrel in three days because Bush lifted the executive OCS drilling ban or because of this release. The change in OCS would not help at all if congress does not go along. At the time of the release, I said that it put a lot of pressure on congress and it does. In fact, the announcement of the 2.5 million acres adds to the pressure. The voters and the congress sees the price of oil falling despite the inaction of congress! It is time to double your bets! If you have no money to bet, you should consider selling defensive shares, mutual funds and other low beta securities in order to own the high risk, high reward shares.

Yes, We Can -- We Already Have -- What a Turn! -- Super Strong Buy Signals!

Nancy Pelosi and other left leaning politicians like to repeat the phrase, "We can't drill our way out of this mess". We can't because we already have. "We" have added production in South Dakota, Saudi Arabia, Brazil, Kazakhstan, Iraq, Montana, Gulf of Mexico, Canada, the North Sea and from many other places. Americans tend to over emphasis the importance of where the oil comes from. Most of the oil America uses for transportation is produced in North America. Common sense tells us to, to maintain strategic reserves while trading or drilling for additional cheap supplies. With 700 million barrels in reserve, we must trust sellers to do what is in their own best interest, which is to sell to us at the market price. Common sense tells us to collect the low hanging fruit in ANWR. I don't think it has sunk into the consciousness of the nation that the value of the oil in ANWR is 1,000 , 2,000 or even 3,000 Billion Dollars!


India produces more bananas than any country in the world; it certainly makes sense for India to sell bananas and for the rest of the world to buy bananas from India. Of course, it makes sense for America to buy bananas from suppliers that are closer to us, but it makes no sense for us to try to become "banana or oil independent". Food is a more strategically important commodity than is oil. Should our enemies or competitors refuse to buy corn from us? Of course not. Should Iran try to become self sufficient in the production of corn? Of course, not. Iran is one of the most inhospitable places on the planet. Most of Iran is covered with mountains or desert, really high mountains and really nasty and crusty deserts where one can break though the top layer of dry sand to find oneself in something akin to quick sand. It would be absolutely foolish for Iran to spend its resources trying to grow corn. Iranians and Americans understand how it made great sense for Joseph to store 7 years worth of grain in Egypt. Doing so did not prevent Egypt from buying cedars from Lebanon, but instead it lowered the relative price of fine wood. All American children should be taught Ricardo's concept of comparative advantage. Children should explore their talents but at some point they should choose to work in the field where they have the most talent. The US should grow corn and produce Intel computer chips and trade these for other goods, including oil. Neither should we tax our oil firms to death. Our oil firms are the best at what they do but they cannot produce oil unless allowed. None of this prevents us from researching or developing other energy sources.

US states should have the freedom to permit environmentally safe drilling, but Americans should not stop buying "cheap oil" on the world markets. Drilling 200 million dollar or even one billion dollar wells in ultra deep waters only makes sense if other options have been exhausted. Those willing to invest the money should decide. Nancy Pelosi has no business trying to speculate on the price of oil by promoting the release of oil from our SPR; she should not try to set the price of bananas; She should not try to choose the winners between solar energy, natural gas or any other energy sources. The proper roll of government is set rules that provide a level playing field, it should be left up to the buyers and the sellers to select which source will win.

In the Gulf of Mexico, Thunder Horse is now on line (500,000 barrels per day by year end). In Saudi Arabia a number of projects have already resulted in increased production by a million barrels per day over last year and the Khursariyah field will start up in August. It will produce 500,000 barrels per day. The Khurais field will start up next June. It will produce 1.2 million barrels per day. Brazil has already drilled deep to discover several monster fields. These fields will be developed over the next 10 years with some production starting in 2 years. Brazil will soon be be a major oil exporter. This is a great thing for Americans. The markets are responding!

What A Turn!

Yesterday, several bank, consumer discretionary, and airline stocks were up 30% or more. "Big Problems" are being "solved". Last Sunday, when Hank Paulson proposed legislation in regard to Fannie Mae and Freddie Mac, he in effect signaled that the administration is ready to finally sign the housing bail out bill that has been banging around between the house and the senate for at least 6 months. Paulson will get what he wants by the attachment of the Fannie and Freddie stuff to the housing bill. A couple of old political tricks are being played. Pork will be included to gain votes and the congress will pass and the president will sign the housing bail out bill just as the market is making its turn.

The 300 billion dollars to be spent by the government is being largely offset by fees to be collected. The net effect of this government program will be a lot like spending $10 worth of resources to produce $9 worth of ethanol, only a little damage to the US in exchange for a tidy sum of bought votes by incumbents. Of course, there will be some big winners in the deal. A pork barrel portion, about 30 million dollars worth f memory serves, will be doled out in community grants. In other words local politicians will win a $30 million dollar slush fund. Local banks will lobby these politicians and they will in turn buy foreclosed properties as a pay off to their "best friends". The turn in housing is big because it influences the price of everything, including bank stocks.

The Iran Deal Moves Forward

"Secret discussions" between Iran and the US are coming close to bearing fruit. The UN coalition has basically held off on tighter Iranian sanctions for about a month while progress has been stop and start. Democrats have supported keeping pressure on Iran. Obama says that he will do what ever it takes to prevent Iran from developing nuclear bombs. At the same time, Senate committees have introduced legislation to add sanctions and they have appropriated money that can be used to encourage regime change. All sorts of little games are being played but progress is being made. As a way to lower expectations and hide the progress being made, Iran has test fired a few missiles and both sides have encouraged speculation about the possibility of war. Photos of the Iranian rocket test were doctored. Just to have a little fun, hucksters have "returned fire" by doctoring photos of Ahmadenijhad.
In the mean time, the counter proposal made by Iran is now close enough to the proposal made by the UN for direct talks to take place. When President Bush ended the executive ban on OCS drilling, he signaled that Iran and investors had better get on board this moving train. Take a look at sector statistics and you will see that the momentum went out of energy stocks weeks ago and the relative performance in the past few days has been very bad indeed. There will be more dips but the bottom has held.

Yesterday, a lot of people who believed the world was close to coming to an end, were greatly surprised by reports from Wells Fargo and Intel. Wells Fargo made a lot of money and INTC is increasing sales and profits by making ever smaller, faster and energy efficient computer chips. In some ways, the world of the Internet is about to go from the horse and buggy days to the days of high speed Interstate Highway. Worker productivity continues to climb using current connections and high speed, highly sophisticated connections are just around the corner. All of this relates to the pending deal with Iran because the driver of the deal is all about nuclear power. Huge new supplies of electricity are needed to support the dramatic increase coming in electricity consumed. This is a trend in place for more than 100 years. The price of electricity falls and falls (the upward bumps are relatively temporary) and the use goes up and up. It is reasonable to expect that electricity is going to be used to power vehicles in one way or another.

Telephone Lines, Cell Phones and Electric Bikes.

In the old days, a reliable measure of economic development was available in the miles of telephone lines per capita. This measure no longer works. Places like China and India have gone directly from no phones to cell phones. Relatively few miles of telephone lines are required when individuals use their cell phones as their home phones. When alarmist say that China is going to push the price of oil to $250 per barrel they assume that China development is going to follow the US model. Guess what? It will not.

In 2005 there were 10 million electric bicycles purchased in China. In 2007 there were 21 million electric bicycles purchased in China. Twenty-four of twenty-five bicycles purchased in America were made in China. The Chinese are buying cars and Americans are replacing home phones with cell phones. The two economies are growing to be more and more alike every day, but so far electric bikes are not very present in America. Yes, at the right price, a number of Americans will give up their cars.

Super Strong Buy Signals.

Back in January and again in March, both short and long term buy signals were very strong. Since March, long term buy signals have remained strong but some of the short term buy signals went all the way to sell, sell, sell. I don't like short signals but then I missed a few strong long term sell signals a couple of years ago and am still paying the price. No need to cry over spilt milk. Both short and long term buy signals have been super strong in recent days. Feeling burned, like the boy who cried wolf to often, I have not emphasized these strong buy signals in recent weeks. Part of the reason has been that the international situation and the mortgage situation have each trumped the buy signals in more than a few instances in recent months. Yesterday, everything was working. The face to face talks with Iran show that progress has been made; the moves by the treasury show that the housing turn is underway; and, the short and long term indicators are screaming, BUY, BUY, BUY!

The long term sock market average is better than 11% but the S&P is up only 2.53% over the past 10 years. Over time, the averages revert to the mean. Even the 20 year average, which includes the Internet boom of the late 90's has catching up to do. It is going to take several years of high returns to get us back to "normal". The best returns will be in the new leadership as the market turn progresses.

How Marilyn and I Turned $10 Into $1,000,000!

The DJ US Mortgage Finance Index is down 61.9% during the past year! The last time a broad stock market mortgage index reached a 60% decline rate, my wife and I purchased two deluxe ocean front condos at Myrtle Beach for $5 down each and the assumption of the outstanding mortgages. Over the next 15 years, our equity in each of these properties soared to over $500,000. Opportunity knocks again! Such opportunities do not come around very often. Again, the last time a broad index of mortgage companies was down this far was in January of 1991.

In the 1960's, Juanita Van Caspel, a Financial Planner wrote a book called Money Dynamics. It was well received and updated several times, the last being in 1982 as I recall. In this text she included a real estate cycle chart called the "Long Cycle". It was this text, and a missed opportunity in 1973, that gave Marilyn and I the courage to buy numerous beach condos in the months preceding and following the collapse and bankruptcy of the Bank of New England, during the real estate recession of 1990-91. In addition to the two purchased with only $5 down payments, we purchased several others with down payments of from $100 to $10,000. At the time we bought, Ken Fisher was one of my favorite authors, however, it was several years later when I discovered a book of his called "The Wall Street Waltz". In this 1987 book, Fisher included an excellent two page chart showing the smoothed real estate cycle going back a couple of hundred years. Both Fisher and Caspel referenced the work done by Clarence Long around 1940, thus the name "The Long Cycle". Long got much of his data from charts produced by a Civil War Union Military Planner who obviously had plenty of free time.


The real estate cycle averages 18.3 years but with rare exception it last between 17 and 22 years. The reason for the 5 year variance is that the economy does not follow a smooth sine wave pattern but is bumped around by other shorter and longer term cycles, by the unique characteristics of each cycle and by investor swings in sentiment. Mark Twain was the economic genius who noted that "History does not repeat itself but it does rhyme".

When the business cycle is mentioned to most investors, they think in terms of the 4-year inventory cycle which is also known as the Kitchin cycle, after Joseph Kitchin. Ken Fisher and other investors have noted that a series of two, 7 to 11 year Juglar Investment Cycles, named after Clement Juglar, combine to make one Long RE Cycle. Please note that from the stock market bottom in Jan 1991 to the October 2002 bottom was 11+ years while the bottom in 2002 to the bottom earlier this year was less than 6 years. But please also note that the first of these two actually ended in the down turn of 2000-2001 but was extended by the events of 9/11/2001.

There are many other complicating factors. The world is moving through a long innovation cycle that started as far back as 1971! It is clear that this wave of innovation is not finished. This wave is very broad based with a continuous flood of innovations in bio-technology and in computer-information technology. Also, the "4-year inventory cycle" varies from 3 to 5 years and it is often influenced by and confused with the 4 year presidential election cycle. Over the past 10 years, Japanese technology has dramatically reduced the power of the inventory cycle. Inventories are now maintained at very low levels by just-in-time manufacturing techniques, instant sales data and the substitution of automation for labor has allowed for profitable small production runs. The irony is that the reduction in the power of the cycles gives the FOMC and the Department of the Treasury more power over the economy.

As noted above, the Juglar investment cycle averages slightly more than 9 years and two Julgar cycles combine to make one Long Real Estate Cycle that averages 18.3 years and no matter how you count the last two,from 9 plus 8 to 11 plus 6 years, the sum works out to almost 18 years. A marker was laid down last week by California based IndyMac Bank. On July 1, the company was forced to deny rumors of insolvency only to be "outed by New York Senator Schumer". Even though 96% of deposits were insured by the FDIC, persistent rumors and the public statements of Schumer caused a run on the bank. As noted in other postings, bank failures tend to occur very close to market bottoms. The time between the failure of the Bank of New England and the IndyMac bank is 17 years and 6 months.

Again, the Long RE Cycle normally takes 17 to 22 years to go from bottom to bottom. The Long RE Cycle is typically composed of 12 to 14 up years, followed by 5 to to 8 years of "roll over" and ultimate collapse. The distortions of 9/11 made this cycle appear to be one of the very long varieties with little room for a down turn to mature before the Presidential elections. The strength of investment in capital goods allowed Canada, Australia and the UK to avoid the 2001-2002 recession. It seemed like the volatility of the cycles had been dampened by the sophistication of the central banks.The US economy continued to grow even after the housing market fell hard. Unlike the previous cycle, the overbuilding of resort hotels never reached even close to the prior level. Commercial real estate markets continued to show strength. It seemed safe to assume that since the first Juglar Cycle had lasted from January 1991 to October of 2002, over 11 years, then the second Juglar cycle would take us over the hump of the Presidential Election Cycle. It appeared that the next trough would not occur until 2011 or later. It is an understatement to say that it did not work out this way. The over building was in second homes this time around. Instead of owning an investment in a hotel partnership, investors owned a second home or more. When the down turn came, it came hard. Housing statistics are now at levels not seen except at or near major bottoms.

The months of June and July have been brutal times for anything related to the mortgage markets. Banks have been squeezed. Hank Paulson, former chair of Goldman Sachs, is helping the "big boys" put on the squeeze. The "big boy investment banks" never liked having competition from Freddie Mac or Fannie Mae, because of the unfair backing of the US government. Because I believe strongly in free markets, I would not mind seeing Freddie and Fannie out of business. The problem is that the next democratic administration would find the way to re-inject the government into the housing business. Paulson has proposed legislation which would extend a line of credit from the US government to these companies and that would allow the government to buy shares in these companies if conditions warrant such action. In other words, Paulson would be given the power to save or to break these huge mortgage companies.

After the failure of IndyMac, as is typical, the financial press and the rumor mills are now playing the game of "Who is next?". Doomers always expect that once one bank fails that many more will follow. The failure of Fannie and Freddie would confirm the fears of the market and cause more fear, BUT NO! Just when expectations are about as low as they can go, Bush just rescinded the executive block on drilling off our coast and agreed to send an Under-Secretary of State to meet with Iranian officials! The administration has also dropping hints about troop withdrawals from Iraq, up to three brigades, up to 20%. This just at the start of a major offensive in Iraq that will be lead by Iraqi forces and at the start of an offensive in Afghanistan lead by NATO forces!

The USA has had virtually no direct negotiations with Iran since 1979! Suddenly, a meeting that has been planned since June 27, between Javier Solana, the negotiator for the 5+1 group and Iranian officials will be attended by William Burns, an Under-Secretary to Condoleezza Rice. Over the past couple of weeks, Iranians have stated their willingness to meet the US directly. The US position has been that Condi Rice is prepared to meet anytime, anywhere, as soon as Iran suspends production of Uranium. Iran has refused to suspend but ultimately it was Amadenijhad who asked for direct negotiations; each side took a small step toward compromise. All the great deals in history started by a small step in the right direction. With the dance between Israel and Syria coming close to becoming a Waltz, it is time for Iran to join the dance or to become a lonesome wall flower.

It is very interesting that officials from Turkey have met with officials from Iran to offer their mediation services. Turkey has been instrumental in moving the Syria - Israeli discussions along. In the old days, both Turkey and Syria (and Iraq and Israel) were concurred by the Persian Empire. Both Turkey and Syria are predominantly Sunnis and Iran is predominantly Shiite. Something like 80% of all Muslims are Sunni. Iran is more isolated than it may seem. The great majority of Muslims would like to see peace. The only reason Iran has remained independent for centuries is because it is so isolated by its mountainous terrain. Even Alexander the Great was not able to take control of all of Iran. Only the Mongol's were able to sweep in from the north east for a brief period. The people who live in the mountains tend to be poor people. The people of Iran would be very poor, like the Afghans and the Pakistanis if it were not for their oil wealth. Production has fallen from over 6 million barrels per day to around 4 since the 1979 revolution.

The web site www.monstersandcritics.com reports that scores of families are moving out of Pakistani villages next to the Afghanistan border, that there have been tribal leadership meetings held and that 300 to 500 tank reinforced NATO troops have taken forward positions along the border. Like I said yesterday, it will be interesting to see what Saudi oil will buy. Pakistanis rebels who have been fighting India for control of Kashmir have moved in force to the Afghanistan border. Just a short time ago, the war in Iraq was criticized for causing al Qaeda forces to "surge" into Iraq. The surge into Iraq was good for US security and the surge into Pakistan will be good for Indian security. None of us want war but if we must have it, let it be in the mountains of Pakistan. This is what is happening, there is now an insurgent surge into Pakistan. A major thrust by Iraqi troops may send more of these insurgents out of Iraq and into Pakistan. Can you imagine that before long there will be peace talks and a settlement between Pakistan and India in regard to Kashmir!

The table is set. The opportunities are real. Sentiment is going to change as the news media will not be forced to report on progress in Iraq and Afghanistan. Then when the troops start leaving Iraq, there will be more press coverage. There will be ticker tape parades when divisions return home. My guess is that about three brigades will leave Iraq and come home while another three will be redeployed to Afghanistan.

It took a lot more than $10 to buy those two condos. Marilyn and I worked hard to keep them rented and maintained. We built a lot of our equity though sweat.

The price of oil dropped $6 on just the idea that drilling may be approved. The pressure on congress continues to grow. In Georgia, there are now 9 representatives and 2 senators who support drilling and 3 representatives who do not. The democrats are split, 3 for and 3 against. The only questions are how long until there is a political compromise and how much junk will be attached to the bill. The pressure is on. Major deals are going to pass well before the November election. Call me at 336-655-3689 if you would like to discuss how to take advantage of the current market.

A Falling Knife?

An old friend and former stock broker with Merrill Lynch wrote the following:

A Falling Knife?
I am starting to wonder if WB is the 2008 version of NEB. The market is telling us WB has severe problems.

My friend and I suffered though the tough market of 1990. At the start of the market decline, in 1989, the Bank of New England was compared to Wachovia, the solid conservative bank of the north. Pundits predicted a fast turn around but what they got, on January 7, 1991, was bankruptcy.


"This time is different." This time, hardly anyone expects a quick turn around. The prevailing theory is that there will be a domino list of bank failures. The TV pundits who are the least bit optimistic are optimistic for next year. I don't blame my friend for making the comparison of WB today to NEB back then but I think he has forgotten what happened after the bankruptcy. Over the next few days, the S&P went down from about 320 to about 310 but within a month it was up to 370. Less than a year later it hit 420. Oil that traded at $48 per barrel in 1990 traded for $23 in 1991. The S&P went up 31% in one year following the bankruptcy but most energy, basic materials and staple stocks did not do well. Many a portfolio saw cash on cash returns of 50 to 100%. Margin accounts saw gains of several hundred percent. Go back through history and you will find that bank failures have occurred right at the bottom. The Indy Bank has scared a lot of folk but this "crisis" need not spread to WB.

The signs of the turn continue to pile up. Lumber prices have recovered from extreme lows, showing us that the worst of the housing crunch is over. Bank assets will recover sharply as soon as the congress and the Bush administration stop talking about what needs to be done. The firm that advertises less talk, more action has the right idea. I believe WB is a strong buy, but, to be honest, I thought so before the last 50% decline. It is extremely difficult to buy at ever lower prices but logic says that the lower the prices go, the deeper one should dig to buy, buy, buy. In a similar situation in 1963, two neighbors had an extra $5,000. The one bought a car and the other bought stock. In 5 years, the one owned a 5 year old car and the other owned $1.5 million dollars worth of stock. Big gains are made by buying stocks when they are cheap.

Professor Don Boudreaux's WSJ Letter -- Relearning Lessons From 118 Years Ago

A week or so ago, I made the point, that over the last 50 years, Exxon has probably saved consumers more money than any other firm. Wal-Mart probably wins this race for the past 25 years. At the time I wrote, I had never heard of Congressman William Mason, cited in the letter posted below. Don Boudreaux's letter in today's WSJ shows the extremes of democratic tyranny. It is the human condition that permits us to vote our pocketbooks over our principles. In the 1890's a coalition of small businesses, media and politicians turned the tables upside down and broke up the most efficient large businesses in the name of lowering prices. Of course, the most efficient of large businesses are able to offer the lowest prices. As history shows, politicians sometimes win by attacking a problem with an upside down solution. Today, politicians fight oil drilling in the name of the environment while allowing millions of tons of toxic fumes to spew from coal fired smokestacks.

I am not the first to declare that I do not enjoy fighting my way though a Wal-Mart, but the reason the crowds are there is because the prices are very low. Wal-Mart provides more pay, more social security, and more health care than any other company on the earth. Union organizers, small retailers and all the time lefties continue to attack Wal-Mart. Environmentalist continue to attack "obscene" Exxon profits. History may not repeat but it definitely rhymes. Below is the letter by Professor Boudreaux.


July 14, 2008

Domestic Protectionism

Don Boudreaux

This letter of mine appears in today's edition of the Wall Street Journal:

Edwin Rockefeller accurately describes antitrust proceedings as "the debris of past political demagoguery" (Letters, July 10). Research shows that the 1890 Sherman Antitrust Act was not sparked by fears of high, monopoly prices: Real prices charged by the so-called trusts fell steadily during the decade leading up to the passage of that statute. Instead, that first national antitrust statute was the result of hostility to the low prices charged by the innovative entrepreneurs who pioneered the use of new technologies that, for the first time, enabled individual firms to serve a transcontinental market.

Populist hostility to the efficiency of firms such as Standard Oil filled congressional debate over the act. Congressman William Mason (R., Ill.), for example, thundered on June 20, 1890, that "Trusts have made products cheaper, have reduced prices; but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to the people of this country by the 'trusts' which have destroyed legitimate competition and driven honest men from legitimate business enterprises."

Donald J. Boudreaux

The pioneering piece of research to consult here is Thomas J. DiLorenzo, "The Origins of Antitrust: An Interest-Group Perspective," International Review of Law and Economics (June 1985).