Who Ordered the Code Red on Wilson?

Maybe one of the best movies of modern day cinema holds in it what I believe may be one of the most important scenes of any film. Jack Nicholson playing the role of Col. Nathan Jessup, the Big Kahuna at the Gitmo Military Base in Cuba, is testifying in a case where his soldiers are being tried for murdering a fellow soldier who was threatening to disclose some ugly things that go on at the military base. Orders came to discipline this insubordinate soldier, and in the course of that so called "Code Red", the soldier accidentally died. Under cross examination the prosecutor for the Army questioned the Colonel about the "Code Red" and about who gave the order to give the "Code Red" to the soldier. The Colonels response was powerful and moving...
Col. Jessep: Son, we live in a world that has walls, and those walls have to be guarded by men with guns. Whose gonna do it? You? You, Lt. Weinburg? I have a greater responsibility than you could possibly fathom. You weep for Santiago, and you curse the marines. You have that luxury. You have the luxury of not knowing what I know. That Santiago's death, while tragic, probably saved lives. And that my existence, while grotesque and incomprehensible to you, saves lives. You don't want the truth because deep down in places you don't talk about at parties, you want me on that wall, you need me on that wall. We use words like honor, code, loyalty. We use these words as the backbone of a life spent defending something. You use them as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom that I provide, then questions the manner in which I provide it. I would rather you just said thank you, and went on your way, Otherwise, I suggest you pick up a weapon, and stand a post. Either way, I don't give a damn what you think you are entitled to. Col. Jessep: You want answers? Kaffee: I think I'm entitled. Col. Jessep: You want answers? Kaffee: I want the truth. Col. Jessep: You can't handle the truth.

What he was referring to was that the things that are done to protect this great country are not always pretty, moral, or socially acceptable, but they are done for the benefit of the whole...even if someone gets hurt in the process. A Real world example of this unspoken policy could be the Karl Rove incident. In an attempt to keep the American people supportive of The War in Iraq, the Bush Administration felt that former Ambassador Joe Wilson could be sacrificed. And I will hope, for the time being, that the Bush Administration did that for the greater good of the country rather than for their own betterment. Joe Wilson was threatening our War in Iraq policy, and that was endangering the country, so the administration needed to discredit him fast to shut him up.

The fireworks may come if we ultimately find out that President Bush himself had a hand in this "Code Red" against Mr. Wilson, either that he knew about, gave the OK, or actually ordered the smear campaign against Joe Wilson and then vehemently denied knowing anything about it. The truth on that matter is yet to come out.

History being what it is, this silly little pissing match may seem like political folly having no real meaning or point, yet if instead of a media smear campaign against a dissenter, what if we put Joe Wilson in Gitmo (Guantanomo Bay Prison) with the other terrorists...because if your not with us, your against us. Governments that lash back at its citizens for speaking out against its leaders or policies are exactly what we are fighting for in Iraq and other places around the world.

At the end of the movie, Colonel Jessup gets arrested for ordering the "Code Red" even if it was for what he believed was the security of the country.

Nothing Matters to the Optimists ...originally written 7/24/07

Everything that is wrong can be explained away. The list is long and sobering...Record Oil Prices, Exploding Twin Deficits, The Eroding Value of the US$, The Flattening Yield Curve, The Escalating War on Terror, The Bankrupt Social Security System, The Coming Demographic shifts, The Exuberant Real Estate market, and The Consumer Debt Balloon. All of these daunting problems are but mere headwinds for the ever rising potential of the United States.

While each of the above mentioned economic, geopolitical, & sociological problems alone would normally be seen as a major challenge, together they pose what I believe will be the demise of the current economic expansion and will expose the serious underlying structural problems that are now embedded in our financial, political, & sociological systems and need immediate attention.

Over the past few years, the Bush Administration, along with the valiant and patriotic assistance of the Chairman of the Federal Reserve Alan Greenspan, has been able to push off the inevitable economic downturn using tax cuts and historic low interest rates as the tools, yet leaving no repair strategy for the aftermath of the unprecedented campaign which has spawned huge imbalances in the economy. The result will be a downturn that will rival that of the Japanese.

Each problem listed above has been rebutted ad naseum in the financial media with the various pundits, wall street gurus, political propaganda, and the CNBC cheerleaders proving over and over that people will believe a lie as long as it feels better than the truth.

To the optimists, nothing really matters. The problems that seem so daunting when examined and understood, are so easily explained away with rosy forecasts of ever rising economic health and prosperity. Most of the intelligent and in-depth analysis of these issues is way too much for the average investor who can only really digest buy, sell, or hold.

The only risk that is ever mentioned and elaborated on is that of not being fully invested in the stock market. I mean, you know the mantra, stocks are the best place to be...especially for the long term. What else can you do with your money...earn 2% in a money market or 4% in some bond. Stocks are the default investment. And if stocks are too risky for you, real estate has become the hot IPO. I hear more and more stories of regular guy types liquidating stocks to buy some pre-construction condos and flip them before the Grand Opening!

The Fed, in its effort to support the country, has in fact inflated its biggest and probably most dangerous bubble yet. And this one is going to really hurt. None of this short and sharp correction stuff that can be fixed with some financial engineering. No two year bear market. This slowdown/depression will be long, hard, and deep. Real Estate takes a loooooooooooooong time to correct. Lots of debt will have to be written down and lots of banks will feel the pain. Homeowners and speculators alike will suffer steep losses of equity.

The War in Iraq, aka The War on Terror, continues to rage on with seemingly no end game or exit strategy. Terrorists continue to launch increasingly fatal attacks in Iraq & around the world. Many believe it is merely a matter of time before another catastrophic attack is carried out in the United States. Meanwhile the American people have become angered & frustrated by the war and its costs, and the rest of the world has become more opposed to U.S. policy in the Middle East. Oil has more than doubled in price since the invasion of Iraq proving again that the Bush Administration had no idea of the consequences of the War in Iraq...whether it be the reason for the war, the justifications for the war, the way the war was planned, the way the war was fought, and the way the Iraqi population would react to the U.S. occupation.

Some of the other issues like Social Security and the Deficits are problems that have built for years and the time to rectify what is wrong was a long time ago. Now the fix will be critical and destructive...there is no other way to fix long term structural problems. Politicians and pundits may try to make you believe differently, but the common sense facts are that it is impossible to painlessly and quickly fix these problems.

Yet, the optimists hardly acknowledge the fact that these problems are serious and for the most part being left to resolve themselves. Some will mention the problems, but then they wax into the virtues of the omnipotent United States of America, and the strength of our military forces and our financial systems. To the optimists, none of these real problems matter.

CONUNDRUM- (ku-nun'drum), noun. 1. a riddle, the answer to which involves a pun or play on words, as What is black and white and read all over? A newspaper. 2. anything that puzzles.

That is the word being used by some FED Governors to describe the current relationship between the 10 year Treasury note and the Fed Funds rate. Longer maturity interest rates have fallen sharply since the Fed embarked on its tightening program at the short end of the yield curve. Yields on 10-year notes (US10YT=RR) are currently at 3.90 percent, down from about 4.85 percent in June 2004 when the Fed started raising rates.

The riddle market participants are wrestling with is "why is the interest rate on the 10 year Treasury note declining while the Federal Reserve Bank raises interest rates?" What is most unusual about this conundrum is that there does not seem to be anyone who knows the answer. Some market pundits have tried to explain why this is happening, but no one has good answer to the riddle. The market riddlers have pushed interest rates lower without explanation, which is confounding the very masters that set those rates.

Safety is always a good reason to buy US Treasury notes, so demand due to some kind of fear may answer part of the riddle. Some economist types think that the "flattening of the yield curve", which is what has happened, is signaling the onset of a recession. Others blame hedge funds being forced into or out of tightly wound and very wrong hedges, better known as bets. Still others blame the insatiable appetite that foreigners have for our Treasuries triple A debt.

Most Wall Street veterans find it a bit unnerving that the market is defying the FED actions. Forces being what they are, many very smart and very visible Wall Street gurus have been very wrong on the 10 year Treasury, so things are likely to get even more "conundrummy" before we know the answer to this puzzle.

At some point the answer to the riddle will be known. Federal Reserve Governor Susan Bies took on the "conundrum" of the disconnected long-term U.S. interest rates in comments to reporters after speaking at a Women in Housing and Finance event in Washington. "I honestly don't know what it's going to take. It just appears that long-term rates cannot stay at this low level," Bies said. Governor Bies added "At some point we do believe that the 10-year Treasury (note yield) will rise and take mortgage rates with it," Bies said. Michael Mandel from the NY Times says..."It's like living in a parallel universe. Surprising most economists, mortgage rates have gone down in recent weeks rather than up.”

With the 10 year Treasury below 4 percent and next FOMC meeting being held in late June, and the next 1/4 percent rate rise is forecast taking the Fed Funds rate to 3.25 percent, an inverted yield curve is not far off. For those that do not know, that's not a good thing. All the financial companies that are being affected by this conundrum as interest rates that they pay for their funds rise and they are unable to raise the rates they charge to borrowers due to the market forces that have pushed rates down. Banks will get squeezed and credit risk will rise. Banks and other lenders are being faced with slowing volumes and lower margins, a combination that is very bad for profits.

The big question is how does this conundrum get resolved? Will the FED get more aggressive to get the result it wants? Will the market adjust on its own in an orderly fashion? Will foreign buyers of US Treasuries balk at the low rates being paid? Will hedge funds with huge losses stick around for the answer or will they get forced out against their better judgment? Will any of this matter to the housing market or the stock market?

Stay tuned, because the answer to these and many more questions are sure to be answered in the coming weeks.

Say What?

Did he really just say that? Say it ain't so. Oh man. Bummer. Party's over, turn out the lights. Say it however you like, but last week's comments from the master bubble blower and national chief financial officer was another in a series of warning 'bells'. Fed Chairman Alan Greenspan said he saw signs of "froth" and local bubbles in housing, but no national bubble. Even at 78 Mr. Greenspan still wields considerable power when it comes to liquidity creation. Mr. Greenspan has been in "easy money mode" for over 3 years now, and as a result, the real estate market has done exactly what it should have...become artificially inflated by low interest rates and a lax credit process.

Banks have been forced to 'find what to do with' all the liquidity the FED provided, so standards had to be lowered to force the money out into the system and generate big upfront fees. Appraisers are on board with the program so they continue to get the business.

Even after 2% (200% relative increase) has been tacked onto the FED Funds rate the market doesn't believe. The 10 year treasury is at the same place it was when the FED started raising rates a year ago, and the real estate market has not even tapped on the brakes. So, last week The FED chairman decided harsher and more direct words were necessary to forewarn the speculators and homeowners, that this cannot continue, and probably shouldn't continue. Greenspans comments were followed by no less than 2 of his fellow FED Governors making similar comments.
A recent Fortune cover story discussed the frenzy of housing speculation. The story detailed several “investors” as they raced around the hot markets to purchase homes or even just contracts to purchase homes under construction. Other anecdotal facts that point to increased speculation include “the number of chapters of the National Real Estate Investors Association has jumped from 44 in 2002 to 170 currently.” The number of homebuyers in Phoenix that labeled themselves as investors doubled since last year to 2,703 and they purchased 18% of all the home sold in Phoenix last year. Eighty-six books on real estate investing were published last year, three times as many as in 1998. According to the article, only 1.6% of mortgages were interest-only in 2001. Three years later in 2004, a whopping 31% were. One investor said he was not worried that he was losing $3,500 per month on his investment houses since he is not renting them all out because he is “in it for the appreciation.”

The FED seems to be heeding the warning signs of previous asset bubbles and trying to jaw bone the rampant speculators and the banks that provide the financing to beware, as they slow the liquidity and raise the cost of money at the prescribed measured pace. In fact, Fed Governor Furgeson had this to say last week "Clearly central bankers would benefit from a better understanding of asset price movements --- particularly more extreme movements - so that we do not mistakenly facilitate in some way potentially harmful outcomes," Ferguson said.

It may be hard to stem the flow at this point, since so much money has been made and many 'exciting' deals are firmly in the pipeline, so the warnings seem to be falling on deaf ears, especially so since the real estate bubble concept has been talked about for so long now that most do not subscribe to the possibility of it existing.

We all are experiencing the appreciation, using the equity to fund our lifestyles, and counting it as part of our net worth. Its great having an appreciating asset that you not only can live in but you can live off it too. Home equity has been and continues to fuel the American consumer and the all the new real estate tycoons. But, as rates rise, even at a measured pace, the cost to carry those inflated assets rise. The values of those assets will surely slow in their appreciation, and in fact might even go down in value. Similar to bond yields and bond prices, there is an inverse relationship between rates and prices. As interest rates on the funds used to purchase the assets rise, the cost to carry the asset rises. Those forces will combine to undermine the real estate market and values of real estate.

Finally, unlike many other financial assets, real estate has an economic value. It is an asset that has a very important use. Their is a cost to that use which is paid in the form of either rent or carry costs of the house. While the appreciation of that asset is nice, the costs associated with the utility of that asset are critical to its valuation.

In many areas, the costs to own a home has doubled and tripled over the last 5 years. Clearly that cannot continue as the end user of the home will not be able to afford to live there. Speculators and investors must either rent or sell their appreciated assets in order to realize the profit. Valuations have gotten to a very uneconomic and overly inflated level, which will undoubtedly prevent the realization of those profits. And dare I say may even cause the unthinkable...a loss of capital in a real estate investment.

Going Ga Ga Over GOOGLE

Give me a break. If you don't hear the bells and smell the coffee then you are going to miss the next great internet, techno-boom, transformational company blow-up of the bear market rally, "after bubble" stock market. The all-neutral, all the time analysts jumped all over themselves to revise estimates, multiples, growth & valuation models and re-evaluate their ratings on the stock.

Jim Kramer gave the "buy, buy, buy" (thats his triple buy call) recommendation on his show and all but called out the other analysts to challenge him to an arm wrestle about it. Kramer also mocked the technology fund managers who he says continue holding the has-beens like Cisco, Microsoft, Intel, and Sun micro, saying that they are the "flat liners" while Google is on its way to $318!

All I can say is that a wierd form of the bubble is back, and Google will be the next great internet stock disappointment (disaster). By the way, I think that the supposed "smartest guys in the world", that would be all the insiders and venture investors who created this company, would not be selling their Google shares at the incredible pace they have been of late, if they thought the stock was undervalued.

And just for kicks, I will be the antithesis of Kramer and put a $75 price target on Google. Thats a long-term price target but I wouldn't be shocked if it was in the short term.

Oil Minister Greenspan

Today Fed Chairman Alan Greenspan took up the topic of energy, specifically the subject of Oil and how its recent price has affected or might affect the U.S. and Global economies. The FED Chairman took the opportunity to comment on the price of oil as well. Mr. Greenspan called the recent price activity a "frenzy" and characterized the rise in energy prices as temporary stating that oil prices will fall back to more normal levels. Now I know how well the FED Chairman has been at controlling the "asset bubbles" in the financial markets. And how well Chairman Greenspan and his fellow Governors have smoothed the business cycle and all but eliminated inflation. But, harken back to a day in 1996 when Chairman Greenspan referred to the stock market price action as "irrational exuberance". After that historic statement, the stock market, as measured by the DJIA rose 90% and the NASDAQ rose 200%. Better early than never? If history is any measure of Mr. Greenspans calls, Oil stands to go considerably higher before the masses recognize that oil is mispriced.

Listening to the Chairman today was a new experience in that he was uncharacteristically clear with his oil stance. No "on the one hand this and the other hand that"...clear and concise...oil prices are too high and do not represent supply and demand. I do not know what makes Mr. Greenspan think he knows what the price of oil should be or shouldn't be, as he has no control over the oil. His control is on money supply, not oil supply. He can adjust interest rates, he cannot adjust the price of oil.

OIL = WMD

Its no secret that Osama Bin Laden is from Saudi Arabia. Its no secret that the Saudi Government has nascent ties to the Bin Laden family. It's also no secret that al Qaida has made it perfectly clear that while it would enjoy killing massive numbers of Americans in terrorist attacks, it would also like to take down the American way of life and our economic power. Recent reports from U.S. intelligence highlight the very real possibility of a terror attack on our financial system. In fact, experts believe that in the future al-Qaida, or other radical groups bent on terrorism, will deploy weapons of mass economic disruption rather than weapons of mass destruction.

I believe that the current Oil crisis is the beginning of a concerted effort by the al Qaida organization, with the help of OPEC...knowingly or unknowingly, to take down the American economy in a stealth attack that will only be realized once its too late to defend against it. Slowly, for the last 2 years oil prices have risen in the face of OPEC and non-OPEC countries trying to keep oil prices within a band of $22-28/barrel. Why then is oil now $58/barrel? OPEC says it has lost control of the pricing and its due to speculators and hedge funds. OPEC has dropped the stated price band. Saudi Arabia has pledged to keep the market well supplied. Other OPEC countries have also committed to helping with supply and have made statements regarding the price of oil being too high. So why then is oil $58/barrel and setting its sights on higher prices? Why hasn't any of the mechanisms put in place to control the flow and pricing of oil worked? I contend that OPEC doesn't really want to control it and in fact is being motivated by either their own self interests or by Al Qaida pressure to continue to squeeze the U.S. economy. The benefits for OPEC is huge profits from the high price of their oil as well as maintaining a certain control over the U.S. which is flexing its military power in their part of the world. It also hurts the U.S. economy and American consumers, which deep down inside, most outside the U.S. do not care for in the least, and in fact feel as though we deserve to suffer for the ills we cause others around the world...namely in Iraq and our policies towards the Israeli/Palestinian conflict...to name just a few. Oil could very well be the terrorists best and easiest weapon of mass distruction...and we can't do a thing about it.

SNOW JOB

NEW YORK (Dow Jones)--U.S. Treasury Secretary John Snow said Wednesday in an interview on MSNBC that inflation isn't becoming a problem for the U.S. economy. While he noted that energy prices have risen to "unwelcome" levels, and he "hopes that we can start to move the other way on that," the Treasury Secretary told MSNBC's Ron Insana that "we're going to continue to have a basically low inflation environment for the indefinite future." He cited an "open economy," productivity, underutilized assets, and the inherent competitiveness of the U.S. economy as reasons for his views.

These comments by the U.S. Treasury Secretary seem to be in stark contrast to the thinking inside the Federal Reserve Building. Federal Reserve Chairman, Sir Alan Greenspan and the sitting Governors seemed to imply, infer, and intimate that indeed inflation is a concern. The financial markets took heed to the statements coming from the FOMC and sold off the long bond pushing interest rates up to their highest point since the summer of 2004. The PPI and CPI data points were hotter than expected as well in the most recent reports, yet Treasury Secretary Snow seems to know better and is using different data.

This Treasury Secretarys statement seems to go well with his "broken record" comments about how the U.S. Government support for a strong US$ policy. The US$ continues to decline in value while the Treasury Secretary mouths the words that the US government supports a strong US$ policy.

His statement about inflation is a continuation of his seemingly uninformed or ignorant rhetoric and hope for an economy that validates the Bush administrations economic policies and tax cuts.

The reality of rising interest rates, falling US$, high energy prices, and no new tax cuts to fall back on, the Bush economic plan has failed to produce results for the majority of the US population.

The coming recessionary period will be difficult for the Republicans to explain away and will be deeper than the recession that was interrupted by the ill advised tax cuts and emergency low interest rates.

As many pundits have pointed out, the FED has opted to replace one asset bubble with another, in the form of real estate for stocks. With Japan as our economic alter ego, their experience which is still ongoing, is what we can look forward to. Japan has been in a recession/depression for almost 20 years now following the bursting of their real estate bubble. The which resulted in banking problems and economic malaise that continues today.

Treasury Secratary Snow reiterated his views on Thursday 3/24/05 with the following comments>>>>

WILMINGTON, Del. (Dow Jones)--The outlook for U.S. inflation is "benign" thanks to the Federal Reserve's monetary policy, U.S. Treasury Secretary John Snow said Thursday. "Fortunately, we still have an overall benign inflationary environment as indicated (Tuesday) by the (Federal Open Market Committee's) statement and action," Snow told reporters following a speech on Social Security reform. "It's important for the Fed to continue to do as it has been doing - anticipate forces and lean against them." On Tuesday, the Fed raised interest rates by 25 basis points for the seventh straight meeting. In a statement released after the decision, the Fed described the pace of recent U.S. economic growth as "solid," a more upbeat assessment than the FOMC had at its last meeting in early February, when it described the pace as "moderate." The panel also added a caveat to its previous statements that the competing risks of inflation and a renewed economic downturn are "roughly equal." That expectation, it said, is subject to the continuation of "appropriate monetary policy." Concerns over inflation have been raised by rising gasoline prices and reports businesses have had found it easier to pass on higher costs to consumers. On Wednesday, the U.S. government reported that consumer prices rose at the fastest pace in four months in February, boosted by energy prices. The Consumer Price Index rose 0.4% last month, four times the rate in January, the Labor Department said. Higher energy prices accounted for "virtually all of the acceleration," the department said. But the core index, which excludes volatile food and energy items, also climbed sharply at 0.3% - the fastest rate since September. "It is important we stay vigilant on inflation," Snow said.

Whats Congress got to do with it??

Terry Schaivo and her family have big problems. This poor lady has been a medical vegetable and a political hot potato for the last 15 years. Countless dollars and energy has been expended to fight and argue about what is done with her. Why all the attention? Why all the interest? Why all the media coverage? Don't we as a country have more to do on other more important issues than to wrangle over whether the life, if you can call it that, of a comatose woman should be sustained or not? We as individuals and as a country have much bigger problems. As far as I'm concerned, it is none of my business and is not the business of the Congress.

Steroid use in baseball is pretty much a non-event and for most spectators and enthusiasts a yawner. Steroid use in professional sports is a "given". We as consumers of the sporting events are all for the athletes being able to achieve new records and do amazing things in their sports. We have changed every sport over the years by using better materials to make the equipment used and by training athletes at younger ages and with more sophisticated training equipment, diets, and programs. Steroid use is just a natural extension of that and if athletes want to use drugs to enhance their ability, its their right to do so. Its not Congress' job to get involved and regulate athletes diets or training regimines.

Congress is put in place by the electorate of their individual states to pass laws and govern the country. They are not put in power to play with social issues that have nothing to do with governing the country or making laws for the betterment of the American people. The recent time, effort, and focus on the Schaivo case and steriods in baseball is a blatant misuse of their power and is a distraction from the much more pressing issues this country has to deal with.

Terry Schaivo's family should handle their problem and I wish them well. I wouldn't want to have to deal with what they are going through. But it is their personal family matter.

Major League Baseball should handle their steroid problem. All athletes need to weigh the costs and benefits of succeeding at any cost in their respective sports versus their long term health and well being.

Neither of these issues should be handled by the Congress of the United States.

DRILLING FOR OIL IN THE

Alaskan National Wildlife Reserve

Not a Solution

The Congress has now opened up the possibility and increased the probability that 'Big Oil' will be allowed to drill for oil in the Alaskan National Wildlife Reserve. The President has urged this and has said that this will help to ease our dependence on foriegn oil. At forecasted peak output which will take a few years, ANWR oil fields will produce 1 million barrels of oil a day. That would be about 5% of our daily consumption. Hardly enough to reduce our dependence on OPEC.

What opening up ANWR does is delay the inevitable for an oil addicted US economy. There will be a day, in the not too distant future, when a sudden disruption in the flow of oil occurs. That will be the equivalent of a withdrawal from oil to run our factories, electric plants, fuel our airplanes and automobiles, heat & cool our homes and offices, along with all the products and by-products we use oil for. ANWR is no solution and is not even a band-aid for what is sure to be a very harsh reality.

By opening up ANWR, we are doing the equivalent of selling our body parts for drug money to support an out of control habit. The only solution to our dependence on foriegn oil and resolving our nations energy crisis is to develop alternative energy sources. The time was 30 years ago, 1974, when we were put on notice of how powerful OPEC is and how dependent we are on the oil they supply to us. Now we face a national emergency. If we spent the money that we are spending to fund the War in Iraq to fund research to develop other forms of energy and to kick the fossil fuel addiction, we could do it and fix the problem permanently.

Big oil won't allow it. Politicians are too weak to make the hard decisions to lead the nation properly. And the American consumer is resistant to changing bad habits and accepting a new reality. Our nation as a whole is resistant to change, and we have a history of waiting until change is forced upon us...that change is coming and alot sooner than most are prepared for.

The time to act is now. ANWR is not the solution. Invading Iraq to secure huge oil reserves is not the solution. We must spend the required money to develop new energy sources and implement a national energy policy and changes in transportation and electricity generation ASAP.

Big oil needs to help. The automobile manufacturers need to get on board. Consumers must demand the alternatives. And our government must provide the funding and facilitate the changes before this change is forced upon this country.

Bush: "No Question" US Is "Hooked" On Foreign Energy

WASHINGTON (Dow Jones)--Faced with surging crude oil and gasoline prices, President George W. Bush said Wednesday that U.S. consumers must change the way they use energy, and the country must develop hydrogen-powered automobiles. Bush added there is "no question" the U.S. is currently "hooked" on foreign sources of energy. "We are going to have to change our habits. We are going to have develop hydrogen-powered automobiles," Bush said. Bush made the comments at a joint press conference with Mexican President Vicente Fox and Canadian Prime Minister Paul Martin. Bush noted the U.S. and Canadian automobile industries are already highly integrated and expressed the hope this will lead the U.S. and Canada to develop cutting-edge technology for a new generation of cars that use hydrogen as a fuel source. Turning to the U.S., Bush said it was clear the economy needs to be regeared to consume less energy. "We are using a lot of it (energy), and we need to conserve better in the United States. We are dependent on energy from overseas and we need to become less dependent on energy from overseas," Bush said. Bush praised Canada's efforts to produce oil from tar sands, and said the U.S., Mexico and Canada needed to share technology for producing energy. "There is a lot we can do and will do on energy," Bush said. Once again, Bush said lawmakers ought to look at the cost of gasoline and crude oil and pass his package of energy legislation. "I put forth a strategy to the United States Congress in 2001 and they are still debating it," Bush said. "Now is the time to get a bill to my desk. This is the year." For his part, Martin noted Canada has a huge untapped resource in the form of hydro-power and added the energy sector in North America will be a big plus for all three countries. "Canada has great potential in terms of hydro-electricity," Martin said. He pointed to the potential for more power from northern Manitoba, Quebec, Newfoundland and Labrador. "The whole energy sector for all of us is a huge opportunity in terms of our competitiveness with the rest of the world," Martin said.

Turn up the A/C

If you are hot this summer, just head to Iraq where the U.S. Government will be making sure that the A/C works great so as to keep the Iraqis comfortable while we try to stablize their country. The U.S. government plans to spend something near $19 billion of our tax dollars to rebuild the electrical grid in Iraq so that the A/C works well this summer.

According to the Reuters news service, The United States is reshuffling Iraq rebuilding funds, putting more focus on electricity before the hot summer months to ease tensions exacerbated by daily power cuts, senior U.S. officials said on Tuesday. Bill Taylor, a senior U.S. Embassy official in Baghdad, said use of the $18.4 billion allocated by Congress for rebuilding Iraq was being reassessed to deal with surging electricity demands caused by air-conditioning in the summer, particularly in Baghdad. "We all know the Iraqi summers are very tough and very hot and electricity is very important to get these people through it," said Taylor in a telephone interview from Baghdad. "We want to increase output, reduce the outages and we want the Iraqi people to see that their government is making their lives better," he added.

There you have it. If you are hot this summer, head to Iraq. If you feel like you are paying too much to the IRS this April, feel good knowing that you are in some way assisting in the War on Terror and in helping to spread Democracy, and air conditioning, in the Middle East. Is this a great country or what?!

HOW-ZING Exuberance 2005

Sir Alan Greenspan had some reassuring words today for the homeowners that have fully extracted the equity from their homes & for bankers who have willingly allowed them to use that cash to live the 'good life'. Congressman from both sides of the aisle questioned the maestro about the level of housing prices and voiced their concerns about the housing price run-up. In his usual fashion, Fed Chairman Greenspan spoke from both sides of his mouth without much in the way of explanation or coherence. What he did say, that was understandable, unusually clear, and could be of importance was the following.

"Some U.S. communities may experience a plunge in home prices after years of gains, but there does not appear to be any national home value collapse ahead, Federal Reserve Chairman Alan Greenspan said on Thursday. "I think we are running into certain problems in certain localized areas. We do have certain characteristics of bubbles in certain areas, but not as best as I can judge, nationwide," Greenspan said in response to questions from members of the House Financial Services Committee. The Fed chair said some decline in house prices on the national level is possible, but should not cause major problems because many homeowners have substantial home equity after a period of rising values.

The use of the word 'plunge' and 'collapse' in the statement did not seem to bother most. I encourage you to re-read the statement, as he clearly states, unusual as that may be for him, that a plunge in home prices may be experienced in some communities. He also states that there does not appear to be any national home value collapse ahead, even though he does acknowledge that he believes that we do have certain characteristics of bubbles in certain areas, but not as best he can judge nationwide. That should be comforting to most, but pretty worrisome for the homeowners in the so called localized areas. Finally, the certain problems he vaguely refers to could have been specified by saying that values are too high and speculative activity is rampant setting the stage for a serious correction in home values...of course that would be locally, not nationally.

The problem may be localized, but it is localized in some very large and important areas like South/Central Florida, Las Vegas, Nevada, Southern California, New York/New Jersey and surrounding areas, Washington/Maryland/Virginia areas, many areas in Colorado, Suburbs of Chicago, North Carolina suburbs, some areas in Texas. If housing prices plunge in these areas, it won't bode well for surrounding communities that have grown around them due to the prosperity of housing in these areas...can you see where this is leading?!

What Sir Greenspan failed to point out is the fact that most, if not all, of the "substantial home equity" has been EXTRACTED from those homes and has been used (spent) by the lucky homeowners to upgrade kitchens & bathrooms, buy new cars, send children to college, go on vacations, buy plasma televisions, iPods, and whatever else the profligate American consumer has wanted to purchase. Or to buy 2nd, 3rd, & 4th homes as investments or vacation homes, thus "parlaying" the investment in their primary residence.

And while their monthly payments may have been reduced, especially if they got a teaser rate refi or an ARM, the equitythat they pulled is most likely gone.

Thus, in the unfortunate communities, a.k.a localized areas, that may experience a PLUNGE in home prices, those unlucky and over stretched homeowners will need to figure out what to do to keep up with the Jones and the rest of their unlucky neighbors. The banks that have lent those happy go lucky folks all that money may also have to deal with the fallout from the plunge in values, as they are the very source of the capital that helped to pump up the bubbles in those certain areas.

Hopefully you are in one of the more fortunate communities, or less fortunate depending on how you view it, that has only experienced slight increases in home equity. Then your drop in value will be small, and not a plunge. And since you didn't get the big move up and weren't able to refinance and take out big bucks to redo your home and buy lots of new toys, you won't have it so bad during the downturn in home prices.

How come I don't think that makes you feel any better?

When I heard the news about the previously unpublished report, I completely freaked out!

TELL ME AGAIN THAT YOU DIDN'T HAVE ANY WARNINGS ABOUT THE 9/11 ATTACKS

For the past 3 1/2 years the American public has been told over and over and over and over and over that the governmental agencies and officials responsible for protecting the public and possibly preventing the 9/11 attack on our country had "no idea that terrorists were planning an attack or would ever use airplanes as weapons against us". Well, according to a previously 'undisclosed' report by the 9/11 Commission that was released today, that is just not the truth...what a shocker!

The report by the Sept. 11 Commission that investigated the suicide airliner attacks on the World Trade Center and the Pentagon detailed 52 warnings given to FAA leaders from April to Sept. 10, 2001, about the radical Islamic terrorist group and its leader, Osama bin Laden. The commission report, written last August, said five security warnings mentioned al-Qaida's training for hijackings and two reports concerned suicide operations not connected to aviation. However, none of the warnings "pinpointed" what would happen Sept. 11. FAA spokeswoman Laura Brown said the agency received intelligence from other agencies, which it passed on to airlines and airports. Adding this information to the previously reported intelligence obtained from the FBI, CIA, and other internal government documents that have 'dripped' out over the past 3 years, and it has become even more clear to me that the 9/11 attack on the U.S. was very preventable and was only able to occur because of a terrible failure on our governments part to follow-up and synchronize the information that they did have.

According to the report:

-Aviation officials were "lulled into a false sense of security" and "intelligence that indicated a real and growing threat leading up to Sept. ll did not stimulate significant increases in security procedures."

-Of the FAA's 105 daily intelligence summaries between April 1, 2001 and Sept. 10, 2001, 52 mentioned Osama bin Laden, al Qaida, or both, "mostly in regard to overseas threats."

-It notes that the FAA didn't expand the use of in-flight air marshals or tighten airport screening for weapons. It said FAA officials were more concerned with reducing airline congestion, lessening delays and easing air carriers' financial problems than thwarting a terrorist attack.

-A proposed rule to improve passenger screening and other security measures ordered by Congress in 1996 had been held up by the Office of Management and Budget and was still not in effect when the attacks occurred, according to the FAA.

-Information in this report was available to members of the Sept. 11 commission when they issued their public report last summer. That report itself contained criticisms of FAA operations.

Seems clear to me that this previously undisclosed information was kept from the American public until after the elections for political purposes and not to protect government sources or investigations. The next time Condi Rice or one of the other Bush Administration mouthpieces says that we couldn't have prevented the 9/11 attacks and that we didn't know that Al Qaida was planning to strike in the U.S., know for certain that it is propaganda meant to deflect responsibility and perpetuate a lie.

When I Heard George W. Bush Won a 2nd Term

I'm not sure how you felt, but I know there was at least a few Americans and many more foreigners that were "shocked & awed" by the re-election of George W. Bush. Not necessarily because of him as much as because of the American electorate and how they renewed the reign of a President that behaved in such an unpresidential manner. Whether because he took the country to War under false pretense and was unapologetic about it or because he gave the largest tax break to the wealthiest of Americans and large corporations, there was ample reason to question his leadership and hold him accountable for his lack thereof. Add to that the fact that most believe that George Bush is a puppet of Carl Rove and that Vice President Cheney is really calling the shots, and you have a concoction of reasons to at least try something new. But NOOOOOOOOOOOOOOOOOOOOOOOO, the complacent and, in my eyes, ignorant American electorate re-elected President George W. Bush.

Maureen Dowd, Op-Ed Columnist for the NY Times, wrote in her book that most foreigners don't hold Americans responsible for the policies of the Bush Administration, but that if the American people re-elect him they will blame us for all his past and future deeds. Well, now everything he does is our fault, and frankly, we deserve whatever he does.

George Bush claims now that he has a "mandate". Yikes! First term he stole the election, went on vacation, and then got the attacks of 9/11 to give him purpose. Now he gets a victory by 3% of the popular vote and he has a mandate. Whether its Social Security, Tax Reform, The War on Terror (Iraq, Iran, North Korea, Syria, or wherever the most Oil and weakest army is) or retooling the Supreme Court, we Americans are in for a 2nd term unlike any other this country has experienced. At least half of America will be very unhappy along with most foreigners.

And in case you were wondering...if any of the policies that President Bush proposes, gets forced down the throats of the congress and the American people, and they turn out to be bad ideas or have unintended results or are discovered to have been founded upon bad information, don't expect George W. to take responsibility for the misdeed...he won't!

The Coast is Clear

With the US & Iraqi elections behind us and the most recent FED FOMC meeting over, the equity markets are back to the business of self promoting and rising on "nothingness". After a miserable January that was plagued with mediocre economic data and uncertainty regarding the aforementioned events, investors have seen fit to buy up the very stocks that just a few days ago were being sold down. Mutual fund flows are streaming in and equity managers are comfortable placing more chips on the table and hoping for the best. Economic data has continued to come in less than anticipated, yet our government officials and FED governors recite ever more optimistic slogans of prosperity and good times to come.

A recent comment from one of the FED Governors, a.k.a. financial bubble blowers, was the following...Fed's Gramlich: "Sees Upside, Downside Risks To Economy"...now boy isn't that helpful.

To try and put things in perspective seems futile, but I feel it is my civic and professional duty to remind people that all is not right in sin city. The US government is still running a record fiscal deficit. The US trade deficit with our very generous trading partners is huge and poses serious risks for the value of the US$ and interest rates. The War on Terror, taking place in Iraq, is costing $1billion per week and continues to result in death and casualties on a daily basis. The FED is raising rates at their prescribed "measured pace" which will undoubtedly slow some very important economic engines that have floated the US economy for the last 3 years, namely housing, refinancing, and auto sales. Unemployment rate aside, as that data point is a fraud perpetrated on the American public, good paying American jobs continue to be shipped over to India and China at a staggering pace as US businesses are forced to cut costs to stay competitive. Most, if not all, of the new hiring is at lower paying jobs at the lower end of the employment spectrum. Nothing to get excited about, especially since wage growth has been stagnant if not declining.

Now thats the reality. Bush Administration propaganda aside, 2005 will be a very difficult year for the economy and the political enviroment. The economic recovery has been floated by 0% interest rates and payback tax cuts for the rich and famous. Both of those life preservers are losing their air and will need to be replaced by "real" economic strength. The Dems are in no way ready to cave in to President Bush's so called "mandate" to lead the U.S. to wherever he and Carl Rove think it should go and that will set up a stagnated governing process. Iraq is sure to be a sore spot even after the widely renowned success of the election held under marshall law.

My sense is that most people are confused and weary from all thats has been going on. Might as well be involved/invested and hope for the best. If the President thinks private accounts are good for my Social Security money then I might as well have all my other savings there too. Scared to miss out on another banner year of equity market gains and if things go kaphlooie, at least I'll be in good company. Don't want to miss the train, and willing to be miserable if I am not the only one. I guess thats as good a strategy as any.

BOCA HOUSING IS FULLY INFLATED

I drive to work through a middle class neighborhood in eastern Boca Raton, Florida. The street I drive down is a 4 lane roadway with small ranch style homes on each side. There is a tree lined median dividing the 2-way traffic and the speed limit is 35 mph. I have been going to work along this road for 6 years, and during that time I have periodically seen "For Sale" signs on the front lawns of the homes along the road. I have from time to time called to find out how much the houses are listed for, hoping that one day I would find a desperate homeowner who would sell their house quickly at a bargain price. In the 6 years I have done this, I have never been able to find a "good" deal.

Today I called on a house that I thought would be in the $200,000 area. The home is a ranch style home built in 1963. It is 1,600 square feet under air, with 2 bedrooms, 2 baths, and a small pool on about 1/4 acre of land. The kitchen is new and the floors have been replaced with wood. The homeowner, who is an investor and does not occupy the home, told me that the asking price was $400,000 and he was not negotiable. That's about $250/sq. ft. not in a gated community and not in a cul de sac. The driveway is on a busy street!

Curious about the stellar price tag, I wanted to know from where this new valuation came from. The house was sold in 1999, for the first time in 12 years, at a price of $125,000. In October of 2004, the investor who currently owns the property paid $325,000. He told me he made improvements costing about $30,000. Now, a mere 6 months later, this gem of a home is worth $400,000 firm. I am clearly in the wrong business and I am investing my clients' money in the wrong asset class.

This home has appreciated, (inflated, blown up) in value by a whopping 220% in the last 5 years. I do not know who the potential buyer is, but I picture the next homeowner as either a young couple with 1 or 2 children, both working at mid-level jobs, earning in the $100,000 combined. Not sure they will be peers of their neighbors who are probably in a lower socio-economic level, but over time, I am sure that will change as the values remain high.

Another real life story and I will revisit the topic in a few months or years to laugh. I know a doctor that bought a house to use as her office. Its in a town just to the north of Boca Raton called Delray Beach. She bought a small ranch style home on a pretty busy street in 2001 for $175,000, at that time the real estate taxes were $1,300 a year. She fixed the place up with about $30,000 and has been handsomely rewarded for her efforts. Today that same house is worth somewhere near $600,000, at least according to recent sales on the block. She is pretty happy about that, and bragged a bit about how she knew the house was a 'good buy' when she bought it. She also complained about the R/E taxes going up to $6,000/year, but was OK with it due to the appreciation of the property.

She and her husband have used the equity in this first property to buy 3 other houses in the neighborhood, all in "special" locations, and they too have appreciated nicely in the past 2 years. She rents the houses to Section 8 (low income) folks and gets rent from the government regularly. The properties are 1,700 sq ft homes 2 bedrooms 2 baths in a pretty run down area. These properties have doubled in value over the past 2 years from the mid $100,000 area to near $300,000 area...R/E taxes have also gone up alot, but the good doctor, turned real estate maven, is happy as could be about her investments. In fact she now has plans to further expand her property holdings in the area. She has bids in on 2 more homes and is thinking about doing a multi-family project on one of the properties after she knocks down the existing building and puts up a 6-8 unit apartment building...yes for Section 8 housing.

I asked her if she planned to sell any of the houses or her office anytime soon, as values seemed terrific and probably can't continue to appreciate at the recent pace. She told me, with a straight face, that she knows the values won't continue to rise at the same pace, but she thinks that her office property will be worth $1,000,000 in the next 4-5 years.

As for the real estate bubble not being a national bubble, maybe not, but in Boca Raton and the surrounding towns it is fully inflated...and so are alot of the very lucky real estate owners/investors in the area. My only comment to the good doctor was "just don't be the last one to sell".

With Freedom & Liberty for ALL the World

Since we invaded Iraq, and the reason for the War was changed, the stated Foriegn Policy of the United States of America has become very different than it has ever been in the past. The new policy is simple "As the dominant political and financial player in the world, we will stand by and assist all people, in all nations to be like the U.S., by spreading freedom & democracy to all nations". The President has made the case that by doing so, and standing by any and all oppressed people around the world, that we will be safer and freer at home, and the world will be a safer and freer place to live.

Personally, while I am all for freedom and democracy, I am not really sure that I want the job or the responsibility to see to it that all people all over the world are free from tyranny and oppression. And, I am not sure that the rest of the world wants to be like the U.S. or live the way we do. And, who exactly are we to think that we can or should dictate to the rest of the world how they should live.

I think we lose sight of the fact that the U.S., while an important and powerful player in the world, we are very small and are far from the majority...by any measure except dollars. Our population of about 300,000,000 is a mere few 5% of the global population. Our Judeo-Christian belief system is the minority when compared to Islam and Muslim populations. Our lifestyle and social beliefs are shunned by most of the world population as frivilous and irresponsible and way to liberal...bordering on hedonism.

Now, I am all for our way of living...its the way I live. Yes I could be more religious, watch less TV, read more, and spend more time with my family, but I like my lifstyle. I don't think I am bothering anybody so, don't bother me. As for other societies and people around the world, I bet they feel the same about the way they live. And, while I am sure they would want the U.S. military to come along and dethrone their tyrant, rebuild their countries with all the latest 21 century comforts & technology, I am even more sure that they do not want any part of our lifestyle or democratic ways. They would welcome us with open arms and escort us to the door with beheadings & suicide bombs.

DIFFERENT THIS TIME...I think not

I can't help but notice the fact that the stock market and its forecasters are in clear violation of some very long standing and very accurate 'rules' of wall street.

First and foremost, "Don't fight the FED". When the FED is in a tightening mode, which it seems to be in currently, the rule states that the market will most certainly 'stumble' upon the third hike in rates. To date we have had 5 rate hikes and a 6th is highly predicted for next week. Whether from very low levels or not, interest rates are being raised, and will continue to be unless the FED's optimism about the economy changes for the worse. In addition, with the benign inflation forecasts, and continued productivity advances, the FED seems to have nothing to stop it from continuing on its prescribed path of "measured" rate increases. Most market strategists are calling the recent sell-off a "buying opportunity" in a continued economic expansion.

Second, "sustained high oil prices are followed by recessions". With oil near $50/barrel and many energy experts forecasting sustained high oil prices, we have what would normally be called an "oil shock". While some have called it that, most of the official government comments and statements from FED officials have played down the sustained rise in oil prices. Many argue that the price of oil on an inflation adjusted basis is still well below that of the price in the early 1970's when we had our last serious oil crisis. That argument may make them feel better and may calm some fears of potentially higher prices, but the facts are less sanguine. With oil prices at current levels, the price is some 50% higher than it was just 1 year ago. Whether inflation adjusted or not, that is a sharp rise and will change the budgets of many consumers and businesses. Oil prices have far reaching effects and rapid and sustained rises will almost certainly cause cost issues for many parts of the economy.

Either one of these factors, rising interest rates or high energy prices, alone would be bad for any economy. The combination could be even worse. Yet, the US economy isn't just any economy, especially of late. Over the past 3 years, low interest rates, which encouraged enormous debt creation, have been the lynch pin for the recent economic recovery, including the dramatic rise in real estate values and the huge cash extraction from that real estate. In addition, low interest financing has allowed automobile manufacturers to flood the market with SUV's that are less than fuel efficient, thus adding to the demand picture for oil.

The War in Iraq and fear of imminent terror attacks lay the back drop for a future of uncertainty and risk unprecedented in recent history. Our economy is not yet growing on a self sustaining and predictable path so the above mentioned economic issues are even more important than in the past.

The flagrant disregard for what has happened in the past when either interest rates are on the rise or a sustained rise in energy prices is maintained, seems unwise. Add to this the uncertainty of a terror attack, the War in Iraq, and our countrys' current fiscal irresponsibility with regards to the twin deficits, and who knows how bad it could really get. My guess is pretty bad.

SOCIAL WHAT?

The latest political issue du jour is how to reform the Social Security system. What is interesting about this issue is what will be done to salvage an inadequate and misguided system put in place by the government under the guise that it will in some way secure our golden years. What exactly needs to be done is still unclear, and why it needs to be done is not understood. The fascinating part of the debate is seeing which politicians support the various reform proposals and trying to figure out their political motivations. What may become the most important aspect of the entire debate, is that in every survey most Americans do not want to pay into the system and most do not believe that the Social Security system will be around when its there time to receive benefits.

The name Social Security is itself a misnomer. The system itself is not secure, and it does not provide any financial security. Today, the system is such that 3 workers are paying in benefits for every 1 recipient. That ratio will be down to 2 for 1 in the next 10 years. When the system was established, 30 workers contributed for 1 retirees benefits. Clearly the system is broken.

The government estimates that in the next 15-50 years the system will bankrupt if serious changes aren't made. Either raising the retirement age, lowering benefits or raising contributions...none of which are 'politically' tolerable, must be done in order to rescue the system. Republicans have different goals then Democrats, yet most people in the country do not understand why. If the Social Security is supposed to be the retirement system of last resort, make the changes that need to be made and fix the system.

As a middle aged American worker, I can tell you that I do not in any way, shape, or form plan on living off my Social Security benefits. Not only won't my benefits be enough to allow me to spend the way I hope to be able to or to live the lifestyle I hope to be fortunate to live, they probably won't be enough to pay for my medications that I will surely need as I live to be 80 plus years old...please G-d. If was planning on relying on Social Security benefits, my expectations would be to live a substandard lifestyle just skirting the poverty level.

Social Security is designed to be a paid-in welfare system, thus allowing the retired elderly a stipend of payments that takes the place of welfare from the government. Social Security is not going to allow the baby boom generation or any subsequent generations anywhere near enough money to live the way they want or are used to, so why bother struggling to fix the system. Aloow it to run out and stop colloecting the payroll tax for it. That would allow workers to get more of what they earn today and would force them to plan for their own retirement and be responsible about how they will live when they retire.

Allowing the system to stay in place with the false sense that it will take care of people when they retire is a sham, and will not help now or when todays workers retire. All good things must come to an end, and Social Security is a broken system that should be allowed to end...most won't miss it a bit.

The More Things Change The More They Remain The Same

and the longer the market ignores the facts the larger the fall will be

I am still "bearish" on the equity markets and the actual economic health of the US economy. Just because nothing bad has happened does not reduce the risk that it will. The fact that the market has rallied does not negate the fact that it still can go down and investors can lose capital. Risk is still high and reward is based on the "greater fool" theory more than ever before.

So, I am ringing in the New Year with some Things I Think Will Happen...and again I state that just because I have written some of this before and to date it has been less than correct, does not mean it will not be correct going forward.

HIGHLIGHTS include...

1)Auto Bubble will burst
2)Higher interest rates will matter...especially to the impervious Housing market
3)Refinance activity will slow dramatically...consumers will run dry
4)Consumers will run out of money/credit
5)Metals will resume bull market and reach new highs...Gold $500+
6)Fannie Mae will blowup
7)Energy prices will reach new highs...Oil $60+
8)Apple's Ipod will become latest over-hyped gadget
9)War in Iraq will spin "totally out of control"...US troops will be hit with catastrophic casualties
10)Market indices will give back last 2 years of gains and then some...

Dow-16%(<8,900)/s&p>-18%(<971)/nasdaq-25%(<1,600)

1)The rubber will finally hit the road for the automobile manufacturers as well as automobile retailers and auto part suppliers. During a historically difficult economic growth enviroment, automobile manufacturers have "magically" induced the American public to "buy" their new vehicles at a pace which just a few years ago was thought to be impossible. The problem with the sales activity, is that many, if not most, of the sales were encouraged and facilitated through financing that left much of the risk on the sellers balance sheet. The manufacturers basically allowed consumers to take the cars for "little or no money down", in some cases with no payments for 3-6 months, and accepted very favorable financing terms (for the buyers) and extracted no collateral to do so. In addition, the manufacturers continued to produce vehicles at a pace that could not avoid creating a glut of new cars that last longer and have better warranty terms than previous production ramps ups. This has created a situation where we now have the "youngest" and potentially longest "life span" vehicles on the road than ever before. Used car values have dropped substantially, and in the next few years many consumers will own their vehicles "free and clear" and will have little or no incentive to buy a new vehicle as the value of the used vehicle will be much less than the value the vehicle provides to keep it...i.e. use as first car for child, "station car", vehicle for older parent, etc. The real "bogey man" for the automobile manufacturers may come in the form of credit defaults. During this period of peak sales, the sales have become harder and harder to come by, and the sellers have become more and more lienient with credit approvals in order to keep up the sales pace. Those 2 factors were a terrible combination for Sears a few years ago, and I forsee a similar problem for the lending arms of the major automobile manufacturers. Finally, as sales slow, the earnings from the financing divisions will drop. While the sales trends have been artificially propped up by incentives and creative financing deals the bulk of the auto manufacturers earnings over the past 3 years have come from the financing of the vehicles, to the tune of some 50-75% of profits came from the financing divisions of Ford and General Motors. Slower sales will necessitate difficult production cuts that could last for 12-24 months. The combination of production cuts, lower earnings from the financing arms, and higher credit defaults could produce a very difficult economic reality for the automobile industry.


2)Higher Interest rates will matter and will have a negative impact on many consumer areas but most significantly on the over-heated HOUSING market. The marginal buyer that was given the gift of low interest rates, easy lending enviroment, and lax appraisal process for the last 3 years will now encounter the reality that a home purchase is "the biggest and most important purchase of your life". Carry costs will become unmanageable, ARM's will adjust upwardly raising mortgage payments, and any economic difficulty or career disruption will result in a very bad problem. For new buyers, the mortgage application/approval process along with the valuation/appraisal process will become more stringent and less forgiving. Refinance activity that has helped to support homeowners with carry costs, upkeep, and home improvements will slow due to higher rates and more stable or falling home values. Homeowners will struggle to deal with higher rates on adjustable rate mortages (ARM's) and will find it difficult to extract any new cash from their homes. Low interest rates that fueled strong sales of new and existing homes will be a distant memory and further increase in home sales and prices will become harder and harder to achieve. Homebuilders that have continued to forecast unabbated sales growth and have built inventory of spec homes and acquired land for future building will find a more difficult pricing enviroment and a less than able consumer to sell to. Oh yeah...remember the one about "3 hikes and a stumble" and "don't fight the FED"... well how about "5 hikes and a wipeout" and "don't forget that stocks usually go down when rates go up"?!


3)Refinance activity will slow dramatically. This will happen due to higher interest rates and a slowdown in the appreciation of real estate values. Other factors will converge to reverse a huge increase in lending activity which occurred due in part to lower rates and in part to large increases in values of real estate over the past few years. The combination of those 2 factors along with higher demand, creative financing, easy credit process, and lax appraisal processes allowed for a huge "extraction" of capital from hard assets which was subsequently "spent" by consumers to maintain their living standards. These trends are likely to reverse, and credits will be strained. Lenders including banks, credit card companies, mortgage lenders, automobile lenders(i.e. F, GM, GE, etc.), store branded credit card lenders, furniture lenders, will all experience a decline in credit worthiness of borrowers/buyers and that will undoubtedly lead to a rise in credit defaults as well as lowers sales volume due to fewer qualified borrowers/buyers. Prime and sub-prime lenders will be hit with a "double whammy" type impact in the form of lower sales/transactions/servicing fees and higher default rates which will lead to large writeoffs. A 3rd impact will be higher expenses as they will have too many employees and overhead to handle the lower levels of business volume. Clearly the sub-prime lenders like NEW New Century Financial and NFI Novastar Financial would suffer severly from a slowdown in mortgage lending activity and an increase in default rates on loans to the somewhat less than credit worthy borrowers. Others that will experience this "pain" could include companies that have benefitted greatly from the mortgage refinance boom of the last few years including HRB H & R Block, F Ford, GM, General Motors, GE General Electric, some homebuilders, especially those catering to 1st time buyers...including CTX Centex, LEN Lennar, RYL Ryland Group, & BZH Beazer Homes, and any other large company that arranged for "seller financing" type deals with consumers in order to help facilitate demand for their products that without financing would not have been there.



4)The US consumer will finally run out of money/credit and retail sales will slow significantly. Consumer retail darlings will suffer sales declines and will be forced to close rather than open new store locations. Clothing, furniture, auto, electronic, jewelry, and home improvement companies will all experience this slowdown. ANF Abercrombie & Finch, BBY BestBuy, CC Circuit City, RSH RadioShack, FD Fedeated Department Stores, SKS Saks, KSS Kohl's, MIK Michael Stores, HD Home Depot, AEOS American Eagle Outfitters, ARO Aeropostle, PSUN Pacific Sunwear, ZLC Zales, TIF Tiffany, AN AutoNation, KMX CarMax, HDI Harley Davidson, POOL SC Pool, PII Polaris Industries, FBN Furniture Brands, ETH Ethan Allen, HVT Haverty Furniture, etc, etc. Any retailer that relies on easy credit and/or a frivolous consumer will face challenges in 2005. Beneficiaries would include TGT Target, WMT WalMart, COST CostCo, DELL Dell Computer, ROST Ross Stores, BBBY Bed bath & Beyond, and others that provide consumers with selection of necessary daily items and a value proposition for discretionary purchases.



5)GOLD ($500)and other metals such as silver, platinum, copper, aluminum, etc. will reach new highs as the US$ continues to erode and demand from China continues. The US$ will reach 1.43EURO and will break 1.00yen. Implications are hard to predict, yet it seems pretty clear that foriegners may limit or stop investing in $US priced asstes and may limit or stop lending money to the US Government, thus hurting spending and causing rates to rise...possibly dramatically. Metals' price increase will hurt manufacturing of various products and cause renewed interest in storing capital in "hard assets" such as Gold and Silver. Any type of serious geopolitical "upset", i.e. major terrorist attack, would also cause a surge in the price of Gold.



6)Fannie Mae will falter and create a significant credit crisis for the mortgage market. The SEC, Justice Department, NYSE, and governmental scrutiny will all prove to be "too little too late" for equity shareholders and for some bond holders, as shortfalls in capital and internal controls will be uncovered, revealed, and will pose a meaningful systematic risk for the overall market. My guess is that the newly placed CEO and management of the company will blame the highly computerized qualification process, new computerized credit scoring systems and approval processes, and lack of internal controls at lower levels for the foul ups. Outgoing CEO Raines will plead "not guilty" to anything he will be charged with and will lay blame on his underlings for not doing their jobs properly. The Federal government will in some way "come to the rescue" of this "too big to fail" entity, for the greater good, but the shareholders equity will be greatly diminished &/or wipped out in the process. short FNM.



7)Energy prices will resume the uptrend and will reach new highs at the levels that many analysts and economists say will create an OIL CRISIS ($84). I think there is a 50/50 chance of a supply disruption caused by terrorism, natural disaster, or OPEC "problems", which would not only cause prices to rise dramatically, but would cause other problems for the economy as well. Many industries that rely on Oil or energy to make their products will suffer margin compression as costs rise and competition will pressure selling prices.



8)The Ipod will prove to be the latest example of a great idea/gadget that "flashes" in the pan. Even as the "gift of the year" this past holiday season, I believe that competition and new product offerings will prove too much for the Ipod to handle. Sales of the popular and colorful MP3 player will flag and will not create new interest in the Apple computer hardware or Macintosh operating system. Recent history is full of what I call "cool but worthless" products. The most recent example is the Palm Pilot, which continues to be a great product and very useful, yet once it was mass produced by every electronic manufacturer and the prices fell while inventories increased, the future profitability disappeared. Another "cool but useless" gadget is the picture phone, which is fun and cool for the first month the consumer has it, but thereafter is just a novelty that is rarely used by the cell phone customer and will not provide a premium price for the cell phone manufacturers to add into phones...i.e it will be given away to induce additional sales and to be competitive. The Ipod is the latest example of a glorified gadget. It is no more than a "fancy" MP3 player that does way too much, holds way too much, and costs way too much. Many formidable competitors have entered the fray to sell MP3 gadgets to the insatiable American consumer, and the result will likely be a similar demise in prices and profitability as the Palm Pilot and picture phone suffered, as well as a decline in Ipod demand. Short AAPL.


9)The War in Iraq, being sold to the American public as an important front on the War on Terror will spin totally out of control. The Coalition forces, aka US Troops, will endure more casualties and deaths than in the previous years. I predict that American troops will be hit with a "catastrophic" attack resulting in the loss of hundreds of soldiers. (I do not wish for this to occur and I loathe the thought, but I do think it is a real possibility.) An attack similar to the Beirut Barracks Bombing that was the beginning of the US exit from Lebennon. If this does happen, the American public will revolt against the war in Iraq, and the President and his administration will be foced to withdraw troops and turn over Iraq to Iraqi control. I also think that there is a 50/50 chance of a terror attack in the US which would result in a renewed sense of fear in the general public and a lack of confidence in the governments efforts to protect the US from terror, despite all the money spent and the efforts put forth to do so.


10)The above confluence of events will result in a very bad trading environment for US equities and will create an enviroment where investors will continuously be disappointed with geopolitical events. Bad news will dominate the headlines and news crawls. Business and economic news will suffer. Business leaders will retrench again and will resist hiring new workers and will cut back on capital spending until a more stable world is evidence. This will result in lower equity prices and I think the major indexes will give back all of the gains of the last 2 years.

Dow-16%(<8,900)/s&p> -18%(<971)/nasdaq-25%(<1,600)

I continue to beleive that we are in a longterm period of economic decline. I see the last few years, since 2000, and the next few years, till say 2008-2010, as the 2nd Great Depression for the majority of the US population...especially the rapidily growing middle and lower class. The upper class wealthy American people have been helped famously by the Federal Government and lopsided pay models of Corporate America. As with most things, financial well-being and economic prosperity are "relative" and relative to past economic periods, the current state of our economy and the future economic outlook is at best "relatively" dismal. The media is fortunate in that it can focus on the positive and "pretty" things up so that the masses don't get to worried or upset. The media helps most to believe that "good times" are upon us or that its only a matter of time before it will be. The reality is much less sanguine and as the baby boom generation heads for a very difficult and protracted period of retirement and old age. Economic malaise will be what most boomers experience. Unfortunately for the baby boomers, the government and the next generation; their children and grand children, are totally unprepared, and unwilling to take care of them, and they are in no way prepared to take care of themselves. As the "greatest generation" lives longer than any of its ancestors, the economic reality of huge healthcare costs, lack of employment opportunity, lack of savings, and high costs of living will create a very difficult period of time for this huge swath of the population during their "golden years".

Stephen Roach, the well known global strategist, economist, and resident Bear at Morgan Stanley recently wrote a piece regarding the risks that abound in the equity markets. Here is a link to check it out for yourselves. Ignore this at your own risk.

http://www.morganstanley.com/GEFdata/digests/20050110-mon.html#anchor0