What is up with this divergence?  Is CSCO really that poor of a earnings performer?  Is there some risk the market sees, that is not obvious to me?  Needless to say, I think you should take a look at this charts.



Longer term, this is a three year chart makes the argument better.



CSCO represents a 10-20 percent premium over market returns in the next 12 months.

First let me say I like the chart.



In this three year chart we seem priced at the low end of the most recent range and is in line with the previous bottoms. 

When you think about the fundamentals and basic economics of this and other domestic natural resource producers, it becomes even more attractive.  Think about shifting all those U.S. Dollars from going overseas creating jobs abroad and to local resource development creating domestic jobs here in America.  The American economy needs less imports and more exporting if we are to shorten the pain from a contracting domestic economy. 

Make no mistake, you cannot contract the excessive leverage of the pre 2007 U.S. economy and not contract the economy.  What the world needs is stuff, (Oil, Gas, Timber, Wheat, Corn, Fish, Copper, Zinc) and they world is willing to pay for those resources.  Elitist environmentalist in America have regulated the middle class out of jobs and forced those jobs overseas where there is little if any protections.  CLNE is a prime example of those companies that will benefit from a more thoughtful Congress and Administration who wants to create jobs in America.

While I can appreciate investors being tired of the hedge funds pushing the equity market around churning it for profit, but I have serious concerns about investors love affair with bonds. 

The 10 Year US Treasury yielding less than 2.5 percent and the Federal Reserve discussing the printing of money have direct negative correlation in my mind.

Take a look a the last year of performance.



I am very nervous about owning bonds.  When investors rush in, I want to be rushing out!

I see Timmy G headlined at the Comedy Store with Billy G being the heckler. 

Where do you think supply of capital that will fund our mortgages comes from?  Pension, endowment and trust funds, SAVINGS?  Yes these are the source for all capital investment from around the world.  Our home mortgages must compete for that capital as any other investment competes for investment capital, on risk adjusted expected returns. 

Bill Gross is complete wrong from a fiscally conservative political perspective -  his solution is just a bad as the government take over of health-care.  We need to get the U.S. Treasury and Federal Reserve hedge funds out of the market and let investments compete for the investment capital.  It is embarrassing to think all those investment professionals (myself a CFA) cannot rationally allocate our clients capital without implied or expressed government guarantees.  For Bill Gross to declare himself incompetent and cannot select fixed income investments for his clients (I am not one) and needs the explicit guarantees from the taxpayer in order to manage funds is astounding.  (If I was a PIMCO client, I would withdraw my funds immediately)

Wall Street can easily rate and aggregate mortgages and fairly disclose the contents of the security issued.  Professionals like myself should be able to determine if I want 700+ credit scored, 15 year fixed rate mortgages for my clients accounts or sub 500 floating rate ARMS - vastly different risks and it should be expressed in expected return.  Apparently Mr. Gross cannot make those determinations without the government guaranteeing his position of heads he wins and tails the taxpayer loses. 

The problem of with index investors is that sometimes really good companies are in the wrong index.  I am of course speaking of VECO Instruments which is classified as a "Semi-Conductor" and LED lighting manufacturers are classified as Semi-Conductors. 

Well, I see little similarity between the two industries.  One makes chips for the computer - information systems the other makes light bulbs. 

If you have a brain, look at VECO because the indexers just gave you a gift horse!

I cannot think there is much value left in the short Treasury market.  In most economic scenarios of slow, stable economic conditions with visibility into earnings and economic policy for the next 18 months, shorter duration fixed income portfolios will benefit by moving into investment grade, Corporate portfolios. 

For those of us who use ETF's, the trade is Sell SHY and Buy CSJ. 

1.  You double your monthly income
2.  Corporate spreads will tighten with economic improvement

So this husband comes home and tells his wife

"honey, my hours have been cut back at work  and the cash-flow coming into the house will be less in the future.  Now given the house, car, credit-card and student loan payments we must stop spending, ONLY NECESSITIES."

So the wife responds

I was just watching the news and this economist Krugman suggests America is in that position and it should spend its way out of this fiscal crisis!  It is called Keynesian Economics.  So I am going to get five new credit cards and spend so your hours at work go up and you will be able to pay off those cards later.!"

Yes believe it, you pay a small fortune to have Professors teach this to your children. 

Keynesian theory has allowed America's leadership to buy the public with their children's future - possible their sovereignty.  Yes, America is bankrupt and some "thinkers" at liberal, ivy league schools are suggesting that we again dip into our children's future so that we can avoid the consequences of our actions again.  Sadly, Mr. Obama a student at one of those liberal schools is listening.

So here is the question Mr. President, how much of the next economic recovery do you wish to spend now? 

Like the couple in the example, they were living well meeting their payments before the husbands hours declined.  When the husbands hours and therefore money returns, the money will need to go and pay for the five new cards (previous consumption) not new consumption. 

Mr. President, cut spending and live within our means always. 

I have talked about IYR or the Real Estate Investment Trust (REITS) exchanged traded fund in the past.  I was looking around for cheap in this period of opportunity to acquire real, income producing assets. 

I initiated positions today below $47 and added to existing ones too.

The longer a house sits idle, the more likely it will need some improvements made at the time of sale.  Need for improvement grows at an exponential rate as idle time increases. 

Working with that hypothesis, where will the seller/buyer go to make those improvements?  Banks and institutional owners will seek licensed professional contractors and they shop?  The first time home buyers and they will shop where?  Flippers and speculators and they shop where?

August 5, 2009 I wrote for the blog, "What are we going to do with all the unemployed"  I just re-read it and suggest all of you do so as well. 

Several themes noted then are the primary driving forces of today's job market - debt riddled governments unable to execute more failed Keynesian economic theories.  While in theory it makes intellectual sense that government spending in the private sector contractions should smooth the economic cycle.  Unfortunately, most Keynesian theories ASSUME that once the private sector economy is recovered the government will contract its presence and payoff the borrowed money, which acts as a natural drag on the economy, hopefully moderating the recovery and extending the period of sustainable economic growth.  We know conclusively that governments do not contract their presence or payoff debt.  So what happens when a government never contracts or payoff its debt?  When lenders will no longer lend, the government will implode. 

Domestic production of energy and frankly I don't care if it is Nuclear, Oil, Gas, Hydro, Solar, Wind, Coal is the quickest path to rebuilding America's balance sheet and put many Americans to work. Look who is standing in Americas way of domestic energy production, Wilderness Society, Sierra Club, Earth Justice, EPA (and many other Federal Agencies), President Obama.  Nobody is interested in the wholesale destruction of mother earth, but running few electrical transmission lines and natural gas pipelines is not going to kill her either. 

Think about the stimulus funds and ask what did we get for our money?  Did we get a smart grid where a bunch of Ohio steel workers go back to work? 

Nope, that blog from last year is as accurate today as it was then.  The U.S. economy was bloated on steroids for the past 15 years and it was at an unsustainable size.  The American economy still has contraction coming and I think it will be in local and state governments which will ripple through the private sector contracting it. 

When does it end?  When the economy reaches a maintenance level in a mostly unlevered state.

Europe is in the same boat as America and will have the same cure.  All of the developed worlds hopes rests with the expansion of  third world economies and improving their standards of living.