Thursday, July 24, 2008

"I'm Mad as Hell, and I'm Not Going to Take This Anymore!"

From the Desk of Joe Rollins

I had a Howard Beale moment this morning while watching the financial news. Growing more and more frustrated with the news, I found myself standing up in the middle of my living room at 5:30 a.m., yelling at the TV set like Beale’s character in the legendary movie, Network. My dogs, Shaft and Daisy, didn’t even notice my outburst, while Sam, my cat, glanced at me and decided it was time to stretch and then go back to sleep. Maybe they’re just used to it by now.

There are so many 24-hour news channels these days that the market is now completely saturated. I watch the international business news from 4:00 a.m. to 6:00 a.m., and it always seems to be one financial analyst after another giving an increasingly glum outlook on the financial world. According to these so-called experts, humankind is entering an economic depression unlike any seen since 1932.

These are the same “experts” that advised investors to not purchase financial stocks for the last six months, but have now turned 180 degrees and are bullish on the sector. If you read my “Think, Don’t Trade” blog on July 10th, you likely recall how ridiculously undervalued these stocks were at that time. Now, many are up 25% to 40% from their lows. This makes me wonder how these analysts even get on national TV. Is it because the more outrageous their comments, the more likely they are to get face time on a financial news program? Regardless, and as I’ll illustrate below, the wealth of misinformation they are circulating has gone too far!

A financial news report being broadcast out of London this morning featured a stately British financial author expressing his outrage concerning the world’s financial situation. As he explained the evils of the world in his incredibly monotone voice, I found myself dozing off from boredom. Of course, like most experts in the media who tend to just criticize, this fellow didn’t offer solutions or anything useful to investors. However, one of his statements did catch my attention, and that’s what made me stand up and scream, “I’m mad as hell, and I’m not going to take this anymore!”

The British commentator was criticizing the U.S. economy and the American banking institutions. Along with trashing nearly everything American, he stated, “The U.S. is now paying the ultimate financial sacrifice for over 30 years of complete and total mismanagement of the economy in the U.S.”

Admittedly, we do have financial strains in the U.S., but it’s a gross overstatement to say that we’re suffering from 30 years of economic mismanagement. It was even more irritating that the interviewer never bothered questioning how the British financial guru arrived at that opinion and simply seemed to accept it as fact. So, I think it’s time for me to get out my bullhorn and tell the world how ridiculous these commentaries have become.

It didn’t take much research to disprove the British financial author’s statement, since it was readily available on the U.S. Department of Commerce’s website. During the first quarter of 1978, the U.S. GDP was $2.15 trillion. Thirty years later, and for the first quarter of 2008, the U.S. GDP was $14.201 trillion. Recognizing that no other economy in the world has a GDP that exceeds $5 trillion (Japan is second with $4.5 trillion), I would have to say that the U.S. economy has done pretty well over the last 30 years. In fact, the U.S.’s GDP has compounded at an annual rate of 6.495% over the last 30 years.

With those facts, how dare the British author make such an inaccurate statement? It is even more offensive that he made that remark when he lives in a country with an economy that has gone from being the strongest in the world to a lower-tier economy over the same timeframe.

Virtually all of Europe’s socialist governments would love to have an economy growing at a 6% annualized rate for a single year. To believe their economies could grow at the same growth as the U.S. over 30 years borders on the absurd. I want to re-emphasize that the British financial author described the U.S. economy as “grossly mismanaged” over the last 30 years. Clearly, the facts do not support his misstatement.

There is absolutely no question that the U.S. economy is stressed right now. There is also absolutely no question that it’s improving. When I hear the daily exclamations in the media of the ongoing recession (and in some cases, a depression), I scratch my head since I know that neither is true. Next week the GDP report on the second quarter of 2008 will be released, and it’s more likely to reflect 2% GDP growth than 1%. But in either case, neither of those anticipated numbers is negative contrary to what many commentators would like for you to believe.

Let’s get real about the problems in the financial sector, people! There’s no question that the financial sector is tense at the moment. However, as second quarter earnings from these banks are reported, realization is setting in that things are not nearly as bad as the media would like for you to believe. Yes, banks are taking write-downs of assets, but never forget that these are write-downs not write-offs. It will be some time before the realization of these assets is accurately written down during this quarter. If these reserves are way too high, as I suspect, when they are reversed in future quarters then these banks will have phantom income to the likes never seen before in this country.

Many media members are now placing the blame on former Federal Reserve Chairman Dr. Alan Greenspan. Their opinion is that Dr. Greenspan, in his attempt to build-up the economy prior to his retirement in 2006 kept interest rates too low for too long. These commentators are Johnny-come-latelies as far as I’m concerned.

Those who know me likely remember my harsh criticisms of Dr. Greenspan in many of the years of his 17-year term. While Bob Woodruff was describing Dr. Greenspan as a “maestro,” and he was being knighted by the Queen of England, I was openly criticizing his economic gibberish and irrational moves in interest rates.

I had another one of those Howard Beale moments when reading a recent article in the New York Times, which placed the blame on our current financial woes at the feet of the financial institutions. The article stated that, “the lucrative lending practices of banks and other financial institutions [helped] create the current financial crisis of millions of borrowers and the financial system in general.” A more inaccurate statement regarding the bank’s responsibility for our financial situation has never been more clearly written.

The U.S. has become a country where no one seems to take responsibility for their own actions. While there are probably some borrowers who were misled, the vast majority of those facing foreclosure were responsible for their present situations.

Former Texas Senator, Dr. Phil Gramm recently exclaimed that the U.S. isn’t in a recession and that we had become a country of whiners where too many Americans are blaming their problems on someone else. After his statement, he was ridiculed by the press and resigned as the financial advisor to Senator John McCain. The fact of the matter is that he was absolutely correct and McCain made a critical mistake by not supporting his comments.

The source of the downturn in banking and sub-prime lending can clearly be laid at the feet of Congress itself. In the Community Reinvestment Act (or CRA) of 1977, Congress required banks to extend home mortgages to underserved populations and commercial loans to small businesses. In fact, Congress mandated that in order for banks to maintain their federal guarantees on deposits in changes to the CRA made in 2005, they would be required to make loans to low and moderate-income borrowers and to certain neighborhoods that they wouldn’t normally approve before that time.

In the late 1970’s, there was great outrage regarding bank “redlining” practices, where certain banks were accused of targeting only wealthier neighborhoods for their lending services. In fact, the Washington Post explained that minority applicants were approved for mortgages only 72% of the time while whites were approved 89%, and therefore, there was overwhelming evidence of discrimination in the lending industry (according to the Washington Post). The press didn’t focus on the quality of credit maintained by the potential borrowers who were being turned down or their ability to repay mortgage loans. But in any event, Congress dictated that income, credit history and net worth would basically be ignored, and subsequently, loans were made to credit unworthy borrowers who had no ability to repay the loans. Even worse, they required by law that Freddie  Mac (FRE) and Fannie Mae (FNM) fund these loans. Sound familiar?

I have known a lot of bankers during my professional life, and I can assure you that banks are in the business of loaning money. They really don’t care who they loan it to; they only care that it is repaid. I recognize that this is totally counter to politicians who couldn’t care less whether or not banks make money; they’re just out to get votes. If they can use their political clout to force banks to make loans that they shouldn’t, then it certainly gains votes for them.

I find it incredibly frustrating to hear how this matter is being reported in the news. Now that we have come full circle and many of these loans that the banks were required to make by government intervention have blown up, it is Congress saying that there now needs to be more governmental intervention in banking. I guess since they didn’t mess it up badly enough the first time, now they want to get involved and make it better….

Truly, banks would function much more efficiently without governmental intervention. “Governmental assistance” is an oxymoron; to suggest that our government can rectify this problem is incredibly na├»ve. Yes, the banks made enormous mistakes by lending to people they shouldn’t have extended loans to. But, it could hardly be legitimately argued that these lending tactics were the bank’s fault.

While there will certainly be foreclosures and a period of unrest in the real estate markets, the best solution to this problem would be to let the lenders and the banks work it out without governmental intervention. In a few years, we’ll look back at this time as being one of the great real estate buying opportunities of our lifetimes.

Friday, July 11, 2008

Congressional Disapproval

From the Desk of Joe Rollins

On Tuesday, the electronic publishing firm, Rasmussen Reports, released the results of a recent public opinion poll indicating that only 9% of voters give Congress good or excellent ratings. This is one of the worst Congressional approval ratings ever recorded.

The 9% approval rating is comprised of the 2% who rated Congress’s performance as excellent plus the 7% who gave it a good rating. To be fair, 36% of those polled said Congress is doing a fair job, a percentage that was excluded from the total approval rating. But, a whopping 52% of voters polled said that Congress is doing a poor job, which I can’t say totally surprises me. I am surprised, however, by the 2% excellent approval rating. Which rock do these people live under?

Congress seems unable to accomplish anything these days. For example, they’ve been completely unable to approve a single bill that would improve the U.S.’s current energy situation. This isn’t because there was a proposed bill on the table that was shot down – they just haven’t even gotten around to it yet. In fact, this Congress cannot even seem to bring any type of bill up for a vote, much less get it approved or disapproved.

There is no doubt that the high price of gasoline in the U.S. will put a dent in oil demand. Americans are already using less gasoline causing a decline in U.S. oil consumption. The Middle East will soon realize that the demand decline in the U.S. will have long-term negative implications for their own economies. At that point, supply and demand will definitely dictate lower prices.

However, Congress’s argument that new exploration and drilling wouldn’t lead to an immediate price reduction is absolutely incomprehensible. If it were announced tomorrow that Congress had approved off-shore oil exploration in Florida and California and opened up Alaska for exploration, the Middle East would immediately get the point. If the U.S. launched an aggressive exploration campaign, it would be clear to the rest of the world that we intend to solve the issue.

Yesterday, the Speaker of the House recommended to President Bush that he release oil from the strategic oil reserves to solve the short-term high gasoline price issues. That recommendation only illustrates Congress’s shallow mindset: while releasing oil from the reserves might help the price over the next 90 days, exploration would help for years into the future. With oil being one of the most important economic problems the U.S. is facing today, it’s baffling that our Congress can’t get a single bill about it (or any issue) on the floor for a vote.

The problem with our Congress doesn’t stop there. I read yesterday that Federal judge nominations have been delayed by 18 months. That’s not to say that any hearings have actually been held concerning particular judges; they simply haven’t even gotten to the hearing stage. It would be hard to complain if they actually voted for or against a particular person, but the fact that they cannot even bring a nominee to a hearing is sad.

Rasmussen also reported that 72% of voters believe that most Congress members are more interested in furthering their own political careers and only 14% believe they are genuinely interested in helping the public. Duh! Some people have a firm grasp on the obvious.

I’ve often said that we’d be much better off if Congress went on a summer vacation and never came back. In a few weeks, Congress will be off for the entire month of August to take a much needed vacation from their lack of effort. With the ineptitude of this particular Congress, it seems that I have finally gotten my wish.

Thursday, July 10, 2008

Think, Don't Trade!

From the Desk of Joe Rollins

It seems like the financial stocks have taken a beating every trading day so far during 2008. Even though most of these stocks are currently selling at much less than the banks’ book values, they continue to be violently traded down by the markets on a daily basis. One expert after anot
her on the morning financial news programs seems to say that no one should be in the financial sector right now, and they suggest that if you are, then it’s time to cut your losses and get out.

I often find myself wondering if these financial “experts” have actually given any serious thought to their recommendations. I understand trading on momentum, and that “the trend is your friend,” as the saying goes. But at some point, common sense and economic reality must have some input on trading decisions.

For the last three weeks, the financial press has been pounding investors with talk regarding the bear market, and all of the major market indices now seem to be trading down 20% from their highs in October of 2007. I often find myself telling clients that investing in a bear market is really not that different than coming face-to-face with a bear in the wild. If you’re ever in that frightening predicament, it’s not wise to make any sudden moves. Rather, it’s best to lay low, move smoothly and think before reacting. Investors should take those same steps during a bear market.

Understanding how banks make their money is fundamental to investors investing money in financials. The central component of a bank’s earning stream is its ability to borrow at low interest rates and lend high. Banks make money on the spread of interest rates between what they can borrow from the public and how much they make by loaning money to the public.
Please review the chart I have provided titled, “U.S. Government Bonds – Yield Curve.” The top line represents bank interest rates from exactly one year ago today, while the bottom line represents bank interest rates today, based on U.S. Treasury bond rates. Any financial analyst who asserts that banks are in a worse financial position today than they were one year ago clearly does not have a handle on the income potential of banks and financial institutions.

In 2007, banks were borrowing and lending money essentially at 5%. Please note that virtually every focal point on the chart for 2007 is at or near the 5% level. It was impossible at that time for banks to make any serious money without taking inordinate risks since they were borrowing at exactly the same rate they were able extend loans. As evidenced by 2008’s results in the chart, all of that has now changed.

To put the bank interest rate spread into simpler terms, if you have money at your local bank in a money market account, you are likely receiving the three-month Treasury bond rate or lower. Basically, the bank borrows money from you, paying you money market interest rates, which are currently significantly below 2%.

With the money the bank borrows from you, they extend mortgages and other long-term loans to the general public. As you can see by the chart, the 30-year Treasury rate is now approaching 5% on the Treasury bond rate. Today, 30-year mortgages are at 6.25% to 6.5%.
If banks borrow money from its customers at less than 2% and subsequently loan that same money to the public at 6.5%, then the spread between the spread between the two is a staggering 4.5%. Believe me; rarely in the history of banking has there been this big of a spread on their borrowed capital.

The recent increase in interest rates by the European banks was also confusing. They increased interest rates by a quarter of a point under the assumption that it would help slow down inflation (inflation is basically the only mandate Europe has to work with within its economy). The Europeans have little or no control over energy, and therefore, their increasing of interest rates will have very little effect, if any at all, on the cost of energy.
Presumably, the Europeans intended to slow down their economy by increasing interest rates while their economy is basically already at break-even. I’m having a hard time understanding why any government would intentionally throw its economy into recession in an effort to slow the rise of a commodity for which they have no control. Am I alone is seeing the absurdity of this interest rate increase?

The “experts” also talk incessantly about the rising commodity prices and the potential fear of future inflation. Please review the chart titled, “Commodity Prices – 1 Year Percent Change,” representing the four basic commodities: oil, corn, wheat and rice. As you can see, wheat, which is the poorest performing of these commodities, is up approximately 50% over the last 12 months. One might assume that these out-of-control increases in these commodities must be leading to skyrocketing inflation. Each of these commodity’s prices will most likely work its way through the economy, as the supply of each commodity must increase to make up for the increase in price.

The rate of inflation is now approaching 4% annualized, and it is assumed it is only going higher due to these escalating commodity prices. However, please note on the chart concerning bond yields that the 30-year Treasury bond is currently yielding only 4.5%. Investors obviously have no long-term fear of inflation or they wouldn’t be willing to tie-up their money for 30 years only to receive a rate almost exactly equal to the rate of inflation. It is absolutely clear that the most sophisticated investors do not believe inflation is a long-term risk to the economy or they would demand a higher rate of interest.

As I watch the financials being traded down to almost ridiculous levels on the New York Stock Exchange, I think of the inconsistencies of the positions outlined above. A lot of investors are apparently trading before they’re thinking. If an investor properly evaluates the facts, it should be obvious that banks and financial institutions are currently in a position to make substantial sums of profits over the coming year.

There are two ways for the Federal government to bail out a financial institution: by “bailing out” the financial institution (similar to what happened with Bear Stearns), or; without government intervention, which is much more effective, by allowing the financial institution to make more profits.

By reducing the short-term interest rates, the Federal Reserve has made the yield curve very steep. The precipitous nature of this yield curve allows the banks to borrow from individuals at nearly zero interest rates, and then loan out the same money to the public with an almost 5 point interest rate spread. This spread on interest rates almost guarantees higher bank profits in the coming years. For the foregoing reasons, the next 30 days may be the best buying opportunity we will see in our lifetimes to purchase the stocks of the great U.S. banking institutions.

Friday, July 4, 2008

Attention Deficit Investing

From the Desk of Joe Rollins

It occurred to me recently that the market’s volatility over the last year is partially due to investors being negatively influenced by certain financial television programs. I sometimes watch the CNBC show “Fast Money,” which seems to be focused on telling investors how to quickly get in and out of trades. The definition of long-term investing to the producers of this show appears to be a mere 48 hours.

After “Fast Money” airs, Jim Cramer’s show, “Mad Money,” begins with lots of hollering and “Booyahs!” Cramer was a very successful hedge fund manager, but I’m not so sure that he does the investing public much good. In a recent broadcast, Cramer launche
d into an exuberant dissertation on the poor state of the stock market and how uncomfortable the investment environment was at the current time.

After Cramer’s diatribe, he began the popular “Lightning Round” segment of his show. In contradiction to Cramer’s earlier apprehensiveness of the current investing arena, he gave nearly every stock discussed a “buy” rating. The inconsistency of his two positions could only lead an investor to utter confusion.

When I first started investing in the stock market in the 1970’s, my research was provided solely by the Wall Street Journal. I looked forward to receiving that paper – via snail mail a full two days after the original publishing date – even though the articles were often old news.

Thirty years later, I still receive the Wall Street Journal, but it is now delivered to my house the very day it is published. By the time the paper hits my front porch, however, I have typically already read all of the important articles and subsequent updates online. Isn’t it funny how quickly information more than 15-minutes old nowadays becomes outdated?!?!

The endless marketplace opining seems to have manifested and caused the investing public to be in a phase of speculating instead of investing. Stocks are selling at historic lows, and hedge funds are moving billions of dollars at the stroke of a pen. This is undoubtedly due to speculation and not investing.

The trade du jour is to go long on oil and short the financials. This has made oil trade at 25% above where it should be based on demand, while banks are selling at the ridiculously low level of 50% of book value. Neither of these positions can be supported by quantitative evaluation of either sector.

When an investor’s goal is to make money over the long-term, it is important to invest and not speculate. It’s not wise to trade day-in and day-out based on the infinite whims of the market, and folks who trade in such a manner will unquestionably lose money.

Some of my clients have asked why I don’t agree with selling to a cash position. While I agree that cash is a viable short-term investment, anything left in cash for longer than 30 days only guarantees a loss. Current cash balances are generating returns of roughly 2% while the inflation rate is now at 4%. While it’s always possible to lose money in stocks, that’s not guaranteed to happen. In fact, most stock market investors typically make a lot of money over time. Conversely, if you sit in cash in today’s market for longer than the very short-term, you’re guaranteed to lose money based upon the increase in inflation alone.

I know that investors aren’t comforted by the current state of the stock market, but I truly believe that if people stopped trading speculatively on a daily basis and instead invested for the long-term, everyone would make more money. “Fast Money” and “Mad Money” may be entertaining and even informative sometimes, but they are probably not the prescription for long-term financial security.

Wednesday, July 2, 2008

"Well, Who Are You Gonna Believe, Me Or Your Own Eyes?" - Chico Marx in Duck Soup

From the Desk of Joe Rollins

The purpose of this memo is to provide you with my thoughts regarding the U.S. economy and the dismal performance of the U.S. financial markets during the first six months of the year. Frankly, the media’s coverage of our current economy has left me in a state of confusion. There is so much bewilderment, fear and misinformation being reported by the press that I figured it was an appropriate time for me to weigh-in on the controversies.

I recently read an online article proclaiming that the U.S. economy is as bad now as it was during the Great Depression. Given that unemployment is currently at 5.5% as compared to 1933’s unemployment rate of 25%, this parallel would appear to be a reach used only for maximum sensational effect. I have actually heard five different television financial analysts say that the U.S. has been in a recession since November of 2007. However, the widely accepted definition of a recession is two consecutive quarters of negative GDP growth, and the first quarter of 2008’s GDP was recently revised to a positive 1% annualized. Therefore, we have not even experienced a single quarter of negative GDP growth yet, much less two.

It is almost assured that the second quarter 2008 GDP growth will also be slightly positive. This is probably not because of positive business operations; it is more likely due to strong consumer demand, mainly an effect of the economic stimulus checks that were recently issued. So, even though we have not yet had a single negative GDP quarter, some media members are claiming that we have been in a recession for over eight months. Can you see why I am so confused?

The cost of a barrel of oil as of this writing is up over 45% just in 2008 alone. While worldwide demand for oil is definitely higher, there has certainly not been an increase in demand of 45%. In fact, the demand for oil in the U.S. was actually down in 2007 while developing world economies have most certainly experienced an increase. At these levels, I see no justification for such dramatic increases in the price of oil. Of course, oil is in a long-term pattern of price increases, but nothing justifies a 45% price increase in such a short period of time.

I am leery of characterizing any particular area of investing as a “bubble,” but the price of oil may just qualify. Given that there has been a 45% increase in crude oil so far this year, this does not appropriately reflect supply and demand. Therefore, it is possible that crude oil could suffer a serious decline in value -- easily between 20% and 30% overnight -- if supply is confirmed to be greater than demand. Even though this is the only asset class to show a profit for the first half of 2008, it is a very risky investment for the average investor.

It is interesting to note that there has been a 20-fold expansion of trading derivatives involved in oil and gas over the last two years. I also find it interesting that there is a seemingly direct correlation to the increases in derivative trading on these commodities, which has driven up prices. In essence, commodities is the only asset class that has made any money whatsoever in 2008. We currently have a large speculative investor class buying paper commodities that clearly have no intention of ever taking delivery of these products. What possible reason do pension plans and private foundations have for buying these commodity derivatives except to profit from the commodities?

The intentions of the derivatives were to protect the public from escalating prices and to lock-in prices at predictable levels. Because there has been such an explosion in derivatives, the price now has nothing to do with the underlying supply and demand for the products. Unfortunately, a vast number of these derivatives are bought by Middle Eastern countries that benefit not only from the increase in the price of derivatives, but also in the underlying commodity itself since they are the producing countries.

Many of my clients have invested in banks or hold bank investments. It is absolutely staggering to see that some banks are now down 80% from their value only last year, and their values continue to fall almost daily. In future years, we will likely look back at this time and marvel at the poor information we were using to evaluate bank investments during 2008.

Unquestionably, banks employ many brilliant economists and businesspeople. I think it can be said without reservation that it is absolutely unlikely that these brilliant businesspeople invested in over a trillion dollars in worthless, sub-prime mortgages. In fact, the real issue here is not uncollectible mortgages, but rather, the way these uncollectible mortgages are required to be valued on the books of the banks. Press releases only refer to write-downs of these mortgages, not write-offs. The entire banking industry in the United States is suffering a severe case of over-accounting regarding these mortgages. By distorting the write-downs, the value of many portfolios that contain bank investments are being destroyed. When these write-downs eventually reverse and become phantom income, I am sure we will have the opposite opinion. But for the time being, I do not think it is even remotely possible that all the major banks in the United States are leading to insolvency. As investors, I urge you to carefully evaluate this matter thoroughly before believing everything the media offers on this subject.

I also find it very interesting that much of the sub-prime mortgage disaster was caused by our own government in the first place. Many believed, including the Federal Reserve, that it was desirable and necessary for all Americans to be homeowners. The Fed encouraged banks to make loans to all potential buyers, regardless of their financial ability to repay the loans. But now, the biggest risk we are facing is the overreaction of the banking industry to the sub-prime crisis.

Before, banks were making loans to anyone and everyone in order to fulfill the Fed’s request. With new legislation and regulations, I fear that the pendulum will swing too far to the other side. Banks are now leery of making loans to even capable borrowers, and that risk is greater than the sub-prime problem we have today. I can only hope that lenders will continue to reasonably evaluate potential borrowers and extend loans when appropriate. There is no question that the pendulum swung too far in one direction and created the sub-prime mess, but we cannot afford the risk of withholding credit to good borrowers to the point of strangling the economy.

Furthermore, I just do not understand why so many Americans have such a negative viewpoint of the economy when things are actually quite good. Unemployment is only at 5.5%, which is very low by historic standards. Individual income continues to rise ahead of inflation even as recently as May of this year. Undeniably, housing prices are down, but then again, most people do not have any intention of selling their homes right now anyway.

Since homes are lived in, they have a utility value. If a home is worth less today than it was last year, it really has little economic effect on the homeowner’s day-to-day life. It is true that there are some homeowners in sticky situations concerning their mortgages, but a vast majority of homeowners -- 95% -- have no mortgage problems, and even those who do will likely wind up keeping their homes since homeowners in trouble will receive government assistance. Home prices are clearly down, but they are still worth over one-third more than they were in 2000. The tightening of credit and the easy availability of borrowing on home equity lines is now a thing of the past. The more I consider that possibility, the more I think it might be a good thing for Americans to not have such easy access to credit.

Inflation is definitely higher in 2007 than it was in prior years, but the fact is that we have had almost 16 continuous years of inflation-free living, and we should not be surprised to see it tick up in any single year. It has been proven time and time again that U.S. living standards today are the highest they have ever been in our history, and this includes the living standards for the middle class and the poor.

When I listen to the negative news reported by the financial media, the contradictions are glaring. There were recently more than $150 million in box office movie ticket sales in one weekend alone. This does not even include the enormous amounts spent on $5 boxes of popcorn and $5 soft drinks at the concession stands. Moreover, even though the price of gas is at historic highs, we still seem to suffer from daily traffic jams in Atlanta. With everything I have read on how the consumer is pinched and how no one has any money to spend, I find it fascinating how hard it is to reserve a table in a nice restaurant on a Friday night. Is this indicative of a recession? Based on the foregoing examples, it is definitely not evident to me. Perhaps this just goes to show that what we sometimes see with our own eyes is different than what is reported by the media.

Skeptics often report the U.S. dollar being so devalued that Americans no longer have influence on the world economy. In fact, the exact opposite is true. Please review the “Exports of Goods” chart I have provided to the left. As you can see, with the decrease in U.S. dollar value, net exports from the United States have exploded as the U.S. has become more competitive with the rest of the world. The lower dollar has actually allowed U.S. manufacturers to compete on a level playing ground, and now the rest of the world wants to come to the U.S. to produce goods. There is no question that this explosion of exports is leading to additional jobs in the U.S.

Foreign auto manufacturers are coming to the United States to build state-of-the-art car plants. These new plants contain high-tech, heavy machinery that will revolutionize the way cars are manufactured throughout the world. These foreign car manufacturers recognize that the United States has the most skilled labor force and a business environment that promotes new businesses. In contrast, the legendary U.S. car manufacturers -- Ford and General Motors, for instance -- are closing old plants and opening operations in Communist-run China. For the most part, they are fleeing the United States to avoid their union contracts, since they are anti-productive and prevent them from generating profits in this country.

It is astonishing to see U.S. car manufacturers fail at the hands of foreign companies that have excelled in the field with revolutionary plants, no union contracts and only a desire to build quality cars at a low cost. American car companies must conform or they will fail since they will be unable to compete in international commerce by building cars in China It is only a matter of time until we see Toyota and other great car manufacturers create a U.S. base of operations that will dwarf the legendary American car companies. While you may argue that this would be bad for American auto workers, it is undebatably positive for the average car-buying consumer in the U.S.

The political rhetoric regarding the lack of jobs is also quite puzzling to me; the facts just do not support all the noise being made. If you review the “Civilian Employment” chart to the right, you will notice that civilian employment in the U.S. has exploded from 136 million workers in 2002 to in excess of 146 million workers in 2008. This explosion of employment was in the face of NAFTA, immigration issues and other concerns that supposedly limited U.S. employment. As such, the facts indicate that more workers now have jobs than ever in the history of this country.

Regarding the recent jump in gas prices, it is time for us to realize that a price increase will help accomplish in this country what probably should have happened years ago. Higher gas prices will lead to conservation of energy and development of alternative power methods. We are already seeing the proliferation of wind power and some progress in building nuclear power plants. Furthermore, there are absolutely no environmental reasons for not drilling for oil off our shorelines. The Chinese are drilling exploratory wells off of Cuba’s shores, a mere 100 miles from our shorelines. It only seems logical that we would want to capture the economic benefits of drilling for oil within our own coastal waters.

The U.S. Congress has been totally ineffective in instituting any type of energy policy. Due to environmental concerns, there has been no major energy legislation passed in decades. Even today, Congress cannot come together to pass a single bill to try to wean the United States from its full reliance upon oil from the Middle East, which we often purchase from potential enemies. However, in spite of Congress’s ineptitude, major oil fields have been discovered in North Dakota and all over Canada. Higher gas prices will lead to more exploration in our own country, which will solve the problem without governmental intervention. The best way to solve this issue is for the U.S. to become energy self-sufficient. The combination of new exploration, energy conservation and alternative fuels will help accomplish that goal in our lifetimes.

However, if you believed the media, you would think that all Americans are economically hamstrung by the cost of gasoline. In fact, most people are only marginally impacted. It has been determined that the average American uses approximately 20 gallons of gasoline per week, which actually seems high to me. On average, that represents 400 miles driven per week or approximately 20,000 miles per year, but I think that most Americans drive less than that amount. However, assuming those numbers are correct and the cost of fuel is up $1 from last year, these amounts are not catastrophic. This dollar per gallon price increase would mean that the average American was paying an additional $20 per week for fuel, or $1,040 per year. While no one wants to pay an additional $1,000 per year, I have a hard time believing it has led to the financial catastrophe the media is reporting.

On another matter, regardless of your feelings pertaining to the war in Iraq, one would be hard-pressed to question whether real progress has been made over the last six months. It is even looking brighter that there will be a resolution to this issue in the next few years. Even Thomas Friedman, the famous author of The World is Flat who has been critical of the war in Iraq, now seems to have a different opinion and sees the positive effects of helping to stabilize that country. Congress has now committed to funding our military through June of 2009, which should be the end of major expenditures in Iraq. Remember, we have been in Korea for 55 years, allowing one of the most prosperous Democratic countries -- South Korea -- to evolve.

In summary, I will be the first to admit that the economy is slower than it was a few years ago, but it certainly does not merit such rampant pessimism. A recent CBS News/New York Times poll reflected that 81% of respondents think the country is on the wrong track and 78% believe the U.S. is worse off today than it was five years ago. In contrast, a current Harris poll reported that 82% believe their situation had improved or held steady over the last five years. I guess the truth probably lies somewhere between those two incongruent poll results. The economy is definitely not great, but it is certainly not terrible either. Employment continues to be high and incomes are rising. American industries continue to produce quality products, and corporate profits, while certainly not growing at prior year levels, are still growing. Corporate profits could not grow forever! But the economy is actually pretty good, even though attitudes are bad. The world is full of broken men and women that have dared to bet against the U.S. economy.

The purpose of this memo is not to explain away the true losses that the financial markets have realized during the first six months of 2008. Rather, I want to point out to you that things are essentially fairly good, and the pessimism in the U.S., for the most part, is unwarranted. Best regards.