Friday, January 4, 2008

Time to place some bets

"My Father's from Kenya, and my Mother's from Kansas"...and Obama whips Hillary in Iowa. Those who feel the weakness and the pinch in the economy and want change identified with Obama, while Huckabee got the votes of those who shared his beliefs. In a few weeks, Romney's campaign crew will probably send their resumes to the Federal Reserve. Soon, some of the patrician Republicans will get a whiff of deflation, after Mitt decides to quite spending his money on hairspray and attack ads.

Although the rally in bonds is getting a bit extended, most people miss the effect of this administration's misguided energy policy on the price of food. Remember how ethanol was supposedly the alternative to high oil prices? It never was, but someone apparently thought it would help jump start Iowa. Iowa wasn't quite what they ordered. Now we have higher food prices because of our ethanol policy, and a moronic Fed that sees the higher prices in food and energy as inflation, and not as an administration mistake. So I'm back to bonds. If there is so much inflation, why have bonds rallied so much?

We have higher prices in these commodities, because of poor utilization of our resources, and we have deflation in our largest assets, our homes. In this economy, housing cannot be supported at the current level of interest rates, thus the declining prices and high foreclosure rate. The debt can't be serviced at these levels when home buyers have expectations of declining home prices. They need lower rates on their mortgages to induce these homeowners to buy. This is the viewpoint of Pimco's Bill Gross, who was just named by Morningstar as the bond manager of the year.

So inflation and deflation seem to exist, but we are really just twisting terms, where academics just argue between monetarists and Keynesians. Money is multiplied through credit; but credit isn't money when it can't be serviced. It's just a bad debt. So financial assets get repriced, and they get repriced lower, just like homes have been to induce buyers. But this time, they need to be repriced lower to discount the aberrant policy decisions of our Federal Reserve.

But Iowa should wake up both sides of the political aisles. Nothing like job insecurity in the political arena to get politicians to act. And the market is now low enough, for it to get a decent trading rally.

And since, we saw how the pundits, had placed the wrong bets on in Iowa, it's time to place some bets back on the casino stocks. Start with this triumvirate in Macau, as they should rally first. Wynn Resorts (WYNN 105.68), Las Vegas Sands (LVS 95.37) and Melco (MPEL 10.71). Melco had some junket operators that were directed their high end VIP action to their Crown Macau, and this, along with a corruption trial, pressured WYNN and LVS. At these prices, you should own them all, and in the order mentioned.

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