BusinessWeek – Don’t let anybody mislead you:  The new push to get a 15% ethanol mandate out of Washington is simply to restore profitability to a failed industry.  Only this time around those promoting more ethanol in our gas say there’s no scientific proof that adding more ethanol will damage vehicles or small gas-powered engines.  With that statement they’ve gone from shilling the public to outright falsehoods, because ethanol-laced gasoline is already destroying engines across the country in ever larger numbers.

From Roland:  Forever we’ve complained that ethanol made no sense, but the media prevailed.

Click here to watch this excellent video analysis from economist Brian Wesbury.

(Total Viewing Time:  6:32)

From Monday’s Wall Street Journal:

Here’s the problem for states that want to pry more money out of the wallets of rich people.  It never works because people, investment capital and businesses are mobile:  They can leave tax-unfriendly states and move to tax-friendly states.

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas.  We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

We believe there are three unintended consequences from states raising tax rates on the rich.  First, some rich residents sell their homes and leave the state; second, those who stay in the state report less taxable income on their tax returns; and third, some rich people choose not to locate in a high-tax state.  Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place.  This is why high income-tax states have such a tough time creating net new jobs for low-income residents and college graduates.

Soak the Rich, Lose the Rich by Arthur Laffer and Stephen Moore

HT:  Carpe Diem

(Via MoreNewMath.com)

Earlier this week we were joined by JP Morgan Chief Market Strategist and one of our favorite economists, Dr. David Kelly, for the Manarin Investment Counsel spring wine and cheese client event.  Below are some highlights from Dr. Kelly’s discussion on what led to the financial collapse and his take on the economy:

• The roots of the financial crisis were in the housing bubble of 2006 – 2007.  Hardly anyone believed that it would have as far reaching financial implications as it did.
• The use of leverage by hedge funds is what lit the fuse.  When the housing market collapsed, the leverage worked in reverse and put financial institutions in huge trouble.
• The government’s biggest mistake was letting Lehman Brothers fail.
• Never underestimate the psychology of the economy.
• The three most dangerous words in economics are “Wait and see.”
• You will not see again for many years mortgage rates below 5%. 
• Vehicle sales are at their lowest level since 1982 and housing starts are currently at one-third their normal level.  Demand will not allows for these figures to be sustained.  They will go up.
• Inventories are what initially start economic growth.
• Unemployment is the last thing to get fixed in an economy; it is a lagging indicator.  Historically it looks like a playground slide – very steep and quickly going up and then a gradual decline over time.
• Inflation is a risk in the long term but I don’t think it is a risk in the short run. 
• I think the economy can recover by itself but it is not being allowed to because of lots of help from the government. 
• The good news about the American economy is that it knows how to grow itself; the bad news is that nobody knows how to grow it.
• Cutting interest rates in the teeth of a recession doesn’t actually fix anything.
• One of the great dangers is that when the economy finally recovers everyone will give credit to the government and the Federal Reserve.  I think the American economy will prosper in spite of Washington rather than because of it.
• The reason you diversify is not because of the stuff you expect; it is for the stuff you don’t expect that ends up biting you.
• How will the market do in the short term?  How could we possibly know?  All we know is that we don’t know. 
• I think discipline is what is necessary to benefit in the long run during this economic climate.

From Roland:  What we’ve experienced is a generational opportunity and there is a very high probability that we will never see stocks as cheap as we did back in early March.  Look forward to brighter days ahead!

The end of the recession does not mean we won’t lose more jobs; employment is always a lagging indicator.  And there will be more defaults, foreclosures and financial market problems, too.  But none of these are leading indicators.  In our view, there are no more shoes to drop.

– Economists Brian Wesbury and Bob Stein in their recent Monday Morning Outlook

It may require some patience, but for the long-term value investor, market history suggests that after a 65% drop in stocks and after earnings have been adjusted downward, the stage is set for higher than average annualized rates of return over the next five years.

- Jim Cullen, president of Schafer Cullen

###

Work with us:  Manarin Investment Counsel

TIME– The VIX has been making headlines.  No, not the rock band or the cold remedy but the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, which has been on a wild ride over the past year.  The stock market crash set this indicator of volatility soaring above 80 – for perspective, the VIX has historically averaged around 20. 

The VIX attempts to predict the volatility of the S&P 500 index over the next 30 trading days using options data from the index’s 500 underlying stocks.

What is next for the VIX?  That all depends on investors’ fear of a further decline in stock prices.  Remember:  even if the VIX continues to fall, that does not mean that high volatility for stocks is finished.  Investors should still hope for volatility, realized from a recovering rally.  But a low VIX – signaling reduced uncertainty – would likely signal a coming rally, rather than stagnation in prices.

We’re still a long way from the halcyon days of yore – remember, the VIX long term average is half of today’s level – but investors at least seem to once again believe that day will follow night.  And that’s good news.