Also, consider the Israeli army, which used to have gender integrated units. But the men were embarrassed to show fear in front of the women, and vice versa. And sometimes, in war, it is best to throw dignity aside and plunge unseemly for the foxhole. Due to the reluctance to engage in this sort of behavior, the casualty rates were higher. So they stopped the practice.

Yes, fear helps one to survive. That is the reason for having an emotion like fear. And in September of 2008, it would have been very good to be afraid, to be very afraid, and to cash out your stock market chips and bail. But in March of 2009, when there was still lots to be afraid of, in many respects more to be afraid of then in September of 2008, it would have been very good to put those fear feelings aside and to act in a courageous manner, buying lots and lots of stock. If you had thrown caution to the wind, maxed out your credit cards, and put it all into Fifth Third Bank (FITB) shares or some other stock beaten down to an extreme low, that would have worked out really, really well. But if you had asked ten people if it was a good idea to do that, all ten of them would have told you not to. So how can you know when to be afraid, and when to be courageous? That really is one of the great riddles of human existence.

Of course, in the short term one cannot know. We all make our investment decisions in, to borrow from famed military analyst Carl von Clausewitz, the "fog of" investing. Data is indefinite, noisy, and subject to revision. One trend runs counter to another. Misinformation is deliberately disseminated. The great unknowables, such as the effect of the huge nominal value of credit default swaps, become more and more frightening as the bear analysts get proven right time and time again and the bulls huddle, chastened, in a quiet corner.

In the fog of investing we are reduced to a reliance on policy. One of my policies is to not panic. Sure, sometimes it would be good to be the first one bolting through the theatre exit. But, in general, it is foolish to succumb to panic, however much one might feel afraid. And I did feel very afraid at times, in midst of the panic. But I'm glad I held on.

It is important to remember that bear markets end when it appears that no end is in sight. Bear markets end when there is little reason for optimism and a lot of reason for pessimism. They end when bear analysts are parading in the full glory of their oft confirmed prescience, illuminated by the spotlight of media adulation. They end when the thought that government action could address economic problems appears to be a laughable exercise in naïveté.

We should also remember that bull markets form when there is extreme skepticism that a recent upswing could be anything more than a brief respite from a continuing plunge. Bull markets form on wobbly knees, appearing fragile, with little in the way of economic growth prospects backing up the positive market movement. At every stage there are a lot of skeptics, loudly calling out, "sucker's rally." How could it be different?? If it were not for the skeptics, the market would already be at a level that would make further progress actually unlikely. The market moves higher as skeptics are convinced and bears turn to bulls. So, when there are a lot of bears ambling about, it is ripe season for conversions.

Yes it is regrettable that my portfolio plunged in October and November of 2008, but I still believe that the better policy is to bet on growth, because that is the more usual pattern. The recent instance of market turmoil does not make it a common occurrence. We should take into account the possibility of a market disaster, but it should not overshadow our actions. We should invest for the more usual case of growth, bearing in mind that disaster is always a possibility.

The best policy is to reject panic. There may be instances in which outcomes would have benefited from panic, but there is no way to distinguish a brief swoon from the beginnings of a market plunge. So if we were to see the exact same pattern as in early September 2008, the eventual outcome could be completely different. Next time, it could prove to be the ideal buying opportunity, just as we can now see that March of 2009 was.

So Fear be not proud and Panic, hang your head. Fear may help us to survive and sometimes even Panic, too. But Courage, at the right moment, can pay off very handsome, and that is something Fear and Panic never do.

My most basic belief about the stock market is that it is a chaotic manifestation of a chaotic world. In a sense it is chaos squared, because the actors are not little grains of sand being swept about in a tube of water, but are conscious and are making decisions for self-advantage, based on their observations of the chaos about them. Trying to predict the self interested decisions of others would be an exercise in futility, although behavioral analysis investing does this to some degree.

This is why it is important to stay humble when viewing the stock market and to refrain from imagining that it is possible to predict market movements in the short term. For every single stock in the stock market, the value of the stock at any moment is exactly what the consensus view of the most interested and moneyed investors believe it should be. There is no point, at least in the short term, trying to second guess this group, because they are smart and very knowledgeable about the stock.

So why invest?? First, if we have any money, then we must. Second, because even the smart and knowledgeable investors are smart and knowledgeable about what makes the most difference in the short term: The structure of a particular company, the immediate market environment for the products of that company, etc. They are not necessarily particularly knowledgeable about the world as a whole, and might not realize that forces brewing in some other part of the world will have a big effect on the company they know so well.

Having said all this, I was way too confident, back in September 2008 that the market would not go down to 7500 on the Dow. First off, I should have followed my own advice, realized that the short term is unpredictable and that therefore a severe market plunge was possible. Second, my model for government action was flawed. I always presume that the government will act to avert short term disaster, to support home-owners and to avoid wide-spread unemployment, because that is the way to woo voters and stay popular. Bush did not do these things and became extraordinarily unpopular in the bargain. Perhaps he just did not understand what it is that had to be done to achieve these goals. It is hard for me to understand, for example, why Bush did not move more aggressively to support the housing market. When Bush administration policy seemed to fly in the face of reason, such as supporting a strong dollar at just the time when export growth and import substitution was needed to pick up the slack from a lack of investment in housing, I figured that administration officials would soon see their errors and reverse course. That did not happen. Of course the most significant policy failure was the decision to let Lehman Brothers go under.

I still think that my model for government behavior is generally correct. I think that if Bush had realized how unpopular he would become and how he would cripple the Republican Party, he would have chosen policies that would have achieved his personal and political goals. I think that he just did not know how and did not know who to turn to, to help him out.

In any event, depending on what statistic one looks at, it appears that China is quickly reacting to its downturn in export demand, by focusing on growth in domestic demand. In Shanghai, value added by industry was down 4.9% in April from a year earlier, but in Hunan province, in the interior, it is up by 18%. In April, investment completed in housing was down 32.9% in Fujian and in 12.7% in Guangdong. In Jilin (a province in Manchuria), however, the same figure was up 87.1%, and in Hunan it was up by 16%. So it appears that although the economies of some coastal provinces have been hit hard by the sudden decline in exports, growth has shifted to interior provinces, perhaps to satisfy growing internal demand and perhaps to some degree due to government intervention aimed at helping these traditionally poorer regions.

Viewing the “Output and Growth of Major Industrial Products” yields a similar impression. It used to be that there would be large increases pretty much across the board, but in the statistics for April, the production of small-sized tractors (lawn tractors), which must be primarily an export product, fell 10%, whereas the production of Medium sized tractors grew by 43%, perhaps because of the economic stimulus agricultural effort. Growth in production of products is now very much a checkerboard, apparently related to export intensity.

The real eye popper, however, is automobiles, up 17% to 1,181,200. That is an awful lot of trucks and cars to produce in a month, and if we multiply by only 11, to be conservative because April tends to be a fairly high production month, we get an annual production rate of about 13 million. China does export some cars, but most of these are for the domestic market, meaning that we can expect petroleum consumption to grow rapidly in China this year. This is born out by the figures for the production of gasoline, up 19.6%, to 1.4 million barrels per day. Diesel fuel, perhaps more closely related to overall economic activity is up a mere 0.7%.

Noting that so far, only slightly more than 5% of the stimulus funds have been spent, China appears to be doing reasonably well and should contribute to growth in demand for petroleum. My thought is that with Chinese consumption growing so rapidly, when the United States starts to rising employment, we will have rapidly increasing petroleum prices.

What’s worse, huge new developments are slated to open that will increase the number of hotel rooms in Las Vegas by about 15,000. Each time one of these huge developments is finished, an army of construction workers will find themselves out of a job with no relief in sight in Las Vegas. As they leave for greener pastures, the demand for housing will fall still further. Of course those new developments will have to hire clerks, maids and card dealers, but if the total number of visitors does not rise, that just means that somehow people doing these jobs at other places will be let go. Just because there are more hotel rooms does not mean that the ratio of hotel workers per visitor will change. I expect that several older hotel/casinos will close. So construction worker employment will decline and I don’t see anything to make up for that decline.

As the construction workers leave, employment of service providers will fall. Teachers, for the children of the construction workers, waitresses, for the restaurants that serve the construction workers and on and on and on, will lose their jobs. The population will fall still further. I don’t see a bottom for Las Vegas real estate. When there are more homes than people to live in them, competition can drive prices down and down to a very, very low point. Las Vegas real estate has dropped a lot already, but it certainly has room to be cut in half, again.

So it is worth avoiding stocks that have Las Vegas exposure as a significant percentage of their business. Wells Fargo (WFC) has Las Vegas exposure. In any analysis of Wells Fargo this must be taken into account. Needless to say, stay away from casino stocks, such as MGM Mirage (MGM), Las Vegas Sands (LVS) and Wynn Resorts (WYNN). I don’t currently have a short position in any of these stocks, because I am waiting for the market to rise a bit first. But if WYNN rises to 50, I will certainly short it.

I believe that there should be an effort at the federal level to save Las Vegas. It should begin now, because government action always takes time. Some federal functions should be switched at least partially from the D.C. area to the Las Vegas area. The developing disaster should be a concern to all right-thinking persons, because it stands to hurt a lot of innocent people.

One item that caught my eye was an item about Americans’ preferences for long term investments. Apparently, 34% of Americans now feel that savings accounts are the best form of long term investment, closely followed by real estate with 33%. Only 15% favored the stock market. This represents a big change from early 2007, when only 18% felt that savings accounts were best and 31% favored the stock market. Real estate was on top back then, with 37%. To me, these figures are very, very bullish for the stock market. Why??? Because it is changes in beliefs that drive prices, and a belief is more likely to increase in popularity from a point of great unpopularity. At a minimum it is easy to say that it becomes hard for a very unpopular belief to become even more unpopular. To do so would require convincing the last holdouts. Taking a different approach, if equal proportions of savings-believers and stock-believers switched places, for example 10% of each group changed belief, the stock-believers would have a net gain and the savings-believers a net loss.

Consider a thought experiment: What if there were two types of equally rare, equally useful metal, gold1 and gold2, and society began with gold1 being three times as expensive as gold2, because of greater hording of gold1. If 5% of gold1 value was exchanged for gold2 and 5% of gold2 value was exchanged for gold1, gold2 would rise in price because 3 times as many dollars would be flowing from gold1 to gold2 than in the other direction. This could well start a trend of rising gold2 prices that would feed on itself, with gold2 becoming increasingly valuable and increasingly popular due to that rise in value. Eventually, it is quite likely that this momentum would lead gold2 to exceed gold1 in value. It could become quite a bit more valuable as many people would have come to view gold1 as a very poor investment in comparison with gold2, which had the quality of tending to rise in value. Then one day, when gold2 was perhaps three times as valuable as gold1, a peculiar thing would happen. The price of gold1 would increase relative to gold2. Perhaps that day, a few gold2 holders had the thought that the price difference had become too great, and they changed belief. Well, this would of course cause the entire cycle to repeat itself, which it could continue to do forever, given peoples’ unwillingness to learn from history.

There is an element of this phenomenon with the stock market, today. As it went down, it had begun to appear to be a less and less inviting place to store one’s wealth. But at some low point, the trend reversed, and then (here is my most basic point) the trend becomes self-reinforcing, until it has gone too far. So, as we recover from the market’s low point, a self-reinforcing trend of stock market advances takes root, and this trend also helps the economy as whole. Fortunately, the trend is also reinforced by increasing government spending as the American Reinvestment and Recovery Act (ARRA) gets slowly into gear and more public works projects enter the construction phase. ARRA public works spending is still a trickle, but this month about 13 billion will be spent on a one-time $250 payment to social security and supplemental security income recipients. This should help the retail industry which has suffered from grievous layoffs, as of late. ARRA public works spending will increase significantly in June and by August turn from a stream into a river of spending and employment. I predict that by mid-2010 the stock market will have overtaken savings accounts in popularity as a long-term savings mechanism.

One interesting aspect of the Gallup survey is that precious metals were not even included in the question. It is my belief that precious metals will be eventually held by pension funds and insurance companies as a relatively stable form of maintaining and building wealth. Nothing else is as fungible, quantifiable, transportable and naturally supply-limited as precious metals. These are among the qualities that have caused gold to be one of the very best investments over the last 10 years. I have to believe that at some point this good performance will cause investors and institutions both to get over their aversion to “hoarding” and come to see that precious metals deserve a place in just about any portfolio. When that happens, watch out. The price of gold will soar. For right now, however, I believe the best bet is the stock market, until it recovers to a reasonable level of 1350 on the S&P 500.

The first is rigs in or rigs out. When the price goes down, rigs are pulled out of service. This has no immediate effect on oil production, because there is a lag between the time a rig starts to drill an oil well, and the time oil is struck, the well is finished and oil production begins. But it does have an effect on oil consumption, because every rig is a direct and indirect user of oil products. First there is the direct use. Power is needed to drill down and to pump mud through the incipient well. This power is typically provided by a 1,000 hp or greater diesel engine that is kept running around the clock. But this is not all, as the pipe and casing used in the drilling represents iron ore that was dug out of the ground, shipped to a steel mill, made into steel using coal that also had to be mined and shipped. Finally, when the steel pipe has been manufactured it must be trucked to the rig site. Of course the roughnecks have to get to the drill site, too. So, add it all together, it still may not be that much, but at a time when demand is falling for other reasons, it helps push it down that much further.

The other kicker is oil use by oil exporting countries. When the price of oil is high, these countries typically go through a boom time that drives up their own consumption. When the price goes down, the opposite may occur. I don’t know that the recent price plunge has kept prices low for long enough to have much of an effect on the consumption of the major producers, so I will focus on the oil used in drilling.

We are now at a point where the number of rigs has been cut by more than half. As the number of rigs started to decline, oil production went up because damage from the fall hurricanes was being repaired. But it has now peaked and is on the way down, with the four week moving average falling by 100,000 barrels per day between April 17th to May 1st. It is likely that there are other, seasonal factors, but it makes sense that the plunge in the number of rigs would show up in decreased production, eventually. That is how supply and demand are supposed to work. But now that prices have started to move up, we are likely to see a reverse phenomenon as more rigs are placed into service. Oil inventories have risen very dramatically over the last six months, but there is a good chance that as prices rise, the effects of rigs being placed back into service will play a role in driving up demand for oil, well before production from new wells starts to fully compensate for older wells drying up. This could help drive the price up sharply.

I predict that before the end of this year the price of oil will reach over $100/barrel, again.

So, I dare to disagree with the very impressive Dr. Roubini because the situation has changed, with the change in leadership. Any time stock is cheap, you will only buy counter to the recommendation of many leading experts. Dr. Roubini's Jeremiah predictions have a great deal to do with the market being so low, still. If he stated otherwise, this buying opportunity would not be here. The market would be a lot higher.

I respect Dr. Roubini, but I also think that he got a little lucky in predicting a financial collapse at a time when most did not realize just how bad our leadership was.

Another good thing about buying stock when a leading light such as Dr. Roubini is proclaiming us to be in a "suckers' rally, is that he can only change his mind from bearish to bullish. If he did so that would be a huge boost to the market.

I believe that we are now seeing another battle between logic and recent experience. Logic tells us that we should soon see a pretty powerful bull market, but recent experience tells us not to hold our breath. Here are the points logic makes:

1. Except for the great depression, every serious market downturn has been followed by a big rally. Even the great depression was, eventually. It is just that we had a three year bear market, before things turned around. But since then, we have never had a bear market that lasted for much longer than a year.

2. A stimulus package appears to be coming.

3. Larry Summers and Tim Geithner- we've got the A-team in Washington, now.

4. Buy cheap is one half of "buy cheap, sell dear."

5. The market anticipates the economy, and causes changes in the economy. Therefore the market should improve months before the overall economy does.

Recent experience is now the gloomy one, so changed from the ecstatic figure of February, 2000. "All the bear analysts have been right" she says morosely, "And they are still quite bearish." Here are the bear points:

1. The bull analysts said, "Stand Pat" after the market dropped in late September and early October, and they were wrong, wrong, wrong.

2. It is naive to think that Government will get this right and fix things. They'll never get it together to do the right thing. They are just a bunch of loud mouths, out to help themselves.

3. It is naive to think that the banks are curable, and the people will refuse to help them out again. Without lending there is no way the economy will recover.

Yes, the bears have some scary stuff to talk about. But the government has both treasury and fed, and between the two, I believe they will have the resources to save the major banks. And Obama's tough talk on bonuses should give him some leeway. Plus, the stimulus package should slow down the rate of defaults, which is at the core of the banks' problems.

So, should we not try?? Sure we should. But I say, let us broaden our view. Let us break from the pattern recognition mindset, and embrace a broader and more liberal view of reality. The market does not exist in a vacuum. It is a chaotic manifestation of a chaotic world.

I don't know if this exhibit still exists at the Exploratorium in San Francisco, but there was a wonderful, wonderful exhibit on chaos. The exhibit designers found marvelously clever ways to construct chaotic systems. One was a tube, about 4 feet long filled with water and sand and vertically rotatable. After the sand had settle at one end of the tube, it could be rotated so that the sand-filled end was higher, and the sand would spill through the water to the other end, forming a million small patterns on its way. The movement of the sand on its way down was completely unpredictable and chaotic, except for the fact that it would all reach the other end eventually. In many respects the stock market is the same way. The small day to day movements are entirely unpredictable, but in broad scope, there are forces that move the market. To understand those forces we must broaden our view, and not try to analyze and predict the stock market based on the stock market alone. The stock market is profoundly influenced by the political world. It is foolish to talk about bottom formation when there are huge political changes taking place. We should look at the broad picture, to include politics here and abroad. When we do, we see that there is a strong push to stimulate the economy. This will make a huge, huge difference. I don't think we will test that bottom. Based on the political scene, I think the bottom is made. I won't try to predict what will happen tomorrow. But I do believe that we are on an uptrend that could, at some point between now and March, take off in a pretty powerful rally.

Weeks after Lehman Brothers declared bankruptcy; Fed Chair Bernanke and then Treasury Secretary Paulson stated that neither the Fed nor the administration had the authority to save Lehman Brothers. How strange, then, that both Bernanke and Paulson waited weeks to take this position, rather than stating this right at the time of the Lehman Brothers bankruptcy. So very strange that the government had been able to avoid a Bear Stearns bankruptcy before, and was able to save AIG a day later, but could not save Lehman Brothers. How very, very peculiar it is that neither Bernanke nor Paulson asked for expanded authorization from Congress, so that they could save Lehman Brothers. How weird that at the time Paulson stated that, "I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers." If he had not had the authorization to avoid a Lehman Brothers bankruptcy, why did Paulson announce his opinion as to appropriateness? If there had truly been no authorization, appropriateness would have been moot.

It was only after it became clear that the Lehman Brothers bankruptcy caused a chain reaction that resulted in devastating problems for the world economy that both Bernanke and Paulson took the position that they were not authorized to save Lehman Brothers. One must sadly, however, reach the conclusion that the Lehman Brothers bankruptcy resulted from a choice made, principally by Paulson. No other conclusion makes any sense.

The decision to let Lehman Brothers go bankrupt was bad enough, but then the delay in passing the Emergency Economic Stabilization Act (EESA) made a bad situation worse. With the investing community waiting on tenterhooks to see how the vote would go and tension mounting day after day, the economy paused and fell during this period. When the bill was passed, the situation had become so much worse that the EESA was unable to stop the downward momentum.

Finally, on November 6 Nancy Pelosi proposed $61 billion in stimulus spending and on November 7 Tony Fratto, Bush's press undersecretary, killed the idea. Never mind that liberal and conservative economists agree that this is what needed and needs to be done, we have been cursed with a president who does not listen to what the learned say. So we have been in a free fall.

It is also instructive to go back farther. For some reason the Office of Housing Enterprise Oversight did not promptly raise the limit on conforming loans, and when it did raise the limit, did so only tentatively and part way. A big increase in the limit for conforming loans could have done a great deal to buffer the fall in housing prices and to avoid the resultant fall in the value of mortgage backed securities. The accounting rules decision that banks would have to mark to market their mortgage backed securities also greatly damaged the solvency of the major investment banks.

The issue that I have with lauding and now crediting the early predictors of doom, such as Nouriel Roubini, is that things did not have to be this way, and the way things have developed is the result of terrible government decisions that were unpredictable. Perhaps I should have realized that with someone like Bush in the White House, someone who has never shown an appreciation for scholarship and expertise, that disaster was waiting to happen.

The good news is that in a mere 17 days Bush will be gone. We will have a new Administration that does respect scholarship and expertise. The National Economic Council will no longer be directed by Keith Hennessy, who does not have an economics degree, but will be directed by Larry Summers, who has a Ph.D. in Economics from Harvard and a world of experience in Academia and public service. I have nothing against Keith Hennessy (who does have a bachelors in math and poli. sci. from Stanford and a Masters in Public Policy from Harvard), but his appointment as director of the National Economic Council, when he does not have a degree in economics, showed that Bush does not value scholarship and expertise in economics.

The greater point is that Obama is assembling a great economics team, one from which we should expect great things. There are some things that I will not believe, and one of these is that we are the helpless victims of circumstance, unable to do anything to better our situation. This cannot be the case, especially when it comes to economics. The government can and should make a difference. Starting in 17 days, thank goodness, I believe that government will.

As the focus shifts to the Obama administration, with the new Congress being seated on January 6 and work beginning on a stimulus plan, I believe the market will tend to go higher. Of course, Bush can still create problems on his way out, so every day closer to the inauguration is another chance for trouble finally gone. History shows that recovery rallies take place before most investors expect. The stock market is still remarkably low, with great values abounding. If we wait until Obama has been in office for a few months, the opportunity is likely to be largely passed. Of course, that is the general rule: Things are only clear after the fact. Opportunity must always be taken when prospects are not clear.

Without greatly increased federal spending over the next year, we would certainly find ourselves with rising double digit unemployment. There is simply nothing to prop up the employment market. We are in a severe downward spiral, with layoffs leading to lower consumer spending, leading to more layoffs, and so forth and so on.

Fortunately we will have a change in administration, about two months from today. Thank goodness. I certainly believe that the "recovery package" being touted by President Elect Obama is just what the doctor ordered. The direction of the stock market in the mean time will be dependent largely on to what degree attention is focused on the future Obama recovery package, and not the Bush present. I have noted that there is extreme, and I do mean extreme, bearishness in the community of commentators. To me, this is a bullish signal. But I don't want to try again to predict a bottom, because last time it did not work out too well. Hey, but I was right about retail and about the Las Vegas Casinos. So at least I have been part right.

But let us take a look at what the long term trends are, and what the implications of those long term trends are. Here are the really important trends that I see, over the next 10 years:

1. Economic growth in China, India, Vietnam, Brazil and Eastern Europe.
2. Population growth in Saudi Arabia and many other oil exporting countries.
3. Gradual topping out of the world's petroleum production.
4. Reduction of U.S. trade deficit.

None of these long term trends has changed. There is a fifth trend that has changed dramatically in the last 2 years and that is a gradual decline in U.S. production of natural gas. We have now figured out how to harvest natural gas from shale deposits far more efficiently than before. This has made a huge difference to our natural gas current production and future prognosis. Could the same thing happen with petroleum? It seems unlikely.

Because the long term trends have not changed, I'm not changing my investment philosophy. I know it has been difficult. But these short term violent pull backs are very unpredictable. And they run along an unpredictable course.

I also feel that the demand for natural gas will increase, as it is substituted for expensive petroleum in a number of different areas. Also, at the current prices I would certainly not presume that production will increase. Harvesting natural gas from shale is expensive, and these prices will not support the sort of strong and dedicated effort that has caused production to rise dramatically. The rate of increase from the Barnett Shale, underneath Ft. Worth Texas, will slow. Other shales are not as good sources as the Barnett Shale is. And conventional gas production is declining. So I think the low prices will effect both the supply side and the demand side of the natural gas equation.

With respect to petroleum, give me a break. Inventories are still quite low, and they have fallen over the last year. At these prices demand will return, not only in the US, but in the areas where demand has been growing so quickly. If inventories were above the levels of last year I could see the price decline that we have seen. I don't know what tomorrow's inventory readings will show, but it just seems that there is not really that much petroleum and product in storage and this will over time, tend to support prices.

And with gold, the growing wealth of China is going to eventually cause prices to rise. We are starting the buildup to Chinese Lunar New Year. Eventually that will have an effect. I hope it is soon.

Investors' perception of the steel industry will never cease to amaze me. The level of negativity is just astounding. Nobody believes in steel. But steel production is necessary to support the production of fossil fuels and to support an American industrial resurgence that must happen if we are to reduce the trade deficit that must be reduced.

So call me stubborn, and I do regret the losses in this very, very difficult quarter. But the long term trends are on our side, and they are powerful and will make a difference.

Tim

Even taking these factors into account, however, I believe that we will see a price recovery. If the low pressure wave in the Caribbean turns into a hurricane, we will see an extraordinarily fast recovery. But even if it does not, there are many factors that point to higher natural gas prices.

First, it is important to recognize that because the readings for the government storage survey take place at 9 AM on Friday, the last week was far more affected by consumption on July 4 then July 11. And July 4 is a national holiday in which many businesses are closed and consumption of natural gas tends to be far lower than on a normal weekday. Some may be comparing the build for last week, which was the 28th week of the year, with the typical build for the 28th week of the year. But July 4 generally falls in the 27th week of the year, so this comparison is erroneous. Compared with the typical 27th week, the last week was not a particularly large build at all, being just 6 billion cubic feet above the 5-year average of 98 billion. And the week-to-week change is an inherently noisy statistic, so one week’s figure should not drive big price changes.

Between May 29 and July 3 of this year gas storage went from being 66 billion cubic feet below the 5-year-average storage to 120 billion cubic feet below the 5 year average, despite the spot price of natural gas being above $12 per million BTU for the entire period. The weather was a little warmer than usual, but taking the nation as a whole, it was not tremendously warmer. And gas at above $12 per million BTU creates a far more powerful incentive to avoid gas usage than does the current price of $10.54.

Let us imagine that I had a knob that I could turn to change the spot price of gas, and I was trying to handle that knob so that this country would end up with at least 3.2 trillion cubic feet of gas at the autumn peak, an amount generally considered adequate to get through the winter. After viewing last week’s storage figures, I would have nudged the knob a little in the “lower-price” direction and then continued to watch to see what effect the change would have and what sort of weather we would have. But the market has swung the knob a huge amount and I just do not think that it was justified. Moreover there are long term reasons to be bullish on gas.

Just as deepwater gas is being exploited; all other gas production is declining. So it is a contest between the deepwater expanding production and all other production declining to see whether production will increase or decline. Petroleum production, however, is down from last year, and this could be an indication that gas production is, too. It also seems likely that Canadian gas production is starting to decline, based on declining reserves.

Also, wind power still produces a very small percentage of U.S. electricity production. Changes must be made to the electric grid in order for wind power to become a more significant producer. This will take time. Also, although production of house building materials, such as bricks, is way down, production of goods for export is up, and some of this production is bound to use gas.

More importantly, there is a huge, growing consumption driver for natural gas, and that is tar sands production in Alberta. In a conventional mine, where the tar sands are scooped up and dumped into hot, soapy water, gas is used to heat the hot, soapy water. In steam assisted gravity drainage (SAGD) gas heats the boilers to create the steam that is pumped into the earth to heat and soften the bitumen. In either case, gas is combined with the bitumen to provide hydrogen when the bitumen is cracked into smaller molecules. With the high price of petroleum, a tremendous amount of development money has been directed toward the Alberta tar sands, meaning ever more gas consumption.

Also, the price of gas is now less than half that of petroleum, on an energy content basis (a barrel of petroleum has about 5.8 million BTU). So for any activity where there is a choice, there is now an enormous incentive to use gas to get petroleum or to use gas instead of a petroleum product. I know that in many cities where natural gas is available, some people still have heating oil furnaces. There is now a huge incentive to switch over to gas, and it would not take long to recoup the investment in a gas furnace. Some may choose to use small electric heaters to heat whichever room is occupied. These heaters are cheap and very easy to use. In today’s electricity production environment it is quite likely that much of the electricity generated to power these heaters will come from gas. We will not see much effect from this until late fall, but there are, no doubt, industrial users of petroleum products that now have a huge incentive to shift to natural gas or electricity, where we would see the difference immediately.

Finally, hurricane season has just begun. Just because we have not seen any major gas production damaging hurricanes in the last two years does not mean we won’t have one this year. Also, despite the last two years of relatively light hurricane activity, I still feel that the 2005 season was a harbinger of things to come, and that hurricane activity in general will become more of a problem in the future, as Caribbean and Gulf of Mexico waters get hotter in the summer and take longer to cool down in the fall.

There are a number of ways to make money from an increase in gas prices. There is an ETF, having the ticker symbol UNG, which tracks the price of gas. Also, energy producer XTO Energy, Inc. (XTO) is known for producing a high proportion of gas in its hydrocarbon mix and tends to be affected by changes in gas prices more than other energy producers. I would rate both of these a buy.

This is far from the first time. On June 6, 2006 the stock market tanked after some tough on inflation talk by Bernanke. And earlier, on May 2, 2006 Bernanke had made some comments to Maria Bartiromo that she announced on her news show, and which also clobbered the stock market.

OK. Now we are in a bear market for real. We are down more than 20% from the October 2007 high. Is there any chance at all that we could stop the inflation tough talk? It has been incredibly destructive. This is an economy that has already been battered raw by the sub prime crisis, the resultant fallout in financial institutions and high petroleum prices. Is there any chance that we could enter into a period of benign neglect from the Fed Chief’s statements. He can still raise interest rates. But comments that have phrases like “strongly resist” in them frighten people. They introduce uncertainty that is destructive to people’s ability to make positive decisions and commitments.

But now I’m hopeful that the stock market, this collective mouthpiece of so many, which is nothing if not 100% sincere, will have finally taught Mr. Bernanke that he could just be a little milder in his statements. Could he not simply have said something on the order of, “It looks like there might have been some mild erosion of price stability expectations and it is probably nothing, but don’t worry, if it ever became a serious concern we would take action that I feel certain would be very effective.” This is a market that needs reassurance.

Well, my gut feel is that this has happened enough times so that the stock market has now tamed Ben Bernanke, at least a little. If he does it again, his term really should not be renewed. But I would hate to see him replaced because at least now he has some experience, and some new Fed Chief would not. And it seems that being Fed Chief is a job where there is just no substitute for actually doing it for awhile to get the hang of it.