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8:30 AM EST Monday, July 31, 2006: I put $42 of gas into my 4-cyclinder Subaru on Sunday. I have never put that much in. I freaked. Fortunately, I only drove it to the train station. Pity the poor wretches who have to use their cars for commuting and visiting customers.

Oil has skyrocketed for six reasons:

1. Huge new demand, especially from China and India.
2. Inability of the major producers to quickly ramp up production to meet that demand.
3. Mideast political fears.
4. Fears we're running out of oil.
5. Hedge fund (and other Wall Street) speculation.
6. Slowness at finding new sources or developing large-scale viable alternatives, like wind or solar.

Oil is critical to us as investors because it's like a heavy tax on the economy. It hurts consumers and companies, cutting expenditures and reducing profits.

Now comes word of a worrying new development in the oil biz. Ten members of the Kuwaiti National Assembly last week tabled a motion to link Kuwait's crude oil production with its oil reserve. After it is passed by parliament (and it probably will be) it will become law. What Kuwait is trying to do is to hold a little of its oil for future generations of Kuwaitis -- a totally admirable goal. What it means for us that Kuwait will cut its oil production from 2.65 million barrels per day to 2.25 million -- about 15%. In and of itself, this is not a huge cut. World production is 85 million barrels a day. But, if every other oil producer got this weird idea of holding something for their grandchildren, the price of oil is likely to skyrocket even further. I smell $100 a barrel.

Each lift in oil prices means more profits for Canadian Oil Sands Trust (COS-UN.TO), a big player up north developing reserves that allegedly contain almost as much oil as Saudi Arabia. . The company recently reported its second-quarter profits -- up 54 percent. As they say in Australia, that's better than a slap in the belly with a cold fish.

My hope here is that what I lose at the gas pump, I more than make up with COS-UN.TO's its rising stock price.

Cash remains King (with exceptions)
Cumberland Advisors is a small money manager in Vineland, NJ , with $800 million under management. This weekend, they put out a regular newsletter. This one reinforces my "Cash is King" theme of recent weeks.

Carthage must be destroyed!

The Financial markets this week started to discount (with the present stock and bond rally) the best possible outcome of the present situation in the Middle East and in the US economy. We believe that was an error.

We describe the best Middle East outcome as follows. 1. Hezbollah is quickly dispatched and rockets stop landing in Israel. 2. Syria sues for a peaceful settlement on its borders. This leads to 3. Syria joins Jordan & Egypt in a non-military border with Israel. 4. Lebanon starts a rebuilding process with a true government and without Hezbollah a part of it. 5. Some settlement occurs with the nutcase leader in Iran. 6. The nuke threat is diminished. 7. Fatigue hits the Shia-Sunni civil war in Iraq. 8. Iraqi oil reserves turn into real production.

In sum: for the best outcome we will need to see that peace breaks out. Oil drops to $40-$50. Stocks soar worldwide. Energy induced inflation heat subsides in the US. Interest rates plateau. We all relax.

Champagne anyone? Not for me.

If you believe this best outcome will arrive, stay fully invested in global markets. BTW, see me privately and I have a bridge to sell you at a bargain price.

Markets are ignoring risk premia which have been rising. That is why they rallied on a single and very preliminary GDP report and a Middle East trip by Condi Rice. This was a relief rally from a deeply over sold condition in both stocks and bonds. It may have a few more days. We are not betting that a new long term bull market has been launched.

For the Middle East, any scenario besides the one outlined above requires some wrenching economic and financial outcomes. In the extreme scenario we will have contagion because of the Iranian missiles being used by Hezbollah in Lebanon with Syrian help as the conduit of supply. The newer and longer range versions are starting to appear. They may be partially manufactured in North Korea. This is a dangerous situation and may lead to a spreading war.

Remember, Israel cannot stop its military action as long as there are rockets landing on her soil. Therefore, Israel must have clear buffers AND iron clad diplomatic guarantees before hostilities cease. Neither seems likely now. Israel has its back to the wall. It has no choice but to persist until the Hezbollah threat is eliminated.

History has a metaphor that leads back to Carthage (modern Tunisia) and the Phoenicians (ancient Lebanon). The Carthaginian’s religion and customs were based on the Phoenicians. Carthage’s economy had its routes in the port city of Tyre in Lebanon. That city now houses Hezbollah supplies; its seaport helps their delivery.

In Carthage, child sacrifices were common. In the modern Eastern Mediterranean, the Hezbollah hide their rocket launchers in civilian cover and care not about the causalities they have brought on their Lebanese hosts. War is not pleasant. In the third Punic War, Rome concluded that Carthage must be completely destroyed. In this one, modern Carthage (the Hezbollah) must be eradicated. I must publicly thank my friend, John Silvia, for this history lesson.

In America, GDP is certainly in a downtrend. We do not know how far or how fast. We do not know if the economy will have a soft landing or if it will get hard. We recently wrote about the housing bubble and the risk it poses to the US economy. See www.cumber.com for that essay. And we have repeatedly discussed the impact of a high energy cost to the consumer in the US. Now that natural gas prices are rising along with high oil, the energy share of disposable personal income is approaching 7%. Coupled with a housing downturn and this is where slowdowns become recessions. That is up from a low of 4% just a few years ago.

It is too soon to celebrate a new bull market in stocks and a permanent rally in bonds. Too soon for certainty that this Fed is going to stop raising rates and start cutting them. The Fed will have no credibility if it allows inflation to exceed its Bernanke-stated targets. That is where inflation is right now. That is also the present Fed forecast. Bernanke has no choice but to lean against inflation and hope that the landing is a soft one. We hope so, too. But we remember the warning that when investors need their hope to be realized in order to succeed, they are flirting with danger.

We remain with a cash reserve in our ETF accounts. Our bond accounts emphasize the highest credit quality and are moving only to a more neutral duration after a prolonged period of short duration as interest rates rose during the last three years. We expect more rocky movement in financial markets during the rest of the summer.

Another reason not to like tech stocks. Gretchen Morgenson wrote "Options Fiesta, and Investors Paid the Bill" in the Sunday New York Times:

BUYING high and selling low is nobody’s idea of a get-rich-quick scheme. But that is precisely what companies do — with their shareholders’ money — when they bestow stock options on executives and employees and then buy back shares to offset the grants.

When companies then backdate those option grants to secure a lower price for the lucky people getting the options, they have essentially used stockholder money to buy high and sell even lower than their filings had previously disclosed.

Much of the recent discussion about backdating has centered on its inequity and its basic cheesiness. Outside shareholders, after all, do not get to change the terms of their stock purchases to manufacture the lowest possible price. Do-overs that sweet seem to be only in the purview of insiders.

But backdating is not a victimless crime. There is already a cost associated with unaltered options grants and for many technology company shareholders it has been high. Backdating only adds to the price tag.

Now that accounting rule makers have required companies to deduct options’ costs from revenue, as they do for other employee expenses, options’ effects on corporate income statements have become clearer. But you can also weigh option costs another way — by analyzing how much money companies must spend to buy back shares that the granting of options creates. Amounts spent on these buybacks keep share counts from ballooning too high, but also reduce a company’s net worth (or what investors — the company’s real owners — like to refer to as shareholders’ equity).

Companies don’t like it when their option programs are described in these stark terms. A tough analysis of the Altera Corporation’s high-cost buybacks was behind its retaliation last July against Tad LaFountain, a technology stock analyst then at Wells Fargo Securities. Altera, a semiconductor maker, stopped talking to Mr. LaFountain because he rated the company’s stock a sell.

A primary reason for his pessimism was his view that Altera’s stock buybacks were a poor use of shareholder money. And a great deal of money it was. Altera’s most recent annual report stated that between 1996 and the end of 2005, it had repurchased 86.6 million shares at a cost of $1.8 billion. That averages out to $20.78 a share. The stock closed Friday at $17.34.

At the same time that Altera was buying back its shares in the open market, it was selling shares to its employees — through option grants — for far less. Last year, for example, Altera paid $18.58 on average to buy back 20 million shares. When employees exercised options in 2005, Altera received only roughly half that amount — $9.32 a share on average. In other words, Altera and its shareholders swallowed a 50 percent hit on shares the company purchased to maintain its lush options program — while Altera employees and executives who sold stock after exercising options pocketed that lucrative difference.

The figures are similar in earlier years. In 2004, the company paid $21.36 on average to repurchase stock while receiving $7.01 a share, on average, from employees exercising options. And in 2003, Altera paid $19.17 a share in buybacks versus the $6.23 on average that it received.

Some $155 million in shareholder money has gone down this particular drain at Altera over the last three years. That translates to about 22 percent of the company’s net income during that period. That’s real money and Altera’s shareholders are all the poorer for it.

Mr. LaFountain, who is no longer an analyst, offers a simple explanation for why this occurred at Altera and other companies. “The whole reason for this vehicle,” he said in an interview last week, “is it is a way of channeling excessive amounts of shareholder wealth to the insiders.”

An Altera spokeswoman declined to comment. Regulators are scrutinizing its options grants for possible backdating; the company has said it will have to restate 10 years of financial figures as a result.

The stock option arithmetic at other companies is similarly eye-opening. Since 2003, for example, Affiliated Computer Services, an information technology company in Dallas, has purchased 22 million shares at an average price of $50.27 each. In fiscal 2004, the company’s shareholders paid $49.57 a share to cover buybacks. Yet the shareholders received just $16.46 a share from employees exercising their options in 2004. Last year, the company paid $50.95 on average to buy back shares; it received an average of $19.24 a share from employees exercising options. Over all, Affiliated’s shareholders paid almost $130 million to buy high and sell low — the equivalent of 13.5 percent of the company’s net income.

And shareholders at Broadcom, a semiconductor company in Irvine, Calif., last year paid on average $42.12 a share, presplit, to buy back 3.6 million of its shares. They received just $21.09 a share on average from option exercises. Buying high and selling low cost Broadcom’s shareholders $77 million in 2005. Broadcom has also said it will have to restate its financial results; depending on how much backdating accompanied its options grants, the cost to shareholders will rise.

There’s something wrong with the idea of using shareholders’ money to turn corporate insiders into multimillionaires. Wasn’t it supposed to be the other way around?

Yet another reason NOT to buy tech stocks:

Bill getting off on his new Zune.

Microsoft is about to
1. introduce an iPod look-alike called a Zune,
2. enter the security arena with its Windows Live OneCare security package, and
3. partner with Nortel Networks to jointly develop and sell internet-based telephony and communications equipment.

In each case it will be competing against companies it has been licensing software to. I can't see how this wins friends. Nor do I see heavy Microsoft product design skills (outside mice) that will make Microsoft more money in product sales than it will lose in licensing revenue.

Sunday on Fire Island.
I love neat signs. This is Leaman Morgan in New York's Penn Station wearing his favorite t-shirt. Leaman explained that to swagger is to shuffle or walk in a very special way -- his way. "Jacking" comes from hi-jacking or car-jacking. It means to steal. Leaman is telling us not to copy his particular shuffle. He explained, "Only I do, what I do. Not you." He was great.


Leaman Morgan showing how he swaggers.

My favorite sign on New York's Fire Island. The biggest crime in Saltaire (where we stayed) is bicycle theft.


Sunset last night on Fire Island. It was perfect. You can see the the Robert Moses bridge in the distance.

The Purina Diet. Who knows if this is true. Who cares.

"I was buying a large bag of Purina at Wal-Mart and was in line to check out. A woman behind me asked if I had a dog. On impulse, I told her no, and that I was starting The Purina Diet again, although I probably shouldn't because I'd ended up in the hospital last time, but that I'd lost 50 pounds before I awakened in the Intensive Care Unit with tubes coming out of most of my orifices and IVs in both arms. I told her that it was essentially a perfect diet and that the way that it works is to load your pants pockets with Purina nuggets and simply eat one or two every time you feel hungry. Since the food is nutritionally complete and perfectly healthy, I decided to try it again."

"By now, everyone in the line was by now enthralled with my story, just hanging on my every word, particularly a tall, black guy who was behind the woman I was describing the diet to."

Horrified, she asked if ended up in intensive care because the dog food poisoned me.

I told her no, and went on to explain that I'd been sitting in the street licking my balls when a car hit me.

"I thought the black guy was going to plotz as he staggered to the door, laughing uncontrollably."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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