It was the best of times, it was the worst of times, it was the age of wisdom,

it was the age of foolishness, it was the epoch of belief, it was the epoch of
incredulity, it was the season of Light, it was the season of Darkness, it
was the spring of hope, it was the winter of despair, we had everything
before us, we had nothing before us, we were all going direct to Heaven,
we were all going direct the other way–in short, the period was so far like
the present period, that some of its noisiest authorities insisted on its being
received, for good or for evil, in the superlative degree of comparison
only." - Charles Dickens, 1859

Dickens' famous novel (which was originally written as a weekly series in 31

installments) depicts life in the time of the French revolution but was also a parable,
meant to warn the British aristocracy that they should not ignore the parallels to the social
inequities that existed at the time in England. Dickens warned the nobles that the seeds of
revolution were planted through unjust acts and surely there would be a time of reaping
yet to come.

It is said that the French Revolution was sparked by outrage over a statement by the
Queen Marie Antoinette who, when told that the peasants had no bread to eat, supposedly
replied (she never actually said this) "Qu’ils mangent de la brioche" or "Then let them eat
cake." It’s hard for us to imagine the impact of this statement in modern times but
"peasants" were 90% of the population at the time. Bread was 90% of what they ate,
consuming 50% of the average family’s income. People weren’t silly enough to pay for
housing back then - they just found a bit of land, bought some wood and nails and built
their own homes. Brioche was a luxury combination of bread enriched with flour and
butter so the statement "Qu’ils mangent de la brioche" implies both lack of caring and
cluelessness on the part of the Queen.

The United States had what passes for a revolution between 2006 and 2008 as we threw
out the Republicans and went with a Democrat-controlled government. While the Bush
administration, the Republican Congress and Fox News may have been as clueless as a
French Queen to the plight of the people - the fact of the matter is that the base pay of top
management rose 78% from 2002-2007 while the pay for workers went up just 24%. The
top 10% of executives and professional workers drew 33% of all income paid in the U.S.
($2.1Tn) and that does not take into account stock options and bonuses that more than
doubled that figure. [click on images to
enlarge]

At the same time as the income gap was

widening to historic levels, commodity
prices doubled, taking the cost of food
and fuel from 12% to 20% of household
income. Add in skyrocketing health care
costs and you can see where the seeds of
revolution had been sown long before the
2008 election. Disposable income has
fallen from 8% in 2000 to actual negative numbers in 2009 (families must borrow just to
survive). Is it any wonder that people in America were hungry for change as the decade,
and their incomes, wound down?

Despite the change in leadership, 2009 has not been kind to the American proletariat.
There has been a $539Bn decrease in real income and, since 2006, Americans have lost
$3.7Tn housing value (15%). Homes represent 42% of the average family’s total net
worth but it’s worse than that because home mortgage debt is at $10.4Tn, which is 57%
of total home worth. U.S. home equity has dropped from 58% in 2003 to 43% this year, a
loss of over 25% in 6 years. This is reality for American peasants, the 300M people who
aren’t in the top 10% and don’t read the Wall Street Journal (as they have nothing to
invest) and don’t shop at Williams-Sonoma (WSM) or Tiffany's (TIF) or Saks (SKS) or
Nordstrom's (JWN) - all stocks that have been off to the races in the second half of 2009
as the rich grow far, far richer.

How much richer, you may ask? Well,

the chart on the right says it all. In the
past quarter century, the inflation-
adjusted household income for the top
3% of Americans has tripled while the
other 97% have gained about 50%,
roughly 2% per year over inflation. Since
1979, 80% of the vast GDP growth in the
United States has been diverted to less
than 10M of its citizens, while the other
295M people struggle to maintain their
lifestyles. Forcing the vast majority of
Americans into a life of wage slavery has,
of course, been an economic renaissance
for those of us fortunate enough to be at
the top of the economic pyramid.

Since 1979, the hourly earnings for 80%

of American workers (those in private-
sector, nonsupervisory jobs) has risen by
just 1 percent, after inflation. The average
hourly wage was $17.71 at the end of
2007. For male workers, the average
wage has actually slid by 5 percent since
1979. Worker productivity, meanwhile,
has climbed 60 percent. If wages had kept pace with productivity, the average full-time
worker would be earning $58,000 a year; $36,000 was the average in 2007. The nation’s
economic pie is growing, but corporations by and large have not given their workers a
bigger piece but have instead, kept that 60% gain almost entirely for themselves.
The typical American worker toils 1,804 hours a year, 135 hours more per year than the
typical British worker (3.5 weeks), 240 hours more than the average French worker (6
weeks), and 370 hours (or nine full-time weeks) more than the average German worker.
No one in the world’s advanced economies works more for less. A 2007 report by the
Congressional Budget Office found that the top 1 percent of households had pre-tax
income in 2005 that was 140% larger than that of the bottom 40 percent.

So let’s not kid ourselves, America, we have effectively re-created a slave-driven

economy but we’ve wrapped it in the flag and keep the slaves in line by providing them
with cheap beer, happy meals and 200 channels of corporate entertainment while
drumming into their heads that all they need is a dollar and a dream and they too can step
right over the fallen bodies of their fellow
workers to join us at the top of the
pyramid.

With the fall of Communism, the global

economy has become more and more like
us. One of the great accomplishments of
capitalism is that we have made the rich
into heroic figures while the working man
or the soldier is just the anonymous cog
in the great machine. Two thousand years
ago, the masses were kept in line with
tales of Hector and Achilles as any man
with a sword that was strong enough
could gain immortality. A thousand years
later, ordinary men could aspire to be
knights or saints. But, after the Dark Ages
that mythos was lost as the noble class
tightened their grip and denied upward
mobility to the masses which, of course,
led to revolution. America, France,
Russia, China - all went through
revolutions and England even had one in
the mid 1600s and many small revolutions swept through Europe in the mid 1800s
(around the time of Dickens' writings).

The cure for all this revolutionary nonsense in the Western World was Capitalism, which
was embodied by another writer in the late 1800s called Horatio Alger, who became
famous for writing over 100 books along the lines of "rags to riches" stories. By leading
exemplary lives, struggling valiantly against poverty and adversity, Alger’s protagonists
gain both wealth and honor, ultimately realizing the American Dream. The characters in
his formulaic stories sometimes improved their social position through auspicious
accidents instead of hard work and denial but the bottom line is the myth of upward
mobility that lets us all aspire to be modern economic heroes like Rockefeller, Hughes,
Buffett, Gates, Oprah, Soros and Pickens - sure there’s only 1,000 of those guys on the
planet but we all like to believe it could be us too, right?

Capitalism is so good at keeping the masses in line that even China and Russia have now
adopted our model as it turns out you can effectively squeeze much more out of your
workers with carrots than with sticks. The dream of modern capitalism also has the added
benefit of relieving the wealthy of the burden of guilt by envisioning a level playing field
in which they have triumphed through their own hard work and perseverance making it
poor people’s own damn fault if they can’t be motivated enough to improve their lot in
life. It is necessary to engender this feeling amongst the rich lest the conscience of some
may lead them to "overpay" their workers, which makes their fellow entrepreneurs look
bad so we have devised a system (the stock market) in which only the most ruthless
practices of capitalism are rewarded over
time.

OK, liberal rant over now - I feel better

having indulged my Dickensian side and
identifying with the plight of the workers
but workers don’t buy stock market
newsletters so f**k them, right?

We are investors and we shouldn’t be

worried about if it’s fair or right that we have established an economic engine that
funnels the wealth of the nation to the top. If you are reading this article, then chances are
you are on or near the top. Our job is to figure out how to maintain or improve our
position. My biggest failing of 2009 has probably been worrying about the long-term
repercussions of impoverishing 295M people when really it’s just us (me and my
9,999,9999 economically close friends) that we need to worry about. We have jobs and
money and assets and stocks so, once
again - F**k those people!

Now that we have Russia and China on

board with this Capitalism thing, we are
more efficient at exploiting the global
labor force than ever. Corporate profits,
other than 2008, have climbed an average
of 13% a year without increasing wages a
single cent over that same time period.

Corporate profits have climbed to their

highest share of national income in sixty-
four years, while the share going to wages has sunk to its lowest level since 1929 -
Perhaps there has never been a better time to invest in Corporate America than right now.
Our global GDP has climbed to about $55Tn, up 100% in 20 years and, the best news of
all is that we’ve made sure that over $21.5Tn (71%) of that growth went to the top 10%
of the population. By keeping the money amongst ourselves, we can be sure that it goes
where we want it to.

What does it matter if the capital allocation to the great unwashed masses barely keeps up
with their population growth when our cut grows by leaps and bounds? We only need
them to have just enough to eat and to be able to dress and transport themselves to a place
where we can get that 1,800 hours of highly-productive work out of them. This makes
good, economic sense. If we give money to the world’s 6Bn poor people, they’re only
going to go and buy bread (or dare I say cake) and maybe shoes or clean shirts and
mostly they will buy them at Wal-Mart (WMT) or, even worse, make it themselves and
there’s little profit for us in that. By keeping the vast global wealth "in the family," so to
speak, we can sell iPods and Hummers and luxury homes and diamonds and gold and
other high-margin, unnecessary items to each other that allow the corporations we invest
in to make obscene profits which, in turn, makes us even richer! Isn’t that fantastic?

So let’s not kid ourselves that anything in this country is being done for the benefit of the
90% who serve us. We provide the basics and there are even many fine companies who
can make money selling those basics like Coca Cola (KO), McDonald's (MCD), Johnson
& Johnson (JNJ), Wal Mart etc. that we can invest in. One of the big issues we had been
facing the past few years is that the damned poor people kept dying because they didn’t
have adequate health care as they squandered their meager wages on cheap Chinese treats
from the dollar store or whatever it is poor people do when you let them have money.
Now we have taken a great step towards mandating that a portion of their meager wages
goes towards health care and, in doing so, we have created 40M new patients for our
wonderful medical industry to exploit.

Back on August 10th, we had discussed IHI

(medical equipment) as a great growth ETF to
play in this space. They have done well, up 20%
so far and I still like them. The components I had
also picked at the time: Intuitive Surgical (ISRG)
(which was a Fall favorite of ours and up over
200% since our pick), Medtronic (MDT)
(11.8%), Thermo Fisher Scientific (TMO)
(7.5%), Boston Scientific (BSX) (7.3%), St. Jude
Medical (STJ) (7%) and Stryker (SYK) (6.1%)
with BSX and STJ acting as the laggards of the
group. I still like BSX but can do without STJ
now. We are expecting a possible pullback now
that we’ve hit $53 as this is our goal for now.

What I had said on August 10th was:

If the ETF does make it over $47.50, then it will

likely fill the gap at $53, which would make a
nice 50% (on our option play) or better profit on the bull side.

General Electric (GE) is also big on medical devices and also infrastructure plays that
should do well next year. Big Pharma (Merck (MRK), Pfizer (PFE)) should do well with
40M new patients coming on line and we always like Biotech like Celgene (CELG) and
Amgen (AMGN) and let’s not forget the actual hospitals like Universal Healthcare
(UHS) and Tenet Healthcare (THC), which have millions of new patients to take care of.
It’s hard to get a grip on how big the impact of national health care is without
understanding that the bottom 90% of this country has no disposable income at all and
now, through a government mandate, we have now enabled them to buy hundreds of
billions of dollars in medical care - what a country!

I don’t think there was a single play in our August 8th selection of Pharmboy’s
Phavorites that didn’t pay off other than OncoGenex (OGXI), which I said was my least
favorite. We’ll be doing a lot of these articles in the coming year as health care looks to
be the most exciting sector for long-term growth, especially with the aging baby boomers
lining up to join the poor to be diagnosed and medicated in the second decade of the
century.

The 295,000,000 that share 28% of this

nation’s wealth in 95M households are
normally supported by about 140M non-
farm jobs but that was down to just 120M
jobs as of Nov 17th so, as a group, we’re
sure not going to be counting on the poor
to be splurging next year as even record
job growth (6M) would only replace
about 1/3 of all jobs lost. What do the
poor do when times are hard? Mainly they shift their spending so we can expect more
money spent at McDonald's and Burger King (BKC) with less money spent on "casual
dining." We can expect pasta and bread to do well and meat to do worse because those
items depend on large numbers of buyers.

The disposable income of the poor this year will depend very much on the price of oil
and other commodities and that’s going to be one of the year’s trickier issues. To some
extent, the price of oil is based on consumption but, since speculators took over the
market, it’s been fairly disconnected from reality and speculation is a rich man’s game so
it’s really a question of how much pain can be inflicted on the working classes before
they change their habits so much that it spurs actual price competition among the oil
producers - something that is also avoided through the formation of cartels. Consumption
of oil fell 5% this year yet the price of oil is up nearly 100% from last winter - go figure.
While the commodity pushers can charge
us (the top 10%) whatever they wish for
oil, gold, copper, food and lumber - it
seems they have already squeezed the
bottom 90% to the breaking point. The
$3.5 trillion that was overcharged for
commodities in the last few years was
withdrawn from household wealth.
Without an expansion of household
values, increases in lending or (gasp)
higher wages - I just don’t see that they have any room to push the commodity train.
Even inflation and dollar devaluation doesn’t work until you get those dollars into the
hands of the bottom 90% so they can trade them for gas or bread. That’s the great joke
about the inflation pundits - they seem to think it can magically appear just because the
banks are hoarding our increased money supply. Unless the banks start buying a few
million barrels of oil per week, we’re
going to have to wait for the citizens to
catch up.

And keep in mind that our poor people

are the richest poor people in the world.
Over 4Bn people in this world get by on
less than $2,000 a year while our welfare
recipients get a whopping $12,000 a year
- enough to be considered upper class in
many of the World’s nations. So our nation’s poor can actually afford to eat cake, as well
as many other foods loaded with delicious and relatively inexpensive polyunsaturated fats
(that are leading to those health problems that are killing them).

Keep in mind that, in the above chart, you are looking at the percentage of the average
US household but imagine how that changes for households on the bottom half of that
$48,000 average income, especially for the 34M homes that make less than $20,000 a
year yet still need to eat as much as the average family of 4 and probably still want things
like heat, clothing and maybe a bed to sleep in - it simply doesn’t leave a lot of room for
"other."

So forget those people - they are simply

not going to be customers of much next
year. Let’s concentrate on the people who
have money - us! With 71% of the
nation’s net worth and 66% of its annual
income, the top 10% are the real
customers for U.S. business. Unfortunately, it’s just 10M households with 30M people so
we need to focus on things that can be sold to relatively few people at high margins.
That’s going to rule out cars (other than Porsche or BMW), mid-priced homes (but look
for luxury home sales to come back) and mid-priced merchandise as the middle class is a
vanishing myth, which is going to leave the merchants who try to service them out in the
cold.

Financial services will do well as we shuffle our money around through various
investments but don’t look for banks who rely on lending to the masses as they are all
tied too tightly together to separate the good from the bad. That makes the whole sector a
bit too dodgy, although we continue to like XLF and UYG as the sector in general should
recover over time.

Another problem with the banking sector is the probable end to the free money train
that’s been supporting them since last November. While there are 30M of us who are
ready, willing and able to borrow money for our various endeavors, banks need volume
and it’s not very likely the other 275M Americans will be filling out successful loan
applications in 2010. That limits the amounts of homes that can be bought and the total
volume of credit that can be extended and also runs up the risk of default as we are now
spreading our risk over a smaller borrowing pool.

With global debt piling up at a rate of over $10Bn a day, we are rapidly reaching the end
of the game where we pretend interest rates can stay this low (especially if the economy
really does heat up and creates a demand for money) and that brings us back to our
favorite ETF: TBT, the ultra-short on the value of a 20-year treasury note. The higher
rates go, the lower the value of the fixed-rate notes that suckers have been buying for less
than 3% interest this past year. We’ve been in TBT since the low 40s but we are very
confident rates have only one way to go in 2010, good for another 20% from the current
50 at least.

Travel should do well next year as many of us put

off vacations while waiting to see how the
economy shakes out. As we get more confident
the world is not ending in 2010. Priceline
(PCLN) is out of control but I still like Orbitz
(OWW) as a value play and Carnival (CCL)
should perform well long-term as high fuel prices
are not likely to return as fast as passengers.
Continental (CAL) is still an airline stock I like
and Marriott (MAR) is the place to stay as
business travelers once again venture out of the
office. Intercontinental (IHG) is also a good pick
in the luxury travel area.

I mentioned that GE should do well on

infrastructure building. My big concern with
them remains Commercial Real Estate but no one else seems worried about that sector.
GE is also big on solar projects, which should do well and my favorite pure play on Solar
remains Sun Power (SPWRA), who are the quality leader but I also like Suntech (STP)
and, of course, MEMC (WFR) on the chip side. Also in the chip space is Applied
Materials (AMAT) and Intel (INTC) while Corning (GLW) should have a great year
supplying glass for all the new electronic devices us top 10%’ers love to buy.

I wouldn’t go so far as to stick my neck out on luxury retail as some of that is affected by
aspirational buyers, of which there are far fewer these days as aspirations have been
crushed into dust by the latest downturn. My main concern for the U.S. and the global
economy is that rising rates and other credit risks, reflected in various CDS rates, will
begin to bring down some of the marginal global economies like Spain, Greece and
anything ending in "stan" or "ia." Also, 20M unemployed in the U.S. and 400M globally
is nothing to sneeze at. Will we, the top 10%, bear the cost of taking care of them or shall
we, like old Scrooge, wish them to die quickly and help decrease the surplus population?

The year 2010 is going to be an interesting one. It seems the majority of investors
believes that we can keep living on this harshly divided planet and keep squeezing
productivity gains out of the working masses even as we continue to hold wages down
and drive the cost of their basic necessities higher. Even the slave owners had to provide
food, clothing, shelter and medical care to their workers although I suppose we can feel
good about the fact that slave owners outlawed education while we simply provide a very
poor quality one - not enough for true upward mobility but certainly enough to hammer
home the message that all they need is a dollar and that great American dream.

As long as we can keep the peasants from revolting we can keep partying like it’s 1999
but I do have reservations (obviously) and we will continue to exercise a degree of
caution in our investing. History has taught us that the rich can indeed get richer and we
have plenty of good places to focus our bullish attention as we begin this century’s
second decade.

Author's Disclosure: We trade very dynamically on our member site and in the hedge
fund. At the time of writing we are short RTH, DIA, USO; Long ISRG, KO, XLF,
MDT, BSX, WMT, GE, CELG, AMGN, PFE, BKC, TBT, CCL, MAR, STP, WFR,
AMAT and OWW, but these can change at any time. Most of these positions are
hedged, so long and short only apply to base positions, not the option covers.