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Monday, July 24, 2006


Entitlements Crisis - Part 3

To review this series, you can re-read the first two parts in the archives. In Part 1, dated March 29, 2005, I teed up the issue placing the entitlement programs in their historical and economic contexts. Part 2 made the case that a funding crisis already exists, and that private accounts were the only reasonable alternative to benefit cuts or increased payroll taxes, attacking the problem from the earnings yield side. Since private accounts failed politically, at least for the forseeable future, Part 3 will explore the case for benefit cuts and higher payroll taxes.

Benefit cuts are easy. Social security already provides much more than was originally conceived, even taking inflation into account. One of the problems is the COLA adjustment. COLA's are put in place because of inflation expectations. The trouble is that such expectations themselves feed inflation. A viscious cycle develops, increasing the real value of benefits provided to unnecessarily high levels.

The most obvious benefit cut to make would be to end COLA's - forever. Take them out of the program. The real value of social security benefits will gradually decrease but not as much as one might think, since I would expect that this change will reduce inflationary expectations and the growth of government expenditures, both reducing inflation versus what it would otherwise be. If a benefit increase achieves a political consensus at some point, let Congress vote for it, but no more automatic increases triggered by anything.

We conservatives have a harder time recommending payroll tax increases. These taxes damage the economy, because when you tax something (payrolls), you get less of them. However, social security taxes are regressive, not because they are flat (that's neutral, not regressive) but because there is a maximum wage base subject to the tax. This is doubly offensive because of the obscene compensation being taken down by corporate senior executives (with the aquiescence of their hand picked boards) and Wall Street investment bankers. The vast majority of this swollen pay is beyond the SS wage base.

Now how does a sensible proposal like the Forbes flat tax get anywhere when paired with the regressive payroll tax? I would propose that the flat tax (eliminating most deductions and reduing the weight of the tax code by about 95%) be implemented in conjunction with the elimination of the cap on the wage base. Make all wages (and option gains) part of the SS wage base - then see if Corporations don't rein in some of this outlandish pay. The favorable impact of the flat tax will offset the negative economic impact of the higher payroll taxes. A larger proportion of government revenues will go to social security, which I would take off budget again. Let Congress live on the flat tax and other government revenues while social security is funded back to solvency in what would be perceived as a much fairer system.

In part 4, the conclusion of this series, we'll look at the really hard stuff, Medicare and Medicaid.


Another day of positive Market fireworks today, which will mean nothing again if we don't see some follow - through. I don't expect to see any - I think the bears are still in control. These big positive days interrupting the market slump are largely short covering exercises. The next day, the shorts are back to reestablish new positions.

However, I don't try to time the market. My system is based on asset allocation, and I still have too much cash. On July 17, I bought 100 shares of WTS at 29.45. On July 19, I established a new position, SHLM with 100 shares at 23.31. Today, I bought 200 of slumping ADCT at 11.98.

Sunday, July 16, 2006


Middle East Shooting War

There comes a time when you have to take the gloves off. Clearly, Israel has reached that point. With the Intifada in Palestine formally confirmed by the election of a Hamas Government, and with the inability of the elected Lebanese government to reign in Hezbollah, there is no point in further putting off confrontation with those two terrorist groups and their sponsors, Syria and Iran. Look for more escalation this week. The point is that time can only work against Israel and the US. Better to take them on now, before Iran goes nuclear. So don't be surprised to see would - be mediators brushed aside. Also don't be surprised to see the US take part in some way, particularly if the Israeli's are not able to establish dominance quickly. The Russians will make like they are not happy, but they won't be sorry to see Iran and Syria set back about 20 years.

One interesting thing to watch will be the machinations of our own State Department. If Rice can reign in State's bureaucracy, State might play a useful role at some point. If not, look for them to become completely ignored by the Administration, and for the Pentagon to become our only real foreign policy arm.

As evidence becomes clearer that Hezbollah's more effective new rockets are being provided by Iran, look for Israel to face a difficult quandry - should they bomb Syria or Iran first? After all Lebanon is small potatoes, really just a warm-up for the real thing. Syria is in the mix simply because it is so miserable - the country you just love to bomb. It reminds me of the line from Patton where he admits that if faced with the Germans on one side and the Russians on the other, he would attack in both directions.

This is not to minimize the sadness and tragedy of the situation and the fact that there will be significant casualties on both sides. The terrorist groups are actually more dangerous than the feckless national armies that Israel faced in the 1950's, 60's and 70's. However, they are also intractable devils, and force is the only thing they respect. Unfortunately, this is the world of the forseeable future, where our grandchildren and Bin Laden's are still likely to be at war.


Last Wednesday, I added 500 shares of SIRI to my IRA at 4.30, not such great timing considering what happened the rest of the week. Anyone still doubt that the trend is bearish?

Tuesday, July 11, 2006


Thoughts on the Weekend

They loved the World Cup result in GC where the town is still roughly 50% Italian. Both School and Glen Streets quickly became impassable and the Italian colors were waved proudly. Frankly, I wasn't interested in seeing the Frogs win, though deciding the tournament on penalty kicks was absolutely in keeping with the spirit of the tournament and rather unsatisfying. The winning goal should have been earlier but the Italians were ruled offside (probably about 6 inches offside). Can there be anyone who doesn't agree with me (see my earlier post on this subject) that the offside rule is ruining the game?


Today's terrorist attack in India is just one more example that this is a sickness, and not merely some manifestation (as if it could be justified) of anti-Americanism. It's amazing how many still don't see it. You read the letters to the editor, and just shake your head. Yes, folks, we are at war, and it may be a long one, lasting decades. The enemy is militant Islam. Their soldiers are not poverty's children - many emerge from middle class backgrounds. They are simply anarchists, savages, and misguided believers in a perverted form of their religion. This is a pseudo-fascist movement, and we might as well dig in and create hell on earth for them, or they will do it to us.


On a brighter note, Friday is Bastille Day when the French Revolutionaries stormed the prison and released political and other prisoners. Of course, after taking over the country, the freedom fighters began their own reign of terror, and eventually began to execute their own. Thus began a longstanding tradition of French foolishness that continues to this day, almost 220 years later, brilliantly parodied by Monty Python and many others. The comic relief would be side splitting if it didn't occasionally have real consequences for world affairs. The French have been useless in the War on Terror, and harbor a large Islamic population that bears an awful lot of watching, I'm afraid.


On Monday, I sold 100 shares of TMO at 36.03 out of my IRA. Originally, these were purchased at $39.25 in April of 1998.

Thursday, July 06, 2006


Teflon Buffet Part 2

First, I have to admit that it was a cheap shot, and a little unfair to lead my last post with Buffet's flawed personal life. In fact, the real story seems to be that the late Susan Thompson Buffet decided that she wanted to physically separate from Warren and move to the West Coast, to Warren's consternation. Furthermore, she encouraged, and may have even arranged for the development of Warren's long term extra- marital relationship. So with that mea culpa, I can now move to the last few things that bug me (but seemingly, no one else) about Warren.

Berkshire Hathaway has been an aggressive investor in various insurance arbitrage plays, where policies are purchased not for protection reasons but as investments. This abuse of life insurance products hits very close to home and threatens the tax favored treatment these products get and deserve. Warren should know better. In addition, Berkshire companies have also provided the annuity side of some of these arbitrage plays.

Another thing that Warren plays up is that he opposes stock splits. All well and good, since splits basically amount to paper shuffling and neither create nor change any real values. However, splits do serve one important purpose and that is to maintain the liquidity in the stock. With Berkshire "A" trading around 90,000, it would be difficult for individual investors to purchase even one share without upsetting their diversification standards. Also, for long time shareholders, selling is awkward. The type of selling I do, usually about 5-15% of my holding at a time, would be virtually unworkable with Berkshire. What's good for Warren and his vast portfolio is not much good for other investors. At this point, a 2000 for one split would be helpful, putting the stock at 45 and within easy reach of most investors.

There's a lot to admire about Warren. He has taught people a lot about investing, particularly value investing, and buy and hold strategies. He has been a bulwark against the ridiculous executive pay packages common today. And he IS a bridge player. But he is not really holier than thou, although he acts that way and the media makes him out to be a true sage.


On Wednesday, I sold 600 shares of CNRD.PK, my pink sheet stock, at 3.40, out of my IRA. A lot of holders ran out of the stock when the company stopped providing guidance, press releases, and required public company disclosure (they dropped below the number of public shareholders requiring it). That depressed the price, so I bought some more. Of the 600 sold, I had bought 300 of the shares in July of 2004 at 2.53, the rest in March of 2005 at 2.22. Still have 8000 left between IRA and non-qualified accounts.

Also I would like to thank Jim Cramer for pumping AXYS on his show the other day, giving the stock a nice little artificial bounce.

Tuesday, July 04, 2006


Teflon Buffet

Somehow, one of the great capitalist investors escapes criticism. Warren Buffet is the Sage of Omaha, and his ethics and behavior seem to be beyond reproach, if one reads the media coverage superficially. Those of us who have followed his career a little more closely wonder how he escapes the criticism routinely handed out to his rival CEO's and free enterprise oriented politicians.

Here is a man who, though he long remained married to the same woman till she died, lived apart from her and carried on a longstanding relationship with another woman. Here is a guy whose reinsurance companies that he acquired were right in the middle of the AIG mess, in fact, aided and abetted it. Somehow, he got a pass since their transgressions predated Warren's purchase of the companies, but the violations did not stop with Warren's purchase, only with Eliot Spitzer's investigations. What kind of due diligence is that for such a principled company? Here is a guy who has campaigned against estate tax relief while setting up his own estate plan to avoid taxes, through the charitable foundation route, giving his Berkshire stock to his family foundations and the Gates foundation. It's nice that the money has gone to charity, but make no mistake, the family trustees retain control of their money. Meanwhile, those moderately wealthy folks who have family businesses and farms, or who have good (taxable) estates but not big enough to go the foundation route, are opposed by the ultra-wealthy Buffet when it comes to estate tax relief. By the way, Buffet naturally favors estate taxes coupled with basis step - up for capital gains relief on death for stock and other assets. Some of the estate tax abolition proposals also did away with the step-up in basis, restoring most of the "lost" estate taxes through the capital gains income tax. I am not saying that I favor that, only that I would have expected the media to point out the self-serving hypocrisy in Buffet's position, but they haven't.

I could go on and on. In fact, Buffet has shown individual investors, as Graham did before, that long term value investing is the way to get rich, and for that, he deserves some credit. The fact that Buffet plays with a stacked deck is not something I would hold against him, since so many others with the same advantage fail. But his down home common sense, and holier than thou approach to public policy make me a little queasy. This is another guy whose skirts are less than clean, but for whatever reason, the business and general interest media have given him a permanent pass.

On Monday, I sold 200 shares out of my BAMM position in my IRA at 16.80. These were shares I bought on 1/2/01 at 1.4375. Life can be good. Still have 1700 shares of BAMM left between my IRA and taxable accounts.

Sunday, July 02, 2006


Market trend still lower

When you have the market seeming to tread water, as it did last week, you can lose the handle on the current trend. One thing I've noticed is that unlike the bull markets that seemed to have the occasional downdraft day, with the market ultimately grinding out enough gains to set new highs, lately we have had one day upside fireworks. These one day big moves, without any adequate follow through, are usually counter to the trend. That tells me we are still in some kind of bear phase.

In my system, the market dictates what to do, I don't rely on predictions. I guess they would call it a market follower's system. I have had a lot of recent buys as a result, since I sold all spring, culminating in the takeover of Stewart and Stevenson (SVC) which put me well over my cash target. When the market tanked, that meant I had to keep buying to bring my cash down. Now we're back in equalibrium, so there should be a more normal mix of buys and sells, unless we get another big lurch one way or the other. If it happens, my guess is the market might work lower, but we'll get to enjoy some occasional big up days like Thursday.

On the 28th, I added to my ANDW position, buying 300 shares at 8.73 for my IRA. For a company that's being taking over, the stock is sure acting miserably.

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