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Tuesday, May 08, 2007

 

Back from the Beach

Our annual Myrtle Beach golf vacation was as much fun as ever, though there was no hiding the constant deterioration in my so-called "skills." In recognition, I am adjusting the redwavemusings profile to show a more realistic handicap. Anyway, it was nice to see a part of the country not dominated by "For Sale" signs. The Beach combines a resort and retirement community, and those are growth industries, in an otherwise decelerating economy.

Don't be fooled by the major stock averages, making almost daily new highs. I think the higher prices reflect embedded inflation more than they do increasing value based on real earnings. Not surprisingly, M & A is the major driver here, also recognizing inflated values. The Fed has been monetizing the deficit, under the disguise of a higher federal funds rate. The resulting inflation continues to be reflected by higher commodity prices. Read Steve Forbes' magazine editorials to get a proper perspective on what's actually going on.

The current blue chip rally looks more like the end of a bullish cycle than anything else. When the generals are out in front of the troops, everybody eventually gets killed.

That doesn't mean that I am going to sell everything, since I don't rely on market predictions, even my own. I'll follow the market, like always, and hope it gives me the right signals. Also, markets don't move in straight lines, and the topping process can take a long time.

Another thing I don't like very much is all this option activity preceding takeover announcements, indicating illegal insider trading. You might recall that we had an unhealthy dose of that before the 1987 market break. So, all in all, this is a time to be cautious and look for good value, even though value stocks and smaller stocks seem to have topped already.

By the way, if the dems retain control of Congress for very long, they will surely kill this economy through misguided tax policy. The Bush tax cuts are what set the current prosperity in motion and are solely responsible for keeping it together. Aside from all their horrendous proposals and pay/go philosophy, the dems can pretty much cause a train wreck by doing nothing, letting the tax cuts expire and allowing the entire middle class, especially in high tax states, to be bashed by the AMT next year.

Repeatedly, I have suggested that using the AMT structure as a flat tax approach in lieu of the current system is the way to go. Part of that proposal would be to eliminate all the deductions disallowed by the AMT but increase the income exemption (taking all low earners off the tax rolls) and reduce the AMT rate from 28% to something like 17-20%. The result would be a much simpler tax system, fairer, easier to enforce and understand, generating sufficient revenue, and encouraging productivity. Again, read Steve Forbes' work on this subject. The solution is so elegant and effective, it will never happen. The social engineers in Congress and the special interest lobbies will fight to their last breath to preserve the illusion they are accomplishing something.
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It's unfortunate that political debates weigh so heavily in our process, since they are an absurd way to assess a presidential candidate, and give the (liberal) media undeserved spin opportunities. Look at the way the media reacted to Rudy Guiliani's comment about Roe v Wade, which I thought was pretty measured. They thought he blew it since they reviewed it in light of their belief that the Republican base is uniformly pro-life. In reality, most GOP voters consider abortion one of many issues they are concerned about, but relatively minor compared to terrorism, tax policy, overall judicial activism, and economic growth.

I'm not an avid Guiliani fan, but the media continues to ignore the poll numbers and pound the drumbeat that he couldn't possibly be the choice of mainstream republicans. As has been noted here, Guiliani is more popular in red states than he is in New York.

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Interesting analysis today by Michael Barone in the Journal concerning the population changes in various regions around the country and how the 2010 census will impact Congressional seats and electoral votes. He made the point that the population is shifting to red states from blue states, but went on to make an error in assuming that those states will vote in accord with their recent patterns. My own take is that population shifts result in the new residents bringing their partisan views with them and probably narrowing the margins in their new states. A good example is Florida, and another is Nevada.

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Mariano Rivera has already blown two saves and lost another game, so his aura of invincibility is gone, at least for now, and that happens to all relievers as they get older. It's always a shock, and if you want to see a team lose its confidence and strut, watch what happens when they perceive their closer is unreliable. Mariano is a guaranteed Hall of Famer no matter what happens from here on, but even though the Stinkees' starters have shown signs of life, I don't think this team is going anywhere. They look like a 500 ball club to me. As for Roger Clemens, the Yanks are rolling the dice on a 40+ year old power pitcher who hasn't pitched in months, and no one knows what's left in the tank. He may help if he pitches like he did last year, or he may simply break down. Glad it's not my money.

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On 4/23, I sold 100 shares of BRLI at 26. 78. Originally purchased for the taxable account on 5/20/02 for 9.07. On 4/27, I bought 100 shares of PWI at 20.09 for the taxable account. On 4/30, I sold 300 shares of CNRD at 9.75 (purchased for 1.95 on 11/2/04 - gotta love those 5 - timers), and bought 100 shares of BMTC, a new name, at 24.28, all for the taxable account. Finally, on 5/7, I bought 100 shares of PBCTD for the IRA at 20.35.

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