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Monday, January 28, 2008


State of the (Dis)Union

Having just watched the President's final State of the Union speech, I was appalled by the behavior of Congressional Democrats, who refused to even politely applaud for much of the speech, no doubt in an effort to appeal to their base that hates Mr. Bush, as has been noted in the immediately prior post. There is a certain respect due the office which in my experience has always been shown, even by Republicans as they were trying to impeach President Clinton. That was not evident tonight, and I think it reflected poorly on the Dems, especially in contrast to the speech itself, which represented one of Mr. Bush's more forthright and diplomatic efforts (smirk and all). I'm sure the base reveled in the disaffection, but I doubt it enhanced the Dems' image in the minds of most independents.


My source on the scene in Florida tell me that it will be Hillary and McCain in tomorrow's primary, and if that is right, that will all but end it for Rudy, who made Florida the linchpin of his strategy. Presumably, everyone who makes it through tomorrow will take their shot on Super Tuesday, but the polls seem to indicate that Rudy and John Edwards will have to give up the ghost after that. That will leave a two horse race in each party, with a particularly interesting contest shaping up on the Dems' side as Obama's campaign gains more credibility and Hillary's makes infantile mistakes. The notable development on the GOP side is the amazing perseverance of Governor Romney, who has put the Mormon issue on the back burner for now, and is finding that the realization by the public of economic problems plays to his strength. Still, it will be a shame to lose Rudy, who seemed to be the only true supply - sider left in the field (after Sen. Thompson's departure).


I must say that I really enjoyed Nashville and the music emanating from the many little bars on Broadway. We heard quite a good mixture of country and rock and it reminded me of Bourbon Street (where there is very little jazz left, by the way). Not quite as raucous and certainly not as dangerous, though even more crowded in some of the bars, notably Tootsie's. I will be looking forward to my next visit.

I was there for a business meeting, which was generally quite excellent with fine presentations given by both my company's leaders and external speakers. It has become fashionable for execs to speak as outside speakers at other companies' meetings, and this seems healthy to me as we can all learn from each other. However, we had one speaker from a well-known investment bank who was nothing if not appalling. Among other comments that I would like to believe were disingenuous (but I am afraid were much worse), he characterized the securitization of the mortgage market as "effective" - this after some $120 billion of write-offs by the purchasers of those instruments (so far). He also described the making of a new market in insured lives in which participants could bet on mortality rates in the group, proudly proclaiming that this was put together in months without regulatory scrutiny. I didn't know investment banks were authorized to run non-regulated casinos! There were others, equally bad but too technical for the blog.

If I make a presentation somewhere, I have to run it by compliance and get my remarks approved in advance. Apparently, this procedure is not observed at the company this gentleman works for, or the compliance people are comatose. Of course, investment banking is not known for a particularly strong compliance function.


A lot of people are amazed by the football Giants run, but if you are even a casual football fan and were watching at all, you had to notice the rapid improvement in that team throughout the season, and especially the very physical play of their defense, always a big factor in the playoffs. I guess New England has to be the favorite this week, but the line could be an overlay. I would say the Pats should be (at most) a 7-8 point favorite, and that may be too much. The Giants played an entertaining game with the Pats to end the regular season, and I expect another one Sunday. Of course, the commercials should be the highlight.


I have to correct two mistakes I made from Nashville in the last post - as I expected I spelled Ceradyne wrong. Also, the price for BMTC was a much more appealing 20.26, not 22.01.

On Wednesday, I bought 200 shares of Avocent (AVCT) at 14.10. Today, I bought 50 shares of Ceradyne (CRDN) at 45.03. This rally still looks like mainly short covering to me, but in some stocks, the shorts may be getting a bit squeezed. We'll see if the rally has any legs. The market has priced in another rate cut by the Fed at the upcoming meeting, and that's a lot to ask (and a lot of cutting) given the recent 75 basis point cut between meetings. This raises the risk that stocks will be dumped if the Street doesn't get the cut. Also a lot of nasty surprises could still occur - more write-offs, a bond insurer downgrade, derailment of the stimulus package (itself not an unmixed blessing) in the Senate, etc. So people without the discipline of a system need to exercise a little discipline of their own here and nibble their way back in, not jump with both feet.

Tuesday, January 22, 2008


Nashville Blues a la Musings

Here I am in Music City and it's raining and cold, but that allows me a short post before dinner. Today's big news was the 75 basis point rate cut by the Fed in hopes of avoiding financial Armegeddon and the reflex short covering rally in the market that helped some of our beleaguered stocks. Otherwise, we have Fred Thompson exiting the race following his South Carolina primary loss, and Huckleberry should soon follow, though he may wait for Super Tuesday. If Rudy loses FL or NY, then the way will be clear for McCain, against whom Romney has no chance, and we will soon see Republicans, as is their wont, unite behind the obvious candidate, though some who hated McCain Feingold, will be holding their collective nose.

On the Dems side, the squabbles between Hillary and Obama get sillier by the day, and ultimately Dems will decide whether to throw in their lot with Hillary or take what many believe to be the sure thing by drafting Al Gore. Edwards is already a non factor being encouraged to stay in by both Hillary and Gore supporters to prevent some kind of Obama rally or Hillary walkover respectively.

So things are already much clearer than they were 9 days ago, though none of the recent results were unexpected. The only thing that has surprised me is the softness of the support for Giuliani.

A recent WSJ op ed postulated that liberals are less open and madder than conservatives. That may be true, but the more interesting thing to me is the continuing hatred so many have for the President regardless of his policy choices or successes/failures.

I think a lot of it has to do with the way he carries himself and expresses himself. Recently, he was asked about the incident with Iranian ships in the Gulf and his response was along the lines of "Well, if it happens again, we'll (heh) respond accordingly." That little, almost involuntary chuckle is the key to the country's dislike for the President IMO. This was a serious question about a provocative incident, certainly requiring a deadly serious response. One could not picture LBJ or any other president in living memory who could not have communicated the gravity of any future provocation. That plus the famous Bush smirk has not endeared him to political devotees of either stripe.

I think history will judge him more kindly, and it's a shame that these TV tics are so much a part of his persona. In the TV generation though, the soundbite has become all important. JFK was first to understand this, but of all the presidents, W. has been the least able to control his demeanor.


On 1/14, I bought 50 shares of Ceridion CRDN) at 46.84. This is a new name that I have probably misspelled but I think this is eventually going to be a good price, even if it doesn't look so hot now. On 1/16, for reasons I refuse to explain, I averaged down again in Blockbuster, (BBI) buying 800 shares at 2.80. Today, I bought 100 shares of Bryn Mawr Bank (BMTC) on the opening (22.01? I will have to check at home). Incidentally BBI is a real estate play as far as I'm concerned. One of Jim Cramer's real estate plays that is not working out is Sears, now being restructured by its not so silent partner, Eddie Lampert. Cramer put his confidence in his good buddy but the problem is that the skills that make a great hedge fund trader are not often translatable to operating a big company. All you have to do to know Sears is a mess is to walk into one of its moribund stores.

Sunday, January 13, 2008


Hillary, McCain Back on Top

As expected, Senator McCain easily won the GOP primary in New Hampshire, driving Gov Romney to the brink of elimination. Romney will make his last stand in Michigan, where I predict he will lose despite the popularity of his family there. Meanwhile, Huckleberry managed a third place finish, not so bad really, but South Carolina has become a make or break state for him, and if, as I expect, the McCain tide whips him there, the last men standing will be the Senator and Mayor Giuliani, who long ago set up Florida as his Maginot Line. That strategy made sense for him, since it is really the first important state. If he survives Florida, he will pin his hopes on Super Tuesday, and if as I expect we are down to a two man race in the GOP by then, that day will determine whether the convention is a scripted event or a suspenseful one.

Giuliani took a lot of hits from the press and from his opponents of both parties for his personal failings and that has depressed his poll numbers vs both Republican opponents and potential Democratic ones. The good news for him is that all of those stories will be old news if he makes it to the general election, not unlike Hillary about whom everything is already known.

Not so with Obama, and Dems became almost panicky before New Hampshire when it looked like Hillary could lose another primary. There were even some ridiculous stories printed that her supporters were wondering if she shouldn't pull out of the race if she lost New Hampshire. Anyone who believed that wasn't really watching Bill Clinton in 1980 who persevered despite almost daily scandal revelations and several primary losses. Or watched him stay the course despite a White House scandal that would have caused anyone else to resign immediately, and led to his impeachment (but not conviction). The Clinton's are determined and imperturbable; for them, achieving power is all that matters. So Hillary is not going anywhere.

This is unfortunate for Republicans who would dearly love to make the race against Obama, not Hillary. Dems know this and that the one sure way for them to snatch defeat from the jaws of victory in 2008 would be to nominate the rookie Senator from Illinois. So they encourage Edwards to stay in, even as a Hillary attack dog, to divvy up the anti Hillary vote and make sure she gets more delegates than Obama. One wonders what the payoff will be - certainly not VP since Edwards is already a failed VP candidate and provides no electoral help for Hillary. At least Richardson would provide regional help and secure the Latino vote. Maybe Edwards would be Attorney General - a thought that must have corporate America quaking - the ultimate capture of governments legal arm by the plaintiff bar.

The stock market is in full scale retreat at the moment, and I suspect we will spend the first six months of the year under water. One of the problems with the country going into, or even near recession, is that every silly crackpot proposal you can think of "to stimulate the economy" gains credence, and it's only worse in an election year. We are hearing some real doozies, but I guess people forget that the Clinton stimulants did nothing. It was only when taxes were lowered and government spending REDUCED (through welfare reform and the peace dividend i.e. starving the defense sector) that both Wall Street and Main Street responded. Making the current tax rates, especially the dividend and capital gains rates permanent is so obviously the right policy, we don't need to discuss it here, but there are other tax cuts that would also be of help, and we should start with the AMT. And the two solutions there are either get rid of it, or better yet, establish the AMT as the ONLY tax system, while raising the thresh hold limits and indexing them for inflation. The benefits of this policy include simplification, lowering the top marginal rate, removing the lower third of the income earners from the Federal tax system entirely, and eliminating all of the needless deductions and tax welfare items from the system that distort it in one fell swoop.

Once we solve that, then it's on to fix social security and medicare. But who would have the political courage to lead these efforts as President and in Congress? We are about to retire the President who had the courage and the will but totally lacked the political know-how and the media support. Will a President McCain have the necessities, or a President Giuliani? Maybe. But a President Clinton? These are not solutions that would appeal to her or any other Dem in the field. That's reality.


One thing Musings was pretty sure of early on was that Countrywide was never going to make it, so the takeover by BankAmerica should be seen as a necessary rescue. There will be a similar rescue of Washington Mutual, another ineptly managed financial (in Musings' opinion) that is now in probably desperate negotiations with Morgan Chase. If you review the archives, you will see that we predicted the exit as Bear Stearns CEO of Jimmy Cayne, though we don't revel in that since his otherwise great career has been sadly tainted. (besides, he is a world class bridge player). Not that these downfalls were difficult to predict. The mortgage problem has actually been UNDERSTATED by the financial press, and especially by Wall Street analysts, who have refused to accept that the foreclosed homes will ultimately see their value discounted by 30%, not 5-15%. That's why we are looking at a slow economy for all of 2008, and a slow stock market for at least the first half of the year.


Of course, that won't stop me from buying at these depressed prices, especially since we are sitting on all this cash we raised closing out ANDW in November and BRLI in January. So on 1/7, I bought another 100 shares of Genessee Wyoming RR (GWR) at 22.14. Then on 1/9, I went back to the well on American Dental Partners (ADPI),buying 300 more at 8.88.

Thursday, January 03, 2008


2008 New Year Musings

As I begin this post, it appears that Mr. Huckleberry has won the GOP caucuses in Iowa and that the Dems are very close with Mr. Obama putting a nose in front at the moment. The media loves these open races, and magnifies the significance and importance of the early primaries, with the unfortunate possibility that they may have more impact than they should. Why it's a good thing that a small minority of Iowa voters and an almost as small minority of New Hampshire voters should have so much influence is beyond me. Hopefully, the Giuliani strategy of concentrating on meaningful states like Florida will be vindicated. This kind of retail politics, traipsing around a state to meet a few voters, is a truly inane way to pick a President and detracts from the seriousness of the task.

That having been said, I am impressed with the ability of John McCain to come off the canvas the media had consigned him to and make a real race of it in New Hampshire and probably beyond. He is without a doubt the Mr. Integrity of this campaign, whether or not you agree with him on every issue. As far as the Dems go, I don't like any of them as you might infer, but I would be especially uncomfortable with Edwards or Obama, whose positions on the issues seem to me irresponsible at best. We don't need a President representing the plaintiff's bar (Edwards) any more than we need one in the hip pocket of evangelicals (Huckleberry). As for Obama, he strikes me as the classiest speaker in the field, but unfortunately an empty suit from the standpoint of his analysis of foreign policy solutions. That makes Hillary the one candidate of the leading three I could most live with on the Dems side. If they go to the convention without a clear leader, though, remember that opens the way for a draft Gore movement, with Bill Richardson most likely taking the second spot on the ticket.


After that depressing analysis, consider the mess that is our Capital Markets. For the last year or two, the corporate mantra has been that they must develop facility with the capital markets to drive ROE and increase capacity and growth. Amazingly, most have not changed their strategies and sloganeering to catch up with the lessons of the last six months. This means that corporate America is likely to underperform in 2008.

The capital markets, through leverage and securitization, seemed able to turn sows ears into silk purses, but it all went sour in the mortgage market because securitizations lack transparency (by design) and everyone from appraisers, to mortgage companies and banks, to rating agencies abdicated their responsibilities in the race for fees, commissions, underwriting and lending profits. Does anyone seriously believe the carnage will be limited to mortgages?

Watch the hedge funds. They are the biggest financial misnomer in history. As these funds have evolved, rather than hedge bets, they have doubled them down through the use of excess leverage. The way hedge fund managers are compensated makes the use of leverage sensible. If you were getting 2 and 20, rather than a small percentage of assets, wouldn't you go for the big return to maximize the 20%? If the leveraged bet fails, you take your 2% fee, close the fund, distribute the shortfalls, and open a new fund and start over. The wealthy folks who have been pouring money into these things deserve to lose when it happens.

By the end of 2008, there will be big hedge fund winners and an equal number wiped out, or nearly so. I think also by the end of 2008, corporate America will remember what the capital markets are for, and that they need to get back to making their own businesses profitable without all the fancy securitizations.


Meanwhile, the Fed is faced with a commodities boom (or dare I say bubble) that reflects the inflationary policies of the last few Greenspan years. This is causing the dollar to swoon, which will have the balancing effect of helping our exports and cooling our imports. However, that pain you feel is a lower standard of living than we otherwise might have had.

It is silly to blame the increased demand for fuels, commodities, food, etc. in places like China and India for our inflation. Yes, excess demand can cause prices to go up temporarily, but that is simply a move on the supply demand curves, not inflation, which is a monetary phenomenon. We have both currently, and it is unfortunate that the concepts are being so confused by the media and even the competent financial press. Our inflation was caused by the Fed's overactive money and credit creation which was reflected in gold's price long before most were aware of it. Steve Forbes was warning about the price of gold two years ago.

Now the Fed is stuck because a tight money policy to correct the inflation could tip us into recession and additional interest rate cuts will further weaken the dollar. I'm afraid that it will have to consider the dollar weakness and the now apparent inflation a sunk cost and do what it needs to do to keep the economy healthy. Then we will have to adopt fiscal, monetary, and trade policies to establish a more sustainable economic environment. Try to imagine that occurring with anyone but McCain or Giuliani in charge, out of the current field. As I said before, most competent on the Dem's side is Hillary (it really hurts to say that!).


On 12/24, I bought 200 shares of Tomkins PLC (TKS), a British Company on my buy list for 14.25. On 12/26, it was the first sale in a month and a half, 100 shares of Lindsay Manufacturing (LNN) at 72.32. 50 had been purchased in April of 1998 at 29.71, and 50 in October of 1998 at 12.44, a nice average down in what has been a decent long term hold. On 12/31, I bought 700 shares of Sirius Satellite Radio (SIRI), a "zero buy" at 3.03, still anticipating that the merger with XM will ultimately be approved (it better be).

I started 2008 by removing Bio Reference Labs (BRLI) from my buy/hold list because I am concerned that new technology will allow doctors to do routine testing in their own offices and that will cause competition in the specialty testing that has been BRLI's profitable niche. I am prepared to be wrong about this and see the Company taken over at $40 some day as I have always believed it would. However, on Jan. 2, I sold my remaining 800 shares of BRLI at 32.56, which turned out to be the high for the day. I paid 9.07 in May of 2002 for 100 shares, 11.55 for 200 on 6/3/02, 10.15 for 200 on 6/17/02, and 7.99 for 200 on 7/22/02. BRLI was recommended to me by friends as a long term investment, and I think I held it the longest of anyone in our group. This was a rare time when an amateur tip paid off.

By the way, don't put too much stock in this January effect and assume that the market will have a bad year because it got off to a bad start. It may indeed have a bad year, but there are too many technical cross currents in January to assume a trend. You have the end of tax selling of losers (in Nov. and Dec.), but early in January, you get the pent up sales of winners by investors who wanted to postpone their tax until 2008 (a la my sale of BRLI). On the other hand, we will see the huge money flows into qualified plans that need to be invested somewhere this month.

In any event, with all this new cash in my account, I am well over my 20% cash allocation again and expect to be buying for a while.

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