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Tuesday, March 25, 2008


The Bear Raid

The developments involving Bear Stearns the last few weeks won't do anything to build Wall Street's credibility and probably will lead to new regulations and perhaps the end of unregulated hedge funds. Given the action in Bear's put options and short sales of Bear's common in the week before the demise of the company, it certainly appears that it may have been the victim of an old fashioned bear raid, no pun intended.

It was in the interest of hedge funds holding large short positions in Bear to talk the stock down and advance the rumors of its liquidity problems. Add to that the very bearish put purchases in large amounts at far off strike prices (with very short expirations) that the Wall Street Journal reported last weekend, and you have the elements for suspicion already. Finally, the liquidity squeeze was triggered when repos didn't close as planned and other creditors basically called in their chits at the same time, events that certainly look orchestrated. Remember, Bear's clients tended to be institutional, not retail, so this was not merely a panicky run.

Now we have the spectacle of the sale price for the company quintupling, indicating as we knew, that the company was not really bankrupt, only squeezed.

It's just another example of hedge funds taking advantage of their unregulated status and the recent loosening of exchange rules (such as the removal of the short sale uptick rule) to act aggressively and with no regard for the integrity of the markets. My prediction - we will be hearing much more about this and similar episodes and there will be a regulatory backlash in the financial markets.

Meanwhile, the stock market has moved higher, perhaps the result of the availability of funds at very low interest from the Fed's discount window coming into stocks. The Motley Fool site today suggested that an arbitrage is taking place since solid dividend paying stocks are now yielding more than the interest charged at the Fed discount window. Whatever, the reason, the stocks I have been purchasing over the last 75 days or so have had a nice move. I thought that they might also benefit from cranking in higher inflation, which hurts stocks in the short run but improves nominal prices in the longer run. No complaints here though, when we can take nice profits during what most believe to be a bear market.

If you saw Counting Crows on Letterman last night, you can see the electric performance level that has attracted such a devoted following. They did their new single, "You Can't Count on Me" from the new album. I think the song is only fair by Adam Daritz standards, though the chorus is catchy and he was clearly wound up. I am anxious to hear the rest of the album to judge whether Adam's self assessment (that he is burned out as a songwriter) is accurate. He is clearly not burned out as a performer.

Enjoyed watching the NCAA's first two rounds, there were many great games, a few stunning upsets, and it's good to see Villanova play as well as it did. I'll be watching the next 2 rounds from Orlando, where I will be on business over the weekend. So unless I do a post from there, this will be it until at least Tuesday.

Meanwhile, for those of us who are baseball fans first, that season is here before you know it, and hope is alive again at Shea, following last year's devastating fade out.
Yesterday, I sold 100 shares of Lindsay Manufacturing (LNN) from the IRA, the first sale since early January. The price was 97.49, for shares purchased 10/12/98 for 12.4375 (yup, that was when you would buy sixteenths of a share). A decent long term return, in what was mainly a period of low inflation. Of course, as per the strategy, this was only part of the holding, since LNN continues on my buy/hold list.

Thursday, March 20, 2008


The Ides of March

The Ides passed over the weekend, and with them went Bear Stearns, apparently, all but given away to JP Morgan Chase for $2 a share. Bear's liquidity fell apart dramatically as clients deserted the firm amid rumors, hedge funds shorted the stock, and even simple repo agreements turned toxic. Ironically, on a going concern basis, Bear was no less healthy than when it was trading at $150, but the combination of a horrible market for fixed income securitizations and the mark-to market regimen for investment banks proved fatal. Maybe the powers that be should reconsider mark - to- market for securities that have no active market. Our financial system would certainly not be under such enormous pressure if some form of amortized cost accounting could be used by investment banks for securities not imminently available for sale.

Still we would be in trouble enough anyway, since it is now very apparent that there has been a massive fraud, not merely a bubble, in the mortgage industry. Driven by fee income, banks and mortgage brokers dispensed with the risk appraisal tools of the trade, such as income documentation, and gave mortgages to all comers, and second mortgages too. The latter tool enabled home buyers to avoid private mortgage insurance even on fully leveraged purchases (the so-called piggy back loans). The Fed was a willing accomplice, inflating the balloon with too low interest rates for too long. Finally, even the buyers were part of the fraud - in too many cases, knowing they would be unable to sustain their purchases and planning to walk away from their homes once they defaulted. So they had virtually rent free homes for as long as they could keep their new homes.

Completing the circle of fraud, mortgage providers packaged the bad loans into non-transparent securities as quickly as possible, obtaining ridiculously high ratings from the ratings agencies as they did. Relying on those ratings, the big national banks and investment banks lapped up the securitizations without really understanding the quality of the loans they were buying. So now, in the midst of the weakest dollar in at least a generation and a looming inflationary spiral, we have deflation in the housing market. Those who predicted declines in home values of 5-10% will find in reality that prices will decline by triple that amount in much of the country. There is no way the economy can hold up in the face of that.

Helicopter Ben is throwing as much money as he can find at this situation, and we have seen a couple of relief rallies as a result. Some are arguing this will prolong the pain in the long run. For the 14,000 BSC employees whose 401(k) plans evaporated and whose jobs may be next, the pain is sufficient already, thanks. I still think that Washington Mutual and a few others will also be taken over at fire sale prices.

Meanwhile, hedge fund performance is all over the place, because their leveraged bets have been huge winners for some, catastrophic for others. When your comp is 2 and 20, you swing for the fences on every pitch. I still say we could see as many as half of those funds fail by the end of the year (their corpses are already littering the field).

A lot of this amounts to a failure of regulation. Hedge funds by definition are unregulated, but that's a problem since their behavior is often predatory as with the ones who shorted Bear and hastened its downfall. The big bank regulators (Comptroller of the Currency and the Fed) are cheerleaders for their regulated companies, not watchdogs. The SEC does a so-so job of protecting investors, but other than issuing traffic tickets to the wirehouses and broker/dealers, there is no effective risk management discipline in place. Rather than blame either political party, this is simply a systemic weakness, and it is largely mirrored across the pond.

Does this mean a depression is looming? I think not. Worldwide demand is simply too bracing. But we could have a pretty severe recession by recent standards, considering how many people are going to be laid off by US companies.

BSC was once on my buy/hold list and for the record, these were my transactions:
10/12/2000 - Bought 100 shares at 52.69
11/15/2000 - Bought 100 shares at 55.38
3/3/2004 - sold 200 shares at 88.05

I took the stock off the buy/hold list because I recognized that too large a portion of Bear's earnings were derived from proprietary bond trading, so I was not confident they would recur reliably. The firm was always under capitalized, and its price to book did not fit my value orientation. It wasn't all that pleasant watching the stock almost double from my sale price, but I feel pretty fortunate now. I still hold preferred shares in my IRA, and apparently Morgan Chase will continue to service them.
Meanwhile, I continued to buy in a down market punctuated by impressive short covering rallies. On 3/12, I bought another 20 shares of Precision Castparts (PCP) at 101, a "zero buy." Monday, I picked up another 100 shares of the plummeting Ceridian (CRDN) at 27.89. Today, it was back to the trough for 400 shares of Limco-Piedmont (LIMC) at 5.42. All of these went to the IRA. I haven't sold anything since taking BRLI off the buy list on January 2nd, but we are getting close to reducing cash to the 20% target. Since Lindsey Manufacturing (LNN) skyrocketed this week, we could pare that holding back or maybe high flying Axsys Technologies (AXYS).

Monday, March 10, 2008


Love Potion # 9

The NY Governor's resignation may be imminent tonight, as it appears he was customer # 9 served by a prostitution ring in D.C. last month. Though clearly a shocking development, it fits a pattern of prosecutorial overreach and arrogance by local, state and federal prosecutors in recent years. Mr. Spitzer made his name by criminalizing business activities which bordered on the everyday. Though some of these activities arguably cost consumers money, most of the alleged "crimes" would have been considered either victimless, or unfortunate corporate or executive excess, but hardly abhorrent. However, once focused on a target, such as the Greenberg's or Mr. Grasso, Spitzer was ruthless and relentless. The guilty pleas he extracted were generally negotiated, not proven in court, with the threat of corporate indictments hanging over the victims heads (and a corporate indictment, as we know from the Anderson case, is a virtual death sentence). When the intended victims (such as Greenberg and Grasso) refused to knuckle under, Spitzer pressured their Boards to terminate them, but then allowed them to twist in the wind without a trial.

We have also seen prosecutors abuse their positions in Alabama, North Carolina and Connecticut to name a few. Democrats have not had a monopoly on the trend - even Rudy Giuliani's ultimate batting average on the insider trading prosecutions was very poor.

Unfortunately, it is fairly easy for AG's to ride their initial publicity to higher office before their cases are concluded. What you typically get is the "steamroller" (as Spitzer characterized himself) bringing his arrogance to an executive position, where it often doesn't work (since compromise is called for in our system). You also get men behaving badly, as they develop a mentality that says they are the law.

I guess it is possible that Mr. Spitzer will try to tough this out, as President Clinton did. However, he is facing the annoying technicality that he has broken the law and may be prosecuted. So even if it turns out that he is beyond embarrassment, he may not be able to continue in office anyway. Clinton did not clearly violate the law until he committed perjury, and his impeachment trial for that was political, not criminal (he agreed to disbarment to settle the criminal charge).

It was sad to see the Governor's apology today, but the people that he hurt most other than his family were his loyal followers, who put lucrative careers in private industry to the side so they could help him govern New York. Those are the people Elliot Spitzer abandoned with his foolish and arrogant behavior, and I hope they land on their feet if he does resign, as most expect.


William F. Buckley was one of the pioneers of modern conservative philosophy, a set of principles that built on the teachings of Friedrich Hayek, and found its political voices in Barry Goldwater, Ronald Reagan, and Newt Gingrich. Buckley was easily the most erudite of the conservative media; his charm and sense of humor somehow broke through the upper crust mannerisms of his lockjaw speech, and ten dollar vocabulary. Engaging political and philosophical opponents on Firing Line, Mr. Buckley had a way of scoring his points while allowing his guests an ample forum and treating them with unfailing respect and friendliness. His heirs are Steve Forbes, Paul Gigot, and Bill Kristol.

Buckley's magazine, National Review, was of course, more widely quoted than read by the country's left - leaning academic and media elites. As a writer, he was humorous, though I felt his syntax and style were overrated - he could sometimes be virtually ungrammatical. No matter. Larger than life, he was capable of creating his own rules, and pressed on, always promoting the cause and the policies he believed would benefit America economically, culturally, and spiritually.

One of his great gifts to us is his son Christopher, the hilarious editor of Forbes Life and gifted columnist/author in his own right. WFB left the world better for his contribution and it's nice to know he didn't get cheated during his successful, entertaining, and full lifetime.


The people who have been predicting economic calamity and depression are looking smarter every day. We don't seem to have the horses in the right places who can overcome the debt lockdown, so I am starting to agree with those who say it just has to run its course, however, painful. Our activist Fed Chairman needs to stop and take stock for awhile. Unfortunately, I don't think he believes in that approach, so he is going to keep flooding the banks with money until they start lending again, and that means a pretty serious inflationary period, with continuing (and worsening) dollar weakness, and much higher interest rates at the long end. And still, I follow my formula, though not sure it will still work in this environment. On Wednesday, I bought 400 shares of Limco Piedmont (LIMC) for my IRA at what then looked like the bargain price of 6.08. Of course, all you have to do is wait a couple of days in this market and yesterday's bargain won't look so good anymore. Today, it was back to the well on Blockbuster (BBI) for 700 shares for my IRA at 2.86. I must say, I am getting pretty good executions on the openings from my discount broker lately, which was not always the case previously. Blockbuster turned in a "blockbuster" quarter, so maybe they finally have a management team in place that can develop a sustainable business model.

Monday, March 03, 2008


Las Vegas Musings

Well finally, I got to visit Vegas. In fact, I am posting on the free computer at the Ritz Carlton at Lake Las Vegas as I kill time waiting for the cab to take me to the airport for the red eye home. Being some 20 miles away from the Stip has its advantages and disadvantages. It's beautiful here and blessedly tranquil compared to the non-stop racket at the Strip. On the downside, it is a $20 cab ride to the nearest poker room, $50 to the airport and about the same to the Strip, and since I am a low level player ($2-$4 limit is my speed), it was all I could do to grind out round trip cabfare in winnings. But the casinos are very friendly, and that goes for both the dealers and the players. The game was better here than in St. Louis.

Last night I did venture to the Strip and did a mini garbage run solo, which was moderately fun, particularly the piano bar at Harrah's and I saw a really good rock cover band at Margaritaville. I did not get to see any shows, which everyone says are great. On balance, I preferred Nashville to the Strip, though maybe I would feel differently if I stayed in a hotel down there and saw a show or two.

All those companies that bought back their own stock the last few years and overpaid must now be wishing they had kept that capital. I really hate buybacks. When considering an investment, buybacks are a negative for me, not a positive. Why reward the shareholders who are leaving instead of the ones who are staying? If you have no use for the money, pay a special dividend instead of a buyback. Of course, company managers listen to the analysts who tell them to buy back stock and leverage earnings per share. Even Cramer thinks buybacks are positive. But they are dead wrong.
If Hillary can somehow hold on in Ohio and eke out Texas, we are coming in close enough to dead even that she can raise the Michigan and Florida issues and keep the convention deadlocked. That will give the Dems a chance to remember they are a political party, not a democracy, and assure a victory in November by nominating Al Gore. This is a nightmare scenario for Republicans, and one this blog has feared for a long time. On the other hand, the media is agitating for a "democratic' result and that plays into Obama's hands. I think it's interesting that already, polls are showing McCain neck and neck with Obama. This is the dream scenario for Republicans who never believed they could be in such a good position so soon.

I've been doing all my buying in my IRA lately. On 2/25, I bought 200 more shares of Bryn Mawr Bank (BMTC) at 20.01 - I know, the formula says it should have been a 100 but it was a market order based on a closing price the previous session of 19.96.
On 2/27, I bought 20 shares of Precision Castparts (PCP), a new name at $114.01. This was a zero buy of course. Then today, I bought 100 more shares of CRDN at
31.02. This stock has been pummeled after a disappointing quarterly, a classic overreaction by The Street. it is now a value buy. Also, today brought news of a hostile bid for Diebold (DBD), which pulls one of my under water holdings into the black. Thank you United Technologies. There is some chance a slightly higher price might yet be negotiated.

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