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Tuesday, April 29, 2008


Back to Reality...and Blogging

Myrtle Beach was a pleasant break, the golf was challenging, cocktails refreshing, but now it's back to the realities of 2008, an election year full of "unpredictables," volatile financial markets, an unsteady economy, and luckily, gainful employment. Myrtle Beach, by the way continues to thrive as a combination golf resort, beach resort and retiree magnet, with a surprising amount of home construction still going on.

In our beach house, we were able to monitor the Pennsylvania primary, a reasonably decisive Hillary win that extends the at times comical dual, perhaps all the way to the convention. Of course, DNC Chairman Dean insists it will be decided no later than June, but we know his track record on presidential politics and helping Dems snatch defeat from the jaws of victory.

Tonight, we have Senator Obama finally renouncing the latest antics of his former pastor Wright, and one might say that the Dems have been fortunate to discover some of Obama's vulnerabilities before committing to him. However, I am not sure that women will return to his cause over the next six months if he is nominated, or if Blacks and youths will find their way to Hillary if she is the nominee. Meanwhile, McCain supporters hide quietly in the weeds, saving their money for the general election.

Will Dems realize in time that neither of their contenders has an easy path to victory in November? We will see. For now, the media and others have the super delegates committed to the winner of the primary "popular" vote, whatever that is. That's a weird concept given that in many states, independents and Republicans can vote in the Dems primary if they want. Of course, nothing really binds the Superdelegates, who appear to hold the balance of power going into the convention. This still makes a brokered convention possible (i.e., a Gore candidacy). That would be extremely bad news for McCain and the GOP.

Meanwhile, the Fed deliberates about its next move to mishandle the economy. My expectation is for the widely expected 25 basis point cut in the Fed Funds rate, accompanied by a statement that the cuts are over for now while the Fed goes on a belated inflation watch. Talk about closing the barn door after all the horses are out. Look for the Fed to start raising rates as soon as we start to get better economic numbers in the third quarter or so.

As John Chapman explained so well in his WSJ op ed column today (http://online.wsj.com/article/SB120943024074251369.html?mod=opinion_main_commentaries), the Fed has been a slave to the Phillips curve, a Keynesian concept, and that has resulted in their overshooting first one way then another. Since Fed operations act with a lag, it is not surprising that this often results in a boom and bust sequence for the economy and inflation. The Fed would do better to use other tools to monitor the money supply and track the price of gold and other commodities to fulfill its mission of maintaining a stable currency. Steve Forbes has been prescribing this approach for decades, as did Professor Milton Friedman before him, who understood inflation as purely a monetary phenomenon.

Another interesting piece in today's Journal op ed section was John Fund's column ostensibly about the Supreme Court decision to uphold the Indiana voter ID law, but really about Senator Obama's long time efforts to support the Illinois Democrat voter fraud machine by opposing voter ID laws. Of course, the deceased have a long history of supporting Democrats in Chicago, going back to the 1960 Presidential election. According to Mr. Fund, inspectors estimated that as many as 10% of Chicago ballots in the 1982 gubernatorial election were fraudulent, including "votes by the dead." In a 2006 Missouri registration drive by the same organization Mr. Obama represented in Illinois, it was found that "over 1000 addresses listed on its registrations didn't exist." Opponents of ID laws bellyache about the potential disenfranchisement of the poor, but expediting fraud fouls the entire election process.


On April 16, I bought 200 shares of Boyd Gaming (BYD) at 17.47, a "zero buy." On April 21, I sold 100 shares of Lindsey Manufacturing (LNN) out of the IRA for
125.00. 50 of those were purchased on 10/12/98 for 12.4375, so it took almost ten years to get the ten timer. This is not a game for the impatient. The other 50 shares were purchased on 3/5/01 for 20. On April 23, I bought 6 more shares of Allegheny at 340, a value buy. Yesterday, I sold 100 shares of Axsys Technologies out of the IRA at 54.50, purchased on 4/17/06 for 16.90. This is why even if you use a discount broker, you can realize value from a relationship with a full service broker. Axsys was recommended to me by mine, and so all my non-qualified shares are in that account. It makes sense to take the gains in the IRA first though, and delay the tax hit.

Monday, April 14, 2008


Inflation Musings

Stagflation is here already, as various economic reports and retail sales have made it clear that we are in a meaningful downturn while energy and food prices rise and the dollar can't get off the canvass. In the seventies we also had very high interest rates, which made for a unique form of torture. I guess rates at the long end have to start moving up from here eventually, but for now, the credit crunch is the result of the unwillingness of banks to lend rather than any high cost of money.

The solution to these problems is complex and requires coordinated actions, probably beyond the capability of our political system and the international banking system to provide them. The elements of what's needed include the end of currency debasement, particularly the dollar, reining in unnecessary public spending, more free trade (not less as Clinton/Obama would have it), lower taxes, and more rational accounting treatments that don't tie up capital and cause financial reporting that is totally unpredictable and discontinuous.

Somehow, the economy will underachieve but muddle through on some mediocre basis. The question is how long will it take. Those predicting a short and shallow downturn are probably smoking something that's pretty fun but severely clouds judgment. My guess is that we are looking at at least a couple of years of severe under performance, that could be lengthened by poor policy choices by the new administration, the Federal Reserve, and the rest of the G7 nations.

Does this mean we should all get out of our stocks? Well, they won't ring a bell when it's safe to buy again. In fact, it's the stocks you buy during the downturns that eventually become your 3 or 4 timers. The trick is to find solidly run companies that will survive the downturn with their market shares in tact, and avoid the companies with weak, leveraged balance sheets that might not make it through a prolonged slump.


The Democrats continue to provide great entertainment, if not much helpful in the way of policy prescriptions. This week, the intelligentsia are in high dudgeon because of Obama's supposedly elitist remarks about the underemployed people in the industrial heartland, who tend to be Hillary supporters. But his remarks are really consistent with the Dems' elitist philosophy, so I assume all the fuss is really about trying to break through his Teflon to keep options open. Democratic party hacks are right to be concerned that Obama could easily flame out in the general election, if he gets the nomination.

This week brought news that my college roommate's law firm, that he started right out of law school in the mid seventies to help provide legal representation for Philadelphia's most at risk youth, has won a prestigious and monetarily significant MacArthur Foundation grant. Bob Schwartz has co-led the Juvenile Defense Center of Philadelphia his entire career, and it has become the model for similar enterprises around the country and the world. You know, it's one thing to be a liberal (as Bob is) and another to lead your life in a way that actually reflects those ideals and brings help to people who need it, not just throw tax dollars at problems. I am proud to say my friend is a role model for all those who would like to make a positive difference in the world.

Last night's excellent episode of Cold Case ended with the song "Recovering the Satellites" by Counting Crows from their album of the same name. It sure sounded great running over the usual last shots of the people touched by the long overdue solving of the case.


Next week, it's off to Myrtle Beach for a week of golfing and "Little Boys" fun, so unless I squeeze in another post this week or find a stray computer down there, musings fans will have to content themselves with the achives for awhile. As usual, we've got the best courses on the Beach in our rota, including Tidewater, Caledonia, and TPC.

CBS delivered a great Masters telecast over the weekend. Augusta may be the most beautiful course in the world, but also it is easily the most exciting from the standpoint of watching on TV since everything from eagle to double bogey always seems possible, and that makes for a more dynamic leader board than you usually get at the weekly Bad Breath Open, co-sponsored by your favorite motor oil. It is also in significant contrast to the US Open where par is a great score and the result is a static leader board. The look on winner Trevor Immelman's face as he came off 18 and spied his two year old son coming toward him is one we will see replayed again and again over the next 12 months.


On April 7, I bought 6 (yes, 6) shares of Alleghany (Y), a new name, at 354.00. This is a property casualty insurer based in mid-town NYC. On April 9, I bought 400 more shares of Limco Piedmont (LIMC) for my IRA at 6.13. Both of these were value buys, so I was due (according to formula) for a zero buy, but I blew it and made another value buy today by mistake, 100 shares of Ceradyne (CRDN) at 33.18. Of course, value buys are the ones that make sense right now.

Sunday, April 06, 2008


Tax Time Musings

UGH!! Last night, after more than sufficient procrastination, I began the annual tortuous process of compiling federal and state tax returns. For me, this is a very well defined and structured process, involving sorting the year's receipts (including purging those no longer necessary), listing the income items in a format easily compared to last year's (to make sure nothing is omitted), listing the deduction items in their own format, and only then dealing with the forms. I now use a printed listing of capital gains and losses (not many losses this year) to attach to Schedule D and that's a major time saver - the printed report comes from Microsoft Money, which I studiously maintain throughout the year.

Even with these time savers, the process takes FOREVER, a disgrace for a country with such a successful self enforced compliance regime (unlike France, where tax evasion is a national sport). Ronald Reagan, Steve Forbes and others have pointed the way to true tax reform, where most of the population could complete their taxes on a 1 page form.

Today, in order to advance the redistribution goals of the Left, we have an endless series of calculations and worksheets to complete, in order to reduce or eliminate the deductions we are otherwise entitled to. Then comes the ultimate indignity - the AMT calculation, where you lose the rest of your deductions and offset the Bush tax cuts. That's why the idea of letting the tax cuts expire is not much feared by upper income taxpayers who understand their tax calculations, since they are really on the 28% AMT rate anyway (without deductions). Removing the Bush cuts will not expand revenues nearly as much as Democrats would have you believe, and to the extent they do, the main victims will be middle class taxpayers (that's where the money is), not upper income. I wonder if Senator McCain will point that out during the campaign. Of course, the GOP has been slow to point it out since that might cause the Dems to switch to a policy proposal that might actually be more effective in causing the redistribution they seek.

Ironically, putting everyone on the AMT is the simplest approach to reform we could take, and would also simultaneously take all lower income people off the rolls.

The one set of Bush cuts that will matter relates to taxes on capital gains and dividends. Raising those rates will hurt the stock market, reduce gains realizations, and extend the economic downturn, in other words, it will have the typical attributes of Democratic "tax reforms." If you are a NY state resident, you pay a 7% state tax on capital gains (with no federal offset assuming you are on the AMT - a virtual guarantee for upper income New Yorkers) which brings your overall rate for long term gains to 22%. If the Dems let the federal rate creep up to 20%, as Hillary wants, that makes the overall rate 27%. If it goes to 25% as Obama wants, that takes the overall rate to 32% meaning that almost one-third of your profits are confiscated in taxes. For very long term gains (as most of mine are), you are being taxed largely on inflation gains, not real gains. So at those rates, it makes sense to just keep your profitable positions until you die, leaving the stocks to your kids with a stepped up basis (erasing the gains for tax purposes). That's why when capital gains tax rates go up, federal gains revenues go down, and vice versa. But they never learn in Washington, at least the stubborn donkeys don't.

No matter - the task at hand is to get the return done and write the checks. We've got to fund this government if we want to keep those earmarks coming.


Counting Crows new album, Saturday Nights & Sunday Mornings, debuted on the Billboard chart at #3. I bought it yesterday, but haven't had a chance to play it yet so there will be no review today. Meanwhile, more concerts on their tour are being scheduled, including one nearby this summer in New Jersey.

How Orlando got to be a business conference city, given the mediocrity of the food, the lack of anything but kids entertainment, and the overall unattractiveness of its highway sprawl, continues to mystify me. I guess when you build all those hotels to accommodate the parks, they are going to try to obtain convention business, whether the infrastructure supports it or not. So they try to appeal to businessmen to bring their families along, but it just doesn't work. Most business meetings these days are work activity filled, running on tight schedules with little free time for family activity. In fact, it is not smart to go on these trips and not use the occasion to socialize with the other attendees, paying attention to building those relationships.

Anyway, I've now been to Orlando twice in the last six months on business, and while I didn't have an awful time on either occasion, I certainly preferred Vegas, Nashville and even (gasp) Houston. So meeting planners, pay heed, let's take a vacation FROM Orlando for a while, OK?


The Sunday Morning news shows have started boosting Secretary of State Rice for the GOP VP slot, and it certainly would not be the worst choice. Apparently, Governor Sanford has worn out his welcome with the McCain folks, so that opens the way for Rice. Governor Romney also lurks in the picture. I guess a fusion ticket involving Senator Lieberman is improbable.

Republicans have a bigger problem and that involves recruiting good Congressional candidates. If you are a Republican, your natural inclination is to work in the private sector, and since the prospect of Democratic majorities continuing for quite a while seems inevitable, being a Republican Senator or Congressman is not an attractive position right now. The result of recruitment issues will be to exacerbate Democratic gains in both houses, even if McCain is competitive at the top of the ticket. Republicans need to worry about maintaining a 40 seat filibuster saving minority in the Senate, or President McCain will be in a very weak negotiating position with the Democrats in Congress.

Nice to get the occasional e-mail from new readers who trip over the musings blog randomly, as they explore the blogosphere. Nothing wrong with making comments or suggesting topics for future entries.

The bear market rally has been very bracing for the musings stock portfolio. We are now up slightly for the year, after dividends. That's right, UP. On March 26, we sold 100 shares of Axsys Technologies (AXYS) out of the IRA for 49.93 (originally purchased on 4/17/06 for 16.90). We'll take a near triple within two years. On
4/2, we bought 20 more shares of Precision Castpasts (PCP) for 108, a "zero buy." On 4/4, we sold 200 shares of Petroquest (PQ) at 18.68, (purchased on 7/28/04 for 4.93). The quarterly disclaimer - Neither redwavemusings nor its author are investment advisors, and the stocks mentioned here may not be suitable for readers (or even for me).

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