.comment-link {margin-left:.6em;}

Saturday, September 27, 2008


Debate Analysis; Paul Newman (RIP)

My opinion is that both candidates performed well at last night's debate, playing carefully to their bases and sticking to their respective campaign strategies. Obama tried to look centrist while sticking with the usual Dem class warfare positions where they play well - executive pay, the Bush tax cuts, etc. He scored "debating points" by obfuscating the argument about whether the President should hold summit talks before lower level discussions have set the agenda, gracefully reversing his earlier provocative statements regarding the lack of necessary preconditions. McCain called him on that but it dissolved into a silly semantical discussion.

For his part, McCain demonstrated his "maverick" chops, with the political advantage of separating him from identity with the current administration but the weakness of leaving doubt about his ability to command the helm without mishap. He does come across at all times as a straight talker, and Obama does not look good when he tries to make McCain look like anything else.

My guess is that whichever candidate you went in favoring, that's who you think made the better impression. As for the undecided voters, they probably are just as uncertain today, and will be looking for more data. Given how many folks vote early, time is running out.


Washington moves closer to a deal on the"bailout" or "rescue" plan, whichever you choose. It is clear that it will be based on the Paulson/Bernanke proposal, the House GOP proposal for an "insurance" solution being a non-starter. The interesting thing about the proposal on the table is that while the government might indeed be putting $700 billion at risk, the chances are that if it succeeds at breaking the negative feedback loop we are in, it will cost much less, and could even be profitable!

What's holding up the deal is the House GOP's legitimate concern about the Dems' provision for dedicating a certain percentage of any profits to left wing "low housing" interest groups like ACORN, instead of to deficit reduction. As the WSJ has pointed out, why should Republicans vote for a plan that has the potential to finance its fiercest enemies? Actually, this is what has conservative talk radio in an uproar (causing an avalanche of phone calls to GOP members), not the quoted cost of the program.

Once the Dems are forced to remove the offending provisions, the deal will be done. If they don't remove them, either Dems will pass it without GOP support or no deal will be done. If the latter, we should expect a windfall for bankruptcy lawyers.


Paul Newman was a modern day "leading man" but one who had more range than the average bear and who played many of the characters we loved. The proof of this is in the charaters he was brought back to reprise in sequels. For example, he played the Bogart-like private detective Harper in the movie of the same name, and then again in The Drowning Pool. He was nominated for Academy awards 10 times, finally winning for his reprise of Fast Eddie Felson (as a mature adult) in the Color of Money. He played the pool shark as young and irresponsible in The Hustler, a truly great performance where we see Felson mature under duress, attaining "character" in the end.

In most of his performances, we see his hallmark sense of humor peeking out through the earnestness and intensity. Maybe that's what we loved.

Other memorable Newman roles were the broken down hockey coach and promoter in Slap Shot (1977), the broken down alcoholic attorney in the award winning The Verdict (1982) with the unfortgettable character actors Jack Warden and James Mason, and of course the two classics with his friend Robert Redford, as Butch Cassidy and the Sundance Kid (1969) and the con-man Gondorf in The Sting (1973), another best picture winner.


I've always said that the key to understanding why football teams win or lose is organization. Playing talent is important, but in football, good coaching and organization mean more than in any other team sport, even basketball. More evidence of this can be seen in college football where the hiring of Nick Saban by Alabama seemingly has ended the Crimson Tide's long down period. His recruiting abilities and game preparation skills will put the elephants back near the top of the college polls again.


On Monday, I bought 300 shares of Sun Microsystems (JAVA) at 8.58. This company is not necessarily going to stay on my buy/hold list much longer, but I think it could be a takeover target. Possible suitor - IBM. On Friday, I bought another 100 shares of LDSH for my IRA at 21.08.

Strange announcement from Bank of Granite (GRAN) where they eliminated their dividend (understandable when capital is king) but also split the stock five for four. Strange because the stock is depressed and the split could take it under 5 where institutions (if any are left in the stock) will have to dump it. A reverse split, one for two or one for four, would have made much more sense. I guess the Board was hoping to neutralize the negative dividend action with a positive one, but the Street saw right through it and took the stock down further.

Thursday, September 18, 2008


Market Manipulation

If you're thrown by developments in the financial markets the last few weeks and especially the last few days, that's understandable. We've essentially had three government takeovers, one bankruptcy and a forced merger, all of major financial services players. We have several other near-giant or mid-sized players teetering, and the last two independent investment banks have seen their stocks pummelled as well. Why is this happening?

We have detailed the massive fraud that took place in the residential mortgage business before. Because of ill-advised, though well intentioned, accounting rules, these deficient mortgages and securitizations have been forced to be written down by staggering amounts. There is simply not enough readily available capital to restore the impacted balance sheets.

However, there is more going on, in my opinion, than a simple deleveraging crisis. I strongly suspect that some conspiracy has operated to exacerbate our economic weakness and exact this terrible toll on our companies and our economy. (This follows the advice I received from an actuary who mentored me for a while: "If you think they might be trying to screw you, they are.") In short, I suspect financial terrorism.

I have no information or unusual insight that leads me to this conclusion, only a set of events for which this conclusion is the one that best fits the fact pattern.
In a "normal" panic, everything goes down, except maybe gold and certain commodities. Strangely, in this panic, the industrials have held up pretty well, and gold was going down until the last few days (it retreated today, too). The oils were also going down, and seem to have been trading for weeks independent of the action in the financials. Interestingly, after today's short covering rally, the Dow Industrials are back over 11,000, barely in bear market territory, if at all.

Perhaps most eerily, the financials haven't even moved together in concert. The initial raid on Bear Stearns, forcing its fire sale to Morgan Chase, was followed after some time by an attack on Fannie and Freddie, resulting in the Government conservatorship. After that, the Bears moved onto WAMU (which is actually fundamentally unsound) and discovered a weakened AIG to attack. With AIG on the run, it was a simple matter to dispose of Lehman Brothers the same week, since it was long rumored to be weak, despite its own protestations.

Now this week, you have the short sellers devastating the stock of Morgan Stanley despite a strong quarterly report, and even Goldman Sachs among a few others. So you have serial attacks on all the IB's, plus the world's largest insurer whose main failing seemed to be that it provided the default insurance on all kinds of debt(basically selling naked puts on bonds. In this role, they were acting like an IB).
Meanwhile, the small local banks have not gone down at all! You mean their mortgages are all fine, and they somehow don't own any of this weak paper debt?

If you were out to undermine the US economy, what better way than to exploit whatever weaknesses existed in the providers of capital. By hitting their equity investments, you could make it impossible for them to raise new capital. Once the providers of capital have all been forced to rein in credit, or driven out of business, the shorts can attack whatever types of companies they choose. Without credit, the economy's expansion must be limited anyway.

The Fed's loose money policy admittedly had caused credit to become too readily available, particularly for home buyers. But now, obtaining credit of any kind is difficult. Many industrial companies and service providers are extremely concerned about their ability to roll over their debt capital as loans become due.

Now, who would be interested and have the resources to orchestrate this cascade? A possible answer would be an alliance of sovereign funds, Al Queda benefactors, and certain oil producing nations (Iran, Venezuela, Russia). A few large international hedge funds could also be involved. Given that a confluence of regulatory mistakes by the US left us vulnerable to market manipulators (the aforementioned mark - to -market accounting rule for impaired assets, lifting of short selling restrictions, replacement of market makers by computers), the possibility for success by conspiring short sellers is much higher than it used to be.

What can we do to end the crisis and reduce the possibility for future manipulation? There are several steps, most of which are now belatedly under consideration, that could be taken. First, the old short selling rules should be restored and enforced. This means no more naked short selling, and restoration of the "uptick" rule. Second, something on the order of the Resolution Trust Corp that helped resolve the S&L crisis of the 80's, should be established as a buyer of last resort for the impaired debt instruments. Third, when a company is being targeted, the SEC should allow them a stock trading holiday, and also a brief period during which they have relief from creditors' demands to give them time to reestablish sufficient liquidity. This is infinitely better than government takeovers or forced mergers that erase jobs on a grand scale and wipe out legitimate equity holders.

Unfortunately, the casualties that have already been taken can not be brought back any more than human victims of terrorist violence can be restored to life.

So is the simple explanation that the housing crisis forced a deleveraging panic that migrated to the stock market also reasonable? I thought so until today. But today, some manipulators made an awful lot of money taking certain stocks down to absurd levels, and triggered a short covering rally that brought those stocks back. If there is no follow through tomorrow or Monday, but instead the short selling attacks resume, you can be pretty sure there is more to what's going on than what can be attributed to a market's reaction to an economic crisis.


By the way, I agree with the Presidential candidates (and Jim Cramer) that SEC Chairman Cox has done a lousy job. When the experimental restriction on naked short selling helped matters, it should have been extended to all stocks instead of being allowed to expire. And the uptick rule should be restored immediately.


Now that the House has passed its phony "bi - partisan" drilling bill, it's time for the GOP Senators who agreed to this "compromise" (led by Lindsay Graham) to pull the plug on it.

By the way, the most ridiculous talking point I have ever heard is the endlessly repeated Dummycrat complaint that drilling won't do any good because it will take years to bring in the new oil. Of course it will! The reason there are no new oil sources now is because they have prevented drilling for the last five years. if we don't allow the drilling prohibition to really expire now, we will be having the same conversation five years from now. The other silly Dem talking point is that oil companies should be drilling on the leases they already have. But obviously these are leases where the geologicals indicated LITTLE OR NO OIL! Why drill there? Does anyone honestly believe that oil companies would be ignoring viable fields at $100 per barrel?


I finally understand the deal that the Clinton's struck with the Obama people at the convention. The best guess is that Hillary will get Barack's support to move Hopeless Harry Reid aside and take over as majority leader of the Senate. I would expect she will do a much better job than Reid, and be much more effective, both for Dems and for the country. Despite her lefty views on health care, on most other issues, she is a centrist, especially by Dem standards.


The Dems are making a serious mistake by continuing to dwell on Sarah Palin's inexperience and alleged lack of readiness for office. They are setting a very low bar for her debate with Biden. Basically, they have equated her with Dan Quayle, and that is an awfully easy standard for her to outperform. Assuming she does, this will only increase her standing and impact on the election.


On 9/8, I sold my last 300 shares of Longs Drugs (LDG) at 71.87. That was immediately followed by the surprise $75 bid by Walgreen, $3.50 above the CVS bid. So, I left a little money on the table, but my guess is that the Walgreen offer is not going to be pursued. This is another example of irresponsible hedge fund behavior, wherein they got a company to put up a phony offer to increase their profits on the deal. Of my 300 shares, all were bought in 2003, 100 at 15.21 and 200 at 16.76. So this was a great transaction, even though I passed up a few bucks. On 9/10, I bought 100 shares of Ladish (LDSH) for my IRA at 23.94.

Because in the long term, off-shore drilling has to be a winner, I added Transocean (RIG) to the buy/hold list and bought 17 shares Monday for 118. I already had a few shares from the spinoff out of Schlumberger. Yesterday, I bought 100 shares of BDC at 31.39 for my IRA. BDC and LDSH are both recommendations from my excellent full service broker, who has provided quite a few good ideas for the buy/hold list over the past year or so.

Monday, September 08, 2008


Sarah's Got Charisma!

In my last post, I listed the reasons why both VP picks made no sense, but clearly, I "misunderestimated" Governor Palin, and a blogger has to own up when wrong. Her lack of experience aside, the Governor's performance last Wednesday at the convention was a home run, clearly out of the ball park, and I expect her to deliver that stump speech to near-perfection from here to November. Furthermore, the timing was fortuitous for the GOP since with only two months to the election, (and less for the millions voting early and by absentee ballot), Mrs. Palin will still be a fresh, attractive face and the inevitable ennui the public might develop will not take hold by then.

The Dems panic was palpable from the day of her selection, as the left-wing bloggers went into overdrive to ferret out every possible negative and inconsistency in her story. Since they went over the top by getting into very personal issues, the criticisms only served to do what Senator McCain had been unable to do all year - unite the party behind the ticket, and much more strongly than the Dems were able to do with their own party divisions in Denver.

Furthermore, the Dems desperate efforts to undermine the "Hockey Mom" have mostly been called. For example, the Dems complained that the jet sold on E-bay resulted in a $600,000 capital loss for the state, but the purchase price was a sunk cost and irrelevant, and the costs of maintenance, fuel, etc. represented real savings. The true stories are related in Friday's WSJ column by Kimberly Strassel, and I urge Palin doubters to read it and discover the real and amazing tale of how she dismantled the GOP machine and its too cozy relationship with big oil.

As for the ridiculous criticism involving her pregnant 17 year old daughter, perhaps the MoveOn.org crowd should consider that Mr. Obama was born into similar circumstances, and for those worried about her ability to do the job with a young family, consider that no such criticism was made about Senator Biden when he was a single Dad. Talk about a double standard. Of course the left wing feminists probably don't consider the Governor a real woman, certainly not a feminist, because by definition, such person can not have a conservative orientation. This is the same mentality that does not consider Justice Thomas a real black man since his views are off the liberal reservation.

No matter. The nation, or at least 55% of it is in love, that's all there is to it, you only have to look at the pictures of the post campaign rally in Michigan and the other stops to come, to see it. She's a Kennedy - like rock star, and though it's usually a mistake to say this time is different, this could be the election where finally the VP choice makes a difference. If nothing else, it turned the GOP convention into a ratings buster, and got Senator McCain a larger and more attentive TV audience than he would have had otherwise. And he came through with a pretty good, workmanlike speech, at least for him. The polls show the campaign got a bigger convention boost than the Dems did, and I'm not sure it won't have some real staying power.


By the way, if you watched the increasingly liberal leaning MSNBC convention coverage, Chris Matthews and especially Keith Olbermann panned the McCain speech, something you would expect from Olbermann, but the performance of Matthews was especially grating. He has moved further and further left to the point he no longer has anchor credibility, and apparently the NBC brass finally saw it that way too, since both Matthews and Olbermann were demoted today. That leaves David Gregory, who at least tries to bury his left-leaning tendencies, to anchor the campaign events the rest of the way.


By the way, another fun take on the Palin speech was Peggy Noonan's column in the WSJ weekend edition. Some of her better quotes:

"The difference between a hockey mom and a pit bull? Lipstick" is pure American and goes straight into Bartlett's. This is the authentic sound of the American mama, of every mother you know at school, who joins the board, reads the books, heads the committee and gets the show on the road. These women make large portions of America work.

She seemed...a refutation to all the men of Washington...who make rules others have to live by but they don't...who mandate work rules from which they exempt Congress...She has lived her expressed values. She has said yes to a Down syndrome child.

No one has really laid a glove on Mr. Obama before, not in this campaign and maybe not in his life. But Palin really damaged him. She took him square on, fearlessly...she showed no awkwardness connected to race, or racial history. A small town mayor is kind of like a community organizer except you have actual responsibilities. He wrote two memoirs but never authored a major bill...This was powerful coming from Baberaham Lincoln, as she's been called.

The media overstepped...How?..By offending people by going so immediately and so personally into issues surrounding Mrs. Palin's family. They did not overstep by digging, by deep reporting, by investigating Palin's professional record.

This new (media) war on new turf is not good, and carries the potential of great harm. Everyone really ought to stop, breathe deep, and think.

John McCain also made a speech. It was flat.

Meanwhile, Mr. Obama also made a speech the week before last, which the reporters generally described as electric, but I can't remember seeing a significant quote from it. Does anyone have the foggiest recollection of what he said? I have been blogging that the Dems were likely to have their Dukakis moment after their convention. I think it arrived last Wednesday night.

The other big story over the weekend was the Treasury's takeover of Fannie Mae and Freddie Mac, bailing out bondholders but washing out common and preferred equity holders. Though this may have forestalled greater financial collapse, there will be significant second and third order effects. We've got quite a ways to go before the bursting of the mortgage bubble is fully played out.

This will also be a political story, since the two GSE's were creatures of Congress, particularly Democrats like Barney Frank, who pocketed huge lobbying contributions from them and generally looked the other way while their executives leveraged their quasi - government guarantees (now real) to pocket huge compensation and provide outsize dividends to shareholders. Incredibly, the two fired CEO's are going to receive seven figure severance packages...for what?

The WSJ edtorial page has been railing against this GSE structure (private profits, public guarantees) for years, and has taken a lot of abuse for its position, despite the overcompensation of GSE execs, the accounting scandals, etc. Seems to me the WSJ had it right all along. Meanwhile, the fact is that Senator Obama accepted over $100,000 in campaign contributions from Fannie and Fred in recent years, while Senator McCain did not take a dime. They just couldn't get to him, complained a GSE lobbyist.


On Sept. 2, I bought 1500 shares of Sirius - XM Radio at 1.34 - I live in hope. On Sept. 3, I sold 200 shares of Conrad at 12.25, originally purchased 2/9/05 for
2.25. Today, I sold the rest of my Long's Drug position - more on that next post.

This page is powered by Blogger. Isn't yours?