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

Sunday, October 26, 2008


9 days to go, and not lookin' good

If you can believe the polls, the McCain campaign continues to founder in the key swing states, as the independent votes actually in play react to the economic mess and the virtual certainty of recession by blaming the party of the current administration. Though Congress has even lower approval ratings than the President, it is always difficult to make the argument that they share or own most of the blame for the problems, and McCain is nowhere near articulate enough to pull that off.

That the polls could be wrong or that there could be an eleventh hour shift of the electorate has occurred to many, though the Dems and their media friends would have you believe that "it's over." One thing that is over is the battle for the minds of the many (and it increases every cycle) voters who vote early in the states where that is allowed. The Obama people seem to have done a remarkable job getting those folks out to vote, and presumably they have a good idea of the likelihood of those people to vote for their candidate.

Talk radio right wing hosts like Rush and Mark Levin have increased the intensity of their agitation about Obama's socialist tendencies, and that may be having an impact. If it wasn't, I doubt you would be seeing libs and Dems so exorcised about them, but Rush and Mark mainly serve to fire up the base.

As bad as things look for the Presidency, the real horror show for conservatives is the increasing likelihood that the Dems will have a filibuster proof majority in the Senate. The magic number for that is 60, and unless Sununu and a few other trailing GOP incumbents snatch victory from the jaws of defeat, the Obama's can pass more of their program that they would otherwise. Question: would Obama and the Dems really follow the Hoover-FDR prescription for depression by raising taxes and restricting trade during the early stages of a serious recession? One can only hope that Obama will be bringing in strong enough economic advisors (like Rubin and Volcker) to avoid such obvious mistakes.


Speaking of Senators, our senior Senator in NY, Chuck Schumer, has long been an embarrassment (most dangerous place in Washington - between Schumer and a microphone) but one really has to wonder about the liberal media's lack of interest in the apparent scandal involving his imprudent Indy Mac comments that precipitated a run on that bank and its insolvency. I thought at the time that even someone as irresponsible as Chuck would have known better, but now it comes out that business interests that were leading contributors to his campaign fund had an interest in Indy Mac's failure. Their aim, which ultimately came to pass, was to pick up Indy Mac assets on the cheap. So it seems that Schumer's comments were not merely stupid and irresponsible, but also served the interests of his financial supporters.

Imagine the media firestorm if a Republican had done the same thing!


Now that the Treasury has determined that it makes more sense to invest in banks and financial services companies than to buy their toxic assets, we are witnessing the unseemly lineup of all kinds of entities at the public trough, looking for a little spare equity capital. These now include not just financial companies, but also auto manufacturers, insurance companies, and even states whose budgets are under water.

Seems to me this is exactly what those opposing the bailout bill were warning about -the socialization of our system, and the reduction of the private sector's area of freedom. These equity investments will not come without strings attached, and the limits on executive pay are the least of those. Frankly, I hope the Treasury adopts the Nancy Reagan philosophy - "just say no."


One reason it is getting increasingly difficult for Republicans to make their case is that more and more Americans are reaching adulthood without the foggiest idea of what the Constitution actually says and without the shared values that Americans of the baby boomer and prior generations learned. No wonder Supreme Court devotees of originalism are so maligned in the liberal media. The young reporters of today believe, like Barack Obama, that the Constitution says whatever they like, or at least, should be freely interpreted according to their own preferences. "Civics" as it used to be called, is not really taught properly any more in the public schools, and hasn't been for two generations. Conspiracy theorists would point out that the teachers' unions see the world the way liberals do and have successfully indoctrinated two generations to think the same way.

The state of American history education is as bad or worse. In discussing with a liberal friend the readiness of Sarah Palin to be President, I pointed out that it has been quite common for mediocrities and players from the small stage to be elected VP. This is because VP candidates are generally chosen, as was Palin, for political reasons and not based on immediate competence. Often, those elected have grown into the job, and especially when called upon to succeed to the Presidency. When asked for examples, I immediately pointed out that Harry Truman was a political hack chosen as a compromise candidate even though many, including FDR himself, knew the President was in failing health. To my astonishment, this otherwise intelligent person admitted not knowing that Truman had ever been Vice President and had succeeded to the Presidency! Further discussion revealed that this person also did not know that Dick Nixon had served as VP under Ike for 8 years. And this person is a younger baby boomer!

They warn you not to discuss religion and politics in social situations, but really, how can you hope to have any kind of sensible discussion when people are so ignorant concerning the basic raw data? They do know the Democratic party line though - George Bush = worst President ever; Dick Cheney - unelected President (well he was elected to serve in the Administration, I thought). The Iraq War - sucks, a war of choice, etc.

That's another thing I have noticed when talking with my younger friends and colleagues is that everything "sucks." By that I mean, they constantly use that term to describe whatever happens they don't like, even trifles. Sitting at a college football game, the kid behind me was typical. Two yard gain for the home team - that sucked. Incomplete pass - sucks! Bad call? That's right, that sucked too.

We used that term as kids, but sparingly and at least reserved it for things that were really horrible, not just a little annoying.

People think the economy is a mess now, but given what we know about the magnitude of layoffs still to be announced, I don't think most people have any understanding about how bad this recession is going to be. The stock market is discounting a beauty of a recession, and that's why you see these repeated tests of the 8200 level. We are trying our best to make a bottom, and I think it may have happened Friday, more likely tomorrow or Tuesday. The market is also discounting the expected Obama victory and the likelihood of an increase in the tax rates on capital gains and dividends. And of course, we are still working through all the deleveraging, with the main action now involving the hedge funds trying to unwind their positions. There is no way these guys can all get out the door at the same time, not when they were leveraged at 5-1, some at 30-1. It's not for no reason that I predicted that half of the hedgies that started 2008 would close their funds by year end.

I think it is fair to say that the market this fall has...sucked.

Still nibbling, with no payoff yet, but we live in hope and follow the formula that takes emotion out of investing, while most of the players are paralyzed by emotion and panic. Last Monday, we bought 700 shares of Books A Million (BAMM), the southern book store chain that has been such a great trading vehicle for me over the years. The price was 3.10. On Wednesday, we bought another 700 shares of Marine Max (HZO) at 3.01 and promptly lost a third of that by the end of the week.

The formula also did get us to sell some shares when the market was riding high, and that is perhaps its greatest strength. As the WSJ noted a couple of weeks ago, "A (pure) buy and hold strategy has been a waste of time and money over the past decade."

Sunday, October 19, 2008


Where the Media Bias Comes From

The media's left wing bias is all but universally acknowledged (despite Obama's great line at the Smith Dinner the other night - "Is Fox News in the media?") these days, and one sees it's impact in all kinds of subtle and not so subtle ways. The question is, how did this come about?

I am old enough to remember when the media had a pretty strong right wing bias. The papers were all owned by wealthy publishers, and they rarely wrote editorials endorsing Democrats. The strong line of demarcation between the opinion pages and the news reporting pages in the tabloids was no better than it is today, likely worse. Only the NY Times and the Wall Street Journal, and maybe the Washington Post could reliably be expected to provide objective news coverage. The same is true today, only the bias is to the left. Now the Times and the Post evidence subtle but sure bias in their news reporting (and subtle is more dangerous since it is less transparent). For sure, there are still conservative oriented papers, the best being the Journal, and the worst being the NY Post. Only the WSJ, of the papers I ever see, gives you reporting that is objective, accurate, and clearly separated from editorial.

As for the broadcast media. the networks still pretend to be non-partisan, but that has not been the case for a generation or more. The cable networks and talk radio make little or no pretense about their slant, and that is actually OK; at least they are pretty much warning you where they are coming from. You have to watch CNN carefully though - it will not acknowledge its lefty slant.

What has driven the media to the left? I claim it is less the media ownership than it is the motivation of those entering its work force. In effect, there has been self - selection by media personnel that has driven the bias. Surely, Woodward and Bernstein's Watergate expose, a legitimate investigative journalistic triumph that uncovered a Republican administration acting shamefully, inspired a generation of other would-be investigative reporters. But why does a journalistic career still appeal mainly to left-oriented students, and why have the nation's editors forsaken the ideal of objective reporting in favor of writing that supports political ends?

I found a great example in my college's current edition of its alumni magazine. The College held a series of seminars for students interested in a journalism career and brought back alumni now enjoying careers in the media. The students wanted to know how to get their first jobs, but what they mainly heard were the reasons they "should" get into a career in journalism. Here are some representative comments:

Adi Ignatius ( Haverford class of 1981, exec editor of Time Magazine) -"I decided to attend the workshop because I believe in journalism, in its power to change the world, and I want to do what I can to help inspire smart, passionate young people to get into the field." Change the world? Is that the job of journalists? Maybe when you reach editorial, like Paul Gigot, or if you're a pamphleteer like Tom Paine. How about teaching these kids to report accurately before they go about changing the world?

The article's author, Brian Johnson, Haverford 2008, on his overall impression of the alumni professionals: "I thought the majority of them must have gone on to journalism school but I learned that few of them had, and even fewer recommended it. They all agreed that you could learn more about journalism by hitting the streets, talking to people, and looking for stories; and that the key to success was getting your "bylines" on as many published pieces as possible." They all agreed? I rejected the idea of J school, but they all agreed? No training, just go for the story, the byline? Yikes!

And how about this from John Carroll, Haverford 1963, most recently editor of the LA Times, in a lecture he gave at the University of Kentucky - "There are many reasons to be a journalist...Maybe you'd like to expose the next Enron scandal - or thwart some future president's plan to invade the wrong country...I won't attempt to list all the new forms journalism is taking. A noteworthy example is YouTube, which is playing an important role in the current presidential election campaign...At the same time, I'm hoping that the old media will continue to employ large teams of professional journalists, to propagate their traditional definition of ethical journalism and, when necessary, to stand up decisively to the government and other big institutions." Mr. Carroll has a big reputations, earned over a long career, but it may be OK that he is out of his job at the Times.

I would have added emphasis to these comments (in bold or italics) but I wouldn't know where to stop. Suffice to say that with this attitude, it should not be any wonder that recruits to journalism are coming in with a sharp left slant and believe that their legitimate role is to advance their own policy prescriptions. Is it really any wonder that the media treated Sarah Palin to a feeding frenzy of "investigative reporting" but continues to question why the Ayres connection is a legitimate story worthy of follow up (or even that it should have been raised)?


Of all the Motown Groups, the most enduring have been The Four Tops and the Temptations. Surely, none of those groups maintained the original personnel as long as the Tops, and its lead singer Levi Stubbs, though clearly among Motown's greatest talents, likely had much to do with keeping the group together. He never seemed to seek individual star status - no one ever called the group Levi and the Tops or anything like that. He was a team player on an incredible team, capable of the most wrenching soul style and also the most alluring ballad work.

I really loved watching the Four Tops in person, and did so on several occasions, and their records will live forever. We lost a great artist this week in Levi Stubbs.

My pick at the beginning of the playoffs was for the Phillies to beat Tampa Bay in the series, and I still feel they will because they have the best closer and because of the dominating presence of Ryan Howard. Nonetheless, you really have to admire the Rays too, and they will be a solid opponent with their youthful spirit and talent, and with the odd game at home.

On Monday, I bought 100 shares of Expeditor's International (EXPD) at 28.24, a "zero buy." Wednesday, the value buy was 400 shares of ADC Telecommunications (ADCT), a long-time under performer because of the overcapacity in its industry. That overcapacity may finally be brought back to a reasonable level by the end of the recession, and that might allow this stock to pop. The price was 5.59, which brought my average cost down quite a bit.

No surprise, the market tested its low last week after the short covering rally. The test was surprisingly successful, given the economic challenges we still face, and the mountains of stock pushed on the market because of mutual fund withdrawals, hedge fund catastrophes, and margin calls on executives. If ever there was a demonstration of the importance of avoiding margin, (recall the advice of Sir John Templeton), the last two weeks have been it. We have probably begun a protracted bottoming process.

Saturday, October 11, 2008



Many years ago, when I was young and foolish (liberal), there was a great satirical TV show that tried to make some fun of current events and had people like David Frost and others. It was kind of a cleaned up version of The Capitol Steps. The show was called That Was The Week That Was or TW3 as the intelligentsia referred to it.

If such a show ran today, I'm not sure I'd want to sit through this episode. The last week surely needs no recap. Quite simply the worst week in stock market history, we watched our politicians and expert economists flailing helplessly in hopes of curtailing the plunge in asset values, while the deleveraging process kept the capital markets shut tight. What a mess.

I have questioned previously the solution of government buying the bad assets, but the availability of government as a buyer of last resort for banks' new preferred stock issues is not a bad way to restart the credit process. Other solutions posed include government guarantees for overnight loans between banks. So there are lots of good ideas around. Also, it is clear that the magnitude of the problem is not the issue - the solution money now far exceeds the amount of all of the possibly bad mortgages.

So the issue is confidence, trust, and a more orderly process of deleveraging. And some very judiciously applied regulation (of the credit default swap market, hedge funds, short selling - please restore the uptick rule!). I say judiciously because one of my major concerns is that the regulatory pendulum will swing back too far. Relaxation or elimination of mark-to-market rules will surely help stop the dominoes from falling too.

Deleveraging is necessary. Debt simply got out of control. We all know about the housing bubble and the mortgage fraud activity, but there is also way too much consumer debt (credit cards, et all) and public debt at all levels of government. This means we will have a slower economy built on a more solid foundation. And we need a very strong exporting sector to keep the dollar at reasonable levels in the face of the inflationary bailout money the government is pumping in.

As the President has said, even when we stumble onto the right policy prescription, this process will take time.

How will our stock trading formula play out in such an extreme environment? The early returns are mixed at best. In a very short period, we have lost over 25% of our accounts' values. Not fun. It would have been worse if the formula had not directed us to be selling most of the summer, but some of those profits went into new value issues, and nothing has escaped the bear's wrath.

Regular readers might recall that in earlier posts, we considered the option to sell everything, and go to cash, but the whole idea of the formula is based on not being able to make those calls consistently, including the option to catch a falling knife by jumping in now. So we will keep nibbling as the formula directs.

An old Wall street adage says to "sell them on Rosh HaShanah and buy them back on Yom Kippur." If the market rallies from here, I'm likely to have some very rich cousins.


Vindication Department - Walgreen gave up its phony bid for Longs Drug (LDG) as predicted here, and LDG quickly retreated to a price below the CVS bid. This makes me feel better about the decision to sell LDG above the CVS bid but below the price Walgreen ultimately bid. This whole sham was perpetrated by the hedge funds who dragged the Walgreen bid out for their own purposes, to boost the price a little bit more before selling out. I'll bet most of the hedgies got out before Walgreen pulled its bid off the table. If so, those hedgies should be arrested.

Also, Bank of Granite (GRAN) pulled its silly 5 for 4 stock split proposal, which I said in a recent post made no sense. Now maybe they'll instead propose a reverse split as recommended here, in order to pull the nominal price of GRAN over 5 or better yet, over 20.


Why can't John McCain simply and accurately describe Obama's phony tax cut as the redistributionist grab that it is? Obama's proposal, of course, is to raise taxes on all individuals (including small business owners) in the $250,000 bracket or higher and allow the large percentage of people who pay no income tax now to receive a tax credit check. This is what he calls a tax cut, but in reality, it is a negative tax for the least productive workers (and non-workers) at the expense of the most productive. If there's a better way to make the overall pie smaller I can't think of one. The GOP candidate should call it what it is - socialism.

Also, McCain needs to dump his own health plan, which won't accomplish anything and even makes for bad sound bites, and simply promise that his administration will establish a blue ribbon commission to review a wide range of solutions. Then he can call the Obama plan what it is - a stalking horse for a single payor plan the result of which will be a bigger federal deficit and a weaker health system.

In other words, the plain talk express needs to focus its message, get plainer so people can understand the real problems we will face with an Obama administration.


I am writing this post from scenic Cortland, NY, a beautiful college town that unfortunately sits in the middle of a county suffering through a multi-year depressed economy. NY's draconian tax policies have murdered the manufacturing sector in upstate New York and sent much of its youth to other parts of the country. What a shame.

Earlier in the week, I enjoyed my annual conference in Cooperstown, NY, best known as the home of baseball's Hall of Fame, but also surely, one of the most beautiful spots on our little old planet. Lake Otsego, nestled in the Adirondack hills, makes for a living picture post card. The views from the elevated tees of the Leatherstocking golf course at the Otesaga Hotel are more than enough to distract the most intense golfer.


On Monday, I bought 100 shares of Precision Castparts (PCP) at 69, what seemed like a good price at the time. Wednesday, ITW was on the bargain table and we picked up a hundred at 35.72. Thus is proved another old adage: just because a stock is cheap today doesn't mean it won't be a whole lot cheaper next week.

Saturday, October 04, 2008


3 step plan to recovery

The current financial crisis will be resolved when banks and other lenders overcome their fear of counter party risk and resume lending to each other. For that to happen, there must be a belief that mortgage lenders can ride out the housing depression without more dominoes falling. Each time a big player goes down, it means more bad paper on everyone else's books.

That's why the regulators blew it when they let Lehman go down (since it was a counter party on all kinds of transactions) and why they realized just in time that they could not let AIG go down.

A big part of why companies are going down is the requirement that they mark impaired assets to market, even when there is no active market in the assets. For debt instruments, this is actually recent accounting policy, and highly questionable. Stocks were always carried at market, since there was an active market with readily available prices. This is not the case for most debt instruments, including securitizations, like asset backed mortgages. Debt instruments were traditionally carried at amortized historical cost as long as the debt was being serviced. Though accountants and certain investors object, it was very bad accounting policy to switch these to mark-to-market when they are not actually traded very often. All that does is force conservative valuations on asset holders, driving them to insolvency and the negative feedback loop of increasing collateral, ratings downgrades, and more collateral. This is what is felling the dominoes, not the foreclosures.

Foreclosures may, in fact be inevitable, but there is no incentive for the mortgage servicer to work with the debtor to avoid foreclosure if they are going to have to write down the mortgage loan anyway.

Fortunately, the bill passed Friday includes some relief from mark-to-market requirements, and the SEC provided additional help in the form of a statement last week that where markets are not ordinary (such as when there is no trading), assets do not have to be marked to market. This is coming too late to save Bear, Lehman, and others but just in time to save our financial system.

What we need are the following three steps:

Relief from mark to market (begun last week)
Passage of the bailout bill (done- needed to restore confidence and liquidity)
Reduce the Federal Funds rate AND the Discount rate to show the Fed will add liquidity to the extent required.

It may take time, but moving on these initiatives should eventually get credit flowing again.


The Palin - Biden debate showed that both candidates are quite good at executing their game plan and driving home their talking points. Sadly, it also showed how silly campaigns have become, frankly in response to the pitiful level of knowledge most Americans have about politics, national and world affairs, and the issues overall.

The explanation that our current crisis resulted from greedy Wall St. traders and bankers exploiting Americans who could not afford the mortgages they were taking on makes a nice populist soundbite, but it ignores the role of Congress in propping up the GSE's, the Dems encouragement of subprime lending in the interest of home ownership, the popularity of no-doc loans in order to generate fees, and the role of the Fed in inflating the housing bubble by keeping interest rates so low. Also, an awful lot of foreclosures involve houses bought on speculation or for investment purposes.

Realizing that the Bush administration is extraordinarily unpopular, it is still unconscionable to state categorically, as Biden did that Mr. Cheney is the worst VP in history, etc. And where are the Republicans to defend the administration? This administration has removed one of the most notorious dictators ever, successfully prosecuted a difficult war, and avoided any terrorist attack on our soil since Sept. 11 2001, despite bureaucracies hostile to administration goals and a Congress that has sought to hamstring it at all times. Objective historians, if there will be any, will certainly give the Bush administration much higher marks than its contemporaries.

The VP debate outscored the Presidential debate in the ratings by about a third. Much has been written by the liberal media about Sarah Palin's supposedly falling popularity, but does anyone honestly believe that all, or any of these additional viewers tuned in to see Mr. Biden?


On Monday, I bought 500 share of Bank of Granite (GRAN) at 4.25. On Wednesday, I bought 19 shares of Transocean (RIG) at 108, a zero buy.

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