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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.

One of your better efforts. Your comments about McCain and Obama's tax policy were excellent.
Henry Morgan
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