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Sunday, January 25, 2009

My friends know that being chronically behind in my reading, I ignore chronological order and read my selected newspapers and magazines in almost random order. This means that on occasion, I can be spotted reading a past issue so old, that it may have turned a bit yellow (the thought of being seen on the train with an "oldie but a goodie" horrifies my wife). Nevertheless, I have no trouble getting into the moment, whether it's now, several months ago, or even more, and I find that it is very interesting to see, with the aid of hindsight, how silly or how insightful were the writings of pundits, editorialists, op ed contributors, etc.

So it was that I finally got around to finishing the main section of the Oct. 11-12 WSJ and found several letters to the editor that agree with my now even more strongly held belief that mark-to-market accounting is killing this economy and the banking system. This is a point that musings readers may be starting to get bored with, but I have to say that rather than feeling any caution about my earlier views, I feel more strongly than ever that the accountants have used the power of their auditing position to trump policy. But let's quote a bit from these letter writers who made the point so simply and directly:

From John B. Woodlief of Charlotte, North Carolina: (Market value accounting) poses great danger to liquidity and lets the most desperate sellers set the price...On Oct. 19, 1987,...Fed Chairman Alan Greenspan asked Chase to provide liquidity to the brokerage industry, as total chaos was unfolding...Such loans would never have been made in today's framework of mark-to-market...The responsibility for liquidity in times of crisis now rests with the government. This is the unintended consequence of letting the accountants set the rules without regard to public policy ramifications...Historical cost accounting has been the bedrock of financial reporting...Collectibility, not marketability, is the prime risk determinant in lending activities. There is no quoted market price for most loans, which are normally based on a private relationship between the bank and its customer."

From Robert M. Gordon, Williamette, ILL.: As a tax lawyer... there is no more contentious issue in tax practice than valuations. It seems dishonest to me to pretend that balance sheets that purport to reflect the 'true' value of assets are any more accurate than those that reflect assets at cost, perhaps adjusted for impairments..."

From Byron Hayes Jr, Los Angeles: "As it stands now, no regulated or public institution can afford to hold a material portfolio of mortgage loans because the mark-to-market rule requires that they be valued as if they were held for sale on a current basis...I believe the private (non government) mortgage lending business will not recover until this rule is changed."

There has been debate about whether the current disaster is a credit crisis or a liquidity crisis. Of course there are elements of both. In our last post, I illustrated the origins of the credit crisis emanating from the horrible, even fraudulent, residential mortgage activity. The liquidity crisis, though, is an accounting phenomenon, caused by the rules requiring accelerated writedowns of loans based on ratings and fictional market prices that force banks and other institutions to amass capital to meet RBC standards. In truth, we have an accounting crisis. In my opinion, most of the large institutions that failed or were forced into merger did not have to be. There did not need to be a TARP, nor a government takeover of Fannie and Freddie (though debunking the GSE's may have been the only positives to come out of this so far). There did need to be a downward adjustment to housing values, probably accompanied by a stock market slump and at least a mild recession, but if historical cost accounting were in place, banking institutions would have had the time to adjust. Yet somehow, there has not been a move to limit the accountants' imposition of balance sheet purity. What will it take?


The Wednesday before last, I returned to Birdland to see the Louis Armstrong Centennial Band again, this time celebrating Saxman Joe Muranyi's 81st birthday. The band outdid themselves, in large part because trombone player/singer Wycliffe Gordon was on the bandstand for both sets. He may be the best young player at his instrument, and he surely is one of the most entertaining and talented jazzmen New Yorkers can see on a regular basis. In true friendly Birdland fashion, a nice piece of birthday cake was distributed to all.

I then stayed for the feature show which was the opening night (of four) for the incredible guitarist Pat Martino, joined in this case by one of the best of the current crop of young tenor players, Eric Alexander. So you got two headliners for the price of one. Pat and his trio play so fast, they usually don't include a horn player, but since they also had Tony Marino on organ for this gig, it was a really special evening, even if it was a strain for Eric (or any horn player) to maintain the pace. As usual, Pat didn't bother introducing or identifying the numbers, so they went right from one song to the next, and we were off to the races again. I can tell you the near capacity crowd really got into the frantic pace. Eric did lay out for one song, a simply beautiful ballad arrangement of Monk's Round Midnight, which may be my favorite song.

Pat has been absent for a while, working on the movie being made about his extraordinary life. More on that as news about its release comes out.


Last Tuesday, I stubbornly bought 300 shares of Carmax (KMX) at 7.99 on the assumption that if there is a market for cars, it is likely to be concentrated in the previously owned arena. We'll see. The next day, I came back for 300 shares of Tomkins (TKS), a British diversification for me, at 6.92. One correction from the last post. BOLT is Bolt Technology, not Electronics.

Sunday, January 18, 2009


History in Progress

It's hard to judge while it is still happening whether an event or a crisis will retain its significance when viewed from the perspective of the future. Certainly, for baby boomers, the Berlin Wall crisis and the Cuban Missile crisis seemed potentially apocalyptic at the time, and it would have been hard to imagine that less than 50 years later, they would be remembered, if at all, as mere skirmishes in the larger Cold War, that was resolved comparatively quietly in the end. Given the priorities and new issues facing younger generations, not to mention the pitiful state of public education, many of the "momentous" events that so enthralled our generation are likely to be forgotten by all but academic historians who thrive on trivia.

But we can be pretty sure that Tuesday's inauguration will qualify as a historical event, transcending the political considerations because of the much larger cultural considerations. Generation Y is certainly America's first post-racial generation, adopting an attitude that went well beyond the racial tolerance of their parents, leapfrogging to acceptance, even embracing of our cultural diversity. I am not sure "boomers" ever intended to be so successful at transmitting these values. When we were young, we had reached the stage of segregation by choice, if you will, where instead of whites imposing it, black youth grouped together to find their way in the world and understand the implications of "Black Power." This posed quite a psychological challenge for boomer whites, who had been told by their liberal parents that integration was the ultimate goal, only to find out that integration on their own terms was still unacceptable.

Whether intended or not, the messages that diversity is a positive force, in school and in the work place, that equality of opportunity was a minimum standard, and that equivalence extended to cultural values and the arts was driven home, and this was probably the most important educational triumph of public schools in recent years (certainly they have not succeeded in any academic way).

The final plank in the platform that made the Obama victory possible was the point, resisted by liberals but co-opted unconsciously, made by people like Thomas Sowell and even Bill Cosby that blacks needed to discard victimhood and adopt a winning strategy instead - responsibility, fatherhood, education, participation in the greater community are among its elements. We even have Al Sharpton making noises along that line recently! The Sowell vision is a long road when you consider the large percentage of young black males (many innocent) with a police record. It is happening though, and it will accelerate as generation Y matures and makes its way in the world. There are awesome challenges facing future generations in our country, but a more cohesive society will be reason for optimism in facing the political, social and environmental hazards ahead.


Not sure interest rates around the world are low? Consider that when the Bank of England recently cut its rate to 1.5%, it was its lowest rate ever. The Bank was founded in 1694.

Last week we saw business channel pundits speculating on whether Citigroup could survive, and then we saw the beginning of the breakup of that failed financial supermarket. We also saw BankAmerica join Citi in the ranks of "federally bailed out banks." All the economic indicators released point to economic momentum still going the wrong way. Now we are hearing that the Obama administration wants to go back to the earliest TARP plan and buy the banks' troubled assets with some of the second installment approved by Congress.

The fact is no one, from the old administration, the new administration, academia, or business has a clue how to solve this slump, which has to run its course as explained in my previous post. Though it's dangerous to extrapolate from the specific, sometimes anecdotal evidence can be useful in understanding the larger picture. The WSJ had a front page story last week concerning a "house" (more like a shack) that was foreclosed and sold to the neighbors for one-seventh of the amount of its outstanding mortgage. The neighbors just wanted to raze the eyesore. Of course this mortgage had been securitized and sold and resold. The borrower had used the money to pay off an earlier home equity loan (with a loan to value ratio of about 400%) and there was plenty of fee income for the mortgage brokers and banks.

So the money is gone, it's not coming back, the fraudsters are going to get away with all this, just like Franklin Raines and his cronies did, and the only thing that can happen is massive deleveraging. Meanwhile consumers can't do anything right. When they were leading the economy by buying everything on credit, the pundits and economists complained we had a negative savings rate. Now that they have pulled in their horns, and are saving everything they can and paying down debts, we hear that consumers are not spending enough.

Meanwhile, the Dems have thrown their lot in with J.M. Keynes, and produced completely unreliable forecasts about how many jobs will be created by the massive stimulus. Apparently, the history lessons of the 1930's have been forgotten. The result of the stimulus will be the transfer of more jobs from the private to the public sector, nothing more. Little did we know how many of those jobs would be in the banking industry.

Israel called a unilateral cease fire with Hamas, reserving the option of retaliating if rocket lobs into southern Israel continue. It is interesting to watch the Israeli's expertly play the most excruciating and humiliating psychological cards in this skirmish. By unilaterally stopping the operation, the message is conveyed that it accomplished its limited goals, that it can resume its devastating assault at a time of its choosing, that therefore, Hamas is powerless to protect its own people, and that Hamas' Arab allies don't count in this calculation. The operation also showed the UN, for the umpteenth time, to be feckless, useless, and anything but neutral. Still to come, what to do about Iran, which will no doubt be the subject of soon-to-be-held discussion between Israel's new government and the Obama administration.


No transactions to report since the last post. I have to say things started to look pretty desperate until the reversal mid-day Thursday, after the miserable Wednesday session. But once again, we were pulled back from the abyss by forces welcome but unknown. Tomorrow is a needed day off in recognition of MLK Jr., and then we'll see what happens with the new guy in charge.

Monday, January 12, 2009


Middle East PR War in Progress

Beyond the latest violence in Gaza, with Israel repeating its Hezbollah strategy this time on Hamas, and having learned from their errors in Lebanon, the war the Israeli's simply cannot win is the PR war. The terrorists are taking their usual lumps in the fighting, but they are expert at manipulating world opinion. By locating their military types among the civilian population, they assure lots of pictures of dead Palestinian civilians including an ample number of women and children. This attracts the sympathy of the Europeans and others who don't much like Jews to start with, particularly when they fight back. And so, the feckless UN Security Council kvetches about the "aggression," never mind that Hamas lobs 30 rockets a day, admittedly to little effect, at Israeli civilians, and that's what triggered the latest episode.

Of course one should not minimize the need for Israel to periodically weaken its opponents by pounding them where it hurts, blowing up the tunnels through which they smuggle arms, etc. After all, these enemies periodically threaten Israel's existence and would happily wipe the country off the face of the earth if they had the means. This is why Israel must prepare to strike Iran preemptively, fairly soon in fact, before they achieve a deliverable nuke.

This conflict must be seen as the continuation of a 1000 year old clash of cultures, one to which Muslim extremists are totally dedicated and so-called moderates make no effort to terminate. The Europeans, a dedicated band of appeasers, should see Israel as their advance guard, but don't get it anymore than they understood the importance of not selling out Czechoslovakia in 1938. So the Palestinians, who no one really wants to help, not even their Arab "brothers," stay mired in the refugee camps, mere cannon fodder in this cultural war, unable or unwilling to rise above their pitiful role in the entire debacle. One should remember that they freely elected Hamas, a terrorist movement explicitly dedicated to Israel's destruction. It's pretty hard for me to drum up much sympathy for them given that.

It's pretty clear that 2009 will not be a year of economic recovery, but rather a year of deepening recession. I doubt that the Obama Administration's Keynesian stimulus approach will do much other than add to our government's debt service. To the extent that they are hell bent on spending $800 billion or so, I hope they at least aim it at projects that will be useful for some period of time. Roosevelt's public works projects didn't dent the depression but they did provide a lot of really useful buildings, parks and infrastructure and let's hope we get that kind of value for our money, even if we don't end the recession or depression or whatever it turns out to be.

The fact is that capitalism creates a bigger pie in fits and starts. The business cycle is natural and unavoidable in capitalist systems, as compared to socialist systems which chronically underperform without such great extremes. The real danger is that if our banking system largely fails, we will end this episode without a capitalist economy.

Unfortunately, while correct monetary policy might be able to moderate the business cycle, it can't repeal it. When the speculative excesses build up, you get the blow off boom and the bust inevitably follows. The only way to come out of it is to let the bubblemeisters fail until the excesses are purged and we can get investment going again. In this case, the excesses were so great, and the deleveraging required is of such magnitude, that recovery will likely take longer to arrive than usual. When you cushion the blows too much, as in Japan in the 1990's you get an "L" shaped recession where the recovery is deferred interminably. If we keep bailing out everyone, we can have that too.

A better solution would have been to fix the accounting and regulatory "disciplines" that caused companies that didn't have to fail to fail anyway. This means scrapping mark-to-market asset valuation, especially for performing debt instruments, and restoring the uptick rule for short sales. The companies that can't survive with those rules in place should be allowed to fail. But those changes are needed to separate the companies that could survive on their own from those who can't.


Enjoyed the football games for the most part, with the only shocker being the Cardinals dismantling of Carolina. Pittsburgh and San Diego figured to be close, but it ain't the real Chargers without L.T. As for the Ravens, they are the "defense of darkness," (as the late Jack Warden might have said) and we warned about the Eagles in my last post. For this week, I give the slight (and I mean slight) edge to the Ravens on the road against the almost equally hot Steelers, the winner installed as a prohibitive favorite in the Super Bowl. The Eagles could be ripe for a letdown against the surprising Cardinals, but if forced to make a bet at gunpoint, I would have to take the Eagles anyway.

In other sports news, I was happy to see Jim Rice, a truly great hitter, finally elected to the Hall of Fame along with sure fire first ballot electee Ricky Henderson. Whatever Rickey's personal idiosyncrasies, he was truly a dominant player, maybe the best leadoff hitter ever.


Thanks to my increasing number of readers for putting the Musings blog over 2000 hits. Who'd a thunk it? Also enjoy getting more comments (but still not many), which you might look for by going to the bottom of the previous post to see if anyone commented since you last read it.
Last Wednesday, I returned to Birdland for the early show (5:30 to 7:15) to see the Louis Armstrong Centennial Band, led by tuba player David Ostwald. It was really fun as always, and the excellent veteran clarinetist, Joe Muranyi, was in top form. For a $10 music fee, you could not beat it.


To complete the Sun Microsystems (JAVA) saga, the stock continued to move up and I decided Wednesday had to be the day to dump the rest of my shares out of my IRA. I must admit to interrupting work a few times during that day to see when there would be a downtick, with more shares offered than bid for the next trade. That would be my clue that the upturn would be running out of steam. That happened in the afternoon and we caught a near high for the day at 5.1612 for the 525 shares, originally purchased in 4th quarter 2002 for 12.44. The stock has been heading straight south since, a downgrade late last week greasing the skids. Also last Wednesday, I bought 500 shares of Bolt Electronics (BOLT), a new name compliments of the often helpful full service broker. We got a price of 7.918. This company trades for a silly (low) price/book and has no debt. Today, on the opening, I bought 50 shares of Transocean (RIG) for my IRA at 53.07, a good price, I thought, until I saw the closing price.

Aside from the happy execution story salvaging a good price for my Sun IRA shares, it is important to learn from one's mistakes, which this clearly was. When we put Sun on the buy /hold list, it met all the criteria - little or no debt and a low price/book ratio. In retrospect there were two fatal problems. First, the business model was not designed for the post tech wreck world of plug and play systems. Sun built its business on proprietary hardware and software. When new management tried to change that model to open source, it only succeeded in undermining its own installed base. This also made it a bad takeover candidate. Second, management's priority was enriching itself and its employees, not stockholders. The overhang of employee stock options, refusal to pay a dividend, etc. diluted the company's currency, i.e. its stock. This is why you should avoid companies that give their stock away through options and restricted stock, and employ buy backs rather than dividends (to replenish the treasury shares).

It didn't really take forever for me to realize these flaws, but the decision to give up on a stock is never an easy one.

Tuesday, January 06, 2009


Recount shananigans

The Dems are up to their old tricks in Minnesota. You see, their philosophy is that the election continues during the vote counting, it's not a matter of simply counting ballots in a completed election. So you have their partisans actively trying to qualify, even duplicate, their candidate's ballots while trying to disqualify those of the opposition. So Al Franken, the lousy comedian who would be even a worse Senator, has "pulled ahead" of Norm Coleman in the recount by over a couple of hundred votes (out of millions). This scenario was predicted some time ago by the right wing talk radio hosts like Mark Levin, and why not since it is simply a repeat of Florida 2000 and other debacles in Arizona, New Mexico, Washington State, etc. On the other hand, the GOP usually gives up in these situations to preserve the public interest. Even an ethically challenged candidate like Nixon ignored pleas to challenge the obviously corrupt Illinois result in 1960 "for the good of the country." Not this time, though. The Franken operatives, and the Minnesota Democrat in charge of the recount have been so gross in their tactics, that Coleman is going to challenge "the result" in court, as he should.

News of that challenge was met by Senator Schumer and others demanding that Franken be given his seat, at least provisionally, in an attempt to present a fait accompli, another tactic straight out of the Dems playbook. Meanwhile, their position is complicated by the rationale they have chosen to not seat Mr. Burris of Illinois, the poor schnook appointed by that state's ethically challenged governor. The reason given was that his appointment was not properly certified (and neither was Franken's election). So if you can't seat one, how can you seat the other?

Meanwhile, there is serious business to be done in Washington. Why would anyone think these guys are really up to the job?

Sadly, a Democrat with real talent but a questionable reputation when it comes to personal affairs had to give up his cabinet appointment due to the appearance of a conflict over campaign funds. Somehow, one of Bill Richardson's major contributing companies ended up with a lot of state work in New Mexico, though it has not been implied that Richardson was behind all that. Nevertheless, it is another disappointment for him and his supporters, and the rumors about his personal life seem to make him unfairly vulnerable to this kind of thing.


We saw some pretty good pro football over the weekend, and the question might reasonably asked why wild card teams on the road seem to be favored versus division winners in the first round. The answer is simple. It's hard to be the wild card. The wild card race is very competitive (witness New England, arguably the best team in football not getting in at 11-5) while the weaker divisions are not. The stronger division winners get a bye the first week, so the wild card games tend in recent years to be a setup for...the wild cards. Only a narrow win by San Diego left the wild cards at 2-2 when they could just as easily have been 4-0.

By the way, the last team the Giants wanted this weekend is the Eagles. They are hot and always play the Giants tough. Coming off the bye week and at home, the Giants should be favored, but this game will not be easy. If Big Blue gets by the Eagles, they should make a repeat appearance at the Super Bowl.


We are off to a good start on the market so far, as Wall Street watches nervously hoping the January barometer will be positive. One thing about the market - you play it like you play against an NFL defense - you take what it gives you. Usually it doesn't give you what you want. Case in point. I am taking Sun Microsystems (JAVA) off the buy / hold list, at last, but wanted to sell my shares in the taxable account by 12/31 to offset some capital gains. Of course, I am not the only holder motivated by tax considerations, so Sun's price just lay there all through December, beaten down by tax selling. So finally, on 12/29. I threw in the towel selling 400 at 3.80 and 300 at 3.82. I decided to keep my IRA shares to see if I could get a little higher price after the New Year, when tax considerations would be left behind. Sure enough, the stock closed at 4.97 today. Since there should be some resistance at 5, I am likely to let the IRA shares go in the next day or two. But to get this kind of price on all my shares, I would have had to forgo the tax loss.

On 12/31, I bought 200 shares of Ladish (LDSH) for my IRA at 13.19. Yesterday, as promised, I bought a preferred stock, though they have had quite a run already the last few weeks. Frankly, I could not find a better buy than Citigroup (C.PR.S), what with the government bailout in hand, at 14.75 for 200 shares, where the yield is obscene. I did spot a couple of others that still have value despite having made great moves. There are several issues of ING preferred, and TransAmerica preferred, currently yielding double digits. Maybe next quarter. In the meantime, Citi already moved to 17.05.

Before you start to think about how smart I am, here were the purchase dates and prices for the Sun Microsystems shares I took losses in:

2/5/01 50 shares @ 115.00
2/12/01 50 shares at 98.25
3/12/01 75 shares at 67.25
9/17/01 100 shares at 37.44
4/29/02 125 shares at 32.76
9/22/08 300 shares at 8.58


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