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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.

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