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Sunday, February 08, 2009


Mostly music this time - it's Emmy night

First, we'll try to respond to Rufus T. Firefly's comment on the January 25th post. Mark - to - market accounting refers to the requirement in GAAP accounting to value certain securities for financial statement purposes at their most recent market price. No problem doing this with certain assets whose market price best reflects their true value, such as stocks. For securities where there is no active market, companies must go to a broker for a best estimate of where the market price would be, and that is not a very accurate value measurement. Further debt securities usually have a quiet secondary market if any, and debt value is more a function of recoverability and collectability than immediate liquidity. Until recently, debt instruments were valued at historical amortized cost, not market. The requirement to value these assets at market is killing the banks and our economy by forcing valuations down and requiring additional capital and collateral.

With respect to the question about bank lending, banks are in poor position to take the TARP funds and lend them out, since they need to maintain the added capital to support market valued investments, and because the poor economy makes new loans risky. Anyway, the politicians and their economists are wanting to have it both ways. When there was too much debt, that was a problem, and now it's a problem that there is no lending.

The big problem with no lending right now is that retailers and other businesses cannot refinance inventory nor roll over their existing loans, and that is causing business failures and layoffs. This is why the banks must be given more reasonable accounting and capital standards, to buy time so that they can return to their traditional financing role. The "bad bank" approach has promise if the assets will be bought at a value that exceeds market (and approaches historical cost). That way, the banks will not lose too much on the capital transaction. The taxpayer subsidy will relate to the extra price paid for the bad assets, but some of that will be recovered over time as real values (even for those bad assets) are realized.


Then there is the stimulus package. It is senseless to argue over whether the amount is enough or too much. There will be a stimulus passed, and that may help confidence, though by itself, it will stimulate nothing. My hope is that the money will be spent wisely and not on boondoggle earmarks. Of course, I know better.


The Super Bowl was terrific, one of the most entertaining ever, and though I did pick the winner, I am sorry if anyone lost money on the Steelers since they did not cover (and that was only right. The Cardinals surprised to the upside). Readers should understand that my football picks are no better than my stock picks, alas. Another great thing about the game was halftime. The Boss was simply outstanding, pulling out all the stops (the guitar throw, the knees slide, and the dueling guitar bit with Stevie). Even those typically indifferent to Bruce (like me) agreed that if he had gone on for 40 minutes rather than 12, that would have been just fine with us.

Of course, his current tour is sold out, so if you want to see him but don't have tickets, you will be at the mercy of the scalpers.


I was staying in the City on business Thursday night, which gave me a chance to go to Birdland for the late show and see the Lewis Nash quintet, including the outstanding bassist Peter Washington and Jimmy Green on sax. Let it be said once again that Mr. Nash is hands down the best drummer around, though it must also be said that the legendary Roy Haines is still playing as well as ever, apparently. Nash is in total control of his instrument, fantastic with sticks, brushes and hands, and feet also (he wowed them with his high hat work on the set's concluding number). Mr. Nash returns to Birdland March 3-8 playing with Michel Legrand and the world's greatest bassist, Ron Carter. This annual Birdland gig has become among the most anticipated on the calendar, and this year, Legrand will also have a string quartet to help him perform his prolific and beautiful compositional output.


Speaking of jazz, one of the best values for NY area Jazz lovers is Hot House, the free monthly magazine issued at all of the venues around town. In addition to several interesting feature articles, Hot House contains the schedules for each of the clubs and bars where live acts perform each month - everything from 55 Bar to Rose Hall at Lincoln Center. There are so many great shows on tap this month, but a few I have my eye on include Helen Sung at Saint Peters Jazz Ministry (free) on Feb. 15, and at Jazz Standard on Feb. 17, Eric Alexander (one of my faves) playing in a Joe Farnsworth (not my fave) led group at Smoke, Feb. 19-21, German bassist Iris Ornig leading a quartet featuring trombone Wycliffe Gordin at Kitano, Feb 18, Wycliffe leading a group at Miller Theatre, Columbia University on Feb. 21, Ken Peplowski leading a quartet including pianist Don Friedman at Kitano Feb. 27-28.


Who cares if it's a bear market rally? Any rally was welcome. On Groundhog Day, we poked our heads out long enough to buy 300 shares of Gencor Industries, (GENC) a new name off the Forbes small company list at 8.17. This company is mainly into road construction, which means that the stimulus plan may mean a recovering revenue stream for this company that has an almost pristine balance sheet. On Wednesday, another new name off the same list was added - 400 shares of Home Diagnostics (HDIX) at 6.38. The hook here is that with half the population testing at pre-diabetes levels (if you can believe the press hysteria), home testing and monitoring is bound to grow. Time for the periodic disclaimer. Neither redwavemusings nor its author are investment advisors, and the securities mentioned in this blog are not to be considered recommendations since they may not be suitable for anyone else (or even for me).


I am not so sure that saving the banks is worth it anymore. The banks lent money in a manner such that they deserve to lose the money they lent. In addition, the economy is so weak that there are fewer and fewer credit worthy customers. Circuit City has filed and so what? We didn't need them and probably don't need Best Buy either. Retail is easy to pick on so let's look elsewhere - Detroit? Way too easy to pick on. America is flooded with too many cars. The government allowed access to the market and Detroit's miserable products guaranteed the imports success. Appliances? Tell that to Jeffey immelt!
We do need a spending package to help us survive what could very well be a very long downturn. But anyone who thinks the President's package will get us back to where we were 18 months ago is flat out dreaming.
As to the market - follow Redwave's advice and sell into whatever rallies happen.
And as for me, as always,
Hail Freedonia

Rufus T. Firefly
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