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Sunday, March 08, 2009

 

We Need An Economist Jack Bauer - Now!

It has not been the popular view, but my feeling has been for some time that we are enduring a form of financial terrorism, international and domestic. Yes, we had bubbles in various markets that assured a significant recession, but watching even viable stocks get relentlessly pushed down to one - third of their book values, I can't help but recognize that the short interests are taking advantage of relaxed trading rules and brutal bank capital standards to make fortunes at everyone else's expense. Even if assets were half soft, these stocks would be trading well below real book.

Steve Forbes op ed in Friday's WSJ should be required reading for anyone wishing to talk or even think intelligently about what is going on. His recount of the FDR administration belatedly putting in the short selling uptick rule and relaxing mark-to-market accounting in 1938, and how that set the stage for recovery once WWII mobilization began, was totally pertinent for current policymakers. For some reason, the Bush administration allowed both of these intelligent regulatory moves to be reversed, and worse, stopped enforcing the need to borrow shares before selling them short. Thank you Chris Cox, perhaps the worst SEC Chairman ever.

The lack of mark-to-market accounting removes any hope of regulatory forbearance for banks pressured by dubious (though not hopeless) mortgage securitizations. The result is a vicious cycle of risk based capital weakness and the need to replace capital when it is not readily available. The shorts pile on without the inconvenience of actually having to first locate stock to sell or wait out a small uptick before moving in. This means they can relentlessly push down stocks to absurdly low levels, forcing margin players to cover, and creating grave doubt about the viability of the banks and businesses they are targeting.

That hedge funds and other known short players are cooperating in this scheme has been widely suspected of course, but it is now routine to see their activities with respect to certain stocks described in the financial blogs. This crime is of the same magnitude as polluting the water supply or other serious crimes against society that true terrorists would consider.

To hear the shorts talking down stocks, calling for the nationalization of banks (that have no current cash strains), defending mark-to-market on grounds of transparency for investors is enough to make anyone sick since all of these comments are so self serving. For that reason, it was good to hear Federal Reserve Chairman Bernanke recently address the regulatory fixes we need and to hear a rising crescendo against mark-to-market among economic experts.

It's time to move on this and, I would say that since the market is SO OVERSOLD, and since the shorts would run for their butt covering lives at the sight of a meaningful rally, any move in the direction of restoration of the uptick rule and eliminating mark-to-market would set off a 2500 point advance in pretty short order. These moves would not by themselves end the recession, but they are a necessary and important first step.

Will the Obama Administration have the courage and wisdom to do this? So far, their only reaction to folks like Jim Cramer and Steve Forbes has been to show a strangely thin skin. I would like to think they could take a short break from their socialist agenda to accept some good advice about how to end the financial crisis, since it's already clear their own gang has no clue. But I am not confident on that score. Hopefully, Bernanke. Volcker, and Gaithner can get it done anyway. In any case, I look for a rally this week. I think the market moved into short covering mode in the last hour Friday, and that there is a lot more of that coming this week.

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Recession or no, the NYC Jazz clubs keep bringing in the crowds, and Thursday night, we had the true privilege of seeing and hearing the legendary Michel Legrand before a very nearly packed house at Birdland. With the incredible Lew Nash on drums, David Finck on bass, and a string quintet featuring harpist Catherine Michel, the 77 year old pianist/singer/composer played a set that playfully alternated romance and swing, exclusively playing his own great songbook that included "What Are You Doing for the Rest of Your Life" and Summer Smiles. Legrand has won 3 academy awards for his movie songs and scores including Summer of '42, Yentl, and Atlantic City among more than a 100 others. He can't sing so much anymore and therefore sings less, but his piano may be better and more in a jazz idiom than ever. He and Nash are especially communicative, in the musical sense.

There's a lot more great stuff still to come to NYC in March. For example, the Jeremy Pelt Quintet is at Smoke March 19-21, 90 year old piano legend Hank Jones at Iridium March 11-15, sax player Seamus Blake at Smoke March 26-28, drummer Louis Hayes' Quartet at The Kitano March 27-28, legendary Lee Konitz at the Creole Music Supper Club March 20-21, Michelle Walker singing at Smoke March 22, and the Wonderful World of Armstrong, featuring trombone Wycliff Gordon at Dizzy's Club Coca Cola March 31-April 5. Also, exciting pianist Helen Sung leads Nugenerations at 1PM at Dizzy's March 21 in a free, first come, first served show.

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Also on March 21, the Philly Sound comes to Westbury Music Fair, featuring 70's stars the Chilites (OK they're from Chicago), the Stylistics, and Eddie Holman! ("Hey There Lonely Girl").

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Last Monday, we added 400 shares of Home Diagnostics (HDIX) at 6.60. On Friday, we made our return to energy (actually, energy service) buying 300 shares of Gulf Island Fabrication (GIFI) at 7.04. We thought that was a good price but apparently the analysts didn't like what they heard on the earnings call because the stock got hit later that morning. I heard the call and didn't think it was so bad since I wasn't anticipating good earnings and growth visibility. This company has no debt and it wasn't that long ago it was selling above 20. Energy needs the economy to rebound a bit, but ultimately, prices should move up toward an equilibrium point 50-100% higher than today.

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