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Friday, August 28, 2009


The US Royal Family

Where does the summer go? September begins on Tuesday, and with it the cooler weather and the start of my 31st year of marital bliss. This year, we get an extra week of unofficial summer since Labor Day is not until the 7th. When you live in the Northeast, this is a major downer because while most of fall is pretty nice, our warm season of shorts and T-shirts is really only about 4 months, and that's not enough. That's why, on top of taxes, traffic congestion, and waiting lines for almost anything worth doing, people retire from here to Arizona, Florida, the Carolina's, etc. And now, with private sector jobs in short supply around here and home prices still too high, even young people are headed for warmer climes and low tax states like Texas.


The urge to ignore the passing of Ted Kennedy for blogging purposes is strong since I really don't like to go too negative on the recently deceased. But I'm afraid my readers would consider that a cop-out, so here goes.

I can remember as a 5th grader, even then interested in politics, being swept up in the enthusiasm most young people had for the Kennedy brothers, and imagining with my other impressionistic friends a dynasty where Bobby and Ted would eventually succeed JFK as President and the US would thrive during an Era of Vigorous Feeling that would more than overshadow the Virginia dynasty of Jefferson, Madison and Monroe. Alas, it was not to be as violence ended the lives of two of the brothers and scandal disrupted Ted's career.

Nevertheless, Ted showed resilience and practicality by making the most of his situation. Without realistic Presidential possibilities after the Chappaquiddick incident, he forged a long and influential career in the US Senate, carrying the liberal banner in the face of the movement's waning fortunes (for most of that time). Though he was unable to realize his quixotic ambitions for expansion of the public sector to take over Health Care and other liberal goals, he kept the liberal dream alive for more than four decades. He did this in spite of his continuing personal demons - divorce, alcoholism, and the periodic scrapes his nephews got into, requiring his frequent intervention. In the process, he won over colleagues on both sides of the aisle. They respected his knowledge of the ways of the Senate, his ability to compromise and mediate disputes, his great staff, and his dogged work ethic when it would have been easy to rest on his family name.

As one might have expected, the media has been sickeningly effusive in its coverage of the death and send-off of the Liberal Lion. This has not been news coverage - it has been an affectionate tribute. So it is unwatchable for me and those like me who have a different perspective.

Though Kennedy was an admirable advocate for his cause, those efforts have caused tremendous damage over the years. It was Kennedy, the influential Judiciary Committee member who unfairly and maliciously trashed professor Robert Bork on the floor of the Senate, making it impossible for him to be confirmed by a Democrat majority. Since then, "Borking" by one party or the other is the prospect for any controversial Supreme Court nominee, no matter how qualified. It was Kennedy who, while failing to pass universal health coverage, has done much to expand the public sector in that field through SCHIP for example, and by trashing private sector solutions. Kennedy has led the fight against tort reform and other ideas that might be part of the solution. And it was Kennedy who enabled the totally unqualified Barack Obama through his early endorsement to defeat Hilary Clinton for the Democratic nomination.

On this last point, we need to consider that since 1960, the Kennedy's have effectively been the equivalent of our Royal Family. Their every move, for good or ill, is subject for the tabloids and paparazzi. They have used their inherited money and political influence to replace private services with public ones (that they themselves would never use, of course). In the process, America's freedom of choice ironically is restricted to a class that is smaller and more elite. This is the impact of liberal statism, and is reflected in all of the current administration's policy choices.

Yet, with the last of the brothers gone, looking back, their record is disappointing, even mediocre. It took Lyndon Johnson to record almost all of the true accomplishments of the Kennedy Administration. Bobby's promise was cut short, but he had veered very far left in reluctantly taking on Johnson/Humphrey. As for Ted, he lived mainly in an era when conservatism and private enterprise were ascendant. All in all, a surprisingly bleak lack of accomplishment, for all of the charisma and opportunity.


Jazz fans, you can still catch the waning hours of the celebration of the 100th anniversary of the birth of Lester Young streaming on www.WKCR.org , followed immediately by the birthday tribute to Charlie (Bird) Parker, running into Sunday. This is one of the top listening weekends of each year on WKCR.


While we have been distracted by domestic matters, the situation in Iran continues to boil. The repressive and murderous tactics of the theocratic regime have not been able to staunch the desire of the population for liberty. Where is George Bush when we need him? It's time for regime change in Iran!

Of course our current President is wasting his energy explaining why Attorney General Holder seems to think that a special prosecutor is necessary to pursue a witch hunt against CIA operatives who prevented any number of terrorist attacks by extracting information from captured terrorists using admittedly aggressive interrogation techniques. We should be thanking these people, not investigating them.


Despite all of the above lunacy, the world of finance goes on, and our stock market rally, despite the attempts of the most influential bears to talk it down, climbs the proverbial wall of worry (cliche festival over). We raised a little more cash. Last Friday, we sold 200 shares of I2 Technology (ITWO) out of our IRA, the result of a reverse stock split some years ago. This one has finally started to work out. We got 16.59 a share, compared to the 10.65 we paid on 4/30/08. We've got some unrealized losses on this stock sitting in our taxable account, waiting until Obama raises the long term capital gain (loss) tax rates. On Tuesday, we sold 100 shares of Lubrizoil (LZ)for 62.82, booking a taxable gain since the purchase price on 10/13/03 was 33.89. Yesterday, we switched to the buy side, picking up 200 shares of ING preferred (ISP) at 12.80. We are hoping that the double digit yield on this one in our IRA will properly compensate us for the risk in buying a shaky Euro financial services name.

Thursday, August 20, 2009


The Money Sieves

We all know about the fiscal mess in the Federal government, but how many of us truly understand the great "money sieve" that is state government. Well if you live in California, you probably have some idea, and we New Yorkers have received quite an education in the fine art of public sector waste. Consider these examples:

item: Governor Paterson continues to hand out six figure jobs to cronies and ex-girl friends even as his job approval ratings sink through the 20's. The accidental Governor has been outstanding in upholding the Democratic tradition of saying one thing (fiscal responsibility) while doing the opposite. After last year's deficit reduction plan and tax increase, his budget director is working on a second round of both for the 2009-2010 fiscal year. In response, companies, jobs and people are fleeing the state en mass.

item: The ethically challenged "Temporary President" of the Senate, Mr. Estrada, as reward for returning to the Democratic fold (and restoring their bare majority) not only received that ceremonial title, he also received a large stipend that goes with it, expanded office space, and a six figure budget for extra staffers, who coincidentally turned out to be people whose full time jobs are in his nursing home business. He claims they are performing necessary constituent service in his district. This guy has zero shame, lies right to your face, smirking as he does, and simply tries to maximize his income at public expense.

The real Democratic leadership, Senator Sampson and the ineffectual Senator Malcolm Smith, should be ashamed they ever played ball with this idiot, as should the Republican Senate leadership.

In a refreshing bit of candor, a veteran Democratic senator told me that he couldn't wait for the day that Mr. Estrada is put in jail, a possible outcome due to his flagrant violations of campaign finance rules.

item: Though the Suozzi Commission, headed by Nassau County Executive Tom Suozzi came up with many good proposals to reduce the cost of local governments by merging sewer districts, small towns, etc., they set the size limits for mandating such changes too low. This had the effect of protecting most of Nassau's public sector, a very "unfortunate" result since the county is one of those flat on its fiscal ass. No matter. The chances that these recommendations will be implemented anywhere are slim and none. How many "public servants" do you see willingly giving up their posts?

Item: it was revealed that four of NY's senior citizen legislators took care to resign on December 31st of some recent year, knowing that they were to be sworn in for new terms the following week. Why? So they could trigger their full public state pensions. They now collect both their pensions and full legislative salaries, and this is all legal. Of course, the legislature could adjust this provision fairly easily (perhaps freezing the pensions of sitting legislators, or eliminating their salaries if they are collecting their pensions). If you think that's going to happen, we have a bridge to sell you. Double dipping is a timeless tradition in the public sector.

So with a tax burden that is already either the highest or second highest in the country, with business and real estate taxes through the roof, with long outdated rent control rules stifling NYC's residential real estate market, NY is looking at a year where all those burdens will probably increase. Could any situation be more bearish for the economy of the Empire State.

Unfortunately, similar mismanagement and scandalous behavior is the rule, not the exception in many of our states. With tax collections in the tank because of the economy, the prediction here is that the economic travails of the states will be just as big a story as the Federal deficit over the next two years, worsening as the stimulus money runs out in 2011.


Bob Novak, who died this week at 78, was an anomaly - an investigative reporter who became a conservative (he started out as a Democrat and was an early admirer of Lyndon Johnson). I first became familiar with him when the syndicated column he co-wrote with Rowland Evans served as one of the lonely voices of conservatism on the then very liberal opinion pages of The New York Post. I remember asking my dad about their column, and he, also being very liberal, grudgingly pointed out that theirs was a readable column despite its conservative proclivities. For me, it was an early awakening to the other side of the political spectrum.

Novak continued the column after Evans died, and also became a familiar TV talking head, appearing on Crossfire and other cable shows, and also as a semi-regular of The McLaughlin Group, where the host simply called him "R." He always retained the curiosity and doggedness of the investigative reporter, which led him to be the scooper of the Valerie Plame CIA outing. This was a story that backfired however, since his purpose in breaking it was to undercut (and deservedly so) the credibility of Ms. Plame's husband Robert Wilson, who was assigned to study the "yellowcake" story that discredited part of the Bush rationale for the Iraq War. In fact, Plame had obtained the assignment for Wilson, who had every desire and intention to discredit the Bush Administration.

When Novak wrote that a Bush administration figure had leaked to him the information about Plame being a CIA undercover employee, the law was broken by the leaker, which set off a special investigation. Novak would not reveal his source, being true to his profession, but the Administration eventually admitted that it was Richard Armitrage. In a final irony, Armitrage was never prosecuted. instead, the politically motivated investigation spotlighted Dick Cheney aide Scooter Libby, and he wound up going to jail on a questionable perjury count. Novak came to regret the injustice that his story set in motion, but, in fact, he did nothing wrong.


There's a reason I don't try to time the markets - I am no good at it. So within a week after I posted the news that we will be buying more preferred stocks, all three of my European bank preferreds dropped 25% today after an analyst questioned their continuing ability to pay dividends. Of course they had run up quite a bit the last two months so my ego was hurt more than my portfolio. As to whether one should really be concerned about these dividends, it is true that the Euro banks have not raised tier one capital by selling secondary equity the way US banks have. They have not wanted to dilute their common shareholders. We'll see how it all works out. I would say ABN Amro is shaky and it could pass the dividend for several quarters at some point. I have more confidence in ING and especially Aegon.

No matter for now - all we do is sell. On Monday, we sold 200 shares of Books A Million (BAMM) for 9.91 - it has since had another move up. This came from the IRA and we had bought 100 on 11/19/08 for 2.20 and the other 100 on 12/15/08 for 1.90. If you don't believe me, you can go back in the archives of the blog and see for yourself. On Wednesday, we sold 300 shares of Marine Max for 7.11, but this time from the taxable account where we could take a loss, since these shares were purchased in 2007 at 21.23 for 100 and 18.70 for 200. This is why estimated tax payments are pretty much unnecessary this year - sorry Governor Paterson. Of course, our average price is much lower. We use first in, first out to determine the cost basis for sales.

It has been an active week besides these transactions. We traded our Centex shares for Pulte (PHM) as they completed their merger. We are also awaiting our cash (and another tax loss) for our CardioDynamics shares which were taken over. We are getting a reverse split, finally, for our Safeguard Scientific shares (SFE), I believe 1 for 6, just as the stock really perks up. That's the time to do a reverse split if you must. Finally, Shaw Group is changing its symbol from SGR to SHAW. All of these changes will be reflected on the Bloomberg.com musings portfolio listing. I will repeat the instructions for viewing the portfolio once things settle down a bit.

In the meantime, it would be good to run our periodic disclaimer. Neither redwavemusings nor its author is a financial advisor and the securities, tactics, and strategies mentioned here simply represent a diary and are not recommendations since they may not be suitable for anyone else (or even for me).

Thursday, August 13, 2009


YouTube Bonanza

I am not a frequent YouTube visitor, but I have to admit that I was interested in seeing for myself just what was going on at these Town Hall Meetings that had Congressmen so terrified. So I watched a half dozen or so videos and I have to admit that I didn't really hear anyone getting shouted down or anything scary, though some argued aggressively and pointedly.

The Dems are much better than we are at exploiting hyperbole and overreaching so it is not surprising that they have taken the tack of arguing that the anti-health reform folks are shrill, organized, and spreading myths about the bill (to the extent there is a bill yet). The R's and their allies will have to be careful about any exaggeration that can be exploited- Sarah Palin's unfortunate use of the term "death panel" to describe the bill's mandated status reviews of older and (near) terminal patients the prime example. You can listen to talk radio all you want - Lavin and Sean and Rush - and you won't hear the term, but the D's are scoring points by saying there is no such thing in the bill (when there is but it is not called that).

The fact is that in spite of the mistakes made by politicians and regular folks opposing the bill, the Dems are in retreat, and not just on health "reform" but also on cap - and - tax, card check, etc. We don't need to bludgeon them with clever wordsmithing. The facts are on our side. For a measured and well written analysis of what happens in the single payer world favored by Obama, Pelosi, and Reid, see today's WSJ op ed piece by Alan B. Miller, Chairman and CEO of Universal Health Services Inc.

By the way, the Dems are making plenty of mistakes of their own, and it's not helping them in these meetings with the public. For example, Sen. Arlen Spector, in the middle of a cogent explanation about how he and his staff go about dissecting a 1000 page bill, dropped an aside that they have to turn this around fast. That caused the audience to scream, virtually in unison, "Why?" After all, what is the hurry to dump the system that provides the world's best health care for the large majority of the population. All we really need to do is figure out how to extend that system to cover those currently excluded. And we need to take the time to do that correctly.

Another example was Obama's explanation for why private insurance plans would be able to coexist with the public option. "Fed Ex and UPS seem to be holding their own against the Post Office." Well, yeah, but that's because the quality of postal service is unacceptable for important packages. I guess if public health care delivery is going to follow the post office model, the private carriers can compete, but is that the quality level reform advocates aspire to?

By the way, it is sinking into the public consciousness that while Obama is the best off a teleprompter, he's not so good on his feet.


The MoveOn.org crowd, still looking for blood from the Bush Administration, believes it has found the smoking gun leading to Karl Rove's culpability in the firing of a few of the US Attorneys some years ago. I haven't reviewed the "evidence" but wonder again about the effort to criminalize politics. Let's stipulate that these Republican appointed attorneys were fired for political reasons - they would not play ball in pursuit of election fraud cases. So what? Don't they serve at the pleasure of the President and the Attorney General? These are not civil servants. Was it a crime when the Clinton's fired the ENTIRE STAFF of US Attorneys shortly after entering the White House. I would say either both were crimes or neither (my own view).


The Administration's foreign policy is alternately inept and embarrassing, but it's handling of Iran is especially scary, particularly if you live in Israel. They are making it easy for Iran's repressive regime to buy time to make its nuclear bomb, so the Israeli's are getting very close to decision time in terms of taking action to destroy Iran's facility. Since much of it is underground, the Israeli's will have to use some fairly sophisticated weaponry to get at it.

Meanwhile, the Administration's main concern in the region seems to be the curtailment of Israel's settlement activity near Gaza and the West Bank. Thus continues the old Cold War axiom - it is dangerous to be America's enemy, but often fatal to be our friend.


One of history's longest running jazz gigs ended for good today when legendary guitarist Les Paul died at age 94. Monday nights at Iridium Club will never be the same.


On Monday, we sold 200 shares of Carmax (KMX) from the IRA at 17.16 for a small profit (originally purchased on 6/30/08 at 14.70). Yesterday, we took a smaller profit, selling 200 shares of First Niagara (FNFG), also from the IRA, at 13.37 (purchased 5/12/03 at 12.99). Sometimes these transactions yield small profits or losses even though our average purchase price is quite a bit lower than the shares we sold. When the formula tells us to lighten up, we do. We've been selling into this great little rally for a while now, the last 8 transactions have all been sales. We are now up more than 18% year-to-date.

Frankly, I am not comfortable. This rally could well be for real, but it also could be, as Robert Prechter believes, a bear market rally. Our formula has been working great for a long time, but we do tweak it when it can be improved. It is important that we feel comfortable following it, and I am not comfortable that it moves quickly enough. We could be raising cash even faster in my opinion. Also, since we're now only about 15% or so below our all time high, I would be anxious to do more purchasing, when the time comes, in preferred's. So we are going to add one transaction per two weeks versus the original formula, which means, where our balance is now, a transaction every other day instead of twice a week. Also, for purchases, we will simply alternate value buys, zero buys and preferred's. Over time, that should make the portfolio a little more conservative, and juice our incoming dividend cash.

You can see the Musings portfolio in Bloomberg.com. See our post from a few weeks ago for the instructions. Next week some time, I will add the preferred's we own to portfolio #5 on that website and then reprint the instructions for viewing.

Thursday, August 06, 2009


Goodfellas Redux

Our most frequent commenter, Rufus T. Firefly (possibly a pseudonym) left an interesting question in his comment after our last post, asking about the legality and ability of health insurance companies to sell their products across state lines.

Insurance, perhaps surprisingly, is one of the few businesses which is still regulated by the individual states. Though federal regulators could easily make the case that the business is interstate commerce, Congress passed the McCarran Ferguson Act that explicitly assigns regulatory responsibility to the states. The state insurance commissioners have a national association, the NAIC, but it has no regulatory authority.

State jurisdiction is jealously guarded not only by the commissioners but by the state legislators through their own national association, NCOIL. Health insurance products are approved by each state for sale in that state, but often, the legislators mandate certain coverages be included in any approved state plans. This means that even when a national company such as Metropolitan Life operates in all 50 states, they have to sell many different versions of their product to meet these various mandates. So if NY requires group health insurance to include coverage (and a charge) for elective hysterectomies, your NY employer's package will include that (even if you are a guy and probably will never have a hysterectomy, elective or otherwise).

Republicans have proposed that employers and individuals should be free to purchase their insurance in any state in order to avoid paying for mandated coverages they don't want but currently that cannot be done. A company cannot sell a product in NY or to a NY employer unless it is approved by the New York Insurance Department, and they can only approve products with the legislated mandates.

The insurance industry has proposed having the optional right to a federal charter, and to be regulated federally, an option banks have. Most Dems and even many R's oppose this because they believe such an option will set off a "race to the regulatory bottom." This is one of many causes for the high cost of insurance and health care in this country. Fixing this, curtailing high malpractice awards, and incentivizing users of health care to care about price are all potential cost reduction strategies. The Obama program, in contrast, will just add more cost while reducing quality and access. This is the message the 75% of the insured population that is satisfied with its coverage but is concerned about rising costs should be delivering to their Congressmen during the current recess. It is not the message that Dems want to hear though.
Some readers may wonder why I haven't had much to say about the Sotomayor nomination. Basically, I think the vetting process has become a farce so I don't get all emotional about the politics of it anymore. I think the public understands what's going on even thought he politicians seem to think we are all jerks.

It doesn't bother me that she is going to be confirmed. What were you expecting Obama to come up with anyway? It also doesn't bother me that most Republicans will vote against her. Everything is played to the base in these situations. Hispanic Americans, who vote majority Democrat anyway, will not resent this either. They are learning faster than most how the game is played here.

We should recall that many Dems voted against Alito, arguably the most obviously competent selection since Scalia. That was OK too, they had to play to their base. If I have a beef with Sotomayor, it is that she is a mediocrity, like Harriet Myers or Carswell (remember him) or Souter who has displayed little understanding of constitutional issues. That is reason enough to oppose her, but not reason enough to engage in all-out character destruction.

When I worked at GE during the Welch era, the company was proud of its record for delivering highly predictable earnings quarter after quarter. From the inside, I thought that pride was misplaced. There was no way an organization of that size and complexity could be that consistent unless the numbers were being managed. And it wasn't as if Wall Street didn't know that too. GE's numbers were greeted habitually with smirks, winks and nods. However, no one could buck Welch in those days, and after a short sell-off after reporting day, the stock would move blissfully higher.

Of course what was happening was that units that had surplus earnings were socking them away for the quarter when they would "need" them to make their number. If a unit was going to miss their number anyway, and especially if the overall company was in danger of missing, a major fire drill would commence with the CFO of each affected business unit being required to scurry around until he "found" the needed net income. Some of these accounting adjustments were pretty creative and highly questionable.

Now finally, the company has owned up to these accounting shenanigans and forked over a $50 million fine for its accounting maneuvers, without admitting or denying guilt, of course. Happily, the CFO as profit center is a concept that is deservedly dead. The CFO should be a scorekeeper, an umpire. I was always amazed that people inside the company who should have known better used to argue with me about the CFO role. I would never knowingly buy stock in a company whose CFO came out of the GE finance area. That rule served me well, for instance, by keeping me out of Washington Mutual.


This is not to say that Corporate ethics are a problem of the past. Today it was reported that Goldman Sachs CEO (another ethically challenged company) Blankfein told employee recipients of large bonuses (averaging about a million dollars or so per) to avoid large purchases that would attract attention. Doesn't that sound a little too much like the mob boss in Goodfellas after the Lufthansa caper? Anyway, I guess the cultural norm there is that there's nothing wrong with the bonuses themselves, as long as they don't attract attention.

Keep in mind that G-S was the actual beneficiary of the AIG bailout since they were on the other side of many of the CDS transactions.


The virtual flood of earnings reports has swamped Wall Street and happily, company cost cutting and other conservative financial and operating tactics have made for more surprises than disappointments. However, no one should be fooled that this economy is out of the woods. Revenues are in the toilet, no one is really hiring, and even though inventories have been drawn down, companies will be very careful about rebuilding them. The success of "cars for clunkers" has caused dealers to complain that they are low on stock. Can you imagine, the auto industry is flat on its back and yet it can't keep up with even a modest (and artificial) uptick in demand. Oh and by the way, why was it necessary for Congress to authorize $2 billion in additional funds for this program when they have about a $700 billion stimulus authorization that has still not been spent? Couldn't cars for clunkers come out of the stimulus?

Anyway. the Musings portfolio had five earnings reports just this morning! Our old favorite Petroquest (PQ) held up OK despite the recession, its reduction in shareholder equity more than accounted for by its healthy depreciation charge. Boyd Gaming (BYD) delivered solid earnings under the circumstances, but I was disappointed that its press release contained no balance sheet info. That's a serious shortcoming. The Street loved Devon Energy's (DVN) earnings, but I did not. Debt was up some and shareholder equity down. That's the difference between having an earnings orientation like analysts do and a balance sheet orientation like I do. Quanta's (PWR) report was steady as she goes. The wind business will never reach the critical mass that environmentalists would like, but it should be a steady factor. Finally, we got a great report from another old favorite, the oft maligned Safeguard Scientifics (SFE) with shareholder equity more than doubling thanks to better stock prices for its start-up companies. This is one stock where the Street understands that the balance sheet is everything.


On Monday, we sold 300 more shares of BAMM from the IRA for 9.16. Never mind that the stock briefly hit the 11's last week before fading. We bought these shares for 2.20 on 11/19/08. We know we won't often catch the top, but we are happy to sell high. On Wednesday, we sold 300 shares of Marine Max (HZO) from the IRA at 6.80. We bought these at 5.32 on 7/14/08.

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