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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).

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