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Tuesday, July 27, 2010


Can GOP get it together?

In a year when huge Congressional gains are all but assured, we face the prospect of GOP hopefuls and conservatives considering third party efforts, bringing certain Dems back into a race they could not win in a two person field. One such race may be for a Senate seat in Colorado, where a Conservative candidate who once backed a GOP hopeful in the primary, has now decided he wants in but too late to enter said primary. He is talking about a third party run, the last thing we need. There are similar possibilities in several other races. One race where I believe the GOP is helped is in Florida, where one-time GOP governor Charlie Crist, with no chance in the GOP primary, is running as an independent for the Senate. The conventional wisdom is that he will hurt the Republican candidate and may even be the favorite. The way I am looking at it, Crist might as well have always been a Democrat, and the existence of an Obama supported Democratic candidate to Crist's left will take votes away from him, imcreasing the chances for Republican candidate Rubio. In fact, Rubio has already taken the lead in the latest Rasmussen poll. The only thing that could stop him would be if the Dems contesting the primary both drop out, and Crist becomes their candidate. But that does not seem to be in prospect.

The fact is, it is getting late in the game for the Dems. Each week, they poll worse. The generic Congressional vote is now tied 43-43, almost unprecedented for Republicans. Among likely voters, Republicans lead 48-40. Old time political junkies are astounded at how badly Democratic Blue Dogs are polling. They just don't get it. I have been saying for months that Blue Dogs are an endangered species. Voters now see them for what they are - the keys to leadership for Pelosi and Reid. Dems could not assemble majorities with only their liberal district representatives. The Blue Dogs also provide reliable votes when needed by Pelosi and Reid, and are only allowed to drift off the reservation when not needed. This kind of cynicism will no longer fool red state voters. They want Pelosi and Reid out after the Health Care fiasco. Wild horses won't keep those voters from the polls this November. Meanwhile Dem voters are disillusioned and disconsolate.

The leaks of the classified information about the war in Afghanistan are disturbing, mainly from a national security point of view. They recall the lionization of Daniel Ellsberg from the Vietnam era. Whatever one thinks of the conduct of the wars by the largely inept Obama administration, there is no excuse for undermining our troops in the field. If an American is responsible, it is simply treason, and the punishment should be meted out accordingly.

On the other hand, the Administration's bumbling handling of the Agriculture Department employee's short lived firing based on an edited snip of her speech posted by a conservative blogger (not this one!) is indicative of the lack of adult supervision in the Obama White House. This is not to exonerate the actions of the blogger, which come under the general heading of dirty tricks. This does not reflect well on the blogger community either. But you would think the folks actually in charge in Washington would know better.

We have said it before - only Hillary has demonstrated the maturity to handle her position, whatever you think of her policy positions. Too bad she is now distracted by her daughter's $3 million wedding. By the way, we should thank the Clintons for stimulating the economy in this way. It beats the ineffectiveness of government spending in terms of providing employment and tax revenues. I don't begrudge Chelsea and her intended a really nice wedding. If you've got the dough, you might as well treat yourselves. Besides, what were the odds that such a plain Jane could hook a mate so expeditiously? Something to celebrate, indeed.

This has certainly been a nice rally in the market, and of course, I am using it to book some profits, as per our investing formula. On the 22nd, we sold 200 shares of takeover target Tomkins (TKS) at 18.60 from the IRA. These were shares purchased for 14.25 in December of 2007, and we are happy to be no longer under water in this stock. We do have doubts that the takeover will happen, since TKS seems to be effectively employing the "just ignore it" defense). On 7/23. we sold 100 shares of Ladish (LDSH) for 28.47, a nice gain over the purchase price of 21.08 from September of 2008. Today, we sold 300 shares of Newpark Resources (NR) at 8.21, a gain from the puchase price of 6.23 from October of 2004.

Newpark was one of a group of selections we made from a list of recommendations made some years ago by the business faculty and students at Tulane University. The Tulane portfolio I constructed included Bristow Group (BRS), Conrad (CNRD.PK), Gulf Island Fabrication (GIFI), Newpark, Petroquest (PQ) and Shaw Group (SHAW). To say this Gulf portfolio has been a net winner would be an understatement. We have made $94,600 in cumulative purchases in these stocks, but already taken out $107,700 in sales. Our current holdings in the 6 stocks still have a value today (on paper) of
$96,700. So thank you, Tulane, and let's keep in mind that the recovery and ongoing business activity in the Gulf is important to the country's well being.

I hope the Obama Administration realizes there should be good reasons for continuing a drilling ban in the Gulf, if that's what they intend to do. Otherwise, drilling with proper procedures and safeguards should resume.

On another financial topic, when I read that certain preferred stocks issued by banks would no longer count as Tier 1 capital starting in 2013, a provision in Dodd - Frank, it occurred to me that there might be an opportunity to invest in preferreds issued by banks selling below par. Banks wanting to replace the preferreds with qualifying Tier 1 capital would be tempted to buy in shares on the open market, providing a price support, and eventually call them in at par.

It hasn't taken long for this effect to be noticed. JP Morgan is already calling in several issues, including the old Bear Stearns issue in our portfolio. They will be called at par, giving us a nice little capital gain to go along with the nice dividend yield we have been enjoying all along. If you look at the new high list in the WSJ, you will see that it is liberally spotted with preferred issues, presumably bid up by speculators thinking along the same lines as I. WE will continue to speculate in bank preferreds below par, though care needs to be taken to avoid the perpetual preferreds not subject to the Dodd - Frank provision.

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Congrats on the Tulane portfolio. Now how about the post on covered calls that you mentioned?

As always,
Hail Freedonia!
R.T. Firefly
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