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Monday, August 30, 2010


The Left's Paranoia

Tonight the Mets are in Atlanta, a must series for them (absolutely have to win 3 of 4) if they are to play any more meaningful games this year. But after watching a succession of the Hitless Amazins' failures to hit in the clutch (as per usual), the uncontrolled lunacy of the Marx Brothers won out - Monkey Business and Horsefeathers showing tonight on TCM. I guess Ted Turner knew what he was doing when he traded in the Braves for cable TV and a classic film library.


The secret is out. The answer to the question about where the funding for the Trade Center Mosque comes from is that it is not raised yet. It's all on the come, which may mean that the controversy may prove to be much ado about nothing. They still have to buy the building. That of course begs the question about why a different location can't be selected when the project is not really even started. The answer to that one is simple enough - the provocation is deliberate.

The libs' spin about how moderate this Imam is and how he has helped us in our relations with Middle Eastern countries should not obscure the fact that this controversy has been ginned up for various political purposes. But if Obama and friends thought they could turn this into an embarrassment for the conservative right and for the Tea Party, they seriously miscalculated.

So now that the funding mystery is solved, we can get down to the really important stuff, like finding the President's long lost birth certificate.

To have a really balanced view, it would be a mistake to confine yourself to only conservative oriented opinion pieces. A steady diet of the WSJ (great as it is), Fox News, Mark, Glenn, and Rush, and Redwavemusings will give you a good grounding but you won't have the benefit of understanding what the other side is thinking about and listening to their arguments. As Vito Corleone famously advised, "Hold your friends close and your enemies closer." Until the WSJ replaces the truly awful Thomas Frank, there is no regular columnist representing the left side of the political spectrum there. Of course, it would be great if they could get Al Hunt to resume that position. His columns were thoughtful, challenging, and beautifully written.

One of my college classmates was Mark Kleiman, who has had an outstanding academic career that featured a long stint at Harvard's Kennedy School. He is now Professor of Public Policy at UCLA's School of Public Affairs. An unreconstructed progressive, Mark's blog, The Reality Based Community is certainly worth an occasional visit to review what he and his very notable contributors are thinking. Mark also contributes to other left leaning blogs such as the Huffington Post.

One thing you can't help but notice in reviewing these and other "progressive" sites is their extreme paranoia concerning conservatives, the GOP and the Tea Party. They are convinced that a Republican takeover of Congress will lead to a Presidential impeachment effort, total nonsense in my view in the absence of impeachable offenses. Frankly, I think the hard-headed strategists on the Right like Obama right where he is, viewing him as a relatively easy mark to take down in November 2012. In that, they may be underestimating him, but I think this is the reality of their thinking. There are plenty of other ideas circulating in the left's blogosphere that are equally divorced from reality.

One other thing - the left and the mainstream media keep repeating the Democratic Party's canard that GOP primary voters are doing them an inadvertent favor by nominating Tea Party types over establishment Republican moderates. Of course, they are whistling past the graveyard. Aside from the fact that conservatives don't care, preferring to go down if need be with an "authentic" conservative than win with a RINO (Republican in Name Only), I expect Tea Party candidates to do just fine in November, thank you. In fact, each revised outlook from Charlie Cook's organization seems to put more incumbent Democratic seats in competitive play.

With early voting set to begin in just about a month, it is almost too late for Democrats in many states to turn their debacle around.

Helicopter Ben spoke, the market rallied for one day, then thought about it and resumed its descent. And why not? The Fed strategy of monetizing the public debt is as ill conceived as the Administration's tactic of throwing stimulus dollars into the gutter. Either way, we are headed for severe inflation (following the brief disinflationery head fake we are now experiencing) - in fact quite possibly a more severe episode of what we had during the Carter Administration - high unemployment and simultaneously high inflation. It was called stagflation then. We are going to have hyperstagflation.

Right now, neither employers nor the unemployed have much incentive to become more productive. Employers, facing into the twin spectres of increased costs and regulation, both of which are ill defined as yet in magnitude, would certainly be foolhardy to ratchet up hiring plans. Workers still collecting the first half of a projected 99 weeks of unemployment insurance are in no hurry to return to the work force or be trained in a new occupation. All the money in China cannot overcome these obstacles the Administration has so unwisely put in place.

Already, both the health insurance and financial services reform bills are headed back to Congress for amendment. The haste with which these huge legislative initiatives were passed led to mistakes regulators just can't work around. We haven't even gotten to the mistakes the regulation writers will make in establishing all the new rules.

No wonder the public is disgusted. The mammoth increase in our deficit would make George W. Bush blush, the Federal bureaucracy is growing out of control while private employment cascades, state governments and their workers are doing everything humanly possible to preserve public jobs while milking their taxpayers to the nth degree, and the only answers we get are that we need more stimulus, more tax increases, more redistribution, and more entitlements. No one outside of the public employee unions and the college campuses believes in those solutions anymore.

On August 25, our 250 shares of JP Morgan preferred was redeemed at 50 which was par. When these shares were bought, they were issued by Bear Stearns and became Morgan when it rescued the investment bank. We bought 100 shares in 2003 at 47.35, added another 100 later that year at 50.30 (a rare purchase over par), and added 50 in 2009 at 44.10. Given that we buy preferred's for dividends and not for capital gains, this investment worked out quite well, though we had some anxious moments as Bear collapsed.

On the 26th, we bought 100 shares of ING preferred (ISP) at 20.87 for the IRA. Today, we bought 700 shares of Frozen Food Express (FFEX) at 2.94, a value buy.

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Saturday, August 21, 2010


Short Sleep in Seattle

In case you are wondering what happened to our (more or less) weekly blog posting schedule, and I have been receiving complaints by the way, there was an interruption in our schedule for a lobbying excursion to Seattle, where my regulator friends were having one of their periodic national meetings. And when you are in a great town like that, there is no attraction to spending an hour or two in a hotel business office hammering out a post on a rental computer.

In fact after 6 days in the Northwest, featuring perfect weather (in contrast with Seattle's reputation, we did not have a drop of rain, hardly even a cloud), mostly pleasant natives, and terrific bars, restaurants, jazz clubs, etc., I think Seattle makes our list of ten favorite U.S. convention cities.

Not that the trip got off to a great start. In JFK's Delta airlines terminal, I had to battle my way to a kiosk, trying to obtain an on line boarding pass and check my bag, which became impossible when I hit the enter button 58 minutes before flight time when Delta apparently requires 60 minutes notice of a checked bag. The employees in charge refused to expedite my passage, instead requiring me to re-book on a (much) later flight. But first, they misdirected me to the wrong line, which didn't move, then to three other lines that didn't move. Finally grabbing a supervisor as we neared the deadline for the new (and final) flight, I found someone willing to help, and miraculously I had a boarding pass and a checked bag in just a few minutes. But this was something like four hours into this most exasperating mission.

The scene on the return was only a bit less inconvenient when the kiosk could not find my electronic ticket. At least I made my flight, no doubt the last I will ever book on that airline.

So arriving at my hotel, the Red Lion on Fifth and Pike after 1 AM PDT, which felt like 4 AM to me, I was not in a real upbeat mood, but from that point on, everything was pretty darned good. The Red Lion turned out to be a comfortable and affordable retreat, from the working soda machine I found that first night right to the very nice 5th floor outside deck, suitable for cocktails, afternoon tea, listening to music and getting some sun. I really didn't ask for more since little time was spent in the hotel other than sleeping, and there was not quite enough of that.

Thursday night after the actuaries' cocktail party, I found my way to Jazz Alley, a short walk north off 6th Avenue, and saw both sets by Kevin Eubanks' quartet. Since leaving the Tonight Show and returning to his jazz roots, Mr. Eubanks has evolved a creative and absorbing jazz set with good support from his players. Besides his strong guitar chops, Mr. Eubanks loves to create unique and distinctive sounds and I was glad I had the opportunity to see this show in such a friendly club. By the way, the wines by the glass were very good and cheaper than what we are used to in NYC.

We also had a little more economical, not to mention tastier jazz experience at the decidedly downscale New Orleans Grill, near the ball park on First Avenue. This is an old fashioned jazz stand with Cajun style eats. Playing was Tom Marriott and Flexicon. Tom is a very good trumpeter, clearly inspired by Miles Davis, but he gave me his CD which has more original arrangements and compositions. His quintet was not really up to his own standard of virtuosity but serviceable enough for the conditions. Our group had a very good time.

As in most cities, the hotel bars in Seattle wrap up on the early side, but we were able to find a later night retreat in the form of the Taphouse on 6th, which features 160 (not a typo) different beers and ales on tap. Those taps just cover the wall behind the bar and the selection would be daunting if it really mattered. The regulator who accompanied me that Thursday night remarked "we should have started this morning" and it was love at first sight. There were several return trips that week I can tell you.

As for food, I had two really good meals. The first at Tulio on Fifth a few blocks south of my hotel, where I had lamb that was perfect, but was just one of many appetizing upscale dishes spotted. The second was at Campagne in the Market area behind First Avenue. This was advertised as French style, but whatever it was, it was done with flair.

Downstairs from the Red Lion was the Elephant and Castle English style pub where lunch was very good and very well served. I didn't have much time for lunch but they had no trouble getting me back on my way. For summertime most of the patrons ate and drank outside, and nothing could be more pleasant last week.

On my last night, I discovered Kelle's, an Irish Pub in the Market area, complete with live (Irish) entertainment, indoor, outdoor and upstairs seating. I was there on a fairly quiet Monday night, and my guess is that the place jumps most nights.

An interesting thing is that the President scheduled to come in to speak on Tuesday, but the reaction of many at the meeting was that if that happened, they would simply change their flights and leave Monday to avoid the hassle. So the White House mercifully cancelled though the President still came to Seattle to campaign for Senator Murray who won her primary.

So here are my current 10 favorite US convention towns, a list I am prepared to change without notice: 1. New York 2. New Orleans 3. Chicago 4. Seattle 5. San Francisco 6. Boston 7. San Antonio 8. San Diego 9. Las Vegas 10 Nashville. Obviously, music is a big part of these rankings as is the ability to walk to places. Honorable mention go to Houston, Minneapolis and Washington D.C. Places to avoid - Dallas, Orlando, Phoenix, LA, Honolulu.


The Obama administration is screwing up on so many levels, it's almost getting too easy, but the latest blowup concerning the planned mosque to be built near Ground Zero is a special example of tin ear politics. Now, I would first stipulate that the imam has done what he is supposed to do in accordance with the law, including obtaining the approval of the zoning board, to get the mosque built. But there is no doubt that the site selected is provocative, and so no one should be surprised that a lot of people are provoked about it. Imagine the uproar if the KKK wanted to build its national office in Harlem and obtained the rights to do so. It would be legal but would it be appropriate? Of course not, and this project is equally offensive.

Rather than support the project, Obama, Bloomberg, and all the rest should be expediting construction somewhere else and putting an end to the controversy. Instead they are simply giving the average American another reason, as if one were needed, to be disgusted with our incumbent leaders.

At the end of my last post, I mentioned that I would be removing Bank of Granite (GRAN) from the buy/hold list and that getting off so many shares into a decidedly busted market for the stock would have to be done a little at a time. In fact, it took no less than 5 trades, the last of which executed on 8/19. We got prices ranging from 0.92 to 1.00 for shares bought between 1998 and 2010 and took a capital loss of around $24 thousand (commissions included). It could have been worse since we salvaged over $9,000 net of commissions on the sales. Believe me, that was very much at risk since the FDIC would be moving in already if it weren't dealing with a lot of other banks as well. So this was a failure of the average down technique, although to be fair, most of the losses went on the early purchases.

An interesting learning concerns the importance of dividends, which many investors take for granted or ignore entirely. We collected over $3,700 in dividends over the years on this stock, and I might have saved a few dollars by selling at the point the company scrapped the dividend.

And with all this, we still have a small capital gain year-to-date. We're up around $1,700 in the taxable accounts and $7,000 in the IRA. The dogs are being expelled from the kennel, and that is helping to reduce April 15's pain. But tax considerations should never trump our formula. If they did, I would have tried to hang on until 2011 when capital gains rates go up. But that might have cost us the $9,000.

Otherwise, it was business as usual. On 8/18, we bought 25 shares of Con Ed preferred (ED.PR.A) at 90.25. We also bought 400 shares of Great Lakes Dredging (GLDD) for the IRA at 5.27. Finally, yesterday we bought 200 shares of GE (GE?) at 15.16, a zero buy because of its high debt load. Not unusual for us to be buying into a cruddy market, and the economic numbers really look sick lately. Let's face it, if you were running a business, how in your right mind could you hire new people not having any idea what it's going to cost to insure them, what your payroll taxes are going to be, and what hoops you will have to jump through to downsize if it turns out that they are too expensive. With an administration catering to a base that despises corporate America, this is the most unfriendly environment for business in our lifetimes.

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Monday, August 09, 2010


Covered Calls - The Enron Story

We actually have lots of issues to comment on, but the outcry from commentors (such as they are - judging by the counter, our readers are all on vacation) has been for the long promised discussion of why the seemingly safe strategy of covered call writing actually is not quite such a simple way to modest returns.

The classic M/O espoused by advocates for call writing as a way to enhance stock returns is to buy the stock, then sell call options on some or all of the shares at a strike price above your cost basis. If the stock stays below the strike price, you pocket the call proceeds. If the stock rises above the strike price, you let them call the stock away from you. This limits your upside stock appreciation, but it certainly eases the sell decision, and adds a cash return to any dividend the stock might be paying. if the stock retreats later, you get another chance to begin again by buying it at the lower price.

You do need to understand a few practical nuances. First, call writing does not garner much cash in quiet markets or with stocks that have little or no volatility. Second, unless your discount broker has a very low option commission or you have a large number of shares to write against, it is also difficult to net much cash on the option sale. Third, almost all option exercises occur at the last minute before expiration. The feeling of watching your stock go up way beyond the exercise price while you sit there helplessly with the choice of buying back the option at a loss or waiting out the expiration, is unpleasant, to say the least.

When my discount broker accounts were small, and little new cash was coming in, and not being a trader, I decided that call writing could at least provide some fresh cash to use to grow the accounts. I picked a number of the sexier stocks I owned where the call premiums were reasonable and began to write options. Eventually, with the market rising, I was facing options expirations where the stocks were going to be called away. Like a lot of people, I was not happy about losing so much of the stock appreciation, even though I had an overall gain. So I employed a strategy that is widely used to avoid or postpone call exercises.

The most dramatic of these stocks I wrote option contracts on was the ill fated Enron Corp. The story behind this stock was a doozy, spoiled only by the fact that its results were substantially fraudulent. Less an energy company than an "energy trader" and market maker, the fact was that such markets were largely "Madoff like." Energy trading was largely a mirage, and so were the profits Enron claimed.
In addition, the CFO of the company was dishonestly cooking the books to favor affiliates in which he was given a personal financial interest. There were signs along the way, of course, but...well Enron carried an investment grade rating until the day it collapsed. Sound familiar?

Anyway, the story begins on February 3, 1998 when I bought 100 shares at 40.9375, following a favorable write-up in Forbes magazine. By 2/26/99, the stock was riding high at 65. The stock was paying a 25 cent quarterly dividend, but I decided that the price of the stock might be ahead of itself and that I could enhance the return by selling covered calls, especially since my discount broker's commission was pretty reasonable ($25). If the call expired worthless, the commission would only apply one way, and the call price assumed lots of volatility. On March 18, I sold a call expiring in July with a strike price of 75. The option price was 2.5625 and the net proceeds were $231.24. Not bad, since if they called the stock away, I would have a long term gain of over $27 per share. However, by mid July, the company announced a 2 for 1 stock split, and the price took off for the 80's. Looking back, I should have taken my $75 and let them exercise, but instead, on July 14, a fateful Bastille Day, I executed an "extend" transaction, which I had learned to do with "in the money" covered calls.

I bought back the July 75 call, then selling for 8.75, and immediately sold the January, 2000 80 call for 9. The transactions, including commissions, cost a net of only $25, and for that, I upped the strike price 5 bucks per share, and bought another 6 months til exercise, with a stock heading for Pluto. If it retreated, fine. If not, I could let them call the stock away for 80. I was very happy with this transaction, as I should have been.

I wasn't so sanguine when January, 2000 rolled around. By this time, the stock had split, I had 200 shares and they were trading around 60! Of course, the miserable bastard who had bought the options I wrote in July could call them away from me for 40. This meant that I would now forgo $4,000 of the stock profits in exchange for the lousy $200 of option proceeds I had. Some risk free strategy call writing turned out to be.

Of course, that was the wrong way to look at it. I would still have had substantial stock profits(over $3,000) to go with my $200 plus in dividends. Time to let it go. But I made a 180 degree wrong decision. Figuring I would just go back in and buy the stock anyway, I instead paid 31.875 to retire the two options - $6,400 - and kept the stock. Of course you remember that first quarter 2000 represented a significant market peak.

Of course, this setback only made me that much more determined to recoup, and the retreating Enron price provided some good opportunities. Owning the stock allowed me to sell more options and speculate on a retreating price. On March 28, 2000, we wrote 2 July 80 calls getting 8.25 and bought them back two days later for 7.00. On May 8, we opened a new position by selling 2 July 45 calls at 30.875 and bought them back the next day for 28.50. On May 11, we sold the July 50 calls for 28.25 and bought them back May 22nd for 24.375. So we were making option money, and Enron's stock price was hanging in near 70. Our overall position was still OK.

And so it went. We executed a number of other good round trips, first selling the options, then covering, until we had made the $6,400 back. It was then that I figured Enron was finally fairly valued and bought some more stock. Of course, you know the rest. The stock collapsed in late 2001. We took a loss on the shares, of course. So the irony was that we came out on the options and lost on the stock, after a ride that took us to the stratosphere and back before we sold out at about a dollar or so a share. In all, we wound up with a small profit trading Enron options, and only a small offset to what we lost on the stock. But much of the recoupment in Enron options came from a more aggressive trading strategy after the passive option writing strategy had ended badly. This caused me to rethink and I curtailed call writing on all my stocks. Instead, we started to evolve the trading formula we employ today.

Earlier in my investing career, I proved to myself that a part time investor could not succeed in options trading as a speculator, and Enron proved that even with the covered call writing approach, dangers lurked. Since then, I have not been tempted to use options, even though they are popular instruments for many market players.


The Mets won tonight, and it's not a coincidence that Carlos Beltran was not in the lineup. The guys who have killed the Mets since the All Star break are the washed up injured veterans who came back to play -Beltran, Castillo, and Cora. Thankfully, Cora was released and Tejada was recalled, moves we were asking for for weeks. Castillo was benched and what Tejada does defensively more than makes up for his anemic offense.

As for the outfield, with Beltran in center, the Mets get hurt in two positions since Pagan is not nearly as good a corner outfielder as he is in center. Beltran's balky knee makes him ineffective in center and at the plate, and I would just bench him. In fact, I would look to trade him to a contending team that might be interested, for some prospects. I would assume that Pagan will play center next year with Martinez, Bay, and Francour sharing the corners. Another possibility for the spring would be to try Wright in left field to make room for Murphy at third base and look to move Bay.

Of course, it starts with management and that means Jerry has finally got to be cashiered. Bringing in certain types of managers can make a difference. Look what Buck is doing with the hapless Orioles. Nothing like discipline and demanding performance to focus a ballplayer's mind.
On July 30, we sold 100 shares of Standex (SXI) at 29.30 that were purchased 5/18/09 for 10.30. On 8/2 we sold 100 shares of Tomkins (TKS) at 20.46 that were purchased 1/21/09 for 6.92. If you don't believe me, look up the purchase prices in the archives. On 8/4, we sold 100 shares of Ladish (LDSH) for 31.57, purchased 8/19/08 at 26. On 8/6, we sold 300 shares of Newpark Resources (NR) for 8.18. We had bought 100 on 10/6/04 for 6.23 and 200 on 12/15/04 for 5.25. Just because averaging down failed with Enron doesn't mean it fails all the time.

We returned briefly to the buy side yesterday, buying 2000 shares of Sirius XM Radio (SIRI) for 1.05. We'll see how this average down comes out. Another average down disaster has been Bank of Granite (GRAN). With the company doing everything it can to hide its quarterly report from view and the FDIC lurking, I decided today to finally throw in the towel before it all becomes worthless. However, this is a thinly traded stock so it has to go out in well timed pieces, not in one big chunk or else I can depress the price. We got off about about 1900 shares today and I will report on those (losing) trades, and hopefully others, in the next post. I would have liked to have delayed taking these losses until next year when I assume tax rates might be higher, but by then, the shares may be really worthless.

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