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Tuesday, November 23, 2010


Turkey Day Comin'

Thanksgiving Day represents a recess - for the lame duck Congress, from work (unless you are in retail), hopefully from stress. Yes, some people actually look forward to Black Friday shopping - not for me though. I prefer the last minute December rush. As for Congress, they have a lot on their minds, income tax rates, an estate tax solution, the new START Treaty (a cause for "debate" on the news shows Sunday morning) and now a renewed crisis in Korea. Yes, the world's a mess, but why is anyone surprised, this administration is just as incompetent in terms of foreign policy as domestic.

It all really came together when the realization hit home that civilian trials of terrorists won't work, and neither does it make sense for the TSA to be patting down dowdy grandmothers. Nevertheless, Obama has to show his base that he is going to stand up to the GOP majority in the House, so look for more stonewalling on all of these issues.

In Dallas last Saturday, at our insurance brokerage convention, George W. Bush was our guest speaker and his appearance was easily the best of the week (beating a tough field that included Tom Peters and Dan Sullivan). Funny how well the same mannerisms that made him look ignorant on television made him endearing in person. (Commenting on the warm reception his book has received, Bush remarked that most people didn't think he could read, let alone write). His self deprecating humor was really fun, but he stuck to his guns on the key positions of his Presidency, Iraq, low taxes, taking the war to the terrorists. Compared to our current President, he looked and sounded competent. He remarked that he feels pretty good these days when people wave, and show him all five fingers.

I think the Bush Presidency was doomed from the start with the media because of Florida, and no matter how many recounts showed him as the winner, the left would not believe any of them until one showed Gore the winner (which never happened). What a shame. I would never try to make the case that George was one of the top tier Presidents since he never stood up to Congress on spending, but he was very good on the war on terror. As for the Iraq decision, subtraction of Hussein was a good thing.


Another Jets thriller Sunday, this one I would have to put in the Ripley's Believe It or Not category. Actually have tickets for Thursday night so my daughter and I will go to the Meadowlands and sit in the rain to see the Jets tackle the Bengals, coming off their hideous loss to Buffalo.

Most disturbing thing for Jets fans is the continued inability of the offensive line to dominate. In fact, against Houston, they neither run blocked nor pass protected very well. That was especially true after a Houston cheap shot took out one of the starters.

Meanwhile, the Giants lost their second in a row, this one excusable since it came on the road against Philly, but still not a real good game. If I were a Giants fan I would be concerned but not panicky. I can see them going on another tear soon.

The other concern for NY fans is that neither team is playing especially well in their new home.

The Mets ended the Los Metso's era, naming Terry Collins as manager, and hopefully that will bring on a new era of discipline and consistency. We'll see. I thought it was interesting that new GM Sandy Alderson indicated he will be undertaking a review of the team's medical and conditioning staff. Those are the only guys whose record the last few years has been lousier than the players.


The Fed's QE2 plan has received sufficient criticism here and from other sources and countries. The capper has been the market's reaction which has been to sell long term Treasuries, driving interest rates UP! This is, of course the opposite of what the Fed had been trying to achieve. Yet, in what will be a great irony, I would predict that higher interest rates are what banks need to have the incentive to loosen the credit spigots. Think about it. Why would you loan money in a shaky business environment at some pitifully low interest rate. Higher rates offer banks a chance for a return. So the Fed might actually achieve credit creation through QE2by causing the opposite effect from what it intended. In other words, screwing up in reverse.


One wonders if anything will save the municipal bond market. Default risks are truly frightening in that sector, especially with the stimulus money that mostly went to the states drying up. Maybe instead of buying Treasuries, the Fed should be buying muni's.


Last week on Monday, I bought 50 shares of Honeywell (HON) at 47.65, a zero buy. On the 16th, we bought 100 more shares of Goldman Sachs preferred (GS.PR.D) at 22.45. On Wednesday, we bought 400 shares of Newpark Resources (NR) at 5.51, a value buy. Yesterday, we sold 100 shares of Ladish (LDSH) at 46.30, now that it is subject of a takeover offer, half cash and half stock in a company I don't want to own. These shares were originally bought following a recommendation from my full service Stifel Broker on 8/19/08 at 26.00). Another good reco!

Sunday, November 14, 2010


Football, Chicken and other sports

Pro football can be a strange game. The Jets again got pushed around for half the game today, made some great halftime adjustments, took charge, only to see the Brownies execute a beautful drive at the end of regulation to tie the score. Dame Fortune again smiled on my team in overtime, the Jets recovering a key fumble and finally scoring in the last minute of the extra period after a missed tackle. So another game we were lucky to win, but another good job in the clutch.

Then there are the Giants, who have simply been thrashing everyone. Today, they got the Cowboys, a recent thrashee, in Jersey, with a new head coach and a second string QB at the controls. Lo and behold, Big Blue came up flat and lost badly to the 1-7 Cowboys. Go figure. And people wonder why I don't gamble on this sport.

Then there is the sad story of Chad Pennington. In the latter stages of an injury plagued career, Chad lost his starting job at Miami in pre-season only to get a chance today because of injury to Miami's starter. So what happens? Chad's chronically bad shoulder gets hurt early in the game and out he goes. Time to retire, if you ask me. Chad will be a better QB coach than he was a player.

Then there are the Lions, who thoroughly outplayed the Jets in an overtime loss last week, visiting winless Buffalo today. Both of these teams are much better than their records, yet you would think that the Lions would be able to continue their improvement against an arguably weaker opponent. But no, the Bills break their virgin, and the Lions extend their road losing streak to something like 25 games.

On any given Sunday...there will be a dozen or so games.

David Axelrod was his usual stubborn self on this morning's news shows, and was in good partisan form considering he only has about six months of this thankless job before he returns to Chicago to manage the Obama re-election effort. He'll be glad he has his reknowned thick skin for that one. It was almost comical to observe the administration's tortured efforts to somehow spin the President's G-20 performance last week into something positive. It brought to mind that JFK soundbite from the
1960 debates when he hammered the Eisenhower administration for allowing "American prestige to reach an all-time low." if that was even remotely close to the truth, it must be said that Obama has somehow surpassed even that low point. However, he will have to share that "achievement" with Ben Bernanke, to be fair, since the Fed is supposed to be independent.

Most of what the G-19 was complaining about really amounts to the effect on the dollar of the Fed's quantitative easing (QE2) and other tactics to pump liquidity into the economy. Of course, everyone else seems to get that the Fed is pushing on a string, that there is already plenty of liquidity in our banks and corporations, it is simply that businesses do not believe in this recovery because of the regulatory displacement caused by the health reform law and the financial reform law. Hence, the lack of impetus to invest, hire and take risk. The ultimate impacts of QE2 will be a much weaker dollar and inflation. It is laughable to hear Obama and his cronies explain that they are worried about deflation. Why didn't Obama make Bob Prechter his chief economic advisor if he is really worried about that? He's about the only guy I know who still believes deflation is an immediate threat.

This argument has been going on for a long time but apparently it bears repeating. When prices increase along the supply/demand curve, that is not inflation, that is market dynamics. When the supply demand curve itself shifts up, that could be inflation. Infaltion has one cause - too much money chasing too little input (goods, commodity raw materials, employees, etc.) When output is high and when supply excesses and shortages occur, we can get price changes along the supply demand curve, but those are neither inflationary nor deflationary. Prices retreated during the recession, as they often do, because effective demand was temporarily suppressed and inventories (of houses for example) got too high. That causes output to fall until we get back to equilibrium. But when the Fed keeps printing money to buy Federal debt, we are creating real inflation and that is what will happen. It may not occur immediately, but it will be cranked in inevitably. If you were around and watching, this is what happened during the Carter Administration when Federal debt was monetized by the Fed.

Dems like some inflation. They like a weaker dollar. It helps their base pay off their debts. Their base doesn't save much. Ultimately, inflation is a tax that hurts everyone and then, the bulk of the public demands a stronger dollar and that inflation be cooled. That's when a Paul Volcker and the Friedman school of economists get called in. The damage caused by this inflation will not be restricted to the U.S. since our currency is the world's de facto fiat money. That is why the rest of the G-20 is pissed at us, and insulted that Mr. Obama seems to have slept through his entire Econ 101 course.


Progressives are also in a lather this week because they believe that Obama is going to cave on all their policy prescriptions, most immediately on the extention of the current tax rates. Wouldst it were true! I think what will happen is that we are about to watch our politicians play a game of "taxation chicken." For once, I do agree that D's must blink first.

The most logical action by the lame duck session would be a compromise to extend all of the current rates for two years, effectively kicking the can to whoever gets elected president in 2012. However, D's will try for a two year extension of the upper income rates and an indefinite extension of the other rates. This would set up a 2012 dynamic where if nothing further happened, the upper income rates could expire, without the ability for R's to hold the middle and lower income rates "hostage."

R's should, and will, of course resist any such decoupling. If that becomes the D's best and final offer, R's should call their bluff and allow all the current rates to expire. The public will be apoplectic about a Congress so stupid as to raise taxes early in such a weak recovery. When the new Congress gets to town, R's and moderate D's (including the many red and purple state Senators defending their seats in 2012) will probably quickly pass the two year extension of all the rates. That will put the chicken ball in Obama's court, and he will have to deal with his progressive base if he decides to forgo the veto.

I still see it that way (the last post included a first draft of this scenario) and it will be fun to watch the academic progressives in their hour of chagrin.

On Monday, we bought 20 more shares of the TIP ETF (TIP) at 111.69 for the IRA. Then on Thursday, we sold 100 shares of Carmax (KMX) out of the IRA for 33.44. These were purchased on 1/20/09, the depth of the downturn, for 7.99. Sometimes, a little courage does get you a 22 month quad. Other times it gets you a Blockbuster. On Friday, we bought 300 more shares of Gencor (GENC) for the IRA at 7.21, a value buy.

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Sunday, November 07, 2010


Post election musings

There are still some races to be decided, recounted, litigated, etc. but our predictions and pre-election guide to the key races were pretty accurate. As expected, GOP gains in the House were at the upper end of expectations, and when all the races are decided, will be just north of the predicted 60 seat swing. In the Senate, the gain appears to be 6 seats, counting Alaska as an R seat whether it turns out to be Murkowski or Miller. In the area of whether this was an anti-incumbent push or a conservative backlash, as we believed, it is worth noting that only 2 R's lost House seats. The message voters delivered was pretty clear - we object to the D's policies and ramming through unpopular legislation by any means available. And we demand fiscal responsibility.

Of course delivering a clear message does not assure that those preferring to hear different messages will get it right. So ever since Tuesday, we still have D leaders beating their chests about their ineffective communications, and how the voters would have approved of their policies if the communication had been better. This is rank elitism of course, and reveals contempt for the voters, but we have come to expect this and even anticipate such reaction from the left. Of course these are the folks who are so often wrong but never uncertain.

Happiest news of the day is the message from Nancy Pelosi that she intends to stay on as D leader in the House, and with Mr. Clyburn determined to remain the Whip, there appears to be no slot for Stony Hoyer, one of the last of the Blue Dog Dems. The more conservative Dems, who were used to obtain the majority in swing districts the last two cycles, took the fall for Pelosi and Reid, just as R moderates were being purged by tea party candidates. So now we have a Congress where both parties are a bit more extreme, and it will be interesting to see what compromises are achieved. The conventional wisdom is that there will be an extreme form of gridlock, but I think the surprise, if any will be to see more constructive agreement than people expect. Some of that agreement will involve undoing the accomplishments of the last Congress, but that can be a constructive exercise.

I think once everybody sobers up, there will be an understanding that the voters have reasserted their right center bias, and that liberals will be sent to the woodshed to agonize over their missed opportunity to socialize America. Dems will be looking at a 2012 scenario where the president must move toward the center, as Clinton did, or lose the White House. I think there is no hope that D's can retain the Senate in 2012 given the seats they have to defend. As for the House, where the GOP really did damage in this election was in the statehouses and governors' mansions so they will control the redistricting process where it matters. That could consign the Dems to minority status for quite a while. They may have no choice but to make policy adjustments.

R's are also acutely aware that they cannot abuse power as they did during the Bush years and expect to remain in control. This means getting things done on taxes, on health care, and on spending. It means engaging in serious conversation with the Administration about how to make things right. Comments like Senator McConnell's concerning the urgency of winning the White House in 2012 are not really helpful.

I think the scenario goes something like this. D's will not get anything done in the lame duck session that is not acceptable to Senate Republicans, who now have 42 seats (Senator Kirk of Illinois takes his seat immediately). I expect a two year extension of all the Bush tax rules and rates for all taxpayers. R's will not agree to the D's suggestion for decoupling any of the income levels, which is just a trap. There will also be the usual AMT fix. There might be a move to compromise on the estate tax, perhaps making the 2009 rules permanent. This could all happen in the lame duck.

Once the new Congress sits, I think we will see an early, unsuccessful move to repeal the Health Law, followed by more successful measures to starve it of the funds needed to implement. That situation will continue until the states' health care suit gets to the Supreme Court, which might take the case on an expedited basis, today's setback notwithstanding. I think Justice Kennedy will tilt a 5-4 decision against the individual mandate, and that will throw the R's and D's into a room to hammer out replacement legislation that is briefer, better, and constitutional. If that happens, everyone can claim victory.

All of this will provoke consternation on the left, and while the administration will empathize, they will simply take those votes for granted and try to reconstruct a winning electoral strategy. In the meantime, with Pelosi and Reid in place but largely declawed, we on the right have the gift that just keeps on giving.

Election night for me was a mostly cheery affair, though there were some disappointments. You have to admire the Dems' turnout machine, which saved Reid, the governorship in Illinois and probably Connecticut (one of three gains for them against 9 losses, if the vote counts hold), and Senator Boxer in California. To overcome the voter apathy they faced was surely a great challenge. Of course, there were lots of states they just could not win with that ground game, including PA, Ohio, FLA, WI, MO, Michigan and others.

As for R's, they need to improve their turnout game for the day when their voters aren't so charged up. They also desperately need a strategy for appealing to Hispanic and Black middle class voters. Electing several R Hispanics to be Senator or Governor represented a good start. Finally, while the tea party provided so much positive impetus, one lesson learned is that carriers of that message need to be chosen more carefully. R's could have, but didn't win Senate seats in Colorado, Nevada, and Delaware largely because of inept candidates who won primaries.

On to more important things. I have only recently been paying more attention to country music so Friday night, we joined 10,000 or so mostly adolescent or twenty something girls along with the usual cowboy hat wearing old timers to see Carrie Underwood at the Nassau Coliseum. Carrie has become the Diana Ross or Bruce Springstein of country, singing virtually non-stop for two hours, flying over the crowd in a blue pickup truck, changing clothes every few songs, and singing a duet with a filmed recording of Randy Travis. So it's a real event, but a very musical one. She is unquestionably a great talent and the biggest star in country music today.

One of the problems though with country is that it now sounds more like rock or pop than country. The singers aren't backed by pickers any more, they are backed by rock bands and the volume is way up. When they play an arena, that gives them an excuse to turn the volume WAAAY UP, with the usual echo and distortion problems. This was not really a problem for Underwood whose voice is strong enough to overcome it, but poor Billy Currington who led off was rendered all but inaudible, his voice sounding like it was coming from some far off echo chamber. This was so unfortunate given that his songs are fun and humorous, but unless you already knew them and the words, you were out of luck, and so was he.

Nevertheless, it was good fun. For those who care, the CMA awards show is this Wednesday, which unlike most award shows is actually semi-entertaining. We'll see if they give Underwood her third straight Entertainer of the Year award.
-------------------------------------------------------------------------------------One of the NFL's enduring scenarios is where the allegedly superior team gets drubbed for three quarters by the underdog, only to come back in the final period, often pulling the game out in the last two minutes. Over the years, my beloved jets have been on the short end of that scenario more times than not, but this year, we have been the beneficiaries of these late game turnarounds. As it was in Denver, it happened again today in Detroit where the hapless but much improved Lions were left to wonder just what else you have to do to win a game.

Meanwhile, the Giants' roll continued in Seattle. There is no question that this team is playing better than anyone else right now. Even the curse of the bye week had no effect on them.

On November 1, we bought 400 shares of Tat Technologies (TATT) at 6.63, a value buy. We were also greeted with the not so surprising news that Wolverine Tube (WLVT) was filing for a prepackaged bankruptcy. Pretty certain that the common shareholders will net their usual goose egg in bankruptcy, I went ahead and took almost a penny for each of my 13,300 shares of this dog, figuring correctly that was $120 that would not be available a day or two later. This is about the last of my real ugly dogs in the kennel and the loss of some $37,000, mostly from the taxable account, assures that I will not have to make an estimated tax payment for the fourth quarter. On Friday, we bought 50 shares of Honeywell (HON), a zero buy, for 49.00.

Stocks continue to do well in the face of inept fiscal and monetary policy. Quantitative easing by the Fed is entering a second round, but quite a bit smaller than we feared. Still, it means more inflation down the road. The bubble in municipal bonds continues to inflate, and I am seriously trying to come up with a solution for the money in my triple tax free fund. I'm afraid I can't keep it there much longer. The states are all hooked on federal money, and that well is likely to dry up in 2011.

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