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Monday, June 13, 2011


Angst Plus

For those who lost interest in the stock market after 2008 proved to be one debacle too many, we can report that after its long rise to the heady heights, stocks have endured a 6 week period of water torture, commonly termed a "correction." That, it may well be, the assumption here being that after this necessary washing out of the weak hands, the trends of commodity inflation and a recovery, albeit among the weakest of the last 60 years, would reassert themselves and be reflected in higher stock prices.

It is very typical of corrections nearing their end that a bit of despair sets in and investors question whether a new bear market is the correct diagnosis, and not a mere correction. In fact, a very plausible interpretation considering a somewhat longer perspective is that the run higher of the last two years was a bear market rally, and we are now seeing the resumption of that secular bear market. If correct, this interpretation would lead to the assumption that we will drop to or through the 2008-2009 lows.

Usually, these kind of thoughts mark the beginning of the end of the correction, except when they don't. That's why the redwavemusings approach long ago gave up the idea of timing markets and tried to build a formula that would react to prices, not forecast them. That formula, with occasional modifications to improve it, has been working for quite a while, but this doesn't mean it must continue to do so.

I have to admit that the chances that we are still in a bear market are too significant to discount. That's because even though we have continued to invest and profit from stocks, we knew and have written in this blog that the economies of the western world are unsound, that policy choices, both fiscal and monetary here and in Europe have been inept, that there are many areas of concern around the world where freedoms do not exist (Middle East, much of Asia, much of Africa) or are precarious at best (much of Latin America). Eventually mistakes must be paid for, not because of some sense of justice, but because decisions matter, they have consequences as GWB would say (an expert on making mistakes).

So rather than rant ad nauseum about how the Administration is letting everything go to hell in a hand basket, I'd rather just itemize a little more succinctly what's wrong and needs to be changed to get our little planet back on course.

1. There's way too much debt. Famously, Ashley Bladen, a Forbes columnist from the 70's and 80's was always kvetching about debt and how we would need a real financial crisis to scare everyone back into "lasting prudence." He was wrong for the better part of three decades as GDP growth here and abroad easily supported the debt that was being taken on. Too bad he wasn't around to see and write about the fulfillment of his warnings in 2008. However, what did not happen was the lasting prudence part. It does seem to have shaken the private sector, and we have even seen consumers snip away marginally at their debts (and also default on some of them). But the message seems to have been garbled in transmission in terms of the public sector, at least on the national level. In order to keep the balls in the air, Geithner and Bernanke have teamed to deliberately increase and monetize federal debt, and by non-trivial amounts. This debt is now almost unmanageable, as interest costs are threatening to subsume revenues. The left believes we should merely increase taxes, since they believe the "rich" are getting a free ride. But this is bunk. The federal budget is heading for 25% of the economy, and will go much higher without real entitlement reform. The poor already pay no taxes, and the working poor only pay their share of the payroll and sales taxes. There is no further redistribution to do. The President's tax commission and the Ryan Plan represent two plausible paths to improvement (not cure, by the way). Even the Pawlenty Plan, a pro growth approach, has some merit. On the contrary, the Administration's plan and budget was no plan at all. On this basis alone, these rascals should be thrown out in 2012.

Abroad, the EU and the UK have done some positive things monetarily and fiscally. However, there continues to be a determination to try to salvage the PIGS (Portugal, Ireland, Greece and Spain) in ways that will continue to pressure the Euro and prop up very weak banks.

2. By getting the scenario of what happened in 2008 very wrong, the Dems and their media allies have won legislative, regulatory and policy changes that are making matters far worse. The media line on 2008 was that large banks, both I - banks and commercial banks, combined with a deregulatory climate to sabotage the mortgage market and transfer wealth to bank CEO's. This made for a convenient story line to sell papers and provide red meat for liberal Dems and their supporters in the academy, but it didn't have much to do with the crisis nor with the real perpetrators, Fannie and Freddie, their Congressional enablers, the rating agencies, and mortgage fraudsters. Nor did it deal with the accounting puritans who pushed their procyclical methodology that caused sound investments to require unfathomable amounts of capital as market prices spiraled below real value.

The resulting legislation (Dodd Frank) and regulatory reaction has not only not cured anything, it has put the economy and the private sector in chains. If Obama and the few economic advisors still working in this administration are scratching their heads over the failure of the jobs number to move up, it's because their dogma does not allow them to see the negative impacts of over-regulation and punitive legislation for what they are. Dodd Frank should be repealed forthwith, and all this nonsense (FSOC, SIFI's and Global SIFI's, and the interference by the G20, the IMF and other national and international regulators) reined in.

3. Why on earth would anyone in his right mind start a meaningful business today, especially one with over 50 employees with ObamaCare looming? If you want jobs, repeal ObamaCare now and start over, understanding that no health system can economically provide every procedure that every person would want. Bring sense to the malpractice system so that defensive medicine can be curtailed and every doctor does not have to start the year $75,000 behind the eight ball due to his insurance premium.

4. Let's have a true bi-partisan approach to tax reform. The redwavemusings solution is to put everyone on the alternative minimum tax, a simple calculation that can be administered fairly, that minimizes incentives, reduces friction, and which can be changed with few unforseen secondary effects. The high tax states will hate this, but most are finally getting the competitive message and realizing that their taxes must be brought in line.

5. Somebody needs to crack heads at the EPA. CO2 is not a pollutant, it is oxygen for plant life, the natural output of animal life respiration. The climate control left must be seen for what they truly are - anti-industrialists. There is nothing wrong with working on renewable energy source technology, but it should be mainly private investment based on discovering technology that will be economically viable. The EPA needs to get out of the way on discovery and distribution of traditional energy sources, including nuclear. Regulators should establish reasonable environmental and safety standards and regulate to those. It is ridiculous that Gulf drilling is still largely curtailed, and Alaskan pipelines are drying up (as the WSJ reported). It is also crazy that Harry Reid and his NIMBY constituents have curtailed the national atomic waste disposal plan. Storing spent fuel rods at individual plants is infinitely more dangerous, as we have seen in Japan.

I am heartened at polls showing Romney and Obama even at this early date, and believe Pawlenty can achieve similar parity quickly. No surprise the Gingrich campaign imploded, which I never took seriously. I don't think Perry will run. Still waiting on Huntsman to step forward. But it looks more and more like a traditional GOP nominating campaign, coming down to Romney and Pawlenty, who can each argue it's their turn.

So after all the babying, the Joba Rules, the shut down periods, etc. Chamberlain still is headed for Tommy John surgery. The elbow ligament transplant procedure is now epidemic in baseball. Why? It is probable pitchers always tore this ligament, but before the surgery was available, they disappeared from the game with a "sore arm" or transformed into junk ball (off-speed) specialists. However, I would agree that it is happening more often now.

The reason? The radar gun, and the emphasis on strike-outs are encouraging big league teams and their pitchers to throw harder than they should, harder than they need to. Today, if you can't hit at least 88 on the gun, they say you don't have a big league fastball. In the 1950's, 90 was considered unusual velocity.

The strike-out emphasis is an unfortunate remnant of the steroid era, when medicated boppers could take you deep even with a ball not hit exceptionally well. Strikeout pitchers had an advantage in those conditions.

The lost art is what we call "pitching to contact." That is, purposely trying to get a hitter to put a poorly hit ball into play early in the count, eschewing the strikeout unless really needed (runner on third, less than two out). To achieve the poorly hit ball, you keep the better off balance by changing speeds, get ahead in the count, and make him reach for a pitch on the border of the plate. This minimizes pitch counts, arm and elbow strain, and keeps fielders (and fans) alert. Firing it in at 90 or better pitch after pitch causes lots of foul balls, higher pitch counts, elbow and shoulder injuries, defensive errors due to lack of action, and bored fans.

In the old days, a pitcher like Larry Jackson, with the Cubs and Cardinals or Bill Pierce with the White Sox provided consistent quality starts and lots of complete games despite average stuff. Somehow, you never seemed to get anything you could whale on against them. Juan Marichal and Warren Spahn could control so many pitches, a hitter never really knew what was coming. Whitey Ford somehow always had extra velocity in reserve for the one or two times in a game when he would actually need a strikeout. Dillon Gee, the Mets remarkable rookie (7-0) seems to be a throwback. The Hernandez brothers in recent times have also been guys who really "knew how" to pitch. I would put Petite, Greg Maddux and Tom Glavine in the same class.

Every once in a while there is a freak of nature who can throw so hard and yet not get hurt. Nolan Ryan was like that. So were Tom Seaver, Bob Gibson, Jim Palmer and Robin Roberts. These power pitchers had two things in common - perfect form, using their bodies to generate power and not just their arms, and pinpoint control. To me, they are the exceptions that prove the rule. Baseball needs to teach the art of pitching to contact again, and to impart that knowledge even to would be power pitchers like Joba Chamberlain.

With the slump in stock prices, we have been buying, while continuing to build assets in preferred stocks, gold and TIPS. On June 3, we bought 100 shares of IDT, a zero buy at 28.02, pretty much establishing our position in that one. On June 6, we bought 100 shares of Aegon Preferred (AEH) at 23.87 for the IRA. On June 8, we bought 200 shares of Quanta (PWR), a value buy at 18.83 also for the IRA. This is our concession to wind power. So far, it is not paying off. On June 10, we gambled on 300 shares of Boyd Gaming (BYD), a zero buy at 7.87. Warning, Boyd is highly leveraged.

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