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Sunday, July 31, 2011


The Eleventh Hour Non-Surprise

As expected, at the eleventh hour, we seem to be on the verge of a debt limit agreement, no thanks to the President and the Treasury Secretary who have been nothing but relentless in politicizing the issue because they believe it inures to their re-elect benefit. Of course, they are not entirely to blame - the debt limit has always been a political football. Both parties have made it difficult for the other party's administration to raise the limit in recent years even though everyone knows it must be raised. In fact, Obama himself famously voted against raising the limit in 2006.

What is different this time is that after the Bush administration allowed the deficit to balloon in 2006-2008, due to the war, the failure to veto a single spending bill, the Medicare part D, and finally the financial crisis, (before anyone even starts to complain about the tax cut, let's remember that it juiced revenues until the 2008-9 recession hit) Obama doubled the deficit in his first year, accelerating the red ink above and beyond anything his predecessor ever contemplated. In fact, while GWB ineffectually rued the expanding deficits, Obama seemed to embrace them as a Keynesian solution to the recession. In that respect, his stimulus spending has failed totally.

On top of that, the looming expenditures attaching to the ill-conceived Affordable Care Act (a misnomer if ever there was one) threatens to accelerate deficits to yet another level. So true conservatives and Tea Party types view the raising of the debt limit as another blank check for Congress to write, an offer it never refuses. They have been determined to extract true deficit control in exchange for the debt limit increase this time. Some of their ideas make a lot of sense, the requirement for specific cuts over ten years at least equal to the debt limit increase, possible repeal of CLASS, and tax reform. Others - the balanced budget amendment for example - not so much.

In any event, according to my friend David Espo's wire service report released within the last hour by the AP, the deal contemplates two stages with a commission determining the terms of the second stage. In the first stage, entitlements and tax rates both escape change. So the deal is likely to have elements of each of the Reid, McConnell and Boehner proposals. The leaders will be trying to round up the votes tomorrow, and I think they will succeed, though both Tea Partiers and liberals will be hard to rein in since they will find objectionable provisions. But I think voters will demand that the measure pass.

The political fallout from all this is hard to predict, but I see no reason to change my view that the President has been badly hurt and now has a pretty much indelible image as a free spender and a class warrior, neither of which will help him in 2012. Worse, he looked ineffectual. I think the Tea Party folks will benefit since they seemed to be the ones really taking our fiscal mess seriously. I expect the way has been paved for DeMint to replace McConnell at some point and Cantor to replace Boehner.

As for GOP candidates, I guess Bachmann may be helped a little, but I don't expect her to be the nominee anyway. I didn't think any of the prospective GOP candidates, including Romney, provided useful input. I guess this means that the option to draft one of the attractive sitting governors is still on the table for the GOP.

As for the country, the debt limit debate was important in that the terms of debate have been reset. But to get things working, we've got a lot of changes to make. These include repeal of the Nixon era law against impoundment, repeal of PPACA, repeal of much of Dodd Frank, resetting regulatory agencies throughout the federal government, wrapping up the two wars (what are we still doing in Afghanistan anyway, now that bin Laden is dead?), approval of the three (at least) free trade agreements with Columbia, Panama and South Korea, and very importantly, tax reform. The Fed will have a difficult job in making the necessary interest rate increases without tipping the budget into a death spiral. These will be challenging times indeed.
I have to admit, I don't really know what to make of the News Corp hacking scandal. Apparently this has been normal operating procedure among the UK tabloids, and that includes the corruption of police and political figures. It is amusing the way the left pounced on the Murdochs during their hours of public agony.

For me, this seems another clear case where criminal activity has taken place, but not the crime of the century and the reaction seems disproportionate. That said, the press, like the academic world, seems to have overreached concerning their frequent assertions of special privilege. No problem seeing them get recentered a little.
The baseball trading deadline was today, and the sport's economics being what they are, you had the usual flurry of deals where contending teams shored up lineups, obtaining front line players in contract walk years from non-contending teams in exchange for unproven prospects. When economics and players contracts dictate personnel moves, fantasy players and other fanatics are amused, but I have to believe kids are turned off. This is why baseball's fan base is at risk and one reason why so many kids play lacrosse and soccer in preference to baseball. It is difficult for kids to be loyal to teams and players when trades are made for economic reasons to the detriment of team performance.

That said, New Yorkers are enjoying the season with both teams exceeding expectations and the Yankees looking forward to their probable post-season appearance. Interestingly, the races for the division leads are more in doubt than the wild cards. It just makes you wonder why Bud is so sure an additional wild card is the answer. I would prefer to see the American League add two teams, perhaps in San Juan and in Mexico somewhere (or Dominican Republic) and then we could have 4 eight team divisions. If Bud wants to include the second place teams in the post season, I could live with that.

Friday night, the Birdland Big Band was in top form before the usual full house, and they reprised a rare treat - the West Side Story medley that launched the band on its successful weekly gig. They played it in lieu of their normal finishing selection, also entitled Birdland, but no one seemed to mind. Most of us had forgotten just how great the medley arrangement is, played by New York's top band in its own house.

The Norwegian horror show, reminiscent of Oklahoma City, should bring to mind that with bin Laden dead and Al Queda apparently in disarray, this is a good time for us to pull back, certainly from Afghanistan, which would save some money, and perhaps reverse the momentum toward ill will in the world. We need to modulate our activity in Iraq too, but there is grave concern (and there should be more concern in the Administration) about increasing Iranian activity in the country.

It is clear that not enough of these homicidal nuts are on the proper medication.

In fact, hospitals around the country are reporting shortages of all kinds of drugs
and it is impacting patients. Maybe it's time for us to reconsider the laws governing patent protection and whether such protection needs to be extended or decreased. As for the FDA, I would like to see their activities reviewed top to bottom.

We are not being well served by federal regulators these days, and that's a big reason why private investment is slow.

We sold 100 shares of XCEL Energy (XEL) on 7/25 at 24.38. We paid 15.78 for these shares on 5/17/04. Then we switched to the buy side, as the market has been on the defensive for a while. We bought 700 more shares of FSI International (FSII) on 7/25for 2.97, a value buy but one you should not try at home, since this is the very definition of a speculative stock. On 7/27, we added 100 shares of International Data (IDT) for 24.97. Then on 7/29, staring right into the face of the phony default crisis, we bought 20 shares of the Inflation Protected Treasury ETF (TIP) at 113.16. The coming inflation will not be phony, I'm afraid.

Tuesday, July 19, 2011


Politics rules the debt limit debate

The debt limit kabuki dance goes on, with the dramatic collapse of the "Big Deal" Friday night and the expectation of both House and Senate proposals tomorrow. A good indication of the bankruptcy of the incumbent administration was Obama's embrace of the new Gang of Six (almost) proposal before he had even seen it. This was followed by the incompetent performance of Treasury Secretary Geithner on this morning's news shows. I saw his interview with Chris Wallace (you can say whatever you want about Fox News but Mr. Wallace compares favorably with all three of the other Sunday morning hosts) and it was a real knee slapper.

Wallace was as tough with Speaker Boehner who came off as much more serious and less politically driven than the Secretary. I still think Boehner will wind up passing a shorter term fix, which ostensibly no one wants, but everyone will take, to buy time. This blog predicted the $2.4 trillion deal would happen, and it could, but even less is possible with a shorter time until the debt limit comes on the table again.

It seems clear that everyone's major concern is the 2012 election, but it is almost an obsession with Obama. Geithner raised the specter that the markets would react badly to anything less than the Big Deal, but what the markets really want is for debt to start to reverse and for the dollar to start to move up. Of course the markets also want jobs, but that means the Administration would actually have to pass the three pending trade agreements (especially with Columbia and South Korea), instead of pretending to support them, and for the administration to back off some of its regulatory initiatives. One idea that seems to have bi-partisan support is to repeal the CLASS act as part of the debt limit increase legislation. Might as well since it will never be implemented anyway. What people forget is that CLASS was scored by CBO as a budget positive in PPACA (when it should actually be a negative) and that PPACA would have been negative without it and probably could not have been passed. So repealing CLASS makes sense, but somehow the corollary, that PPACA should also be repealed is not happening. The deal I would support would be a clean debt limit increase in exchange for repeal of all of PPACA and all of Dodd Frank. Believe me, that would provide for a lower deficit and a boost for the economy - but Democrats would view it as a violation of their cannon so it won't happen. Too bad.


It's also too bad that the Progressive doctrine is so extreme and so uncompromising because just like Conservatives, there is good and bad in what they believe. Here's an example. I'm not much for the environmentalists - I believe they are more anti-industrialist than anything else. But I am convinced that one of their major areas of concern is legitimate. That is, what we are doing to the ocean environment is disastrous. Man is clearly overfishing. We are also dumping shit - literally - into the water, as well as chemicals, acid rain, etc. and this is having fatal impact upon coral reefs and many other essential elements of the food chain. I think this is something all of us should be concerned about - it is a much more serious problem than the occasional oil spill. I think this is a more urgent problem than global warming or any other non-problem keeping environmentalists up at night.

The unfairly maligned GWB administration (which I will admit was not God's gift to freedom) got another indirect boost from 60 Minutes tonight when it re-ran the astonishing episode concerning Saddam Hussein's diversion of the Tigris and Euphrates Rivers in his effort to eradicate the "Marsh Arabs." Somehow, the environmental lobby does not get so exorcised when GOP enemies commit environmental sins in the cause of their murderous political goals. It does not reflect well on the Left that it opposed Bush on everything. even when he took on and removed one of history's worst mass killers. If anything, it seems we all underestimated the horrors of the Hussein reign of terror, and since our CIA put him in power in the first place, it seems it was also our obligation to remove him.

Look, GWB failed in many ways, most notably doing too little to restrain the free spending Congress of his era, but it is increasingly a bankrupt judgment to say that the removal of Saddam Hussein was anything but a humanitarian impulse.


Last weekend was certainly a feel good sports weekend. Darren Clarke finally won the British Open, his first major, following a miserable five years that included the death of his first wife due to breast cancer. He is now engaged to what will be wife number two. Also, the Japanese girls comeback win against the US in World Cup soccer was a nice outcome for that beleaguered country. It took nothing away from our girls who also performed brilliantly throughout.

On July 13, we bought 1200 shares of Hauppauge Digital (HAUP), another $2,000 flyer on this HIGHLY speculative stock. Not for the faint of heart or those inexperienced with dynamite. But it's a value buy due to no debt and the low valuation it probably deserves. On 7/15, we bought 100 shares of Shaw Group (SHAW) following the brutal beating the stock has taken because of its involvement with nuclear power projects and its always questionable management team, perhaps light on the compliance side. On 7/18, we bought 100 shares of ING Preferred (ISP) at 21.20, completing a series of high risk purchases, at least for now. On 7/20, we sold 300 shares of Newpark Resources (NR) at 9.30, purchased 6/22/09 for 2.85.

Tuesday, July 12, 2011


Both Sides Dig In On Debt Limit

I invite redwavemusings readers to review the comments appended to our last post. It seems that Dr. C. is concerned that we may have implied that we support GOP and Tea Partiers resisting increases in income tax rates at the higher brackets (or as he would put it, restoration of the rates prior to the Bush inspired tax cuts). So I guess I should clarify. I wasn't implying that holding the line on taxes is the redwave position, I was saying it, clearly and in no uncertain terms. Sorry if I soft pedaled it before.

Actually the redwavemusings position on income taxes is and has been more nuanced. The fact is, middle class taxpayers were by far the primary beneficiaries of the unfairly maligned Bush tax cuts (and misnamed since I believe they were passed by Congress - oh, never mind). That's because most taxpayers in the $250,000 + brackets were already paying their taxes based on the AMT tax calculation, so all the cutting of their rates did was transfer more of their liability from the tax rate line to the AMT line. Their taxes did not go down, for the most part. I know this has been true in my case, since I calculate my own taxes. If you let your accountant do your taxes and you simply sign the return and mail your check, it is likely you have limited if any understanding of how our tax system actually works.

Of course, some upper income taxpayers in states with low or no state income taxes may have actually enjoyed a cut, at least for a while. As the AMT works its way down the income scale (due to bracket creep and the lack of indexing), those taxpayers and actual middle income payers are losing their cut. So if we are going to compromise about anything, let's agree to stop demagoguing about the "Bush tax cuts," OK?

So that's why, for me at least, it's no big deal whether the tax rates are restored, since it won't change my taxes or that of most others in my bracket. It will only transfer some of the liability from the AMT line back to the tax rate line. Who cares? Of course, restoring those rates won't impact the deficit much either.

Also, it has long been this blog's position that the characterization of "carried interest" as capital gains, eligible for the 15% tax rate, is ridiculous. That gift to hedge fund managers should have been corrected long ago, recharacterizing that income as ordinary income.

Having said that, I see no reason for Republicans to compromise on the question of revenues, and I hope they don't. To the extent small businesses might be hurt by raising rates and eliminating deductions, we will only be hurting ourselves, since that will be yet one more reason for jobs to be eliminated (as if this Administration hadn't already provided enough). You might recall we have been through this chapter where eliminating incentives to buy yachts and corporate jets resulted in the near death experience for both industries, and so the loophole closers were repealed out of necessity. In fact, the repeal relating to corporate jets was part of the first Obama stimulus package! It takes chutzpah to berate the GOP on that one.

The other chapter that has endlessly repeated itself for the last 50 years is that various administrations have reached compromises with Congresses controlled by both parties wherein tax policy was enacted with an eye to spending cuts coming later. Somehow those cuts never happen. Now we have Obama, Conrad, Reid et al claiming to have offered all kinds of unspecified cuts when, in fact, there is no deal on the table. The current GOP majority was voted in specifically to impose fiscal discipline, and to their credit, they are for the most part honoring that commitment. They dare not break faith with the voters who put them in place or they will not survive 2012 primary challenges, and they know it.

Except for the coasts, which never seem to lose faith in tax and spend policies, the rest of the country has had it. They are imposing discipline in their states and see it working. They know that the magnitude of current and future federal deficits is out of control, making the Bush deficits look trivial by comparison. They know that actuarially, the entitlement programs are all broke. They know that, even before it starts, PPACA is fiscally unsupportable. They look across the pond and see the fiscal mess that the EU has to deal with after its failed experiments with socialism.

Compromise makes for warm feelings and everyone involved at least temporarily looks reasonable and competent. As a governing philosophy, compromise isn't one. At best, it provides for a suboptimal plan; at worst, it rationalizes continuing down the path of failure. This is not a time for compromise, though I would be willing to move on carried interest, because I think it's the wrong tax accounting in the first place. If we want to redesign the tax system to simplify it and eliminate deductions, i am all for it when there is time. In fact, this blog has said that the AMT for everyone represents a better way while still eliminating the lower half of the income population from the tax rolls (and that's probably too many). But right now, we need to leverage the opportunity presented by the debt limit. $4 trillion over ten years is only a down payment, I'm afraid. $2 trillion is a mere dent. The Dems are trying to make a political point by scoring a trivial amount of the deficit reduction as revenues. That's all it is. There's no need to give them that, though, the problem is a spending problem, not a revenue problem. But you've already heard that. The question is, when Republicans stick to their guns about spending while Dems are equally intransigent about revenues, why are only Republicans taken to task for being uncompromising? Seems to me neither side is moving, but I understand that. They'll move when it's in their interest.

One good thing this debt limit fight has done is to reenergize Tea Partiers all over again. In fact, many Tea Partiers don't want to raise the debt limit at all. That may be an extreme position, I'll admit, but it would enforce a balanced budget more quickly than a Constitutional Amendment. To accomplish that, I believe Congress would have to repeal the Nixon Era law passed against executive impoundments. And that won't happen while Dems control the Senate and the Presidency.

So let's stipulate that the debt limit will have to be raised. The logical deal will be to reduce corporate deductions in exchange for a lower corporate tax rate. Interestingly this does nothing for small businesses which are often Subchapter S organizations and whose owners pay tax rates at individual rates. But it will sound like each side got something for its base.

But budget cuts are coming. I predict the $2.4 trillion proposal over ten years. At least it's a start.

By the way, Dr. C., as an accounting guru, is there really a worse proposal than the Dems' suggestion that LIFO be scrapped? I understand that currently low inflation has reduced the impact of LIFO inventory accounting, but what happens when all the inflation that the Fed has cranked in takes hold? I suggest you provide remedial accounting and economics instruction for the dunderheads who came up with this one.

Lest anyone think otherwise, readers' comments are greatly encouraged here, especially those who might differ from the admittedly opinionated blog author. These comments hopefully will generate a little more discussion here and challenge us to write better, more accurate, and more thoughtful posts than might otherwise be the case.

On 7/6, we sold another 1000 shares of Sirius XM at 2.17, incurring a small loss even though the price is above the average we have paid for the stock. Our feelings about Sirius (SIRI) haven't changed. we still think it's a coming business, with a much improved product and a potentially better cost structure following its merger with XM. Unfortunately, it will be a long time before its balance sheet is healthy or its book value bears any relation to its stock price. We'll make money on our remaining shares, but we will have to be very patient. We had paid 4.30 for 200 shares on 7/12/06/, 3.03 for 700 shares on 12/31/07 and 2.00 for the last hundred on 6/23/08. On 7/8, we sold 100 shares of Kaman Corp KAMN) for 36.44; we paid 15.75 in 1/8/02. Another "patience is required" stock. Yesterday, we bought 25 shares of Con Ed preferred (Ed.PR.A) for the IRA at 97.46.

Tuesday, July 05, 2011


What does the 14th Amendment Actually Say?

As the debt limit issue heats up, we find progressives, and even Treasury Secretary Geithner floating the possibility that the 14th Amendment might provide the Administration the Constitutional authority to ignore Congress and issue new debt itself. To put it charitably, this represents an expansive reading of Article 14, Section 4, which I invite readers to review. To put it bluntly, it reflects on the illiteracy of those who would take this position, and invites the Administration to violate Article 1 of the Constitution (flagrantly, I might add) which reserves the authorization of federal debt to the Congress only.

One might ask what this subject is even doing in the 14th Amendment, the Civil War Amendment which made the former slaves citizens. The purpose of Section 4 was to clarify that Congress would see to it that Union debts incurred would be honored but debts of the Confederacy would not, including debts associated with the institution of slavery.

The fact is that the Administration and its allies are desperately seeking leverage because it is becoming increasingly clear that unlike past times, the GOP is showing little or no inclination to buckle. This is the salutary impact of Tea party freshmen.

This is not to say that we are going to solve our fiscal profligacy all at once. Merely, to say we are going to have what the Left considers draconian cuts in the budget, they are as inevitable as they are necessary.


July 4th is the traditional halfway mark for the baseball season, yet, the Mets, Pirates, Indians, and Diamondbacks hang around the race and that means meaningful summer baseball even in Flushing by the Bay, at least for a little while. Several good races are shaping up, including competitive races for first place in each division, though the wild cards have clear leaders (whoever finishes second in each Eastern Division). I guess this is why Commissioner Selig is floating his trial balloon concerning a second wild card for each league.

He is also talking about some kind of realignment, that makes little sense to me (6 five team divisions so there are 15 teams in each league, necessitating interleague play throughout the season). My personal preference is that baseball go back to its original plan when expansion began - four 8 team divisions, two in each league, no wild cards. If we must have wild cards, let the second place team from each division play the first place team from the league's other division in the first round. Frankly, I could do without wild cards. We never missed them before we had them, I can tell you.

Where would I go for the two new teams? Outside the continental US probably. Maybe one team in San Juan, the other in Mexico City. If Juarez wasn't a drug infested mob run town, it could be a candidate.

But it will not be happening as long as myopic Bud is running things.

More and more, Europe is looking like a lost cause to me economically. This does not bode well for us. In fact, it is hard to find a government not spending way beyond its means. That means there is no actual financing going on and leaves the world susceptible to inflation everywhere.

It seems that Man is no longer willing to admit that there are things beyond our means, at least temporarily. Look at the riots in Greece and demonstrations by unions in the UK. How did we get so spoiled to the point that we all demand things we haven't earned? And has our generation done enough to inculcate the work ethic in the next generation and the one after that? Answer - NO!

In short, something's gotta give. It may be sooner, it may be later, but someday, we have to produce as much as we consume. Or consume less. Not good for an economy that depends on growth to make the numbers work.


On June 24, we bought 700 shares of FSI International (FSII) at 2.98, a value buy. FSI's stock had taken a hit after providing a subpar earnings report and outlook. On 6/27, we pounced on 200 shares of USA Trucking (USAK) at 10.08 a zero buy. Then with the market recovering, we went into profit taking mode. On 6/29, we sold 200 shares of Conrad (CNRD.PK) at 13.10. We had paid 2.25 for 100 on 2/19/05 and 1.30 for 100 on 4/26/05. Back then, the stock had been delisted by management to sidestep Sarbanes Oxley requirements, rare commom sense shown by public company management. You have to have a single minded success orientation to bury that much ego. Never have I made so much on a pink sheet stock. On 7/1, we sold 100 shares of Worthington (WOR) from the IRA for 22.85. We paid 14.27 on 5/19/03/ On 7/5, we sold 100 shares of Gulf island Fabrication (GIFI) for 32.06. We paid 7.04 on
3/6/09, a gain for which we owe thanks to our friends at Tulane University from where we got the recommendation.

Our periodic disclaimer: Neither redwavemusings nor its author are investment advisors and the securities mentioned on this site should not be considered recommendations since they may not be suitable for readers (or anyone else).

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