.comment-link {margin-left:.6em;}

Tuesday, August 30, 2011


Post Hurricane Irene Post

Lots of people were chuckling here in the Mid Atlantic / Northeast States as Irene passed through that we were overhyped again, that as usual, a mean looking storm had lost its punch over our cooler waters and on Long Island's south shore. But interestingly, hurricanes do more damage via water and flooding than by wind. Often that damage is realized after the storm has passed. So it was with Katrina in
2005. Many forget that New Orleans actually breathed a sigh of relief when the storm passed and the worst fears had not been realized. The real flooding came a day or two later, as did the loss of life and the chaos.

Now we have, admittedly on a less intensive scale, a similar post storm learning experience as Irene floods New Jersey and, of all places, Vermont. Though millions from North Carolina to New England have been seriously inconvenienced by the loss of power and the downing of trees, causing suspension of rail service on many routes, these are minor compared to the stories of whole towns being flooded off the map in upstate New York and Vermont. The death toll is rising accordingly.

In fact, here on Long Island's north shore, the wind wasn't much to speak of until later on Sunday afternoon with the rain already long gone. It was at that time, after we had restored the outdoor furniture to its rightful summer places and done some preliminary cleanup of branches, that a neighbor's rather large tree (well over 50 feet) came crashing through our fence and into our back yard, covering about two- thirds of its length and seriously damaging a row of hedges upon which it came to rest. Not having power for about forty or so hours was annoying, but at least we have it back; many do not.

So all in all, we count ourselves very fortunate. The tree missed our house, and we have no flooding or other damage.

The concern is, will other storms this season be inclined to follow much the same track? That would not be an unusual hurricane season experience, since storms go where they go for a reason, usually having to do with the jet stream and prevailing weather conditions.

One other observation. Hearing Governor Christie on Sunday night providing his update (on our battery powered radio), I couldn't help being impressed by a leader clearly hands-on, clearly in charge, stepping up to be responsible for what didn't work as well as what did. It was a refreshing change from the constantly professorial ambivalence we hear from our incumbent President. However things turn out for New Jersey, and it is far from settled, the Governor has demonstrated he has the chops for higher office. I know he doesn't believe 2012 is his time. He's young enough that his time will come.

The Fed officials keep hinting that QE 3 is still on the table, and that seems to be part of the reawakening of stocks, and quickly ended the correction in gold. To most knowledgeable players, QE 3 means more inflation, more debt, more of what's wrong. However, the folks who will keep buying stocks as long as cans are kicked down the road love the idea.

Those readers who were around to read the posts describing our stock investing formula, or who have reviewed the archives where those posts reside, know that we would be buying now regardless of policy simply because the correction made the stocks on our buy/hold list too cheap, the indication of which is that our cash rose to well over 20%. That is no longer the case so sales will now be mixed in. Meanwhile, we have continued to accumulate other inflation hedges, like gold and TIPS. Historically, you don't go wrong betting against the tendency of governments to debase their currency. Those plays certainly had me sleeping better during our recent sharp correction.

The hurricane did a lot of economic damage in addition to physical damage. I was supposed to attend a convention with about 1500 other attendees in Philadelphia, and the whole thing was cancelled at the last minute. A disaster for the hotel, the city and its restaurants, not to mention the bars!! This is also prime vacation time, through Labor Day. As if the economy didn't have enough issues.

I guess we'll be hearing Irene added to the litany of plagues that have prevented poor President Obama's program from adding jobs. There was the earthquake and tidal wave in Japan, the European bank crisis, Republicans failing to knuckle under to allow the job training handout to unions that Dems are demanding as ransom for passing the free trade agreements with Panama, Korea and Columbia, the debt limit deadlock and the Treasury downgrade, now Hurricane Irene. How are you supposed to overcome all that with mere hope and change?
-------------------------------------------------------------------------------------We will need to deal with two upcoming spinoffs in the near future and decide which parts of the businesses to keep. Fortune Brands (FO) will be separating its liquor distribution from its other businesses, having already sold its Acushnet golf business. My inclination is to keep both stocks on the buy/hold list. IDT is likely to spin off its Genie shale oil energy business from its telecommunications (main) business. It's the energy business that I was interested in, especially the initiative in Israel. So I may keep Genie and sell IDT.

We've been buying into the correction, as per the formula, and after ten straight buy transactions, we bought 6 more since the last post. On 8/17, we bought 500 more shares of Pulte Homes (PHM), a zero buy at 4.85. We were losing faith, but today Pulte was actually upgraded by a brave analyst. On 8/22, we bought 15 shares of the SPDR Gold Trust (GLD) for the IRA at 181.93. On the same day, we bought 100 shares of ITW, a value buy at 42.40. On 8/25, we bought 300 shares of slumping USA Trucking (USAK) at 7.81, another zero buy. On 8/26, we bought 200 shares of Goldman Sachs Preferred (GS.PR.D) for the IRA at 19.73. Yesterday, we bought 200 shares of IDT, a value buy at 20.36. It closed below 20 on Friday, hence the order for the extra 100 shares.

Tuesday, August 16, 2011


Quasi - socialist hell

When Israeli soldiers retaliate against rocket firing or sniping Palestinians in Gaza or the West Bank, it makes the front page of the Times and engenders the wrath of the academic left. But how many of you know that Syrian tanks and gunboats this week shelled a Palestinian refugee camp of 40,000 in the Syrian port city of Latakia, killing four and prompting thousands of residents to flee for their lives? This according to the Wall Street Journal, perhaps the only paper left in this country where the line between the editorial page and the news pages is still respected.

This is a pretty complicated situation. It has been well known for decades that Arab nations are happy to have Palestinians cause agitation against Israel but would never lift a finger to help them themselves. Syria and Iran are known Hezbollah patrons and have some sympathy for Hamas in its rivalry with Fatah. However, right now, the Assad government is under pressure from the Arab Spring rebellion and so they are concerned about the Palestinians in their midst. It's a natural instinct for bullies like Assad to strike at weakness.

The fact is, no Arab country wants Palestinian refugees in their country. This has been true since 1948. The misery of the Palestinians is caused more by their Arab brothers than it is by Israeli's. This does not go down well with Islamists of all stripes, and you won't find the truth in any Arab school textbooks.

One question is, why aren't our own students learning the truth? For that, you have to understand the attitude of our academic progressives and their contempt for our traditional values. Go to the progressive websites and you will see what I mean. Or ask your kids who are subject to anti-American propaganda in high school and college here at home. The garbage they are subjected to, presented to them as fact, is shocking. We have to work full time to make sure they hear both sides. Even, intelligent, skeptical kids have a hard time coming out of our colleges with a balanced view. Imagine how difficult it is for the unfortunately vast majority of our kids who are not well read and lack the chops to challenge their left wing professors.

There was a very good letter this week in the Wall Street Journal, written by a reader, Jonathan Kahnoski, who finally had enough of the overreaction to the concept of American exceptionalism:

What Mary Rosenthal (Letters, Aug 10) calls America's acting "aggressively around the world for over 100 years," others may cite as our saving the world. The U.S. tipped the balance for Great Britain and France in World War I; we forced unconditional surrender on Nazi Germany and Imperial Japan in World War II; we defended South Korea from communist invaders and held the Soviet Union at bay until that last great empire's collapse. When America didn't act "aggressively," millions died in places like Cambodia, Rwanda, Somalia, and the Balkans. No question, America is not and cannot be the world's policeman, but we should remember when we do not bring our strength and values to a situation, people often die by the thousands and tens of thousands.
There is nothing noble or even realistic about denigrating one's own country in the name of giving due respect to other nations. And some of us are quite capable of simultaneously maintaining two thoughts: love of our own country and respect for other countries.

Well said, Mr. Kahnoski. To your list, I would add that we removed one of the real nasty tyrants of the Middle East, Saddam Hussein, and given the evidence of his atrocities that continues to be uncovered, I make no apologies for that. And that has unleashed a chain of events that ultimately will remove Khaddafi, Assad, and the Mullah's in Iran. That is, unless the likes of our current President lose their nerve yet again. One can only hope that voices like the Clinton's and the loyal opposition leaders will overcome the progressive appeasers.

A lot of folks on this side of the pond are having trouble making sense of the riots in the UK, which they assumed was a happy quasi-socialist island with a popular National Health Service, enlightened race relations, and a population well behaved despite a largely unarmed police force. Progressives assume that conservative policies causing higher youth unemployment, particularly among immigrant non-whites, have caused a purely rational reaction. Of course this is bunk. Those actually reading about what has gone down and paying attention will understand that what we are seeing is the logical consequence of socialist entitlement policies, where youth has learned that's what really rational is to avoid work, violently take what you want, and fear no lawful response. Consider these observations (WSJ op ed excerpts):

From Theodore Dalrymple (the pen name of a British physician): The youth of Britain have long placed a de facto curfew on the old, who in most places would no more think of venturing forth after dark than would peasants in Bram Stoker's Transylvania. Indeed, well before the riots last week, respectful persons would not venture into the centers of most British cities or towns on Friday and Saturday nights for fear - and in the certainty - of encountering drunken and aggressive youngsters...The rioters...had a thwarted sense of entitlement that has been assiduously cultivated by an alliance of intellectuals, governments and bureaucrats. "We're fed up with being broke," one rioter was reported as having said, as if having enough money to satisfy one's desires were a human right rather than something to be earned. "There are people here with nothing," this rioter continued: nothing that is except an education that has cost $80,000, a roof over their head, clothes on their back and shoes on their feet; food in their stomachs, a cellphone; a flat screen TV, a refrigerator; an electric stove, heating and lighting, hot and cold running water, a guaranteed income; free medical care; and all of the same for any of the children that they might care to propagate...(Meanwhile), Britain was importing labor to man its service industries. You can travel up and down the country and you can be sure that all the decent hotels and restaurants will be manned overwhelmingly by young foreigners; not a Briton in sight (thank God)...The young unemployed Britons not only regard fixed hours as a form of oppression, they are also dramatically badly educated. Within six months of arrival in the country, the average young Pole speaks better, more cultivated English than they do.

From George Mason University professor Joyce Lee Malcolm: Great Britain's leniency began in the 1950's with a policy that only under extraordinary circumstances would anyone under 17 be sent to prison. But the alternative to incarceration has been simply to warn them to behave, maybe require community service, and return them to the streets. There has been justifiable concern about causes of crime such as poverty and unemployment, but little admission that some individuals prefer theft to work and that deterrence must be taken seriously. Victims of aggression who defend themselves or attempt to protect their property have been shown no such lenience. Burglars who injured themselves...have successfully sued homeowners for damages. In February, police in Surrey told gardeners not to put wire mesh on the windows of their garden sheds as burglars might hurt themselves when they break in. Tony Martin, an English farmer, was sentenced to life in prison for killing one burglar and wounding another with a shotgun during the seventh break-in at his rural home in 1999. While his sentence was later reduced to five years, he was refused parole in 2003 because he was judged a danger to burglars. In 2008, a robber armed with a knife attacked Tony Singh in West Lancashire. During the struggle the intruder was fatally stabbed with his own knife. Although the intruder had a long record of violent assault, prosecutors were preparing to charge Mr. Singh with murder until public outrage stopped them.

And finally, London's City A.M. editor Allister Heath: Fear. Debilitating, widespread fear. The country held ransom by feckless youths...The cause of the riots is the looters; opportunistic, greedy, arrogant, and amoral young criminals who believe they have the right to steal, burn and destroy other people's property...The context was two-fold: first, decades of failed social, educational, family, and microeconomic policies, which means that a large chunk of the UK has become alienated from mainstram society, culturally impoverished, bereft of role models, permanently workless and trapped and dependent on welfare or the shadow economy.
For this the establishment and the dominant politically correct ideology are to blame; they deemed it acceptable to permanently chuck welfare money at sink estates, claiming victory over material poverty, regardless of the wider consequences, in return for acquiring a clean conscience.

If any of this sounds familiar, well, it should. This is where our politically correct elite would take us too. They admire the European socialist model. They would impose the health, unemployment and other entitlements that foster dependency and entrench their political favorites. They believe that it is only they who have the intellectual chops to organize the economic, social and intellectual climate. They are unwilling to allow the rest of us the freedom to pursue our own path. They don't believe that desire for success and fear of failure are necessary to motivate kids to learn, young adults to work, mature adults to stay with and raise families. They don't accept that the world evolved as it did because it works better that way. Allowing it to evolve further will allow mankind to further progress. There are no short cuts. Marx and all the others who believed they could impose their will to accelerate progress only proved the futility inherent in their arrogance.

But don't expect the academic left to ever agree with such common sense. They are the geniuses; they know it all; the rest of us need their guidance. Right.

Meanwhile those of us on the political Right have our own little problem. We've got an incumbent President set up for an electoral defeat and no candidate so far who seems even remotely suitable for the job. Believe me, all we want is someone with Conservative chops who can avoid saying stupid things, refrains from belief in flying saucers and the like, has never advocated secession, witchcraft, converting homosexuals, loyalty oaths, etc. In short, just give us someone who can win. The reason Romney is leading is he's the closest thing to such a candidate, but Romneycare unfortunately calls into question his conservative chops. So here I am, once again in the position of hoping for a deadlocked convention that would draft a hand picked candidate who can win. Someone like Governor Daniels of Indiana for example. This is a quaint, 19th century notion, I'll admit.

The Obama folks are dying to run against a far Right candidate. Their dreams of running against Palin are now supplanted by a desire to run against Bachman or Perry. It won't be them. But who it will be is very much a question, and that's why Romney remains the presumptive candidate, despite his obvious flaws.

The deficit commission has been named and the inescapable conclusion is that they will agree to nothing and we will have across the board cuts, a much less than ideal result. At least the GOP tried to name people capable of compromise, and I have to give credit to Harry Reid for doing the same (as much as it hurts to do so). But the Pelosi picks were brutal, coming from her leadership group and including the noted class warrior Clyburn. At least Boehner resisted naming Ryan, who really wanted in, knowing his lines in the sand could not be breached. Forget about the House Dems; they are incapable of compromise.
Preseason football is only for junkies, the folks who are actually interested in seeing the rookie draftees and free agents play even though most won't actually make the team. This year's pre-season is accelerated because of the lockout, and the usual desire to avoid injury is exacerbated by the inescapable conclusion that the players are not yet in shape. So I hope the gridiron powers that be won't mind if I just ignore these games that don't count. Please wake me up when the bell really rings.


On 8/10, we bought 400 shares of Boyd Corp.(BYD), a zero buy and a sinkhole so far, I might add. The price was 6.02. On 8/12, we paid 24.78 for 100 shares of MetLife Preferred (MET.PR.B) for the IRA. Yesterday, we bought 100 shares of Manpower (MAN) at 41.99, a value buy at these prices.

Tuesday, August 09, 2011


Market capitulation leads to reversal (for now)

Yesterday's wipeout of the stock market was followed, as one might expect, by a technical rebound this morning. However, in a very volatile session even by recent standards, the market seemed to be giving most of the gains back. Ar 2 PM, the Fed released its statement following its meeting, which featured a lengthy and fairly grim assessment of the economic picture, followed by the most unusual statement that the Fed was now defining its extended period for holding interest rates near zero as lasting at least into the middle of 2013.

At CNBC, it took the commentators more than a few minutes to digest the statement. Clearly, the Fed was saying that the economy was so bad, and immediate inflation pressures had eased to such an extent that higher interest rates were not appropriate. On the other hand, the Fed also provided some red meat for inflation hawks by not mentioning anything about QE III, the "fix" liberals anticipated.

The market reaction was initially negative, and sharply so. The Dow went from about an 80 point gain to a 200 point loss in a matter of minutes. As usual, there were differences of opinion about why. CNBC economist Steve Leistman seemed to think that market participants reading the statement's dour economic prognosis were reacting to that. Others may have felt that it was disappointment that QE III was not being initiated. I don't think either is the correct interpretation. In any event, the market then did another about face, rallying over 600 points in the last hour and a half to give us a reversal of about two-thirds of yesterday's carnage. Was the market cheering Fed action, Fed inaction, or was it simply tired of selling. That was one of the suggestions made tonight - when the hedge fund types couldn't drive the market over the edge, they switched to the buy side and gave us the big relief rally.

My own view is that the market at first wasn't thrilled about the continuation of current policy, then thought a second time and realized that at least it wasn't more monetizing in the form of quantitative easing, that we could now look forward to at least two years of fairly stable Fed policy, and that the Fed quite properly kicked the economic ball back to the politicians to solve.

It should also be noted that there were three dissenting votes, mainly from the hawkish side who presumably would like to have kept the Fed's options open to raise interest rates.

No surprise that the administration is the big loser in this chapter, since it is now so clear to all but the most "convinced" progressives (never right but always certain) that what everyone is demanding is real spending discipline. Meanwhile, the administration and the President seem to be obsessed with its political message. This quote from yesterday's message from the President on the convulsed markets has become all too typical: "the package should include tax reform that will ask those who can afford it to pay their fair share." A President trying to position himself above politics would have ended the sentence with the word reform, but Obama cannot resist the impulse to engage in class warfare, which is key to his ill-conceived re-elect strategy. The WSJ editorial writer put it best, quoting a friend: "The Obama administration needs to stop trying to disarm the fire alarm and start trying to put the fire out."

By the way, what would be our fair share? Aren't the "rich" paying a disproportionate share of our taxes already?

As for the S&P downgrade of Federal debt, instead of pointing out that economically, it was really a non-event (simply making official what should have been fairly obvious) Obama and Geithner degenerated into intimidation mode, taking S&P to task for their action and claiming that the downgrade was based on a $2 trillion mathematical error. Today, Democrats in the Senate piled on, threatening to subpoena S&P officials to testify at hearings.

In its ineffectual nod to "job creation," Obama has proposed (or rather, demanded) that the payroll tax reduction (waiving 2 per cent of the employee's social security withholding) from the failed stimulus be extended, along with the 99 week unemployment benefit period. Neither of these items creates a single job of course. The two per cent reduction in withholding does not apply to the employer's share, therefore does nothing to encourage either large or small business to hire. As for the extension of unemployment benefits, I view that as a negative for the economy. Not only does this add to employer costs for funding those benefits, it alters the equation for job seekers, causing them to demand more before taking a job but leading to the further erosion of their skills.

Of course, incentives are not considered by this gang that can't shoot straight.

All extending these measures will do will be to increase the overall Federal debt, hasten the looming insolvency of social security, and discourage able workers from returning to the workforce.

Sadly, Tim Geithner has decided to stay on at Treasury which means he can continue his apparent mission to compile the worst record at that post in over 30 years. He has also become a shill for the administration's class warfare policies, further reducing his almost non-existent credibility.

In happier news, the Mets have reacted to their latest flurry of injuries by engineering remarkable come-from-behind wins against the hot Padres the last two nights. We were in the ballpark for Monday night's rally, and it was really fun.

Yankee fans were on cloud 9 following their very clean win over the hated Bosox Friday night and anticipated winning that three game series. Instead, it was the Red Sox coming up with two devastating wins, as CC was bombed Saturday and Mariano actually blew a save. Rivera also took the loss at home against the Angels tonight.

Baseball is certainly fun in its unpredictability.

As followers of this blog might expect, the market swoon has us in buy mode. On
8/5, we bought 100 shares of Hartford Financial Preferred (HIG.PR.A) at 22.64. On Monday, we bought 100 shares of Flir Systems (FLIR) at the opening for 24.01, of course not knowing how much cheaper it would get over the course of the day.

Thursday, August 04, 2011


Why Prices are Cascading

As expected the debt limit increase passed, with belly aching by both Tea Partiers and Liberals, but with healthy margins. Congress never refuses to write itself an increase in its line of credit, even when it makes a pretense of self-discipline.

An interesting reaction to the denouement has been that the financial markets have voted thumbs down. In my view, I would interpret the market slumps (everything but metals and certain foreign currencies) as a protest against the softness of the savings so far identified. In fact, the markets interpret the deal as another instance of our leaders kicking the can down the road, the Tea Party's success at changing the nature of the conversation notwithstanding.

Of course, one problem with market reactions is that the market doesn't speak specifically or definitively, so anyone can make the interpretation they like. Progressives think the market is upset because "austerity" exacerbates the double dip recession possibility. So one must accept that people of different world views will have extreme difficulty in having a civil and enlightening conversation about these issues. To me, reviewing the liberal blogs is like visiting fantasy land. They revile the Tea Party and consider THEM the crazies. In fact, the Tea Partiers are the only people facing the reality of our crippling fiscal situation. Hence the rise of Cantor and especially DeMint.

After a technical bounce yesterday, the market is resuming its devastating slide today. We opened down a hundred points today and as this is written, trail by about 220. That means we are down about a thousand Dow points in the last ten sessions. This is reflective of a concern about the health and ability of corporations to deal with a significant double dip recession experience. Frankly, the bottom today could be quite a bit lower.

In fact, corporations have largely enhanced their balance sheets since 2008, though I have detected some weakening in the second quarter reports. Though scary, this probably represents a nominal buying opportunity; nominal because I expect the inflation that we will soon experience to offset the price gains when they come in. In fact, it will be inflation that drives stock prices higher once equilibrium is restored.

This is a very difficult time to be on the Federal Reserve Board, though they brought much of this mess on themselves. The fact is that we NEED higher interest rates, and we need to reduce the Fed's balance sheet, not increase it again as they seem to be tempted to do now via QE3. How does the Fed take these actions on the precipice of another downturn? This is yet another reason why the Fed needs Congress and the Administration to cooperate by reducing spending.

Why do we need higher interest rates? Right now, corporations and banks are hoarding cash, as they have since 2008. Would you invest in any venture involving risk at a yield of near zero? How many of you are buying CD's, and providing capital for accumulation purposes, at such low rates? That is what the Fed seems to be asking business and consumers to do. Not going to happen, and the economy will remain dead in the water until a normal risk/reward ratio is restored.

Meanwhile, the Fed continues to prop up banks by paying them much more on their reserve deposits than they have to pay what consumer deposits they can drum up.

Furthering the problem is the regulatory madhouse unleashed by the Obama Administration, and the one they have promised by enacting PPACA and Dodd Frank. That just raises business costs and risk. Other frictions include the failure to submit the trade agreements for approval, a nod to the administration's union buddies.

If all this sounds like a rerun of the Carter Administration, that's because it is. Luckily, we reversed course in 1980 after four years of this kind of nonsense. Let's hope the electorate in 2012 has some of the same common sense.

Back at my computer, and the markets have finally closed, as I expected, down much more, over 500 Dow points and even worse on the NASDAQ - over a 5% loss. This was a day that resembled the bad days of 2008 in that every time the market tried to poke its head up, the big players came in and squashed it. Paul Kangas might call it "mindless selling." Nice earnings reports were greeted with double digit losses. Dividend increases were ignored. It was really a day to lay low.

Maybe now, readers will understand why we have been moving money gradually into preferred's, gold and TIPS. Even there, only TIPS thrived in today's rout, indicating there is more fear about inflation than deflation. More on that in a second.

This was a day that only Bob Prechter and his followers could love. As the Eliot Waves came crashing down around us, one wonders whether Prechter will ultimately be vindicated after all. I would say that he already has, at least economically if not in terms of his stock price predictions. We are certainly well into a decade or two of flat to no growth.

On the other hand, Fed actions to inflate the dollar seem to have thwarted Bob's expected deflation and the attendant slump for gold and commodity prices. In fact, I think there is a good chance the Prechter scenario might have occurred if not for the irresponsible fiscal and monetary policy of the country since 2005 or so. Instead we face an inflationary, no growth period, something like what we experienced during the Carter years. It will be different though; I'm just not yet sure how.

So where does the market go next? We don't know and we don't forecast. We do react to market developments, methodically, unemotionally, and in accordance with our investing formula. I will say that what happened today just doesn't feel as much like a bear market as it does the end (or very near the end) of a short but very sharp correction. There was capitulation today, and that is necessary to go through before we start back up. I just don't see how a bear market starts when all these companies are raising earnings guidance and dividends. That doesn't add up for me.

We did take a beating today along with most other players, one of the worst ever. I suppose we might be down for the year now, or even at best. We have been buying, at what seemed like good prices at the time, but not now. On Monday, we bought 200 shares of American Dental Partners (ADPI) at 11.67. On Wednesday, we bought 400 shares of Pulte Homes (what, again? PHM) at 6.24. We do what the formula says, but these are both speculative stocks that most folks should avoid, particularly in such volatile markets. We'll fish in the preferred pond tomorrow and reassess over the weekend.

Good time for our periodic disclaimer. Neither Redwavemusings, nor its author are investment advisors, and the comments and securities mentioned here do not represent advice nor recommendations. The securities and our investing strategy are likely to be unsuitable for readers (and everyone else, including moi).

This page is powered by Blogger. Isn't yours?