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Thursday, September 29, 2011


(Jewish) New Year's Blogpost

Several years ago, the Mets utterly collapsed down the stretch and missed winning the division and the wild card. The swoon was a bit inexplicable, but to a great degree, it was a pitching staff breakdown, starters and bullpen.

The same thing has now happened to the 2011 Red Sox, who first lost their division lead to the Yankees and then during a simply awful September, where they never won even two games in a row, they handed the wild card to Tampa Bay. The regular season's final night was perhaps the most amazing, when the Rays rallied in the eighth inning from a 7-0 deficit against the Yanks to win in extra frames, (Rivera was held out after pitching earlier in the series), while the Red Sox closer allowed a two run rally by the lowly Orioles in the ninth after striking out the first two batters of the inning! To add to the irony, ex - Ray Carl Crawford fell short of the last line drive hit, a catchable ball.

In the National League, the Cardinals, who struggled all year, emerged with the wild card when the Braves, who seemed to have a playoff spot locked up most of the year, simply stopped hitting the last month of the year and their previously reliable bullpen imploded.

Both the Braves and the Red Sox were playing so badly that it was doubtful either was going to go very far in the playoffs if they had made it, but the nature of baseball is such that a short series is largely a roll of the dice and any team would love to get their chance. So now, in the American League, you have the Tigers coming in playing very well, and the Rays playing their best ball of the season with a pretty good starting staff. The Rangers and Yankees are both too good in too many dimensions to discount. So I think all four teams have legitimate hope, but my gut tells me it might be Detroit's year.

In the National League, the Phillies' starters give them an edge, no matter how shaky their bullpen has been during much of the season. I don't think the Cardinals are a threat but the Brewers certainly are, since they are almost impossible to beat at home. Arizona is a dark horse team, having played so much better than anyone expected and done so consistently. If forced to make a pick, I've got to pick the best pitching staff and that's the hated Phillies.

The team that had a fantastic second half, but too late to threaten a playoff spot, was Don Mattingly's Dodgers. In my opinion, he should be a Manager of the Year candidate. Maybe the Dodgers will return to contention next year. One of the year's feel good stories was the mentoring relationship between Don Newcombe, one of the few remaining survivors of Brooklyn's Boys of Summer, and star slugger Matt Kemp who contended in the Triple Crown categories. "Newc" was 20-5 in 1955 and 27-7 in 1956 as the Dodger ace and was a dangerous hitter with power throughout his career. He frequently pinch hit and occasionally batted 7th in the order when he pitched. One article I remember in Baseball Digest claimed that the ball was dead when Newcombe pitched it and lively when he was hitting it. He later pitched well for the Reds but his career was shortened by a severe bout with alcoholism. He has spent much of his retirement visiting clubhouses around the major leagues to speak to players about alcohol's ill effects.

For a significant segment of his playing career, Don Newcombe was a Hall of Fame caliber player. He has always been a Hall of Fame caliber human being.

A significant downside to the Great Recession of 2008 and the financial crisis that spawned it is that there was never consensus about its cause or even about its economic underpinnings. This has hampered discussion about the form its cure should take and how to prevent the "next financial meltdown." It has also contributed to the low level of political discourse in this country.

Of course, everyone wants someone to blame, a scapegoat, whether it's greedy bankers, the Bush administration, the GSE's, mortgage fraudsters, the ratings agencies, the hedge funds, and on and on. This blog pointed out well before the crisis took hold that the mortgage industry was laden with fraud and that Fannie and Freddie were accidents about to happen. There was no great genius there; the WSJ had been railing about the GSE's forever.

The bankers took a lot of flack because some of them got bailed out (notably not Lehman, Bear Stearns or Washington Mutual by the way) but I always viewed them as victims or collateral damage, with the possible exceptions of the aforementioned WaMu and Goldman Sachs, a true maker of mischief. Bank executives exacerbated their bad PR by taking outsized bonus compensation, another of my pet peeves.

Failing to achieve consensus on the cause of the crisis has led to very dysfunctional cures, among them, the Dodd Frank legislation, the BASEL banking standards, the determination to identify Significantly Systemic Financial Institutions (SIFI's) for Federal Reserve Bank regulation, etc. It has also emboldened those economists favoring Keynesian solutions, never mind that those have been the wrong prescriptions since the the 1980's. A good example is David Wessel's WSJ column today where he parrots progressives like Mark Kleiman in ruing that the Obama stimulus efforts have been too passive.

Many felt that way about the New Deal, and they were probably correct in that instance. Certainly Ben Bernanke's academic work has its grounding in that view. But the 1930's are not quite the same as our current state of affairs. Going into the depression, the federal government's debt load and obligations, funded or otherwise, were nothing compared to today's. Adding more and more debt to the $14 trillion already owed, knowing that at least that much has been promised in the form of entitlements and pensions to government employees, can't do anything but make our economy weaker. The Keynesian mechanism works when debt creates money for investment. Today, we are awash in cash even while we work at the task of deleveraging consumer and business debts. We need to start sovereign deleveraging too. Take on more sovereign debt to create money, pass it back to consumers in the form of payroll tax cuts, and it will be used to deleverage because consumers and businesses understand that when the government comes calling to delever, it means much higher taxes AND inflation. That's why we are in the Japan scenario, a (probably) 20 year no-growth phase predicted by Robert Prechter and others who understand the long range cycles that occur when debt formation alternates with debt liquidation.

As for banks, the requirement that banks hold more capital may seem logical, but in reality, it will do little or nothing to stave off future crises. That's because the nature of banks is to take on risk by borrowing short and lending long. When those mismatches go against banks, they overwhelm any capital that it might be reasonable to hold. Increasing capital to 7% as the Basel agreements propose (over many years) is like building an eight foot embankment to hold back the ocean. When the storm comes, the embankment is nothing but an underwater sandbar.

It's about 30 years since we deregulated banks by first breaking down the barriers between thrifts and commercial banks. It didn't take long after that to bring on the S&L crisis, and a huge bailout. Then came Gramm, Leach, Bliley, breaking down the barriers between banking, investment banking and insurance. The added risks in the system allowed by GLB led directly to the 2008 debacle. Dodd Frank can be seen as a partial repeal of GLB, but it is at best a halfway measure that purports to leave GLB in place. So now we will have the worst of all worlds, a purported free market in financial services where the Gullivers are tied down by the Lilliputian regulators.

I am not really advocating a return to New Deal regulation a la Glass Steagall, though the stability it brought to the system allowed other businesses and industries to thrive. But I am saying that if banks are going to be free to take risk, indeed, if they have to to attract capital, it is a mistake to tie them down, and a bigger mistake to bail them out, or somehow achieve an orderly resolution when they fail. In a true capitalist system, failure must be allowed, and it has to be painful; otherwise moral hazard takes hold.
An interesting column in today's WSJ posed the question of why Herman Cain's candidacy shouldn't be taken more seriously. Indeed. Mr. Cain is a solid businessman with an outstanding record of achievement. What a role model he would be and what a boon for so far laughable attempts by Republicans to woo Black voters! If you haven't noticed, there is a little boomlet underway for him, as he and Paul have been the primary beneficiaries of the deflation of the Perry candidacy (predicted here 10 days ago). I still think Romney is the likely candidate, and don't think Christie is ready to run (though it seems to be his for the taking), but wouldn't it make a lot of sense to consider Cain for second spot on the ticket?

On 9/19, we bought 100 shares of ING preferred at 17.94 for the IRA (ISP), reaching the maximum number of shares we want to hold in that one. On 9/21, we bought 100 shares of Stiefel Financial (SF) for the IRA at 27.42. On 9/23, we bought 200 shares of our longtime trucking fave, Knight Transportation (KNX) at 13.07. On
9/26, we bought 50 shares of AES Preferred (AES.PR.C) at 48.49. Finally, yesterday, we bought 200 shares of Alcoa (AA) at 10.50. All of these transactions were in the IRA.

One of the oldest of market axioms is to "sell them on Rosh Hashanah and buy them back on Yom Kippur." Like the Super Bowl indicator, there is no logical reason for this, but it does seem to work more often than not. Obviously, I prefer to follow my own formula. This has been a really bad quarter for the market, and most players on the long side are down meaningfully for the year. Lets hope that once we've atoned for our many sins, we can be redeemed, financially as well as spiritually.

Monday, September 19, 2011


Class Warfare Redux

After the lead balloon "jobs plan," today comes the deficit plan, otherwise to be called "class warfare redux." Now, in addition to allowing the Bush tax cuts to expire for those couples in the $250,000 and up income range, Obama suggests eliminating the lowest dividend and capital gains rates for those in the million and over bracket. Presumably, by emphasizing the latter, he figures we might abide the former. But the GOP will never OK severing the higher income Bush cuts from the middle income cuts, and that means neither will happen.

As for raising the tax on dividends, well Ok, it was ordinary income not so long ago, I can live with that. Raising the tax on capital gains (presumably this is the Buffet tax, since gains constitute most of his income), that's just stupid economics. First of all, it won't raise any revenue, as has been shown many times before. Second, it murders stock prices, which only reduces growth, revenue, everything all good things.

The one thing I agree with the President about, as readers know, is ending the tax favored status of hedge fund managers' carried income.

If you want to increase capital gains rates, and increase the amount of double taxation of corporate profits in the system, you just have to adjust those gains for inflation. In fact, as an investor, I would gladly exchange the low rate for inflation indexing. Most of my taxable gains would disappear.

As for the rest of the plan, all of the savings were phony, from the unidentified cuts to be "found" by the special deficit committee, to the projected military wind downs, to the always rescinded provider cuts for medicare. Every day, this President sounds more desperate, more repetitively political, and just inept. He should be an easy mark in 2012. The recent Republican wins in the two special Congressional elections are all the evidence you need to know that the Dems' downward spiral continues.

But Republicans still need to settle on a viable candidate. I have said for a while that their most capable and electable prospect, Governor Daniels of Indiana, seems determined not to run. Of the current crop, Governor Perry has the lead, but I don't believe that will stand up. In baseball terms, we would say he has little upside. He can add the Bachmann voters, and Palin holdouts if any are left, but I think that's it. So of those actually running, I am more and more inclined to join the Romney bandwagon, warts and all. I think he's electable, he's reasonably conservative without being crazy (he was the McCain alternative in 2008 in case you forgot), and he will bring good and capable people to Washington with him to actually run the show. I might be inclined toward Huntsman, but he can't seem to gain any traction, and it's actually getting late in the process.

Of course, if you still want Daniels, or Christie, or whoever, you can hope for an old fashion convention deadlock. It would make for great TV, but it's been a long time since that happened.

What can be done about the Euro bank and sovereign debt crises? Interestingly, I don't think the "richer" Euro countries can solve it on their own. If Germany bails out Greece, who bails out Germany in 5 years? My instinct tells me the solution does not lie there.

An interesting aspect of the world financial situation is that despite the teetering governments and banks, there is an awful lot of cash sloshing around idle. Some of it is in corporate accounts; some of it is in investors' cash allocations. Much of it is in the BRICS countries and others developing quickly.

The salvation of insolvent sovereign funds and undercapitalized Euro banks is, in my opinion, to simply pay up for the cash they need. For governments, they need to pay enough interest to make the risk of loaning to them worthwhile. It might also be possible to post collateral in the form of hard assets they control but which yield no income. That could mean land, buildings, rights, licenses, etc. For banks, I think they should seek equity financing. They will have to give up some control, but having Chinese or Brazilian partners is preferable to being forever under the gun.

If the European markets are so attractive, why wouldn't the BRICS countries and well heeled investors from all over the planet be interested in investing in them? But they will have to give up some of their socialist tendencies and restore free market opportunities. Same here. Obama's socialist lurches just have to be reversed in the next administration.


We went to the Jets game yesterday, and it was a love-in as the Jets enjoyed a rare laugher. This after being so fortunate to escape the Dallas game. In that one, it looked like 2010 in that the Jets were dominated on both lines of scrimmage only to win the game thanks to their special teams and turnovers. Yesterday, at least the Jets defensive line held its own. The offensive line continued to struggle, especially at right tackle where there hasn't been much attempt to even impede the other side let alone block anyone. Actually, the game was won largely by the Jet secondary.

As much fun as MetLife Stadium is, I think the fans enjoy tailgating before and after the game more. There is even a section of the parking lot devoted to huge campers! And everyone was in green (except the Jets themselves who wore throwback NY Titans blue). It used to make me laugh to see St. Louis Cardinal fans all in red, but wearing the team colors and uniform shirts has become the routine for fans at pro games.

At Birdland Wednesday night, we were treated to the increasingly rare appearance of trombonist Wycliffe Gordon appearing with the Louie Armstrong Centennial Band. Increasingly rare because Mr. Gordon has been leading various groups at venues all over the tristate area recently.

The highlight of the show was when Wycliffe was featured on Basin Street Blues. He played a chorus, then sang, moving in mid-chorus to accompany himself on the piano (with one hand while holding the mic in the other), then a two handed solo (accompanied by lone drum) then a scat solo. Returning to the main mic and resuming his trombone, he played it out while the rest of the band (laying out) looked on in delighted awe, and the audience cheered and sang along. I've said it before - Mr. Gordon is quite simply a force of nature.

The jazz scene in New York is heating up this week with a Coltrane salute at Birdland, Helen Sung at Smoke, Brandon Wright at Iridium, and many other venues worthy of your money and attention. Next week, Bill Charlap brings his trio to the Vanguard. And another of my favorites comes to Birdland in October, the Nicholas Peyton Sextet.

We are still buying. On 9/9, we bought 200 shares of SEIC, a zero buy, at 16.06. On 9/12, we bought some more TIPS for the IRA, 20 shares (TIP) in the ETF at
116.40. On 9/14, we bought 1600 shares of Hauppauge Digital (HAUP), a very risky value buy at 1.33. Don't try that one at home. On 9/16, we bought 50 shares of Honeywell (HON), a zero buy at 46.99. All of these transactions were in the IRA. Remember, all securities and transactions are recorded here, but they are not to be considered recommendations, and this blog does not dispense investment advice.

Thursday, September 08, 2011


The Jobs "Plan"

The President asked Congress to invite him to speak to a joint session about jobs in hopes of preserving his, and Congress obliged after a little spat concerning the date and time. No matter about that, the question was what kind of plan would the President roll out. It soon became obvious there was no plan as the White House spent the last several days lowering expectations. In the end, the President rolled out a convoluted series of recycled proposals rather that any kind of cohesive plan, but included a couple of wrinkles, a nod or two to the Right, offset here and there by a nod or two to the Left. He did return to a more energetic and animated delivery which may give his likability number (already pretty high) a bit of a boost. And there were a couple of new ideas that amounted to reality checks concerning what has a chance to pass versus what doesn't. There was a nod to American exceptionalism, American individualism, an admission that A. Lincoln was a Republican, all proving that someone in the White House has at least been skimming the WSJ op ed pages.

In the recycled category, there was stimulus (round 3 or 4?) type public works stuff that states used to do (schools, roads, etc.), extended, even deeper payroll tax cuts (the taxes that fund our already under water entitlements), and extension of the extended 99 week unemployment benefit. I'm not sure how that last one creates any jobs. In the new wrinkle category, we have payroll tax cuts for employers (something that might actually help), tax credits for hiring the long term unemployed, (a stretch for most employers but modeled after a successful Georgia program),and refinancing help for under water mortgages (good luck on that one). In the cynical category were a bunch of recycled ideas, none more phony than the pushing of the free trade pacts which the administration has refused to submit to Congress for approval until Congress commits to the job retraining program the administration wants. Of course, that money would go to the Dems' union friends with the understanding that a good portion of it will be recycled back to the Democratic campaign committees. So the House is not going to go for that. This doesn't stop the administration from blaming Congress for failing to ratify agreements it won't submit!

The cynicism doesn't end there of course. There was the nod to unions and environmentalists when the President promised not to expand trade with partners who don't play by the rules, meaning the US Left's ideas of labor and environmental rules. There was the President taking credit for deregulation on the basis of the administration's purge of completely outmoded regulatory language long not enforced and on last week's decision not to implement the EPA's ludicrous smog standard, hoping to deprive Republicans of an easy campaign issue. Meanwhile, the EPA, the FCC, the FTC and others continue to torture industry and eliminate jobs with unnecessary regulatory burdens. And of course, not word one about rolling back PPACA and Dodd Frank, the two biggest job inhibitors of all.

In fact, there was this entire paragraph of business bashing:

"But what we can't do — what I won't do — is let this economic crisis be used as an excuse to wipe out the basic protections that Americans have counted on for decades. I reject the idea that we need to ask people to choose between their jobs and their safety. I reject the argument that says for the economy to grow, we have to roll back protections that ban hidden fees by credit card companies, or rules that keep our kids from being exposed to mercury, or laws that prevent the health insurance industry from shortchanging patients. I reject the idea that we have to strip away collective bargaining rights to compete in a global economy. We shouldn't be in a race to the bottom, where we try to offer the cheapest labor and the worst pollution standards. America should be in a race to the top. And I believe that's a race we can win."

So we'll all be broke but at least we can wear the blue ribbon for winning the race to the top, whatever that is.

This is typical of Obama's rhetorical style. Giving with one hand while bashing with the other, and letting the listener try to figure out where he's really going. But after this long, we know, and in the end, he makes no one happy because he doesn't deliver results.

The biggest howler of all was Obama's claim that this "program" is paid for. How? First, the usual unspecified, and probably unachievable medicare/medicaid cuts, such as those that came with PPACA which have already been rescinded. Then, there is the request that the deficit commission find the rest of the cuts needed. This is after the President and his Dem colleagues negotiated a reduction in the cuts that the commission is committed to. So they'll give the R's the cuts they originally wanted in exchange for the new jobs stimulus. Only in Washington.

Republicans will find a few things in this hodgepodge that they could and should move on, such as the Georgia proposal, the free trade pacts (if they are ever submitted) and tax reform in 2012 or 2013. But if anyone actually believes this program is going to change our jobs picture, they don't have the slightest idea where jobs come from, which is the same problem the President has.
I found it amusing that Lauren Bush decided her new married name would be Lauren Bush-Lauren (and not simply Lauren Lauren). It reminded me of an old Mad Magazine feature where they would dream up celebrity marriages where the women would wind up with funny names, such as those that rhymed. But contrary to popular opinion, those Bush's are just too sharp.
The post office, which is only a quasi-governmental operation, is broke anyway, to the surprise of ...no one. Frankly, the business model has been made largely irrelevant because of e-mail and electronic bill paying. The talk is that Saturday mail deliveries will be curtailed, as well as a lot of local post offices. This does not go nearly far enough in my opinion. I would reduce mail deliveries to three days a week, giving businesses the option to ride on over and collect their own mail as often as they like from their P.O. Box or local post office. Frankly, Monday, Wednesday and Friday would be plenty of deliveries for me. Or even just Tuesday and Friday. Whether I get my solicitations and junk catalogues a day or two later means nothing to me.
Sunday is the tenth anniversary of 9/11, and I have studiously avoided reliving the day on TV as many of the networks would have us do. For those of us in NYC that day, and the weeks and months that followed, even if we weren't downtown, the memories are still fresh enough, thank you. We still cherish the memories of the friends and acquaintances we lost for no good reason, and worry about the health of those first responders and ground zero workers we know.

Tonight we hear that Homeland Security has alerted the NY and D.C. police officers about specific credible threats for the next few days. That actually figures. Lets hope that the preparations and security procedures implemented will prevent any incidents.

On 8/31, we removed our Royal Bank of Scotland preferred shares (RBS.PR.E) from the portfolio. We sold 1200 at 10.71, a capital loss of about $8,600, some of which we had recouped in the form of dividends over the years. Still, you don't buy preferred's to lose money. Nevertheless, RBS has suspended its dividends, and depends on the UK government for its solvency. It was a good time to get out.

On 9/2 we resumed buying. We bought 100 shares of Shaw Group (SHAW), a zero buy at 22.57. On 9/6, we bought 100 shares of Hartford preferred for the IRA (HIG.PR.A) at 19.62, which seems like a nice price. Yesterday, we bought 1100 shares of FSI International (FSII) for the IRA, a value buy at 2.04.

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