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Friday, December 30, 2011


2011 Heads for History's Ashcan

With Sears / K - Mart announcing store closings following yet another moribund Christmas performance, it's time to repeat (in our typical "I told you so" fashion) our take on the company and its owner/hedge fund investor Eddie Lampert. He's a Cramer fave and bought control of Sears based on financials (it was allegedly undervalued). You have to be careful with this. Sometimes companies, especially retailers, are undervalued for good reason.

Now I have respect for Cramer and little doubt concerning Lampert's genius as an investor/financier. Unfortunately, those talents have little to do with operating a business. Sears problem was not so much overspending as it was under-marketing. It simply had an outdated business model that is only getting worse. Adding K-Mart compounded the felony, taking a discounter that was being run over by WalMart, and adding it to a failing business. So all the while Cramer was touting this stock based on his friend's capabilities, we were warning our readers to stay away. A more aggressive posture would have been to short the stock.

This just proves that even as smart an investment advisor as Cramer can have blind spots. He also would advise you to do your own research, and I warn you not to take any advice from this space for the same reason. I can't think of a better illustration for taking my, and everyone else's, disclaimer seriously. There are no guarantees. Period.
Speaking of CNBC's very smart commentator/analysts, there is none better, in my opinion than the Chicago based commodities/bond follower, Rick Santelli. He is extremely entertaining, like most of the station's analysts, which is why the station is so much more watchable than either Bloomberg or Fox Business. But like many folks who follow the bond markets, Rick is so clear-eyed and skeptical that he is a welcome counterweight to most of the stock analysts who are biased to the bull side. Rick's honesty and courage to say (or even shout) what he thinks got him in trouble with the Obama Administration in its early days, but he has been totally and consistently vindicated.

One of our most loyal readers sent me an article from the NY Times written by one David Kocieniewski pointing out an apparent loophole for corporations in the tax treatment of stock options allegedly costing the Treasury gobs of money, according to geniuses like Michigan's Senator Carl Levin (who never saw a dollar he wouldn't tax). This has come up because the options issued during the 2008-09 market collapse are starting to come up for exercise and executives are realizing windfalls while their employers are realizing outsized deductions. For example, the author points out that Sirius CEO Mel Karmazin's options exercisable at $0.43 now purchase stock trading at 1.80. Sirius allegedly gets a deduction at the higher price when he exercises.

So let's set the record straight, since the Times suffers from its chronic inaccuracy as well as its anti-business bias. First, there is no information regarding whether these, or any of the options discussed in the article are qualified or non-qualified, which makes a huge difference in the tax treatment. But let's put that deficiency aside and talk in general about non-qualified options, which most are. When the options are granted, it's a non-taxable event, though the company reports a non-taxable expense for the "value" of the options granted, which is the number of options times the market price of the shares. Never mind that this is not really an expense at all to the company, since no cash changes hands at that point. This accounting treatment is the result of a galactically stupid law passed some years ago to try to get companies to issue restricted stock instead of options (I'll give you two guesses which party wanted that law), never mind that any executive in his right mind would actually prefer to get restricted stock.

When the options become exercisable, the executive pays ORDINARY income tax on the increase in price above the strike price, even if he keeps the stock. So this is hardly a sweetheart tax arrangement for the executive. The corporation gets a deduction for the amount of income the executive takes (not for the price of the stock as Mr Kocieniewski misleads his readers). This makes sense since compensation is supposed to be a neutral taxable event. The corporate payor's deduction is supposed to be equal to the employee/executive's reportable income. There is nothing unfair about the tax treatment.

My gripe, which was printed in this blog back in 2008-09 (and someday I will print all these posts so I can direct you more specifically to our archives) was that the collapse in stock prices was setting up executives for these huge paydays at the expense of the public stockholders. Since companies determine the number of options to give out based on a percentage value of salaried compensation, and strike prices were depressed, there were outsized awards being made, which I pointed out would dilute the holdings of public shareholders and reduce earnings per share. And this is precisely the result that has the Times in a lather. But it has nothing to do with taxes.

In fact, to a great degree, this is the unintended consequence of liberals' ill-fated attempt to deal directly with outsized executive salaries. They decided to pass legislation denying ordinary corporate deductions for salaried incomes above $1 million, forcing companies to compete for executive talent by compensating them in other ways than through salary. The result is outsized stock awards, either through options or restricted stock, which from the point of view of the ordinary investor is worse than salary. Forget about aligning executive and shareholder interests, we don't need your help Mr. Levin. Can't you ever leave well enough alone?

Now Levin has the bright idea that he'll deny the deduction for compensation over $1 million however it's paid. This is typical Democratic class warfare, "fairness," jealousy, whatever you want to call it. It won't work.

Investors need to stand for their shareholder rights and not be victims, and not depend on Congress. In 2008-09, it was clear to many of us that we needed to vote against certain incentive compensation awards, and I did so. If you don't like what your company is doing, sell the stock. I will say, as a Sirius holder, Mel is worth every dollar he's been paid, and I felt that way then and I feel that way now. The company was all but dead when he came in.

Freddy Cole's show at Birdland was so memorable. If anything, he is better than ever, and I bought his CD's after the show, and he signed my box. His working band is wonderful. When he sang The Christmas Song, made famous by his older brother, I doubt there was a dry eye in the house. But all the songs were excellent, and I especially loved I Was Telling Her About You, written by Bill Charlap's father.

On Tuesday, after a hard (and reasonably successful) day at the bridge table, I went to hear the Birdland Big Band and stayed for both sets, each one well over an hour. So it was a late night but a very satisfying one. The Band was in top form, and I even got a ride home from NY trumpet legend Glen Drewes.

On 12/21, we bought 300 shares of IDT at 9.35, a zero buy. On 12/23, we sold 600 shares of FSI International (FSII) which has had a nice run. We got 3.63 this time for shares we bought on 9/8/09 for 1.01. On 12/27 we sold 100 shares of Pfizer (PFE), a nicely recovering stock, which is now an income stock rather than a growth stock. This was in the IRA so the loss won't help with this year's tax return. We got 21.77 for shares we bought for 41.20 on 12/11/01. Recent purchases have been at a much lower price. On 12/29, we bought 100 shares of Protective Life preferred (PLP) for 23.30 for the IRA. Today, we sold 100 shares of Lancaster Colony (LANC) out of the IRA for 70.48. We paid 35.85 on 3/12/03. That's almost a 9% compound return. They can't all be gems.

We'll summarize the year for the Redwave portfolios after we get the brokerage statements and crank in the December dividends.

Happy New Year to all our readers!

Monday, December 19, 2011


A Little Pre-Holiday News

News and politics are breaking out all over. Let's get right to the action.

Item: Kim Jong II or whatever his name was suffered a fatal myocardial infarction which the North Korean propaganda machine attributed to "overwork." Well at least we don't have to worry that Obama will suffer ill health because of workaholism. Perhaps too much golf or too much campaigning, but not too much work. But anyway, getting back to Kim, he succeeded his evil father who led his country to a high position in the arms race but a very poor position in the food and beverage race. The younger Kim did the old man one better, increasing the country's nuclear capability while even more of his pitiful subjects sought refuge in places like China in search of something to put in their stomachs, anything in fact. It wasn't as if they were dying for Szechuan specialties or lobster Cantonese style. Now Kim's son is trying to consolidate power, which may be more difficult than we expect, since he is under 30, was perhaps civilized by some Scandinavian schooling, and he looks like Korea's answer to Jonah Hill.

All of this might be amusing, but then you have the Obama Administration pleading for stability. This administration, the latest in a long line of U.S. Presidencies that have made no progress at all in dealing with North Korean hostility, is more concerned with keeping the dictatorship in firm control of the country and its weapons than it is with having anything like a tilt to democracy in the North that might enable eventual reunification with the South. Reminiscent of the initial U.S. reaction to the Arab Spring right? And look how well that's working out in places like Egypt.
Item: The U.S. military evacuates Iraq, declaring victory, but leaving...a mess. How long do you give the current coalition government there, months, weeks? Obama was advised by military leaders to keep 20,000 military personnel there, but he decided 3-5 thousand would be enough. When Malicki determined that small a force would be worthless and merely provide a target for the country's nihilists, he told Obama to forget it and denied them immunity, whereupon Obama went with the total pullout.

It's nice to have the guys and gals back home, but why lose the peace after the noble sacrifice of over 4,000 U.S. lives and many more wounded? In the end, the war there will have been seen to have been a necessary strategic move, not the "war of choice" depicted by Democratic propaganda. Today's WSJ had an excellent op ed making just that point. Let's hope voters remember that Obama inherited a good situation in Iraq (unlike the economy) including a working surge and a successful occupation. He frittered it away trying to prove a political point and the ensuing mess will be his.

Item: the extension of the payroll tax cut for two months achieved a consensus in the Senate, but the GOP backbenchers seem determined to upset such a stupid deal. What the heck is a two month extension designed to do other than give Obama another bludgeon to use against Republicans for the State of the Union? For my money, I'm against both the payroll tax holiday and the extension of the 99 week unemployment deal. Though I am for the Keystone pipeline, I don't see what accelerating Obama's decision to scuttle it is going to do. Do people even notice the 2% payroll tax savings they have been getting and would they miss it when it's gone? Of all things to cut, why are we cutting social security funding, when the system is actuarily insolvent already?

The 2% is not going to create a single job. If you want to create jobs, give the 2% cut to the EMPLOYERS out of their share? But I guess that would make too much sense.
As for the unemployment extension, what that is giving us is lots more people out of work for so long, they can't get back into the work force. That is hurting people, not helping them.

Item: Countdown to the Iowa caucus: It's interesting how quickly the air went out of Newt's boomlet, like Perry and Cain before him. Suddenly Paul is in the lead, and Romney is second, in a state where he has paid little attention. In fact, my belief is that the Romney juggernaut is about to roll, and when it does, the nomination will be sewn up quickly. As Romney endorsements even from Tea Partiers like Nikki Haley come in, Republicans are getting on board, reveling in Romney's leadership qualities and holding their nose concerning some of his middle of the road policy prescriptions. But above all else, Republicans want to win, so Romney should be their choice. That's the way the nomination process should work. It was less awkward in the days when party regulars simply picked the candidate with the best chance, and before every state had a primary to pick the delegates.

One more thing - Michelle Bachmann was interviewed on Meet The Press yesterday. Like many politicians, she is a shameless promoter, but she is intelligent and much more informed than say, Sarah Palin. But I just can't listen to her anymore. She has the most irritating monotone. It's unfortunate but she really needs public speaking lessons. It's bad enough to be her constituent, but can you imagine what it must be like to be her husband?

By the way, a good role for Newt in a Romney Administration would be HHS Secretary. Whether ObamaCare gets repealed or not, the new Administration will have a pretty free hand in reshaping (i.e.fixing) it, and Newt has lots of good ideas along that line.
Item: Today's WSJ lead editorial had a field day poking holes in the premature rush to judgement on the impact of fracking on Wyoming well water. In fact, it appears that Wyoming water has always tasted and smelled like it does, at least for the last 50 years, and in any event, there does not appear to be any possible effect caused by fracking. The science behind the allegation turns out to be complete junk and is easily debunked, bringing back memories of global warming e-mailgate.

Environmentalism has become a secular religion among its adherents, and their absolutism is both repugnant and economically disastrous for those whose jobs they put at risk. I can understand how such zeal leads adherents to make claims that ultimately can't be supported. When you add to that the anti-corporate and anti-development agenda which is the true cause of too many in the environmental movement, you have a recipe for mischief.

Worst of all, none of us want to see the environment seriously damaged so when true environmental scientists lose credibility as a result of these specious or exaggerated claims, the environment does become truly at risk. That is the real tragedy.
The Cuomo tax solution in New York was a truly special example of political magic. Right now, Andrew is in "can do no wrong" mode. So when he resisted extending a temporary tax increase on upper income payors, only to put forth a smaller one that somehow reduced the budget deficit (which assumed expiration of the surcharge), he was hailed on all sides. So I will give him his props, but let's maintain perspective here. New York is still one of the country's most heavily taxed states, and the extension of a slightly smaller tax increase will do nothing to revitalize the economy here. Businesses will continue to flee, and so will high earners, senior citizens, and recent college graduates. Though Cuomo's administration talks a good game about job creation, its tax and regulatory policies do the opposite. Sounds like a certain incumbent President. The Governor's honeymoon will end too.

Following up our last post, I did see Roy Haynes at Birdland Thursday night (I know I had him penciled in for Friday night for our fictional vacationer), and the show was terrific. I did meet a young couple there on a brief vacation from Richmond, so they were "beneficiaries" of some of the research I had done for the post, since I was able to inform them about who else would be in town and about Bar on 5th.

December 15 was the 60th anniversary of the opening of the original Birdland (then on 52nd Street) so it was fitting that Mr. Haynes was headlining. The opening night headliner in 1951 was, of course, Charlie "Yardbird" Parker, for whom the club was named. His drummer that long ago evening? Roy Haynes.

We have had a busy ten days on the buy side, while the market has been in full scale retreat. On 12/9, we bought 100 shares of Hartford Financial Preferred (HIG.PR.A) at 19.87, for the IRA. On 12/12, we bought 200 shares of IDT at 12.82, just in time for lousy earnings to be released and for the price to tank even further. On 12/14, we bought 300 shares of Genie Energy (GNE) at 7.61. On Friday, we picked off 15 shares of the GLD ETF since gold has been tanking too. We paid 154.52 to put these shares in the IRA. Finally today, we bought 1600 shares of beleaguered Frozen Food Express (FFEX), a very risky purchase at 1.28. Don't try that one at home.

Time for the periodic disclaimer: Neither Redwavemusings, nor its author, is an investment advisor, and the securities and transactions mentioned here are for the record only and should not be considered recommendations as they are likely to be unsuitable for any other man, woman or child.

Thursday, December 08, 2011


Your NYC Holiday Jazz Vacation

You've got two weeks of time off to burn before year end, and as a devoted musings follower, you've wondered what's so great about this New York jazz experience, so you decided to plan out a vacation in the Apple, and though you know there will be great food and the tree in Rockefeller Center and New Year's Eve, the main idea is to immerse yourself in the jazz club scene and decide whether it's for you or if it's just a defect in the Redwave personality. You know it's going to be a tad expensive and so pennies have been saved and a mid-price midtown hotel room reserved(maybe even the new Intercontinental across the street from Birdland), though mid-price in Manhattan sounds palatial anywhere else, especially during the holiday season. But now that's a sunk cost, so let the fun begin!

You'll fly in on Friday, the 16th, take a cab to the hotel, dump the stuff (OK, you can take a moment to unpack and actually hang up the clothes people will see) and then, as per RW's instructions, get to Birdland and pick up a Hot House. Or better yet, you can rely on the below guide to where to go on your jazz vacation!

Actually, it's your good fortune to have picked one of the greatest weekends in recent NYC jazz history to start your tour. Among the headliners this weekend are the venerable yet still spry legendary drummer Roy Haynes, and three outstanding pianists, Cedar Walton, Danilo Perez, and Bill Charlap. And trombonist Wycliffe Gordon is leading a group uptown. Better get busy.

No reason not to start at Birdland, New York's friendliest and my personal favorite jazz club. And no better way to start your tour than with the early show there (reservations all but a must, unless you get there early and grab a seat at the bar), the Birdland Big Band led by Tommy Igoe. Their first set starts at 5:15 and they will play until 7. You will hear two sets and wish for two more. Believe me, no other big band ever sounded like this. The Birdland Big Band consists of Broadway pit players who are absolute pros and love to unwind a bit before their regular gigs by playing some jazz. But this jazz is funky, or its Latin, or its brassy, or its balladic, but it's always sublime and driven by the drummer/leader Tommy Igoe. There will usually be a guest star too, often a guitarist or a percussionist. There will always be a full house, and this is a house that Tommy just owns.

Meanwhile, you will be served by friendly bartenders and waitresses, dressed tastefully in black (as is the band), and all seem to be enjoying the music as much as the customers do. You might as well have dinner while you're at it; order the catfish or the authentic Cajun style seafood gumbo or jambalaya. For something lighter, the catfish strips, fresh cut vegetables, or the crab cake sliders are recommended. There is no beer on tap, but the Brooklyn Lager is a winner, and the half bottle of Savignon Blanc is a value buy.

Since you're tired from your travels, you had thoughtfully reserved a table seat for Roy Haynes and will stay right there for his first set. You won't be sorry. He's a living legend, and he'll have three very good young players with him to complete his working quartet. At some point, Roy is likely to get up with his sticks, prance around the drum set, and then play the seat of his chair for a while. You won't believe how great a chair can sound in the hands of a master. When the set's over, listen to the announcement to see if you will be allowed to remain for the second set without a new music charge. Since it's Friday, you will probably have to leave, and then it's decision time. There's always bed if you're out of gas, but if you've got the energy you can take a cab ride or walk over to the Setai Hotel on Fifth Avenue and go to Bar on 5th and catch Antonio Ciacca's last set in one of NYC's most intimate and comfortable settings. If you really dig pain, take a cab to Small's for the Steve Davis Quintet and the after hours group. You can sleep in on Saturday.
Saturday afternoon would be a good day to go to Rockefeller Center and see the tree and get that out of your system. Then it's a case of who to see. Personally, addicted as I am, I would start off at Jazz Standard so I could have a barbecue dinner and see Danilo Perez Trio's 7:30 show. The pulled pork sandwich is usually a good choice. This is a decent size room but you have to watch the sight lines. Actually, the area up near the bar is not bad. Then I'd get a cab uptown to the Lenox Lounge to see Wycliffe Gordon's 10:30 set. Gordon is one of the top trombonists around, but lately he has been playing more and more trumpet to very good effect. He is also a great singer/entertainer in the Armstrong tradition. If for some reason, you can't get a reservation for Wycliffe, go to the Kitano Hotel on Park Avenue and see trumpeter Jeremy Pelt playing with the Mike DiRubbo Quintet. This is a very small room but the wine selection is to die for, and the music sounds just great there.

For Sunday, there are any number of places to have jazz brunch, including the Kitano where the Tony Middleton Trio plays in the Garden Cafe or even Docks, the seafood eatery. But the hot ticket Sunday night is to go downtown to the Ear Inn on Spring St. and see trumpeter Jon-Erik Kellso and the EarRegulars.

For Monday, the 19th, it's back to Jazz Standard for the Charles Mingus Orchestra. Chances are, you will be allowed to stay for both sets for one music charge. If not, there's always Bar on 55th where tonight, you've got Ayako Shirasaki. Tuesday, the
20th will be a perfect night to go to Sofia's in the Hotel Edison and enjoy the unique show that is Vince Giordano and the Nighthawks. This would be a good night to wear your dancing shoes. Vince plays arrangements from the 20's and 30's and you will be amazed at how much you will enjoy them. There are always guests too. You might want to eat early somewhere else, since the food at Sofia's is very pedestrian Italian. For carnivores, I recommend Keene's Chophouse on 36th. You can walk off dinner getting to Sofia's if the weather is decent. If you're still not sated, take a cab to Dizzy's in Columbus Circle or to Small's in the Village for an after hours set.

By this time, you should be a converted jazz fanatic. But there's a long way to go and some of the best is yet to come. For Wednesday, the 21st, I would go back to Birdland for Freddy Cole's quartet. It's the best night to stay for both sets, and Freddy, like his brother Nat King Cole, is a terrific pianist and very entertaining, though no one could sing like Nat and Freddy's singing style is quite different. The 22nd is your night to go to the Vanguard and see Cedar Walton. You'll need a reservation. The Village Vanguard is a decent size room with classroom seating in the middle, and strange side seating as well. I like to sit at the bar, where the sight line is only so-so but I don't feel so claustrophobic. Treat yourself to a restaurant meal, for which you will have time since the first set is at 9 PM. If anyone at the Vanguard offers you a hamburger, check the expiration date - they haven't served food in decades. If the weather is good and you decide to walk to the Vanguard, that's fine, but be prepared for some street scenes that might never occur in say, Des Moines.

The 23rd ushers in another weekend, and I would definitely reserve a seat in tiny Smoke up on Broadway. Take the 1 or the A train and you will find yourself in a very nice West Side neighborhood, with great bars and eating places. Smoke is just terrific, a very nice bar, tables to enjoy the music and good food; in summer, they open the window and let the folks on the sidewalk share the sounds. Tonight, you will have the extreme good fortune to hear a John Coltrane Celebration featuring veteran Harold Mabern and house tenor Eric Alexander.

Christmas Eve and Christmas Day are those rare nights when many of the clubs are closed. You can go to Dizzy's and see Wes Anderson's Sextet's Holiday celebration, but I would rather just relax and eat at the Kitano and enjoy a set or two by trumpeter Tom Harrell and Kyoko Oyobe. Harrell is one of the true oddballs of jazz, but a great talent. You'll still be able to make it up to St. Pat's for midnight mass. On Christmas, the Bar on Fifth is one of the few spots playing jazz, and I would go there to hear another set or two by Antonio.

Your last week in New York will be memorable, especially if you have a reservation for Wynton Marsalis at Dizzy's, easily the most beautiful club in New York. Besides the simple but lush appointments and comfortable table seating, there is a fabulous bar and a spectacular picture window behind the bandstand overlooking Central Park. After Monday night with Marsalis, you might as well continue with the outstanding trumpet playing of Jeremy Pelt at Smoke on Tuesday. Wednesday the 28th, a special Birdland treat is lined up. The early show at 5:15 will be the Louis Armstrong Centennial Band led by David Ostwald, whom you have read about in this space many times before. The headliners will be none other than Tommy Igoe and the Big Band. You will want to see them again, this time playing a headline gig. It really doesn't get any better.

On the 29th, I would want to catch the early (7:30) show at Smalls featuring pianist Ehud Asherie. He is a silky smooth player with classical chops who ferquently plays with Dave Ostwald on Wednesdays. For the 30th, Jazz Standard is likely to be fun. The show is Richard Bona: Mandekan Cubano. You've got lots of choices for New Years Eve, but you might want to experience Times Square and forego the jazz parties. However, I'd be inclined to try to get a reservation at one of the two Kitano parties, preferably the one featuring Joe Locke. Of course, if I could see the Big Band at Birdland again...

By this time you'll either love jazz or hate it. My guess is anyone who could approach this schedule would just be completely hooked. Exhausted, broke, but hooked.

Regular Musings readers know that rallies are for profit taking, and we have been doing just that. On 12/1, we sold 200 shares of ADPI at 18.81, closing out the IRA position in anticipation of selling the rest of our shares at the $19 takeover price. We paid 5.20 for these on 12/17/07. On 12/2, we sold 100 shares of (XEL) the old Northern States Power, at 26.20. We paid 15.78 on 5/17/04. Monday, we sold 700 shares of FSII from the IRA at 3.07. We paid 2.04 on 9/17/11, an unusually quick turn. Yesterday, we sold 100 shares of Fastenal (FAST) from the IRA at
41.80. We paid a split adjusted 19.52 on 6/26/06. The market tanked today, so we'll be back to the buy side tomorrow.

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