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Thursday, May 31, 2012


Facebook, the Fiscal Cliff, and Alumni at Play

After two blogless weeks, we are back and posting. There is no shortage of subjects to comment on, so let's get right to it. I don't have a lot to say about the Facebook IPO that you haven't already read. The business press consensus seems to be that the exercise was blown, a combination of mispricing by the company and its investment banker advisors, and technical snafu's at NASDAQ. The usual measure of a successful IPO is the comparison of the first day's closing price to the offering price. By this measure, Facebook was a clear disappointment closing barely above its offering price of 38. Since then, the issue has traded considerably lower. To make matters worse, Zuckerberg went to maximize the shares sold into the market, putting even more pressure on the stock. As is often the case, I have a somewhat different view. I think the closing price should be somewhat above the offer, but not too much. Otherwise, there is a concern that the company has left too much money on the table. In fact, it seems that Facebook maximized its offering proceeds and didn't leave enough value for its new shareowners. The problem here is that so much of the money did not go into the company, but instead went to insiders and angel investors. The few times I have participated in IPO's, I read the prospectus carefully trying to determine where the proceeds of the offering would be going and how they were going to be used. I also wanted to understand the business, its pro forma balance sheet, and its potential. So rather than shooting for a one day profit, I treated the offering as a real investment and made my decision accordingly. This is a hard way to get rich, since the odds are agianst any IPO succeeding as a long term investment. Yet, I did make money on all of my IPO's (ok, there were only a handful) though it took a fair amount of patience. They were all based on good business plans, and I insisted that I would only invest if the lion's share of the proceeds were going toward that business. Of course those requirements disqualified a very large percentage of the IPO's I was shown. Where will Facebook go from here? Beats me. My guess is that there is more than enough money to conduct business, and lots of ideas for monetizing the access to their vast user base. But the amount of outstanding stock issued is going to make this a hard lift just to get back to the offering price. I had no interest in this issue which did not really meet most of my requirements and failed the most basic one in terms of where the proceeds were going. ---------------------------------------------------------------------------- You have no doubt been reading quite a bit about the Fiscal Cliff looming at year end. The term refers to the tax increases and spending cuts coming out of the expiration of the Bush tax cuts and the compromise deal Congress reached last year to enable the increase in the debt ceiling. Since both of these changes would serve to reduce federal borrowing and contract the economy (according to Keynesian theory), the concern is that if Congress does nothing, we could tip back into recession. The concern is well taken, though on balance, I think deficit reduction will be more helpful economically then hurtful for reasons discussed on this blog many times before. However, one aspect of what's coming would be a serious problem, and that is the increase in the tax rates on capital gains. In fact, this will cause less profit taking and a reduction in capital gains tax collections, as has occurred in the past. The higher rates on dividends and capital gains will be very damaging to the capital markets. I am more sanguine about the expiration of the Bush tax cuts, since for most high earners, it will simply transfer taxes now paid as part of the AMT to form 1040. However, middle income earners will really pay more taxes if their cuts also expire. Better would be to let none of them expire, and just cut the federal budget as much as we can consistent with maintaining adequate military spending. One tax I would raise for sure would be the rate on "carried income," the farce that allows hedge fund managers to pay capital gains rates on their earnings. That should definitely be taxed as ordinary income. Keep in mind that capital gains also escape the AMT calculation. In short, there is a growing consensus for adoption of the Bowles Simpson program, warts and all, since it was an honest, bi-partisan effort to do something about our fiscal mess. This effort was perhaps President Obama's best idea since taking office, and why he has not pursued its implementation is a continuing mystery. Above all, it adds to the perception that he is a completely ineffectual President, a perception that is likely to result in his (deserved) defeat this November. Bowles Simpson would certainly be a better alternative than diving off the Fiscal Cliff. --------------------------------------------------------------------------- This past weekend was alumni weekend at Haverford College, my alma mater, a weekend I enjoyed thoroughly, particularly since my classmates were very much in attendance (about 40 of us representing more than 25% of the surviving class members). Rather than try to improve upon last year's alumni weekend post (one of redwavemusings most popular ever - see the year ago entry in the archives if you want to enjoy it again), I will simply mention a couple of highlights/lowlights. The Class of 1957 put on a panel show, in part on Energy Efficiency and the Energy Future. One of the presenters is Managing Director of something called the Energy Reduction Group, which should put you on guard right away. Sure enough, his portion of the show was a simply brutal exposition on how we should return to... a pre-industrial society, I guess. For example, his argument against fracking was that decades ago, Pacific Gas and Electric had dumped pollution causing a superfund site, though of course this had nothing to do whatever with fracking. I wish I could say that he ever actually talked about fracking and its consequences, or even mentioned why it's a problem but he never did. As for nuclear plants, his comment was that even the utility companies won't build a plant because of the expense involved (somehow, he never mentioned that the expenses that have put new plants out of reach are largely the cost of meeting outrageous requirements pressed by groups like his). As for green energy, our ultimate salvation, he remarked that all we had to do was cover approximately 10% of the earth's land area with solar cells, surely a manageable goal I guess for something so obviously important. I kept looking for the guys in the white coats to come and remove him, but I guess their electric cars wouldn't start. No one in the audience called him on these and other obvious logical shortfalls. I was fully prepared to start a verbal row, but luckily I had my own class's panel to go to, a surprisingly interesting discussion around liberal education and its future. Another good session was a Friday afternoon panel presented by the Class of 1962 on Quaker Life at Haverford: Then and Now. It seems that Fifth Day Meeting (which stopped being mandatory in 1968) is now held on Fourth Day (Wednesday), which is a good trick, but the bottom line is that the Quaker tradition and values are still in evidence on campus. Our old house band, consisting of members of the Classes of 1971 and 1972, played Saturday night for our listening and dancing pleasure, and they were quite a bit better than last year (which was the last time they played together). They did very good renditions of Space Cowboy, I Got a Line on You, and Sympathy for the Devil. One not on the old playlist but fit in nicely was Sweet Child O' Mine. And an added female singer did a first rate version of White Rabbit. And, of course, I made the usual mandatory visits to the local Irish Pub, Roache and O'Brien's. Closing time in the Philly area is 2 AM, strictly enforced and arriving each night all too soon, it seemed. ------------------------------------------------------------------------------ For the third straight year, "sell in May and go away" proved to be very good advice for those who took it. We took a lot of profits in January and February, you may remember, but have been buying into the market the last three months. So we are feeling about 6% poorer since the end of April, like everyone else. On May 16, we bought 50 shares of Dupont (DD) at 50.33. On 5/17, we bought 100 shares of Protective Life preferrred (PLP) at 22.06. On 5/18, we bought 300 shares of Genie (GNE) at 6.96. On 5/21, we bought 400 shares of USA Trucking (USAK) at 6.26, not for the faint of heart I might add. On May 24, we bought 20 shares of the Treasure Inflation Proof ETF (TIP) for the IRA at 120.34. On 5/29, we bought 400 shares of Newpark Resources (NR) at 5.85. NR is part of our "Tulane Portfolio." On 5/30, we sold 100 shares of Roper Industries (ROP) at 101.35. We paid a split adjusted 18.22 on 9/19/01. The bad news is that we have to pay tax on a pretty big gain. The good news is that we will be paying that tax at this year's rate as opposed to the possibly higher rate that will apply next year. On 5/31, we bought 300 shares of FNFG bank for the IRA at 8.02. For those of you who are new readers, we report these trades as a simple log - they are not to be considered recommendations or suitable for anyone else. Our investing philosophy is based strictly on an asset allocation formula - we buy when cash gets above 20% and sell when it goes below 20%. Stock selection is subjective, but which stocks out of our buy/hold portfolio get purchased or sold is strictly by formula. We keep emotion out of these decisions and never try to time the market, except as occurs naturally because of adherence to our asset allocation target. To find the formula, you'll have to explore the archives - some day I will actually print out these posts and will be able to refer to them more specifically. For now, I have enough trouble writing them without providing ancillary services.

Tuesday, May 15, 2012


May Musings

Last week I spent three pretty nice days in our nation's capital, enjoyed a good meal or two, and also took a nice long walk from Metro Center to Georgetown via M Street. My intended destination was the 10 PM show at Blues Alley, a New York style jazz club with first rate headliners. I saw Arturo Sandoval's sextet, who put on a truly memorable show. Sandoval, of course, is a top rank trumpet player and composer, and his show (and latest CD) is a tribute to his idol, Dizzy Gillespie. Besides trumpet, Sandoval took several turns on percussion, another on synthesizer, played piano on one song and sang another. So the night was pretty memorable. Next week, Roy Haynes comes into Blues Alley and this summer's headliners include Pat Martino and Freddy Cole, neither of whom should be missed if you are in D.C. M Street is alternately a lively night life magnet and then a quiet, upscale residential area. Coming into Georgetown is a revelation as the architecture, restaurants, shops and bars combine to provide a truly welcoming neighborhood. I expect to be back. ----------------------------------------------------------------------- The power and reach of the internet is at once awesome and humbling. If you go to the end of our last post, you will see that we received a very nice comment from a reader in India. I like to think that the blog is honest, fun and has enough variety to occasionally please a wide audience. But I never imagined it could be that wide. ------------------------------------------------------------------------------ I don't have much to say about the J P Morgan episode that you haven't already read in the conservative press. I reject the Dodd-Frank mentality that every corporate action and misstep is a matter for regulation, on the grounds that taxpayers will have to bail out the banks and auto dealers again. They shouldn't have been in that position before, and in fact, J P Morgan was quite literally forced to take Federal money it neither needed or wanted. Jamie Dimon is a stand - up guy and he has given a candid assessment of the poorly executed hedging trades that will ultimately cost Morgan between 2 and 4 billion dollars. However, in their zeal to put regulators in charge of everything, Rep. Levin and his cheerleaders in the liberal media have jumped all over this opportunity to argue for strengthening the Volcker rule and implement the most draconian aspects of Dodd Frank. in the long run, that will only hurt the country. We should always keep in mind that corporate stupidity and poor execution does not equal criminality. In fact, some corporations will wildly succeed even as others blunder. The chips fall where they may, and that competition is what drives our incentive driven capitalist system. That said, I am not really opposed to the Vocker Rule, agreeing that corporations that provide FDIC protection for customer assets should not be risking that capital for their own trading profits. It was a mistake to repeal Glass Steegal by passing Graham Leech Bliley, and the Volcker Rule simply corrects that mistake. But let's put what happened in perspective. In a three trillion dollar portfolio, we are agonizing over a loss of, let's say 3 billion. Now I'm not saying that's not real money, but it comes to a loss of about one-tenth of one per cent. I wish my down days on the stock market were only that bad. In a day when one per cent moves in the stock market are considered routine, it seems to me that Morgan's paper loss is a tempest in a teapot. It's not only not a scratch, it's not even a nick. So, Jamie, maybe you should think twice the next time you have this urge to give so much money in support of Democratic candidates. ------------------------------------------------------------------------ Last night, my daughter and I went to see the Mets, and despite the drizzle and the breeze and the shaky work by the Mets' alleged closer, we had a grand old time. Baseball is fun again at CitiField, tonight's one-sided loss notwithstanding. I just love Terry Collins and the job he's doing with his largely home grown team. The Mets are not baseball's only feel good story, of course. There are the revived Orioles, also led by a terrific manager, Buck Showalter. Don Mattingly's Dodgers have picked up where they left off last year and are all but unbeatable at home. The Braves are back too, on a good run on Chipper's farewell tour. And the Rangers are well prepped to make a third run at a world series. The Cardinals have a new manager, they don't have Albert, but the winning tradition continues. Pretty exciting stuff, all around. ----------------------------------------------------------------------------- I don't think gay marriage and Obama's "new position" will have an iota of impact on what will be another very tight election. I do think the whole scenario did nick his credibility, especially the way he was outed by his loose cannon Veep. Who really believes that this position evolved? The political calculus behind this administration's every pronouncement (at least the ones that are planned) is now so obvious, it no longer needs to be pointed out. As the Obama credibility factor erodes, it has and will have an impact so gradual it may not be noticed until it is too late to reverse. When you consider the level of viciousness in the attacks by Obama on Romney, it is really bracing to see that the polls are showing the race to be in a virtual dead heat. ------------------------------------------------------------------------------ On May 4, we bought 100 shares of Ceradyne for the IRA at 25.06, a value buy. On May 7, we bought 200 shares of Harsco (HSC) at 19.39. After taking the rest of the week off (but doing business) in Washington, we bought 100 shares of Hartford Preferred for the IRA yesterday at 20.37, completing our positioning in that issue. Today, we bought 600 shares of Alumina (AWC) at 3.80, making a longshot bet on the Australian economy to recover. It is likely to take time, and this stock could go lower from its already depressed level. But it's a value buy, and we've never made money playing scared.

Friday, May 04, 2012


Economics 201

Hearing President Obama blame rising gasoline prices on "speculators," Fed Chairman Ben Bernanke claim inflation can't be a problem as long as wage growth is restrained, and Treasury Secretary Geithner parrot administration talking points about millionaires and billionaires as if he were some kind of marionette makes you wonder how these guys came to be the smartest in the room when they apparently slept through macroeconomics class. All three have repeatedly made the same fundamental mistake neophyte journalists, the media talking heads, and just about everyone who has not actually studied econ makes. And that is confusing inflation with raw price level data. Prices may rise or fall because of inflation or deflation, but more often the price level of any commodity changes because of shifts in demand versus supply. That is not inflation. If speculators were adding to demand, that would be a perfectly normal price effect in an otherwise stable environment. But that is unlikely to have much of anything to do with the price increases we are seeing, which I believe are early visible inflationary effects. Following Hayek, the monetarist school personified by Mr. and Mrs. Milton Friedman taught that inflation is a monetary phenomenon. That is, increases in the money supply that exceed increases in productivity cause supply and demand curves to shift up the Y axis. When this happens, prices of commodities (including labor) generally increase. Deflation is the opposite effect, of course. This is completely different from price changes that fall along a stable supply demand curve. Those price changes are a market phenomenon. In that case, the price runs up or down the curve, but the curve does not itself move. The price will move until a level is reached where there is equilibrium between supply and demand. When we used to hear Greenspan, and now Helicopter Ben claim that the money supply can be safely increased (indeed, that it should be) because there is slack in the labor and other markets indicating an absence of inflation, I just cringe because they are confusing the two concepts. How is the public supposed to understand what's going on when the person charged with running the economy is so misleading? The President blames speculators for gasoline price rises, with no evidence by the way, when in fact the change in prices could be a function of demand and supply for the commodity, but more likely reflects the inflation we have been expecting because of the prolonged inflationary monetary and fiscal policies we have followed. This situation was predicted a long time ago, because of the Greenspan mystique. Greenspan managed the monetary strings of the economy for years by monitoring all aspects of the labor and commodity markets, trying to control the price level while supplying as much credit as the economy "needed." While mainstream economists worried about the possibility that whoever Greenspan's successor would be could not possibly match his record, monetarists sounded alarms about looming asset bubbles and inevitable inflation. Sure enough, we had repeated stock market bubbles and worst of all, the disastrous residential real estate bubble that culminated in the financial fiasco of 2007-2008. And clearly we are building to more of the same. Some years ago, this blog predicted that the next bubble would be in public credits, and that has occurred in European sovereign debt and, to a lesser extent, in the US municipal market. Though those who predicted disaster for the local and state governments have been ridiculed in the financial press, the fact is their predictions were off only by a matter of degree, not conceptually. In addition to the bankruptcies of a number of cities and counties (notably Jefferson County in Alabama and Harrisburg, PA), we have cities and states all over the country frantically cutting their workforces and revamping pension plans in last ditch efforts to avoid bankruptcy. Unless Paul Ryan style budgeting is actually enacted and implemented, we are heading for "inflation unchained" because the only way to pay for the services that our Social Democrats want to provide for their voters is to keep the printers and banks printing money and expanding credit. When that happens, gold will resume its upward climb as will most other commodities. It won't matter what demand is, when those curves shift up the Y axis, the misery index will rise. --------------------------------------------------------------------------- You might as well try to convert an environmentalist to a Jehovah's Witness as convince them they might be wrong about something, so I think I'll just agree to disagree with our commenter and drop the subject for now. At least that was my intent until I spotted the following editorial in the WSJ this week, which seemed timely and on point. So at the risk of unleashing readers' fury one more time, I will simply (and without permission, so keep it under your hats) reprint that short WSJ opinion called "Crucify Them." It's no secret that the bosses at the Environmental Protection Agency hate fossil fuels. But few are as candid as Al Armendariz, the regional administrator who says the agency's "general philosophy" is to "crucify" oil and gas producers. That's how EPA chief Lisa Jackson's point man for Texas, Oklahoma and other south-central states put it in a 2010 lecture. Mr. Armendariz explains that his staff's "philosophy of enforcement" is "like how the Romans used to conquer little villages in the Mediterranean. They'd go into a little Turkish town somewhere, they'd find the first five guys they saw and they would crucify them. And then you know that town was really easy to manage for the next few years." The point is to "make examples" of alleged lawbreakers. Oklahoma Senator James Imhofe released video of the speech on Wednesday as part of his investigation into the EPA's now-discredited claims of water contamination due to hydraulic fracturing, including in Parker County, Texas. In that case Mr. Armendariz's shop targeted Range Resources, a driller that has since been exonerated, and his remarks about executions raise questions not only about his own work but the EPA's larger impartiality and judgment. Julius Caesar probably would have suggested a different remedy, but Mr. Armendariz's resignation would suffice. The postscript is that Mr. Armendariz actually took the Journal's advice and resigned Sunday. ------------------------------------------------------------------------------ Over the years, we have cited Birdland's Wednesday early show featuring Dave Oswald's Louis Armstrong Centennial Band as one you should make a special effort to see. Oswald's rotating sidemen (and sidewomen) feature some of the best talent, young and old, around for a fraction of the cost of seeing the headline acts. One veteran musician we praised some time ago was clarinetist Joe Muranyi, who played with Dave into his 80's at an extremely high level and was part of the Wednesday evening fun, contributing humor as well as musical improvisation. We haven't seen him on the bandstand for a couple of years now, which was understandable given his age. Turns out that he was suffering from an array of serious maladies, and he passed away on April 20 at age 84. Mr. Muranyi was the last person to hold the regular clarinet chair in Armstrong's All Stars band from 1967 to 1971, when Pops passed on. He had studied with the great pianist Lenny Tristano as a young man. ------------------------------------------------------------------------- The old adage is "sell in May and go away," and that has certainly been timely advice the last two years. Right now, the market looks so shaky that it might be good advice for this year too. It's always a danger sign when the big stocks outperform the small ones, and that's what we're seeing lately. You don't want the generals out in front of the troops. On 4/27 we bought 15 shares of the SPDR Gold Trust (GLD) for the IRA at 161.78. I can't worry about the fact that gold is likely to go down more from here. I don't try to pick bottoms. I just know that when the inflation hits, this price will look low. On 4/30, we sold 200 shares of Marine Max (HZO) at 11.03. We paid 1.54 on 11/10/2008. At that time, we remarked in this blog that the stock was priced as if no one would ever buy another boat. Well people are still buying and servicing boats I guess. On 5/2, we sold 200 shares of Conrad Industries (CNRD), a lightly traded stock, for 17.31. This was not a great execution by my discount broker, since they didn't get the opening price of 17.75, presumably because there are lots of places to buy and sell these pink sheet stocks. Your only defense against such shenanigans is to make a limit order at the price you want, but then you risk the possibility that you won't get the trade off at all. Not the end of the world since we paid 1.30 on 4/26/05 for these shares, when this stock was shunned by all because it looked like the company would go private to avoid Sarbanes-Oxley reporting requirements. Good thing our formula doesn't get spooked by any emotion. We are the Vulcan investor. Here's the periodic disclaimer: Neither redwavemusings nor its author are investment advisors, and the securities mentioned here are not to be considered recommendations or suitable for anyone else (or even for me).

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