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Friday, December 31, 2010

The ultimate Progressive Lie

I just saw a video of what can only be called the ultimate progrssive lie. Ezra Klein was being interviewed on MSNBC and was asked about the plan by the House GOP to read the Constitution at the start of the next session of Congress. Klein called it a gimmick, which is a fair comment. Then Klein went on to say that because the Constitution is over 100 years old, it is written in language that is confusing and no one really understands what it means. Wow! That is an unbelievable lie.

Let's look at the document: Article 1 Section 1 is where we start. It reads: "All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives."

Wow, is that confusing or wht? Imagine, someone reading this would have to figure out after years of study that the US legislature will have two house: the Senate and the House of Representative.

If you get through all that confusion, you come to the next section Article 1, Section 2 which reads:

"The House of Representatives shall be composed of Members chosen every second Year by the People of the several States, and the Electors in each State shall have the Qualifications requisite for Electors of the most numerous Branch of the State Legislature."

Again there is a massive question as to what does this mean? I personally have spent years trying to figure this one out and have concluded that members of the House are elected every two years and those who get to vote for house members need have the same qualifications as those in a state who get to vote for the state legislature (in other words, registered voters.) No wonder Klein is confused.

This section continues "No Person shall be a Representative who shall not have attained to the Age of twenty five Years, and been seven Years a Citizen of the United States, and whoshall not, when elected, be an Inhabitant of that State in which he shall be chosen."

So, in order to be a member of the House, you need to be 25 years old, a citizen for at least 7 years and live in the state from which you are chosen.

I am not going to continue on with the exercise. I think you all get the picture. The constitution is clear and not confusing. Klein is just a blatant liar who wants to claim that there is confusion about the meaning of the constitution so that he can justify the acts by the federal government that exceed the powers given to it by the constitution. Indeed, the biggest problem faced by those like Klein who try to use propaganda to distort the constitution and its clear meaning is that the language is not confusing. It has a plain meaning and the liberal liars are stuck with it.

One last point is necessary here. for the last two hundred years, the Supreme Court has interpreted the meaning of the Constitution in hundreds of cases. If there were any question about the meaning of the document, it has or will be answered by the Court. The truth is that nothing I have said is unknown to Klein. He should and does know better. He would do well to cut back on his propaganda.

Good wishes for 2011

I want to take this opportunity to wish everyone a very hapy new year in 2011. I also want to thank eveyone for visiting Connecticut Comments. December 2010 has been the best month ever. Traffic to the blog was more than double the previous highest month. I hope you enjoy your visits.

Silver and gold in 2011

Over the last year, both silver and gold have risen dramatically. Both of them, but especially gold, have been surrounded by hype of all sorts. So the question remains: As we enter a new year, is it time to invest further in gold and silver or to get out altogether?

The answer to this question lies in the purpose of the gold/silver investment. Such investments can serve many purposes. For those worried that there will be inflation in 2011, precious metals are a good place to be. As the value of the dollar declines, the value of these commodities are likely to rise. For those worried that there will be major disruptions in the world currency markets, again gold and silver are good places to be. These are investments that do well in times of panic; investors park their wealth here to avoid the turmoil in the other markets. For those who see China or the oil producing states as abandoning the dollar as a reserve currency, once again these commodities provide a haven in troubled times. Even for those who see only that China is increasing the size of its gold reserves and that certain other countries are following suit, gold, in particular, is a good place to be. The new demand for gold will drive the price ever higher. So, to summarize, for those worried about all sorts of geopolitical and economic events, gold and silver are good places to be.
But what can go wrong? Well, if the world economy gets stronger and stocks and bonds do well, money that is now parked in gold may exit quickly. If that happens, the price of the metals may drop rapidly. To me, this is the key. Gold can go down, but if it does, almost certainly the other sectors in which one is invested will do quite well. So I view gold and silver as hedges against the geopolitical and inflationary risks of the world economy.
In short, I believe that responsible portfolio management requires an investment in gold and silver of at least 5% of the total value of the portfolio to hedge against these risks. So how is the best way to do this?
First, there is the question of whether to invest in gold or silver. Historically, the ration between gold and silver prices has been about 16 to 1. At the moment it is almost three times that amount. If things go back to normal, the price of silver will rise dramatically. Even so, however, I believe that gold is the place to be for the bulk of the investment. It is gold that is being bought by the Chinese, Indians and other countries. Gold is not an industrial commodity the way silver has become. Gold is the best hedge.
Next, the question is should one buy bullion, gold funds, or stock in the gold mining companies. Bullion has the problem of storage and the fact that it produces no income. It is dead money, but it is an asset that you can keep out of banks, brokerage accounts and the like. If there is a total disaster, you can still have access to your gold. In truth, however, while this is appealing, it is not realistic for most people. Having gold around the house makes no sense. It is more like building a bomb shelter than making an investment . I favor buying gold etf’s for about 75% of the investment and stock in the miners for about 25%. Stock in gold ETF’s like GLD also generate no income. These ETF’s, however, have no company specific risks.
So how best to structure an investment in GLD? The key here is to leverage the amount of gold controlled and to use options to generate returns. One should buy far in the money long term options and sell short term out of the money calls against these long positions. For example, if one buys GLD September 100 calls, the cost at the close today was about $38.20 with the price of GLD at 137.03. This means that the long call has $37.03 of intrinsic value and $1.17 of time value. It also means that for an investment of $38,200 one can control $137,030 worth of gold and get both the full upside and downside for that large position. If one also sells the February 142 calls against the long position, one can get $2.01 per contract. This means that one is controlling the gold but paying a net of only $36.19 for a position with an intrinsic value of $37.03. The time value of the short position will decay much more quickly than that of the long position. By early February, the short position will get close to zero, and it can then get rolled out a month to something like the March 143 calls. My rule of thumb is that whenever one can roll out a month and up a dollar and get a credit of more than a dollar, it is a trade worth making. In essence, this provides an income on the investment of about $1 per month or $12 per year, for a return on the investment in the long calls of over 30%. If gold continues to rise, one also gets that increase up to the level at which one has sold the short position.
Obviously, one needs to watch the numbers on these investments very carefully. It may be necessary to close out the positions and re-establish them at different strike prices. Another rule of thumb that I follow is that I trade the long position for another one with a $5 higher strike price if I can clear at least $4.50 for that transaction. This lets me consistently reduce the downside risk as GLD goes up.
For those who want to invest in gold mining companies, my favorite at the moment is Yamana Gold (symbol AUY). If commodities rise over the next few years, Yamana’s results will soar as its new production comes on line. It has properties like Agua Rica in Argentina that have not yet even begun physical development but which hold enormous gold and copper reserves. I will post another time on the other details of Yamana. Suffice to say that in my opinion it will outperform the other gold stocks over the next few years.
Disclosure: I am long Yamana and have written both calls and puts on that company’s stock. I am long GLD long term calls and short GLD short term calls something like the illustration discussed above. I change these positions frequently, however. I also have similar positions in SLV, the silver equivalent of GLD. I also am invested in the stock of a few other gold and silver producers.
Final caution: gold and silver are not investments that ought be made and then ignored. Particularly if one is going to use a call strategy, one must monitor the position and adjust it as needed, sometimes as often as daily.

Thursday, December 30, 2010

Death by snow

According to the New York Post, the snow clearing debacle in New York City was the result of an intentional slow down by sanitation workers to protest recent cut backs due to tight finances. If this is true, then these guys are guilty of manslaughter. Sure, no one is going to be arrested and charged with a crime. After all, in New York, labor leaders can do pretty much whatever they want and the liberals all line up in support. Nevertheless, there were people who died during and after the storm when ambulances could not get to them due to unplowed streets. If those streets were intentionally left snow covered to make a point in a labor dispute, then the people who made that decision are directly responsible for those deaths. It is no different than if the staff of an emergency room refused to treat half of the patients who came into the ER one evening as a protest of their benefit levels. If the untreated patients were to die, you can be sure that the doctors would face severe consequences. So, let's see if mayor Bloomberg does anything about this.

Wednesday, December 29, 2010

Lies, Damned Lies and Joe Klein

Writing in Time magazine, Joe Klein is never much of a stickler for sticking to the truth. Today, however, he is out with a column describing how nothing much happened in 2010. Forgeting the obvious nonsense of the article, Klein repeats talking point after talking point from the DNC. Still, he hits perhaps the low point of the article when he says this:

"We have now had two stimulus packages of relatively equal size in two years — one Democratic, one Republican. Both were flawed: the Democrats wasted too much on their pet governmental projects (and lavished money on the profligate states with too few strings attached); the Republicans, brilliantly hypocritical, squandered tax cuts on people who didn't need the money after spending the entire election season screaming about deficit reduction. In 2011, we'll see if the Republican brand of stimulus produces anything better than the muted results of the Democratic plan (and it may well, building atop the economic hole the first stimulus filled)."

Where to start? Klein equates a law that keeps tax rates unchanged as a "stimulus". In truth, only an actual tax cut would be a stimulus. Preventing tax increases that the Democrats wanted is, instead, preventing the Obamacrats from trashing the economy. The real stimulus poriton of the tax bill was the partial payroll tax holiday. It totals about 10% of the amount in the Obama stimulus package. Klein is just trying to lay the groundwork for later claiming that the Republican "stimulus" has failed. Of course, since there was no Republican stimulus, it will be hard for it to work. The dishonesty is overwhelming.

But time keeps printing this garbage. Much of our media is getting like the media of the old Soviet Union. In Moscow there were three main newspapers: Izvestia (which means News), Pravda (which means truth) and Trood (which means labor). these three gave rise to the Russian proverb that "in Izvestia (News) there is no truth; in Pravda (truth) there is no news; and in everything there is Trood (labor)." the russians knew that their press was lying to them. Unfortunately, we are reaching the same point in the USA.

It's just the Weather!

Here in connecticut, we are still digging out from the two feet of snow that the latest storm dropped over the weekend. Temperatures have been cold and we have had more snow than normal for the past few winters. All this leads to dissapointment. I thought that we were soon going to have a climate more like that in Orlando than the one in Minneapolis; it was the promise of global warming. There would be the downside of more major hurricanes hitting our shores, but that was a small price to pay for the pleasant warm weather all year. Oh, there were, of course, no hurricanes that hit the US mainland this past year, despite the dire warnings of the global warming crowd. While this seems puzzling, I read an explanation that the cooling is actually due to global warming. It seems like everything is the result of global warming. There was nothing interesting to watch on TV last night -- it was the fault of global warming. Al Gore is a blowhard -- it was the fault of global warming. (Wait, in fairness, Gore has been a blowhard for as long as I can recall, even long before anyone was talking about global warming -- maybe the warming just made things worse.)

The real truth is that we still have no acceptable proof that global warming even exists. We know that hte basic data used by by the warming alarmist crowd came from East Anglia University and it was "adjusted" to reach the desired result. Why is it that no one is redoing the research without the predetermined adjustments so that we can see if warming even exists?

Fizzle -- Why???

In the New York Times this morning, David Leonhardt writes that for the economy, 2010, which began with much promise, became a year that "fizzled". He blames it mainly on debt worries in Europe. Maybe he should have looked more closely to home.

In the last year, the economy has suffered from two major problems: government caused uncertainty and antibusiness actions lowered investment and steady unemployment tamped down demand. So what was the government caused uncertainty? 2010 saw no clear tax policy going forward until mid December. Nothing does moe to kill an investment than uncertainty as to how it will be taxed. The Obama Administration also pushed the requirement for through hundreds or thousands of new regulations that would seriously affect much of the US economy. What will the new health care law require of business? No one knows for sure yet, since the regulations have not yet been written. Will investment firms and banks be able to profit in certain areas of their business? We won't know until the regulations under the new "reform" act get written. In the meantime, investment is frozen. That means that growth in output and employment, the direct result of investment, falter.

And what were the anti-business acts of the Obamacrats in 2010? I believe that the biggest is not Obamacare. Rather, it is the continued efforts by the Obamacrats to drive up energy prices and reduce the carbon footprint of the USA. Obama mismanaged the oil spill, but he used it as an excuse to stop most off shore drilling in the USA. As supplies run down, energy prices will be forced up. The cap and trade bill did not pass Congress, so the Obamacrats announced that they would use the EPA to regulate their way into forcing up energy prices. Natural gas prices were low, so the EPA started looking into the "safety" of hydraulic fracturing which produces most of the abundant shale gas that could supply the USA for decades. If the EPA actually takes action on either front, it will make 2011 a disaster for the economy. And I did not mean to overlook the major contribution from Obamacare. Thousands of businesses now face major new expenses for health insurance, just as their businesses are under maximum strain. Wall Street is now subject to using hiring quotas based upon race, gender and ethnicity rather than relying on merit as the determinant for employment. It will no longer be the best and the brightest, but those who fit the government mandated profile who get hired.

In short, 2010 did not fizzle due to some foreign debt problems. 2010 was destroyed by the failures and intentional acts of Obama and the Obamacrats. Let's hope that after the November elections, the Obamacrats are better kept in check for 2011.

Tuesday, December 28, 2010

Living in a Fantasy World

Eugene Robinson of the Washington Post often has difficulties recognizing reality. For the last two years, he has told us of the great successes of the progressive wing of the Democrats and of the racism, xenophobia and homophobia of the evil conservatives like the Tea Party. Even when the facts did not support his contentions, he did not stop. The old saying is that "facts are stubborn things", but apparently not for Robinson. And November's election results have changed nothing it seems. In today's Post, Robinson is out with a column that begins like this:

"It's been not quite two months' time since Republicans won a sweeping midterm victory, and already they seem divided, embattled and -- not to mince words -- freaked out."

Ans what is Robinson's proof? He claims that the Republicans capitulated during the recent lame duck session of Congress. First and foremost, they gave Obama a better deal than they had to on taxes rather than waiting for the new Congress to arrive in January.

So let's get this straight. For the last three years, Obama and the Democrats have announced that they would raise taxes on those they call wealthy, namely anyone making over $250,000 per year (which just happens to include about half of small businesses in the country). Republican, on the other hand, said they wanted no tax increases on anyone in these bad times. A few weeks ago, Obama capitulated and agreed with the Republicans. Republicans also wanted the estate tax to be abolished rather than being reinstated at 55% with a $1,000,000 exemption; Democrats wanted the 55% rate and the one million dollar exemption. Obama and the Democrats have now agreed on a 35% rate with a $5,000,000 exemption. This will keep the estate tax from all but the wealthiest Americans. It is a clear Republican victory. For the last two years, Republicans have argued that the best way to help create jobs would be a payroll tax holiday. Democrats have wanted increased government spending, a methodology that faioled when they tried it in the Stimulus Bill. As part of the "compromise" that Robinson calls inadequate for Republicans, the Democrats agreed to a partial payroll tax holidy for the next year. Again, this is a clear vicotry for the Republicans. So what did Obama get? Unemployment benefits were extended for more Americans until 99 weeks. Robinson knows that there is no way that the Republicans would ever have blocked that. Obama also got some of his small tax incentives from the Stimulus Bill extended. I guess the best analogy is that Obama lost the Super Bowl, but he got a nice gift basket for attending.

A second big battle of the lame duck session came on spending. the Obamacrats tried to push through spending for the next year, something that they had failed to do for the preceeding months. The net result: the GOP forced the issue of spending levels to move to the next Congress when the conservatives will have the ability to stop exorbitant spending. Sounds like a GOP victory.

But Robinson says that the START Treaty was passed, and he is correct. But perhaps someone will tell me why the passage of a treaty with Russia is something that the GOP shold have stopped. Robinson assumes that by voting for the treaty, the GOP gave Obama a big victory that they should have wanted to deny him. That, of course, is Robinson's mentality that blocking a treaty for domestic political purposes makes sense for the country and the party. First of all, the GOP senators did what they thought best for the country; they were not looking for political gains. Robinson just does not understand this fact. Second, the START Treaty is a minor achievement. We no longer live in a Cold War world where the nuclear forces of the USSR threaten world peace.

But then what of Don't Ask, Don't Tell. It is here that Robinson makes his biggest mistake. Robinson calls this a defeat for the GOP. It is not. The new GOP is focused on jobs, spending and the economy. It has moved on from battling on social issues as one of its major components. Oh sure, the GOP will be more a pro-life than pro-choice group. There will be a more conservative outlook in Congress than that of the left wing Democrats. But, unlike the Democrats, the GOP is actually focused on the economy. The GOP is going to cut spending. The GOP is going to be pro-growth. The GOP is not interested in "spreading the wealth around".

The real truth is that Robinson is just so concerned about finding good news for Obama that he has tried to turn a better than expected lame duck session for the GOP into a victory for Obama. Two more years of this type of "victory" by Obama will see the election of a Republican in 2012. Of course, even if Obama loses the election in 2012, Robinson will find a way to spin it as a Democratic victory.

Monday, December 27, 2010

HSBC -- "How Stupid Bank Company"

For the last few days I have been meaning to write about the connection between HSBC and Iran. This is the result of perhaps the dumbest ad campaign ever seen. HSBC is posting ads in Europe which read "Only 4% of American films are made by women; in Iran it's 25%. We find potential in the most unexpected place. Do you?"

So now Hong Kong and Shanghai Bank is touting the great opportunities for women in Iran? And they base this on the film industry -- Iran's enormous film industry? Has HSBC lost its mind?

The ad can be seen by going to Commentary -- just click on the title to this post to get there. It is an amazing statement from one of the world's largest banks. Are they saying that women in Iran have more opportunities than those in the USA? If so, perhaps they will need to explain why Iran supports keeping women out of schools, allowing women who are raped to be killed due to their dishonor, letting husbands abuse their wives however they desire, etc. Iran sounds like a virtual paradise for women.

Maybe the HSBC ad was meant to be humorous. If so, what comes next? An ad where the bank points out some amusing positive fact about Nazi Germany? Maybe the bank can explain why the ebola virus is actually good for the environment.

I do not have an account at HSBC. If I did, I would close it now. I would never do business with an apologist for Iran.

Where to find yield for 2011

Anyone with money to invest in 2011 already knows that putting the money into a bank account will provide safety but no return. CD’s are paying very little, and money market funds pay even less. Five year US Treasury bonds pay just a bit over 2%. So that leaves us with the question of where to get return on your money for 2011. Here are a few choices together with their plusses and minuses.
First, buy stock in Business Development Companies (known as BDC’s). These are companies that make loans to lesser credits and get compensation other than just interest in return. For example, some borrowers provide equity interests as well as interest on the loans. Companies like Apollo Investments (AINV) and Ares Capital (ARCC) pay dividends in the area of 8-10%. In addition, the stocks have options, so their yield can be increased and their risk reduced through the sale of covered calls. Ares close on Thursday at $16.73 and it pays a dividend of 35 cents per quarter. (Note that these are unqualified dividends and they change over time more frequently than industrial corporations.) Selling the February 17 calls would probably take in 45 cents, a move that would up the return on the stock by another 15% while leaving a small bit of room for further capital appreciation as well.

A second place to invest is in mortgage REITs. The best of breed here in my opinion are Annaly Capital management (NLY)and Invesco Mortgage Capital (IVR). The companies borrow mostly using short term funds and buy mortgage backed securities (mostly from agencies backed by the federal government). I would stick only to those companies which buy only agency debt – there is no need to take the risk on the mortgage backed securities. Since short term rates are unlikely to go up in the short term (unless the Fed has a major change of heart), the biggest risk to these companies has been almost eliminated. Another risk for these companies, a spike in the refinancing of mortgages, has also been greatly reduced due to the recent rise in longer term rates. Again, both NLY and IVR have options, so covered calls can be used to increase yields and reduce risk. The premiums on the options are a bit less than those on the BDC’s, but they are still worth using. For example, with NLY at 17.85 at the close on Thursday, the April 18 calls would bring in about 48 cents.

A third place to generate yield is by investing in Municipal bond closed end funds. I wrote about these funds – called Muni CEFs – on September 30 and November 12th. You can get the full discussion there. With the recent rise of the fear of defaults by certain municipal borrowers, rates have increased to a point where these funds now yield 7-8% tax free. One caveat: unless you buy a state specific fund (of which there are many), the return is tax free from federal income taxes but not state or local income taxes. Also, for anyone who is subject to the Alternative Minimum Tax, some portion of the return could be hit by that tax, so you need to check out the characteristics of the fund that you are buying before you purchase it. For someone in the 25% tax bracket, 7.5% tax free is the same as 10% on a taxable investment. My favorite Muni CEF at the moment (and it changes daily) is the Invesco Van Kampen Trust for Investment Grade Municipals (Symbol VGM). It is paying 8.09 % and it is selling at a discount to net asset value. Of course, if the municipal market really does get hit by many defaults this year, this area could see a decline in the value of all muni bonds to take the increased risk of default into consideration.

A fourth place to generate yield is in natural resource royalty trusts. Examples of these are San Juan Basin royalty Trust (SJT) which gets royalties on the production of certain natural gas wells and BP Prudhoe Bay Royalty Trust (BPT) which gets revenue from the production of oil on the North Slope of Alaska. These are currently paying about 8% and they come with substantial tax benefits that make current income either totally tax deferred or close to it. Of course, when the trust stock is sold, the tax will be due at that point. These trusts also have options which can again be used to increase yield and reduce risk.

One more place to get yield is by buying stocks which have been paying dividends consistently for years while increasing the amount of the dividend over time. My favorite in this category is a stock that anyone who reads this blog has heard much about: Armanino Foods of Distinction (AMNF on the Pink Sheets). Armanino is selling at 74 cents per share and it pays a regular dividend of 4 cents per year for a yield of 5.4%. Almost every year, however, the company also pays a special dividend which further ups the yield. In addition, the company is on a winning streak, setting records for earnings and revenues almost every quarter. Over the last year, the stock price has gone up by more than 50%.

There are, of course, many other options for getting increased yield from one’s portfolio. These are just a few that I like. It is important to keep in mind that none of these methods are meant to be used exclusively. You want to employ a mix of many different types of methods in order to use diversity to reduce risk. In addition, these are investment methods that require one to pay attention to them every day. These are not like CD’s; things change, and you need to react appropriately.
Disclosure: I have used all of these methods myself over the years. At the moment, I am invested in all of them except for the natural resource royalty trusts which I do not use since my energy and metals investments are through other vehicles.

Sunday, December 26, 2010

Snow and more Snow!

According to the forecasts, the snow that is now falling here in Connecticut is going to total somewhere between 10 and 16 inches. I can hear the plows periodically rumbling down the main street about half a block from my house. I can also occasionally hear the wind whistle through the trees. Aside from that, however, there is silence. I can hear the clocks tick and the circulating pump on my heating system kick in as needed, but that is it. It is one of the marvels that come with snow. Silence!

I was just thinking how nice it would be if the snow could come to Washington and silence the folks there. Just imagine! We have a snowstorm and presto, no more statements from Nancy Pelosi until the snow melts. We could get a few days off from listening to the pearls of wisdom that gush out of Barney Frank's mouth. Maybe even Obama himself would be quiet.

I truly believe that the whole country could use some time off from listening to these folks. Maybe even though it will not be due to the snow, we could still get a breather from the brouhaha. Ya know, I'm just sayin...

A Christmas for Everyone

On Christmas Eve, I happened to turn on the television at 11:45 p.m. On CBS, I encountered a program called “A Christmas for Everyone”. According to the TV listings, it was a Christmas special featuring a minister a rabbi and an imam. While the listing sounded a lot like one of those old jokes (you know, a minister, a rabbi and an imam walk into a Christmas service…), I thought the program was appalling. I could not tell whether this was a local New York program or a CBS national program. Either way, however, it seemed in very poor taste, a triumph of political correctness run amok. It is one thing for schools to have holiday programs where they have Christmas songs, a few Hannukah songs, and some smattering of other cultural works. Some place have Kwanza music (although frankly, I have no idea what that is.) One year, the program at my daughter’s school had a Buddist chant from the chorus at the “Holiday Program”. School events are for children who are required by law to attend, so being inclusive of minorities as well as majorities makes sense. Actual holidays, are something else altogether. Christmas is not a holiday to be celebrated by a rabbi or an imam. These people are representatives of religions that do not accept the very premise of the holiday. I did not stay to see the content of the TV show, but I wonder if the imam spoke of the “misguided worship by the infidels” or if the rabbi spoke of the “celebration of the birth of the false messiah”. Jews, Muslims and Christians can be tolerant of each other and accept that not everyone believes the same thing, but there is no need to include those other beliefs in a basic celebration of one of the defining moments of each religion. Will there now be recitation of verses from the Koran and readings from the New Testament at Yom Kippur services? Will Muslims start lighting Sabbath candles and saying blessings in Hebrew at the end of their Friday Sabbath? Maybe all Buddhist monks will now wear crosses and celebrate Easter.

A multicultural society is one that allows each group within the society to follow its own beliefs and practices. “A Christmas for Everyone” was not a celebration of multiculturalism. Instead it was a new variation of the old melting pot ideal for America. Instead of the melting pot being for the homogenization of national identity (something that the PC crowd now decries), this was a melting pot for religious beliefs, something antithetical to the very idea of freedom of religion. In America, people are free to worship as they choose; they should not be subject to pressures to incorporate other religions into their own.

The Greatest Hits of Christmas Weekend

I know that it’s a holiday so many of the regular pundits are not at work, but much of the mainstream media is clearly scraping the bottom of the barrel in order to put out “news” every day. Here is one of the worst pieces of garbage that tried to impersonate the news.

Writing in the Washington Post, Edward Schumacher-Matos explained why the increased population for red states in the just completed 2010 census is really bad news for Republicans. According to Ed, the increase is all immigrants and that’s bad for the GOP. His specific reasoning:
“And as we know from polls and the last election, immigrants and their recent descendants aren't looking very kindly on the Republicans these days. The party, in its fierce intent to force out unauthorized immigrants, has demonized all nonwhite immigrant groups, creating deep resentments.”

Maybe someone should tell Ed that he is repeating a Democrat talking point and not reality. There is no question that the Republicans have pushed the issue of sealing the border better in order to deal with illegal immigration. They have also been the force behind the Arizona statute that tried to give the state police some but far from all of the same powers that the feds already have to enforce the immigration laws. The over-the-top response by the Democrats to these efforts has been the usual: accuse the GOP of racism and xenophobia. It won’t work.

The new governor of New Mexico is a Hispanic Republican. Many of the new GOP congressmen elected in November were minorities. Indeed, the Democrats’ tired old meme of labeling the GOP as the party of old angry white males is getting to the point where it makes about as much sense as pointing out that the principal opposition to the landmark civil rights laws of the 1960’s came from Democrats. Both points are really irrelevant.

Thursday, December 23, 2010

When Did Everyone Get so Sensitive

This morning, I was buying a cup of coffee when the Muslim store manager wished me "Merry Christmas". Normally I would have said Merry Christmas back to him, but I asked him instead if, as a Muslim, that would "offend" him. I guess that after living in a society with PC Police on the march everywhere, I have succumbed to their efforts. My friend the store manager laughed and said that it would be fine. Then he told me of a few instances in which he had said Merry Christmas to a customer only to be met with a tirade in response. One man said that he was Jewish and that no one had the right to wish him a merry Christmas. He told the manager that the proper thing to say was "Happy Holidays." Another customer told the manager that mentioning Christmas was an endorsement of religion that had no place in commerce. (My guess is that this customer must listen to NPR. Who else would talk about "commerce"?) A third customer said that she did not want to be assaulted by "Merry Christmas" everywhere she went.

My suggestion to these folks is simple: "Loosen up!" We live in a society that is supposedly multicultural. That means that every culture, including the dominant one, should be tolerated.

So, in the spirit of the season, let me just say this: Merry Christmas to all; Happy Channukah; Kwanza Greetings and Belated good wishes for Ramadan.

I will not be posting again until after Christmas. See you all next week.

Wednesday, December 22, 2010

The big Victories for Obama

I spent much of today helping my daughter move into an apartment near the University of Connecticut. When I got home, I came across a plethora of articles in the Main Stream media proclaiming that Obama's big victories in the lame duck session of Congress had restored much of the lustre that was lost by the president during the elections. Huh?

Maybe I missed something, but the president's biggest "victory" consisted of him giving up on his plan to raise the taxes of the wealthy and going along with an extension of the current tax rates for all Americans, something that he had declared immoral during the presidential campaign. That was no victory, it was a capitulation. Another victory that I saw promoted was the withdrawal of the omnibus spending bill proposed by the Senate democrats. Huh? Democrats were unable to get funding in place for their priorities, and this leaves those programs vulnerable to Republicans cutting off funding in March of 2011. Sine when is failure to get ones priorities funded a success? Only in Washington or in the media could an abject failure be spun as a success.

There are more of these great "successes", but I am sure you get the picture.

Tuesday, December 21, 2010

pSivida -- a big move today

Back on october 6th, I recommended the purchase of stock in pSivida corp (PSDV) at $4.60 combined with writing the Jan 5 straddle at $2.20. The stock moved up and on October 18, I suggested that you hold the position. Today, there has been another big move in the stock. At this writing, the stock is up 71 cents to $6.59. That is a rise of over 43% in two and a half months. If you also sold the straddle at the time, it would cost you about $2.60 tp buy it back. That makes the package worth $3.99 compared to the original total cost of 2.40, for a gain of over 66% in two and half months or close to 300% on an annualized basis.

I would not fault anyone for closing out this position at this point. It is hard to argue with taking profits of this magnitude. On the other hand, there remains a potential profit of another $1.01 if you hold the position until January expiration on January 22d, provided that the stock remains above $5.00 (which is $1.59 below the current price of $6.59). Obviously, if there is negative news that comes out about the company, you could still lose money, but the stock would have to fall nearly 50% from current levels for that to happen.

My take on this is that if the inivestment is in the speculative portion of ones portfolio, it is worth holding for another month. If it is in the more mainstream portion of the portfolio, I would take the profits.

Disclosure: I am currently long PSDV and am short both puts and calls. I am going to hold the position discussed above.

More Revealing than He Will Ever Know -- Axelrod Admits Mistakes

In Newsweek, Eleanor Clift has an interview with David Axelrod that focuses on the first two of the Obama years and the prospects for the 2012 presidential election. Most of it is the usual stuff, but there is one moment where the quintessential Obama Administration viewpoint is exhibited. Axelrod is asked the following question and gives the following answer:

"Can you identify any mistakes over the past two years?

There are things I would have liked to have messaged differently...."

There you have it -- the Obamacrats in a nutshell. with all the problems of the last two years (like the atrocious and disorganized response to the Gulf oil spill, the inability to generate new jobs, and the like), the big mistake that Axelrod points to is the failure to message properly. He actually thinks that the problem is that the Democrats did not tell people the right thing, not that they did not do the right thing.

If anyone ever needed clear proof why Obama and his crew have to go, this is it. These folks do not consider their lack of competence or their policies as possible problems; it is only their messaging that matters.

All Tuckered Out

There is no bigger idiot in the media today than Cynthia Tucker of the Atlanta Journal and Constitution. Indeed, using her name and constitution in the same sentence seems like an affront to the US constitution. Tucker finds race and racism as the root cause of every issue. She is hyper partisan; I think in her mind the only good Republican is one who votes for the Democrats. She regularly writes columns accusing Republicans of all sorts of nefarious deeds. Now, however, she has outdone herself. The lead to her latest column starts this way:

"There is simply no modern precedent for the behavior of Republicans in the U.S. Senate. They are not only hyper-partisan, but they are also petty, petulant and unpatriotic, willing to jeopardize national security if they think they can hurt President Obama. Witness their growing resistance to a nuclear pact with Russia, the New START treaty."

So, if senators do their job of considering and discussing a proposed new treaty that will clearly affect US security, they are unpatriotic. UNPATRIOTIC!!! The only proper description for this woman is an old legal term that I learned in law school. She is a narrow minded idiot. she ought to be ashamed of herself. Here she is an unquestioning supporter of Obama who was bringing a new era of bipartisanship to Washington. While we all know that Obama's promise on that front was just so much campaign blather, even Obama himself has never accused those who disagree with him of being unpatriotic just because of the opposition. No, that takes the narrow minded idiot Cynthia Tucker.

Cynthia, maybe you recall the famous quote that patriotism is the last refuge of scoundrels? It was said with folks like you in mind.

I am not even going to discuss in detail the merits of the START Treaty. It is of minor importance in today's world. It basically calls for the US to cut its nuclear arsenal and for Russia to freeze its arsenal at current levels. since the Russians have been reducing their arsenal since they have not had the funds to expand it, the treaty gets the US nothing. Indeed, all that the treaty accomplishes is to put in place a "victory" for Obama and to have a symbolic move forward in nuclear arms control. Of course, the control is not on Iran or North Korea or any of the other powers who are trying to get nukes. Instead, it focuses on the remnanat of the nuclear forces of the old Soviet Union which have been kept under control by the Russians and which have been diminishing on their own.

It seems to me that there is much to discuss about this treaty. For those in the Senate who do discuss it, I say more power to you. I also have two words for Cynthia Tucker, but I will let you all guess what two words they are.

Is Eric Holder leaving?

The headline on Drudge this morning deals with an interview given by Eric Holder in which he talks about the problem of radicalized Americans (he still won't say Muslim Americans) who are trying to attack the US through terrorist methods. After two years during which Holder and his crew have focused in great detail on the purported threat from right wing activists like the Tea Party, he now says that his focus is on the actual terrorists. Given the track record of the Obamacrats, my guess is that Holder is on his way out. If it is true, I have only one thing to say to Holder: "Could you speed it up? The USA needs a competant Attorney General, and you are not it."

Monday, December 20, 2010

No Budget, No Tax, No Spend

In an article this morning, Michael Barone discusses a point that I made on this blog last Spring, namely that by failing to pass a budget resolution this year, congressional Democrats gave up the use of reconciliation. That procedure, which allows the Senate to sidestep the fillibuster, can only be used to reconcile a spending or tax bill to the budget. Hence, if there is no budget, there can be no reconciliation.

Barone makes the point that had there been a budget, then Senate Democrats could have used reconciliation to pass a tax increase on those earning over $250,000, a long cherished policy goal of the Democrats. Barone is correct.

Last Spring, Democrats decided to forego passing a budget in order to avoid the spectacle of approving enormous spending and enormous deficits that would provide further proof of congress' big spending ways to the voters in the 2010 campaign. The move does not seem to have been successful, although maybe even more Democrats would have lost had the proper budget process been followed. Democrats also held off passing spending bills prior to the election for the same reason. As a result, the 111th Congress will now adjourn without ever setting spending rates for the current fiscal year. As a result, the new Republican House will be able to cut spending for the remainder of the year, something that would have been impossible had the Democrats acted responsibly.

I think it is safe to paraphrase Winston Churchill and say that "Never in the course of American government did so many owe so much to so few."

Sunday, December 19, 2010

Teva Pharmaceutical Industries -- Fear and Misunderstanding Means Opportunity

TEVA Phamaceutical Industries Limited (symbol TEVA) is the world’s largest manufacturer of generic drugs. It also produces Copaxone, one of the most important drugs for the treatment of Multiple Sclerosis as well as some other less important proprietary drugs. It has been growing quickly and steadily both through wise acquisitions and internally generated progress. So you would think that it should have a nicely rising stock. After all, no matter what happens with healthcare, generic drugs will be getting ever larger shares of the market. TEVA stock, however, has not had a good year. In December of 2009, TEVA ranged between 53.26 and 56.88 and one year later, the stock has spent the first half of December trading between 50.62 and 53.88. So what is happening here?

The answer to the likely cause of TEVA’s trading pattern reveals an opportunity for profit. Mostly, the pattern stems from misunderstanding and baseless fears. First, let’s look at the misunderstanding. To understand this, one needs some additional background. In early 2010, TEVA stock continued its long term trend of rising steadily and it hit $64 in April. At that point, an extraneous change started to push the stock down. Specifically what happened is that Israel was moved from the status of a developing country to that of a developed country. TEVA, after all, is based in Israel, but no one would suspect that the change of status of the country should affect the share price for the stock. In truth, however, the effect was large. While Israel was a developing country, its companies were purchased by the various funds that own stock in such markets. TEVA seems to have accounted for a large portion of the Israeli stocks held by such funds, and among developing countries, the Israeli economy comprised a large share of the total. As a result, when Israel got reclassified as a developed country, the emerging market funds had to sell TEVA along with their other Israeli holdings. While it is true that other funds that cover developed markets had to buy into the Israeli market, the amount so purchased was much smaller (Israel is only a tiny part of the world’s developed markets). So there was a lot of selling of TEVA that started to drive the price down in May and June. Indeed, the low for June was 50.63, more than $13 off the high. As investors saw the price start to decline, many (who had nice profits on the stock) ran to take those profits. The price declined even though not many investors in the stock understood the reason why it had happened. That was the misunderstanding.
Next we come to the baseless fears. Here the big issue is Copaxone and whether or not someone else will be able to produce a generic version or a competing drug. Many investors fear that the loss of Copaxone would hurt TEVA severely. The true issue, however, is not how the loss of Copaxone would affect TEVA; rather, it is whether or not TEVA will lose Copaxone, and on that front there is much too much gloom and doom in the market. Copaxone is not manufactured by a simple process. I will not go into the entire story as to how the drug gets produced, but suffice to say that production is extremely complex and difficult. Right now it seems more likely than not that any company wanting to manufacture generic Copaxone when the patents expire will have to first conduct trials of some sort to prove that it can manufacture the product in effective and safe form. This will add enormously to the cost and time of manufacture and it should give TEVA many more years of exclusivity. Beyond this, TEVA is likely to be out with its new oral drug before the patents expire on the basic version of Copaxone, so it will have a further advantage.
The truth is that those who fear for TEVA’s future with Copaxone are also misunderstanding the essential nature of the company. TEVA remains a generic drug manufacturer and should be evaluated as such. Those who import the modality used in evaluating big pharma like Merck, Pfizer or Abbott are looking at the stock in the wrong way. As a generic drug company, TEVA has no equal. It has a major presence in both North America and Europe. It has made some savvy acquisitions (the latest large one being Ratiopharm, a major player in Germany and the rest of Europe). Even for those who want to transform TEVA into a regular large drug company, it must be noted that TEVA has a pipeline of proprietary drugs in development.
And then there is the other side of the fight to retain Copaxone exclusivity, namely that Teva is uniquely positioned to best succeed in the relaxed regulations in many countries which for the first time allow for biosimilars to be approved for biotech drugs (the equivalent of generics for pharmaceuticals). Teva has the financial strength, know-how and manufacturing expertise and efficiencies to succeed in obtaining such approvals in the medium term, according to many analysts. This is a huge potential upside for Teva which is barely, if at all, reflected in EPS estimates for 2012 and beyond. As is, the PE on the 2011 consensus is 9.8 which is very inexpensive for a 16% grower.

In short, TEVA is now at a very attractive price as a result of the market misunderstanding the true nature of the company and what has affected the share price in the past. Buying TEVA at the Friday close of 51.93 can also be combined with options to improve the return. For example, were one to buy the stock and write the March 55 calls, would and annualized result in a return to call of about 32%.

Disclosure: I am a long time investor in TEVA and am currently long the stock. I also write and/or buy both calls and puts on the stock. I have no plans to change my holdings in the near future.

It's not news, its's opinion, but at least get the facts correct

The headline on Drudge links to a piece from My Way news that discusses how casualties from natural disasters in 2010 were the highest for at least a generation. And, in usual media fashion, we are also told that the fault for all these disasters and casualties is due to the actions of man. As the article puts it: "And we have ourselves to blame most of the time, scientists and disaster experts say."

The article is just plain wrong. First of all 220,000 out of the quarter of a million people who died in natural disasters this year were killed by the earthquake in Haiti. The authors blame human action for these deaths since the fatalities lived in earthquake prone areas. In other words, since humans did not abandon Haiti as a place of habitation, it is the fault of humanity that the fatalities happened. Under that reasoning, all fatalities are the fault of humanity since we have not previously committed mass suicide so that there would be no one left to be injured or killed in a disaster.

The remaining 30,000 who were killed this year are primarily blamed upon global warming by the authors. Of course, they provide no evidence that any of the storms, floods, earthquakes, snowstorms or the like were actually caused by human action. Instead they use the old "experts say" as a way to promote the idea that global warming has caused this. Don't get me wrong -- I am not saying that global warming did not cause this stuff, but I would like to see some actual proof one way or the other before deciding. Hysteria will not suffice. Nor will belief in environmentalist dogma unless it is backed up by actual facts.

Beyond the issue of cause, the reporters got their facts mangled as well. In 2004, there was a tsunami at christmas time that according to the US Geological Survey killed at least 275,950. That one day alone exceeded the total killed in 2010, but it happened only six years ago. As far as I know, no one blames the undersea earthquake that cased the tsunami on global warming.

So the authors got the number wrong, the causes wrong and the conclusion wrong. Other than that, they did a great job.

Why must it be spin instead of truth?

The bill passed by the Senate repealing law setting the "don't ask, don't tell" standard for gays in the military has engendered a chorus of supporters who engaged in spin rather than just telling the truth. My favorite line is that by allowing gays to serve in the military, it would help with recruiting since all gays would now be allowed to serve. That is complete nonsense. Gays are a small minority of the population; they are probably at most 5% of the total. If only 20% of the straight population decides that having open gays serving alongside them is unacceptable, then this bill cuts the current pool of potential enlistees by about 15%; it will make recruiting harder, not easier. The recent study done by the Department of Defense suggests that these are close to the correct numbers, although I do not understand how soldiers who already know that gays are serving besides them under DADT can get very upset about serving next to open gays.

That being said, I do support the repeal of DADT, but there needs to be a new standard set for the conduct of all soldiers including gays. I believe that the new standard should be one which reassures those who are concerned about the presence of gays without impinging on those gays who are serving (at least any more than the amount that other military regulations impinge on all soldiers). I suggest requiring the use of reasonable discretion with regard to sexuality. Gays could remain in the military even if they were to announce their sexual preferences. On the other hand, soldiers who made advances to those of the same or opposite sex in inappropriate circumstances could be discharged. By inappropriate circumstances, I mean repeated unwanted advances as well as in conditions (like combat) where sex would be a dangerous distraction.

Saturday, December 18, 2010

A Coming Trading opportunity -- Panera Bread (PNRA)

Panera Bread is one of the long term success stories in the stock market. Over the last 15 years, the stock has risen by a multiple of about 40 times. It closed on Friday at $105.75, and it has been hitting all time highs for the last few weeks. Indeed, the stock now presents a great opportunity for a short term trade in my opinion. I believe that the stock will decline substantially right after the beginning of the new year. Here are the reasons:

First, Panera has been going up all during the last year. Essentially every person who holds the stock has a profit on it. Since the year is ending, almost everyone who wants to sell will wait for next year when the tax on the capital gain can get put off for an entire year. When the tax rates were scheduled to rise next year, this was much less important, but now that the current rates have been extended, the tax situation should push a major amount of selling into the beginning of January.

Second, because Panera has had such a strong 2010, there are a number of money managers who have or will buy it as window dressing in December. These folks want to show their clients on their list of year end holdings that they chose stocks well in 2010. They think that when clients see that Panera is in the portfolio, the clients will be pleased with the abilities of their portfolio manager. Most of these folks who buy the stock as window dressing at the end of December also sell the stock at the start of January. This provides another push downward for the stock after the first of the year.

Third, Panera's stock has actually gotten ahead of its value in my opinion. Panera's estimated earnings for 2011 come in at $4.36. This prices the stock at a P/E multiple of over 24 based upon the next year's earnings. That seems to be full value for this stock; it is now so big that it cannot continue to meet high growth targets as it did in the past. This idea is not unique to me; Goldman Sachs recently resumed coverage of PNRA at neutral and commented on the declining growth rate that it expects from the company.

Fourth, this pattern has happened to Panera in the past. I have watched the stock closely since the days when it was still Au Bon Pain in the mid 1990's. In fact, at the time that Au bon Pain acquired St. Louis Bread, a chain of about 20 restaurants, and renamed the St Louis Bread concept Panera, the company was far an away my largest holding. No long thereafter, the company sold off the Au Bon Pain concept and renamed the entire company Panera. The stock rise began almost immediately as the Panera restaurants proved to be great successes. The stock rose from about $5 to about $24 in the first year and basically duplicated the today's situation where everyone had a profit and money managers wanted to use the stock for window dressing. In the first two days of January, the stock dropped 20% on heavy selling, but then it bounced back almost immediately and continued to rise. The same thing happened two more times.

So what is the best way to play this trade. I strongly recommend against shorting Panera. Over the years, too many people have lost too much by going short on this stock. Any bet on the short side has to done in a way that there is a maximum amount placed at risk. One way is to buy puts that are near but not at the strike price. For example, at the close on Friday, you could buy the january 100 puts for about $1.50. For ten of these puts, you would only put at risk $1500. Were the stock to decline by $4 or $5 in two days, the volatility in the put price would rise and the intrinsic value would also kick in, and both factors would provide a nice profit. I would not buy the put now, however. We still have two weeks left in the year, and there may be more movement in panera extraneous from the basic causes that provide the basis for this trade. The time to buy the put is the last day or two of the year.

Other folks might recommend using a bear spread to play Panera, but I do not like that. The move in January, if it comes, will be short and quick. You will need to watch the stock and pull the trigger quickly to take advantage of the situation. A bear spread will not move nearly as rapidly as a long put.

One final note: This is another speculative trade. It is not meant for any portion of your portfolio other than the small amount that you set aside for higher risk trades. Panera could surprise and just go up. The market as a whole could move up and ruin the trade. Nevertheless, I think it is a good percentage play. You should be in during the last week of 2010 and out by the third day of 2011.

Disclosure: although I have owned Panera for 15 years, I recently divested myself of my last stock. I am not going to do the trade recommended above, since I will be away on vacation during the first week of January and will not be able to watch the trading so as to react if and when the stock drops down.

A story that deserves more coverage -- suicide bombings in Iran

Last Wednesday, Moslem suicide bombers killed 39 people at a religious gathering in Iran. The worshippers were Shiite Moslems and their attackers were Sunni Moslems. In truth, the attacks represent the ultimate uprising by the Sunnis in Sistan-Baluchestan Province along the southern coast of Iran. Sistan-Baluchestan is one of the few areas in Iran where the Sunnis constitute a majority. Since the Islamic Revolution 30 years ago, Shiite rule has been complete in Iran. All high ranking government officials are Shiite. During some periods, the government has sponsored missionaries in the province to promite conversion of the Sunnis into Shiites. At other times, the government has promoted moving Shiites into the province from the outside in order to reduce the Sunni majority. During the whole time, the government has made it hard for the Sunnis to worship as they see fit. As a result, in recent years, there has been an anti-government Sunni group that has tried to get rid of control by Teheran. Over time, the uprising has turned violent.

It seems strangely fitting that Iran finds itself the target of suicide bombers. Over the last 30 years, Iran has funded more suicide attacks than any other source. It began with the bombers that it used in Lebanon in the 1980's. It also funded Hamas and Hezbollah in their attacks on the Israelis. Countless thousands died with the explosion of Iranian bombs in Iraq and Afghanistan (including a great many US service personnel). The bombings in Pakistan are also said to have an Iranian connection. In other words, "those who live by the sword, die by the sword!"

Despite the poetic justice of the Iranians being hit by these attacks, the truth is that this is a sad development. The last thing that the world needs is yet another group of people who decide to commit suicide and kill innocent civilians to advance their cause. A basic building block of the civil compact that has allowed the development of civilization is that people are to be kept safe in their homes and workplaces. When that concept is shaken, so is our concept of society.

President Obama has denounced the attacks in Iran. Indeed, one would hope that he would do the same when their are attacks or attempted attacks in the US. Remember the Times Square bombing and the initial statements from government officials? NY Mayor Bloomberg said that the bomber was probably a right winger angry about Obamacare. The media went on about how the bomber was the victim of discrimination (even though there was no proof of that). All that came from the White House was silence for a few days. There should have been an immediate statement by the President deploring and condemning this attempted attack. Perhaps Obama thinks that attacks in Iran are more important than those in the New York.

The real question now is what happens next in Iran. If the mullahs operate in their usual fashion, there will be many arrests (8 already) and executions in response to the bombings. It is unknown if the folks arrested actually have anything to do with the attacks. If not, there will soon be more. Sistan-Baluchestan may soon be the Iranian version of Chechnya.

Friday, December 17, 2010

So where are the jobs and why are they missing?

On Thursday night, Speaker of the House (thanksfully soon to be emeritus) Nancy Pelosi gave a speech on the floor in which she said that from day one of his administration, Barack Obama had been a "job creator". That led me to look at the actual facts and to find some rather startling truths.

Since World War 2, there have been eleven recessions. More jobs were lost in both absolute numbers and in percentage terms in the current recession than in any other. Over two thirds of all the job losses came while obama was president. Nevertheless,many people would tell you that the cause of the recession was not something that could be blamed on Obama, and I agree with that. The current recession began before Obama even took office. On the other hand, Obama is responsible for how the US dealt with the recession. In others words, the way into the recession is not Obama's responsibility, but the way out of the recession is all his. And the picture is not good.

First of all, the current recovery has been unusally slow and weak. In each of the other ten recessions of the last 65 years, jobs have come back much more quickly. The point of greatest job loss in this recession came in December of 2009; it has been a year since then. In nine of the other post war recessions, by one year after the date of greatest job losses, all the losses had been regained and additional new jobs created. In two of the eleven other recessions, at one year after the date of greatest job losses more than half of the total losses had been made up through cration of new jobs. In the current Obama recession, after the passage of one year from the month of greatest total job losses, the economy has only recovered enough to regain less than 10% of the jobs that were lost. If the economy continues to creat jobs at the same rate as it has so far in the recovery, it will take almost eight years just to get back the jobs that were lost.

Second, the remedies used by the government to get the economy growing again have been very different in the current recession than in the other ones since world War 2. Obama's biggest move towards creating jobs was the Stimulus bill, a massive spending push by the federal government that was focused mainly on shoveling funds to states and infrastructure projects. This government spending remedy had not been used in a major way since the Depression. At least four of the other eleven post war recessions were attacked successfully through the use of tax cuts. The remainder were mostly dealt with by letting the economy regain its balance and then move on without assistance.

So, with Obama's unique method of dealing with job losses, the US economy has fared much worse than it did in prior recessions when tax cuts or benign neglect were the method of attack. Obama is directly responsible for the manner of dealing with the recession; he cannot blame this on George Bush. And the only possible conclusion is that Obama has failed as a job creator. In other words, Nancy Pelosi is just wrong in her claims. Obama is not a job creator.

Another record

It has been quite a month so far for Connecticut Comments. In just the first 17 days of December, there have already been more visitors to this site than in any previous complete month. I just want to say thanks to those of you who visit.

Headwaters (symbol HW) -- what is really going on?

One of the most interesting stocks in the market in recent weeks has been Headwaters Inc., a small company headquartered in Utah. HW has a market cap of about $275 million, and its price has gone from $2.60 in July to about $4.75 as I write this. This price rise of over 80% in just five months is, in part, a bounce off of lows that the company hit when its financial security was in question. Most of those issues have now been resolved, and the earnings estimates for the company have also improved. Headwaters, however, still has estimates of future losses for the next two fiscal years (It only reaches a loss of $0.41 per share for fiscal 2012). The company operates in three fields: construction materials, coal combustion products and alternative energy. It used to be the leader in low pollution coal, but it was dependent on federal tax credits that ended a few years back and took the whole field with it.

So the real question with Headwaters is this: What is going on that is taking the stock up day after day? In just the last six weeks, the stock has gone up by $1.35 on a base of $3.40. Volume has also been increasing, although not as dramatically as price. For example today, the stock has already traded over 589,000 shares as of noon, a total which exceeds both the 10 day and 90 day average volume.

I have owned shares in the company periodically over many years. The last six months are the best sustained performance by Headwaters that I recall ever seeing. The company also has options that have nice premiums, a fact which makes the stock more attractive. Right now, were one to buy the stock for $4.75, the May 5 calls could probably be written for $0.60. this would mean a cash return at an annualized rate of over 30% while retaining the possibility of some further small appreciation. The May 6 calls could bring in about half as much while providing for a much larger appreciation.

Given the long term trend in this stock and the heavy volume, I have to assume that something is happening here. Honestly, however, I am not sure what it is. Both the duration of the climb and its slow and steady nature tell me that this is something real. I usually like to have a reason for such a move before I jump in, and I do not have a satisfactory one here.

Nevertheless, I think it is worth pointing this stock out as one that has undergone an accelerating transformation over the last six months. I am not recommending a purchase; nor am I recommending that you stay away from it. I just think that it bears watching.

Disclosure: I am long the stock and have covered call options written on about two thirds of my holdings.

How Idiotic

With the tax bill passing the House, here is the take of bloomberg News, supposedly a business oriented news service: "The bill marked the second time in nearly two years that Congress rammed through a massive economic stimulus. The first one, Obama's $814 billion spending bill, was opposed by Republicans who complained about its impact on annual deficits, now hovering at about $1.3 trillion annually." You have to wonder what planet the reporter comes from. The bulk of the so-called stimulus comes from keeping middle class tax rates unchanged, something that everyone has agreed should happen since the 2008 presidential campaign. Then there is the so-called stimulus of not raising taxes on the wealthy, a much smaller amount. Again, keeping taxes the same as this year is hardly a stimulus. Oh, then we have setting the estate tax at 35%; this is up from 0% during 2010. Here raising taxes is called a stimulus; even for Bloomberg this is idiotic. Then there is the extension of unemployment benefits. While this is stimulative it was hardly passed for that reason. that would be like calling a cost of living increase in Social Security a stimulus package. Next we have the continuation of a few of the current tax breaks that were set to expire. More of keeping taxes where they are as stimulus. Finally, we have the temporary payroll tax reduction. This will cost about 100 billion dollars and will indeed be a stimulus. In other words, only about 15% of the total bill is properly called a stimulus. Everything else is either keeping taxes as they are now or raising them by less than was expected.

I have to assume that the reporter and the editor of this piece are either to uneducated to understand that the talking point of the Democrats who want to tar the GOP as having promoted a "stimulus" like they did are false, or they are part of the group that is pushing those phony talking points.

The nice thing is that the bill has now passed. This is not going to make the economy much better; it will, however, prevent the policy pushed by the Democrats which would have made the economy much worse. it is sort of like the Hippocratic Oath for politicians -- First, do no harm!

Thursday, December 16, 2010

the Omnibus Crashes

According to the latest news, the Democrats in the Senate have abandoned their attempt to pass a 1.3 trillion dollar omnibus spending bill. Let's hope that the story is true and the decision is final. The attempt by Reid and his Obamacrats was both arrogant and tone deaf. Imagine, after the election results we just saw a few weeks ago, the Obamacrats want to fund all of their pet projects in order to thwart the will of the people. the people say that government spending is out of control and the Obamacrats proposed answer is to spend still more.

Hopefully, a continuing resolution will be passed to fund the government for two or three months, and the new Congress can pass individual spending bills that cut out the fat and waste in the budget.

How low can Congress go?

Today's latest developments in lame duck drama include 1)attempts in the Democrat controlled Senate to pass one bill covering all spending for the entire government for the year in a bill that no one has yet read; 2)attempts in the Democrat controlled House to stop the tax compromise from passing which will mean higher taxes for all Americans come the first of the year and higher taxes for millions in the current year due to the AMT; 3) attempts by the Democrats in the Senate to approve the START treaty, a move unparalleled in modern times (no treaty has been approved during a lame duck session in over a hundred years); attempts by the Democrats to move forward with the Dream Act that gives amnesty to certain illegal aliens; 4)Attempts by the Democrats in the Senate to pass repeal of Don't Ask Don't Tell; and much more.

I have to ask: Where have the Democrats been for the last two years? None of these items are new. None of these items are things that could not have been voted on six months ago. In short, all of these things are parts of the Democrats agenda that they ducked before the elections in order to avoid having to defend their actions on these votes. Now, after the Democrats have already lost and are about to depart, they want to pass things that they chose previously not to do.

The truth is that the Democrats should be ashamed. Unfortunately, these folks do not know the meaning of the word "shame". I just hope more of them are gone after 2012.

Pier 1 -- Let's clear up the misunderstanding

I got a question after my post this morning about the great earnings from Pier 1 Imports. Specifically, I was asked how I can like the company when the estimates for earnings for next year are one cent less than those estimated for the current year. This question illustrates a major misunderstanding about the stock that needs to be clarified.

The answer to this question is all about taxes. In the current year, Pier 1 is not booking any taxes as expenses other than various state corporate taxes. Because of the losses incurred during the recession, Pier 1 has a tax loss carry forward that it is using to offset any federal income taxes that would otherwise be due on its profits. The company has made clear that it has sufficient losses remaining so that it is unlikely to incur any tax expense for the quarter now underway as well. Starting with the new fiscal year on March 1, 2011, however, the company will have to begin to expense taxes since the loss carryforwards will be used up. The company says that it will be carrying taxes at 35% commencing at that time.

If one does the math, the current estimate of 70 cents per share for next fiscal year translate into earnings of $1.08 before the tax expense. using the proper pre-tax comparison, then the estimate for 2010 is 71 cents per share and the estimate for next year is $1.08 per share, an increase in earnings of over 50%. In short, the increase in earnings for PIR is great, but, after the tax adjustments, it looks like much less.

In many ways, these figures are much like the headlines about the earnings this morning. News organizations seemed almost uniformly to report that earnings had declined by a large percentage from last year for the quarter. Only a few of them, however, also reported that last year the earnings were entirely created by a one time tax benefit that the company got when it carried its losses back so as to earn a refund from the government. Again, this quarter was much better than last year, and the estimates for next year are much better than this year.

One last note: Since the earning for the quarter were substantially better than the Wall Street consensus, there will likely be increases to the estimates for future periods. I expect that the estimate for next year will climb by 10-15% over the next three weeks. As all of this information permeates the consciousness of investors, Pier 1 stock should rise nicely.

Pier 1 -- Great Earnings

My stock of the month for December, Pier 1 Imports (PIR), reported stellar quarterly earnings this morning. EPS came in at 18 cents (as against the consensus of 14 cents) and revenues were $353.8 million just above the consensus. An outperformance of four cents over the analysts views means more than one might think. Pier 1 reported its comps for the quarter over a week ago, so the Wall Street crowd had time to adjust their earnings expectations before today's reports. these numbers mean that not only were sales up (comps were up over 10%), but also the management has achieved this while getting higher margins with lower costs than expected. Given today's bad climate for business tied to home furnishings, this is no mean feat. Also on the good news front, the company said that sales momentum continued into the all important Christmas season.

The next big impetus for the stock after today's reports will likely be the upgrades from Wall Street or the increases in earnings estimates from the same crowd. PIR closed yesterday at $10.38, and it has been higher in the last week. After things settle down following today's numbers, there remains, in my view, still another potential 50% rise from where we are now. My one year target for the stock remains $15.00.

For those interested in reading my original and more complete discussion of PIR, it can be reached by clicking on the title to this post.

UPDATE: In the conference call this morning, management said that sales for December are going very well and further disclosed that the switch to a spring merchandise line will take place on January 5th. this early change over means that there is less holdiay merchandise being sold on clearance at low margins and a longer duration for non-discounted merchandise to be on the floor. This means higher margins than last year and is another good sign of things to come.

Disclosure: I remain long PIR and have about two thirds of these holdings hedged with covered calls.

Casino Stocks -- pick MGM

With the opening this week of the Cosmopolitan Resort in Las Vegas, the gaming industry is front and center in the news. The last few years have not been a good time for the industry. The Nevada results have been stagnant after some severe declines. The Atlantic City market continues to decline in the face of hard times and hard competition from the new casinos in Pennsylvania and New York. The Indian casinos in Connecticut have declined as well. Indeed, all around the US, the casino industry has fallen on hard times. Even in the international markets like Macau there has not been much success for an industry that used to count on double digit annual growth. So the question remains: is there a good investment to be made in the gaming industry?

My answer is that there are good places to put your money in gaming, but the nature of these investments has changed from a few years ago. Casino stocks used to be held for maximum growth as one or another mega resort opened to enormous crowds that threw money at the tables almost as fast as they could. Now, I view casinos as a place to take advantage of high returns when the purchases are coupled with options. In this regard, my favorite casino stock is MGM Resorts. MGM owns some of the biggest name casinos in Vegas like the Bellagio, Mirage, Luxor, Aria, Excalibur among others. It also owns the City Center in Vegas. Its properties bracket the new Cosmopolitan, so it may even gain from the buzz surrounding this new destination. MGM also has a mega casino in Macau, the eponymous MGM Macau. As a result, it is centered in the two major markets where casinos are doing the best at the moment.

Because of the volatile history of the casino industry, the options for these stocks carry higher time values than for many other industries. For example, As of the close on Wednesday, MGM stock was selling at $12.72, and the March 13 calls were fetching $1.40. Thus, buying the stock and writing the option cost a total of $11.32, and the potential return if the stock closes above $13 on the March expiration date is around 58% on an annualized basis. In other words, because of the high time value, if the stock rises just 28 cents or a little over 2% over the next three months, this investment translates that into a 58% annualized return. further, the investment remains profitable unless the stock goes below 11.32 at March expiration. That would be a decline of over 11% in three months. For me, this risk/reward ratio is quite inviting.

there are obvious risks associated with MGM. The future of gaming in Vegas is not yet clear. MGM is likely to be one of the survivors, but with the economy in its current shaky condition, nothing is guaranteed. Nevertheless, with returns like the ones outlined above, I think that a small investment in MGM could pay big dividends.

Disclosure: I have been in and out of MGM many times in the last year. Each time, the ownership was coupled with a covered call. At the moment, I have no position in the company, but that may change shortly.

UPDATE: After the open this morning, I purchased MGM at 12.86 and wrote the March 13 calls for $1.46.

Wednesday, December 15, 2010

Guest Post -- How urgent is it for Israel to militarily destroy Iran’s nuclear program?

From time to time, I am going to have posts from others than myself. Here is the first one, from Steve Brill.

A year ago it seemed that one way or another Iran’s nuclear program would be dealt with in 2010. While Israel seemed to be willing to give the U.S.
some time to engage in almost certain to fail diplomatic efforts, it repeated a number of times that there was a limited window and that Israel would have to act by the end of 2010 if nothing were accomplished diplomatically by the United States. The details of what Israel would do – undoubtedly through some kind of military action -- were obviously never disclosed and different sources stated the urgency somewhat differently. But the upshot was that 2010 could not end with Iran’s nuclear program proceeding apace.

In recent weeks, despite the end of the year approaching, discussion of the Iranian issue seemed to have waned. I thought that maybe Israel had been bluffing and knew all along that military action was not feasible, and that explained the silence. However, recent revelations of a worm that, according to the Jerusalem Post, damaged the Iranian computers and effectively set back Iran’s nuclear program by 2 years, suggests possibly a much happier explanation. There have been many references to a worm elsewhere, but the information here is quite specific. Hopefully it is also true. Whether Israel alone, Israel and the U.S. together or some other combination did this deed is less important that that it seems likely to have been successfully accomplished.

While this is not the kind of subject as to which we can expect to get the full story, the information in this article and elsewhere nevertheless gives hope that there is a possible way to effectively thwart Iran without a risky and potentially very dangerous military action, which may or may not be feasible even on a best case basis and could have catastrophic consequences. Let’s hope that 2011 brings more computer worms which eliminates the need for military action for even longer periods of time, and hopefully permanently. The consequences to Israel, the U.S. and the entire world would be hugely positive compared to the unhappy alternatives.