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Friday, November 30, 2012

The Coming Slaughter

Things have taken a dark turn in Syria. For a country that has been at war with itself for over a year, it is hard to imagine that things could be getting worse, but that is exactly what is happening. In the last few days, the Assad regime has cut off the internet and cell phone service in much of the country. At the same time, the air forces and artillery of the regime have stepped up their bombardment of rebel positions. Meanwhile, the rebel forces are attacking the government positions across a broad front. Hundreds, if not thousands, are dying each day. But, I fear that the worst is yet to come. Assad and his forces are mainly comprised of Alawaites, a Shiite sect of Islam. Roughly three quarters of the country are Sunni Moslems. The Alawaites are about one-eighth of the total population. Given the brutal onslaught by the Assad forces against rebel forces and civilian population, it is likely that there will be significant revenge taken by the Sunni majority once the Assad regime falls. We may soon see slaughter at a scale that makes the current death toll of more than 40,000 look like a footnote.

I just hope I am wrong.

An Unsurprising Response

In the early 1990s, Israel and the PLO signed the Oslo accords, an agreement that outlined a plan for reaching peace between Israel and the Palestinians. All of the negotiations and agreements since then have been the result of the Oslo accords. Today, Palestinians rule themselves in the Gaza Strip and large portions of the West Bank because of these accords. The central tenet of the Oslo accords is that there will be a two state solution that will be reached only through a settlement negotiated by the parties.

With the vote yesterday by the UN to give Palestine observer status in the General Assembly, the Palestinians basically threw away the Oslo accords. Today, we got the response from the Israelis.

At a cabinet meeting in Jerusalem, the Israeli government gave approval to the construction of 3000 new apartment units and homes in and around Jerusalem. These units are located on land that was controled by Jordan prior to 1967, so they get classified as "settlements" by the Palestinians. Israel had held up approval of this construction for years in deference to the requests of the USA and in an attempt to get talks started again. With the abrogation of Oslo by the Palestinians, the Israelis are going back to letting their people build new homes in all portions of the metro area of the capital. These new apartments will connect central Jerusalem with Maale Admunim, a suburban area northeast of the city.

To say the least, this is a low key response from the Israelis. They could have cut off the flow of tax revenues which they collect for the Palestinian Authority (and they still may do that.) They could have reoccupied the areas of the West Bank that are self governing.

I am sure that in the next day or so we will hear the usual protests against the Israeli construction of homes for Jews in the Jewish capital city. Too bad that the protesters do not know what they are talking about.


The General Assembly of the United Nations voted overwhelmingly yesterday to grant Palestine observer nation status. There were big celebrations in the West Bank in response. One has to wonder how long it will be before the Palestinians understand that actions like this one by the UN are unreal.

American law provides that contributions by the USA to UN agencies that recognize Palestine as a separate state in the absence of a negotiated peace with Israel will be cut off. Most likely, president Obama will find a way to circumvent that law, but maybe not. It would be nice to see all these UN agencies get their budgets cut by 25%.

It would be nice if just once there were a Palestinian leader who put a major effort into reaching an actual peace deal with Israel. But, as Abba Eban used to say, the Palestinians never miss an opportunity to miss an opportunity.

The Obama Plan

Yesterday, Treasury Secretary Geithner presented the Obama plan for dealing with the fiscal cliff. Clearly, that plan is to go over the cliff and then blame the GOP. Obama wants 1.6 trillion dollars in additional taxes from the wealthy over the next decade with no other tax changes. He also wants to do away with all the automatic spending cuts and instead INCREASE spending by about 50 billion dollars as additional stimulus for the economy. Finally, Obama is willing to discuss cutting about 400 billion from Medicare and Medicaid over the next decade. This is not an offer; it is a joke. These changes will INCREASE the federal deficit over the next decade by over 2.5 trillion dollars. That's right, Obama's plan to deal with the deficit is to increase it in a major way. On top of all this, Obama wants an unlimited increase to the ceiling on the national debt.

Of course, the plan was presented in secret to Congressional leaders so that there are no sound bites showing Obama advocating for this plan. Instead, we had Obama campaigning for months on reducing the deficit in a balanced way. It took just a few days for that promise to go away. Well, the GOP should go away as well. Republican leaders should lay out principles that include keeping the level of spending cuts that were previously agreed to, requiring additional spending cuts in exchange for additional revenue, and a commitment to entitlement reform. Indeed, not only is the fiscal cliff coming, but the debt ceiling is also coming as well, so GOP leverage is great.

Obama is making it easy. Agreeing to what he wants is worse, far worse than just going over the cliff.

Thursday, November 29, 2012

I've Got A Secret

It is almost funny to hear that the Speaker of the House John Boehner is angry that the White House leaked a one-sided version of a suposedly secret phone call between him and president Obama. What did he expect? Secret talks between Boehner and Obama is a guaranteed way to make sure that whatever happens will be blamed on the GOP.

Boehner should be insisting that he will have no further talks until the Democrats put forth in public their plan for avoiding the fiscal cliff. Republicans already passed such a plan in the House last summer.

Let's have America find out just what it is that the Democrats are proposing.

Cliff Notes

1) Howard Dean has now come out in favor of just going over the fiscal cliff. He says that it will mean a recession but it will cut the deficit by the most.

2) A number of other far left Democrats have also endorsed the idea of going over the fiscal cliff. It will mean a big bump in tax revenues and a major cut in defense spending.

3) We are still waiting to hear Obama's plan for cutting spending to avoid the sequestration cuts. The latest is that he just wants to do the tax cuts and leave the spending cuts for later.

4) Republicans are still talking with the Democrats as if the Democrats seriously want to avoid the cliff. This is a big mistake. Republicans should just announce that they have already made a proposal in the form of the budget passed by the House and that they are waiting for the Obama proposal before voting on anything. They should pull an Obama and just announce the principles that have to be met:

A. Spending has to be cut by an amount equal to the sequestration cuts.
B. Entitlements must be addressed in a meaningful way.
C. Revenues cannot make up more than one quarter of the total measures to close the budget gap.

5) There is a need for leadership if the fiscal cliff is going to be avoided. Sadly, with Obama, there will not be any.

A Reminder

Last week, we watched as the media played up the fighting between Israel and the Hamas terrorists. There were civilian casualties in Gaza as well as in Israel. The ones in Gaza were used to portray the Israelis as cruel oppressors; the Hamas media campaign included staged pictures of phony injuries. My favorite in this group is the video of Hamas "soldiers" carrying a wounded man to safety which is followed on the same video of the wounded man getting up and walking away.

Meanwhile, one country away, in Syria, there were 158 people killed in fighting just yesterday including 99 civilians. The death toll there is approaching 50,000. When was the last time you saw an article in the media denouncing the cruelty of either side in Syria? Indeed, when was the last time that you saw a prominent article about the fighting in Syria? It just continues and the world ignores it. Hundreds and thousands die, but the world ignores it. Why is it big news if Israel accidentally kills 20 civilians while taking out over 150 terrorists but not big news if the Syrian government and rebels take out 40,000 civilians (many of whom, by the way, are Palestinian?)

Wednesday, November 28, 2012

Remembering Brownie

At a cabinet meeting today, president Obama singled out UN ambassador Susan Rice for praise. "Susan Rice is extraordinary," said Obama. "Couldn't be prouder of the job she's done."

It sounds a lot like what George Bush said to the director of FEMA shortly after Katrina hit Louisiana and right before he was forced to resign.

UCORE Reports Very Good News

I have written previously about Ucore Rare Metals, Inc. (symbol UCU in Canada and UURAF on the pink sheets). Ucore is developing a group of mining properties, the most important of which is Bokan Mountain in Alaska. Today, Ucore released the long awaited and much delayed Preliminary Economic Assessment ("PEA") for that proposed mine. The full PEA can be read here. The PEA is very good news.

According to the PEA, the pre-tax net present value of the Dotson Ridge portion of Bokan Mountain is $577 million. This value is based upon some rather conservative assumptions. First of all, the future revenues are reduced based upon a 10% discount rate. In today's extremely low interest rate environment, a 10% discount rate is extremely high. Second, the prices for the rare earth elements which will be produced at Bokan Mountain are figured based upon the average price for these minerals over the last three years except for four minerals for which there are only reliable figures for the last two years. For those who worry that this may include inflated figures from the period after China threatened a cut off of exports of the rare earths, Ucore also provides figures based upon the average prices for the last six months and three months. These figures bracket the longer term price average and provide a measure of reassurance as to the propriety of using the three year average. Third, the estimated cost to get the mine and processing facility up and running includes a contingency of about 12%. Given the nature of the development, this ought to be sufficient.

So let's translate the net present value into a per share figure. Ucore has about 170 million shares on a fully diluted basis. That means that the Net Present Value for this portion of Bokan Mountain come to about $3.40 per share. Since the stock is selling at roughly 50 cents per share, this project should provide a significant up side to stockholders.

But simply translating the Net Present Value to a per share figure in this way does not accurately project the true value of the company for a number of reasons. First, the Dotson Ridge portion of Bokan does not include the entire site owned by Ucore at that location. There is no way now to accurately project how much, if anything, these other claim locations hold in the way of rare earth elements, but it would not need to be much to allow for a substantial profit for Ucore. Remember that the processing facities and the control and shipment areas will be built as part of the Dotson Ridge section of the project. This means that about 70% of the capital costs that might be needed for the new areas can be avoided by using those already in place.

Second, the mineral estimates used for Dotson Ridge do not include all portions of that section. Minerals below the areas that were drilled and those adjacent to the drill areas could be substantial. The point is that both the other claim areas and the other portions of the Dotson Ridge claim could provide a significant up side to the value of the project. The only down side is the potential drilling cost to examine the potential of these areas.

The total expected capital expenditures for the Dotson Ridge section is just over $220 million. This is not a small sum, but as mining ventures go, it not a large sum either. For Ucore, however, there are a number of advantages that it possesses when it comes to obtaining financing. First, the federal and the Alaska state governments both want the project to go ahead. Bokan would be the only domestic source of heavy rare earth elements that are needed for many defense and other critical applications. In one way or another, the could well be state or federal money put into the project. Second, there are a great many manufacturers who need the rare earths and who want a source other than the Chinese. These companies may also be willing to invest in the mine in order to develop a second source. Third, the economics of the mine are good enough that a large mining company may want to form a joint venture to develope this mine.

The simple truth is that the PEA is a big step towards the final development of Bokan Mountain. In my opinion, Ucore stock is a strong buy at its current price.

DISCLOSURE: I am long Ucore stock.

Chicago Theater

Suppose your Congressman were to be under federal investigation for misuse of campaign funds (which means taking campaign contributions for personal use rather than for the campaign costs). Then suppose that that same Congressman disappeared from view for a month only to reveal later that he or she was hospitalized. Suppose it later was announced that the hospitalization was for depression and other problems. Would you be happy to keep that person in office? The answer from Chicago is a clear yes. Representative Jesse Jackson Jr. was re-elected in the third district of Illinois with something like 80% of the vote. Since the election, Jackson has had to resign in the face of the federal investigation. While there is no proof of this, it looks suspiciously like Jackson resigned as some part of a deal to avoid prosecution.

There is now a special election scheduled for February to fill this seat. It makes one wonder why they even bother with the special election here. If Jackson could win with a landslide despite all of the problems he was facing, the voters in the district could best be described as brain dead. Indeed, Jackson is the third Congressman from the district in a row to leave office under a cloud. Let's hope that the next representative can avoid that fate. Indeed, let's just hope that the next representative from Illinois-3 is not a felon.

Tuesday, November 27, 2012


Just prior to the Iraq War, the American Secretary of State, Colin Powell, made a speech at the UN in which he laid out the intelligence that made clear that Iraq under Saddam Hussein was building weapons of mass destruction. This was a principal basis for the American invasion of Iraq that followed shortly after that.

Powell, of course, later claimed that he had been given faulty intelligence. But the media, nevertheless, went to town on him for years and years. How could he have made the statements that he did when the intelligence was so faulty? Who was responsible for the intelligence mistakes?

But it was not just the media that went after the faulty intelligence and the secretary of state. The Democrats in Congress who had supported the start of the war turned against it by 2006 and began a steady drumbeat of complaints about "lies" that got us into the fight. Remember Hilary Clinton telling General Petreus that to accept his testimony about the need for the surge and the basis for the war, one would have to suspend disbelief? Remember all those speeches from Obama about his opposition to the war? That is just the tip of the iceberg.

Well now, the sides have flipped. Currently, the person spouting falsehoods who is the focus of the debate is Susan Rice, the American ambassador to the UN and the likely nominee to be Secretary of State. Rice claims that she was just repeating faulty intelligence that she was given about the terror attack in Benghazi that resulted in the killing of the American ambassador and three others. Of course, there is a major difference between Powell telling the UN about WMDs and Rice telling America that there was no terror attack: Powell had no reason to know that what he was saying was wrong. On the other hand, Rice clearly knew that what she was saying was most likely false. After all, by the time that Rice began her TV appearances to promote the lie that it was a video that had caused the attack, the president of Libya had already gone on tv to announce that this had been a terror attack, the director of the CIA has sent a report that said the same thing, and there had already been secret testimony to Congress from the DNI that this was most likely a terror attack. For Rice to tell America over and over that there was no credible evidence that terrorists were involved was just a lie.

Today, however, the White House says that the upset from various Republican senators about Rice's lies to the American people is a "political obsession". Not so! It is nothing like what the Democrats themselves did when they were on the other side. It is simply an attempt to try to have a leader for the State Department who knows the difference between truth and a lie. It is an attempt to have a Secretary of State who can recognize reality. Much has been said about the fact that Rice is a black woman so the opposition is sexist and racist. While this is all phony stuff, it is even worse than phony. If American foreign policy and national security are to be determined under some phony politically correct methodology, we are all in danger.

Obama would do himself a big favor if he did not nominate Rice to be Secretary of State.

A Time for Reflection

It is now three weeks since the elections and the USA is back to the usual things that occupy us at this time of year. Folks are finishing the leftover turkey and shopping for Christmas. Politicians in Washington are positioning themselves for an upcoming last minute deal to avoid the fiscal cliff. The media is breathlessly reporting every comment made about the fiscal cliff like they actually mattered, and few people are paying attention.

The sad thing is that the politicians did not get any clear message about what to do from the people. Obama won, but his majority was greatly reduced. In the senate, Democrats picked up two seats and remain in control, but in the house, the GOP maintained an easy control of that chamber. People voted for and against raising taxes on the wealthy. They voted for and against cutting federal spending in a meaningful way. They voted for and against severe cuts to defense spending. They voted for and against maintaining Obamacare. You get the picture. No matter which side of the issue one is on, one can find support in the election returns. It is a mess.

What all this means is that America must rely on the genius of our political system to fashion solutions to ongoing and major problems we face. That's the big problem. Right now, our political system does not seem to have any ideas sufficient to allow for a meaningful resolution.

Monday, November 26, 2012

Cliff Dwelling

As we look ahead on the road to the future, there is an enormous pile of cans in the way. These are all the cans that president Obama kicked down the road so that they could be dealt with after the election. There is the problem of a nuclear armed Iran. Four years ago, there was time for negotiations without conditions. Now, the time to act to stop a nuclear Iran is measured in weeks rather than years. There is the expiration to the current tax rates. These will jump in five weeks and, while there is much talk about how everyone wants a deal, there is no agreement in sight. There is the automatic sequestration of spending that will gut the defense budget and cut other programs substantially as well. These cuts were designed to hurt key constituencies rather than to rationally reduce federal spending. Here too, there is talk of a deal, but no indication that one will be forthcoming. Then there is the issue of the implementation of Obamacare. We know that starting relatively soon, millions of workers will lose their health insurance as the law that was supposedly going to guarantee everyone coverage goes into effect. No one is even talking about how to deal with the regressive aspects of Obamacare. It is perhaps, a can too far. On top of all this, there is the looming deadline for withdrawal from Afghanistan. The plan is for the Afghans to take over their own defense, but American forces are still not even going on joint missions with the Afghan forces. At some point, a decision is needed on how to deal with the likely inability of Afghan forces to maintain control without an American presence.

There are other cliffs we are about to fall over and other cans to be reached. For all the campaigning that went on for the last two years, there is precious little told to us all about how Obama will handle this mess. Indeed, with all this about to happen, perhaps the best summary of the situation is to quote Obama's long time pastor, Rev. Wright: "America's chickens are coming home to roost."

Sunday, November 25, 2012

Sandy Hook

I just read another article discussing how hurricane Sandy is a symptom of climate change. What a joke! The hurricane is not a symptom of climate change. It is a weak hurricane that had an extremely unusual course and which joined up with a regular low pressure area as a result. Let's look at the facts.

1) Sandy hit the shore with sustained winds at just about the minimum amount needed to be categorized as a hurricane rather than a tropical storm. As hurricanes go, it was extremely weak.

2) Sandy was travelling on a course to the north-northeast for about a day prior to making a turn to the west and hitting New Jersey. In the Atlantic, storms at higher lattitudes (like those above 35 degrees north) almost never turn to the west. It was Sandy's hook to the left that made the storm so unusual and so devastating.

3) Sandy joined together with a normal low pressure area that was over the east coast as it approached the shore. This made the hurricane extremely wide. The storm extended out hundreds of miles wider than a normal hurricane. This wide reach is what caused so much of the damage in northern New Jersey, New York and Connecticut.

4) As hurricane's go, there was nothing about Sandy that indicates anything whatsoever about the climate. Is Earth warmer? Is Earth cooler? Is the atmosperic temperature unchanged? It makes no difference as far as Sandy is concerned.

The sad thing is that so much of what gets written about climate change is nonsense.

Wednesday, November 21, 2012


I will not be posting for the next few days. I wish everyone a happy Thanksgiving.

Let's Not Forget the Contrast

The fighting in Gaza and teh missiles hitting Israel present an important contrast that ought not be forgotten. The Israelis have the power to obliterate Gaza and to wipe out the terrorists who launch missiles into Israel. They choose not to do so and they take pains to minimize civilian casualties. Hamas rejoices when a bomb on a bus in israel explodes and kills non-combatant civilians. children are given candy in Gaza to celebrate the great "victory".

Simply put, the terrorists of Hamas and their supporters are evil. They are not fighting for a just cause. They are fighting for the chance to commit genocide. The USA and teh world have to remember this the next time that Hamas tries to parade their wounded in front of the world media.

Tuesday, November 20, 2012

The Fifty-first State???

I am writing from San Juan in Puerto Rico. Two weeks ago, Puerto Ricans voted for the first time to seek statehood from the United States. The change was a dramatic one. In the past, Puerto Ricans chose again and again to maintain their status as a “commonwealth” whose citizens were American but which was separate from the usual American state. A small minority wanted independence. The burdens of statehood (read that as taxes of the federal government) outweighed the advantages of statehood for the vast bulk of the Puerto Ricans. So what changed? I asked a number of folks in San Juan that question. The predominant answer surprised me. I was told that many changed their votes to statehood because they feared that the USA would cut Puerto Rico loose. They voted for statehood in order to stave off independence.

Obviously, I did not do a scientific survey, so the answer I got was purely anecdotal. Nevertheless, it would not have occurred to me ever that votes for statehood were really votes against independence.

Monday, November 19, 2012

The Rice Follies

Susan Rice, the American ambassador to the UN, is at the top of the list of potential candidates for replacing Clinton as Secretary of State. The biggest obstacle for
Rice is her performance as the spokesman for the Obama administration on the Sunday after the attack in Benghazi that killed four Americans including our ambassador to Libya. Rice went on five news programs that day and basically lied to the
American people. There are some who quibble abut whether or not ‘Rice lied; they say that she merely repeated false statements that she had been given to say but which she did not know to be untrue. It makes no difference.

Here’s the basic point: Rice told America and the world that the attack was not the work of terrorists even though Obama and all of Washington knew that al Qaeda had been in charge of the attack. Rice certainly had access to the intelligence that made the involvement of the terrorists clear. That means that Rice either lied or else that she knowingly decided to close her eyes to the evidence that contradicted what she had been told.

A Secretary of State has to be able to separate the truth from the miasma of rumors and lies that swirls through the diplomatic world. If Rice lied to America she does not deserve to be Secretary of State. On the other hand, if Rice just did not recognize that the story she had been given to tell was false and contradicted by a wealth of evidence, then she does not deserve to be Secretary of State.. In other words, Rice does not deserve to be Secretary of State.

Sunday, November 18, 2012

Strategies for the Fiscal Cliff -- 2

Another issue that needs to be addressed as part of the fiscal cliff discussions is corporate taxation. America has the highest corporate tax rates in the world. It is a major problem in convincing companies to locate their businesses here. We also have one of the most complicated tax structures for corporations in the world. A company like General Electric can earn tens of billions of dollars but not owe any taxes, while a small store that earns $50,000 may owe a substantial portion of that in taxes.

There needs to be an effort made in Congress to get rid of all the garbage that has made its way into our corporate tax code. Special provisions and subsidies for one industry or another have to be ended. At least three quarters of the code could be deleted with no effect except increased fairness for all. Indeed, if the loopholes were closed, the rates could go down dramatically.

Another item that has to be resolved is the taxation of profits earned by US companies overseas. Right now we have a crazy system that allows companies to avoid American taxes on profits if they keep the funds outside the USA. Obama wants to tax all of this money and, thereby, take a third of it from the companies. That will give the government a one time batch of cash, but it will just reduce the amount available for investment in the USA. It also will inevitably lead to companies moving to other countries to avoid the tax.

A better result would be for America either 1) to declare a one time tax holiday so that the funds could be repatriated so long as they are invested here, or 2) to allow repatriation with the company getting a full credit for taxes paid to foreign countries where the funds were generated. Both moves would encourage more money to come back to the USA. That means more investment, more growth, even more tax revenue.

Saturday, November 17, 2012

A Few Strategies for the Fiscal Cliff

Let's assume that the Congress and president Obama actually want to accomplish two goals: 1)to reduce the budget deficits that America is facing and 2) to promote economic growth for the country. This is a big assumption since there are many who believe that Obama's main goal is to punish the rich with higher taxes in order to be "fair" even if the result is a slow down in economic growth or a recession. If that is the case, then there are a few ideas that can be used to avoid all or at least part of the fiscal cliff.

The first issue to consider is the payroll tax holiday that has now gone on for two years. Basically, wage earners have been given a two percent reduction in their social security taxes during the last two years. This program costs about $120 billion each year and it drains resources out of the Social Security trust fund.

There seems to be consensus that this tax holiday must end. It was sold each year as a temporary measure, so there ending the benefit is not violating some solemn (or not so solemn) promise. Social Security is weak enough already that the additional funds are truly needed.

Thus, the conferees should agree to let this payroll tax holiday expire.

The second issue to consider is the split between spending cuts and revenue increases. This is one of the biggest issues facing the negotiators. Republicans want spending cuts. Democrats want tax increases. Neither can achieve their goal without agreement with the other. Even so, there are constant screaming voices in the country that demand that one side or the other refuse to compromise. If there can be a real compromise that will help reach the goals of a lower deficit and more economic growth, then that compromise ought to be accepted. That is a big "if", however. Phony spending cuts like the $1 trillion that Obama claims to save by not fighting the Iraq war into the future cannot be accepted. Similarly, tax changes have to be made on a permanent basis. The constant revisiting of tax rates and rules just means that there is more uncertainty in the economy and, hence, lower growth.

Everyone needs to remember what happens if there is no agreement. Tax rates go back to the levels of the Clinton administration and spending is cut with the bulk coming from defense. Those who want to posture rather than actually negotiate ought to remember what the result of such changes would be. Obama's second term would start out with a recession. Federal spending would be cut and the deficit would be cut in half or better. After a bit of time, the shock would make its way through the economy and growth would return. There would be, however, a much sounder basis for the economy since the threat of endless deficits would have been greatly reduced. Folks would be unhappy at first, but after a few years, it would all be in the past.

Let me put this another way. If we go over the fiscal cliff, the Democrats will get nothing of what they want, while the GOP will at least get a move towards fiscal sanity. It is a mistake for the Democrats to assume that disagreement and lack of compromise is on their side. It is not.

Friday, November 16, 2012

The Petreus Testimony Leaks

That did not take long. The AP already has an article out describing the confindential testimony given by ex CIA director David Petreus. It is quite disquieting. Here are the main points:

A) Petreus "he believed all along that the Sept. 11 attack on the U.S. consulate in Libya was a terrorist strike."

B) The description of the attack that was compiled by the CIA "referred to it as a terrorist attack. But Petraeus told the lawmakers it was removed by other federal agencies who made changes to the CIA's draft."

C) Petreus did not know exactly who made the changes to the CIA conclusions or who removed the references to terrorism. Nor does Petreus know who gave the talking points to Ambassador Susan Rice that she used on five different news shows on the Sunday after the attack.

D) Even though he claimed not to know who made the changes or how they came to be made, said there was no White House interference or "political agenda". Of course, one has to wonder how Petreus could be certain of this if he has no idea of what happened.

E) Petreus did not discuss his affair with Paula Broadbent "except to express regret about the circumstances of his departure."

So what new does this tell us? Just a few things:

1) The CIA from the people on the scene up to and including the director correctly recognized the attack as a terror attack from an al Qaeda affiliate. Previously, it was thought that the CIA leadership thought that the video might have been a cause since this was what they told Congress in a briefing on September 14th.

2) Someone other than the CIA changed the description of the attack to one that was clearly erroneous although Petreus claims not to know how that happened or who did it.

3) There is no competent information about how that change came about or why it was made. Petreus expressed an opinion about this, but also said that he had no knowledge about it. In other words, he has no basis on which to speak.

4) President Obama told Ambassador Rice what to say when she went on TV. That is what he told the nation two days ago. Somehow the information from the CIA was either modified before it got to the president or else Obama himself directed that it be changed. It is still a mystery. Of course, there is a clear political benefit to Obama in making the change and no one else seems to have any reason to insert incorrect information into the intelligence.

Crunch Time For Iran

The terror group Hamas has been launching rockets from Gaza into Israel for months now. The numbers were small at first, but then they grew larger and larger. Israel had been responding with small counter attacks, but that changed two days ago when the Israelis were able to target the military commander of all Hamas forces as he rode in his car. Israel also immediately sent in fighter jets to take out all of the depots for long range missiles held by Hamas (at least the ones Israel knew about). Since then, Hamas has responded with barrage after barrage of short range missiles and a few longer range missiles. Israeli jets have also continued to pound military targets in the Gaza Strip. There have been few casualties. The Israelis have managed to shoot down most of the incoming rockets, but three people died in a village near Gaza when a rocket hit their building. In Gaza, the Israeli air force has been quite successful in hitting only military sites. There are about twelve dead in Gaza, but they are nearly all soldiers for Hamas.

So, what does all this mean? Since this is the Middle East, the first rule of interpretation is to ignore the obvious. This is not just a fight between Israel and Hamas. There had been a truce between those two enemies for years. There was no reason now why Hamas would start launching more and more missiles so as to lead to this confrontation. At least there was no reason that pertained to Hamas for that to happen. The reason for such behavior, however, comes from Iran. Hamas is supported to a great extent by the Iranians. The missiles being launched from Gaza were supplied by Iran. The Hamas forces have been trained by Iran. Hamas' financial needs are met by Iran. In fact, Hamas functions as the local representatives of Iran. There is no way that the missile attacks would have started again without approval from Iran. Indeed, the likely reason for the attacks is a directive coming from Iran.

Why would Iran want to start a fight between Israel and Hamas? The answer is simple: Iran wants to take attention away from its nuclear program. Iran wants to distract the Israeli leadership for the next few months. Iran is close to the point where its nuclear ambitions will be unstoppable. It just needs a few months more for that to happen.

The world cannot be distracted. Either Israel or the USA will have to take out the Iranian nuclear facilities, and that has to happen soon.

Petreus Testifies about Benghazi

As I write this, General David Petreus is testifying in Washington in a closed hearing. Closed hearing or not, it will probably take about five minutes after the end of the hearing until we start to hear what the general says. We do know a few things for certain that had previously been questioned. These include the following:

1) In the 24 hours after the attack on the embassy in Benghazi, it was clear to the CIA and the White House that this had been an assault by a terror group. It was believed to be the work of an al Qaeda affiliate in North Africa. Both the acting director of the CIA and the Director of National Intelligence so testified yesterday in a Congressional hearing.

2) When the Ambassador to the United Nations Susan Rice went on five different Sunday morning news shows on September 16th, she just told the country what the president had told her to say. She really knew little else about the subject of the attack. President Obama himself told us this in his press conference two days ago.

3) There is no explanation yet how Rice could have told America that there was no evidence that Benghazi was a terror attack when the intelligence community and the White House believe the opposite to be true. Neither the acting CIA director or the DNI could answer this question before Congress. Both claimed not to know.

4) In the days right after the attack, Congress was briefed by Petreus and told that the attack was likely not a terror attack but the result of anger over the youtube video. This was wrong, and it was contrary to the intial understanding of the CIA and the rest of the intelligence community. Today's testimony may clear up how this could have happened. We will learn if Petreus was forced to mislead Congress or if he was simply confused or deranged.

5) In early August, Attorney General Eric Holder personally approved certain steps in the investigation of Petreus and his affair with Paula Broadbent. Holder said yesterday that he made the decision at that time not to tell president Obama about the investigation since he did not see any national security implications to it. Holder, the most political Attorney General of the recent past, expects us to believe that in the middle of a presidential election, he did not tell his friend the president that there was a potential scandal brewing that could blow up at any moment during the campaign and greatly embarass the administration. Only a fool would believe that.

6) The week before the attack in Benghazi, the Democrats at their convention spent speech after speech telling America that Obama had destroyed al Qaeda. It would hardly look good for Obama to have an attack the very next week kill the US ambassador and three others. For the story to focus on the youtube video, however, Obama needed the cooperation of Petreus who would be briefing Congress. And, as a total coincidence, there was this investigation that could destroy Petreus' career about which Obama had been kept in the dark by Holder. Really?

7) For days after Rice spoke, Obama's people maintained that this was all due to the video and that there was no terror involvement. Jay Carney, the White House spokesman said about ten days after the attack that there was no evidence of any terrorist involvement in the event. No evidence! Among other things, the Congressional committee yesterday was shown the real time video of the Benghazi attack taken by a surveillance drone starting within minutes of the beginning of the attack. Everyone who saw that video says that it makes clear that there was no mob, no upset over the video, and only an organized attack by well armed terrorists.

I hope Petreus tells the truth. America deserves to hear what actually happened. After all, Petreus has already lost his job and, probably, his marriage. Maybe he can at least salvage part of his reputation.

Thursday, November 15, 2012

Call Their Bluff

Senator Patty Murray of Washington is the likely chair of the Senate Budget Committee in the next Congress. Murray, a Democrat, said today that she cannot commit to the senate passing a budget during the session that begins in January. It is time to call out the Senate Democrats for their illegal behavior.

The law currently requires the Senate and House to pass a budget each fiscal year. For the last two years, the House has passed a budget and sent it to the Senate. The Senate, however, has not passed a budget since 2009. If there is no budget in 2013, then it will make four years in a row that the senators have disregarded their legal obligations.

I suggest that the House Republicans announce a list of federal departments for which funding will not be approved unless and until there is a budget in place. The Democrats have to be forced to act in a responsible manner when it comes to spending. There should be a date given like April 15, 2013 for completion of the budget. Until then, there can be continuing resolutions for funding in order to allow time for completion of the budget. After that date, however, funds for part of the government should be cut off.

I truly believe that Americans understand the need for Congress to act in a responsible manner when it comes to spending taxpayers' money. We cannot go on just spending in a totally haphazard manner.

Investing for Yield -- Do Not Panic

In the last two days, most of the high yield segments of the market have been falling fast. One area in particular, the floating rate funds, have declined in a fashion that one almost never sees in the segment. Others like MREITs and BDCs fell on Wednesday and have recovered somewhat today. Bond CEFs and also Municipal bond CEFs have joined the downward move. If you are invested in the floating rates or the bond CEFs DO NOT PANIC!! The key bit of information that you need to understand is that the bonds that underlie these CEFs have not declined in value. Municipal bonds have even risen a bit during this selloff of the funds. What has happened is that these stocks have moved from selling at a premium to the net asset value to selling at a discount. In some areas like the MLPs, there is some movement due to folks worrying that the tax benefits of the MLPs will be taken away in any deal on the fiscal cliff. The segment is so tiny, however, that Congress is unlikely even to focus on them in a rushed compromise reached in the upcoming lame duck session.

For those who have strong stomachs, the current downturn is a buying opportunity. For everyone else, remember that if you chose your positions wisely, the income that you will be receiving is not going down. Investments made for yields are not meant for short term trading. Things will most likely right themselves once the current upset is over.

NOTE: Remember to check out your particular positions to make sure that there are not special circumstances that apply to your specific investments. The above discussion is general in nature and does not cover each investment in the area.

Alternative Stories

CBS Radio reported this morning that "wealthy Americans" are letting it be known that they are okay with higher taxes provided that the additional money collected is not wasted. It was a typical bit of propaganda. There was no basis for the report, but there it was. In any event, it got me to thinking about other stories like this that CBS Radio could report. Here are a few:

1) People with Type 2 Diabetes are quietly letting it be known that they are in favor of eating unlimited ice cream so long as it does not raise their blood sugar.

2) Folks in South Florida has told CBS that they are in favor of unlimited time in the sun so long as it does not result in sun burn or other skin damage.

3) NOAA has announced that it enjoys watching hurricanes and is hoping for more so long as the storms cause no damage or injuries.

4) PETA is in favor of reintroducing wolves, bears and other predators to Central Park in Manhattan so long as the animals do not cause injury to any people or attack any of the other animals in the park.

5) NARAL has announced that they oppose abortion so long as there are no limitations a woman's right to choose.

6) The Moslem Brotherhood in Egypt announced this morning that it is totally in favor of religious freedom in that country provided that all people are required to be Sunni Moslems who strictly follow sharia law.

Wednesday, November 14, 2012

Total Lies From Obama -- So What Else is New?

President Obama gave a press conference this afternoon. Most of the questions were about the fiscal cliff and General Petreus. The two questions and answers that bothered me most, however were about Syria and the families of those killed in Benghazi.

First on Syria: here is what Obama had to say in part: You know, I was one of the first leaders, I think around the world, to say Assad had to go in response to the incredible brutality that his government displayed, in the face of what were initially peaceful protests. Obviously the situation has seriously deteriorated since then. We have been extensively engaged with the international community as well as regional powers to help the opposition.

In April of 2011, protests spread across Syria. Very quickly, the Assad regime began having snipers shoot at the crowds killing people at random. The hope of the Assad regime is that these acts of terror would keep people in their homes and end the protests. That strategy led to the deaths of hundreds of innocent people, but it did not stop the protests. Obama was silent. Even though the Syrian regime was killing its own people, Obama said nothing. Indeed, the State Department continued to call Assad a "reformer" for weeks after the killing began.

About a month or so later, the sniper attacks on protests escalated into attacks by the Assad regime with much larger fire power than just a few snipers. Mortars and other more deadly weapons were used. The response from Obama was to stop calling Assad a "reformer". Leaders of the Arab world condemned the violence against innocent civilians in Syria, but Obama just stood silently on the sidelines.

Eventually, the level of killing of civilians in Syria rose. The Assad regime started shelling cities like Homs. Thousands of innocents died. Obama said nothing but the State Department did call for a cessation of violence.

Following month after month of slaughter in Syria, following the outcry of the leaders of states like Turkey, Saudi Arabia, and other neighbors of Syria, following statements by leaders of European countries like the UK, Germany and France, Obama finally said that he thought that Assad ought to go. Obama was not leading from behind like in Libya. Obama was just trying to catch up to the rest of the world.

For Obama to claim that he was one of the first world leaders to call for Assad to go is a total lie. People died in Syria. People are continuing to die. The election is over. Why can't Obama just be honest about the situation there?

Now, as to the families of those killed in the Benghazi attack, Ed Henry asked the president about what he had to say regarding the calls for help from the embassy which were basically ignored by Washington. Obama spoke for about two minutes, but he carefully avoided answering the question. Again, the election is over. Don't the American people deserve to know the truth here?

It is going to be a long four years.

Even more Good News

Nancy Pelosi announced this morning that she is staying on as the leader of the Democrats in the House. This is good news. Pelosi is a living joke. Every time her botox laden face appears on TV to spout some position, she reminds millions of Americans why they tossed the Democrats out of the majority in the House two years ago. She is an insurance policy for continued Republican control.

Good News for Once

The head of the military forces of Hamas has been killed by Israeli action in Gaza. At the same time, Israeli air forces struck at missile storage facilities and other weapons storage areas in the Gaza Strip. The dead Hamas leader Ahmed al-Jaabari is the highest level terrorist to be killed by the Israelis in years.

The response has been predictable. Hamas is calling for war. So what else is new? Iran is outraged that Israel would kill a terrorist leader. Again, what else is new?

The truth, however, is that this strike is a very good move by the Israelis. It is important for those who have been indiscriminately firing missiles into southern Israel to come to understand that their days are numbered.

Let's Go Over the Cliff

January bring the so called fiscal cliff to America. On January 1, the income tax rates will revert to those in place at the end of the Clinton administration. The estate tax will rise by 20% and the exemption will fall from $5 million to %1 million. Expensing of corporate investments will end and we will go back to normal depreciation rules. Federal spending will be cut as the sequestration provisions go into effect. That means about $100 billion will be cut from the budget -- half from defense and the other half from domestic programs. At the same time, the reimbursement rates from Medicare will go to the levels that Congress passed years ago and then kept postponing.

The panic over the cliff is pervasive in the media. It will bring a recession, we are told over and over. Well, that may be so, but the correct course is still to go over the cliff. Here is why I believe this is the correct choice:

1) For tax rates, we need to do something more than tinker with the highest rate only. There needs to be tax reform in a major way. There is no reason why people making the same income should pay drastically different amounts of tax due to the existence of loopholes and deductions. We need to bring fundamental fairness back into the tax code as a goal. The only way to motivate Congress and the president to actually focus on this problem is to keep the pressure on them. A deal that avoids the cliff will take that pressure away and we will just have business as usual.

2) Federal spending also has to be cut. Remember, the sequestration cuts are in place just to try to keep the budget deficit from ballooning further. Let them go into effect and then let Congress look for a more realistic way to make such cuts.

3) The Medicare reimbursement cuts have got to go into effect. These are the same sorts of cuts that Obamacare uses to finance most of its costs. If Congress is not going to allow them to go into effect, then America needs to know this. If these cuts are really likely to have such a bad effect, then America needs to know this.

4) If there is a recession, it will be much less severe than the depression which will surely come when the USA loses its ability to borrow because of all the debt it has run up. Remember, the fiscal cliff will close the budget deficits by about 6 trillion dollars over the next decade. We ought not simply to avoid reality. It has a way of coming back and hitting you in the face.

Tuesday, November 13, 2012

The World's Least Important Announcement

Tomorrow, Nancy Pelosi is going to announce whether or not she will stay on as the leader of the Democrats in the House. Who cares? Minority leader is perhaps the most meaningless leadership position in government. It is sort of like being vice president. You get the title; you get the perks; you have no real power and nothing much to do.

I hope Pelosi stays on. I have gotten used to ignoring her. I would hate to have to break in someone else.

Does Anyone Really Believe This?

According to the news reports, Attorney General Eric Holder was told of the investigation into CIA director Petreus last summer when Holder's permission was needed to obtain the emails in Pertreus' account. Also, according to the news reports,Holder did not tell the president of the investigation and Obama remained unaware of it until after the election.

On Saturday Night Live, they would look at each other and say "Really?" at this point. There is no way that Holder would let the president go forward, especially in a campaign year, without telling him of the investigation. It would violate the first rule of political survival: keep your boss out of harm's way. Even more than political survival, there is the issue of the security of the USA. Holder would have to tell Obama, since this mess had the potential to affect national security.

So what really happened? We may never know for sure. As more facts come out, I remain convinced that Obama used the investigation as a means to keep Petreus in line on the Benghazi mess during the campaign, and then he threw Petreus under the bus once the election was over.

Natural Gas Trucking is Inevitable

This morning brings news that General Electric and Clean Energy have enetered into a deal under whick GE will sell two natural gas liquification plants to Clean Energy. GE is also financing the sale which will total about $200 million. Clean Energy will use the LNG produced to supply the filling stations that are part of its "natural gas highway", a string of locations across the country at which natural gas vehicles can refuel.

Many folks will just look at this as another move of little importance, but this deal has great significance way beyond the $200 million involved. First let me say that $200 million is significant in and of itself, so don't send email or write comments telling me that..please.

The importance of the deal is that General Electric is putting at risk this huge amount of money on a sale to a company that is unlikely to succeed if the transition to natural gas vehicles never takes place. That means that GE is now reasonably convinced that the conversion to nat gas is a done deal. One can criticize the management of GE for all sorts of things, but no one believes that it would put a fifth of a billion at risk unless it believed that the deal would be a success.

The truth is that the entire natural gas vehicle infrastructure and marketing model is coming together faster and faster. Clean Energy itself announced the other day that it remains on schedule for the roll out of its filling stations across the country. It also has signed more companies to deals testing some of their fleets of trucks on natural gas. The Cummins-Westport engine for long haul truckers is due out in February and recent reports has confirmed that the roll out is on schedule.

Once all this has occured, basic economics will move the conversion to natural gas forward. After all, by using natural gas, a long haul trucker can reduce its cost of fuel per truck by a minimum of 25%. That is an enormous savings. Further, if some truckers convert, the cost advantage that they will achieve will quickly force their competitors to make the transition just to keep up.

It is worth keeping in mind the difference between the flop which is electric vehicles and the looming success of natural gas vehicles. Electric vehicles cost substantially more than gasoline or diesel powered vehicles. The cost differential is so great that the fuel savings achieved do not make it up. Further, the operation of the electric vehicles has a great number of shortcomings. For example, the Chevy Volt will only go 28 miles on an electric charge. Even heavy subsidies from the government has not brought success to the electric vehicle market. On the other hand, natural gas vehicles make economic sense; they cut the costs of operation to such a great extent that any additional cost for the vehicles is made up within the first year of operation. Even without government help, the move towards these nat gas vehicles is proceeding apace.

Investing for Yield -- What to Avoid Now

I have been writing about where to invest to get a good yield in the current market. That is only half the problem, however. There is also the issue of investments to avoid.

Right now, there are two areas with alluring yields that I do not believe are worth an investment. These two are the mortgage REITs and the business development companies also known as BDCs.

Mortgage REITs are companies that mostly invest in mortgages. Some only buy the mortgage backed securities issued with government guarantees. Others buy mortgage backed securities from private issuers. Normally, these companies borrow against their holdings at low short-term interest rates and then invest in higher yielding long term bonds. There are many different paradigms used by the MREITs, but they each face certain problems that keep me from currently investing in these entities. First, they do not have any major items on the horizon that could improve their financial positions without a major increase in risk. The MREITs profit from a lowering of short term rates, but these rates are as low as they can possibly go. The MREITs also profit from higher long term interest rates and therefore higher mortgage rates, but with the latest Fed easing, there is essentially no likelihood in the next two years of such higher rates. Further, rising rates only benefit the MREITs on new investments; bonds that they already own will decline in value if the interest rates rise. Most MREITs have the ability to substantially increase their leverage, but with the near term prospects for interest rates being government by the Fed, it makes little sense for such an increase in risk to be undertaken.

MREITs also face some ongoing problems. The biggest problem is the Federal Reserve and its ongoing effort to lower mortgage rates. As mortgage rates fall or even stay a the current low rates, folks across the country can refinance their homes at lower interest rates. As the mortgages are prepaid, the MREITs get portions of their holdings redeemed and there are only new investments available at lower rates. This phenomenon keeps downward pressure on the interest rate spread that the MREITs can obtain on their funds. for the moment, the MREITs are being helped by the difficulties that many home owners are experiencing with refinancing. Rates may be lower, but there are many home owners who no longer meet the qualifications for a new mortgage. If the government ever takes effective steps to allow refinancing of these homes, there will be a massive slug of prepayments which could really hurt the MREITs. There have been numerous attempts by the Obama administration to allow such refinancing, but they have all been failures, thus helping the MREITs.

So, MREITs have little prospects for improvement and a mid term prospect for lower incomes and distributions. Under current market conditions, I would stay away from them. Their day will come again, but right now they are just too risky.

Business Development Companies make loans to and investments in corporations that are having trouble getting sufficient funding from banks and the bond markets. Because they are not banks, they can receive payment for the loans, in part, by taking equity positions in their borrowers. This provides an up side for the BDCs that banks do not have, but it is not enough to make up for the lower credit quality of most of the borrowers. If the world moves further down the road to renewed recession, the BDCs will be the ones who are most at risk due to failure of their borrowers. There is no doubt that the BDCs pay a nice return, but right now, it is simply not high enough to take the risk of this class in my opinion.

For those who nevertheless believe that the BDCs are a good place for some of their portfolio, I recommend Ares Capital (symbol ARCC). It is one of the stronger and better managed BDCs. It also has options which can be used to enhance the dividend return through just out-of-the-money covered call writing.

Where to Find Yield -- Investing for a Good Return -- Part 4

No discussion of high yield investments would be complete without addressing MLP's. Normally, these are companies that engage in businesses like natural gas pipelines, oil field trusts, and the like. Although these companies are traded on the stock exchange, what is bought and sold are not shares of stock, but rather units of ownership in the limited partnership. Because of this, the tax treatment of ownership is different from normal stock investments. Master Limited Partnerships do not pay tax at the corporate level. Instead, at the end of the year, the MLP sends out a form K-1 to each partner which tells that person what his or her share of the taxable income and loss for the year has been. The level of distributions from the company does not determine the tax; it is the actual profit and loss of the company. As a result, ownership of units in an MLP means that completing ones taxes become more complicated when April rolls around. Often, the MLP is delayed in sending out the K-1s, so the unit holders have to file for extensions until the form comes in. The common response to this problem is to put the MLP units into an IRA or other non-taxable account. That is not an entirely satisfactory solution, however, as there are taxes which can be levied upon the IRA dependent on the amount of distributions from the aggreagate of the MLPs. I will not explain those rules here; just realize that they may come into play and make tax filings more difficult.

My favorite among the MLPs has, for a long time, been Plains All American Pipeline, L.P. (symbol PAA). Plains, as the name suggests, is a large energy pipeline company. As of now, it is paying just under 5% in distributions. It has consistently raised the distributions for many years now. It has also been a steady performer when it comes to the stock price itself. In addition to the distribution, the price of the stock is more than five times what it was when the company first went public during the 1990s.

There is also a way to invest in MLPs without having to deal with all of the tax complications. There are corporations that do nothing but invest in MLPs. These entities pay tax at the corporate level, so dividend that get paid to shareholders are treated like any other corporate dividend for tax purposes. A good example is Tortoise Energy Capital Corp. (symbol TYY) and its sister entity Tortoise North American Energy Corporation (symbol TYN). Both pay about 6% in dividends (TYY just below and TYN just above.) Further, since these companies holdings are MLPs, and since the MLPs frequently operate at a paper loss (due to heavy depreciation or depletion), the distributions frequently come as tax free return of capital. Such a distribution reduces ones tax basis in the stock, so there ultimately will be a capital gain when the stock is sold.

This area is one that is complicated because of the tax issues that these investments raise. I would avoid the problem by investing in companies like TYY and TYN. Putting a part of an income portfolio into this type of investment is a good way to diversify and reduce risk.

DISCLOSURE: My accounts are long TYY and TYN but I have no holdings in PAA.

Monday, November 12, 2012

Electoral Nonsense

Now that the elections are over, we are seeing an endless stream of articles from the media about the problems facing the Republican party. We are told that demography will kill the GOP; only whites will vote for the party and blacks and Hispanics are wedded to the Democrats. We are told that large states like California, New York and Illinois as well as Michigan and Pennsylvania will only vote for Democrats. We are told that Democrats have women's votes locked up. The truth is that there is an old legal term for this analysis. Simply put, the entire discussion is crap.

There is no doubt that the Democrats won the presidential election this time. It was a lot closer than in 2008, but the size of the margin does not change the result. The Democrats picked up two seats in the senate, but the Republicans maintained their majority in the House of Representatives. The GOP also increased the number of governors it holds while it lost a few state legislative bodies, although it maintained a control of a majority of them.

So was 2012 the last hurrah of the GOP as many, particularly on MSNBC, would have you believe? No. The tide will turn again. It always does.

The truth is that even the so-called demographic divide will shift in the future. Think about it. If the 2016 ticket includes Marco Rubio as the first national Hispanic candidate, how many Hispanic voters will vote for him? When president Obama was first running in the primaries in 2008, he was leading among African Americans, but the race was close with Hilary Clinton. Once Obama won in Iowa and it was clear that he had a real chance, his margins in the black community went up to numbers like 90%. The same thing will happen among Hispanics.

The truth is that the issues of 2016 and beyond are what will drive the voters in their selections. It is foolish to decide today that one or another group will be wedded to one party or the other.

Let me illustrate: In the 1950s, the South was totally Democrat. It had been that way since the Civil War and Reconstruction. Over the next 60 years, that region moved to being totally Republican, a move that is still happening at the local level; Arkansas now has a Republican majority in its legislature for the first time. All the southern states have GOP majorities. At a national level, however, states like Florida, North Carolina and Virginia are moving towards parity. In the 1960s Catholic voters were firmly Democratic; the selection of John Kennedy had cemented them into the party. By the Nixon years, however, Catholics were no longer sure Democrats. When Reagan ran in 1980, the so called Reagan Democrats were largely Catholics. They moved with the issues.

I do not know how the various groups will line up in 2016. No one does; no one can know. We do not know what the issues will be in that election. Will today's terrible economy continue? If so, it will be hard for the Democrats to blame Bush after 8 years of failure. Will there still be a serious terrorist threat? The extent of such a threat may make people choose on issues that hardly played a role this time. Will Obamacare have failed by then? Will Obamacare be viewed as a success by then? Will the surge in the national debt have led to high interest rates and inflation? There are so many questions that have to be answered before one can tell how the voting will play out, that it is just a fool's errand to try to proclaim the future right now.

Where to Find Yield -- Investing for a Good Return III

This is the third in a series. The first two articles are available here and here.

If one is looking for a relatively safe return, another area to explore are the so called floating rate funds. These are funds that invest in corporate debt that adjusts as the market interest rate rises or falls. Usually, this debt is of a much shorter term than a regular corporate bond. This tends to reduce the level of risk. Further, because the interest rate on the loan varies somewhat with the market, the risk of rising rates is greatly reduced.

Let me take a moment to explain why rising rates are a risk. For those of you with experience in bond investing, you will already know this. On a regular corporate bond, the rate paid by the company is fixed for a term like thirty years. If interest rates rise in the market, the only way for the rate on the corporate bond to rise is for the price of the bond to fall. A bond paying $50 or 5% on a thousand dollars of principal each year will rise to 5.5% if the price of the bond falls to $900. A major interest rate rise can take the price of long term bonds down substantially. There is a countervaling force which comes from the ultimate payoff of the bond being at $1000 while one is paying less, but for a thirty year bond, this is a small amount.

In any event, floating rate funds invest in debt for which the interest rate is not fixed. If the market rate rises, so does the rate on the floating rate funds. On the other hand, if the market rate falls, so does the rate on the floating rate funds. One of the things that makes the floating rate funds so attractive at the moment is the small likelihood that the market rate of interest will go any lower. Again, this is thanks to the Federal Reserve which has pushed interest rates about as low as they can possibly go.

Now you should be aware that the credit quality of the debt owned by the floating rate funds is usually not as good as the best corporate bonds. If there are a large number of bankruptcies, the floating rate funds could be hit. Nevertheless, the diversity of the investments reduces this risk to a more than manageable level. To put this in context, during the crash in 2008 and 2009, the floating rate funds declined by just about the same amount as both the junk bond funds and the investment grade bond funds. Of course, at the bottome of the market, the floating rate funds were still paying interest at a rate approaching 20%, a rate that normalized as the price of the fund rose quickly when the panic ended.

For me, the key to picking a floating rate fund is to find a management which has demonstrated skill over the past years. I like three different floating rate funds at the moment: Nuveen Senior Income Fund (symbol NSL), Nuveen Short Duration Credit Opportunities Fund (symbol JSD) and Invesco Van Kampen Dynamic Credit Opportunities Fund (symbol VTA). At the moment, NSL pays 7.23% return and is selling at a premium of 3.2%; JSD pays a return of 7.53% and is selling at a 1.97% premium; VTA pays 7.01% but it is selling at net asset value, i.e., no premium or discount. If I had to pick just one, it would be JSD because it is earning much more than it is currently paying out, so it looks like another increase in the payout is imminent.

It is important to remember that floating rate funds, like all of the areas the give off yield, are not a place to put all or even the majority of ones assets. They are just one of many places that make sense for yield investors. Right now, because of the current low rate environment, increasing this segment of investment would be a good move. Once rates actually begin to rise from their current depths, however, it will be time to start to cut back on these funds.

REMINDER: Before you invest in any of the funds listed here, please do your own research on the subject. I cannot begin to cover all of the important information that deals with each of these potential investments. You need to review these in more detail.

Sunday, November 11, 2012

Where to Find Yield --Investing for a Good Return --PFN

I have been writing a series about various categories where one can find high yield investments that have a lower risk profile. Today, I am going to take time out from discussing categories of investments to covering one idea in particular. The individual investment for today is Pimco Income Strategy Fund II (Symbol PFN). PFN is one of many bond funds that are traded on the market. It is a closed end fund that invests in all sorts of debt instruments. Many of the bonds that it buys are relatively higher in risk. I rely on Pimco, one of the premier companies in managing debt to avoid too much risk in the fund.

There are some very good reasons to buy PFN at the moment. These include the following:

1) The fund is currently paying a return of 8.5% at its current price of $11.29.

2) PFN is selling at a premium above net asset value of 3.58%; this is a bit on the high side, but not too great for a corporate bond fund.

3) PFN has undistributed income of just over 50 cents per share. The current monthly payment is 8 cents. More than likely, PFN will pay a special dividend either in December or January. This could raise the return from the dividend to more than 12% and it also could lead to a nice rise in the price of the fund. The high undistributed income could also lead to a rise in the monthly payout. Last April, this went from 6.5 cents per month to 8 cents per month. Indeed, both the special dividend and the increased monthly payout could be in the cards for the near term.

In my opinion, PFN is a good place for a high yield investment at this time. The yield is fine without the possible bonus or the increase in the dividend. When you add both of those possibilities on top of the current dividend, the return may be outstanding. One could even buy the fund in the expectation of selling once these higher payouts are announced.

DISCLOSURE: I am long PFN at the moment. I may add more in the near term.

Where to Find Yield -- Investing for a Good Return -- Part II

This is the second in a series. If you have not read the first installment, it can be seen here.

Another place to get good returns are with municipal bonds. These instruments have the obvious advantage that the interest that they pay is free of federal taxation and, if you buy bonds from your own state or from Puerto Rico, free of state and local taxes as well. The problem with these bonds, however, is that the interest rates that they pay have fallen quite far in the last two years. In my own state of Connecticut, the returns even for a thirty year bond are quite low. As a result, I would only invest in municipal bonds by means of a closed end fund or a CEF as they are known.

CEFs are companies that issue stock and then use the funds raised to buy other assets, in this case municipal bonds. Most of the CEFs also borrow against the value of the bonds which they purchase and use the loan proceeds to buy more bonds. In the current interest rate environment, this helps to raise the return paid by the CEF. Think about it. The CEF borrows short term at a rate that is extremely low thanks to the efforts of the Federal Reserve. Then, the CEF uses these extra funds to buy municipal bonds that pay substantially more than the CEF itself is paying on the borrowed funds. The spread between the two interest rates is pure profit which gets returned to the shareholders.

There are a great many municipal bond CEFs available for purchase. The question is how best to choose one. I would look at five characteristics of the CEF prior to purchase. First, the most obvious parameter is to look at the current yield of the fund. Right now, the good CEFs are paying just under 6%.

Second, one needs to look at the discount under or premium over net asset value at which the CEF is selling. Let me explain: the bonds and cash held by a CEF less the debt that it has gives one the net asset value of the CEF. Normally, the stock issued by the CEF sells at something near the net asset value of the CEF, but the range could be from ten percent below that figure to ten percent above that figure. When buying a CEF, it is best to look for a fund that is selling at a discount to the net asset value. In that way, the underlying value of the fund helps to support the price. Buying a CEF selling at a premium to the net asset value means that one is paying for something other than the true value of the holdings of the fund, a paper asset that could disappear quickly. Of course, paying a small premium like 1 or 2 percent is not the end of the world, but it is, nevertheless, an additional risk.

The third parameter that must be examined is the level of earnings of the fund compared to the amount that is being paid out in dividends. Obviously, you want a fund that earns more than it is paying out. This means that the dividend at the current rate is likely to stay the same or even be increased. These days, it is also acceptable to buy a fund that earns nearly as much as it pays out provided that it has a substantiall UNII. The UNII held by the fund is the fourth parameter to examine. Without getting too technical, the UNII consists of the past earnings of the fund that it is still holding. In other words, it is money that the fund earned but has not yet distributed. A high UNII means that the fund will have a cash account that it can use for future distributions if its current earnings decline below the current distribution. It is insurance against a cut in the dividend payout.

The last parameter that needs to be checked is that portfolio content of the fund. There is no need to look at each individual bond; it is sufficient to look at the ratings of the portfolio and the timing of maturities and calls. Obviously, a fund with lower ratings for the bonds it holds should yield more than a fund with only high rated debt. I would stay away from any fund that does not have the vast bulk of its assets in at least BBB rated bonds. The call profile is also important. The rate of return paid on new municipal debt is much lower than the average rate was five years ago. If ten percent of a fund's assets get called in the next year, there could be a quick reduction in the earnings of the fund as higher paying bonds are replaced with new one that pay less. This could lead to a reduction in the dividend and a lowering of the yield.

There are risks in municipal bond CEFs of which one must be aware. First, municipalities can and do go bankrupt. Buy buying a CEF, you are diversifying your risk by owning little bits of a great many issues. Still, the muni market could tank if bankruptcies start to mount up. Second, there has been sporadic talk of the taxation of muni debt. Were there to be a serious move towards taxing municipal bond interest, this market would tank. Third, some of the muni CEFs are not all that liquid. One can always get out if one wants to sell, but some of the CEFs will move if a substantial block is sold. For this reason, try to stick with CEFs with a larger market cap. Lastly, there is the obvious interest rate risk. If short term rates start to rise, it is a good time to get out of municipal CEFs since the debt of the funds will begin to cost them more. Similarly, if long term rates start to rise, it is also a good time to sell since rising rates mean falling bond prices which, in turn, means lower prices for the CEFs.

There is a great deal of information available on the CEFs. If you wish to study them in order to find a good one, I recommend that you visit a site called CEF Connect.

Two last notes: First, do not rule out buying a muni CEF from a state other than your own. It is true that will have to pay state income tax on the dividends, but the extra yield for the right fund may more than make up for that tax. Second, muni CEFs are not investments that need to be monitored every day, but they also are not things to buy and then ignore. Interest rate markets move every day, and sometimes the movements are large. You need to pay attention to the CEFs on a frequent basis and not be afraid to sell if the market seems either to be peaking or to be moving against you.