Friday, January 18, 2008


The big banks have cut deals with the sovereign funds of the Middle East and Japan to be able to "hold what they got" and to buy more. These big banks have marked down good mortgages to pennies on the dollar. In the mean time, their buddy at the FOMC, Ben Bernanke, sat in a congressional hearing yesterday talking nonsense. He of all people knows that a drop in the Fed Funds Rate would be more stimulative that the package of junk that is about to be passed by congress and signed by Bush. From the republican point of view, it is great to show that the new party of fiscal discipline is willing to go from Pay as You Go to budget busting spend thrifts in no time flat. Bush is having fun letting the Democrats twist and turn and ultimately agree that tax cuts are needed during an economic down turn.

All the while, the big boys continue to squeeze out the "little guy". The little guy in this case includes some very large fish who cannot get financing to hold onto big properties and projects but it also includes all public investor who has bought the "crisis" hook line and sinker. Selling out now, is selling out due to fear, not due to reason. The mortgages that were written down will only come back up in value gradually as a home is sold here and refinanced there. In the mean time, the big boys will use the argument that the government must provide fiscal stimulus as a way to hold off doing what really needs to be done. The Fed Funds Rate is 2% above the 2 year treasury! Banks that wish to lend are being penalized.

How long will this situation last? Bush clearly wants to be perceived as part of the solution. He wants to support a big stimulus package to show that republicans "care about the little guy". This situation is a weird game of Robin Hood, where the pockets of the poor are picked secretly so the pickers can magnanimously give the money back.


A write down on paper is nothing but a tax and perception gimmick. As I have related, the situation is the same as when Warren Buffet wrote off his loss in US Airways in the early 1990's but continued to hold the cumulative preferred shares. When the stock recovered from $4 to $65 he made up the write off of $20 to $4 and three times more plus the accumulated dividend at 9%.


A reader who has ridden the airline roller coaster with me to the bottom, wants to diversify. He has ridden the fastest horse to the wilderness but wants to get on a slower horse on the trip back home. Well, there is ample opportunity as there are bargains galore in the market today. There are several problems. One is that most industries have not come through a total rationalization like the airlines. It was in 1978 that the airline oligopoly was broken and the oligopoly of limited landing slots has only bitten again in recent months. My friend Lamar sent me an article posted in the Wall Street Journal on January 16. You can Google the news and find it quickly if you like. The point of the article was that the need for merger is not so strong right now because the major carriers are in the position of being able to raise prices dramatically. The Chair of Continental says the company will respond to mergers as size is important but that the companies competitive position continues to improve as is. Last week, United pushed through a massive fuel surcharge that succeeded until Continental retracted. It is not clear why they retracted but yesterday, AMR gave it the second try. Instead of the $50 round trip increase, AMR has done a $40 round trip increase. I think this will turn out to be one of those situations were the traveler pays the $40 and says thank you very much at least I got out from under the $50 increase. The bottom line is that there are all kinds of bargains in the market today but the one that is most obvious to me is CAL.


Even after the phony write downs, the big boys shares are not as cheap as others. Companies such as Merrill enjoyed a lot of years of easy growth but in the second half of the business cycle a lot of growth will be the old time natural organic growth. As millions of businesses gradually expand, they will not need an investment banker to help put their business up for sale to the highest bidder. The IPO market will not be super strong as existing businesses will absorb much of the "normal growth".


The big boys continue to spend heavily so that the ultimate choice for President will be a "big boy insider". Yes, that includes Hillary. The Chair of CitiBank was a key player in the Bill Clinton administration. Hank Paulson left his $200 million a year job at Goldman so that he could drive Bush in the right direction. Even McCain is too much of a maverick for the 'big boys" and Huck is certainly outside the "big boy" circle. Still, the big boys will be willing to join Huck if he pulls off the upset. As we have seen once again, money is not the final arbiter of political success. Mitt and Rudy have outspent all the other republicans by wide margins but with only modest success. Huck has done very well while spending modestly. Rush Limbaugh is behind Romney, which is interesting because Romney is a Bill Clinton polling clone. Bill and Mitt take polls to see what the public supports and that becomes their new policy. When Mitt was in Massachusetts, the polls showed that he should support government payment for abortion so that is what he signed. Bill passed laws to end welfare and to open free trade not because he wanted to take the country in this direction but because he wanted the ego trip of "leading" the band. Getting out in front with a baton is not the kind of leadership the country needs. Even so, if evenhanded exposure was given to the FairTax, the majority of the public would support this change. The big problem with the FairTax is that it dramatically reduces the need for Washington lobbyist. A lot of big law firms would need to find other clients.


Insiders are buying and buying stocks. The public is selling and selling more. The public is wrong again. If you can find the way to buy now, you will be well rewarded.