Random Thoughts on November 1st

One of the pleasures and pains of writing a weekly financial blog is determining what to say. This weekend I have a number of incomplete thoughts from various stimuli I received over the weekend. Any of these ideas could be developed into blog in and of itself. However, by focusing on a single subject, one would not see a number of the cross-currents that are washing over my mental boat in rough seas. In no particular order, my thoughts include the following ideas:

1. Peggy Noonan writes in The Wall Street Journal that many people either believe our various structural problems will not get better and we have to live with the current imbalances, or that they have a sense of optimism without any focus on innovation. I believe that both views are wrong. Some of the structural imbalances are cyclical, made worse by government intervention which prolongs the period of healing. Other imbalances will get worse, such as structural unemployment; we have produced a labor force that does not know how to labor in today’s world. I am afraid this is a multi- generational problem of education in the home. On the optimistic side, I believe that technology will create new products and services that will make much of our existing ones obsolete to a point that we will replace the old with the new, even before the old wears out. My optimism, particularly in technology, leads me to favor funds that have significant technology holdings, often found under healthcare and energy classifications, as well as those that have a separate technology classification.



2. Alan Abelson in Barron’s quoted John Williams of Shadow Government Statistics, stating that 92% of the 3.5% gain announced for the 3rd quarter 2009 GDP was essentially contributed by “one-off” items, i.e. “Cash for Clunkers,” and expiring first-time home owner mortgage credits. Abelson’s comments reinforce my concern on the reliance on government numbers. One might add to the list, the President’s claim of 1 million jobs created or saved by the stimulus. As primarily equity investors, our focus should be on the revenue production of companies and the bottlenecks they are discovering in their sales and delivery processes. Commodity prices and transportation data are much more reliable indicators.



3. Little mention is being made in the financial press, and none in the stock market comments of the general press, about the fact that Mutual Funds operate on an October tax year. Most of the equity funds have large realized losses created in 2007 and 2008, as well as earlier this year. I suspect that in October, a number of portfolio managers sold some of their positions that had gains, without incurring any additional tax liability for their shareholders. They may share my point of view that it is unlikely that any significant news will break in the next thirty days, suggesting at best, a flat market for a month. This hiatus in the market recovery will allow them to reallocate their portfolios or return to their prior positions, (we will never know for sure, as the funds that report on a calendar quarterly or semiannually do not have to report on intra-quarter activity). In my mind, I believe this factor is a possible additional explanation why the month of October was flat. If I am correct, the stock price weakness shown in the last week is not a canary in the mine giving us a signal to get out of the stock market.



4. Another market phenomenon is that in the last week Berkshire Hathaway disposed of another major portion of their holdings in Moody’s, at current prices. The credit rating company is regularly under attack in the press, the regulators and some well known short sellers. What I find significant is that the stock absorbed this selling without further declines. As the company is not currently buying back its shares, the other side of the trades may represent one or more substantial buyers, as the public does not appear to have any interest in this stock. Often I find when a stock does not decline much in the face of a strong, well-known seller, there is a “story” in the unidentified buyer. Perhaps these thoughts are wishful thinking in that Moody’s is a long-standing position in our Financial Services Hedge Fund.



5. Now for a non-market thought: Saturday night’s, or more accurately Sunday morning’s, victory by the New York Yankees in the third game of the 2009 World Series is something of a cultural identity. People have a visceral reaction to the New York Yankees; they either like them or hate them. Friends of mine from all over believe that everyone who currently works or lives in New York, or ever did, is a Yankee fan. Never mind that many of these people are not baseball fans, and like me, have difficulty in naming the starting team, but the Yankees represent something. I would suggest they represent a culture of winning. (The image is greater than the statistical history. Nevertheless they have won more pennants and World Series than any other team, although in any many years they are not the best team). To many others, the Yankees represent a swagger or arrogance. This is one of the deep root causes for the current Administration’s and Congress’ desire to “reform,” or some may say punish, Wall Street. During the rain-delayed game I saw the Vice President of the United States in the front box seats. As a kid growing up in Pennsylvania, and a long-time Senator from the neighboring state of Delaware, one can easily understand his affection for the Philadelphia Phillies. Parenthetically, I find it interesting that his brother and son are involved with a hedge fund.

We should not expect any solace from the vice president, his administration or Congress for New York. One of the critical issues recognized by the current CEO of the New York Stock Exchange is that its future is dependent upon on what Washington pitches at New York. In the long-run, those of us who are spiritual New Yorkers have to find ways to become more loveable to the rest of the country. This tension is not new, as Alexander Hamilton and Thomas Jefferson, as well as Theodore Roosevelt and JP Morgan somewhat successfully worked on creating conditions from which all benefited. That is our job today. Go Yankees. .