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Brian McMorris
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A grizzled veteran after 30 years of personal investing, I have strong personal interests and aptitude in economics, business analysis, technology and personal finance. I have experienced the lows of the 70s and 80s, and the highs of the 90s. After surviving the Great Recession, I have... More
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  • Two California's
    One advantage of a Federalism is the opportunity to test variations on political and cultural mixtures within different states. America has a wide range of cultures, geographies and political systems which provide an interesting array of results. Given the very heated debate today over the continuum of liberal to conservative values, there are a few states that can be used as labs to demonstrate the effectiveness of various opinions on the subject.

    California and Minnesota are two good examples of liberal or "progressive" political values while Utah and Texas might be two examples of states with predominantly conservative values and politics. There are many states in between and some, like Ohio, that are classically in the middle, and therefore become political "swing states".

    Because America has a few extreme examples of political systems and culture on both ends of the spectrum, it makes good sense to observe those states to see what is working and what isn't. From the success or failure of those states' policies, others can adopt the best and reject the worst.

    All of this said, and I believe fervently in our Federalism precisely because it affords these ad hoc real-world laboratories, I was struck by an article written by a native Californian who conducted his own informal research on the effectiveness of the political systems and values in place in California. At least from this writer's perspective, the results are not encouraging. What he reports is socialism, not only out of control, but dripping with hypocrisy as well.

    Reflecting what seems to be a national trend, the political and academic elites in California attack the wealthy and near-wealthy, holding them to the highest regulatory standards in the world, while punishing them with some of the highest taxes. But at the same time, turn eyes away from the abject poverty and regulatory lawlessness of the poorer people, most of whom are immigrants, legal or not. And, like other liberal or progressive states, California is attracting those that are poor and pushing out those who are better off, economically, exacerbating the financial problems for the state into the future. Minnesota also has this reputation, though seems not to have lost control of its destiny, yet. Bordering Canada rather than Mexico helps Minnesota avoid the worst of California's problems of illegal immigration and legal immigration beyond the state's ability to support it.

    But enough of my opinonating. Read on for a very intelligent and personally researched story:

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 11 8:19 PM | Link | Comment!
  • The Trouble with Demographics

    I have written in the past how the American demographics (actually, all the developed world) will work against an economic recovery / expansion going forward.  In today's post by David Rosenberg, he writes extensively about this major overhang to the recovery of the American economy.  We have only reduced our debt overhang caused by the meltdown in 2008 by $1T. There is still $6T to go. How will this overhang get paid down without impacting economic growth in a demographically challenged (aging) market? It seems like there is no way to reconcile this problem, other than through painful saving and resultant economic stagnation (as consumption dollars are transferred to debt reduction). This is the exact setup for a long period of economic non-performance such as has been experienced in Japan the past 20 years.

    Here is an article in today's WSJ, "Obstacle to Deficit Cutting", that makes this same point in detail.  It also exposes the economic problems with "leveling the playing field" as the current administration desparately wants to do.  Entitlements are never the path to economic well being, for the taxed, or the beneficiaries of transfer payments.  Instead, the focus should be on paying down the debt and training and motivating the population to adapt to the modern, non-blue collar, economic era.

    In the meantime, the economic winds will be at the back of the emerging world which will have little economic competition from "The West" during this same period. America benefited from the weakening of Japan as a competitor during the 1990s up until 2007. The BRIC nations will benefit in the same way from the Euro/American block of nations being tied up in deficit reduction for the next 20 years.



    Disclosure: I am long through call options, EEM and FXI as a way to play the devloping world. TDF, a closed end fund, is another good option in place of FXI. I am short the American market via SDS.
    Tags: TBT, SDS, EEM, FXI, TDF
    Sep 15 3:34 PM | Link | Comment!
  • Bill Ackman’s Take on the Goldman Story

    Those who talk finance with me know that I have an abiding respect for investor Bill Ackman.  It comes close to man-love, I must admit.  Bill is eloquent, thoughtful, intelligent, well-informed and any other adjective that gives praise.

    My first experience reading about and listening to Bill came about this time last year when I was struggling with whether to invest in General Growth Properties.  At the time last April, GGP was entering bankruptcy.  But the market and economy had just begun to turn and I had personal experience with GGP properties and management and thought the company had excellent mall properties and was well run.  I wanted to invest in GGP which was then selling for only $0.65 per share and had a total capitalization only around $200M on a business with properties once valued at $30B.  If it were possible to solve the debt problem at GGP, then the company had an excellent chance of survival.

    Enter Bill Ackman into my life.  As I was researching GGP, I came across research that Bill had put together as his hedge fund, Pershing Square Capital Management.  He had done a very thorough job researching GGP and was able to show that with even modest “cap rate” assumptions, GGP would do very well.  All it needed was time to restructure its debt.  Ackman proceeded to take an active role in buying time for GGP, first by offering to provide bridge (DIP) financing (later provided by another party), helping convince the court of the merits of GGPs survival and later by joining the GGP Board of Directors. 

    As the year 2009 progressed, Ackman’s activism and my confidence in his research proved very profitable for both of us.  I have now exited my GGP investment (much too early) but Ackman, to my knowledge, remains on board and has seen his investment return over 20-fold.  I admire this type of clear vision and the courage to act on it.

    Ackman was a noted short trader earlier in his career.  He gained notoriety for his big short position in credit card company MBIA in 2005, for which he was investigated by the now-notorious Elliot Spitzer, then New York State Attorney General.  He was able to demonstrate to Mr. Spitzer his innocence and turned the table on MBIA by exposing the Attorney General their fraudulent practices, the reason for his short position  (presaging the debt crisis to come).  He took a “sow’s ear” and turned it into the proverbial “silk purse”.  That taxes moxy.  That takes class.

    Given his career path and the level to which he has risen, Ackman is very intimate with the inner workings of Wall Street.  He shows himself to be rational and level-headed and has a thorough, first-hand understanding of the arcane financial instruments that Wall Street has created.  So, when he gives his opinion on the Goldman Sachs situation, I listen (much more so than to EF Hutton).  Today as guest host on CNBC Squawk Box, Bill Ackman shared with us his assessment.  He comes down on the side of Goldman Sachs for all the reasons I have provided in the past two weeks, but with the conviction that can come from only an insider.  Here is an excerpt from the show:

    Goldman Sachs did not commit fraud and the insurance company that bought the product that is the subject of a government investigation should have known the risks, Bill Ackman, founder and CEO of hedge fund Pershing Square Capital Management, told CNBC Tuesday.

    “I don’t believe that Goldman committed fraud,” Ackman told “Squawk Box Europe.” “(ACA, the counterparty to Goldman – Paulson Partners) took their own risks.  “They’re sophisticated investors.” “I don’t think the (Securities and Exchange Commission) has a good case,”  Ackman said.

    “Having been the subject of investigation in the past  (for the MBIA case referenced earlier)… I don’t feel sorry for Goldman Sachs, but they’re not being treated fairly (either).”

    Not only does Ackman contend that Goldman is innocent of the charges of fraud, as I also maintain, in addition, it would even have been unethical if Goldman had disclosed that hedge fund manager John Paulson was shorting the housing trade to any investors taking long positions, Ackman said.

    Ackman argued that sophisticated investors (the German and Dutch bank that bought the long positions from ACA) have the information at their disposal to make their own decisions, and are also responsible for their own mistakes.

    “Imagine that Soros and Buffett were on the two sides of this transaction,” he said. “We wouldn’t even be talking about this now.” 

    But later in the interview, Ackman states that the true victims are the taxpayers as they do not know they are party to the trade via “too big to fail” and taxpayer rescues.  This is true in Germany and the UK, as well as in America.  It is the taxpayer that has to cover the losses made by overly aggressive bank managers who are playing with OTM (other people’s money) in order to win large bonuses.

    So, it is not Goldman Sachs that should be taking the fall for the financial crisis, but the bank managers that lost money and the regulators / government officials that are charged by the public with protecting the financial system.  The “witch hunt” that is today’s Congressional hearing is completely misdirected and intended to make the Congressmen who failed in their sworn responsibilities, look better, much better, than they really are. 

    At the end of this segment, the former SEC general counsel, Simon Lorne, appeared with Bill Ackman. Mr. Lorne offered his highly informed opinion that the case by the SEC against Goldman Sachs is “weak”. This is the position I have maintained. The facts will show that there was no “fraud”. If anything, there may have been some technical error of omission where disclosure is involved. This might justify a fine of some sort, even a large fine given the stakes involved. But Mr. Lorne says it all much better than me.

    Disclosure: I am long GS with October Call contracts; If I could be, I would be short the Congress
    Apr 27 2:07 PM | Link | Comment!
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