Stocks: Where We Stand

They will rise this year, but not dramatically.  Early in 2013, when the Street was cautious, we expected “valuation levitation,” which happened.  Late last year we warned rising complacency would lead to higher volatility, but we stayed positive as investors “reach for yield.”   Volatility has indeed soared as momentum stocks collapsed.  What next?  Profits will rise 8-9% this year and so will stock prices, to around 2000 on the S&P 500.  Most of the return will likely come in the fourth quarter, after Republicans do well in the November elections.

Profits Will Be OK, Not Great

I see no reason for either the U.S. or global economy to accelerate meaningfully this year.  Economists continue to underestimate the negative impact of Obamacare on hiring (which, by the way, has not improved over the past two years). A friend of mine saw his monthly health insurance costs rise from $750 to $1,750, with higher deductibles; he is not unusual.  And keep in mind the employer mandate has yet to be implemented. The NFIB small business optimism index remains in recession territory. Obama continues to resist pro-growth measurers such as the Keystone Pipeline and corporate tax reform.  His push for a big hike in the minimum wage discourages hiring.  But capital spending may pick up modestly; for example, truck orders look fairly strong.

Globally, the main positive is that Europe, a key market for U.S. multinationals, is growing rather than shrinking.   But let’s not exaggerate the improvement; France and Italy are stagnant, and the banking system still needs to de-lever. (Europe lags the U.S. by five years in this department.) The key emerging market, China, is slowing and many others have political / economic problems that retard growth (e.g., India, Brazil, Venezuela, Egypt, Turkey, Russia, Thailand).

Against this tepid economic backdrop, with profit margins are at all-time highs, a major positive profit surprise is improbable.  We look for SPX EPS of $119-$120 in S&P 500, which is roughly the top-down consensus.

The Message from the “Early Reporters:” Fairly Positive

They were mixed but not bad.  We saw good or in-line results from Paychex, Fastenal, Cintas, Monsanto, Micron, Kroger, General Mills and ConAgra.  JB Hunt, a major trucking firm, posted solid 9% revenue growth.   Poor results from Bed Bath & Beyond and Family Dollar partly reflect bad weather and vulnerable business models.

More worrisome were poor results in the two most important “swing factors” for profits—big energy and big banks.  Chevron preannounced soft results; big oil is spending oodles of money but not finding much oil.  JP Morgan, particularly its FICC division, is being hit by tougher regulation; Wall Street analysts have done a poor job assessing just how much Dodd Frank will weigh on profits as compliance costs rise, trading revenue slows, and balance sheet leverage declines.  I will be interested to see Goldman’s Q1 results.  (Wells Fargo’s Q1 was better than JPM, with 4% loan growth.  But the beat was low-quality.)

Thirst for Yield Supports Equity Valuations

Janet Yellen is a full-feathered dove.  Even if rates do start to rise late next year money market funds’ average return in 2016 will probably be less than 1%.  Meanwhile, bonds are expensive and risky.  So large-cap stocks are attractive for yield-oriented investors.  SPX DPS growth has average 15.5% over the past three years; with the payout ratio still low at 32%, dividends will probably grow 15-17% this year.  (The 2013 comparison is easy because some firms accelerated dividend payments to Q4 2012, before tax rates rose.)  The S&P 500’s current yield on 2014 DPS is 2.2%, but it is easy to assemble a portfolio yielding 3-4%.   Investors’ thirst for yield should keep the trailing PE on pro forma EPS about where it was at the end of last year, 16.8x, implying a year-end price of 2000 (16.8* $119 = 1999).

History Strongly Suggests Most of the 2014 Return May Come in Q4

Stocks should act better over the next month as attention turns from downbeat “sentiment” about high-fliers to decent “fundamentals” revealed in Q1 profit reports.  Even if Q1 earnings are not great, managements will highlight improving demand in March and April (as Fastenal, an industrial bellwether, did). That said it may take a while for investors to digest the demise of momentum stocks.  Before long we will be in the August doldrums, followed by the pre-election jitters in September and October.  So stocks may not do much in Q2 and Q3 and then perform well in Q4 following a strong Republican showing in the election.  There is a very pronounced tendency for stocks to be strong in the fourth quarter of mid-term election years.  Consider:

  • Looking, first, at all 69 years since 1945, stocks tend to be strong in Q4.  The average pattern of S&P 500 price return by quarter is: Q1 +2.2% / Q2 +2.0% / Q3 +0.4% / Q4 +3.9%.  If we look at median price returns, Q4 strength is even more pronounced:  Q1 +2.2% / Q2 +2.1% / Q3  +2.5% / Q4 +4.9%.
  • Now let’s look at 17 mid-term election years since 1945:  The average return in Q4 is 7.7% and the median is 7.9%. That is far above the typical Q4 return, and nearly four times the typical quarterly return in the first, second and third quarters of all years since 1945.

Obviously, past may not be prologue. Unexpected events may intrude.  But in current circumstances the historical norm seems very relevant.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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Where Are Krugman’s Black Colleagues?—a Disturbing Diversity Dearth

Without regard for civility or accuracy, econo-gadfly Paul Krugman will accuse conservatives of racism at the drop of a hat.  In a recent NYT column he:

  • Accused Paul Ryan of using a “racist dog-whistle” for making comments similar to Barack Obama’s.
  • Accused CNBC’s Rick Santelli of being racist for attacking Obama’s proposed mortgage subsidies, most of which would have gone to whites, not blacks.
  • Accused the Tea Party of being racist even though African Americans Dr. Ben Carson, Col. Allen West, Senator Tim Scott and Herman Cain are among its heroes.
  • Accused the Tea Party of being racist for opposing Obamacare but not corporate welfare, such as Wall Street bailouts.  This is factually incorrect; many Tea Party people did oppose TARP.

Actually, it looks like Krugman and his colleagues in the Princeton Economics Department are not all that keen on racial diversity.  Krugman may be happy to pose as the Great White Hope of America’s non-white masses, but you are not likely to find black professors occupying offices down the hall from his.  Despite the University’s strong support for a demographically diverse faculty, the Princeton Economics Department has only one African American professor.  Of 61 faculty members listed on the Department’s website, only one is black. That is 1.6%, whereas fully 8% of the undergraduate population was black in 2012.  So much for faculty diversity.  Not much has changed since the genteel, homogeneous days of F. Scott Fitzgerald in the 1920s.

Princeton’s President, in an expansive report on the virtues of diversity, intoned “Diversity is . . . a precondition for academic excellence, institutional relevance, and national vitality.  Engagement with this issue is central, not tangential, to Princeton’s mission and to the maintenance of its leadership in higher education.”  Well, it looks like Princeton’s econ majors can forget about getting an “academically excellent” education.  They don’t have much chance of taking an economics course from a black professor.   There is only one, and she is Dean of the Woodrow Wilson School, which means she doesn’t have much time to teach undergraduates.

What makes the Princeton Economics Department’s nearly lily-white hew so ironic is that the Department is packed with Democratic Party stalwarts (Krugman, Alan Blinder, Alan Kreuger, Uwe Reinhardt), and the Democratic Party constantly lambasts Republicans for their alleged aversion to racial diversity.  Never mind.

Don’t get me wrong.  I’m sure some of Krugman’s best friends are black. And, to recycle the lawyerly verbiage in Krugman’s nasty NYT hit piece on Rep. Ryan, “just to be clear, there’s no evidence that Mr. Krugman is personally a racist.”  He’s just a hypocrite.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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David Letterman to Be Replaced by Janet Yellen

She deserves the job (which is far more influential than running the Fed) because, during the financial crisis, she told her colleagues:

“On Wall Street trading floors there is a joke going around: ‘The trouble with bank balance sheets is nothing on the left is right, and nothing on the right is left.’”

Copyright Thomas Doerflinger 2014.  All Rights Reserved


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Hedge Fund Madness–Providing a Way to Diversify Out of Sound Investments

On Friday the S&P 500 dropped 1.25% and the NASDAQ fell 2.6%, driven by a sell-off in momentum names such as biotechs, FB, TWTR, AMZN, TSLA, etc.  There was forced selling as leveraged hedge funds and other speculators liquidated positions.  One prop trader told the Wall Street Journal, “A lot of people had been performance chasing in these momentum names.  Now they are panicking.”  A popular Biotech ETF, he noted, ballooned by $526 million in the first two months of 2014 but has since seen $280 million withdrawn.

“Playing” momentum names—trying to get in and out before the crowd—exemplifies the Greater Fool Theory.  TSLA may be overpriced, but it is going up and should become more overpriced.  It typifies what many—not all—hedge funds do for a living.  They trade short term, trying to exploit market trends and inefficiencies.  One reason for their short time horizon: they are paid by the year and lose assets if they fall behind in the quarterly performance derby.

Vanishing Inefficiencies

Here’s the problem.  These days, there are very few inefficiencies to exploit and hedge funds have a great deal of money to put to work, trying to exploit these vanishing inefficiencies.  Today copious corporate information is instantly available to virtually all investors.  FactSet and Bloomberg can tell you nearly anything you want to know about a company; even Yahoo Finance has copious information.  Conference calls are available to everyone.  Company presentations are on the web before the CEO says a word to the investors and analysts at the Pierre Hotel.  One solution to hedge funds’ efficient-market problem is to use illegal inside information, but that has turned out poorly for several funds.

Whether it is used to play momentum names or to exploit non-existent inefficiencies in the stock market, short-term trading is not likely to beat the broad indexes, especially on an after-tax basis.  Trading costs are high, and the gains are short-term and taxed as ordinary income. Another hedge fund strategy—trading macro trends—is no more promising.  Macro trends are extremely difficult to forecast, and even if you get the economic trend right you may get the market reaction to it wrong.  The European economy is still a mess; who could have predicted the Euro would stay as strong as it has?  The Fed was unable to forecast the last three recessions, as we know from the Fed minutes.

Then there are the fees.  Let’s say Sexy Hedgie has great performance, managing to beat the S&P 500 by 300 bps per year, with annual returns of 13% vs. 10% for the index.  It charges 2% of assets and 15% of profits.  On average that is 2% + (0.15 x 13%) or 3.95%, which means it underperforms an index fund.  And small investors may pay a second layer of fees, to their bank or broker.

Bottom line:  Over the long run, most hedge funds will not deliver attractive after-tax returns.  Yes, there are exceptions.  There are super-traders such as George Soros and Steve Cohen.  There are exceptionally talented investors such as the folks at Omega, who ran Goldman’s equity strategy product for a couple of decades.  Some other specialized funds may figure out a way to beat the market.  But they are exceptions.  Which means, quite simply, that hedge funds are not an attractive “asset class.”  The average schmuck who walks in to J.P. Morgan with $30 million, and puts $10 million in a few hedge funds, is not likely to do very well.  What should she do instead?  Assuming the broad stock market is not wildly over-valued, a la 1999, I think she should buy the stocks of high quality companies, mostly U.S. names  but with a few world-class foreign companies.  After fees and taxes, she will do much better than in hedge funds.

Learn from the Biggs, Mother and Son

A real world example is to be found in the late Barton Biggs’ fun book Hedgehogging, which I recommend.  As I described in July 2012, Biggs’ mother did very very well over the years by simply owning a basket of blue chip growth stocks selected by her husband (who was a professional investor) and her sons.  Biggs estimates that her real purchasing power rose 12% annually for about three decades.

Contrast that performance with that of her hot shot Wall Streeter son.  After he left Morgan Stanley in 2002 Biggs could not bear the thought of hanging around Greenwich and Palm Beach all week long, so he and two friends set up a hedge fund, Traxis Partners.  In 2004 they fell upon a great macro insight, which they researched to death and concluded would be a big money maker.  They decided to sell short oil.  They reasoned that oil prices were at an all-time high, global output was increasing, global demand was slowing, and the U.S. strategic petroleum reserve was full.  With oil trading at $40, their elaborate regression models revealed to them that the equilibrium price was $32.50.  The trade was a disaster; global demand was much stronger than they figured, and hurricanes in the Gulf of Mexico added to their pain.

My take on Barton Biggs’ oil trade is this: Are you kidding?  Why would anyone, especially three guys in a New York office building, bet on the price of oil?  (I am reminded of a friend, a successful Street economist, who told me the reason he survived so long in the business was that he never had to forecast oil prices or the dollar.)  Why would anyone pay high fees to participate in a bet on the direction of oil prices, especially when they have the option of inexpensively investing in solid growth companies whose dividends will grow nicely over time?

Wealth Managers’ Diversification Trap

Despite their obvious defects, hedge funds continue to be recommended by Wealth Management firms.  I am looking at the monthly publication of a well-respected firm, which advises clients with a moderate risk tolerance to invest 10% of their assets in hedge funds and 39% in stocks, with the rest in bonds, commodities, private equity, and real estate.  The rationale for this over- diversification is supposedly to limit risk, which is defined as the price volatility of the portfolio.  Hedge funds may be a crappy investment compared with stocks, but they won’t go down as much in a bear market, because they are hedged and not too tightly correlated with the equity market.

I don’t buy this logic, because for a wealthy long-term investor like Mrs. Biggs a temporary decline in stock prices—or even one that lasts a few years– does not matter much.  They are living off dividends; why should they care if stock prices decline for a few years?  Let’s get specific, with United Technologies, a diversified but moderately cyclical Blue Chip.  In 2008 the company’s EPS was $4.90, but then the world economy collapsed and EPS fell to $4.12 in 2009 and $4.74 in 2010.  The stock price plunged from a 2008 high of $77 to a 2009 low of $37.  OMG the stock was cut in half!!!  But what happened to the UTX dividend? It rose 26% from $1.35 in 2008 to $1.70 in 2010.

The asset allocators in Wealth Management shops are basically telling clients to diversify out of sound long-term investments (common stocks) into bad one (hedge funds) to avoid declines in the quoted value of their securities, even though they are mostly living off dividends and don’t need to sell at the bottom of the market.  This is bad advice, in my opinion.

The Wisdom of Warren

For some reason Buffett groupies tend to overlook one of the major reasons for his success.  He does not try to time the market and does not care if one of his long term holdings—WFC, KO, IBM, AXP, or whatever—declines in price during a bear market.  He recently directed that a trust for his ex-wife invest 10% of assets in cash and the other 90% in a stock market index fund.  If, during a bear market, you need more cash than you get from dividends, you don’t need to sell stock because you can spend the cash.

This makes a lot of sense.  Anyone can do it, via mutual funds, by themselves if they want to spend the time, or with the help of an investment advisor who follows a sensible buy-and-hold strategy. The aim is not necessarily to “beat the market” but simply to participate in the long-term success of companies.  Transaction costs are low and so are taxes.  One key reason this strategy is not followed more is that brokers and investment advisors feel they need to try to beat the market to justify their fees.  You need to get over that “performance” mindset.

Copyright Thomas Doerflinger 2014.  All Rights Sreserved




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The New McCartheyism…or…Silicon Valley’s Black List

In the summer of 2008 a gay friend of mine, who was active in Democratic politics, told me she did not expect Barack Obama to come out in favor of gay marriage because it could blow his chances of winning the White House.  He did not favor gay marriage until the end of 2010.  The left did not brand him as a big for opposing gay marriage until 2011.  Yet Brendan Eich lost his job as CEO of Mozilla for donating $1000 in 2008 in support of California Prop 108 opposing gay marriage.

This is an open and shut case of close-minded bigotry and intolerance–the opposite of the intellectual “diversity” liberals claim to love.  Historians decry McCartheyism of the 1950s and the “black lists” of suspected communists who could not get jobs in Hollywood.  This situation is identical.  Eich was blacklisted for having politically incorrect views on gay marriage.  Gay pundit Andrew Sullivan correctly calls this an outrage, which is no more defensible than job discrimination against gay people.  I will be interested to see how many other liberals join him in denouncing Silicon Valley’s black list.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.


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Growth Stocks: What the Big Money Likes

It’s instructive to review the holdings of the smart PM’s at leading mutual fund houses—T Rowe Price, Fidelity, Gamco and Vanguard.  We looked at the top 10 holdings of 18 big-cap growth-oriented funds.  Some themes:

  • A favorite holding is the card processors, Visa and MasterCard.  They look a bit too popular to be great stocks going forward, especially if there are new regulatory / technology hurdles.
  • TROW is high on Danaher.  But the mainstream industrials and transports names are not much in evidence; United Technologies is the most popular.  Only one fund owns GE.  Gamco likes International Paper as a dividend play.
  • The funds also don’t own many consumer cyclicals such as big retailers (M, WMT, COST, JWN) or apparel companies (NKE, VFC, etc.).  An exception is the auto parts retailers, AutoZone and O-Reilly, which TROW likes a lot.  This is a play on the Obama economy, where only the fabled 1% can afford a new car.
  • The favorite tech names are Google and Apple, followed by Microsoft and Qualcomm.  These PM’s are not big fans of supposedly cheap old tech names such as ORCL, HPQ, IBM and CSCO.
  • Gilead is the favorite “new pharma” name while JNJ is, by a sizeable margin, the favorite “old pharma” holding.
  • Wells Fargo and U.S. Bancorp are the most popular banks, followed by BAC.   Fido likes Ameriprise.
  • Some “surprises” – at least to me – include Crown Castle  (wireless infrastructure),  Acuity Brands (lighting), and Fiserv (payment technology).

We know that smart, very well-informed investors like the fundamentals of the 20 stocks highlighted.  I own 7 of them.  But you have to decide for yourself whether some of them (perhaps V, MA, DHR, GOOG, GILD) are too popular.  I am rather surprised these funds don’t own more industrial names, which benefit from creating a cleaner, more energy efficient infrastructure, as discussed in my February 13, 2014 post.

Un-natural Selection Leaves Skeletons in the “Value” Closet

A challenge for “Value investors:” because Mr. Market is smart, “cheap” stocks are often cheap for a reason.  In what might be called a process of unnatural selection, some big, dominant companies are mismanaged for so long that their corporate DNA is corrupted to the point where they are very difficult to turn around.

Take GM and Citigroup–please.  It turns out that GM knew about its defective ignitions for years without telling regulators; twelve motorists died.   On Friday GM did another giant recall.  Not great for a tarnished brand in a hyper-competitive industry that is adding lots of new capacity. Meanwhile Citigroup managed to lose $400 million dealing with a shady bank in Mexico, and for the second time it failed its Fed stress test.  I am guessing the Fed folks did not give Citi the benefit of the doubt, given its century-long history of egregious mismanagement and government bailouts. Recall that Citi lost Wachovia to Wells Fargo after it thought it had a “done deal.” (See my Dec. 16, 2012 post, “Chronic Crony Capitalist – Time for a Break-Up.”)

Both GM and Citi were giant, sprawling, flat-footed industry “incumbents” that almost failed in 2008 and needed government assistance.  They have probably had a hard time recruiting top talent.  Their “low valuations” may look tempting, but after years of mismanagement the corporate genes may be more defective than investors appreciate.

More on China—“Reform” and “Downside Risks to Growth” are Perfectly Consistent

On Bloomberg Surveillance perennial China bull Stephen Roach, formerly of Morgan Stanley and now at Yale, sounded peeved when responding to China bears worried about a severe slowdown.  They are missing the point, he explained.  China is simply “reforming” by shifting from an export and investment led economy to one driven by consumer spending and services (which are more labor intensive and so create more jobs).  A crackdown on corruption, less support for State Owned Enterprises and a shift toward market discipline (i.e., more bankruptcies and bond defaults) are other elements of the reform agenda.

I get all that.  But Mr. Roche admitted that reform might entail a GDP slowdown.  To me, the downside risks are considerable; growth may fall far below the spurious 7-8% GDP numbers Street economists bandy about.  Here is an economy moving from being driven by strong export growth, a government financed building boom, a housing boom, and huge credit expansion (to over 200% of GDP), to a more disciplined, market-oriented, consumer-led economy – at a time when housing prices are moderating and export markets are sluggish.  It’s hugely optimistic to assume this transition will be smooth and easy.

Copyright Thomas Doerflinger 2014.  All Rights Reserved


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Downside Risk in China

Eight months ago I warned that the China slowdown would be much worse than expected.  I suggested the Wall Street parlor game of China economists daintily trimming their GDP growth estimates from 7.5% to 7.3%, etc. was fairly ridiculous because the figures were fictitious.  Today on Bloomberg Radio, this view was supported by Leland Miller of China Beige Book, whose firm regularly surveys 2000 China business.

Since our last post, the incremental news on China has been worse than many observers expected.  I expect that to continue to be the case.  Some Wall Street firms forecast a rebound in GDP next year, but I think that is very unlikely.  It is extremely difficult to reposition an economy from being driven by exports and government-sponsored investment to being driven by private consumption and private investment.  Japan tried to do it in the 1990s, without success.

What I wrote Eight Months Ago (Which Still Looks Right to Me)

I know almost nothing about China, except what I read in The Financial Times.  But what I read is pretty scary; if you apply a little logic it is reasonable to conclude China growth will be much worse than current consensus. Yesterday in an FT column, “wise man” Gavyn Davies made these salient points:

  • China will need to spend several years tackling a combination of excess credit and overinvestment.
  • China is in the midst of a classic credit bubble.  The ratio of total credit to GDP has climbed from 115% in 2008 to 173%, a danger level.
  • The debt service ratio in the economy, which the Bank for International Settlements says reliably signals risk of banking crisis, is around 39% (according to SocGen).  The danger level is 20-25%.
  • Much of the credit financed “low return” capital spending by local governments—i.e., the Chinese equivalent of Alaska’s “bridge to nowhere.”
  • The arithmetic to get a soft landing is “formidable.”  Private investment growth needs to slow to about 4% in the next decade from 10% in the last decade.
  • On the bright side, government has the money to capitalize the banks if necessary.

It gets worse.  The latest figures on exports and imports were much weaker than expected, which is not surprising because all of China’s major markets are growing slowly, if at all.  The FT quotes a “spokesman for the customs administration” as saying, “Our country is facing serious challenges.”

So, to summarize, the two major drivers of China’s growth, exports and investment, are slowing sharply.  A credit bubble is being popped.  And much of the credit growth of the past few years funded government projects which, by definition, were made at least partly for political not economic reasons.

Even if the government has the capital needed to prevent a “China Syndrome” meltdown, we can expect Wall Street economists to keep ratcheting down their forecasts—a lot.  For the past couple of years the major Wall Street houses have been playing a dainty parlor game of cutting their China GDP growth forecasts 10 or 20 bps at a time—7.5%, 7.4%, 7.2%.  My guess is that, before they are done cutting, they will be debating whether growth is above or below 5%.  Even competent, well-managed governments of giant, sprawling nations that are simultaneously grappling with a credit bubble, overinvestment by governments, and a sharp slowdown in exports should not be expected to engineer an oh-so-soft landing in GDP growth.

March 2014 Post Script

The recent export figures and PMI data have been very weak, which is not too surprising because most export markets have been soft.  The Ukraine crisis won’t help.  Real estate prices are rising more slowly.  The government has said it will permit some bond defaults, which won’t be great for investor confidence.  Obviously it is not easy to shift the economy toward consumptions when consumers are seeing real estate values soften.

I continue to be impressed by the opacity of the China situation.  Just how bad are the loans made in the “shadow banking system?”  In my experience, when credit bubbles unwind the news is always worse than expected.  I am reminded of a Citi executive who said after the last crisis is,  “After you get an estimate of the haircut in asset values, the first thing you do is increase it 50%.”

Copyright 2014 Thomas Doerflinger.  All Rights  Reserved.

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Racism Inc. Blocks the School House Door; GOP to the Rescue

Tuesday, March 4, 2014 was a seminal day in the history of American social policy.  Seven thousand school kids, mostly black and Hispanic, went to Albany to protest NYC Mayor Bill de Blasio’s attack on the charter schools that were giving them a good education.  Their protest worked; Governor Cuomo sided with the kids and against his fellow Democrat in City Hall.

Why was this a big deal?  Because racially paternalistic liberals – who really really hate charter schools, which are supported by hedge fund honchos and feared by teachers’ unions—could not play the race card, as they invariably do when anyone attacks failed liberal social policies.  How are rich white guys like Bill de Blasio and Paul Krugman , or rich black guys like Jesse Jackson and Al Sharpton, going to argue with a black mother in Harlem who believes she has found the right school for her son or daughter?

Republicans should take notice and push the charter school agenda aggressively.  Follow the lead of Louisiana Governor Bobby Jindal, whose recent New York Post column took de Blasio and the teachers’ union to task and went on to celebrate the expansion of charter schools in his own state.  House Republicans should create a special tax deduction for charter schools and dare Democrats to oppose it.

Two Pauls: Ryan Assesses the “War on Poverty;”  Krugman Plays the Race Card

Claiming Republicans are intrinsically, inherently, innately racist, the media will do all it can to prevent them from constructively addressing inner city poverty, which has worsened since Obama became President.  The poverty rate has been stuck at 15% for an unprecedented three straight years.  Median black household income in 2012 was 10% below the 2005-07 average.  Over the past year the employment / population ratio for black males averaged 58.4%, down a huge 6.7 percentage points from the 2005-07 average; the ratio for white males is much higher (68.4%) and has declined less (5.1 percentage points).

On the 50th anniversary of LBJ’s declaration of “War on Poverty,” the House Budget Committee published a detailed analysis of why Federal anti-poverty efforts have largely failed.  Commenting on the report, Paul Ryan noted that one cause of poverty was a “culture, in our inner cities in particular, of men not working and just generations of men not even thinking about working.”  As Rich Lowry noted, Ryan’s comments merely echoed various statements by Barack Obama.  Nevertheless liberals attacked Ryan as a racist and, rather than get in an argument the media would never let him win, Ryan backed off, saying his comments had been “inarticulate.”  Paul Krugman ludicrously accused Ryan of using a “racial dog whistle” “because American conservatism is still, after all these years, largely driven by claims that liberals are taking away their hard-earned money and giving it to Those People.”

Terrible Education for “Those People”  . . .

Actually, conservatives favor policies that really do help folks in the inner city escape poverty and achieve The American Dream.  Even leaving aside moral considerations, affluent tax payers obviously stand to benefit from rising prosperity in the inner city.  A good place to start is education reform, which was a hot topic at a meeting of conservatives I attended recently.  A measure of the challenge is results of tests to gain entry to New York City’s elite high schools.  As an example, in 2013 Stuyvesant High School offered admission to 9 black students, 24 Hispanics, 177 whites and 620 Asians.  Students in the worst schools are literally cheated out of an education and don’t even know it.  Here’s a letter to the New York Post from a student at Murray Bergtraum High School, protesting the Post’s attack on the school’s corrupt and incompetent principal:

“Hi my name is M.B.  I’m a junior at Murry Bergtraum high school  I’m a junior at Murry Bergtraum high school  , I was concern and surprised by what (a teacher) said of us that we are a fail factory  With all respect who are you to be making false accusations we are not any of the things that he or you said instead of talking about how Bergtraum is scamming or is a fail factory why don’t you talk about our womens basketball team that we are known as having one of the best ones  .

“What do you get of giving false accusations im one of the students that has blended learning I had a course of English and I passed and and it helped a lot you’re a reported your support to get truth information other than starting rumors for your information if it wasn’t for blended learning seniors wouldn’t be graduing come to Bergtraum one day and get information real information.                               Sincerely M.B.”

I’m guessing M.B. will have a hard time getting a good job.  The Post provided writing samples from seven other students, showing that unfortunately M.B.’s writing skills were fairly representative.

. . . but Not for My Kids

Liberals’ opposition to charter schools is the height of hypocrisy.  Rich liberals are strong supporters of public education for all students in the inner city – except their own.  In Washington DC the Obamas and their peers send their kids to Sidwell Friends (middle school tuition and fees: $35,733 per year).  In New York, they send them to Dalton, Trinity and the Little Red School House.  If they are unable to afford private schools or get their kids into the best public schools, New York Times reporters move to Montclair NJ.

School choice for me but not for thee.  Pathetic and, yes, racist.

Racism Inc. Exploits the Underclass

As far back as 1987 the sociologist  William Julius Wilson highlighted a fast-expanding gap between the successful black middle/upper class and an “underclass” suffering poverty and high crime, mostly in inner cities.  Part of the black middle class and elite, together with paternalistic whites, cynically exploit the woes of the underclass to maintain their America-is-racist narrative.  Call it Racism Inc.—which is both an ideology and an industry supporting thousands of bureaucrats, lawyers, educators, affirmative action consultants and academics who pretend to assist poor blacks while promoting policies that have failed to alleviate inner city poverty for a half century.

Eugene Robinson . . . .

Exhibit A is Eugene Robinson of the Washington Post.  Early this year, when he was on a TV panel discussing likely big news stories for 2014, Robinson said:

“And one story, huge story in 2013 that we kind of don’t mention, was the acquittal of George Zimmerman and the racial issues and conflict that remain just under the surface that bubble up from time to time, that erupt. And I think you can predict we’ll have more eruptions in 2014. We come to big anniversaries of the Civil War, big anniversaries of the Emancipation and this and that. We’ll see more of that.”

Translation:  Let’s hope we have another Trayvon Martin type story, whether real or fabricated, involving a white person killing a black person, to whip up racial tensions and divert attention from the pathetic record of Barack Obama and the Obamacare Democrats.

. . . . Meet James Hailey

On Christmas night 2013, on Schley Street in Newark New Jersey, Zainee Hailey age 13 and Kasson Morman age 15 were killed by a gunman while minding their own business.  A third victim, Abdul “Scooter” Frazier, was critically wounded and died in mid-January. Zainee was taking out the trash.  She was an honor student and cheerleader and sang in the choir at the New Zion Baptist Church in Elizabeth NJ.  Her father, James Hailey, said, “She was just joyful.  That’s all.  She was just a fun person to be around, when I’m down, she keep me up, in so many words man, she was me and I was her.”  It turned out that the gunman was a 15-year-old from the neighborhood.

To the Eugene Robinsons and Paul Krugmans of the world, the killing of Zainee Haily,  Kasson Morman, and Abdul Frazier was no big deal because they were not killed by a white person.  No news there. No racial “hook”  for CNN and MSNBC.  Happens all the time.  B O R I N G.  Robinson (and Sharpton, Matthews, Krugman, et. al) need a tale of white racism that the paternalistic liberal press can really sink its teeth into.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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Obama Punishes Putin (as reported in the NYT, Mar. 25, 2014)

Obama Vows to “Step on Gas” in Response to Putin

Address to Nation

Shift in Energy Policy to Increase U.S. Exports,

Reduce European Dependence on Russia, Curb Emissions

By Keith Beidermeyer and Philip Furlinger

WASHINGTON — In a ten minute speech from the oval office, U.S. President Barack Obama outlined a plan to accelerate development of American oil and natural gas resources in a bid to reduce Russian influence in Europe.  “It is time for America to step on the gas.  If we move decisively, in concert with our European friends and allies,” Mr. Obama said, “we can increase U.S. exports, reduce European reliance on Russian natural gas, raise the living standards of America’s working families, and cut global emissions of greenhouse gasses that threaten our planet.”  The plan has four main elements.  First, immediate approval of the Keystone XL Pipeline, which will move crude oil from Canada to America’s gulf coast.  Second, permitting renewed exports of crude oil from the United States, which were banned during the oil crisis of the early 1970s.  Third, open up more Federal land in the United States to oil and gas production, while encouraging states to speed up drilling permits.  Fourth, accelerate permits for construction of liquefied natural gas (LNG) export facilities in U.S. ports.

Financial markets reacted swiftly to the unexpected news.  Asian stocks rallied strongly, as Obama’s plan was believed to cut the risk of a violent confrontation with Russia over Ukraine.  In Japan, which imports most of its energy, the Nikkei index was up 2.3% at mid-day; the Shanghai Composite Index rose 1.7%.  U.S. stock index futures were up 1.5%.  Natural gas prices plunged on an expected increase in global supply.  The price on contracts for May delivery fell 12.7% to $5.23 per million British thermal units.  Brent crude oil prices declined $2.86 to $102.35 per barrel.  Currency markets were also volatile.  The Euro climbed 1% versus the U.S. dollar to $1.393 on the improved energy outlook in Europe and reduced tensions in the Ukraine.  But the Russian ruble fell 5.2% and shares of Gazprom, the Russian energy giant, plummeted 12.8% to a ten-year low.  Russian share prices were broadly lower.  “The Russian economy is a one-trick pony, and that pony just broke its leg,” said Erhard Zimmerman, senior emerging market economist at Deutsche Bank in Frankfurt.

Mr. Obama’s plan is likely to be controversial with environmental activists within the Democratic Party.  But administration officials pointed out that it would actually reduce greenhouse gas emissions in Europe, which has increasingly been relying on importing U.S. coal, whose price has declined as it is displaced by cheap natural gas in the U.S. electricity sector.  “This is an economic, environmental, and geopolitical win for both the U.S. and Europe.” said Barton Howard Wentworth, Undersecretary of State for Economic Affairs, “U.S. exports will increase while European energy security improves.  And carbon emissions will decline as Europe uses less coal.”  Opposition to the Keystone Pipeline has been a major priority for environmental advocates.  Mr. Wentworth noted that pipelines were safer than moving crude oil by rail cars, which have been involved in several major accidents in recent years.  Cleopatra Franpoui, spokesman for the Progressive Energy Coalition, vowed to fight Obama’s plan, saying “This stop-gap measure will only increase American addiction to . . . .

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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The Mill & Bill War: a Report from the Southern Front

Barack Obama promised to “transform” America by curbing income inequality, and toward that end he declared war on “millionaires and billionaires.”  To gauge his progress in this noble campaign, I departed the frigid climes of the Northeast for Palm Beach, Florida.  A tough assignment, but someone had to do it.

Sadly, signs of progress in the Mill & Bill War are difficult to discern on the island known to cognoscenti as “America’s Riviera.”  Even before you reach the island, there are troubling signs.   Moored in the Inter-Coastal Waterway, between the déclassé mainland (West Palm Beach) and Palm Beach proper, is a sprawling fleet of gleaming white yachts.  On the island itself, ensconced in a profusion of exotic foliage and freshly clipped topiary, opulent Mediterranean mansions shimmer in the sunlight.  For billionaires and mega-millionaires, they are very fairly priced.  An exquisite Atlantic prospect, palm-shaded swimming pool, soaring entry hall graced by Venetian gothic windows and intricate wrought iron screens, a Renaissance dining room with Islamic tiled floor and coffered ceiling—this and more can be yours for a trifling $22 million.  Alas, in today’s hot real estate market few such properties are available.

On the narrow lanes of Palm Beach, BMW’s and Mercedes are overawed by Bentleys and Ferraris.  The main shopping street, appropriately named Worth Avenue (formerly Net Worth Avenue, but the prefix was dropped in the 1930s, I suspect) received a pricey face-lift a few years ago—not unlike many of its denizens.  Jewelry shops abound.  The local book shop features eight different magazines describing the polo tournaments and benefit balls of Palm Beach Society. Well preserved gentlemen squire comely female companions half their age.  Still younger, single females are on the prowl.  Don’t be surprised if that baby carriage up ahead is transporting a white Poodle. (Babies are scarce in Palm Beach.)  Worth Avenue restaurants Bice and Taboo are packed on a Monday night.  At Bice, try the Costata di Vitello Alla Griglia Con Capponatta E Salsa All Timo for just $46.

Though it is forward-looking and up-to-date, Palm Beach pays due respect to its moneyed heritage.  The top cultural attraction is the Flagler Museum, once the sumptuous 75-room mansion that Standard Oil magnate Henry Flagler built for his third wife in 1902, at the apex of the first Gilded Age.  The Flaglers called it home for a couple of months each winter.  Like many of Florida’s founding fathers, Henry Flagler’s main contribution to the state was to build hotels, which were strung along his Florida East Coast Railroad, from St. Augustine to Miami, like so many pearls.  The hotel he built in Palm Beach was said to be the largest wooden structure in the world.

I would not wish to convey the impression that you have to be a billionaire or a mega-millionaire to enjoy Palm Beach.  Common millionaires are welcome as well. They can find shelter at the Breakers, a perfectly adequate beachfront hostelry with two golf courses, six swimming pools, eight restaurants, and 2000 employees—all situated in lush tropical acreage and ornate beaux arts interiors patterned after a Renaissance Italian palace.  The imperial suite is well worth the price at $5,800 per night (excluding taxes and fees).

Bernie, my able accountant, who has clients in Palm Beach, explained to me that the town deals with crime the old fashioned way.  After a heist, they pull up the draw bridges, so the brigands cannot escape to the mainland.  To caution the locals, a patrol car is permanently parked on Bingham Island, one of the potential escape routes.

Barack Obama, Secret Friend of Millionaires and Billionaires

How are we to explain the tragic failure of Obama’s War on Mills & Bills?  The uncharitable take on our President—the sneering, insolent, disrespectful view of the Fox News crowd– is that his eloquence is exceeded only by his incompetence.  But I, as usual, take a more nuanced view.

Obama is way smarter than you think.  He is looking ahead to his post-White House days.  By throwing up multiple regulatory barriers to hiring, Obama obliges the Fed to keep interest rates near zero.  This is great for Mills & Bills who can borrow at 1.1% and buy stocks with current yields of 2-5%, dividend growth of 5-20%, and PE’s that are drifting higher in a zero-rate environment. (Fed policy is not so great for middle class savers who get just 1.3% on a three-year CD.)  Once President Obama leaves office and is earning $400,000 per speech he, too, can hop aboard this nourishing gravy train.  A gleaming multi-deck yacht and $22 million Palm Beach mansion may be in his future.  As for the huddled masses who can’t find jobs, well, hey, Obama—unlike those heartless Republicans—is supporting an extension of unemployment insurance and a hike in the minimum wage.  What more do you want?

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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