Pirates from the failed state of Somalia are plaguing the Indian Ocean. But free enterprise, unleashed on the problem, has come up with a solution.

“I haven’t had this much fun since flying choppers in ‘Nam. Don’t worry about getting shot by pirates… they never even got close to the ship with the crap they shoot and their lousy aim… reminds me of a drunken juicer door-gunner we picked up from the motor pool in Phu Bai!” — Dan J. – Denver, CO

I must say, I’m disappointed with Arnold Schwarzenegger. Early in his term, he showed that he understood what needed to be done; he proposed a defined-contribution retirement plan for state employees, and proposed elimination of over two hundred of the boards and commissions that provide sinecures for the political elite. Neither proposal cut any ice with the legislature; they would negatively impact two powerful constituencies, the unions and even more, the legislators themselves and their cronies. I’m sure he knew they wouldn’t fly, but at least he made the gesture.

Now that there is a genuine fiscal crisis, those measures, needed now more than ever, are nowhere to be found. Instead, he has resorted to the lowliest of political tactics – punishing the public for not paying more. When they want to punish the public, state government closes the parks. City governments close the libraries. They do this because these are the government facilities used and enjoyed by more people than anything else. Sure, he can cut other visible programs, but nothing has quite the impact of being denied access to your favorite beach or forest.

Yes, he proposed a 5% salary cut for most state employees. But that requires legislative approval, which is certain not to be forthcoming. (5% is nothing, anyway, should be 50% of anything over $100K, including “overtime”).  I suppose at some point in time reality will take over. But right now he is saving the overpaid and dysfunctional political bureaucracy at the expense of people who deliver real services to real people.  Arnold, you should be ashamed. Because you do know better, you have shown us that.

A good post about the nonsense going on at Friday’s stock market close.

There are only two possibilities that I can come up with, and both demand answers:

1. “Someone” was forcibly liquidated out of a short position – a fairly big one. 1,000 S&P “big” contracts has a maintenance margin requirement of $22,500,000 – that’s not a small position, and each point, as noted, has a $250,000 move associated with it. Who was it and why?
2. “Someone” who didn’t give a damn if they lost a sizable amount of money intentionally wanted to shove the cash market up through the 200DMA, a critical technical level. They were 1 minute late; they succeeded in doing so in the futures, but not the cash!

Edit: A vote for door#2.

Well, I’m back on a par with buy and hold for this year. Nothing amazing, but better than being in the ditch as I was. Last month I said I thought the vigilantes were coming back, and this month they returned with blood in their eye.  The yield on the 30-year Treasury increased from about 4 to over 4.5%, accompanied by a fall in the U.S. dollar index from 85 to the 80 area. While the bond yield retraced somewhat, a message was sent to Mr Bernanke – up with this we will not put. Since this was what I was positioned for, I’ve basically stood pat for the entire month, doing little trading.

AAV and PGH, the poorest energy performers, went over the side to be replaced with SDS and GDX as a hedge. I sold half my TCK position as it was becoming too large, and added GDX calls. Would have been better if unhedged, but the market came so far so fast that I couldn’t keep my finger off the trigger. I hate it when it does that. Anyway, I’m about 30% net short right now (on a simple-minded calculation assuming my longs have the same beta as my hedge indexes. Which is manifestly untrue.)

Relative performance is based on a relative return fund,  FMAGX, an absolute return fund, HSGFX, and, newly added, “the Fed,” CPI-U price inflation as driven by public enemy number one, the Federal Reserve. Inception refers to reporting on the blog, and is based on the close of 2005.
5/31 portfolio.

The slowing economy is cutting income tax revenues much faster than the overall economy. Federal income tax revenues were down 44% in April (versus the previous April), the same as in California. This is the result of the “progressive” income tax, which relies on taxing a relatively small segment of the population, while the majority pays little or nothing. But this small segment of the population’s income is much more sensitive to corporate profits and the state of the financial markets than that of the overall population. So when things go south, tax revenues take a disproportionate hit.

Given the huge expansion in government spending, legislators are looking to replace the lost revenue. So, as “r” observed, they are considering a tax which everyone pays, a value-added tax or VAT. Despite Obama’s pledge not to raise taxes on families making less than $200,000, there is no choice. The “middle class” must pay. It always does. It is that or cut short the spending spree. And what U.S. politician could ever do that?

Of course, this guarantees that a sluggish economy will be with us for a long time to come, together with further declines in people’s standards of living.