Friday, June 27, 2008

Sell in May?

There is an old stock market adage that you should "sell in May then go away". Frankly, it hasn't had great form as a trading tip.

But this year it has struck with fury and might. This from MarketWatch:
The Dow Jones Industrial Average tumbled 358.41 points, or 3%, to 11,453.42, leaving it down nearly 1,200 points, or 9.4%, for the month, with two trading days yet to go. As things stand, the month is the worst June so far since 1930 when the index declined 17.72%.

For those who just can't bear it, consider the following chart of the DJIA:

Click to enlarge

Notice that spikes through the bollinger bands, particularly downside ones, have a fair chance of setting up at least a tradeable situation: bounce from bottom spike, dip from top spike. The Chaikin Indicator is also at extreme, adding volume (Accummulation/Distribution) confirmation of a possible bounce. This does not combine to make an infallible indication (doubtfully none would be public or available through off-the-shelf software), but this has better form than the sell in May adage.

This is purely observation and not in any way investment or trading advice. They have not repealed either the business cycle nor caveat emptor.

Made my day

It appears that Chief Justice Antonin Scalia has made my Second Amendment day.

Image by Mitsumune Nakasato from David Mount's Image Gallery


The New York Times has more, and Guambat is certain there will be many other commentaries, reports, digestions and indigestions to come. Guambat now knows what the punk felt like.


Guambat was struck by the irony in Scalia's opinion, as reported in that NYT article:
Justice Scalia wrote, “The court’s opinion should not be taken to cast doubt on longstanding prohibitions on the possession of firearms by felons and the mentally ill, or laws forbidding the carrying of firearms in sensitive places such as schools and government buildings, or laws imposing conditions and qualifications on the commercial sale of arms.”
What's ironic? Well, you see, the case arose because some militiaman walked into the US Senate with a gun and was busted, not for carrying the gun into the halls of the US Congress, but under the Washington DC gun control act.

We're going to be seeing a plethora of cases now, trying to determine the Scalia Court's "sensitive places" limitations on the Second Amendment. Is, for instance, a restaurant a "sensitive place"?

A young cowboy named Billy Joe grew restless on the farm

A boy filled with wonderlust who really meant no harm
He changed his clothes and shined his boots
And combed his dark hair down
And his mother cried as he walked out

Don't take your guns to town son
Leave your guns at home Bill
Don't take your guns to town

He laughed and kissed his mom
And said your Billy Joe's a man
I can shoot as quick and straight as anybody can
But I wouldn't shoot without a cause
I'd gun nobody down
But she cried again as he rode away

Don't take your guns to town son
Leave your guns at home Bill
Don't take your guns to town

He sang a song as on he rode
His guns hung at his hips
He rode into a cattle town
A smile upon his lips
He stopped and walked into a bar
And laid his money down
But his mother's words echoed again

Don't take your guns to town son
Leave your guns at home Bill
Don't take your guns to town

He drank his first strong liquor then to calm his shaking hand
And tried to tell himself he had become a man
A dusty cowpoke at his side began to laugh him down
And he heard again his mothers words

Don't take your guns to town son
Leave your guns at home Bill
Don't take your guns to town

Filled with rage then
Billy Joe reached for his gun to draw
But the stranger drew his gun and fired
Before he even saw
As Billy Joe fell to the floor
The crowd all gathered 'round
And wondered at his final words

Don't take your guns to town son
Leave your guns at home Bill
Don't take your guns to town

"Don't Take Your Guns To Town"
Lyrics via

Thursday, June 26, 2008

Bush's World War Too

The WSJ has done a splendid job of piecing and parsing the legal arguments that Bush tried to run up to support his "war powers". Regrettably, in its lead story, it characterizes this putsch as a "legal miscalculation". Guambat is quite certain, though only by prejudice because he has not been confided in by the Bushies, that it was a calculated stretch of the envelope and hardly a miscalculation; the only miscalculation was that the neocons hadn't packed the courts fully enough with his acolytes to rubber-stamp their ideology.

Fortunately, in its sidebar presentation, the authors frankly note,
"The justices did not do this in a cursory fashion but in detailed historical lessons intended to ensure that no future president gets the wartime precedents so wrong."
The lead story says,
even the conservatives have chided him. A 1948 decision, Hirota v. MacArthur, was a "slip of a case" that "cannot bear the weight the Government would place on it," sniffed Chief Justice John Roberts in a recent opinion. [Guambat doesn't find that the Chief Justice "sniffed" in the opinion, so that must just be editorial reportage. Strike it from the record, and the jury is instructed to disregard that characterisation.]

"The bottom line is that the court is not buying off on this concept of the global 'war' on terror," says retired Col. David Crane, a law professor at Syracuse University and former war crimes prosecutor.
The "interactive graphic" sidebar is full of the opinions, arguments and summaries that flesh out the debate. Guambat hopes it is available to you if you don't have a subscription. Since there are only a couple of readers of these posts, and that's being charitable, if you can't get through the subscription barrier, send Guambat an email, or leave a comment with your email contact, and Guambat will email the article(s) to you.

Wednesday, June 25, 2008

Bush's Department of Just Us

The US Department of Justice is headed by the US Attorney General and provides primary legal services for the Government of the United States, "To enforce the law and defend the interests of the United States according to the law." It is, therefore, not the personal legal representative of the President, to represent the President's interests.

Representing the interests of the United Sates is a high calling and deserves the talents of the best in the land. To that end, the Department of Justice has established a variety of programs to attract new lawyers of the highest caliber to serve. The programs are highly sought after and ruggedly competitive.

The Washington Post has described one of the programs, the Honors Program:
The honors program, established during the Eisenhower administration, is a highly regarded recruiting program that attracts thousands of applicants from top-flight law schools for about 150 spots each year and has been overseen for most of its history by senior career lawyers at Justice.
As that WaPo article mentioned, Bush's Attorney General John Ashcroft, and other political appointees in the department, highjacked the recruitment effort from the career lawyers and put it under the thumb of political commissars:
The changes alarmed many current and former Justice officials, who feared that the Bush administration was seeking to pack the department with conservative ideologues. Many law school placement officers said in 2003 that they noticed a marked shift to the right in the students approached for honors program interviews.
The career lawyers pushed back, and eventually engineered an independent review of the situation, conducted by an internal DOJ collaboration of the Office of the Inspector General’s (OIG) and the Office of Professional Responsibility (OPR).

The OIG/OPR report has now been released and it found the Bush's DOJ weeded out lawyers who might not share its political agenda, in violation of civil service laws. Under President Bush, the Department of Justice has been turned into the Department of Just Us.

Some selected and perhaps rearranged and emphasised excerpts from the 115 page report follow:

The Honors Program is a critical recruiting tool for the Department to bring in talented new attorneys, many of whom will become long-term public servants. It is important for the Department to have a fair and open competition for these positions and to ensure that the selection for the program is based on non-partisan considerations.

Positions for DOJ attorneys fall into two broad categories: political and career. It is not improper to consider political or ideological affiliations when hiring for DOJ political positions. However both DOJ policy and civil service law prohibit discrimination in hiring for DOJ career positions on the basis of political affiliations. This prohibition applies to attorneys hired for permanent positions through the Honors Program as well as summer interns hired through the SLIP, because these are considered career positions. The Department’s policy on nondiscrimination is contained in the Code of Federal Regulations, Section 42.1(a) of 28 C.F.R. Part 42, Subpart A.

While the regulation does not define “political affiliation,” courts have considered political affiliation to include “commonality of political purpose, partisan activity, and political support.” See, e.g., Curinga v. City of Clairton, 357 F.3d 305, 311 (3d Cir. 2004).

In addition to Department policies, the Civil Service Reform Act (CSRA) prohibits the Department from discriminating in hiring for career positions based on political affiliation. For example, the CSRA states that federal agencies must adopt hiring practices for career employees in which selection and advancement should be determined solely on the basis of relative ability, knowledge, and skills, after fair and open competition which assures that all receive equal opportunity. 5 U.S.C. § 2301(b).

"employees and applicants for employment should receive fair and equitable treatment in all aspects of personnel management without regard to political affiliation . . . .” 5 U.S.C. § 2301(b)(2).

These policies and laws do not define “political affiliation.” Nonetheless, identifying candidates as “liberal” or “conservative” based on the activities or organizations with which they are affiliated can be used as a proxy for political affiliation and thus can violate CSRA’s prohibition.

In 2002, the Honors Program and SLIP hiring process was fundamentally changed as a result of recommendations from a Working Group of senior officials from the offices of the Attorney General, Deputy Attorney General, and Associate Attorney General.

rather than sending career Department attorneys to various locations across the country to conduct regional interviews, all Honors Program candidates would be brought to Washington, D.C., at the Department’s [taxpayers'] expense, for interviews. According to the members of the Working Group we interviewed, this change was intended to allow more Department attorneys, particularly political appointees in leadership positions, to participate in the interview and hiring process.

in July 2002 the Attorney General’s Working Group directed that component heads appoint someone from their front offices to coordinate Honors Program hiring in their components.

a Screening Committee, composed of several members of the Working Group, reviewed and approved the candidates who the components selected for interviews

in general the components did not know who served on the Screening Committee or what criteria it applied in reviewing candidates. In addition, the Screening Committee gave no reasons or explanations for its decision to deselect a candidate from the list of those to be interviewed.

The changes implemented in 2002 remained in effect until 2006.

That changed in 2006 when OARM reported that many complaints surfaced after the Screening Committee took weeks, rather than the normal 2 days, to conduct its review, and deselected an unusually large number of seemingly qualified Honors Program and SLIP candidates.

As a result of the complaints and controversy in 2006, the Department changed the hiring process in 2007. Among other changes, the screening function performed by political appointees during the previous 4 years was replaced with a Screening Committee composed of career employees.

some members of the Screening Committee in 2006 used liberal and conservative affiliations as a proxy for political affiliation.

We found that, in general, the major criteria considered by the components from 2002 through 2006 included grades, quality of law school, judicial clerkships, law review experience, work experience, and a demonstrated interest in public service. Several of the components’ selecting officials told us that they considered it a positive factor when a candidate had a federal clerkship, particularly a federal appellate clerkship. In addition, some components looked for experience that indicated an interest or expertise in the type of law practiced by that component.

OARM Director Louis DeFalaise said that he was aware of general complaints in 2002 that the process had been taken away from the career employees and transferred to political appointees (with the implication that the changes had politicized the process), although DeFalaise said no one specifically complained to him

We conducted extensive data analysis of the applications of Honors Program and SLIP candidates who were approved or deselected by the Screening Committee in 2002 to detect any patterns in the approval and deselection rates between candidates with differing affiliations.

The data indicates that the [Honors] candidates with liberal affiliations were deselected at a much higher rate (15 out of 18) than candidates with conservative affiliations (0 out of 5) or candidates with neutral affiliations (11 out of 48), even though all candidates met the same criteria.

We found that all 7 [Honors] applicants who indicated that they were American Constitution Society members were deselected by the Screening Committee for interviews, while 2 of the 29 applicants who indicated that they were members of the Federalist Society were

The proportion of Democratic Party affiliated [Honors] applicants deselected by the Screening Committee was significantly higher (70 percent, or 43 out of 61) than the proportion of Republican Party affiliated applicants

The overall data [for both Honors and SLIP applicants] indicated a pattern of deselecting candidates based on political or ideological affiliations.

The 2002 Screening Committee did not maintain a record of the basis for its decisions on individual candidates, nor did it provide any explanations to the components at the time as to why specific candidates were deselected. We recognize that the passage of time has made it difficult for Screening Committee members to recall the basis for their selection or deselection decisions. After we conducted our data analysis, we contacted the 2002 Screening Committee members again for their comments on the pattern that the data revealed. Higbee stated that the data “surprised” him. Nielson said that he was not certain that he participated in the screening process. Ciongoli stated that he had no recollection of participating in the screening process.

In sum, the data showed that [the 2002] candidates with Democratic Party and liberal affiliations apparent on their applications were deselected at a significantly higher rate than candidates with Republican Party, conservative, or neutral affiliations. This pattern continued to exist when we compared a subset of academically highly qualified candidates from the three groups. However, we found no other evidence that the members of the Screening Committee intentionally considered political or ideological affiliations in making their deselections, and the Committee members all denied doing so.

We did not find evidence indicating that the Screening Committees from 2003 to 2005 used political or ideological affiliations as a basis either to accept or deselect candidates.

In contrast to the Screening Committees in 2003 to 2005, the Screening Committee in 2006 deselected many Honors Program and SLIP candidates. These deselections, made without explanation to the components, generated significant controversy within the Department. based on the results of our investigation we concluded that two of the three members of the Screening Committee inappropriately considered political and ideological affiliations in the deselection process.

Some component officials said they sought an explanation to help them decide whether to appeal the Committee’s decision or to simply understand the basis for what appeared to be inexplicable decisions to deselect candidates with high academic qualifications. Elston generally responded to these requests for explanations by stating that the deselections were made by a committee. While he told us he did not remember the basis for individual deselections, he suggested to the components at the time that poor grades and poor grammar were the reasons for most candidate deselections.

Many component employees involved in the selection process told us they were shocked and upset at the large number of candidates the Screening Committee had deselected. They said the impressive qualifications of many of the deselected candidates, together with no explanation for their deselection, led to widespread speculation that the Screening Committee considered political or ideological affiliations in deselecting candidates.

We conducted extensive data analysis of the applications of those Honors Program and SLIP candidates who had been approved or deselected by the Screening Committee in 2006 to detect any patterns in the approval and deselection rates between candidates with differing affiliations.

Overall, based on the results of our data analysis, we found that Honors Program candidates whose applications reflected liberal affiliations were deselected at more than three times the rate (55 percent) of candidates whose applications reflected conservative affiliations (18 percent) and more than twice the rate of candidates whose applications reflected neutral affiliations (23 percent). We found a similar trend when we examined a subset of highly qualified candidates.

In addition, candidates whose applications reflected a Democratic Party affiliation were deselected at a significantly higher rate (48 percent) than candidates whose applications reflected a Republican Party affiliation (27 percent) or who did not show any party affiliations (30 percent). Similarly, highly qualified candidates who had Democratic Party affiliations were deselected at a much higher rate (37 percent) than candidates who had Republican Party affiliations (7 percent) or who did not show any party affiliation (18 percent).

following deselection of 28 of 74 of the Tax Division’s SLIP candidates, a senior Tax Division attorney reviewed all the candidates’ applications and wrote in a memorandum analyzing the deselections that she was “unable to identify any legitimate reason the students were deselected.” The attorney concluded that all but one candidate who had worked for a Democrat were deselected, while all candidates who listed connections to Republican Members of Congress or the White House were approved.

A senior attorney in the Civil Division’s Appellate Branch conducted an analysis of the 59 candidates that were deselected out of the 135 candidates that were submitted by the various sections in the Division. The senior attorney wrote that, as the approval and deselections of SLIP candidates trickled out in the fall of 2006, a pattern emerged that became impossible to ignore: candidates who had worked for [Democrats] were uniformly rejected, notwithstanding some with outstanding qualifications. In fact, 12 of the 13 candidates on the Civil Division’s list who had worked for a democratic senator or representative were rejected. . . . In addition, 4 out of 5 candidates who had worked for democratic state legislators were rejected. The attorney wrote that “every candidate who had worked for GOP legislators at the state or federal level had been approved.”

Daniel Fridman began his career with the Department in December 2004. Fridman had no responsibility for or involvement in hiring prior to September 2006 when Elston assigned him to work on the Screening Committee. Elston stated that because this was the Attorney General’s Honors Program, they wanted to hire candidates who were supportive of or who had views consistent with the Attorney General’s views on law enforcement. However, Elston did not explain how Fridman would determine whether a candidate supported the Attorney General’s views.

We asked Fridman to review a sample of approximately 50 applications of deselected candidates who had outstanding academic records. Fridman said that he would have voted yes on each of the candidates. Fridman repeatedly expressed surprise that candidates for whom he voted yes, based on their grades, law school, and class rank, were in fact deselected. Fridman said that based on our informing him that these candidates had been deselected by the Screening Committee, Elston must have sided with McDonald in deselecting these candidates.

At the end of the interview, Fridman stated: I’m still kind of reeling from the résumés that you . . . showed me . . . people from Harvard, Yale, Stanford who were deselected. There were a lot of them. And I am shocked and very disappointed about that. . . . I didn’t know that this was going on. I thought that this was being conducted in good faith. I was conducting my reviews in good faith and making my recommendations based on merits and what I thought were the people [who] were going to be the most qualified candidates for the Department. And I’m sickened by this. And I’m not happy that I’m associated with this.

McDonald graduated from law school in May 2003. McDonald was hired as a political appointee as Counsel to Acting Associate Attorney General Mercer and began work on September 5, 2006. Her duties as Counsel included assisting with oversight of the grant issuing components. She was also assigned by Mercer to work on the Honors Program/SLIP Screening Committee after she had been at the Department only a few weeks.

No one we interviewed (including Elston, Fridman, and Mercer) said they gave McDonald any instructions on how to conduct her review of Honors Program and SLIP applications. In a letter to OPR and OIG investigators in which he reiterated McDonald’s unwillingness to be interviewed, McDonald’s attorney stated that she was given no instructions on how to conduct the review, “except for limited high level statements.” McDonald’s attorney did not name the source of this guidance, and he declined to allow McDonald to be questioned about this issue.

Fridman and Elston reported that McDonald conducted Internet searches on the candidates using Google and MySpace. Our search of McDonald’s Internet activities on her Department computer during October and November 2006 confirmed that she conducted searches on many of the candidates’ names. We were able to determine that, among other things, McDonald searched for organizations to which candidates belonged, read blogs by or about candidates, and searched Westlaw, school websites, and school newspapers for articles by or about candidates.

Elston and Fridman both remembered McDonald circling items on candidates’ applications and writing remarks about those items, including employment or affiliations with organizations, judges, law school professors, and legislators who could be considered liberal. In the November 29 e-mail, McDonald wrote that three of the eight candidates were “Unacceptable” based on her objections to the candidates’ ideological affiliations. She objected to one candidate on the basis of the organizations he belonged to and to statements in his essay that she considered “leftist.” McDonald noted that she deemed another candidate unacceptable because the candidate was “active in ACS.” However, we determined that this candidate’s application did not mention his membership in the American Constitution Society or ACS.

McDonald found another candidate questionable because of the candidate’s grammar, writing style, and grades, but noted: “In her favor, she refers to wanting to work for DOJ to fulfill her goal of ‘enforcing the law.’ Leftists usually refer to achieving ‘social justice’ or ‘making policy’ or anything else that involves legislating rather than enforcing.”

Elston joined the Department in 1999 as a career Assistant U.S. Attorney In April 2006, he converted from a career employee to a political appointment. Elston told us that he initially became involved in the 2006 Screening Committee when Monica Goodling called him and asked him to lead it.

Elston confirmed that Fridman raised with him early in the review process Fridman’s concerns that McDonald was deselecting candidates based on “membership in liberal organizations, or those kind of things,” revealed in the candidate’s application or from Internet searches she conducted. Elston said he reviewed the applications Fridman noted and saw that McDonald had either circled or written comments about liberal affiliations on the applications and then voted to deselect those candidates.

Elston said he was aware that if McDonald used liberal affiliations as proxies for party affiliations to deselect applicants, that would be inappropriate. He said he thought at the time of the review process that at least “the appearance of what [McDonald] was doing was problematic.” However, Elston said he did not raise the issue with McDonald. Elston said he did not want to accuse McDonald of doing something inappropriate because he speculated that Goodling may have told McDonald to do what she was doing.

Elston said that he knew the Committee had put a lot of effort into reviewing the applications and he did not want to veto all of McDonald’s decisions. He said he often upheld her no vote, but for reasons other than the ones relied on by McDonald.

Elston acknowledged in our interview that when he became aware in the spring of 2007 of the allegations that Goodling had used political affiliations in hiring career immigration judges, “I had in the back of my mind the concern that, that some of those same things were at work in the Honors Program in hindsight.” He said he became concerned that “there was political stuff going on,” and that the Honors Program and SLIP may have been “Monica-ized.”

In addition to asking Elston about the general criteria he used, we showed Elston applications of approximately 50 highly qualified candidates who were deselected and asked him to explain the decisions. These were candidates Fridman said he believed he approved, which indicated that the two negative votes were cast by McDonald and Elston.

For example, we asked Elston about a deselected Honors Program candidate who was first in his class at Georgetown Law School, had clerked for a judge on the U.S. District Court for the Southern District of New York, was clerking for a judge on the U.S. Court of Appeals for the Second Circuit, and had been an articles editor on a law journal. He had also worked for a Democratic U.S. Senator and a human rights organization. Elston said he did not recall why this candidate was deselected. He noted that the candidate had written a note about using international law as a tool in constitutional interpretation. Elston explained that if McDonald had read the article and confirmed that the candidate was advocating the use of international law in constitutional interpretation, that would “be of concern.”

We asked Elston about another deselected Honors Program candidate who was enrolled in a joint degree program for law and urban planning at Harvard, served as an articles editor on a law journal, graduated in the top 5 percent of his undergraduate class at Harvard, and had worked on a congressional campaign for a Democrat. Elston said he remembered the applicant because he had “chuckled” at the following portion of his essay: In high school I thought that I wanted to captain a Green Peace skiff in the North Atlantic. I figured that was what serious environmentalists did, and I wanted to be a serious environmentalist. I decided later that potential martyrdom on the high seas was not for me, and rather than operate at the margins, I would prefer a job in which I could have a less antagonistic and more direct impact." When asked how he voted on this candidate, Elston said, “A lot of times when I chuckled, I said no.” Elston said he was certain McDonald would have circled items on this application. I couldn’t vote . . . with Dan all the time. I mean, if Esther felt very strongly and it came though clearly on a résumé, I gave that weight. . . . You can review the application package and come away with a, with a conclusion that this is not a person who comes to the Department with [an] . . . evenhanded approach to environmental issues.

We asked Elston about a deselected Honors Program candidate selected by ENRD who was in the top 10 percent of his class at Lewis and Clark University, was an articles editor for an environmental journal, and had worked for Earthjustice and the Northwest Environmental Defense Center.55 The candidate indicated in his essay a strong interest in working in environmental law, including that he wanted “to serve as part of the team charged with enforcing the world’s most comprehensive environmental laws, and with defending the crucial work of our environmental and resource management agencies.” Elston commented that while he did not know anything about the organizations that the candidate worked for the impression I’m left with after a quick look at this is that this is someone who had come to the Environment Division . . . with an agenda, not with an open mind as to the best way to enforce the environment, environmental laws. . . . I had a negative reaction to that. So, I may well have voted with Esther on that one.

We asked Elston about another deselected Honors Program candidate who had graduated from Yale Law School, had been a member of the Yale Law Journal, graduated summa cum laude with a Bachelor of Arts degree from Yale College, was clerking for a judge on the U.S. Court of Appeals for the Second Circuit, had studied Arabic, and had worked with a human rights organization. Elston said he looked for people with Arabic language skills and that he also knew the judge this candidate was clerking for, so he believed he would have been enthusiastic about this candidate. Elston could not explain why the candidate was deselected and said he was “starting to get concerned that some ‘yes’ pile [applications] got in the ‘no’ pile.”

We asked Elston about a deselected SLIP candidate who was a student at Harvard Law School, graduated in the top 5 percent of his undergraduate class from the University of California, Berkeley, was an editor on Harvard’s human rights journal, had interned with a city attorney’s office and a state court judge, and had worked for 5 years in marketing before entering law school. In his essay, the candidate referred to his perception that working for the government would be “work for the people” where “principles forged by experience, prudence and moral obligation” would guide the work. In his last line of the essay, the candidate stated, “It is precisely this ability to have my principles guide my work that inspires me to be a government lawyer.” Elston thought he would have reacted negatively to that last sentence because “I believe that a civil servant enforces the law impartially [and] often times is called upon to set aside his or her own beliefs.” However, Elston stated that he had no recollection of whether he reviewed the application and voted no.

We also questioned Elston about his decisions on the components’ appeals of deselected candidates. As noted above, Elston alone decided the appeals submitted by the components. Elston denied component appeals of 16 of the 32 Honors Program candidates and 13 of the 18 SLIP candidates who had been initially deselected. Because many of the candidates whose appeals were denied had strong academic credentials, we showed Elston some of those candidates’ applications and asked him to explain his decisions.

Elston stated that he had a “bias against overturning the work that the Screening
Committee had done” and accordingly his “bias was to not grant appeals because to do so would undermine the departmental review process.”

We discussed with Elston appeals of specific candidates. For example, we asked Elston why he denied the appeals of two candidates by the Civil Division. One candidate was a student at Harvard Law School, had an undergraduate degree from Princeton University, had worked for Planned Parenthood and a Democratic Senator, and had received high praise for her work during a SLIP internship the previous summer. Another candidate had graduated sixth in his law school class from the University of Alabama, had been a member of the law review, had interned for the Public Defender Service, currently was clerking for a federal judge, and had written a paper on the detention of aliens under the Patriot Act.

Elston’s only explanation for deselecting these candidates was that he was “pretty offended” by the Civil Division’s appeal, which stated that the Division screeners had taken the responsibility of selecting candidates seriously and “given the care we exercise in making these selections, we would urge some deference to the difficult choices.” Elston said he found the appeal offensive because the Division employees were “basically saying we know better” and “you should defer to us.” However, Elston could not explain why he accepted other candidates appealed by the Civil Division but denied these two candidates. Elston recalled that Civil Division AAG Keisler subsequently made a personal appeal in a telephone call on behalf of the candidate who worked for Planned Parenthood, which caused Elston to reverse his decision and reinstate that candidate.

We asked Elston why he denied the appeal of a SLIP candidate who was a student at Yale Law School, a member of the Yale Law Journal, a Rhodes Scholar, a Truman Scholar, graduated summa cum laude from Yale College, interned with the U.S. Attorney’s Office for the Southern District of New York, had researched national security and terrorism issues for Yale Law Professor Bruce Ackerman, and had worked for the Minnesota Advocates for Human Rights, the Coordinating Council for Children in Crisis, and the Legal Services Organization’s Trafficking Clinic.58 AAG Keisler had sent Elston an e-mail indicating that this candidate was the top priority among all those SLIP candidates that the Civil Division was appealing. Elston said that this candidate “looks like a perfectly outstanding candidate, although she doesn’t say much in terms of essay that would give us a view as to why she’s interested in public service.”

We asked Elston why he denied the request of U.S. Attorney Carol Lam to interview a candidate who graduated in the top third of her class at Stanford Law School, was summa cum laude with an undergraduate degree from George Washington University, was clerking for a judge on the U.S. Court of Appeals for the Ninth Circuit, and had previously worked for the Center for the Study of Sexual Minorities in the Military. Elston said he could not recall the reasons for his decision, but thought he may have struck the candidate based on a reference in her essay that being a federal prosecutor would afford her the opportunity to exercise prosecutorial discretion in deciding what charges were appropriate and whether to offer a plea bargain.

We asked Elston about his denial of the Antitrust Division’s appeal on behalf of a candidate who was in the top 10 percent of his class at the University of Minnesota Law School, was a law review editor, graduated from the Wharton School of Business at the University of Pennsylvania, was clerking for a federal appellate judge, and listed membership in both the Federalist Society and the American Constitution Society with a comment that he was “open-minded to all points of view.” The candidate also noted in his essay that he was capable of defending positions such as the constitutionality of the “President’s NSA‘s wiretapping program” even though he “remained personally conflicted” about the program. Elston said he was “surprised” that he did not grant the appeal and could not recall the reason for his decision. Elston said that he may not have granted the appeal because this candidate was listed fourth among six candidates that the component was appealing and he may have assumed that the component listed the candidates in order of priority. However, Elston could not recall why he granted the appeals of other candidates requested by this component, including one who was fifth on the appeal list, had lower grades, attended a lower-tier law school, and had no political or ideological affiliations on his application.

We asked Elston about an appeal he denied of a candidate who was a student at Georgetown Law School with a 3.08 grade point average, who graduated in the top third of his undergraduate class at Georgetown University, and who had worked for Senator John Kerry’s presidential campaign. The candidate selected the Criminal Division as one of the components he was interested in, stated in his essay that he had “always wanted to be a prosecutor,” but that his interest in prosecuting was not “limited to rapists,” and included a paragraph that spoke highly of the role of the U.S. Attorney. Elston denied that the candidate’s work on the Kerry campaign had any negative effect on his decision. Rather, Elston said that one of the reasons he did not grant the appeal was because other than selecting the Criminal Division as one of the components he was interested in, the applicant “didn’t express an interest in the Criminal Division.” the Division “doesn’t prosecute sex offenders” and “does very different things than U.S. Attorneys’ Offices.” We note that Elston’s statement that the Criminal Division does not prosecute sex offenders is incorrect. Elston also said that his grades were not impressive and that he used too many exclamation points (we found three on the three-page application),

We also asked Elston about a SLIP candidate who was a thirdyear student at Yale Law School, had secured a clerkship on the U.S. Court of Appeals for the Ninth Circuit for the fall of 2007, had a master’s degree in history from Harvard University, graduated cumlaude from Yale College, had successfully served as a SLIP with the Department, and had a security clearance. The candidate’s application also stated that she had worked for a Democratic Congressman and had worked at the Yale Lowenstein Human Rights Clinic on human rights issues “arising from the war on terror.” Elston was unable to say why the candidate was deselected. Elston said he remembered being moved in a positive way by the personal essay the candidate had written about some difficulties in her childhood. However, Elston said he found this candidate’s essay “a little bit troublesome” because she said she wanted to work at the Department where she would “be able to consider both the needs of my client and also what is best for my country.” Elston said that “line attorneys in the Department of Justice don’t get to indulge themselves [by] deciding for themselves what’s best for the country.” Nevertheless, Elston said he did not think that statement in the essay would constitute a reason to disqualify somebody with an outstanding record and an otherwise great essay.

We asked Elston why he denied the appeal of a SLIP candidate who was a student at Stanford Law School, an editor on the Stanford Journal of International Law, President of the Stanford International Human Rights Association, and had graduated summa cum laude from Northwestern University. Elston said there was nothing familiar to him about the application so he could not explain why he did not approve it. However, on reading the applicant’s essay when we showed it to him, Elston said that he had a negative reaction to her statement that working for the Department would stimulate her conscience as well as her brain and allow her to work on cases that she cared about.

The evidence demonstrates that McDonald used inappropriate criteria in her evaluations. The November 29, 2006, e-mail from McDonald to Elston and Fridman opining on ATF SLIP candidates is direct evidence that McDonald inappropriately evaluated candidates based on the candidates’ political or ideological affiliations.

McDonald wrote that she voted against candidates because their essays used “leftist commentary and buzz words” such as “environmental justice,” “social justice,” “making policy,” or “anything else that involves legislating rather than enforcing.” She also expressed disapproval of candidates’ affiliations with liberal organizations such as the American Constitution Society, the Poverty and Race Research Action Council, Greenpeace, and Greenaction. Her remarks in the e-mail about “leftist commentary” suggested that this was not an isolated incident or the first time she had applied these criteria. Moreover, Fridman and Elston both told us that McDonald’s comments in the November 29 e-mail were consistent with other comments she made in her review of Honors Program and SLIP applications. Fridman also told us that McDonald circled items and expressed concern about applications that indicated a candidate had worked for a judge, law professor, or legislator she considered liberal, was a member of or had worked for a liberal organization, or expressed views in a law review article that were not entirely consistent with positions taken by the current administration. Elston also acknowledged that McDonald appeared to have considered political or ideological affiliations in her review of applications.

Based on the results of our investigation, we concluded thatMcDonald committed misconduct and violated Department policies and civil service law by considering political or ideological affiliations in assessing Honors Program and SLIP candidates.

However, we believe the most significant misconduct was committed by Elston, the head of the Screening Committee. Elston failed to take appropriate action when he learned that McDonald was routinely deselecting candidates on the basis of what she perceived to be the candidates’ liberal affiliations. We also concluded that Elston deselected some candidates – and allowed the deselection of others – based on impermissible considerations. after he became aware early in the screening process that McDonald was rejecting candidates based upon what she perceived to be their liberal affiliations, he did not discuss that impropriety with her.

Elston told us that he decided not to talk to McDonald about the criteria she was using because even if she was rejecting candidates based on their liberal affiliations, he and Fridman could overrule her. Elston admitted, however, that he frequently gave deference to McDonald’s decisions because he could not always vote against her

we concluded that Elston violated federal law and Department policy by deselecting candidates based on their liberal affiliations. First, the data analysis indicates that highly qualified candidates with liberal or Democratic Party affiliations were deselected at a much higher rate than highly qualified candidates with conservative or Republican Party affiliations.

Second, Elston admitted that he may have deselected candidates in a few instances due to their affiliations with certain liberal causes. Elston also was unable in specific cases to give a credible reason as to why highly qualified candidates with liberal or Democratic Party affiliations were deselected.

While Elston generally denied that he considered political or ideological affiliations in evaluating candidates, he admitted when questioned about certain candidates that he considered aspects of those candidates’ ideological affiliations in his evaluation. For example, Elston admitted that in two instances he would have voted with McDonald to deselect the candidates based on their affiliations with pro-environment causes because he did not want the candidates coming to the Department “with an agenda” or without “an evenhanded approach” to environmental issues.

In addition, Elston consistently was unable to provide credible explanations as to why he denied the appeals of the highly qualified candidates who had liberal or Democratic Party affiliations. His proffered reasons were also inconsistent with other statements he made or actions he took.

Elston tried to minimize his role in selecting candidates when he was questioned by others about the Committee’s decisions. Elston frequently explained that other Committee members had been responsible for the decisions and described his role as a conduit. However, the evidence demonstrated that he was casting the deciding vote on a significant number of candidates that Fridman had approved and McDonald had rejected.

We believe that McDonald’s and Elston’s conduct constituted misconduct and also violated the Department’s policies and civil service law that prohibit discrimination in hiring based on political or ideological affiliations.

In addition, we believe that various employees in the Department deserve credit for raising concerns about the apparent use of political or ideological consideration in the Honors Program and SLIP hiring processes. For example, Daniel Fridman deserves praise for reporting his concerns about the process in 2006 to both his supervisor and Elston and for avoiding the use of improper considerations in his review of candidates for the Honors Program and SLIP. A few DOJ political employees also objected to the apparent use of political or ideological considerations in the hiring process, such as Assistant Attorneys General Peter Keisler and Eileen O’Connor, and they should be credited for raising their concerns. Certain career employees, particularly in the Tax Division and the Civil Division, also pressed concerns about the hiring process. By contrast, we believe that others in the Department, such as Acting Associate Attorney General William Mercer and OARM Director Louis DeFalaise, did not sufficiently address the complaints about the deselections.

Other reports on this topic:
Inquiry Shows Hiring Based on Ideology

Ideology-Based Hiring at Justice Broke Laws, Investigation Finds

Audit: DOJ Played Politics, Broke Law in Hiring

Sunday, June 22, 2008

Praise the lord and pass the salt*

This story has been variously portrayed, which is in itself a bit of the story.

Teacher told to remove Bible from desk:
John Freshwater has taught science at Mount Vernon Middle School for 20 years and last year was named Teacher of the Year. For the past 18 years, he has kept his personal Bible on his desk.

Administrators recently ordered Freshwater to remove the Bible, citing a violation of the separation of church and state. But Freshwater’s spokesman, Dave Daubenmire of Pass the Salt Ministries, said the First Amendment gives Freshwater the right to keep his Bible on his desk.

“The issue is his own personal faith, and whether or not … a teacher become[s] a second-class citizen,” said Daubenmire. “Does a teacher forfeit all of his constitutional rights, all of his God-given rights, when he becomes a school teacher?”

“If they try to [take] legal action against Mr. Freshwater for his failure to remove his Bible, I can tell you this: the battle will be on. And I think the law is very murky there – the whole idea of separation of church and state is a fraud anyway [and] we want to try to expose it as a fraud.”
Group repeats demand for answer to Bible question
representatives of the Mount Vernon chapter of Minutemen United have repeated their demand for a public statement on whether a classroom teacher is permitted to have a Bible on his or her desk.

“Although we do not want this to be taken as a threat,” the letter reads in part, “we feel it is only right that we inform you that if a public statement is not made in support of the Bible by June 10 we will have no other choice than to begin a recall procedure on all members of the School Board who voted to ban the Bible from the view of the children.”

Teacher to be fired for pressing beliefs
An Ohio school board is firing a science teacher accused of pressing his Christian beliefs on students.

John Freshwater discussed his creationism beliefs, disregarded evolution and failed to follow the standard curriculum while teaching eighth-grade science at Mount Vernon Middle School, board officials said.

An investigation revealed he continued teaching his beliefs even after he was ordered to stop, the Columbus (Ohio) Dispatch reported Saturday.

Freshwater's attorney, R. Kelly Hamilton, said his client's rights to practice religion were infringed and he plans to call for a hearing with the school board to fight the dismissal.

Ohio Teacher Who Burned Cross on Student’s Arm Fired
The board of administration of an Ohio school decided on Friday to fire a middle school teacher after he burned a cross into the arm of one of the students attending his class. The school’s administrators voted to get rid of the teacher because he refused to keep his religious beliefs out of the classroom.

Freshwater’s supporters reportedly gathered in a parking lot yesterday asking God to inspire the school board to make the right decision....

Guambat reckons the supporters were a bit gobsmacked -- make that godsmacked -- when, just as they asked, the board did, indeed, make the right decision.

The school board hired an independent investigation into the matter, and the report of the investigation is at this link (hattip to Ed Brayton for the reference). Among items in the report:
during our interview the parents stated that their primary concern is not the Bible on Mr. Freshwaters’ desk. They stated that their primary concern was that Mr. Freshwater appeared to be teaching students to defy the school and to disobey rules....
Among its findings:
Several students described him as a “great guy” and their favorite teacher.” Fellow teachers and administrators also spoke positively regarding Mr. Freshwater as a person.

high school science teachers expressed frustration and concern regarding having to “re-teach” concepts that in their opinion had been improperly taught by Mr. Freshwater at the eighth grade level.
Comments included:
· At the high school level evolution is the underlying principle of all biology. At the ninth grade level when we bring up evolution there is challenge and argumentation from students who have had Mr. Freshwater, bordering on hostility.

· “Here” from John Freshwaters’ students means that anytime he was telling them something out of the textbook that was wrong from his perspective they were to say, “Here.” For example, Mr. Freshwater taught there are reasons why carbon dating may not be accurate and so students were to say, “Here.” The high school science teachers pointed out the scientific data supports carbon dating as being accurate. Mr. Freshwater’s emphasis to the students is, “If carbon dating is wrong then evolution is wrong.”

"I find it extremely unfair to have to start EACH SCHOOL YEAR reteaching students how science ACTUALLY works.”

A current student said that Mr. Freshwater would throw out both sides of issues, such as the big bang theory, intelligent design, carbon dating and evolution. When asked, Mr. Freshwater would offer his personal opinion such as I believe there was a boat in a flood. He also taught that you can’t trust radiometric dating.

The investigators found the following material in the second cupboard in the front of the room during a walk through of Mr. Freshwaters’ classroom on May 15, 2008:
· A book titled “Refuting Evolution”
· A video tape titled “Lies In The Textbooks, Part A 4 Of 7, 10 Lies Of Evolution”
· A book titled “Evolution Of A Creationist”
· A book titled “The Real Meaning Of The Zodiac”
· A book titled “Icons of Evolution”
Mr. Freshwater said that he uses a telsa coil as part of a lab experiment where he charges gasses. He puts the elements in test tubes in a row, and then charges them with the device, and the students identify the elements by the color of the gasses.

He said that he demonstrates it on his own arm by making an “X”....
The current or former students that were interviewed that had participated in the December 2007 incident or other similar incidents in earlier years described the demonstration in the same manner as had Mr. Freshwater with one exception.
They all described the mark Mr. Freshwater put on his arm as a “cross”.

During our interview on May 15, 2008 Mr. Freshwater stated he has had his Bible on his desk for 21 years. He did have two boxes of Bibles in the back of his room.
When asked if the school Bible was there to make a statement, he said, “Yes.”

* Praise the Lord and Pass the Ammunition

Tuesday, June 17, 2008

No accounting for taste

(Photo:Shawn Baldwin/Reflex News, for The New York Times. Click story link below for full context.)

Army Overseer Tells of Ouster Over KBR Stir (by James Risen, NYT)
Ever since KBR emerged as the dominant contractor in Iraq, critics have questioned whether the company has benefited from its political connections to the Bush administration.

Until last year, KBR was known as Kellogg, Brown and Root and was a subsidiary of Halliburton, the Texas oil services giant, where Vice President Dick Cheney previously served as chief executive.

[T]he Pentagon has recently awarded KBR part of a 10-year, $150 billion contract in Iraq.

The Army official who managed the Pentagon’s largest contract in Iraq says he was ousted from his job when he refused to approve paying more than $1 billion in questionable charges to KBR, the Houston-based company that has provided food, housing and other services to American troops.

The official, Charles M. Smith, was the senior civilian overseeing the multibillion-dollar contract with KBR during the first two years of the war.

Army auditors had determined that KBR lacked credible data or records for more than $1 billion in spending, so Mr. Smith refused to sign off on the payments to the company.

Army officials denied that Mr. Smith had been removed because of the dispute, but confirmed that they had reversed his decision, arguing that blocking the payments to KBR would have eroded basic services to troops. They said that KBR had warned that if it was not paid, it would reduce payments to subcontractors, which in turn would cut back on services. [No tickie, no lunchie.]

“You have to understand the circumstances at the time,” said Jeffrey P. Parsons, executive director of the Army Contracting Command. “We could not let operational support suffer because of some other things.”

As chief of the Field Support Contracting Division of the Army Field Support Command, he [Mr. Smith] was in charge of the KBR contract from the start. Mr. Smith soon came to believe that KBR’s business operations in Iraq were a mess.

By the end of 2003, the Defense Contract Audit Agency told him that about $1 billion in cost estimates were not credible and should not be used as the basis for Army payments to the contractor.

Eventually, Mr. Smith began warning KBR that he would withhold payments and performance bonuses until the company provided the Army with adequate data to justify the expenses. The bonuses — worth up to 2 percent of the value of the work — had to be approved by special boards of Army officials, and Mr. Smith made it clear that he would not set up the boards without the information.

Mr. Smith also told KBR that, until the information was received, he would withhold 15 percent of all payments on its future work in Iraq.

In August 2004, he told one of his deputies, Mary Beth Watkins, to hand deliver a letter about the threatened penalties to a KBR official visiting Rock Island.

The next morning, Mr. Smith said he got a call from Brig. Gen. Jerome Johnson.... “He told me, “You’ve got to pull back that letter,”’ Mr. Smith recalled.

A day later, Mr. Smith discovered that he had been replaced when he went to a meeting with KBR officials and found a colleague there in his place.

Mr. Parsons, the contracting director, confirmed the personnel changes. But he denied that pressure from KBR was a factor in the Army’s decision making about the payments. “This issue was not decided overnight, and had been discussed all the way up to the office of the secretary of defense,” he said.

“In the end,” Mr. Smith said, “KBR got what it wanted.”


Guambat was (subsequent to the above post) reading Yves Smith's blog, naked capitalism, and came across this link to a "report" based on details from a CIA insider/whistleblower. The report indicates the above KBR tale is just a drop in the bucket of corruption Bush cronies carried into his administration.
SueAnn Arrigo is the source. She was a high-level CIA insider. Her title was Special Operations Advisor to the Director of Central Intelligence (DCI). She also established the Remote Viewing Defense protocols for the Pentagon in her capacity as Remote Viewing Advisor to the Joint Chiefs of Staff (JCS). It earned her a two-star general rank in the military.

Arrigo worked at CIA for over 30 years and reported directly to Tenet.

Among the items the report more extensively covers:
~ Arrigo discovered high-level Pentagon corruption. It involved bid-rigging .... new plane orders were to enrich Boeing and high-level Pentagon types getting kickbacks for their cooperation. She also learned how much - an average $22,000 "for each (JCS meeting) vote according to their bank" records. Not US ones. CIA-arranged Swiss accounts specifically for this purpose.

~ a new section at the Agency without her knowledge. It employed 40 people, all working for Halliburton "while being paid by the US taxpayer as if they were CIA." It was secret. No files were on them. They were never interviewed, never vetted, and she concluded: "CIA had a back door in its security to let Halliburton put anyone they wanted in (its) hallways.

~ the company shipping half the contracted for amounts and shortchanging the troops and taxpayers. It was no different for war zones. Halliburton "set up the same corrupt system of swing shift receivers (for) at least 3 continents. They received the cartons and signed (off) that the goods were all received properly. Then the shortages later were chalked up to thefts or war damage, etc." Halliburton uses each shortage complaint as a new order. "In that way (it) never (loses) by having to make good for (what's) missing," and (it gets) paid double for the same merchandise.

~ Halliburton's "CIA Representative" confronted her, tore out her phone, ransacked her office, removed every shred of paper, and hauled her off bodily "to a prison cell" inside its basement offices. She was intimidated and threatened. Thought she might be killed. She survived, but the message was clear.

~ it's pure myth that Dick Cheney stopped running the company. "He called in orders to the man I worked for almost every day and sometimes two or more times a day. He remained (Halliburton's) functional head in all but name. No one....had the power to override his orders." Second, Cheney never divested himself of Halliburton profits. "He merely hid how (he got them) through a series of shell companies."

The article goes into more detail about how the CIA and Haliburton conspire to cook the books in ways that benefit the contractor and burden the taxpayer, and ends with the note that there are three times as many more instances of misconduct available from the source but not ready for prime time viewing.

Frankly, this is just so wildly and plausibly preposterous to Guambat that he's not at all sure it isn't just an outline for a cheap paper back fictional whodunnit.

He's certainly hoping that's the case.

Bush gives UK PM The Thumb

Gordon Brown thrown by George Bush's hip-hop handshake
Mr Bush threw the Prime Minister off balance with his hip-hop-style handshake when the pair met during the outgoing President's farewell tour of Britain.

Instead of going in for a straight grip-and-pump, with the fingers slipping under the wrist,

Mr Bush gripped around Mr Brown's thumb,
to the obvious confusion of his partner in the War on Terror.

Alfred E. Bushman

Monday, June 16, 2008

Proof positive derivative speculation drives commodity prices higher -- for now

The weight of money moves markets, be it speculation or whatever other moniker you want to put on it. This was one point John Mauldin made as pointed out in a recent Guambat post, but the more general notion has also been ranted about for months or years on these "pages".

The anecdotal evidence of this dynamic is featured in a Bloomberg report today:

Goldman, Morgan Stanley Profits Conceal Reliance on Commodities By Christine Harper

Goldman Sachs Group Inc. and Morgan Stanley are making money the old-fashioned way: Buying and selling commodities.

Goldman and Morgan Stanley are expected by analysts to report the best second-quarter earnings of the world's biggest securities firms this week, having limited their losses from the collapsing credit market. They also lead Wall Street in commodities trading, where crude oil futures doubled in the past year and the price of products from gold to corn soared to record highs.

Surging prices are attracting investors, as well as companies hedging their positions by buying derivatives. That's played to the strength of Goldman and Morgan Stanley, which dominate the market for commodity derivatives. The two New York-based companies accounted for about half of the $15 billion of revenue that the world's 10 largest investment banks generated from commodities last year, said Ethan Ravage, a financial-services industry consultant in San Francisco.

"There's just a lot of money chasing these markets," said Peter Fusaro, chairman of New York-based Global Change Associates, which advises hedge funds on energy investments. The number of energy-related hedge funds his company lists has more than tripled to 634 in less than four years.

Global trading in commodity derivatives on exchanges rose 52 percent to 489 million contracts in the first quarter from a year earlier, according to data compiled by the Bank for International Settlements. Energy and agricultural products led the climb. In the over-the-counter market, the value of outstanding commodity- derivative contracts jumped 26 percent to $9 trillion in December 2007 from a year earlier, the most recent BIS data show.

The commodities business is also risky. Amaranth Advisors LLC collapsed in September 2006 after trader Brian Hunter's natural gas positions lost about $6.6 billion in one month, the biggest loss ever by a hedge fund.

Commodities revenue can swing wildly. Morgan Stanley said in December that its fourth-quarter commodities revenue decreased 84 percent, without providing an actual figure.

The firm's traders were "badly positioned in electricity, natural gas and oils," Chief Financial Officer Colm Kelleher told analysts on a conference call. "It was poor trading; it is as simple as that."

At New York-based Merrill Lynch, the third-biggest U.S. securities firm after Goldman and Morgan Stanley, President Gregory Fleming said the commodities boom could turn out to mirror the rise and fall of technology stocks in the late 1990s and structured-credit products between 2002 and 2007.

"I'm hearing a lot of talk about supply and demand in commodities is not necessarily what we should be looking at," Fleming said in an interview on May 29. "Boy I've heard that twice before in less than a decade in two different markets."

Saturday, June 14, 2008

Greetings from the Dark Side

Dark side of the Googlesphere, that is. Guambat's regular read, Barry Ritholtz' Big Picture, turned Guambat onto a nifty graphic device that purports to measure the Google informational space/distances between various points on Planet Earth.

Guambat really doesn't understand what it does, but it does make a pretty picture, which pretty much sums up that Guambat is sitting on the edge of the Dark Side of the Information Loop.

Pretty much as expected.

The market's inflation squeeze

Everyone knew that this month's US CPI number was going to be a shocker (and next month's even worse). And yet, and yet Mr Market has blossomed on the announcement and the DJIA is up triple digits as Guambat's digits try to hit the right keys at 2 o'clock in the morning.

Rising inflation, of course, is often fought with rising interest rates, which tend to hurt capital assets like stocks. So why is the stock market thumbing its collective nose at the inflation numbers?

The market "expected" 0.2 monthly core inflation (not a passively mild number at that), and got what it expected, but headline expectations of 0.5% monthly came in higher at 0.6%, which, for our purposes, might in some quarters be the makings of a runaway train.

And as Mr. "inflation ex-inflation" Barry Ritholtz points out, on a year over year basis, these figures show we are all being slugged quite bruisingly in our real world hip pocket, even if the virtual world at the core of US Central Bank inflation is remaining almost (at least by comparison) tame-ish.

Still, Mr. Market behaved so exuberantly that the Wall Street Journal was able to "print" the headline of a story on the online front page "Tame Core CPI Pleases Markets" (which linked to this story).

Guambat reckons that it was all just a trading set-up, because Mr. Market is usually better at upsetting apple-carts than providing a rational marketplace. Given that "everyone knew" the figures would be bad, and given that the end of the futures contract quarter is approaching next week, Guambat reckons this was all nothing much more than an easy short squeeze lay-up by the good sports jockeying trading screens.

And why -- rationally -- should Mr. Market be more concerned that core inflation is upwardly challenged when headline is not?

Consider what's rotten at the core. (Hint: "housing 'slump'" ring any bells?)

This from WSJ's Realtime Economics blog:

This reflects an expectation of continued significant deceleration in the [Owner’s Equivalent Rent] (which accounts for a little more than 30% of the core!) and residential rent categories as vacant properties are transitioned to the rental market. This anticipated deceleration in the key shelter category of the CPI (which accounts for about 40% of the core) should help to offset any spillover effects tied to higher food and energy prices. –David Greenlaw, Morgan Stanley

Right now, what has mitigated a much sharper rise in core prices, which by the way at 2.3% on an annualized basis is well above the implied target range at the Fed, is the muted rise in the housing component over the past few months. It is our assessment that over the remainder of the year that firms will reach a breaking point with respect to the amount of pain that can be absorbed vis-à-vis already razor thin profit margins and begin to pass along those costs. –Joseph Brusuelas, Merk Investments

When inflation expectations are “well-anchored” (that is, the public trusts the Fed), it is the Fed’s opinion on the inflation outlook that matters. When inflation expectations start to drift, then the Fed’s outlook is relevant, but it is actually the public’s view on the future course of prices that is paramount. Even if the Fed thinks inflation will be fine, if the public is ratcheting up their expectations, legitimately or not, the Fed has no choice but to respond. Right now, we are in the verbal jawboning phase of that process, and if that doesn’t work, then the Fed will have to hike rates whether they want to or not. –Stephen Stanley, RBS Greenwich Capital

And this from BugaBear Stephen Roach via FT via Barry:
Moreover, as the stunning surge of the US unemployment rate in May suggests, slowing economic growth in the industrial economies is likely to open up further slack in labour markets [caused or correlated, Guambat reckons, by cheap Asian labour], thereby putting downward cyclical pressure on [developed economy] wages over the next couple of years.

But there is a new threat to global inflation.... For developing Asia as a whole, consumer price index inflation hit 7.5 per cent in April 2008, close to a 9½-year high and more than double the 3.6 per cent pace of a year ago. But even the residual, or “core”, inflation rate in developing Asia surged to 3.8 per cent in April, more than double the 1.8 per cent pace of a year ago..."

Stratfor points out that food inflation is a problem of Biblical proportions:
What we are facing are dramatic increases in the prices of strategic commodities. A strategic commodity is one that is indispensable for a society in the short term.

Food is obviously the first strategic commodity, with grains constituting the foundation of all other foods save seafood. Oil is strategic but secondary. You can last without food for a few days, but you can manage without oil for a few weeks. Still, in the end, lack of either can wreck a society — or a life, for that matter.

The increase in oil prices has been orderly. You can buy all the gasoline you want if you are prepared to pay the price. Grain markets have been disorderly.

The Bible recounts, in the Book of Genesis, how Joseph became the grain broker for the Pharaoh, stockpiling grain in the seven good years in anticipation of the seven lean years. Joseph originated agribusiness on behalf of the Egyptian government. The Egyptian government had to protect the country against famine in order to avoid an uprising driven by hunger.

We are clearly moving into a lean period.

Guambat reckons Mr. Mainstreet will strike back at Mr. Wallstreet once this little trading squeeze is squozen.

Thursday, June 12, 2008

Short people got no reason

They got little hands
And little eyes
And they walk around
Tellin' great big lies
They got little noses
And tiny little teeth
They wear platform shoes
On their nasty little feet

Well I don't want no Short People
Don't want no Short People
Don't want no Short People
Round here

-- "Short People" by Randy Newman

Sooner or later, most things make their way to Australia, which tends to put it in some kind of time warp. To truly understand that concept, go there and spend some time. Then go to New Zealand.

And so it is that the Lucky Country's Lucky Stock Market is now, only at long last, coming to grips and gripes with the demons that have terrorized the markets in New York, London, and (gasp) Shanghai. Nearly everywhere, so it seems, except, perhaps, the Gulf States. (And as an aside, the property market will suffer the same fate, too.)

The latest bugabear (perhaps related to the Koala Bear, but not to Guambats) to come out of the woodwork is Babcock & Brown, known as B&B, "Australia's second-largest securities firm".

It so happens that Guambat's favourite after-dinner tipple is a B&B (Benedictine and Brandy), which has become so old fashioned as to be hardly had these days. So it was with shock/horror that Guambat read the headlines over the net Down Under:
"B&B in freefall" and "B&B hammered".
Now, B&B (of the non-tipple variety) is small poTAYtoes/poTAHtoes by truly large market standards, but it is of no small import on the Australian finance scene, 'struth. So, this event has been a bit earth-moving for the Aussie market today.

And to prove the point that the Blokes (and a Sheila) from Oz do learn a thing or two from their O/S "peers", the cry has gone out that poor old B&B has been buggered by short people -- and don't mention the Business Model (the company "buys ports and tolls roads and bundles them into listed and unlisted funds").
Rumors also came out on Wednesday that Babcock & Brown was being short-sold by speculators

Sydney-based Babcock has been targeted by unidentified short sellers, spokeswoman Erica Borgelt said. "We believe the stock is being shorted, but we don't know by whom," Borgelt said. "Our business is carrying on as normal. We are none the wiser." [Fair dinkum; that's straight from the article.]
But, for Guambat and others, it all comes back to that old Black Magic Business Model and a little help from a Black Swan.

The Black Swan was the unlikely (?) explosion in its "satellite" natural gas facility, the ramifications of which were ineffectively hosed down with statements and news reports such as this:
It is believed the company's ["Western Australia's biggest natural gas retailer"] problems with the Apache explosion have been considered by its banking consortium and have not affected the pledge to loan $2.7 billion.

Instead of refinancing the full $3.1 billion, the company has announced asset sales to make up any shortfall. Babcock & Brown, which launched BBP and is one of its prime investors, has also offered to step in to make up any shortfall.

The power generation company will be hoping that its statement will reassure analysts who have raised concerns that a reduction in energy supplies to Alinta - the largest retailer of natural gas in Western Australia - could have a flow on effect to its earnings, which would then hit Babcock & Brown Power's distribution to investors this year.
But the Business Model was always there on the sexy catwalk, cloaked in alure alone, wearing nothing of old-fashioned values, as these two commentary/reports reveal:

B&B in freefall as woes mount by Stuart Washington
Babcock & Brown bore the brunt of investor uncertainty yesterday about the $2.7 billion refinancing of Babcock & Brown Power, which is due to emerge from a trading halt today.

The increasing gap between Babcock & Brown's carrying value and the current market value puts pressure on the company's directors to write down the value of their investments if conditions do not improve. But this depends on whether they regard the assets as "impaired", or whether they think they will rebound.

Sources within Babcock & Brown said much of the unit price volatility was based on refinancing issues, not on asset quality, and there was confidence that asset sales from the funds would prove the value of the underlying assets.

The slump in infrastructure funds has occurred as investors shun highly-geared structures.

Babcock's thin lifeline by Michael West
A financial engineer, Babcock relies on market confidence to gear up, buy assets, revalue and repackage them, and spin them off.

The model is busted.

This fund model has already claimed the scalps of Centro, Allco, Rubicon and MFS, and now Babcock is perilously close to the edge.

What the whole party has done, however, is enrich a handful of top executives and their hangers-on at the expense of thousands of small investors who have collectively dusted billions.

Much of the executive pay was ripped out of capital, upfront, when the deals were struck rather than when the cash flow came through.

Their first concern is the structure and the debt in the mothership. Can the cash flows from underlying operations fund the repayment of the loans? It would appear to be line ball.

There is more than $50 billion in debt across the Babcock empire of listed and unlisted satellites.

The unlisted stuff remains the subject of conjecture.

The maze of guarantees and cross-guarantees, the loans between various vehicles, the management agreements and the legal minutiae of the entire structure will have to be evaluated.

Today, Babcock and Brown became a political issue. It will survive for some time at least and there will be trading opportunities for the savvy and the foolhardy. It could recover.

You can bet its financiers will pull out every stop to restructure and recapitalise, for this one is almost too big to fail.

Not only does Babcock control a host of essential services in energy and transport but both the mothership and its satellite stocks are owned by hundreds of thousands of small investors.

Many of these are elderly investors who acquired the stocks for the handsome yield.

Pity it was a manufactured yield in most cases, paid that is from capital rather than cash flow.

The small investors, and indeed the super funds themselves, were sucked in by the lure of a fancy yield of 7% or so: great value it appeared for investing in a solid infrastructure play.

Yet the reality was quite different. These were always high-risk propositions because of their sheer leverage. Some of the satellite yields are now up to 25%. These are either first-rate bargains or cum-writedowns.

When the present mayhem in the financial engineers is past and they are either dead or recapitalised and restructured the Macquarie-inspired infrastructure fund model, which allows distributions to be paid out of capital from a trust, will likely be deemed a policy disaster. The accountants, as is their wont, will duck for cover.