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    Senator McConnell’s Dilemma:   To Serve Patients or Investors?

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When evaluating health care investments it is important to analyze the structure of leading drug and medical equipment companies.  A close look indeed reveals a derivative driven system in which private equity and hedge funds increase demand for drug payments by purchasing the rights to the cash flows from key drugs.  Patients are indeed unaware that many of the drugs they consume are now owned in part by private equity investors.

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On November 18, 2008 I gave a presentation to the local chapter of the American Association of Individual Investors (AAII) at the Multnomah Athletic Club here in Portland, Oregon regarding the overall state of the financial markets.  The talk focused on how we arrived where we are and what to look for going forward.  Also included were what I believe to be the six most important regulatory reforms– all of which could be implemented immediately– that would collectively turn around the economy.

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VIEW EXCERPTS FROM AAII PRESENTATION

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This week Bloomberg disclosed that Warren Buffett, the man who has called derivatives a weapon of mass destruction, has himself afterall leveraged his fund Berkshire Hathaway by making a $40 billion bet in derivatives.

Little known to most investors is that Buffett’s primary source of revenue is his 50 insurance companies, including General RE, his company in which top executives are going to jail for accounting fraud associated with transactions involving AIG. The derivaties revelation was accompanied by a sharp drop in the fund price and the downgrading of Berkshire Hathaway bonds.

It is probably also time that Buffett divest himself of Moody’s, he is the bond rating company’s largest shareholder.  Moody’s played the key role in the subprime mortgage debacle and later claimed that it mistakenly overrated subprime debt due to a computer error.

It has been a tough month for Buffett in which the old expression “walk the walk” comes to mind.

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On Friday President Elect Obama designated Tim Geithner to be the next Treasury Secretary and the stock market rose roughly 5 percent in minutes.  Clearly, this was former Federal Reserve Chairman Paul Volcker’s choice and once again demonstrates Volcker’s influence as a beacon of integrity and competence.  It also highlights Obama’s good judgement by seeking out and relying on the best advice, i.e. Volcker.

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One century ago Republican Theodore Roosevelt was elected president and instituted sweeping changes in government, including the establishment of an estate tax and the national park system.  What followed was an economic boom that lasted for years. Roosevelt knew the importance of circulating wealth in order to revitalize the economy by investing in key infrastructure, including the public education system.

Today fierce battle lines are drawn over whether or not the estate tax should be repealed.  On one side are Bill Gates Jr., Grover Norquist and the Wall Mart heirs and on the other side are Bill Gates Sr. and Chuck Collins.  This is certainly not a case of “like father like son.”

While Bill Gates Sr. has co-penned a book with Chuck Collins calling for increased exemptions but not abolishment of the estate tax, Bill Gates Jr. has been the prime funder of Grover Norquist as Norquist tours the country relentlessly advocating a complete repeal of the tax.  Like Bill Gates Sr., I believe the exemption should be raised to $5 million yet do not support a repeal.

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For several years now I have recommended adding short term Canadian Treasury notes to client portfolios, beginning when the Canadian dollar was roughly 62 cents to the US dollar.  The last of these positions mature in 2008, including those that already matured in July and another group set to mature in December.

Earlier this year the Canadian dollar peaked at 102 and today it sits at 82, implying a decline of 20 percent.  The Australian dollar has by comparison dropped more than 30 percent and the euro has declined 18 percent.  For quality foreign fixed income diversification I have prefered Canada with the notion that Australia is riding a commodity boom yet poorly manages its national finances and the euro is simply being sustained from new countries being added to the euro trading zone.

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Today is Columbus day, a day that celebrates Columbus discovering America.  Perhaps it is ironic that over the weekend America discovered Europe when it comes to guidance in dealing with our financial crisis.  The answer to the crisis is not to have the Treasury purchase vast amounts of worthless securities from troubled banks but rather to invest in non-dilluting bank stock to help weakened banks re-capitalize.

Thus far it appears that Paulson is still lost at sea because he is advocating purchasing preferred shares, which if done, need to pay interest, be convertible to common and also non-dilluting.  Non-dilluting means that if top execs issue more shares and the govt takes a 25 percent stake, the govt gets 25 percent of all new shares.  Absent this the stock market will clearly plunge again due to becoming overcome with exhaustion at the abject incompetence of Treasury Secretary Paulson.

Secretary Paulson and Christopher Columbus

Secretary Paulson and Christopher Columbus

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