Friday, January 23, 2009

Stock Market Update--Things Are Differenter Than They Seem

On the surface it would appear that the stock market has picked up in 2009 right where it left off at the end of last year.
After closing 2008 down by almost 40 percent, most of the market averages have remained weak during the first few weeks of the new year.

It was supposed to be different. I was among those who believed that the downward pressure on stocks during the fourth quarter was exacerbated by forced selling due to liquidations from hedge and mutual funds. That selling is now over and there should be fresh money coming into the market from retirement and 401-K plans--new cash that should provide some demand for stocks. Those factors have seemingly been overwhelmed by the uninterrupted flow of terrible economic news and ongoing concerns regarding the viability of the world's banking system and the markets have continued to fall.

While this might look like more of the same, in fact there are a number of important differences between what's going on now and what happened late last year.

First and foremost, in this market there are actually stocks and sectors that are doing well. I have structured my accounts around two basic themes which seem to be working. The first is that at some point, the market will start to focus on the inflationary implications of the trillions of dollars the government is spending that is not backed by tax receipts. In other words, we are running the printing presses at warp speed to stimulate the economy and keep the banks afloat but the paper being printed is backed by nothing. Our theory is that investors will start to favor hard assets over pieces of paper and we have built positions in gold and energy-related assets which have started to perform very well.

The second theme is that not all companies are created equal. Most of the calls I get are from clients who either want to get out of the market altogether or who want to bottom fish among broken stocks such as Citigroup, Bank of America, and General Motors which have lost more than 90 percent of their value and are trading at the cost of a Happy Meal. I believe that both groups are making a mistake.

We are focusing on solid, cash-rich companies that continue to deliver solid earnings selling products or services that people either want or can't do without. Amid the spate of recent earnings disappointments have been buried great reports from Procter and Gamble, Research in Motion (the maker of Blackberry), Apple, Google, Becton Dickinson (diabetes syringes), Kinder Morgan (natural gas pipelines), IBM, McDonalds, Pepsi, Clean Harbors (waste disposal), Johnson and Johnson, Exxon, and other companies that are cash-rich, have little debt, and seem well-positioned to deliver even higher earnings and dividends going forward. These companies and others like them are down in price and likely to be the true bargains going forward. I'd be happy to share my entire model portfolio with you and talk more.

Many formerly great U.S. banks and companies are on the critical list because they are losing so much money and are so buried in debt that their common stock may no longer have any value at all. The "bailouts" that we hear so much about are rescue packages for their creditors and customers--not for the poor souls who own their common stock. Don't be fooled. If a company is determined to be too big to fail, it doesn't mean its shareholders will not lose all their money.

None of my portfolios contain any long-term U.S. Government bonds which lock in yields in the 2-3 percent range over a 10 to 30 year period. They provide virtually no upside and are very likely to provide investors with low returns that will be paid back over time in dollars that may buy a fraction of the goods and services that they would buy today. It seems very likely that long-term rates will be going higher--perhaps a lot higher--over time and that the value of long and intermediate term bonds and bond funds could drop significantly if that happens.

It is ironic that most people who have gravitated to U.S. government bonds did so to seek a high level of safety. Given the low returns that are being locked in and the likelihood of rising interest rates, they are actually making a very risky investment. High quality municipal and corporate bonds are much better alternatives on a risk adjusted basis. For those who are willing to accept a very low return in exchange for a government guarantee, my advice is to stay as short term as possible and stick with CDs and money market funds. These are not rates that should be locked in for any period of time.

I am more convinced than ever that this is not a time to be bullish and it's not a time to be bearish. It's a time to be smart. There are great risks out there but there are also outstanding risk-reward opportunities.

Sunday, January 18, 2009

Madoff's Chosen People--A Dialogue (Sort Of)

My friend David Kudish wrote a thoughtful comment to my last blog but it apparently was too long for the "Comments" section of blogspot to handle. He asked that I post it on the blog which I am doing and then following it with my response.

Anyone who has thoughts or comments should feel to do the same.


I have several problems with your interesting comments. First, I take offense at the phrase “‘goyification’ of American Jews.”

I don’t respect those who use the monikers such as ‘kike’, ‘goy’, ‘wop’, ‘spic’, ‘wog’, ‘frog’, or the ‘N’ word that are so prickly and offensive. It is from another time (the 1950s and 1960s) that best be left in the past... like women who were taken to abortion hatchet men down dark alleys.

I would prefer that enlightened Jews use the phrase “Christianization” of American Jews. That is so less offensive and does not make us appear more elevated or superior by denigrating someone else’s background.

Then you make a leap to assuming “victory” because today, Jews are largely able to marry out of their faith. Is this a “victory” that would be celebrated by all Jews? Certainly not traditional or Orthodox Jews. (I tried this once; I married a non-Jew who demanded a very generous pre-nup agreement. I thought that I was fully prepared to address the complications but it turned out that I was not. And it resulted in a complicated series of painful problems that left me in an emotionally weakened and negative state of mind for many years. Maybe the sages are correct in advising that one should stick with their own? I know that you have married a Christian lady who is lovely, kind, generous and welcoming to your co-religionists and we, in turn, enjoy her company. So, please do not take this as criticism. It is not. It is an observation of probabilities and tendencies.)

Further, Larry thinks that we have passed the time of “real” anti-Semitism if one examines the metrics of disappearing impediments to career choice, geographical location for living, marriage partner or social club entrance and acceptability. There are strong undercurrents in many parts of the world whereby anti-Semitism has made a vigorous comeback. This is especially so in the Muslim areas of the world where the mosques (largely funded by Gulf-state Wahhabi Arabs whose coffers are flooded with petro-dollars) teach a virulently Jew-hating version of political Islam. But, let’s not fail to mention Western Europe and especially the United Kingdom whose institutions are trying to twist themselves into pretzels to accommodate Muslims’ calls for a dual system of civil governance — the embracing of Sharia in place of British law (a horrible precedent and a prelude to civil conflict).

Larry, you are a good-hearted fellow but often you bite off more than you can chew with attempts to make good-sounding panoramic sweeps of history of which you know less than you might realize. You sound good but your wide-ranging prescriptives sometimes fall short. I would suggest that you stick to doing what you do best, selling investment advisory services. If this is received as “hurtful” — it is not meant that way — I offer to share with you some of my wonderful single malt Scotch in Aspen this summer (when we are on break from working for tips parking cars ... given that our main line of work has evaporated).



Thanks for your thoughtful response. I don't take any of it as "hurtful" but I think much of what you say is misguided.

I used the term "goyification" advisedly and for a reason. It is not I but Joseph Epstein who seems to believe that phenomena such as Jews playing golf in great numbers or naming their children with appellations such as Meghan Goldberg or Hutchinson River Parkway III (a favorite of mine with credit to my friend Rabbi Joseph Telushkin)is a sign that our people has lost the essence of whatever it was that made us great.

I refer you back to his opinion piece in Newsweek that I cited and linked in my original blog.

The term "goyification" is my own because it hits a very large nail right on the head. Decades ago, friends of your family and mine were getting nose jobs and changing their names to make them look and sound less Jewish. They did not do that (as you suggest) to make themselves more Christian. None of them had the least interest in the Christian religion and they certainly did not accept Christ as their savior.

They didn't want to be Christians--they wanted to be goyim. They wanted to be able to live in the neighborhoods they wanted, join the clubs they wanted, get the jobs they wanted, and to send their kids to the best schools at a time when being Jewish was a real liability. It was about having full access to the American Dream and all that came with it.

Our parents and grandparents fought a fight for access to all aspects of that dream without having to make those changes and sacrifices and they won a huge victory. Along with full acceptance of Jews in this country came an increased willingness and even a desire on the part of non-Jews to allow their kids to marry us.

The ability to marry anyone we want was not the victory--it was an inevitable byproduct of being fully accepted in a free country where people can do pretty much whatever they want, even if they are Jewish.

I never said that the rest of the world is in the same place. It's not. That's what makes the U.S. such a unique and special place for Jews and pretty much everyone else. There is still anti-Semitism in much of the world. It's a problem and we and others need to work on it. But in the U.S., the only vestige that remains is Jew-hatred among a relative handful of bigots. That's a very different thing from anti-Semitism.

It also needs to be said that many of our Jewish friends seem to have fallen to the dark side in the bigotry and prejudice department. I can share with you dozens of hate-filled emails that I received during the presidential election full of hateful lies and slurs about the man who in a few hours will become our next president. It is clear that some of our people can dish out the venom as well as receive it.

If you want to play Divorce Horror Story Whipout, my sense is that we will end up with a lot more heat than light with numerous examples of painful situations on all sides of the ledger.

I was married to a wonderful Jewish woman for almost 30 years. We raised an amazing family and all of us grew as individuals and as Jews. For the last six years I have been married to a wonderful Catholic woman. My Judaism has never been a bigger or richer part of my life and I remain extremely grateful for my good fortune.

I'm sorry that your experience was more painful but I'm not sure that any important conclusions can be drawn from either of our stories other than that we are all lucky to live at a time of unlimited choices and in a country that gives us more freedom than Jews have ever had in any place or at any time in history. It's up to us to make those choices wisely. That's sort of the whole point of the Torah, isn't it?

The downside to having choices is that the decisions we make have consequences that are often unpleasant or expensive. It still beats the alternative of living trapped in a world without the freedoms we now enjoy. Billions of less fortunate people in other places have to deal with that reality every day.

Thanks for sharing your thoughts. As always, I look forward and value your comments and as long as it end with us sharing a single malt, how bad can it be?

Friday, January 16, 2009

Madoff's Chosen People--What Can and Can't Be Said Out Loud

Since Bernie Madoff admitted that he had swindled hundreds of his friends and several charities out of $50 billion, we have learned very little regarding the details of his operation. We still don't know exactly how he did it, how many people were in on the scam, and where the money went. Eventually we will.

But there continues to be no shortage of emails, blogs, news reports, and commentaries--most of them from inside the Jewish community--and that is the part of this drama that continues to be most fascinating. Fascinating for what is being said and written, but far more for what seems most people feel they can't say out loud

The low-hanging fruit here is Madoff himself. He has become the lightning rod not just for his victims but for all of the frustration, anger, and fear that millions of Americans feel over the money they have lost during the last year. Make no mistake about it. Madoff is a crook who cheated a lot of people out of billions of dollars. He should and will spend the rest of his life in jail.

But let's get real here. Does it really make sense for the entire country to be sitting glued to its TVs watching continuous coverage of Madoff leaving his apartment, driving to the courthouse, walking in and out of a building, and then driving back home. I mean this is a guy who did some very bad things, but he didn't kill anyone or physically abuse his family. He cheated a lot of people and stole a lot of money. Period. Do we really need to be on "Madoff Watch" 24-7 with reporters and cameras camped outside his apartment building?

My fellow Jews love to write and talk about how horrible Madoff is and how much damage he has done to the Jewish people. Some have even compared him to Hitler which is scary because it means that money has become so important today that someone who steals stuff and swindles people is comparable to a person who engineered the murder of six million people.

My friend and teacher Rabbi Brad Hirschfield of CLAL wrote a blog for entitled "Madoff and Hitler--Bernie, Adolf, and the Death of Proportionality" that laments what it says about us that such a comparison can even be made.

Most Madoff-bashers stop short of the Hitler comparison. But I have received dozens of emails from Jewish friends who want to make sure everyone knows what a horrible person Madoff is, how he has devastated the Jewish people, and how he has provided anti-Semites with new ammunition.

The most widely disseminated email is an article written by Rabbi Marc Gellman (no relation, although we have met) who wrote a piece for Newsweek entitled "A Letter to Madoff."

Rabbi Gellman's main point (I like the way that name sounds) is that Madoff should be ashamed of himself (he should) because his actions have devastated his best friends (they have), wiped out several charities and foundations (also true), and helped promote anti-Semitism (it hasn't). Is there any non-Jew in America who was thinking about marrying or doing business with a Jew that is now reconsidering that decision because Madoff was Jewish?

But, with credit to Sherlock Holmes, what I find most fascinating is the dog that isn't barking--the questions that are not being asked of and about people who clearly shared blame for much of what has happened.

For example, there has been little said out loud about how a multi-millionaire, much less an entire charity, could put himself in a position where he could be totally wiped out as a result of having money invested with a single crook.

I have been an investment professional for almost 30 years and investor for even longer. On balance I have done well but there have been at least a dozen times that I have made an investment where I lost all my money. In most of those cases, I came to know for sure that I was cheated or lied to by one or more people who were involved.

On a few occasions I have been tricked, swindled, and/or robbed by people I knew and trusted. Everyone has. That's why no responsible person puts all their eggs in one basket--particularly if the basket is being held by a man whose honesty and integrity has been publicly questioned by a number of experts in national publications (Barron's in 2001) and before the Securities Exchange Commission (2005).

This is analogous to person taking all his money and/or all of a charity's money and betting it on a "sure thing" in a horse race. Then, against all odds and logic, the favorite horse loses the race and the entire bet is lost. Later it is learned that his jockey deliberately threw the race.

The jockey is clearly a crook and should go to jail. But how much of the blame for the financial disaster should go to the jockey and how much is on the head of the person who decided to bet all that money on a horse race in the first place?

For all of the obsession with the evil of Madoff, where is the discussion of the breakdown in oversight and governance of the trustees of those charities, universities, and non-profits who chose to invest all that money with a mysterious character who employed an investment strategy that no one understood?

I have chaired and served on many non-profit and school boards of directors. In each case, the first thing one is required to do upon becoming a trustee is to sign a Conflict of Interest document agreeing to never do business with or profit from their relationship with the organization they are helping to direct and oversee.

In most of the charities that were hurt the worst, it appears that Madoff or one of his asset gatherers served on their boards or were in positions of great influence. Why were the Conflict of Interest prohibitions waived by the other trustees in those cases? Where were the governance and the widely accepted standards of conduct in those organizations? With all the focus on Madoff's crimes, where are the conversations about the "victims" who behaved so irresponsibly?

The Jerusalem Post came the closest to raising this issue in a recent article which took an very gentle shot at the private foundations and charities which seemed to allow the ego and chutzpah of key players to take the place of sound institutional process. In this article, a spokesperson for the Jewish Federation movement--which has seen millions in assets and many key donors move away from the umbrella organization to start and run their own private foundations--points out that having process and burocracy isn't always a bad thing.

But by far, the most interesting and telling piece I had read so far is author Joseph Epstein's recent column in Newsweek entitled "Uncle Bernie and The Jews."

Epstein concludes (as I did last month in my post "Bernie Madoff and his Chosen People") that one reason why Madoff has been so vilified by so many Jews--even those who were not his victims--is that many of us continue to view ourselves as part of The Tribe. So Madoff's actions were not just embezzlement and theivery--they rose to the level of treason.

He notes that "Jews are still tribal enough to think of their co-religionists vaguely as family and that Madoff bilked his own family..."

But Epstein then goes off the track and comes to exact wrong conclusion about that tribalism.

He says the Madoff affair has highlighted the extent to which American Jews have gone astray. He views it as highly symbolic that Madoff solicited most of his victims at Jewish country clubs--places where Jews play golf ("there is something deeply trivial about golf that is unseemly for Jews"). He considers this new fondness for golf as part of the general "Episcopalization" of American Jews.

But there's more.

"A younger generation has now taken to giving their children WASPy first names, so that today one runs into such comic nomenclatural pairings as Tyler Ginsberg, Mackenzie Rosenthal, Hunter Fefferman, Kelly Rabinowicz, and other such preposterosities," Epstein concludes.

He says this assimilation has drained the energy from American Jews that made us so great in the past and finally states that the "silver lining" of the Madoff affair is that he "performed the valuable--if very expensive--service of demonstrating to his coreligionists, among others, that the waters of life are not as pacific as they seem."

I couldn't disagree with Epstein more.

What he and others lament as the "goyification" of American Jews is actually the reward we are enjoying from a battle that our parents and grandparents fought for decades and finally won. For many years, there was real anti-Semitism and discrimination against Jews in most of America. People changed their names, altered their physical appearance, watched what they said, and took great care not to seem "too Jewish" because there was a real price to be paid.

Today, there is no school, no profession, no neighborhood, and no potential spouse that is off-limits to Jews. That's how complete and total victory our people have won.

But, as with all victories, there are challenges that comes with success as well. Jewish institutions and organizations which for many years had a captive audience are now being forced to fight for business in an open marketplace and some have done a better job than others at competing on a level playing field.

It is a hallmark of failing enterprises to blame the customers rather than focus on ways in which they need to change their own strategies to compete better. But any efforts to blame Jews for taking full advantage of the choices we now have is doomed to failure. No one with choices ever voluntarily goes back to a more restrictive environment.

Today, most American Jews choose to become or remain Jewish because of the value that Jewish wisdom, values, and traditions bring to their lives. Being Jewish today is an active choice. People will not choose to stay on board because the rest our non-Jewish neighbors hate us so much and isolate us so badly that we have no choice but to stick together. Those days days are over, but some of my Jewish friends haven't gotten that message yet.

It is true that the Madoff affair has pointed out the need for Jews to move beyond tribalism, or at least redefine what it really means to be a Member of the Tribe. But longing for a return to the good old days--days that weren't considered so good by the people who actually lived through them and worked tirelessly for change--is not the answer as Epstein suggests. Our parents and grandparents would say "good riddance" and look with pride--not apology--at their great victories which helped create the new Jewish reality in our country.

So I will let everyone else obsess over Madoff himself. How did he do it? How much money did he really steal? How many other people were in on it? Where did the money go? Should he be imprisoned in his apartment or in jail while he's awaiting trial?

At the end of the day, what difference does it make? What's done is done. Madoff was a crook. He stole a lot of money and he'll die in jail and no one will get their money back.

It's the drama, soul-searching, and thoughts of my fellow Jews that continue to be most fascinating to me. It's all about what is said and what isn't. And the lessons that some people claim to be learning from this episode say a lot more about themselves and their own world view than they do about Madoff.

Thursday, January 15, 2009

The Stock Market--Where Do We Go From Here?

Well I guess it was too good to last.

After being up for 2009 for four days (including a long weekend), the continued bad economic news has dragged my accounts down for the year. We are still doing better than the overall market which apparently didn't get the news that this year was supposed to be much better than the horror show we just finished.

I have enclosed the highlights of a letter I sent to all my clients giving my thoughts on the stock market and outlining our strategy at this time. But there is a point that I want to emphasize right up front because it is REALLY important:

There may be industries and individual companies that the government will determine are "too big to fail." But that doesn't mean that the value of their stock can't fall to zero and that their shareholders won't lose all their money.

Last year, the bluest of blue chip names such as Lehman Brothers, Bear Stearns, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, Wachovia, and Morgan Stanley all either went broke or were rescued by being acquired or receiving a government bailout. Most of their businesses survived in some form under new leadership and others like Lehman disappeared. But in every case, their stock holders lost almost everything.

This week, Nortel filed for Chapter 11 protection. Nortel is the massive Canadian version of A.T. & T. that used to be called Northern Telecom. Ten years ago, its stock traded well above $60 a share and its market value was so high that it made up more than one-third of the market cap of the entire Canadian stock market.

Today it is worthless. Like Nortel, Citigroup, General Motors, Chrysler, and many other huge companies have important businesses that will survive in some form. But their shareholders will probably get nothing because the companies are losing tens of millions of dollars a day and they owe their creditors much more money than they have assets to back that debt.

Millions of Americans are losing their homes to foreclosure everyday. In almost every case, it's not because there is anything wrong with the home. It's because they paid too much money to buy it and now they can't or don't want to pay off that debt. It's the same for companies.

So PLEASE don't fall into the trap of thinking that every well-known stock that is selling at a fraction of where it was in the past is a great bargain. The economy stinks right now and it's going to get worse before it gets better.

As I've said before, it's not time to be bullish and it's not time to be bearish--it's time to be smart. There are huge traps and great opportunities presenting themselves in great numbers. The key is to know the difference.

There is very little that can be said about 2008 that hasn't been said before. It seemed pretty clear throughout the year that the economy would be weakening due to fallout from the subprime mortgage crisis.

As we moved into the fourth quarter, the financial problems that had been confined to the housing sector spread to a point where it jeopardized the very existence of the world banking and investment system. The financial crisis took a great toll on investor confidence and the stock market, and the damage was exacerbated by forced liquidations from mutual funds and unregulated hedge funds that had taken on huge leverage to buy a broad range of stocks and commodities.

As those liquidations continued, the economic news worsened and investor fear spiked to panic levels. As a result, we experienced a "perfect storm" during which every class of asset other than U.S. government bonds ended the year with huge losses. Real estate, energy, commodities, stocks, international markets, corporate bonds, and municipal bonds were all down substantially for the year.

The U.S. stock market was down almost 40 percent for the year and most international markets did even worse. There was truly no asset class anywhere in the world that provided a positive return. A number of bond funds managed by prestigious managers were down more than 30 percent in the 4th quarter alone. One Oppenheimer high-yield fund was down more than 70 percent during those three months.

Fear has reached a point where investors are literally willing to accept zero return on their money in short-term government guaranteed notes and CDs. There is now a record $10 trillion invested in cash equivalents that is earning next to nothing. That's how scared people have become. That represents 40 percent of the total value of the stock market—an unprecedented level of caution.

Historically, investor sentiment is a contrary indicator. People tend to be most confident at market tops and most fearful when the news is bad and fear is running rampant. That positive indicator has to be balanced against the bad economic news which seems to be getting worse. More than 2.5 million net jobs were lost in 2008, and the economic downturn and de-leveraging of America will result in lower incomes and spending levels by companies and consumers for some time to come.

So, is there a light at the end of the tunnel or is it really a train coming the other way?

This is a time a great risk and even greater opportunity.

We are avoiding highly-leveraged companies that need to raise massive amounts of capital to stay alive. We are also avoiding companies that are dependant upon a strong economy where consumers have a lot of disposable income and are optimistic about the future. The recession has taken a huge psychological as well as financial toll on most people. Consumers at all income levels either have less money than they used to or feel like they do. As a result, people will put off purchases that they feel are not necessary for as long as they can.

The great opportunities lie in solid companies that are earning good money and are well run, well capitalized, and whose stock prices have suffered as a result of the massive fund liquidations that took place during the fourth quarter of last year. We are particularly attracted to those that are paying good dividends and are likely to continue to increase those payouts going forward.

We want to own companies that provide essential products or services. No matter how bad things are going, most of us will continue to wash our clothes, brush our teeth, heat our homes, and live our lives.

With cash equivalents yielding zero and substantial economic risks remaining, we want to own stocks and bonds that will pay us well while we are waiting for growth. This is the first time in a generation that stocks (the S&P 500 index taken as a whole) are yielding far more than long-term government bonds. In addition, there are a number of gas pipelines, preferred stocks, and corporate and municipal bonds that are providing very attractive returns on a risk-adjusted basis.

Our government is already more than $10 trillion in debt, and we are on track to more than double that number over the next few years. At some point, our creditors are going to demand much higher rates if they are going to keep lending us money. We believe that those who invest in long-term government bonds yielding 2 percent are taking a huge risk. We are increasing our exposure to gold, energy, and hard assets to offset the substantial risk of inflation going forward.

During the final months of 2008, the market's biggest problem was the enormous level of forced liquidations by hedge and mutual funds. That selling is pretty much over.

The problem now is a lack of motivated buyers. There is huge liquidity on the sidelines but investors are sitting on it believing that there is no rush to get into anything right now.

The market will get better when people feel a sense of urgency and get worried that the train is leaving the station without them. Right now they're sitting in the station restaurant sipping cocktails in the belief that the train isn't leaving any time soon. Hopefully they will be proven wrong.