As we watch the actions and listen to the comments of our Congressional leaders, one can only hope that they're really smarter than they seem and that they just can't help themselves.
We now know the reasons that we are facing an economic crisis. Banks and other financial institutions loaned too much money to people who couldn't pay them back so those borrowers could overpay for homes, cars and lifestyles we really couldn't afford. Our government did the same, spending trillions on wars and other stuff while lowering taxes on the richest among us.
At the end of the day, we and our government spent too much and took in too little while the agencies that were supposed to be regulating all this were either incompetent or asleep at the switch. Too many bad investments were made with too much borrowed money by people, banks, and government. The bubble popped, equity disappeared, loans can't be repaid, and people have stopped spending.
So armed with all this insight and with a true financial crisis upon us, our President and Congressional leaders are on the case with a plan to help stimulate the economy. Reasonable people can disagree over whether any stimulus plan will really do any good. But if the government is going to spend more borrowed money, it seems pretty clear that it should be spent on things that will create jobs, build infrastructure, and get that money coursing through the system.
Instead of being smart and focusing on the matter at hand, however, House Democrats have been dumb. Their hard-wired Liberal instincts caused them to lace their proposal with a broad range of spending programs to benefit the arts, education, family planning and other priorities that all make sense but which really have nothing to do with economic stimulus.
Republicans have been dumber. Instead of trying to work with the Democrats, they are lining up to pledge fealty to Rush Limbaugh who has repeatedly stated that he wants President Obama to fail. Instead of learning from the voters who rejected them so sweepingly last November, Republicans have chosen to pretend the last eight years never happened. They continue to harp on the need for lower taxes and then when Democrats compromised, they pledged to vote "no" anyway.
Does anyone with half a brain believe that high taxes are the problem? Taxes are lower than at any time during our lifetime and the economy has fallen off a cliff. People didn't stop spending because their taxes are too high. They stopped spending because they are losing their jobs, losing their net worth, and losing hope.
But dumbest of all has been the media. Instead of focusing on the complexities of the real issues, the media has focused on satisfying the public demand for villains--a handful of people who can be blamed for this mess.
Swindler Bernard Madoff, former Merrill Lynch CEO John Thain, and the Congressional pillorying of big bank CEOs have received 24-7 coverage on all the cable channels, blogs, and print media. Each of the targeted individuals deserve to be blamed for a wide range of irresponsible and perhaps illegal actions. Each of them has a lot to answer for.
But at the end of the day, a few individuals did not create this mess and their firing and/or imprisonment won't solve it. By focusing on blame and anger, the media has made it easier for most people to ignore the wave of schizophrenia that is running rampant in public conversation.
When the depth of and reasons behind the economic crisis began to surface, the banks were harshly criticized for lending too much money to too many people. Now the banks are being criticized for not making enough loans to enough people.
The government was criticized for spending too much money and not collecting enough in tax revenues to pay our bills. Now it is being criticized by Democrats for not spending enough money to get us out of this mess and by Republicans for collecting too much revenue in taxes from companies and individuals.
Individuals were criticized for spending and borrowing too much money and not saving enough. Now we're being criticized for paying off our bills and not spending enough.
None of these non-sequitors is being discussed in any serious way in Washington, in blogs, on the news shows, or in newspapers. Instead, we have dozens of reporters sitting outside Bernie Madoff's apartment and helicopters providing constant aerial TV coverage when he drives to and from the courthouse. We have hundreds of pieces written about John Thain's outrageous $1.2 million office redo and his $15,000 wastebasket. CNBC brought us all seven hours as the CEOs of the biggest banks were publicly whipped by a House committee.
This stuff is entertaining and helps people vent, but is all this coverage really necessary? Is any of it enlightening?
All of the important commentary is coming from the financial markets which are speaking volumes. They are telling us that no matter what we do, it is going to cost more to borrow money going forward and that there is less confidence in the buying power of the dollars and paper currency of all kinds going forward.
After a disastrous nose dive during the fourth quarter of 2008, stocks have done very little during the last few months. But it now costs the U.S. Government 40 percent more to borrow money for 10 years than it did two months ago (rates have climbed from 2.00 percent to 2.80 percent) and gold prices have skyrocketed by more than 30 percent from $700 to $950 an ounce during that period.
And while the news media is telling us constantly about falling real estate prices and rising foreclosures, the stock index tracking prices of the U.S. homebuilders has actually risen by more than 40 percent since November.
The markets are telling us that the government can't spend trillions of dollars that it doesn't have on bailouts and stimulus plans without consequences. They are also looking beyond the public posturing and outrage to the future.
The stocks of our largest banks and automakers are no longer investments but are trading vehicles which often see their prices go up or down 10-20 percent a day. No one is investing in these companies--people are just trading them back and forth from the long and short side. These companies all losing lots of money and owe several times what they are worth and while the companies will probably survive in some form, there may be nothing left for current shareholders.
That's the main reason that nothing has been done to get the toxic assets off the books of our banks. If those assets were bought by an investor at a fair price, the banks would realize such great losses that they would become insolvent. The banks can only afford to sell those assets at an artificially inflated price and, thus far, not even the government has been willing to pay up.
But instead of constructive discussions, all we get from the media is meaningless prattle about good banks and bank banks and instant reviews of the "performances" by Timothy Geithner (he bombed), Ben Bernanke (more of the same), and President Obama himself (still love him).
On top of that, the media and politicians of both parties are constantly repeating the lie that American taxpayers are paying for all this. If we were, then gold prices and interest rates wouldn't be going through the roof.
The fact is that we are paying the lowest tax rates of our lives and the Stimulus Plan being passed by the Senate will have us pay even less in taxes. Taxpayers aren't paying for this and we never will. Instead, the investors and foreign countries who hold our bonds and currency will pick up a big chunk of the tab as they get repaid in dollars that will buy much less than the dollars they loaned us.
We are in a mess and it is becoming increasingly clear that only time--maybe a great deal of time--will enable our financial system to get back on track. But I would certainly feel better if our elected leaders acted like they had a clue. It would also be nice if the media would try to entertain and titillate us less and inform and enlighten us more.
Wednesday, February 11, 2009
Thursday, February 5, 2009
It's Time to Own Stocks and Stuff
There have been so many lies and distortions coming out of Washington and the news media that it's hard to know where to begin setting the record straight. But I'll try.
The biggest lie is that American taxpayers are going to be paying for the massive stimulus and bailout packages that will soon be approved.
Fact: no American is paying higher taxes. The last time I looked we were all paying taxes at the lowest rate in our lifetimes. Most of us are paying less tax because we are earning less. In addition, many of us have a reverse annuity--capital losses we can never outlive--so we won't be paying any capital gains taxes for a long time either. And all the talk in Washington is about lowering tax rates--not raising them.
So, at the end of the day, American taxpayers aren't paying for any of the stimulus and bailouts and it is unlikely that neither we nor or children ever will. Do you think any Republican or Democratic congress or administration will ever have the guts to raise taxes by the tens of thousands of dollars per American to pay off the debt we are incurring as a result of this crisis?
Democrats in Congress seem to be focused on showering billions on the special interest groups that helped elect them while the Republicans have missed yet another opportunity to be wise and nuanced. Instead they just keep harping on lowering taxes. People have not stopped spending because their taxes are too high. They've stopped because they have lost their jobs, lost their hope, lost their net worth, and are scared to death about the future. And there is no conversation at all about how we will ever pay for all this.
The path of least resistance will be to just keep printing more and more money and inflate our way out of it. That way it will be the Chinese and the other sovereign and institutional investors who have been making 10 and 20 year loans to the U.S. Government at a 2 percent interest rate that will get slammed.
Many U.S. investors who moved their money out of "risky" stock funds into "safe" government bond funds will get hammered as well and they won't even know what hit them. These funds are not safe and can lose a lot of their value. Most of them have already started to move down.
For 20 years, the value of baseball cards went up and up and people who "invested" in them made a fortune. People looked at the cards as collectible pieces of American art. Then, a couple years ago, people suddenly looked at the cards and all they saw was a piece of paper with a picture on it. The bottom fell out of the market overnight.
The same thing could happen to paper money.
But while the news media has been reporting about "good" banks, "bad" banks, bailouts, stimulus, Madoff, and the greedy fat cats on Wall Street--something far more important has been happening and received very little attention.
Since the first of the year the price of gold has gone up more than $100 an ounce, oil and other commodities prices have stopped falling, and the rates that lenders are demanding to loan money to the federal government has gone up by 40 percent. The yield on 10-year U.S. treasury bonds has gone from 2.00 percent to 2.80 percent in just a few weeks. Those "safe" bond funds are dropping in price.
The word is getting out--through the markets, not the news media--that dollars and other world currencies may just be viewed as pieces of paper with nothing behind them. Investors are moving more and more into "stuff" and the companies that make it.
If that trend continues then a couple of things will happen. First and foremost, interest rates will rise dramatically and the value of long term bonds (and the funds that invest in them) will drop hard. The investments that sounded the safest will turn out to have been very risky. Cash, money markets, bank CDs and such will yield more and more but their buying power will drop faster than the returns go up.
The only way to stay ahead of the game will be to own the investments that have been labeled as "risky." Hard assets, real estate, energy, and a broad range of companies that make essential products and which have pricing power should start to do well. There is a glut of real estate and oil on the market right now, but prices will bottom sooner than most people believe as our dollars start buying less and less stuff.
Technology, bio tech, small cap stocks, and emerging markets--deemed to be the riskiest of the risky--could actually do the best in this environment. These are companies that develop and manufacture very useful stuff.
This may not happen today or tomorrow. It may not happen at all. I've been wrong before. Often. But I believe we are headed into this new environment sooner rather than later.
People should keep money that they're going to need during the next couple or years in the bank. The rest should be going into stocks and stuff.
The biggest lie is that American taxpayers are going to be paying for the massive stimulus and bailout packages that will soon be approved.
Fact: no American is paying higher taxes. The last time I looked we were all paying taxes at the lowest rate in our lifetimes. Most of us are paying less tax because we are earning less. In addition, many of us have a reverse annuity--capital losses we can never outlive--so we won't be paying any capital gains taxes for a long time either. And all the talk in Washington is about lowering tax rates--not raising them.
So, at the end of the day, American taxpayers aren't paying for any of the stimulus and bailouts and it is unlikely that neither we nor or children ever will. Do you think any Republican or Democratic congress or administration will ever have the guts to raise taxes by the tens of thousands of dollars per American to pay off the debt we are incurring as a result of this crisis?
Democrats in Congress seem to be focused on showering billions on the special interest groups that helped elect them while the Republicans have missed yet another opportunity to be wise and nuanced. Instead they just keep harping on lowering taxes. People have not stopped spending because their taxes are too high. They've stopped because they have lost their jobs, lost their hope, lost their net worth, and are scared to death about the future. And there is no conversation at all about how we will ever pay for all this.
The path of least resistance will be to just keep printing more and more money and inflate our way out of it. That way it will be the Chinese and the other sovereign and institutional investors who have been making 10 and 20 year loans to the U.S. Government at a 2 percent interest rate that will get slammed.
Many U.S. investors who moved their money out of "risky" stock funds into "safe" government bond funds will get hammered as well and they won't even know what hit them. These funds are not safe and can lose a lot of their value. Most of them have already started to move down.
For 20 years, the value of baseball cards went up and up and people who "invested" in them made a fortune. People looked at the cards as collectible pieces of American art. Then, a couple years ago, people suddenly looked at the cards and all they saw was a piece of paper with a picture on it. The bottom fell out of the market overnight.
The same thing could happen to paper money.
But while the news media has been reporting about "good" banks, "bad" banks, bailouts, stimulus, Madoff, and the greedy fat cats on Wall Street--something far more important has been happening and received very little attention.
Since the first of the year the price of gold has gone up more than $100 an ounce, oil and other commodities prices have stopped falling, and the rates that lenders are demanding to loan money to the federal government has gone up by 40 percent. The yield on 10-year U.S. treasury bonds has gone from 2.00 percent to 2.80 percent in just a few weeks. Those "safe" bond funds are dropping in price.
The word is getting out--through the markets, not the news media--that dollars and other world currencies may just be viewed as pieces of paper with nothing behind them. Investors are moving more and more into "stuff" and the companies that make it.
If that trend continues then a couple of things will happen. First and foremost, interest rates will rise dramatically and the value of long term bonds (and the funds that invest in them) will drop hard. The investments that sounded the safest will turn out to have been very risky. Cash, money markets, bank CDs and such will yield more and more but their buying power will drop faster than the returns go up.
The only way to stay ahead of the game will be to own the investments that have been labeled as "risky." Hard assets, real estate, energy, and a broad range of companies that make essential products and which have pricing power should start to do well. There is a glut of real estate and oil on the market right now, but prices will bottom sooner than most people believe as our dollars start buying less and less stuff.
Technology, bio tech, small cap stocks, and emerging markets--deemed to be the riskiest of the risky--could actually do the best in this environment. These are companies that develop and manufacture very useful stuff.
This may not happen today or tomorrow. It may not happen at all. I've been wrong before. Often. But I believe we are headed into this new environment sooner rather than later.
People should keep money that they're going to need during the next couple or years in the bank. The rest should be going into stocks and stuff.
Tuesday, February 3, 2009
Stock Market Update -- What We Learned In January
I caught a lot of flak last week when I wrote that "Things are Differenter Than They Seem." I heard from my fourth grade English teacher who was mortified (with good reason) but I also was roundly criticized by a number of my friends in the business who accused me of being blind to the harsh and gloomy realities of the worldwide financial disaster and the relentless flow of horrible economic news.
The numbers would seem to be on their side. We are finishing the worst January in the all-time history of Januarys for the stock market averages as most of the major U.S. indices lost yet another 10 percent. That comes on the heels of an absolutely wretched end of 2008 during which every asset in the world lost much of its value. How can any reasonable person be upbeat in this environment?
Here's how. I stand by my statement of last week. Beneath the surface, this month has been very different. Unlike last quarter when forced hedge fund liquidations drove the prices of everything straight of a cliff, there have in fact been some winners during January. The stocks that have done the worst have been banks and financials (which may be worth zero) and those companies that make products that people want but don't need. Retailers, auto makers, hotels, casinos, and such continue to do quite poorly.
But there were companies and sectors that reported good results and saw their stock prices go up. I repeat what I have said many times: It's not time to be bullish and it's not time to be bearish. It's time to be smart.
So what have the markets taught us during the last month? A number of important lessons:
1. Anyone who is thinking of refinancing their home had better do it right now. My daughter was looking into refinancing last week and watched as rates went up three times in two days--from 5.25 percent to almost 6 percent.
A number of markets have suddenly started telling us that interest rates are going higher and the price of gold and other hard assets will continue to rise as people do the math and realize that paper money is not a good asset to own when governments are printing more and more of it with nothing to back it.
If Democrats get their way, our government will spend trillions bailing out banks and others and providing "stimulus" to every nook and cranny of the economy. If Republicans get their way, we will cut our current tax rates (the lowest in our lifetimes) which will stimulate nothing but cut government revenues more and raise the deficits even more. Our economy is not hurting because corporate tax rates are too high. It is in the tank because people are losing their jobs, watching their net worth plummet, and owe too much money. What will lower corporate taxes due to address any of these real problems?
No one is even talking about what damage these misguided plans will do to the value of our currency or the level of interest rates that will be required to get lenders and other countries to provide us with the long-term loans need to pay for all this.
But the markets get it. Gold was up almost $100 an ounce last month and the rates on long term U.S. Treasuries--the next bubble to pop--shot up by 20 percent. With all the talk about bad banks, Wall Street bonuses, and jump-starting the economy, did you hear one word on the news about skyrocketing interest rates or gold prices last month? Of course not. That's what I'm here for.
2. A lot of companies have been reporting disappointing earnings and laying off thousands of people. But there are companies that are reporting really good earnings and pretty positive outlooks.
The markets were down about 10 percent last month but a number of stocks were up. Energy stocks seem to be bottoming and companies like Google, IBM, Research in Motion, and Amazon.com all beat their estimates and saw their stocks go up for the month. Biotech and health care companies with consistent revenues and/or promising new drugs seem to be doing better as well.
In addition, stocks and ETFs that pay you to wait for growth are hanging in quite well. Natural gas pipelines are my favorites (yielding 8-11 percent with growth potential) but there are number of sectors that make a great deal of sense.
3. A lot of people have bailed out of the market entirely--which is a positive since they can only help stock prices when they come back. They can't hurt prices any more since they have nothing left to sell. Many of those who remain have become traders who are addicted to the action, short term swings and leverage.
It is telling that the most heavily traded exchange traded index funds (ETFs)-- which are supposed to be conservative diversified investment tools--are actually the "Ultra" funds which are leveraged and provide double the move of the underlying indexes.
There has also been a lot of interest in stocks like Citigroup and Bank of America which have been going up or down 5-10 percent a day or more. That volatility is a sign that people aren't investing in these companies--they are trading them for short term moves either individually or through leveraged ETFs.
Until a couple of years ago, it was almost impossible for most investors to go short or use leverage in a meaningful way. Today, anyone can go long or short on margin the Ultra long or short fund in any industry or sector and get four times the move of that index in either direction. It's just as easy as buying a stock. Billions of shares of these funds trade daily, so lots of people must be doing it. That play a big role in creating the big daily swings in the market.
The volatility in the whole market remains a little numbing. Before last year, there were 17 days in history that the S & P 500 went up or down by 5 percent or more in one days. During 2008 alone there were 17 days when the market moved that much. That is partly due to economic developments but it is mainly due to the leverage that has seeped into every aspect of our financial system.
We are still in the midst of a massive deleveraging mode. People are buying less and doing less as they adjust their lifestyle to cope with the new reality. The millions of people who have lost jobs are making dramatic adjustments but so are the tens of millions who had gotten used to supplementing their income with home equity loans or stock market profits over the last 20 years.
All of these facts and figures support my view of how to invest for the future. We live in a time of great risk and great opportunity. The risk is that we assume that formerly great companies are bargains because their stocks have fallen a lot. Many of these companies will not survive and if they do their stockholders may be wiped out anyway. I've talked a lot about the banks, but bankrupt companies like Nortel and Circuit City as well as former blue chips like Motorola and Eastman Kodak (whose stocks have joined the "priced less than a Happy Meal" club) fit that description as well.
On the other hand, there are great opportunities in hard assets, funds that short long term U.S. Treasuries, and solid companies that are well run, provide needed or productivity enhancing products, solve real problems, and/or pay good dividends. Inefficient markets always provide the greatest opportunities and the distress of one group of investors can create benefits for others who are smart and patient.
The numbers would seem to be on their side. We are finishing the worst January in the all-time history of Januarys for the stock market averages as most of the major U.S. indices lost yet another 10 percent. That comes on the heels of an absolutely wretched end of 2008 during which every asset in the world lost much of its value. How can any reasonable person be upbeat in this environment?
Here's how. I stand by my statement of last week. Beneath the surface, this month has been very different. Unlike last quarter when forced hedge fund liquidations drove the prices of everything straight of a cliff, there have in fact been some winners during January. The stocks that have done the worst have been banks and financials (which may be worth zero) and those companies that make products that people want but don't need. Retailers, auto makers, hotels, casinos, and such continue to do quite poorly.
But there were companies and sectors that reported good results and saw their stock prices go up. I repeat what I have said many times: It's not time to be bullish and it's not time to be bearish. It's time to be smart.
So what have the markets taught us during the last month? A number of important lessons:
1. Anyone who is thinking of refinancing their home had better do it right now. My daughter was looking into refinancing last week and watched as rates went up three times in two days--from 5.25 percent to almost 6 percent.
A number of markets have suddenly started telling us that interest rates are going higher and the price of gold and other hard assets will continue to rise as people do the math and realize that paper money is not a good asset to own when governments are printing more and more of it with nothing to back it.
If Democrats get their way, our government will spend trillions bailing out banks and others and providing "stimulus" to every nook and cranny of the economy. If Republicans get their way, we will cut our current tax rates (the lowest in our lifetimes) which will stimulate nothing but cut government revenues more and raise the deficits even more. Our economy is not hurting because corporate tax rates are too high. It is in the tank because people are losing their jobs, watching their net worth plummet, and owe too much money. What will lower corporate taxes due to address any of these real problems?
No one is even talking about what damage these misguided plans will do to the value of our currency or the level of interest rates that will be required to get lenders and other countries to provide us with the long-term loans need to pay for all this.
But the markets get it. Gold was up almost $100 an ounce last month and the rates on long term U.S. Treasuries--the next bubble to pop--shot up by 20 percent. With all the talk about bad banks, Wall Street bonuses, and jump-starting the economy, did you hear one word on the news about skyrocketing interest rates or gold prices last month? Of course not. That's what I'm here for.
2. A lot of companies have been reporting disappointing earnings and laying off thousands of people. But there are companies that are reporting really good earnings and pretty positive outlooks.
The markets were down about 10 percent last month but a number of stocks were up. Energy stocks seem to be bottoming and companies like Google, IBM, Research in Motion, and Amazon.com all beat their estimates and saw their stocks go up for the month. Biotech and health care companies with consistent revenues and/or promising new drugs seem to be doing better as well.
In addition, stocks and ETFs that pay you to wait for growth are hanging in quite well. Natural gas pipelines are my favorites (yielding 8-11 percent with growth potential) but there are number of sectors that make a great deal of sense.
3. A lot of people have bailed out of the market entirely--which is a positive since they can only help stock prices when they come back. They can't hurt prices any more since they have nothing left to sell. Many of those who remain have become traders who are addicted to the action, short term swings and leverage.
It is telling that the most heavily traded exchange traded index funds (ETFs)-- which are supposed to be conservative diversified investment tools--are actually the "Ultra" funds which are leveraged and provide double the move of the underlying indexes.
There has also been a lot of interest in stocks like Citigroup and Bank of America which have been going up or down 5-10 percent a day or more. That volatility is a sign that people aren't investing in these companies--they are trading them for short term moves either individually or through leveraged ETFs.
Until a couple of years ago, it was almost impossible for most investors to go short or use leverage in a meaningful way. Today, anyone can go long or short on margin the Ultra long or short fund in any industry or sector and get four times the move of that index in either direction. It's just as easy as buying a stock. Billions of shares of these funds trade daily, so lots of people must be doing it. That play a big role in creating the big daily swings in the market.
The volatility in the whole market remains a little numbing. Before last year, there were 17 days in history that the S & P 500 went up or down by 5 percent or more in one days. During 2008 alone there were 17 days when the market moved that much. That is partly due to economic developments but it is mainly due to the leverage that has seeped into every aspect of our financial system.
We are still in the midst of a massive deleveraging mode. People are buying less and doing less as they adjust their lifestyle to cope with the new reality. The millions of people who have lost jobs are making dramatic adjustments but so are the tens of millions who had gotten used to supplementing their income with home equity loans or stock market profits over the last 20 years.
All of these facts and figures support my view of how to invest for the future. We live in a time of great risk and great opportunity. The risk is that we assume that formerly great companies are bargains because their stocks have fallen a lot. Many of these companies will not survive and if they do their stockholders may be wiped out anyway. I've talked a lot about the banks, but bankrupt companies like Nortel and Circuit City as well as former blue chips like Motorola and Eastman Kodak (whose stocks have joined the "priced less than a Happy Meal" club) fit that description as well.
On the other hand, there are great opportunities in hard assets, funds that short long term U.S. Treasuries, and solid companies that are well run, provide needed or productivity enhancing products, solve real problems, and/or pay good dividends. Inefficient markets always provide the greatest opportunities and the distress of one group of investors can create benefits for others who are smart and patient.
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.
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.
DAVID KUDISH'S COMMENT TO MY BLOG
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).
MY COMMENT TO DAVID
David--
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.
http://www.newsweek.com/id/178928
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?
Anyone who has thoughts or comments should feel to do the same.
DAVID KUDISH'S COMMENT TO MY BLOG
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).
MY COMMENT TO DAVID
David--
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.
http://www.newsweek.com/id/178928
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 Beliefnet.com 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.
http://blog.beliefnet.com/windowsanddoors/2009/01/madoff-and-adolf---bernie-hitl.html
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."
http://www.newsweek.com/id/176821
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.
http://www.jpost.com/servlet/Satellite?cid=1230111706865&pagename=JPost%2FJPArticle%2FShowFull
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."
http://www.newsweek.com/id/178928
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.
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 Beliefnet.com 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.
http://blog.beliefnet.com/windowsanddoors/2009/01/madoff-and-adolf---bernie-hitl.html
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."
http://www.newsweek.com/id/176821
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.
http://www.jpost.com/servlet/Satellite?cid=1230111706865&pagename=JPost%2FJPArticle%2FShowFull
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."
http://www.newsweek.com/id/178928
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.
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.
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