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Quarterly Report
Fall 2009 |
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Table of Contents:
Looking Back: Top Ten Reasons We Are Where We Are By Jude Bedell
Looking Forward: The Wheels Are Still On By Mike Frazier
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Looking Back: Top Ten Reasons We Are Where We Are
By Jude Bedell
By far, the question I’m asked the most at town hall meetings
and monster truck rallies is this: “How did we get into this mess?” With apologies to David Letterman, here are the Top Ten Reasons We Are Where We Are:
10. Wimpy Economics
9. Accountability
8. Regulate / Deregulate
7. Damn that Fed!
6. Derivative Derivatives
5. Understanding Risk (Not the Game)
4. Politics
3. Bubble, Bubble, Housing Trouble
2. Leverage
1. Greed, Glorious Greed
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Number 10: Wimpy Economics
Popeye’s bud Wimpy used to say, “I’ll pay you Tuesday for a hamburger today.” It must have worked because you rarely saw him without a hamburger. As usual, fact trumped fiction. Consumers didn’t stop at hamburgers. They used their Titanium Cards to buy Chanel purses, Blu-Ray DVD players and new golf clubs. So who’s at fault: consumers who bought more than they could afford or the financial institutions who recklessly marketed credit to consumers who they knew would buy more than they could afford? As another great cartoon character would say, “Doh!” |
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Number 9: Accountability
It seems nobody is responsible for their actions anymore. This nation was founded on hard work and the willingness
to take some risks in order to reap its rewards with no guarantees.
Number 8: Regulate/Deregulate
In a perfect world, there’d be no need for regulation of the financial markets. This isn’t a perfect world. Get used to it!
Number 7: Damn that Fed!
Sure, blame Alan Greenspan and the Federal Reserve! After
all, they were in charge. The buck stopped there. They made the rules and played the game.
Number 6: Derivative Derivatives
Remember when we made money by investing in a stock at a low price and selling it at a higher price? Remember
being in the market for the long term and living off dividends? Remember buying bonds and feeling secure that when they matured we’d have more money than we started with? Somewhere along the line, very creative financiers decided that wasn’t enough. It was like a casino only having slot machines and a wheel of fortune. The more creative they got with their money-making schemes – and creative they were– the riskier investing became.
Number 5: Understanding Risk (Not the Game)
Risk used to be something that people took seriously. The old “if/then” was critical to any decision. “If I climb up on the roof during a storm to fix a TV antenna, I might get struck by lightning.” “If/then” turned into “why not.” It’s easier to go with the flow than think through potential consequences.
Number 4: Politics
Washington has become too short-term oriented. Party politics have prevented fundamental ratifications. Many politicians appear focused on getting elected and staying
in office. The changes needed require multi-decade thinking. Quick fixes are rarely sustainable solutions.
Number 3: Bubble, Bubble, Housing Trouble
Remember flipping a house? You’d buy some real estate for $50,000, polish it up a little and put it on the market for $100,000. And when housing was booming, you’d sell it, no sweat. It wasn’t location, location, location that drove real estate, it was easy money and dumb decisions. It had to fall. Really, it had to.
Number 2: Leverage
At the point of their demise, both Lehman Brothers and Bear Stearns had leverage positions of over 34x assets. The use of leverage artificially inflated asset prices and distorted the true health (or actual illness) of our economy.
When the music stopped, the fragile house caved in.
And the Number 1 Reason We Are Where We Are: Greed, Glorious Greed
I fervently believe in capitalism and do subscribe to the “Greed is Good” axiom offered by “Wall Street” (the movie, not the New York City neighborhood). But there are limits. The financial crisis we’re experiencing wasn’t a failure of capitalism. It was caused primarily by crony corruption linking many in our nation’s financial and political capitals. When their schemes began to unravel, they were slow to react. Oh yes, they also bailed themselves
out of the mess they created … on our dime.
The good news is that once the markets were allowed to function, they functioned very well, thank you. Capitalism
saved capitalism. And that is critical to looking forward. |
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Looking Forward: The Wheels Are Still On
By Mike Frazier
The fourth quarter is here and that’s always sort-of-good news. Here’s why we’re optimistic:
- By keeping the federal funds rate at zero, the Fed continues to provide us a turbo boost.
- The U.S. Dollar should continue to remain weak, which would continue to drive stocks and commodities higher.
- Inflation remains very low, and should stay low while unemployment is still high.
- Global growth continues to be driven by China, and looks sustainable. Consumer demand from the West is on the rise.
- November and December are traditionally the best market months, and corporate earnings should be strong, particularly because they have such easy comparisons to last year’s carnage.
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So what do we expect from October? Well, Mark Twain poignantly pointed out “This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” |
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This historic Bull Market rally has sent stocks skyward to the tune of 60% in six short months. But Americans are still licking their wounds, and consumers will be focusing more on saving and less on spending. This will hold the U.S. economy in check near-term, but allow for a healthier and sustainable long-term recovery. |
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However, tight wallets are not shut. In September, consumer sentiment rose to the highest level since the beginning of 2008, which is important. People only tend to spend when they are optimistic about their financial standing. It’s pretty basic stuff. When prices of things you own go up, you feel good. When they go down, you don’t feel so good.
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So far it’s been a V-shaped recovery, which had a sharp decline, and a swift recovery. There is risk that the recovery ultimately ends up a W (which in reality is actually a Double-V, not a Double-U). We have gone on record expecting V-shaped upturn, but believe economic growth will be fairly anemic and unemployment will remain high.
A key factor is a large percentage of the population doesn’t believe in this economic recovery and don’t trust this Market. Stocks have risen substantially in the face of this skepticism. As a discounting mechanism, the stock market prices in future developments and this Market is telling us the recovery is real. Stocks usually rise highest ahead of news, not after.
What’s so interesting now is fear of being in the Market has been replaced by fear of being out of it, and missing the rally. Fear is a stronger emotion than greed. This explains why Markets tend to stay over-bought for a while but panic selling creates quick cathartic bottoms. We still believe that the March lows were artificially driven by chaos, and never reflected fundamentals. Keep in mind, despite the huge rally from those lows, the DOW is only up 10% for the year. Greed was largely responsible for our financial crisis, and fear and skepticism are helping us heal.
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The U.S. Dollar has been a key ingredient in the rally. As the Federal Reserve maintains its accommodative stance, keeping interest rates low, and Treasury keeps its printing press active, we still see the Dollar on the decline and stocks and commodities going higher. |
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Weakness in the greenback has been ridiculed and scrutinized across the globe. In fact, it was the primary topic at the first ever BRIC (Brazil, Russia, India and China) Summit. The U.S. Dollar is the dominant world currency, and has been since WWII. In many countries, people preferred Dollars to their own local currencies because it was safe, liquid and highly-valued everywhere. But two key factors have international leaders irritated:
1. A weak U.S. Dollar makes American products more competitive in the global markets. Europeans and Asians have voiced their displeasure as their exports get hurt.
2. Many foreign governments have pulled back in their Treasury purchases because of their concerns of our ballooning deficits. Recent Treasury auctions have been very strong and the U.S. Government has taken advantage of low rates to refinance our economy. But until we get our spending under control and pay down excessive debt, foreign buyers will stay cautious, and seek alternatives like gold, and perhaps ultimately, a new blended international currency. As long as the U.S. remains the lone superpower, the Dollar will reign supreme. But with wary buyers and substantial deficits, its dominance appears to be on borrowed time.
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A Market correction is inevitable; it will most certainly be driven by the Dollar because in this rally, stocks and the Dollar have been inversely correlated. As the Dollar has declined, the things that trade in Dollars, specifically stocks, oil, gold and other commodities have risen sharply. We still believe that the Dollar trend will remain weak until our Federal balance sheet is cleaned up. But, given the massive 15% Dollar decline in only six months time, a near-term reversal will likely show the Dollar strengthen at the expense of stocks and commodities.
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The economy has stabilized, and we are in the beginning stages of what looks to be a sustainable recovery. The Federal Reserve appears to be committed to its asset re-flation program and will remain supportive while we heal. But a sustainable recovery requires natural demand, not artificial and temporary spending by the government. The training wheels are still on.
We need to see companies increase their revenues, not just profits benefiting from lower costs. That means they need to sell more stuff. That means people need to buy more stuff. We need employment to rise. We anticipate the inflection point soon. In fact, the personal computer
replacement cycle is upon us. This occurs every three-to-five years, when companies and individuals ditch their old machines for new to keep up with technology and enhance productivity. This should have technology stocks building off their new found leadership, and, considering that most tech companies maintain significant cash positions with little debt, they make very clean growth investments when the cycle turns.
We will continue to own high quality corporate bonds and tax-free munis, which provide another way to grow your money. We see interest rates staying low and inflation tame, so the Bond Market will provide the predictability that investors crave. When the 15% tax rate for qualified dividends sunsets in 2010, demand for tax-free income should send municipal bonds higher.
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We will position portfolios with a focus on China’s growth, technology’s resurgence, the growing need for stuff necessary to build things – like copper, energy, iron and steel – and staple consumer products that Americans need and the emerging markets want. We think the subject of healthcare will remain difficult, but investment opportunities exist. We enjoy our gold position as a hedge for the Market, for the Dollar, and ultimately as a beneficiary of inflation.
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In February, we went out on a limb and predicted the S&P 500 would finish the year between 1000-1050. We are already there. Heading into the final quarter of 2009, we see this Market going higher. Although some sort of correction is warranted, we will be buyers on weakness. We remain cautious optimists, as potential rewards outweigh
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Archive
Summer 2009 Newsletter
Spring 2009 Newsletter
Winter 2009 Newsletter
Fall 2008 Newsletter
Summer 2008 Newsletter
Winter 2008 Newsletter
Spring 2008 Newsletter
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