Bloomberg Quote of the Day: “It requires a very unusual mind to make an analysis of the obvious.” – Alfred North Whitehead. True, but someone has to do it -TB.
…to those of you who thought TB’s rant yesterday on regulators and Congress was over the top, just look at what happened to the stock market yesterday. Without an uptick rule it is impossible for a responsible investor to get a toehold when all someone has to do is keep on selling. This is Las Vegas with the deck stacked against you.
CNBC had T. Boone Pickens and Byron Wien on discussing the energy crisis…and yes, it is a crisis. While they had all kinds of explanations…including the constantly discussed “it’s a global demand problem,” neither addressed the obvious…or what is certainly obvious to TB…that the last $30-40 or more in the runup in the price of crude is due to commodities index funds thanks to the related derivative swaps. Now look down at the Commodities section in yesterday’s summary. Both the GS Commodity Index and the CRB were off 2.8%…with losses of more than 1% in every grouping from Livestock to Grains…it was a rout. Is this a coincidence with the House Agriculture Committee holding hearings this week and grilling the CFTC on why they dragged their feet until last week before ’studying’ the impact of letting banks take unlimited positions in what is supposed to be a zero sum game as they cater to investors…not commercials who need to hedge the underlying commodity (the key phrase) and speculators who all that to happen. It is anything but a level playing field. Not only was every group down more than 1% (worth repeating) yesterday but only 6 commodities were down less than 1%
and only 3 <0.5%, while coffee, wheat and cocoa were all down more than 5%…cocoa -8.2%. 11 were down from 2% to 5% too!…there was not one commodity gainer…zip!
Back to Las Vegas, the question of whether Las Vegas is still recessionproof came up on CNBC yesterday. First, TB knows of what he speaks as he lived in Nevada for five years while working as Chief Investment Officer for its largest bank, and it is the bankers that know the situation best. The CEO, after Moody’s used this expression in rating a bond issue, said it is not true but because it was the only place to gamble it appeared to be. When New Jersey passed the gaming initiative there was little concern since all the top entertainers were locked in on long-term contracts.
But times change and it was Howard Hughes who changed the picture followed by Kirk Kirkorian as corporations took over the casinos. First, they converted them to family affairs, as Vegas had never had any interest in having your kids there for obvious reasons…they wanted you at the tables. Then, profit centers emerged so goodbye 25 cent shrimp cocktails and 99 cent dinners as well as cheap rooms.
New Jersey never caught up with Vegas but then along came state lotteries and Indian gaming, the Internet and the development of Macao. We are in a recession…with only fools and economists mincing technicalities in denial. Worse it is turning into one of global proportions…look at last nights summary and the news coming out of Europe while emerging markets continue to subsidize energy costs to keep their dollar at least loosely pegged to the US dollar. Vegas is feeling the pinch…yep, the second fastest growing housing market in the nation, behind Phoenix is now in such bad shape that half of the homes sold are ’short sales’. Yet look at the prices in the hotels and restaurants there even as the economy weakens. Worse, consider the water and energy used there…TB has long wondered why there isn’t a continuous string of trucks entering the city. Now consider the run-up in gaming stocks and ask yourself if you want to own Las Vegas Sands, etc. LVS is off 74% from its 10/29 high and has wiped out all gains since 12/31/05…but GE is down 30% from its April 2 high and back to the same price as 3/3/03!
That was some segue from the gaming to the industrial sector…but it could have been anything…except energy and energy related stocks and even those sectors have big cracks developing…in a crisis you don’t sell what you want to sell…you sell what you can sell! Overly dramatic? No!
This leads us back to the other regulator: the SEC. By turning a blind eye to naked shorts and a year ago eliminating the uptick rule…just as the major indices were on a run to all time highs…a rule implemented by the SEC’s first Chairman, Joseph Fitzgerald Kennedy, and because HE and his cronies had made money by selling and shorting stock until everyone else was out and then buying it back like in the movie Wall Street…greed may be good but is it good for a democracy? Apparently Chairman Cox thinks so. Being a typical politician however, he will not admit his error…or their limited bridling in of naked shorts so the market crumbles around them and nary a word…or concern…that’s because they like the GOP believe in free markets…the unbridled capitalism preached by Sir Lawrence of Kudlow and other supply siders…it is a plague on efficient markets. TB never thought he would be taking a stand against this but someone has to: the markets are broken. Consider that even with the weakness in stocks, bonds have provided little relief. What does it take to wake up America? TB has tried and apparently failed.
TB has long been opposed to mutual funds (except the low cost index funds offered by Vanguard, which have become the only cheap funds they offer…to the chagrin of founder John Bogle). TB hates their high fees…use of soft dollars to pay higher commissions and get services for ‘free,’ their obfuscating record keeping and accounting, their inefficient tax problems, and overpaid managers. Last year, the most consistent manager, Bill Miller, whose Legg Mason Value Trust missed the mark in 2006 not thru mismanagement but thru holding on to Amazon and Google too long and thus dragging down his returns until he was bested by the S&P 500 for the first time. Seeing financial stocks pummeled he bought ‘value’ in the financial sector according to Barron’s (Citigroup, JPMorganChase, Merrill Lynch, and before them Bear Stearns and Countrywide…that is the problem with being a value investor: separating underpriced securities from dreck…last year he had a knack for picking the latter. Listen to what Miller wrote in his quarterly commentary: “Even the best investors go through periods of poor relative performance,” he wrote, “for value investors price is one thing, and value is another. When prices move against us, it usually means that the gap between price and value is growing and our future expected rates of return are higher.” Wow! You have to believe…drink up the Kool-Aid. Interestingly, TB has noted little difference between growth and value stocks performance and for that matter even income stocks which he favors…especially with the growth outlook diminished for quarters or even years to come.
Mutual fund managers seem to have a common failing: they are dealing with hot money…the inflows come when they least want it…after they hit critical mass at least…and that dilutes their returns. On the other hand, when performance is bad…relative or otherwise…investors pull their money out of the funds forcing asset sales and making it that much more difficult to regain. Think of them as a hedge fund with no capital and 100% leverage…isn’t that true? Yet another black swan as 99% of the time this isn’t a problem…only when you need the statistics to be right. TB could cite studies back to the 1970’s that show there is no correlation to how a fund will perform (relatively) from one year to the next…mainly because investors ‘chase returns’. Barron’s reports that according to AMG Data, founded by a former bond salesman TB knew, Miller has been losing asset for the last six months!
What was the best performing fund in the second quarter? TCW Large Cap Growth…BUT it has assets of just $22.5 MILLION, not the $9.7 billion of Legg Mason Value Trust. TCW’s fund was up 10.45%…but for the first six months it is still off 0.9%! Will money flock to this fund based on their second quarter returns? History says yes…and likely it will be another flash in the pan.
The above was not meant to criticize Bill Miller, nor to laud TCW’s managers…stuff happens and as managers performance vs. the indices shows…it happens a lot after deduction of fees. This is why TB prefers exchange traded funds (ETF’s) and they work well…with broad indices. They do not work so well with sectors…such as the financial sector where they are dominated by Citigroup, and other losers which have dragged the performance down. On the other hand, TB has tried to buy individual stocks such as US Bancorp and found it dragged down along with the entire sector…Wells would be a good choice but it still has a lot of write-downs ahead of it.
To those of you who love JPMorganChase…and readers know TB doesn’t and feels they have just been lucky…so far, listen to what Richard K. Davis, Chairman and CEO Of US Bancorp told the American Banker: though credit cards accounted for just 7% of the banks first-quarter loan portfolio, they prepresented one-third of the charge-offs. Now think: who are the biggest issuers of credit cards: JPMorgan Chase, Citi, Capital One, and BofA…especially with their MBNA acquisition (readers will recall that these four, thru their lobbyists wrote the new improved bankruptcy act which swept in right in the wake of Hurricane Katrina, and was the beginning of his rants on the sellout by Congress to the bank lobbyists). To JPM, add their enormous derivative exposure and you have the makings of some bad surprises.
Want a chuckle? We all know the problems Lehman Brothers (primarily a bond house) and even Deutsche Bank have had. The question is: why would you pay attention to any forecasts they made on stocks or earnings (they can’t even estimate their own). Well, according to a Bloomberg story yesterday, they both see stocks rally big time…26% over the rest of the year! Note at the year end the consensus was for 11% growth for the year…yet is was down 14% in the first half! Also, corporate profits have been down for three consecutive quarters and the Q2 estimate is -11.2%. Four would be the most since 2001. The S&P earnings are off 13% over the past 5 quarters, the worst since 2001-2002 and in the last three quarters of 2002 earnings rose yet the S&P 500 declined another 23%…these analysts would do well to help solve the problems in their own firms than to forecast…or not!
One last question: why isn’t anyone in Washington showing any real concern? Because they are too busy getting themselves and their party elected…perhaps Nero wasn’t all bad…also it is a myth that he played the violin while Rome burned.
If TB has awakened anyone to the problems he feels good…unfortunately those who have been awakened have a sickening sinking, feeling in their stomachs…join the group! You cannot solve any problem until you identify it…and we have yet to identify it!
Hope this helps at least a bit.
TB
