Bloomberg Quote of the Day: “Delusions of grandeur make me feel a lot better about myself.” – Jane Wagner.
…the Grinch who stole Christmas…and Hanukkah….and Kwanzaa! Virginia now knows there is no Santa Claus as do a whole raft of ‘savvy’ investors, right? He told him he had a ‘black box’, and guess he would have to kill them if he told them how it worked. If one investor pulled out he just went to another hedgie and said he was going to open it to them so they could put in more…what a guy! …and they bought it! You sure don’t get much for 2 and 20 these days or 1 and 10 but what were you doing at the discount window. The beauty of the funds of funds is the fees are lower as you can see but the diversification really makes it safe…until it isn’t…and it wasn’t. Bernie should have a movie made about him…too bad Weekend at Bernie’s was already used…perhaps The Deal of a Lifetime at Bernie’s? Anyway, he put a pall of gloom on the markets somewhat do to the fact that he supposedly used options and Friday is Grand Ole Expiry. The best part is nobody was watching him…nobody knew how the ‘black box’ worked…and UBS Head Floor Trader Art Cashin says he never declared owning more than $1 billion in securities. Now tell me this: how could any rational investor give money to one man who won’t tell you what he is doing and nobody who works with him does. Let’s just assume he was legitimate, which he definitely was not…who would know what his positions were or how to unwind them…something smells here and when you have most of your family working for you one has to wonder, no? One better wonder. 2009, The Year of the Lawyer…surpassing even the wonderful 2008…they must be the only ones throwing Christmas parties these days!…and Wall Street thought they were the dumb ones letting the guys in the flashy braces (or Bermuda shorts if it’s a hedge fund), make the money. Not any more, Virginia…not any more!
Wonders never cease…SIPC is going to guarantee investors accounts up to $500,000. How many will come out whole? Not many IF any!
Believe it or not, TB firmly is in the camp that the Madoff scandal could signal an end to this mess. Finally, it has hit someone that most of us can identify with: university endowments, charitable foundations, banks, an insurance company, hedge funds…Man Group PLC, Access International Advisors, Fairfield Greenwich Group; Fix Asset Management (some not well diversified either), banks ‘savvy’ investors including a U.S. Senator’s (Lautenberg), Steven Spielberg’s, Mort Zuckerman’s, and Carl Shapiro’s charitable foundations and the Elie Wiesel Foundation for Humanity, wealthy people who invested without their knowledge through highly paid money managers, and yes, even retirees. It has now come down to the least common denominator. One has to think that Madoff, as prominent as he was in New York and Miami circles, would have been a philanthropist at least in the Jewish community. But looking at who was scammed whatever he might have given had to be a mere pittance from the guy who made Ponzi look like a piker!
But why a bottom? Well, not necessarily a bottom but the ‘revulsion’ stage has set in. Utter disgust at the greed of people and and it began to come out yesterday, even on CNBC. When charitable giving will be down sharply…in a recession where it was already going to be much lower, along comes this slimeball and takes even more away, and for what? Ego? What was the driving force behind him? Nobody needs that much money…and to do that with your friends and associates is unbelievable. So we have reached a low…we ignored the fact that our brokers, insurers, mortgage lenders…including some of the top banks in the country failed us…miserably. We doled out money to rescue them without asking for retribution or even an act of contrition (except the automakers who must be very low on the pole these days for supporting Congress…why else single them out after they did their bidding for decades?).
Anyone who reads this column knows TB has no use for Larry Kudlow and in fact believes his elitist views were part of the problem that created the huge wealth gap. They also know that TB views Jim Cramer as a buffoon and a blowhard…not to say he isn’t a smart if eccentric blowhard. But Cramer is more and more preaching the gospel according to TB. First it was his damning of the SEC and especially Chairman Chris Cox, for failure to prohibit ‘naked’ shorting and for not seeing what was being caused by eliminating the ‘uptick’ rule (when instead he should have put some teeth in it), then it was his embracing dividend paying common stocks and even preferred’s and sometimes even a positive aside on bonds…something TB has been screaming about since before the peak (unfortunately even preferreds and sound dividend payers have been trashed along with those great ‘growth’ stocks…much of which was accomplished thru massive record stock buybacks).
But before TB accuses him of stealing his ideas, Cramer has a new enemy: ETF’s that leverage long or short positions against the indices…once again blaming, and rightly so, the SEC for failure to see the damage they could cause to the system. Lest, TB be accused of becoming an acolyte however, TB felt his relentless bashing of Bernanke for, in his opinion, mishandling the credit crisis, “he knows nothing”, and his scare tactics of “we are going into a depression”, which he has since modified and which was in itself a modification of his ‘buy, buy, buy’ all the way down saying “you can’t make money unless you have skin in the game.” The man is dangerous but at least HE is now sounding the alarm and has been, to his credit, doing so for months. What he fails to see is the impact of the biggest deleveraging in history and how that impairs any bull market in equities for years…possibly decades (same goes for real estate which has historically grown at the same rate as the economy).
Last night, Cramer read from a list…too quickly for TB to catch the specific figures…that he obtained from someone working at the NYSE that proves that both the uptick rule and naked shorting were the major cause of the implosion of our financial system. It appears that at a minimum, 50% of the trades in the financial stocks just as they were imploding were shorts…the average appeared to be about 70% and some were as high as 90%. He pointed out that some of those shorts were by brokers to make markets (or as he said some to front run customers), but on down days….which were the ones they obtained the data from…they should have been buying! Cramer concluded, and TB concurs, that the massive damage and near destruction of the global financial system was done by greedy speculators without regard to the damage they were doing to economy and it is little consolation that there own wealth is now, finally, being diminished (to TB this started with Soros being a hero for shorting the pound to ‘help’ the Bank of England realize the error of their ways?…and this all happened on the watch of Christopher Cox…including Madoff!
Without the catalysts of Alan “leave the punchbowl in place” Greenspan, the phenomenal growth of credit and hedge funds, the booming real estate market in the wake of the Dotcom bust, and unilaterally trained quants and MBA’s, plus the accompanying massive income increases of the top 1% or so of Americans while the lower 90% went nowhere – for at least 10 yrs and arguably much longer (the top 10% stopped at $100,000 in 1981 and has scarcely budged since…which is a big negative after adjusting for inflation, thus average income has become a total farcical joke!), we could not and cannot have rapid growth. Meanwhile, the ‘dumb’ lower 90% just kept borrowing on credit which the bankers and credit card companies were only too willing to accommodate…do you see where this is going? Until the lenders can rebuild capital they cannot lend aggressively, and that lower increase in loans means profits will grow more slowly…especially since they have to repay the Feds for that TARP money.
The obvious answer of repaying loans can only inflict pain as it further curtails spending (you don’t really believe there are going to be pay increases do you?), and thus slows consumption which is running more than 70% of GDP. You do the math! See, there are no simple answers…and without Wall Street and hedge funds leveraging themselves to provide product…to a depleted class of investors…growth will be further impaired.
Rapid inflation is a bad thing…some inflation (as opposed to deflation which is bad), is a good thing…you decide where we are on that metric.
But it appears even the ‘experts’ are becoming skeptical of how cheap stocks are. First, while some p/e’s look cheap, that is on the assumption that even trailing earnings levels can be supported which TB doubts. Schiller recommends using 10 year trailing earnings but depending on the company that might not be enough. TB would urge you to look at dividend paying securities and not count on growth! Those dividends re-invested in other cheap securities might be able to work you out of the whole. But beware of bonds as the ‘yield to maturity’ is based on reinvesting the coupon income at the same yield over and over until maturity so if rates stay down for a long time period you might not get what you think you will earn…that is the same problem that we are faced with when rates peak as they did in 1981 and the only bonds that could deliver the promised returns were zero coupon bonds…and only if those were in tax-advantaged accounts since you have to ‘accrue’ the income and get taxed when you have no real income which can be painful.
Beware of those talking ‘averages’ here…or anywhere for that matter” the average length of a recession, the average duration of a bear market, the average lead time between stocks bottoming and the end of a recession…the list goes on and on. We are in a six sigma event…something that is ignored… just as the “quants” ignored the possibility of all those variables coming together at one time…but they did and now we are paying for it!
You have to love this: CNBC is going to have a special: Inside The Harvard Business School…do you think anyone is left there? How timely: many of those who have just shafted us graduated from there…or some other highly esteemed edifice of learning. Some students might consider enlisting in the Army and requested Afghanistan so they can get some useful experience on their resume’s (it is sad and a lost opportunity that Dubya didn’t ask people to do something other than spend in the wake of 9/11…if he had we might not have gotten in this mess…emphasis on ‘might’). Hopefully, a lot more people who are just in this business for the money will pursue other interests or better yet do something to make the world a better place!
Hopefully, you got some value from this…if not insight…at least something to make you think about the issues here and that if you invest in your old style you are not only unlikely to do well but even worse to regain a significant portion of your investment losses. Please think long and hard about how you invest and who you invest with!
Color TB disgusted!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC December 16, 2008.
