April 5, 2009
Please find your first quarter 2009 statement enclosed. Stocks posted their 6th straight losing quarter. Year-to-date, the averages are all in negative territory – Dow Jones –13%, the S&P 500 –12% the NASDAQ –3% The value of the S&P 500 as of 3/31/09 = 798 (used to compare your account (from inception) to the S&P 500). When comparing your account to the indices, remember that the indices are unmanaged – they do not include management fees or reinvested dividends. The growth of your account always reflects my management fee.
CALL IT WHAT YOU WANT…
We are in an economic war. But let’s be honest, at this point we don’t want villains, we want victory. The common interest is that we work together and get this economy going. We need to look forward. But we need to understand the past, so we don’t mess up again. We will not be able to withstand another blow. Inevitably, the market doesn’t react; it overreacts and shoots itself in the foot.
The recession began in the 3rd quarter of 2007 and in September of 2008, the United States and world financial markets came under unprecedented stress. The immediate impact was a dramatic decrease in liquidity and credit availability throughout the world. An incredibly rapid and significant deterioration in economic conditions, especially in the United States and Europe followed (how many times have we heard this on the news?).
What’s fascinating (as I told my wife the other morning while watching CNBC), is that the brightest minds are still trying to make sense of it all. No one completely understands the entire picture, but here’s something that may be enlightening. Don’t worry if you can’t make sense of it.
So-called derivatives caused much of the chaos. If a company owned derivatives and wanted to count them as part of their capital, regulators demanded that they buy insurance against their default. And everyone did buy. The “default insurance” was in the form of credit default swaps (CDSs), often from AIG’s now infamous Financial Products unit. However, AIG never bothered reserving for potential payouts or ever had to put up collateral because of its AAA rating. The whole exercise was stupid, akin to buying insurance from the captain of the Titanic, who put the premiums in the ship’s safe and collected a tidy bonus for his efforts. Because these derivatives were part of the banks’ reserve calculations, if you could knock down their value, mark-to-market accounting would force the banks to take more write-offs and scramble for capital to replace it. So Wall Street got stuck holding the hot potato, making them vulnerable to a bear raid. General Electric CEO, Jeff Immelt, famously complained that “by spending 25 million bucks in a handful of transactions in an unregulated market” traders in credit default swaps could tank major companies. “It’s the most easily manipulated and broadly manipulated market that there is.”
Does any of this make sense? Probably not, and that my friends, is the problem. As I famously stated in my October 2007 letter to you: we have nothing to do with these derivatives, so don’t worry, be happy. I told you that I didn’t understand them, and if I can’t understand something, I’m not buying. Looking back, how wrong and naive was I? Just because we did not directly participate in these hard to understand investments had absolutely no relevance to the impact we felt from them. Hey, if the world didn’t suck… we’d all fall off.
– A Will is a… Dead giveaway
– $500,000 is the annual income a man must make for a beautiful woman to consider him for a husband –
posted on Craigslist
In essence, AIG and others brought the world down due to their greed and ineptness. Now the government is trying to eradicate unregulated markets from ever appearing again. I strongly agree with this. When a market is unregulated, it is IMPOSSIBLE to ever know what’s going on. That is why no one knew (including me) what was going on! There was NO gathering of information that would tell us that there were trillions of dollars in the CDS market! The biggest mistake that Wall St. & the federal government made is not realizing the financial debacle that could occur by allowing any part (large or small) of the financial community to remain unregulated. Shame on us.
You are stuck with your debt…. if you can’t “budge it”
Conventional wisdom has it that in economic slumps, it’s best to invest in big companies that can better weather tough times. Then, as a market bottom seems near, investors should switch to shares of smaller companies, which often outperform in the early phases of a market recovery. These days, the steady stream of disappointing company earnings and job cuts makes the timing of an economic recovery difficult to anticipate. Despite the conventional wisdom, larger stocks as a group haven’t provided as much shelter lately as investors had hoped. Can you say GE, GM, and DOW?
As the financial crisis deepened this year, the collapse of some financial giants overwhelmed the relatively stronger performance of other large stocks. As a result, both large-stock and small stocks have had dismal total returns. Nevertheless, many investment professionals believe that small stocks will be winners when the market rebounds. In past cycles, small caps have jumped as much as 50% in the first 12 months of a market recovery. Currently, even “really good” small caps are trading at historically inexpensive levels — and as credit markets thaw, a lot of these companies will become targets of larger companies because they are so deliciously cheap. That could help fuel a rebound in the small-cap sector.
In an unsettled economic climate, it’s more important than ever to be a stock picker; looking for high-quality, well-financed companies (such as TSYS). This market requires stock-picking, first and foremost. We want to be investing in those companies that aren’t overleveraged and have plenty of cash or access to it. Here’s my prediction: WE WILL MAKE MONEY with WELL-CAPITALIZED COMPANIES and PATIENCE, but we have to look forward. I know and you know that your accounts are down quite a bit from mid-2007. But we need to deal with the present and the future, albeit, keeping the past as a reminder. Here’s some good news – I am still buying many of the companies I was buying 2-3 years ago because if I liked it at $8 and nothing but the stock price (and economy) has changed, I love it at $2. But to emphasize… the stories and financials still have to be intact. As we all know, change is inevitable – except from vending machines!
I’m going to tell you about a myth that’s hurting investors right now. It is well expressed by Bob Dylan, in the immortal song, It’s Alright Ma (I’m Only Bleeding), ‘warning against being nothing more than something they invest in”.
We are more than our investments. We are more than the year-to-year or day-by-day changes in our net worth. We are what we are for our charitable deeds. We are how we treat our family and friends. We are how we treat our pets and what we do for our community. If you had a $1,000,000 or $250,000 a year ago, and now you have a lot less, you are still the same person. You are not a balance sheet, at least not one denominated in money. Losing and making money are not moral issues as long as you are being honest. It is a myth that money determines who you are, and if you’ve gotten over that myth by now, then maybe the past year was not that bad. There are more important things in life; however, as my Dad always said, “rich or poor, it’s nice to have money”.
Remember, when the chips are down ….. the buffalo is empty
Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past performance is no guarantee of future results.