Today marks the 27th anniversary of Rich’s career in the investment industry, beginning as a stock broker at the prestigious (but now extinct) firm of Kidder, Peabody & Co. You can learn a lot in 27 years, much of it the hard way. The most valuable trait one can acquire when working on Wall Street is cynicism. Being naïve and gullible are dangerous traits in any walk of life but extremely deadly traits on Wall Street.
In 1981, some of you may recall the following names: Dean, Witter Reynolds, E.F. Hutton, Drexel, Burnham & Lambert, Bache, Halsey, Stuart & Shields, Prudential Securities, PaineWebber, Piper Jaffray, and many, many others which no longer exist today. And most importantly, let’s not forget Bear Stearns which recently disappeared under the umbrella of JP Morgan.
Why do we point this out? Cynicism. One would assume (we did at one naïve moment many years ago) that “professionals” working at big name Wall Street firms would be “experts” in the field of investing. Kidder, Peabody was “absorbed” by PaineWebber after a bond trading scandal left their solvency in question. Drexel, Burnham was burned by the junk bond scandal of the late 1980’s. Most recently, Bear Stearns teetered on bankruptcy before being bought by JP Morgan for a pittance. All were the ultimate victims of the same things: greed and stupidity.
So we listen with a rather large degree of skepticism when we hear that an analyst at UBS raised his/her rating on a certain company or an analyst at Merrill Lynch thinks the stock market is headed in a certain direction. The TV shows which purport to give you useful financial information are referred to by us as “financial pornography”. If you insist on watching, watch with the same degree of cynicism and skepticism that we do.
The Dow Jones Industrial Average closed the month of June at 11,350, a decline of 10.2% for the month of June, 14.4% for 2008 Year to Date and 19.8% from its peak in October, 2007. Statistics for the S&P 500 are similar.
This is one of the worst June stock markets since 1932. Only a few of our clients were alive in 1932 but they can tell you it was the middle of The Great Depression. As my uncle Bob said to me, “nobody had ANY money”.
Boyer & Corporon Wealth Management is not predicting another Great Depression. However, we continue to view the current economic catastrophe in more dire terms than the average financial pundit.
To repeat some of the more obvious observations listed in previous Investment
Commentary’s:
- Home Equity has declined dramatically
- Credit Card debt has increased (it totaled $957 billion in March)
- Higher commodity prices have caused groceries to cost more
- Oil trading at $143 per barrel translates into gasoline in excess of $4.00.
- Unemployment in May increased to 5.5%, the largest one month increase in a year.
Given the above, it seems impossible for the average consumer to have any discretionary income.
Meanwhile, the Fed avoided a financial market “meltdown” by rescuing Bear Stearns….which raises two concerns:
- Should the Federal Reserve Bank of the U.S. be in the business of bailing out financial firms which are not regulated by the Fed and who are the victims of aggressive, highly leveraged investment strategies?
- Can the Fed afford to do this again (remember the Fed is ultimately…….us, the taxpayers).
You may recall the local anecdote mentioned in our June Investment Commentary. The one about my bicycle ride and real estate signs (if not, go back and read June’s Investment Commentary). As of the end of June there are 2 fewer homes for sale. Four homes took down their signs (although I’m not sure ANY of them actually sold) and there are two new signs that appeared for a total of 23. Reminder: last August, there were 8 signs.
Because our long-term outlook for the US economy is still rather grim, we will continue to react to stock market rallies by raising cash and “hedging” (buying securities that go up when the stock market goes down). When the stock market has dramatic declines, we will “un-hedge” but we are not anxious to invest in stocks unless there is a very significant sell-off. Where would that be? As we write this, the S&P 500 is hovering around 1280. We would get very interested in beginning to invest at around 1250. And we reserve the right to adjust that entry point if economic conditions worsen.
One last note. We are not predicting a big drop in the price of oil but……one year ago, oil was trading for $66 per barrel, today $143. Did demand for oil increase by 110% in one year (that was a rhetorical question because the answer is “no”)? Or was it horribly mis-priced a year ago and we just didn’t know how cheap it was? Or is it horribly mis-priced today? Don’t ever assume that, just because an item is selling for a certain price one day that that price represents the actual value of that item (tech stocks in 2000, real estate in 2004, etc.) By the way, Rich was in Sweden for 10 days earlier this month and, after adjusting for the fact that they purchase gasoline by the litre and doing some rough math, figured out that they are paying around $8 per gallon of gasoline.
Doesn’t that make you feel better?
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.