Thirty years ago today (July 1st) I got my start in the investment industry as a stockbroker at a firm called Kidder, Peabody & co. I was reminded of that today when I walked into the office and there were signs and balloons (30 of them) congratulating me for… surviving? Technically I think they were congratulating me for “success” but success in this industry sometimes feels like surviving.
Let’s see, there was October, 1987 when the stock market crashed 23% in one day. There was the year the technology bubble burst and tech stocks collapsed, some over 90%. And then there is 2008, 2009, 2010, 2011… the Great Recession.
I learned many lessons as a stockbroker (most of them the hard way) but the most important lesson was that I did not really want to be a stockbroker. I wanted to be a securities analyst and portfolio manager. Along the way (1993), I ran into a young lady, Mindy Corporon, who turned out to be the perfect business partner. We began to transform our business from the “stock brokerage” model to a “wealth management” model and established our own independent Registered Investment Advisor four years ago. We have been operating several iterations of Boyer & Corporon Wealth Management for over 17 years and we now have seven additional awesome members of BCWM. Most importantly, we have many wonderful clients who have been texting me, emailing me and calling me today with their kind thoughts and congratulations.
We have close to $230 million which we oversee and when we get an additional $20 million, I’m not going to say we are managing $250 million. I’m going to say we are managing a quarter of a billion because a quarter of a billion sounds like a lot more money than $250 million. Doesn’t it? Oh well, all jokes aside, if you are one of the people who helped me get where I am today, I appreciate you. I am in the best business in the world and it is the best time in history to be in it. And I have never been happier.
There are many people who have helped me get where I am today but I would be remiss to not mention Richard C. Jensen, the manager of the Kidder, Peabody office in 1981 who, against his better judgment, hired me anyway. If you like what we do, you can thank him as well.
By now I’m sure you are aware that Greece is in a whole bunch of financial trouble. The Greek have borrowed billions of dollars from other nations and there is no way they are ever going to be able to pay it back. Yes, the Greek Parliament just voted in favor of an “austerity” plan that is meant to lead us to believe that, given enough time, they will be able to come up with the money. But we all really know better (or should). They’re not going to come up with the money… at least not all of it… and certainly not in a timely fashion. How do we know this? Because defaulting on debt is what Greece does. It’s what they have ALWAYS done.
According to Reinhart and Rogoff in their book titled “This Time is Different,” Greece is a perpetual international deadbeat (I paraphrase). Since 1800, Greece has spent a quarter of its existence in default. This is not new to Greece and it should not be new to us. They have defaulted so much you would think the only entity that would loan them money would be Countrywide Financial.
Greece’s inability to repay its debt is a problem which normally is an inconvenience to its debtor nations. This time European banks, sporting short memories, loaned a fair amount of money to Greece… which might not have been a huge problem had we not experienced that little financial bump in the road three years ago… otherwise known as the Great Recession. That economic disaster left banks a bit more fragile than usual (if you recall, it came close to destroying major U.S. Banks). With their balance sheets slightly out of kilter, a Greek default right now might be a severe blow to the European banking system. So what did the banks do? They (along with the IMF and the ECB) loaned Greece MORE money… so Greece could make payments on the debt they already couldn’t repay. With Portugal, Ireland and Spain lurking near the edge of financial disaster, the European banks seriously need to postpone a Greek default.
That’s right, all of the recent meetings and votes and changes in policies are not about avoiding a Greek default. They are just about postponing the default so the banks can work on restoring health to their balance sheets before the default. They need time. They need to… ”kick the can down the road.” (you know, one of the positive things about the finality of a Greek default might be that perhaps we would not have to hear the phrase “kick the can down the road” anymore. I hear it every day, several times a day. I think it is a stupid phrase and I am tired of it. I don’t know that I have ever actually seen anyone in a road kicking a can over and over so the phrase doesn’t even make any sense. If you have a better analogy than “kicking the can down the road,” please email it to me. If I receive one I really like I will use it in future Commentaries.)
Meanwhile, the United States is not Greece. The Greek 2-year bond is trading for about 19%. The U.S. 2-year Treasury bond is trading for .47%. That doesn’t mean the U.S. can’t become Greece but investors clearly are not worried about U.S. debt at this time. And the U.S. default rate? Well, I guess we have to talk about that now.
August 2nd is the alleged deadline for Congress to approve raising the debt ceiling. If they don’t, our government has to make choices… ugly, difficult choices fraught with political agendas. Do they halt some government services? Do they temporarily eliminate Social Security checks? Do they default on government bonds? (I predict they will NOT halt Social Security checks. That would be political suicide for all of them.)
The Republicans are hoping this will make the Obama Administration look really bad heading into an election year. The Democrats are hoping voters will blame the Republican House of Representatives for causing so much financial turmoil. It is a big game of political chicken that neither side will win. Why? Because they will eventually vote to raise the debt ceiling. Neither side will be able to risk the actual fallout from not raising the debt ceiling.
After they raise the debt ceiling, the Republicans will take credit for being so compromising by allowing Obama to raise taxes someday on only the wealthiest gazillionaires who own a corporate jet. (in Obama’s speech Wednesday, the 29th, he used the phrase “corporate jet” six times. Made me want to sell my corporate jet.)
After they raise the debt ceiling, the Democrats will take credit for being so compromising by cutting spending but I hesitate to hazard a guess where they will propose cuts.
Nevertheless, if the 2-year Treasury Bond is paying less than ½ of 1%, investors apparently don’t think the U.S. Government will default on its debt.
Inflation took a break in June. The price of crude oil, corn and wheat all experienced significant declines and prices at the pump have eased bringing some relief to consumers. Meanwhile, housing prices continued to slide, hitting the lowest levels since 2002.
Ben Bernanke spoke last week and basically said “things are a little slower than we anticipated and we don’t know why.” He conceded that 2012 might be thwarted by the same “headwinds” that are stunting the economy today… a weak financial sector, a weak housing sector, and consumers with ugly balance sheets who are still deleveraging.
Although I stated last month that QE3 (a third round of quantitative easing) wouldn’t occur because it would be too politically unpopular, Bernanke hinted that further action by the Fed may be necessary (but probably not until 2012). I guess a double-dip recession is more unpopular than a third round of economic stimulation by the Federal Reserve.
The stock market rallied hard the last week of June to salvage an otherwise ugly month. After falling almost 6% the first two weeks, the market rallied to finish down 1.67%, the second monthly decline in a row. Year-to-date it is still up 6%.
We are pleased to see the recent rally and hope it continues. However, as Bernanke noted, economic headwinds abound. We will use market rallies to reduce equity exposure. The U.S. equity market is not overly expensive so we are not in a panic… and any major decline will result in us increasing equity exposure.
More thoughts on being in the investment business thirty years. In 1981:
- Bill Gates had not yet invented Microsoft Windows.
- We didn’t have “personal computers.”
- When you spoke with someone on the phone, you had to stand in one place because the phone handset was attached to the telephone with a cord.
- Car phones were not available to the general public, much less mobile phones.
- The most popular movie was Raiders of the Lost Ark… the first one, which means Harrison Ford is also getting very old.
- “Endless Love” by Diana Ross and Lionel Richie spent 9 weeks at the top of the charts as did “Bette Davis Eyes” by Kim Carnes (ushering in a less than inspiring decade of mediocre music). Carnes, Joe Cocker and Rod Stewart are proof you don’t have to have a great voice to sell a lot of records.
- There were no sports stories of any great significance that I could find. That being the case, after seeing the most popular movie and songs, it appears the most significant moment of 1981 may have been Rich Boyer’s first day in the investment business.
- There were no active markets for Mortgage Backed Securities, Credit Default Swaps, Collateralized Mortgage Obligations, and Collateralized Debt Obligations.
- Companies which were on the list of 30 stocks in the Dow Jones Industrial Average in 1981 (or were added after 1981) but are no longer in the DJIA today:
- Manville Corporation
- General Foods
- American Brands
- Owens Illinois
- Inco
- Navistar
- USX
- Primerica
- Westinghouse
- Texaco
- Bethlehem Steel
- Woolworth
- Chevron
- Goodyear Tire & Rubber
- Union Carbide
- Sears, Roebuck
- AT & T (which got back in by merging with SBC Corporation)
- Eastman Kodak
- International Paper
- Altria Group (called Philip Morris then)
- Honeywell (called Allied Signal or something else then)
It’s amazing how a company can go from being considered one of the most significant companies in the nation to one of almost total irrelevance. Woolworth? They didn’t see WalMart coming. Eastman Kodak? They kind of didn’t see that digital thing coming. If I was running one of the 30 stocks in the DJIA today, I would be looking over my shoulder.
~Richard W. Boyer, CFP, CFA
Chief Investment Officer
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.