Waxingandwayneing’s Weblog

October 16, 2008

A Toe in the Water

Filed under: The Economy — waxingandwayneing @ 8:09 pm

You would have to be near dead to be unaware of the wild fluctuations in the stock market over the last two weeks.  From the session high to the low, the major indices have seen unprecedented movement on intraday activity.  Fundamentally, how could a 1,000 point swing be justified in one day?  What news could possibly spark a recovery from a huge loss in the same day?  “Oh, we meant to say our sales were UP 50% not down 50%….sorry!”

I think someone is messing with us.  Or several someones.  Clearly there is money to be made in the recent market declines, but when do you get in?  When do you even dip a “toe in the water”.  I almost did last Monday.  I thought the market had bottomed and was ready to rise.  In fact, Monday showed nice gains and the turn looked strong.  But then Tuesday was weak, followed by a an even more dismal Wednesday.  Now today, the market is up 401 with another large intraday swing.  What gives?

The bottom line is that no one really knows.  The financial news hacks are trying to sound smart, which daily proves to be difficult.  The technicians try to argue for support at various trend lines, but have difficulty trying to advise in a market unconcerned about charting.  After all, the entire system is collapsing!  This week, earnings once again became a basis to measure stock value.  Go figure!  The optimists who tried to drive the market up earlier were met with the reality of corporate performance in the presence of a recession.  (You mean, we now have to be concerned with how these companies actually performed?)

This is no market for the timid.  I do know that there are bargains out there to be had.  Many company have been unfairly hammered.  But, just when I think it is time to allocate funds back into the market, the market falters.  With the beta as high as it is now, waiting is prudent.

With the FDIC insurance now at a higher level of $250,000, our cash is safe.  Please don’t be one of those imbeciles who withdraws your cash because you think there will be a bank run.  Measure your risks based on facts, not on illusion.

My advice is to stay liquid for awhile longer.  I would want to see an established recovery in the Dow showing at least 5 up days.  If you feel that toe is getting dry and needs to be dipped in the water, then invest slowly and knowledgeably.  Earning 3% on your cash is a lot better than losing half of it on a stock play.

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October 13, 2008

Tightening the Belt

Filed under: The Economy — waxingandwayneing @ 2:50 pm

With the economic news getting worse by the day, most Americans have finally realized that the “Buy Buy” days of yesterday have now gone “Bye Bye”.  Fueled by unrealistic liquidity over the past several years, the American consumer has been on an artificial shopping spree, accumulating merchandise they didn’t really need or certainly couldn’t afford.  It now looks like the party is over.  Hallelujah!

Last week, Stephanie Rosenbloom of the New York Times reported that, “Sales at some of the nation’s best-known retailers fell by double digits in September, highlighting the rapid deterioration of the economy and raising fresh questions about how many of those chains can survive.  Retail analysts and executives said they had not seen such a rapid slowdown in consumer spending since the nation’s last deep recession, in the early 1980s.”

If it takes a recession to sober up the American consumers from their drunken buying binge, then so be it.  No longer able to borrow on their home equity lines or credit cards, and worried about losing their jobs, consumers are starting to adopt responsible spending habits, e.g., “Can i really afford that?” or “Do I really need that?”  Go figure!

Jan Hoffman wrote a nice piece for yesterday’s Sunday New York Times entitled, “The Frugal Teenager, Ready or Not”.  She discusses the shock to teenagers being forced to do without all the luxuries they grew up with.

“When Wendy Postle’s two children were younger, saying “yes” gave her great joy. Yes to all those toys. The music lessons. The blowout birthday parties. But as her son and daughter approached adolescence, yes turned into a weary default. “Sometimes it was just easier to say, ‘O.K., whatever,’ than to have the battle of ‘no,’ ” said Mrs. Postle, a working mother who lives in Hilliard, Ohio, a middle-class suburb of Columbus.  This year her husband’s 401(k) savings are evaporating. Medical bills are nipping at the couple’s heels. Gas prices are still taking a toll. Mrs. Postle recently decided that although she and her husband had always sacrificed their own luxuries for Zach, 13, and Kaitlyn, 15, the teenagers would now have to cut back as well.”

Ms. Hoffman writes about the indulgent behavior of parents…eager to please their children and avoid arguing.  So many kids “were raised in comparatively flush times by parents who believed that keeping children happy, stimulated and successful, no matter the cost, was an unassailable virtue. A 2007 study by the Harrison Group, a market research firm in Waterbury, Conn., found that nearly 75 percent of parents caved in to their children’s nagging for new video games, half within two weeks.”

So, having raised a generation of adolescents trained to get whatever they want, whenever they demand it, we are now having to turn to these kids and say, “No”.  Cutting back is not only prudent, it is imperative.  Mom and Dad simply do not have the money.  Shocking or not, you had better tighten your belts.

What will be most interesting with this economic diet is to see the impact on personal identity of children, as well as adults.  No longer able to afford that designer handbag, sports car, or the week-long rental in St. Barts, consumer will start to suffer from luxury withdrawals, followed by deflation of the ego.  Having previously identified themselves from material goods, people will struggle to define themselves in the absence of these possesions.

It will probably shock many consumers that their personalities are vapid without toys.  What else is there to talk about?  For others, the cutting back mode might yield interesting personas, able to relate to others on a deeper level.  The optimist in me imagines more people reading thought-provoking books, listening to NPR, attending a lecture at the local community college, or volunteering time at a local non-profit.  There are so many things to do that do not involve spending money, but that do yield meaningful enhancement to the person and contributions to society.

The next few months (or years) are going to be tough for so many.  As you tighten that belt to the next hole, take a deep breath, realize you are not alone, and seize the chance to be a better person.

September 20, 2008

Cruel and Necessary Punishment

Filed under: The Economy — waxingandwayneing @ 9:04 pm

In my last blog, I shared with you my anger over the economic situation our financial executives have forced us into over the past several months. Years of abusive business practices aimed solely at the enrichment of these so called “experts” have now resulted in the need for the federal government to inject billions of dollars of equity into institutions and provide hundreds of billions of dollars in bailout funds to buy up the troubled loans of banks. Congratulations to you stewards of our trust….thank you for taking our money and enriching yourselves to unheard of levels creating a failed financial empire that we must now fund.

Why be critical of business failure? Most people in business do not succeed. It is hard to form a business that will grow and generate a profit. So why be upset when these corporate managers find themselves running illiquid entities? Two reasons: Greed and the lack of remorse.

According to Reuters, the executive of Fannie Mae, just one of the players involved in this financial debacle, were incredibly well-compensated for being crooks. Daniel Mudd, president and chief executive officer of Fannie Mae, received more than $14 million in compensation from Fannie Mae in 2006 and more than $12 million in 2007; Robert Levin, chief business officer, received more than $9.5 million in 2006 and more than $8.4 million in 2007; Stephen Swad, chief financial officer, was handed more than $4.8 million in 2007; and Stephen Ashley, chairman, received more than $500,000 in 2007. This level of compensation is commensurate with success, not for breeding failure. If the money they were paid is fair compensation for the work they did, then let me have a job application. If you won’t hold me accountable, then I will take the job. I can do what they did working just a few hours a week.

So what about the failed investment banks? Lehman Bros., run into the ground by its executives after 158 years in business, rewarded their brain trust handsomely for finding a way to end a legacy. Chief Executive Officer Richard Fuld took home $34.4 million in 2007, while J.M. Gregory, Lehman’s chief operating officer at the time, made $26 million last year, according to the March 5 proxy. Thomas A. Russo, chief legal officer, earned $12.1 million. C.M. O’Meara, chief financial officer, made $3.7 million, and Ian T. Lowitt, co-chief administrative officer, was paid $4.9 million. According to Lynn LoPucki, a bankruptcy law professor who teaches at Harvard University and the University of California, “Bankruptcy law allows recovery of compensation paid to insiders if the company didn’t receive reasonably equivalent value”. It is strongly believed that lawsuits will be filed to recover the compensation from these executive criminals.

This is really simple to me. If I hire a professional painter to paint my house and the work is shoddy, I get my money back; I didn’t get what I bargained for with this individual. You don’t do your work, you don’t get paid. These executives did shoddy work and now need to pay us back: Matter closed.

The second reason I am so irritated at this situation is the lack of remorse of these executives. Have you heard any of them simply say, “I’m sorry”? Have any of these pompous managers issued any apology for what they have done—for the mess they created? If they have, I haven’t heard them.

As I analyzed the practices of these failed executives, I began to see the similarities between them and drug dealers. Motivated by greed and unconcerned about the consequences of their efforts, both these financial executives and drug dealers prey on society as leeches, providing no benefit to anyone but themselves. Getting people to get hooked on drugs or mortgages they can’t afford creates an artificial economy.

So, my solution is simple. If a police bureau arrests a drug dealer, they can seize his property and use those assets for the benefit of the agency. Money, cars, houses are all fair game for seizure. Ill-gotten gains must find a new owner. Let’s make these financial executives subject to the same rules convicted drug dealers face. Make them return all of the money they were paid to do their jobs. Let’s also force them to return assets they acquired during their tenure—the cars, the houses, all of the perks. If they refuse, fine. Then send them to prison for at least 10 years. And not the country club facilities we sent the Enron or Tyco boys to. Make them room with Bubba, who can teach them a thing or two about screwing others.

If we fail to aggressively deal with these crooks, then we are permitting future criminals to repeat these egregious acts. Would you deal with a misbehaved child by letting her off from bad behavior without administering punishment commensurate with the act? I would hope not. Then why deal with adults differently? It’s time these bad boys were put in time out—permanently.

September 18, 2008

“I’m as mad as hell, and I’m not going to take this anymore!”

Filed under: The Economy — waxingandwayneing @ 10:08 pm

In the 1976 film, “Network”, actor Peter Finch expresses his outrage over being fired and ends up firing up a nation similarly frustrated over life’s inequities.  Declaring to the country, “I’m as mad as hell, and I’m not going to take this anymore!”, Finch becomes the unwitting spokesman for a frustrated populace.  An apathetic public is energized by a television anchor pushed beyond his boundaries.

How much outrage must we feel before we say, “Enough is enough?”  With the events of this week–the bailout of private investment houses and the injection of massive amounts of precious capital into the financial system–isn’t it about time we feel the need to open our windows and shout Peter Finch’s mantra?

I am not critical of the intervention taken to stave off a probable collapse of the financial system.  Although you cannot blame the surgeon for amputating a gangrenous leg, you should be upset that the patient’s situation got to that point. Far-reaching measures are needed to address such a serious situation, yet anger is still a valid emotion that the matter occurred.  When will we en masse express the viceral frustration with these buffoons for getting us into this mess?

These so called “experts” promoted these financial programs with such cavalier recklessness and egotistical bravado, enriching themselves along the way to previously unheard of levels.  Mortgage executives and investment agencies created a lending environment that required a limitless level of mortgage loans to feed an insatiable demand for collaterlized debt securities.  The result of this unbridled demand caused loan origination standards to abandon the basic principles of lending:  Can the borrower and will the borrower repay the loan?  Instead, the system took on the strategy of a drug dealer–interested only in getting others dependent on his product than in the long-term detriment of dependency.  With mortgage brokers popping up on every corner with the sole purpose of feeding new loans to a thirsty investment community, we all sat back and watched the market get strung-out and compromised.

So, instead of stopping the flow of drugs, I mean loans, that should never been made, so many of us looked the other way while unqualified families became homeowners, driving up real estate prices to unsustainable levels.  Real estate brokers made fat commissions for deals that sold themselves, while mortgage lenders paid fees to poorly trained producers so happy to bend rules and fabricate financial data to just close those loans.  Others along the way also enriched themselves from artificial means, yet none as much as the investment house executives and quasi-government agencies.

These selfish fatcats knowingly seized upon a vulnerable marketplace.  Veiled behind the premise of providing a necessary flow of funds to the lending community, these executives promoted a system that provided them with massive amounts of compensation for the generation of assets they knew would eventually be found out to be grossly overvalued.  Instead of stopping the practices that lead to these realities, these crooks cared primarily about the short-term and their growing wallets.

My solution is rather simple.  Now that the government has decided to use our funds to bail out the system, we must do what we can to return to the basic premise of any business transaction: the matching of risk and return.  This week, many people have criticized the imbalance of the current financial debacle, with the public sector now absorbing the risk, while the private sector enjoyed the profits.  I recommend that we make all of the executives of the affected financial institutions pay back all of their compensation, since they feel no willingness to absorb the effects of the risk they created.  Those executives unable or disinclined to repay the benefits they realized should first be paraded down Main Street–make them feel the shame of what they have done by publicizing their names in newspapers–and then sent to prison.

If you think this sounds harsh, then enjoy your life of complacency.  Remain silent as the big boys continue to screw you without permission or regret.  If you are as pissed off as I am, then get up, walk over to your open window and yell, “I’m as mad as hell, and I’m not going to take this anymore!”  Then, after you scream, send an email to your congressional representative and share your outrage.

July 13, 2008

Return…………….and then the Risk

Filed under: The Economy — waxingandwayneing @ 11:43 pm

So many people seem to be chasing that brass ring, that above-market rate of return that others don’t seem able to achieve. People ask me, “So what do you think of those hedge funds?” Or they tell me that they are thinking of investing in a venture that promises to pay a 16% dividend each year for 20 years. Even simpler, why not put some idle cash into an Indy Mac money market that ispaying 75 basis points more than any other bank’s monthly market account? These higher returns seem so nice….so much better than the rates being offered by other institutions.

Sure they are. That is, until the inevitable reality sets in. They are paying higher rates of return for a reason. They are riskier investments. They are paying you more money to compensate you for the fact that you may not get your money back. Then why is it we always talk about “Risk and Return”, when we actually live in a world of “Return…..and then the Risk?”

In the financial world, we act more like a horny teenager on prom night–unconcerned about getting his date pregnant and focused solely on delivering the goods–than someone who cares that there will be a tomorrow to worry about. We constantly chase the rate, seeking out the better return, without much regard for the risks involved. Typically, we tend to minimize the potential for risk, arguing propensity, or rationalizing that someone will rescue us if necessary.

We need to get to the point in this country where we are responsible for our own decisions–financial ones included. If you put money above the FDIC limit into a bank or thrift that fails, you stand a good chance of losing that money. Don’t petition the government for help. You should have known the rules.

If you don’t fully understand the risks of a particular investment, then stand down….don’t invest. Most investment products are complicated and complex for a reason. The principals will come out just fine, win or lose. They don’t tell you that in bold writing, but it’s all there. Do you really think they are compiling all those documents to protect your interest? Please!

Were you surprised that Indy Mac didn’t take out full page ads that said: “Our rates are the best because we really need your money right now and we might not be able to give it back to you, but we will still be paying our executives a lot of money”? They were offering you a nice return……..and then they were presenting you with a lot of risk. Go figure!

Just remember: In business, politics, life in general…..If something sounds too good to be true, it probably is.

April 29, 2008

Tax Stimulus Package as Viagra

Filed under: The Economy — waxingandwayneing @ 9:12 pm

Once the media started talking about the economy, the politicians figured they better do something about it. Instead of addressing the systemic problems of our financial affairs, our brilliant government decided to simply throw some cash at the problem. Our never ending thirst for “quick fixes” has yielded the economic stimulus package, where eligible Americans will get a check for $300 to $600.

According to the IRS,

“the vast majority of people who file a 2007 income tax return qualify, and many who don’t regularly file a tax return may qualify as well. You’re eligible if you have a valid Social Security Number (SSN), can’t be claimed as a dependent on a tax return and have either an income tax liability or “qualifying income” of at least $3,000. Qualifying income includes any combination of earned income and certain benefits from Social Security, Veterans Affairs or Railroad Retirement.”

Some 130 million households (75% of the country) will receive these payouts, costing us (not the federal government…they don’t pay taxes, we do!) $168 billion. The first checks will be mailed this week. And then what?

As reported by CBS, a CBS News/New York Times poll conducted over the weekend shows that,

“of those expecting a rebate, half say they plan to pay bills with the extra money, 27 percent say they will save or invest it and 18 percent plan to spend it.”

So, with 50% of those polled expecting to use this windfall to pay bills and another 27% saving or investing the rebate, how can we expect any stimulus from these checks?

One could argue that paying bills will help the economy, as it frees up credit to enable new purchases. Fair enough. Saving the money does grow deposits at banks providing them with funds to loan out, with a multiplier effect. Investing is not as clear, since buying a stock does not stimulate the economy, per se, except that it does enrich the seller of that stock who may then buy something that helps the economy.

What is unfortunate about this bailout scheme is that it was intended to be spent. Back in January when the stimulus package was being developed, Treasury Secretary Henry Paulson, said,

“There are no silver bullets. But…to give money to consumers, there’s plenty of evidence–you give money to people they’re gonna spend it.”

On the eve before the first checks enter the system, that doesn’t look like what will happen.

But let’s give the politicians the benefit of the doubt for a moment. Let’s assume (incorrectly) that these checks will all be spent in our economy. Best case scenario, every check is spent on new TV’s, refrigerators, bikes, lawnmowers, clothing, side of beef, DVD’s, or whatever. For precisely the length of time it takes the checks to work through the system (probably 6 months), retailers will enjoy spikes in sales.

So how does this help the economy? It clears out stale inventory; that’s a good thing. But does it cause new orders to be placed? Probably not. Retailers will very cautious in ordering new merchandise to support the new sales levels, because (and here is the big surprise) the sales peak is just a one-time shot. So the suppliers to the retailers will not feel any benefit from the rebates.

How will these checks create jobs? They won’t, at least not in the long-term. At best, employers will hire employees to handle the sales spike. That is great for those hired, but I would imagine the job growth will be marginal at best. And then, most of the temporary hires will get laid off. How lovely!

Doesn’t this economic stimulus package sound a lot like Viagra? If a man has erectile dysfunction, he has two basic choices. He can take Viagra (or a similar short-term pill) or cure the problem–either surgically or psychologically. I am not making any value judgment of those who have ED (although I am grateful I don’t have that problem!) Clearly, if a man chooses to take the magic blue pill, he will have put off worrying about his flaccidity for 4 hours or so. But when next he has an urge to “rise to the occasion”, he will have to pop another pill. Unfortunately for the man whose penis is in a recession, he will get no stimulation without medication.

Why is our economy any different? I may be a bit slow on the uptake, but I am not wrong about this. The rebate checks are a one-time benefit, no different than a rebate check you might get from a manufacturer. Once you spend it, it’s gone. Unless you can count on an endless supply of rebate checks, you are not going to make any long-term changes in your spending pattern.

The economic malady we are in now is deeply rooted, systemic. Quick fixes will provide, at best, a temporary respite from the realities of the problem. Pop that pill and delay the need for a long-term fix.

Unfortunately, the only thing our politicians know how to do is send us pills. And we simply swallow them.

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