My Comments and Opinions
First Quarter, 2009
Full Quarter
Whew! Hope and change…the kind I like: A lot less talk and a lot more action. As reported on the front page of the Friday, March 27, 2009 Wall Street Journal… from the 12-year low of March 9th, the Dow Jones Industrial Average advanced 21% over 13 days, the quickest rally of this magnitude since 1938. This is the first time that the Dow advanced by 20% or more since the Great Bear first roared in October, 2007. Many Wall Street observers consider an UPWARD move of 20% or more from the last low to be the beginning of a new Bull Market. Of course, time will tell. We could re-test the old March, '09 lows prior to the next upswing. But I doubt it. So, before you take another pessimism pill, look around. There are signs of spring-like optimism poking up through the gloom as we depart this investment winter of our discontent. Earnings reports are starting to show colors other than red. Credit is easing in several parts of the economy. Banks are attracting lots of cash that must eventually be loaned to borrowers now that the Federal Government has made vast sums available to them. Inventories of goods are being reduced, the harbinger of future new orders. The stock market is moving up in anticipation of the recovery. These are days of great bargains in stocks, bonds and real estate. Buy the discounted shares now. Add to your portfolio. This is not the time to sell. In my experience this is the best bargain sale since I first entered the world of financial services in 1975. Below are a few facts and some of my assessments, estimates and recommendations related to First Quarter, 2009.
1) CREDIT CRISIS FACTS Like a massive pile-up of vehicles on a Los Angeles freeway in dense early morning fog, our global credit markets crashed and stalled in a massive confluence of distrust as real estate values began to collapse during the final two quarters of 2008. This Credit Freeze was marked by an almost complete cessation of credit between and among the largest international banks. Loans were not available to even the best credit risks for weeks. Probable cause: TOO MUCH DEBT accumulated over at least thirty years by individuals, families, communities and countries. When large institutions began to bundle up bags of mortgage-backed securities to be sold to the investing public, the first crack in Humpty-Dumpty appeared. These securities (insecurities) are collections of various mortgages, sold as tradable entities. It all happened very fast…just like the traffic pile-up in L.A. Suddenly the value of the securities in these bags became unknowable. The "Mark-to-Market" rules contributed to the disaster, in my opinion. As real estate prices began dropping, the mortgage market fell apart. Then bonds and stocks were hit. Money stopped flowing freely. The U.S. Government jumped in and became lender of last resort.
They shot Lehman Brothers, so to speak; forced the sale of Bear Stearns; made the largest banks agree to the Troubled Asset Relief Program (TARP); got into the car business and are holding together a nervous economy by creating generations of future national debt. Debt got us here. Will more debt get us out? We'll leave the forensics to the historians. Nobody has the power to do what the U.S. Government can do.
1-a) FACTS ABOUT FOUR 'BOOMS AND BUSTS' As I consider the longest recession in my career, indeed in my lifetime, four large up and down waves come into focus: Debt, Real Estate, Stocks and Commodities.
A) Debt An increase (boom) in personal, corporate, town, city, county, state, national and international DEBT over thirty years or more contributed mightily to the bust in real estate values. There always comes a day in any manically booming market when the last item sold is sold for a lower, not a higher, price. Nothing grows up to the moon. Debt becomes too much debt when the underlying assets that collateralize the I.O.U. drop in price; or when the borrower can't pay back the principal and interest on the loan. There are libraries of books on this topic.
B) Real Estate A year prior to the bust I had discussions with some people who believed that real estate could NEVER go down. I said that it could and has gone down from time to time. It did. In most places in America we have what's called "non-recourse" rules regarding mortgage lending. The house is the only collateral, not the person who borrows the money. This rule allows someone to move their furniture out some night and drop the keys off at the bank in the morning. Not so in places where the borrower is personally responsible for the debt.
C) Stocks When the mortgage market imploded bonds and stocks were negatively affected. Stock and bond markets reflect confidence or fear. Stocks began a slow slide at the top in October, 2007, but didn't really crater until the last quarter of 2008, the result of what could be called a perfect storm of fear and distrust. The short sellers (Ugh! those guys again) were hard at work selling borrowed shares in order to buy them back at lower prices. Trading rules had been relaxed which helped the short sellers to engage in further schadenfreude. We're now learning that some of this shorting was actually done without even borrowing the stock. The S.E.C. and FINRA are working to plug this nasty little hole. Short selling is legal. The argument for its existence is that it helps create a more orderly and liquid market. Well, that's the argument.
D) Commodities The boom and bust in commodities was not covered in the media in as much detail as were the credit, real estate and stock and bond cycles. We remember oil at $140 a barrel and gasoline at $4.00 or so. Gold, silver, copper, oil, and the many other commodities ran up and down in a fairly short cycle. Today many commodities are lower-priced due to the current recession. I believe that in the not-too-distant future the recession will end and prices of the main ingredients in our manufacturing, transportation and energy industries will go up. There are over six billion people on Earth. I suspect the majority of them would like to have not only the necessities of life, but perhaps a few luxuries as well. Knowing this, I believe that this or any other recession is only temporary because people everywhere want and need products and services. It's really that simple.
2) ASSESSMENTS At the core of many of our economic and financial problems lies ignorance and inexperience. I believe that too many of us are financially illiterate. I attended Classical High School in Worcester. It was a good public school. Did I take a class in finance, economics or hear even a single lecture on how to balance a checkbook? No. None of these topics were discussed. I graduated from a good university with a Bachelor of Music Education and a Masters in Music (performance, conducting, etc.). Did I take any economics courses? No. Financial courses for those matriculating in the School of Music were unavailable. They taught us the skills needed to earn a living, but not what to do with the money once we earned it. Was money a taboo topic? Maybe.
We are a nation in need of financial education. Many home buyers signed mortgages that were NOT affordable. Perhaps millions of Americans carry credit card balances every month and pay huge finance charges. How many families actually live by a written monthly and annual budget? How many are living paycheck to paycheck, two or three paychecks away from homelessness? Too many, I fear. The Financial Planning Association spends a lot of money each year in an effort to bring financial understanding to people in those countries where our organization is represented. I continue to offer my clients the opportunity to create a comprehensive financial plan. For more information about financial planning, check my website: www.brimmerfinancial.com.
Certainly greed played its part as it always has since the first caveman grabbed a chunk of grub from the caveman next to him. We all agree that no one should be paid to run a company into the ground. The CEO, CFO and other executives of public companies are paid employees. The shareholders are the owners. The managers are supposed to work with the best interests of the customers, the employees and the owners of the company in mind - not for themselves alone. And while we're on the subject, aren't many of our elected officials greedy for the power and money their positions offer them? Why do almost all of them run for re-election every time? Why do we re-elect them? Congress wrote the laws that helped create the mortgage bubble. America can do better.
We don't hear about the many thousands of good managers who spend long hours working honorably for the good of their customers, employees and owners. It irritates me to hear the news flies buzzing about certain innocent capitalists who have been successful as though they are wicked and evil. There's no room in the news room for stories about the good people, so we only hear about the sleazy and crooked ones. These same pungent pundits who blast those who create employment for thousands say nary a mumbling word about the multimillionaires in Hollywood. I guess it's OK to be really rich as long as you are on the "A" list. How about a little balance in reporting?
3) ESTIMATES I'm guessing that history will repeat itself. It always has. How many ways are there for a person to be well dressed? Maybe animal skins worked tens of thousands of years ago. Furs are out today. Romans had togas. Saris are popular in India. Pants and skirts are found everywhere. Clothes have always been designed for form and function as well as ornamentation. In commerce little has changed over millennia except for the medium of exchange. Barter was replaced with money because money is easier. Over the last three hundred years or so, ownership has been expanded from material objects - things like real estate, boats, tools and livestock, which are tangible things, to include liquid, fungible non-tangible assets, things like stocks, bonds, bank accounts and annuities. We're not going back to barter, well, not completely, unless, of course taxation becomes so onerous that people trade non-taxable products and services to avoid tyrannical tax rates.
So, assuming we all don't go back to a forty acre farm growing and hunting our own food, societies will continue to advance with money as the preferred medium of exchange. Now the problem with money is that in most cases money is only fiat currency. This type of money has no intrinsic value except that which the people assign to it by common assent. If there's too much of the stuff in circulation, each unit of money becomes worth a little less. One Dollar in 1926 bought about as much food as $12.00 does today. It's lost over 90% of its purchasing power during a single lifetime.
4) RECOMMENDATIONS If I'm right about inflation, and I hope I'm wrong, investors, dependant upon personal investment objectives and tolerance for risk, should own some gold or shares of gold mining and processing companies, growth stocks from the emerging countries of the world, growth stocks and/or funds, healthy companies with dividends, short term to intermediate term bonds and/or bond funds in a portfolio that matches client with asset allocation. If you're in a high tax bracket consider municipal bonds. Congressmen own them. They don't want to pay the taxes they vote in. Stocks in the S&P 500 or its equivalent have outpaced inflation by about 3:1 over 80 years. There's no reason to believe that the future will not be like the past. Our current way-down market reminds me of Mr. Peabody and the Way-Back Machine. He always returned safe and sound. Two hundred plus years of stock market ups and downs have paid for educations, retirements, trust fund income, charities of every size and stripe, and the overall welfare of the citizens of the United States. This time is not different. No time has been different. They're all the same: Scary! I've said it before. I continue to say it - add to your portfolios. Buy when you have the money. Buy at the point of maximum pessimism. Buy right now! For those of you in your working years, please give serious thought to creating a formal written comprehensive financial plan. The old expression still holds: "If you don't know where you're going any road will take you there."
DISCLOSURES
The views expressed contain certain forward-looking statements. Although they are forecasts, actual results may be meaningfully different. This material represents an assessment of the market and conditions at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any security in particular. The opinions expressed are mine alone and do not reflect any opinion of National Securities Corporation, my Broker/Dealer, or any of its Affiliates. Securities offered through National Securities Corporation, Member FINRA/SIPC. Investment Advisory Services offered through National Asset Management, Inc., a Registered Investment Adviser. Accounts carried by National Financial Services LLC, Member NYSE/SIPC. Sources for this letter include the Wall Street Journal, "Sixteen Rules for Investment Success" by Sir John Templeton, thirty-three years of experience in financial services, and my own common sense.
Wishing you success,
Robert W. Brimmer, CFP™
BRIMMER FINANCIAL
rbrimmer@nationalsecurities.com
59 Finlay Road - P.O. Box 2806 - Orleans, MA 02653
tel. 508-240-0320 fax 508-240-2309 toll free 800-237-9322
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Securities offered through National Securities Corporation, Member FINRA/SIPC.
Investment Advisory Services offered through National Asset management, Inc., a Registered Investment Adviser and affiliate of National Securities Corporation.
Accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments Company.