February 2009

Middle Age

Last week I was chugging away on an elliptical machine and wondering if reaching my 39th birthday the week earlier had officially put me into middle age or if I have one more year to reaching that particular age category. Judging from the 20-somethings chugging much faster than me, I am guessing it is at least possible I am at the front end of middle age, though I do not want to admit that out loud- writing it is hard enough. I hope if I work hard enough that maybe I can put off this middle age thing for awhile longer.

Too cope with my midlife awareness, it is not a crisis yet (when I show up in a Corvette, you will know I had the crisis), I gave in to my daughter and son, and got a puppy. She is a black Lab and Husky mix, and very cute at 9 weeks old. My kids named her Bella, even though I preferred Pokey. I am rationalizing that if I make it through the puppy stage unscathed, she might help me add about a decade to my life, as part of her description is "needs daily long walks and runs."  If I can live up to the dog's exercise program, exercise being something I have clearly struggled with this decade, the belly on me you have noticed (a few of you openly) being proof of my struggle, she will clearly have been a good addition to the family.

Ironically (or not) the American economy is clearly having a midlife awareness issue right now as well. While we are not sure it will reach crisis levels again, we are clearly afraid it might, and frankly on the verge of that happening in my estimation. Last week, to stave off the crisis, President Obama, Treasury Secretary Timothy Geithner and the U.S. Congress, from what I can tell, bought a puppy for the U.S. economy. While reading the 1800 page document that Congress finally passed is not on my agenda, the Financial Times thinks that there are at least some strong elements to the plan, although clearly with many unknowns, and certainly far from perfect (much like my puppy only being about 80% house broken after a week).

Like a puppy, this stimulus package should grow. What I am coming away with is that this only part one of what will be a three or four part plan, that will certainly include a comprehensive infrastructure bill relatively soon. As the plans are implemented, they will obviously get more expensive, and cause inflationary pressures at some point in the future.

Congress, Banks and TARP

I was watching the testimony to Congress of bank executives and two things jumped out at me.

One, many Congress people have no idea how the banking system and broader economy work.

Two, many upper level executives of large companies are clearly out of touch with the reality that 90% plus of the world population faces.

Among the Congress people, and I know this is hard to understand, though I had hoped the people in charge of the government got it, the lack of understanding of how the TARP funds (the fall bank bailout money) are supposed to work is astounding. The TARP funds are not meant to be loaned back out to consumers. That money is there to shore up the balance sheets of banks to legally required statutory levels, so they can maintain their previous lending levels.

As of now, large banks which have received government money are lending at roughly flat levels to the recent past and smaller banks which are in relatively good shape are also lending. The lack of lending being experienced is due to the mid-sized banks being in dire straits, and the disappearance of former lending entities, for example, mortgage companies and financing companies that got much of their capital from private equity firms, hedge funds, university endowments and pension funds.

The pain in the mid-sized banks is important to watch. Treasury Secretary Geithner implied that those banks might not receive much more help. The positves to not bailing out the mid-size banks are that inefficient banks will be forced to merge thus becoming stronger sooner, and that the government will not be adding to the monetary pressure on future inflation by printing money for the purpose of mid-size bank bailouts. The negatives are that lending will not loosen up for consumers quickly and that there will be another bump in unemployment as merged banks lay people off. In my opinion, despite the pain of letting mid-size banks fail, it is an essential process that will help the banking system in the long run, not to mention be fair to the smaller banks which have behaved relatively more responsibly. There might be quite an investment opportunity in small banks as a result.

Fat Pitches

(Mandatory name drop) Warren Buffet described investing like this once:

The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'

While I have brought up the above notion before, generally in justifying why many of my clients have not been fully invested in what I considered expensive markets the past few years, it might be time to consider this: that our fat pitches are coming soon.

Here's what we know right now.

  • The stock market averages are down about 40% from the 2007 highs depending on which index you look at.  This might very well have let enough froth out of some very well run company's stock prices to be attractive again.
  • There is a lot of money creation right now and planned over the next few years, which is likely to cause asset price inflation.
  • Government stimulus around the globe will be focused on infrastructure, healthcare, energy, alternative energy and defense.
  • The baby boomers continue to age and continue to be the biggest drivers of the American economy, though their spending will change from traditional consumerism to healthcare driven.
  • The emerging markets still want to create better living standards in their countries and won't be held back long by what are largely the problems of developed market's financial systems, although financial recovery will be measured in years not quarters.

I am currently reading research and looking for investment opportunities that benefit from lower than justified valuations, government stimulus winners, anticipated inflation in the next decade, evolving baby boomer spending habits and the growth driver of emerging markets reigniting eventually. This will be our very simple theme over the next several years.

So while I do still believe that a broader stagflation is likely in developed (middle age and mature) markets around the world, there will be some terrific investment opportunities for people who can shake off the cult of over-diversification that has destroyed many a portfolio this time around (versus under-diversification that many portfolios suffered from in the 2000-2002 market beatings). My anticipation is that we gradually reinvest over the next two or thre quarters (though we have been nibbling since around Thanksgiving 2008).

Brett Favre and the Economy

As most Packer fans know, the world does in fact revolve around Brett Favre.  Due to Brett's 2009 retirement (just to clarify), I thought I would post some facts about one of the NFL's all-time ten greatest players relationship to the economy:

  • In years where Brett Favre played for a Packer team that lost to the Dallas Cowboys in the NFC playoffs, the economy was pretty good.
  • In years where Brett Favre won in a Superbowl, the economy was really good.
  • In years where Brett Favre lost in a Superbowl, the economy was really good.
  • In years where Brett Favre was the NFL MVP, the economy was really good.
  • In years where a coach named Mike failed to call enough running plays on a Brett Favre playoff team in the playoffs, the economy was mediocre.
  • In years where Brett Favre retired then came back to play for a mediocre New York team rhyming with "gets" the stock market got slaughtered and the economy was very bad.

As you can clearly see, when Brett Favre is going good, the economy goes good. I know that is not very scientific, but it is as good as a number of Senators use for their financial understanding apparently. If Brett ever runs for Congress, I'll be sure to vote for him, or if I don't live in the state he runs in, I'll at least throw him my moral support, as his throws kept up my morale for a long time with regard to the Packers.  Let's hope his retirement (or his next season) goes well for the economy's sake. Thanks for the great times Brett, we will miss you. Enjoy middle age and maybe get a puppy.

It is clearly time for me to click submit.

Kirk Spano