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Thursday, January 03, 2008

 

2008 New Year Musings

As I begin this post, it appears that Mr. Huckleberry has won the GOP caucuses in Iowa and that the Dems are very close with Mr. Obama putting a nose in front at the moment. The media loves these open races, and magnifies the significance and importance of the early primaries, with the unfortunate possibility that they may have more impact than they should. Why it's a good thing that a small minority of Iowa voters and an almost as small minority of New Hampshire voters should have so much influence is beyond me. Hopefully, the Giuliani strategy of concentrating on meaningful states like Florida will be vindicated. This kind of retail politics, traipsing around a state to meet a few voters, is a truly inane way to pick a President and detracts from the seriousness of the task.

That having been said, I am impressed with the ability of John McCain to come off the canvas the media had consigned him to and make a real race of it in New Hampshire and probably beyond. He is without a doubt the Mr. Integrity of this campaign, whether or not you agree with him on every issue. As far as the Dems go, I don't like any of them as you might infer, but I would be especially uncomfortable with Edwards or Obama, whose positions on the issues seem to me irresponsible at best. We don't need a President representing the plaintiff's bar (Edwards) any more than we need one in the hip pocket of evangelicals (Huckleberry). As for Obama, he strikes me as the classiest speaker in the field, but unfortunately an empty suit from the standpoint of his analysis of foreign policy solutions. That makes Hillary the one candidate of the leading three I could most live with on the Dems side. If they go to the convention without a clear leader, though, remember that opens the way for a draft Gore movement, with Bill Richardson most likely taking the second spot on the ticket.

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After that depressing analysis, consider the mess that is our Capital Markets. For the last year or two, the corporate mantra has been that they must develop facility with the capital markets to drive ROE and increase capacity and growth. Amazingly, most have not changed their strategies and sloganeering to catch up with the lessons of the last six months. This means that corporate America is likely to underperform in 2008.

The capital markets, through leverage and securitization, seemed able to turn sows ears into silk purses, but it all went sour in the mortgage market because securitizations lack transparency (by design) and everyone from appraisers, to mortgage companies and banks, to rating agencies abdicated their responsibilities in the race for fees, commissions, underwriting and lending profits. Does anyone seriously believe the carnage will be limited to mortgages?

Watch the hedge funds. They are the biggest financial misnomer in history. As these funds have evolved, rather than hedge bets, they have doubled them down through the use of excess leverage. The way hedge fund managers are compensated makes the use of leverage sensible. If you were getting 2 and 20, rather than a small percentage of assets, wouldn't you go for the big return to maximize the 20%? If the leveraged bet fails, you take your 2% fee, close the fund, distribute the shortfalls, and open a new fund and start over. The wealthy folks who have been pouring money into these things deserve to lose when it happens.

By the end of 2008, there will be big hedge fund winners and an equal number wiped out, or nearly so. I think also by the end of 2008, corporate America will remember what the capital markets are for, and that they need to get back to making their own businesses profitable without all the fancy securitizations.

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Meanwhile, the Fed is faced with a commodities boom (or dare I say bubble) that reflects the inflationary policies of the last few Greenspan years. This is causing the dollar to swoon, which will have the balancing effect of helping our exports and cooling our imports. However, that pain you feel is a lower standard of living than we otherwise might have had.

It is silly to blame the increased demand for fuels, commodities, food, etc. in places like China and India for our inflation. Yes, excess demand can cause prices to go up temporarily, but that is simply a move on the supply demand curves, not inflation, which is a monetary phenomenon. We have both currently, and it is unfortunate that the concepts are being so confused by the media and even the competent financial press. Our inflation was caused by the Fed's overactive money and credit creation which was reflected in gold's price long before most were aware of it. Steve Forbes was warning about the price of gold two years ago.

Now the Fed is stuck because a tight money policy to correct the inflation could tip us into recession and additional interest rate cuts will further weaken the dollar. I'm afraid that it will have to consider the dollar weakness and the now apparent inflation a sunk cost and do what it needs to do to keep the economy healthy. Then we will have to adopt fiscal, monetary, and trade policies to establish a more sustainable economic environment. Try to imagine that occurring with anyone but McCain or Giuliani in charge, out of the current field. As I said before, most competent on the Dem's side is Hillary (it really hurts to say that!).

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On 12/24, I bought 200 shares of Tomkins PLC (TKS), a British Company on my buy list for 14.25. On 12/26, it was the first sale in a month and a half, 100 shares of Lindsay Manufacturing (LNN) at 72.32. 50 had been purchased in April of 1998 at 29.71, and 50 in October of 1998 at 12.44, a nice average down in what has been a decent long term hold. On 12/31, I bought 700 shares of Sirius Satellite Radio (SIRI), a "zero buy" at 3.03, still anticipating that the merger with XM will ultimately be approved (it better be).

I started 2008 by removing Bio Reference Labs (BRLI) from my buy/hold list because I am concerned that new technology will allow doctors to do routine testing in their own offices and that will cause competition in the specialty testing that has been BRLI's profitable niche. I am prepared to be wrong about this and see the Company taken over at $40 some day as I have always believed it would. However, on Jan. 2, I sold my remaining 800 shares of BRLI at 32.56, which turned out to be the high for the day. I paid 9.07 in May of 2002 for 100 shares, 11.55 for 200 on 6/3/02, 10.15 for 200 on 6/17/02, and 7.99 for 200 on 7/22/02. BRLI was recommended to me by friends as a long term investment, and I think I held it the longest of anyone in our group. This was a rare time when an amateur tip paid off.

By the way, don't put too much stock in this January effect and assume that the market will have a bad year because it got off to a bad start. It may indeed have a bad year, but there are too many technical cross currents in January to assume a trend. You have the end of tax selling of losers (in Nov. and Dec.), but early in January, you get the pent up sales of winners by investors who wanted to postpone their tax until 2008 (a la my sale of BRLI). On the other hand, we will see the huge money flows into qualified plans that need to be invested somewhere this month.

In any event, with all this new cash in my account, I am well over my 20% cash allocation again and expect to be buying for a while.

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