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Investment Commentary
A monthly look at investing
+ other news of interest from
Boyer & Corporon Wealth Management
July
2011
Investment Commentary
By Richard W. Boyer, CFP, CFA
Thirty Years of Investing
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
More News of Interest:
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