January 9, 2009: The Capitol Hill Parade…Again
January 6th, 2009
The President of SIPC and Inspector General of the SEC had the distinct pleasure of spending the day with some of their friends in Congress yesterday.
The Congressmen took turns saying pretty much the same thing…”The Madoff mess is not because we don’t have enough rules. It’s because we didn’t enforce the rules that we have.”
Watching the politicians thunder on about how badly the regulators failed was a familiar sight. The same kind of self-righteous anger was a familiar scene in Washington for several months of 2008. What was striking about yesterday is that one of the questions was, “Is it good that the same agency (the SEC) that so badly failed on many occasions recently is now investigating itself?”. This was directed at the SEC who is promising a rigorous investigation of its handling of the entire Madoff situation.
There are two dominant themes at work now in the broad market; Stimulus/Bailout plans and worry about the next “shoe to drop”. Fractured investor psychology is being temporarily aided by the constant and increasingly loud promise of stimulus plans that will fix everything. So far, investors are somewhat optimistic that the stimulus train will provide enough cash to fill every need. At some point, the government will stop throwing money at every imaginable problem. When that happens, the wildly optimistic but short-sighted buyers of late will panic and turn into crazed sellers. Also, if another shoe emerges and does indeed drop, investor sentiment will quickly and sharply reverse.
There is a growing assumption that all the bad news is behind us. That lays the groundwork for a serious negative surprise, in our view. Buying in anticipation of a wave of good news seems to be a recipe for failure.
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January 3, 2009: Stimulus Nation
January 3rd, 2009
As 2009 kicks off, there is the usual “this will be a great year for stocks” parade going on. Upon opening the Bloomberg website (the free service at www. bloomberg.com), there are four strategists making their bullish case. With quotes like, “2009 will be a bull market for stocks.” and “The worst for stocks is over.”, the weight is decidedly on the bullish side of the boat. Maybe they are right….maybe.
In most of the analysis that is so confidently declaring a market bottom, there is an enormous reliance on the government. Figures have been thrown around that estimate the new round of stimulus plans could be $1-$2 Trillion. The nagging question that must be considered is where will that money come from? At some point, debt become a drag on potential growth. The (somewhat) promised avalanche of government intervention is medicine that a sick stock markets wants right now but it may not necessarily be what it needs.
If the promise of un-ending government stimulus becomes less than certain, traders who rushed in to “not miss the move” will likely scramble to get out just as quickly.
Over the last three days of 2008 and the first day of 2009, the major averages, low to high, performed as follows: Dow 30 +8.32%, S&P 500 +9.06%, NAZ 100 +9.36, Ru 2000 +10.29. Such moves, in our view, do not indicate that a bottom is in. Rather, it seems like panic buying that is terrified to miss the next stimulus announcement.
Sincere wishes for a happy and healthy 2009.
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December 30, 2008: The Year of Madoff
December 30th, 2008
There is another startling article today that uncovers more of the carnage related to Mr. Madoff. The Wall Street Journal is reporting that Swiss private bank Union Bancaire Privee placed investor funds from eleven of their twenty-two accounts into Madoff products. Estimates are that UBP had approximately $700 Million tied to Madoff-related investments. While $700 Million is a relative drop in the bucket for UBP who manages $124.5 Billion, one particular statement in the article is rather signifcant.
In explaining the services that private banking provides and the fees associated with those services, the writer said, “Now, the extent of the banks’ investments and involvement with Madoff-related funds is raising questions about the value of those services.”
We wrote a blog titled, “A Dark Day for Wall Street” when the Madoff mess was first revealed. That dark day is evolving into a much darker, much longer period.
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December 27, 2008: More Layers of the Madoff Onion
December 27th, 2008
In today’s Wall Street Journal (weekend edition), there is a fascinating article about some of the “feeder” organizations that funneled money to Bernard Madoff’s firm. The article profiled four brokers who had intricate, long-term relationships with individuals and sold investments to them based on a (presumed) record of unusual consistency in returns with very low market risk. Although the brokers could not explain how the proposed investment strategies actually made money, the returns attracted a lot people with substantial investable assets.
The investors trusted the person selling the strategy rather than understanding the strategy itself.
Now the brokers are pointing to Madoff and claiming ignorance as well as significant losses. It seems that each day reveals another twist to the whole Madoff saga.
As investors take inventory of 2008, it will be difficult for individuals and institutions not to think a lot about the Madoff mess. Any manager who is involved in the hedge fund industry will be intensely scrutinized. Further, investment managers and brokers in general will likely endure a wave of questioning regarding their investment process.
A possible outcome of this tragic chapter in market history is that individuals will become far more familiar with where and how their money is invested. If a broker or manager cannot easily explain their investment process, it should be questioned; whether that person is from a small shop or from a major Wall Street firm.
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