Bail Everybody Out!

I was recently talking to various office workers, asking them what they thought of the outcome of the recent election. They were excited. I asked them why? They pointed out that the Government bailout of mortgages and the advertised 90 day mortgage moratorium on foreclosures, gives them a unique opportunity to: (1) have their Mortgage Interest Rate reduced; (2) gives them a 90 day grace period for which they don’t have to make mortgage payments; (3) will allow them to get a major discount on their unpaid principal.

They stopped making mortgage payments, and look forward to Foreclosure. MANY PEOPLE CAN MAKE THEIR MORTGAGE PAYMENTS, BUT SEE A FREE LUNCH COMING, THANKS TO OUR WONDERFUL GOVERNMENT BAIL OUT PROGRAM. The Feds will probably allow an upside for the Mortgage holder but who’s going to monitor this? The “defaulters” tell me that their credit rating will be hurt in the short term, but who needs credit? Nine months from now their credit rating will be fine. Obviously the Lunch will be paid for by us – the US Taxpayer. Our Government calls this program “Mortgage Forbearance and Mortgage Modification”. Don’t you love it! Anybody want to become a Mortgage Lender?

On another front many Banks have applied for hand outs from the Feds. They don’t need the Capital, but since it’s there, why not take it. Only in America. I can’t make this stuff up. Meanwhile, the Banks that are really in trouble can’t seem to get help. Finance companies have now become Banks (American Express Goldman Sachs etc)

The stimulus program that was implemented this summer with Tax Rebates to the poor - backfired. The poor saved their money or paid down debt, rather than blowing it on a big screen TV’s. Now comes another boondoggle spending stimulus program. Caroline Baum, an Economist for Bloomberg writes that a Federal Stimulus program is coming, and will pass congress quickly (like in the next 60 days). To get the program started quickly, she writes, “The spending will be focused on infrastructure, things like roads and bridges. Unless this time is different, the money won’t necessarily be allocated efficiently.” In the same article, Jim Glassman, senior US Economist at JP Morgan Chase & Co says: “…there is no plan to assess the cost of sitting in traffic jams, for example. So we get irrational things: The money goes to building bridges.”

The theory that the Stock Market does much better with a Democrat as President is nonsense. Greg Mankiw (Harvard University Economics Professor) says “…the perceived relationship between the president’s party and the stock market is meaningless.” Geoffrey Hirsch, editor in chief of the Stock Trader’s Almanac says that the Stock Market prefers gridlock. That is, no one party controls the ability to control legislation. Hirsch’s data support the idea that gridlock is best for the stock market with a Democratic president and GOP Congress yielding the maximum results: an average gain in the Dow OF 19.50%. No such luck for 2009-2010.

The talking heads tell us that you have to buy stocks for the long term. Ten Years, long enough? Below is the Monthly Compound Yield at Nominal Annual Rates for a ten year holding period from December 1909 to November 30, 2008.



Note that anybody that bought the SP 500 in November 1999 lost money for the ten year period which includes dividends. To go 10 years and lose money on anything is just awful. Also note, that those that bought stocks in 1930 lost money. Although the average yield for the period of 10 years was 9.38% (a Standard Deviation unit of 4.90%), I think the days of holding stocks for ever is not well advised.

Now take a gander at the chart below that provides the same information but is adjusted for inflation. Now the game changes, as the average yield is 6.89% with a Standard Deviation Unit of 5.36%. Not a lot of room for error. If you further adjust this for Federal and State Income Taxes (the tax rate on dividends, and capital gains) the yields have to be even worse.

When I was a senior in College (1958), the text books on investments said the value of any asset today is equal to the present value of the Cash Flow (income) plus the present value of the Residual (principal) using an appropriate interest rate. The Dividends were relatively easy to project over a given time span, but the Residual was always tough.



In theory it’s a great idea. However, in implementing the math to figure out the correct value of a stock is mind boggling. To compute the current value of a stock based on a 5 year projection you need to estimate: Earnings Growth, the Estimated PE multiple in 5 years, and what your required investment yield is over the next 5 years. There are 5,000 financial wizards willing to give you their research identifying all the variables outlined above. However the reality is an earnings estimate is at best close to the truth and at worst totally bogus. Look at the Banks Earnings. If you believe any their Earnings Reports, you must also believe in the Tooth Fairy. Who in the world can forecast correctly the Growth rate of earnings, over the next 5 years? How about forecasting correctly the PE multiple in 5 years? Do you know your required yield to justify buying a given stock? How do you know when stocks are cheap? Are they cheap relative to the past?

In the good old days (prior to the creation of retirement plans), Most stocks paid dividends of about 6.00% and had modest PE multiples (6 to 12 Times). The common investor had a shot at making some money. With the advent of 401K’s and other “tax free” retirement plans, Wall Street responded. Mutual Funds grew at an alarming rate offering the poor working man a potpourri of choices that included: Growth-Big Cap, Growth-Small Cap, Blended Growth, No Growth-Big Cap etc. Then Wall Street gave us ETF’s (Exchange Traded Funds) that allows an investor to get into any single purpose investment medium you can think of. You name it, they got it. FAN is a ETF that owns Wind Mill generating Companies, TAN is an ETF that owns Solar Energy Companies. You can buy shares in ETF’s that represent every Country on this planet: India, Russia, Hong Kong, Brazil, Mexico, and Bulgaria. They even have an ETF (symbol VICEX) that invests in Tobacco, Liquor and Firearms stocks. All these choices, for which the pour individual investor has no idea what he just bought, and worse yet, has no idea how the Economy Works.

The bubble in my opinion is not only in Real Estate, but just about every investment alternative on this planet. There are too many Common Stocks, too many Mutual Funds, too many ETF’s, too many Bonds, and too much money chasing too many securities. God help us!

Below is a chart of the ratio between the S&P 500 Stock Index and the price of Gold per Ounce. In December, 1947, .3123 ounces of Gold bought 1 share of the S&P 500



By December 1968, 2.5262 ounces of Gold bought 1 share of the S&P 500. The low of the graph was in January, 1980 when .1573 ounces of Gold bought 1 share of the S&P, and the high was booked August, 2000 when 5.4135 ounces of Gold bought 1 share of the S&P 500. Note the decline in the S&P relative to Gold since 2000.

As Richard Russell said recently in his daily newsletter “Dow Theory Letters” (http://ww1.dowtheoryletters.com/dtlol.nsf), (I Paraphrase) - Buy lumber and paper stocks, the Federal Reserve will be printing money at an exponential rate.
He said this with tongue firmly in cheek, but the part about printing money is for sure. You can count on it.

Congress, the new President, and the Federal Reserve will not allow our Economy to go into deflation. Our Government Deflation therapy suggests bail everybody out. If you are not a Bank, Investment Company, Insurance Company, a Business with no profitable business plan but lots of employees, or totally stupid in understanding what you agree to, you are on your own!

The Auto Companies will surely be bailed out. Why? Because - they are too big to fail. They probable would have said the same thing about the Buggy Whip business it its time. Look at General Motors Financial Statistics since 1992. Average profit margin on sales = .43%. Average growth in earnings = negative 10.71%. Net Earnings for the year 2005 = Loss $10.567 Billion, 2006 = Loss $1.978 Billion, 2007 = Loss $38.732 Billion, Quarters ending 3/31/08 = Loss $3.251 Billion, Quarter ending 6/30/08 = Loss $15.471 Billion. Net tangible Net Worth 6/30/08 = Negative $58.04 Billion. They are technically bankrupt. And we are going to save them!

Boys and Girls and members of the Jury, you’re on your own. This is the new era in which the stupid get bailed out, and we get the bill.

Hold on to your Capital. Keep it save. Get out of Debt. Love your Family, and hang on! This will be a long Recession, manifested by the Bozo’s that now run our lives - Washington.