Wednesday, December 30, 2009

Thought of the Day
                                                                                                                                                            Sydney M. Williams
                                                                                                                                                            December 30, 2009

Another ‘dog bites man’ story is being served up on Bloomberg this morning – “U.S. Treasuries are experiencing their worst annual loss since 1978!”

At the end of 2008, while credit conditions had notably improved, fear continued to grip markets. The Ten-Year Treasury, which at the end of 2007 was yielding 4.04%, was yielding 2.11% on December 31, 2008. Even more dramatically, 90-Day Treasury Bills fell in yield from 3.17% to 0.11%. Fed funds began 2008 with a 4.25% yield (higher than Ten-Year Treasuries!) They exited the year yielding 0.25%. In short, Treasuries benefitted from a flight to safety, as equity, corporate bonds and commodities tanked during the most frightening credit crisis I have ever experienced.

It is unsurprising, then, that as credit conditions and confidence returned, risk assets would once again gain favor. Treasuries, which had been stand-out performers in 2008, became losers in 2009.

In 1978 the United States was in the early clutches of an inflationary cycle that would only be snuffed out when Fed Chairman Paul Volcker raised Fed Funds to 20% in June 1981. President Reagan was willing to take a short but deep recession in order to kill inflation which, if left alone, would have proved calamitous.

While inflation does not appear to be a concern of many in Washington or even among strategists on Wall Street, the amount of borrowing remains dizzying. The Treasury has indicated that both Fannie Mae and Freddie Mac have unlimited support, theoretically suggesting they have an unlimited ability to incur losses – losses which would be funded by the American tax payer. Ostensibly the grant was provided to keep mortgage rates from soaring, but there is little question that the upcoming mid-term elections factored into the equation. GSEs have been, are, and will be political bodies. Also, the Wall Street Journal reports today that GMAC has asked for and will receive an additional $3.5 billion on top of the $12.5 billion they have already been provided. In times of trillion dollar deficits, a billion may not seem like much, but it is. It takes about 2000 years to consume a million days, and a billion is a thousand times bigger!

The moral hazard of encouraging big banks to get bigger, without far more onerous capital rules, risks far larger bailouts than we experienced in September 2008. It may be the easy way out for the moment, but it sets a dangerous precedent. Banks, or government entities, that are too big to fail are too big. The longer this borrowing binge persists, the more painful and difficult will be the purgation. It takes a rare politician who is willing to knowingly induce recession to prevent worse down the road.

Tuesday, December 29, 2009

A Hike on Mt. Tam

A Hike on Mt. Tam


                                                                                                                                                              Sydney M. Williams
                                                                                                                                                              November, 2003

The path slopes upward and away from the paved road at a ten to fifteen degree angle. Almost immediately the air becomes cleaner, a good thing for those of us who, as the rise becomes steeper, inhale more deeply and breathe more quickly. Within a few minutes the view from the rock-strewn path provides vistas south toward San Francisco. The sky is blue, and the sun warms the late October day.

Today’s hike began a half-mile back when the seven of us, and three dogs, gathered for lunch at Left Bank in Larkspur, which is in Marin County, California. Five – John, Lang, Lori, Jeff and Garrison – live in the area and often hike in these hills surrounding and abutting Mt. Tamalpais (more commonly known as Mt. Tam), which stands in 6300 acres of protected land and rises 2571 feet. I join the group three or four times a year. The seventh is my son whom I feel particularly fortunate to have along; as he lives with his wife and two children in London, but happens to be in San Francisco on a working vacation. Having my son with us reminds me of his first hike, in the summer of 1972, in New Hampshire’s White Mountains. That day three of us headed out early from Pinkham Notch (my younger brother, Willard, was with us). We started out enthusiastic and full of joyful expectation on a cool, drizzly August day. Seven hours later we arrived, wet and cold, at our destination, Madison Hut, looking a little like Aeneas, who carried his father, Anchises, while leading his son, little Ascanius, by the hand out of Troy. On this day, though, the fates and good planning would provide a pleasant and invigorating hike.

We follow the trail up through open meadows, which appear somewhat barren to an Easterner but are awesome in their vastness, with spectacular views of Mill Valley and the Bay area. The cool air and the warm Pacific water create banks of fog which pass, ghost-like, through the Golden Gate Bridge and into San Francisco Bay. We stop, look back, and note that we are above the fog bank, and the office towers of the City sparkle in the sunlight. We are fortunate, we say, to be alive and able to enjoy this place of such beauty. The view also encompasses the prison at San Quentin and Alcatraz Island; so serves as a sober reminder of the fragility, and the great rewards, of freedom. The trail, which ascends a shoulder on Mt. Tam, continues upward, dipping in and out of a wooded area before beginning its descent. Heading down, the steeply-angled path follows a largely-dry, stream bed. It will, I am assured, become a torrent in a couple of months when the rainy season is in full sway. Even now roots and rocks, smoothed by years of hiker’s boots and eons of rainy seasons, are slippery. Long arms and strong hands become valuable appendages as we come down the trail. The dogs show approval of the downward, and homeward, journey in running ahead, then scrambling back, all the while looking for any damp place in which to cool their haunches. ‘Zöe’, John’s Boston Terrier, is particularly happy to be coming down. At six she is the oldest of the dogs, and, with ten inch legs she is certainly the shortest. (About midway up the climb I caught her surreptiously giving John a glance that seemed to ask, “Why am I here?”). ‘Maggie’, Jeff’s puppy, is the youngest, most curious and most energetic of any of us – dogs or humans. She is, I believe, a combination of Pointer and Lab. She views us all as slow and dull. Lang’s dog, ‘Bennie’, has the heaviest coat and so is the most interested in looking for a place to cool off. His look seems to say, “Hey man, cool it. What’s your hurry?” ‘Bennie’ is the result of an unlikely meeting between a Newfoundland and Springer Spaniel.

About two hours after leaving we return by another road. A one-half mile walk takes us past cars, people and other signs of civilization - something which for a brief time we had shunted from our minds as they had been shut out from our vision. A refreshing and welcoming beer at the Lark Creek Inn puts a fitting finish to what had been a short, but highly enjoyable, afternoon. We had been a band of brothers and sister. Hiking up the trail away from houses and paved roads we had a taste of what it must have been like for the first settlers. We sensed the vastness of our Country with its richness and its beauty. With weary legs stretched before us, we felt blessed and thankful.

Freedom & Technology - Inextricably Linked

Monness, Crespi, Hardt & Co., Inc.

767 Third Avenue
New York, NY 10017
212 838 7575

                                                                                                                                                                  Sydney M. Williams
                                                                                                                                                                  November 9, 2009

Market Note
Freedom and Technology – Inextricably Linked

“A society of sheep must in time beget a government of wolves”
                                                                                                                                    Bertrand de Jouvenal (1903-1987)
                                                                                                                                    French philosopher

“When computers (people) are net worked, their power multiplies
geometrically. Not only can people share all the information
inside their machines, but they can reach out and instantly tap the power of
other machines (people), essentially making the entire network their computer.”
                                                                                                                                    Scott McNealy (1954 - )
                                                                                                                                    Former Chairman
                                                                                                                                    Sun Microsystems

The tearing down of the Berlin Wall twenty years ago today came to symbolize the victory of freedom over oppression. More countries have become democratic in the last thirty years than at any other time in history. In the past decade, the internet has enhanced the ability of people in all societies to communicate easily and freely, and has helped spread the cause of capitalism and democracy. It brings new meaning to the words of a song written in 1918 by Joe Young and Sam Lewis: “How you gonna’ keep ‘em down on the farm after they’ve seen Paree?”

So, it comes as a disappointment that a dispiriting aspect of the Obama Presidency is their instinct and inclination to avoid siding with brave, democratic dissidents in their battle against totalitarian leadership. This fact has been very visible in Iran and Honduras, in the decision not to meet with the Dalai Lama and in the absence of the President from ceremonies marking the removal of the Berlin Wall. The dissidents have, at great personal expense, challenged their authoritarian leaders and, while the excuse may be that it is none of our affair - it is an internal matter, it is argued, and dictatorships provide stability – the truth is that the world is less safe with people like President Mahmoud Ahmadinejad of Iran, Kim Jong-Il of North Korea, Hugo Chavez of Venezuela, or even Manuel Zelaya Roslaes of Honduras.

Contrast, if you will, Iraq under Prime Minister al Maliki today versus Iraq under the tyrant, Saddam Hussein. The desire to be free is inherent among all people. The world is an ever-changing place and democracies are far more flexible in adjusting to dynamic change than dictatorships. This gut instinct of people to rise up should be supported, not suppressed, and was, in fact, better understood by the previous Administration than the current one. This reminds me of a point I have made in the past – a problem with liberals is that they are not liberal; they are often intolerant of those with whom they disagree and they believe that personal responsibility should be subsumed to the State.

For the past few years, global economic growth has been driven by countries like China, Brazil and India. The financial problems which brought this growth to a halt in 2007 were not caused by them. And it was not caused by hedge funds, the scourge of the Press and the Beltway. It was caused by leverage incurred by consumers who bid up asset prices, encouraged to do so by big, regulated, banks (both commercial and investment) and nourished by Washington politicians who wanted a house at the end of every driveway.

The United States is now at a turning point. The old “West” is decaying in a miasma of socialism, aging and declining populations. Throughout history much of the United States has been tied to the West. It is the foundation of our culture and our laws. That culture and those laws have served us well for two hundred years, but Western Europe has been turning its back on the very fundamentals which brought enlightenment and made it strong and successful. The Twentieth Century, with its two world wars killing 100,000,000 people, has taken its toll. After the Second World War, the United States stood ready to defend Europe against the encroachment of a nuclear-armed Soviet Union, so Europeans put away their weapons and hid behind our skirts, while focusing on a “Nanny State” style of socialism. In recent years, Germany and then France picked leaders more capitalist than their predecessors, but not strong enough to alter the course followed for six decades. The only Western European leader who truly proved revolutionary was England’s Margaret Thatcher, now disparaged by so many; her ideas forsaken in a “politically correct” world.

It is difficult to view old Europe with much optimism; aging populations and declining birth rates suggest they are not optimistic either.

But in their place, arising like the phoenix of Greek myth, are China, Brazil, India and the newly democratized nations in Eastern Europe.

At the same time, people everywhere are becoming electronically connected. Growth, when not experienced, will be seen (virtually); competitive, aggressive, intelligent people of all nationalities want their share. Government can do two things to quell this surge: they can become more dictatorial and so suppress the internet, or, more subtlety, they can increase the dependency of their citizens on a “benevolent” government, thereby making people less willing to take risks. It is into this latter camp that “Old Europe” risks falling, and so does the United States, as socialism is substituted for capitalism.

A world that for forty-four years was divided between the West and the East, between the U. S. and the USSR, will soon be divided between capitalists and socialists, and the irony is that “old Europe”, the source of much of our heritage, looks to become the losers in this new world. And we risk following suit.

Human nature does not change; the use of force to compel one nation to submit to another will be a constant threat. Thieves will operate, as will terrorists and fear mongers. In this world, relativism has little value. It certainly does not among those who would do us harm. A belief in and a willingness to stand up for, universal moralities will be essential to achieve success. As political columnist, Charles Krauthammer has said, political correctness is a political abomination and a danger.” A “wild west” world is vulnerable to anarchy. So sheriffs are necessary, and the United States, at present, is the only one in town. But we won’t be for long and that, in and of itself, is not bad. China’s army is bigger than ours. Their navy is becoming stronger by the day. Its enormous surplus of dollars will permit them to one day match ours. Does that portend another arms race? Perhaps. Is that something to worry about? No, as long as we understand the stakes.

It has become almost universally accepted that the United States is in decline. I am not sure. We are, however, at a turning point. Issues such as universal health care, cap-and-trade, global warming dominate our Press and the thinking of liberal elites. I do not dismiss the importance of any one of those problems, but they pale in comparison to fixing the financial system and restoring economic growth.

Unlike Europe, which has made the bed in which they must sleep, options remain for us. But it will take daring and courage, and at times we may be accused of acting alone, but our system of creative, responsible capitalism must prevail. Otherwise we fail.

A student of Dr. Hans Rosling, a Swedish professor of international health, when once asked to describe the difference between developed and undeveloped nations, responded: developed nations have small families and long lives; undeveloped nations have large families and short lives. Think about that statement – small families and long lives, absent an engine for growth, lead to declining birthrates and aging populations, a recipe for ultimate decline.

We are different from “Old Europe”. Our immigrant-based population is unique in the annals of nations. They provide the “promise of America”. To ensure our future growth and maintain our pre-eminent place in the world, we must align ourselves with the developing world and with the change and hope that technology and democracy are bringing to a billion and more people. It is more important to embrace this change than be everybody’s friend. Those marchers for freedom in places like Iran and Honduras are far more likely to be our partners in a revitalized world than dictatorial leaders, intent on pillaging their people and denuding their resources in order to sate their personal desires.

We should never forget the fear and misery experienced by East Germans during the forty-four years of Soviet occupation, nor the hope provided them when on June 12, 1987, President Reagan spoke out, “Mr. Gorbachev, tear down this wall!”, nor the elation experienced when, on November 9, 1989, the wall was first breached. No more should we forget or ignore current cries for freedom emanating from Burma, Iran, or Honduras.

The internet has hastened the path toward democracy. The two are inextricably linked; we benefit from their union; we ignore them at our peril.
Monness, Crespi, Hardt & Co., Inc.

767 Third Avenue
New York, NY 10017
212 838 7575

                                                                                                                                                                Sydney M. Williams
                                                                                                                                                                December 29, 2009

Market Note
Year End 2009

“The future is an opaque mirror. Anyone who tries to look into it
sees nothing but the dim outline of an old and worried face.”
                                                                                                                                                               Jim Bishop (1907-1987)
                                                                                                                                                               New York Journal-American
                                                                                                                                                               March 14, 1959

“The future ain’t what it used to be.”
Yogi Berra (1925-)

Man has always yearned to know what lies ahead. Odysseus consulted Tiresias, the blind prophet of Thebes. Cassandra was granted the gift of prophecy by Apollo. The Biblical period had its prophets, including men like Barnabas and Hosea. Shakespeare’s Macbeth opens with the three witches and their forecast of tragedy:

“Fair is fowl and fowl is fair
Hover through the fog and filthy air.”

Charles Dickens, in a Christmas Carol, has the third spirit, the ghost of Christmas yet to come, lead him through harrowing visions of what’s in store unless he mends his ways.

Today, with soothsayers in disrepute, we have invented analysts, technicians and economists to guide us toward the unknowable future. We know only that they are human and that their vision is not much better than that of my nine-year-old granddaughter; so we view with skepticism their forecasts, as though a yellow sign accompanies each prediction, “Caution: unknown road hazards ahead!” Extrapolation of one’s most recent experience tends to be the light that guides most. Often expert opinion proves wrong. In 1927, Harry M. Warner, one of four brothers who founded Warner Brothers, was quoted as saying, “Who the hell wants to hear actors talk.”

One year ago the credit crisis had already passed its nadir and was showing flickering signs of life. The TED spread, for example, had peaked at 465 basis points in early October 2008 and ended the year at 131 basis points. The VIX, at 40, was still high, but the decline from 85 was an indicator that confidence was waxing, not waning. While credit markets were off their worst levels, the economy, already in recession for four quarters, was on its way toward its lowest point. World stock markets, commodities (excluding gold) and corporate bonds (especially High Yield) were in decline. Gold, the U.S. Dollar and U.S. Treasuries, reflecting a flight to safety, were the lone assets to show strength in 2008.

A year ago we were concluding a period in which year-over-year losses in equity valuations were the greatest in forty years, with the S&P 500 down 38.5%. Ten year returns to the same index were negative 26.5%. Despite a 24.8% gain in the S&P 500 this year, ten year returns remain a negative 23.3%. In fact, should the market be up 16% in 2010 (higher than virtually all strategists’ predictions) the ten year return to the S&P 500 will have been negative for the third year in a row – worst than any period since the 1930s. And, yet, we now have an article in the current issue of Barron’s, entitled, “A Flat Dow for Ten Years? Why it Could Happen.” Where was Gary Gorton, a liquidity expert at Yale, in 1998, or 1999, or 2000? Extrapolation is the inference of an unknown from something that is known, so it is not surprising that quantitatively schooled analysts make use of mathematical models in an attempt to understand and forecast events, events which are more often driven by psychology or behavior rather than rationality.

As I look back over the past three Year-End Market Notes, I am struck by how far we have travelled. At the end of 2006, I started my note: “Complacency has settled over the financial markets like a soft coating of December snow.” I went on: “Within this environment, the consumer blithely skips ahead, borrowing to ensure he lives as well as the next man, while ignoring rumblings from the housing sector.” By the end of 2007 things had changed. I wrote: “Today we are in the midst of rapids and the din is all about us. We do not know how far the rapids extend or what the descent will be…” While I expected a lower market, the din became much greater and the extent and descent was far worse than anything I foresaw. And a year ago, I began my note: “This has been a year whose conclusion has been eagerly awaited.” I added: “Arguing the bull case at a time like this is difficult, even though common sense tells us that it is from ashes of such destruction that fortunes are created.”

As we peer through the haze that will ultimately dissipate to disclose the year 2010, it is, as always, difficult to see. Early in the New Year, in his State of the Union Address, the President is likely to take a victory lap on health care, regardless as to whether he has signed legislation into law and no matter what the Bill entails. With an eye on the mid-term elections, he will have to get his Homeland Security Secretary to admit, yes, there are terrorists out there, and they are at war with us, even if we are not at war with them! He may not admit it, but it is becoming increasingly obvious that reaching out to regimes such as Iran, Venezuela and Cuba has failed, and that support for dissidents is a better reflection on our democratic values. In short, we will see President Obama move closer, in this regard, to the positions held by his predecessor.

The winter Olympics will provide a few days respite before the press of the November elections begin in earnest. The President’s poll numbers have declined. He emerged from the radical left and campaigned in repudiation of everything Bush. He spoke of restoring a favorable view of our Country by the rest of the world (by which he really meant Western Europe), and of reconciliation; he promised an end to partisan politics and vowed to clamp down on K Street lobbyists. Nevertheless, partisanship has intensified and the lucrative business of lobbying has never been so bountiful. The reality of actually running a large and diverse country has caused him, verbally at least, to moderate his rhetoric and to tone down expectations.

The Christmas day near-disastrous attempted bombing of Northwest flight 253 by the young Nigerian, Umar Farouk Abdulmutalllab was a reminder of the war many seem to have forgotten. The young man was trained in Yemen by former Guantanamo-held prisoners – the Country to which President Obama has seen fit to receive additional detainees. Despite having won a Nobel for Peace, the New Year is likely to see the President take a tougher stance on terrorists and rogue regimes. The Middle East will remain very much in the news, as Iran continues its not-so-stealthy march toward nuclear armaments and Yemen risks becoming the third battle ground in the war against Muslim extremists.

While I believe the economy is on track for recovery, the market has anticipated such an eventuality. The consensus suggests growth will be modest, which seems likely, but exports to consumers in emerging nations may provide surprise to the upside. Corporate earnings, given unusual productivity gains during the downturn and a reluctance to rehire quickly, should be very strong, especially for the manufacturing sector and particularly in the first half. Unless analysts are greatly underestimating earnings for the S&P 500 (a very real possibility, in my opinion), the multiple of earnings suggests stocks are selling (at 15X 2010 earnings) close to fair value – indicating neither unusual weakness nor strength in stocks over the next year. It does seem likely to me, however, that rates are likely to move higher during the course of the year, with the Federal Government having to sell about $1.4 trillion in securities. They have indicated an interest in extending maturities (a smart move, in my opinion, given current rates), which will add upward pressure to long term rates. At the same time, the free-riding banks have enjoyed over the past year – borrowing at virtually no cost and investing with no risk in longer dated Treasuries – is likely to come to an end with an increase of the Discount Rate coming earlier than generally expected and demands that assets be concentrated in corporate loans. Rising interest rates will put downward pressure on stock multiples. So, earnings may be better than estimated, but multiples may be lower. Previewing higher interest rates, over the past month, rates on Three-Month Treasury Bills have risen from ten basis points to fifty-five basis points. Rates on the Five-Year Note, in the same time, have risen from 2.03 basis points to 2.60 basis points.

With all the volatility we have experienced over the past ten to twelve years – from the irrational exuberance of the late 1990s to the outright fear of September/October 2008 – businesses have marched along. Google went public in August 2004 and has since soared eight fold. A re-vitalized Apple is up ten fold in the same period of time. Intractable and unbreakable chains to the past have claimed union-driven businesses, like the auto and auto parts companies, unable and/or unwilling to adapt to a changing and flatter world. Corruption and greed have buried companies such as Enron and WorldCom. Over time we are likely to bear witness to the vaporization of financial wizards who used shareholder’s and the public’s money to garner unfathomable bonuses without creating one iota of GDP. It is the way capitalism works.

Despite my “old and worried face,” mounted with white hair, I have no memory of the 1930s, but the situation does remind me of the 1970s. Following the absolute low reached in October-December 1974 and the subsequent 73% rally, it was generally a period of meandering markets – up one year, down the next. But it was a time when stock picking worked. Panic and volatility morphed into malaise; inflation picked up dramatically and growth was slow, giving credence to the theory that Keynesian economics was flawed. It was not until Paul Volcker, as Fed Chairman, killed inflation by raising interest rates in 1982, creating a short but severe recession but building a foundation for two decades of economic growth. George Melloan, late of the Wall Street Journal, warns of creeping socialism today and lays out the case for supply side economics in a new book, The Great Money Binge: Spending Our Way to Socialism. It is a book worth reading. However, my guess is that we are a few years away from the next Paul Volcker. In the meantime, with expectations ratcheted down, subdued volatility should provide an environment favorable to stock picking.

May the New Year bring health, happiness and prosperity!

Market Note Year-End 2009

Monness, Crespi, Hardt & Co., Inc.

767 Third Avenue
New York, NY 10017
212 838 7575

                                                                                                                                                                             Sydney M. Williams
                                                                                                                                                                             December 29, 2009

Market Note - Year End 2009

"The future is an opaque mirror.  Anyone who looks into it
sees nothing but the dim outline of an old and worried face.”
                                                                                                                            Jim Bishop (1907-1987)
                                                                                                                            New York Journal-American
                                                                                                                            March 14, 1959

“The future ain’t what it used to be.”
                                                                                                                            Yogi Berra (1925-)

Man has always yearned to know what lies ahead. Odysseus consulted Tiresias, the blind prophet of Thebes. Cassandra was granted the gift of prophecy by Apollo. The Biblical period had its prophets, including men like Barnabas and Hosea. Shakespeare’s Macbeth opens with the three witches and their forecast of tragedy:

“Fair is fowl and fowl is fair
Hover through the fog and filthy air.”

Charles Dickens, in a Christmas Carol, has the third spirit, the ghost of Christmas yet to come, lead him through harrowing visions of what’s in store unless he mends his ways.

Today, with soothsayers in disrepute, we have invented analysts, technicians and economists to guide us toward the unknowable future. We know only that they are human and that their vision is not much better than that of my nine-year-old granddaughter; so we view with skepticism their forecasts, as though a yellow sign accompanies each prediction, “Caution: unknown road hazards ahead!” Extrapolation of one’s most recent experience tends to be the light that guides most. Often expert opinion proves wrong. In 1927, Harry M. Warner, one of four brothers who founded Warner Brothers, was quoted as saying, “Who the hell wants to hear actors talk.”

One year ago the credit crisis had already passed its nadir and was showing flickering signs of life. The TED spread, for example, had peaked at 465 basis points in early October 2008 and ended the year at 131 basis points. The VIX, at 40, was still high, but the decline from 85 was an indicator that confidence was waxing, not waning. While credit markets were off their worst levels, the economy, already in recession for four quarters, was on its way toward its lowest point. World stock markets, commodities (excluding gold) and corporate bonds (especially High Yield) were in decline. Gold, the U.S. Dollar and U.S. Treasuries, reflecting a flight to safety, were the lone assets to show strength in 2008.

A year ago we were concluding a period in which year-over-year losses in equity valuations were the greatest in forty years, with the S&P 500 down 38.5%. Ten year returns to the same index were negative 26.5%. Despite a 24.8% gain in the S&P 500 this year, ten year returns remain a negative 23.3%. In fact, should the market be up 16% in 2010 (higher than virtually all strategists’ predictions) the ten year return to the S&P 500 will have been negative for the third year in a row – worst than any period since the 1930s. And, yet, we now have an article in the current issue of Barron’s, entitled, “A Flat Dow for Ten Years? Why it Could Happen.” Where was Gary Gorton, a liquidity expert at Yale, in 1998, or 1999, or 2000? Extrapolation is the inference of an unknown from something that is known, so it is not surprising that quantitatively schooled analysts make use of mathematical models in an attempt to understand and forecast events, events which are more often driven by psychology or behavior rather than rationality.

As I look back over the past three Year-End Market Notes, I am struck by how far we have travelled. At the end of 2006, I started my note: “Complacency has settled over the financial markets like a soft coating of December snow.” I went on: “Within this environment, the consumer blithely skips ahead, borrowing to ensure he lives as well as the next man, while ignoring rumblings from the housing sector.” By the end of 2007 things had changed. I wrote: “Today we are in the midst of rapids and the din is all about us. We do not know how far the rapids extend or what the descent will be…” While I expected a lower market, the din became much greater and the extent and descent was far worse than anything I foresaw. And a year ago, I began my note: “This has been a year whose conclusion has been eagerly awaited.” I added: “Arguing the bull case at a time like this is difficult, even though common sense tells us that it is from ashes of such destruction that fortunes are created.”

As we peer through the haze that will ultimately dissipate to disclose the year 2010, it is, as always, difficult to see. Early in the New Year, in his State of the Union Address, the President is likely to take a victory lap on health care, regardless as to whether he has signed legislation into law and no matter what the Bill entails. With an eye on the mid-term elections, he will have to get his Homeland Security Secretary to admit, yes, there are terrorists out there, and they are at war with us, even if we are not at war with them! He may not admit it, but it is becoming increasingly obvious that reaching out to regimes such as Iran, Venezuela and Cuba has failed, and that support for dissidents is a better reflection on our democratic values. In short, we will see President Obama move closer, in this regard, to the positions held by his predecessor.

The winter Olympics will provide a few days respite before the press of the November elections begin in earnest. The President’s poll numbers have declined. He emerged from the radical left and campaigned in repudiation of everything Bush. He spoke of restoring a favorable view of our Country by the rest of the world (by which he really meant Western Europe), and of reconciliation; he promised an end to partisan politics and vowed to clamp down on K Street lobbyists. Nevertheless, partisanship has intensified and the lucrative business of lobbying has never been so bountiful. The reality of actually running a large and diverse country has caused him, verbally at least, to moderate his rhetoric and to tone down expectations.

The Christmas day near-disastrous attempted bombing of Northwest flight 253 by the young Nigerian, Umar Farouk Abdulmutalllab was a reminder of the war many seem to have forgotten. The young man was trained in Yemen by former Guantanamo-held prisoners – the Country to which President Obama has seen fit to receive additional detainees. Despite having won a Nobel for Peace, the New Year is likely to see the President take a tougher stance on terrorists and rogue regimes. The Middle East will remain very much in the news, as Iran continues its not-so-stealthy march toward nuclear armaments and Yemen risks becoming the third battle ground in the war against Muslim extremists.

While I believe the economy is on track for recovery, the market has anticipated such an eventuality. The consensus suggests growth will be modest, which seems likely, but exports to consumers in emerging nations may provide surprise to the upside. Corporate earnings, given unusual productivity gains during the downturn and a reluctance to rehire quickly, should be very strong, especially for the manufacturing sector and particularly in the first half. Unless analysts are greatly underestimating earnings for the S&P 500 (a very real possibility, in my opinion), the multiple of earnings suggests stocks are selling (at 15X 2010 earnings) close to fair value – indicating neither unusual weakness nor strength in stocks over the next year. It does seem likely to me, however, that rates are likely to move higher during the course of the year, with the Federal Government having to sell about $1.4 trillion in securities. They have indicated an interest in extending maturities (a smart move, in my opinion, given current rates), which will add upward pressure to long term rates. At the same time, the free-riding banks have enjoyed over the past year – borrowing at virtually no cost and investing with no risk in longer dated Treasuries – is likely to come to an end with an increase of the Discount Rate coming earlier than generally expected and demands that assets be concentrated in corporate loans. Rising interest rates will put downward pressure on stock multiples. So, earnings may be better than estimated, but multiples may be lower. Previewing higher interest rates, over the past month, rates on Three-Month Treasury Bills have risen from ten basis points to fifty-five basis points. Rates on the Five-Year Note, in the same time, have risen from 2.03 basis points to 2.60 basis points.

With all the volatility we have experienced over the past ten to twelve years – from the irrational exuberance of the late 1990s to the outright fear of September/October 2008 – businesses have marched along. Google went public in August 2004 and has since soared eight fold. A re-vitalized Apple is up ten fold in the same period of time. Intractable and unbreakable chains to the past have claimed union-driven businesses, like the auto and auto parts companies, unable and/or unwilling to adapt to a changing and flatter world. Corruption and greed have buried companies such as Enron and WorldCom. Over time we are likely to bear witness to the vaporization of financial wizards who used shareholder’s and the public’s money to garner unfathomable bonuses without creating one iota of GDP. It is the way capitalism works.

Despite my “old and worried face,” mounted with white hair, I have no memory of the 1930s, but the situation does remind me of the 1970s. Following the absolute low reached in October-December 1974 and the subsequent 73% rally, it was generally a period of meandering markets – up one year, down the next. But it was a time when stock picking worked. Panic and volatility morphed into malaise; inflation picked up dramatically and growth was slow, giving credence to the theory that Keynesian economics was flawed. It was not until Paul Volcker, as Fed Chairman, killed inflation by raising interest rates in 1982, creating a short but severe recession but building a foundation for two decades of economic growth. George Melloan, late of the Wall Street Journal, warns of creeping socialism today and lays out the case for supply side economics in a new book, The Great Money Binge: Spending Our Way to Socialism. It is a book worth reading. However, my guess is that we are a few years away from the next Paul Volcker. In the meantime, with expectations ratcheted down, subdued volatility should provide an environment favorable to stock picking.

May the New Year bring health, happiness and prosperity!

Monday, December 28, 2009

Notes from Old Lyme -- An early morning row

September, 2003

The air is cool and clean. Under my feet the grass is still wet with the morning dew, as I walk the three hundred yards from my house to the dock carrying oars in one hand and my scull’s seat in the other. The best time to row is early in the morning when the water is quiet and the only people on the river are early morning fishermen and crabbers. Mist rises from the water as the cool morning air comes in contact with the water still warm from the late summer sun. The dock reaches out into the Duck River, a marsh creek that connects the Lieutenant River to the Back River. In turn these two rivers flow into the Connecticut about two miles and one mile, respectively, from Long Island Sound. As I walk toward the water the sheep look up from their breakfast grazing. I acknowledge their look. Seagulls flit about overhead. Osprey nests are now largely empty, their occupants having retreated to warmer climates. Crows call out with their high-pitched short screams of irritation. I walk over a catwalk and then over a narrow mowed field to where my scull rests upon its rack. Lifting the boat, it rests easily on my head - the 27-foot length belying its 38 pounds. At the beam the scull is 18 inches, but its outriggers provide an over all width of 6 ½ feet. I carry the scull across the second catwalk to the small dock, which being low in the water, is perfect for launching an equally low-in-the-water boat. Having placed the seat in its tracks, I gingerly grasp the oars in my right hand (freeing the left to hold onto the dock should the need arise), place my right foot in front of the seat and carefully set myself down.

Sitting backward in a narrow scull, precarious in its balance, provides an interesting and all too familiar perspective from which to view the world. (Wall Street, like most businesses, is best understood when viewed with knowledge of its history.) The past is what faces me. To see the future I must awkwardly turn my head and shoulders carefully, so as not to upset the boat. As I move away from the dock I take quarter strokes, which gradually lengthen as I move into the current of the river until I’m at a point where I’m sliding forward. My knees come up to greet my chin, at which point the blades of the oars dig into the water allowing me to pull on the oars while simultaneously pushing back with my legs. The boat spurts forward – or backward to the oarsman. I move upstream with the incoming tide, but against the current. Rowing across Duck Pond I enter a canal that connects to the Lieutenant River. The Lieutenant is noted, at 4 ½ miles, as being Connecticut’s shortest river. The headwaters are a marsh area fed by a stream called Mill Brook and made famous by Roger Tory Peterson, whose home was on the western edge of the marsh. The beauty of the environment is exceptional. The salt marshes and the creeks that drain them are filled with cattails, sedge, black grass and the ubiquitous phragmite. Muskrats, raccoons and even mink make their homes in the banks of the river. Overhead - besides seagulls and ospreys - ducks, cormorants, plovers, marsh wrens and swallows dip and dive. It is little wonder that The Nature Conservancy has declared the tidal basin of the Connecticut River one of the last Forty Great Places in the Western Hemisphere.

My focus, alas, is staying upright and powering the scull forward. But as the tempo smoothes and I begin to relax, a state of quiet ecstasy embraces me. The work is monotonous in its repetition, but the delicacy of the balance keeps one alert. It is at this point that one feels a sense of oneness of man with boat. Sliding forward I feather the blades backwards across the water until the catch is reached, at which point the blades are given a half turn and dropped into the water; I then push off with my legs while simultaneously pulling on the oars to the point of release when the blades are again raised, given a half turn and feathered back. The process is repeated. The silence of the moment is interrupted only by the calling of birds and the splash of water against the gunwales. My course takes me up the Lieutenant, under a railroad bridge, under route 156 and under route 95. I row past the village of Old Lyme with its picturesque homes, past the Florence Griswold Museum where Connecticut impressionists were painting 100 years ago until I reach a point where the river widens, before disappearing into the marsh; turning around, I row home.

An hour after leaving the dock I return back from whence I came, this time watching what had been the future recede into the past. The rising sun has warmed the air and swept away the morning mist. Walking back to the house, glad to be again facing forward, I feel a satisfaction brought about by intense exercise while communing with the natural world that surrounds me.

Wednesday, December 23, 2009

TOTD - XMAS - 2009

December 23, 2009



If 2008 was characterized as Annus Horribilis, 2009 might be considered Annus Conrectus. While we have not returned to the halcyon days of yore, the situation is greatly improved. Of course, as Rahm Emanuel pointed out, in different circumstances, a crisis is a terrible thing to waste and those investors who took advantage of the fear that spread through financial markets a year ago were very well rewarded. Even if one did not, but only stayed the course, one, still had a pretty good year, with the S&P 500 up 23.8%. However, the index is still 10.7% below where it was on the Friday before the Lehman bankruptcy, suggesting, at least to me, that markets are not extended.

The rally this year has been accompanied by a decline in volatility. The VIX ended 2008 at 40 (down from 85 in September); yesterday it closed at 19.54, the lowest it has been since the Lehman bankruptcy. In December 2008 there were ten days when the Dow Jones Industrial Averages traded up or down more than 1.5%. (Again, this was down from 17 days in October of that year, another indication that fear of a credit collapse had already moderated.) So far this month, there have been no such days. Should December continue in this manner, it will be the first such month since the first half of 2007.

None of this has any predictive possibility for 2010; nevertheless it feels better than a year ago, even if opportunities for investment are not as great today as they were a year ago.

Nest week I plan to issue my year-end Market Note. I appreciate everybody’s forbearance with my scribblings in 2009.

I have attached a photograph showing ten joyful reasons why Caroline and I are smiling, as this year comes to a close; for the nonce I wish everybody a wonderful Holiday and a healthy and happy New Year!

Tuesday, December 22, 2009

A Profusion of Thoughts

December 22, 2009


The spread between Three-month LIBOR and Three-month Treasuries, which at the height of the credit crisis in the fall of 2008 was over 400 basis points, is now a negative 17 basis points. Its historical level has been about 50 basis points. Since much corporate borrowing is based on LIBOR, the collapse in the rate may indicate a lack of demand, but is a positive for those seeking funding.

……………………………………………………………………………

The lead article in the Money & Investing section of yesterday’s Wall Street Journal presented a bar chart showing compounded returns by decade going back to 1830. The decade of the 2000s was the worst ten year period in the past 180 years (slightly worse than the 1930s), but there had never been two contiguous decades comparable to the 1980s and 1990s.

Despite an S&P 500 that is up 24% for the year and has rallied 67% from its March low; we are merely back to where we were at the end of 2004, when the market was recovering from the 2000-2003 bear market. The Index is where it was in April 1998, giving proof to the obvious fact that equities were not the asset of choice during the last decade, but the past is not necessarily prelude.
……………………………………………………………………………….
Housing has been at the center of both the credit crisis and the economic down turn. The median sales price, at $175,000, is 22% below its level of a few years ago. Last week the Wall Street Journal had an article suggesting the number of homes under construction was below the levels in 1960. While it is true that the Country, in 1960, was continuing its migration from cities to the suburbs, the population in the ensuing 50 years has increased 77%. It begs one’s imagination to expect the present low rates of construction to persist.

………………………………………………………………………………

The final revision to third quarter GDP was out this morning and it suggests growth of 2.2%, still positive, but below expectations. Preliminary fourth quarter GDP numbers will be reported in the last week of January and expectations have been rising. Today, consensus puts the estimate at 4%. Debate continues to rage as to the type of recovery – a V, W or square root – but the economy is in better shape than it was a year ago. Last December, a year after the recession began, the National Bureau of Economic Research officially placed the U.S. economy in recession. One can expect a similar delay in officially acknowledging recovery.
…………………………………………………………………………….

Sovereign debt is where risk exists today, at least in the view of the rating agencies, with their recent, well-publicized downgrade of Greece. That they were negligent in reducing ratings on all forms of securitized debt a few years ago should not cause one to ignore their decisions today, but if one views them with a degree of skepticism it is understandable. I also note a headline on Bloomberg today: “New Jersey Leads Municipal Bond Downgrades as State Aid Shrinks.” The headline is indicative of the enormous debt transfer now underway, from consumers and corporations to government. And states, unlike the federal government, fortunately do not have the ability to print money, though they can tax in a confiscatory fashion. Whatever happens, it is difficult to believe that short rates will remain close to zero.

………………………………………………………………………….

Earnings estimates for next year are modest. I wonder if analysts are perhaps overly cautious. Many large companies, facing Armageddon a year ago, cut staff and expenses dramatically. The instinct to survive superseded any plans to grow and expand, so now a small increase in revenues could produce pretty strong earnings. The market has experienced cycles like this before. The problem with extrapolation is that it tends to accentuate the trends we have been experiencing.

Wednesday, December 2, 2009

Remembering December 2

Remembering December 2


                                                                                                                                                                 Sydney M. Williams
                                                                                                                                                                 Decemember 2, 2009

“I am the Alpha and the Omega,
the beginning and the end, the first and the last.”
                                                                                                                                          Book of Revelation 22:13

“And in the end, it is not the years in your life that count.
It is the life in your years.”
                                                                                                                                          Abraham Lincoln (1809-1865)

December 2 is a date to remember. On this date in 1763 the first synagogue in what would become the United States was built – Touro Synagogue in, of all places, Newport, Rhode Island. Shabbat services are still held, on Friday’s at 6:00PM and Saturday’s at 8:45AM. On December 2, 1804, Napoleon had himself crowned Emperor of France. John Brown was hanged on this date in 1859 for leading a raid against the United States arsenal at Harper’s Ferry, in what would be a precursor of the Civil War. It was also on this date in 1942, under the stands at Stagg Field at the University of Chicago, that Enrico Fermi produced the first controlled nuclear fission chain reaction, and the atomic age was born. And on December 2, 1981 Britney Spears was born.

However, for me, my family and my siblings December 2 has had a very special meaning. The day has meant birth and it has brought death.

It was on this date that my brother Stuart was born in 1950. The seventh of nine children, Stuart was born with a condition – at the time unidentified – but now known as Prader-Willi Syndrome. Prader-Willi is a rare genetic disorder, in which seven genes on chromosome fifteen are deleted or unexpressed in the paternal chromosome. The disorder affects approximately one in every eighteen thousand births. It was first described in 1956 by Andrea Prader and Heinrich Willi and a team of researchers in Switzerland. The syndrome is accompanied with an insatiable appetite and manifests itself in obesity, small stature, delayed puberty, small hands and feet and some learning disorders. There is no known cure.

Stuart has handled the cards he was dealt, with a remarkable resilience, good humor and an independence unexpected in one so afflicted. He now lives in Texas about a hundred miles west of Dallas, reads more than most people I know and pursues a career as an artist, following in the steps of our parents.

December 2 was also the date on which three people very close to me died – my father, my mother and sister. My father died in 1968, at 58, after a ten month bout with lung cancer that had metastasized to his brain. My mother died at 79 during the night of December 2-3 twenty-two year later in 1990. Stuart, who was the only one home at the time, is certain she died on the 2nd. So, if that date is good enough for Stuart, it is good enough for me. My sister Mary died, like my father at age 58, on the same date in 1997, after a five year battle with breast cancer that had metastasized to bone cancer.

So, to me and my family, the day is exceptional – a day for remembrance. It marks the Alpha and Omega of life. After my father’s death, on Stuart’s 18th birthday, my mother, in comforting Stuart who felt terribly about the timing (and my mother little realizing the importance the date would play in her life), stressed the special meaning the date would always hold.

Stuart’s birth gave life to a wonderful, creative man whose art now hangs in museums and who, in the manner in which he has handled his disabilities, has inspired all who know him. The deaths of my parents and my sister, all of whom died too early but all of whom took Lincoln’s words as their maxim, serve as a reminder of the sweetness of life and the importance of living well each day. The three live on in memory.

Nevertheless, despite the singularity of the day and no matter how much I honor it, and, while not really superstitious, I always awake with a sigh of relief on December 3rd.