Monday, March 29, 2010

'Geely Holdings' Purchase of Volvo - Another Big F@&#% Deal"

Sydney M. Williams
Thought of the Day
“Geely Holdings’ Purchase of Volvo – Another Big F@&#% Deal”
March 29, 2010

The sale of a Swedish company, owned by an American company, to a Chinese company says a lot about the world in which we live. Zhejiang Geely Holding Company is buying Volvo Cars for $1.8 billion.

First, the transaction makes clear we live in global world and is indicative of the increasing wealth in the rising East. (Three years ago Ford sold three British auto companies – Aston Martin, Jaguar and Range Rover – to Tata Motors of India.) Second, the price, at $1.8 billion was 72% below what Ford paid eleven years ago in a bidding war with Fiat and Volkswagen.

Of course, the world is a different place than it was in 1999 – just as it will be different in 2021. In 1999, about 17 million cars were sold in the United States and less than 5 million cars in China. Last year, for the first time, China’s market proved larger than the U.S. – 10.2 million cars versus. 13.6 million in China. According to this morning’s New York Times, the average car in China sells for $17,000 versus just under $30,000 in the U.S., so on a dollar value basis the U.S. remains the largest market, but the trend is obvious. Geely’s plans are ambitious. Last year 20,000 Volvos were sold in China. Geely Chairman Li Shufu said he plans to build a plant in China capable of producing 300,000 vehicles.

Earlier in March, an article in the Wall Street Journal by Kris Maher and Bob Tita spoke of the trend toward “onshoring” – the relocation back to the United States of manufacturing facilities. The article focused on Caterpillar, but mentioned that both General Electric and U.S. Block Windows, Inc. were moving some facilities back to the U.S. Disadvantages of manufacturing offshore, according top the authors, include shipping costs, logistics, quality issues, political unrest and fear of theft of intellectual property. The relocation of manufacturing facilities is a process in constant motion. But, as Scott Paul, executive director of a lobbying group Alliance for American Manufacturing, says of the trend, “I would call it a trickle.”

In my opinion, the message from this announcement is two-fold: China and other emerging nations cannot be ignored and, over time, will continue to expand and second – and perhaps more relevant – the price indicates that values, in general, are far more attractive than they were a few years ago. What is true for the value of businesses is also true for stocks. This is an important deal, and it won’t be the last.


I will be in Florida for the balance of the week with son Edward, his wife Melissa and their three little blondes.

Friday, March 26, 2010

"The 'Great' Recession - Was it?"

Sydney M. Williams

Thought of the Day
“The ‘Great’ Recession – Was It?”
March 26, 2010

How many times have I heard it expressed: “This is the worst recession since the Great Depression!” Today we get the fourth quarter final revision to GDP numbers. The first revision was revised up to 5.9%. (The final number was 5.6%.)

There are many ways to measure the severity of a recession, but two of the most common ways are the level of unemployment and months of declining GDP. By those two measurements the current period does not look as bad as the dismal nine years between November 1973 and November 1982 when almost a third of those ten years were spent in recession – thirty eight of the one hundred and twenty months. Unemployment peaked at 10.8% in December 1982, and remained above 10% for ten months – September 1982-May 1983. In contrast, the current (or past) recession extended 18 months, and unemployment peaked at 10.2% in October 2009.

Why the insistence in making the current period to be worse than the 1970s? The answer, in my opinion, is simple. In talking up (or down) the severity of the current period, the Administration lays the foundation for making fundamental changes in our economy – more power to the State and less to the people. It goes right back to Rahm Emanuel’s comment, “A crisis is a terrible thing to waste.”

There is little doubt in my mind that September-October 2008 held the potential – very real and very scary – to render the credit crisis into a global depression that would have made the 1970s look like a picnic. But it didn’t happen. We can debate the reasons. We can credit some people and discredit others, but the important thing is that it did not happen. In fact, by the time President Obama took the oath of office, the TED spread had improved by over 350 basis points, indicating the worst of the credit crisis was behind us. The stock market was still in decline, but the corporate bond market had been rallying for two months.

I would also say that is too early to smugly agree that credit and financial markets are back to normal. They are not. Small business still has difficulty getting credit and unemployment remains too high. Sovereign deficits in Dubai, Greece, Portugal and others are far too high and corrective measures have yet to be taken. Solutions to the deficits at prodigal states such as California, New York and New Jersey promise to be painful when implemented. The economy could well roll over and match or exceed the experience of those ten years between the end of 1973 and the end of 1982. But, at this point, the current recession has not matched that of 37 years ago. To claim that it is, is hyperbolic, misleading, self-serving and damaging to confidence.

As a debater in high school, I always preferred the “con” side of whatever the resolved topic might be. Arguing from a negative perspective sounds more intelligent, less emotional and more analytical. However, it is somewhat analogous to carving a roast. Slicing the meat does not require the surgical skills necessary to sew it back up.

In our partisan world, politicians similarly seem to enjoy running against something – a promise, a person or a health care bill. But great politicians, such as FDR and Reagan, always exuded optimism, speaking enthusiastically about the future. As the mid-term elections approach, talk of the “Great” recession by Democrats will be replaced by speaking of the recovery. By the end of the third quarter, GDP should have been advancing for five quarters. Unemployment will be drifting lower. A recovering economy will be the most powerful arrow in the Democrat’s quiver, and should not be underestimated by Republicans.

What should work in favor of Republicans is that the line delineating the two Parties is very well defined. Democrats, with their emphasis on entitlements and a move toward, if not Socialism, centralized power in Washington, are vulnerable to a clearly articulated vision that such centralization emasculates the individual. The health care bill symbolizes the difference. As Phil Gramm points out in today’s Wall Street Journal, the discussion is really one of containing costs. The government can do it by some form of rationing, the Democrats preferred route. Republicans would do it by empowering the individual. There are fundamental differences between the two Parties, so the people have a real choice. But, if Republicans run on the sole issue of repeal, it will be a road to defeat.

Thursday, March 25, 2010

"Google versus China - It's no Contest"

Sydney M. Williams

Thought of the Day
“Google versus China – It’s no Contest”
March 25, 2010

China is experiencing the jeopardy that comes from bringing financial success to individuals living in an authoritarian state. Financial success brings economic freedom and economic freedom ultimately demands political freedom. The well publicized conflict with Google is a manifestation of that struggle.

China’s ascendancy has been real and dramatic, but gradual and controlled. As different as their culture is from ours, their economic success is proof their system works for them. Three hundred million people have moved from abject poverty to the middle class. As a friend and investor in Asia pointed out, contrast the financial success of China with that of Russia who tried to go from zero to sixty in three seconds, enriching a handful of oligarchs, but impoverishing millions. Or compare the success of capitalism in China, at this point, with that of Asia’s largest Democracy, India, whose economic pace has been notably slower than China’s. We may not approve of the way their government exercises totalitarian control – certainly I do not – but their citizenry has benefitted.

BBC’s Damian Grammaticus, reporting from Beijing, suggested that Google’s move to shut down its mainland Chinese search service is “a major blow to China’s international image.” Gartner, Inc. analyst, Whit Andrews, said “any financial pain Google suffers will be worth the respect the company wins for refusing to bow to a government’s demand.” On the other hand, BGC financial analyst said that what Google did was “a direct slap in the face to the government.” In my opinion, Google gambled and lost. Google made a mercantile decision – to garner market share by forcing China to open their doors. Now, in defeat, Google is attempting to convert a business loss into a moral gain. Just as we expect companies operating within the U.S. to abide by our laws, companies operating in China should expect to act in accordance with their laws.

The purpose of companies is to serve their shareholders, employees and customers. There may be times when making a political statement does serve their constituencies, but I am not sure this is the time. According to the BBC, the Chinese internet market is growing by 40% a year. There are an estimated 350 million people on line in China, a country in which Google garners about 3% of their revenues. A Susquehanna Financial Group analyst, Marianne Wolk, expects the internet ad market to grow from $3 billion in 2009 to $20 billion in 2014 – a better than six fold increase in five years. Did Google management best serve their shareholders by taking a political gamble that violated the laws of the country in which they were operating and pass up on perhaps as much as a ten fold increase in revenues?

Like most Americans, I appreciate and revel in the freedoms which are ours. Within the confines of laws and acceptable social behavior, the freedom of individuals in America to think, write and act as they please is one of our great strengths. And, like most Americans, I would likely sense and dislike any restrictions on movement or thought that living in China might entail. But ours is a Country that has practiced Democracy for more than 200 years. China has been a Communist dictatorship that is morphing into a capitalist powerhouse. Mark Leonard, the Executive Director of the European Council on Foreign Relations, and who was a visiting scholar at the Chinese Academy of Social Sciences, has written a book, What Does China Think? He is not an economist, but a student of culture. He concludes his book: “Beijing’s ascent has already changed the balance of economic and political power and it is now changing the world’s ideas about politics, economics and order. Those who argued that the People’s Republic would become more Western with its growing wealth have been proven wrong. For the first time since the end of the Cold War, Europe and America face a formidable alternative: the Chinese model.”

China continues to be a work in progress, but thus far a successful one. The road will incur bumps, but the trajectory is up and incomes will continue to expand. Financial freedom breeds freedom of ideas, and ideas breed openness to differing opinions, and ultimately to the concept of individual rights. The ideas that created the United States two and a quarter centuries ago may have been largely based on English customs and laws, but they reached back to a polyglot origin – Romans, Greeks and Hebrews. The culture in China may well change, but in the meantime the people are being served better than they were three decades ago.

Here in the U.S., there has been a ratcheting up in China bashing. Our government has deemed their currency should be revalued higher. Is it possible that the Google flap has the implicit backing of the Administration? China is a rising giant in the East and threatens our hegemony in the Pacific region. Foreign policy of the U.S. has, since the collapse of the Soviet Union, been one of maintaining regional balances, thereby thwarting the rise of any one power. China’s economic and military growth and its cultural influence are threatening that stability. But these forces, in my opinion, are inexorable and inevitable. As a nation, we must come to terms with that fact and learn to live with the concept that, within a generation, we will be dealing with an equal partner.

Wednesday, March 24, 2010

"The Enemy in Sight is not the One to Fear"

Sydney M. Williams

Thought of the Day
“The Enemy in Sight is not the One to Fear”
March 24, 2010

Without a 10% decline, the market has rallied 76.1% since the lows reached on March 9, 2009. While this may not be unique in the annals of stock market history, it is unusual. Nevertheless, the S&P 500 remains 6.2% below where it was on September 12, 2008, the Friday before the Lehman bankruptcy. The market peaked in October 2007 and had already declined 20.6%. And, even that fact doesn’t accurately set the table. The October 2007 high, at 1576.09 was only 1.5% above the high reached seven and a half years earlier, in March 2000 at 1553.11.

There is little question that the market in March of 2000 was reflecting a giddy and unrealistic sense that good times would roll ad infinitum. But I would argue that in March a year ago, the market was making the opposite case – that the credit crisis would end capitalism as we know it. That risk, in my opinion, did exist in the immediate hours and days following the Lehman collapse, but by year-end, with the TED spread having already narrowed by 200 basis points, the possibility of an imminent collapse seemed increasingly remote. Nevertheless, as spreads began to narrow, stocks continued to decline.

Last year both stocks and bonds rallied (the exception being Treasuries), but money poured into bond funds and continued to exit stock funds. The rally in stocks has been notable, but pales when compared to what happened in High Yield. The Bloomberg-FINRA Index, in November 2008, had High Yield bonds yielding in excess of 25%. Today the yield is 8.76%. At the end of 2008, the spread between High Yield and Investment Grade Corporates was 1108 basis points. Today that spread is 395 basis points.

Not surprisingly, with yields close to zero, money market funds have declined from $3.6 trillion a year ago to $3.0 trillion today, but flows have gone primarily into bond funds, despite the fact that equity assets are roughly twice the size of corporate bonds – $12 trillion versus $6 trillion.

The Two-Year, Ten-Year spread has narrowed modestly – by about 11 basis points – since year end, but the curve remains pretty steep. In terms of commodities, natural gas has been under a lot of pressure, down 25% this year. Soft commodities, like wheat, soybeans and corn have also moved lower this year, while oil and gold are very close to year end levels.

Volume, which peaked during the height of the crisis, continues to moderate, though the rate of decline seems to have leveled off. Volatility has noticeably declined. The VIX, which spiked in late January, is 20% below where it was at year end and is back to the levels of three years ago. Daily volatility continues to be modest. But, in my opinion, unlike three years ago, complacency is not present.

All in all, it seems to me that, while the values that were available a year ago when fear dominated, greed is not yet widely apparent. Certainly there are macro problems, both real and perceived – Greece, Iran, Portugal, a possible trade confrontation with China, excessive sovereign debt and deficits, a possible double dip in the economy, rising taxes, inflation, deflation – but there are always macro concerns. They just tend to be ignored when complacency rules and come to the forefront during periods of apprehension. As long as these problems remain within our gun sights, they are less likely to surprise.

While I don’t find myself exceptionally bullish, it is equally hard to be very bearish. Valuations don’t appear egregious with the S&P 500 selling a little over 13X consensus estimates. However, unlike the period between 1982 and 2000, it is my guess that it is more likely interest rates will gradually rise putting some pressure on multiples. But for those who have qualms about our place in the world over the next generation or so, I recommend a book reviewed in today’s Wall Street Journal, The Next Hundred Million by Joel Kotkin. Mr. Kotkin may prove too optimistic, but at a time when the world is focused on opportunities in the East, it is eye-opening to read a book which paints a rosy future for the United States.

Tuesday, March 23, 2010

Obama Meets Netanyahu - Ther is More at Stake than Settlements in East Jerusalem

Sydney M. Williams

Thought of the Day
“Obama meets Netanyahu – There is More at Stake than Settlements in East Jerusalem”
March 23, 2010

Despite his appeal to the Muslim world, exemplified in his speech at Cairo University last June 4, and his coveting of the United Nations, President Obama has been rebuffed by the Iranian government and stonewalled by the U.N. Iran persists in being the single most dangerous country in the most dangerous part of the world. Alan Dershowitz has termed Iran the “world’s first suicide nation – a nation whose leaders have not only expressed but, during the Iran-Iraq war, demonstrated a willingness to sacrifice millions of their own people to an apocalyptic mission of destruction.”

There are, at present, nine nuclear powers. Five have either signed or ratified the Nuclear Non Proliferation Treaty – United States, Russia, U.K., France and China. Three countries are declared nuclear powers, but have not signed the NPT – India, Pakistan and North Korea. The ninth, Israel, is an undeclared nuclear power. The entrance of Iran, a possibility that appears increasingly likely, could well lead to an arms race among other Middle East countries.

Indicative that tensions are mounting, Lloyds of London has raised insurance rates on ships leaving and entering Iran. Yesterday, in preparation for President Obama’s meeting with Israeli Prime Minister, Benjamin Netanyahu, Secretary of State Hillary Clinton called Iran a “menace to the region and to their own people.” She also called for UN sanctions that would “bite.” Nine months ago, she spoke of “crippling” sanctions. So far the U.N. is yet to act. In part, their failure to act is because of the inability to get the Chinese on board. Despite Iran’s vast oil sources – its production, at 4.2 million barrels a day, is second only to Saudi Arabia – the country must import gasoline. China gets oil from Iran and, in turn, sells them gasoline.

The Iranian government seems to have recalled, and benefitted from, the childhood saying: “Sticks and stones may break my bones, but words will never harm me.”

The Middle East has always had tensions and, as George Friedman writes in a piece out this morning: “The United States seeks to maintain regional balances of power in order to avoid the emergence of larger powers that can threaten U.S. interests.” He goes on: “The American goal in each balance is not so much stability as it is the mutual neutralization of local powers by other local powers.” A nuclear Iran risks that balance.

The threat of a nuclear Iran grows greater every day. The flap caused by the Israeli government when they announced further settlements in East Jerusalem while Vice President Biden was in the country – certainly non-PC – and made worse by the overreaction on the part of the Administration, should be set straight with the closed-door meeting today between Mr. Obama and Mr. Netanyahu. The consequences of a further rift are too significant.

Israel’s concern regarding Iran and the bomb are justified. Alan Dershowitz writes in today’s Wall Street Journal, that Hashemi Rafsanjani, “a former president of Iran, boasted in 2004 that an Iranian attack would kill as many as five million Jews.” With a population of seven and a half million, that suggests total annihilation. It is little wonder that the Israelis view a nuclear armed Iran as a menacing threat.

The situation places the President in an unenviable position. Dershowitz claims the situation is analogous to the decision by the victors of World War I, in the early 1930s, to permit Germany to rearm. Should Iran get the bomb on his watch, President Obama’s legacy would be badly damaged, despite the fact that the program began years before he took office. The Bush administration knew full well that Iran was working on nuclear weapons and yet took no action.

The fatalist in me senses that it may not be possible to reverse the course Iran is on. In terms of sanctions, the United States has decided to defer to the U.N., an increasingly toothless organization, and Israel cannot respond without, at least covert, approval from the U.S. The balance of power will change. If Mr. Dershowitz is correct in his assessment, tensions will elevate and would “inevitably unleash the laws of unintended consequences.” Containment would have to become policy.

Monday, March 22, 2010

Sixty-five Years on Skis

March 22, 2010

Note from Old Lyme                                                                             Sydney M. Williams

Sixty-five Years on Skis
“Skiing is a dance and the mountain always leads.”
Author unknown

In my barn in Old lyme hang a pair of Stein Eriksens’, skis that were given to me when I turned fifteen in 1956. At the time, they were state-of-the-art with a black and white laminated top and multi-grooved base. At 214 centimeters, they are roughly a third longer than the skis I use today. The toe binding had a clasp that when pushed forward levered your boot back; the heels were held down by a six foot leather strap (called a long thong) anchored to the base of the ski that wrapped around your boot to hold it firmly in place. The bindings, for obvious reasons, were called ‘bear traps’. The skis cost my parents $85; with the DJIA roughly 20 times higher than it was that January, the comparable price today would be about $1700.

My first skis appeared on Christmas 1944. With my father headed to Italy with the 10th Mountain Division, my mother, who was not a skier, decided the gift was appropriate. She had moved back from New Hampshire to her parents’ home in East River, Connecticut; fortunately there was enough snow on the ground that I was able to walk around; so began a lifetime love affair with the sport.

After the War and back in Peterborough, New Hampshire my father took my sister, brother and me to Whit’s Tow. It was located just north of the village on the road on which we lived – Middle Hancock Road. Mr. Whitcomb had established a rope tow that skiers gripped and which then carried them four or five hundred feet to a point on the edge of the Peterborough Golf Club. The rope ascended what seemed a steep pitch and then flattened as it neared the top. The rope became very heavy as it went over the crest and was ideal for snapping off girls (or our teachers) who might be riding behind. The idea was, once over the crest, to swing out to the left several feet and let the rope go. It snaked back sinuously making it almost impossible, for those hanging on behind, to remain upright. By the time the victims had picked themselves up, we were back at the bottom of the hill, our faces angelic, as we gripped the rope for the next trip.

One of my earliest memories of skiing at Whit’s was in the winter of 1946 or ’47. A smaller, children’s tow carried skiers about fifty feet up a small slope. That rope tow was powered by a Model A Ford engine housed in a shed located at the bottom of the hill. I ran into the shed, broke off the tip of my ski and, in tears, went to find my father. I found him, and shortly thereafter the shed housing the engine was moved to the top of the rope tow.

While skiers today would thumb their nose at Whit’s, the hill offered an opportunity to learn to ski.


Nick Paumgarten, in a piece entitled “The Ski Gods” (The New Yorker, March 15, 2010) writes that archeological finds in Norway indicate that skiing goes back thousands of years: “Skis predate the wheel; we ripped before we rolled,” he wrote. In America, skiing was introduced early in the Twentieth Century. One of the early promoters was the Dartmouth Outing Club, founded in 1909. During the next ten years, Dartmouth men skied forty miles to Mt Moosilauke, a 4802 foot peak, where the college owns 4600 acres (about a third of the mountain above 2000 feet.) They climbed Mt. Washington and, with Carl Shumway as the President of the D.O.C., were the first on skis into Tuckerman’s Ravine on March 9, 1913. The 1920s saw more skiers take up the sport, including Al Sise of Wellesley, MA (formerly of Vermont), whose daughter, Nancy, I once raced. Al Sise had the longest racing career on record, from 1928-1981. A “Snow Train” would leave Boston’s North Station, taking skiers to North Conway, NH. In the very early 1930s, my father, then in college, could take an early morning train, ski on Mt. Washington, and return the same day, or the next, in time for a hearty dinner at Durgin Park. The number of skiers expanded during the 1930s, but given the depressed economy it remained a “rich man’s” sport. Those two decades, between the end of World War I and the start of World War II, saw a number of Europeans, like Austrians Hannes Schneider and Toni Matt, escape the Nazis and come to this Country.


The “big” hill near Peterborough was Temple Mountain, near the town line with Temple. This area had perhaps twice the vertical drop as Whit’s and was owned and operated by Charlie Beebe, a classmate of my father’s from Harvard. It was there, on New Year’s Eve 1961, that my sister, Mary, introduced me to Caroline, the girl who would become my wife.

It was also at Temple that I first used my Stein Eriksen’s. Eriksen was born in Norway in 1927 and won a gold medal in giant slalom at the 1952 Olympics, becoming the first skier not from the Alps to win gold in the Olympics. Following the Olympics he moved to the United States and is director of skiing at the Deer Valley Resort and host of the Stein Eriksen Lodge. At the age of 83, he continues to ski.

The heavy, black skis with their distinctive four white grooves on top – two in front and two behind – were fast and the envy of my friends. My first races were on those skis and then, in 1958, on a pair of Kästles. Anton Kästle made his first pair of skis in 1924 in Austria; by the mid 1950s they became the favored ski of those on the World Tour and, in fact, every member of the 1956 U.S. Olympic ski team used Kästles.

My Kästles Kombinations, with their marker bindings, also hang in my barn, the now-frayed leather long thongs still attached. These were the skis I used in the mid 1950s during a down hill race on Mount Sunapee’s Flying Goose. Sunapee is a state-owned property about 40 miles north of Peterborough and the race was one in a series for those competing in the Eastern Juniors. The area was served by a single chairlift; however, as racers we had to walk up the course, carrying our skis so as to better learn its turns and its contours. It was during this hike up that I realized my racing career would be short; for discretion, in the face of fear, is a motto to which I adhere. In those days a downhill race consisted of a starting point and a finish gate. There were no control gates. The fastest skier down the hill won. As we walked up the Flying Goose, I noted some of the boys marking trees, so they could cut corners by skiing through the woods. I thought they were crazy and I have no memory as to who won the race, other than it sure wasn’t me.


It was also about this time that my father took my brother Frank and me to Tuckerman’s Ravine on Mt. Washington, a place my father first skied in the late 1920s. The Lodge at Pinkham Notch, which is still there, now designated the Joe Dodge Lodge – somewhat enlarged, but looking pretty much the same – is where we stayed. At that time, Joe Dodge was the proprietor. His son, Brooks, skied for Dartmouth and in the 1956 Olympics. The base of the Ravine is about two and a half miles up from Pinkham Notch. We put seal skins on the bottoms of our skis; the fur reversed allowing one to glide forward, but preventing the skis from sliding back. Releasing the cable bindings in those days allowed one to lift one’s heel making the ascension easier. The climb up took a couple of hours.

My first view of Tuckerman’s was breathtaking. It is difficult to imagine its enormity. It resembles a third of a tea cup. One climbs over the “little headwall” and into the bowl, with no trees and a couple of large rocks, one of which, on the right, was known as the “lunch rock”. Facing the Ravine, on the right is Lion’s Head Trail; on the left is Boot Spur. It is about a mile from one side to the other. The snow reaches depths of about one hundred feet.

The air was crisp and cool, the sky blue. Distant skiers appeared as black specks against the snow-white background. The slope begins gradually before steepening sharply as it terminates at the “lip”. Walking up, carrying your skis, stretching out your arm you touch the slope before you. While I never skied over the lip of the Headwall (I climbed to a point just under it), I could see the two rocks you had to avoid when skiing off the top. One of America’s most famous early races was called the Inferno; it went from the top of Mt. Washington to the Pinkham Notch Lodge, a distance of eight miles. And the most famous of the Inferno races occurred in 1939 when Tony Matt, an Austrian skier who in poor visibility schussed the Headwall. His time was just over six and a half minutes, eclipsing the skier who placed second by six minutes. It has been estimated that he must have hit speeds of 85 miles per hour, as he came over the Headwall and down the Ravine – an unbelievable feat in those days and on that equipment.

We had time for three runs on the Headwall, eating a packed lunch on “lunch rock” before heading back down. The next day, across Pinkham Notch, we climbed Wild Cat Trail, which had been cut out by the CCC in 1933. Another classmate of my father, Bob Livermore, who in 1931 had been the first to ski over the Lip of Tuckerman’s ravine, won the first race down its slope in 1934. Twenty-eight years later, on March 12 1962, my wife broke her leg on the mountain, as she and I headed down on our first (and last) run of the day – her last time on downhill skis.


Despite my mediocre performance racing in the Eastern Junior races, I joined the ski team at Williston Academy in 1956, becoming its captain in my second year. The school had a ski area on the west slope of Mt. Tom serviced by a rope tow. We had to participate in all four disciplines – downhill, slalom, cross country and jumping. I liked downhill and slalom. Cross country was too much like work. Jumping, however, was totally new to me. The skis were longer, wider and heavier than regular skis, with four or five grooves on the bottom side for stabilization. The school had a small, perhaps twenty meter, jump, reached by climbing a steep pitch, down which you slid, then over a man-made lip, landing on a second steep slope. My first time down I attempted to jump, sprang forward at the edge of the jump, somersaulted and landed on the back of my neck. I slid down the hill in frustration and chagrin, but unhurt. The next time I just coasted off the jump. Fortunately, during my three years at the school, we never had to jump in competition.

Most of our meets were held at similar, skier-challenged and snow-deprived schools. I remember one multi-school meet on Mt. Greylock in Williamstown, MA. It was snowing and visibility was poor. I was slotted to be the first racer down. One of the fore-runners had a bad accident in the descent and the race was called. Fortunately the young man was not seriously hurt; relieved, I skied to the bottom.


During those same years – mid to late 1950s – my father began taking us further afield – day trips to Sunapee, Hogback and Mt. Snow and overnight ones to Stowe, Mad River Glen and Cannon. Hogback, which opened in 1946, was unusual in that the car park was midway up the slope, so you skied down to buy your ticket and at the end of the day you took the T-Bar up and skied back to the car. On warm spring days, when sap from maple trees flowed, maple taffy served on a bed of snow was available to those waiting in line. Mt. Snow was a more recent ski resort. Walter Schoenknecht, a tall, slope-shouldered man, came to Vermont about 1955 from Mohawk Mountain in Connecticut. When we first went there Mr. Schoenknecht was always around, asking how everybody was; he knew us by name. Since my father usually had four to six children in tow, we were a memorable and recognizable sight.

Stowe was exciting and glamorous with people arriving from all over the east coast. A single chair served Mt. Mansfield; so on very nice days, during holiday weekends, the wait in line could take up to an hour. But the length and steepness of the trails justified the wait. At the top was the Octagon serving overpriced $0.50 hamburgers. The Nose Dive, with its seven turns, was the oldest, trickiest and best known trail. It started slightly above the top of the lift and was narrow and steep. On icy days it was treacherous. I remember once, on a very icy day, watching, wonderstruck, as Christian Pravda, a dual medalist in the 1952 Olympics, swooped down like a giant bird. The other trail at Stowe that I remember well was the National, steep and wide. Once on the National, with visibility so poor that you could only see a few feet up or down the slope, out of the fog a skier appeared – and then disappeared like a phantom. It was Marvin Moriarty, a member of the 1956 U.S. Olympic team. On another trip, again on the National, my father discovered the hard way he needed new boots. He had skied for years in boots and on skis recovered from German alpine troops after the war. For years, as children, we had been growing increasingly embarrassed by his brown leather ski boots. So when he fell, his boot peeling from the sole, we cheered.

Mad River is (and was) a skier’s mountain (“ski it, if you can” is still their motto), a place with no frills. We usually stayed at a place called Tucker Hill Lodge, built, owned and run by another classmate of my father, Franny Martin. (As I write, it seems as if the Harvard class of 1932 was all over the Northeast at the time!) In those days, Mad River conducted an annual family ski race. The winning family was based on times, but more importantly on the number of combinations. With the exception of mother combinations, we had them all – father-son, father-daughter, sister-sister, brother-brother, and sister-brother. A Vermont family, whose name I have forgotten, had more combinations and for years were winners of the race. I remember the great satisfaction when we finally won and then kept the prize for the next year or so.

We went to Cannon Mountain a few times, staying in Franconia with the Hannah’s. A second cousin of my father, Pauline White, had married one of skiing’s legends, Seldon Hannah. Seldon Hannah, who skied for Dartmouth in the early 1930s, had been named to the 1940 Olympic team, the games which were cancelled because of the war. Pauline was also a very accomplished skier and an Olympic prospect, but contracted polio around 1940 and was confined to a wheel chair for the rest of her long life. Polly’s Folly, one of the two steepest trails at Cannon, was named in her honor. Their daughter, Joan, skied in the 1960 Olympics at Squaw Valley and in the 1964 Olympics at Innsbruck.


By the mid 1960s, while I continued to ski every year, I did so less frequently. Marriage to a non-skier, children, and a tough stock market consumed the rest of the 1960s and much of the 1970s. Every year I would ski somewhere, generally in New Hampshire with family, once or twice out west. It wasn’t until the later 1980s and early 1990s that I started skiing more regularly; the past several years I have skied between fifteen and twenty days, half the time out west. A change in equipment and skiing in the west have added new dimensions. New skis are shorter and more user-friendly, clothing is warmer, the bindings are easier to put on and safer, as are helmets, and the slopes in the west have more powder and the bowls, on sunny days, are Nirvana.

For the past several years I have taken, annually, a couple of trips to Vail with friends, both old and new. These trips mean a lot, not only because of the skiing, but also because of the camaraderie. Ten or eleven months go by between visits, yet conversation restarts remind me of the opening line from Oliver Wendell Holmes, The Autocrat at the Breakfast Table, “I was going to say, when I was interrupted…” We ski hard; we laugh hard and we wine and dine with great gusto.

Twenty or so years ago, one of my siblings came up with the idea of a family ski day, at Sunapee, the first major ski area we were taken to as children. It has become a wonderful tradition, for a family, not widely scattered from a geographical perspective, but ones whose lives have taken different paths. We gather as the children of our father, talking of days which each year are more distant, of a time when our responsibilities were none, other than how many runs we could make, and of a time when the skiing community was much smaller and more intimate. Our skiing reunions have, themselves, now provided great memories. None of us who were there will ever forget the moment in 1996 when my older sister, Mary, who five years earlier had been diagnosed with breast cancer which then metastasized to her bones, skiing down Hanson Chase caught air as she crossed a cat walk. Those of us who saw her were concerned that her bones, grown fragile with cancer, would break if she fell. However, she landed on her feet, skied to the bottom and with the exhilaration of an excited child, turned breathlessly toward us, “Did you see me take air?!”

In the past three years, my grandchildren have begun learning to ski. I watch with swelling pride, in their developing improvement, as they ski down slopes with élan and determination. They are a marvel to witness.


A feature of skiing, perhaps unique in the sporting world, is that it is something one can do alone (although wiser with a friend) and one can do for many years. This has been my last winter skiing as a sextogenarian; next January I turn 70; so age is something I do think about. My skiing days will end when they end, but the memories I have accumulated will always be with me: hot chocolate and a doughnut in the warming hut at Whit’s; a warm, spring day at Temple, skiing in shirt sleeves. Whenever I ski down the Lynx at Sunapee, in my mind’s eye I watch my father in his inimitable style, skiing while standing erect; I recall gate keeping at a veteran’s race at Waterville Valley and his coming down the course, smoke curling from a pipe clenched in his teeth; entering the old lodge at the base of Sunapee, I see him speaking to other men who wear the insignia of the 10th Mountain. I see some of the giants, skiing pioneers like Joe Dodge, Seldon Hannah, Bob Livermore and Al Sise, all of whom I met.

I think of the heaviness of rope tows on warm wet days and the chill when riding a single chair on a very cold day with a heavy blanket draped across my lap. I recall my early teens and the evening chore of replacing steel edges after a long day’s skiing, and the wise-cracking on the bus ride back to Williston after a practice on Mt. Tom, with our coach, David Stevens. I remember gliding on my cross country skis across the Back River in front of my house and over the marsh on a cold February day, and dropping into Genghis Kahn at Vail and skiing down the Slot, also at Vail, with powder up to my chest.

Seal skins, bamboo poles with baskets ten inches across, skijoring behind a horse on Middle Hancock Road, holding a rope as a “cat” pulled us up Pack Monadnock are all memories I cherish. Those memories stretch back to that Christmas of 1944, in East River, Connecticut walking around on my first pair of skis, and they reach forward to three weeks ago, skiing with two granddaughters at Ski Sundown in northern Connecticut.

In that March issue of The New Yorker, Nick Paumgarten wrote of Fridtjof Nansen, a Norwegian who crossed Greenland on skis in 1888. He quotes Nansen: “it is better to go skiing and think of God than to go to church and think of sport.” My sentiments exactly.

Health Care Reform - The Devil will be in the Details

Sydney M. Williams
Thought of the Day
“Health Care Reform – The Devil will be in the Details”
March 22, 2010

In his rush to add a new entitlement (universal health care) and therefore increasing the dependency of even more people on the beneficence of government, the President has accomplished two negative factors: he has deepened the hole already containing $100 trillion in unfunded future liabilities for Social Security and Medicare and, in relentlessly pursuing a plan the majority of Americans oppose, he has further divided an already divided nation.

Unlike both Social Security and Medicare, this legislation passed in a totally partisan fashion – not one Republican voted for the Bill. What gave the Bill its final impetus, in my opinion, was the decision by the President in February, instead of arguing the merits of universal care, to attack the insurance industry based upon the Anthem Blue Cross in California to request a 39% increase – an increase that already had been approved by the California Insurance Commission.

The creed of promises today, with little regard to costs tomorrow, is as old as politics. What is needed in this Country are programs designed to increase savings, reduce spending and to recognize the consequences of a failure to do either. The problem of unfunded liabilities is not just confined to government programs, it is acutely apparent in the private sector as defined contribution plans replace defined benefit plans. (Stephanie Pomboy, in Barron’s over the weekend, quoted an EBRI [Employee Benefit Research Institute] study that stated, a “staggering 27% of workers have saved less than $1000 toward retirement.”) The conversion to defined contribution plans is a result of a realization on that part of employers that promises given years ago were never going to be met. That reality is what is facing state governments today, as promises to unions threat bankrupting state coffers. This new entitlement, no matter the CBO score, is bound to run into the same future funding problems.

Entitlements remove a sense of individual responsibility; it is a dangerous path to be on (think Friedrich van Hayek and The Road to Serfdom). Government has a responsibility to the elderly, the infirm and to those incapable of caring for themselves – those who truly need its support – but when government supplants individual responsibility it condemns its citizens to a future of subservience. As the Chinese proverb has it, give a man a fish and he eats for a day; teach him to fish and he eats for a lifetime.

A second negative consequence of the Bill’s passage is to further divide an already divided nation. Partisanship in Washington has been well publicized. It can be seen in the reportedly now-empty Senate dining room, supplanted by weekly Party caucus meetings. Every time a Party leader heads to a microphone, he or she is surrounded by a group of their own, heads nodding approvingly like puppets on a string.

But partisanship is visible abroad in the nation. In Sunday’s New York Times, Book Review section, Ross Douthat reviews Voodoo Histories by David Aaronovitch. He writes of a poll: it showed “…roughly a third of Republicans believed that Barack Obama had been born outside the United States. Liberals trumpeted the finding as proof of the Republican base’s slide into madness. But conservatives had a rebuttal: as recently as 2007, they pointed out, polls showed that a third of Democrats believed George W. Bush knew about 9/11 in advance.” The same division is palpably evident in religion where the fastest growing sects – Evangelical Christians, Orthodox Jews and Islamic Fundamentalists – are those that are the least tolerant.

Partisanship is encouraged by politicians who compartmentalize specific groups, to whom they promise special deals rather than discussing universal ideas. Partisanship is abetted by a Press more interested in ad sales than in truth. Even the normally balanced Financial Times over the weekend had a front page story, “Obama Nearing Victory on Healthcare”, by Edward Luce, in which he wrote: “Republicans, who have opposed all versions of healthcare reform, yesterday signaled they would do what they could to upset the likely vote.” Mr. Luce is well aware that Republicans don’t “oppose all versions”. They have made proposals, such as tort reform, allowing insurance companies to compete across state lines, providing individuals the same tax treatment in purchasing health insurance as corporations, among others. They disagree with the plan that was voted upon and the tactics used to pass the plan. His article was simply partisan and untruthful.

Nancy Pelosi, despite my dislike for the processes she employed, did an incredible job in bringing along recalcitrant Democrats – a feat that seemed impossible a few weeks ago. Now, as she earlier said, we will discover what is in this monstrosity – the devil will be in its details.

The consequences of this Bill are that interest rates will rise further, taxes will go higher and that over time health care will be nationalized. The Federal government now pays more than Berkshire Hathaway, Procter and Gamble and Johnson and Johnson for Two-year paper. Whenever the rights and freedoms of the individual are made subservient to the State, it is a step toward socialism.

I was reminded this morning of a timely quote from Winston Churchill: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of misery.”

Thursday, March 18, 2010

"A Payroll Tax on UInearned Income - A Slippery Slope"

Sydney M. Williams

Thought of the Day
“A Payroll Tax on Unearned Income – A Slippery Slope”
March 18, 2010

Why, when the economy and capital markets continue in need of resuscitation, would the White House decide a Medicare tax (A payroll tax) should be imposed on unearned income?

Currently the Medicare tax is 2.9%, half paid by the employer and half by the employee. The President’s proposal is two-fold: first, Medicare taxes on individuals whose income exceeds $200,000 ($250,000 for couples) would increase from 1.45% to 2.35%. The employer’s share would remain at 1.45%. Introducing an element of progression into the system is understandable and could well be considered fair. But the second part of the proposal would apply a 2.9% tax on unearned income – dividends, capital gains, royalties, annuities and rents.

That proposal, therefore, introduces a fundamental change to the system. In effect, it changes Medicare taxes from a payroll tax to an income tax – opening the door to possibly making similar changes to Social Security – a radical departure, and made more onerous as the Bush tax cuts are scheduled to end at the close of 2010. Long term capital gains will revert from 15% to 20% and the tax on dividends will rise from 15% to 39.5%. The addition of a payroll tax on top of the increases coming anyway would make those taxes, at the top end, 22.9% and 42.4% respectively.

The Country has significant funding problems, as we look out over the next two or three decades. Entitlement programs, such as Medicare, Medicaid and Social Security are seriously under funded. Adding another entitlement program – government mandated health care reform – only aggravates the situation. Consumers, for years, have spent more than they earned. Savings are at very low levels and the state of 401K and related plans are seriously low in terms of capital. What is needed is encouragement for consumers to save more and to consume less. Increasing taxes on invested capital only makes the situation worse.

The President made a big thing of hiring behavioral economists when he entered the White House, men like Cass Sunstein, co-author with, Richard Thaler, of Nudge, Jeffrey Liebman from Harvard and Austan Goolsbee from the University of Chicago. He should be using them to “nudge” the economy in a direction that encourages individual investment and discourages unnecessary consumption.

Imposing payroll taxes on unearned income sends the opposite message.

Wednesday, March 17, 2010

"The Finance Bill - Dodd Promises Reform, Except for Congress"

Sydney M. Williams

Thought of the Day
“The Finance Bill – Dodd Promises Reform, Except for Congress”
March 17, 2010

Increased regulation of the financial world took another step closer, as Senator Dodd released his revised draft version of a bill Monday afternoon.

The bill, common in this day of excessive verbiage, is 1136 pages long, so who knows what lurks within its pages? However, below are a few key elements and some of my thoughts:

The centerpiece of the legislation is the creation of a Consumer Protection Authority, to be embedded in the Federal Reserve. The purpose is to protect naïve and gullible consumers from predators such as abusive and deceptive lenders, brokers and others intent on separating people from their money. While there is little question that greater transparency is warranted and laws clearly stated and enforced, the risk is the increasing dependency of the consumer on the benevolence of the State. Like all entitlements, protections of this sort can be addictive and reduce the responsibility individuals should have for poor decisions they make.

The bill creates a Financial Stability Oversight Council, which would consist of nine members drawn from existing regulatory bodies, chaired by the Secretary of the Treasury and housed within the Federal Reserve. Its purpose would be to act as an early warning system, as it monitors financial firms for the possibility of systemic risk. That seems to me a good idea.

The bill also creates the “Volcker” Rule, which would prohibit banks from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds. The practical application of this provision, as it applies to prop desks (for distinguishing between trades done to accommodate customers and those done for the sole benefit of the bank will be difficult to determine), may make this difficult to pass or enforce. There would be consequences. Since Goldman Sachs and Morgan Stanley would be forced to retain their bank charters, it is possible – and perhaps likely – that prop trading operations, along with hedge fund and private equity operations could be spun off into private partnerships. Personally, I like the Volcker Rule and know, if I were a prop trader, I would rather work for a private partnership than a public firm operating in the gun sights of the federal government.

A Financial Rescue Fund would be established with $50 billion funded by large financial institutions. The purpose would be to avoid the necessity of any future crises needing to tap the resources of the tax payer. The large banks will condemn this idea, but to me it makes sense. When one’s own money is at risk, greater discretion is likely to be employed. That principle would apply in this instance.

The question regarding derivatives and whether they should be subject to a central clearing house and trade on electronic exchanges was not fully resolved. In part that is because many derivative products are custom tailored to fit a specific situation, but greater transparency is called for. I have long felt that general derivative contracts should trade on exchanges and that products such as credit default swaps should be considered and governed as the insurance products they are. But there must be allowance for the continued creation of and allowance for tailor-made derivative contracts.

There are a number of other rules. A rule providing shareholders more of a say in corporate compensation through a non-binding vote, while sounding attractive, my guess would prove to be more cosmetic than effectual. Significant shareholders should benefit from this rule, though, so I like it. I understand that leverage would be reduced – a good thing – and that rating agencies would come under greater scrutiny, also a good thing.

However, there is nothing in the bill indicating the complicit role played by Congress, or holding its members to stricter standards – think Senator Dodd and how, as a “friend of Angelo Mozilo” he was provided favorable treatment on his Irish farmhouse.

What I like best about the bill is its emphasis on transparency and I like the fact that the Fed appears to be the big winner. The Federal Reserve is, despite its members being selected by the President, supposedly independent of the executive branch. (As an aside, I do not like the provision that the chairman of the New York Fed should be appointed by the President, rather than the current method of being elected by the board of the Fed.)

What I like least is that it does not appear to address the question of influence that the banking industry has on regulators (including members of Congress), and I dislike the sense that consumers, who, like other parties were also guilty of greed and willful ignorance, are given not only a pass for irresponsible behavior, but look to be further protected. I am a firm believer that people should reap the benefits and suffer the consequences of their actions. I recognize that there are legitimate victims and they should be protected and made whole, but society must be careful of this slippery slope.

To my mind, changes are needed and this bill addresses many of them; transparency is critical and this bill appears to address that; on the other hand rules should not stifle creativity. It is also no guarantee against another crisis. Yesterday, Senator Dodd was quoted in the New York Times: “This legislation will stop the next crisis from coming. No legislation can, of course.” He is right. A $40,000 bank examiner is no match against a $5,000,000 Wall Street prop trader.

Many aspects of the bill will serve to raise costs for banks and that might well result in banks charging higher interest rates and doing more due diligence, thereby hampering loan availability and, thus, economic growth. These rules could well decelerate growth – a consequence that needs understanding.

Keep in mind, economic growth over the past decade, has been accompanied by a widening of debt. In fact GDP growth, in the past decade, looks to have been a function of debt expansion. Between 2000 and 2007, U.S. GDP grew from $9.8 trillion to $14.5 trillion, an expansion of 58%. Consumer debt, during the same period, increased 100% from about $7 trillion to $13.8 trillion, and U.S. Government debt widened 70% to $9.0 trillion. A shrinking of debt may well have the opposite effect.

Nevertheless, the near meltdown of late 2008 was an experience none of us is anxious to revisit and this bill is a start toward redemption.

Tuesday, March 16, 2010

"Health Care - The President's Last Hurrah"

Sydney M. Williams

Thought of the Day
“Health Care – The President’s Last Hurrah?”
March 16, 2010

Common to most successful Presidents is a sense of humor – think Franklin Roosevelt and Ronald Reagan. On the other hand, consider those where humor appeared absent – Herbert Hoover, Richard Nixon and Jimmy Carter. A question: within which group does President Obama reside? He is a serious and obviously intelligent man, but his singular focus on being a transformational President is risking not only his passionate desire to remake our health care system, but the economy which requires his full attention.

While the odds of health care reform passing are said to be only 40%, I find it hard to believe that the President’s own Party will turn on the man who lead them to victory sixteen months ago and will deliver him a defeat that could well destroy his Presidency and all of this within fourteen months of his inauguration! It is possible the bill fails, but I think unlikely – as much as I disagree with the content of the proposed plan and I hope that it fails. The slight of hand, for example, in taking $500 billion from Medicare while not taking it, is worthy of David Blaine.

Each day, as he repeatedly slips his oar into the maelstrom of the Beltway – and out-of-town – health care politics, he becomes increasingly the victor, or victim, of the health care bill’s successful passage, or defeat.

It needn’t have come to this. Mr. Obama campaigned as a center-left candidate whose vision included transforming the way we are viewed in the world and to bring bi-partisanship to Washington. In the first instance, he has succeeded, at least to an extent. In the second, he has not. Despite having spent a few years in Washington (he was elected to the U.S. Senate in 2004), he misread the intense partisan feelings in that city. So, instead of master-minding the process from the White House – after all we are talking of sixteen percent of our economy – where he could have gathered both Democrats and Republicans and hammered out a deal that neither may have preferred, but that both could have lived with, he chose to put the process into the hands of two of Washington’s most strident political partisans – Nancy Pelosi and Harry Reid. It was like tossing a side of beef to a pack of lions and then asking a Labrador to retrieve it.

Clive Crook, a fan of both Mr. Obama and his proposed health care plan, wrote in yesterday’s Financial Times, the debate is now “…in the realm of surreal farce…All that is missing is a speech in favor of the plan by Groucho Marx.”

Representative Paul Ryan (Republican from Wisconsin) has laid out a cogent, practical alternative health care proposal, while exposing financial weaknesses in the Democrats plan, but instead of the American people being able to witness a debate based on each plan’s merits, Ryan has been marginalized by the President and Congressional Democrats and ignored by the Press.

There is no one I am aware of who does not want to reform both the health care system and the insurance industry which serves it. The system leaves too many people uncovered; too often those with pre-existing conditions have difficulty getting coverage; many doctors (especially those considered “gatekeepers” are overworked and underpaid; incentives to doctors are too often based on prescriptions, rather than results. There have been many suggestions as to how to address these problems, ranging from a government-run insurance plan to increasing competition among private insurance companies. Some proposals are common to both parties, so should be easy to resolve, others are not.

For example, most agree that medical research in the U.S. is among the best in the world and must be encouraged. All agree that electronic records are important in terms of improving health care and in reducing costs; on the other hand tort reform is a sensitive issue, but resolution should be able to be found.

But the President’s traveling around the country speaking to hand picked audiences, so that his words can be beamed back for the evening news, only deepens the divide. It appears it is too late for any resolution to be bi-partisan. Increasingly, the President seems desperate (and humorless) – desperate to pass a bill, any bill, regardless of its distinctions, because he has committed his soul, so that now – consequences be damned – this may be his last hurrah.

Monday, March 15, 2010

"Money Flows - A Contraian Indicator?"

Sydney M. Williams

Thought of the Day
“Money Flows – A Contrarian Indicator?”
March 15, 2010

The last two decades were a remarkable time for hedge funds. In 1990, there were an estimated 530 hedge funds in the United States with about $39 billion in assets under management. By 2000, assets had grown to approximately $537 billion managed by nearly 3300 hedge funds. The peak in hedge funds and assets under management occurred in late 2007 and early 2008, with assets in U.S. based hedge funds topping $1.2 trillion run by about 8-9000 funds, suggesting an average of about $130 million per fund. Like most businesses, a small number of hedge funds control the lion’s share of assets. Assets declined in 2008, but rebuilt in 2009 and now must be close to the $1 trillion level. Exact numbers are difficult to verify, as some lists include foreign based funds and others include fund-of-funds, essentially double counting assets. Others are so small that they fly beneath the radar.

The important thing for investors is that, despite all the negative publicity they have received, overall results have been substantially better than the indices. On balance, hedge funds protected their limited partners well during the credit crisis. Most equity hedge funds employ leverage rationally, and a few employ little or no leverage.

However, one should not expect much growth in the overall number of hedge funds. According to Absolute Returns + Alpha, 189 shuttered in 2009, versus 49 that closed in 2008. The rush into hedge funds in the early and mid 2000s was, in part, a function of the publicity received by David Swenson of Yale who, as early as the late 1980s and early 1990s, began investing in alternative vehicles, including hedge funds and private equity funds. Unfortunately, as is typical of markets, many institutions’ timing, in imitating his success, was not propitious. Many invested as markets were cresting. It is very possible that the next decade may prove the mirror image of the last one – a decade of reduced volatility and gradually rising prices, yet one in which hedge funds lose assets, as least those directed and managed by consultants and because of negative hype, as politicians look for scapegoats.

Nevertheless, Hewitt Associates reports that 2009 showed a doubling in terms of the number of hedge fund manager searches in 2009 compared to 2008.

For the thousands of hedge funds that began operations in the late 1990s, their timing could not have been more opportune. Money was plentiful and investors were willing. The collapse of the dot com bubble – provoking a two and a half year bear market – provided the perfect venue for hedge funds with their ability to sell short. The subsequent rally took some by surprise, but the assets were there, so modest returns, given their fee structure, provided out-sized income to the managing partners of these funds. It was a decade during which asset flows allowed hedge funds to sail before the wind, while at the same time the tide governing investment opportunities was ebbing. It was a scenario unlikely to be repeated.

The upcoming decade may provide the exact opposite environment. Despite a 23.4% return to the S&P 500 last year, money allocated to equities in both pension plans and mutual funds continues to be negative. Allocators of assets are also likely to continue to remove money from alternative investments at the precise moment that the investment environment is improving.

The moral of the tale is as old as investing. Money flows are a contrarian indicator. Money flows into strategies that are cresting and flows out in the final moments of an ebbing tide. “If that were not the case”, as my friend Walter Harrison is fond of saying, “then tops would be bottoms and bottoms would be tops.”

Friday, March 12, 2010

"Muslim Backlash in Holland"

Sydney M. Williams

Thought of the Day
“Muslim Backlash in Holland”
March 12, 2010

One hundred years ago this May, seventy-four members of royalty, along with thousands of lesser nobility, gathered for the funeral of Edward VII. Included were three grandsons of Queen Victoria – King George V of England, Kaiser Wilhelm II of Germany and Tsar Nicholas II of Russia – who would soon find themselves embroiled, on opposite sides, in a World War, which would lead to the deaths of an estimated 37,000,000 people, most of whom were civilians. That war was a precursor of the Second World War, in which an estimated 60,000,000 died. Yet, on that sunny day in May, in 1910, few would have forecast the storms that lay ahead.

World trade had flattened the earth in a fashion remarkably similar to today, at least in the minds and expectations of those then alive. The fruits of the Industrial Revolution had raised living standards in the developed world to heights unimagined a few decades earlier. Following the devastation of the first War and the world-wide depression that followed caused suffering people to look for someone, or something, to blame. The upshot was that the world experienced a bout of anti-Semitism of monumental proportions and 9,000,000 Jews were killed.

Today, it is again inconceivable that a Europe, which has been war-free for sixty-five years, could be embroiled in any period of extended violence.

But I worry about the possibility of a back-lash developing against an expanding Muslim population. While Muslims in the United States have been largely assimilated, in Europe 20,000,000 Muslims live in isolated sections of cities, not dissimilar to Jewish ghettoes of the 19th Century. Their birthrates are expanding, while those of their host populations are shrinking. An anti-Islamic Fascist feeling is morphing into simple anti-Muslimism. The potential is a tinderbox and ready with a match are politicians like Geert Wilders, a name likely not known to most Americans.

The Netherlands have been a hot bed of anti-Islamic feelings since the film director Theo van Gogh was gunned down on November 2, 2004. Following his murder, Aayan Hirsi Ali, an extraordinary Muslim woman who was born in Somalia and a member of the Dutch Parliament and a collaborator of Mr. van Gogh, was forced to move from the Netherlands to the United States, as her safety could not be assured by Dutch officials. Taking advantage of the growing hatred has been Geert Wilders. Wilders, who has been prosecuted for incitement to hatred and discrimination, has argued that there is “no such thing as moderate Islamism” and that Muslims who wish to stay in Holland should “tear out half the Koran.” He has argued that Muslim immigration should be halted and those that live in the Country should be paid to leave.

We might dismiss these ravings as those of an isolated nut, but Wilders is a member of the Dutch Parliament and is now leading in the polls as the head of the Party for Freedom, as the Country prepares for the June 9th national elections. He has produced a controversial film, Fitna (Arabic for test of faith in time of trial), which alleges that the Koran motivates its followers to hate all who violate Islamic teachings.

2010 is not 1910. The likelihood that these events develop will into a serious problem for Europe are remote, but a peaceful integration of Muslims into European societies also seems remote. To blame a race or religion for the acts of terror of a few is blatant racism with potentially devastating consequences. The situation bears watching.

Thursday, March 11, 2010

"Public Unions - a Force for Destruction - Part 2"

Sydney M. Williams
Thought of the Day
“Public Unions – a Force for Destruction – Part 2”
March 11, 2010

March 11 is a special day for me. Today is my grandson Jack Featherston’s eighth birthday; and forty-eight years ago this day I asked my wife to marry me.


An adage from my childhood was the promise, if food was scarce, of air pudding and wind sauce. I do not know the origin of the saying, but it may have emerged from the Depression when air pudding and wind sauce provided the only sustenance for too many people.

Those words have taken on new meaning, as demands from and assurances to public unions risk becoming empty promises. It is largely unions that risk bankrupting states such as California, New Jersey and New York, as well as countries like Greece. The Federal government can print its way toward honoring extravagant promises, but at the risk of paying off obligations with depreciated dollars.

As the Wall Street Journal editorialized yesterday, the California legislature, in 1999, enacted pension legislation that assumed, for actuarial purposes, investment returns of 8.25%. (As the Journal pointed out, had the DJIA compounded at 8.25% over the past ten years it would now be selling at 25,500; instead the Index is 10% below where it was ten years ago.) There are 15,000 retired California public employees on annual pensions in excess of $100,000, many of whom retire under the age of fifty – young enough so that they can take on another public job and collect a second pension in fifteen years. Needless to say, that promise is now negatively impacting California’s deficits, private sector job growth and tuition at California’s universities. It is likely to get far worse, as the money just isn’t there. No matter the promises of politicians, it is going to take the bitter pill of layoffs and reductions in pension benefits to return these profligate states to some sort of sanity.

State employees were the prime beneficiary of last year’s stimulus bill, as that money saved thousands of union jobs – a short term positive, but one that will have served to perpetuate a longer term problem for state legislatures already under enormous budget restraints if you believe, as I do, that unions are bleeding states dry.

The political web of entanglements is dense. Membership in unions for public employees now exceeds that in private industry. While corporate mismanagement led to the problems in the auto industry, union demands contributed to the problem. Unions are the single largest contributor to political campaigns, donating half a billion dollars in the 2008 elections – 90% to the Democratic Party.

Senator Jim Bunning (Republican from Kentucky and former major league pitcher) received nothing but derision when he attempted to hold up an extension of unemployment benefits. I don’t know the man, but I suspect he was attempting a symbolic gesture, pointing out that Congress cannot continue to spend money that does not exist, or, more accurately, Congress can spend it, but the inevitable result will be the depreciation of the currency. Should the economy continue to strengthen, as we all hope, the problem will be temporarily masked, but, with state legislatures increasingly dependent on the beneficence of public unions, the power those unions have over legislators will continue to expand. It becomes a self perpetuating cycle.

Wednesday, March 10, 2010

"Greece - Don't Blame Speculators"

Sydney M. Williams
Thought of the Day
“Greece - Don’t Blame Speculators”
March 10, 2010

Growing up on a small farm in New Hampshire, I was witness more than once to the fact that a wounded chicken would be attacked by his or her healthy companions. The fate was death. Mr. Papandreou would have us believe that Greece is that sick chicken and that speculators represent the healthy flock. Nothing could be further from the truth. First, blaming speculators is as erroneous as a drunk blaming the producers of scotch for his misbehavior and, second, Mr. Papandreou needs those speculators to buy his bonds, for if a Greek bond is not a speculation I don’t know what is.

Blaming short sellers (or buyers of CDSs) for their woes in times of crisis is a time-honored custom in an America, with its optimistic demeanor and its face turned toward the future. But the facts are that short sellers have done more to uncover fraud and to keep corporate (and governmental) managers honest than any regulatory body or rating agency. Are there nefarious short sellers motivated purely by self interest and willing to step outside the law? Of course. There are criminals in all parts of life, including all aspects of the investment community and, as we have all learned recently, in government.

I have had my beef with the dark corners in which many derivatives operate; permitting sunshine in would be healthy for all concerned. There should be a central clearing house for these products. I also believe, in terms of the Credit Default Swap market, that the amount written against any specific issue should not exceed the size of that issue, but for Mr. Papandreou to blame the industry for the mismanagement of his country’s economy is demagogic and dangerous. As Ireland is learning (and described well in this morning’s Wall Street Journal), the only answer is a painful retrenchment – a lesson not yet learned in our own state of California!

Expanding debt, particularly at the consumer and financial industry level, drove the economies of the developed nations over the past ten years. During the last decade, growth in debt greatly exceeded growth in GDP. Like an addict, the detoxification process will take time and involve sacrifice; there is no easy way out. Government has stepped in, but hopefully only to temporarily ease the pain and not to turn the crisis into an opportunity to permanently expand government. Growth, when it returns in force and if it is to be sustainable, will have to be driven by the private sector. Exports have become the expected avenue for growth. The problem is that not every country can run a surplus in foreign exchange. Someone must run a deficit. It could be that developing and emerging nations will assume that role, but that suggests a tectonic shift.

As to whether Greece, as Professor Ken Rogoff of Harvard has forecast, is but prelude to a series of falling dominoes, I don’t pretend to know; though I agree with Jeff Saut of Raymond James who yesterday on Bloomberg said, “It’s usually not the snake you see that bites you.”

The common denominator in the on-going credit crisis is that blame has gone around the table like a hot potato. Banks, as the easiest target and a natural foe of populist politicians, have become the visible victim. Notably absent have been mea culpa’s from any of the participants – politicians, bankers, regulators, rating agencies and consumers. And what is true in the United States is true in other parts of the world, recently and most notably in Greece. The German poet, Friedrich Hebbel, once said: “Whoever wants to be a judge of human nature should study people’s excuses.” Today, candidates for such a study are in surplus.

Tuesday, March 9, 2010

"Boring is Good"

Sydney M. Williams

Thought of the Day
“Boring is Good”
March 9, 2010
In the past month there has only been one day during which the market moved more than 1.5% – February 16, when the market closed up 1.6%. Yesterday morning, one of the younger members of our staff lamented the lack of excitement in our markets – how boring they have become. His reasoning, for a firm such as ours, was not entirely misplaced. After all, we are in the commission business. Active markets provoke trading and trading generates commissions.

However, to those of us, of a certain age, boring can be good. In fact, to most of those of us who dealt with customers during the chaotic days from mid September through mid November 2008 boring is very good. The chasm we peered into seemed bottomless, and might well have been.

A little over a month ago Paul Krugman wrote an op-ed in the New York Times, entitled, “Good and Boring”. He wrote of the irony that “boring” Canadian banks, which performed in exemplary fashion during the recent crisis, have received little publicity, but should serve as examples worthy of emulation. “Man bites dog” has always had more fascination than its obverse, so it is unsurprising that the near disasters in Iceland, New York, London and now Greece have consumed the attention of Washington and the Press. Yet, as Professor Krugman writes, boring can and should be a good master.

Today marks the one year anniversary of the twelve year low we made in our markets, and, curiously, close to the tenth anniversary of the peak of the tech-internet cycle that marked the end of the great bull market of the 1980s-1990s, all of which provided the “lost” decade we have just completed. From the highs in October 2007 we crashed down a steep slope losing 58% in value in 17 months, as the S&P 500 declined from 1576 to 666. While the market is up 61% from those lows, it remains 38% below the highs.

In terms of daily volatility, the numbers are dramatic and telling. During the 12 months prior to the market bottoming one year ago, the DJIA experienced daily volatility of up or down 1.5% on 110 occasions, or about 44% of the time. The 12 months subsequent to the bottom have seen similar volatility on 46 days, or about 18% of the time. And 17 of those 46 days occurred in the first two months of the recovery! The road back has been more comfortable than the hasty decline.

I am not sure a lesson can be drawn from these observations, but as a hiker I do know that one can last longer and go further walking up a gentle slope than ascending a cliff.

As for investing, there is little doubt that boring works. Warren Buffett’s Berkshire Hathaway is exhibit A. History demonstrates that almost half of long term returns to the equity markets are derived from dividends. Collecting dividends may not seem an exciting pastime, but the accumulation of wealth over the years permits numerous outlets for animal spirits.

Monday, March 8, 2010

"The economy, not health care, should be the priority"

Sydney M. Williams

Thought of the Day
“The economy, not health care, should be the priority.”
March 8, 2010

While recent economic activity – capped on Friday with a fall in jobless claims and a rise in productivity – and a strong stock market in February (and the first week in March) has emboldened the President to persist in pursuing his health care agenda, the Economic Cycle Research Institute (ECRI) suggests growth will slow by mid year. In Friday’s Investor’s Business Daily, their leading indicator for the U.S. economy fell to a 30-week low. No index is infallible, but this index has made some early and accurate forecasts. It called the current recession in March 2008, a full nine months before the National Bureau of Economic Research on December 1, 2008 (a year late) officially said we were in recession. And last April, the Index forecast the recovery that began during the third quarter.

Economists are generally calling for 3.5% GDP growth this year and 3% next. That may be true and certainly I hope it is, but the risk of a double dip recession exists. Despite reported fourth quarter GDP of 5.9%, Paul Volcker yesterday suggested it is still too early to begin tightening either monetary or fiscal policy. This morning Bloomberg Radio reported that the National Federation of Independent Business Research Foundation (NFIB) released a survey indicating 80% of those surveyed cited uncertainty in Washington, not access to capital, as the principal reason for concern. And that uncertainty is largely based upon the swelling, society-changing health care bill that, though apparently on life-support, continues to divert attention from jobs and the economy.

There is little question that the current employer-based health care system is tremendously flawed, largely, in my opinion, because it removes the consumer from the pricing equation. (When something is “free” people will consume vast quantities.) The current system leaves uncovered too many people and penalizes those who self-insure. However, the proposed system further distances the consumer from making cost-value decisions, has little public support, will add a trillion dollars or more to the deficit, may well weaken existing government programs such as Medicare and, at 2700 pages, will prove a lawyer’s delight. To suggest that the government, which will set prices and likely ration care, will be a more efficient dispenser of health care than the private sector, begs credibility.

Why the simple and cost-effective suggestion of permitting interstate competition among insurance companies is not allowed and why tort reform is not addressed in those 2700 pages remains a mystery? Perhaps because common sense and government are rarely mentioned in the same sentence. Commendable goals, untempered with reality, rarely achieve hoped for goals.

The risk is that while Washington fiddles with health care, the economy slips backward.

Monday, March 1, 2010

"The Bill That Won't Die"

Sydney M. Williams
Thought of the Day
“The Bill That Won’t Die”
March 1, 2010

The health care summit has come and gone and did little to reconcile the differences between health care proposals of Democrats and Republicans, though reconciliation may well be the result.

If the President hoped to achieve bipartisanship, he was disappointed. If he wanted to showcase that his is the Party of action and that Republicans were the Party of “no”, he did not succeed, as Senator Lamar Alexander of Tennessee and Representative Paul Ryan of Wisconsin well articulated the Republican’s position and urged the President to start with a clean slate. The President, with 13 months and a 2700 page Bill behind him, declined. Speaker of the House, Nancy Pelosi concurred: “We don’t have time to start over.” If Mr. Obama wanted to demonstrate that he was the President, he succeeded, as he so informed Senator McCain who he accused of continuing to campaign for a race he had already lost.

The positions held by Democrats, as Peggy Noonan wrote in the weekend’s Wall Street Journal, “started out hardened and likely ended so. Good faith and generosity did not flourish.” If anything, Democrats, according to Saturday’s New York Times, “confirmed their belief it was futile to try to work with Republicans on a major health care bill because the philosophical differences between the Parties were too profound.”

Nevertheless, the President urged Democrats to press ahead. Taking her cue, Mrs. Pelosi on Friday said: “I believe we have good prospects for passing legislation.” Our health care analyst, Avik Roy, pointed out that reconciliation can only modify a current law, which means that the House must pass the Senate version, without modification. He continues to believe that comprehensive legislation will fail to clear Congress.

The President began the conference by mentioning the one area with which there is agreement – the rising costs of health care must be halted. Reed Abelson in Sunday’s New York Times wrote: “…health policy analysts and economists of nearly every ideological persuasion agree. The unrelenting rise in medical costs is likely to wreck havoc within the system and beyond it, and pretty much everyone will be affected, directly or indirectly.”

should the current bill fail, some feel that lawmakers may focus on a series of smaller fixes. Mr. Abelson quotes Stuart Butler of the Heritage Foundation as suggesting that Congress may focus on more narrow areas such as insurance regulation, or another expansion of Medicaid.

However, the essence of the differences between the two parties remains. The President and Democrats are intent on government programs and tighter regulation, while the Republicans, as reported by Grace-Marie Turner, “…believe in providing incentives for more competition, consumer choice and transparency to force changes in the market place.” Edward Luce, writing in the weekend’s edition of the Financial Times is simply wrong when he writes: “Republicans still abhor any attempt to overhaul America’s health care system.”

In terms of solutions to the health care problem, the difference between the Parties is crystallizing. Democrats believe the answer lies with increasing government’s reach, while Republicans believe the answer lies in giving the consumer a greater say, transparency and more competition. Bringing 16-17% of the economy under the government’s purview is no trifling matter. We are at a significant junction; one way leads left, the other, right.

The Democrats’ version of health care reform, which appears to be in need of intensive care, has not yet died. The President will speak mid-week about a “way forward”; Nancy Pelosi cannot be underestimated and she may well find the votes in the House to pass the Senate version of health care. If she does, the President will sign it and it will become law.


I will be out the balance of the week, skiing with a few of my siblings at Sunapee in New Hampshire, a place I first skied fifty seven years ago.