Q2 | 2016

Good Buy America

The U.S. stock market continues to advance as we move sluggishly toward an economic recovery. The fourth quarter GDP advanced slightly less than estimated, and the index finished 5% higher as of the writing of this letter.

It seems like relative to most of the rest of the planet, America is handling its problems in a more orderly fashion; that is quite remarkable. (Notwithstanding, everyone here seems to be complaining!) Europe has its PIIGS (Portugal, Ireland, Italy, Greece and Spain) as the Euro has fallen from its peak in the summer of 2007. China continues to chug along, but it is slightly tightening money to cool its economy down. Some see a bubble developing in China, but one can really never know the true status of their economy because the government controls the statistical reporting. India reported higher inflation than predicted which raised a cause for concern.

However, the recent U.S. note and bond auctions were met with a cool reception last week, which sent U.S. interest rates higher with the 10 year note touching 3.9% before settling the week at 3.85%.

All this data is the backdrop for darkening trends in the developed world. The rich are getting richer — much richer. The poor are being subsidized by the rich. The middle class is getting squeezed, and that will end up being very bad for everyone.

In the name of social justice, the health care reform bill passed largely on the back of procedural maneuvering and on an idea whose time has come. The problem is the true effect it will have on the economy in the future. And nobody knows just what that effect will be. It will be a wait and see proposition, but as one who is fundamentally in favor of health care reform, I just do not get the impression that our health care system works efficiently in its current state. Nor do I believe that this bill brings costs and benefits in line.

Municipal bonds are on the front page — many states are running massive deficits. In addition, a recent article discussed price fixing among large investment firms in the municipal bond market. We will keep an eye on this matter as it develops. We are very proud of our municipal bond management and can assure you that we are always acting in your best interest.

More than 21% of single family homes are under water — that is why the government must develop a program to encourage lenders to write many of these mortgages down so that the borrowers can maintain their homes. Further, the government must not, it cannot, withdraw its stimulus too soon for fear of a double dip.

The stock market was on a “sugar high” last year from cheap money. There has been a carryover to 2010, but at over 18 times earnings and a dividend yield of less than 2%, the market seems unlikely to advance much more without significant earnings improvement. It is certainly difficult to short the market with so much cash and bond money on the sideline. Liquidity may drive the markets higher — current valuations, I believe, are fair as a whole, so beware not to overextend yourself.

The U.S. must find a way to keep its deficits under control. This is the issue that must be tackled before it’s too late.

Pat Moynihan said “If you are in a hole, stop digging.”

We dig and stand with Pat!

Q2 | 2016

Good Buy America

What a bonanza!!! If you die this year, you can pass the blessings of your bounty on to your heirs tax free, maybe… If Congress decides to reinstate the estate tax retroactively, maybe you shouldn’t get yourself sick about the economy—oh well, just another day in D.C.!

The Great De-leveraging continues—Americans are saving more and consuming less—the addiction to credit is waning steadily. What troubles us is that every legislator is focusing on the consumer and his spending. What about focusing on saving and investing, thus creating a productive society?

A devalued dollar obviously helps America’s competitive edge in the world. Don’t we want to invest more capital in productive areas which would help us compete successfully in world markets or do we just want the Chinese to buy our bonds?

The Great “Right” Hope, Scott Brown, took Ted Kennedy’s Senate seat in Massachusetts in a repudiation of President Obama’s policies. It is ironic that the death of Mr. Kennedy, the champion of healthcare reform, ultimately may have killed health reform.

In a quick response to salvage populist momentum, President Obama vowed to tear the banks apart, and Wall Street reacted negatively, as expected.

The downturn may just have been a response to the under-pricing of risk in the marketplace. Maybe our memories are so short that we forget that just a year ago we were stuffing dollar bills under our mattresses?

Approximately $1,000,000,000,000 (that’s right, a trillion) has to be refinanced over the next three years in the commercial real estate business. Wow. How is that going to happen?

The SPIG countries (Spain, Portugal, Italy and Greece) are showing the stresses of their deficits, as are so many of the developing nations.

Let’s go back to the fall of 1998 when the chair of the Federal Reserve, Alan Greenspan, made a surprise move and cut interest rates in the face of a failing economy. The summer of 1998 was when the Russian debt crisis occurred and when the hedge fund Long Term Capital Management blew up. Mr. Greenspan forestalled a recession, which we believed at the time was necessary and about to begin. The stock market took off, and the U.S. was off to the races with the beginning of the debt explosion fueled by easier money, especially in the housing market.

The hope of a new world technology (think AOL-Time Warner) began to burst in the spring of 2000. Y2K provoked thoughts of planes falling from the skies, computers crashing and the electric grid shutting down the nation. 9/11 occurred shortly thereafter, and the great American society began a “live for today era” which continued until Bear Stearns collapsed.

President Obama inherited a mess—pulled us back from the edge, but on his populist pulpit, put the healthcare agenda ahead of getting “the patient out of the hospital before he decided to do major surgery.”

Healthcare reform is necessary—pre-existing conditions must be eliminated. However, increasing the cost of health insurance to corporations while jobs continue to be lost cannot go hand in hand.

President Obama continues to press for total reform: he made promises that both parties and the nation now realized were means to justify a not so terrific end. Long Live the King….

Rough sledding will ensue if the people continue to lose faith in our nation’s leadership. As President Obama said, “The same frustration that led to his election, led to Scott Brown’s victory.”

We stress all to be methodical in planning and steady in purpose. Make sure the steps you take are slow and well defined.

Quality of assets is key! Do not reach for yield.

America will regain her footing, but very clearly we are not out of the woods yet!

The best is yet to be!

Q2 | 2016

Good Buy America

If one believes The Bureau of Labor and Statistics, the unemployment rate climbed above 10% for the first time since 1982. Do you believe this number to be truthful? Do you trust our government to give us honest and correct information?

Whether it be protecting our shores, our environment, our financial soundness, our soldiers (internally or abroad), our consumers at P.C Richards or J.P. Morgan, the question is this: Is our government still competent? As I speak with clients and friends, there is a growing frustration in the American psyche that our government is no longer able to perform its “job functions”.

As the recent dollar trading suggest, a strong dollar would imply a strong country, just as the current weak dollar implies a weak one.

The U.S. has spent and wasted so much money, and now it is on the verge of passing a Health Care Bill that could very well put us in the way of a Mohammad Ali knock out punch.

Rather than focus on cost containment, tort reform, preventative care and directing tax policy to create jobs (in order to increase the private sector’s ability to provide health care), the Democratic Congress and President want to deepen the financial hole and create larger government. I’m sorry, but count me out. Yes, I do believe that everyone should be entitled to healthcare, but I also believe that it should be provided by the private sector. (i.e., the government run U.S. Postal Service reported a loss for the year of $3.8 billion.)

Rumblings have been heard about making the Federal Reserve a less independent institution and more accountable to the politicians in D.C.; Goll………y Gee!!! It is indeed in this country’s best interest to politicize everything?

So, as we continue to print money and the gold bugs continue to have their day, does anyone know where this is all headed?

The prognosticators predict anything from deflation, stagflation and inflation to the total collapse of the dollar and the purchasing of food with gold coins.

The greatest investor perhaps of all time, Mr. Warren Buffet, has just purchased Burlington Northern Railroad in the belief that: 1) more population growth in the U.S. means more goods will need to be transported, 2) trains are fuel efficient, 3) the U.S. will export more goods as time goes by and 4) that America is here to stay.

We feel great about this, as well as Berkshire Hathaway (Mr. Buffet’s investment vehicle — no not a train “vehicle”) for the long term. The stock pays no dividend, but has great management, great businesses and a great balance sheet.

So, if you are feeling bad about this country’s budget deficits because “federal tax receipts shrank by 16.6% in the 12-months to the end of September, with a decline of 54.6% in corporate-income tax receipts”1, please remember that to predict the end of an economic slump is not easy to do. As we have learned, the darkest hour is just before the dawn!!!

There are some positive signs that we are slowly climbing out of this funk. Corporate profitability has begun to turn. There has been an increase in demand for housing, and the consumer is not rolling over, just saving more.

The Christmas selling season, which officially begins the Friday after Thanksgiving, will be abound with sales, sales, sales and hopefully, there will be buyers (on not too much credit, we hope).

Finally, we end this year and the newsletter with some advice for the current administration. JOBS, JOBS, JOBS!!!

Nothing can lift the economy and the spirit of this nation as much as more jobs can. Every small business in America should be given a $25,000 tax credit towards new hires; and the cost of healthcare for that employee should be 100% deductible — just an idea.

Peggy Noonan wrote the following in an article in the Wall Street Journal, “[a] friend who emigrated from Nicaragua 21 years ago and lives now in New York knew right away what she was thankful for: her still-new country, ‘I’m mainly grateful that I could raise my son in freedom. I could vote for the first time in my life. I could express my opinions without being shot on the spot, jailed, or exiled like my grandfather. I could sleep through the night without fearing for my life. I cold work and buy food without rationing.’”2

Remember, we live in a great country.

As 2009 draws to a close, there will be very few sad to let it go. We feel the same way.

We are grateful for your support — customers, friends, advisors and vendors.

As we approach the end of the decade, all of us face challenges of one kind or another. Meeting these challenges builds character and makes us appreciate everything much more.

Thanks again for everything.

Happy and Healthy New Year.

Q2 | 2016

Good Buy America

It’s roughly one year since the financial meltdown started.

I do not know if anyone could have predicted the series of events that has occurred since that time, but certainly there are some lessons to be drawn from the “Great Recession,” which, contrary to the press, is by no means over.

Lesson 1: Don’t borrow too much money.

Lesson 2: Don’t think that your risk tolerance is higher than it really is.

Lesson 3: Understand how fear and greed can drive your investment decisions.

It has been said that when your friend is out of work — that’s a recession, but when you are out of work — that’s a depression. There are just too many people out of work for me to say we are out of the woods just yet, and sometimes technical terms do not provide the answers.

Nevertheless, the G-20 met and concluded that they should withdraw stimulus, but they are not sure when.

There is so much economic stimulus that it is truly incomprehensible. As Jim Grant wrote in The Wall Street Journal, “In the post world war era, the government has attacked recessions with an average fiscal stimulus of 2.6% of GDP and an average monetary stimulus of 0.3% of GDP, for a combined countercyclical lift of 2.9%… This time out, the fiscal stimulus is likely to measure 10% of GDP, monetary stimulus 9.5% of GDP, for a combined pickup equivalent to 19.5% of GDP.” This is an astounding statistic and argues for less to be done going forward because, as in post war eras, the economy recovered anyway without the massive outpouring of federal money.

Here in the U.S., President Obama has to walk a fine line; not enough stimulus and perhaps we fall backwards, but too much stimulus and perhaps inflation takes hold…

Many nonconformists believe that a strong bounce back will occur. There will be opportunities for sure, but I do not believe there will be a strong surge.

Meanwhile, China is in the driver’s seat. Chinese banks are extending loans as U.S. banks do not. China has a huge pool of savings upon which to draw for investment and spending as U.S. households save more and attempt to bring their debt levels under control. As China becomes more entrepreneurial, America seems to be moving more in the direction of Socialism. Who are the Communists anyway?

On a related note, the health care debate continues and continues—it makes me sick!!! Preventive medicine is truly the only real answer for the long term. I believe everyone should be insured—how to do so is the $64,000 question.

Antidepressant drug use doubled in this country from 1996 to 2005… who could guess what it is now??!!! The truth is that there have always been big challenges for us to rise to, and rise to them we must!!!

There has been a sense of entitlement in this country for a long time… leadership has tried, mostly through rhetoric, to change many of our domestic and international policies, but as long as this country has been fat and happy (credit cards), the rooster has not come home. THIS is what we are experiencing today and likely will continue for quite some time.

Investing will require more patience. We believe that the current rally is tiring, and that the markets will be range bound for quite some time. Certain equities will probably continue to deliver a “total return” that is acceptable to most cautious investors. Bonds, in general, have had a good run also, and may give a tad more return via capital appreciation if the stock market falters. Proven trading strategies and hedge funds will continue to outperform, and we are finding more opportunities in many different sectors to bring to your attention.

Now that a Russian businessman has bought the New Jersey Nyets (as they are now called), will they finally serve borscht at the games??? Also, now that water has been discovered on the moon, I want a ticket! It’s peaceful, no pollution, golf balls travel farther and the views are great! Never say never!!!

What will be the locomotive for the next move in the markets? Will it be a crisis with Iran? The Chinese selling their U.S. debt in the market? No doubt there is a great deal of unpredictability at this point. The key is to stay focused on YOUR OWN objectives, and don’t be distracted by short-term dislocations.

America is a great country, and there is no doubt that the best is yet to come!!!

Get a flu shot and stay healthy!

Q2 | 2016

Good Buy America

The Wall Street Journal reported that “the percentage of homes that are vacant fell 2.25% in the second quarter to about 18.7 million units, the lowest rate since mid-2006 and a sign that housing market conditions are gradually improving.”

That is really good news – what is not good news is that the government is piling on debt like never before.

Our thinking is although short-term interest rates are likely to stay low for some time, longer term interest rates will inch higher as investor expectation of increasing amounts of debt and inflation spooks the credit markets.

In our opinion, inflation is not going to be a significant factor until the fifth year of an Obama presidency. Do you see any political overtones in this prediction?

Global stock markets lost approximately $35 trillion of value from the high in October of 2007 to the March 2009 lows. Because the “de-cession”, as we call it, was a global phenomenon, governments around the world took coordinated action to combat the effects. This has very positive political implications for the future of the planet.

The more cooperation and communication among the world’s nations, the better the opportunities for prosperity and peace.

As the world recovers ever so slowly from the de-cession, China leads the way with huge savings and enormous stimulus to its own economy which has reignited growth internally. Because of its pool of savings, China will clearly have the upper hand in its financial dealings and ultimately its political dealings with its friends and foes.

Money goes to where it finds the best returns, and clearly the developing nations are growing faster than us. This does not necessarily mean that one should run out to buy stocks in these countries – very often these markets are not as efficient as the U.S. markets. There are many great U.S. companies that will benefit enormously from their operations in these countries (in addition to potential incremental earnings from the dollar depreciation) – thus we are investing in equities along these lines.

Russia and the U.S. seem to be beginning a “new rapprochement” as President Obama visited and struck a good response in the Russian hierarchy.

However, Mr. Biden quickly created havoc giving a tongue lashing to Russia’s leaders – was this a good guy, bad guy routine or is Joe “Biden” his time? Could Hillary be the next Vice President in a second Obama administration?

Global arms spending is up! World governments spend $1.46 trillion on upgrading their armed forces last year. China climbed to second place behind the U.S. Despite the economic downturn, global military spending was 4% higher in 2008 than in 2007 and 45% higher than a decade ago!

So all in all, the summer has brought a higher stock market, some increased confidence, and a great deal of rain! The message in this is to enjoy the good, hope for the best, but bring an umbrella as we never know when the rain will fall yet again.

Go and have fun!

See you in September!

Q2 | 2016

Good Buy America

What is the price to earnings multiple on hope? The stock market advanced as soon as President Obama said that it was a good buy. Did he mean a “good-bye”? Maybe the President should head for Wall Street after his career in government.

As the markets have surged over 30 percent in the last few months, we find ourselves saying “where’s the beef?”

In referring to the economy, Larry Summers, a former Treasury Secretary and the current Director of the National Economic Council, said that it no longer feels like a ball falling off a table. So does it feel like a ball bouncing once it has fallen off a table?

Anecdotally, many of our clients say that “it feels better”; some say “it feels better” just because they have become used to it, and some say it actually is better. So I guess when we realize that there is nothing to fear but fear itself that it actually is better!! Now…when “it feels better” consumers do what they do best, which is consume. The economy needs its balance sheet to be restructured and quickly. Banks needed to raise capital, which they did, while they wrote down bad loans. The Government “stress tested” the banks to determine how much extra capital they needed. This comforted the markets.

By and large, everyone agrees that business is off 25-35 percent. When lenders, buyers and sellers are able to digest this concept, the velocity of transactions will increase and the engines will start moving—in some places this is actually occurring.

So, as we write this letter, General Motors, once one of the nation’s largest corporations, is preparing to file for bankruptcy. What happened? GM’s costs were bloated, their products inferior, their management asleep and thus, their customers moved to better and more valued product. The average car in America is 9.4 years old. The companies that make the cars of the future will be some of the greatest new businesses of the 21st century. Why? Because the “green theme” will be increasingly important, and it is an example of a theme that will carry America out of its malaise.

Russia’s pullback, commensurate with oil’s pullback, may end soon if the price of crude continues to climb. If the dollar continues to fall, this will also benefit the Russians as oil is priced in dollars.

China’s accelerating power in its relationship with the United States is both good and bad; Bad because we should have never allowed ourselves to become so deeply in debt, and Good because the symbiotic nature of the relationship will most likely keep it in balance. We’ll see………

Speaking of China, the U.S. Government is borrowing money at an unprecedented rate. This has resulted in an increase in interest rates in the last few weeks. This rise is very dangerous and certainly must be monitored very closely—especially by fixed income investors. We have been buying bonds with this situation in mind and, therefore, we are well positioned to take advantage of rising interest rates. (Please be very careful if you are invested in bond funds, as you can never know if the capital will be preserved as is usually the case with individual bonds.)

Market volatility seems to have abated, but we believe this may be a temporary situation. Do not take on more risk than you can handle. It is important to set your asset allocation properly to ride out waves of volatility and potential inflation.

We are concentrating portfolios in “blue chip” and solid dividend producing equities, high quality corporate and municipal bonds and a stable of quality managers in the hedge fund and separate account space.

Our real estate portfolios have high quality and well leased assets, and high yielding secured debt instruments which hold great promise in their cash flows and appreciation potential.

The summer may be calm, but do not expect the markets to forgive investors for overreaching for returns. The time for caution has not passed, but we do give the Government high marks for taking the patient out of the emergency room.

Wear sunscreen!

Q2 | 2016

Good Buy America

Not too long ago, a billion dollars was a lot of money. Not too long ago, a trillion dollars was a lot of money. Well my friends, welcome to the new world, “The Quadrillion Dollar World.” Before too long, we’ll hear that term as our deficit and expenditures rise to unprecedented levels.

As the world becomes increasingly less confident in central banks, the price of gold has continued to rise. There is an inverse relationship between the two. The lack of confidence in paper money is showing up all around the globe. As capacity for resource producers becomes constrained (in the worldwide slowdown), commodity and material companies should perform well in the next upturn. Demand for resources will increase and scarcity due to constrained capacity will push prices higher.

The above are the reasons to own gold and resources, and it is in large measure our view of the future.

As the world economies look shaky, there is some compelling thought to look beyond the abyss to a brighter and more prosperous America. This is especially true when one can buy great American businesses on sale. When everyone believed that the trees were growing to the sky, few were willing to sell. Conversely, now too few are willing to buy at bargain prices: it is still dicey though, so do not over indulge yourself—always leave a margin of safety.

Will we recover? Will America prosper again?

As an investor, one must look to the past as a prologue to the future. Thus, my answer is a resounding YES!

President Obama has his work cut out for him. I would not want to be President now, but I would take the job in four years (as Mr. Clinton did). Bush Sr. fixed the economy in his first term, but never got a second try. This may happen to President Obama.

Healthcare is sick! The percent of GDP dedicated to healthcare in America must come down if we want to take care of everyone—and that is what President Obama wants, and I believe, will ultimately get. If so, healthcare costs will probably decrease per capita but increase as a percent of GDP.

I fear that quality and access to healthcare will decrease AND your taxes will increase to pay for the universal coverage. Right now the proposal is to limit the deduction for charitable giving to pay for universal health care. My friends, there is no free lunch—that is, if you actually make enough to pay taxes or you are not a proposed member of President Obama’s cabinet. Speaking of which, picking his cabinet proved to be dicey…..doesn’t anybody pay their taxes anymore?

A good attitude beats bad times. China has a good attitude—get it done and quickly. Believe it or not, China’s purchasing managers reported stronger numbers in February, and despite “thinking” otherwise, China’s exports to regions other than Europe and the U.S. account for 80% of their activity. Things are looking better for China and let’s hope it stays that way.

Our federal budget deficit will be between 12% and 15% of this year’s GDP. With savings rising, some of the shortfall will be covered by domestic buyers of treasury debt. However, we still depend as Warren Buffet would say, “on the kindness of strangers” to finance our deficit.

Bail out…that is what has happened to the country and the crooks that have stolen from innocent victims. We advocate that crooks who steal from the masses in white collar crimes should receive special punishment. Our society depends on honest and trustworthy capital markets. We also advocate that ANYONE investing on behalf of others be registered as an investment adviser and be held to the highest possible standards. Further, we also advocate that if the government polices activities, it should be held responsible for its failings.

Congressional criticism of excessive pay for failure sounds like the pot calling the kettle black!

I have enclosed an article from The New York Times. The housing crisis is at least ten years in the making. Time will heal these wounds, but let’s give credit to and when “credit” is due.

When the Dow Jones Industrial Average reached 6500 it looked cheap, and now at 7800ish, it looks ahead of itself. The yellow caution light is blinking.

Inflation is on everyone’s mind. My guess is that it is a little early to worry about it. The consensus is rarely right.

Thomas Jefferson said, “I place economy among the first and most important virtues and public debt as the greatest danger to be feared. To preserve our independence we must not let our rulers load us with perpetual debt…We must make our choice between economy and liberty or profusion and servitude.”

As we pile debt onto our economy and country, we must remember that OUR UNWILLINGNESS TO MAKE THE TOUGH CHOICES MORTGAGES OUR FUTURE.

Since 9/11 our society has adopted a “live it up” mentality. There is no question that the pain we felt led to the “roaring 2000’s.” As we come to accept the reality of the 21st century, we must come to the realization that we will never be the same.

Our hope is that the leadership of this great nation understands what has been sacrificed to get to this place of freedom and greatness, and that they are prepared to look beyond the populist political landscape.

Hope (and spring) springs eternal!!!

Q2 | 2016

Good Buy America

“We must accept finite disappointment, but we must never lose infinite hope” said by Martin Luther King, Jr. These days, his comment could not be more relevant.

The underpinning of every capitalist society is the financial strength of its banks. As of this writing, most of America’s large financial institutions have been compromised by loose lending standards and securitization of residential and commercial mortgages. We believe that these institutions were in too many businesses creating conflicts that inherently led them to muddy their balance sheets. When the added dimension of leverage came into play, it was like throwing kerosene on a fire. Money and humans have proven to be a highly combustible combination.

Strong balance sheets are critical to survive long recessions. Fortunately, the U.S. government will restore the balance sheets of the major U.S. banks no matter how much money it takes.

The systemic problems that created this deepening recession have many parties to blame—that is old news. Think of the recession as a big hole in the ground. The government will continue to pour money into that hole until it believes the hole is filled back up to ground level. The government usually continues to such an extent that it puts more money than needed and the money starts to pile up above the hole. This creates inflation.

In our opinion, this is likely to occur now because the government would rather deal with inflation than deflation. Therefore, until there are positive signs in the economy, we believe the government will continue to keep interest rates very low and the financial system awash in liquidity.

The turnaround that we are all hoping for is not likely to happen quickly. We are still watching the deterioration in the form of layoffs and bankruptcies.

If you were planning to die next year to avoid the estate tax, think again! President Obama has said that he plans to repeal the law eliminating the estate tax in 2010.

On a positive note, this year the individual estate tax exclusion (for federal purposes) has been raised to $3,500,000.

Carlos Slim Helú, the second richest man in the world and one of the most successful media businessmen of all time, is investing $250 million in The New York Times Company in exchange for the right to convert his holding into a majority equity position. Such is the weakness of some of the greatest American institutions.

What has happened? Have we been depleting our bounty at the expense of our future? I think the answer is a resounding yes.

Here is our interpretation: After 9/11, America went on a spending binge. Our country watched innocent people die and, as a result, many of us decided to live for today. The savings rate of Americans declined and consumerism was the word of the day. Consumer and mortgage debt ballooned (no pun intended) and the piper eventually showed up.

Now for the GREAT news. America will change. We will become a nation of savers and investors. And I believe that we will also become a nation of innovators and manufacturers again.

The risks you may ask? The risks are fear, despair, laziness and lack of good government.

But I am a Believer! We as a nation will overcome this dip.

What is exciting is to look for the opportunity and the silver lining in the cloud.

Despite difficult markets and unsavory characters that live in our waters, we will navigate this period with a rededication to all of the principles that have always guided our firm.

Tough people last—tough times do not! Help someone you care about and YOU will feel better.

Stay warm and safe.

Q2 | 2016

Good Buy America

That is what you would get from exchanging a $10.00 bill for one share of Citigroup. Can you believe it?

As we write this letter, the U.S. government grows bigger and bigger while private industry continues to shrink. Is this absolute proof (as we have stated before) that repealing the Glass-Steagall Act was the biggest regulatory mistake of the 20th century?

It is time for responsibility and accountability to return to American business. Hopefully, both of these concepts will become valuable again in the corporate world.

When I started working, one of my first mentors taught me “People do what you inspect, not what you expect.” That principle still holds true. Ronald Reagan said, “Trust, but verify.” That’s one for the gipper!

If Senator Obama governs the way he campaigns, the country is in for a great ride. Rarely have we seen organization, fundraising and messages so clear in the race for the nation’s highest office.

And speaking of shrewd, who is it that said, “Keep your friends close, but your enemies closer”? Hilary Clinton as Secretary of State keeps both Clintons from back biting the President-elect – well, just maybe!

The stock market roared at the appointment of Timothy Geithner as Secretary of the Treasury. We always respected Hank Paulson. However, spending crisis time defending “letting” Lehman Brothers fail gives us real pause. In our view, the government should have let Lehman enter into bankruptcy with the proviso that all counter-party payments would be guaranteed by the Fed. We also believe that the automobile companies should be put into prepackaged bankruptcies.

So many of our Nation’s businesses need fresh starts under the new economic reality, not band aids for old wounds.

If you think disinflation or deflation is here to stay, think again. We believe that after a bout of deflation, a new reality will emerge similar to the 1970’s when President Ford wore the “Win Pin” (Whip Inflation Now). Although we believe that interest rates are headed lower for at least six months, we feel that the yield on the 10-year Treasury note will be at least 5% at some point in the next three years. In addition, the price of gold rising is a leading indicator of future inflation.

Notwithstanding the fact that hedge funds have taken their lumps, most have performed much better than the stock market. This is not to say that the hedge fund world is problem free. In many cases, the phrase “hedge fund” has been misused; too often “hedge fund” has referred to a method of compensation rather than to an investment strategy.

There are rotten apples in every bunch, and no doubt there are plenty around now. We are proud to say that we are joining industry colleagues to form an “investor led activist and reform group” to assure that the hedge fund industry continues to weed out the bad apples and maintain the highest standards. We will keep you posted on our progress.

Many friends and clients have called me with questions about what is happening. In my view, the system became contaminated by easy access to credit and poor government self-regulation somewhat similar to giving a child all the candy he or she wants…

Our society has become irresponsible in many ways – a new age of fiscal responsibility is about to emerge. But it will take five years to feel the effects of the new business cycle and the tax and fiscal initiatives. (This does not mean five years of poor returns.)

Additionally, the world is interdependent. There is no such thing as diversification if all one does is invest on the basis that “over time the stock markets go up”.

It is important that we’re aware of our true risk tolerance in light of what has happened in the economy. Doing so requires careful re-examination of how family, health, career, emotional state, etc. affects one’s financial goals and appetite for risk moving forward.

At Family Management Corporation, we strive to create individual financial profiles and portfolios – we want to get it right for you!

Though we are far from perfect, we will always give 150%.

For your friendship, support, patience and loyalty through a very difficult year, we want to thank you from the bottom of our hearts.

May 2009 bring you good health, happiness, profits and always keep in mind that The Best is Yet to Be!!!

Happy Holidays!

Q2 | 2016

Good Buy America

It was the spring of1994 and President Clinton decided to introduce an enormous “home ownership initiative” that would eventually loan over one trillion dollars to people who did not qualify for a mortgage.

Thus, $200 billion a year for five years was pumped into the banking system with a directive to provide mortgages to those who were previously unqualified. So heavy handed was that initiative that the government was prepared to penalize banks (“The Community Reinvestment Act”) that did not lend to sub-prime candidates.

The Banks realizing the risk in holding these mortgages got approval to securitize these mortgages. Simply put, they sold them off to the public markets by creating income securities.

In fact, before 9/11, the Bush Administration tried to inhibit this reckless lending, but the planes hit, and the rest is history—Is everyone guilty and no one to blame?

The recent market gyrations have turned cowboys into cowards – remember the old song “Buddy can you spare a dime”? The answer now is, “no pal, I put it into sub-prime!”

As of the writing of this letter, Secretary Paulson has announced the “institutionalization of the cure”. (The Resolution Trust Corporation type answer to the problem)

The Government has injected billions of dollars into the financial system, plus it has guaranteed loans and values of publicly traded money funds. (I am proud to say that at Family Management Corporation we held only Treasury backed money funds for our clients.)

The markets breathed a sigh of relief and rallied stunningly on September 18th and 19th. Short selling of financial stocks (799 companies to be exact) was temporarily banned. Short sellers ran for the hills and regulators beamed as the markets snapped back.

Oil has retreated from its high and is hovering above $100 per barrel! High oil prices encourage conservation and innovation. Low prices encourage complacency and lethargy. We need high oil prices to keep the pressure on our politicians to legislate change!!!

Given the government’s need to raise capital, we believe that selling assets such as toll roads and airports will emerge as a viable solution. We believe that this is a good idea.

We also believe that saving AIG was the right idea. Not only did the government save our financial system from systemic problems, but the American taxpayer also is likely to make good money from this investment.

The American spirit is truly unique. Despite the sub-prime mess, look at how important home ownership is to the average American. The American Dream is real, and we applaud the risk takers who plucked down their money in an effort to provide nests for their families!

Treasuries remain an important investment for foreign central banks – as of August 27th, their holdings stood at $1.44 trillion. Government Agency notes and bond investments stood at $971 billion. Japan now holds approximately $583 billion of treasuries and China has the second largest stash at $503 billion. Thank G-d for our trading partners who buy our debt to help finance our ever increasing deficit. We believe that they should be included in the Treasury package.

Back to today’s headlines: Liposuction is what the government wants to do to the bad mortgages held by the largest American institutions. If the fat is gone, is the patient healthy or not? The answer is that the U.S. economy has been kicked in the stomach… (euphemism)

Don’t be fooled into believing that we will bounce right out of this – we do not believe so. Thus, be extra careful with your finances. This is a time to save and refill the cabinet with supplies for the inclement weather ahead. We expect a long period of sluggish economic activity before the clouds clear.

We also believe that the normal retirement age should be lifted to seventy. With the increased longevity in this country, this would make sense from both a sociological and economic point of view.

We are optimistic about America’s future no matter who wins the White House. Whoever wins, will be faced with greater problems than any President since FDR. Since 9/11, America has been on the defensive. Not realizing it, we slowly lost the upper hand on the economic front. It’s time for America to put its house in order. We owe that to our children and grandchildren.

Each of us has a duty to participate. Don’t think like the crowd and don’t get lost in it!