After All!

What happens here affects there. But where is there? There is everywhere.

They (whomever they are) use to say that if America catches a cold, the rest of the world gets pneumonia. Then there were the “new age” economists who said “America’s days are over”.

We say Humbug! Without America buying goods from around the world, where would “they” be? Without American ingenuity? Capitalism? Deficits?!!!

It’s also a small world because big is out – at least we think it is. As behemoth organizations disintegrate, smaller organizations that deliver quality products and specialized services will flourish. At the end of the day, people want to deal with people.

Speaking of people, despite all the talk about the growth of China’s economy, U.S. GDP in 2007 was $13,844 billion while China’s was $2,773 billion; so don’t count our fortune out, cookie.

By the way, Russia’s GDP was not even one tenth of the U.S. GDP – it was $1,290 billion. We are not DIS-“PUTIN” that Russia’s economy has emerged as powerful – but it has a long way to go!!!

More importantly, labor unions in China are becoming powerful for the first time. Workers want overtime pay! Can you imagine???!!! Seriously, wage inflation has become a problem in China particularly in the urban areas causing production of lower cost goods to move further out of the metro-centers into the outer provinces.

Going even farther out, life on Mars? On May 5th, the Phoenix (spacecraft) landed on Mars and discovered that its soil could produce some vegetables, especially asparagus. With all the pollution and population we have on Earth, we had better move quickly – this food is potentially “out of this world.”

Back on Earth, citizens are tired of government putting the blame on the private sector when things go wrong with the economy. The increase in oil prices have been blamed on the speculators. Of course, the government, which has not created a coherent energy and conservation policy, is not responsible for any of the predicament. Remarkable!!! In six short months, the world has become aware of the laws of supply and demand.

The massive deleveraging of the world’s economies is leading to the liquidation of assets which can be sold. Great bargains will be found in those assets as buyers demand steep discounts and sellers just want to get out!!! The bargains include beaten down shares. Investors are not inclined to buy assets losing value. However, some shops are losing value because, not withstanding their intrinsic value, they must be sold!!!

As we move into the second half of the year, the challenges of investing are many. Western governments are showing poor leadership. Totalitarian systems are succeeding because of their national resource bases. Trade imbalances and deficits hamper the U.S. The U.S. Presidential election is uncertain. The planet is being abused, the list goes on…

Behavior modification is required for the U.S. to lift itself from this mess. We are overconsumers and borrowers. At the end of the day, I believe we can succeed and flourish. We have it in us to do so.

As investors, we must be mindful of this transition. Only through being nimble and cautious can we succeed.

We have managed to avoid significant pain this year. We will continue with our attitude of capital preservation and taking advantage of opportunities as they present themselves.

Albert Einstein said “the only real valuable thing is intuition.”

Hold on to your hats!!!

See you in September.

Filed under: Q2 | 2016 by Investment and Financial councel
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The top 29 hedge fund managers made $29 billion in 2007 according to The New York Times.

No wonder every kid wants to be a “hedge fund manager!” What about doctors and teachers…….my guess is that the top 50 teachers made about $5 million…

The “crude” reality is that it is now more difficult to get black gold out of the ground in Saudi Arabia with great demand from China, India and developing countries and oil prices may be headed for continued new highs…it is mind-boggling that the United States has yet to develop a comprehensive national energy and conservation policy.

Meanwhile, the falling U.S. dollar is on everyone’s mind, yet no one wants to address the real problem.

In the 1970’s, petrodollars, the money earned by oil exporters, were used to buy U.S. Treasury securities. This created a natural support for the U.S. dollar. Over the past number of years, oil exporters have been diversifying away from the U.S. dollar.

“Greater Europe” and Japan have been the beneficiaries of this diversification. Imports of products by oil producing nations have grown by over 40%, while imports from the U.S. have fallen 10%. The oil exporters are buying much more of their products from others. In short, American industry has fallen behind.

I wrote several months ago that high oil prices were good for this country because petrodollars were funding our deficit (and now funding the correction of the sub-prime mess) and thus our dollars were being repatriated. The real risk in this is the purchase of large blocks of U.S. companies by sovereign wealth funds.

Remember, that we live in a country that mostly reacts to crisis as opposed to taking initiative before crisis occurs.

In reality, the high oil prices are forcing us to do what we SHOULD HAVE BEEN DOING for many years—finding a solution!!!

Ultimately, this will be a positive…remember, no pain, no gain.

As I write this letter, I am in Israel. The Palestinians are hosting a conference inviting companies to learn about potential investment opportunities in their land.

The fact is that only through economic progress and raising the standard of living can a regime exist and perpetuate itself. We view this as a positive sign and believe that these kinds of conferences, and hopefully the ensuing investments, will make it easier for peace to prevail.

The U.S. economy is having a difficult time no matter how one were to label it. We have a 23 year high inventory of unsold homes, a 49 year low in per-capita home sales, a 28 year low in consumer confidence, and an all time high in inflation adjusted oil prices.

Now for the market reality—the S&P is at the same level as it was nine years ago!

When Mr. Greenspan bailed out the hedge fund “Long Term Capital” and smoothed the shock wave caused by the Russian debt crisis that same year (1998), he in effect rewarded investors for assuming risk and losing.

Then we approached the year 2000, and EVERYONE was worried about the Y2K. The hypothesis was that computers would cease functioning, “planes would fall from the skies and utility plants would shut down” and a lot of other poppycock!!!

In response, the Federal Reserve made funds abundant, which ultimately resulted in the excessive use of credit.

If nature had taken its course, the natural cycle would have led us to a healthy recession in the late 90’s, which would have flushed the system of its excesses.

What did happen, however, was a continuation of “the party” and the continued extension of credit (indiscriminately at times) and, thus, here we are.

As the system goes through a period of de-leveraging (which may last a few years), Americans will feel further pain and our standard of living may decline as we are forced to reduce debt and to and use less energy.

The world has 6.7 billion people. The demand for resources from our planet is exploding. By the next generation, the population is expected to reach 9 billion people. The message is “start conserving now”!!!

We continue to like the energy and natural resource sectors (including water), infrastructure plays and basic consumer franchises.

As we also believe that interest rates are not likely to move lower, we are cautious about the maturities in our bond portfolios.

The markets, in our view, are likely to remain volatile. Better leadership and clearer policy from Washington would help, but that is not likely until late 2009, one year after the elections (if ever!).

Stay well diversified and extremely cautious in your financial decision making.

Just remember if you are looking for big opportunity, seek out a big problem. We are always looking!

Filed under: Q2 | 2016 by Investment and Financial councel
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Approximately 8 million homeowners have negative equity – that means they would owe the bank money if they sold their homes! If home prices decline another 10%, the number would double to nearly 16 million homeowners.

The events that have transpired in the financial world over the last few weeks are unprecedented, and ultimately raise the question, “Was the repeal of The Glass-Steagall Act really in the best interest of the nation?”

Well, this has certainly been The Year of the Rat. Whom do you think we mean?

Web searches for the word “recession” are up 155% year over year. I think that puts an end to the question if we are actually in one!

Even though retail sales are reportedly up, the reason behind it is inflation. Americans are spending 13% more on food and energy than they were a year ago, and gasoline prices are up 22%. Department store sales are declining at a rate of 3%, while women’s apparel stores now take in four times as much revenue as stores dedicated to men!

Speaking of smoking, nearly half of the world’s smokers live in China, India, and Indonesia. More people smoke in China than live in the United States!

Egypt’s young are turning to Islamic fervor because of a deteriorating economic climate; in 1986 there was a mosque for every 6,031 Egyptians. By 2005, there was one mosque for every 745 people! Egypt’s political climate is an important barometer for what will transpire in the Middle East.

For the first time in history more than one in every 100 Americans is in a prison or jail. States spent $49 billion on correctional institutions last year – up from less than $11 billion 20 years ago.

The primary reactions to Obama and Hillary have been fascinating. The Obama phenomenon, especially among younger voters, is remarkable.

This is truly a presidential race with “electile dysfunction.” What is that you ask? It is the inability to become “excited” about any of the candidates!!!

The Federal Reserve acted wisely to stem the fear of investors. Nevertheless, there is a structural problem in the housing market and our society is over leveraged. The leverage will not disappear in a month, two, or three. It will take a few years to work through the excesses.

As we have said before, there are a lot of good buys in this market…….goodbye to your house, goodbye to your car…

It is important to be hedged and well diversified in your portfolio. Be thoughtful about ALL of your investments.

In the meantime, spring is here and will bring warmer weather and a season of heated political debate.

We will stay tuned!

Filed under: Q2 | 2016 by Investment and Financial councel
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$7 billion here, $7 billion there. Sooner or later, it adds up to real money. Societe Generale’s rogue trader was only 31 years old. It took many older and wiser American Wall Streeters to lose that kind of money. Scary, isn’t it?

What is most concerning about the current mortgage securities meltdown is not that credit was extended to many who did not deserve it – it’s that there was the lack of checks and balances in the system that permitted it to happen.

To mitigate the swoon in the stock market, the Federal Reserve cut the Federal Funds rate by ¾ of a point. We believe that Mr. Bernanke has been reacting to events rather than anticipating them.

The stock market is clearly in trouble because the economy is in trouble. The collapse of credit is behind the current situation. We believe that this situation will last beyond 2008.

In the first six years of this decade, mortgage debt and consumer debt doubled. Credit card debt, we believe, will be the next shoe to drop.

A recent NBC poll found almost one-third of consumers said their priority for 2008 was to spend less.

We could be entering a period similar to the one between 1969 to 1982. In that period, it was a stock picker’s market. Short selling was very productive, and alternative asset classes, such as real estate and commodities, did well.

Nobody knows where “the market” is headed, but caution is the operative word.

Power, let’s talk power. The U.S. has 3% of the world’s population, and yet, consumes over 25% of the world’s power – what is wrong with this picture?

We like niche power companies as great stock plays in 2008.

Oil rich nations are now using more energy at home, cutting their ability to export. Indonesia has already made this flip, and some project that Mexico (the number two source of foreign oil for the U.S.) will flip in five years – with Iran soon to follow.

Some governments of these oil exporters subsidize gasoline prices by selling it for as little as 7 cents a gallon; that, of course, encourages great waste.

Speaking of waste, by the next Presidential election, the two nominees are expected to break the $1 billion mark in spending.

Unfortunately, our politicians are offering no solutions, just rearrangements of our problems. Until we get competent leadership willing to make tough choices, America’s course will be more reactive that active.

Please keep us very up to date on your total financial picture. We want to know how your business is, and if you anticipate any changes that could adversely affect your needs. We are confident in our ability to navigate these markets, but always need to understand where you are.

You know that our choices at Family Management Corporation are always pro-active – we will always sleep with one eye open.

Stay warm.

Filed under: Q2 | 2016 by Investment and Financial councel
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