Wednesday, September 24, 2008

DON'T PANIC... but we must make change

I'm sorry I have not posted much the last few days. I've been up to my ears in financial documents, papers, calls, taking notes, and trying to learn as much as I can about the current situation.

Anyone with questions about how to invest their money or what to do now should consult a financial advisor. If you have money put away for your kids college tuition, or retirement, I cannot give you any advice as to where to put it.

But I can explain a little about what has been going on, and here it is...

We have over the last week, entered a new era in finance. In fact, a Senior VP at JP Morgan stated, it quite literally changed over night, from Sunday to Monday, with the announcement of Morgan Stanley and Goldman Sachs, a bell tolled and the investment banking industry died.

While markers have been on the horizon for some time- stagflation- a situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time- T bill rates at historic lows not seen since the 1930’s, reverse return cures, over consumption, over valued dollar, no savings, high debt, and outrageous military spending- we seem to all be caught by surprise at this collapse.

This is not a time to spend more, as our esteemed president is urging us to do, but to realize that current price to earnings ratios have dropped to an average of 20. The historical average is 16 and in order to end the bear market we’ve been in since 2000, we will need to see them drop to mid to high single digits.

Simply put, that means there is still a long way to go.

While a traditional response is to move towards value managers, with P/E ratios continuing to decline, be very careful. It is going to be a fraught market- it will be heard to determine when is something undervalued and a great buy and when will it become worthless.

Like Lehman’s. Bears Stearns. AIG. We’re not talking about quirky little micro cap companies.

Some mega cap companies have money on the balance sheets and are using it to buy back stocks- Nike, HP, Microsoft all did this on Monday in response to the fed’s bailout plan. This is an extremely defensive position.

The Fed has tried to come in and save the day with a proposed massive 700 billion loan repurchase program, whipped up over night, much like the decision to nationalize AIG was. The bailout creates more questions than it gives answers. Without getting into the nitty gritty, simply put it does not identify a pricing mechanism for the buy back. While its intention is to bring liquidity back to banks, it may in fact, accelerate losses in the very banks they are trying to help.

I’m not even going to discuss the absurd golden parachutes tucked into the bailout. The excuse is that the high level of management must be retained in the companies in order to keep them running- the same management team that in fact ran the them into the ground. As Rachel Maddow said, this is like asking a 7 year-old to watch over your 6 year-old and his mother lode of candy. When you get home, the 6 yr old has eaten it all, and the 7 yr old says, "You need more candy." (thanks Sue!)

Or telling Americans to go spend more.

It’s dumb.

We have to recognize our economy and financial systems are in extreme distress. This is not a time to sit by and hope for the best. It is time to start saving money. Remember that? When you didn't use credit cards but actually saved money up to buy something you wanted? Paid cash?

This is a time to live simply. Going to Crate and Barrel to buy candles is not living simply. Neither is, as I explained to my son last night, having three pairs of Nike sneakers because you want them in different colors.

It's about making due with what you have and since most Americans are living in obscene amounts of debt from over consuming, you should all have enough stuff to last for a while. When credit card companies charge more than loan sharks, it's time to say enough.

Enough with the war. It has not paid for itself. There is no oil revenue coming into our coffers. We are not liberating anyone. All we have to show for our years of war are dead soldiers, continued chaos and an unstable government unwilling to stem the violence as long as they have someone else there to do it.

Enough with the constant barrage of bullshit coming from the White House trying to push through a financial package that will continue to emphasize consumer spending as an answer.

It isn't. Consumer savings, raised taxes- yes, I said raised taxes, end of military spending at the current unsustainable level, is the only way out.

We must make change.


Blogger Sue J said...

Amen! Sorry -- no religious implication there ;-)

I heard Barney Frank on the Diane Rehm Show this morning and I feel a "little" bit better about our "leaders" in Washington. But you are right -- very soon this is going to hit the average consumer, and it's going to hit hard. Maybe my investments are safe, since I certainly don't have more than $100,000 stashed away. But what about prices continuing to climb? Credit rates shooting up?

Did Bush really say that we should go out and spend more? Is that his total understanding of economics?

11:38 AM  
Blogger Sara said...

credit rates are shooting up. yes, bush does believe we should spend more.

I think Barney Frank is doing an amazing job right now. The reality is, whatever they vote in will suck.

but if they don't do something? we really will end p with the great depression, part two. that's not from me, but from some senior investment folks who I cannot name.

and god, I hope donald has not read this yet, as I just went and found some wicked typos.

11:53 AM  
Blogger Sue J said...

Typos are the sign of an impassioned post.

btw, I just posted the video here of everyone's pretend girlfriend, Rachel Maddow, with the Halloween Candy metaphor.

12:01 PM  
Anonymous Morgan said...

Yes, my broker and I could be considered an item we have been talking with each other so much. You are definitely right about the saving part. It's cash on the barrel or nothing. This is going to have such social implications that our society is yet to realize.

12:13 PM  
Blogger (no subject) said...

wait a minute. "Consumer savings, raised taxes- yes, I said raised taxes, end of military spending at the current unsustainable level, is the only way out." isn't this obama's stance and hasn't it been for awhile now? *raises eyebrows* hmmmm...maybe HE should be president...just a thought...

12:51 PM  
Anonymous Anonymous said...

"It's about making due with what you have and since most Americans are living in obscene amounts of debt from over consuming, you should all have enough stuff to last for a while."

Spoken like a wealthy person. I actually don't have even close to enough and often I NEED my credit cards just to pay for things I actually need. I can't save or make investments and I've never set foot in a C&B. And I work and have a house (which I'm unable to sell, so I can't downsize any more) and use credit only when necessary.

I know your intentions are good, but that part sounded a bit full of "it."

4:58 PM  
Anonymous Anonymous said...

thanks for posting this for those of us who don't quite get all the shit that's spinning around.

5:48 PM  
Blogger Sara said...

anon, I am sorry if that seemed harsh but in reality, most americans live on credit cards and spend money they do not have.

when you have to live on credit cards to pay the basics of life- and I know people in this position- it is a miersable cycle that you cannot get out of.

Remember, I live in suburbia. A wealthy suburb. I watch people tool around in Escalades, BMW's wearing designer clothes and putting kids in every kind of program money can buy.

I understand it is not everyone.

but it is where I live.

6:37 PM  
Anonymous Anonymous said...

Buying back stock is an extremely defensive position? AIG, Lehman Brothers, and Merrill Lynch all had large stock buyback programs in 2007 when they thought everything looked rosy. Don't you think they would have been better off holding the cash in case they ever needed over the past few months?

10:16 AM  
Blogger Sara said...

buying back stock ends up investing in the company's balance sheet- it keeps stock prices up.

instead of taking that cash and spending it on capital improvements, buying new business- make sense?

it's actually a very conservative move which signals these companies are afraid of the coming environment where their stocks could spiral down.

4:13 PM  
Anonymous Anonymous said...

You might want to talk to your investment advisers again. Spending your cash to buy your overpriced stock doesn't strengthen your balance sheet. Nothing strengthens your balance sheet like having cash, or using it to reduce debt.

Buying back your stock is a sign of weakness. It shows that you believe your growth is limited and have no good opportunities to invest in the growth of your business through additional capital improvements.

If you have too much cash, pay a bigger dividend.

12:30 PM  
Blogger Sara said...

yuh, pay a bigger dividend? I have a bridge for you...

it's my opinion. not my investment advisor's opinion.

I will, however, go ask.

1:29 PM  
Blogger Sara said...

and anon? I looked at my notes- a senior economist at JP Morgan Chase said that.

yes, he could be very wrong.

2:14 PM  
Anonymous Anonymous said...

If a senior economist from JP Morgan Chase said it, then it must be true. No doubt they also told you a year ago that the financial system was about to melt down. If you were following their advice, then you would have taken all your cash and bought more stock in these companies. Do you think your balance sheet would be looking better now if you did?

2:40 PM  
Blogger Sara said...

actually, two years running they have been advising the economy was going down.

no, they did not advise to buy those stocks.

no, when JP morgan says it, that doesn't mean truth.

personally? I think it's all about sustainable living, sustainable businesses.

the bailout was rejected. think anyone on wall street will lose their homes?


3:16 PM  

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