Don’t Drink the Water

May 4, 2009

Good morning. A mostly sane and slightly positive week last week, with the SPY up from 86.66 to 87.89, or 1.4%. The relative sanity was reflected in the continuing drop in the VIX, from 36.81 to 35.29, or 4.16%. You would need to go back to last September to find the VIX this low, and again it is an indication that investors are starting to feel (rightly or wrongly) that some positive things are starting to happen and maybe the worst is behind us. It does seem that the rate of economic degradation is slowing, and that maybe a “bottom” might be close, but any amount of time spent at these levels without significant growth would bring about another whole set of problems. For instance, in the auto industry it would be a positive thing for sales, which in some cases were off 45-50% year over year, to stop going down, but even moving up to down 35-45% for any length of time still spells doom for most. We need significant growth from here, the kind of growth reflected in real jobs and real income, and I see no signs of that yet. I am seeing some people starting to use the time for retraining, and others actually looking at new businesses, and those steps are positive.

Last weekend we had another of our Saturday morning Protected Index Program® seminars at PTI, and again we had a terrific group. I really do enjoy meeting the people that take the time to come down on a beautiful Saturday morning to learn something about investing. We had a solid give and take about the market, and I would say that it was the unanimous view that an awful lot was wrong with Corporate America. There were, to no one’s surprise, differing views on government’s role in “fixing” the corporate model and how much the federal involvement should be (if any), but no one seemed satisfied with the current situation of shareholders of most large companies, either in profit participation or in influence on policies. In short, the conundrum seems to be how to invest profitably and relatively safely in companies; while knowing that some percentage of the management teams are totally out for themselves and almost totally unchecked. I would say the buy, trust, and hold theory was pretty dead with the group present on Saturday.

I have, from time to time, talked about the role of personal morality, or lack thereof, in the current economic mess we find ourselves. In doing so I have tried to not make it a generational thing, as this new generation certainly did not invent stealing or looking the other way while someone else did. Even in the corporate area one only needs to look at the sordid history of the first real Corporation, the Union Pacific Railroad, to find that most corporate dirty tricks are not new. In some cases it does appear, however, that people’s outrage with immorality is waning, or that we are becoming more immune to it, and that I find a bad sign, but there is no indication that the current group has invented anything new. I did hear something on Saturday morning driving into the seminar that put, for me at least, some of this in perspective.

For those that are not from Chicago, I will give a brief history of a problem in one of our suburbs. It seems like the Village of Crestwood, for a long period of time, had been mixing tainted ground (well) water with the Lake Michigan water they were purchasing. This ground water had been tainted, and was known to have been tainted, by dry cleaning solvents that had been allowed to seep into the system (the perpetrators of which are probably long gone and unpunished). Anyway, for some reason (savings or lack of volume) the people running the show decided to mix the two and pump it out to people for drinking. In a strange mix of events, dealing with a combination of revenge and whistle blowing, this was actually found out and all hell has broken loose from people who had been drinking the stuff. Anyway, our new governor is now supporting a bill that would require anyone working in a water treatment area to come forward and report if any municipality is sending unsafe drinking water out to the general population. This is not a shot at Gov. Quinn, but have we really reached the stage where we need a law to require someone to have the backbone to report unsafe drinking water? I put this right up there with the sign on the bus requiring healthy people to give up their seat to people that can barely stand. Throw in the warning that Viagra does not protect against STD’s (what moron would think it would). Maybe we also need a law that requires Board members (wealthy, educated people) to have some feel for the shareholders (read, owners), some feel for the environment, and to generally get your head out of the behind of the Chairman. If we are at the point (due to rampant materialism, parental disinterest, no-fault religion, or something) where we need to tell a large majority of adult citizens what basic morality and conduct is then we have a real problem. To say that our political system is not up to the job of being both parent and pastor is an understatement.

Anyway, the big business news this week is the Chrysler bankruptcy. Danger, danger!! Why do I say that? For one it appears that it is nothing more than a test for the so-called “surgical bankruptcy” touted by none other that our new President, and eventually destined for GM. What does that mean, exactly, surgical bankruptcy? It appears that someone, in this case the government, gets to walk into the Bankruptcy Court and tell the judge what the deal is, seemingly without regard to corporate law or previous precedent. In this case, it seems like the unions and senior bondholders are taking the hit. In most cases, the Judge gets to hear the case and decide who gets what, or whether to liquidate or not. In this case it may actually be in the best interest of senior debt holders for the company to be liquidated, but any rights they would normally have seem to have been “usurped” for the greater good. In this case it may actually be the “best” outcome, but who gets to decide all these things? Rahm Emanuel? Tim Geithner? President Obama? I am mostly a Democrat, but this makes me real nervous. Why did we not have a “surgical bankruptcy” with Lehman, Bear Stearns, or AIG where we marched into Court and “surgically” removed their liabilities regarding Credit Default Swaps? You and I, not to mention the government’s balance sheet, would look a whole lot better, even if Goldman and a few others looked a little worse. The point is, to me “surgical” is just a synonym for “politically expedient” and exactly the reason why there is a separation of powers. Then again, everyone knows it is politically easier to shortchange some union workers and anonymous bondholders than Goldman.

So, has the investing “all clear” been sounded? Some of you have noticed that we have committed some more money to the market in the last couple of weeks. That is due to a combination of a little more confidence and a decrease in the cost of the put protection. I am still very concerned about the economy spending any time at these levels, and if some growth does not show itself by fall I think we need to prepare for some more problems with the market. There still is some “relative” opportunity in industries that have been totally beaten down. If we do start to actually show some growth I think some of the infrastructure plays (like Foster Wheeler FWLT) might outperform, or natural gas (Chesapeake CHK or EL Paso EP). I also think you need to watch some of the homebuilders or REITs, as they have been beaten down so much they will give high percentage gains with the first hint of a recovery in that area (even though actual recovery may be a ways off).

It is still being negotiated, but there is a good chance that the radio show will be back in June as an internet only show. Details to follow.