Is All This Necessary to Save the “System”?
December 22, 2008
Good morning. The end of the year is almost upon us, and not a lot of people are going to be missing 2008 much. The SPY is still down almost 40% on the year, and the market does not seem able to provide even a token end of year rally, though we still have a little time. Individual stocks in totally beaten down areas, for example DRYS, AA, XLE, RDC, C, etc. have had some high percentage bounces from their lows, but so far any sustainable rally of the general market seems elusive from this level. One positive shift last week is the drop in the VIX from over 54 to under 45, signaling possibly some shift in sentiment to the upside.
Where does that leave us? Certainly with a ton of questions going forward on the state of the economy, the state of the individual investor, the state of the American Corporation in general, and the state of government. Surely you would think they are tied together in regards to any set of solutions. It is this seeming lack of appreciation for how this is all tied together, and how every action on the part of any one sector affects them all has me very nervous about those we have graced with leadership positions. For instance, last week we heard ad nauseum about the auto companies (nice to know that every elected official and every journalist who never changed a tire is an expert on autos and manufacturing) and their $15 B loan. We also were treated to everyone opining on how much an autoworker should make, and whether he deserves health care or payments for when his or her plant closes. It is also nice to know that everyone (other than yourself, of course) should just suck it up and work for the lowest anyone in the world might be willing to work for. I wonder what a TV journalist (notice I was nice and did not say talking head) in an outer province of China gets paid?
My point is not to debate whether firms, and workers, in the long run need to be competitive to survive. Most everyone reading this knows my background is in Economics, and I would never say that it is healthy being non-competitive for very long. What is missing, however, is any sort of understanding of how we made it to this state of sad affairs. The economy is in total disarray, mainly because of over leveraging in the housing sector and in the financial institutions that fed off that sector. Those institutions, large banks, large investment banks, mortgage firms, etc. have essentially looted this country to a very egregious and damaging extent. We, meaning our government, have determined that these people need to be “saved” to the tune of several trillion (yes, trillion) dollars, really without much oversight or determination (or punishment) of who looted the places in the first place. Most leaders of these institutions are still there, most Boards are intact, and no one has missed a meal or had to fly commercial.
Fine. Maybe all this is necessary to save the “system”, and our leaders are doing the best they can given the cards they have been dealt (doubtful). Let us not be so ignorant, however, to not understand how this is working its way through the rest of the economy. The auto companies (not just ours) are high fixed cost producers that have traditionally not funded all the obligations they have promised people (sort of like government hmmm!) The economic downturn has caused auto sales to drop dramatically in a short time, say 45 to 50%, an incredible hit. The banks we are pouring money into seem unwilling to give out any loans, including auto loans or leases. Mainly because auto purchases for a lot of people (including the half million laid off just last month) are purchases very easy to delay, the auto companies are (and easily predicted to be) one of the first to feel the brunt of the economic contraction. Why are we surprised? We shouldn’t be. Would we also be surprised to hear that the fellow selling coffee outside the closed plant is having a bad year? I would hope not, but with our leadership, I wonder. The point is that we are giving massive amounts of money directly to people that have helped cause the problem, and seem to be a little ignorant or surprised about others being affected by the problem, and a little stingy with them. Somehow, it would seem, the solution of this whole mess does not rest with the autoworker being willing to work for $15 per hour. Maybe autoworkers need to own up a little more to the fact that their benefits negotiated and legally contracted for have never been funded, but to spend the amount of time castigating them as being undeserving and the source of the problem seems misplaced. How much should a bank V.P. be paid, a teller make, a TV talking head make, what should a politician’s pension be? I am sure everyone else would say Less!! Should the auto executives and Board members (and maybe union executives that let it happen) be sent to jail for making promises and not funding them? Absolutely! Should any politician be sent to hard labor for castigating an auto executive for non-funded promises given the amount of non-funded promises at the federal level? Yes! Should we have a little sympathy for those pension plans that have taken a 40% hit in the market this year alone, rather than telling people they don’t deserve a pension? Maybe so as well.
Enough of that. What about PTI and our clients? By now everyone in the PIP plan that does not have their funds in and IRA or some other retirement plan should be thinking about taxes. You have either been contacted, or will shortly, by either Dan Haugh, Robin Spitalny, or myself to discuss what your tax situation is in your PTI account. Hopefully you will have contacted your tax advisor so we can discuss if there is anything we need to do to mitigate any issues.
What about investing and making money? The drop in the VIX should mean that we could put some funds to work shortly at some better overall prices. As most of you are aware the very high prices of the long-term put protection have kept us in a lot of cash, but maybe that is starting to change a little. I am not looking for any V-shaped recovery next year in the market averages, but if we can enter the market at favorable underlying/put prices, I think we would like the opportunity to sell calls next year. If we could get even a little stability in the market, coupled with the elevated call prices, we could have a very profitable year.
This week Dave Westhouse is putting together a little summary of returns on some corporate bonds and preferred stocks. Some, like the CAT bond paying around 7%, may be of interest to some. Let us make sure going into next year that we are on the same risk page, and if you have any questions or changes going forward let us make sure to talk.