Year End Wrap-Up
December 31, 2009
Happy New Year! This last year was certainly a tester, as really was the whole last decade. We will finish the year in the SPY up almost 25% at around 113 or so, after a furious sell off in the first quarter took the SPY down to a low of 67.10 on March 6. The VIX looks like it will close under 20, after starting the year around 40, so as the market has steadily climbed since March the perceived fear in the market place has dropped by half. Interesting! For the decade, the SPY started at roughly 147 as we all worried about Y2K, and is down approximately 23% for the period (I believe worst decade ever). So much for buy and hold, even though you still hear the pundits telling you to not only keep your investments un-hedged, but to pay them a fee to do so.
Make no mistake; it was a horrible decade for most normal investors with the view that earning 5-10% on their hard earned money as they approached retirement was almost a right. Returns on fixed income have dropped to near zero, and somehow banks pay you nothing for deposits even though they have not forgotten how to charge their clients. How many U.S. citizens do you think have $5,000 in a checking account earning nothing while having a credit card balance at the same bank of $10,000 charging them 18-25%? The return on saved money has been awful, not only for individuals, but for pension funds, endowments, you name it. What if you were a legitimate person on a pension Board (I guess that leaves out anyone on any state Boards in Illinois) and you picked, and funded appropriately, a conservative 4% return for the decade, only to have that return be negative? I would think your fund has a serious hole in its ability to pay people. PTI’s Protected Index Program returned a total of approximately 23% for the decade versus a negative 6% for the S&P (including dividends), so we had some positive return (along with lower volatility). For anyone who knows me, however, and I think most clients have a good feel, you know I did not get into this business to return 2.3% a year. Given the horrible cards we were dealt the performance is ok, but it still is not good enough for clients to feel good about their retirement and the money they have put away. No matter what happens in the market going forward I plan to do better than the last decade for our clients, I just hope we get a little help from the market. Maybe there is one year out there where it won’t feel like we are in a prizefight every week, but right now I do not see any relief in sight to needing to be imaginative and vigilant.
Why are returns to money so bad? I had a conversation at Christmas with a large contractor in the Chicago area who is paying 6-7% for working capital at a bank paying 1% for CD’s and virtually nothing for checking. That spread is insane, historically I am thinking good borrowers paid one or so over prime, say 6.5%, and banks returned somewhere between 2.5 and 3.5% to depositors. I will leave the whole credit card issue alone. How can that be, why do we have to pay all these “imbedded” taxes to refloat companies in industries that have caused a lot of the problems. Not all in the banking industry have been the cause of problems, but due to lack of competitiveness in the industry all are jumping on the new oligarchic-like pricing structure. In the America that used to exist, and maybe does not at all any more, someone would jump into the fight, see there are good customers willing to pay 7% for loans, and be willing to pay 2 or more percent for the funds to do it. That is what should happen to fix the now skewed pricing structure. Even a sup-primate should be able to see some opportunity and make some money here. Yet I don’t see it happening! Why hasn’t anyone stepped into the breach on car loans as GMAC has continued to blow itself up? Either we have all changed (totally lost the entrepreneurial drive to video games or something), or the barriers to entry in these businesses, regulation, fees, taxes, insane examiners, have gotten so bad that no one has the courage to try. As a country we better find out what it is and fix it, or we can forget about “Everyone going back to work as the economy improves.” I have news for anyone who looks around them, most of the old jobs are gone, and new ones will require a serious amount of entrepreneurial drive, capital, and the ability to be left alone from every level of government with their hand out. I just don’t see that in the near term.
I almost spilled my Christmas coffee when I read that the Chinese (Chinese?) have taken the lead in high-speed trains. I can’t believe this is happening, maybe I will wake up and it will all be a bad dream. The Chinese? We have a President (in full disclosure I voted for him and still am hopeful, but hope is fading) that talked about high-speed train travel months ago. Has he, or anyone, done anything about it but talk? It is reaching the point where I wonder if the man (President Obama) could possibly play basketball (as alleged), after he is done talking about the upcoming game it must be time to do something else. For those who do not know, the first high-speed train was built here in the 1930’s, a streamliner named the City of Salinas, followed by others like the City of Denver. These were 100+mph relatively fuel efficient trains built 80 years ago by American workers, American engineers, etc. with no help from the government. Now we have a President talking about maybe it being a good idea while the Chinese are actually making it happen. Does this bother anyone else but me? Not only would those be real jobs in the actual design and manufacture, but maybe we could save the homes of some people in those areas losing jobs if we could have a high speed commute for them to where new jobs might grow. No, let’s just talk about it, regulate it, and tax it, to the point where we never do it.
Is the cup really half empty, have I lost the ability to be optimistic? I really hope not, but I do think the powers that be (Republicans for a while, now Democrats) have seriously underestimated both the nature and intensity of the growing economic problems for a long time. We have seen income depletion for a lot of the population for well over a decade. It is not just the current crisis. We see education as a way out, yet somehow we have allowed the price of education to almost triple the consumer price index. I believe we can fix the problems if we look them square in the eye and admit what they are, but politically that somehow is not possible. For some reason, in the words of Jack Nicholson, maybe “We can’t handle the truth!” I think we have the economic equivalent of a broken leg, which we have the skill and manpower to fix over time, but we can’t if we keep treating the bone sticking out as a surface abrasion. There is much real work to do here, and there is profit in doing it, if the government will just let it happen. Instead of saving old banks, or maybe in addition to saving old banks, let’s let a few new ones in, maybe that was the problem in the first place. Let’s not get on the podium and talk about too much about excessive concentration in the banking industry, Mr. President, while every person in the Treasury and FDIC (your employees) are working tirelessly towards increased concentration.
What about the market? It is bumping along higher, but in a narrower and narrower range. The Nasdaq continues to lead, but the drivers (AMZN, GOOG, AAPL, PCLN) seem awful pricey with AMZN approaching 80 P/E for a retailer. As our technical analyst on Stocks and Jocks, Kevin Riordan, says, “2009 was a good year for the technical guys, as there are a lot of good looking graphs, like AMZN, that have performed very well. If you would have looked at the fundamentals you probably would not have gone near them.” There does appear to be some promising opportunity in the decreased volatility levels. If the VIX stays at these levels we will certainly look to profit from some long premium positions, in fact some of you may have noticed that we initiated one in IBM this week. The lower premium levels will also allow us to keep our protection in the PIP Program at much lower cost than in 2009. It is one of the great unknowns in the investment business as to why the price of put insurance drops (generally) as the market rises and there is more to insure. Last March, when the SPY was slightly under $70, the price of the $70 puts for December 2011 was almost $20. Now, with the SPY over 112, the $110 puts for the same month are roughly $14. You would think the chances of the SPY going to $96 over the next two years (a 14% move) would be a lot greater than the 28% move needed to break even when paying $20 for the puts with the SPY at $70, but that is not how the market thinks. It also is what creates opportunity.
We certainly appreciate your business, and we are always trying to be vigilant and gain whatever advantage we can in trying to protect your investments and provide a solid return. I think we have not been beaten up in the last two years like the average investor and have the capital, skill, and determination to deal with whatever the market may deal us in 2010.
It looks like Jon and I may be getting back on the air in the morning starting Feb. 1. It will be a lower power station but from 5:30 to 7, so a better time. Will keep you posted. We also may be holding a seminar sometime in February for those clients looking to have us trade a small percentage of their money in a different risk profile. For those who have been in that program the returns have been very good, but it involves some different risks and I think everyone should come in and understand what we are doing before going down that road. Again, we will keep you posted. Also, we are having a PIP seminar on Saturday, January 9th at 9 AM. View details and register here. Happy New Year!