Revenge of the (Harvard) nerds
I catch a lot of flack for reading Harvard Business Review.
“Egghead academics with no real-world business experience telling you how to deal with a pain-in-the-a** employee? No thanks,” is how one colleague put it.
I showed him the return Harvard’s endowment generated in fiscal year 2008; it shut him up. Whatever they’re doing in their ivory towers isn’t all that complicated, and is a testament (yet again) to the benefits of asset allocation and a properly diversified portfolio. So relate this little tale the next time one of your clients gets emotional. Whether it’s an up or down market, money is still to be made. More importantly, this also means your poor performance is a whole lot tougher to excuse.
James Stewart, writing in his Common Sense column in the Wall Street Journal, runs through the numbers. The endowment generated a return of between 7 percent and 9 percent for fiscal year 2008.The S&P 500 fell about 15 percent during the same period – which equals a 22 point spread (if you didn’t get that, find another career).
“How did Harvard do it? The key is diversification, and not just by investing in a variety of stocks and bonds,” Stewart writes. “Harvard invests in 11 noncash asset classes, only one of which is U.S. stocks. Like Yale and other large endowments, it counts on one or more of those to shine even when others are weak, achieving better long-term results than could be attained with fewer asset classes. It looks as though Harvard's 33 percent allocation to real assets, which include commodities and real estate, salvaged performance in what was otherwise a treacherous year.”
Read the whole thing at online.wsj.com.
Hank's unholy trinity
This monster just won’t die. Fannie and Freddie will survive, and we missed a historic opportunity to rid ourselves of them once and for all. Holman Jenkins says as much in the Wall Street Journal earlier this week. It’s an excellent bit of analysis on the financial and political risk that the market is pricing into the mortgage giants’ shares (Freddie was selling for $3.99 Tuesday compared to $67.20 a share a year ago). One particular item of interest was his mention that the legendary Bill Miller doubled down on his Freddie stake. Yeah, he’s taken it on the chin of late (as have we all), but I’ll still trust old Bill to sniff out alpha in the most unlikely of places.
The key to the twin Fs’ survival - of course - is Henry Paulson, whom Jenkins rightly notes was granted “near-monarchical powers” in the housing bailout legislation. He describes Paulson’s thinking this way:
“I, Paulson, understand that their share prices are irrelevant as long as the government backs their debts. You, Mr. Market, are testing my will, but soon you will understand too. Then Fannie and Freddie shares will recover. Investors will realize their taxpayer-backed business model is going to survive and will step forward to provide whatever amount of capital their regulator specifies.”
Read the whole thing at online.wsj.com.
Greenspan is "utterly clueless"
Not my words, so put down the pitchforks and back away. Got an e-mail from my friend Sam alerting me to Bill Fleckenstein’s post on MSN Money, and it’s one of the more reasoned criticisms of the former Fed chairman that I’ve read. Greenspan’s recent contradictions are raising eyebrows (to put it mildly, it isn’t as if the official record isn’t there for all to see), and the reactions I received to last week’s tempered take on his comments in the Wall Street Journal are an indication passions will continue to rise.
"[M]y strongly held (and well-documented) view [is] that when it comes to matters of economics, Greenspan is utterly clueless and unable to learn from his mistakes," Fleckenstein says.
Strong words. I was going to grant Greenspan some quarter because of the size of Long-Term Capital’s collapse at the time, but when you're talking about $30 billion in government loan guarantees for Bear, it evaporates pretty quickly. Again, the argument is about the precedent set.
Fleckenstein says it better than I. Read the whole thing at http://articles.moneycentral.msn.com.
Greenspan's gripes
I’d chalk it up to the ranting of a crotchety old man, but the guy’s as sharp as ever. In an interview this week with the Wall Street Journal, Alan Greenspan takes issue with the government’s response to Fannie Mae and Freddie Mac. After unease with some of Greenspan’s comments lately, I’ll agree the government’s response was less than stellar, but it is the government for God’s sake; I was never expecting much. Remember, it was Congress (Chris Dodd and Barney Frank in particular) who were encouraging Freddie and Fannie to make more loans available (i.e. take on more risk) as the meltdown was happening. Not exactly a tightening of the belt.
“They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted -- with necessary taxpayer support to make them financially viable -- as five or 10 individual privately held units, and auctioned off," Greenspan said.
Any time I see the word “nationalized” I get queasy, but it’s tough to truly nationalize something that the government already has such a big hand in anyway, and what he suggests is actually a path to privatization. I certainly don’t agree with everything he says, and his luster has unquestionably diminished of late, but as I said, sharp as ever. …
When has capitalism not worked?
Chicken and egg, cart before the horse — pick any of the obvious clichés. Here's an old point, but one worth repeating in the run-up to the Olympic games: Russia stumbled in its early crack at capitalism because economic reform followed political reform. Without a strong centralized government, party bosses seized what they could in the post-Soviet feeding frenzy. If the party put me in charge of one of the people's factories prior to the union’s collapse, it was mine for the taking once the Wall came down. China, on the other hand, proceeded with economic reform with the world holding its breath (and now turning blue) in anticipation of political reform.
I only bring this up in order to point to former labor secretary Robert Reich’s confusing blog post on authoritarian capitalism.
“The real competition lurking behind the upcoming Olympic games is between democratic capitalism and authoritarian capitalism … We thought capitalism and democracy went hand in glove. They don't … when it comes to civil and political rights, China today is where it was almost two decades ago at the time of Tiananmen Square.”
He concludes by telling us to think of the upcoming U.S. presidential election as our own Olympic games. According to Reich, “It will showcase to the world whether, and how well, democratic capitalism still works.”
I have no idea what he means by this. When has democratic capitalism (at least in this country) not worked? For those tempted to quote Enron or the latest bubble burst, the first was a perversion of capitalism (yet another cliché, the only problem with capitalism is capitalists) and the second is exactly how capitalism is supposed to work in over-heated markets.
Read the whole thing at http://robertreich.blogspot.com. With all due respect to a former labor secretary, what am I missing?
Warren Buffett's hypocrisy
Truth be told, Warren Buffett’s politics and policies scare the crap out of me. Every one of his public pronouncements about what we should do in the political realm almost always contradicts what he does in business. It seems like an obvious contradiction and raises the question as to whether or not he could have achieved his fantastic wealth if his ideas were implemented sooner.
A fascinating lunchtime discussion with Buffett and Bill Gates took place last May at Gate’s home in Medina, Wash. Moderated by Michael Kinsley, the three discussed Gates’s idea of creative capitalism, the latest twist on corporate social responsibility.
“[W]hat if you had three percent ... of the corporate income tax totally devoted to a fund that would be administered by representatives of corporate America to be used in intelligent ways for the long-term benefit of society?” Buffett asks in his opening remarks.
The rich, he claims, will never trust government to effectively administer their money, so tax them anyway, but have it administered by representatives of corporate America.
Interesting idea, but it’s still the forced redistribution of wealth to fund someone else’s idea of what’s socially good. Milton Friedman famously wrote on the topic in his essay “The social responsibility of business is to increase its profits.” That was 1970, and the arguments he raised then still rage today. I point you to the August issue of Boomer Market Advisor for a discussion of the socially responsible steps that corporations and individuals are taking that aren’t forced and are incredibly effective.
The entire transcript of the lunchtime discussion can be found at http://creativecapitalism.typepad.com. It’s well worth the read.
No more naked (sigh)
I’ve gone on about this for far too long now, so barring something spectacular, it will be my last post on naked short selling. But I absolutely have to point to L. Gordon Crotivz’s piece at www.wsj.com. He validates my earlier viewpoint (at least in my own mind) that the dustup over naked short selling was more political than practical. Writes Crovitz:
“Asked for an example of false market rumors bringing down a firm, Harvard financial historian Niall Ferguson thought for a moment. 'You might look at France in the 18th century,' he suggested."
Seems it happens much less than politicians would have you think (or not at all). And how’s this for irony:
“For one thing, rumors about Bear Stearns' losses appear to have been true, confirmed by the federal regulators who oversaw the forced sale of the firm. For another, the list of the largest financial firms being protected from naked short selling by hedge funds (among their most important customers) includes several being investigated for potential manipulation of Bear Stearns and Lehman shares. Still another, Fannie Mae and Freddie Mac are among those being protected, even though forensic-accounting short sellers (naked or not) were right over the years to warn that the federal housing insurers were putting taxpayers at real risk. A final irony: In the credit crisis, the one class of financial-services firm that has not collapsed or begged for a bailout is the hedge-fund industry.”
Pump and dump, distort and short
I like Chris Cox (try saying it like Sir Mix-A-lot). I liked him as a congressman, and I like him (mostly) as SEC chairman. Even so, I came down pretty hard on his naked short selling announcement last week (let me re-phrase: his announcement on naked short selling). I’m certainly not for naked short selling (it’s illegal anyway), but I envisioned a repeat of the commodities “speculators” scapegoating we witnessed recently being applied to all short sellers. Apparently I wasn’t the only one, and Cox set to reassure skeptics in an op-ed piece in Thursday’s Wall Street Journal. A sample:
“Abusive naked short selling is far different from ordinary short selling, which is a healthy and necessary part of a free market. Manipulative naked short selling is one worry investors shouldn't have.”
I don’t think any of us can necessarily be blamed for our response to Cox’s grand pronouncement last week on short selling. It’s an election year, and easy answers to complex problems are the norm. I absolutely should have specified that Cox was referring to naked short selling, and he hit the right notes in the Wall Street Journal piece. Read the whole thing at www.wsj.com.
Screwed by the SEC - Your reactions
Never thought the word “naked” would be so loaded. Had quite a bit of reaction to last week’s post on short selling. Call it lost in transcription, but due to a transcription problem caused by spotty cell phone service from rural Massachusetts, the subject line mistakenly read FCC instead of SEC (incredibly cringe-inducing, as if the FCC didn’t have enough problems, wardrobe malfunctions and all). Once corrected, it didn’t slow reader commentary. A sample:
“I have no problem with people making money … but not when they make this profit by selling out the stability of our country and making life miserable for millions of people. This is greed pure and simple.”
“I agree this is a knee jerk reaction, but I also agree that individuals or entities that are trying to manipulate the market should be HARSHLY punished. So the question is how do we ... or should I say the SEC do this? I think the theory is bring down the hammer and then we may be able to ease it off later.”
“What people don't seem to be understanding is that they are outlawing NAKED short selling. [A] large hedge fund could theoretically short a stock into the ground if they had enough money and never have to actually take delivery of the shares.”
“I believe that the only entities that should be able to short stocks are market makers, in the effort to create an orderly market. I do not believe that naked short selling should be allowed at all."
“Yep, just watch the Senate hearings if you want to see some totally ignorant grandstanding.”
“This isn't about short sellers. It is naked short selling, fails to deliver. That's what's not legal. I'm curious how you twisted this into a them against us. It has always been illegal to not deliver.”
Call me oversensitive, but after the skewering the G-8 summit gave commodities speculators I saw another political potboiler on the way. I agree I should have specified naked short selling. For more on the controversy, see Holman Jenkins's excellent piece “Washington loves bank investors” at www.wsj.com.
Two politicians and an oil billionaire
I don’t usually pay much attention to media advisory press releases from Washington. It’s usually a junior senator out to make a name for themselves and the content doesn’t relate to what we do. But I stopped short of the delete key on the latest.
***MEDIA ADVISORY***
SENATORS LIEBERMAN AND COLLINS ANNOUNCE HEARING ON ENERGY SECURITY, T. BOONE PICKENS TO TESTIFY
I greatly admire Senator Lieberman on just about everything except his proposed energy policies. Not that his heart isn’t in the right place; I just think the cost/benefit analysis of the climate bill he co-sponsored with John Warner doesn’t work. It will do little to actually help with climate change, it won’t help your clients' wallets and certainly not their portfolios. But no matter the opinion, the inclusion of oil billionaire (and alternative energy convert) Pickens will make for an interesting day. Tune in tomorrow (Tuesday, July 22nd 9:30 AM) and then share your thoughts here at www.boomermarketadvisor.com.
Boomer Stat of the Week
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