December 23, 2008
"Madoff with Ya Money"
Punsters, pundits, politicians, and lawyers (of course!) are having a field day. Bernie's $50 billion gig is now another page in Wall Street's anthology of shame. Globalization in extremis, another international Ponzi scheme has imploded. Country clubs in St. Paul, Naples, Weston, and Palm Beach are declaring insolvency. Foundations are closing their doors. Many once wealthy individuals who are no longer, are sorting through the debris deciding whether to seek treatment from their psychiatrist, cardiologist, CPA, financial advisor or attorney. Others, those of us who have not been swept into this "cult of access," might be inclined to ask ourselves "What could possibly be next?"
Aside from the embarrassing revelations of the unraveling Madoff scam, one might also reflect on why a deception of this magnitude didn't send the global equity markets into further convulsions? Are investors, speculators, market-makers now immune to the relative size of such scandals? Faced with a Federal government deficit of $1 trillion for 2009, perhaps it's understandable that the investment markets have taken all this in stride.
If this also prompts one to question whether their own wealth management arrangements might be vulnerable to a similar con game, you might be reassured by the following:
1. Your assets are held in your name by a fully insured custodian (i.e., Charles Schwab, National Advisors Trust Company, or Fidelity);
2. You receive transaction advices directly from the custodian of all account activity, usually one or two days following any trade;
3. You receive through the mail monthly also directly from the custodian accountings and statements, as well as our quarterly reports. Up-to-the-minute status reports are available on-line through your custodian website access;
4. Your account is structured according to the Investment Policy Statement discussed and signed by both TFC and you at the beginning of our engagement, and
5. At our review sessions we usually "open the books" (perhaps sometimes beyond what clients might wish to endure) covering in detail what we think would be of interest to each investor.
Timely full disclosure and transparency are the essential protections to assure investors avoid deceptions like the Madoff sham.
What Might Be Next?
Philip Stephens in a recent Financial Times op-ed piece suggests that "…confounded by the present, the commentariat seeks solace in the certainties of the future." Nevertheless, undaunted by such reservations, one might consider the possibility that $40 oil for an extended period might prompt future debt defaults by Venezuela and Russia, as well as greater internal civil unrest in Iran. Such a series of events would be a further shock to the global financial system. The question for investors today would be how to psychologically prepare for this and position one's portfolio? Our answer continues to be a fully diversified exposure to a variety of global market sectors and currencies; "intelligent diversification," as our friends at Reynders, McVeigh phrase it. The longer term implications of hydrocarbon prices (down 77% from last summer's peak) at these depressed levels will turn on whether we can really alter the profile of our energy consumption behavior.
The underlying trend behind all this is the realignment of economic and, therefore, political power, throughout the globe driven by our energy addiction, information technology and the emergence of consumerism in the developing countries. Unfortunately, we as consumers, our government, regulators, and the world's central banks have no play book for this. We are all calling signals at the line of scrimmage. Our Federal Reserve Bank, printing money at a furious pace, has leveraged its own balance sheet beyond what as recently as last summer would have been considered imprudent by most measures. Attempting to control the deflationary bursting of the housing market bubble today, the seeds of future inflationary excess have been sown widely throughout the world. The challenge for the Fed, and the world's central bankers, will be to reabsorb all this emergency liquidity when the credit markets return to some semblance of order.
"As GM Goes, So Goes the Nation?"
When this writer entered the money management business, the nation believed our bellwether manufacturing industries were located in Detroit. GM was dominant, so powerful it was the target of zealous anti-trust Justice Department proceedings because of its DuPont stock ownership. Today, on political life-support and saddled with a $70.00/hour labor cost structure, the company's future hangs in the balance. The Federal government's "loan" just granted is the next step in a charade which will probably turn out to be the phased bankruptcy many have argued should be the logical outcome. A cynic might be tempted to conjecture that GM's fate, as suggested in the paragraph's heading above might also be in this country's horoscope?
The Worst Year Since 1931?
It's not over til it's over, but U.S. equity markets are headed for their worst performance in nearly 77 years. To date, the Dow Jones Industrial Index is off 35%, the S&P 500 Index is down 38%, the Russell 2000 (U.S. Small Company benchmark) has declined 44%. International equity markets performed poorly as well; MCI EAFE -52%, Emerging Markets -35.6%, and commodities, lead by oil, have plummeted. As many have said, there were few places to hide except U.S.Treasury bonds, notes or bills. In our balanced accounts, a significant portion of our fixed allocation has during the past many years been invested in the latter. Today, Treasury securities yield a negative real return, much lower than any point in half a century, tempting one to reach for increased yield in the tax-exempt and/or high-quality corporate bond sectors.
Year-end Portfolio Strategy Shifts
Another round of portfolio transactions is pending, completing our loss realization and fund restructuring program. You will shortly be receiving your custodian transaction advices which will be followed by TFC's year-to-date Realized Gains and Losses Report. Your CPA will want to review the latter before calculating your final 2008 quarterly estimated tax payments due by January 15, 2009.
Thank you again for your continued confidence in our efforts on your behalf. As always, your thoughts, comments and questions are most welcome. Please contact us via email at tfc@tfcfinancial.com or call us at 617-210-6700.
Best of the Holiday Season,
James L. Joslin
Chairman & CEO