One Dozen Notes on our Current Situation in the Markets

I’m leaving for two days.  I might be able to post while I’m gone, but connectivity is never guaranteed, particularly in southwestern Pennsylvania.  (Sometimes I call it “the land that time forgot.”) Apologies to those that live there — Pittsburgh is the capital city of Appalachia.

Here are a few thoughts of mine:

1) Many have been critical of Buffett after a poor showing in 2008.  Much as I have criticized Buffett in the past, I do not do so here. The mistake that many make in analyzing Berky is forgetting that it is first an insurance company, second an industrial conglomerate, and last an investment vehicle for Warren Buffett for stocks, bonds, derivatives, etc. With most of his investments, he owns the whole company, so you can’t tell how Buffett’s investing is doing through looking at the prices of the public holdings, but by reading Berky’s financial statements. By that standard, 2008 was not a banner year for Berky — book value went down — but it was hardly a disaster. Buffett remains an intelligent businessman who deserves the praise that he receives.

From The Investor’s Consigliere, he agrees with me.  Berky is more like a special private equity shop than like a mutual fund.

2) I’m past my limit for cash for my broad market portfolio.  I have sold bit-by-bit as the market has risen.  I’m planning on buying more of my losers, or finding a few new names to throw in.  Will the current “bull market” evaporate?  There are some sentiment measures that say so.  Also, when cyclicals lead, I get skeptical.

3) As correlations rise, so does equity market risk.  Are we facing crash-like risks now?  I don’t think so, but I can’t rule it out.  My opinion would change if I knew that major foreign investors were willing to “bite the bullet” and recognize the losses that they will experience from investing in Treasuries.

4) My initial opinion of Ben Bernanke, which I repudiated, may be correct.  My initial opinion was that he would be a disaster.  Now that the transcripts of the 2003 Fed meetings are out, he was among the most aggressive in loosening policy, which was the key blunder leading into our current crisis.  It also explains the novel policies adopted by the Fed over the last 18 months.

5) Investors are geting too excited about a recovery in residential housing.  Such a recovery is not possible while 20%+ of all residential properties are under water.  Foreclosures happen because of properties under water where a random glitch hits (death, disaster, disability, divorce, debt spike (recast or reset), and disemployment).

6) I have long had GM and Ford as “zero shorts.”  Sell them short, and you won’t have to pay anything back.  Though Ford is prospering for now, GM is declining rapidlyIn bankruptcy the common is a zonk.  With dilution, the common will almost be a zonk.

7) I worry over our government’s involvement in the markets.  First, I am concerned over contract law.  The bankruptcy code in the US strikes a very good balance between the needs of creditors and debtors.  I worry when the government tampers with that.  I fear that the Obama administration does not grasp that if they attempt to change certain regulations, it will have a disproportionate effect on the economy.

8) I have almost always liked TIPS.  Do I like them now?  Of course, particularly if they are long-dated.

9) Much as I do not trust it, we have had a significant rally in leveraged loans and junk bonds.

10) Did major banks support subprime lenders?  Of course many did.  No surprise here.

11) The EMH exists in a dynamic tension with its opposite.   Because many, like me, are willing to hunt out inefficiencies, the inefficiencies often get quite small.  So it is that those that come into investing with no hint that the EMH exists think it is ridiculous.  Coming from a household where the EMH had been stomped on for many years (thanks, Mom) made me ill-disposed to believe it, and not just because we subscribed to Value Line.

12) He who pays the piper calls the tune.  To the degree that the government gets involved in business, it will intrude into lesser details that should only be the province of shareholders.  What this says to management teams is “don’t let the government in in the first place,” which should be pretty obvious.  Major shareholders with secondary interests are often painful.  With the government, that secondary interest is regulation, which makes them a painful shareholder.

With that, I bid all of you adieu for a time.  May the Lord watch over you.