Poor Richard’s Report
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My Mission: God has uniquely designed me to seek, write, and speak the truth as I see it. Preservation of one’s wealth while providing needful income is my primary goal in these unsettled times. I have been given the ability to evaluate, study, and interpret world and national events and their influence on the future of the financial markets. This gift allows me to meet the needs of individual and institution clients.
Economies Change Principles Never Do
In my July 2009 letter I wrote that I would not write a letter about investing for a year. Well, economies may change, but never the principles behind them. We have had the worst recession/depression since 1981-1982 and many have called an end to it.
Let me make one point vitally clear. Today’s stock markets are only for individuals who have extra funds. Funds that are “dear” should remain in a savings account at your local bank where you can watch it. We need a new congress to enact honest reforms that protect us.
Today’s economists look at all kinds of statistics and come up with many wrong conclusions. Alan Greenspan, former Federal Reserve Chairman, loves the picture of himself in the bathtub surrounded by stacks of financial garbage. If only he had walked around any random town or talked to any local bank or asked a few questions, things might be better today.
I turned bearish in January 2001 when the Fed lowered the discount rate Jan. 2 and again Jan. 3, 2001. That is the only time it was ever done two days in succession, I believe. Edson Gould’s “3 steps and stumble” rule was transformed into my “2 steps in a row and drop dead” rule.
So this letter will be more of my opinion and where I stand based upon clear observations.
Let me state right out that using today’s standards, the economy has bottomed. I use the word bottomed. We should see a mild recovery before we turn down again. The mainstream media will not tell you this because they are all selling something.
Small businesses grow into big business if they are fairly successful. They hire instead of layoff. They don’t need big bonuses, because the challenge is success and stock ownership. IBM is the only corporation to remain top-dog for over 60 years. J P Morgan is a close second.
Here is the problem, which we should have learned from the Japanese Economy. Government spending does not mean a hill of beans. What is a hill of beans? Nothing!
I believe Dr Bernanke’s helicopter speech was meant for the general public – not the politicians in Washington D.C. The “cars for clunkers” was an overwhelming success – short term. I believe this is why the economy bottomed or stopped going down- temporarily.
If the general public was given a trillion dollars and was told to pay down debts and to spend the remaining moneys wherever they wanted – you would see the overall economy pick up. We might have lost a few car companies, but that is “creative destruction” as one famous economist (Schumpeter) calls it. Small businesses hire and pay employees. Large corporations try to downsize and cut expenses after they have grown. Their earnings are shown with mirrors.
So there will be no follow-through with all the wasted government spending and this, coupled with more government borrowing and weaker dollar, will cause the economy to slide down again.
When I started in this business there was a very ugly word and it had to be used sparingly. It was USURY. Banks operate under the Rule of 72. Take whatever interest rate you are paying and divide it into 72. So if you have a 7% mortgage then 7/72 would mean that the bank would double its money every 10.29 years.
Millions of people who own homes today are getting crushed by Credit Card Companies reaping an immoral return on huge Satanic interest rates. Divide 15% into 72, that is 4.8 years for them to double their money. Paying lobbyists to bribe our Congress is child’s play to these companies. However, the homeowners are careful about what they spend in these scary economic times. They are waiting for price cuts, which is how deflation starts. Cutting prices brings in business, but that puts pressure on employees and companies to stay profitable let alone grow.
All economic bubbles create a deflationary trend wherever that bubble occurred. We have had several and the world has had its share. This makes consumers cautious. This slows down the economy while owners try to work down excess inventory. This is deflationary.
The US Government has to borrow trillions of dollars to pay for the misbegotten stimulus funds. Now take the interest rate THEY are paying. Divide that into 72 and that will give how many years it will take the bondholder to double his money. So, sooner or later we must borrow to pay interest rates. What goes around comes around. We are digging a bigger hole for ourselves and we don’t even have a shovel.
Bank Bonus versus Salaries
This is a simple problem. Brokers of any sort should never be put in charge of any financial institution. That is worse than putting a fox in the chicken coup. Bankers love a steady salary and following rules. They have their own code of conduct. Brokers hate salaries and a steady paycheck. They need the challenge of competition with a commiserate reward. Most brokers are left hand column readers. The left hand column normally has the sales credits and they check the fattest one first. Good left hand column readers get promoted and end up in management.
Banks should be able to form their own syndicate to bid on bonds and preferred stocks but not common stocks. Banks should be in charge of Money Market Funds and Brokers should not have cash management accounts. My point is that banks and brokers should be able to compete on a level playing field, but the more aggressive ones can go belly up in bad times. No government bail outs.
OFF Shore Drilling- Way out
Two deep water oil wells have recently been discovered in the middle of the Gulf of Mexico that hold billions of barrels of recoverable oil. Also Brazil has discovered light crude 200 miles off shore and they will become a major exporter in a few years. They will be competing with Saudi Arabia.
It is believed the outer continental shelf on our eastern seaboard holds giant finds. Just think, with our own over-supply of oil our President would not have to bow to oil kings.
Derivatives
My long time readers know that I hate derivatives with a passion. They are the Judas of the financial world. It is a complex transaction that derives something to give to someone else. It is a con-job designed to maximize sales credits (commissions) while placating the unwary (on both sides) into a false sense of security and pleasure (believing they have outsmarted everyone else), which is encompassed by a soap bubble that will be pricked over time.
All or almost all financial problems and disasters have the root cause in derivatives, from the Orange County California to Sub-prime and consequent bubbles. This has cost us more than Health Care ever will. We should ban all future derivative trades right now and then wait five years to see how much better off we are. The President can issue an edict. It is not how much money one makes but how you make it. There is no such thing as a free lunch.
More advice…..
Stay away from funds. Remember the sub prime mess started when the mixed AAA debt with junk bonds or sub prime notes.
The economy is struggling on a lower level and the debt coverage of many bonds is now suspected. Only the CFO and chief executive officers really know what is going on, and some cases they don’t even know. Directors only know what they are told. I have seen directors go down with the ship and they can’t even swim.
Buy Gold. GLD on the NYSE and CEF are my favorite choices. (Check out on the internet or consult with me about your concerns.) WE are not buying gold because of inflation, but as a hedge that the dollar collapses because of too much debt and a loss of confidence in it. Going back on the gold standard would shut the spending congress down.
Governments in the future will save for future social projects. This is due to the mess we are in now.
President Obama did the correct thing when he nominated Benjamin Bernanke for a full term as Federal Reserve Chairman. The Fed is supposed to be politically neutral. The chairman’s former students at Princeton thought he was a democrat when President Bush nominated him. This makes up for the error Donald T Regan, then Secretary of the Treasury under President Regan, made for canning Paul Volker because he was a democrat. Chairman Volker miffed, named Greenspan as his replacement as a joke, and they fell for it.
I love preferred stocks. Especially Amerco $2.125 cumulative preferred selling under its call price of $25. It is listening on the NYSE and is currently yielding in the 8% range. 85% of the dividend is considered tax free. That amount to an 11% tax free return. Remember the rule of 72! An easy way to keep tabs on this company is to check out the common stock. The common stock is U-HAUL. The symbol is UHAL. If it takes a sudden dive of 10% or more; it is a good chance the company is in trouble.
I love the Canadians because they have a strong pro-business economy. Their stocks got clobbered also, but their financial system is strong because their bankers thought before they acted. There is a lot of value up there.
Then there are some local small cap products that have a unique product that can have a positive affect in its application. Companies that provide a need where today there is a black hole. These are very speculative and can be bought in small lots until their fortunes improve over time.
Finally there is cash and lots of it. In deflationary times there are moments when the chance of a lifetime emerges IF you have CASH.
So right now I would keep as much cash available where you can retrieve it by writing a check or walking into your local bank for a cashier’s check.
I still believe we have a rough two years ahead of us with many false starts as far as investments go. The players today believe a new era has started and most are playing by the same rules. A major rule though is that most past leaders fade in the new market. They become a source of funds for new ideas and investments. Stocks that tanked into the teens and single digits have a high marble wall to surmount and you have an ice pick.
We could have a double dip, but the market could make new lows.
That is it for now.
Breaking News:
The Financial Times Headline dated September 15, 2009
OBAMA;
WALL ST
must
change
Compliance sought
with financial overhaul
developing ………………….
Cheerio !~!!!!
Richard C De Graff
256 Ashford Road
RER Eastford Ct 06242
860-522-7171 Main Office
800-821-6665 Watts
860-315-7413 Home/Office
rdegraff@coburnfinancial.com
This report has been prepared from original sources and data which we believe reliable but we make no representation to its accuracy or completeness. Coburn & Meredith Inc. its subsidiaries and or officers may from time to time acquire, hold, sell a position discussed in this publications, and we may act as principal for our own account or as agent for both the buyer and seller.