Blue Jeans Millionaire

Deep Pockets Getting Shallower

Richard — Wed, 19 Nov 2008 12:13:54 +0000

More evidence emerges daily that the big guys also got wrong-footed in the recent decline.

Not Just the Little Guys This Time

The list would include fabled investor David Bonderman, and his Texas Pacific Group that earlier this year plunked down $1.35 billion into Washington Mutual.

This sank without a trace after the equity holders were wiped out, and the Feds engineered a shotgun wedding of WAMU with JP Morgan Chase.

Not to be outdone, oilman T. Boone Pickens has seen his energy hedge fund lose over 3/4 of its $2 billion high watermark.

Not to worry. He is drilling in a much more promising patch, now…seeking federal subsidies for his pet alternative energy projects.

This well never runs dry.

Woe To Those Who Invested in U.S. Automakers

Next on the list would be Kirk Kerkorian, rounding out his trifecta bet on the Detroit 3 auto manufacturers (aka “The Trio Formerly known as the Big Three…until they got schooled by Toyota, Honda and Hyundai).

Kerkorian made billions when he invested in Chrysler’s earlier rescue. He somehow manged to eke out another $100 million in profit when he invested, then divested, in GM.

Now his record will be tarnished as he has begun to liquidate his huge position in Ford , incurring very steep losses.

Cerberus, the hedge fund, trying to live up to its fearsome name, thought they were the junk-yard dog chasing down Chrysler. But dogs usually just chase cars. They wouldn’t know what to do when they finally catch one.

It turns out that Chrysler was the dog all the time. Daimler was ecstatic when they sold to Cerberus, even though most of their $35 billion purchase price had long since evaporated. The principle is simple enough. When you are being hit in the head every day with a hammer, it feels so good when it finally stops.

Detroit…All Aboard!!!

The future of the Detroit three is clear enough. They will eventually meld all three companies into one surviving “national champion”. They will burn through the billions the government shovels into them. The unions will dig in, knowing that the government has deep pockets, even if the company is technically insolvent.

Now the infamous “jobs bank”….where idled assembly line workers draw full salary for doing absolutely nothing…will have its deposits replenished in perpetuity.

And then we will have our next zombie, semi-nationalized company, like Amtrak, destined to stagger along forever…never again profitable on its own…tethered permanently to the dole.

Maybe I’m Out-of-Step With the Times Here…

If we follow our present course, every insolvent bank will be resurrected by the government, every failing corporation will have its hand out for subsidies, and every upside-down homeowner will be bailed out by an accommodating congress.

There will be no more onus or adverse consequences to failure…nor any urgent need to succeed.

The latest in self esteem. The experts were right all along.

We’re all special.

The Death of the Diversified Portfolio

Richard — Tue, 18 Nov 2008 11:56:34 +0000

Looks like we’ll have to rewrite most of the investment textbooks after this year.

The cherished concept of portfolio diversification has taken a big hit and may never fully recover.

Back in the day…

The conventional wisdom was that non-correlating assets would not move in tandem. If foreign stocks tanked, domestic stocks would take up the slack. Real estate and commodities would zig and zag on their own disjointed course, so as to smooth out the volatility of your other equity holdings.

So how to explain how all these asset classes moved south in lock-step this year?

Everything tanked. Foreign emerging and developed markets. Domestic large and mid-cap stocks. Value and Growth. Oil and the basket-ful of agricultural commodities. Foreign and domestic real estate…residential and commercial.

Blame it partially on the securitized mortgage securities and derivatives that found their way into global economy, so that we could export our burst housing bubble to the whole world.

But perhaps the real culprit was the hubris, the sense that the market could be tamed and parsed out on the basis of mathematical models and hypothetical theorems.

All these models were based on prior market behavior and history, but there was nothing in our history to factor in the lunacy of making loans that encouraged default over repayment.

There was never anything irrational about walking away from upside-down loans. The suspension of wisdom and prudence came from the separation of the loan origination function from the portfolio investor at the bottom of the food chain.

It made perfect sense at the time, I’m sure.

Not my problem. Not to worry.

There was, however, one diversification model that would have allowed you to survive and ride the market as it sawtooths its way back up to the next plateau.

For simplicity sake, look at these four broad areas of diversification.

Cash and federally insured fixed income (CDs, Treasuries, etc.)
Public Equity
Private Equity
Conservatively leveraged Real Estate.

Three out of four is not bad.

Cash never goes out of style. Bank deposit Dead Presidents type cash….not the faux “ultra short term high yield” junk that came down crashing and burning this past year.

Private equity could be any part-time or full-time business opportunity, partially or wholly owned, that you control. During the rough recovery ahead, the status symbol for our time will be a job you can never be laid off or fired from.

If you bought your real estate the old fashioned way, with a down payment and sufficient income to cover the mortgage, you have nothing to worry about.

If you keep these four horses pulling in harness, the strong three can carry the weak fourth until it once again finds its footing.

The Europeanization of America

Richard — Mon, 17 Nov 2008 12:39:38 +0000

Now we must face an idea whose time has come.

Only I wish it hadn’t.

Even if the other guy had won the Presidential election, it would not have made much difference at this point.

If you had to choose the pivotal event that marked the end of the free market economy in this country, it would be the passage of the $700 billion rescue bill.

It was as if the Fed and the Treasury held a gun to their own heads and told Congress that they would shoot if they didn’t get their funding. It sounds like an early Woody Allen movie, the premise of taking yourself hostage and threatening your own suicide to force money from innocent bystanders.

And of course, it worked like a charm.

The token resistance of house Republicans was steamrolled in just four days, as they were unnerved by market reaction to the first vote.

Now….every industry in America has their tin cup out, waiting for their own very special bailout. There is no worse example than the Detroit-three automakers whom I blogged about last week.

My task as wealth manager for my extended family and my clients is to dodge as many bullets as possible…not an easy task as the market economy is being systematically plundered and dismantled. But not an impossible task, either.

The easiest way to navigate a major paradigm shift is to learn from those who have gone down this path before you. As pioneers, they are easily recognized….what with the arrows sticking out of their backs.

Of course, I refer to middle and upper income western Europeans.

Exhausted and broke after World War II, and jumpstarted with our very generous Marshall plan aid, western Europeans focused inward, protected by NATO and the American garrisons in their countries. Their focus was the transition towards welfare democracies, and the insulation and protection of their citizens from economic inequality.

Call it what you will, it was a sharp turn towards statism, with the government dictating terms of universal health care, employment…even mandatory vacation and maternity leave. And in the process it became a beacon to be emulated by left of center policy wonks on our side of the ocean.

The transition on our side was made easier by the credit implosion resulting from the burst real estate bubble, and the execrable behavior of gluttonous executives looting their own companies. They were in no position to protest when the government invited themselves into their capital structure, in a move that Tony Soprano would have envied.

And still…with the heavy hand of government over-regulation, heavy handedness, and industrial policy propping up sclerotic corporations…

Still there are entrepreneurs able to launch new businesses.

When taxes on wages are confiscatory, the most able and alert will shift their focus into equity investments or direct ownership, where they can pile up untaxed long-term capital gains.

The tax collector in the welfare state is always and ever at his levelling, redistributionist task.

The family tax planner and wealth manager must always be one or two steps ahead.

Tell your kids that degree in urban planning is not going to cut it.

This is shaping up to be a very long street fight. And you never bring a knife to a gunfight.

Time to go back to school for your LL.M. in taxation.

Newest Strain of Asian Flu

Richard — Fri, 14 Nov 2008 12:20:36 +0000

Too bad there is no inoculation for this nasty bug emerging in Asia.

I had never heard of it, until November 6, when I read Laura Santini’s article in the Wall Street Journal, “Asian Investors ‘Accumulate’ Big Losses on Risky Contracts” (page C1).

In the grand scheme of things, it’s not the worst idea that ever came down the pike. It just falls into that huge grab bag of ideas that work only in up markets, and come to grief in down markets.

An Analogy: Your Employee Stock Purchase Plan

You may have seen a version of this from your employer, if they offer an employee stock purchase plan. I’m generally in favor of such plans…not necessarily because the stock is such a great pick…but because any systematic savings and investment plan that involves dollar cost averaging is an excellent financial habit to acquire.

Based on the plans I’ve seen, typically the employer allows employees to purchase the parent company stock at a discount ranging from five to fifteen percent, including the purchase of fractional share units, and with no brokerage commission.

This combines the best features of no-load fund investing, with the added bonus of the built-in discount. The only negative is the single stock focus, and you must diversify this risk away by making broadly diversified purchases in your other investment portfolios.

How Accumulator Contracts Work

Now let’s fast forward to the “accumulator contract” plans that became popular in Asia during the pre-credit bubble years.

Like the employee stock purchase plan, these plans allowed buyers to buy a stock (or a currency or commodity) at a fixed, below-market price.

Well, not allow….more like required the purchase for the duration of the contract.

Here are your possible outcomes:

The underlying investment goes up during an agreed upon time period. This triggers a so-called “knock out” clause, where the issuer essentially calls in the contract, and pays the profit to the investor.Like I said, it works in rising markets. Just like that hole in your roof won’t bother you at all so long as it never rains.
Oh oh. The underlying investment unit falls in price. Now things get interesting. If you were dollar cost averaging into your 401k or even your employee stock purchase plan, you have the option of pulling the plug and bailing out.Not with these plans. You are contractually obligated to continue your monthly purchase at the original, agreed upon price. It may have started out as an automatic gain with each purchase. Now it is an automatic loss….and there is no panic button you can push to get off the treadmilll.
What starts out bad gets worse. Buried in the boilerplate on many such plans is the “double down option”. Optional on the part of the issuer, but not the buyer.Essentially, if the investment falls below an agreed upon threshold, the issuer will lower the fixed purchase price obligation to a new set price, and then require that the investor accumulate twice as many units in return for the adjustment.

Averaging Down…Revisited…

We discussed this in an earlier post…this is a variation on the technique known as “averaging down”…which posits that a falling asset price is an inducement to load up on the sharply reduced price.

This brilliant stratagem was field tested by some very smart people who bought Bear Stearns, Lehman Brothers, and WAMU on their rapid descents, losing billions in the process, with leverage to accelerate their road to perdition.

A quick physics lesson about margin and leverage is appropriate. What is a remarkable force multiplier in a rising market is equally devastating on the downslope.

The typical term on the Asian accumulator contracts was 12 months. But this could be reduced to 3 months if the stock went up. Heads you win. Some. Tails you lose. Big time.

Which is fine, if your twelve months ended before October 2007.

Long Story Made Short…

You might make a limited profit for a short time, but you risked losing all or most of your investment due to the much longer lock in period.

No wonder this was such a popular investment vehicle.

It was a one-decision type investment, that the public could buy and file away. It appealed to their virtuous nature, instilling the discipline of monthly investing.

A classic neutron bomb of an investment, that can wipe out the little guys, while leaving the underlying structure fully intact.

Because it transferred ownership risk from the sellers and their brokers and placed most of it on the backs of their trusting clients.

Let’s start paying closer attention out there.

We could start by removing that “kick me” sign pasted on our backsides.

Why Bonds Make Me Nervous

Richard — Thu, 13 Nov 2008 12:26:19 +0000

How will we know when we’ve finally reached bottom?

Maybe we’ll have a reprise of Business Week’s legendary cover article of August 13, 1979, entitled “The Death of Equities”….written when the Dow was at 875.

The public mistakenly believes that bonds must somehow be virtuous as recompense for equities that are now discredited. This is the triumph, once again, of hope over experience.

Even as investors and their brokers have become enamored of bonds as a result of the equity market meltdown, I’m not buying it…for two reasons.

First, we must acknowledge the obvious…the Fed Funds rate is low

And going lower at the next rate setting meeting. The two-decade-long bull market in bonds during the eighties and nineties was ignited by interest rates falling from their exaggerated nominal rates over that time period.

Interest rates and bond prices always move in the opposite direction.

So, by starting in a low rate environment, we can expect higher rates during the inevitable economic recovery. Bonds will get clobbered.

Second, and even more disturbing, is the musical chairs environment now unfolding, where failing companies will first line up for government assistance.

Not every customer will be served. The Treasury could run the currency printing presses 24×7, and never satiate the bottomless demand.

When the music stops, and debts mature, there will be forced liquidations and cramdowns. It will be an ugly and treacherous environment for bond holders.

You should check out the dire forecast from Richard Lehmann (No…Not that Lehman) in the Fixed Income Watch column of Forbes (10/13/08 p. 130)

Lehmann predicts that the shakeout in Corporate Junk Bonds will exceed the thrashing they took in the 2001-2002 bear market. Back then $98 Billion of bonds defaulted, out of a universe of $757 billion. Today, Junk bonds total $1.3 trillion.

Many of these are covenant-lite bonds, including the notorious PIK toggle option, where the borrower could Pay in Kind….i.e. pay the interest with a new bond issuance. Many of these are zombie bonds, dead from the neck down, but the realization has not set in yet since they can still print their own currency.

He also points out the peril in municipal bonds, particularly the revenue bonds dependent on a vanishing revenue stream for repayment. Think of all the improvement bonds that were used for infrastructure spending in new communities that never took hold due to the housing crash.

Just as the full depth of the depravity in the credit and derivative markets did not materialize immediately, so it will be with much of the impaired bond indentures that the lawyers will have to sort out.

One of the ugliest side effects of the credit bubble was the wholesale degradation in asset protection that bonds used to offer.

When the bond holders press their claim in bankruptcy, they are in for a nasty shock when they examine the extent to which the nominal assets of the issuing corporation or municipality have been hollowed out and compromised by borrowers who were too clever by half.

All of this aside, my preference for equities is based on the snap-back of the markets that will occur when buyers come back to their senses.

As the rising tide lifts stock prices, rising interest rates will sink bonds.

Buyer Beware.

Redefining Risk

Richard — Wed, 12 Nov 2008 13:01:53 +0000

Selling risky assets is itself a risky strategy….long term.

There is a paradox to falling security prices. We loved these stocks a year ago, when they reached their all time highs.

And we are selling them indiscriminately now that they have fallen 40-50%.

Because they are perceived to be risky.

Hold on a second….how can an asset that is selling at half off be as risky as it was when it was floating inside the leveraged economy bubble?

Risk manifests itself in many guises in our economy.

Specific security risk says that any individual stock could take a big tumble. Of course, that’s why we gravitate towards diversified stock portfolios, or let our fund managers do it for us. Once we have 20-25 stocks, we have insured against company risk.

Systemic risk is the risk inherent in the market as a whole. The past twelve months have been highly instructive and illustrative of this risk.

Volatility risk is a longitudinal measure, comparing expected returns to actual returns over time. The correlation over time is that higher returns are a function of increased volatility.

No pain..no gain.

The thundering herd is now running hard from Volatility Risk and its cousin, Systemic Risk.

And they are running into the trap of inflation risk and opportunity cost risk.

Inflation risk is not so swift in its retribution, but is devastating over long time periods. It now takes $11 to purchase $1 worth of goods based on the 1926 dollar, when Ibbotson began tracking securities returns.

Inflation will benefit the borrower more than the lender, since the borrower takes down real money, and repays later in devalued monopoly money.

Inflation is why governments and businesses and households become heavily indebted. It goes hand-in-glove with high leverage. But now we are in for a prolonged and painful unwinding of leverage.

Instead of borrowing funds to harness the power of inflation, we will be forced to save. Saving funds makes you a lender (to banks and other depositories), so now you are the one who will be stuck holding the diminishing asset.

Opportunity cost risk is the position the public will be in when markets revert to the norm (the upward pointing right leg of the U or V shaped recovery), because they won’t believe it while it is underway.

They will believe it at the next market top, to repeat the dreary cycle once again of buying high and selling low.

The point is this: There is no avoidance of risk…

…only the choice of whichever risk preference you choose.

Age will tilt your selection. The young who have decades to go until retirement should choose volatility risk, to obtain the best long-term returns. They need to be fully invested for the long haul.

Even those at or near retirement would be wise to split the difference, and hold half their assets hostage to volatility risk.

The old joke was the wage earner’s lament about having too much month at the end of the money.

What’s not so funny is having too much longevity at the end of the money.

Dying Detroit

Richard — Tue, 11 Nov 2008 12:33:00 +0000

It’s time we eulogized our decrepit and decaying domestic auto industry….if only I could think of something nice to say.

There are three guilty parties at this funeral:

Management
Labor
Government

The government actions taking place during the financial crisis are in fact serving to promote and exacerbate the market’s sickening slide. They simply don’t have a clue.

Bailing Out Auto Companies too?!

We are witnessing industrial policy in action….an activist government choosing winners and losers. AIG gets bailed out. Lehman gets a shiv in the ribs.

At the top of the rescue list now is a concerted effort to breathe life into a rotten corpse….

…what was formerly known as the big three…now more accurately known as the Detroit 3.

It’s not that the entire auto industry in this country is collapsing. Our market is a powerful magnet, and we have some two dozen foreign-owned assembly plants, well run and managed by Toyota, Honda, Nissan, Hyundai and even some European firms.

I am indebted to two Wall Street Journal columnists for their contributions on this subject. Paul Ingrassia and Holman Jenkins, and most especially for Jenkins’ November 5 column, “Yes, Detroit Can be Fixed” (page A21).

Let’s line up the perps and read their rap sheets.

1. Management

Paul Ingrassia was for many years Detroit bureau chief of the WSJ, and he was astonished and appalled at the level of management ineptitude and elitism. On a factory floor tour, he asked for directions to the restroom, and his guide told him there were different facilities. One for management. One for labor.

Separate but equal? Hello?

Management caved in when pressed by the other two parties. When the labor cartel threatened to strike, they gave in on wages and an outrageous menu of benefits. When the government insinuated its will with mandates for CAFE fuel standards, they folded. Management was insular, coddled and out of touch.

2. Labor

Their sin was to try to levitate their non-skilled workers into skilled labor wages. It’s astonishing it lasted as long as it did. Not only were wages and benefits running at levels three times other manufacturing industries, but restrictive work rules and gold-plated retiree health benefits were totally over the top.

Together, for decades, management and labor simply passed on their featherbedding labor costs to the buying public.

Only we’re not buying anymore. Not from these guys.

3. Government…the ultimate culprit

Due mostly to the law of unintended consequences. At the core is government’s belief that business and the public cannot make decisions in their own self interest and must be bludgeoned into acceptable behavior.

That’s how the CAFE standards came about, forcing an entire industry to produce a product no one wanted. They compounded the error by requiring these small cars to be manufactured only in the U.S., giving the UAW an exclusive labor cartel.

Had the Detroit three been able to import from their global network, they might have dodged this bullet. They never had that option.

The Europeans took a different approach. They slapped humongous taxes on their gas pumps, and their drivers shifted to small cars without being told to do so.

So now here we are…gas prices have fallen in half from the mid-year peak. Demand will increase for larger cars as it always does. Government will mandate fuel standards that cannot be met, unless each small car sells at a loss due to the rule on domestic labor.

Our elected officials have killed an entire industry….but it will be propped up, Zombie-like. Maybe merged with AMTRAK, to have one giant loser of a governmental graveyard of failed transportation companies.

Tough Love for Detroit

What can you do to help? Stop enabling these companies. Stop buying all GM, Ford, and Chrysler products. Let them die a more merciful and swift death, and let the Japanese and Koreans step in to clean up this rancid market.

Enough is enough!

One Firewall Remains

Richard — Mon, 10 Nov 2008 12:06:38 +0000

Now that the election is finally over, let’s see what, if anything, still remains to ensure gridlock.

It would be nice to think there might be a brief honeymoon….to allow the new administration to settle in, but let’s not get totally carried away.

It would not be to the President’s advantage to have an unchecked legislative branch, even of the same party…and the peril to the economy would also be heightened without a modicum of resistance.

Let’s examine one particularly nasty bit of business waiting in the wings:

The Union Card Check Bill

This is pure payback for the unions’ unwavering support for the Democrats, but it comes at a very high price.

The mechanics are simple enough. Unions only win about half their organizing elections, due to the sanctity of the secret ballot. This proves that the workers being organized read the news too. They see the shrinkage and layoffs in highly unionized sectors of what we used to call the private economy, and they vote in their self interest, as often as not, to prevent union representation.

The card check bill, if passed, would avoid the quaint private ballot, in favor of a card that workers would check off, yea or nea, as labor goons and militant co-workers gather round to ensure that you vote as they want.

This is beyond the pale. One of the core requirements for ensuring a clean election is to allow everyone to vote in private, without undue influence or intimidation. This applies to both civic and union elections. Both in this country and abroad.

The unions know that they are peddling a product that is not in high demand, so they have no qualms whatsoever about abridging individual liberties to boost their enrollment.

The House of Representatives passed this odious legislation, only to see it die in the Senate under threat of filibuster by the minority Republicans in the present congress.

This came as no surprise to them…because this is how the game is played when the opposition can throw sand in the gears.

When Gridlock is Good

This way, the contrite house Democrats could go back to their union supporters and tell them….”We did our part…it was those treacherous Senate Republicans who derailed the bill…..what can we do?”

(And don’t be surprised to see the new President duck for cover when legislation that threatens the recovery is killed before it ever hits his desk. He’ll be busy enough even without trying to honor all his campaign chits.)

The reality is that house Democrats know how utterly destructive and pernicious this legislation would be. They must put their ethics and integrity in escrow and hold their noses as they pass such a bill, knowing all the time that it will never see the light of day.

This way they do good and do well at the same time…saved by the roadblock thrown up by their opposite numbers in the Senate.

This is why gridlock works for both parties…to prevent partisan zeal from somehow being actually enacted into law.

Which Brings Us to Election Math…

At the time this is being written, the Senate has 57 Democrats, 40 Republicans, and three seats with election results still too close to call.

It’s not likely that all three remaining seats will go to the Democrats. And anything short of 60 ensures that the minority party can filibuster legislation they cannot stomach…performing a vital function truly in the national interest.

This applies not only to intemperate legislation, but outrageously partisan judicial nominations as well.

The market is still digesting the new political landscape, and it doesn’t like what it is seeing. If investors see that the Senate firewall is fully functioning, it will serve to steady some very shaky hands.

Gridlock. The gift that never stops giving.

Generational Warfare

Richard — Fri, 07 Nov 2008 12:30:06 +0000

Not warfare, exactly. More like an implacable imbalance.

Demography is destiny…and we have three distinct age cohorts who will soon be at odds as they attempt to divvy up the spoils.

1. The Baby Boomers

Front and center, thirsting for their entitlement transfers, are the baby boomers. The 77 million born from 1946-64. Their sheer bulk and heft have radically re-shaped markets, and even gave birth to the phrase…”the pig in the python”…as they continued to age in place.

2. Generation “X”

Then came generation “X”, from 1965-79. Two factors combined to make this the smallest, by far, of the three generations.

First, their parents were the silent generation born and raised in the depression and World War II years. This was not a large enough population to propagate a large “echo” boom.

The other mitigating factor was the emergence of the birth control pill in the early sixties.

3. Generation “Y” - the Millenials

The third generation, known as either generation Y or the Millennials, includes those born from 1980 through 2001. It is as large, in fact, as the baby boom generation, and is a classic echo boom reflecting family formations by the boomers once they settled down.

The Millennials are further bolstered by the dramatic increase in immigration, legal or otherwise.

This background helps explain the inevitable collision between population and investment trends.

Don’t Worry About the Stock - Worry About the House…

The fear generated by authors like Harry Dent a decade ago was that the aging boomers would not find enough buyers of their stock market holdings when they began liquidating to finance their retirements.But that was before the boom in globalization and the flattening of our planet. Equities trade globally, and if fairly priced will find buyers in China and India and other growth markets.

The concern is not in equities, which are liquid, portable and more or less fungible…but rather in residential real estate, which is fixed, immobile, illiquid and absolutely dependent on the rate of domestic family formations.

Stevie Wonder could see this one from a mile away. Some aging baby boomers will be stuck in homes much too large for their needs. They will, at first, be house rich and cash poor, but that will soon give way to being house poor and cash poor.

Time to De-Leverage

They may try to pry out their equity with reverse mortgages, but as I explained in a prior post these are heavily laden with fees, and do nothing to address the distorted asset allocation problem.

The smart and lucky boomers will get ahead of the curve and downsize, facing what will be in effect a national dutch auction, with prices being bid down until they get a nibble.

De-leveraging of extravagant household consumption is now underway whether we like it or not. Expect this trend to accelerate as more and more buyers opt to sell, and fewer and fewer of the already slim Gen X buyers show up to buy.

By 2015, the leading edge of the Millennials will begin to turn 35, prime years for family formation and trading up, just as their parents’ generation did beginning in 1981, igniting the building boom that turned bust 25 years later.

Until then, Gen X buyers will have the run of the table, picking and choosing at their leisure.

Don’t say you didn’t have fair warning.

Who is on the Right Side of the Trade?

Richard — Thu, 06 Nov 2008 13:31:18 +0000

Something to think about as the market’s ups-and-downs continue.

Every sell order executed since the bottom fell out on September 29th has had a corresponding buy order.

Of course, the imbalance is lopsided. That’s how markets lose value…when the sellers outnumber the buyers.

The mirror image is when buyers outnumber sellers, and bull markets emerge.

And that wheel will eventually turn.

So which side represents the smart money?

The indiscriminate sellers, who toss everything into the garbage bin because they have exceeded their threshold of pain….

Or the methodical and patient money buying back in, at prices they last saw in 2003.

Just by asking… the question pretty much answers itself.

Check out some of the recent comments from Wall Street Journal and Smart Money columnist James B. Stewart, as he bellies up to the bar, adding to his portfolio steadily as the Nasdaq averages hit new lows.

He’s been there…done that…many times before, redounding to his ultimate profit.

I caught Jim Cramer on the tube recently, telling his audience it was time to sell.

No.

It was time to sell one year ago, when the market had topped out.

Think of this next time you go to any “expert” for advice. They are subject to the same emotional imbalances and lack of impulse control as the rest of us.

At it’s core, what the markets are testing now is not the investment acumen or genius of each investor. It is more a stress test of character and endurance than any particular investment skill set.

And it is payback with a vengeance.

Payback for the hotheaded hotshots who quit their well-paying day jobs so they could flip condos in South Florida or Las Vegas. Now that they have sobered up, the jobs have long since been downsized or eliminated.

Payback for the day traders who cannot distinguish between speculation and investment.

Payback for the insanity of the tech stock bubble, which tried to levitate above mere balance sheet and profit and loss constraints.

Payback for the legislators who unleashed Fannie and Freddie to underwrite the liars loans and the phony appraisals.

It might help to rank order the long-term returns the market will return.

Residential real estate will appreciate long term at the rate of inflation, and at a modest multiple of family income. The current savage correction is nothing more than the inevitable reversion to the norm.
The stock market will return 10-11%, including reinvested and compounded dividends. Not every year. Not this year. But over decades.
Cash and bonds will lag inflation over time. Liquidity and fixed income are a hedge for our reckless hedonism and hubris, but not the ultimate repository of our net worth. All the panic selling has piled up cash on the sidelines.The impatient cash will plunge back into equities well after the turn is underway. Greed will override fear, and the public will buy high after selling low. You can absolutely depend on it.
The highest returning investment…and the easiest to ignore…. is your job or profession. If you discount your future earnings to a net present value, you will most likely never find another investment that even comes close.

We get rich on paper, but go broke when the cash runs out.

You will never be impoverished if you continue to enhance your skill set.

So start to show up early for work. Cut back on your lunch hour. Stay late, if the task requires completion. Do whatever it takes to make your boss look good.

We’re entering a painful recession, so the game of musical chairs is now fully underway.

Social Darwinism, with a vengeance.