JR Snell Capital Management, LLC

I read a varied selection of blogs many days. The financial news seems fresher or more real when viewed through the lens of someone who doesn’t have a possible agenda like much of the mainstream media.

One of the people that I follow off and on from time to time is James Altucher who writes, ” The Altucher Confidential”. In past lives he used to manage a hedge fund and from time to time you’ll see him as a guest on CNBC or other financially-oriented news shows. Recently, he made some salient points about Greece, the country and their debt. Here are a few items that I found the most interesting:

We first even heard of Greece in May 2010. There were some rumblings. They couldn’t pay their debt and everyone wanted to retire by some early age – what? 24 years old they wanted to retire. And then hang out on the beach and get paid by the government.

It’s 0.15% of the world’s population.

If you go to Greece (or, in my case, if you go to a pool hall in Astoria, NY which is almost entirely populated by Greek people, and many of the waitresses at the Greek diners were too beautiful for me despite the fact that I wrote my phone number down on $2 bills that I gave out as tips) they have three types of backgammon that they play as opposed to our one. No wonder they want to retire so early!

The Greek debt divided by the Eurozone GDP is similar to Rhode Island’s debt divided by the US GDP. If Rhode Island defaulted I wouldn’t care either. Rhode Island, also btw, is a beach resort. Just like Greece.

Most important: Since the time of Augustus in 20 BC, Greece’s bills have been paid by other countries. All the way up to Ronald Reagan in 1989 who was terrified the Soviet Union would have access to the Mediterranean so kept paying Greece’s bills. So the EU knew this going into the situation that Greece can not live without the kindess of strangers. THIS HAS BEEN KNOWN FOR 2030 YEARS!

In 1981, the top 5 banks in the US were 263% exposed to South American countries that TOTALLY DEFAULTED! Zero! THANK GOD the word “contagion” had not been invented yet by some media Einstein. What happened next in the US? 20 year Stock market BOOM!

So ok, what’s our exposure to not only Greece but let’s throw in Portugal, Spain, Ireland, Italy. Other than Ireland, all prior leaders of the world. Total exposure in the top 5 US banks? 8% Glory Be! You know what this means? It means I should NEVER be able to turn on the TV and hear the word “Greece” unless I am watching some backgammon tournament on ESPN 3.

This isn’t to say that the stock market won’t produce a wild ride if investors (pushed by the media) head for the exits en masse based upon a contagion fear theory currently trumpeted about by the media. For this reason, it’s important to respect the potential for market volatility.

But, it’s also a pretty good reason not to get our shorts in a bunch about the whole Greece-Europe-Contagion thing and recognize that; while we should respect the market movements that others may cause because of it (this is the world that it appears we now invest in); we might also view it as a possible buying opportunity once calmer heads prevail.

bailout, credit crisis, Greece, Greek, rescue, strategy, timing

Just when we thought the credit rating agencies might have learned their lesson, this little tidbit popped up earlier this year, very low on the radar, “Standard & Poor’s Triple A Ratings Collapse Again. The Question is Why?” wherein it refers to a recent press release, quietly put out by S&P, that it was about to downgrade nearly 1200 mortgage securities that it had recently assigned a AAA rating due to a faulty analysis.

It may have escaped the short memory of the investment world that the credit rating agencies were one of the key pillars that crumbled under the weight of the financial debacle that they helped create. You will recall that it was their admitted ignorance or understatement of the risks associated with securitized mortgages that led to a mass downgrade of billions of dollars of mortgage securities and triggered the collapse.

Expertise we can count On?

The subject of this recent mis-analysis were re-remics, a securitized mortgage instrument (here we go again) comprised of repackaged mortgaged back securities that managed to survive the latest rounds of defaults. This re-rating comes right on the heels of another one that occurred just 3 months ago with aother batch of 224 re-remics.

Most disturbing is the fresh light this casts on the questionable objectivity of the rating agencies which are highly compensated for their ratings, but only after winning the business by outbidding each other. Apparently, rating re-remics commands a much higher fee and the banks are willing to pay it to get the ratings they need to be able to market the securities.

Lessons for the Taking

Individual investors can, hopefully, take away some lessons from the lessons that weren’t learned by the ratings agencies and the banks.

• First, we have no business investing in financial instruments that we don’t completely understand, especially ones that require some sort of engineering by backroom financial geeks. Seriously? When the rating agencies don’t understand them enough to develop the right methods for analyzing them, it’s time to run; run far away.

• Second, even though the loss that the banks that are holding these re-remics won’t amount to more than a blip on their balance sheets, it’s a reminder to the rest of us “sophisticated” investors that proper diversification is key in the face of these human-caused flare-ups that could possibly trigger the next calamity.

• Third, unless you have some sort of twisted financial death wish, stick to the fundamental tools. The “next big thing” in investments is usually a re-hashed, raked over financial product loaded with fees and back-door profits intended to enrich the promoters with little regard for your financial future.

None other than the notorious stock trader, Jesse Livermore, stated it the best, “Another lesson I learned early is that there is nothing new in Wall Street…Whatever happens in the stock market today has happened before and will happen again.”

The big takeaway here  is that in successful investing, there are no crutches, no models, no experts, and there are no short cuts.  With experts like S & P, it’s more important than ever to be able to think for yourself and move deliberately along your own course.

bailout, bummer, credit crisis, s&p 500, safety, scheme

In my previous post, The Problem with Investment Models: Not Keeping it Real, I wrote of the well-known investment guru, Nassim Taleb, to validate my position on the use of investment probability models such as Modern Portfolio Theory (MPT). Allow me to expand somewhat on our reasons behind our difficulties with MPT.

In his best-selling 2007 book, Black Swan: The Impact of the Highly Improbable,” Taleb argues that these models are essentially useless because they ignore the stark reality of cataclysmic-sized risks that have rocked the financial markets time after time. He contends that probability models are based on a dilution of major, market shifting events (black swans) that, while rare, have the effect of rendering the models nearly ineffective.

Models that only assume the existence of white swans rely upon scenarios that exclude the real possibility of events such as the Lehman Brothers collapse, the near failure of AIG, or the collapse of the housing market, and the potential financial collapse of several European countries. With such events occurring more frequently, it seems that we’re surrounded by more and more cliffs.

This leaves investors who ascribe to MPT or other probability models in a perilous position where probable risk has been severely underestimated, and without a way to react except after the damage has been done. While MPT may be an appropriate tool to analyze historical returns, its danger as an investment tool is that it can provide a gilded view of future performance. Those investors utilizing MPT may, in fact, be walking backwards towards the cliff with their eyes on past investment results and little concern for impending disasters.

In our previous writings we have been fairly clear on our stance that MPT doesn’t work because it is largely based on risk calculations that implies knowledge of future uncertainties, which is impossible.  It also assumes that people, as a whole, do act rationally, which has been disproven time after time.

We have also politely suggested that, absent a crystal ball, investors who formulate their own thoughts and opinions, or who are thoughtful enough to seek the advice of those who follow their own thinking, are better positioned to survive, and even thrive in uncertain times.

Taleb reinforces this principle in a list of his own ten principles for protecting your portfolio against “black swans” that were quoted a couple of years ago in the Financial Times.  His ninth principle states, “Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbor the certainties that normal citizens require.

We believe that, if you “definancialise” your investment approach and, instead, focus on what it is that is most important for you to achieve, you’ll not only avoid the cliffs, you will gain a firmer grasp of your financial future.

The approach is simple, easy to understand, and it centers on you.  Please feel free to contact me for a brief overview.

bailout, buy and hope, credit crisis, investing strategies, investments, strategy

To my chagrin, I am often reminded, by well-meaning clients, that our investment philosophy seems to run counter to the mainstream thought which relies heavily on popular investment theories and hypothetical models such as Asset Allocation and Modern Portfolio Theory.  Not one to take up the whiteboard and start lecturing, I simply point them to our appraisal of these academic theories and their near ruinous application in the real world of investing (How Investing Got Broken).

By no means is this a source of frustration for me.  I know how difficult it is to run against the herd.  It’s natural to feel isolated and vulnerable when you see the masses moving off into a different direction leaving you to your own doubts about the validity of your direction.  Would you feel any different if you knew they were heading towards a cliff in the dark of night?  While that is not necessarily a certainty, our contention is that an overreliance on lab-generated portfolios can lull investors into a blinding complacency that will impede their ability to change direction before they reach the edge.

Rather, my frustration is channeled into the army of well-meaning, but misguided advisors out there that continue to promulgate investment myths based on flawed models that have yet to prove their validity, and, in fact, have led many institutions and millions of individual investors over a cliff.

Nassim Nicholas Taleb, one of my favorite investment philosophers, has been on a mission to expose risk models, such as MPT, as pure academic folly, and his latest rant actually is an indictment of the Swedish Central Bank (the issuer of the Nobel Prize in economics) for legitimatizing a theory that has led to market crashes and huge government bailouts. (‘Black Swan’ Author Says Investors Should Sue Nobel for Crisis. Bloomberg. Oct 2010).  Taleb holds no malice for the theorizers. He wants to hold Nobel accountable for rewarding a destructive fallacy.

While that may seem like a drastic, and perhaps, improbable step, Taleb has cast a light of controversy on the underlying problem of probability models that have undeservedly earned academic respect and legitimacy for which there is no valid basis.

Stay tuned for my next post wherein I dissect the controversy of probability models as they apply in your investment decision-making.

If you have questions or comments regarding the use of investment models, I would appreciate hearing from you.

bailout, buy and hope, investing, investing strategies, safety, stock market, strategy

Yesterday (11/19/09) on Capital Hill, Rep. Kevin Brady R-Texas got into a little a little “tiff” with Timothy Geithner (Treasury Secretary) during a Joint Economic Committee hearing.

It seems that Rep. Brady rankled Mr. Geithner a bit by insisting that he resign, blaming him for rising unemployment, growing federal deficits and accounting flaws in the number of stimulus jobs created, among other economic problems.

All of the articles that I’ve read about the exchange focused on how unusually forceful Mr. Geithner was and how hot the debate ended up getting. Included in most articles is this statement by Mr. Geithner:

“The economy fell into the worst crisis in generations after almost a decade — certainly, eight years — of basic neglect of basic public goods, in health care, in education, in public infrastructure, in how we use energy.”

Whaaaaaat?  I thought it was a credit crunch, lax regulation, an irresponsible banking system colluding with an irresponsible public piling on debt they couldn’t afford to buy things they didn’t need. Since when was the current economic crisis caused by not addressing health care? Or education? Or how we use energy?  That’s pretty far out there… even for you Tim.

Seriously, Timmy… If this is what you believe caused the economic crisis, then maybe you should step down. That kind of a statement is either simple felony stupid or reckless historical revisionism to get political points.

bailout, credit crisis, fed, geithner, politics, rescue, treasuries, treasury

I was just reviewing and reorganizing my “…for further study” page and I tripped upon this quote. I had to post it again because I am still baffled and befuddled by what this means.

Maybe what it means is what he says? Is it even reasonable to postulate that our current economic conundrum is the simple result of one man’s mistaken economic theory? Could it all be that simple? 

REP. HENRY WAXMAN (D-Calif.): And my question for you is simple: Were you wrong?

ALAN GREENSPAN: And what I’m saying to you is, yes, I found a flaw….a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?

ALAN GREENSPAN: That is–precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

bailout, credit crisis, fed, investing strategies, Market Comments, markets, treasuries, treasury

This is fairly succint and seems to sum up pretty well what my big-picture concerns are about not just the economy, but society… at present. (I am an optimist/realist.)

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

Dr. Adrian Rogers, 1931

bailout, ponzi, rescue, scheme

In the last two paragraphs of my last post, I chastised “The Great Orator” (BHO) for being so down in the dumps and putting forth what I feel was an excessively pessimistic view as a part of an agenda to get his stimulus package passed.

This past weekend I was sitting with my Grandson, eating Cocoa Puffs together on the sofa and watching on the boob tube the kinds of stuff that appeals to your average five year old…. and that’s when I heard it… that fimiliar refrain… “Yes We Can”

That’s where BHO got it! That’s where he got it all, the chant and the building stuff about putting the American people back to work in construction jobs! This has to be the genesis, the root, the seed of the Great Economic Recovery and Ego Act: “Yes We Can!”

On a serious note: I was, in fact, a little less distraught at last night’s speech. It seemed more hopeful and “Rooseveltian” now that he’s gotten the package passed. I think the hopeful message that he put out there is a bit of the salve that Americans need at the moment.

As usual, I just wasn’t finding much substance to the whole thing. The FDR flashback is a very popular faddish image at the moment for “pseudo-economists” to grab a hold of, but the problem is that most serious students of economic history concede that FDR’s plan didn’t really work.

The market’s action since early January when the plan started to come to light seems to be saying that BHO’s plan may not work any better. Back in Roosevelt’s day, the whole world at war finally snapped us out of it. Although it worked, nobody wants that kind of a stimulus plan.

bailout, credit crisis, humor, Market Comments, rescue

OK… The world is not coming to an end already…. Yes, we have problems… Yes, they are serious… and yes, they will take years (probably many) to resolve.

We have some massive deleveraging as a country and as individuals to work through. Deleveraging is painful, whether you are a nation or a household. As we pay down debt (individually and collectively), those funds have to come from somewhere… Maybe they come from curtailing our spending, maybe we curtail our investing and saving.

If you can think about what you would do personally if you find yourself having to “de-lever”, then you know exactly what is happening with our economy. You know why spending has evaporated, why no one is buying cars, or houses, or Rolexes right now.

You see, it’s not just that credit has tightened up, it has. But, I think we have to recognize that the demand for credit has evaporated as well. It’s for this reason that I believe that simply making credit more available will not solve our problem… We all have to de-lever… pay off debt, pay down mortgages, get off the credit cards, etc.

It doesn’t matter whether you personally find yourself in the position where you must de-lever. If you don’t, your neighbor probably does and the country definitely does… and this is what matters: There’s A LOT of it that is going on.

The solution? Time. Time for Americans to do what they’ve always done: Get up in the morning, work hard and pay our bills. We will take the kids to school and soccer practice and buy a house or a car if we need it.

And we’ll do this all the while and over and over and over until the problem solves itself. It will solve itself because it will all be done with a new attitude, one of frugality and a new conciousness of the difference between a WANT and a NEED.

Maybe we can learn the lessons that our ancestors learned during the Great Depression without having to plumb the same depths of despair.

Frankly, what we don’t need right now is the excessive hand-wringing and scare-tactic speeches that our President has been making as a ploy to get his package passed. And we don’t need the media hype and horror stories thrown at us every single day. We get it… the economy sucks.

What we do need to do is to stop, take a deep breath, relax and to look around. Most Americans are working, have good jobs and are not in trouble with their mortgages. Most Americans are already doing what needs to be done to get us out of this thing. We’re a lot more resilient and creative than ‘they’ think we are!

bailout, bank failures, cash, credit crisis, interest rates, investing, investments, rescue, safety

A couple of months before I started writing blog entries, I “looked into the abyss” on my own personal trading screens here at the office.  It was mid-September or so, right after the Fed let Lehman fail and before the significance of what just happened was really felt by anyone but a few… yet.

Early the morning of the 15th of September as I look at my screens, I’m thinking that I’m seeing a “blip”… you know, a data error, an internet outage, the ghost in the machine… whatever.

Specifically, what’s confusing is that the couple of trust preferreds that I follow (like bonds, but traded on exchanges in $25 hunks rather than the off-Broadway $1000 chunks that a regular bond trades), traded at around $15.00 or so a minute ago and now many of them are now being “bid” at an odd $.50 or so. For a few minutes, I thought the system totally freaked. After a while the 50 cent bids finally were replaced by 3 to 5 dollar bids… then up to about 7 to 8 bucks… finally settling in at about two-thirds of what was bid the day before.

Of course today, I now know it wasn’t the ghost in the machine… it was the abyss. I had looked “over the edge”. I had seen the financial “white light”.

And apparently Hank had seen it too. He met with Congress, made the talk show rounds (white as a ghost, btw) and said SOMETHING to Congress and they gave him the money. So, what was the SOMETHING that scared him so badly?

OK, so thanks to Representative Kanjorski of Pennsylvania (maybe he was talking out of school??), we’ve got a pretty decent idea what happened that day. He says that…

“On Thursday, September 15, 2008 at roughly 11 a.m., the Federal Reserve noticed a tremendous draw-down of  money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two. Money was being removed electronically.

The treasury tried to help with $150 billion. But could not stem the tide. It was an electronic run on the banks The Treasury intervened, but, had they not closed down the accounts, they estimated that by 2 p.m. that afternoon. Within 3 hours. $5.5 trillion would have been withdrawn and collapsed within 24 hours the world economy.”

Watch the video, his explanation starts at about 2 minutes and 20 seconds into it. I also double-checked some additional congressional testimony tapes where Rep. Kanjorski questions Mr. Paulson about this very thing because I didn’t want to foist some “conspiracy theory” crap off on my loyal readers. In the tapes, Mr. Paulson does not deny what happened.

[[He also mentions that there was only the 'lone gunman' and there was no alien autopsy.... Sorry gang.]]

Now we know.

bailout, bank failures, credit crisis, fed, investments, rescue, safety, scheme, treasuries, treasury