Its November – but – Risk Off

November 12-2011

Normally, I begin to invest more aggressively at the start of November unless I see compelling technical or fundamental reasons to stay out of the market.

At this precise moment I consider the technical case neutral……BUT…. there are compelling fundamental reasons to be very risk adverse.

The markets don’t like uncertainty and on a global basis and USA basis there is plenty to worry about.

I know the Fed is being very accomodative on interest rates with the flip negative side being  investors   forced into the equity market for a better, but riskier, return.  AND, I know that its probably not smart to fight the Fed when it comes to interest rates. 

I also know, markets can climb a  “wall of worry” ,  BUT ….is this a normal wall ?!   To me, the ratio of sand to concrete seems way off and unsafe.  Maybe in this case,  how well  the market can climb is irrevelent. What is relevent is how much weight the worry wall will support.

As I see it, we are not in a normal expansion / recession cycle where the Fed can cook up a cure. This time the problems are global and systemic, ranging from how much Italian debt is being held by our banks to what perversions the Chinese are causing our economy by their refusal to revalue their currency… whether the European Union will actually end.

And then there are systemic problems in the USA which defy solution by Congress because Congress  has become so politicized.  ” Occupy Wall Street ” is signaling a need for systemic REFORM.   The signal is  that middle America has lost faith in the ability of our government and institutions to effect positive change for the vast majority of Americans.  The playing field is no longer level and people feel ripped off and powerless. 

The middle class has been dis-enfranchised by Congress, dis-enfranchised by Government Departments, dis-enfranchised by  Corporate America and dis-enfranchised by Wall Street.

Examples ? 

Congress and Government Departments have too many special interest groups thwarting the ability to effect change for the greater good of America.  Congressional staffs have been thoroughly infiltrated and corrupted by lobyists with gifts, freebees and promises of future employment.  This has made Congress non-responsive and incapable of courageous positive action. 

Government Departments ( example Defense ) are too cozy with contractors who have a vested interest in weapons…. a vested interest in war……..some war ………any war…….. the threat of war.  This is money that could be spent on improving our education system !    Industries, such as the pharmacutical industry ,  are too close to congressional  decisions such as how much the government pays for drugs.  There are many more examples of loss of control to government insiders with a personal agenda that doesn’t include what is best for America.  This ” what’s in it for me ” attitude is pervasive and brazen because it has become  too easy to get re-elected.

 When I was growing up,  I was told that more and more Americans were owning corporate stock and that we were evolving   into a nation of  employee capitalists.  The only problem is that somewhere along the way corporate managers have hijacked the corporations we own. Its as if they created a separate class of stock with rights and privileges not available to holders of common stock.  As individual shareholders we lack the concentrated strength of a CEO led management team which can suround itself  with a  layer of compliant  Board Members who appoint  committees  to decide on executive compensation which may very well include ridiculous  options and severance windfalls.   

When I get a proxy I throw it away because its a travesty to think I have any say in how MY EMPLOYEE…. the CEO …and his team perform and get paid.  All I can do is sell my shares if I don’t like it.  That’s why there are so many big caps which represent dead investments for you and me.  The list includes names like Cisco, Intel and Microsoft where cash is being hoarded instead of being put to visionary use. 

I find this situation similar to the 1930s when workers had to unionize to concentrate employee power to offset the power of management. What we need now are two or three larrge Investor Cooperatives where sufficient shares are accumulated by the Cooperative to acquire a seat on Corporate Boards to protect shareholder  interest……… with  implementation of a  system of  protection and rewards for whistleblowers.

Wall Street – I knew it was a very bad sign when partnerships began to incorporate.  That meant if things went bad  partners wouldn’t be losing their personal  capital.   As a corporation , if things didn’t work out, it would be the individual investors in the Corporation ( you and me ) who would take the loss while the former partner was protected. incentivized and rewarded as an employee Manager.  Is it any wonder that in some cases risk leverage increased from the low teens to over forty times capital.  Would you take the risk of borrowing to invest 40 times your personal net worth ?  A decline of 2.5% would wipe you out !  BUT, you would if  you thought you had an insider’s edge and your gamble carried the potential of  mega million performance bonus. And  the worst case scenario for the former partner … a big separation package with  no risk whatsoever to his personal net worth. 

Banking  –   The convenient  ” One Stop Shopping ” concept is  now  pervasive in our financial system.  All it does is allow banks to hide the negative performance of any one activity and create an overall lack of transparency.  That’s the real convenience ….the convenience to hide the truth from you. 

I’m for allowing  Bank Holding Companies to create separately reporting subsidiaries for every money business channel.   Proprietary trading results would be reported separately by a separate  trading subsidiary whose  funding would be from outside investors and be totally segregated from Bank deposits. 

I can remember during the summer of 1959 having lunch on the 52nd floor of 20 Exchange Place, NYC .  The lunch was hosted by George Moore, President of First National City Bank, the predessor of Citibank.  There were about 20 of us…new graduate school recruits to the elite Citibank  Overseas Division Training Program. I suppose in an attempt to tease our imaginations, President Moore asked if any of us could name the bank’s chief competitor.  All the obvious answers came forth.. Chase, Bank of America, Chemical Bank, etc.  Nope !  According to President Moore our main competitor was Sears Roebuck ! ??  Yes even in 1959 Citibank saw itself in the credit card lending business. And, that was an insiders preview of the Bank’s mission to become  the  one stop financial powerhouse it became .  Too bad the lines between activities within the bank became so blurred and too bad the barrier  between commercial and investment activities was viewed as an obstacle.

Even now, we don’t know how much Italian debt is on USA bank books.  Do the banks want us to know ?  No.  How many questionable mortgages are our major banks holding ?  The Fed is keeping rates low to allow Banks to slowly repair their balance sheets by borrowing at zero and lending to you and me at 19%.  So, yes,  you can be certain there will be balance sheet repair.  BUT,  you can be equally certain that there will be  sufficient profit via this artificial situation  to fund  huge  year end performance rewards for bank senior managements.  Wait and see !

All of the above systemic issues are being papered over and shoved into a corner while your attention is being directed elsewhere … to a Congressional tug of war over the budget with hope that there will be an 11th hour compromise.  Talk about shell games !

Do you think an 11th hour compromise  will solve our systemic economic problems?

Honestly, I don’t think the market can sustain a climb up such a steep and crumbling wall .  If the technicals turn positive there will  be opportunities to lock in profits on short term daily and weekly  trades but that will require close  attention and fast response .   This is not a market for the individual risk adverse investor.  At the moment the market  is undulating higher in a way to seduce  so called ”  investors “.  I think its a head fake and that there will be lots of thrills and spills just around the next bend.

Richard – Richie – RMG – Smiley from Woodlawn.

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