February 17, 2012
Commentary by Joseph Warren
Perhaps it’s the great recession and the gradual pace of the economy's recovery that has uncovered them, but the number of suspect and unethical undertakings revealed in the financial services arena over the past few years is greater than anytime I can remember in my career. While the dark shadow of these mischievous acts looms over my entire industry, I know that no level of regulation can guarantee that your money is being held by the ethical standards I believe it should. Ultimately, the responsibility of insuring such rests on the investor. Given my 19 years of experience, I offer some basic steps for investor protection.
Before I get too far, let me clarify the subject. These steps are intended to address the basic concept of custody and practical matters of ethics that anyone who has the responsibility of holding someone else's money should abide. This is not about a money manager's investment prowess, a subject I'll address in a future edition. Simply stated, the following will help you validate if your money is where you think it is:
1) Investigate and understand the institution that actually holds your money. Do you recognize the name? Did you or someone you trust read the disclosures on the account application? Is the term hypothecation in the agreement? What rights does the custodian have to borrow money from your account? If you don't know or can't find these then ask the institution you’re considering to explain and verify. If you don't understand their explanation, do business elsewhere.
2) Are your accounts covered by Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC)? SIPC deals specifically with investment accounts held at broker-dealers registered with the Securities and Exchange Commission. SIPC’s role is to return funds and securities to investors if a broker-dealer registered with the SEC holding these assets becomes insolvent and it covers the first $500,000 held within your account. The FDIC is an independent agency of the U.S. government and it protects depositors of insured banks. The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.
3) What insurance coverage does your broker-dealer have beyond $500,000? Almost every large broker-dealer has coverage beyond SIPC and you should know the amount.
4) What investments do you actually own and are they being valued by the investment manager or a third party? This subject can be tricky because many invest via mutual funds or private investments companies and their underlying holdings aren't publicly disclosed at all times. Mutual funds are one of the most highly regulated investment vehicles, however. In all my years I don't remember a single mutual fund that was able to commit fraud. But to validate, take your fund symbol and type it into Yahoo Finance or Google. That should give a good idea of what was in it last time it filed its holdings and how it’s invested. If you don't get any results from the Web, call your broker and investigate. Private investment companies/funds are more difficult as they are often invested in more exotic instruments than stocks and bonds and valuation is done by the money manager, which is difficult. But private funds require accounting and are often audited. Seek out the accountant and auditor before investing. Be suspicious if the fund doesn't have either.
5) What underlying assets are in your money market? Many money market funds have the ability to invest in non-Treasury instruments. Funds often purchase commercial paper of financial institutions or sovereign debt of foreign countries. In 2008, the Primary Reserve Fund "broke the buck" because it held Lehman Brothers’ paper which plummeted in value when they declared bankruptcy. Many people consider money market the equivalent of cash. But there are underlying assets in money market and you should know the risk. For absolute safety, find a money market that can only invest in Treasuries.
6) Ask your broker or bank representative exactly what they personally are invested in or where their money is held. Our clients take comfort in the fact that we hold the same positions they do. If your broker isn't doing something fairly similar to what you're doing you should ask why.
Several cases have emerged of recent that demonstrate the greed and guile of those rotten few within our industry. Be it acts of Madoff, Rajaratnam or the insider trading network currently under SEC investigation, they all tarnish our image. But the motive for writing this article is the MF Global case. While details are still emerging, it seems as if MF Global utilized regulatory rulings that few knew existed and coerced its regulator into continuing to permit questionable borrowing.
As a commodities broker, MF Global was under the regulation of the U.S. Commodity Futures Trading Commission (CFTC). The Commodities and Exchange Act of 1936 set forth that customer’s assets were required to be segregated from firm’s assets. (Be certain that everyone in the securities industry and the futures business knows the line between customer funds and broker funds is sacrosanct!) However, firms could invest customer’s cash “in excess” but only in the safest assets, such as Treasuries. But unbeknownst to many customers, a ruling in 2000 allowed MF Global to invest in sovereign debt of other nations as well, like that of Greece, Italy and Spain. To top it off, a 2005 ruling allowed MF Global to lend themselves their customers’ cash in exchange for things like sovereign debt and it permitted them to do it without customers’ knowledge or consent. The trouble is that when the value of the sovereign debt falls MF Global has to post cash to cover its loans, which they didn’t have. If this is done by a broker that has SIPC coverage, then the aforementioned protection applies. But MF Global was a commodities broker and there was no such protection. Tragically, $1.6 billion of customer money is still unaccounted for some five months after its bankruptcy. This differs from Lehman Brothers, as to my knowledge, all customer securities and funds were returned to the customer or transferred to another broker. The ones who lost were people that invested in Lehman Brothers and its creditors, which all knew there was some level of risk.
To me this is the most egregious violation of the fundamental ethics of our business. What makes it even more disgusting is that it might just have been legal! While my legal opinion is not much better than my branzino recipe, there is a very real chance that no one will be prosecuted for this despicable act. Regardless, merely conceptualizing this act of circumvention reaches beyond the ethical standards of the financial services industry as it tears at the very fibers of morality. Imagine conjuring up a way to borrow money from the very clients that keep you in business while not properly informing them that you are borrowing or that what you are doing with the borrowed money is speculative and there is no backstop. The only solace I can find is that the executives that conducted this act will have to face themselves in the mirror, be it at their beach house or their penitentiary of jurisdiction, every day forward knowing that this conduct was simply wrong and that fact can't be contested.
The vast majority of financial brokers and professionals exhibit the highest ethical standards and steward their clients’ funds to the best of their ability. Client investment goals, be it a second home, early retirement or helping a child leave college debt free, are met every day. But since these accomplishments garner no media attention, the positive things our industry produces are easily overshadowed. Tragically, a few rotten apples somehow nudge their way in and occasionally linger for too long. But the misdeeds of a few confirm the high code of ethics by which firms such as Warren Capital practice. Our clients trust we hold their interests above all else and they understand and appreciate our transparency and principles. My proof is the number of referrals we get. But as much as I think we should, I realize we don't hold every investment dollar out there and there are investors that choose to do business elsewhere. So, I author this as a field guide to everyone with assets as I consider part of my duty as a financial professional to help implement basic standards of investor protection.
As always, I appreciate your continued trust and confidence.
December 30, 2011
Commentary by Stuart Brown
For this week only…All is quiet
All is quiet the week before the New Year celebration. Could it be Europe has stumbled into a solution of their debt crisis with the circularity of the European Central Bank (ECB) lending billions to the banks, which in turn deposit the funds with the ECB (rather than face counterparty risk by lending to each other or businesses)? Or have the hedge funds, like Congress, simply taken the last week off?
The ECB, still at work, is quietly buying billions of Italian sovereign debt and that has helped keep rates tame. (If paying seven percent marks the end of the world, the debt problem can’t truly be solved.)
In the US, for all the brinksmanship and bluster of the year, the budget has barely been trimmed by a few billion. Bruised by the payroll tax debate, Congress went home leaving the President to quietly ask for another trillion dollar hike to the debt ceiling this week.
(In the spirit of getting something for nothing, who will ever want to see a thousand dollars less in their paycheck? Like the unfunded prescription drug add-on to Medicare, the payroll tax holiday is another Trojan horse bringing forward the day of insolvency.)
But next week, with the Iowa Caucuses, the volume of the political discourse will be turned up again. Congress reconvenes and Wall St. will get us back in the swing of things. There is a trillion dollars of European debt to refinance in 2012, along with another trillion of junk bonds and some hefty Treasury borrowings.
Everyone knows all the woes. Seems to me, that must then, be already priced into the market. It is what is not priced in the market that will prove important as the new year unfolds.
Stocks began the year with a P/E of 17 and ended at 14, or an Earnings Yield of over 7%, historically a tremendous value in light of the thirty-year treasury paying under 3%. Over the next few weeks companies will report their fourth quarter earnings, which are expected to be generally pretty good.
For all its gyrations 2011 was a lot of nothing. The New Year may still be volatile, but is starting from a better valuation and so may very well be more profitable.
I want to thank you for your continued confidence. I hope 2012 comes with great happiness and health and the joy of loving family and friends.
November 22, 2011
Commentary by Joseph Warren
The word amortization comes from the Latin word admortire, which means, “to kill.” Given the state of the housing and debt markets these days the derivation couldn’t be more fitting. Regardless of the origin, understanding how an amortization schedule is calculated and the influence of such a calculation on things like the housing market could not be timelier.
I’m not going to go through the entire amortization formula as it would take most of this piece. But know that the interest rate, the number of payment periods and the principal balance are the variables that calculate the monthly payment. (Visit our mortgage calculator at http://warcap.com/services/harmonyloans). Those variables also dictate the amount of interest vs. principal allocated within each payment: the amortization schedule. As you might deduce, the larger the number of payments (there are 360 monthly payments in a 30-year loan) the less principal allocated at the start of the loan. The nature of this formula and the fact that very few homeowners or mortgage brokers understand the formula is a primary reason for the current state of the housing market in this country.
Take a 30-year fixed loan for $500,000 initiated in November 2009 at 6%. The monthly principal and interest payment would be $2,997. While that is an important number, often mortgage brokers fail to properly explain that such a mortgage obligates the borrower to pay $579,190 in interest over the 30 years of that loan for a total repayment of $1,079,190. Today a qualified borrower could get a 30-year fixed mortgage for about 4.3%. While this is a significant rate difference, there is a dirty little secret hidden inside the option to refinance and most in the industry don’t want you to recognize it.
Two years of payments at $2,997 equals $71,928. But because of the magic of the bank’s amortization formula, the principal balance of this loan after two years is $482,922. Only $17,078 of $71,928 has gone to paying down the $500,000 borrowed. Moreover, refinancing into a new 30-year fixed mortgage immediately subjugates the borrower to another 360 monthly payments and a new amortization schedule. Under this scenario, after four years of payments totaling $129,480, the borrower would have a principal balance of $466,427. When you add back the $22,000 of closing costs the borrower would have to pay for both loans the total reduction of debt is de minimis. Here at Warren Capital, we believe this type of scenario should be avoided and we give our clients a much better solution.
Through our alliance with Mortgage Harmony Corp., we are able to offer our clients a unique type of loan that allows the borrower to reset their interest rate after they finance by simply clicking a button on their lender’s Web site. If interest rates change after the loan closes, which they always do, you now have the ability to take advantage of that new rate without refinancing. No credit check, no appraisal, no title work, no income or job verification and no new 30 year amortization schedule.
Our job at Warren Capital is to build and protect our clients’ wealth. Both asset and liability management are necessary to accomplish our job. There will be times when asset growth will be limited because of economic circumstances. During such times, you can be assured that we will use that opportunity to improve the other side of our clients’ ledgers and to make sure they don’t succumb to hidden financial pitfalls. While this is a unique approach for advisors in our industry, we know it’s the right way to help our clients build their net worth.
As always, I appreciate the continued trust and confidence.
September 12, 2011
Commentary by Stuart Brown
Since 1900, the stock market has averaged six percent growth per year, excluding
dividends. Seldom have stocks been priced as inexpensively as today. When at this valuation in the past, a year later, on average, the market was up over twice the historic average.
Most recently, in June 2009, a dollar invested in the S&P represented 1.7 times the yield on the thirty-year Treasury bond. A year later, the market had risen 28%.
Today, with reported earnings of $85.18 and the S&P at 1169 (an earnings yield of 7.3%) the market is priced at over twice the 3.5% yield of Treasuries.
The stock market has been similarly valued 46 times over the past century. Each following year, the market had rebounded sharply (with the exception of the early years of WWII). There are no assurances as to what the future might bring. But if things unfold the way they have in the past, this could be a very profitable time to own stocks.
There are ways, other than higher prices, for stocks to appear expensive, e.g. if interest rates soared above 9%, the market would no longer look as cheap in comparison. Or if a soft patch turns into full blown recession and earnings decline. There are three moving parts to this model: earnings are reported quarter by quarter, interest rates and the price of the market change moment by moment.
Most recently earnings have been reported for the second quarter and have generally been good. For the Dow Jones Industrial Average, earnings rose on average 14% on 10.5% higher sales. Not bad, but the market, concerned about where earnings might be next year in a slower economy, sold off some 15%. Money moved to bonds, driving the yield on the Treasury down from 4.7% to under 3.5%.
Irene blew her way up the east coast. While hurricanes aren’t known for doing much good, there may be one nice thing about a market decline; once again stocks are offered at a compelling price. Stocks are as cheap as they were in early 2009—at the recent market bottom.
August 09, 2011
Commentary by Warren Capital
WASHINGTON, Aug. 9, 2011 -- It appears that the Fed is on the edge of more monetary easing, and that at the inner circles of the Fed they are becoming concerned about what remaining arrows they have in their quiver to energize the economy.
However, there are options: a Fed-backed Infrastructure Fund.
Washington, D.C. based money manager Joseph Warren, founder of the Warren Capital Group wealth management firm, proposed an infrastructure fund to the Fed in November. (See Letter to Chairman Bernanke here) Such a Fund could be used for building and improving schools, roads, water systems and the electric grid across America.
"If the Fed is going to create money out of thin air, why not build the value of the country rather than bail out those who made bad decisions and can't pay their debts," Warren says, adding that he understands there may be technical difficulties to be considered.
"Naysayers might point out that this type of Fed funding is completely outside the realm of the Fed. But this is no more outside the intent of the central banking system than bailing out AIG or buying Lehman's Maiden Lane mortgage portfolio," Warren offered in his Nov. 16, 2010 letter to Fed Chairman Ben Bernanke.
"The government is already in the market of helping states and municipalities with their infrastructure needs through the Build America Bond program. Furthermore, this cannot be derailed by an incapable Congress as the Fed can actually create these new dollars and this plan does not add to the deficit."
Warren did receive a response from the Fed, and neither Fed policymakers nor anyone else has come up with a legitimate rebuttal of this concept.
Warren says he's hoping that someone in the administration, Congress, the Fed or any other able entity will at least consider an infrastructure option.
A creation of an Infrastructure Fund by the Fed could pump real jobs into the economy, Warren says.
This idea is timely given the Fed meeting today.
"After the events that have transpired in Washington of recent, I am truly concerned that very few policy makers have quality ideas on how to improve the economy and that our country will be permanently impacted by more of the same. Policy makers don't know how lucky they are that treasuries rallied yesterday," Warren says.
Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group and its independent financial advisors are based in Washington D.C.
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July 27, 2011
Commentary by Joseph Warren
Right now the political rhetoric in Washington is thick as I’ve ever heard as the debate over the debt ceiling is coming to a crescendo. While I believe the majority of America would simply like some compromise between parties, the elected show no signs of that consideration as they are retracting further into their respective political burrows. This comes as no surprise, and I expect that even if an agreement is reached before August 2 it will have little impact on the indebtedness of the United States. Therefore, I take it upon myself to present reality.
We can all point fingers at Congress and its inability to enact legislation. But in theory, politicians are here to represent their constituents. Given such, the reality is that either citizens of this nation don’t have the civic fortitude to deal with the indebtedness for which we are all now responsible, or they haven’t made clear what policy they are willing to accept to correct this imbalance. Whatever the case, dealing with our imbalances can be done if handled practically.
It’s important to recognize that while the $14.3 trillion in treasuries is an obligation of the government, the ultimate responsible party is every American citizen. That means that because of previous policy and our lack of action every citizen of the country has become indebted by roughly $45,800 to treasury investors. In addition, government expenditures for the year will be approximately $3.55 trillion while incoming revenue will be $2.38 trillion. So, not only do you owe a huge sum but to simply prevent yourself from incurring another $3,751 in debt by year end you must take action! Here are some options:
1) Given that government receipts can only cover 67 percent of expenditures, take out a piece of paper and calculate the dollar value of every benefit you receive from the government. Once calculated, reduce that overall number by 33 percent and write down which of those benefits you are willing to reject.
2) Look back on your tax return for 2010 and examine what deductions you took. Remove a third of those deduction going forward so your tax obligation is increased by 33 percent.
3) Prepare a check written to the U.S. Treasury for $3,751.
4) If you have treasuries in your investment or retirement accounts repudiate your ownership in four of those securities thereby alleviating the U.S. Treasury of $4,000 worth of its obligations.
While none of these options are very appealing, this only gets us through year end. Your next priority is to figure out how to pay off the $45,800 you already owe. We can all whine and moan about how we got here, but that doesn’t change the reality that you owe it and are paying interest on it. The good news is that you have more time to pay off that debt. The bad news is that it’s going to take a much more drastic combination of the aforementioned options to get whole. While these actions are necessary, communicating what you’re willing to do is just as vital.
I’ve been searching the net for records on the volume of phone calls, emails and letters that have been made to Congress in the last few weeks and the data is sparse. The best that I can tell is approximately 3 percent of the U.S. population has made contact with his or her representative of late. I live in the District and politics supersedes any other topic including the weather in this town. So, I’m not sure how much this subject stirs the blood of the general public. But I do believe that remaining 97 percent would care that they are on the edge of incurring nearly $50,000 in debt at the behest of ill-directed policy if they actually recognized their looming obligation.
I also know that most Americans truly care about this country and are willing to endure some personal sacrifice for the benefit of the nation. The question is how much do you care? If there can be such a thing as a call to action in this day and age than this is it. (To find your representative visit http://www.congress.org/congressional_staff). It is no longer acceptable to simply point fingers and dodge the issue. If you decide not to participate, realize that those of us who do take action will determine the fate of your responsibility.
Short Term Consequences
Because of our reputation and what we deliver, we bring on many new clients each year. What we often hear during the initial consultation with a prospective client is that they can’t afford to take a loss like they have experienced in the past. The alarming thing is that even though much time has passed since they took such losses, they have done nothing to protect themselves against that experience going forward. That’s usually the time we explain our process as independent financial advisors and how we differ from all other money managers. While we’re not predicting it, the next few weeks could prove why we invest the way we do.
Even if my call to action sweeps the nation and it starts tomorrow, the effects will not take hold for some time. Therefore, investors might face some unique circumstances for the next few weeks related to the debt ceiling debate and the potential effects on the financial markets of a treasury default. We always look to the markets to measure the amount of trouble looming, and right now indicators remain stable. But we are keenly aware of how quickly things can change.
Whatever happens, you must have a plan in place to deal with unprecedented circumstances, like a treasury default. Our clients take solace in the fact that we do have a plan and the ability to act quickly if needed. If you’re not a client and you don’t have your plan in place, consider this your wakeup call and see our phone number is below. As always, I appreciate the continued trust and confidence.
May 01, 2011
Commentary by Joseph Warren
Given the close relationship we have with our clients and the amount of time we get to spend with each of them we often hear their worries about various economic issues. Having clients in the real world expressing their economic concerns to us holds immeasurable value as they are the true barometer of the level of fear in the markets. But often times the fearful topic du jour is not the issue to worry about as a more silent, less media-friendly matter emerges as a sure way to lose. Right now the looming debt vote in Congress serves as the former and inflation the latter.
For those not aware, the U.S. Treasury’s borrowing spree has a limit and it’s called the debt ceiling. The debt ceiling is a cap set by Congress on the total amount of indebtedness the Treasury may incur, currently $14.29 trillion. According to the Treasury, the cap will be met in the next 60 days. Two things can happen once reached: The debt ceiling can be raised like it has been done almost every year for the past five decades or the government can stop paying some of its bills.
I’ve written extensively in past editions about the inevitable path to insolvency the country is on with this deficit spending and the media has covered it ad nauseam. In reality there is no political benefit to the politicians balancing the federal budget as each representative gets elected by and is responsible to their own individual constituents. (I imagine allocating federal dollars to benefit the voters in the districts that elected you helps at re-election time.) As such, I doubt there will ever be a political consensus on government outlays vs. spending. So I can understand why clients are concerned about the pending ceiling vote on the Hill. But according to the markets, they should not be.
The most recent headline to spook investors regarding federal debt was Moody’s release that it was considering downgrading the credit quality of Treasuries. Losing its gold-plated AAA status would be a huge blow to Treasuries. But contrary to logic, the Treasury market has rallied since Moody’s release in mid-March as the yield on the 10-year Treasury has declined from 3.34% to 3.17%. While it’s not a big move, the mere decline in yield, or rally in price, proves the point. Treasuries are the world’s safe haven investment and even a threat of a downgrade to the ratings of Treasuries themselves doesn’t replace that notion. Furthermore, the paltry yield of 3.17% suggests that investors have no concern whatsoever about the government’s ability to meet its obligations. In comparison, 10-year yields on Greek and Portugal debt are 15.1% and 9.63%, respectively. Now I’m not saying it’s right, but the markets are telling you not to worry about the government defaulting. What is a concern and what we work to mitigate every day is inflation.
Inflation is a complicated matter as the cost of goods affects people differently depending on their direct use of those goods. That is why the consumer price index (CPI) may increase by only 2.7% in the past year while you are paying 28% more for gas. Whatever the measure, inflation is far more onerous than the government’s creditworthiness.
First, it is important to understand that the ultimate agent of stability, the Federal Reserve, faces consequences each time it eases. The Fed has absorbed $2 trillion of new assets since the financial disaster of 2008. In order to buy these assets, the Fed had to create new money. Increasing the amount of dollars in existence by 20% will eventually cause the value of each dollar to fall. We measure the value of a dollar on an index basis as it must be measured against a basket of currencies. At 73 it stands just two points away from its all time low!
Second, the value of the dollar has an inverse relationship to the cost of anything that is priced in those dollars. Hence, the recent sticker shock at the pump and the grocery store. The ultimate threat to any central bank is falling prices or deflation. One way to counteract the deflation we faced in 2008 is to add new dollars to the total amount of dollars in existence. This is guaranteed to lower the value of the dollar and will likely raise the price of anything denominated in that currency over time. What makes a falling currency so burdensome is the inflation it produces and the effect that inflation has on “real return.”
Many investors who manage their own money often cite the return they are receiving on their investments. While it’s a useful measure, it has less meaning than real return, a measure followed at Warren Capital. Real return accounts for inflation as it subtracts the inflation rate from the net return. From our perspective there is no point in evaluating how many dollars can be made on an investment without considering what those dollars will be worth when earned. Furthermore, measuring real return will continue to hold more creed going forward as Fed policy is poised to keep the value of the dollar low for some time.
Currently the Federal Reserve’s federal funds rate is targeted at zero percent. It’s pretty difficult to lower a rate beyond zero and, therefore, the Fed has no other stimulus available other than printing and buying, as noted by their recent QE2 effort. Given the anemic growth of the economy and comments from recent minutes released by the Fed, it’s hard to foresee any eminent policy designed to increase the value of the dollar or slow inflation. With CPI at 2.7% an investor would have to go out eight years on the Treasury yield curve to find debt that would break. By not considering this and owning investments with less than an equivalent yield you find a sure way to lose.
As always, I appreciate the continued trust and confidence.
Warren Capital Group is a registered investment advisor specializing in private wealth management and protection and growth for high net worth individuals, institutions, foundations, and corporations. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth. As a fee-based personal wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services.
April 11, 2011
Commentary by Stuart Brown
GDP = C + Inv + G + (Ex – I). Gross Domestic Product (GDP) is calculated as the sum of private consumption (C), gross investment (Inv), government spending (G), and the net of exports minus imports (Ex – I). Having already exhausted “job-killing” sloganeering, there is scant mention that reducing government spending will, by definition, take a toll on GDP. We can only hope the economy is sufficiently recovered to withstand retraction of stimulus.
The Fed doesn’t think so. If the Fed were confident in the sustainability of the recovery, rates would be raised or at the least, Chairman Bernanke would be talking about the end of quantitative easing.
Recent forecasts of a 4+ percent expansion in GDP for 2011, now appear overly optimistic in part due to budget austerity and debt brinkmanship. Also weighing on estimates are world events like the Japanese earthquake, euro-zone malaise (austerity has not led to robust recoveries), and higher oil prices, the result of continued chaos in the mid-east and increased global demand.
The unemployment rate is now 8.8%, down from 10.6% a year ago. If those working part-time or temporary jobs, but desiring full-time employment, were included in that statistic, the number would probably be closer to 18%. Creating a couple hundred thousand new jobs a month is not a rate fast enough to bring unemployment down to desired levels.
The battle between the Keynesians and the Hawks warms up. Last June, at Wimbledon, John Isner and Nicolas Mahut played a single match that lasted over eleven hours. At the time, I likened that eternity to the matchup between the Keynesians who wanted to stimulate an economy deep in recession and the deficit hawks who instead called for deep cuts in the federal budget.
The party for whom “deficits don’t matter” (as long as they have the White House) has successfully moved the conversation from the economy to the deficit. The agreement that narrowly avoided shutting down government may merely be one more game in the set that includes next month’s battle over the debt ceiling and then the 2012 budget hearings.
We’ve seen this before. In the 90’s we went from deficit to surplus with higher taxes and a strong economy. In the 30’s the US descended back into depression when government prematurely addressed deficit spending before the economy was back on its feet.
Ultimately all Parties in the match are rooting for a growing and vibrant economy in which all Americans participate and benefit.
Meanwhile it is earnings season again. Estimates have been raised. Year over year, earnings are expected to grow over 17% this year and almost 13% next. Hopefully the plus of strong earnings in a growing economy can overcome the negatives of less G (Government spending) and the possible end of quantitative easing.
Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth.
March 01, 2011
Commentary by Joseph Warren
Sometimes I wonder if the founders of the Internet understood the full implications of what they were producing. While there’s some debate about who started the Internet, it is my understanding that the Department of Defense (DOD) created it in 1969 as a way to connect internal computers. Of course this is woefully ironic given the geopolitical turmoil now erupting across the Middle East all because of the Internet.
For those who don’t know, it was the death of 28-year-old Khaled Said — who was beaten to death last June after being dragged from an Internet café in Alexandria, Egypt — that galvanized Egyptians into a social movement that led to the resignation of the 30-year dictator Hosni Mubarak. Not only did access to the Internet assist in this movement, the movement took shape via Facebook and when the dictatorship blocked access, the cyber movement transformed into massive protest. The reality is that the Internet is a form of freedom and authoritative regimes may crumple in its path.
I’m taking a few things for granted when I say this, but it’s not surprising that the Internet was created in the United States. While our reputation is suffering in various parts of the world, it’s generally still accepted that America represents a free nation. And in this age what better way to demonstrate our unalienable rights than via the Internet? Of course life, liberty and the pursuit of happiness are rights that fundamentally contradict the oppressive nature of authoritative regimes.
The list of countries with oppressive governments is vast. But according to a popular human rights index, both Egypt and Libya are in the top 20 in the list of worst rights offenders. So it shouldn’t be surprising to see Mubarak ousted and Muammar Gaddafi, the controversial leader of Libya, losing his grip. What’s interesting is how the dictators react to insurrection.
With the Egyptian experience the protestors were blessed with a government that didn’t have a clue how to deal with an uprising via the Internet, as demonstrated by their fraught attempt to shut the Internet down. In Libya the reaction has been much more violent as the military fired upon protestors. This led to a massive defection of army colonels who are now attacking Col. Gaddafi’s remaining forces. What’s shocking is that these multi-decade tyrants didn’t learn more about handling Internet insurgencies from governments like China, which has more documented cases of human rights violations than both.
Last year a 24-year-old peasant was arrested in China for “illegal blogging.” The peasant mysteriously died in prison and the incident generated 100,000 comments on a Chinese blog. But the Chinese government reacted differently by reaching out to irritated bloggers and inviting them to join an investigative committee on the incident. Nothing came of the investigation as it was extremely limited, but the social unrest subsided. To me the results of these vastly different strategies have investment implications.
The seven largest companies by market capitalization are Exxon, Apple, GE, Microsoft, Berkshire Hathaway, IBM and Google. (Facebook is not included, as it remains private.) It is not coincidental that four of the seven all provide technology, software and hardware focused around the Internet. Those that further the ease of use and help push greater access worldwide stand to change both the economic and political landscape. As it becomes the tool that both democratic governments (President Obama’s online campaign was a vital tool for his overwhelming victory) use to further their reach and the force of liberty that oppressive governments must face, we will be on the lookout for the next game changer. Because not only can tyrants be toppled, but vast wealth can be created by the freedom of the Internet.
Warren Capital News
For those who read my November 2010 letter to Fed Chairman Ben Bernanke, you'll remember that I questioned effectiveness of the $600 billion treasury bond purchase the Fed was about to embark. I was concerned that the second part of their dual mandate — to promote a high level of employment — would not be reasonably influenced by such a bond purchase. Rather, I proposed, start an infrastructure fund with said funds, which would certainly create jobs. Well to my pleasant surprise, I received a reply from a Fed director in late January.
Part of the beauty of the Fed is the unique manner in which they communicate. When you control monetary policy and are the lender of last resort, you better have an ability to mask your intentions or the markets will manipulate them. The Fed is truly the master of the obscure and their reply to me served proof. The general nature of the reply was neither to dismiss nor fully address my suggestion, but rather point out the merits of their quantitative easing (QE2). After reading it multiple times I came to the exact conclusion they wanted me to: That the Federal Reserve’s treasury purchases “should help keep interest rates lower than they would otherwise have been”. While this was not the revelation I'd hoped, I did learn two things.
First, the interest on the treasuries that the Fed purchases is returned to the treasury; thereby, saving the government $110 billion in interest payments. So through this bizarre tactic, not only are the interest payments the treasury must make on their bonds lower “than they than would otherwise have been," the Fed also massively reduces the treasury's expenses. (If I was running the treasury I'd have to send a thank you note to Chairman Bernanke.) Second, and potentially more important to me over the long run, I now know that there is a decent chance that some of my opinions are reaching powerful ears. So if you ever decide to employ such a brash tactic as composing a letter to arguably the most powerful individual in the world, I advise you to make your point direct and your language precise. Your message might just reach intended recipient. As always, I appreciate the continued trust and confidence.
Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group's independent financial advisors based in Washington D.C. assist clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth.
February 14, 2011
Commentary by Stuart Brown
How Goes the Recovery? So far 27 of the 30 stocks comprising the Dow Jones Industrial Average (DJIA) have reported earnings for the 4th quarter 2010. If this is indicative of the market and the economy, the results are encouraging. Earnings are up on average 18% on 8% higher sales. This continues the good news from the third quarter when earnings and sales were up 37% and 4% respectively.
Dow Jones 12000. Much is being made of the market breaking above 12000 for the first time since August 2008. Back then S&P; earnings were slipping from $64.67 to $15.73 by December 2009. Today’s higher earnings of $75.45 is consistent with a recovering economy.
Dow Jones 14000. When the DJIA hit its all time high in October 2007, S&P; earnings were $74 (down from $85 in June). So today there are greater earnings than when the market was fifteen percent higher.
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