THE TYGRRRR EXPRESS

While I do not believe the sky is falling, and have lived through people panicking hysterically before, I have to confess that I was taken aback by the violence and ferocity and speed with which Bear Stearns was brought down.

This was not some fly by night company, or some internet stock with no revenue. This was Bear Stearns, an established, white shoe, blue chip Wall Street firm. This stockbrokerage and investment banking powerhouse has collapsed.

http://money.cnn.com/2008/03/17/markets/markets_morning/index.htm?cnn=yes

One year ago the stock was at $160 per share. On February 27th, 2008, it closed at $87.30. This past Thursday, March 12th, it closed at $57. It then dropped 47% on Friday to close at $30. On Monday it dropped another 84%, and J.P. Morgan offered to buy it at $2 per share.

Normally when one company acquires another, the acquirer loses value and the company being acquired gains value. This is because the acquirer normally pays a premium. As my old corporate strategy professor once said, “Acquisitions destroy value, but every CEO believes they are the exception.” This situation is the reverse because it is an emergency bailout, not a hostile takeover.

For the sake of disclosure, I do not own stock in Bear Stearns (thank God). I do own stock in J.P. Morgan, but despite my being a part owner of the company, I am not on the Board of Directors, and the CEO has never solicited or accepted my opinion on any issues.

For the sake of even fuller disclosure, I worked at Bear Stearns for one day in 1994. I was fresh out of college, and was hired as a cold caller. The broker thought I was fabulous on the telephone, but the manager was angry that the broker hired me wiithout his knowledge. Plus, my hair was past my collar, and I wore a dark red shirt instead of a white one. The manager had a military background, and over the vehement objections of the broker, I was told to leave. I was not fired, because I was told I was never hired. Thankfully, soon after that, the manager was fired. Several years later, I did some temp work at the same office. They did not remember me from the first time, and the few days I spent their were fine. I even saw people wear jeans on Friday.

Lastly, in the department of too much disclosure, my best friend growing up worked at J.P. Morgan. He did not know a stock from a bond, so I wondered how he ended up on Wall Street when 50 million people would kill to work there. He eplained that he worked in the firm’s gym as a personal trainer. He told me that if I sent him my resume, he could see about getting me an interview. When I asked if he knew anybody in equity research, he replied, “no, but I know everyone at the gym.” I laughed, thanked him, and decided not to ask him to flex his (gym earned) corporate muscles.

As for this violent Bear (Stearns) Market, there are certain things that need to be kept in perspective.

The United States is not in free fall.

Yes, the dollar is low. The downside to this is that people do not want to invest in a weak dollar. However, a strengthening of the dollar would exacerbate the trade imbalance and deficits we ave with many nations. I will be the first to admit that the dollar must stop weakening, because unless we remain an economic superpower, we will not be a military superpower.

This is not 1929. It is not even 1987. Yet unfortunately, like both of those situations, this situation was completely avoidable.

In the 1920s, people bought stocks on margin. Margin is leverage. When you buy something outright, be it a car, a house, or a stock, you own it, lock, stock (as in market), and barrel (as in oil). It cannot be taken away from you. When you buy on margin, and you default, you lose it. The reason that today the margin level is 50% (higher for riskier stocks, some which cannot be margined) is because back in the 1920s, margin was only 10%.

So as cruel as this sounds, those that lost money in the stock market got what they deserved. No, the rest of America did not deserve the Great Depression, but the speculator went wild, and eventually lost. The expression, “Don’t confuse brains with a bull market” is still apropos. Also, in an irony that should not be lost today, it was J.P Morgan himself who stepped in and saved the country during an early 20th century financial panic. The private sector did have its positives.

In the 1980s, leverage became the issue again, this time in the form of derivatives, mainly options. People thought they were buying “portfolio insurance,” to keep their portfolios safe. There is nothing safe about financial markets outside of bank CDs and money market funds. Attempts to smooth out markets and minimize risk usually lead to bigger risk and more violent swings. The portfolio insurance did not work, the options went against those using them, and the stock market crashed over 500 points, a 22% loss in one day in 1987. Quick and decisive action by Sir Alan of Greenspan prevented what could have been a financial breakdown.

The situation today is no different. People can blame greedy and crooked lenders to make themselves feel better, but at some point personal responsibility has to take over. Speculation is as old as the hills, and whether it be tulips, paper, gold, porkbellies, internet stocks, or real estate with “cheap” loans, the bottom line is that bubbles will burst and unlucky gamblers will lose.

I do not wish financial misery on anybody, because when people hurt, America hurts. My career is highly correlated with the economy. I am the first to get hurt when things go South.

So given my 14 years of experience on Wall Street, I offer sound advice for many.

If you cannot afford something, do not buy it. I drive a 1987 Oldsmobile Cutlass Siera. Yes, this IS your father’s oldsmobile. The owner took good care of it, and I bought it with only 74,000 miles on it. I live only a few minutes from my office, and put less than 10,000 miles per year on a car. This helps from a quality of life standpoint as well. No, the car is not sexy. Who cares? I have seen guys drive $200,000 cars, and have them repossessed. I bought mine for $2,000, and I own it.

I do not own my own home. I rent. I would love to buy my condo, but the prices are too high. Besides, people should not buy anything without doing research. I know nothing about real estate. I do know stocks, which is where I put my money.

Today people are in debt for different reasons than in the 1920s. There are many of people saddled with debt, including many in lower middle class neighborhoods, who had to buy a big screen tv on an installment plan. I went “factory refurbished,” after determining that this was safe as long as I had a warranty. My 55 inch tv cost me $800, and has lasted several years. Yes I wll cry when it dies, but it was worth the purchase. My black leather sofa set seats 9 people. Two of the chairs fold out into lounge chairs, and the other side opens up to form a bed. It costs over $2000 in stores. I bought it on EBAY for $600. The couple that sold it was too rich to care. One person’s trash is another person’s treasure. Another person in my building was going to throw away a lovely marble table. Yes, I think they were insane. I quickly (ok, slowly, it was heavy) brought it back to my condo. It is a gorgeous table, and I am stunned that somebody would not want it.

As for investing, all investing…let me repeat, all investing…is gambling. There is no guarantee that we can make our portfolio risk free from a safety of principal standpoint (again, discounting bank CDs and T-Bills), but stupid behavior can increase risk dramatically.

Do not buy something if you do not know what it is. Your friend knows nothing, unless they are a financial professional. Their needs may differ from yours. Mutual Funds are not “safer.” All a Mutual Fund is is a collection of “things.” If these individual things are risky, adding them together may not lead to a diversified portfolio. It could lead to less diversification and more risk.

Also, public companies issue reports. Those reports are public information. Everything about the financial health of the company is right there. One company may have 20 billion dollars of cash reserves and no debt. Other companies may be saddled with debt. Most companies are inbetween, but their capital structure is in plain view.

Even situations like Enron can be avoided from an investor standpoint. I have gotten many things wrong, but this one I got completely right. By reading that the company had a significant amount of “off balance sheet financing,” one could see the company was debt laden. It was in the footnotes.

Additionally, those with 401ks should make sure that the 401k is not heavily invested in the stock of their own company. It does not matter how large or solid the company may be. Bear Stearns was not a fly by night operation.

Some people claim they are too busy to do the research. Yet even if they hire a financial planner or money manager, they must do research on that professional, and oversee them. Being too busy is not an answer.

If your life is at stake, you do what is needed to save it. The health of your finances should be no different.

It is your money.

eric 

This entry was posted on Tuesday, March 18th, 2008 at 2:43 am and is filed under POLITICS, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.