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The Independent Investor: Clients Last? Welcome to Wall Street
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| Sam Rogers, head of trading: "And you're selling something that you 'know' has no value." John Tuld, CEO: "We are selling to willing buyers at the current market price." John Tuld: "So that we may survive." — "Margin Call"
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If you ever wondered where you stand on Wall Street, the op-ed piece in Wednesday's New York Times is a must read. The fallout from the words of a 12-year veteran of one of the world's most prestigious investment firm is resonating around the world.
It is not necessary for me to identify either the firm or the writer, since just about everyone now knows who I am talking about it. Yesterday, my inbox was deluged with readers who forwarded me the piece. Most readers are aware that I have a huge beef with the ethics on Wall Street and what I see as the "customer comes last" attitude that is prevalent within that sector.
As has happened in the past, I'm sure that after this column runs I will receive a flurry of hate mail from those in the financial community, who believe I am attacking them personally. I'm not. Most individuals in this business are decent folks who do care about their clients –when they are allowed.
Unfortunately, they work for firms that cannot put the interests of their clients first or even in the top ten of their business objectives. These firms are just too big, too short-term and too focused on next year's bonuses to afford the luxury of putting their clients first.
Now, I know for the most part I am preaching to the choir at this moment. As the facts have come out about just how duplicitous these companies and their managements have been in creating, exacerbating and finally being rewarded for the financial crisis they engineered. Is it any wonder that very few Americans trust Wall Street?
Despite financial legislation and promises of a new ethic by those caught with their hand in the cookie jar, it is very much business as usual on Wall Street. It cannot be otherwise. When I first got into the business in the early 1980s, the big names on the Street were largely partnerships with long-term relationships with their clients. It was a world where trust among your clients was your most valuable asset.
The shift from private to public companies, the end of fixed commissions, the dawn of proprietary trading (firms trading their own capital), the escalation of risk and with it much greater rewards, altered the ethics of finance. These new masters of the financial universe embraced greed and abandoned the old ways. As a result, they saw their total pay skyrocket 70 percent above average paychecks in all other industries in the last decade.
Big became not only beautiful but mandatory in this new high stakes area. The bigger you are, the more muscle you can throw around, not only with your competitors but with your customers as well. Clients become numbers to be crunched. Today, these firms are so big that they truly are "too big to fail." And because they are, they are largely immune from retribution or legislation.
I say we should salute this middle-management executive and his op-ed piece. He most likely will face legal and monetary retribution from his ex-firm. You see, almost everyone on Wall Street must sign both a non-compete contract as well as agree not to say anything disparaging about their firm upon departure (whether voluntary or not).
If you violate these agreements, the company will and does come after you with the full weight of their legal departments. It is one of the reasons that so few ex-employees actually "tell all" when they quit. Although this guy's opinion will amount to no more than a cry in the darkness, he should be commended and remembered for his courage and honesty.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Patience Is A Virtue
"So was that the pullback you were looking for?""Let's say it was the beginning of one," I answered.
"So how much longer am I supposed to wait? I've got tons of cash and it's not earning me anything."
Sometimes the hardest thing in the world is to do nothing. This appears to be one of those times. Yes, we did pull back over 1 percent earlier in the week in all three averages but the downside was short lived and the markets regained all they had lost by the end of the week. We can thank world governments for that performance.
The EU and its central bank successfully concluded the renegotiation of Greek debt. Just over 80 percent of Greek bond holders "volunteered" to exchange their old bonds for new ones that are worth less than half the value. For all intents and purposes this amounts to a massive bond default by the Greek government, but that's not how it is playing out.
When governments are involved, what normally would have become a default becomes something else. In this case it becomes a "restructuring" and not an embarrassing default. The markets rallied, bidding up European stock markets at the news. They ignored comments from the head of the European Central bank who said that further interest rate cuts and other stimulus measures are at an end. At the same time, the fact that Europe is also entering a recession seemed to be unimportant.
In the U.S., the Federal Reserve added to the cheer by planting a story in The Wall Street Journal. The gist of the article was that the Fed is considering a new kind of bond purchase that would boost the economy further but would be designed to reduce the inflationary impact of such purchases. The economic term for this is "sterilization" and just the mention of additional easing had investors buying back stocks. As I explained last week, the entire move up in the markets since October has been based on central banks flooding world markets with more and more money. This is like offering investors a huge punchbowl with all you can drink right now. Nothing else matters right now and like those who indulge too often and too much there will be a price to be paid down the road.
As I pointed out to a client this week, the markets did recover on all this good news but are still at about the same level they were when I suggested lightening up on your most aggressive equity holdings. Actually, the Dow Jones Industrial Average was around 13,000 at the time and it is now trading lower than that.
The S&P 500 Index and NASDAQ are where they were on March 1. Gold and silver have been losing trades for the last few weeks as well. But don't get me wrong; I'm not bearish, just cautious in the short term. I expect a choppy market at best and in that kind of environment it pays to wait it out.
Many investors believe the sidelines are an unacceptable position in today's markets. Granted, sitting in cash at money market rates yielding next to nothing is akin to watching grass grow in the middle of winter. The point I would make is that sitting in cash is not about making money. It is about not losing money and that can be a smart move sometimes.
I have no crystal ball that tells me this period of caution will only last a week or two or drag on for a longer period of time. I'm guessing it will be shorter than longer so I'm willing to keep the cash and forego investing it in bonds or something else that provides a greater yield. Part of that decision is based on tax considerations and trading costs. However, those may not be important considerations to you. I can only council patience; the rest is up to you.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Child Labor: An American Tradition
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The words "child labor" evokes visions in our minds of wretched children working in filthy factories or dangerous coal mines with little to eat and even less compensation. The universally accepted definition of child labor is the "employment of children in regular and sustained labor." Most countries ban that kind of child labor, but what about other forms of labor?
I had my first paper route at 11 years old. By the following year I was also delivering Sunday papers, waking up at 4 a.m. and working until noon. By my 14th birthday, I was working at Duff's, my neighborhood drug store in Philadelphia, serving soda and making change for the neighborhood after school. During the summers, I worked even harder: cutting lawns, bagging in supermarkets and even hauling hot roofing tar up two stories on occasion. I always had money, was rarely bored, made OK grades in school and received a fabulous education that I could have never obtained in school.
In the U.S., you can legally get a job at 14 as long as you work no more than three hours a day (18 hours a week during the school year or past 7 p.m.). Youths of any age can deliver newspapers, perform in radio, television, movie or theatrical productions; and baby sit or perform other minor duties around a private home. In the agricultural sector, kids can work as young as 12 years old during non-school periods. But by the age of 16, America's youth can work without restrictions or parent's consent.
In this country, there is a long tradition of kids like me, dating back to the last century. The jobs of our youth often teach us skills that are with us our whole lives. Some of the things I learned were simple things like filling out applications and more complicated skills like interviewing, working responsibly and how to get along with co-workers and, of course, the boss. Since my father started his underage work life in the coal mines near Altoona, Pa., (until he was trapped in a cave-in), my early working career seemed comparatively easy.
My daughter, Jackie, followed in the family footsteps, first as a snowboard instructor at 13 years old (almost 14). She was the snowboard director by the age of 17, managing almost 50 instructors on the weekends at a local ski slope. She credits her early work experience for giving her confidence and independence, an MVP status among her high school peers and a developed sense of responsibility that continues to this day as a new mother and as an executive at a international public relations company.
Like me, her work life kept her on the straight and narrow in school, away from parties, drugs and poor grades. She also learned the meaning of money and had enough income to pay for her own auto insurance when she learned to drive.
Now, granted, this is all anecdotal evidence. Research indicates that those teenagers who work more than 10 to 15 hours a week do receive lower grades. Many also sacrifice extracurricular activities and friendships they would have otherwise made if they weren't working as hard.
Some teens, their pockets flush with cash, have the means to experiment with drugs and alcohol, which many obtain from older co-workers. Finally, there are many cases where overworked teens spend a lot less time with their families, eating and exercising less than those kids without onerous work schedules.
Many teens' first jobs are in the retail sector such as fast food outlets, restaurants and grocery stores. Often these entry-level jobs are routine, boring and lack positive interaction with adults. It can be tough on a young person, and that's where you can add value as a parent. Encouragement, a sympathetic ear and a little compassion can go along way to help your child through that first rough year or so.
I also advise you to monitor your child's progress. Don't simply take "OK" as an answer for how work is going. And if you don't like the thought of after-school work for your teenager, summer employment is an excellent alternative.
If for some reason your kid doesn't need to earn money, there are always non-profit alternatives to choose from, like selling Girl Scout cookies or fundraising for the Boy Scouts of America or any number of charitable organizations desperate for additional help.
The point is that child labor, American-style, is a major positive in my opinion as long as it is accomplished within the guidelines above.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Bulls Batter the Bears
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Despite an increasing number of predictions that the market has run too far, that stocks are heading for a correction, investors still use any minor dip in the markets as an opportunity to get in. On Friday we touched 12-month highs on the S&P 500 Index while the Dow flirted with the 13,000 mark for most of the week.
It seems to me that it is time for a little profit-taking, if you haven't already. My suggestion would be to pare back on your most aggressive equity holdings and keep the proceeds in cash for now. I know that money markets are yielding next to nothing but I don’t expect your cash to sit there for long. Any correction should be short-lived and if it isn't, well, you could always put the money into something higher yielding if necessary.
There are plenty of signs that the averages are "crusin' for a brusin'" from the dissipation of volume, the continued decline in the market's breadth, to the fact that markets usually have trouble when they approach certain technical areas of resistance (like now).
Fundamentally, the rise in oil prices is a real threat to the markets. I outlined the causes for oil's rise in this week's column ("Gas Prices Going Higher"). At $109 a barrel for West Texas Crude and gasoline above $3.60 a gallon nationally, consumers are starting to feel the pressure. The higher energy prices climb, the worse the impact on economic growth. Although investors are aware of this threat, most are assuming that sometime soon (when speculators least expect it), the Commodity Mercantile Exchange (CME) will announce an increase in margin requirements.
The same thing happened last year when oil prices rose above $112 a barrel. Speculators, forced to pay much more for their short-term futures holdings in oil, gasoline and heating oil, dumped their positions, sending energy prices plummeting over night. At some point soon, something must give: either oil prices or the stock markets.
Now that Greece has largely faded from the headlines, Europe faces the aftermath of two years of a festering debt crisis. The European Union overall is now in recession with the Southern European nations suffering the worst. Most nations now face the need to reduce their deficits and are doing so with a combination of reduced government spending and increased taxes.
In Europe, it is much easier to raise taxes than reduce spending thanks to the politically difficult nature of laying off government workers or cutting back on their pensions and benefits. Of course, raising taxes and cutting spending while an economy is in recession is exactly what happened in this country in 1933, and we all know how that ended. Maybe this time will be different, but I'm not counting on that.
As I wrote last fall, the problems in Europe were blinding investors to the positive news coming out of our own economy. By October it had become obvious to me that our stock market did not adequately reflect the stronger growth in the U.S. As predicted, investors have finally realized the truth and prices now reflect the facts, so its time to take some profits.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Gas Prices Going Higher
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Their forecasts are being extrapolated from the present price of gasoline which averages $3.61 per gallon. That is high for this time of year, since February is usually a period of low gasoline demand. You might think that this year is a bit different since the mild winter and absence of snow throughout much of the country might bolster driving. But demand nationwide is down to 15-year lows.
What has propped up oil prices so far this year is continued instability worldwide. The financial crisis and subsequent recession in Europe, which should have reduced energy demand has been counterbalanced by events in the Middle East. The real culprit in the oil patch appears to be Iran.
The world wants Iran to cease and desist developing nuclear weapons or else. In response, Iran has been threatening to close a key oil avenue through the Strait of Hormuz, if the U.S. and the EU deliver on their intent to apply economic sanctions to their country. As a result, the price of oil has been flirting with $100-barrel level over the last few months and is presently trading above $106.73 a barrel for West Texas crude. The threat of higher oil prices if Iran were to embargo Europe or the U.S. is real. Iran boasts the world's fourth-largest proven oil reserves and the world's second largest natural gas reserves.
Middle East tensions are nothing new. The oil market periodically moves up and down with unfolding events in that region. Spikes tend to be short-lived but everyone from the Fed on down pays attention to trends. What makes this situation a little different than usual is that the tensions are occurring just at the moment when the U.S. economy appears to be picking up some speed.
The last thing this country needs right now is for oil/gasoline prices to trend higher. I have written at length on how energy prices are another form of tax on American consumers. Although energy prices account for only 5 percent of our overall spending, it is spending that cannot easily be cut back. If the experts are right and gasoline prices move higher as a result of a stronger demand and the continuation of political tensions, then consumers might be paying a few hundred dollars more this summer for gasoline.
That is a lot of money when multiplied by the number of Americans driving cars, trucks, buses and motorcycles. If past behavior is any guide, consumers will fork over the extra money for gas but at the same time cut spending on other things like restaurants, vacations, and shopping at the mall. Higher energy prices will also take a bite out of profits in Corporate America. It will also mean higher prices from everything from diapers to tires as companies attempt to pass on the higher energy costs to consumers.
Unfortunately, higher energy prices are here to stay as long as this country fails to develop a comprehensive energy plan that will reduce our dependency on oil. Until then, we will remain hostage to every two-bit, oil-rich dictator or wanna-be nation that takes a swipe at us.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
