Sunday, March 1, 2009

Shared Sacrifice or Sacrifice by Everyone Other than Those Who Are Already Overpaid/ Mini Bernie Madoffs Coming out the Wazoo/More on AIG

My new profile picture above, the one with a good head of hair and the usual serious look, was taken when I was a senior in high school, so it does have some age in it since it was originally taken, more than a few full moons ago. The miracles of digital scanning and photo enhancement software can make the old look new again.  Two of the photos are of Andy taken a few year years ago, one with Earl Scruggs and the other with Dolly Parton.  The Infamous Stringdusters performed at the Opry last night. The Infamous Stringdusters on MySpace Music - Free Streaming MP3s, Pictures & Music Downloads(Mike mentioned that AndyAndy Hall on MySpace Music - Free Streaming MP3s, Pictures & Music Downloads also played with Ricky Skaggs and the Del McCoury band last night).     The other photo of me had been hidden away by my mother, and was located by me just today, a 1970s unkempt look taken when I was at Tulane in the early 1970s.  Apparently I was trying to see if my sideburns could be grown all the way to my belly button.    

A financial writer for GQ wrote in an article in the WP that the most helpful advice today comes couched in the language of psychotherapy, which always involves a lack of clarity and avoids simplistic lineal analysis, rather than self-assured black and white advice dispensed by talking heads on CNBC.   It is certain that there is no certainty.  All that I can say is that the economy is most likely headed for the worst downturn since the Great Depression and I will not be surprised now by a jobless rate exceeding 10% before the start of a recovery.   Alan Abelson's new label for the current downturn is the "Not So Great Depression."    

American corporate managers have grown accustomed to perks and pay that can not be fairly justified, but is nevertheless routinely rubber stamped by pay consultants and Board of Directors.  This compensation is already 400 times greater than the average worker.  Management and their sycophants on the Board would not even consider the possibility of cutting their pay and perks when slashing a dividend to the true owners of the business or cutting tens of thousands of jobs.  When it becomes really too embarrassing for them to maintain the status quo, the most high profile executives might decline a bonus in a year when the stock declines 50- 80%, the dividend is slashed, and tens of thousands of workers lose their jobs.  There is no conception of shared sacrifice in the corner offices of American corporations.  

For shareholders, we are losing our dividends left and right.   In every one of the releases about dividend cuts, I have yet to see a single word about cuts in executive pay.  I did note that Medtronic cut executive pay by 5% without cutting the dividend.   Over the past century, dividend income provided about 40% of the return received by investors.   Many retirees depend on a constant stream of dividend income and have been told by the likes of GE's Board to accept a 68% reduction in their dividend stream as their sacrifice.  Well, okay, now tell me about the sacrifice of everyone making over $100,000 a year in a salary at GE.    I am not referring to any claimed sacrifice, such as Immelt declining a huge 2008 bonus, in a year when he made several representations that proved to be untrue, where the company had to go begging hat in hand to Uncle Warren, and when the stock lost over 1/2 of its value.   

The dividend cut at GE portends a nasty second half of 2009 since GE probably would have held the dividend if it saw a recovery starting in late 2009, as suggested by Bernanke last week. 

I do know that it is harder to generate a reliable stream of income.   I know what companies and sectors are undeserving of any reliance for steady dividends for the future.  But knowing that Bank of America and General Electric are unreliable does not provide me with the names of companies that are worthy.    Can I rely on Pepsico or Coca Cola, AT & T, Verizon, Emerson Electric, Johnson & Johnson or Proctor & Gamble?  I used to rely on General Electric and Bank of America, but that reliance proved misplaced.  I own now shares in KO, T, VZ and EMR.  My inclination now is to place virtually no reliance on dividends from American companies as a source of income and to instead focus more attention in the future on securing favorable prices on purchases of investment grade senior debt.   If I feel a need to increase stock holdings in the future as a source of dividend income, I will focus more on consumer staples and possibly electric utility stocks.  For now, however, I am just going to add  senior investment grade bonds.

I did read in Uncle Warren's letter that he viewed the current treasury prices as a bubble.(p.16 of 2008 Shareholder Letters ) He also continued his discussion on derivatives being weapons of financial mass destruction.  He doesn't think that regulation is the answer however for large derivative portfolios. He points out that Fannie and Freddie had 100 employees of their regulator,  OFHEO, who had nothing to do except examine the GSEs books. Notwithstanding a large force of regulators, they missed Fannie and Freddie cooking their books.  (p. 16)  The sheer magnitude and complexity of the risks prevented effective regulation and oversight.  The ability to comprehend the risks even by those who created and managed the derivative contracts becomes increasingly unlikely  as the number of contracts and counter-parties expands into ever larger numbers.   

While the details are still sketchy, AIG and the government have apparently reached a new deal to kick the can down the road a few more weeks.  Most importantly, the rating agencies have apparently agreed that the new arrangement will keep them from downgrading AIG's debt further which could have triggered another financial meltdown extending far beyond AIG.   In these posts, I have repeatedly criticized the ratings agencies and their involvement as facilitators of the Not So Great Depression. Idealogues on A Mission: Revisionism Already Well Under Way to Explain the Origins of the Mortgage Crisis Reduced Exposure to BAC debt/PEP & Origins of Frito Lay/Rendition to Somalia UNFIT IN SO MANY WAYS
Marsha Blackburn and the Bailout   Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSM But, when you have a contract with AIG that says AIG has to put up more collateral in the event of a downgrade, and AIG does not have any collateral to put up, then it only matters what the rating agencies do, and whether they are correct or incorrect is just irrelevant on this narrow issue.    If the new deal between AIG and the government is cemented, then this may improve the pricing of International Lease bonds which I tried to sell a couple of weeks ago.  Apparently, the major part of the deal is for the U.S. to give a 30 billion dollar credit to AIG,  and the U.S. would exchange a good chunk of its outstanding loans for large stakes in two of AIG's insurance subsidiaries.   MarketWatchAlso interest on the existing loans would be lowered and apparently other terms made more favorable to AIG.   

The SEC filed an amended civil complaint alleging that Robert Allen Stanford  and his lieutenant James E. Davis ran a Ponzi scheme. 
Forbes had ranked Sanford #205 among the richest 400 Americans. The 400 Richest Americans: #205 R Allen Stanford -
Maybe I could join that list provided I could count other people's money as my own.  No criminal charges have yet to be filed against Stanford.  Mr. Davis was known as a deeply religious man according to the NYT as was his subordinate Laura Pendergest-Holt who has been criminally charged with obstruction of justice.  She intends to enter a plea of innocence according to her attorney.  Another money manager know for his charity, Paul Greenwood, was accused of allegedly committing an investment fraud totaling over 500 million.  Our Towns - Paul Greenwood’s Public Persona of Generosity Hits Wall of Federal Charges -
2 Money Managers Held in New Wall St. Fraud Case -   Apparently, being seen as a benefactor for charities and the arts is seen in some monied circles as proof of character.  Then, how much of the charitable donations by Bernie and the others were made with other people's money entrusted to the money manager.  A local Brentwood manager plead guilty to operating a Ponzi scheme last week.  NewsChannel - Nashville, Tennessee - Ex-Tenn. stockbroker pleads guilty to Ponzi scheme  Other recent stories along the same lines of "alleged wrongdoing"SEC accuses Brentwood adviser of fraud | | The TennesseanPonzi Schemes Galore/BMY, AVY, VZ, SYK, SLG/ GE review by Moody's/ Stop Making Acquisitions NADX/ADD 50 MSFT/Sold Delek

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