Kort Session 10—“Back To The Future”- The Dreaded Sequester Part II

If you are an investor with a liberal bent (i.e. a species formally known as a moderate Republican) and if you are paying attention to our friends at MSNBC, their rhetoric might lead you to believe we are on the verge of an economic disaster.  This will begin March 1, if nothing is done to […]

BillI like this piece because in putting it together I found some press and learned journal items from the early 1970s that might make you feel more at ease with the current investment environment.  But first I digress.

My initial thought was to talk about the knee-jerk reaction Tuesday to the minutes of the January Fed meeting where that austere group debated when to wind down and reign in Quantitative Easing III.  The Dow was down over a hundred points (not really a big deal), but the media chatter immediately tacked to the negative.

Here is a sample from the mobile CNBC headlines from 8:00 AM central time Wednesday, February 20th.

  • Jobless Claims Move Up: Inflation Pressure Builds—Claims Up but “Still At Levels Consistent With Steady Improvement”…Consumer Prices Ex. Food and Energy Up .03 Percent.
  • Wal-Mart Tops Est., But Guidance Weak
  • Market Music Has Stopped, “I’m getting out”: Gartman (Dennis).
  • Should Bond Investors Brace for a 1994-Style Crash.
  • Technical Red Flags Could Signal More Selling

They didn’t even mention the Fed debate that may have prompted the down-tick, but as we pointed out “Session 8”; and, as Laszlo Birinyi articulated, you have to “Follow the Money”.  The Fed debating backing off QE and actually doing it are two different things.  I believe that on Thursday, Fed Governor Bullard reiterated that in his mind Fed monetary policy would remain easy for quite a while.  By Friday’s close we regained most of what we lost Tuesday and Wednesday.

An important aside to all of this is that some day, I think (maybe), the Fed punch bowl will be withdrawn and it will not be a bad thing, as it will signal that we are in a more vibrant economy.  Nonetheless, the Market probably will not like it.  In the meantime to ease your fear of that happening any time soon, I offer the following argument:

Fed Chair Ben Bernanke spent most of his academic career becoming a pre-eminent authority on “The Great Depression”, its causes and potential remedies.  He knows that a tremendous amount of stimulus went into the U. S. economy during the mid 1930s.  He also knows that in 1936, as the economy began to grow again, the economic authorities at the time decided to pull the “punch bowl” away for fear of over-heating the economy.  This was premature.  As a result the economy drifted back into depression mode and we really did not get out of it until the massive deficit spending associated with World War II.

Pardon my digression, but before I move on I have to say that I hate to pick on CNBC, but these guys so fit the mold of 24/7 fear and dread, I cannot resist it.

On to the Penn Central Transportation Company and why I think you should know about it.

“The Pennsy”, as folks in the trade use to call it, was an amalgamation of Northeastern railroads the largest of which were the New York Central and the Pennsylvania Railroad.  They were merged together in the late fifties and sixties to gain efficiencies. It was a dream not to be realized…defeated by burdensome union contracts and rules, the interstate highway system (more people travelling by car and more freight going on trucks), and eventually the airplane.  At the time, though most of this was readily apparent, it just was not registering, very much like the housing/debt bubble we just experienced did not register.  The Penn Central was a sacred U.S. corporate entity until it wasn’t and that happened June 20, 1970 when the company declared bankruptcy. This was at the time the largest bankruptcy in U.S. corporate history. It came as a complete surprise and shook the market to its core.

Check out this snippet from the June 1973 ABA Journal, “Last Tango At The Penn Central”.

  • “The worst feature of the disastrous bankruptcy of the Penn Central Transportation Company….is that it took so many people by surprise who should have known better.  If the staff of the Securities and Exchange Commission is right in its Staff Study of the Financial Collapse of the Penn Central Company, released in 1972, the surprise was in large part the result of corporate wheeler-dealings that would have made Ponzi stand up and salute.”

Sound familiar? Can you relate?

The fear and uncertainty that went along with an event of this magnitude was tremendous. The Dow Jones Industrials had already come off its 1966 time high of 1000 and, as the Pennsy was in its death spiral in the Spring of 1970, it hit a low around 600 (a 40% drop!).

As it pertained to the media, at the time there were only three national news networks covering the story and there were only two national newscasts per day from each.  The quality of the reporting was much different.  They were interested in getting the viewer the facts without embellishment, editorial comment or hyperbole.  It was not about keeping your eyes glued to the tube all day.  It was about informing.  The quality of the reporting was far superior with names like Cronkite, Huntley, Brinkley, Sevareid and Rudd, all career journalists.  Even though the news was scary you were not getting an emotionalized, politicized, 24/7 saturation bombing.

Now, I ask if you are my age (66) or even if you are a ten or fifteen year younger Baby boomer, were you aware of the Penn Central debacle or the really bad markets of the 1970s?  I am betting the answer for most who read this is “No”.  Trust me for my parents (the parents of all Boomers), the “Greatest Generation”, this was a very traumatic time, as traumatic as 2008 was to us.  No one knew how many other Penn Centrals might be out there or what banks might fail because they were holding oversized positions in Penn Central’s worthless commercial paper.  And as the PC was such an iconic U.S. corporation, many public and private pension funds did have position in its common stock and debt.

To the last point here is another ‘blast from the past” that might bare some resemblance to what transpired in the run-up the bursting of the Housing Bubble…i.e. ”The More Things Change the More They Stay the Same”.  We go back to the 1973 June ABA Journal.

  • “Lawsuits that have ensued named…Dun and Bradstreet, Inc., and its wholly owned subsidiary, the National Credit Office as defendants.  It appears that N.C.O., on whose ratings of corporate issuers of commercial paper investors rely heavily, gave Penn Central had the highest prime rating up to a slim three weeks before the bankruptcy.”

Again, people were scared. My parents and others of their generation had “skin in the game”.  The Baby Boomers were just starting out with no assets, ergo nothing to lose.   Now that their bucks are on the line, they too get to enjoy feeling the same concerns as their predecessors.  What is comforting for all to know is that they are neither the first nor the last to be in the position of having to husband and protect the assets they have worked a lifetime to accumulate.  It is learning how to filter and deal with these normal, sometime volatile markets (both up and down) that will help you navigate the continuing adventure of the market and owning shares in productive, growing assets.

To wrap up I give you one more snippet from memory lane.  This is from the March 3, 1974 edition of the Pittsburg Press.

  • Headline “Ex-Executives of the Penn Central Live in Clover”
  • “With one exception, the men who ran the Penn Central Railroad into bankruptcy in mid-1970 are still pretty much in clover.”

The one exception was the C.F.O who at the time had been charged with diverting $21 million in corporate funds to his own purpose.  Any of this look familiar…”déjà vu all over again”?  Check out the attached hyperlinks for more of the cited articles.

Let me know your impressions.

The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.


Session 8—A Masterpiece of Uncertainty and Contradiction or…..  “All The News That’s Fit to Print” and Some That Ain’t

Session 8—A Masterpiece of Uncertainty and Contradiction or….. “All The News That’s Fit to Print” and Some That Ain’t

This Sunday’s edition of the New York Times carried an article penned by Jeff Sommer, a masterpiece of uncertainty and contradiction, entitled “Jumping Aboard The Train, As If There Won’t Be Another”.  What Mr. Sommer is referring to is his belief that a rush has begun on the part of individual investors to get into […]

BillAgain, I digress from the main point of this blog, calling the media and punditry on misleading, late to the table commentary and general fear mongering.  I thought it might be helpful for you to see where I am coming from and why I lean toward investing in stocks on a long term basis.

Deficits, easy Fed policy and government dysfunction are big problems.  The continued deficit spending and printing of money should be inflationary, and it will be very hard to take the punch bowl away as the economy continues to recover.  When you begin to withdraw liquidity, it will spook the market.  The dreaded “R” word (Recession) will get thrown around and, based on past experience, resolve to tackle the problem will weaken.  Politicians can’t stand the public’s pain.

Assuming nirvana and we had the resolve to do the tough cutting, there are other sources of inflation that I think may be coming our way that we cannot control.  I will list a few.

  • The rise of China and India:  We have been shipping Jobs to Asia for decades so we could buy cheap goods at Walmart with a secondary benefit of keeping pressure on wages in this country.  That ploy looks like it about ready to bite us in the rear end and this may already have started.   To wit, Chinese labor has been demanding and getting double digit wage increases, ergo those cheap goods at Walmart are getting more expensive.  As a benefit manufacturing jobs are beginning to return the U.S., which eventually should tighten our labor market making way for greater wage demands.
  • Asia Part II, the demand sid:  The middle classes in China and India are exploding and they want to live the good life just like you and me.  That means that they need lots of  steel, aluminum, copper and oil.  Remember there are about 320 million of us here in the good old USA.  There about 1.2 billion people in China.  Their middle class may be in excess of our total population and that does not even begin to contemplate India or the growth in both countries’ middle classes.  So there is huge and growing demand for goods that in the past the Western world had a lock on.  Again you have witnessed the rise in the price of oil and agricultural commodities over the past few years.  That is what the buying power of Asia looks like and it would appear that it is by no means over.
  • Finally a significant portion of the rest of the world is following in our footsteps and adopting more expansive monetary policies, which should also equate to inflationary pressure down the road

In the United States if you are a family of four earning $50,000 a year, you have already felt the pinch in higher food, energy and healthcare prices.  Inflation is real to you.

The important question here is what do you do, besides hunker down in the family bunker with your hoard of provisions and survival gear waiting for the revolution?

I believe the answer is that you have to own assets which will benefit from inflation/ debasing of the currency over time… farmland, commercial and residential real estate, commodities, collectibles and stocks.  I am agnostic to which of the above you use or in what mix you use them, but you need to own assets.

The corollary here is that it is not a time to lend money, as you will be paid back in a cheapened version of that which you lent.  It is a good time to borrow money  because, over time, you will be able to pay it back with cheaper dollars.  This is not to mention the fact that rates are extremely attractive and not likely to go much lower (i.e. a great time to buy a house on a 30 year fixed mortgage).   Finally, it is the case with all of these “to do” items that most people, over the last few years, have been scared away from them.  If you act along these lines many will tell you that you have “lost it”.  The fact is you will not have lost it,  you will have become a contrarian.

One caveat to my inflation bluster is if the government gets serious about our problems.  That, I would say, in the long run this might be taken as a pretty good positive by the markets. Frankly, I just don’t see the backbone or the ethics for these guys to stand up against the special interests and do the right thing.  As it pertains to their constituents they have made no real call for “shared sacrifice” and again probably don’t have the courage to ask those constituents to take a little pain for the greater good.

Lastly, you may ask “when?” on the inflation question.  To answer I will share a story.  At the Kort House, when I was growing up, our dinner conversations were not about sports, but rather current events, politics, the economy and stocks.  My dad, you see was a restaurateur/ stock trader who eventual became a stockbroker.  He had the “bug”.

I can vividly recall conversations about the Kennedy Administration’s proposal to cut taxes to stimulate the economy of the early 1960’s.  Dad felt it would not work, and would worsen our national debt problems (eventually leading to inflation).  Later in the decade as our involvement in Vietnam blossomed and The “Great Society” programs enacted after President Kennedy’s assassination went into effect, similar conversations occurred (re. how the “Guns and Butter” economy was going to drive us to inflation).   The inflation finally came in the early 70’s and did not start to abate for about ten years. For example houses purchased in the mid 60’s for $25,000 with 5 ¾% mortgages were selling for $50,000 in the mid 70’s; and baby boomers like me were buying them, financing them with 9 ½ % mortgages.

So, when and if inflation comes, some sort of equity asset position would seem prudent.  If you still can’t stomach the volatility (which really lessens if you adopt a longer term strategy), keep your debt maturities short.  If inflation rears its ugly head you will be amply rewarded for not chasing yield in longer-term or lower quality debt.  Personally I have a tough time reconciling owning any long duration debt when you can easily get 2%, 3%, 4% in high quality stocks where you have the potential for increasing price and dividends over time.

As I have stated before, these are my reasoned opinions based on a lifetime of experience, but they are not divinely guided.  This is food for thought in a 24/7 media world that rarely takes a long-term approach…a media world that scares and confuses.   I  hope to add some balance.

Your comments and questions are welcomed.

The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.


Session 6–“Economists Gain Optimism”

Monday morning I happened to see a copy of “USA Today” with the front-page headline: “Economists Gain Optimism” “Job Creation, Growth, Will Pick Up Speed Panel Predicts” The panel consisted of forty-six economists.  What is interesting here is that for all intents and purposes the economy has been in an upturn, albeit slow and steady, […]

Kort Session 5–The Dreaded “Sequester”

Sequester used as a noun means a general cut in government spending.  In order to get an increase in the debt ceiling, Republicans and Democrats agreed on August 1, 2011 to a sequester of $1.2 billion of discretionary spending (spread over 9 years), if no other more appropriate compromise could be found to cut federal […]

Kort Session 4–How to Prepare for the Next Correction (Or Worse)

This is a really tough topic, because we don’t know exactly when it happens or from what level of the indices it will come.  One thing is certain it will become the next big question among the financial talkers and that some of their pronouncements will be very dire…. from 10 or 15% down to […]

Kort Session 3–Current Events

It is Monday, February 4, 2013 and if you managed to ride out the last 5 years your investments are back to even (hopefully better than that including the dividends).  If you took CNBC’s Jim Cramer’s unfortunate advice of October 6, 2008 and sold off that portion of your portfolio that you would need to […]

Session 2–Recent History

Recent History Before we get into the financial media portion of our work , I think it is important to talk about the political thrust of this blog.  There should not be one.  But because the “Party of Stupid”, as Louisiana Governor, Bobby Jindal, has called it has been so active in fear mongering, I […]

Session One

I am 67 years. I have spent the past four decades as a broker selling common stocks to individual investors and institutions.  I am addicted to the market and love my work I want to offer my experience and perspective as a tool for people to critically examine what they see and hear.  This is all in […]

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