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Jack's Market ThoughtsClick Here for Disclaimer
Posted on: Monday, April 14, 2008
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Jack Hargis, CEO
There's an awful lot of conversation on television and other media concerning the election and the fact that we will most likely be electing a liberal democrat. Several of my peers are of the opinion that that is one of the contributing factors to the recent market decline. However, I don't agree that that is the total reason although it does have some partial impact.
The actual cause of the current decline, that could be observed as potentially going to happen as far back as two years ago, has to do with the American public's greed and Wallstreet's absolute unmitigated cupidity in view of the fact that Wallstreet was no longer able to have the commission schedule nor the spread in the trades that they were able to prey upon the unsuspecting investor for many, many years. Having realized that they could not do that any more, they were looking for something that would produce large income with very little risk and particularly not any of their money. So therefore, they fell upon the low interest rates as Alan Greenspan dropped the rates to one percent in order to stimulate the economy. He publicly asked and encouraged the individual to be a home owner literally, at all cost. Then we had the ridiculous "mortgage broker" who was involved in qualifying people with what they call "no-doc loans" that is to say no documents.you didn't have to document how much you made or anything else.just lend them the money and no down payments and artificially low rates for two to three years. This in turn caused many, many people to evaluate paying rent vs. buying a house and it worked out to be the same so therefore they bought the house. They were not able to afford a higher rate mortgage so when the higher rate hit, due to an adjustable rate mortgage, they began to default. I think you can understand why. It wasn't their fault, it was the seller's fault who was out there forcing off houses to unsuspecting individuals.
To finance this ridiculous loan package, Wallstreet, particularly Bear Stearns, Lehman Brothers and similar large firms put together these "collateralized loans" which they in turn peddled to banks all over the world and other institutions. Now, the only reason they were able to peddle these was because they could bring in poor quality loans and mix them in with some high quality loans and get a median return, that is to say interest rate, much higher than what the banks were able to get any other place. Banks were getting one and two percent. They offer these things five, six, seven, eight percent and they had all this trash in them. They split them up and split them again, securitized and collateralized and all these other "buzz" word names. That's all well and good and everything was going fine until it comes time to readjust the loans and when the loans get readjusted then people can't pay, they default. The banks then don't get their income and the banks have put all their money in this so it creates a credit squeeze. Thus, we totally lost Bear Stearns.
Enough about that. That's a problem, I'm very pleased to say, that the American public is not going to suffer the loss like they have in the past. The many past credit crisis we have had, they were able to put it on the American public. That's not going to happen this time. It's going to be the greedy Wallstreet bankers that are going to suffer and rightly so because they were the ones that exhibited all of the avarice, establishing this financial situation, as it were. John Q Public then will not and I repeat, will not, have to suffer from the stock market going down because the stock market is not and will not be the cause of all of this. It had no part in it. Stock prices were high and needed some rest and correction, but not a lot. Therefore, they haven't gone down a great deal. I hear constantly from Wallstreet and London, etc. the statement that the market isn't off as much as it "should" be for us having this credit squeeze. Well the reason it's not is because the stock market was not the cause of the credit squeeze. So you will hear constant talk regarding the market. The market was down 257 points on Friday "because GE had a bad quarter and projected further weakness in the future." We owned GE and I sold GE simply because they are in the finance business and it was my understanding that they would not be able to sustain their profitability if they were involved in a certain amount of this questionable loan practice. GE Capital accounts for a considerable amount of their business and, therefore, I sold it. It was my deduction that that was a reason to sell it and I did sell it. We did not suffer from GE's shortfall and it doesn't take a rocket scientist to figure that stuff out.
So, where do we go from here? We go up from here because one of the safest investments around is not the greedy bond packages, not the buyout bonds, not the housing bonds, none of those proved to be safe. This also kills off the predatory buyout funds. Private equity funds, so to speak. It kills them off because they are not able to get that cheap financing anymore. Their main source of financing was Wallstreet and Wallstreet cannot produce that anymore because of what they did with the housing crisis. The ball is in the court of the individual investor for the first time since 1974. He is the king of the walk today simply because he has savings, he has cash and cash is really scarce on Wallstreet. He can selectively invest this cash in the quality issues for tomorrow at today's discounted prices. That particular area of investment, in my opinion, will be in rebuilding the infrastructure in the US which will be the interstate highway system, bridges and roads all over the country because it puts a large number of people to work and it's politically viable and it will be a favorite of the democratic administration, which I suspect we will have after November.
Having said all of that, I think our situation looks particularly good at this time because, in anticipation of this type of shakeout, that I thought might come as a result of the housing bust, we raised cash. We have kept this cash available for the opportunity to buy some of the infrastructure companies that are going to rebuild America, and not particularly just America, but the world. Which is to say roads, bridges, buildings and airports, etc. in India, China or Indonesia.the Far East.
I hope you're having a happy day because it is a happy day for us!
Thank you for reading,
Jack
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