Streetwise
Lauren Rudd
Sunday, October 4,
2009
Am I Getting Too Old and Soft
Could it be that I am getting too old and soft to deal with
Wall Street? I admit that the world of professional trading and investing has
never been a walk in the park. Greed and one-upmanship are part and parcel of
the investment world.
However, when you read heart wrenching accounts of the
desolation on Main Street wrought by Wall Street, followed by advertisements for
private jet ownership — it does give one reason for pause.
Meanwhile, October is upon us once again, that time of the
year when trees display their fall colors and pumpkins debut as pumpkin pie. It
is also the most dreaded month in the annals of investing, the month of black
Mondays.
Does October really deserve its rotten reputation? There is
some justification for the bad rap, especially if you take into account the
debacle of October 1929. More recent, but still only history book material for
most of those currently working (or laid off) on Wall Street today, is the
decline on October 19, 1987 that sent the Dow down 23 percent or 508 points and
resulted in the initiation of this column. Of course we cannot forget the
relatively minor “October massacres” of 1978, 1979, 1989 and 1997.
Nonetheless, you should probably view October’s overall
reputation in the same light as those ghosts and goblins that will come knocking
on your door on Halloween. Wall Street is an inherently forward-looking animal.
In economics we call it a leading indicator and right now the markets are
pointing towards better times and an improving economy.
What is crucial is whether there is a connection between what
happened in 1987 and what happened a year ago. It appears there are some
unfortunate but definite parallels. Let me summarize it for you in two
words...leverage and greed.
What had been hoped for was that if 1987 did not teach
politicians the need for initiating a new era of discipline within the financial
markets, then 2008 certainly would. At this point you are probably either crying
or laughing.
Barely a year after one of the worst crises in all of
financial history, we have, as Newsweek Magazine so ably pointed out, returned
to the Gilded Age of the late 19th century — or more specifically the time when
bankers came close to ruling America.
A few Wall Street giants, led by none other than JPMorgan,
are back to making serious money and paying million-dollar bonuses. Meanwhile,
every month hundreds of thousands of ordinary Americans face foreclosure or
unemployment because of a crisis caused by a few Wall Street giants.
What is so unfair is that there is one law for the small
debtors and another for big ones. If you lose your job and fall behind on your
mortgage payment, the bank takes your home. Meanwhile, Citigroup can lose $27.7
billion (as it did last year) and the federal government hands over $45 billion
of taxpayer dollars.
A hundred years ago, people angrily compared the House of
Rothschild to a giant octopus with its tentacles wrapped around the U.S.
economy. Today Goldman Sachs is likened to a "great vampire squid."
We are currently faced with a regulation charade. What is
needed is a serious application of antitrust law to the financial-services
sector. The government needs to clarify that federal insurance applies only to
bank deposits. If a bank or other financial institution goes bankrupt, the
creditors should take the hit, not the taxpayers.
So where are we today, or more specifically, what actions
should you be taking in terms of your portfolio. The most important point is not
to be unduly swayed by the negativism that currently surrounds the financial
markets.
Investing can be deadly if you dance along with the crowd for no other reason
than to join in. What is central to the issue is what you can realistically
expect from a specific company in terms of earnings over a 12 to 24 month
period. Pick quality companies to invest in and you will receive quality returns
in return. Next week we will discuss one
of those quality companies.
