Friday, August 14, 2009

The horror...the horror

"Are you an assassin?"

I'm not sure which scene from Francis Ford Copolla's Apocalypse Now is most analogous to the wealth destruction I've watched in real time over the past two years. On the macro/CNBC level, the broader market meltdown resembles the opening, slow motion, napalm air strike with the Doors' "The End" as the soundtrack. That's what the public got to see as the pretty T.V. people put on their serious face as they came out of commercial. If you go upriver, after passing over the bridge where the whacked out G.I's had no idea who the commanding officer was (which was how I felt the weekend Lehman failed), to the real heart of darkness, it's more like the ritualistic machete hacking Martin Sheen's character deals Marlon Brando's Colonel Kurtz. The battle between two crazed egos, the hunter and the hunted, is choreographed and inter cut with the tribal butchering or sacrifice of the water buffalo. It's almost as if they were killing the fatted calf in some respects.

"I'm a soldier"

A lot of people lost a lot of money. I have clients that lost money. Now, in defense of my and my partner's management style, I feel that we did manage the downside appropriately in our balanced accounts in that only 60% of the downside of the benchmark was (i.e. if the market is down 41%, we would be down 25% percent) "captured". Nevertheless, a loss is a loss. It still sucks. You still get pissed of when the number on your statements is in brackets. As far as my personal investments fared, 2008 and 2009 were the best since I started investing money for myself at the age of 14. OK, I'll brag 59% and 52% respectively, before taxes net of fees. How did I do it? For compliance reasons, I can't go into great detail. I can say that I didn't use options or shorting or commodities. I did follow Baron Rothschild's dictum of "…buy when you hear the cannons…sell when you hear the violins." Again, in defense, when clients asked me what I was doing with my money, I shared my strategy with them. Their reaction was either "Are you insane?" or "Whoa! That's way too risky for me." That's what frustrates me about my job, sometimes. When was the last time you second guessed your doctor before a triple bypass?

"You're an errand boy…sent by a grocery clerk to collect a bill"

-25% here, -18% there, -41% everywhere. Those numbers are merely annoyances when compared to some of the carnage lying around financial ground zero: bank stocks. Because of their perceived conservative image, bank stocks have always been a haven for the widows and orphans style investor. Low price to earnings ratios, low price to book value ratios, generous dividends have always been their repp tied, buttoned down allure. My grandmother was a public school teacher. Her husband (the grandfather I never got to meet) died in 1960. He left behind a relatively small investment portfolio that included a municipal bond, a few shares of an electric utility and 90 shares of a local bank. Ironically, an old broker I worked with at the beginning of my career had handled my grandfather's account when he was alive and bought those shares for him. My grandmother never reinvested dividends and enjoyed the check she got every quarter. Through mergers and splits over the course of 40 years, she wound up with 11,000 or so shares of a large regional bank that was valued at around $500,000. Not a mint but not bad for a widowed math teacher who saved wrapping paper and didn't cook. Honestly, I saw her cook maybe twice. Both times it was terrible. No wonder my father puts ketchup on everything. Those dividends helped pay for school tuition, bar mitzvahs, a couple of trips to Israel and Europe, a comfortable little apartment in a retirement community and nursing home care in the last few years of her life. That was then. This is now. Today $500,000 would be worth about $50,000. Luckily, she died at the top of the market and the inheritance was passed along and spent or diversified. Again, $500,000 turned into $50,000.

I'll throw out some bigger numbers. One of the largest individual shareholders of a large regional bank owns around 4 million shares. At the top he was worth around $151 million. Today, he clocks in at a beggarly $22.5 million. While $22 million is nothing to sneeze at, your lifestyle will change even at that level. Honey, we're going to have to sell the Gulfstream and the house in Maui. Chin up.

"…a snail crawling on the edge of a razor"

Now, let's say you were a lifer at the same regional bank. You worked your way up from an assistant branch manager in the worst neighborhood in town to upper mid-level or lower upper level management. You're pushing 60 and are on the cusp of retirement. It's highly probable you've collected $1million worth of the bank's stock in your various retirement and stock purchase plans. That $1million is now worth around $150,000. Golf four days a week? Probably not. A paper route? Highly possible. This story is hypothetical, but the battlefield is littered with real bodies with the same story.




I have a client who , like my grandmother, had accumulated regional bank stocks. In a recent conversation, he mentioned that he was back to his cost basis. He'd been collecting it for the last 25 years. As I write this, a large bank in Alabama has entered FDIC receivership which means, that for all intents and purposes, the institution has failed. One of the largest individual shareholders position was worth over $30 million at one point. Before they halted trading this morning it was worth $1.7 million. Again, like the detective story says, the city is filled with a thousand stories.



"Charlie don't surf!"



And if Charlie owns bank stocks he doesn't sell either, especially if he worked there. Where was he during the whole Enron clusterfiretruck? That was almost a decade ago. Why did these people hang on like a battered spouse? Emotional attachment maybe. "Well Daddy and Grandaddy did business with 'em..so..its bound to come back." I'd love to be an optimist. However, the market, love it or hate it, is a pricing mechanism. Usually, its pretty irrational. Hell, I'd say its bipolar. We're either going to the moon drinking champagne with Vegas hookers in a hot tub full of money in a stretch Hummer limo or the world is going out of business, there'll be no electricity or cable, we'll be riding bicycles and we'll be growing radishes in our front lawn. This time, as far as the bank stocks are concerned, I think the market is batting close to a thousand. I'll veer from Apocalypse Now and quote one of the last lines from Planet of The Apes: "YOU MANIACS!!! YOU BLEW IT UP!!!" They're trading based on fundamentals here and the fundamentals are terrible. The bank stocks deserve these prices. They earned them.



Trillions of dollars evaporated. Butchered like the water buffalo on the patio of Colonel Kurtz's Mekong chateau. One regional bank, historically had paid an annual dividend of 83 cents per share. That dividend is now 4 cents. The journey upstream back to 83 cents will be long and dangerous. Put on your flak jacket. Buckle your chin strap. Lock and load.



-Jake Stein