Exxon Mobil - XTO Energy - Part II

Another part of the Outlook for Energy: A View to 2030, released by Exxon Mobil a week before the XTO Energy deal really bothers me.

"ExxonMobil technologies have unlocked vast new resources of natural gas that previously were trapped in dense rock formations, as well as other types of so-called “unconventional” natural gas. These technologies have resulted in a significant upswing in U.S. natural gas production, and may have similar applications in other parts of the world."

How about this instead:

"Exxon Mobil sat around and watched smaller companies enter these new plays and drill circles around us because we thought that they were too risky, and that North America was too mature an area to be bothered with."

or

"We had the technology to unlock these unconventional shale resources, but didn't have the balls to use it on a large scale, and sat around and bought back stock instead. Now we have to pay up for these resources."

Full Publication

Christopher H. Browne

Christopher H. Browne of Tweedy, Browne & Co. died a few days ago and in memory of this value investor, here are excerpts from a speech he made to the Graham and Dodd Value Investing Center at Columbia University in November 2000.

"A whole body of academic work formed the foundation upon which generations of students at the country’s major business schools were taught about Modern Portfolio Theory, Efficient Market Theory and Beta. In our humble opinion, this was a classic example of garbage in/garbage out."

"Investment performance is generally measured against a benchmark, and claims to being long-term investors aside, the typical institutional client tracks performance on a monthly or quarterly basis versus the benchmark. Performance that deviates from the benchmark becomes suspect and can lead to termination of the money manager. Consistency of returns relative to the benchmark are more important than absolute performance especially in a world dominated by the hypothesis that asset allocation is more important than stock selection."

Columbia Speech

Exxon Mobil - XTO Energy

Exxon Mobil released a publication entitled Outlook for Energy: A View to 2030, about a week before the XTO Energy purchase. There was one part that caught my attention and gave a little hint of what they were planning:

"Natural gas supply to expand, particularly in the U.S. where unconventional gas supplies are expected to meet more than 50 percent of gas demand by 2030."

and later on:

"There will be an expansion of natural gas supply, particularly in the United States where unconventional gas supplies are expected to satisfy more than 50 percent of gas demand by 2030."


Full Publication

How Bad Could It Have Been?

A recent academic study called Financial Crises and Economic Activity, written by Stephen G Cecchetti, Marion Kohler and Christian Upper, has implications for the current strength and trend of the U.S. and Global economic recovery.

The paper examined 40 systemic banking crises since 1980 and evaluated the real output costs of these crises. The conclusion:

“First, the current financial crisis is unlike any others in terms of a wide range of economic factors. Second, the output losses of past banking crises were higher when they were accompanied by a currency crisis or when growth was low at the onset of the crisis. When accompanied by a sovereign debt default, a systemic banking crisis was less costly. And, third, there is a tendency for systemic banking crises to have lasting negative output effects.”

How bad could it have been for us this time? The mean peak to trough decline in GDP for the 40 crises was 18.4%, with a median decline of 9.2%. Also, in one crisis, it took seven years for GDP to get back to its pre crisis level.

Read the original study here.

FDIC Report

The Federal Deposit Insurance Corporation (FDIC) recently released its third quarter of 2009 Quarterly Banking Profile detailing a host of statistics on the banks under its jurisdiction. This report has been well covered, but one part I wanted to highlight was the section on the number of employees at the FDIC.

The number of employees has moved up from 4,476 in September 2006 to 6,298 as of September 2009. While this might seem like a lot, the total number of employees peaked at 22,586 in September 1991, during our previous banking crisis.

The point is that either current employees are much more efficient than they used to be back in the early 1990's, or the FDIC may be one of the few agencies to be adding jobs to the economy over the next few years. Just something to think about.

How To Destroy Value

It was reported today that Motorola (MOT) is shopping around its division that makes set top boxes and other equipment for cable and phone companies. The rumored asking price is around $4.5 billion.

That sounds great, but unfortunately for Motorola and its shareholders, the company paid $11 billion for it 10 years ago. Read how management gushed over it back then:

"This partnership will enable us to expand our portfolio for network access, delivering next-generation solutions along with 'home hubs' that will handle high-speed Internet access and video entertainment, as well as carrier-quality voice services," Motorola chief executive Christopher B. Galvin said. "People want access tailored their way and the ability to get online quickly and simply."

Some might say that Motorola didn't really pay $11 billion since it issued its own stock to complete the purchase. This is nonsense of course.

Deals like this might be a contributing reason to explain why Motorola stock has been a disappointment to many investors.

Interesting Article

I ran across an academic article recently that I haven't had time to read yet, but thought I would share it with readers of this blog.

The Financial Crisis as a Symbol of the Failure of Academic Finance? and it's available here.

This excerpt from the abstract drew my attention:

"Theoretical constructs such as the efficient markets hypothesis, rational expectations, and market completeness were too often treated as intellectual dogmas instead of (parts of) falsifiable hypotheses...the failure of academics to communicate the limitations of their models and to warn against (potential) misuses of their research - and sins of commission - introducing (often implicitly) ideological or biased features in research programs."

Full Citation

Blommestein, Hans J., The Financial Crisis as a Symbol of the Failure of Academic Finance? (A Methodological Digression) (September 23, 2009).

"Short-Termism" In The Market

I have blogged constantly about the value and importance of long term investing, and a recent report from the Aspen Institute came out with some practical proposals to fight what they call "short-termism" in the market.

Let's start with the problem as outlined by the institute:

"High rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains."

"Fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term."

"The focus of some short-term investors on quarterly earnings and other short-term metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors."

The report recommends market incentives to discourage such short term behavior. This would include revising the capital gains structure to impose a lower tax on stocks held for a longer time period, and an excise tax on short term trading.

These sound like sensible suggestions and should be taken seriously by the powers that be.

The full report is here.

Another Greenshoot

Another green shoot in the economy hit the tape last week:

"FedEx Corporation (NYSE: FDX) today announced that it expects to report earnings of $0.58 per diluted share for the first quarter ended August 31, down 53% from $1.23 per diluted share a year ago. The company's guidance for the quarter was $0.30 to $0.45 per diluted share."

"FedEx expects earnings to be $0.65 to $0.95 per diluted share in the second quarter, which reflects the current outlook for fuel prices and a continued modest recovery in the global economy."

How many green shoots equal a recovery?

BJ Services Take Under

Am I the only BJ Services (BJS) shareholder out there who thinks that this is a lousy deal? Is there any hope for a competing bid? BJ Services traded close to $40 back in 2006, and was as high as $33 last summer.

So we get .40 shares of Baker Hughes and $2.69 cash for a big total of $16.47. Wow, that's a big $0.63 premium over the previous close for BJS.

I know that the management of BJ Services has a reputation for being cheap, but that's not supposed to extend to when you sell your own company.

Article Shows That Sell Side Analysts Still Suck

An article entitled "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations" published in the Journal of Business Finance & Accounting examines these issues:

"Whether sell-side analysts are prone to behavioural errors when making stock recommendations as well as the impact of investment banking relationships on their judgments. In particular, we analyse their report narratives for evidence of cognitive bias."

The conclusions:

"New buy recommendations on average have no investment value."

I think everyone already knew that, although I would add that in the short term they can drive the price of a stock up.

"Whereas new sell recommendations do, and take time to be assimilated by the market."

Again, fairly logical since sell side sell recommendations are fairly rare, they are likely to be more noticed.

"We also show that new buy recommendations are distinguished from new sells both by the level of analyst optimism and representativeness bias as well as with increased conflicts of interest."

Just as a review, representativeness bias refers to "A cognitive strategy for quickly estimating the probability that a given instance is a member of a particular category. We use it to judge the likelihood that something or someone belongs to a specific category."

"Successful new buy recommendations are characterised by lower prior returns, value stock status, smaller firms and weaker investment banking relationships."

Small Cap Value stocks with little or no analyst coverage rule.

So what does this all prove? That sell side analysts are humans just like the rest of us and suffer from deviant investment behavior despite what is arguably a higher formal education.

Mokoaleli-Mokoteli, Thabang, Taffler, Richard J. and Agarwal, Vineet,Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations. Journal of Business Finance & Accounting, Vol. 36, Nos. 3-4, pp. 384-418, April/May 2009. Available at SSRN: http://ssrn.com/abstract=1400370 or DOI: 10.1111/j.1468-5957.2009.02125.x

Health Insurance Debate

There has been a lot of media attention on the continuing debate over the Obama Health Care proposals that are tortuously making its way through the U.S. legislative process. Well here is another thing to consider - a new study by the folks at Stanford University, the Rand Corporation and the University College of London entitled:

Does Health Insurance Make You Fat?

The conclusion reached was that "We find stronger evidence that being insured increases body mass index and obesity."

Abstract

"The prevalence of obesity has been rising dramatically in the U.S., leading to poor health and rising health care expenditures. The role of policy in addressing rising rates of obesity, however, is controversial. Policy recommendations for interventions intended to influence body weight decisions often assume the obesity creates negative externalities for the non-obese."

"We build on earlier work demonstrating that this argument depends on two important assumptions: 1) that the obese do not pay for their higher medical expenditures through differential payments for health care and health insurance, and 2) that body weight decisions are responsive to the incidence of medical care costs associated with obesity. In this paper, we test the latter proposition – that body weight is influenced by insurance coverage - using two approaches.'

"First, we use data from the Rand Health Insurance Experiment, in which people were randomly assigned to varying levels of health insurance, to examine the effect of generosity of insurance coverage on body weight along the intensive coverage margin. Second, we use instrumental variables methods to estimate the effect of type of insurance coverage (private, public and none) on body weight along the extensive margin."

"We explicitly address the discrete nature of the endogenous indicator of health insurance coverage by estimating a nonlinear instrumental variables model. We find weak evidence that more generous insurance coverage increases body mass index. We find stronger evidence that being insured increases body mass index and obesity."

Bhattacharya, Jayanta, Bundorf, M. Kate Kate, Pace, Noemi and Sood, Neeraj,Does Health Insurance Make You Fat?(July 2009). NBER Working Paper No. w15163. Available at SSRN: http://ssrn.com/abstract=1435601

Value vs. Growth

The ancient battle between Value and Growth investing continues, with Barron's weighing in with its take on the issue. It's starting to remind me of the Hundred Year's War between France and England or that Star Trek episode where two planets have been at war for five hundred years.

Value Investing has underperformed growth investing over a six month or three year horizon, but Value Investing outperformed in the second quarter of 2009.

The problem with this and all other like statistics is that it artificially categorizes all cheap stock as Value stocks. Barron's uses the Russell indexes to measure performance, and specifically mentions Bear Stearns, Citigroup (C), Freddie Mac (FRE), General Motors, Macy's(M) and JCPenney(JCP) as being particularly harmful to Value investors.

Just because a stock is cheap doesn't make it a Value stock. This is pretty basic and is one of the first things any investor learns after picking up a book written on Value investing.

The Real Vampire Squid On The Face Of Humanity

Matt Taibbi’s article on Goldman Sachs has now achieved legendary status for the term he coined in this sentence:

“The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

The entertaining article was a little short on facts, but who cares, after all, in an age where blogging dominates, no one cares about accuracy anymore. What really matters is shock value, and no one should be surprised that this article appeared in a mainstream media publication, as they are desperate to find a way out of its slow death.

I digress, though, as I am not writing this post to argue against the points that the author made. What I am writing about is to tell everyone that the real “vampire squid wrapped around the face of humanity” is not Goldman Sachs but in reality is the “momentum” investor.

When I worked on a trading desk at Morgan Stanley, we had a more colorful name for them. We called them “fast money scum,” and we meant it.

The ethos of the momentum investor is simple in concept. Buy what’s going up. If it keeps going up, buy more. When momentum breaks, get out. Everyone knows who these investors are. When a stock you own is down 20% after it misses earnings by a millionth of a cent – that’s them.

The momentum investor has enabled all three bubbles in the last ten years – Technology/Internet, Real Estate/Homebuilding and Commodities. They do this by pushing stocks up far above what they should be trading for on a fundamental basis.

It wouldn’t be so bad if these investors were honest about what they do, but they are not. They usually manufacture or hide behind some fundamental story about whatever sector is bubbling up, usually in league with sell side enablers, who are enamored of the trading commissions they generate.

Even worse, the financial media - CNBC and Bloomberg TV - orient programming toward this group, by amplifying short term trends, rather than discouraging it.

This infects the entire market as institutional investors, most of whom are trained as fundamental investors, are forced to jump on the bandwagon, lest they be left behind in the relative performance game.

Momentum investors have cost ordinary investors trillions in wealth over the last decade, as many small investors buy into these fundamental stories and then don’t realize when momentum breaks and the plug is pulled.

Any new regulatory initiatives out of the Obama Administration should be oriented toward controlling or destroying these investors.

Sovereign Wealth Funds

Does anyone remember a year ago when everyone pundit and media outlet predicted that Sovereign Wealth Funds were going to take over the world? The assets they controlled were growing so quickly due mostly to the commodity boom that it was starting to create hysteria in the United States. It's amazing how quickly the conventional wisdom can change.

From the Financial Times:

"The financial clout of sovereign wealth funds has been savaged by the credit crisis as the value of their assets has plunged and forecasts for their growth have been dramatically scaled back."

Steve Forbes Video

Steve Forbes drags Julius Caesar into the current financial crisis in a video from late June 2009. He compares Caesar's hubris to that of those who led our financial system into disaster.

Hubris is a Greek word which is officially defined as either overbearing pride or presumption or arrogance. The word is used, in the context of our financial crisis, to refer to a group of financial elite, or "masters of the universe" who felt that they could manufacture unlimited speculative profits using almost unlimited leverage, without any significant risk.

I agree with Steve Forbes on this, but his historical knowledge is severely lacking. He states in the video that Caesar conquered more land than any military leader in history, and specifically mentions Alexander the Great. This is clearly not true, as Alexander controlled a larger empire as measured by land mass, than Rome at its largest extent. Look at the links after the video.




This is a map of the Roman Empire at its peak in 117 A.D., which is 150 years after Caesar was killed. Since Alexander has a larger empire than Rome at its largest,then he certainly had a larger one than at the time of Caesar.

This is a map of the land that Alexander conquered.

Wikipedia also has a list of the largest empires in history as measured by land mass. Rome is way down on the list.

List of largest empires.

What Will The End of Newspapers Mean For Blogging?

Here’s the real issue behind the fall of the Newspaper industry. What will all those bloggers do when there are no newspapers left and they can’t scrape content from a newspaper while hiding behind the “fair use” doctrine?

If you’re not familiar with scraping content, it works like this. Cut and paste the opening paragraph from the online version of an in print Newspaper article. You can put it in quotes, with a link to the original source if you are generous, or just reference it without a source. Charts and tables are also copied into the blog. You then frame the content with your thoughts on it afterward.

You’d be surprised how much web content is derived from this without any thought to how difficult it is to write these newspaper articles. No consideration is given to the hours spent researching stories or wading through dense government press releases, or the years spent cultivating sources, etc.

I just looked at the front page of a highly followed blogger who has been in the news a lot lately, and fully 50% of his stories are scraped from other publications. This blogger does give full credit to the source with a link. Just something to think about.

So Much For Chinese Demand

"The International Energy Agency cut its oil demand estimates for every year through 2013 by about 3 million barrels a day, it said in its Medium- Term Oil Market Report today. Consumption will average 86.76 million barrels a day in 2012, the first year it will rise above 2008’s level of 85.76 million barrels a day, according to the Paris-based agency."

Well so much for demand for Energy from China. This demand growth has always been hyped by Energy bulls, but as I and many others have stated previously, what really matters is demand growth from the the U.S. and other industrialized nations.

Here is how the math works:

Oil demand in 2009 for the OECD countries is 45.2 million barrels per day, down 2.3 million barrels per day from 2008.

China oil demand is 7.9 million barrels per day. Let's assume that it grows at 5% a year, or about 400,000 barrels per day.

As you can see, the fall in demand from the OECD easily wipes out demand growth from China by a factor of at least five.

Two More Oil Bears

James Mulva, the CEO of Conoco Phillips said that the doubling in the price of oil off of its bottom to $73 a barrel was "a little bit ahead of the actual supply and demand situation and inventory levels."

Nouriel Roubini, the economist, said that the rally in oil prices was "too high too soon." Here's a short video of Roubini covering his full views on the current economy.

When General Motors Ruled The World - Part III

General Motors was formed in 1908 by William Durant, when he incorporated the Buick Motor Company. Later that year, Oldsmobile becomes the second company to join General Motors. In 1909, General Motors purchased a 50% interest in the Oakland Motor Car Company, which later became known as Pontiac. In 1909, General Motors bought Cadillac for $5.5 million. This is a photographic tribute to this iconic American institution.

In 1936 and 1937 the United Auto Workers (UAW)attempted to organize the labor force at General Motors. This strike later became known as the "Flint sit down strike," where workers occupied the large General Motors plant in Flint, Michigan.

The strike spread to other plants and in February 1937, General Motors capitulated and recognized the UAW as the exclusive bargaining representative of workers in the union.

The first three pictures below are of John L. Lewis, and other labor leaders discussing the strike in January 1937 in Washington, DC.

Did the union victory in 1937 plant the seeds of the eventual destruction of General Motors? These men had no way of knowing, obviously, and were just fighting for basic rights that we take for granted. It certainly is not fair to blame the union for all of the ills of General Motors, as management made its share of bad decisions.

The final picture is the management of General Motors, including Alfred Sloan, discussing the strike with the Governor of Michigan and the U.S. Secretary of Labor. The management of General Motors refused to even sit in the same room with the Union leaders and all negotiations had to be done through intermediaries.

When General Motors Ruled The World - Part II

General Motors was formed in 1908 by William Durant, when he incorporated the Buick Motor Company. Later that year, Oldsmobile becomes the second company to join General Motors. In 1909, General Motors purchased a 50% interest in the Oakland Motor Car Company, which later became known as Pontiac. In 1909, General Motors bought Cadillac for $5.5 million. This is a photographic tribute to this iconic American institution.

This is the one millionth car built by General Motors. It was a 1919 Oldsmobile 37-B model.



This is car number ten million for General Motors, a 1929 Buick sedan.



This is car number twenty five million built by General Motors

They Did Have Good Intentions

Another video from a lecture series called "The Culture that Spawned the Crisis: A Closer Look" held at The National Constitution Center in May 2009. The speaker is Peter Wallison, who worked in government during the Reagan Administration.

He argues that a push under the Clinton and Bush administration's to increase the homeownership rate was a worthy goal, but it was done by distorting the credit market by pressuring banks and the two Government Sponsored Entities to make loans that they should not have made. This is not the first time that someone has made this point, but it does bear repeating.

A Pathological Mutation of Capitalism

I wanted to share an interesting video from a lecture series at the National Constitution Center entitled "The Culture that Spawned the Crisis: A Closer Look." Several speakers argue that the changing culture of the United States led to the conditions that caused the financial crisis.

Some of these cultural changes include the concept of "thrift" which used to be an important part of American culture, but over a generation evolved into a culture of envy and personal gratification, where people expect something for nothing.

John Bogle, the founder of the Vanguard Group, speaks in this video. He uses the the term "pathological mutation" to describe the change in our capitalistic system, from a traditional owners capitalism where rewards went to the owner and providers of capital to a managers capitalism where the majority of rewards went to corporate managers and financial intermediaries.

When General Motors Ruled The World

General Motors was formed in 1908 by William Durant, when he incorporated the Buick Motor Company. Later that year, Oldsmobile becomes the second company to join General Motors. In 1909, General Motors purchased a 50% interest in the Oakland Motor Car Company, which later became known as Pontiac. In 1909, General Motors bought Cadillac for $5.5 million. This is a photographic tribute to this iconic American institution.

The First Car Produced By General Motors



Source

White Mountains Insurance Analyst Day 2009 - Part II

Here are my notes from the White Mountains Insurance Analyst Day held on May 20, 2009. These are for the introductory section, the financial highlights and a review of bad news in 2008. When I went back to the events section of the White Mountains Insurance web page, the webcast link was missing, so I don't know if I'll be able to review the rest of the meeting. I have e-mailed the company asking for the link but haven't heard back. If anyone has the link to the webcast, please send it to me.

2008 – Bad News

WTM had $1 billion in excess undeployed capital last year because of a lack of investment opportunities – so the company bought back stock and did Berkshire transaction. Barrette admitted that with hindsight this was obviously, not a good idea. He doesn’t think it will destroy value but will not do what he thought it would do.

Equity Portfolio – Bad News

Equities as a percent of adjusted shareholder value has gone from 55% in December 2007 to 70% pro forma for the Berkshire transaction in June 2008, to just under 38% in the first quarter of 2009. He said that with hindsight the company should have sold down its equity portfolio, but instead paid Berkshire out of proceeds from its fixed income portfolio.



By December 2008, WTM altered its equity strategy to a goal of capital preservation. After first two weeks of October 2008, WTM found its capital falling to levels that came close to minimum capital levels necessary to keep credit ratings where they needed to be. Moved out of common stocks and de risked fixed income portfolio.

Barrette said the company likes what they own and would probably own some different things if they had more capital or flexibility. WTM owns things not because they have to but because they want to.

WTM Life Re – Bad News

This was a business that WTM got into that it didn’t fully understand what they were getting into. Alan Waters is in charge of fixing the business.

WTM has reinsured two blocks of Japanese variable annuity policies with same counter party that guarantees the return of initial deposit at death or maturity. These are ten year policies with average remaining life of 7 years. Outstanding guarantee is $2.5 billion for WTM, which is the difference between the account value and the guaranty value. Seventy percent is invested in fixed income index funds, and 30% in equity index finds.

Lost $188 million in this business in 2008, $181 million in last quarter of 2008. This loss comprised $93 million from assumption and model changes, which was the change in WTM assumptions on policyholders surrenders.

When a policyholder surrenders a policy the insurer does not pay full guarantee value of policy but only the account value so when account or asset values are low, high surrender are good. Unfortunately for WTM actual surrenders were well below what the company had estimated when they wrote the policy so they had to change the surrender assumption in the last quarter of 2008. WTM changed surrender assumption from 6.2% to 2.2% of all policies.

WTM lost $32 million in first quarter of 2009, but business is now marginally profitable now that the markets have calmed down.

WTM has reduced risk through increased hedging and improved method of hedging. WTM uses swaps instead of bond futures. Increased volatility coverage from 60% to 70%., and added local trading coverage in Europe and Asia.

WTM is still sensitive to surrender rates and if rate decreased to 1.1% then it would cost company $44 million.

Barrette says WTM ventured into a business it did not fully understand, and now he understands that they didn’t fully understand it, and he apologizes for it.

Barrette said it is a big loss but believes that they have it under control but there is still possible downside. The lesson is when something looks easy then look again. WTM usually laughs at those who get into its business who think it is easy and now they are on the other side of that.

White Mountains Insurance Analyst Day 2009 - Part I

Here are my notes from the White Mountains Insurance Analyst Day held on May 20, 2009. These are for the introductory section, the financial highlights and a review of bad news in 2008. When I went back to the events section of the White Mountains Insurance web page, the webcast link was missing, so I don't know if I'll be able to review the rest of the meeting. I have e-mailed the company asking for the link but haven't heard back. If anyone has the link to the webcast, please send it to me.

Notes

Ray Barrette introduces the Board of Directors of White Mountains Insurance (WTM) and says that some are in the room and the rest are listening on the phone. He commented that the Board had a tough time with them due to the poor returns the last few years. Barrette says that he was not sure if Bruce Berkowitz would be there in person or listening on the web.

Barrette then introduced some of the WTM people who would be speaking:

David Foy, CFO
David Linker? (spelling), fixed income manager
Mike Miller, One Beacon
Alan Waters. White Mountains Re

Financial Highlights



Barrette said that 2008 was a tough tough year. Book value of WTM dropped 20% and book value of One Beacon dropped 22%. First quarter things have stabilized with WTM book value flat and OneBeacon up 3%.

One Beacon combined ratio at 94% for first quarter of 2009.

WTM Re has had a bit of an up and down combined ratio and has had reserve issues in the past but Barrette believes that those reserve issues are behind them. He knows that he has said that before and if people are skeptical he is not surprised.

Answer Financial (AFI) – controls $1.2 billion in premiums combined with Esurance. He believes that Esurance/AFI is third choice for consumers behind Geico and Progressive.

Esurance combined ratio is at 103% in first quarter of 2009, but WTM looks at loss ratio rather than combined ratio, but the combined ratio did come down 10 points. WTM cut marketing and advertising expenses but are ready to ramp them up when needed.

Investment Returns

Barrette said it was the first time in his very long career that underwriting is doing well, but investments are the problem. Investments were always value added to the company. Total investment results were down 9.5% in 2008, and while this might be good for some people, the company’s job is not to lose money, and the company was disappointed with that. Things stabilized in first quarter of 2009, and the company likes what it owns.

Surprise from last year was Life Reinsurance business, which they had barely talked about in past meetings and then there were significant losses with it. First quarter of 2009 was a problem and the company lost $32 million in the Life Reinsurance business, but things have stabilized.

Book Value Growth

Barrette said this a chart that he used to love to show at investor meetings, but it looks a whole lot less attractive now. Since IPO in 1985, 15% growth in book value – still ranks pretty high in industry. Stock value growth used to be above book value growth but now it is below.



Since 1999, book value has grown at 10% a year and market value of stock at 8% a year. Barrette apologizes for the results.

The Mind of Wall Street - Part II

I just started reading a book called “The Mind of Wall Street,” by Leon Levy. Levy died in 2003, but had a fifty year career on Wall Street and was one of the early partners at Oppenheimer and Company. Levy is a value and contrarian investor who incorporates the psychology of the market into his investment process.



An interesting bit of information is that according to Levy, the concept of the adjustable rate mortgage was conceived by Gene Fenton, an employee of Oppenheimer and Company. Fenton, in true Wall Street spirit, constructed it so that it could only adjust upwards. Of course, this concept did not catch on too well given the one sided nature of the product.

Some time later, Marion Sandler, another Oppenheimer and Company employee, came along and changed it so it would adjust either way. If you don't recognize this name, years later Marion and Herb Sandler went on to fame with Great West Financial, a leader in the mortgage market. The Sandlers sold out to Wachovia at the peak of the housing bubble.

FDIC Quarterly Banking Profile - Q1-2009

The Federal Deposit Insurance Corporation (FDIC) just released its quarterly banking profile for the first quarter of 2009. Highlights include:

1) FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009. This was down 60.8% year over year, but up from the $36.9 billion net loss reported in the fourth quarter of 2008.

2) Banks set aside $60.9 billion in loan loss provisions.

3) Banks reported an average net interest margin of 3.39%.

4) First-quarter net charge-offs of $37.8 billion.

5) Noncurrent loans and leases increased by $59.2 billion, the largest increase in three years.

6) The percentage of loans and leases that were noncurrent in the quarter was 3.76%, the highest percent since 1991.

7) Total equity capital of insured institutions increased by $82.1 billion in the first quarter, concentrated mostly in large TARP recipients.

8) Twenty one banks failed in the quarter, the most since 1992.

Varsity Notes

I recently stumbled across an interesting web site that contains hundreds of free lecture notes and other materials for various courses at different colleges and universities across the world.

The site is called Varsity Notes, and is great if you want to freshen up your knowledge in certain areas related to investing or elsewhere. The relevant categories for our purposes would be:

Finance

Business Administration

Economics

Accounting

Some of the more famous professors whose notes are available include Aswath Damodaran of New York University. Damodaran makes available on his web site a 58 page handout on Valuation.

The Mind of Wall Street

I just started reading a book called “The Mind of Wall Street,” by Leon Levy. Leon Levy was one of the first partners at Oppenheimer and Company. Levy died in 2003, and was a value investor incorporating much behavioral psychology into his investment process.

When I saw the book at the store, I saw the title and the name Levy, and my eyes skipped over the first name and I assumed that Gus Levy was the author. Gus Levy was in charge of Goldman Sachs in the early 1970’s.

Oppenheimer and Company has an interesting history. The firm was founded in 1951 after Max Oppenheimer left the firm Hirsch and Co. Levy joined soon after that. Oppenheimer catered to many German refugees at the beginning, and in the first few years more German was spoken at Oppenheimer than English.

Another interesting tidbit recounted by Levy was his accounting of the ethnic divisions that used to exist on Wall Street. The major street firms were broken down as follows:

Merrill Lynch – Catholic.
Brown Brothers, Morgan Stanley – WASP
Goldman Sachs, Lehman Brothers - Jewish

This book should be an interesting read, and I will post on it over the next few weeks.

White Mountains Insurance Analyst Day

White Mountains Insurance is holding its annual investor meeting on May 20, 2009. The meeting is in New York City, but is being webcast. White Mountains Insurance doesn't hold earnings conference calls or market very much to the investment community so this is a good chance to get a review of what going on in its business segments.

Some investors may feel that management has some explaining to do considering the stock was trading at close to $450 last year compared to $214 per share today.




Here are my notes from the meeting last year.

The Credit Crunch Peaks

The April 2009 Senior Loan Officer Opinion Survey on Bank Lending was released yesterday and the results show that the "credit crunch," may have peaked. Here are highlights:

Forty percent of domestic respondents reported having tightened their credit standards on commercial and industrial (C&I) loans. This was down considerably from the 65% in the January survey.

Sixty five percent of domestic respondents reported having tightened their credit standards on commercial real estate loans (CRE). Once again, this was down from the 80% in the January survey.

The story was somewhat mixed for consumers, where a higher percent of banks tightened standards on Residential Mortgage Loans, both prime and non prime.

On credit card loans and other consumer loans the opposite was true, a smaller percentage of banks tightened standards on these loans.

Here is the full survey and some charts to look at.

Gulf South Bank Conference

I’m heading down to the Gulf South Bank Conference later in the week. This is an industry-sponsored event that has about 20 or so banks presenting to investors. These aren’t the giant commercial banks that dominate the news, but are smaller community banks that don’t get a lot of publicity. I think the largest bank presenting has a market capitalization of approximately $2 billion. Here is a list of the banks attending:

BancorpSouth, Inc. (BXS)
MidSouth Bancorp, Inc. (MSL)
Bank of Florida Corporation (BOFL)
Peoples Financial Corporation (PFBX)
Bank of the Ozarks, Inc. (OZRK)
Porter Bancorp, Inc. (PBIB)
Capital City Bank Group, Inc. (CCBG)
Renasant Corporation (RNST)
CenterState Banks of Florida, Inc. (CSFL)
Simmons First National Corporation (SFNC)
Encore Bancshares, Inc (EBTX)
Southside Bancshares, Inc. (SBSI)
First Financial Bankshares, Inc (FFIN)
Superior Bancorp (SUPR)
First Security Group (FSGI)
Teche Holding Company (TSH)
Hancock Holding Company (HBHC)
TIB Financial Corporation (TIBB)
Home BancShares, Inc. (HOMB)
Trustmark Corporation (TRMK)
IBERIABANK Corporation (IBKC)

I just found out that Whitney Holding (WTNY) pulled out of the conference several weeks ago because it didn’t want to get any political flack from Congress about spending money on wining and dining investors. I will post my thoughts on the conference when I return.

TXCO Resources Gets Hit

TXCO Resources (TXCO) looks like it may become the first casualty of the credit crunch in the exploration and production sector.

The company just received an acceleration notice from its lender demanding full repayment of the $150 million owed under the agreement, an amount the company does not have.

It's a shame since the company has some interesting properties in the Maverick Basin in Texas, and is also exposed to the Eagle Ford Shale.

I uploaded a few pictures of drink coasters I received from them at an investor meeting some time ago.

What is or What Was The Financial Crisis?

Here’s the bitter truth about the “financial crisis.” Things were never as bad as people thought, and now things are not as good as people think. Over the last six months, there was too much pessimism around what was going on, and now we are moving toward too much optimism.

Why is this happening? One reason is that too many investors and commentators take cues from the stock market and use that as a fundamental barometer for whether things are “good” or “bad.” This is reflected in media commentary by these pundits who go on TV and say something like this:

“The market doesn’t believe it.”

“The market is saying this….”

“What the market is telling us.”

The market is a poor substitute for doing fundamental research on stocks, yet millions of people use it as the Oracle of Delphi instead of what it really is – the uncontrollable collective mass hysteria of terrified investors and short term traders.

Bank of America traded as low as $2.52 last month and peaked two years around $47. Which was correct? Neither. Bank of America was never worth the 2-3 times book value it traded at when it peaked, nor was it ever worth as little as the 15% of book value it traded at in March 2009.

Yet now everyone is breathing a huge sigh of relief, as the crisis is over, and as evidence of this, the stock market is cited as the determinant of that conclusion.

Here’s the bottom line. Don’t use the stock market to tell you the fundamentals of our financial system, as it is a terrible indicator of those fundamentals.

Festival of Stocks Number 136 - April 13, 2009

I humbly present the 136th edition of the Festival of Stocks. This is the eighth time I have hosted, and if you want to sign up as a host then go to this web page.

Stock Ideas

Jae Jun presents Cheap Graham Stock Ideas posted at Old School Value.

Dividend Growth Investor presents Best High Yield Dividend Stocks for 2009-1Q Update posted at Dividend Growth Investor.

D4L presents Federal Realty Investment Trust (FRT) Stock Analysis posted at Dividends Value

Bootstrap presents Company Update: Miller Industries posted at Bootstrap Investing.

Zach Scheidt presents Netflix - High Flyer or Falling Star? posted at ZachStocks.

Andy presents Warren Buffet's Berkshire Downgraded as AAA Credit Rating Lost posted at Saving to Invest.

Ray presents S&P Dividend Aristocrats to be changed? posted at Financial Highway.

Steve Alexander presents 5 Points to Look For When Evaluating Management posted at MagicDiligence - The Best Magic Formula Stocks.

George presents Special Situations Real Money Portfolio March 2009 Update posted at Fat Pitch Financials.

Mutual Funds/ ETF's

Cody Butler presents How Do Mutual Funds work? posted at Investment-For-Beginners Blog.

Darwin presents Colombia ETF - A Return to Supercharged Frontier Market Returns? posted at Darwin's Finance.

Ripe Trade presents Ripe Trade: Leveraged and inverse ETF pitfalls posted at Ripe Trade.

Walter W. Fouse presents 7 Ways to Pick the Best Noload Mutual Funds and ETFs posted at Top No Load Mutual Funds.

Precious Metals

Shaun Connell presents The Case for Buying Gold posted at Learn Financial Planning.

Declan Fallon presents Gold and Silver under Pressure posted at Zignals blog.

Traders

Dr. Barry Burns presents How Day Trading Works According to Einstein posted at Top Dog Trading.

Stock Trading Terminology posted at Stock Tips.

etrades presents Day Trading Tips From The Pros - Time To Cash In! posted at eTrades.
Enjoy!

Mike Pastore presents Get the Right Type of Day Trading Software posted at Mikes Millions.com.

Sun presents Individual Country ETF First Quarter Performances posted at Earn More Invest Wisely at The Sun's Financial Diary.

Stock Trading Brokers presents SEC Considers Proposal for Uptick Rule posted at Stock Trading Brokers.

Other

Patrick @ Money Saving Deals presents TradeKing Offers up to $150 in Transfer Fees posted at Money Saving Deals.

Patrick @ Cash Money Life presents Leave Your Money in Your Retirement Accounts! posted at Cash Money Life.

RJ Weiss presents What is Inflation? posted at Our Financial Planner.

Michael Haltman presents Mark To Market Eased: Making A Silk Purse From A Sow's Ear? Example Included posted at The Political and Financial Markets Commentator.

James Fowlkes presents 5 Steps to Becoming a Better Investor posted at JamesFowlkes.com.

Frank B. presents Beginners Guide to Investing posted at Investment Basics.

The Smarter Wallet presents Investing In The Stock Market? Rules To Help You Sleep At Night posted at The Smarter Wallet.

Dorian Wales presents The Recent Rally in Stock Prices is Nearly Over posted at The Personal Financier.

Tushar Mathur presents Getting finances in order posted at Everything Finance.

Silicon Valley Blogger presents Best Online Stock Brokers For Cheap Stock Trades posted at The Digerati Life.

Lympho-Maniac Charity Event

Chad Landry is an institutional equity salesman and works for Capital One Southcoast out of New Orleans. Once a year he organizes a charity event to raise funds for research into cancer. He is a survivor himself and lives life to the fullest because of that. Here's an interview that the local media did with him last month in connection with the event:



Chad is a good friend and has done everything he can to help me ever since I went off on my own two years ago and started my investment partnership. He lives up to his motto of "Reputation over Revenue."

Donations can be made at this web site:

Lympho-Maniac

Tom Gayner of Markel Insurance (MKL)

Thomas S. Gayner, the Chief Investment Officer of Markel, will be interviewed on the blog - Manual of Ideas - on Monday, April 6th. Gayner manages the investment portfolio at Markel and has a strong long term track record of outperformance, and follows a value investing approach.

I wrote an article on Markel for Investopedia back in late 2008.


Here is an excerpt from the interview:

Question

You have stated that the businesses you seek should have

(1) a demonstrated record of profitability and good returns on total capital,
(2) high measures of talent and integrity in management,
(3) favorable reinvestment dynamics over time, and
(4) a purchase price that is fair or better.

Perfection, however, is rarely attainable in the stock market. Have you had to compromise on these criteria, and if so, could you illuminate for us how you decide on acceptable versus unacceptable trade-offs?

Answer

Tom Gayner: While you say that perfection is rarely obtainable in the stock market, I would go so far as to say that it is never obtainable in the stock market. Perfection doesn't exist in this world. All of my choices involve various degrees of compromise and trade offs. As an accountant, I can tell you that my wife and children are sick of hearing me use the phrase "opportunity cost".

Every decision is also another decision (at least) and every non-decision is also a series of other decisions.
The challenge is to get the balance roughly right between the choices that actually exist. All of the 4 points I lay out are north stars that guide me. I admit though, that I have never personally been to the North Pole.

The one area where I will not compromise is in the area of integrity. I may not make every judgment correctly when I'm trying to make sure I'm dealing with people of integrity but I will never knowingly entrust money to people when I am concerned about their integrity. Even if you get everything else right, the integrity factor can kill you. My father used to tell me that, "you can't do a good deal with a bad person." And he was right.

The other factors can be thought of as shades of gray and nuances. We look for as much of the good as we can find and weigh that against what we have to pay for it, our expectation of how durable the business will be, and what our other alternatives are. I don't have a formula or algorithm to get that precisely right, I just spend all my time thinking, reading, and adapting as best as I can.

Origins of Value Investing

The origins of Value Investing has been pushed even further back than Henry Clews.

I am currently reading “Devil Take The Hindmost,” by Edward Chancellor. The book is an excellent review of the history of speculative activity in the financial markets. One quote that I wanted to share was from Richard Steele, an English writer who wrote a publication called the Spectator in the late 17th and early 18th centuries.

“Nothing could be more useful, than to be well instructed in his Hope and Fears; to be diffident when others exalt, and with a secret Joy buy when others think it is their interest to sell.”

Sounds just a little like Warren Buffett when he says:

"Try to be fearful when others are greedy and greedy when others are fearful."

A Letter From A TARP Recipient To The Government

Banks have received billions of dollars from the government as part of the Capital Purchase Program (CPP) of the Troubled Asset Relief Plan (TARP) set up by the Bush Administration. Here is the letter they would love to send to Congress.

Dear Congress,

Thank you very much for the capital last Fall, but there are some things that we need to explain to you.

Most of us didn't need the capital, but took it because you browbeat us into accepting it, or we were so scared that we felt we had no choice.

Please stop calling it a "bailout." It was not a bailout, because you received something of value in return for your investment. The security you received pays you a healthy dividend, and it came with warrants to purchase our stock. Although most of the warrants are out of the money because of the panic in the market, investing is a long term game, and it is possible that five years from now, you will find that in the aggregate you made a great investment in the financial system. Also, remember that every single one of us that took capital from you is current on dividend payments.

We understand you are angry because of the losses we are taking currently, but quite honestly, and with all respect, you have run up a $10.8 trillion dollar loss in the country's finances since the late 1700's, and maybe you should take care of that before you criticize us for our considerably smaller losses.

You are a stakeholder in our bank now, but nothing more, so stop telling us not to play golf with our clients, or to stop sending our most productive employees on weekend trips when they make money for our firm. Normally, we don't put up with this much abuse from our preferred shareholders, but we cut you some slack due to your inexperience with capital markets.

Please stop hauling us in front of various Congressional committees to generate sound bites to display to your constituents back home. I would think you have enough of these already, and we have lots of work to do to get through this credit cycle.

Thank you, and please contact investor relations like all other shareholders if you have any further questions.

Sincerely,


Anybank

The Cognitive Distortions Of Chicken Little

I was listening to CNBC, and they just reported that the sky is falling. Oh my God!! Look out below.

The Financial Media is deepening and prolonging the recession by engaging in a series of what a professional would call cognitive distortions. The first of these is called Catastrophizing. This is defined as believing that a situation is much worse than it really is. Here's an example of Catastrophizing. A large bank reports a huge loss due to a unrealized loss in its securities portfolio, and deteriorating loan asset quality leading to higher charge offs and loan loss reserves. Then a talking head, or one of the anchors on CNBC says something like this:

"The entire Banking System is insolvent."

Well actually, no it's not. There are thousands of Banks in this country and just because Citigroup thought they could "ride the worm," if I may be allowed to quote from Dune, doesn't mean that every other banker did.

This Catastrophizing is closely related to Magnification, or the tendency to put a stronger emphasis on negative events and ignoring the the positive events.

So what are the causes of these cognitive distortions? There are many possibilities:

1) The media is so immersed in the flow of information and the negative effect of the markets that all they can see are the problems. This "wall of bad news" leads to the distortions listed above. The media was guilty of this in reverse when the markets were heading up. Can anyone remember an anchor actually challenging the Energy Bulls with tough questions two years ago, or were you as annoyed as I was that they were treated as God like investors incapable of error?

2) They are easily manipulated by large institutional investors who have their own agendas to advocate. Have you considered that the commentators who are pushing Nationalization are short the Banks, and their souls are not as pure as they seem?

Some Good News Lost In All The Doom And Gloom

The sentiment is obviously terrible out there for the market and the economy, so it is important to highlight some data that didn't get that much play because most pundits are too busy predicting when the sky will fall and who it will fall on.

The Conference Board reported that its Index of Leading Economic Indicators rose 0.4% in January. This is the second month in a row that it increased. Five of the ten components in the index were up.

And no...I am not saying everything is great in the economy, but the world is not coming to an end like the blogosphere seems to be saying. This is not Imperial Rome, and there is not a Barbarian army camped outside our walls waiting to sack us.

Capitalism is cyclical. Get used to it.

The White House Fires Back Against Rick Santelli

The Rick Santelli "Rant of the Year" is now legendary in the investment blog world so I won't waste any time discussing it. The clip is below:



What is less well known is the response from the Obama Administration by Robert Gibbs, the Press Secretary. The clip is below. The Gibbs part starts about 20 seconds in.



"I also think it’s extremely important for people who rant on cable television to be responsible and understand what they’re talking about," he said. "I feel assured that Mr. Santelli doesn’t understand what he’s talking about."

Beating A Dead Horse

This won't come as news to anyone, but here is another depressing chart on the economy from the Dallas Federal Reserve:




"Over the three months ending in December, the Texas Leading Index experienced its sharpest decline since its inception in January 1981 (Chart 1). All eight of the indicators gave negative signals, with the steepest drops coming from the increase in the Texas export-weighted value of the dollar and declines in the stock index of Texas-based companies. In addition, the Texas Business-Cycle Index was revised downward, indicating Texas likely entered a recession sometime in the second half of 2008."

Full report is here.

What Is The Real Story With The Senior Loan Officer Opinion Survey

The Senior Loan Officer Opinion Survey on Bank Lending Practices for January 2009 was just released by the Federal Reserve. The universal headline from most media outlets ran something like this - "Banks Continue To Restrict Lending."

While this is technically correct, there is some interesting data in the release. The survey asks 25 questions to domestic lenders, many of which are multi part, and then another series of questions to foreign banks with domestic locations.

1) The fraction of banks that are tightening lending standards overall actually declined from October 2008.

"Relative to the October survey, these net fractions generally edged down slightly or remained unchanged."

The level is still "elevated" however.

2) The fraction of banks that are tightening lending standards for Commercial Real Estate also declined from October 2008.

"80 percent of domestic banks reported that they had tightened their lending standards on commercial real estate (CRE) loans over the past three months, slightly less than the roughly 85 percent that reported doing so in the October survey."

Once again, still elevated.

3) The fraction of banks tightening standards on Home Equity Loans also fell from the last survey.

"About 60 percent of domestic respondents, down from 75 percent in the October survey, noted that they had tightened their lending standards for approving applications for revolving home equity lines of credit (HELOCs) over the past three months."

I'm not saying everything is going great out there. So what's the point of all this? Don't believe everything you read. It wasn't that long ago that we were being told that Oil prices were never going to go down, and that Fannie Mae and Freddie Mac were the greatest companies in the world.

Go to the original source and draw your own conclusions. The sky is not falling and the world is not coming to an end, although that seems to be the general consensus out there.

Is It Time To Buy The Insurance Sector?

I just came across a survey from the Council of Insurance Agents and Brokers that gives confirming evidence that the soft market in insurance may be over.

The survey concludes that "Commercial property/casualty market premiums showed definite signs of leveling off in the fourth quarter of 2008 across small, medium and large accounts and for most major lines of commercial business."

Rates still declined in the fourth quarter of 2008, but at a slower rate than the last few quarters, according to the survey.

“We see evidence in the fourth quarter that premium rates eased as insurers tried to hold the line on pricing. It’s still a competitive market, but we think this may signal the bottom of the soft market, following six years of steady decline. We will see if this trend continues in the first quarter of 2009 as price increases in the reinsurance market begin to trickle down and as the full impact of the economy and market conditions comes home to roost on insurers’ bottom line,” Council President Ken A. Crerar said.

Most insurers are trading below book value due to investor concern about the investments they hold, so is it possible that a return of the hard market along with decade low valuations might be a buying opportunity for investors?

The survey is here.

More TARP Banks

The Treasury released the list of banks getting money from the government as part of the Capital Purchase Plan. The total amount given out was $14.77 billion for 43 banks. Some are household names and others are rather obscure:

Nine Surprises For 2009

In the spirit of Byron Wien, who every year releases a list of surprises to expect during the coming year, I submit my own surprises for 2009:

1. Investors stop listening to the talking heads on TV after realizing that they are on TV to shill for their own portfolio and not to help them out.

2. Jim Cramer is finally institutionalized after changing his mind ten times in one week about a stock.

3. Commodity bulls admit that oil futures are no different than any other financial instrument and that there are speculators in the oil futures market. The speculators are rounded up, taken to the basement of the Federal Reserve in New York, and hung by the neck with piano wire.

4. After blinding leading individual investors into commodities, the third great investment bubble in ten years, the Sell Side is prohibited from recommending any stock or other investment ever. The terms Buy, Sell and Accumulate are replaced with “the hell if I know.”

5. The term “smart money” is banned from being used in the financial media. A crowd of investors burns an effigy of “smart money” at the corner of Wall and Broad Street.

6. After hiding out for months during the Energy Bear market, Matt Simmons is finally located in Carthage, Illinois and beaten by a crowd of angry peak oil enthusiasts. He is quoted as being “flabbergasted” by his treatment by the mob.

7. Hedge Funds admit that Hedge Funds are not a separate asset class. “We just go long and short stocks, bonds and derivatives like everyone else.”

8. Shareholder activist investors admit that they don’t really care about the long-term health of the companies they are targeting. “We just want the stocks to go up in the short term, and then dump our position at a profit. We have to say we are long term investors so management will listen to us.”

9) Investors start investing rationally, they ignore rumors, they weigh stocks rather than vote for them.

Words of Wisdom - Part II

More words of wisdom from Henry Clews to get us through the harrowing market that we find ourselves stuck in. Henry Clews lived from 1836-1923 and wrote several books on his views and experiences on Wall Street, including "The Wall Street Point Of View" and "Fifty Years in Wall Street."

"I cannot refrain from expressing the opinion that there are permitted to exist in this country conditions which needlessly aggravate the perils of financial upheavals, when they occur. In every panic much depends upon the prudence and self-control of the money-lenders. If they lose their heads, and indiscriminately refuse to lend, or lend only to the few unquestionably strong borrowers, the worst forms of panic ensue."

Just like back then, banks hold the keys to the recovery.

"If, on the contrary, they accommodate to the fullest extent of their ability the larger class of reasonably safe borrowers, then the latter may be relied upon to protect those whom the banks reject, and thus the mischief may be kept within some bounds. Everything depends upon anxiety being held in check by an assurance that deserving debtors will be protected. This is tantamount to saying that all depends on the calmness and wisdom of the banks. They may easily mitigate or aggravate the severity of the crisis according as they are prudently liberal or blindly selfish."

The Words of Wisdom of Henry Clews

Henry Clews lived from 1836-1923 and wrote several books on his views and experiences on Wall Street, including "The Wall Street Point Of View" and "Fifty Years in Wall Street." Here's a quote that seems to sum up very succinctly and without emotion what we are going through now:

"The action of commerce, like the motion of the sea or of the atmosphere, follows an undulatory line. First comes an ascending wave of activity and rising prices; next, when prices have risen to a point that checks demand, comes a period of hesitation and caution; then contraction by lenders and discounters, and then a movement, in which holders simultaneously endeavor to realize, thereby accelerating a general fall in prices."

"Credit thereupon becomes more sensitive and is contracted; transactions are diminished; losses are incurred through the depreciation of property, and finally the ordeal becomes so severe to the debtor class that forcible liquidation has to be adopted, and insolvent firms and institutions must be wound up. This process is a periodical experience in every country, and the sharpness of the crisis that attends it depends chiefly on the steadiness and conservatism of the business methods in each community affected."

What we are going through now is no different than what other generations experienced. We are probably better off because we have more of a social safety net and an activist government to smooth the rough edges of this downturn.

So Who Should We Believe?

The Securities and Exchange Commission (SEC) just released its voluminous report totaling more than 200 pages that investigated whether fair value accounting was to blame for any or all of the credit crisis and financial dislocations over the past year. The SEC concluded that fair value accounting "did not appear to play a meaningful role" in the 25 bank failures that have occurred this year or the tumult at collapsed investment banks."

The next day a group of insurers say just the opposite in its report.

"The application of fair value accounting measurements to an inactive, illiquid, and disorderly market for structured credit products helped fuel the worldwide credit crisis, an organization of major insurers and reinsurers told the U.S. Financial Accounting Standards Board (FASB)....that while the organization does not believe that fair value measurements caused the global credit crisis, "unreliable, and non-transparent fair value measurements served as a powerful accelerant."