2008 Strategy....Plan for a Recession
Below is an excerpt from a memo written from Hamilton Wealth to clients in the beginning of 2008 warning of the financial challenges ahead and getting ahead of clients’ needs before the economic downturn.
From: Randy Hamilton
Sent: Monday, January 14th, 2008 8:47 PM
Subject: “2008 Strategy… Plan for a Recession”
The negative impact of the U.S. mortgage meltdown is no longer debatable. Even the monkeys in Washington have finally admitted that the economy is in trouble. This should be no surprise to you. Last year in an effort to get more defensive we lowered our exposure to stocks from 65% to 50%. In addition, we sold our investments in telecom, biotech, semiconductors, Japan, China, and emerging markets. We also bought more bonds and added foreign currency (Euros and Yen) to hedge the falling U.S. dollar. Exactly one year ago in January of ‘07 I began sending my annual year end review along with recommendations titled, “Time to Rebalance Your Portfolio” in which I wrote the following:
“I feel the market is at an inflection point and we must be proactive. Oil shocks, housing slumps and inverted yield curves have each lead to recessions in the past (not that I am predicting one in ‘07).”
Wall Street and economists have been poor predictors of recessions (defined by at least two consecutive quarters of negative economic growth) and I am certainly not going to do so, myself. However I believe the ongoing housing correction and its spillover effects are going to make it feel like a recession this year. Some even speculate that we are already in one as evident by the carnage in the financial sector.
--Largest U.S. bank, Citigroup...stock down 45% last year… CEO fired, currently being bailed out by the Chinese ($7.5 billion investment) and a Saudi prince... and aggressively seeking more money
--Largest U.S. brokerage firm, Merrill Lynch...stock down 41% last year...CEO fired, currently being bailed out by Singapore ($4.4 billion investment)...and aggressively seeking more money
--Largest U.S. mortgage broker, Countrywide...stock down 78% last year...recently escaped bankruptcy thanks to Bank of America’s buyout announcement last week
One could speculate that the Bank of America was simply protecting their $2 billion investment they made in Countrywide last August. Until the buyout was announced last week, their investment had dwindled to under $900 million, meaning they were down over $1.1 billion in six months! If only somebody at the bank was a reader of Bill Gross’s monthly ‘Investment Outlook’. Published for free on the company’s website (www.pimco.com) this is a part of what Gross wrote in the July ‘07 issue, just one month prior to Bank of America’s $2 billion bet:
“Escalating delinquencies of course ultimately lead to escalating defaults. Currently 7% of subprime loans are in default. The percentage will grow and grow like a weed in your backyard tomato patch. Now I, the curmudgeon of credit, am as sure of this as I am the sun will set in the west.”
As Gross predicted that percentage is growing rapidly and the desperate ‘election year’ proposals to save homeowners (and the economy) by Dubya, Paulson and Bernanke maybe too little too late especially for the $500 billion in mortgages scheduled to reset in ‘08. In my opinion, its not the government’s job to bail out financial institutions that had a complete disregard for risk management. The talking heads in the media are quick to blame the economic downturn on ‘subprime’ or the ‘credit crunch’. The bottom line is that these companies failed miserably when it came to risk control. They were all too willing to forget about the traditional lending standards in order to collect that higher yielding subprime mortgage.
Last week charge-card giant American Express said a slowdown in cardholder spending and rising delinquencies would lead to a pre-tax charge of around $400 million for the fourth quarter. Obviously the U.S. consumer (which represents 70% of GDP or economic activity) is feeling the squeeze. I do not subscribe to the popular ‘decoupling’ thesis (that robust global growth will continue despite America’s economic troubles) and I suspect the U.S. slowdown is already spreading globally.
The silver lining in all of this is that true long term investors will be rewarded with opportunities this year to buy quality investments at bargain prices. As Warren Buffet says, you can not find bargains if the stock market is making new highs every day, but rather you find opportunities in times of crisis. Eventually financial stocks will become attractive as will real estate, retail and technology.
It is important to understand that I am not attempting to time the economic slowdown (or possible recession). Rather, I am simply doing what the banks forgot to do… exercise prudent risk management.
I believe that it is important that we meet face to face for an in depth portfolio review, as well as discuss your risk tolerance, return expectations, and the challenges we may face this year in our effort to protect and build your wealth.
I appreciate your business and I look forward to another great year in 2008!
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the Hamilton Wealth, LLC employees providing such comments and should not be regarded as a description of advisory services provided by Hamilton Wealth, LLC or performance returns of any Hamilton Wealth, LLC investment client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Hamilton Wealth, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.