Monday, September 29, 2008

WSJ: Jason Zwieg: What Should Investors Do Now?

The Intelligent Investor: When the Dow drops 778 points in one day, it seems like there's nowhere to hide.

Jason Zweig gives us some great perspective on today's events, a couple excerpts from this excellent article:

On whether we are heading for another Great Depression:

"First, when you spend time studying the Crash of 1929 and the depression that followed, what stands out the most is the dearth of doomsayers. Even Roger Babson, the economist known to posterity as "the man who called the crash," did no such thing; he forecast only a 15% to 20% drop, not the apocalypse that actually occurred. Depressions start not when lots of people are worried about them, as we have today, but when no one is worried about them, as in 1929.

Second, the Great Depression and the Panic of 1873 (which triggered what arguably was the worst depression in U.S. history) both occurred before the Federal Reserve Bank had aggressively grown into its role as "lender of last resort." In the wake of 1873, after a railroad-building boom had swept the nation and then gone bust, companies and consumers alike were left gasping for capital. Nothing but the passage of time could supply it; the Fed would not be established until 1913. After the crash of 1929, when the Fed was still weak, years passed before the federal government could flood the economy with cash.

Today, however, the resolve of the Fed is not in question; nor is there any doubt that the Treasury department is willing to provide the financing it takes to get the economy moving again. Furthermore, U.S. non-financial companies have just under $1 trillion in cash on their books."

I encourage you to read the whole article.

Scott Dauenhauer CFP, MSFP, AIF

Bailout Fails - Investors Bail

Well, well, well......yesterday everyone was told that congress was ready to play nice with each other and actually work for the American people. In the end we found out that in fact, they just didn't have it in them. They couldn't hold themselves back from playing the same political games that are partially responsible for the mess we are in now. I don't know if it was Pelosi's speech that threw Republicans into a tizzy (if it was, how utterly ridiculous and thin skinned of those Republicans), but the speech was certainly not needed. Regardless, the bailout package failed and investors bailed on stocks - giving us the worst one day point loss in two decades.

Where do we go from here? I can only imagine that the two parties will come back together, curse each other out, blame each other then come back to the American people with a package that works....and actually pass it. This will not be the final measure, but it would be a good start - it is a bank bailout or a partial recapitalization of the banks (after all, we are overpaying for the assets).

The bottom line is that America is suffering from a lack of leadership, Paulson and Bernacke are attempting to step in, but so far are not making necessary progress. President Bush is a lame duck with a low approval rating and congress has the worst approval rating in history - we are in a leadership vacuum. We need strong leadership and we need more transparency in our markets, we also need a solution to the housing/foreclosure problem - without this, nothing will change.

This doesn't mean you should be eternally pessimistic about stocks. Stocks are on sale, they may go on sale further (I guess that might be a clearance?) but they are not going to go down forever. History shows us that stocks recover and those that hold on should be well rewarded.

Hang in there and read my next post with Jason Zweig.

Scott Dauenhauer CFP, MSFP, AIF

WSJ: Calling JP Morgan

I've been reading "The Panic of 1907" as a way of better understanding our financial crisis history. Its amazing the parallels of today and back then. The panic happened over 100 years ago (there were 13 previous ones) and yet, America survived. We will survive this panic as well.

Today's events are a little unbelievable, but not unprecedented. If you want a fascinating read about how JP Morgan solved the Panic of 1907 in just eight weeks and what we can do now to get through this've got to read this article.

Scott Dauenhauer CFP, MSFP, AIF

Historical Market Reaction to Financial Crises

I realize that these graphs may be difficult to read, but if you click the above link it will take you to a page that will allow you to download them and those are very easy to read. The main point....stocks have always rebounded after a crisis.

Scott Dauenhauer CFP, MSFP, AIF

MBS, CDO's and CDS's In Layman's Terms......

You've probably been hearing a lot about securities that you've never heard of before. I bet you never thought it would be important to know what an MBS or CDO or CDS you may be wondering. I'll try to give you a brief synopsis of each.

MBS - Mortgage Backed Security

This is in its simplest form a bond. The bond is backed by a pool of mortgages that are being paid by homeowners across the United States. Each month a homeowner makes a payment, that payment basically sent to the holder of this bond. If one were to buy a Mortgage Backed Security (MBS) they would receive an interest payment and a partial repayment of their principal (since some of a homeowners payment is interest and principal). These securities are issued by Fannie Mae, Freddie Mac and Ginnie Mae - but can also be issued by other institutions. When an investor buys a Fannie Mae bond, they are essentially buying the cash flow from different homeowners as they make their monthly mortgage payments. If a homeowner defaults on their mortgage or misses a payment, the MBS holder suffers....of course this is where Fannie, Freddie and Ginnie step in and make them whole. With so many people in foreclosure and not making can see why Fannie and Freddie had to be bailed out.

O.K. - as if MBS was not hard enough - Collateralized Debt Obligations or CDO's.

These are tough to understand and I won't bore you with the internals, but think of this as a Mortgage Backed Security on steroids. Instead of one investor owning the cash flow of a mortgage - multiple investors could own it. Here is an example of how a CDO might work:

Pretend that you have a mortgage (okay, most of us aren't pretending) and you make principal and interest payments each month - these payments are made to your loan servicer and then split up as follows:

Investor A - Gets all of the interest payments from years 1 - 4
Investor B - Gets all of the principal payments from years 1 - 4
Investor C - Gets all of the interest payments from year 5
Investor D - Gets all of the principal payments from year 5
Investor E - Gets the interest and principal payments from years 6 - 10
Investor F - Gets interest payments from years 11- 24
Investor G - Gets principal payments from years 11 - 24
Investor H - Gets the remainder of principal and interest payments, if made from years 25 - 30

Imagine you are the borrower - your payments don't just go to your local bank anymore - they get split up depending on the year you are making a payment and how much is principal and interest. All of these investors who are in line to receive these payments have bought into a trust - called a CDO. The trustee of the trust has a fiduciary responsibility to each of these investors. Now you know why when someone who is having problems paying their mortgage and is on the brink of foreclosure is having such problems trying to get their loan modified - if the trustee changes the interest payments, one of multiple investors may get hurt at the expense of another, same goes for principal changes. The trustee is in an impossible situation and thus does nothing........the house forecloses even though a workout was entirely possible.

CDO's were purchased by investors who were told by "creditable" ratings agencies that these securities were "investment grade". Some of these investors obviously didn't believe the credit agencies and decided to seek insurance in the case that their CDO defaulted. They went out and bought.........Credit Default Swaps or CDS.

There is nothing wrong with a Credit Default Swap - it is basically an insurance policy against the failure of a specific asset. The reason these have been in the news is because some companies - like AIG, Lehman and Fortis (and many others) found these insurance policies to be very lucrative business. AIG in particular issued Credit Default Swaps on CDO's so that institutions that held CDO's would be made whole if the CDO defaulted. The problem is that AIG didn't foresee that ANY of these would default - they thought this was a risk free operation. AIG took in a ton of money to insure the CDO's through Credit Default Swaps - but never reserved for losses. As we all know now, AIG made a huge mistake as there were and is risk with CDO's. Credit Default Swaps are basically just insurance policies for securities.

Consider this a 101 class on mortgage derivatives.....its probably boring to you, but it might help to explain a little of what is going on right now.

If you're an expert in these derivates please don't e-mail me telling me how I botched these explanations.....they are correct enough to ensure normal people understand the basics of what is going on!

Scott Dauenhauer CFP, MSFP, AIF

The Bailout

The link above will take you to an article that gives some details about the bailout agreement reached by congress yesterday. What follows are some of my thoughts:

It has become conventional wisdom that this bailout must pass or all hell will break loose. I'm not much for conventional wisdom, however I do believe this bailout will go a long ways toward softening the hit to the global economy that would occur if we didn't have this bailout. The idea is to create a market for securities that banks hold on their balance sheets so that the banks have some breathing room, can recapitalize (hopefully using the private markets) and begin lending again. Lending is at the heart of this crisis - without lending (reasonable lending) our economy cannot function. Be aware that the government IS participating in re-capitalizing these institutions by purchasing the so-called "toxic" assets. While you may not be hearing this, the government IS going to overpay for the securities they are buying.....despite what we are being told. Remember that there is always a market for virtually anything one has to sell, the toxic assets held by these banks CAN be sold right now and there are willing buyers. If you don't believe me you need only to look up a transaction that occured just a few months ago when Merrill Lynch offloaded their toxic assets for 22 cents on the dollar. The banks CANNOT do this - they would be insolvent, thus the government will purposely overpay for these assets in order to re-capitalize the banks and give them some room.

While the government will be recapitalizing these banks, it won't be paying so much for the securities that they will fully re-capitalize the banks, the banks need more capital. The hope is that institutions will have confidence in the balance sheets of these banks again and make investments in them.

I do not believe this plan will add to the deficit, I do believe it has the ability to make money for the Treasury. I'd be happy if it was just cost neutral over the long run.

What does this mean for you? We'll just have to wait and see. I don't think it will lead to higher taxes. Higher taxes will kill or severely maim any possible recovery. In the short term things will continue to be painful, this is not a silver bullet - but perhaps it is a silver covered bullet.....which is the first step in the right direction.

I do not and will not speculate on what the markets will do in the short term - I do not know. A brilliant man once said when asked what he thought the market would do "It will either go up or down." Those are my thoughts exactly. I do believe in the long term prospects of the stock market though. This financial crisis might seem like something new, and for most of us it is, however American has faced such crisis before and weathered the storm.....and came out stronger than before.

Did you know that their were financial panic's before the Great Depression? Yep, we had a severe panic in 1907 (I'll be writing more on that later) and previous to that we had at least 13 panics that led to runs on banks (including one partially owned by one Ulysses S. Grant). The hope is that we've learned from these panic's and have the tools in 2008 to ensure that they don't lead to Depressions, I believe we have those tools.

Scott Dauenhauer CFP, MSFP, AIF - Lehman's Demise Triggered Cash Crunch Around Globe

When Lehman went bankrupt I applauded the government for finally letting an institution fail. Had I know what they should have known, I would not have allowed Lehman to fail. Lehman was also a big player in the Credit Default Swap market, the failure created shockwaves that led to the panic and exacerbated the credit crunch and accelerated the downfall and eventual bailout of AIG. Had we structured something for Lehman, similar to that of AIG - we may not have had to bailout AIG.

This Wall Street Journal article, though a bit technical gives you the background on the collapse of Lehman and why it had such a profound effect on the markets.  
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Sunday, September 28, 2008

Fortune: How it got this bad

Here is another brief synopsis of how we got to where we are. It is not comprehensive, but should give you an idea.

Scott Dauenhauer CFP, MSFP, AIF

AIG: A Bit of the Background Behind Their Failure - NY Times

The NY Times does a reasonable job of giving us an glimpse of the stupidity behind the AIG collapse. Basically an unaccountable tiny unit of AIG managed to brink the global economy to the bring of collapse....its really a story of stupidity and hubris.

There are many to blame here.

Scott Dauenhauer CFP,MSFP, AIF

Warren Buffett's happy housing story

For all the talk about Subprime loans being the problem, we get a story that points out that Subprime loans may not be all that bad afterall. Warren Buffet has found a way to make loans to those with less than perfect credit and not go belly up (while bringing down the global economy. How does he do this you ask? The Berkshire Hathaway subsidiary, Clayton homes makes loans to people who can afford their payments, yes, a revolutionary idea. Clayton also keeps all its loans, it does not sell them, thus when a loan goes bad they feel the pain and thus are more careful upfront in selecting who they should loan to.

This is a simple, but good article that reminds us, it was stupid lending practices, not subprime loans that got us into the mess.

Scott Dauenhauer CFP, MSFP, AIF

Friday, September 26, 2008

LA Times Money Makeover Features Yours Truly

Click on the above link to read about the family I worked with on this LA Times Money Makeover.

Scott Dauenhauer CFP, MSFP, AIF

The Paulson Plan Will Make Money For Taxpayers

As promised, the article that claims the bailout could in fact by the largest winning trade ever and potentially add $2.2 trillion to the treasury (so that our politicians can then spend it on more pork). We'll call this the Pork Trade!

Seriously though, I'm not counting on this to be a profitable bailout, I'd be happy it it paid for itself or only lost a little, if we profit.......even better.

Scott Dauenhauer CFP, MSFP, AIF

As Expected, WaMu Fails......JPMorgan Scoops It Up

Washington Mutual has finally failed......its about time. I'm not sure how it lasted this long. For those of you with bank deposits at WaMu you have nothing to fear. While the bank was taken over by the FDIC it was sold to JP Morgan, which proves that those banks who have sound lending practices will find themselves with big opportunities during difficult times. JP Morgan bought Bear Stearns earlier this year. It seems that the House of Morgan is continuing its reputation as an entity of respite in tough financial times.

The funny thing is that this isn't really news, its almost an afterthought. The real focus is on the so-called "bailout" package in Washington. This bailout package could easily turn into a pork barrel bailout - where dissenting politicians are bribed with all sorts of ridiculous things the American people don't need in order to be induced to vote for the bailout.....which I do think is needed. I hope I am wrong, but congress has made us all cynical.

As for the bailout, I have not as of yet commented either way. Its strange for me not to have an opinion on something like this, but its also been hard to really wrap my arms around. For months I've been saying that we need real leadership to get through this financial one stepped up, until a little over a week ago. The more I read about the plan, the more comfortable I am about it and the more skeptical congress is of the plan, the more I think it might work. Congress tends to be for things that turn out bad (can someone say Fannie and Freddie) and against things that work - so, using my contrarian congressional indicator.....this package might work.

I'll try to link to an opinion piece in the Wall Street Journal that claims this $700 billion bailout could in fact be the most profitable trade in the history of the world, potentially adding $2.2 trillion to the Treasury in a best case scenario, a true windfall. However, I'm not counting on that to happen - I just want us to get our $700 billion back plus costs and interest (and get the financial industry working again) and then I'd be happy.

Is this bailout perfect? No. Is it ridiculous that we have to do this? Yes. Do we have a choice? Of course, but I think the decision to do nothing in this case is a choice that will hurt far more people than if we act.

I'll keep you updated.

Scott Dauenhauer CFP, MSFP, AIF

Thursday, September 18, 2008

Money Market Funds: When a Buck Isn't a Buck (Morningstar)

One of the oldest money market funds around "broke the buck" the other day, meaning that its net asset value dropped below $1.00 - an unheard of event for a money market fund whose main goal is to maintain a shareholders money with a reasonable rate of interest. This was caused by some Lehman debt that the fund held that went bankrupt. This has caused a ripple effect of people now fearing money markets.

I've posted this video from Don Phillips of Morningstar and will be posting a few additional links to stories to help assuage your fears. Money markets of large money managers are and will be fine. There is risk that they could lose money, but we would expect that firm to make up for that loss.

Scott Dauenhauer CFP, MSFP, AIF

SmartMoney: Is Your Money Market Fund Safe?

Morningstar: A Large Money Market Fund Breaks The Buck

Marketwatch: Where to Stash Cash (video)

Is This The Leadership We've Been Looking For?

About 18 months ago the credit crisis started. Things looked dire, then everything started to look good again. Around June of this year I started writing that the worst was not over and that there were a bunch of bad loans out that there that still had to be dealt with. Since June the markets have been in a major tizzy. I don't remember this much anxiety over the markets since the tech bubble burst (which really wasn't that long ago). If someone had told me at the beginning of the year that AIG would be owned by the government, Lehman (a company that never reported a negative quarter as a public entity) would disappear and that Bank of America would buy Merrill Lynch....I would have laughed in their face.

My new phrase for Wall Street became Hubris Street as one by one the great independent investment banks teetered on the brink of bankruptcy. Only Morgan Stanley and Goldman Sachs are left and it looks like even those two may end up partnering with a bank.

Government bailout after government bailout contributed to even more anxiety for people - was there no end in sight? In my blog posts I said "We need leadership right now and we're not getting any". People, Hubris Street and the world needed to know that we (America) was going to acknowledge that we had a problem and actually take comprehensive steps to solve it.

That leadership may have started yesterday when Hank Paulson alluded to an entity, similar to the Resolution Trust Corporation of the 80's and 90's to buy up bad loans and take them off the banks balance sheets. This just might be the leadership we need.

I don't know what is going to happen in the stock market in the short term, though I do know that ten years from now people will be kicking themselves for not buying at these levels.

Our financial system is in shambles, but it is not broken and with the right leadership it can be restored and be stronger than ever....we'll have to wait and see, but I think for the first time in 18 months we might be heading toward the right track.

Scott Dauenhauer CFP, MSFP, AIF

Fidelity Q & A Regarding Their Money Market Funds

Here is a link to a document Fidelity released to reassure investors that their money market funds are secure. They do have some exposure, but it appears to be minimal. I think Fidelity would not allow their funds to drop below the $1.00 net asset value - however, that doesn't mean they can't.

Scott Dauenhauer CFP, MSFP, AIF

Of Fires That Burn

I sent this little piece out to my clients yesterday. For some reason my e-mail software left out the part about who originally authored the following piece. So their is no confusion, it was written by Nick Murray.

On October 17, those who can even remember it will mark the twentieth anniversary of the day the great Yellowstone fire was contained.

The summer of 1988 would turn out to be Yellowstone National Park's driest in recorded history. But there was no way of knowing that in advance, as seasonal, lightning-sparked fires broke out in May, and burned into June. More storms in July brought more lightning; the fires spread and intensified.

Still, it wasn't until late July - when some four thousand people had to be evacuated from Grant Village, a collection of lodges, restaurants and a visitor center - that the nation's attention became riveted on Yellowstone. Hundreds of reporters descended on the park, as more than 25,000 firefighters fought the spreading blazes.

On August 20, which came to be known as Black Saturday, winds of up to eighty miles per hour doubled the size of the fire to 750 square miles, and on September 7 the historic Old Faithful Inn had to be evacuated. (It was saved essentially by a sprinkler system installed just the prior year.) Four days later the rains came, and by October 17, the fires were under control. In all, 1,875 square miles burned out - something like a third of the park -- in what was universally regarded as an ecological disaster of epic proportions, perhaps the greatest in American history.

No fewer than three separate Congressional hearings were held to review fire management policies at Yellowstone and on other public lands, and the National Park Service was pilloried for an alleged "let it burn" strategy - a policy it had in fact never maintained.

Today, as the leaves begin to turn again in Yellowstone, you will find it a renewed paradise. Trees have taken root everywhere among the burnt logs that litter the forest floor. The fires, it seems, cleared out the overgrown forest canopies, allowing new plants to bloom. Bird and animal life flourishes. And people who know and love the park say that it's greener than they've ever seen it. The fires weren't an ecological disaster at all; they were nature's way of cleaning out and renewing one of the most beautiful places in America.

This autumn, we find ourselves in the later stages of a great credit conflagration. Hordes of catastrophists on cable and the Internet decry an unprecedented disaster burning out of control and engulfing one great financial institution after another. In their view, the fire is beyond the capacity of nature and man, is constantly getting worse, and will surely end in the long-term destruction of the financial system.

It will do nothing of the kind, any more than the Yellowstone fire of 1988 did. Nothing that is occurring today is unprecedented - though it may be happening on a larger scale - and nothing is unnatural. This is nature's way of cleaning out the rot. And it will lead to a healthy renewal of the global financial system in ways that today's doomsayers cannot even imagine.

Between 2000 and 2002, the world unwound the greatest equity market bubble of all time. Last year and this, we have been unwinding the greatest credit bubble of all time. These are horrific processes as one goes through them, but it is useful to remember that they burn out - that the rains do come again, even after the driest summer, and that, as John Kennedy said, no human problem is beyond the capacity of human beings.

While waiting for the rains, it will be useful to ask oneself: if this is an unprecedented long-term destruction of the financial system, why does the equity market refuse to burn down?

From its false dawn last October, the broad equity market declined about 24% peak-to-trough through the close on September 15, 2008. A 24% decline over nearly a year is hardly a walk in the (national) park, but neither is it an indicator of Armageddon. Indeed, the October before the great Yellowstone conflagration, the equity market went down nearly that much between a sunup and a sunset. (This event, too, sparked any number of equally spurious Congressional investigations, to equally negligible effect.) But as the leaves turn yet again - even in this season of despair - the equity market stands nearly five times higher than it did that evening.

Perhaps it's time to turn the television off, and to make a weekend of it in Yellowstone. At the very least, this exercise might restore some very important long-term perspective.

But be sure to pack your slicker and boots. The rains are coming.

I am always available to talk.

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, September 16, 2008

The Resilience of American Finance

Siegel echoes much of what I've been thinking:

"There is no doubt in my mind that if we didn't have a proactive Federal Reserve and deposit insurance, we would have been following the same course as we did in the 1930s, when the bursting of the stock bubble and fear of loan defaults led to thousands of bank failures and ushered in the Great Depression.

That will not happen this time. The rapid provisions of liquidity by the Fed will prevent any full scale downturn. In fact, I take it as a mark of confidence in our financial system that the Fed did not feel compelled to bail out Lehman Brothers as they did last March when they folded Bear Stearns into J.P. Morgan. Certainly politics played a role in this election year, as critics (and some Congressmen) criticized the government for bailing out the big boys, while letting homeowners twist in the wind.

Despite the recent turmoil, there is good evidence that the worst is over, especially for the commercial banks with access to Federal Reserve credit. Despite yesterday's severe sell-off, most are significantly higher than their July 15 low, and some such as Wells Fargo and UBS are up over 50%."

I encourage you to read the entire opinion piece (not very long - 5 minutes maximum).

Scott Dauenhauer CFP, MSFP, AIF

Wesbury: Gales of Punitive Destruction

Brian Wesbury does a great job of explaining the difference between the "financial" sector meltdown and the rest of the economy. For those of you who are freaked out by the recent craziness in the market, I urge you to read this one page commentary. Excerpts below:

"The economy is not taking down investment banks; lousy lending standards and the excessive use of leverage are taking down investment banks. And just like the problems of the 1980s and 1990s, the roots of the problem reach back to a period of absurdly low interest rates. When the Fed cut interest rates to 1% in 2003, balance sheet math involving leverage-based strategies turned so lucrative that many financial market players could not help themselves. Wall Street based its business model on leveraging up the most leveraged asset on Main Street – housing."

"The good news is that this financial earthquake is unlikely to turn into an economic earthquake. The bad loans made earlier this decade did not create a widespread economic boom; and the realization of how bad some of these loans are will not create an economic bust. The nonhousing economy, which is roughly 95% of total US economic activity, has been remarkably stable. In the three years ending March 2005, non-housing real GDP grew at a 2.7% annualized rate. In the three years since then, nonhousing real GDP has grown at a 3.2% average annual rate."

Scott Dauenhauer, CFP, MSFP, AIF

AIG's Fallout: What Policyholders Can Expect

As someone who has business with AIG (mainly life insurance) I thought this article was decent and it might help you find some comfort in an uncomfortable moment.

If you have an insurance policy with AIG you shouldn't panic. Read this article, relax and go on with your day.

Scott Dauenhauer CFP, MSFP, AIF

Monday, September 15, 2008

On A Positive Note....

While it seems like everything is going to hell in a handbasket (what does that mean anyway?), not all is lost.

Here are a few things to keep in mind. The dollar is up, not by a lot and it could certainly reverse and drop again, but it appears it has hit its lows. Oil is down below $100 for the first time in five or six months - this is huge - oil has fallen over 30% in the past five months. Interest rates are low (bad for people trying to generate income) for those who are borrowing and home prices in most places are finally reasonable again......if only those people could get a loan!

The Lehman bankruptcy is a good thing. Yes, I said a good thing. Did you notice that Lehman went Bankrupt and didn't get bailed out? Finally a financial institution that the government didn't bail out (makes one wonder why Bear Stearns was). Did you notice that Merrill Lynch didn't go bankrupt? It was bought by a strong bank. Yes, there are banks in the US that did not fall prey to sub-prime mortgages. While Washington Mutual teeters on the edge of insolvency, Bank of America is spending $50 billion to buy Merrill Lynch. JP Morgan is strong, Wells Fargo is strong and US Bank is strong - not to mention several regional players. The banking system is in turmoil, don't get me wrong, but we can survive this crisis (though not without some big bumps and bruises and additional regulation).

Yes, stocks are down, but that was inevitable as traders work out their trades - the fact that we are only down a few hundred points is a good sign. Don't think that things can't fall further, they always can, but it is still the right thing to hold on.

A well diversified portfolio if held through the hard times will serve you well long term. Bear markets are temporary, those who panic and sell will regret their decision. Having said that, you should also have a reasonable asset allocation to begin with.

Things aren't all rosy, but things are not all bad either. Don't let all this financial turmoil give you an ulcer (that's my job), go on with your day and remember the things in life that really matter.

I don't know when we will begin to recover from this latest bear market, it could be months, it could be years, but recover we will. Remember that.

Scott Dauenhauer CFP, MSFP, AIF

Lehman CEO Hubris Leads to Bankruptcy

A 158 year old company that has never reported a negative quarter of earnings (while public) has now vanished from the financial landscape. While many are blaming Lehman's fall from grace on the CEO's hubris, Lehman is not the only Wall Street bank being led by "hubris".

In my opinion "Wall" Street's name should be changed to "Hubris" street. This final culmination of events that started with Bear Stearns has led to a meltdown in institutions that thought they were smarter than everyone else and that the normal rules didn't apply to them.

Of course, it wasn't just Wall Street, the federal government and their Government Sponsored Entities also contributed their own Hubris. Before you jump on the Bush administration be careful, this crisis was brought about in a bi-partisan manner. Democrats in congress as much as Republicans are to blame for a severe lack of regulation which was brought on by huge amounts of lobbying dollars. It looks like congress finally did something in a bi-partisan way, tear down our financial system. You can bet that they won't take responsibility for it. You can bet they'll hold hearings and we'll watch as Democrats vilify Republicans and Republicans vilify Democrats and both vilify some now invisible financial institution - then they'll pass a series of laws (in another bi-partisan manner) that will go way to far and hurt what will be an inevitable recovery.

It was quite a weekend on Hubris Street, one that will be written about.....and repeated decades from now when we have all forgotten this financial crisis.

I know that all of this is not easy to take, especially when you open up your financial statements, but panic is not an option. This too shall pass.

Scott Dauenhauer CFP, MSFP, AIF

Sunday, September 14, 2008

Merrill Lynch.....Sold......To Bank of America

In a deal no one would have predicted twelve months ago, Bank of America has agreed to pay $44 Billion for Merrill Lynch. My career highlights have now come full circle, I started my financial services career at Bank of America, then went to Merrill before moving on to Morgan Stanley and Citibank (and then starting Meridian Wealth Management). I can tell you this, the Merrill Brokers are probably in shock right now.

For those of you who still think Merrill is a smart place for your money - consider that the company fell face first into nearly every major financial implosion in the past two decades, this last one (the subprime mortgage crisis) was the one that finally wrestled the bull to the ground. B of A will not take this bull by the horns, but don't think you'll be getting any better advice.

Scott Dauenhauer, CFP, MSFP, AIF

Friday, September 12, 2008

Jim Cramer - Still A Moron

As many of you know, I've elected Cramer to my Hall of Idiots. This guy is like the gift that keeps on giving, the funny thing is that he still has credibility. CNBC hasn't pulled his show despite the fact that he is wrong more often than right, ratings are the name of the game. As long as people tune in to watch this train wreck (perhaps that is the allure) he will continue to make a ton of money while pushing financial dope.

Just so you know that my dislike of him is based on fact, not professional jealousy (Yes, I dream of having my own show on CNBC - of course it couldn't be as popular because its hard to make buy and hold entertaining!) I've posted a few links to show that following Cramer's picks won't make you money (unless perhaps you short them):

Barron's Article

Cramer Short Selling

Please understand I am not recommending you short sell Cramer picks.....this is purely educational. Repeat after me, " Buy and Holding a Diversified portfolio for the long term works."

Scott Dauenhauer, CFP, MSFP, AIF

The Health Scare Lurking in Your Retirement Plan

This is a good primer on Health Savings Accounts and how they can help you save for retirement and retirement health care. I support these accounts and actually have one myself. It is amazing how different you think about health care when you are actually footing some of the costs directly. Having said that, HSA's must be well understood before buying into them. They are a little complicated at first, but once you understand them they can be a great tool.

If your employer offers an HSA, look into it. If you're a client of mine and would like help making the decision of whether to utilize one, lets talk.

Scott Dauenhauer, CFP, MSFP, AIF

Wednesday, September 10, 2008

The Next Bailout? FDIC

As I expected, the government took over Fannie Mae and Freddie Mac. I hope they do the right thing, but I won't cross my fingers. The government had no choice - while publicly saying they were not a guarantor of either entity, they always said that with a wink and a nod - everyone knew that the government backed this entity, why else would they be able to borrow at near Treasury rates?

So who will the next bailout be? The Federal Deposit Insurance Corporation. I personally think Washington Mutual will go under, but it is possible that the feds could arranged a white knight to buy them (their best option, if unlikely). The only way this will happen is if the buyer is given some type of federal guarantee. If this doesn't happen then the FDIC reserves are effectively wiped out. I think the FDIC will be wiped out anyway over the next couple years and its because of mismanagement in many, many areas.

We need leadership right now and I don't feel we are getting it. We are not facing the problems head on, we are trying to punt them forward and hope things will get better. The same thing happened during the Savings and Loans crisis......sure enough things got worse.

Without major write downs, principal mortgage reductions and outright bank failures - new rules and looser credit, we won't move out of this housing/credit/mortgage crunch.

Scott Dauenhauer, CFP, MSFP, AIF

Friday, September 05, 2008

Rebekah's Surgery Report

Rebekah's 2nd surgery went very well. It was a tough week, but its over now. She is fully recovered, eating well, sleeping well and continues to be a very happy baby! Thank you for all your kind words, thoughts and prayers - you don't know how much they were appreciated.

Below are a few pictures, one of Rebekah right after the surgery, then a couple pics of her and then her and her brother, Collin!

Click the link above to see all the surgery pictures (from the start of the day till we left the hospital!).

Thanks again,


Higher Fees For Mortgages

Here's the deal. Fannie Mae and Freddie Mac bought mortgages they never should have bought because they lowered lending guidelines to levels unreasonable by any normal lending standard, they are now taking a bath on those mortgages and hoping for a government bailout. In the meantime, because of their huge mistakes in judgement, you, the person who wants to take out a mortgage gets the privilege of paying higher fees and higher rates (even in a low rate environment) in order to help Fannie and Freddie out of the hole they've dug themselves out of.

I've never been a fan of either organization - any entity designed so that the profits go to shareholders while the losses go to taxpayers is destined for a crack up and is not in the best interest of taxpayers, turned out to not be a great deal for shareholders either (though management and politicians walked away with an enormous amount of money).

Fannie and Freddie are the biggest scandal in Washington and nobody is talking about it. I've supported a bailout only because the government for years has implied that they stood behind these organizations. My thoughts are that these institutions need to be cleaned up and either abolished or privatized.