We had a
wonderful meeting today at BJ's!
We had a total of 5
attendees: (from left to right) Trey Jackson, Ry Zamora, VJ Arjan, Kevin Day
and we had Elena Swindull join us later on.
The Evolution of Investment Banks and the repealing of
Glass-Steagall
We
started the meeting talking about the evolution of the investment banking
industry from its inception in the 1960s till today. VJ noted that in his researches on the
industry, in the 70s there was only one investment banking institution on Wall
Street that was a corporation, all others were partnerships. It is no surprise that the investment banking
business was considered trite and routine early on because the advantage of a
partnership is that the partners funds are also tied up with the clients and so
the stakes are more involved. In fact,
Kevin mentioned that during his career beginning in the brokering industry,
many of the prominent Jewish firms on Montgomery Street in San Francisco were actually
run by rabbis.
With
the repeal of Glass-Steagall, however, commercial banking institutions could
also become investment banks as well.
The directors of a corporation often have very little of their own money
at stake and so the risks that could be taken with the clients' funds were
higher precisely due to the limited downside for those running the
corporation. The result, which we
witnessed four years ago, are not surprising therefore.
Today,
many of the bell-weather investment banks that existed have either gone bankrupt
or have been absorbed by commercial banking institutions. Bear Stearns is now part of JP Morgan Chase,
Merrill-Lynch is now part of Bank of America, and although most of Lehman
Brothers went bankrupt, a small division was absorbed by Barclays Bank in the
UK. The only remaining large investment
banking firms are Morgan Stanley and Goldman Sachs. It has also been argued that the crisis may
have been mitigated due to the commercial banks ability to absorb troubled
investment banks, however, the counter has been argued with equal vehemence.
Fiscal Cliff and the Historical Tipping Point in the US
Here
is what we can expect to happen starting January 1st, 2013 (provided that we
all do not perish on the 21st of December, according to the Mayan calendar):
-
In order to reduce the deficit by half, it is fairly certain that taxes will
have to go up. Kevin has argued that the
Bush Tax cuts are expected to be extended by another year, but it remains to be
seen and confirmed given the recent indications from Speaker Boehner regarding
the tough negotiations with the President.
-
If the mortgage interest deduction is tapped, it is fairly certain that a blow to
home prices will ensue as this is value now taken away from the owner of the
asset (in this case, real estate). Home builders
(KB homes, DR Horton, Beazer homes) and improvement stores (Home Depot, Lowes)
are also likely to take a hit.
-
There are slated to be cuts in defense spending, so companies that have exclusive
contracts with the US government, like Raytheon and Lockheed Martin, will take
a hit. Kevin stated that due to the uncertainty
of what will be cut and of what magnitude, he had to collect his profits on an
position in Lockheed Martin and he mentioned that he most certainly was not the
only one doing this.
All
this talk about the "cliff" we are approaching, led Kevin to
reminisce about the America whose shores he
came to in the 1950s and how the
pillars of this great nation have been weakened over time. He remarked that the tipping point of this
country in his eyes, was the Vietnam war as it was not only a very costly war,
financially and geo-politically, but it was really the first war that the US had
waged which did not garner support from home.
He mentioned how he remembers the weeks on end of continuous
protest. VJ added interestingly enough
towards the end of that war, President Nixon took the US off the gold standard
and the purchasing power of the dollar has, in time, steadily declined.
Kevin
also mentioned that it is convenient to say that the problems we are facing
happened overnight, but that would not be true and that the country has been in
a steady decline in his eyes for several decades now.
Accounting Scandals
Our
discussion revolved around the recent accounting allegation made by HP against
Autonomy corp, a company HP acquired, which claims it lied about its finances
before being acquired.
VJ
recounted one of the most "creative" accounting methods used by
Arthur-Anderson in the Enron scandal.
This is all detailed in a great documentary called Enron: The Smartest Guys in the Room (a clip of the CEO is provided
below).
Enron
for many years, was able to fool analysts from even very prestigious investment
houses for over a decade, before the house of cards collapsed. The principal method they used was to build a
shell corporation that would account for all the losses and by also accounting
for all prospective revenue for any project and reporting them as revenue for
today. Interestingly enough, the
analysts were totally confident and collectively bought into the hubris that
Enron was reporting correctly and there was hardly a tremor or break in the
surface until 90 days before it was declared bankrupt. VJ recalled that in an conference call a
couple months before declaring bankruptcy, an analyst from a small firm asked
the CEO, Jeffrey Skilling, what the small shell company on their books referred
to, upon which, the now-convicted felon, replied dismissively, "That's a
stupid question, what a dumbass! Next
question."
Kevin
recalled an Italian firm he used to be on the board of while working at ITT,
one of the largest insurance brokers in Italy and one of its largest clients
was the Vatican, which insured its Vatican Art Treasures through this
particular company. Every year, the
board would have a party to which two monseigneur would come and they would
personally receive envelopes with a sizable "gratuity" of $70,000
each. Kevin then inquired on how this
vast "gratuity" was accounted for on the books and one of the
directors replied, under the category of "unaccountable expenses".
Steve Jobs - the Zen Buddhist and Peak Performer
(Steve Jobs in his apartment in the 1980s)
VJ
brought up some of the studies he has been doing on the success of Apple
products and also of Steve Jobs, a person who will most likely go down as clearly
one of the great pioneers in the Information Age. The interesting thing about Apple products is
that although technologically, Apple products do not have the maximum capacity,
their user ease-of-access and the way in which technology is used to make life
easier and more accessible for its users are surely huge factors in what makes these
products so desirable.
Steve
Jobs grew up in California, around the Bay Area. He was in San Francisco, the poster city of
the flower power movement. He studied
many philosophies at Reed College as a liberal arts major, among them Zen
Buddhism, which ended up having a lifelong lasting impact upon him. He came onto the philosophy that "less
is more" and that "simple is better". He was also influenced by the Zen aesthetics. Take for example, a
Zen Garden:
Like the iPhone and iPad, both
utilize space as a vital part of its aesthetics.
It is simple and at the same time a beautiful concept.
In
fact, many peak performers, from athletes to captains of industry, often find
that the most productive place to be in mentally is when the mind is totally
empty or having "inner spaciousness", when it is functioning in the
simplest way. Many athletes, in
particular, have stated that the key to peak performance is to remain in a
totally relaxed state.
Elena and Ry - Conflict Breeds Innovation
Elena
discussed with us how she is watching a National Geographic documentary called Mysteries of Mankind which discusses the origin of Man and the evolution
thereof. Among many of the startling
realizations she has come to while watching this series is that one of the
greatest catalysts for innovation has come from warfare.
In fact, she stated that from her perspective
it seems that conflict, in general, breeds innovation.
Ry
mentioned that some of the greatest technological innovations have come from the
wars after the Industrial Revolution. World
War II, for instance, spawned the creation of pressurized cabins, radio
navigation, Penicillin, radar, and, of course, nuclear power and weaponry.
A Brief History of India
After
hearing the shocking revelation that the country of India is, in fact, only 65
years old, VJ gave a brief history of India, discussing all the elements that
he has studied about the county dating back to its origins. It ended up being a fascinating story.
At
the very beginning, around 6000 BC, the Indus Valley civilizations of Harrapa
and Mohenjo Daro had cities up to 20,000 people. These two cities are often regarded by
archeologists and the birthplace of civilization.
The
fact of the matter is that the country of India has not been a united block
until recently. They remained fragmented
and rather isolated, until the thunderbolt in the form of Alexander the Great,
who VJ regards as the greatest military general of all time, came charging in
from the Northern part of India, near the modern Hindu-Kush Valley.
(Alexander the Great)
Alexander
wanted to conquer all of India, and probably would have, had his own army
decided that enough was enough and they wanted to turn around and go home back to Greece,
which is pretty much what ended up happening.
During
300-100 BC, the Indian subcontinent was ruled by the Mauryas, which pretty much
remain set as the current boundaries of India and Pakistan country today. There were other empires that came and went,
but there was no concerted effort to unite the people as Shi Huang Di did for
mainland China. And this remained so for
the next 1500 years.
(Babur, the first Mughal conquerer, note how the similar the words "Mongol" and "Mughal" are)
The
Mughals, who were descendants of the Mongols (aka Genghis Khan), ruled from the
early 1500s until the British arrived in the 1800s. And truly it took the British to rule India
to unite it. VJ argued that modern India
may not have existed today had the British not come. Because of the mercantilist treatment of
India by the British, Mahatma Gandhi was able to unite the Indian people in a
quest for freedom.
(Mahatma Gandhi)
In
1947, India attained independence from Great Britain. That makes this county 65 years old. However, as soon as they declared independence,
there were internal conflicts amongst the Hindu and Muslim people that led to
the split of India into West Pakistan and East Pakistan (now Bangladesh).
(Map of British India)
It
is for this reason, the fragmented history and therefore lack of willingness to
unite towards a single cause, that VJ has believed and continues to believe
that India will have manifold problems in living up to the hype of being an emerging
economy and world power.
Potential Market Plays - Emerging Markets
The
following equities came up during our discussion as potential market plays:
The
Emerging Markets - Kevin suggested that the emerging markets haven't looked
this good in a long time and he is slowly nibbling on the ETFs that have been
discussed in prior meetings. These can
include: FXI (China), EWZ (Brazil), EEM (Emerging Markets), GUR (East Europe), PIN
(India), EWY (South Korea), TUR (Turkey).
Trinity
Biotech (TRIB) - Ry mentioned this may be a good company to invest in giving
their niche target market.
Comstock
Mining (LODE) - A junior miner mentioned by Kevin as having good upside
potential as the neighboring county itself has invested in the success of this
company.
BlackRock
Enhanced Capital and Income Fund (CII) - VJ mentioned that he has invested in
this ETF which provides investors with the premium generated from writing
covered calls.
With the close of 2012, I want to wish all of our readers a very happy holiday season and a happy new year to come in 2013. May the year to come keep bringing more happiness, health, and wealth to our lives!
The
next meeting will be on Sunday, January 6th, 2013.
For
those who have not attended a meeting, but would like to attend, please email
your wish to VJ Arjan at scarletkings@gmail.com
Also I find that there are many domestic and
international readers who are following our blog posts not only in the United
States but all over the world including Europe, Latin America, and Asia. If you
wish to be added to our email list, please email at scarletkings@gmail.com
