Meeting Minutes

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