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The Quarterly Report

  • The Quarterly Report
  • Third Quarter 2009
  • Chuck Osborne

My Turn

This fall, we commemorate the one-year anniversary of the financial meltdown of 2008. What a crazy ride it has been. In many ways this crisis actually has been good for our business in that we have gained several new clients, I – like most of us – still wish it had never happened. Life seems to be getting back to a new normal, and seven months of positive returns have calmed nerves and somewhat restored portfolios. This calm has given me time to reflect on the past year.

For most of the past year it has been our role to calm our clients’ anger and fears. We have tried to rise above and to bring rational thought to what was an emotional rollercoaster. We feel privileged to have helped our clients through this process and to have been the grateful recipients of unsolicited gratitude as well as the sounding boards to whom some of our clients have vented. I am proud of the Iron Capital team and the fact that we have performed far better for our clients than most in the industry, and yet I wish we had done better still. Now that some calm is here, it’s my turn to vent a little.

There are many things that stand out in my mind over the last year, but none irritate me as much as the media coverage. Much to my dismay, somehow in 2008, I and everyone else who works in the financial industry became a “banker.” I’m not sure how this happened, but it did. Almost every story about the crisis describes all kinds of people as “bankers.” I have read about the bankers at Merrill Lynch, the bankers at Goldman Sachs, even the bankers at AIG.

I’m not sure if the average lay person can understand how distressing this is to those of us in the financial sector who are not, in fact, bankers. With all due respect to my banking friends (and I do have several), most of the rest of the financial world thinks of bankers in the same way novelist Tom Wolf describes them in A Man in Full – bankers are the people who finished last in their class at business school.

Of course the media are trying to simplify things by using a somewhat generic term. They don’t want to explain the difference between a retail banker, a commercial banker, an investment banker, an analyst, a trader, and a portfolio manager. Let’s just call them all bankers. What is the problem with this?

The problem is that it was the non-bank financial firms that got us into this mess. The epi-center of the financial crisis was Freddie Mac and Fannie Mae – government agencies, not banks. Bear Sterns was the first victim – not a bank. Lehman Brothers and AIG were the biggest problems – guess what, not banks. Yet over the last several weeks there has been much talk about the new regulations finally coming out of this. The grand total of these new moves is the consolidation of some of the various banking regulators and the creation of a Consumer Protection Agency to police bank products. These proposals may or may not be good, but they certainly do not address any of the issues exposed in the crisis.

This is not the only area where media coverage has let us down. As John Maynard Keynes once pointed out, “Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be.” Our modern media has certainly taken this to heart. The Nightly News should be renamed The Nightly Polls and Pundits, as this is about all we get. My favorite example is from a report I heard on CNN early one morning as I was about to board a plane. This was shortly before the ’08 presidential election and CNN was breaking a story about how most Americans blamed the Republicans for the crisis.

What ever happened to true experts? I could be wrong, but I believe we are living at the height of the uninformed strongly held opinion. I guess to prove that I would actually have to conduct a poll. Instead of experts, today we have opinion polls and political pundits. Benjamin Graham once said, “You are neither right nor wrong because the crowd disagrees with you. You are right (or wrong) because your data and your reasoning are right (or wrong).” Just because the poll said Americans think the Republicans created the crisis does not mean that is true – or false. It has no bearing whatsoever on solving anything.

I do realize experts are boring, and they typically do not present well. They tend to offer a long, detailed, often complicated analysis of the issues, and we no longer have the attention span to deal with such. After all, who needs to study books when you can simply find all the answers in a one-paragraph entry on


This phenomenon is not directly related to the financial crisis, but it sure has impacted the aftermath. Barely one year from the apex of this crisis and revisionist histories are already being written. The problem is that the true causes of this crisis are very complicated, and our modern media doesn’t do complicated. They do pundits and polls.

One of the issues coming out of this era of the uninformed strongly held opinion is that pundits don’t just pick their point of view; they actually get to pick the facts. I have read several articles that will have a sentence beginning something this one from a recent issue of The Wall Street Journal: “The fact that our current troubles are the consequence of government’s withdrawal from the economy…” This is not, in fact, a fact. The person who wrote this obviously has never worked in our economy. Government is everywhere in our economy. The author may believe we have too little regulation, and he is certainly entitled to that point of view, but that is his opinion, it is not a fact. This is, in my opinion, the primary reason our politics have become so hateful: people with differing points of view can intelligently debate each other and remain respectful, but people who choose to make up facts cannot be reasoned with.

Unfortunately, this particular fiction is fast becoming consensus in government circles. The danger of this avoidance of the truth is that we will end up not addressing the actual causes of the financial crisis. If we don’t address all the causes we will be doomed to repeat this chapter of our history. It won’t be exactly the same, but we’ll face these issues again. To paraphrase Mark Twain, history doesn’t exactly repeat itself, but it sure does rhyme.

One year after the apex of this crisis, not only has government gotten off clean in the media consensus view, but the real attack is on capitalism itself. Michael Moore has a new movie out entitled “Capitalism: A Love Story”. I have not seen the movie but I have read interviews with Moore about it. In one interview Moore states, “Capitalism is evil and you can’t regulate evil.”

He goes on to argue that capitalism is a big scam that was devised by the rich to convince the regular folks that if they worked hard, they too could be rich one day. Moore says this is a big fat lie. I’m curious how Moore, the child of a secretary and a factory worker who has become a multi-millionaire movie producer, explains his own life story under this “big fat lie” theory.

Ayn Rand once said, “The hardest thing to explain is the glaringly evident which everybody had decided not to see.” The overwhelming superiority of capitalism over every other economic system is so glaringly evident that it is indeed difficult to explain. Yet people like Michael Moore condemn the very system that makes their material existence possible. Moore is a poster child for capitalism, yet he condemns it.

Perhaps the best way to explain it is to go to the dictionary and define it. defines it as follows: an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth. In other words, capitalism is simply a system of private property. When we think of property we tend to think in big wealthy terms, but property begins with a much smaller radius. It begins with your ownership of yourself. Capitalism is freedom, and to call it evil is the mother of all uninformed strongly-held opinions.

In The Seven Habits of Highly Effective People, Steven Covey points out that effective people focus on what they can control. In this article I have taken my turn to vent about what I think is wrong, however I have no control over the media, or public perception, or the overall direction of our nation. I and the rest of the staff at Iron Capital can control only how we react to these forces and how we allocate our clients’ money. The current attacks on capitalism and the resulting growth of government will have the same negative impact it has always had. In the 1930s and the 1970s, these same forces brought us economic stagnation, high unemployment and markets that were volatile but went nowhere. On the bright side, these decades also gave us investment greats like Benjamin Graham and Warren Buffett. There will be positive investment opportunities and we will find them for our clients. That is my pledge to you. This too shall pass, and the pendulum will swing back. Truth has a way of coming out in the end. We may be heading into a dark chapter, but the American story isn’t over yet.


Charles E. Osborne, CFA, Managing Director


Review of Economy

THE ECONOMY IS EXPECTED TO HAVE GROWN 3.1% in the 3rd quarter as measured by GDP. This follows a 0.7% decline in 2nd quarter GDP. The recession is officially over, but it may not feel like it, as this recovery may be one of the slowest in history.

Unemployment is the real story as we are at 9.8% and climbing. There are no signs of the job market improving anytime soon. This is not going to happen until we get real growth in the economy. Unfortunately we are facing the most anti-growth policies we have seen in this country in over 30 years.

There has been a disturbing increase in protectionist trade policies, most notably the tariffs on Chinese tires. The previous administration tried to do the same with steel, to disastrous effect. We are facing a new health-care tax, a new cap and trade tax, and more regulation at every turn. These policies will all act as economic brakes, slowing progress. One can argue these policies are worth it for the greater good. It is not our role to judge such things. However, the economic impact and therefore the impact on our client’s portfolios will be negative.


Review of Market

THE MARKET KEPT ON GOING THIS QUARTER. The S&P 500 was up 15.61%. This rally is beginning to look a little too good to be true. It started with the realization that things were not as bad as the end of the world view had painted them to be. It was boosted by better than expected earnings in the 2nd quarter and now we are up  19.26% year to date. Value outpaced Growth, as beaten up financials continued to rally. Small value was the best place to be in the quarter, with the Russell 2000 Value index up 22.7%.

Emerging markets continued to shine. While China has gotten a lot of attention it has been Brazil which has been the best place to be. The MSCI Brazil index is up 102% year to date. Even after this run the developing world seems to be providing better long-term growth prospects as their markets continue to mature.

Market Forecast

WITH THE S&P 500 UP 19.26% YEAR TO DATE, our 9% forecast looks as conservative now as it looked optimistic in February and March. It is hard to see how this market can continue its meteoric rise. However, it is also difficult to see any meaningful pull back. We think we will be range bound from here, but we are increasingly cautious.

Emerging markets and domestic small caps seem the best opportunities for continued growth. International continues to surprise on the upside but it is hard to believe this is sustainable. Currently corporate earnings are being helped by a rebuilding of inventories which had been drawn down during the height of the downturn. The question remains, where will growth come from when that is done? Until that question is answered broader markets will not do much of anything.

We still believe the opportunities in bonds are in the corporate and high-yield bond market, but for different reasons. Treasuries, usually the safe haven, continue to look dangerous. The record spending spree raises the fear of inflation. The dollar continues to drop like a rock. China and Russia are pushing for an alternative to the dollar as the default international currency. These trends do not bode well for treasuries.