June 19, 2012

Greecing the Skids

The Investment View from Prescott, Arizona

By Will Hepburn 

The central themes of the financial markets are still job creation, a weakening economy, the presidential election, and Europe.

This newsletter is being written on June 17th, just before the elections in Greece which are garnering more scrutiny than any foreign election I can remember. The elections are expected to have a major influence on financial markets, but the question is: how?

The most popular scenario has Greek voters thumbing their noses at those who have been providing financial bailouts, but this is pretty obvious and when something is obvious, it often does not work out in the stock market quite as expected.

With everyone expecting this outcome in Greece, it is possible that the elections could be construedas “not as bad as they could have been” and produce a yawner in the financial markets.

If things get really ugly, I would expect the Central Banks, probably Europe’s, to step in and provide money to prop up whatever is at risk of collapsing.

Trying to guess what will happen and how to position one’s investments is fraught with error.  It is just best to hold a conservative portfolio and just watch.

Spain recently pumped money into their banking system, which may be good in that it will keep the wheels from falling off of their economy for a while longer.  But the way Spain did it bothers me.

In return for the money they gave the banks, Spain received bank stock.  Stocks are the most risky form of investment because if the company fails, and banks are companies, stock holders get wiped out first and bond holders get what is left.   This method of financing puts the Spanish taxpayer at “first risk”, meaning that if there is a loss, they get hit first.

As John Hussman, manager of the Hussman Funds puts it, this financing method means governments are protecting speculators and socializing losses.  I believe earlier investors should be forced to bear the cost of their poor decisions and take some losses.  How else will they ever learn to be better investors?  That is the mechanism that makes capitalism efficient.

I find it fascinating that the media labels groups that protest Wall Street’s actions as socialist, when all around us governments are socializing one loss after another, protecting the large bondholders and in the process, benefiting Wall Street firms at taxpayer’s expense.

The US government used this same tactic in some of their bailouts a few years ago.  So, is Wall Street capitalistic or socialistic?  It is getting hard to tell, and that is what is so fascinating about watching this all unfold.

Will

Will Hepburn is the President and Chief Investment Officer of Hepburn Capital Management, LLC, in Prescott, Arizona. He specializes in developing, implementing and teaching innovative investment strategies that Adapt to Changing Markets^®.

Will began helping clients make smart decisions with their money in 1977. He practiced as a Certified Financial Planner from 1994-2006, and currently focuses exclusively on investment management.

His academic record includes a major in business and economics at Ottawa University where he studied under Dr. Wayne Angell, a former Federal Reserve Board Governor prior to transferring to the Institute of Computer Technology in Chicago where he graduated first in his class. He has also completed a number of post-graduate level courses with the College for Financial Planning in Denver.

Will is also a college instructor. He taught classes on investments and estate planning at Yavapai College in Prescott, AZ for 20 years. His articles on financial topics have been published nationally and his ideas have been included in best-selling books such as Rich Dad, Poor Dad, by Robert Kiyosaki and leading investment newsletters such as Dow Theory Letters and John Mauldin’s Thoughts from the Front Line. In addition, he frequently gives expert interviews to national media, including InvestmentNews, Kiplingers, Forbes, Fortune, CNNMoney and The Wall Street Journal. Will is a past-president and currently on the Board of the National Association of Active Investment Managers (NAAIM).