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A Better Way…

Kirk SpanoAccording to Warren Buffett, the top 2 investing rules are…

Rule No. 1: Never lose money. 

Rule No. 2: Never forget rule No. 1.  

What we can take from those rules is that the most important aspect of financial planning is having an investment approach that protects you from large losses and still gives you an opportunity to make money over the long-term. Very few people actually have that.

My name is Kirk Spano and I founded Bluemound Asset Management, LLC in 2010 as a response to what I saw the financial industry doing to people. I am widely published, including on MarketWatch.com of the Wall Street Journal network. I have also appeared on television and radio. Take some time to learn for yourself how I have helped people a lot like you. 

What I can tell you in short is this: if the way you have been invested has subjected you to large risks and not given you the returns you hoped for — there is a better way.

MarketWatch  Fox Business  WisBusiness.com  Seeking Alpha

Bridges To Freedom

July 2009

Bridges To Freedom

After taking time off from writing due to a hectic schedule, here we are back again, a couple months into a rally we first talked about potentially occurring in February.  Before we get into any real economics, first a little about a trip I just returned from.

The first week of June I was one of a small group of financial advisors. nationally to be invited to San Francisco to attend the annual due diligence meeting of Highmark Capital Management, an investment management company that provides advisory services for various investment vehicles for sale or use by stock brokers and investment

After arriving at the absolutely magnificent Palace Hotel, I decided to start my first San Francisco visit by being a sightseer.  I lit out on foot from my room and headed towards AT&T Ballpark, which was an obvious choice for me being the Commissioner of the Milwaukee Baseball League.  Along the way, I passed several pubs and bars, which made me feel right at home.  As I walked along McCovey Cove behind the stadium I was able to peak into the field and see what I believe was a workout of players the Giants were considering in this year’s amateur baseball draft.  A pretty cool start to the day in my opinion.

I then walked the Embarcadero all the way around beginning in the South Beach Harbor neighborhood, with stops at the Hi Dive for a fantastic fish taco lunch and interesting conversation, every pier there including Pier 39 where the Sea Lions were holding court and by Alcatraz.  I ended a long afternoon having street crab along Fisherman’s Wharf, chocolate ice cream at Ghirardelli Square and exploring just how emotionally deep it can be to be an art collector at the Franklin Bowles Gallery with Sy Sajid who was great in helping a novice begin to learn.

Throughout the day, there were two structures that stood out, no matter where I was: The Bay Bridge and the Golden Gate Bridge.  I stopped several times to think about just how these awesome structures were built.  I remembered watching the Bay Bridge sway on TV during the 1989 Loma Prieta earthquake that took place during the World Series between the two Bay cities, San Francisco and Oakland.  I could not believe that these massive man made highways did not collapse from the force of an angry earth that day.  The bridges are truly a testament to what mankind and America can accomplish with directed thoughts and efforts.

Economic Earthquake

It is easy to blame capitalism for the problems we face now as an economy.  Put as plainly as I can, capitalism is not the problem, it is the solution.  Over the past decade, it was not capitalism that ruined the economy, rather, it was a lack of ethics and quite frankly very much a criminal element that brought the system down. 

In 1999, the Republican Congress led by Phil Gramm and President Bill Clinton relaxed banking safeguards and oversight by cutting back and in many cases eliminating depression era banking regulations.  While this was not on the surface unethical, it invited unethical behavior across the financial industry a few short years later, as we will once again review.

What I am about to say next is no revelation, and there are several books on the topic: During Alan Greenspan’s tenure as Federal Reserve Chairman he increased the money supply by more than all other Fed Chiefs and Treasury Secretaries of the United States combined, and in turn the value of the dollar decreased by about half in eighteen years.  The effect on our economy was to create back to back bubbles, first stocks, then real estate.  Greenspan himself has said in interviews he misunderstood what was happening in real estate and securities markets.  His misunderstanding, led to two massive collapses, the second of which we are dealing with now.  While what Greenspan did was certainly not criminal, it flies in the face of common sense economics and the ethics of his job at the time. 

Consider this hundred year old quote from a renowned economist which is broadly accepted: ““There is no means of avoiding a final collapse of a boom brought about by credit expansion.”  No Fed Chairman should ever, by ignorance or any other reason, such as politics, help create a financial bubble by monetary policy that can only end in the misery of the citizens of the nation.  Greenspan did just that.  While my criticism might seem harsh I am hardly alone.

With the easy money then, banks relaxed lending standards in line with President Bush’s “America’s Homeownership Challenge” of 2002 which called for the real estate and mortgage finance industries to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities.  Some have noted that hispanics in Florida benefitted in the short run from what was going on, at least through the 2004 Presidential election.  Was there an ethical dilemma here?  Hard to say for sure, but clearly Florida became the focal point of the 2004 election.  At a minimum, banks put immediate profit and financial gain ahead of the sustainable health of their businesses, a problem that plagues many companies.

Another root cause of the financial collapse, which is almost completely and inexplicably ignored by the media, was clearly the Securities and Exchange Commission’s changing of the net capital rule in 2004 that regulated the leverage that the big 5 investment banks– Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns– could employ.  In a NY Times article, it is pointed out that only one dissenter in the SEC, Harry Goldschmid, brought up that if the five firms being exempted from capital requirements had a problem “…it’s going to be an awfully big mess.”  Truer words were never spoken as three of those firms no longer are in business on their own.  The leverage that these firms were allowed to employ directly stimulated the mortgage banking industry into writing bad loans as they did not have to carry the risk of faulty underwriting– or so they thought.  This one piece of the puzzle likely made the collapse worse by a magnitude of at least double, probably triple and possibly much more, only time will tell.

Interestingly, Hank Paulson, CEO of Goldman Sachs at the time, was a major advocate for the rule change.  Two years later, he would become Secretary of Treasury under George Bush, and would preside over the initial TARP funds that were paid out to Wall Street firms.  Much of that money went to retention and other types of bonuses for employees of the failing firms.  Many of the people who received that money had been part of receiving record bonuses on Wall Street during the decade and faced few sanctions or restrictions on income even though virtually everything they had done the previous several years not only collapsed their firms prompting Federal bailouts, but were the catalysts to the American and world economies spiraling out of control.  While I hesitate to call any of the people involved outright criminals, the conflicts of interest are off the charts from an ethical standpoint.

Finally, criminality surged in mortgage origination.  From 2002 to 2004, the Office of the Comptroller of Currency, an office of the Treasury Department, effectively killed the ability of states to enforce their mortgage fraud laws.  In its 2005 Mortgage Fraud Report, the FBI showed that mortgage related fraud had more than doubled from the previous two years.  The FBI later noted that “according to a May 2006 Financial Crimes Enforcement Network (FinCEN) report, finance-related occupations, including accountants, mortgage brokers, and lenders, were the most common suspect occupations associated with reported mortgage fraud.”  In essence, the foxes were in charge of the hen house.  You can find local examples of the crimes that were committed.

There are several other smaller factors involved in the collapse, but those listed are the main links in the chain.  summarizing, we had:

  1. Gramm-Leach-Bliley Bill of 1999
  2. Easy money from the Fed.
  3. Careless underwriting at the commercial banks.
  4. No standard mortgage underwriting by the shadow banking system, i.e. mortgage corporations, structured investment vehicles (SIVs) and various offshore mortgage loan funding companies and investors issuing mortgages without verifying income or job.
  5. Over-leveraging via securitization at the investment banks and lenders taking advantage of Fannie Mae and Freddie Mac loan guarantee systems which were not equipped for the types of risky mortgages suddenly being issued.
  6. And finally, outright criminal behavior at the point of mortgage origination and issuance. 

Crossing Bridges

Right now, the American economy sits at one end of a long bridge.  Unfortunately, it is the end opposite of where we want to be.  We currently have high unemployment, high debt at the household level constraining spending, high debt at the governmental level weakening the dollar and threatening inflation, a significant trade imbalance, a weak financial sector, high healthcare costs, energy challenges and a lack of productive manufacturing.  All of these issues need to be addressed over the next several years.  While some might want to address these issues slowly in a piecemeal fashion, I believe it is imperative that we move quickly and decisively on all fronts lest we risk a massive long-term economic malaise in this country which could cost us many of our freedoms.

The Obama administration seems to agree with my analysis that a go slow approach would court further economic disaster.  In general we also agree on many of the remedies.  My one huge concern is that politics takes precedent over economics– which it usually does– and we cripple the American economy long-term by squeezing out private investment and innovation, which have long been the strengths of America.  We must move quickly, but more importantly, wisely.  We must sustain capitalist incentive, while regulating unethical and criminal gluttony.  And we must do these things without expanding government to the point where it loses its effectiveness as an oversight mechanism and becomes a further bureaucratic burden on the nation– for example, if government were to actually run the healthcare system rather than just setting basic standards and rules (the most important being eliminating pre-existing clauses and underwriting), creating oversight and providing safety nets for the poor.

If we allow capitalism to be crippled and government to grow unimpeded and unchecked, we will not be solving any problems, we will merely be covering up our problems with expensive wall paper.  If that happens, we will lose our freedoms under the yoke of oppressive financial weights, intrusive government meddling and ultimately civil unrest.  While I do not think those worst case scenarios will come to pass, we clearly face decisions today that will impact our children and grandchildren immensely.

With that warning I will simply mention that with regard financial planning, it is prudent to keep extra cash, pay down debts, learn higher end job skills in your profession (or if you are switching professions consider energy and healthcare related fields) and employ a sound investment strategy.

Now, I will hit send, and say goodbye for a few weeks.  I am taking my children to Cleveland to visit the Rock and Roll Hall of Fame and to see a baseball game, Washington DC for Independence Day on the Washington Mall, a lot of sightseeing and a baseball game, and New York to see the Statue of Liberty, Ellis Island and the World Trade Center site.  Have a fantastic, safe and reflective Independence Day.

Cordially,

Kirk Spano

 

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Tactical Asset Allocation

The best offense is a great defense.

Tactical Asset Allocation

Are you utilizing the appropriate defensive strategies for your portfolio?

Today’s economic and financial climate are extremely dangerous and could lead to a large, fast drop in asset prices. Do you have a strategy to get out of the way quickly should that happen? 

“Set it and forget it” methods of investing like mutual funds, do not usually work. So-called “guaranteed” products, like annuities, are expensive, often lock people into low returns forever and aren’t always as safe as advertised. 

Tactical Asset Allocation using some of America’s top financial minds can offer protection that sales driven investment approaches don’t. Call today to find out how a tactical investment strategy can protect your retirement nest-egg and secure your lifestyle.

Punch Card Stocks

Buffett MungerWarren Buffett has famously said that investing in only twenty stocks, represented by a punch card, could improve your financial welfare. That is the impetus behind my “Punch Card” Stock Portfolio. These are the roughly twenty companies that I believe belong in the long-term growth portion of your portfolio and mine. 

Read my columns on MarketWatch, on my websites and elsewhere to see how a slow-handed and well thought out approach to stock investing can control risk and be profitable long-term. Learn more here.

 

Time for a Change

Do you want greater peace, security and freedom to pursue the lifestyle and legacy you really desire?

Do you want to avoid large losses in the next financial crash?

Do you want to take advantage of market opportunities when available?

Are you willing to take a few steps to secure your best future?

If so, call me today: 855445-4321

Monthly Investor Call

The first Friday of each month at 4pm Central. Open to the public.

My next call is on: October 3rd, 2014

To join, follow this link or call 262822-3677. No PIN needed.

Submit questions by email. Podcasts available.

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Kirk’s Recent Quarterly Letters

Freedom to Unite and Invest in Tomorrow

UpWhen I was a kid I dreamed about being an astronaut, a baseball player, a rock star and the President. As I hit my teen years and I hadn’t done much musically, I dropped the Mick Jagger aspirations and focused on baseball. By senior year of high school I knew that baseball was fun, but that I wasn’t an elite player so I had to drop the Robin Yount dream too. 

When I got to college, I focused on having a good time and taking courses that might help me when I grew up. For awhile I thought I’d be a lawyer, but a great uncle gave me some guidance and I decided against that career path. I graduated from college with a degree in economics and a second in political science with a law certificate tossed in. That’s not what I dreamed about as a kid, but it has proven to be a good direction for me. I got there by taking one step at a time and just not stopping.

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The Great Retrenching Continues…

Total DebtIn September of 2008 I had coffee with a group of executives from local manufacturers, it was just after the financial crash had started. One company president in the group — a particularly political sort — asked me how long the economic slowdown would last? I said “until the middle of the next decade sometime.” He laughed at me.

Fast forward to today. What we know now is that the economy still has not recovered in real terms and that it will be a few more years until it does. The United States is just about in the middle of a demographic depression that can not be fixed with legislation or easy money. We must wait until household formation and spending by the very large millennial/ echo boom generation ramps up. Last year was the first year since 2008 that we saw an uptick in the birth rate, so that is a positive, however, it is only a baby step.

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2014 Another Crossroads

S&P 5002013 proved to be a profitable year for investors. The S&P 500 rose 29% and set new record highs. Global balanced indexes, more representative of most people’s portfolios, also did very well by returning about 20% despite a tough year in China which lost 9%.

The high return of the stock market had an expected effect on people. Many investors started to chase returns and look to be more aggressive after years of being risk averse. The result was that 2013 saw the most money from retail investors flow into stocks since 2000. I discussed this in a November article on MarketWatch titled “How Bad Will New Investors Get Hit.”   

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Volatility, Opportunity and the Next Crisis

Secular Bulls and BearsOver the past several years, I have discussed the monumental demographic changes that not only America is dealing with, but also that Europe, China and Japan are dealing with. The cumulative impact of national and personal debts, de-leveraging from the bubbles of the 2000s and the four largest economies in the world having aging populations has created global demand destruction that is not likely to end soon.  

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