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Friday, May 17, 2013

Cynics and Skeptics Wanted

It was worth some sadness I read of the passing of Alan Abelson last week. I have been reading him since I was a younger man ducking out of work doe a few hours to hang around in the old EF Hutton office instead of selling the insurance I was paid to peddle at the time.   I will miss his elegant writing style and commentary. Most of all I will miss his skepticism and cynical view of all things Wall Street. He was often derided for always being bearish on the market and the world but I always thought that was wrong. He was not so much bearish as skeptical about the claims and predictions offered up for the investing public by the cheerleaders and salesman.

We have plenty of cheerleaders on Wall Street. The sales machine of the Street is always bullish it seems. In a world where we have been sold such things as the 10% a year average return as an ATM for investors and brokers offered accounts funded by home equity right before the crisis kicked in back in 2007 we need a cynic or two to make us question the sales machine. Someone needs to cast a cynical public eye at  an industry capable of combining packages of garbage together to make an AAA security.

The unfortunate truth is that the relationship between Wall Street and Main Street is often adversarial. The Street exists to sell stuff and they often manufacture stuff that is not really good for us and hide the fact in a 400 page prospectus. In the course of my career I have seen tax shelters, leveraged bond funds, real estate limited partnerships, structured notes and a host of other really bad products hoisted on the investing public with promises of safe high returns. I have seen analysts strongly recommend stocks they knew were garbage and Investment bankers bring companies to market they knew would fail. In such a world having a good old fashioned skeptic around can help us protect our net worth.

It is not just the Wall Street folks that are worthy of a healthy dose of cynicism either  We find that economic reports released by governments around the world are often structured to tell a story more than provide information. Unemployment rates are lowered by adjusting the work force size. We see the unemployment claims numbers seasonally adjusted so that the official number goes down when the real number goes up in a given week. The headline number of most of these reports is what everyone follows and too few take the time to dig into the guts with a cynical eye.  I have seen stocks go up because stock and bonds went up enough to the prior month to jigger the Leading Indicators into positive territory. While billions of dollars are chasing the headline it helps to have some scratching their head and telling us these numbers just do not look right.
We see big promises and promises of enormous potential in individual stocks all the time. Company management with the assistance of Wall Street often brings us stocks that will be the next big thing and industries that create a new paradigm.  We regularly see Buy ratings on stocks with triple digit earnings multiples that actually have a negative earnings yield. Income statements can be constructed so as to say almost anything management desires.  Investors are sold hopes, dreams and growth at any price all the time. There needs to be someone who points out that everything has a value and even greatness can carry too high a price tag. Someone needs to remind investors that books can be cooked and that not all geese are golden.

Being a skeptic or cynic on Wall Street can carry a high price tag. For most of his career Mr. Abelson was vilified by the cheerleaders as a nattering nabob of negativism. Cynical newsletter editor Jim Grant often takes the same kind of heat and our own Doug Kass has felt that heat for some of his bearish and cynical comments. Jim Cramer can suggest buying fifty stocks in a row but when he points out that a market darling may be over priced the Twitterverse lights up with hateful commentary of 140 words or less. People like the eternal optimist and the truth is that hopes and dreams sell. They do not always work but they do sell.
We need the cynics and skeptics to point out that not everything the sales machine is selling is good for us. 

Someone needs to remind us that salespeople, fund managers and even our government have an agenda and it does not always fit our own. Someone needs to occasionally point out that valuations matter and that trees do not only grow to the sky they often collapse under the own weight with disastrous results.  Someone needs to be monitoring the quality and fit of the emperor’s outfit and that task falls to the cynical skeptic. We need them far more than they need us.

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