Tag Archives: Investments

So Many Mice. So Little Cheese.

Thanks to Wall Street’s Marketing Machine, most individual investors continue to invest their own capital in mutual funds.

Mutual funds, for all of the foibles, remain the de facto Main Street investment vehicle. But why?

For one, Wall Street spends billions per year touting the funds. Then, Wall Street’s minions, the 50k financial advisors working for the major brokerages, also use them. Not for themselves. But for their clients. They require less effort. Less expertise. Utilizing mutual funds, an advisor can play more golf, do more marketing, and still get paid.

I’m not saying that all mutual funds are terrible. Only the ninety-five percent utilized by most investors. That is, the ones you use.

Actively managed mutual funds attempt to beat the market by purchasing a portfolio of stocks that will outperform the benchmarks. These bright, capable investment professionals usually have the best of intentions. Yet, their task is difficult.

Most mutual funds charge fees and expenses in the one to two percent range. These fees are charged based upon the assets under management. The more assets, the more fees, the more money is made. Accordingly, the incentive is on gathering assets. Not performance.

As mutual funds grow in size, they become less flexible in terms of the potential investments they can make. The investment policy of most funds forces them to avoid small, conceivably risky companies in order to invest in large, blue chips with huge amounts of liquidity (shares traded).

Therein lies the rub.

Most of these funds end up owning the same large, easily researched blue chip stocks. These blue chip stocks do not typically provide outsized returns to the average investor. In fact, most blue chip banks, consumer products and technology companies consider it a point of pride if they’ve managed to keep pace with the benchmarks. Once the fund’s fees have been subtracted (not to mention those of the advisor), any outperformance is negated.

Next, consider that most mutual funds own between seventy five to two hundred stocks. For the quantitatively gifted, it is difficult to assess the proper valuation of ten companies. One hundred or more? Well, you need more than an abacus.

Even with ability to accurately value many companies, the idea that the market will price a handful of those a fund manager is following at substantial discounts to intrinsic value is highly unlikely.

Further, having so many small positions in so many companies ends up detracting from the value of the occasional home run. A fifty percent gain in a position that represents a half of one percent of the portfolio ends up doing little for your financial prospects.

Another problem? Keep in mind that fund managers are essentially boring. Not saying they make bad company. But, that their investment policies make them predictable and monotonous. Yet the market is anything but.

That is to say that fund managers pay little mind to events that often create alpha, or market outperformance. Like stock buybacks. Corporate spin offs. Restructurings. Bankruptcy turnarounds. Negative headlines.

These are the situations that bring markets to misprice a company. These are the situations that create discernible opportunities.

In other words, most mutual funds are buying two hundred stocks because they feel these companies are positioned to do well over the long run. So, when the market goes up, these companies follow. And when the market goes down, these companies do the same.

Require anecdotal evidence?

Consider Chemed Corporation. In May, the stock went from $82 to $63.90 when the Justice Department announced an investigation into the filing of false Medicare claims. Not the company’s first rodeo. Hospice and long-term care facilities, like Chemed’s, face such occasional allegations.

We know that Chemed’s healthcare and plumbing businesses generate lots of cash. We also appreciated the company’s low price-earnings-to-growth ratio, which represented an attractive current price versus Chemed’s future earnings.

So, we purchased some Chemed. Shares rose to $75, and currently sit at $72.

There is yet another problem endemic to mutual funds.

Smaller, more esoteric companies are more likely to be valued at substantial discounts to their intrinsic values. There are many more small than large publicly traded companies. They are lesser known. Not as widely followed. So, there exists much more opportunities for mispricing.

Moreover, smaller companies, when valued appropriately, are more likely to provide the outsized gains fancied by most investors.

Unfortunately, most actively managed mutual funds cannot buy them.

Many fund regulations require that no fund can own more than 10 percent of the shares of any company. Smaller companies have smaller floats (amounts of shares outstanding).

Nor can any position typically represent more than five percent of a fund’s portfolio. Leaving most funds unable to invest in companies with market caps below a certain level, and severely limiting their abilities to find small, exciting opportunities.

Most funds cannot even invest in stocks trading at less than five dollars per share. Talk about a handicap.

All of which prevents funds from taking large, concentrated positions that would potentially reward the rigorous analytical research of lesser know yet altogether viable companies.

Remember, even Microsoft once traded for less than a dollar.

If the stated goal of most mutual funds is to outperform their respective benchmarks, then the best approach would be to:

1. Consider investments in the thousands of lesser-analyzed, smaller-capitalization stocks that exist in today’s markets…

2. Take fewer, more concentrated positions after rigorous analytical efforts have translated to strong investment convictions…

3. Lower those often cumbersome internal expense ratios to a point where the fund has a chance to outperform with more regularity…

4. Quit rewarding mediocre fund managers with billions of dollars in new assets.

From 2000 to 2009, the S&P 500 averaged a negative one-percent annual return. That same decade, the average investor lost 11 percent per year. Poor decisions. Poor timing. High fees. Bad funds. Not to mention the hundreds of biases and psychological barriers most investors can never overcome.

Today, the onus is increasingly on individual investors to achieve some semblance of financial independence. Thus, the last thing investors need are lemons parading as Ferraris. That is, well-marketed investments offer mediocre returns. Yet, that is what most actively managed funds provide.

Hyde Park Wealth Management’s Core+Alpha methodology endeavors to find those yet-to-be-developed areas of the market. Once established, our portfolio managers buy land before the developers, surveyors, bulldozers and occupants arrive in mass.

The method employed by most mutual funds is more akin to flipping homes in midtown Manhattan. Loads of work. Low margins. Intense competition. Low returns.

Yet, fund flows reveal that Main Street continues its abusive love affair with the mutual fund industry.

The average mousetraps, billion-dollar advertising campaigns, and legions of salesmen posing as advisors have kept the mutual fund industry fat and happy. Even as over 70 percent of actively managed funds do not outperform the S&P 500 index each decade.

To outperform the market, one must invest differently than does the market. But, when fund managers can make king’s ransoms by surviving, why build a better mousetrap?

Especially when the mice are willing to settle for so little cheese.

Nostradamus and the Perils of Forecasting.

Every human being reflects back on childhood moments. Certain memories bring a smile. Others, not so much. On occasion, we bore witness to something not meant for tender, eyes.

Like when a bus driver announced to a load of third and fourth graders that Santa was not real. Still painful. Though, not nearly as painful as the caustic earful the bus driver got from my mom.

My cousin was once allowed to watch The Texas Chainsaw Massacrewith his father. He was six. Nearly three decades later, he is still not right.

Perhaps my seminal “What The?!” moment was when the seventh grade social studies teacher at my catholic grade school decided to show us a documentary entitled The Man Who Saw Tomorrow.

Narrated by Orson Welles, the movie details the life and work of Michel de Nostredame (AKA Nostradamus). Nostradamus was a sixteenth century Frenchman who, reportedly, had the power to see into the future. The guy was an oracle. He wrote a book entitled The Prophecies in which he compiled all of his long-term predictions.

Throughout his life, Nostradamus made lots of forecasts. Over the centuries, his supporters have celebrated their accuracy, claiming that these broad, often open-ended suggestions had accurately predicted many of history’s most compelling events. The Crusades. The Ottoman Empire. Christopher Columbus and the New World. Napoleon. Hitler. The Kennedys. 9/11. Among others.

To his critics, Nostradamus was an astrological quack who leveraged the notion that while history may not repeat, it certainly rhymes.

So anyways, back to 1982.

There we sat, a bunch of catholic seventh graders in Cincinnati, Ohio (translation: very sheltered), watching this movie narrated by one of the most imposing voices of all time.

Most of the forecasts could have made the cover of the sixteenth century’s People magazine. Affairs. Political intrigue. Power couples and religious wranglings. However, it was the movie’s conclusion that forever seared its ghastly impression upon my 12-year old, catholic, not-yet-tainted cerebrum.

That was the scene in which Orson, bellowing in his most intimidating baritone, describes how Nostradamus essentially forecast The End of the World. Which was tweaked to play off the the geopolitical headlines of the day. Remember, it’s the early eighties, people.

Anyway, according the Orson, Nostradamus saw the end of the world presided over by a cackling madman in a blue turban somewhere in the Middle East. Welles called him “The King of Terror.” Seriously.

So, The King of Terror is portrayed standing (and crazy) before a bank of computers. He is rejoicing as volleys of missiles fall upon New York like the first snowflakes of my idyllic Midwestern upbringing. Except, instead of snowflakes, it was a nuclear hellstorm. And Welles is calmly discussing how “fire would rain down from the heavens.” That, the sky in New York City “will burn at 45 degrees, as fire approaches the great new city.”

Nostradamus predicted that WWIII would last for 27 years, at which point the United States and its allies would overcome The King of Terror (translation: Islamic fundamentalism). The imagery showed cities burning. Mushroom clouds. Like Happy Days. But with Zombies.

Suddenly, it was over. Lights on.

There we sat. 25 seventh graders. All of whom now knew when, more or less, the world (as we knew it) would end.

“Alright kids. Quiz tomorrow. Then we’ll watch a movie in religion class about the lives of priests. It’s called The Exorcist. Enjoy!”

With that, 25 little lambs shuffled silently forth, stunned by what we’d learned. Do I tell mom? My brother? Can they handle the truth?

Still, on occasion, I recall with dread the silent hysteria that swept through that little classroom as the King of Terror fired missiles like water balloons at cities across the world.

Nostradamus was an analyst. A forecaster of historical events. Plenty of analysts make livings by attempting to forecast the future. Politicians. Economists. Stock analysts. Odds makers. Gamblers. Pollsters. Sometimes they’re right. Sometimes they’re wrong. Some are more effective than others.

John Paulson made $16 billion forecasting the crash of the housing market. Lehman Brothers missed it and went bust.

Recently, The New York Times’ Nate Silver, who writes their FiveThirtyEight blog, accurately forecast the outcome of the election. Leading up to election day, Silver was oft mocked for his pronouncements and ill-seeming confidence.

Yet, when the fog cleared, Silver had been right. Precisely so. Why? Because he applied a strict methodology steeped in empirical evidence, facts and figures. Leaving his confirmation bias at home, Silver sought to determine the probably outcome. Not to simply dig up data that bolstered his own opinions.

Facts and process trumped bias and hope. They always do.

Which is why, in the game of investing, it is incumbent upon every investor to have a well-conceived game plan when allocating capital. A game plan that seeks to benefit by market upside. And seeks to preserve capital when markets fall.

Investors need consider a more defensive posture for the time being. Too many shifting tectonic plates. To do otherwise is to expose one’s self to inordinate amounts of risk.

Given the uncertainty surrounding the fiscal cliff, U.S. budget and European debt issues, we would espouse the following 10-point plan as you look to solidify your year-end financial planning:

1. Refinance mortgages at the current record-low interest rates.

2. Limit exposure to overly concentrated stock positions, especially within corporate retirement and profit sharing plans.

3. Seek out stable, dividend yielding investments like blue chip stocks and dividend-oriented indexes. This will provide continuing income streams as well as a buffer against volatility.

4. Keep bond durations short, which will protect against future interest rate increases and the corresponding volatility.

5. Set trailing stops in order to avoid precipitous declines and lock in available profits should such declines occur.

6. Befriend volatility, by consulting with a trusted advisor on how to play the volatility index, hedge against rising volatility, or seeking out vehicles that perform well in such circumstances.

7. Diversify by investment styles and methodologies by averaging into vehicles meant to perform well over the long run, while trading in specific vehicles with more positive short-term prospects. And have a methodology designed to get into, and out of, every position.

8. Defer to cash. Allow trailing stops to get you out of rapidly falling investments. Patiently identify positions you’d like to own should they achieve certain entry points. True, the dollar may be the prettiest horse in the glue factory, but in the short run, it could appreciate over the next six to twelve months as the euro and the yen continue to navigate their own difficulties and global investors continue to seek a safe haven.

9. Seek out real growth. That is, find those areas around the globe that offer solid growth with lower debt. These areas can include many of the world’s emerging markets, which (like their developed market counterparts) currently provide 40% of the world’s economic growth, but hold only 10% of global debt (while their developed market brethren currently hold over 70%). This might include an allocation to EM stocks and bonds, among other asset classes.

10. Don’t panic. While no rational observer will argue the ineptitude of both political parties, there is simply too much at stake for them to avoid diplomacy. Leadership of both parties fears the fallout of not achieving a compromise. Mid-term elections have already begun. Neither party wants to have a trip over the cliff pinned to its resume.

Not as dramatic as Orson Welles preaching Nostradamus’s doomsday forecasts to a class of 12 year olds. But, we prefer to hedge against the worst case scenarios instead of dwelling upon them. Not as sexy as a doomsday prognostication. But, it lets you sleep at night.

Even Dark Horses Eventually Leave the Barn.

As a child, I was spoiled. Rotten.

By the time I was seven, my expectations had become so elevated that disappointment was imminent. Eventually, the harsh light of reality crept over the horizon. Once in view, I saw the light. And was crushed.

You see, I was a baseball fan from day one. The Reds had me at Hello. And having been born in 1969, I was indoctrinated at the onset of one of the greatest teams in baseball history: The Big Red Machine.

I sat on the old man’s lap and watched my first game, chomping nervously on my pacifier, warm milk in hand. Ended up getting so nervous that I drank too much and wet my pants. Sorry dad. But I wasn’t embarrassed. I was obsessed!

How could you not be? Under Sparky Anderson’s leadership, The Reds won NL Pennants in 1970, 1972, 1975 and 1976. They went to the World Series in 1972, 1975 and 1976. They won it all in 1975 and 1976, becoming the fist team since the ’21 and ’22 New York Giants to win consecutive World Championship Series.

Johnny Bench, Pete Rose and Joe Morgan each won NL MVP honors during that run. In fact, Rose was the only one who didn’t win it twice.

During playoff season I would sprint home after Maple Dale Elementary’s final bell in order to watch my beloved Reds battle the Pirates, Dodgers and Cardinals. Could’ve taken the bus. But it was too slow. Every inning counted.

The joy of those days? So simple. And immeasurable.

Well, The Reds made one last run at the NLCS, unsuccessfully, in 1979. By 1980, The Big Red Machine looked more like a vending machine. Its best players scattered to the wind.

The next ten years? A long walk through the desert. Following the success with which I’d been confronted at so tender an age, those 10 years seemed like 10,000.

“Dad, are you telling me that the Reds don’t go to the World Series every other year? And what in the heck is Pete Rose doing in Philadelphia?!”

Point is, cycles end. Rotations turn and favor yesterday’s weakest links, much to the chagrin of those appalled spectators who assumed that success was everlasting.

Economies and the investments therein are no different. Yesterday’s world champions are tomorrow limping losers.

From 1978 through 1999, the S&P 500 index was negative in only two years. Otherwise, investors in large cap U.S. equities kicked butt and took names. Lots of them.

Then, from 2000 through 2002, they did not. Yet, other areas of the market did great. If you weren’t tied down to one team.

Point is, as in life, success – and a lack thereof, occurs cyclically. In a rotation. Losers become winners. When I grew up, the New England Patriots were terrible. Laughingstocks. Look who’s laughing now. Certainly not their poster boy quarterback who also happens to be married to the world’s most highly paid (and reasonably attractive) Brazilian super model.

Five years ago, the very mention of emerging market debt was enough to make the drunkest of speculators risk averse. Emerging market nations were poor. And poorly run. Why invest in foreign bonds that could be more volatile than domestic equities, right?

Rotation shifts. That’s why. Even dark horses eventually leave the barn.

As U.S. earnings as a percentage of GDP reach their highest levels since 1929, and wages as a percentage of GDP reach their lowest since 1937, you simply can’t help but look elsewhere. U.S. Treasuries? Two percent returns. European equity? Don’t even go there.

So what about these emerging markets? What, with their burgeoning middle classes, sparkling infrastructure and thirst for success? They’re like the Dos Equies guy, without the mystery.

I’m not simply talking about their equities. Consider their bonds. Less volatility. Lots of upside.

EM bonds provide 3% to 4% more yield than their U.S. counterparts. Moreover, their debt to GDP ratios? Very American, when America was debt free.

Consider that the G-5, the world’s five largest economies, have 40% of world GDP but 70% of world sovereign debt. Meanwhile, those “risky” EM nations also count for 40% of the world’s GDP, but they have only 10% of the sovereign debt. And their annual growth rates are quadruple (or better) that of their developed market counterparts.

As Spain, Italy and the U.S. begin to droop under the weight of their burdens, Chile, Korea and Columbia are saving their allowances.

Investors can purchase broad baskets of EM bonds through an index. Those indexes can yield nearly 6.5%, a 4.5% spread. With less than 25% of the debt.

On the equity side, while they will remain volatile so long as Europe’s debt contagion rages, EM stocks are trading at a 20% to 30% discount to U.S. equities. If everyone admits that EM nations are the growth engines of the global economy, then why are they trading at such a discount to their aging, over indebted, bickering developed market counterparts?

Exactly. Investing habits, like all old habits, die hard. Like Bruce Willis. Or, Michael Meyers in Halloween 6.

Regardless, they do eventually die. And when they do, you do not want to be the last guy on the deck of the Titanic, still waiting for the waiter to bring your gin and tonic, even as the boat begins to list uncomfortably, and the women and children have all but disappeared.

Navigating Rough Seas.

Stocks sank for a second week. Concerns emanated from the U.S. and Europe, where slowing growth and debt issues continue to haunt us like Rod Blagojevich did the state of Illinois. He left the governor’s mansion, but he remained omnipresent.

Europeans have begun to question the very idea of austerity, having recently awarded political gains to anti-austerity candidates (um, socialists) in multiple countries.

How many socialists does it take to screw in a light bulb? Two. One to screw in the light bulb. And another one to screw everyone else.

The last stop at the end of the gravy train is never pretty.

Domestically, tech and banking bellwethers Cisco Systems and JP Morgan poured gas upon the flames. Cisco, through a poor earnings report. JP Morgan by the revelation of a large trading loss.

Of course, no negative week is complete without a healthy serving of Greek Salad. Amid rumors that political paralysis may force Greece to depart the eurozone, investors got an unwanted helping.

Chinese economic data came in worse than expected, leading many to believe that one of the world’s primary growth drivers may slow.

My grandparents never feared a slowing of the Chinese economy. Of course, my grandparents shared a car and ate liver and onions.

Tit for tat, people.

Technical indicators have officially turned bearish. Likely to remain so through the end of the month. Yet, not all sectors are moving in a chaotic lockstep typically reminiscent of market chaos (think 2008). This tells us that markets could just be consolidating Q1 gains, not falling apart.

Q1’s leaders have been those most rapidly declining. Technology. Financials. And as is typical, not everything makes sense at the time. While the consumer staples index has held up (people always need soap, aspirin and razors), so the home builders and consumer discretionary indexes continue to outperform.

Real estate investment trusts represent another attractive space. Continuing to skip up the 50-day moving average. These investment companies pay nice dividends, provide growth, and have added a nice lack of correlation to stocks and bonds since the market began to decline.

Still, the market has wind in its sails. In fact, Bernanke’s quite the blow hard. Record-low interest rates. A highly accommodative fed. Low inflation.

All of these provide a a safety net. A put contract beneath markets.

Speaking of puts, it was this time last year when the market began to really put it to investors, dropping 12% between May and October. Those losses remain fresh in investors’ minds.

So, what does one do with so much uncertainty?

Well, a good financial advisor is like a sailor. His job is to navigate the waters on behalf of clients. Sometimes seas are calm. Other times, rough.

Like an accomplished sailor, a good advisor understands the sea. Its tidal currents. Lunar cycles. He can read nautical charts. Use a compass. A sextant. Chronometers.

An experienced sailor knows his ship. How to fix it. Bail water. Lighten the load. He understands when one must ride out the storm, and when to out run it.

Experienced financial advisors, like accomplished sailors, have seen tempests before. Ridden the swells. Rolled violently. And returned safely back to port – more experienced and effective for having done so.

He appreciates the power of the sea. Realizes that he must brave the rough to arrive at the calm.

There remain storms ahead. Rough seas to navigate in route to calmer waters. We cannot avoid them all. Yet, we will plot a course and endeavor to pilot the ship, crew and cargo safely back to port.

According to Seneca, “If one does not know to which port one is sailing, no wind is favorable.”

Well, we cannot always control our direction, yet we certainly know the direction in which we’re headed.

The Perversion of an Ideal.

Gingrich is out. Santorum is done. Only Mitt remains.

President Obama officially announced the beginning of his campaign for reelection.

Both parties, their supporters and super pacs are set to get medieval on each other. They’re squared off in a scene reminiscent of the fight from the movie, Anchorman. It’s about to get really, really ugly.

While this political bloodbath rages throughout the rest of the year, the Fiscal Cliff, set to expire at year’s end will only draw nearer. Politicians on both sides of our political duopoly will say much and do little.

By October, my four-year old son will be questioning the very validity of the American dream, so fed up with the political stage play transpiring before us will we be.

Yet, this duopoly that exists so that Democrats and Republicans can, even in the worst of times, keep their fiefdoms intact, is a poorly copied print of a beautiful original.

The United States of America was founded on principals set forth on parchment. Principals that, when followed, pointed to liberty and justice for all. These principals allowed everyone to pursue happiness, dreams and interests, without infringing upon the inalienable rights of others.

Alexis de Tocqueville noted in the early 1800s that Americans pursue their economic interests with passion, while also forming associations to take up public affairs and steward the needs of their communities.

The American calling card was optimism, independence and accountability. To fail was to mean you tried. And one was given the right to fail often along the road to success.

We opened our borders to immigrants, many of whom were fleeing authoritarian, omnipresent states that sought to control every aspect of their lives. Here, they could be free to express, act and achieve in any way that suited them, so long as it did not adversely affect others.

Through hard work and diligence, many of these immigrants charted fabulous successes that continue, even today, to offer guidance and inspiration to those who follow.

At that time, the nation could be likened to the woods beside the neighborhood in which you grew up. Full of adventure. Full of opportunity. Sometimes you would fall down. Hurt yourself. Yet, never so badly that you could not get up. And the attraction to return was so strong that yesterday’s failures were oft forgotten before the new day arrived.

In the woods, you were free to roam. Explore. Discover. Dream. Nobody was there to tell you which trees to climb. Which creeks to walk. Which rocks to throw. Even as a child, you just knew.

Our rugged individualism and sense of right and wrong was respected. We approached problems with a can-do, idealistic and optimistic attitude that caused other nations to gravitate towards us.

Our government was by the people and for the people. Politics were local. The federal government simply stood an army, protected our borders, and saw that the states and localities had what they needed to pursue their interests. Service was honorable. And having served, one then went back from whence he came. To tend to his family, business and get on with life.

This great nation. Having once thrown off the yolk of tyranny, set out to change the world. We kept our minds on what mattered. Improved ourselves. Worked hard. And when history, on occasion, came to our doorstep seeking assistance in the fight against oppression and tyranny, we answered the call. With unbridled optimism and fortitude.

Our heads clear. Our vision resolute. Our balance sheet clean. And our eyes on the prize.

This beautiful, strong, resource-laden nation became exceptional.

Eventually, technology and an all-encompassing 24/7 media complex weaponized the political process. Turned politicians into celebrities. The first time the television turned its focus on the Kennedy-Nixon Debate, a star was born. Advertisers bought more. And coverage flourished.

Soon, principals gave way to promises. Many of them empty and unattainable. Yet, they served to lead these new celebrities to the very pinnacle of power. Where connections, opportunities and access can provide wealth, power and prosperity unavailable to firemen, accountants and teachers.

Today, the United States of America remains exceptional, in so many ways. Even thought many of our politicians dispute the idea.

Our nation’s capital is infinitely more powerful than it once was. It is also a far less attractive and effective place.

Our federal government is the largest enterprise in the history of the world. It consumes more people, capital, time and energy than any other organization that civilization has ever known.

Jefferson, Washington, Franklin, Adams – these gentlemen stood for their ideals. Today’s politicians stand for office. Every two to four years.

Once our political class learned, in the European tradition, how to parse the voting populace according to interest groups, they ceased running on ideals and began running on promises. Most of them empty and unattainable.

And so the next six months will be replete with mudslinging, grandstanding, demagoguery and, occasionally, impassioned pleas centered on theoretical possibilities. Entire speeches will focus on who might get what.

Yet, the America ideal remains exceptional. Emphatically shown by the number of people who come here each and every year in search of their dreams. Even while our government, especially at the federal level, has become a perverted, bloated and empty version of the original.

The next six months, and all of its made-for-television chicanery, will prove this in a manner that is exceptional only for its expense and grandiosity.

Regardless of who wins, there are likely to be few winners.

Hypocritic Oath.

John Edwards will stand trial this week. Four years ago, he was a primary or two from competing for the highest office in the land.

Edwards made politics look easy. Nice suit. Great hair. Bright smile. Kind face. Promise the world–or, at least whatever it takes to get elected. Once in office, he chose to live by a wholly different set of standards.

Could Edwards have pursued and performed other professions in the same effective yet decidedly dishonest fashion?

Depends on the profession.

Becoming a doctor is a different matter altogether. Doctors cannot promise to move heaven and earth. Then, after having failed to do so, use sophistry and half-truths to win back patients’ hearts.

Doctors utilize understatement. Then, they are judged on results.

Conversely, success is politics is largely determined by what you say and how you say it. Still, the differences don’t end there.

First, one must gain entrance to medical school. Then, students endure rigorous four to six year programs that test their mettle at every turn.

Upon graduation, students take the Hippocratic Oath. The oath requires doctors to promise that they will do their best to practice medicine ethically, and in the best interest of patients.

Only then does one receive a license to legally practice medicine.

Recently, I read that Dutch bankers may soon have to swear to a similar oath. One requiring them to put their clients’ interests first.

The laws, rules and regulations governing the means by which we are free to conduct our lives are no less important. They rank right up there with health and money as the most important items with which each of us will contend as we navigate our lives.

So, doctors must swear an oath to practice. And bankers may soon have to swear a similar oath. Should not our politicians have to swear an oath before they are given the right to establish laws? Amend the constitution? Govern our nation’s legal, educational, medical, technological, diplomatic, military and energy infrastructures?

Of course, politics was once a temporary pursuit practiced by honorable men notable experience.

Lucius Quinctius Cincinnatus was a Roman aristocrat, political figure and hero of the Republic. He served as consul, soldier and dictator. His service was notable for, among other attributes, his immediate resignation upon the achievement of the formidable tasks he’d be asked to complete.

He was once called from his farm to serve as Rome’s dictator (the second time he’d done so) when the republic had been invaded by enemies. Upon defeating the invaders, he immediately resigned and returned to his farm.

Contrast the story of Cincinnatus with today’s politicians. Men and women who gain office by scandalizing their opponents as best they can. Once in office, they do everything in their power to remain. Building vast networks of wealthy donors who are granted favors in return for their contributions. They lecture the public on how it should conduct its existence. All the while, they hold themselves to a different standard.

Our politicians utilize a separate healthcare system. They receive better pension benefits than do private sector employees. And often, when in legal hot water, their problems are handled in ways that John Q. Public could never rely upon. Problems disappear. Arrests are suppressed. Illicit affairs are forgiven. And that’s just Edward Kennedy.

Today’s politicians have only one standard which truly dictates success: how much access does one have to monetary resources capable of keeping donors satisfied, their fiefdoms in place and their problems at bay.

The contest is not how to accomplish as much as possible, so much as it is how to remain for a long as possible.

Many of today’s politicians consider theirs to be lifetime appointments. And, once given the next job up the ladder, they do everything they can to secure their position for family or associates. American politics has become big time family business.

Why not force our lawmakers, regulators and governors to take an oath? An oath that demands their abject adherence to honest, ethical practices. To transparent activities conducted in the public’s best interest. To doing their jobs without the intentions of seeking wealth, favors and influence.

Outside of term limits, which might be the most effective step in saving our republic, such an oath might have a positive effect in our ability to remove those who do not adhere to their promises.

An oath requiring the repeal of hypocrisy in our nations’ political offices may help to purge the Goat Rodeos currently transpiring in D.C. as well as in state capitals throughout the nation.

Till then, we’ll get what we deserve. Candidates who will say absolutely anything to attain office. And then do absolutely anything to remain.

Anthony Weiner. John Edwards. Eliot Spitzer. Gary Condit. Jim McGreevy. Rod Blagojevich. Tom Delay. Larry Craig. Mark Foley. All ages. Both parties. Ad infinitum.

We are human. We make mistakes. We deserve forgiveness. But, like doctors, attorneys, nurses, financial planners (and Danish bankers), if you cannot live up to the standards of your position, you should step down. Not waste countless tax payer dollars attempting to remain in office. Yet, our politicians are given too much wiggle room and held to too low a standard.

November’s election will pit two very capable, flawed individuals against each other. Everything they have ever said, done or thought will be available for your dissection. Yet, as in all elections, what these two promise in the heat of battle will bear little resemblance to that which is delivered on the post-electoral buffet table.

Perhaps Newt Gingrich, himself a supremely bright, capable and flawed politician, most aptly summed up our November choice–not to mention our political process, when he recently said: “Would voters rather hear a comfortable and familiar set of lies eloquently repeated by a lifelong politician who has proven himself phenomenally ineffective at actually accomplishing anything or a fresh new set of ever-shifting lies delivered by a gaffe prone, part-time politician who has spent most of his career outside of Washington getting rich by methodically achieving his objectives?”

Cynical indeed. But beneath a cynical surface lay a harsh reality. Recognizable for its truth, as well as its unpleasantness.

Public service will always be conducted by less-than-perfect public servants. Yet, it should at least be conducted in the best interests of the public. Perhaps an oath would better align that which is promised with that which is done. Help to purge the system of some of its hypocrisy.

Till then, we freely choose to defer our liberties to a less than adequate system. And this epidemic of cynicism only worsens. More Blagojevich, less Cincinnatus. Until, someday, the cynicism remains the only part of the process our children recognize.

Spring Break.

Stocks imploded like Jon Corzine’s reputation last week, reacting negatively to weak March employment data and renewed fears in Europe.

After racing out to a 12% first-quarter gain, the S&P 500 packed its bags and took the family south, having fallen 2.7% since April began. Yet, unlike Kim Kardashian’s wedding vows, markets have a reason for their abrupt change in sentiment.

In January, the fear was palpable. Risk was oversold as investors shivered at the prospects of Europe’s implosion and an American recession. By April, investors had relaxed. Fear over European debt issues appeared to have been quelled. The U.S. seemed to be effectively navigating its economic maladies. The VIX index, which measures market volatility, had dropped to levels indicating that investor concerns had flat lined.

So what gives?

In short, we believe that investor confidence is realigning with the dangers that continue to threaten global economic and corporate earnings growth.

Investors are frequently lulled into a state often occupied by J Lo on American Idol–completely oblivious to what is occurring around them. Now, investors are being reacquainted and coming to grips with the very real problems that left the front pages, yet never disappeared completely, only a few months ago.

Iran and the Cost of Oil

Global energy prices continue to rise as geopolitical spectators consider an Israeli attack on Iran’s nuclear infrastructure. Analysts agree that the window is closing on the West’s opportunity to prevent Iran from going nuclear. Iran contends that its nuclear ambitions are peaceful, and as legitimate any nation’s right to develop nuclear energy sources.

As the saber rattling continues, the fear is that Israel could strike at any time. At that point, Iran’s probable reaction would be to mine and shut down the Strait of Hormuz, which connects the Persian Gulf to the Arabian Sea, and through which 20% of the world’s oil passes.

The strait is absolutely critical to the world economy. Should it be closed, oil costs and energy prices will spike. The fear is that this will kill an already tenuous global economic recovery.

China’s Growing Pains

There is no doubt that China’s economy has slowed. The question is, how much?

The world’s second largest economy expanded at its slowest pace in three years last quarter, growing at 8.1%. Last year saw the Chinese economy expand by 9.2%.

While many economists feel the slowdown is a natural deceleration, the ramifications of a Chinese hard landing are vast. China is a key market for most of its Asian neighbors. If China begins buying fewer imported goods, their economies take a hit.

Further, China’s ravenous hunger for the natural resources and commodities needed to fuel its infrastructure development has been a key contributor to the economic well being of many other nations. Should that slow, or worse–contract dramatically, the ripples will be felt throughout the global economy.

A Farewell to Easing

The Fed has recently disappointed markets by explaining that the strength of the U.S. recovery likely means an end of quantitative easing (QE). This is significant, because the stock market loves QE like Star Jones loves air time. QE puts cash into the system. That cash needs a place to go. It often ends up in the stock of publicly traded companies.

QE (cash injections), low interest rates (easy money) and low inflation (predictable purchasing power) represent a powerful cocktail of stimulants capable of sending even average stock markets higher. In fact, we would argue that these are the three most powerful variables necessary to any upward trending market–outside of improved earnings.

So, when the Fed says that it will no longer engage in easing activities, the market reacts like Andy Dick in rehab. Not pretty.

The Pain in Spain

Considering all of the usual suspects in the European debt drama, Spain is the new Kaiser Sohze.

Yields on Spanish bonds have been spiking. Credit default swaps on the bonds of American banks having exposure to Spain have jumped. This means that the market believes there is an increasing opportunity that the Spanish economy (and its banks) may collapse.

Spain is already enduring a severe recession, and will likely require a bailout by the European Central Bank this summer. The Spanish stock market is down 10.8% this month alone. That is ominous, as the stock market is generally a leading economic indicator.

Worse, Spain was one of the main beneficiaries of the recent European Long-Term Repo Operation, and yet it is still coming apart. Why? Because the values of Spanish sovereign bonds are declining quickly, crushing the balance sheets of the Spanish banks. So, in addition to the nation’s fiscal crisis, you now have a potential banking crisis.

All of this ends up looking like another Greek-style bailout, accompanied by another decimation of private creditors. All at a time when Europe can ill afford any financial setbacks.

What’s Next?

So, should investors panic, sell and hide? Course not. Haven’t we seen this movie before?

There are reasons for optimism. The market is much oversold. A snapback could be in order

Also, as the U.S. labor market is struggling, some analysts are forecasting a change in the Fed’s opinions, and a renewal of quantitative easing this summer.

Finally, last week brought the beginning of Q1 earnings season. And the initial reports from major companies were largely positive, with 75% of the larger companies that reported beating estimates.

Bottom line? Most of the nation has been on Spring Break these last couple of weeks. The stock market, having raced out to a strong first-quarter return, could simply be taking a breather as well. Equities could come back invigorated following a brief respite. This week’s earning will tell the tale.

Yet, stocks could return from Spring Break like so many frat boys after a week in Daytona–sick, exhausted and in need of another vacation. If that is the case, then this market will quickly resemble last year’s initial performance. A fast start followed by downgrades, sovereign debt woes and lots of turbulence.

Time will expose this market for what it is. Stay tuned…