MONEY 144 - AMERICA 12

THIS IS MY 144^TH BLOG ON UNDERSTANDING MONEY TOOLS

September, 2018

understandingmoneytools.blogspot.com

This is my 12^th blog on America approaching the subject from a history of money and debt.  We have left the historical build-up of debt and now moved into America and its biggest industry, money investments….Wall Street and beyond.

I hope these blogs follow in a decent sequence, as I write them in my head in advance not following any outline.

Relating to a past blog a friend asked me in regard to hedging a “long” position in stocks, or a stock, why I would rather turn toward an option versus buying a like amount of stock in a “short” position?  Good question. Let’s think this through together from the knowledge you now hold.  One would be leverage.  One option is 100 shares of stock.  Two, would be limited financial liability to the amount of the option.  I could always let the option expire. I have a safety net here. I am only out the cost of the option money.

NOTE: Not all stocks are available for options.  Options exchanges are different from stock exchanges.  One of the largest founded in 1973 is the Chicago Board of Options.  They cover equities (stocks), indexes and interest rates.

EXAMPLE:  Let’s say I hold 1000 shares of a stock now worth $25,000, and have a $5,000 profit to protect.  That day I sell short $25,000 of the stock.  Perfect hedge.  (A “short sale” we have explained in the past.  You sell a stock hoping it will go down.  The brokerage holds the money. If the stock goes down, you purchase the stock at a lower price and take the profit.)  Let’s also assume the stock is quite volatile, perhaps like Facebook, where within a day 20% could be lost or gained.  Let’s assume the stock goes up.  My short position is in negative territory.  At some point the brokerage firm may want me to cover my “short”.  If I don’t have the money on hand, the brokerage will sell my “long” position to cover losses.  Got it?  I hope I didn’t lose you with this example.

I could go on “margin” or borrow money from the brokerage up to 50% of the value of my stocks.  Normally a minimum of about $2,000 is required to open a margin account.  Dangerous to borrow money for stocks!  At some point if I am over 50% borrowed against value the brokerage will have a “margin call” and want immediate payment to cover or they sell my stocks to cover the “call”.

As promised we are going to finally cover bonds in this blog. 

BONDS:  What is a bond?  A form or debt or “I owe you”.  We have country bonds from all over the world; we also have state, county, city bonds and more.  To entice people to buy city or county bonds we sometimes form debt exempt from taxes.  In turn, this “municipal bond” may pay a lower yield.  Cities call in a brokerage firm to help issue bonds for roads or water/sewer lines.  Many times I have seen corruption here. To get the bond business the brokerage firm will “kick-back” a percentage of their commission fees to city counsel members.

There is an old cliché here: “When interest rates go up things blow up”!  Especially bonds more than stocks.  Interest rates have been going up, but this time it has not affected bonds nor the stock market; very strange.  You noticed recently the government came out with the report that “consumer confidence” hit a 18 year high?  I believe that statement was intended to offset any negatives, get Americans to go further in debt and buy more items.

Let’s start with some bond insanity; Greece.  As you know, a few years back the money the International Monetary Fund and World Bank lent to Greece could not be paid back.  Their bonds were in default.  Now, here is info I don’t like to see, and you should know about.  These bankers knew ahead of time Greece could not be able to pay.  America controls these two institutions above, and they lend in US dollars.  With the non-payment of bonds, Greece was obligated to sell off their best assets (airport, ports, etc.) to buyers outside Greece,  (countries and individuals), who could “cherry pick” the best assets.  This resulted in a few things.  The smart, young educated people left the country, and Greece was left with secondary assets.  After this, Greece needed more money to survive.   Here is what happened according to my sources.  Wall Street bet the wrong way with “credit default swaps”, into the multi-billions of dollars, so the IMF and World Bank lent Greece more money.  What this did was push their total debt from 130% debt to GDP to about 180% debt to GDP, so the coffin has been nailed shut, so to speak.  Down the road Greece will once again default on their bonds.

I hate so see corruption by bankers, but they have done this many times with  third world nations.

US Bonds:  US Bonds have remained quite stable, and seemingly desirable, even with our debt.  Interest rates have risen on the excuse inflation is here. Partly true.  However, we need to increase the yield on our bonds to be able to sell them.  The 4 biggest holders of our debt are China, Japan, Russia (until recently when we placed more sanctions on their country and they sold hundreds of billions of our bonds. China has softened ownership of our bonds, too.  They now own about $ 1 trillion down from $1.25 trillion.) Japan stabilized our dollar by buying more of our debt and US dollars. The fourth biggest owner of our bonds is Saudi Arabia.  You must look at the big picture here.  Brazil, Russia, India, China, South Africa (BRICS) plus now Iran have set up alternative lending outside of the IMF and World Bank that trade in US dollars.  We have been attempting to disrupt most of these countries and economies to impede their progress, where they could disrupt the strength of our dollar.  China and Russia right now are big buyers of gold.

Recently, I have been hearing advertisements for Americans to buy US Savings Bonds.  Sounds like the big push we had during WWII.

Corporate bonds:  Tons of corporate debt issued since The Great Recession.  Let’s say a company goes bankrupt.  Who gets any money out of the bankruptcy?  Bond holders get paid first.  Then, comes preferred stock holders, perhaps defined as different “classes” of stock, such as A and B.  Lastly comes the common stock holder who may not get anything, as there is nothing left.  Lawyers will make certain they pay themselves!

Historically speaking the market value of bonds works inversely to interest rates.  If interest rates go up, bond values go down. If interest rates go down, market value of bonds go up.  Now, from your investment standpoint let’s use this information with bond funds.  If interest rates are going up, like they have been, I would want to be in an “open-ended fund” where the fund is always buying new bonds with higher yields.  Right?  If at some point, and most likely, interest rates go down, I want to be in a “closed-ended” bond fund where the fund will not buy anymore bonds.

Let’s look at state and local bonds.  Illinois and Connecticut, not sure if they can pay, both greatly indebted.  Don’t buy even at their higher yields.  They may have to settle with bond holders, and you lose.  Be very careful with county and city bonds.  How financially stable are these locales?

MY LIFE STORY:  Again, a friend suggested that I add a bit of my life to these blogs hoping you will find it of interest.   30 years ago a friend on Wall Street who owned seats on the New York Stock Exchange gave me a compliment saying I was the most “connected person” he knew in America.  That certainly no longer holds true!  I’m lucky if people today know me at my local Starbucks!

In my business life it was important dealing with investment bankers and Wall Street over a 20 year period.  Again, to start off it was Vail and Aspen, Colorado and my skiing ability that gave me initial contacts.  Then, it was the Rothschild family and contacts through Energetics Inc. (oil and gas), New Court Securities and Rothschild Inc.  Along with that was a good reputation working for wealthy families along the line.  That will bring me to this writing. 

As I did work for Edwin “Jack” Whitehead he asked if I would represent the family at a week’s seminar given by Northern Trust, out of Chicago.  I did not know this at the time, but Northern Trust gives a very worthwhile seminar on various topics for the top 100 wealthiest families in the US.  This was in about 1990, and the seminar was held at Loew’s Vantana Canyon Ranch in Tucson, AZ.  At the time, Whitehead wanted to start more of a family investment company and have other wealthy families parallel his investments.

Northern Trust structured the meetings with one or two daily useful seminars on various topics thought to be constructive to these families.  Then, we would have daily “break-out” small groupings to intimately discuss the family and their needs.  We also had plenty of time to mingle individually and recreate.

All the big families were there or their representatives like me.  To my surprise the topics varied all over the place from investments, to all the kids and grandkids dealing with drug and alcohol problems, to just about anything that was personal to that family.  I also noted it wasn’t only Whitehead wanting to promote other families on his investments, this was now becoming the new “thing”. 

In recreation, I played golf one day with Bob Dayton (Dayton Department Stores and Target).  I lost 2 sleeves of balls before the first 9 holes in “rattlesnake” country so had to borrow balls from Bob to make it to the pro-shop to buy more balls for the back 9.  The Loew’s also had a nice home about 3 doors down from their hotel.  Their son in law wanted to play tennis on their court skipping lunch, so did I, so he lent me tennis clothes, shoes and racket and we played.  One cocktail hour I met the representative for the Harriman family.  Coincidentally, it came out that a classmate of mine in college, David Billings, ripped them off for several million dollars.  Ouch!  David was a close friend, came from Eastern money, but left his family and Denver to disappear in Bermuda.

I also spent time with a lovely young lady, Alice Walton, of Walmart.  She was starting the family investment business in Arkansas.  Everyone seemed to want to promote everyone else in some manner.  You may think these wealthy families make some great investments, but that is not the case.  Like Whitehead, most of these prominent families hit it big only once.  They lose most of the time. I stayed in contact with Alice for some time once I was back in Denver.  Another Denver oil friend, Fred Mayor, and I participated in 2 of Walton’s investments and we lost our money on both.  Similarly I bought stock in 2 companies Bill Gates had bought into and lost all my money on those ventures.

The Dupont family was there.  You may not think of this, but the old-line families, like the Duponts, are so diluted these days from the original family. The Duponts now have over 1,000 family trusts with all the kids, grandkids and great grandkids.

Another good person I met, about my age, was Bob Rockefeller.  He was a tennis player, sailor and ran the family gold division. We stayed in contact for a while especially, in New York City, after that week.

Northern Trust did a fine job, and encouraged mingle, mingle, mingle, connect, connect, connect the entire week!

I hope you found this of interest.