The Financial Analysis Guy

Since I hang out in Vegas where my job and family are, I tend to wake up to the opening bell on CNBC around 6:30am PST.  When I woke up this morning, I was giddy with the idea of Ben Bernanke and the Fed coming to the proverbial “rescue” of the credit markets.  I was beside myself actually.

Financial Analysis Guy is a long-term investor…no kidding
I am a very long term guy, very Warren Buffett-like, when it comes to investing.  I am a land investor in Vegas and I know that if my investment doubles in 3 years, I earn roughly 25% IRR (Internal Rate of Return) - not bad.  If it doubles in 2 years, I am a very happy 36% IRR.  Which is about as good as you can get with a large sum of cash invested in a passive investment - regardless of what the infomercials or phone-jockey’s that call you at 7:00 am at home will tell you.

Now, since the Oracle of Omaha has increased his book value in Berkshire Hathaway by 23% compounded annually over his management life, I know this is the mark that everyone is shooting for.  Most “professionals” in the business will say they earn way beyond this, but they are lying or at the very least misrepresenting.  Some years they earn way beyond this, but some years they are down 30%.  So, over time, their compounded annual return will probably be something like 10%.

Since I am a long term guy, I know that my portfolio being down 25% year to date is not that big of deal - kind of like The ‘Stones (Detroit Pistons if you are new to this blog) being down be 25 points at halftime.  Chauncey and the guys would like to be ahead by 25, but realize it is only halftime and A LOT can happen before the game is over.  Just like my investing, come talk to me this time next year to see who is smiling.  So long as Benjamin Bernanke (Uncle Ben as many like to call him) continues to loosen credit (jargon for lowering the Federal Reserve Funds Target Rate), I know that equities will rise over time.  This is a fact, not a theory. 

Fed and Uncle Ben
The other tool Bernanke and the Fed Committee can use is injecting funds into the credit market by buying “stuff” from the major banks.  They call this injecting liquidity through the purchase of debt instruments…YUCK!  What the heck does that mean?!?

Well, the credit crisis is here because the Wall Street guys and gals (not the Financial Analysis Guy) can not get enough funds (cash flow) in the house after they have lent it out.  They need to sell their debt on the secondary markets after they create it through the lending, in order to free up funds to keep the lending machine (mortgage creation and other commercial paper) cranking.  As of recent memory, they bundled these individual mortgages into CDO’s (Collateralized Debt Obligations) maybe to the tune of 10,000 or so and sell them to investment houses (Private Equity; Hedge Funds; Pension Funds; Endowments; etc.) - pieces at a time.  As long as the underlying obligations don’t default in mass quantities, these are great investments to supplement their investment portfolios…whoops, again, a whole other topic…

If no one is buying these CDO’s, then lenders can not lend more money.  If lenders don’t lend money, then business shuts down and people start selling whatever they can sell (regardless of how good the investment is)  just to raise cash.  This is the equivelent of everyone heading for the exits at the same time in a crowded theater - mass panic!  Since no one is lending and everyone is selling - hence, the fabled CREDIT CRUNCH. 

The FED to the Rescue
The Federal Reserve Bank has decided to buy these collateralized debt obligations to the tune of $200 Billion (yes, with a “B”) over the next 30 days.  This is a HUGE thing to the markets.  Now, there is liquidity being injected.  Now, the other buyers have a feeling that there is hope.  Where there is hope, there is better times ahead.

The Federal Reserve is basically saying to everyone, we got your back.  Just like The Wolf in Pulp Fiction - they are coming “DI-rectly” - classic movie.  If the Fed is buying, so should everyone else.  If that happens, you will begin to feel like the world isn’t actually coming to an end (25% decline in just 2 months!!!).  If the world is not coming to an end, then even The Lemmings of Wall Street (another Graham/Buffett thing) will decide to come back to equities. 

I love waking up to seeing the market up 4,850,938,408,230,480 points…or something like that…makes me giddy since I have a lot of equities in my portfolio.