Saturday, March 14, 2009

I saw Jim Cramer on Jon Stewart this week...

...and I didn't think Stewart necessarily got the better of him. In fact, I think the subject is quite a bit more complicated than he thinks and Cramer was actually very polite and patient with him.

I watch CNBC more than most people (I hope) and I think for all its faults it's actually a good network with a lot of serious journalists who are interested in pursuing the truth. I also think that anyone who watches it as much I do should quickly realize that it's really infotainment. That is, aside from providing the viewer with the latest economic numbers, earnings releases, and other breaking news affecting the markets, it's a show meant to entertain as much as to inform. It reminds me a lot of the political shows I watch or the football pre-game shows my son watches. They are just for people who love the subject and can't get enough of it. But I wouldn't recommend you betting on the football teams these ex-coaches and players recommend any more than I would advise you to invest based on anything you've heard on CNBC. For another example, I watch more political shows than any normal person should and predicted that Mitt Romney and Hillary Clinton would get their parties' nominations in 2008. Morale of the story? Watching these shows doesn't make you any better at predicting the future. So take what you see and hear on CNBC with a large grain of salt.

On the show Jon Stewart made a number of assertions that need to be addressed. The first is that CNBC is "in bed with corporate America." This doesn't square with my experience. As I mentioned, the reporters on CNBC are serious journalists who are after the truth. They are also after a breaking story and would have no trouble reporting bad news. In fact, they would be thrilled because it would be a boost to their careers.

The second is that the reporters on CNBC should have "seen this coming." I don't think anyone saw this coming, except maybe Nouriel Roubini, and I've already voiced my skepticism about him. (Did he put his money where his mouth was? Was he short the last year or so? I wonder.) Jon Stewart ridiculed the notion that this was a "once-in-a-lifetime tsunami." But it was. Any year that the most successful investor in history, Warren Buffett, is down 60% is probably an anomaly. In fact, if you had told anyone the events of 2008 they would have found them hard to fathom: Bear Stearns and Merrill Lynch being sold at fire-sale prices; Lehman Brothers going out of business altogether; AIG, Citigroup, Fannie Mae, Freddie Mac, Bank of America and others being bailed out by the federal government; and the stock market losing 50% of its value in a year. This was the equivalent of a "one hundred year flood."

Another assertion is that Wall Street somehow did all of this with our money and at our expense and got away with millions. Granted some, like Stan O'Neal at Merrill, presided over the demise of his firm and walked away with a fortune. But others, like James Cayne of Bear Stearns and Dick Fuld of Lehman, watched their wealth go down with their firms. Sandy Weill, who built Citigroup, is no longer a billionaire. "Cry me a river," you might say. But there is a lot of hurt on Wall Street as well as Main Street. And no one, least of all the money men, wanted the market to crash and the party to end.

Finally, Stewart claims that Wall Street is in conflict with the public. He shows clips of Cramer discussing ways of manipulating the markets to make his point. But this is a false choice. There are two tiers on Wall Street, but they don't necessarily operate at cross-purposes. There is the hot money crowd, the insiders, the dealers who compete with each other. This is who Cramer was referring to when he talked about spreading rumors or marking the futures down. The second tier is the public, who should be investing for the long-term like for their kids' college education or their retirement. The two should rarely intersect. If Cramer spreads a rumor about Apple or sells futures to protect his short position, this should only influence the market for a short time. He's trying to beat other hedge funds and fast money types, not you or me. The public, i.e. long-term investors, shouldn't even pay attention to these short-term gyrations in the market. They should have their eye on the big picture. And the big picture says that over the long haul equities should outperform all other investments. If you need your money in the near future you should have it in fixed-income securities or cash. Which brings up the subject of Stewart's 75-year old mother. Why is she watching Cramer and why is she still in the stock market at her age?

7 comments:

Vinny said...

I currently trade options from home so I probably watch CNBC as much as you. I was formerly a floor trader on the CBOE and the AMEX and I used to be a securities lawyer as well. Outside of Harwood, Liesman, and Faber, I think that they are almost all hacks.

Peter Schiff saw this coming but when he would go on Kudlow and Company he would get ridiculed by people like Arthur Laffer and Ben Stein while Kudlow played cheerleader for the stockmarket.

Cayne and Fuld may have lost on their stock but they had huge salary and bonus packages tied to the short-term performance of their companies. This gave them an incentive to take much greater risks than the people who had their 401(k)’s invested could withstand. This is where I think your two-tier theory breaks down.

Much of Wall Street compensation is tied to short-term performance. Bonuses and commissions don’t depend on the long term viability of the products that are being sold. Wall Street executives cranked out mortgaged backed securities and credit default swaps because they generated short term profits but the risks fell on the long term investors. (I managed to dump Bear Stearns in time, but I rode AIG all the way down.)

Private equity firms bought companies and levered them up to produce short term gains but long term investors were saddled with the risks as overall prices became inflated. I have heard that as much as half the gains of 2002-2007 were a premium put in stocks by the potential for leveraged buy outs. Any long term investor who got in during that period has lost that premium forever.

I think the game that the insiders play affects long term investors in a multitude of ways.

mtracy said...

Thank you for your comment. I think you make several good points. Your point about Cayne and Fuld is particularly well-taken, although I have to think they would be happy to exchange their salary and bonuses for their pre-crash equity in Bear and Lehman.

Your point about short-term performance is also well-taken and it raises a subject that I should have addressed. I think one of the problems on Wall Street in the last few decades is the transformation of several partnerships to public companies. This encourages taking out-sized risks as there is undue pressure to increase the price of the stock. Also, companies have more incentive to risk stockholders' money than their own. I don't think it's any coincidence that Wall Street partnerships like Evercore, Lazard, and Brown Brothers are doing just fine, thank you. This is why I think that private equity firms and hedge funds will replace the traditional investment banks going forward.

Again, thank you for your comment. I look forward to reading your blog. Coincidentally, I'm rereading "Zen and the Art of Motorcycle Maintenance" right now.

Vinny said...

I think your point about partnerships is right on the money. When I hear people demonizing government regulation of markets, I like to point out that a corporation itself is a form of government regulation. In a genuinely free market, the only permissible form of business combination would be a partnership where every investor who enjoys the profits of a venture is also liable for the losses. A corporation is an imaginary person created by law because (in theory at least) the elected representatives of the people believe that the ability to combine capital will benefit society by producing increased prosperity. The government can and should regulate corporations in order to mitigate the risks created when enjoyment of profit is separated from liability for losses.

I always get irritated when Dennis Kneale claims that executive compensation is nobody’s business but the board of directors. I might agree if investors in a partnership want to create incentives for their managers to seek short term gains at the expense of long-term stability because they are the ones who will bear the consequences of a down turn. However, in a corporation, the interests of the people awarding the compensation can be much different than the interests of the owners and the public.

James said...

I would defer to a house plant when it comes to an intricate discussion of high finance, but I did want to chime in about the Cramer/Stewart deal.

While I agree that they sort of fought to a stalemate on the Daily Show, I guess I thought it was for slightly different reasons. First of all, I don't believe FOR A SECOND that Cramer is as contrite as he was acting. I think he went on the show knowing that Stewart had a penchant for moralizing and he wanted to make Stewart look like a pompous lecturer. I also think he nearly succeeded.

I say nearly because I do think that Stewart made a good point not just about the failures of CNBC but of the network's failed potential. From the clips I've seen, I agree that you couldn't watch Cramer's show for more than five seconds without realizing that you're going to have to find some more sources if you want to consider yourself a well-informed investor (if that's even possible.) Still, I think the point about showing Cramer's hedge fund clips is that Cramer did know more about the behind the scenes aspects of Wall Street than he let on to the public.

Building on that, I also would guess that there are other CNBC reporters who know the ins and outs of Wall Street as well as Cramer. It seems these reporters could have dug deeper about why the Dow just kept going up and up and up, since they should know it just can't keep going on forever and that something fishy was probably behind its rise.

I have heard parallels drawn from these financial reporting failures to the failures of the media to dig deep enough in the lead up to the Iraq war. Does this sound like a decent comparison?

As the "fourth estate", the press is charged, in part, with keeping the major institutions of America honest. Unfortunately with the current media conglomerations and the ad-revenue dominated nature of television, this task is a steep (if not impossible) climb from the start. The result being that instead giving the high muckety mucks a good fight, the press seems to just keep taking dives for them. Which I guess is what you do when you're on the take.

Which brings me to a last concern about the press's treatment of Tim Geithner. Again, I don't know much about finance but I saw that guy on Charlie Rose and he seemed pretty on point to me. If the heads of the media conglomerations don't like what a guy in government says about the future of American capitalism, can they send their armies of pundits to destroy him?

In place like Washington where perception can often become reality, I guess the question isn't "can they" but "do they"?
(I don't know how to put overdramatic, ominous music into words but I'll assume it's implied...)

mtracy said...

I'm working on the music portion of this blog but since I haven't even figured out how to download pictures it may be a while.

As for Cramer's show "Mad Money," I will admit that it's painful to watch. It could make me reconsider my entire posting on drug use.

But the rest of CNBC is pretty good, I think. Recently, Erin Burnett (who's nice to look at by the way) and Steve Liesman claimed they had been reporting about the bubble for some time. I believe them. Just like with the tech bubble of the 90s, a lot of people knew there was a real estate bubble but didn't know when it would burst or what it would mean when it did. In their defense, when the tech bubble burst in 2000 it didn't have a huge effect on the average person. This bubble is obviously the worst one in our lifetime.

As for Geithner, I didn't see him on CR because my DVR hasn't been taping him lately for some reason. Maybe it is tired of hearing me complain and just took it upon itself to stop recording CR. But I heard he came across really well and that was one reason the market rallied last week. Some wag said that compared to CR's long, rambling questions Geithner came across as clear and succinct--exactly what Wall Street has been waiting for.

Vinny said...

I think Liesman is excellent. The problem is that no matter how good a job he does explaining the reason for a particular government response to the crisis, the segment ends with Kudlow shouting about tax cuts.

I think Burnett is quite fetching, but I also think she is an airhead who said the dumbest thing I have ever heard on CNBC: "I think people should be careful what they wish for on China. You know if China were to revalue its currency or China is to start making toys that don’t have lead in them or food that isn’t poisonous, their costs of production are going to go up. That means prices at WalMart here in the United States are going to go up, too. So I would say China is our greatest friend right now."

mtracy said...

I actually get a kick out of Larry Kudlow; he's fun to watch. But you're right--he's stuck in the '80s. Reagan may have been appropriate for his time but the world has changed and the Republicans need to let him go. Until they do they are doomed to minority status.