Vol 6 Issue 2-April 2008.pub
T H E S T R AT E G I S T
EVERGREEN CAPITAL MANAGEMENT VOL 6, ISSUE 2
Apocalypse Not Now
by David Hay
APRIL 2008
Special Points of Interest Market Commentary: Apocalypse Not Now
Join EVA Weekly! ECM Directory
“More than anytime in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly” -Woody Allen
Despite the fact that America has enhomes, once the source of so much net joyed astounding prosperity over the worth pride, now seem like the Roach last 70 years, and for two decades has Motel: You can get in them, you just been the world’s lone superpower, its can’t get out. Meanwhile, banks are no citizens seem continually burdened by longer willing to allow us to treat them an unshakeable malaise. Recently, our as inexhaustible ATMs. Without quescollective flames of fear have come to a tion, today’s typical consumer must raging climax fanned by severe stress in stretch simply to pay for the essentials our financial system, soaring food and of daily life, as you can see below. energy prices, and acute weakness in our currency. In fact, Personal consumption expenditure on staples* as a share of personal disposable income (%) our discomfort has become so pronounced that in a recent USA Today/Gallup poll 59% of those surveyed stated that they believe we are in a modern-day depression! It’s undeniable that we have been going *Defined as the sum of consumer spending on food, energy and medical care Shaded areas represent periods of US recession through some difficult times lately. The recession we have been forecasting since last To make matters worse, not that they September is now almost unarguably need to be, the media has been overupon us. Once proud financial instituflowing with that dreaded relic from the tions have been laid low, if not laid 1970s: Stagflation. In fact, that word down completely for their final rest. has been more prevalent in the spoken The costs to fill a refrigerator or a gas and written press than “recession.” tank have gone ballistic and our sacred Thus, we are told that we are experienc(Continued on page 2)
Evergreen Capital Management, LLC | 500 108th Ave. NE, Ste. 720, Bellevue, WA 98004 425-467-4600 | 800-755-1359 | 425-467-4606 (fax)
Page 2
THE STRATEGIST
MARKET COMMENTARY (CONTINUED FROM PAGE 1)
ing a perfect storm of negative growth combined with uncontrolled inflation and that our financial system may simply implode. No wonder so many folks are having visions of breadlines and bank failures! However, dear client, one thing I’ve learned over my nearly 30 years in the investment business is that times are rarely as good or as bad as they seem. For example, the boom caused by the tech stock bubble in the late 1990s and the false sense of wealth created by the recent housing mania were never as beneficial as they seemed when they were at their headiest. The reality is that both were sowing the seeds of their own demise, as all bubbles do, by detaching far from reality and any fundamentally based pricing structure. As long-time clients know, we were highly critical of both these asset inflations as they were evolving into full-blown lunacy. The trouble with bubbles is that they always burst and they consistently bring pain and suffering in their aftermath. The Great Depression was a direct result of the stock market insanity of the late 1920s. Clearly, Japan’s nearly 20 years of economic stagnation was a consequence of the twin bubbles it experienced in property and stock prices during the late 1980s. Such speculative frenzies rarely occur without generous servings of debt creation. Our recent experience with the housing market was no exception. As we have seen in the past, and are reliving today, once the centerpiece of the asset bubble begins to deflate, in this case home prices, all the debt tied to it starts to unravel. This then sets off a chain reaction that for a time seems unstoppable. In actuality, without various government safety nets, such as deposit insurance and a highly responsive Federal Reserve, the adverse feedback loop we’ve seen lately could have become horrific almost beyond imagination. However, the ultra-bears and perpetual fear mongers, who seem to be ever-present on CNBC and CNN when trouble strikes, rarely highlight the radically different
situation today versus the 1930s. Instead, they rail against efforts like the Fed’s damage control with Bear Stearns, and its dramatic interest rate reduction policy, with accusations of bailing out Wall Street or recklessly fueling inflation. These dark-soul types seem to want there to be some sort of financial Gotterdammerung where all imprudent debts are extinguished and all past excesses mercilessly punished. In other words, they’d like to see another Great Depression despite the incalculable human agony that would entail. But it’s because of the lessons learned from past crises, and the safeguards put in place as a result of them, that such an outcome is beyond unlikely. Paramount among those safety nets is that people have access to funds in their banks. This wasn’t true in the 1930s when whatever wealth left after the stock market crash was lost in a catastrophic series of bank failures. This is not to say we don’t have serious problems: We undoubtedly do and we have highlighted many of them in these pages and our companion publication, the Evergreen Virtual Adviser, over the last couple of years. We continue to lose sleep over the $45 trillion worth of credit fault swaps floating around, of which about one-third have a hedge fund either as a buyer or seller. In fact, we believe the near certainty of a domino-effect meltdown of the credit default swap market was one of the main reasons the Fed moved so quickly to arrange a shotgun marriage of Bear Stearns and JP Morgan. The credit default swap issue is far from put to bed; in reality, it’s not even in its jammies. But the government has made it crystal clear it will not allow our financial system to go through the sort of cathartic downward spiral the gloom-and-doomers would like to see. In spite of our manifold challenges, our country has abundant strengths and resources. Somehow, this gets lost in all the negative noise that U.S. consumers have some $7 trillion in short-term liquidity vehicles. They
Evergreen Capital Management, LLC
Page 3
VOL 6, ISSUE 2
MARKET COMMENTARY (CONTINUED)
also have around $55 trillion in overall assets, net of liabilities. Our people and our corporations have vast overseas holdings that we believe are dramatically undervalued in official calculations because these investments, in many cases, were made years ago at prices far below those prevailing today. Furthermore, even though there is clearly a feeling of theend-is-nigh in the air these days, the reality is that our national economic stress is nowhere near where it was when I was a struggling young stock broker at Dean Witter in 1980. It was during that era that the Misery Index, which added together inflation and the unemployment rate, was first widely publicized, helping to elect a former California governor who had a message of hope and economic renewal to the White House. As you can see, we are light-years away from that level of despair.
ings estimate. And thus far, the 2000s, with less than two years remaining, have generated the worst return of any decade save the 1930s. In other words, a huge amount of bad news is in the pricing of corporate securities. The bottom-line: The end of the world is not at hand, or at foot, or at any other appendage, and we are buyers whenever stocks or income securities swoon on apocalyptic anxieties. We may have something more to fear than fear itself, but we’ve coped with far worse in the past and we’ve always emerged stronger for the challenge. Don’t let fear be the mind—and action—blocker.
David Hay Chief Investment Officer Evergreen Capital Management, LLC
The “Misery Index”— Sum of Inflation and Unemployment Rates
Join us for EVA Weekly! We’ve had an overwhelmingly positive response to our now weekly e-letter, the Evergreen Virtual Advisor. Thank you for your feedback, it is always appreciated! Each week you can get a piece of Dave’s mind to hopefully gain some peace of mind about your portfolio and the financial markets.
As is typically the case, fear breeds opportunity and this is most definitely true right now. The yields we are able to attain for you in safe and sane corporate income securities are simply extraordinary. In addition, the valuation of the Evergreen Capital core portfolio, chock full of the planet’s finest companies, with an aggregate return on equity of 19%, is selling at just 15 times this year’s earn-
If you have not been receiving EVA regularly, we would like to fix that. We may not have your most up-to-date email address and/or your email system may not be set up to accept emails from [email protected]. Please add us to your “safe” list, and to be added to the Evergreen Virtual Advisor distribution list, please contact Kim Harlan at: 425-467-4604 or [email protected] We look forward to hearing from you soon!
Evergreen Capital Management, LLC
EVERGREEN CAPITAL DIRECTORY
Stephen J. Dunn
Jeffrey M. Eulberg
Helene A. Fehler
Kim G. Harlan
Bob Hannah
Research Analyst 425-467-4605 [email protected]
Director Client Services Principal 425-467-4602 [email protected]
David M. Hay
Tyler B. Hay
William Karr
Stephanie J. Kruse
Chief Investment Officer Principal 425-467-4600 [email protected]
Research Analyst 425-467-4622 [email protected]
Consultant 425-467-4600
Receptionist/Administrative Assistant 425-467-4600 [email protected]
Marketing Consultant 425-467-4600 [email protected]
Business Development Consultant 425-467-4612 [email protected]
Executive Assistant 425-467-4604 [email protected]
Ladd Moore Client Development Specialist 425-467-4609 [email protected]
Larry P. Morris
Jeff E. Otis
Olesya S. Sinitsa, CFA
Rosann Watson
Principal 425-467-4600 [email protected]
Client Development Specialist 425-467-4624 [email protected]
Director of Research 425-467-4618 [email protected]
COO/CCO 425-467-4607 [email protected]
Michael J. Wiesmann Director of Marketing Principal 425-467-4619 [email protected]
Randy W. Wo-Eng Trader/Compliance Associate 425-467-4610 [email protected]
EVERGREEN CAPITAL MANAGEMENT VOL 6, ISSUE 2
Apocalypse Not Now
by David Hay
APRIL 2008
Special Points of Interest Market Commentary: Apocalypse Not Now
Join EVA Weekly! ECM Directory
“More than anytime in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly” -Woody Allen
Despite the fact that America has enhomes, once the source of so much net joyed astounding prosperity over the worth pride, now seem like the Roach last 70 years, and for two decades has Motel: You can get in them, you just been the world’s lone superpower, its can’t get out. Meanwhile, banks are no citizens seem continually burdened by longer willing to allow us to treat them an unshakeable malaise. Recently, our as inexhaustible ATMs. Without quescollective flames of fear have come to a tion, today’s typical consumer must raging climax fanned by severe stress in stretch simply to pay for the essentials our financial system, soaring food and of daily life, as you can see below. energy prices, and acute weakness in our currency. In fact, Personal consumption expenditure on staples* as a share of personal disposable income (%) our discomfort has become so pronounced that in a recent USA Today/Gallup poll 59% of those surveyed stated that they believe we are in a modern-day depression! It’s undeniable that we have been going *Defined as the sum of consumer spending on food, energy and medical care Shaded areas represent periods of US recession through some difficult times lately. The recession we have been forecasting since last To make matters worse, not that they September is now almost unarguably need to be, the media has been overupon us. Once proud financial instituflowing with that dreaded relic from the tions have been laid low, if not laid 1970s: Stagflation. In fact, that word down completely for their final rest. has been more prevalent in the spoken The costs to fill a refrigerator or a gas and written press than “recession.” tank have gone ballistic and our sacred Thus, we are told that we are experienc(Continued on page 2)
Evergreen Capital Management, LLC | 500 108th Ave. NE, Ste. 720, Bellevue, WA 98004 425-467-4600 | 800-755-1359 | 425-467-4606 (fax)
Page 2
THE STRATEGIST
MARKET COMMENTARY (CONTINUED FROM PAGE 1)
ing a perfect storm of negative growth combined with uncontrolled inflation and that our financial system may simply implode. No wonder so many folks are having visions of breadlines and bank failures! However, dear client, one thing I’ve learned over my nearly 30 years in the investment business is that times are rarely as good or as bad as they seem. For example, the boom caused by the tech stock bubble in the late 1990s and the false sense of wealth created by the recent housing mania were never as beneficial as they seemed when they were at their headiest. The reality is that both were sowing the seeds of their own demise, as all bubbles do, by detaching far from reality and any fundamentally based pricing structure. As long-time clients know, we were highly critical of both these asset inflations as they were evolving into full-blown lunacy. The trouble with bubbles is that they always burst and they consistently bring pain and suffering in their aftermath. The Great Depression was a direct result of the stock market insanity of the late 1920s. Clearly, Japan’s nearly 20 years of economic stagnation was a consequence of the twin bubbles it experienced in property and stock prices during the late 1980s. Such speculative frenzies rarely occur without generous servings of debt creation. Our recent experience with the housing market was no exception. As we have seen in the past, and are reliving today, once the centerpiece of the asset bubble begins to deflate, in this case home prices, all the debt tied to it starts to unravel. This then sets off a chain reaction that for a time seems unstoppable. In actuality, without various government safety nets, such as deposit insurance and a highly responsive Federal Reserve, the adverse feedback loop we’ve seen lately could have become horrific almost beyond imagination. However, the ultra-bears and perpetual fear mongers, who seem to be ever-present on CNBC and CNN when trouble strikes, rarely highlight the radically different
situation today versus the 1930s. Instead, they rail against efforts like the Fed’s damage control with Bear Stearns, and its dramatic interest rate reduction policy, with accusations of bailing out Wall Street or recklessly fueling inflation. These dark-soul types seem to want there to be some sort of financial Gotterdammerung where all imprudent debts are extinguished and all past excesses mercilessly punished. In other words, they’d like to see another Great Depression despite the incalculable human agony that would entail. But it’s because of the lessons learned from past crises, and the safeguards put in place as a result of them, that such an outcome is beyond unlikely. Paramount among those safety nets is that people have access to funds in their banks. This wasn’t true in the 1930s when whatever wealth left after the stock market crash was lost in a catastrophic series of bank failures. This is not to say we don’t have serious problems: We undoubtedly do and we have highlighted many of them in these pages and our companion publication, the Evergreen Virtual Adviser, over the last couple of years. We continue to lose sleep over the $45 trillion worth of credit fault swaps floating around, of which about one-third have a hedge fund either as a buyer or seller. In fact, we believe the near certainty of a domino-effect meltdown of the credit default swap market was one of the main reasons the Fed moved so quickly to arrange a shotgun marriage of Bear Stearns and JP Morgan. The credit default swap issue is far from put to bed; in reality, it’s not even in its jammies. But the government has made it crystal clear it will not allow our financial system to go through the sort of cathartic downward spiral the gloom-and-doomers would like to see. In spite of our manifold challenges, our country has abundant strengths and resources. Somehow, this gets lost in all the negative noise that U.S. consumers have some $7 trillion in short-term liquidity vehicles. They
Evergreen Capital Management, LLC
Page 3
VOL 6, ISSUE 2
MARKET COMMENTARY (CONTINUED)
also have around $55 trillion in overall assets, net of liabilities. Our people and our corporations have vast overseas holdings that we believe are dramatically undervalued in official calculations because these investments, in many cases, were made years ago at prices far below those prevailing today. Furthermore, even though there is clearly a feeling of theend-is-nigh in the air these days, the reality is that our national economic stress is nowhere near where it was when I was a struggling young stock broker at Dean Witter in 1980. It was during that era that the Misery Index, which added together inflation and the unemployment rate, was first widely publicized, helping to elect a former California governor who had a message of hope and economic renewal to the White House. As you can see, we are light-years away from that level of despair.
ings estimate. And thus far, the 2000s, with less than two years remaining, have generated the worst return of any decade save the 1930s. In other words, a huge amount of bad news is in the pricing of corporate securities. The bottom-line: The end of the world is not at hand, or at foot, or at any other appendage, and we are buyers whenever stocks or income securities swoon on apocalyptic anxieties. We may have something more to fear than fear itself, but we’ve coped with far worse in the past and we’ve always emerged stronger for the challenge. Don’t let fear be the mind—and action—blocker.
David Hay Chief Investment Officer Evergreen Capital Management, LLC
The “Misery Index”— Sum of Inflation and Unemployment Rates
Join us for EVA Weekly! We’ve had an overwhelmingly positive response to our now weekly e-letter, the Evergreen Virtual Advisor. Thank you for your feedback, it is always appreciated! Each week you can get a piece of Dave’s mind to hopefully gain some peace of mind about your portfolio and the financial markets.
As is typically the case, fear breeds opportunity and this is most definitely true right now. The yields we are able to attain for you in safe and sane corporate income securities are simply extraordinary. In addition, the valuation of the Evergreen Capital core portfolio, chock full of the planet’s finest companies, with an aggregate return on equity of 19%, is selling at just 15 times this year’s earn-
If you have not been receiving EVA regularly, we would like to fix that. We may not have your most up-to-date email address and/or your email system may not be set up to accept emails from [email protected]. Please add us to your “safe” list, and to be added to the Evergreen Virtual Advisor distribution list, please contact Kim Harlan at: 425-467-4604 or [email protected] We look forward to hearing from you soon!
Evergreen Capital Management, LLC
EVERGREEN CAPITAL DIRECTORY
Stephen J. Dunn
Jeffrey M. Eulberg
Helene A. Fehler
Kim G. Harlan
Bob Hannah
Research Analyst 425-467-4605 [email protected]
Director Client Services Principal 425-467-4602 [email protected]
David M. Hay
Tyler B. Hay
William Karr
Stephanie J. Kruse
Chief Investment Officer Principal 425-467-4600 [email protected]
Research Analyst 425-467-4622 [email protected]
Consultant 425-467-4600
Receptionist/Administrative Assistant 425-467-4600 [email protected]
Marketing Consultant 425-467-4600 [email protected]
Business Development Consultant 425-467-4612 [email protected]
Executive Assistant 425-467-4604 [email protected]
Ladd Moore Client Development Specialist 425-467-4609 [email protected]
Larry P. Morris
Jeff E. Otis
Olesya S. Sinitsa, CFA
Rosann Watson
Principal 425-467-4600 [email protected]
Client Development Specialist 425-467-4624 [email protected]
Director of Research 425-467-4618 [email protected]
COO/CCO 425-467-4607 [email protected]
Michael J. Wiesmann Director of Marketing Principal 425-467-4619 [email protected]
Randy W. Wo-Eng Trader/Compliance Associate 425-467-4610 [email protected]
