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The Wall Street Journal published an article today detailing once famed stock picker and mutual fund manager Bill Miller’s recent demise. It is a well written story of how the highly praised mutual fund manager ended his 15 year out performance streak over the S&P 500 index in dramatic fashion. 

Mr. Miller has profited from investor panics before. But this time, he said, he failed to consider that the crisis would be so severe, and the fundamental problems so deep, that a whole group of once-stalwart companies would collapse. “I was naive,” he said.

A must read for anyone considering active investing (stock picking vs. passive index investing).

Enjoy,
Franco

I would like to officially introduce Frugal Franco’s first guest post. A friend of mine, who goes by many names but we’ll call him the Bargain Burro, recently submitted a diary esk dictation of a memorable Black Friday. Enjoy!

Franco

Tuesday
I went over to my friend’s house and had to listen to him brag about his new flat screen TV all night. I sure would love to steal his thunder by getting a bigger one for less money. Fortunately, black Friday is right around the corner.

The final episode of this series opens in summer of 2006 at the peak of the US housing markets. Consumers have been leaning on their home equity to finance their spending and drive economic growth. In addition, the advent of the credit default swaps have made risk a transferable and tradeable product. The perception that risk can be stripped out of an investment vehicle and transferred to another counter party has driven credit spreads (the difference between the cost of risky, corporate debt and the risk free US government debt) to historically low levels. Tight credit spreads have made it very cheap to borrow money and create leverage to amplify returns. But all that is about to change as the era of easy money and excessive leverage comes to a screeching halt.

It’s that time of year again…time to camp out in sub-zero (unless you live in a warm weather state) temperatures on the rock hard concrete to grab the door buster sales at your favorite retailer. For those that haven’t partaken in this glorious ritual, I highly recommend it (actually, I highly recommend getting your little brother to do it while you sleep in a nice warm bed and then swoop in as the doors open to save big bucks on a new flat screen TV…thank little bro!). For those that would like to get a jump start on the process and map out the best deals at each store, check out this thread at Fat Wallet for scanned copies of all the upcoming Black Friday ads. Happy Thanksgiving!

Franco

In response to continued requests about recommended readings and websites, I’ve created a dedicated page for Franco’s Favorites. Check it out.

Franco

In the first two parts of this series, we covered the rise of securitized loans and birth of credit default swaps. We left off in the throngs of a raging bull market being driven by a new era of technology companies. With the exception of a few hiccups, Wall Street has perpetuated almost 20 years of wealth creating, bull market returns on the backs of financial leverage, innovation, and good ol’ fashion greed.

Anyone who has read Liar’s Poker (and even those who have yet to read it) will enjoy this recently penned article by Michael Lewis. In it, he explores the mortgage market meltdown through the eyes of a bearish hedge fund manager and revisits the synthesis he drew from his brief stint with Solomon Brothers in the mid 80’s. I recommend both the article and his book for a “colorful” look at some of the inner workings of the US financial markets.

Enjoy!
Franco

We last left off with a red hot financial market in the mid 1980’s being led by the fancy MBS (mortgage backed security) and CMO (collateralized mortgage obligation) securities running in tandem with a leveraged paradise known as the junk bond market. The easy money and lavish lifestyles of the 1980’s were not isolated to Wall Street. Savings and loan (S&L or “thrifts”) institutions across the nation were taking advantage of the newly implemented Tax Reform Act of 1986. The new act was passed to update “old banking standards” and allow thrifts to take on more risk in order to better compete in the “complex financial markets” of the 1980’s. Thrifts ran with their new found freedom and grew like wild fire. Some of the more aggressive ones were doubling in size every year with less than ethical lending practices. All this easy money was making thrift executives very rich and further compounded the greed running rampant through the markets of the 80’s.

Falling home values, growing unemployment, plunging stock prices; how did we get into this mess? Well, in order to fully understand our current economic funk, we need to go back and examine the roots of what has now been coined the credit crisis. So take a walk with me down memory lane while we explore the origins of securitized loans and unregulated swap contracts in a fascinating tail of innovation, riches, stupidity, and good ol’ fashion greed.

Warren Buffett recently penned an article explaining why he is investing in US companies during this hair raising credit crisis. Please take a couple minutes to read it and gain some perspective on the current market conditions in light of previous stock market downturns and the overarching goal to remain focused on long-term investment returns. 

Franco