On December 1, 2008, Russell Bishop, husband of 67 years to Ardyce, father to my wife Kathy and her brother and sisters, Dennis, Randa, Brenda and Kimberly, grandfather to our children Andrea, Justin, Elizabeth, their cousins Brandon, Megan, and Chris, and Great-Grandfather to Epiphany, Jacob, Cohen and Caitlin, passed away.
Russell was a master storyteller. His stories drew a picture in your head, placing you right there with him as he shared his life with you. He was quite well known for his ability to use his voice and tempo to deliver the punch line of a joke at the perfect time to ensure a long and hard laugh. I wanted to share with you a couple of my own stories about Russell and then one of his own.
Growing up in Webster City, Iowa, a little town sitting on some of the most productive farmland in the world, the farm equipment dealer was known by everyone, both locally as well as by countless farmers throughout central Iowa. This local farm equipment dealer, Russell E. Bishop, was the proud owner and operator of Bishop Implement Company. I worked for Russell for a couple of years. Besides selling tractors and combines, he sold all types of other equipment necessary to run and operate a profitable farm. Of course, just like a car dealership, the store included a large parts and service department. At the time, most farmers not only grew corn and soybeans, but also operated a cattle feed lot. Cattle, just like all creatures, create waste. Given the high organic content of this waste, farmers would collect it, load it into a special piece of equipment called simply a "manure spreader," and spread it over their crop land to enrich the soil.
These "manure spreaders" looked like a wagon with a special chain-driven series of paddles, which pushed the manure from the wagon and slung it into the air so it would spread evenly over the field. As with all mechanical equipment, sooner or later these manure spreaders would need repair. Thus began my employment and area of expertise for Russell at Bishop Implement Company. My first job was to use a power washer to clean the manure spreaders in need of repair. You can tell that Russell had a deep respect for my talents and abilities... after all, whom else could he entrust with such an important job?
The shop opened at 8:00 am. Considering myself a good employee, I showed up at the shop about the same time as the rest of the employees: a few minutes before eight. It was not even two months before Russell pulled me aside and informed me that I was not giving him, or the business, the proper respect a son-in-law should. In simple terms, he informed me that I should be the first to show up at the shop and the last to leave. This began a habit that is still with me today. Although I will admit that as Justin has become more involved in the day to day operations of our business, he has started to challenge me for winner of the "first in, last out" rule that Russell set down all those years ago.
I learned all I needed to know from Russell about running a business. He had three simple rules: work hard, be honest, and treat every customer as you would want to be treated. I only hope I have the ability to pass these same rules down to Justin.
Russell was born in 1920, and was a teenager during the Great Depression of the 30's. He was quick to share with us stories of these times. Today, with all the talk of another "Great Depression," one of these stories and the impact it had on Russell's life is worth sharing with you. Russell first learned to farm from his Dad with a team of mules. Mules, just like horses, need to have a proper set of shoes for the traction and protection needed to work the land. In the winter of 1933, Russell was given the task of taking the mule to town to get a new set of shoes. After a few miles' trek, he had the work done by the local farrier and blacksmith. He paid with his father's check that was drawn from the local bank. The blacksmith informed Russell that the check was no-good, as the local bank had failed. He was to inform his Dad to come to town later to work out a solution.
As with many people in Russell's generation, this first hand knowledge of our financial system and the possibility of a loss of money set the stage for the years that followed. You may think that this loss drove him to the ultimate safety of a guaranteed investment, but you would be wrong. This knowledge drove Russell towards a lifetime love affair with American Capitalism. Instead of trusting the "safety" offered by promoters, he put his faith in the ownership of a business, and with his extra savings he purchased common stock in some of the greatest companies in the greatest nation in the world, and not as a speculator, but as an investor and owner. This love affair was so strong that this spring as the market sold down to levels we have not seen in years, he was excited at the long-term opportunities and encouraged me to make additional purchases of common stocks. This love affair has secured the future of his family, and I am sure that the same will happen to anyone who takes advantage of the opportunities so easily seen by Russell.
This ain't no Great Depression!
Now as I look around, it's mighty plain to see
This world is such a great and a funny place to be;
Oh, the gamblin' man is rich an' the workin' man is poor,
And I ain't got no home in this world anymore.
Woody Guthrie " I Ain't Got No Home"
For Russell, the years of the Great Depression were filled with hard times, but also great times of growing up, falling in love, getting married and having children. Fewer and fewer of the Depression survivors are with us today to share with us their firsthand knowledge of those years. Instead we must rely on books, movies and songs to create our own understanding of the difficulties our forefathers faced in one of America's bleakest moments. Three weeks ago, Kathy and I attended a special event for the benefit of the Rodman-Oakgrove Community Center in Rodman, South Carolina. This event featured Sarah Lee Guthrie and her husband Johnny Irion. Sarah Lee is the daughter of Arlo Guthrie, and Woody Guthrie's Granddaughter. Woody Guthrie will forever be remembered and associated with those terrible years in our history, and he has been memorialized in books, movies and, more recently, by the rediscovery of his songs.
For our friends in the cities around the nation, Rodman is not really a town. While it was at one time, today it is just one building and one house. The building is an old church that has been renamed the Rodman-Oakgrove Community Center. Prior to and after the event, we gathered on a farm for some good ole conversation. It was fun listening to stories about Woody Guthrie directly from his Granddaughter. Of course her stories were not told directly to her by Woody, but came secondhand through the memories of her Dad and the rest of the Guthrie family. For most of us, the Great Depression is nothing more than a memory created by the stories delivered to us by our relatives. These stories are mostly filled with fond memories of the good times, with little mention of the difficulties involved.
The Great Depression was such a time of economic hardship that the very term was retired from the economic literature. Prior to the decades of the 30's, all periods of shrinking GDP growth were called a "depression". After that, however, economists and the media forever decided that an economic slow-down would from then forward be termed a "recession". The logic of this was that if the term depression were ever used again, a panic would soon ensue. If this single word could have such fearsome power, the time must have been far more difficult than anything this generation has ever dreamed of... this ain't no Great Depression!
Unemployment averaged 20% during the Great Depression, reaching a peak in 1933 at 24%. A full ten years after the 1929 stock market crash, unemployment was still 20%. Let's put this into perspective. Try to envision the typical family in the 1930's. Dad was the breadwinner, and Mom stayed at home and took care of the family. There were no thoughts of women being employed outside the home. This meant that virtually 20% of all households in the United States had absolutely no income. Today, however, stay at home moms are an exception. Families more often include dual breadwinners. When one member of the household is unemployed, the other will usually still have a job. Family finances may be strained, but there will still be some sort of cash flow for support. With two workers per family, the unemployment rate would need to be very close to 40% to have the same number of households in the United States with absolutely no income. This ain't no Great Depression!
There were also many other differences during the Great Depression. There was no social security and no unemployment insurance. Of the total US Budget, 1.5% was spent on relief. There were no food stamps, rent subsidies, or welfare. In fact, it became so bad that hunger marches were taking place when breadlines ran out of food. This ain't no Great Depression!
Currently, Gross Domestic Product (GDP) has declined in the third quarter by 0.3%, and depending on who is making the forecast, current estimates are for a 3% to 5% decline. In 1932, the US GDP declined by 46%. This ain't no Great Depression!
How about the banks? So far in 2008, the FDIC has shut the doors on 23 banks and assisted in a number of mergers. The toll from 1929 to 1932 was 5000 banks! And there was no Federal Deposit Insurance. Every dollar deposited in those 5000 banks was lost. This ain't no Great Depression!
The stock market declined dramatically from 1929 through 1932. While the 1929 crash has been taught in school and recently has been refreshed in our memories by the media, it was but the beginning of a decline that continued into 1932. Although the market recovered by 1936, another "depression" took place in 1937 and 38 with another round of market selling. In 1938 the Dow Jones Industrial Average dipped below 100. The first time the Dow exceeded 100 was 1905, a full 33 years earlier. To put that in perspective, the Dow Jones Industrials closed at 8829.04 on the last day of trading in this November. On the last trading day of November, 33 years ago, the Dow closed at 860.67. This ain't no Great Depression!
All this talk of depression is, yes, flat out depressing. But it is necessary for us to put all of these things into perspective, and this includes the "Bailout" of the financial industry. The thought of bailing out some corporation and their executives is against our most sacred beliefs. Why should these people be rewarded for the mismanagement of their business? Why should we as taxpayers have to put our own futures at risk for these few? Our anger is apparent when we listen to our Congressmen, when we read the editorials, and when we discuss the bailout with our friends and neighbors. However, it is time to sit back, take a deep breath, and look at the situation from a different angle.
Because of the state of the current economy, you and I, as taxpayers, will have to pay, whether a bailout happens or not. The question our leaders are facing is whether the cost of a bailout is less expensive than the cost to the economy and taxpayers if a financial collapse is allowed to happen.
Ben Bernanke, the Chairman of the Federal Reserve, must be in the camp of those who believe the failure of the financial markets will cost the taxpayer substantially more than the cost of a bailout. With the help of the US Treasury, the administration, and Congress, the Troubled Asset Relief Program (TARP) was established and funded initially with $250 billion, including another $450 billion on the sidelines.
As initially outlined, the funds would be used to buy various mortgage-backed securities and whole loans and create an insurance program to insure these assets while trying to give relief to struggling homeowners facing foreclosure. Within two weeks, however, this was changed to emphasize a direct cash infusion into both financial and non-financial institutions. This action, adding capital in lieu of buying mortgages, increased the sentiment that this is truly a bailout of the banking industry and is not going to help anyone other than a few big wigs.
It is important to understand the impact of these two choices, buying mortgage assets or infusing cash, on total cost to taxpayers. Each of us, as individuals, has assets and liabilities. Assets are what we own while liabilities are what we owe. If our assets are greater than what we owe, we have a positive net worth. If our assets are less than what we owe, we are, for practical purposes, bankrupt. However, as individuals, if we have enough cash coming in each month, we are under no pressure to declare this bankruptcy as long as we're paying our bills. To sum this up in an equation form, Assets - Liabilities = Net Worth.
Because the Banking industry affects the lives of almost everyone, and because US Taxpayers have guaranteed the banks' deposits, banks are under a set of rules far more stringent than we are as individuals. Three rules that are important to understand are the rule limiting the relationship between assets and liabilities, the requirement to mark all assets to a current market price, and the requirement to maintain a positive net worth.
Although assets vary from bank to bank, the majority are in the form of loans. When you borrow money to buy a house or car, you know that you will repay this money over time. These loans, therefore, create cash flow to the bank. However, they cannot be converted into cash quickly... unless the bank takes a bunch of loans, puts them together into a package, and then sells the package to an investor. If one bank happens to buy a package of loans from another bank, they will have a new asset. Instead of a loan, it will be classified as a security, which in many cases is the second largest asset in these banks.
Liabilities vary from bank to bank, but the majority are in the form of deposits. When you make a deposit into your bank, the bank will owe that money back to you, and thus this is a liability to the bank.
Our equation for the bank, then, can look like this: (Assets) Loans + Securities - (Liabilities) Deposits = Net Worth. The tricky part is that banks can leverage their net worth by a factor of 12. To make this easier, let's put it into numbers:
Our Little Bank
Assets 1,200,000
Liabilities 1,100,000
Net Worth 100,000
What would happen if 10% of the loans we made were suddenly not being paid, and it was probable that they would never be paid?
Our Little Bank
Assets (1,200,000 - 120,000) = 1,080.000
Liabilities = 1,100,000
Net Worth -20,000
BANKRUPT
Currently, 10% of the mortgage loans in this country are behind or in default. Our rules require a bank to keep a positive net worth. The TARP is designed to remedy this problem. Initially, the plan was to buy tarnished loans directly from the banks. The impact on Our Little Bank would be a decrease in assets and an increased net worth by the amount paid:
Our Little Bank
Assets (1,200,000 - 120,000 sold) = 1,080,000
Cash from Sale 120,000
Liabilities 1,100,000
Net Worth 100,000
Again, this was the initial plan. However, purchasing the bad assets would only be worthwhile to the taxpayer if the loans were ultimately paid off. Do you think this would happen? Neither did the Treasury. If the TARP funds were used to directly add cash to net worth and receive, in return, ownership in the bank, the impact would be to maintain a positive net worth while the banks themselves absorbed the losses from bad loans.
Our Little Bank
Assets (1,200,000 - 120,000 Bad) = 1,080,000
Liabilities 1,100,000
Cash from TARP 120,000
Net Worth 100,000
The taxpayer in this scenario at least has the opportunity to get repaid at 100% of their investment. We believe this is a far better use of taxpayer funds as opposed to buying loans that will never be repaid.
How are we doing?
Even when the world is treating us poorly, we have to ask and, in some way, compare our performance to that of others. It would be a lot easier to just disregard all mention of performance. However, as your employee and portfolio manager, it is my duty to make sure that you have 100% transparency of all activity in your portfolio.
In the investment world, when the chips are down, we can find solace in the fact that everyone is in the same boat. We can also find a bit of relief by grading ourselves on a curve and comparing our returns with those of our peers, for better or worse. This month we received two notifications on how our composite (average by objective) fared against many of the largest and best known managers in the country.
Morningstar has given our Focused Growth Separate Account an overall 4-star rating for the period ending September 30, 2008. The only composite return information we provide to Morningstar is on our Focused Growth Strategy. We provide return information on all of our major composites to Money Manager Review who have ranked all four of these composites favorably for the 1, 3, 5, 7 and 10 year periods ending September 30, 2008. One of our composites, the Focused Balanced composite, is a member of Money Manager Review's US Balanced Large Cap Growth set and was ranked # 1 for returns over the past five years ending September 30, 2008. Our web site includes news releases, which discuss the Morningstar and Money Manager Review process. Please take a look at these for more detail.
Also, some of you have suggested that we withhold the paperwork we send to you or that we have sent to you directly by your broker and custodian. We have discussed this but believe that the delivery of the information is important to you for verification and accountability purposes. However, we can set up your account for email delivery of a large portion of the information sent. If you would like to make this change, simply give Justin a call and let him know.
Our Web Site
During the month of November, we posted three new market commentaries on our web site. In addition, we launched a radio show on WRHI AM 1340 and FM 94.3 which airs each Tuesday. The shows are short three-minute programs which are discussions of our market commentaries, and these are linked from our site. If any of you have not had a chance to listen, just visit www.andersongriggs.com.
You can now also forward anything on our site to someone you think may be interested. Just click on the "Email this page" link found at the bottom of any section and follow the instructions. We encourage you to share our thoughts and commentaries with others.
Until Next Time,
Kendall J. Anderson, CFA
Anderson Griggs & Company, Inc., doing business as Anderson Griggs Portfolio Management is a registered investment adviser with the US Securities & Exchange Commission. Pursuant to laws and regulations Anderson Griggs also maintains notice filing with several individuals state regulators including North and South Carolina. Anderson Griggs only conducts business in states and locations where it is properly registered or meets state requirements for advisors. This commentary is for information purposes only and is not an offer of investment advice. We will only render advice after we deliver our Form ADV Part II to a client in an authorized jurisdiction and receive a properly executed investment Management Agreement. Any reference to performance is historical in nature and no assumption about future performance should be made based on the past performance of any Anderson Griggs Investment Objective, individual account, or index. The authors of publication are expressing general opinions and commentary. They are not attempting to provide legal, accounting, or specific advice to any individual concerning their personal situation. Anderson Griggs Portfolio Management's office is located at 113 E. Main St., Suite 310, Rock Hill, SC 29730. The local phone number is 803-324-5044 and nationally can be reached via its toll-free number 800-254-0874.