Saturday, March 3, 2012

Trust Your Greedy Doctor, Not Your Greedy Banker

One of the traditional chores of fatherhood, or so my wife has instructed me, is accompanying your wife on her first visit to the obstetrician after the birth of the baby, so that you, as the father, can tend to the baby in the waiting room during your wife's appointment. At one such event during the past few months, while strangers googaa-ed my new baby and cooed the traditional oh, she's beautiful and she's so alert, I overheard the administrative assistant of my wife's doctor scolding a patient on the phone for not having paid the many-thousand-dollar medical bill left over after her medical insurance company had paid their legal obligation toward the patient's recent labor and delivery. The administrative assistant was indignant that the patient, aka debtor, would even consider coming to her post-partum checkup without having paid the many-thousand-dollar-bill and passed on the irritation of the patient's doctor, as well. She told the debtor, "Well, the doctor expects you to pay at least half of the balance before she will see you." And then the administrative assistant paused for the debtor to say something and then tried to offer the very helpful "Don't you have a credit card you could put the bill on?"

Sure, I am a fan of making profits. Every article I write is about profiting from the markets, but I am troubled by the pardon given to doctors in the United States for being greedy for profits, a pardon that, during the past four years, has not been extended to bankers, a group of people who did not collectively take the Hippocratic Oath. Of course, I understand that the Hippocratic Oath really doesn't apply, despite their having sworn it, to American physicians because they all had their toes crossed while swearing it and because deep down we know that our greedy doctors deserve all that money. After all, they're smart, aren't they? They went through all that schooling, right? Haven't you seen all those TV dramas with doctors melodramatically saving lives? And they must pay for their kids' private school tuitions and BMWs, as well as the newest Mercedes sedan for themselves, right?

This week the rhetoric against the greedy bankers resurfaced, as Treasury Secretary Timothy Geithner wrote an op-ed piece for the Wall Street Journal entitled "Financial Crisis Amnesia", in which he argues that if we forget about how the greedy bankers forced all those blameless Americans to buy houses and then forced them to walk away from those mortgages and then had the indecency to try to foreclose even after those blameless Americans hadn't paid their mortgages for years---yes, if we forget how guilty those greedy bankers are, we are doomed (again). Still, what nobody seems to understand, as I have argued before, is that until we let the greedy bankers off the hook, these caretakers of the Treasury's printing presses will not lend the newly minted money that could encourage economic growth in our country. New, safe lending will spur economic development, which will encourage hiring, which will ultimately put more money in our pockets, which, in turn, we will spend, thus inspiring new confidence in the financial system, and the virtuous cycle will continue. We may even be able, once again, to pay our greedy doctors.

The good news is that, despite the anti-banker rhetoric, the bank stocks themselves have been performing well lately. Bank stock performance is one indicator I look at for overall market health, because without the banks' outperformance, any market move to the upside will be, sadly, unsustainable, inasmuch as the banks are the engine of the market. Also, I watch the banks because I am hopelessly long two of them in my (nearly) permanent portfolio, Bank of America (BAC) and the widow-maker Citigroup (C). Don't get me wrong: I think the market is overdue for a pause here at these lofty levels, and I have been holding a sack of cash in anticipation of a pull-back; yet, when we all expect a correction in the market, the market rarely gives it to us. I expect that we will drift unsubstantially higher during the next month or so and then have a fairly unpleasant April, May, or June. That's when I'll add to my (nearly) permanent portfolio.

What will I buy? I bought some shares of the New York Stock Exchange, or as it is officially called NYSE Euronext (NYX), after the company's deal to merge with the Deutsche Borse fell apart when the Germans realized that CEO Duncan Niederauer is indeed America, not European, despite his last name. The shares traded over $40 on the euphoria of the deal and then sank well below $30 after its collapse. I bought shares under $30 and will buy more, much more, when NYX drops again to $28 or below. NYX currently sports an annual dividend yield paid quarterly of more than 4%, which is solid and safe, as it represents only 50% of the company's annual profits. A 50% payout ratio, which is the official term, usually represents a very stable dividend; only when the payout ratio exceeds 70% or 80% should we really start to worry about the sustainability of a company's dividend. Niederauer claims that the company has returned to its pre-Deutsche Borse deal strategy of maintaining the dividend and building growth from within the company, which means one thing: after memories of the failed Deutsche deal fade, NYX will try to grow its derivatives business through mergers and acquisitions once again, and that may drive the stock price back up to $40. Of course, we get to collect 4% while we wait. With trading volume a mere trickle at the NYSE, Duncan Niederauer must eventually make a deal with someone.