Quotes of the Times

“Index Funds don't care what they buy.
Hedge Funds don't know what they buy.”

Jim Rothenberg,
Capital Research

Hedge Fund

A very specialized, volatile, open-end investment company that permits the manager to use a variety of investment techniques usually prohibited in other types of funds. These techniques include borrowing money, selling short, and using options. Hedge funds offer investors the possibility of extraordinary gains with above-average risk…currently not subject to regulation by the SEC, the NASD or other Federal regulating commission…hedge funds can be either long or short assets and may enter into futures, swaps, and other derivative contracts…because of the substantial risks involved in unregulated, complex, and leveraged investments, hedge funds are normally open only to professional, institutional or otherwise accredited investors.

TEXAS TEACHERS:

FASTEN YOUR SEATBELTS.
PUT ON YOUR RUNNING SHOES, AND GET READY TO RIDE.
THERE'S A NEW SHERIFF IN TOWN!

T. Britton Harris, IV is the new Chief Investment Officer at the Texas Teachers Fund and the former Chief Executive Officer at Bridgewater Associates, the Connecticut based hedge fund group with about 165 billion dollars under management.

"... Now, here's my plan ..."

Mr. Harris aims to increase returns on the Texas Teachers' Retirement Plan by 1% annually by utilizing what else - hedge funds. Mr. Harris maintains that he will be able to produce higher returns with the same level of risk. "Investment in alternative assets has not hurt returns at other pension funds," says Mr. Harris, "It has helped returns." No, and unlike Superman, if I jump off a high building, I will break both legs. Things can always be different. Especially leveraging serious pension funds in order to multiply the bet.

So, you're a history teacher at a public high school in Houston. You happen to read that the new manager of your Retirement Plan is a hedge fund guy. You remember reading about the recent melt-down by two Bear Stearns hedge funds that invested in sub-prime mortgages. Bad decision, and Bear Stearns kicked in 3 billion of their own money in an attempt to keep the funds afloat.

"... And also ..."

You recall that less than a year ago that venerable hedge fund, Amaranth Advisors, blew away an unknown amount of pension fund money while losing 6 billion dollars on natural gas bets that went wrong. And here's another thought: who would come up with a name like High-Grade Structured Credit Strategies Enhanced Leverage Fund? You got it. Bear Stearns, of course. With a name like that, it's obvious it's going to blow up. The New York Times reported that one of the officials at Bear Stearns said, "Bear Stearns is trying to unload somewhere around 4 billion dollars worth of sub-prime mortgages, which apparently made up the bulk of the supposedly un-hedged portfolio of the fund." Of course, if they can't do that, they say their intention is "to shut down the fund." For all of us who are not as brilliant as Bear Stearns's legendary mortgage backed securities traders, let me give you our friend Nick Murray's definition of that statement. He says that it's a euphemism for "acknowledging to the partners that every dime of their equity - and then some - has gone up the flue, and hope we don't get sued from here to Tuesday week."

HERE'S OUR TAKE

If your children or grandchildren are going through Texas Colleges and Universities and plan on being teachers, our suggestion is tell them to opt out of the Teachers State Retirement Plan, if they possibly can. Presently Texas teachers are forbidden to opt out. Investing their long-term funds with people who learned 50 years ago that there is no such thing as a free lunch or a short cut to riches will give them better odds of a secure retirement.

"... Oh, by the way ..."

As another aside, Mr. Harris received a degree in Finance from Texas A&M, where he now teaches a course, "Titans of Investing." One of the "Titans" is Warren Buffett, Chairman at Berkshire Hathaway, an avowed enemy of Hedge Funds.

In a recent interview with the Wall Street Journal's Craig Carmin, Mr. Harris was asked, "What will happen if you are unable to boost the funds' returns?" "Then others won't follow us," he says, "and I'll go somewhere else." Certainly, we here in Fort Worth hope he doesn't go to work for TCU or Texas Wesleyan.

"Don't kid yourself ..."

Where are the people who ignored the short cuts and did their investment homework (read research), valued companies in a rational analytical way and bought or sold with a long term view? Where are the investors who know what they own, and filled with the conviction of their research, hold on? One of them is in Omaha, Nebraska, running Berkshire Hathaway. Others are managing our personal and corporate accounts as well as the portfolios and the investments of the clients of Omega Securities. No tricks. No gimmicks. Hard work is oftentimes boring.

AGREE OR NOT: OUR FIVE DECADE SONG IS STILL PLAYING

There are only two entities that can derail your long term investment objectives – you and/or your investment advisor.

As of this writing we have had a number of phone calls from clients concerned about the "market." No, not because the market was too low, but because it was too high!

Well, we understand. We have been through both ends of it: high and low. The idea of worrying about markets being up instead of down occurred to me not long ago as I was shopping for a suit at a very popular department store. I made a choice, and just before I tried it on, the salesman, who is a friend of mine said, "If you want to hold off a week, we are putting these things on sale." Now what an idea! If I could buy at a 25% discount for the same suit selling for full price now, why not wait, since I knew the day the sale was going to start.

Don't we wish we knew when the full price of the "market" will correct, and the sale will begin? We would definitely want to hold off until the prices go down. The key is, we don't know on what day the stock sale starts.

"Nobody knows about tomorrow ..."

Worrying about markets and being concerned at what level the market stands is an exercise in irrationality. No one knows the tops or the bottoms. On second thought, it makes sense if you have turned your money over to professional managers, and they have shown you excellent results in the management of your money, then it really doesn't matter when you turned your money over to those managers. Naturally, you might get a "good feeling" if you happen to buy at the bottom of the market; on the other hand, if you invest the money when it becomes available, wouldn't it make sense that if your managers were more skilled and better trained than you were, (let's hope so) that they themselves would be in a good cash position until some of the stocks they desired to buy after thorough research, go on sale?

We've discovered over the years that the longer a client stays with us and we can have the opportunity to suggest reallocations and rebalancing at various times, that our clients worry less. Our experience tells us that the longer the time span with your money invested, the less you'll be concerned about the "market." There will always be downturns, that's for sure. Our approach is to attempt to help you understand that your long term effort to determine real life portfolio returns isn't investment performance; it's the investor's behavior.

So rather than speak to you about good or bad performance, we endeavor to encourage you to concentrate on long term results and consider if you are positioned in a situation that will provide for the goals you wish to achieve. It takes experience and courage to do these things, and hopefully, we can be the catalyst for the results you seek for the future.

OUR OPINION

Once again, please: "Don't tax me, don't tax thee. Tax that man behind the tree."

One of the best ways to gain votes if you are running for office, or if you are campaigning for someone who is running for office, is to make the bold assertion that Robert B. Reich posted on his blog. Mr. Reich, Labor Secretary during the Clinton Administration, stated that "Middle income workers are now paying in taxes a larger share of their incomes than people near or at the top." (Let's run those Capitalist slugs out of town with higher taxes, they've got plenty of dough!)

Boy, if that doesn't stir you up and make you want to vote for Mr. Reich's candidate, (whoever it might be!) nothing will. However, in order to find out the real truth about this tax business, the most objective data can be found with the Congressional Budget Office (the C. B. O.) These guys have the hard data on who pays taxes. The tax analysts at the C. B. O. are some of the best in the business, and are definitely non-partisan. Sorry, Mr. Reich, according to the New York Times, July 15, 2007, this is not quite the case. The numbers shown below are based on 2004 tax data, and the tax code hasn't change much since then.

The lowest paid one-fifth of the population with an annual average income of $15,400 pays 4.5% of its income in Federal taxes. The middle income group with income of $56,200 pays 13.9%. The top fifth, with incomes of $207,200 pays 25.1%.

At the very top of the income distribution, the C. B. O. reports even higher tax rates. The richest 1% has an average income $1,259,700 and forks over 31.1% of its income to the Federal government. Of course, the politicians make no distinction when they quote statistics, as Mr. Reich has done, that there is a difference in ordinary income taxation and capital gains taxation.

We've known for quite some time that the reason the Treasury is getting more revenues than in the history of our country is because of the tax laws that were enacted under the Bush Administration. As we've said in these pages before, many people in financial circles expect that if a new Democratic Administration storms the White House, the tax on capital gains and dividends will increase from 15% to anywhere from 25% or 30%. Hopefully, someone in Washington will wake up and see that this is like playing Russian roulette with a six shooter and 5 bullets in the magazine. Requiring the rich to pay more, just because they are rich, is little more than officially sanctioned theft.

If that happens, please lock the doors. There will be an avalanche of complicated tax shelters that will rack the economy which is, at this writing, humming along quite smoothly, thank you. Let's hope that Washington will realize that lowering tax rates encourages the work ethic in both individuals and businesses; thus productivity increases as well as income which has increased government revenues. The left has always believed that higher taxes raised more money, but don't consider the psychological charge that people and businesses get when tax rates are lowered.

When was the last time you voted for a President who promised to raise taxes?

That's our take, yours is welcome.

The Omega Financial Group
309 W. 7 th Street, Suite 900
Fort Worth , TX 76102