Wednesday, November 21, 2007
Let me introduce you to Dr. Konrad Hummler.
Dr. Hummler is one of the managing partners of Wegelin & Co. Founded in 1741, Wegelin is Switzerland's oldest private bank. As such, Dr. Hummler's own money is on the line should Wegelin get into trouble.
You see, private banks like Wegelin act not only as a place to deposit your extra money, but as a kind of asset manager for you and your family. And unlike managers at Bank of America or Citigroup, managing partners at Swiss private banks are personally responsible for meeting their bank's liabilities if the firm gets into trouble. So you don't become a managing partner at a private bank unless you're extremely cautious and financially sophisticated.
Dr. Hummler is one of the all-stars in the industry. He and the other managing partners at Wegelin are widely credited for transforming it into one of the most innovative financial institutions in Switzerland. Considering the Swiss' legendary reputation for banking, it's a big compliment.
From 1996 through last year, Wegelin's assets under management increased eightfold, drawn by the bank's methods of investing in worldwide stock markets based on value and momentum. Since 2004, Wegelin's "active indexing" has shown returns of 77%: nearly twice that of the MSCI world index. Similarly, the bank's profits are up 25-fold from 1996.
I met Dr. Hummler in Zurich this year... and I always like to check in on what he's excited about in the markets. Last week, he shared his thoughts on the huge credit mess the big banks have gotten themselves into...
"Graham, the current credit market crisis is best compared to a sausage. A sausage is a thin, edible skin filled with a mixture of what were previously real pieces of meat. In this sense, it is a meat derivative. There is a significant distinction between meat and sausages. In the one instance, one knows what one has in one's hand; in the other, not necessarily."
Dr. Hummler went on to explain how Wall Street took mortgages and loans and repackaged them into financial sausages: a mishmash of assets incomprehensible to outsiders. Big Finance then sold these sausages to hedge funds and other outside groups. As it turns out, some of these assets were "rotten meat." Just like in the beef industry when mad cow turns up, the entire financial sector has been slammed as investors flee.
Dr. Hummler's dead-on here. As I explained earlier this month, investors have been in panic mode concerning financial stocks for several months now. No one fully seems to understand how deep the rot goes.
Even insiders at mortgage-lending companies such as Luminent Mortgage Capital and Thornburg Mortgage have lost millions of dollars worth of their own money, betting that their company was immune to the sell-off. In other words, the "sausage makers" didn't know what they were processing...
Of course, Dr. Hummler recommends avoiding the bigger banks, which are still exposed to credit problems. But he does like a certain group of stocks...
"Large-cap stocks have jumped as investors flee from sausages into other safer investments. We are wary of financials at the moment. Rotten meat is still in circulation. However, our bank is currently moving away from the U.S. and increasing our exposure to the U.K. and Europe. Sector wise we are bullish on utilities, consumer staples, health care, and telecom."
Dr. Hummler's advice is something I've been running into more and more: Investment heavyweights are shifting their focus away from the U.S. And Wegelin is betting that consumers will continue to feel pinched by the credit crunch and only buy things they absolutely need.
Mortgage stocks drop on Freddie's $2 billion loss... Freddie Mac, Fannie Mae, WaMu, Countrywide, IndyMac, and Friedman Billings Ramsey at fresh lows.
Homebuilders follow... new lows for D.R. Horton, KB Home, Centex, Lennar, M/I Homes, Standard Pacific, M.D.C. Holdings, and Hovnanian.
No house, no boat... West Marine and Brunswick hit lows.