Nov. 24–In the 1960s, Lyndon Johnson told us we could afford “guns and butter.” That we could spend money fighting a war and finance the “Great Society.”

Now George Bush is telling us we can have “guns and tax cuts.” That we can fight terrorism and still get checks from the government to spend on new cars and plasma TVs.

It didn’t work for Johnson. We paid for the deficits with a slowing economy, rising interest rates, and a sinking stock market through the 1970s. And Johnson had one huge advantage over Bush. When Vietnam was escalating, the baby boomers were just entering the workforce. These young hungry 20-somethings were great for the economy. They became productive workers, and demanded little from government. They were finished with school, had low medical costs, no pensions, and were 40 years away from needing Social Security and Medicare.

Bush, and whoever follows him, won’t be so lucky. The baby boomers are approaching retirement. As they stop working, the economy will lose their productive input and payroll taxes. With people living longer, fewer workers will be supporting more retirees. Right now the ratio of workers to retirees is about 3.3-to-1. In the next two decades, it will drop to 2-to-1.

Not only will the boomers stop working, they’ll demand more health services, whose costs are rising faster than inflation. Because politicians like to pander to voters, and because boomers are the largest voting block, no one is likely to have the political courage to control these costs.

More ominously, according to Larry Kotlikoff, an economist at Boston University, in a recent issue of Fortune magazine, there’s a projected $44.2 trillion budget shortfall in Medicare and Social Security. That’s a big number — quadruple our annual Gross Domestic Product. And this estimate could be low.

Payments for Social Security and Medicare are based on costs and interest rates. If our deficits keep increasing, interest rates and inflation will rise. This will raise financing costs and projected payments for Social Security and Medicare, creating a lethal time bomb for our economy — a time bomb no one is currently discussing.

It’s time for all of us to think about the impact of generational change on our economy.

I do not know if there will really be a $44.2 trillion shortfall. But I do know the economy could stagnate under the weight of these payments. Long-term, this means higher interest rates and a lower stock market.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

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(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

Nov. 17–As I was walking to work last Friday, I approached the townhouse of a money manager friend named John.

Two detectives were waiting in front of the garage. A car pulled up. The first detective flashed his badge. I shook my head. I had thought John was honest.

Now every time I turn around, someone I know is taking a perp walk. What’s saddest is that most don’t even realize they’re crooks.

To them, it’s just a game.

I always enjoyed visiting Dick Strong in Wisconsin, where I could sense the morality of heartland America.

Dick was a farm boy from the Dakotas, who embodied conservative midwestern values, and built a very successful mutual fund company.

So how could a man worth $800 million cheat his own shareholders out of $600,000 through illegal market-timing? The money didn’t mean anything to Dick. Neither did the fund-holders. It was just a game.

Gary Pilgrim and Harold Baxter were legends of growth fund investing.

In the 1990s, no one was hotter. Though their funds got crushed in the bear market, they made hundreds of millions for themselves.

So, how could Pilgrim let a hedge fund where he’d put his own money market time his own funds, taking money from his investors? Obviously, he did not think there was anything wrong with taking nickels and dimes from those who were paying his fees.

Many mutual fund managers think nothing of using the money you entrust to them as vehicles for lining their own pockets. In this practice, called scalping, they buy stocks for themselves. Then they have one of the funds in their family, for appearances, bid up the price of the stocks so they can sell at a quick profit. This is a risk-free way of using your money to make themselves rich. But they’re already rich.

I suspect money managers learned the game from CEOs in whose companies they invested. In the 1990s, the game was simple — how much could CEOs grab from shareholders before someone objected? With friendly boards, the answer was a lot.

The two cops I saw were Jerry Orbach and Jesse Martin. They were filming an episode of “Law and Order.”

My friend John had figured out a legal way of making money from the scandals engulfing my industry. He was renting out his house for an episode on white collar crime.

It’s a sad commentary that I was relieved that one of my friends was not a crook. It’s a sadder commentary that so many are. And the saddest part is that most haven’t figured out that there’s something wrong stealing nickels and dimes from the people who made them rich.

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(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

Nov. 10–I’m having a good year in 2003. My fund is up about 65 percent. But I owe my good performance to the decisions I made in 2002, when everything I did was wrong.

Last year, I felt like an idiot. Stocks I loved kept plunging. I was the investing equivalent of the Knicks in the fourth quarter, lots of air balls and turnovers. There were days I didn’t even want to look at the computer.

I believe investors learn when they lose money and get greedy when they make money. Last year, when I did lousy, I forced myself to reexamine my investing discipline. I realized I was a fundamental investor, not a trader or market-timer. I like to do basic research and invest in stocks selling below their real values.

This type of investing isn’t for everyone. It requires lots of fundamental research and the stomach to bet against the consensus. It isn’t easy buying plunging stocks analysts hate and selling surging stocks analysts love.

Nor is it easy watching stocks you own die of boredom, as no one wants to follow them. But it is the way I like to invest. This year my discipline paid off as my cheap stocks returned to fair value, and many orphan stocks I recommended have been bought out.

Right now, the market is fun. Everyone’s making money. Investments such as bonds aren’t as attractive as stocks. The economy’s recovering.

There are lots of reasons to stay the course and only one reason to start selling. The extraordinary values I saw last year are no longer there.

This is where investors have to take another look at who they are, and more importantly at mistakes they made in the past. How many remember the bull market of 2000? Well here’s a flash — the hype is back.

Look at some semi-conductor stocks, like Applied Materials, selling at 8 times revenues and 54 times next year’s projected profits. Internet stocks, like Amazon or Ask Jeeves, selling at 64 times and 40 times next year’s profits, hotel companies, like Four Seasons, selling at 64 times profits, restaurant companies, like P.F. Chang’s selling at 38 times profits.

These are fine companies, and the economy is recovering, but the current prices may be implying a more robust recovery than is likely or possible.

Investors are now only looking at the upside.

If you’re a momentum investor, enjoy the ride.

The market looks like it will continue to go up. But if you’re a fundamental dog like me, it’s time to take a hard look at valuations.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

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(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

AMAT, AMZN, ASKJ, FS, PFCB,

Nov. 3–The government is now cracking down on market timers and portfolio managers. This sounds good. But so far, the actions of government have tilted the playing field even more in favor of thepros.

In other words, the cure has been worse than the disease.

Now that the global settlement between regulators and the big banks has been confirmed by a judge on Friday and the $1.4 billion is on its way by Nov. 10 from the banks to the government and possibly some pennies to small investors, cracking down on the conflict between analysts and investment banking seems especially smart.

But the consequences may not be. Now fewer analysts cover fewer companies. Small companies are ignored. This gives professionals a big advantage over individuals.

Cracking down on abuses in IPOs seemed like a good idea. But the result has been many small companies being shut out of the public arena.

Stopping analysts from owning stocks in companies they follow seemed like a good idea, but it isn’t. Now when analysts find a stock they love, they may buy it for themselves and whisper the story to their best clients. The pros get the hot ideas, and the analysts make money in their personal accounts. The losers are individual investors.

This process would have worked better if lawmakers, instead of grandstanding, had understood the dynamics of Wall Street. Investment banking and analysis are linked. Companies need analysts if they’re to raise capital, and analysts need revenues from banking to cover their research costs. Separating the two is stupid.

The government should have demanded three rules.

Analysts should have to publish their investment record on each report, so we know if they are winners or losers. Brokers should have to divulge their banking fees. Analysts should have to obey insider trading rules.

Investors should want analysts to invest in stocks they recommend, as long as they file with the SEC each time they trade a stock in their industry.

Now we’re facing a new series of scandals related to insider trades from mutual fund managers and market timers. With worldwide markets trading 24 hours a day, monitoring every trade will be impossible. But abuses can be stopped.

Portfolio managers should be forced to follow insider trading rules and report the size of their investment in their own funds. They should also have to file whenever they buy or sell shares in their own funds.

As with other insiders, if they sell shares in less than six months, all profits should go back to the fund. By eliminating the possibility of short term trading profits, we can instantly eliminate the market timing trades by insiders.

As far as the other market timers are concerned, the solution again is easy. The government should impose an excess profits tax scaled to the number of days a fund is held. If investors have to pay 90 percent of their profits for funds held one day or 75 percent for funds held three days, the incentive to market time will be eliminated.

Cracking down on corruption is good, but if the solutions hurt the people they are supposed to protect, we will be worse off than before.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

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(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.