How To Invest Like Brooke Astor

The New York Times (NYT) has had an interesting series of articles over the past year or so discussing the tug of war over control of the personal finances and estate of socialite and philanthropist Brooke Astor’s fortune. The story gets interesting as her son, Anthony D. Marshall (son with her first husband but he took the last name of her second husband) is at odds with his son Philip and the trust division of JP Morgan Chase (JPM). If you are into soap operas then stop reading now. However, if you are interested in asset management then please read on.

Today’s installment in the NYT times of the Astor/Marshall story disclosed the findings of an audit over Astor’s investments. The entire estate was valued at $131 million. Real estate accounted for $41.2 of the estate. Personal property was valued at $10.3 million including some baubles that Mrs. Astor owns. Private equity and hedge funds accounted for over 1/3 of her assets or $46.8 million. It was disclosed in the NYT that a $20.6 million investment was in the Optima Fund, L.P. hedge fund which I am not familiar with and hence have no opinion. Bonds and cash equivalents were just over $9 million. Finally stock holdings were $23.5 million.

The stock portfolio is a compendium of big cap investing including, according to the NYT: Morgan Stanley (MS), Johnson & Johnson (JNJ), Citigroup (C), Eli Lilly (LLY), Four Seasons Hotels (FS), Google (GOOG), Molson Coors (TAP), PepsiCo (PEP), Proctor & Gamble (PG), Staples (SPLS), XTO Energy (XTO) , Encana (ECA), Cimarex (XEC), Cicso Systems (CSCO) and United Technologies (UTX). MS was her largest individual holding valued at $3.4 million.

What is strange is that her grandson accused her son of mismanaging the portfolio. I guess you have to call it as you see it and the son deserves some accolades because this is one splendid portfolio with lots of big safe growth and income names. As for the other charges leveled by her grandson at her son of stealing from and mistreating Mrs. Astor, that we can leave to the courts.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of C and GOOG although positions can change at any time.

Handicapping the FOMC

What can we expect from the FOMC? For one, after Tuesday’s sell-off and the concomitant rush to the safe haven of the bond market, Fed Funds futures rallied moving forward the probability of a 25 basis point ease. As we can see from the table below (source: Bloomberg Professional Service) there is a 92% chance of a 25 basis point rate cut by August.

The next 4 scheduled FOMC meetings are March 20/21, May 9, June 27/28 and August 7. Here is where we need to do some handicapping. First, I think that given the sub-prime mess and what is likely to be a baby with the bath water credit tightening reflexive reaction by lenders, I believe that we will get not only one but perhaps multiple easings this year. The first easing is always the hardest. This time around the first easing will be to remove that extra tightening from 5 to 5.25% from the FOMC last rate bump last year. The question is when? Next week the FOMC doves will circle the wagons and begin the official dialogue to set up an ease, likely pushing the hawks out of the picture. I don’t think we get the cut but we get the message that they are willing to do so if the mortgage and credit markets continue to deteriorate. The Fed Funds markets indicate a 50/50 chance of an ease by July. I think the FOMC acts at the June meeting in what will be a mild surprise. By the end of the year we could get another 25 to 50 points of easing. The yield curve will level off and then slope upward very gently. This would set the markets up perfectly for a 2^nd half rally.

Inverse and Leveraged Inverse ETF Activity May Be a Contrarian Indicator

One sign that the market had gone too far to the downside was when the volume of chatter about inverse and leveraged inverse ETFs went up dramatically. I have begun to experiment with such securities recently with some success but I used them only on a test basis in limited quantities. At this juncture I hold no positions in these instruments for my clients, family or myself. However, there are now many day traders and chartists out there who are jumping into those instruments with reckless abandon. Just check out the surge in volume for the UltraShort QQQ ProShares (QID) and UltraShort S&P500 ProShares (SDS) since the beginning of the year.

I think that testing my hypothesis which I am now suggesting that these products are contrary signals is a great research project for one of my Seton Hall students. Of course, we would need significantly more data points to display meaningful results. We will get hopping on this endeavor when classes resume next week.

What Makes Sears Such a Compelling Investment and When To Buy Stock

Sears Holding (SHLD) remains one of my favorite stock picks. I have written extensively about SHLD on The Street.com’s Street Insight website; have discussed the company frequently on Bloomberg Radio; and, have been widely quoted in the written press. Last week, SHLD reported a superb quarter and as usual the SHLD bears tried to cut the stock down. Every quarter they find some excuse to hammer the stock. The stock selling happens like clockwork after the quarterly report is issued. Also like clockwork is my equal and opposite reaction to this phenomena by adding more stock to my LakeView Asset Management client, family and personal positions. I think so much of SHLD that it is also in my children’s custodial accounts. Time and time again, the earnings related selling provides more opportunities to get into a publicly managed Eddie Lampert investment. Even yesterday when the stock sold off more than $2 in early trading I was back in nibbling again. SHLD closed higher on that day despite a weak market and a very bearish closing hour.

You can’t look at SHLD as just a retail story. If you did then you missed out on a 650% rise in the stock since the end of 2003.What is Lampert doing at SHLD that makes it such a compelling investment? Many things. First, he has been on an asset sale program for several years to rid the company of unwanted real estate and operations. While this is happening, he has focused on the core retail business by bringing in a professional merchandising team, focusing on margins rather than same store sales and building up the apparel department. This is now paying off. Recently, Lampert has been using his hedge fund acumen to make strategic investments through the swaps market, a business that I built up at Merrill Lynch over a decade ago. Finally SHLD has been using its strong cash flow to buy back stock. Lampert's letter to investors is a must read. The next step in this process will be for Lampert to start acting more Warren Buffett-like and acquire another company. I think that BJ’s Wholesale (BJ) is an attractive target for Lampert but could get snapped up by another smart private equity firm. I have also bought BJ for the accounts of my clients and my personal account.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of BJ, MER and SHLD, in addition Scott Rothbort owns call options in MER -- although positions can change at any time.