Beware the Nun in the Whorehouse!
As we move into the final months of yet another dismal year in the stock
market, many bulls are taking delight over the fact that the annual Fall Season meltdown has failed to appear so far. After all, mass investor panic during the Fall Season has become a hallmark of general equities over the past several years.
Despite almost daily revelations of more corporate malfeasance in terms of
accounting creativity, the stock market has stood its ground and resisted a
hard leg down. In the bulls' minds, this signals that indeed, the stock market has truly bottomed and investors can look forward to resumption of the superbull market cycle. To that effect, even various bearish analysts have been advising a closing of short positions in general equities and a movement out of precious metals back into the mainstream investment
vehicles.
If only life were that simple.
In my mind, there is one enormous financial sector within the stock market
that, to date, has avoided a thorough investigation into its accounting practices, yet requires a due diligence evaluation no less probing than that which corporate America is now undergoing.
I am speaking of the mutual funds which, as of this date, have yet to have a
spotlight shone down upon them -- and which operate as though they existed
within a holy moral vacuum separated entirely from the corruption swirling
around them. In other words, American investors are asked to accept a major leap of faith, namely the notion that the mutual funds are "the nuns
in the whorehouse," the only saints operating within a swamp of moral decline and nefarious business ethics.
For those who think that I am a gloom and doom pessimist or another
Chicken Little looking for trouble where there surely is none, I can only respond with one acronym:
*** IOS ***
Those who were not alive or active investors during the Sixties may not know
anything about IOS (aka Investors Overseas Services), the Swiss-based mutual fund created by the late Bernie Cornfeld. In fact, IOS created the first mega-mutual fund (Fund of Funds) in America and at its zenith, it held assets of several billion dollars, which in today's inflated currency would represent tens of billions of dollars of net worth. Cornfeld's promise that "everyone can become a millionaire" inspired the tremendous growth of IOS -- and IOS stimulated the general equities market to boom as it had not done before.
Unfortunately, the Sixties market boom ended suddenly when it was revealed that IOS partner, Robert Vesco, had looted the mutual fund of a huge slice of monies and escaped offshore with the loot. With the collapse of IOS, the major spark behind the Sixties stock market euphoria suddenly
died. Scores of small investors were left with huge losses, leaving them
soured on equities for a long time. Today it is said that Vesco lives in Cuba under "house protection" of Fidel Castro. As such, Vesco is the living embodiment of a karmic morality tale: a man who stole vast amounts of money only to find himself imprisoned by it, unable to visit any Western nation where he would face incarceration, yet unable to live freely in the country where he is now housed.
In the Eighties, as a young man, I had the opportunity to meet Bernie
Cornfeld and visit him at his mansion in Beverly Hills on more than several
occasions. At that time, Cornfeld lived his own unique, sad, morality tale - a man who, although wealthy, was ostracized by most of the Los Angeles
Establishment, harassed relentlessly by IRS agents, and surrounded by young attractive women who liked him only insofar as his ability to satisfy their insatiable material cravings.
It was Bernie Cornfeld who first enlightened me with respect to the
treacherous waters within Wall Street financial circles. Thanks to the
lessons imparted to me at his dinner table long ago, I avoided investing in
the internet mania since it seemed apparent to me that, during the entire
madness, the market was rigged for the ultimate benefit of the big Wall Street players. On the other hand, I was not the best student at the
table because I have been a heavy investor in gold stocks for years now,
despite a market rigged some time ago via the gold carry trade for the
benefit of the bullion banks.
In any case, one lesson Cornfeld taught me still resonates in my mind.
Specifically, he warned me that the same kind of malfeasance that visited
IOS would recur down the road. There would be new mutual funds and they
would ultimately follow the same crooked path. The temptations of
mega-sums of money always bring out the worst in certain types of
personalities (like Vesco). To the day of his death in England, Cornfeld
affirmed his own innocence, claiming that Vesco, and Vesco alone, had caused
the demise of IOS.
I long ago published thoughts to the effect that I believed the general
equities bull of the Nineties would be terminated by revelations of
malfeasance in the mutual funds....at one point, I even theorized (like so
many others) that the Y2k computer bug might be the thing that would take
down the stock market. However, much to my surprise, it turned out that
criminal activity in the big corporations (Enron and Worldcom), aided by
collusion amongst investment firms (JP Morgan and Citigroup), would prove
to be the final nails in the coffin of the bull market.
However, as the bull struggles to get up one last time and drag even more
innocent investors back into the stock market, I still firmly believe that
Cornfeld's admonitions are worth heeding. It is time for accountant sleuths and market watchdogs to demand an intensive
examination of the major mutual funds (from Fidelity to Janus) and determine if their books are what they really say they are. It is time for the SEC to be proactive, not simply reactive, and launch investigations
BEFORE investors pick up their newspapers one day to discover that a
Vesco-type at Magellan or some such fund has cooked the books and already
illegally moved huge sums to an offshore bank account.
In my mind, the biggest failure of the SEC to date has been its reactive
nature. Proper regulators MUST instigate measures to preclude malfeasance BEFORE its occurrence rather than simply applying tiny band-aids to the severed arteries of injured investors following the newest revelation of some devastating financial wound.
Precious metals investors need to be as concerned as mainstream equity investors since, in the event of a mutual fund panic caused by revelations of fund malfeasance, there could be a negative spillover effect to the gold mutual funds. However, I am willing to bet that, based upon the amazing clean-up that swept through the precious metals sector following revelations of the Bre-X scandal, the one mutual funds sector that is likely operating in good faith is colored gold and silver (EXCLUDING those precious metal funds holding HEDGED gold/silver stocks such as Barrick, Newmont, Placer Dome, etc. since the hedgers do NOT appear to be acting in the best interests of investors in any way, shape, or form).
In the final analysis, it is not inconceivable that the mutual funds are
virtuous beyond a fault. After all, once upon a time, there lived a fellow named Noah, a lone righteous man surviving in a most corrupt world. It is not impossible that the mutual funds are the contemporary version of Noah, although forgive my cynicism if I have my doubts. Yet even if the mutual funds prove to be blemish-free, I would still wager that gold and silver (metals and stocks) will prove to be the modern day equivalent of Noah's Ark.
Farfel
November 13, 2002
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