If you’ve been reading our missives, you know we don’t pull punches. We call ‘em like we see ‘em, and one target of our scorn is those within the investment community who put self-interest ahead of client interest.

We occasionally have a passing thought that perhaps we are too harsh; that our views of how this industry should work put us so far at odds with the mainstream investment community that our bias is naturally critical of an industry that might not be all that bad.

Then we read something like this.

Earlier this week, former Merrill Lynch CEO John Thain sat down with New York Attorney General Andrew Cuomo and spilled his guts about the absurd, ill-timed and completely undeserved bonuses and special compensation the company doled out just prior to the company’s merger with Bank of America. He told Cuomo that Merrill execs carved up about $3.6 billion in the waning days of the bank’s independence.

My guess is that Thain was willing to share this information with Cuomo since Andy had the ability to compel testimony; I doubt Thain’s conscience was robbing him of sleep. During this apparent come-to-supreme-personal-deity meeting with Cuomo, he was more than willing to share names, dates and amounts.

There are a lot of questions about what Bank of America knew about these bonuses prior to taking over the bank, but one would think that the accountant’s finger at BOA would pause as he or she ran down the quarterly numbers prior to approving the acquisition.

Let’s say for the sake of the argument they didn’t notice $3.6 billion in cancelled checks in the monthly reconciliation, but they had to know of the bust-out when BOA executives turned to the US Government, hat-in-hand, looking for a bailout.

It defies belief that BOA would think this wouldn’t raise the hackles of every sentient American. Hell, I am surprised Thain wasn’t confronted with an angry mob, pitchforks and torches in hand.

What we see on the national scene is also happening here, on a local level.

We recently learned of a well-regarded, successful broker here in our market. This person had a great book of business, and the respect of many of their clients and colleagues. Recently, clients learned the broker was moving to a different, competing organization. Reasons for the move included: the new company had far better technology that would allow the broker to serve clients better was one. The new company had a far greater number of money managers was another.

What this broker didn’t disclose was the new company wrote a seven-figure check to move their book of business.

Are we saying this person shouldn’t have moved? No, of course not. What we are saying, though, is the broker had an obligation to disclose the move, and let clients know, truthfully, why they were being asked to make allowances and considerations.

Like Thain, we don’t think this broker was acting in their clients’ best interests. Moreover, we think this sort of double-dealing staunches the opportunities for honest investors to do well for themselves, instead having to carry the costs of these hidden tariffs.

Act in your clients’ best interest – it seems like a simple idea, but one that appears in short supply in some segments of our world. Maybe it is time for pitchforks and torches.

President Obama is set to sign the stimulus tomorrow; a bill that we believe will be a watershed moment in the history of our country. Hammered out in a highly divisive Congress, the bill will pour $787 billion into the economy through a combination of tax cuts and public spending projects. The enormity of the bill is such that it will affect all of us, one way or another. Here are our thoughts on its impact, who we believe will benefit, and what you can do to grow your net worth in this fast-changing economic landscape.

WHAT WE BELIEVE
The structure of the stimulus package pushes a majority of the funds to federal, state and local government entities. The Obama administration has touted that the funds will go to “shovel ready projects,” building bridges and repairing our nation’s infrastructure. While we are sure this will happen to some degree, we are sorry to say that the majority of the funds will be sucked into the operational budgets of the federal and state bureaucracies. Certainly, we will see some spending on high-profile initiatives, but a shockingly high percentage will simply be subsumed in operational budgets. Critics will say the WPA legislation of the 1930s had a similar role, and many economists are rethinking whether the massive federal spending helped bring an end to the depression, or whether WWII was the true catalyst for economic recovery.

THE AMERICAN BUSINESS PERSON WILL LEAD THE RECOVERY
While Republicans and Democrats argue about the mix between spending and tax cuts, we know where economic recovery will begin, and it isn’t in Washington. It will begin the moxie of the business owner who stays up late to find creative solutions to our dilemma. Those who succeeded in the last economic slowdown - those who understand the issues and what it takes to turn their “personal economy” around, will lead that charge.

Business leaders who personally weathered the recession of the late 1970s will have a unique advantage over those who did not. Those who felt the banking crisis of the early 1990s will be much more qualified to work their way out of this economic quagmire. This will also force the 30-something real-estate developers who had it all figured out to find humility, and become a better investor in the next cycle.

WHAT WE ARE SEEING ON THE GROUND
Business activity has been stuck for almost a year, but we are starting to see evidence of traction, and the banking industry is the pivot point. We are finally seeing some of the banks get on with the painful, messy work, of cleaning out bad debt. Some are writing down first-position real-estate notes by as much as 70 percent. Painful, yes, but until the banking industry stops deluding itself about the amount of bad debt, they can’t fix it.

For investors who are liquid, this will provide a bounty of opportunity. Investors will be able to buy that bank debt, begin the process of completing well-planned developments, and sell them at today’s lower market price. We are recommending this strategy for Lakeside investors, and recently proposed a deal that should leverage these economic realities.

While we are pleased that some banks are getting it done, others just don’t get it. You can usually determine which ones have their heads in the sand by looking at the stock price. We will refrain from braying about which ones are still ignoring their problems to the detriment of their employees and customers, but know they are there, and they continue to impede our ability to move this languid economy forward.

IN SUMMARY
It is too early to tell how the stimulus package will impact the economy. We know it will help government agencies with the most severe budget deficits, including many here in Washington state. Let us all hope that the economic rebound occurs soon, whether caused by taxpayer relief or the creativity and imagination of all Americans.

Each time the stock market falls, investment firms try to replace risky investments with safer ones. Then when markets rise again, their advice is to sell safe investments and “go for growth.”

The pendulum of investing.

You might ask, what’s the problem?

One problem is with the very business model of those investment firms directing the decisions of many Americans. These investment firms have an overly developed focus on selling. To survive and prosper, they need to sell investors something, anything. I think this focus on the transaction comes at the expense of providing good, solid counsel to clients.

Here is how this plays out: Every investor lives in fear of losing money, so when the stock market falters and brokers begin touting bonds, the pendulum begins to swing, and swing it does. Right now, brokers are pushing that pendulum, encouraging investors to buy “safe” investments like tax-free municipal bonds. We urge you to be very thoughtful before you act. We believe tax-free municipal bonds aren’t the answer.

Here are our thoughts on why.

• Tax-free municipal bonds make perfect sense if you are in need of safe, low-risk assets and prefer tax free over taxable treasury bonds.
• Tax-free yields of three percent equal taxable bonds paying 4.5 percent.

Here comes the hard part…

• Interest rates are at historic lows and will likely rise two to three percent.
• For every one percent increase in interest rates, 10-year bonds fall eight percent in value.
• The reality is that people do not always hold bonds for a decade - sometimes situations arise that require liquidity.
• In the 1970s, investors acquired four percent tax-free bonds that fell 50 percent in value as interest rates rose.
• Smart investors take advantage of tax-free bonds when rates are high. Others do so when rates are low and fear is high. Our advice: now is not the time to acquire tax-free municipal bonds.

When the markets are high, euphoria abounds and all is well, the major investment firms sell you on strategies that carry risk and speculation. When fear is present, and there’s overall anxiety about further declines, they sell you safety.

I have witnessed this cycle for 22 years while employed by Shearson Lehman Brothers in the 1980s, Oppenheimer, Kemper and PaineWebber in the 90s and since co-founding Lakeside 10 years ago.

We suggest the pendulum is broken because this cycle means too many investors miss the growth years and catch the down ones. Being a smart investor includes understanding what you are being sold and why.

Here we are, one month already in the books for 2009. We have a new administration at the helm, a newly approved stimulus package moving through the senate and still a great deal of uncertainty in our economic future.

Today, I would like to continue our discussion about steps we all can take to make sure we are putting ourselves in the best position to weather this economic challenge.

What We See Next
Most Americans with any sort of investment portfolio saw assets whither by as much as 40 percent. If all your investments are with Lakeside, those losses are significantly less, but still down for 2008. Many of our clients draw off the interest of their investments to augment, or in some cases completely underwrite their lifestyle. Even if we immediately return to the profits we’ve seen in years past, decreased principal means reduced cash flow, perhaps significantly affecting how you live.

Asset acquisitions have stopped, gifts to charities are slowing and even being reneged upon and funding for children’s education accounts are being frozen. If the world’s largest foundations are adjusting their giving, you probably should be too.

Now could be the time to make some changes to spending patterns, reducing your outflow and increasing your inflow. I am not talking about clipping coupons or taking advantage of early-bird specials at Denny’s, rather, taking a few simple, prudent steps to put yourself in a stronger position.

For example, many of our clients make routine gifts to foundations, non-profits or other charitable-giving organizations. These organizations are adjusting their budgets and programs in anticipation of lower giving, and perhaps you should adjust your giving too. If you are a regular contributor, most charities will say that they would much rather have you tell them that you are dropping back to a lower amount, rather than stopping altogether. They know that contributors are much more likely to increase giving when the economy improves than to start up again from scratch.

Now could be the time to see if you still have the emotional flexibility to enjoy the things that would have likely made you perfectly happy when you were less affluent. Instead of booking a three-bedroom oceanfront suite in Hawaii, rent a condo and enjoy mixing your own Mai Tai. If you are in the market for a new car, think about buying the top-of-the-line Toyota Avalon instead of a Lexus - the engines are the same, but the price tag is smaller. Better yet, if you are set on buying a Mercedes, check out a place like Complete Automotive here in Seattle where instead of paying $90,000 for a new CL500, you can pay less than $30,000 for the ‘06 model.

If you are not big spenders in the first place, consider shifting your portfolio to sound lending opportunities that increase cash flows coming your way.

If we are all misguided and the stock market recovers with a vengeance, then the rally in that asset category tends to continue in three to five year cycles. Missing the first year of the bull market of the 1990s had an immaterial affect on portfolios. It was catching the first year of the bear market that did investors in.

For example, shifting a $5 million investment portfolio to include 50 percent lending at a 10 percent return, you will enjoy $250,000 per year of income. At that level, your concerns about the stock market declining are lessened considerably.

Shakespeare wrote that “sweet are the uses of adversity,” reminding us that when we are faced with challenges, we can use them as an opportunity to make positive changes that will have lasting benefit. I urge you to do just that.