Unknown Advisor

Stayin' Alive

2010-08-23T12:34:00.002-04:00

You could call it a test post, or a 'does this blog still have a pulse' post.

The unknown advisor is alive, and has a brainwave and a pulse. I'll post again, from time to time.

Endurance. The new black.

Chrysler Bankruptcy Deal Chickens Coming Home to Roost

2009-05-20T13:18:00.004-04:00

As a consequence of the new administration's treatment of the bondholders in the Chrysler bailout and bankruptcy, will investors now either avoid similar debt of unionized companies, or demand higher interest payments?

According to Rep. Phil ware, an Illinois Democrat:

Wells Fargo, the fourth-largest U.S. lender, is responsible for Hartmarx’s collapse because it refused to extend credit. Wells Fargo said in a statement the bank wants the suit maker, which defaulted on more than $114 million in loans, to 'stay in business.'

Fund Managers Burned by Obama Now Say They Are Wary - Bloomberg.com

From the same article, hedge fund manager George Schultze: “Lenders will have to figure out how to price this risk ... Don’t lend to a company with big legacy liabilities or demand a much higher rate of interest because you may be leapfrogged in a bankruptcy.”

When you change the rules, or refuse to honor the rules, investors, including lenders, not being fools, will alter their behavior. Bending or breaking the rules has consequences, including some unintended consequences. Unintended consequences have unforseen costs.

FT: Chrysler saga sets dangerous precedent

2009-05-02T14:39:00.003-04:00

FT.com / Markets / On Wall Street - On Wall Street: Chrysler saga sets dangerous precedent

"...the Chrysler saga sets a dangerous precedent for US capital markets. For once, the law is unambiguous: senior secured creditors should be paid before junior unsecured creditors and employees...."

Is it time to speak truth to the new power now? Here is some truth: Rational investors will be cautious about buying corporate senior secured debt, if it is really to be politically subordinate, and politically unsecured. Such buyers will be particularly cautious when there is a union involved. The Obama administration should tread lightly here: Will we still have the rule of law in America, including our nation's bankruptcy laws, or will the new administration's behavior become perceived to be comparable to the rule by fiat of political strongmen like Hugo Chavez? If our leaders are in fact men who will uphold and defend the Constitution and live under the laws of the land then it is time for them to show that.

If the Constitution is now a "living document" with emanations and penumbras, with no bounds at its four corners of the pages it is written on, and no longer is nothing enshrined therein but the words which appear within those four corners, then what can we say of any of our other laws? Is political expedience and raw power now the trump suit, and not our laws?

It is to be hoped that the attorneys for the dissident bondholders will have the means to compel sworn testimony from the big banks and government officials to enable the court to determine if undue influence has been exerted by administration officials on the banks to coerce them to accede to the government's terms in this matter. Let us hope that such is not the case.

It is not for nothing that many Americans are very incensed over the actions of both the last and the current administrations as they strove to deal with unprecedented catastrophic financial events of the last two years.

It is not impossible that some of these actions could be held one day to have been illegal or unconstitutional, and perhaps even constitute high crimes and misdemeanors. That is how seriously they might be viewed by objective historians of the future.

The message should be: tread more lightly, and more carefully, and above all, with respect for the law.

Some of Chrysler's Bondholders Say No to Obama's Deal

2009-04-30T12:02:00.002-04:00

Chrysler Will File for Bankruptcy, Official Says (Update3) - Bloomberg.com

The deal offered by the Obama team is said by Bloomberg to have been worth about 33 cents on the dollar, which is, I believe, a lower percentage than that the union was to have received for Chysler's obligations to it.

Frankly, not being a lawyer, I don't see the basis for favoring the union's debt over the supposedly secured, and supposedly senior debt held by the bondholders.

Obviously, the politics of the situation would seem to link the priorities of the union and the Obama administration.

All in all, this may be a favorable outcome for the rule of law over politics and for all parties. One gets the sense that if the deal at GM or Chrysler winds up being too much of a politically driven ongoing transfer of more and more and more billions in defacto taxpayer subsidies to the UAW, at the expense of everyone else's interest, through the conduit of zombie car companies, that an outraged public very likely would soon decide to go on a buyer's strike against the companies involved just to force an end to the misery once for all.

We need a new birth of shareholder freedom!

2009-04-24T14:06:00.003-04:00

Mahalanobis

As for the Wall Street banks: They aren't run for the benefit of the stockholders anyway. They are run for the staff.

This was the eighth of ten reasons not to own bank stocks now. The original list is from here. Sadly, it is a valid reason to re-examine the whole concept of owning stocks at this point. Corporate governance is dead. Dead. The stockholder is the mark at the poker table. The directors are all too often at heart just management suckups and sycophants. That is, when they are not themselves management. Absurd percentages of earnings are transferred to managers. Stock buybacks and empire-building acquisitions are prioritized over cash dividends, and shareholders are fobbed off with a promise of greater earnings and share prices in the by-and-by. So maybe we should all just own bonds and commodity-linked investments for a decade or so!

Or perhaps we need a great stockholders' strike! Such a strike would be ended only when corporation by corporation, we get much more shareholder-friendly and shareholder-empowering bylaws and directors truly committed to a vision of corporate governance where their duty is first, second, and last to maximize the long term value of the enterprise to those who have bought their shares, be they individuals or institutions. That, by the way, would end any notion of a fiduciary obligation to open the gates and do business with those whose goal is only to slash, pillage, burn and dump the enterprise while exiting with a quick hundred million bucks or so.

Nothing too radical about that, is there? Don't look for the government to do it for you! They are too narcissistic, inept, slow, and um, manipulable by lobbyists to do more than mess things up worse.

Seriously, now. Stockholders' tea party time, anyone?

P/E Ratios: They Ain't What They Used to Be!

2009-03-20T11:29:00.007-04:00

Price divided by earnings, right? Simple. No.

When you cannot agree on how to define the term "earnings" anymore, then it isn't simple. In the last few days, we have seen some pretty big guns in academic and "real world" finance utterly unable to agree on what the current P/E of the S&P 500 index "is" now. One man, who knows more than I do, says that earnings should be capitalization-weighted. The guy in charge of the S&P's own computation of the index's P/E, says, more politely, "Bosh!"

Forward-looking or, um, "not-forward-looking"? One extremely bright man who runs a hedge-fund-of-funds says that on his projection of very low earnings, we are headed downward, much lower, before the bear market bottoms out. Others, including one noted "perma-bear", are now very bullish, for about the first time in anyone's living memory, and . (He's been around a while.)

Can this humble (I'm so humble that I'm unknown,) advisor offer a thought or two on P/E ratios? Thank you, I will.

1. Earnings of individual companies are less reliable than they once were. There is scope under the accounting rules, despite what the accounting profession says, for company management to smooth out income in normal years, and to do things like really throwing in the kitchen sink in a bad year, so as to look better later.

2. Forward-looking earnings are estimates only. Evidence-based estimates, but still estimates.

3. P/Es of indexes are just composites, however you calculate them, of the individual constituants of the index. And they are less reliable measures of value at market extremes, both tops and bottoms. Take them with a big grain of salt. Beware of obvious extremes, like those during the dot.com or tech bubble. They are unsustainable. Perennially profitable companies, running current losses, cannot have meaningful P/Es. It does not compute. So how meaningful is today's S&P 500's P/E, no matter how you try to calculate it?

4. But what about this market crash? P/Es were not obviously at ridiculously high levels. We just had what one very clear-sighted observer called a "liquidity bubble". Individual investors' behavior was not the cause of this last crash. Crashes do need a catalyst, something to sufficiently upset the status quo. See point 5 below. Institutions, both investment banks and other players, like hedge funds, were in my opinion the primary cause. Bear Sterns had what? Something over 30:1 leverage. Others were about as bad or even worse. Borrowed money, leverage, deployed in "safe, risk-controlled" strategies, like very highly-levered huge positions in CMOs and CDOs. Bye bye, Bear Stearns, and friends. but they were hedged! Yeah, right. Hedges can fail when markets aren't working or if the other party is himself in too deep. And now we find out that the European banks were more levered than Bear Stearns? That, if so, is trouble, with a capital T. If Euroland has a really bad time, they tend to spawn very big conflicts over there. Russia is economically weak now, but Putin is no fan of liberty, and wants Russia's old vassal states back. Germany was weak too, in the early thirties. China and the rest of Asia are not without large problems now either. And trouble in a globalized world, tends to flow around, back and forth, rather like a tsunami.

4.1. But why did all asset classes and equities of all the developed and emerging markets fall? Simple, in hindsight. Massively overlevered institutional investers, in a state of crisis, had to sell whatever could be sold, to meet lenders' demands for payment, and in the case of hedge and mutual funds, to meet the horrified retail investors' demand for redemptions. So, the levered players dragged down everything except sovereign debt, such as US treasury securuties.

5. But wasn't it really the housing bubble, and the politically-motivated lowering of mortgage lending standards, and lax bond-rating and institutional credit-rating practices which caused all this? That was bad, bad indeed. And it would have all blown up in due course anyway. And yes, this was the catalyst.

And that's how we got where we are.

Oh. P/Es. They are just a tool, and not always a very good one.

Should Regulators' Audits Be Geared to Finding Ponzi Schemes Like that of Madoff?

2009-02-04T11:07:00.007-05:00

No, no link. You're probably tired of reading all those Madoff stories already. And the other guys, Nadel, Cosmo, et al.

I believe it is fair to say that the SEC and the states' routine compliance audits focus on routine and rather mundane procedural compliance matters. Do you have the proper files, are they current, do you avoid various specific fiduciary or suitability no-no's? Have you done whatever the last guy to hit the newspapers and embarrass the agency was guilty of doing? I other words, are you honest but guilty of sloppy record-keeping? Are you guilty of whatever the latest hot-button issues are?

I would submit that it would be a good and reasonable goal to get beyond that kind of predictable bureaucratic thinking. A suggested goal, which would require legislation and funding: In the types of investment vehicles where Ponzi-scheme bahavior has occurred, regulate them. Require the types of accounting and other controls under discussion. Third-party, arm's-length portfolio valuation and client reporting. If portfolio holdings are illiquid or unmarketable, require regular, more frequent disclosure, and conservatively value them. If that impacts fees, too bad! Audit them. Regularly. And make those auditors utterly independant of political interference.

Here's an idea the hedge funds will just love! Tax them to pay for the cost of regulating and auditing them to keep them clean.

So, what do you think? Should SEC and other regulatory audits of entities such as hedge funds be designed to do this, to get beyond the usual regulatory issues, to do more, to reasonably minimize the opportunities of men like Madoff and these other bad actors we've been reading about to hurt good people and wonderful charities?

John Templeton Dead at 95

2008-07-08T13:28:00.001-04:00

John Templeton, pioneer investor, dies at 95 - MarketWatch

John Templeton, the legendary mutual-fund manager who was a pioneer of international investing and later committed much of his fortune to scientific causes, died Tuesday. He was 95.

My first thought was that it is sad that he is gone, but he was, as the Hebrew Scriptures say of some other special men, "old, and full of days". With all that we know about him, I think it's pretty certain that he is in a better place, a much better place.

I have a book about Templeton, Ten Golden Rules for Financial Success, by Gary Moore, Zondervan Publishing House 1996. I still pick it up every now and then and look through it. It has been encouraging and helpful to me. I recommend it.

"AmeriCredit Raises $750 Million in Subprime Auto-Loan Bond Sale" (Bloomberg)

2008-05-20T13:50:00.003-04:00

It is very good to read this. Perhaps a harbinger of better things to come. When subprime debt can again be bought and sold, then it may be time to revisit some of the asset writedowns. Such upward revaluations could be seen by the markets as a significant positive, of course.

Bloomberg.com: Worldwide

It's an Inflammatory Read, and it Should be!

2008-02-12T00:11:00.001-05:00

So, the shareholders are taking it on the chin, and the directors are doing their usual marvellous job of protecting the shareholders' interests. Management? Big bonuses at Goldman, as usual. And, as the article points out with remarkably restrained words, when an chief executive is forced to go, like at Merrill or Bear Stearns, he gets to keep his stock options. Look closely at the following beautifully, bluntly honest quote:

"The employees and executives at Bear Stearns own a significant portion of the firm; as such our interests are closely aligned with outside shareholders,'' company spokesman Russell Sherman said. ``We are intensely focused on delivering value to our shareholder base.''

By making themselves as big a part of the stockholder base as they can???

I'm waiting for an ETF holding profitable companies with dividends, without larcenous stock options programs camouflaging dilution by stock buybacks, and with directors militantly committed to defending stockholder interests, specifically minimizing management influence over the board. Haven't seen one yet!. We've got everything else! If the name isn't taken, they could call it the Governance Leaders Fund! An ETF with contrary practices could be called the Sticky Fingers Fund!

Bloomberg.com: Exclusive

Extremely Important Read: Mahalanobis' "Estimating exposures in credit derivatives"

2008-02-04T20:20:00.001-05:00

He says it better than I can. How's that for humility? I have been of the opinion that some of the subprime-related asset writedowns have been ludicrously exaggerated. When the dust settles, and the writedowns get adjusted to reality, will the markets suddenly get rather happy? Will heavily-impacted financials get wind in their sails? I suspect they will.

Mahalanobis

ETFs, Indexation Threaten Mutual, Hedge Funds: Michael R. Sesit (Bloomberg)

2008-02-02T13:06:00.001-05:00

It's interesting every now and then to see what really are the primary questions facing investors grappled with in the mainstream financial media commentary, which is usually so fixated on the latest financial markets "noise". Here's a little commentary of my own. It's helpful article and a good read. A link is below.

The article is generally right on. Quibbles? Yes, I have a few. Sesit refers to ETFs as an "asset class". No. No. No. ETFs are no more an asset class than open end mutual funds are, despite the dumb pie chart you see each month on your brokerage statement! They are a financial investing vehicle which can be used to invest in one or more particular asset classes, i.e., US large-cap stocks, emerging market stocks, various types and duration ranges of bonds, or also quite usefully, investment "styles" in a particular asset class, such as US small-cap value stocks, or even economic sectors, such as consumer durables companies.

More recently, the field has widened to include more diverse approaches, still useful and well worthy of acceptance, such as the "fundamental indexing" approach used by WisdomTree. But it's come to the point that you can get ETFs built to invest in companies with left-handed Sagittarian CEOs, companies with cute corporate logos, companies in industries not yet discovered, and companies most likely to be acquired by extraterrestrials. Well, not yet. Wait a while. ETFs have been created for fanciful "indexes" that are neither asset classes, sectors, or investment styles. In other words, a mixed bag, just like mutual funds. Good and bad ETFs exist. ETFs are just not an asset class.

Are ETFs somehow a "threat" to open-end mutual funds and hedge funds? No more than open-end actively-managed mutual funds are a "threat" to investors! Yes, they are gaining market share, presumably at the expense of the worst of the active funds. If so, thank God. The article suggests that hedge fund replication ETfs are a threat to hedge funds. May it be so. One can hope. How much money do investors have to lose to learn that lesson?

Bloomberg.com: Opinion

ETFs, Indexation Threaten Mutual, Hedge Funds: Michael R. Sesit

Most Penetrating Comment I've Seen on Jerome Kerviel and Societe Generale Yet

2008-01-29T12:22:00.001-05:00

David Weidner of Marketwatch: "Kerviel, the bad apple who was smart enough to fool a banking empire but not enough to beat the markets...."

Brilliant. No sarcasm at all intended. Smart enough to utterly defeat whatever passes for internal risk controls at an ostensibly world-class institution, but not smart enough to beat the market. Who's next for a similar story? Goldman? Some other firm? Just a matter of time. It seems these guys are given ambitious goals to meet; they are, when you get down to it, told to win or else at what is rather like a very big ongoing coin-flipping contest. So what do you think is going to happen?

A rogue ruined the financial system? Which one? - MarketWatch

FT: (free registration required) US pawnbrokers benefit from hard times

2008-01-26T12:38:00.001-05:00

A sign of the times?

On Manhattan’s 47th Street, the New York block through which about 90 per cent of US diamonds are sourced, some merchants report a sharp uptick in the amount of jewellery being brought in for sale. 'Its real sad – they don’t want to sell,' said Ruben, a 52-year-old street hawker who buys jewellery from passers-by in the diamond district. They might have paid $150,000 for a necklace but they will get back $25,000 or $30,000 at most. But it’s either that or lose their house.

FT.com print article

Will be Resuming Blogging

2008-01-26T12:03:00.000-05:00
Just to let you know, business demands have made it impossible to blog for the last few months, particularly as the blog is more of a "giving back" thing than anything else.

WSJ: Goldman Hedge Fund Had Worst Month in August

2007-09-14T19:02:00.001-04:00

"For years, Goldman Sachs Group Inc.'s flagship Global Alpha hedge fund could do no wrong. Over the past year, it has been able to do almost nothing right."

"August was the worst month in the fund's 12-year history; it was down 22.7% last month alone, according to a recent letter to investors. So far this year through the end of August, it was down 33.4% due to bad bets on everything from the Australian dollar, the Norwegian stock market and Japanese government bonds. The letter gave no indication about how the fund was faring this month. Over the past 12 months, the fund has lost 37% of its value."

Ouch.

For those who do not know the difference between speculation and investing, this sort of result may provide a useful opportunity for review, as they at least look more like an example of speculation than of investment, and of what happens when speculation goes awry. Money vaporizes, for one thing.

Speculation, per Investopedia, is "The process of selecting investments with higher risk in order to profit from an anticipated price movement." Further... "Speculation should not be considered purely a form of gambling, as speculators do make informed decision before choosing to acquire the additional risks. Additionally, speculation cannot be categorized as a traditional investment because the acquired risk is higher than average." And, reading on, "More sophisticated investors will also use a hedging strategy in combination with their speculative investment in order to limit potential losses."

I would go further, and say that there is not really even such a thing as a "speculative investment". It is sort of an oxymoronic usage. It is a speculation or it is an investment. And the reference to use of "hedging strategy in order to limit potential risks" is a bit ironic, as we're looking at a hedge fund, like many others, which has seem its efforts at risk control overwhelmed by market events.

"Investment", remarkably, is not defined in Investopedia! You might best define "investment" by a reading of chapter 1. of Benjamin Graham's classic work The Intelligent Investor.

I guess you might say the difference is indifference!

Relative indifference to risk, and greater willingness to accept more of it, are characteristic of the speculative, er, speculator. I said relative! Risk is always there, as even Graham would have admitted. There is such a thing as an aggressive investment, and an agressive investor, but the aggressive investor has tied his approach to his goals, and has pretty serious policy controls on the degree of acceptable volatility. A willingness to accept relatively greater levels of risk, with relatively poorer compensation for bearing that risk, or less knowledge of the actual risk taken, is associated with speculative commitments of money. In terms of equities, investors seek more compensation for bearing risk through such things as revenue streams (dividends) and lower prices for access to growth in earnings. A mere hope that the share price will go up or down based on expected short term developments is a speculative approach, for example. For example, using this view of the terms, just about everything I have ever seen Jim Cramer suggest is speculative, not investing.

Bottom line: In what sense is a commitment of money to a hedge fund an investment? If, as has already been said by someone other than me, the 'best and brightest' in the business cannot run a hedge fund without results like this, then who can?

(the story is $ subscription only)
Goldman Hedge Fund Had Worst Month in August - WSJ.com

Retirement Funds Vanish as Bankruptcies Hit Tax-Deferred Scheme : Bloomberg's Erik Larson

2007-09-12T12:31:00.001-04:00

The story is about an intermediary and some section 1031 exchanges gone very bad. Money not there. Now I'm neither a CPA nor a tax practitioner. From a very general investment and personal finance perspective, what are the lessons?

Businesses built around the tax code's loopholes can turn out to be very poor places to put your money. There must be a "valid business purpose" somewhere in there. I'm not just talking about such a business purpose for IRS purposes, but for investment purposes, such as "has this thing made money?" and "has it ever paid back the investors' principal?". When a very big tax loophole gets lobbied into existence, legitimate businesses will be built which also accommodate it, and then sometimes more exploitative types come in, for the big, quick bucks which might be hustled. No specific characterizations of such intended here, but generally, it should always be a concern if it is your money that is involved. When the tax consequences of a transaction, or a use of a specific intermediary look to you, as a lay person, to be the key drivers, rather than the making of a profit or gain, then, caveat emptor.

Another lesson, for business owners such as the person mentioned in the story, is to surround yourself with reputable people, to run something like the transaction described in the story by both your lawyer and accountant, and listen to them.

Seek real diversification, not just apparent diversification, when you can. If one thing goes very badly, will you be washed up?

Finally, if in a situation somewhat like the one in the story, if there is not a way to get the favorable tax outcome you would prefer, a way which passes the "smell" test, look for a fall-back approach, perhaps a less aggressive approach, with a still pretty good outcome. Beware people giving you a hard sell on some sure-fire tax-avoidance scheme, which just happens to compensate them handsomely. Ask how they are compensated! Demand specific written disclosure! The proposed actions might look like tax evasion, not tax avoidance, to the authorities. There's a world of difference. Even when the "intermediary" doesn't lose or steal your money.

Bloomberg.com: Exclusive

Credibility of financial blogs is questionable: Investment News

2007-09-11T11:55:00.001-04:00

via the estimable Fintag .Yes, again. Yeah, I know he has a hedge fund. I read some of their blogs too. I never said they weren't smart!

So, what good is a financial blog? Why should you read any blog? Why should you allow yourself to possibly be influenced by anything you encounter, like a blog, or the New York Times, or Fox News? If some blogger has a discernible axe to grind, you should indeed factor that in as you are reading or viewing. Is there a sales pitch in what you read, even a veiled sales pitch?

My own intent, sincerely stated, is to warn folks of investing or personal finance mistakes, and bad deals. Sure, I'd like more clients for my fee-only investment advisory business, but I develop my business in other ways than through this blog. This blog, like Fintag, is anonymous. Getting introspective here, could I or other bloggers have other motivations, possibly questionable ones, which might work to the detriment of the reader or a third party? In my own case, I really don't see any. First, my readership is small, but presumably reasonably sophisticated in its outlook on things. If I "cry out", so to speak, against generic problems with a type of investment product, or against a client-unfriendly business practice in the financial services industry, one pretty good test of what I say is whether it is propositionally true. I know that I am by no means the only investment adviser around who wishes to run the most exemplary little shop to be found. If I were to describe the most desirable sort of adviser-client practices I know of, with some explanations or support information, noting that I am by no means the only one operating this way, is that a sales pitch in some way?

If you read a story in what has come to be known as the "MSM", the mainstream media, and find it to include subtle (or not so subtle,) editorial coloring, shading, texturing, etc., do you discount that, never forgetting the source, as you read? You really should.

A test: Can you take such media as the Financial Times, The Economist, the Washington Post, the New York Times, and the Los Angeles Times, and the CBS News, et al, and conclude that there may be the same problem as the linked article alleges exists among bloggers?

Credibility of financial blogs is questionable - InvestmentNews

at an inflexion point in subprime crisis? Perhaps

2007-09-07T14:33:00.001-04:00

Hat tip to Fintag on this one.

A couple of rather powerful thoughts: "...investors should be canny and careful, and take little for granted. My own strategy is to invest in sound assets and simply hold onto them. That’s because the other relevant phenomenon about crises, is the system ultimately recovers. If you have the staying power, you will probably do fine." This is how investing, real investing, is done. You establish an appropriate asset allocation for you, in full consideration of your own time horizon and ability to bear market risk. You stick to it. If you do not understand how to do this, you should study some, or you gird up your loins and go find yourself a trustworthy, competent adviser. He can.

A trustworthy adviser has an investment approach consistent with objective academic investment research, not Wall Street's age-old refrain: "We're sooo smart, we can out-research and out-invest and out-trade everyone else for you! It must be so. Just look at my nice watch and expensive office!"

Bruner: We are at an inflexion point in subprime crisis - General News - FinanceAsia.com - The network for financial decision makers

Bloomberg's strangest headline of the day, "It's Time to Meet the Subprime Devil We Don't Know: Caroline Baum"

2007-08-24T12:42:00.001-04:00

Is this perhaps a slightly awkward headline? I always figured she was perfectly nice. (Just kidding now.)

Seriously, she has a very substantial point: Is the lack of transparency which goes with certain investments such as some mortgage-backed securities, sufficient to make it very difficult to evaluate the risks present in the financial markets? Sufficient to render problematical proper evaluation of the risk present in heavily-leveraged, quantitatively-driven portfolios of such investments? Evidently.

Sufficient even perhaps to alter the "riskiness", i.e., volatility, of even other asset classes? In the short run, apparently. Did Stephen King ever write anything as scary as that?

Bloomberg.com

The other side: TheStreet.com's James Altucher rebuts Barron's, sort of...

2007-08-22T11:14:00.001-04:00

Yes, it is a cute response. Meaningless, but cute! Altucher's test period is too short, ridiculously so, to "prove" anything. But I do believe him as to Cramer's picks being better than those of Barron's! Oh, well.

Both, using Altucher's methodology, underperformed the S&P 500 over the chosen "sample period". You would have done better with one buy of SPY. Better still, probably, if you then held it for a year and a day. Any of these people ever hear of transaction costs? Spreads? Income tax on short-term capital gains? The value of your own time, which could be spent having a life? Active investment management? Just another way of saying "negative alpha"? Has anyone ever started a recovery group for ~~Street Addicts~~ stock pickers?

Putting Cramer's Mad Money Picks to the Fire

What Was the SEC Thinking??

2007-08-20T21:43:00.001-04:00

I'm with Larry Kudlow on this. In a time when we have a naked (essentially fraudulent, If you ask me,) short selling problem in the markets, what on earth was the SEC doing making it easier to short sell? Eliminating the up-tick requirement can only make for more brainless volatility, and it's mostly mom and pop main street investors who get hurt in wildly volatile markets.

Kudlow's Money Politic$: More on What Was the SEC Thinking

Here's the link to the WSJ story he mentions.

Cramer's picks haven't beaten the market--Barron's

2007-08-20T14:22:00.001-04:00

No kidding!

I credit Jim Cramer with working very hard at what he loves. And with being a fine communicator, and an under-appreciated writer. And he is likable, when he is not being completely nutty. But the market is just too efficient for him. No argument exists on this, the numbers are in. Only trading "true believers" are willing to commit money to trading approaches for which there is no rational basis to expect bigger gains after taxes as a result.

Because he is on after the markets close, and because the more naive of his viewers are immediately buying his picks, in after-hours trading, a number of day traders will be right there in after hours action, catching those market orders, shorting his picks as those folks buy in. I know that he says not to do that. They do it anyway. Guess how that works out.

Cramer's picks haven't beaten the market--Barron's: Financial News - Yahoo! Finance

IHT: 'Size doesn't keep Goldman fund from gyrating with market' -- Or is it, gyrating the market?

2007-08-12T21:19:00.001-04:00

So, is it a fair question, if your portfolio was down last week, was it largely Goldman's hedge fund's selling to raise cash that did it for you? Presumably, anticipating big redemptions, with Global Alpha now down something like 33 percent, perhaps more, over last year and this YTD, and since there is now rather limited demand for subprime-"backed" debt, needing to sell genuinely marketable securities, down, down, we go.

Size doesn't keep Goldman fund from gyrating with market - International Herald Tribune

Vindication isn't so great.

2007-08-10T23:56:00.001-04:00

Anyone who's read this blog before knows that I don't think much of hedge funds. Re: the Goldman story, this is of course unconfirmed as of this time. Perhaps it's not that bad. Nobody would want this to happen to folks.
Bloomberg.com: "Goldman's Global Alpha falls 26% in 2007, People Say" So, hedge funds are just a great way to go, huh? When the redemptions have been paid out, and the investors lick their wounds, how will they come back in? One of the hedge funds which come out relatively unscathed? This time. Or in a somewhat more traditional investment approach?

What to Do if You Can't Reach the Broker -- WSJ Free article

2007-08-01T13:51:00.001-04:00

What follows is not investment or trading advice. It's just common sense. If you're worried sick about a market drop, you are most likely too aggressively invested. You can use asset allocation to limit your overall portfolio volatility by diversifying. And you should. When you see on TV or hear on the radio that the market is having a really bad day, that is probably not a good basis to freak out and go and start selling stuff willy-nilly. Because probably tomorrow it will go back up. And you'll not be in there for the bounce-back. You'll be worse off than if you had stayed the course. Do this a lot and it will devastate your returns. Staying in and not selling is a viable choice, presuming you have reasonably good diversification. If you don't know whether you are diversified or not, you should attend to that. Are your stocks all US large-cap growth or tech stocks? Are you heavily into China or Russia or emerging markets? Are you (I hope not,) heavily into junk bonds? If you are an investor, you should learn what real diversification is. Here's a start: Investopedia on "diversification"

The article should have risen above fostering knee-jerk selling.

WSJ: What to do if you Can't Reach your broker

Investment banks raising margin requirements on lending to hedge funds -- Forbes, with a comment

2007-07-30T12:41:00.001-04:00

Consider this an editorial. I mean, even more so! This is good news. Almost anything to rein in the hedgies, in their reckless attempts to profit by screwing up the financial markets for everybody else, is good news. You have to wonder how much of the current market decline represents the efforts of hedge funds to massively "attack" the financial markets. Who knows?

What else would be good? One thing would be rules to stop naked short selling. Perhaps a rule requiring the shares to be sold short to really exist, on pain of prison. The possibility of a more restricted definition of "accredited investor, as the SEC has been mulling, would be a big plus. Getting radical here, how about a rule allowing the prime brokers or other lenders to hedge funds no higher standing than the investors, or even making them jointly liable to the investors in the fund, if a fund blows up? Or making the fund's owners personally liable if there was wrongdoing involved. Yes, that's radical. We can dream.

Investment banks raising margin requirements on lending to hedge funds - report - Forbes.com

You call that a sell-off? -- MarketWatch

2007-07-27T16:22:00.001-04:00

Once in a while you see a statement which is just stunningly strange:

"In general, stocks are not cheap, especially if you consider that corporate profit margins are hitting all-time highs."

If earnings are high, then how is it that stocks are expensive?

Should you care? Should you act if you think stocks are expensive, or cheap? Market timers have no rational basis for expecting to beat out all the other market timers. N-O-N-E. Acting with money without some rational, defensible basis for what you are doing is not rational. Investors, not traders, as a group win. The objective research, as a body of research, bears that out.

Only if you think you have some genuine edge, would you rationally get into trading in general. No disclosed trading strategy has survived rigorous research to see if it works. Perhaps presence of a trading edge explains the existence of brokerage and institutional trading desks. For a brokerage to suggest it is working for you, while it is trading against you, is not my idea of fiduciary behavior. But, as an old friend, the first real portfolio manager I ever knew, once said to me, long ago in the '70s, when I expressed shock at something I had seen, "...but who ever told you that brokers are in business to serve the best interest of their clients?"

You call that a sell-off? - MarketWatch

Subprime lender CompuCredit's nearly $90 million "tied up" at Horizon hedge fund which has blocked withdrawals: NY Post

2007-07-25T14:42:00.001-04:00

Interesting reading. "CompuCredit will have to settle for only a percentage of its cash coming back. "

A remarkable comment near the bottom of the article: "Other investors biting their fingernails over the fate of Horizon include several hedge funds that invested with the fund as a way to park excess cash for several months." Now that's a first for me. I had no idea that anyone in their right mind would "park" excess cash in a highly volatile vehicle such as a hedge fund. A rule of thumb for sane investors: Do not expose short-term money to market volatility! If the intent was a deliberate short-term commitment of funds to that investment, while considering other investment opportunities, then, well...

LENDER'S $90M HIT IS ON 'HORIZON' | By RODDY BOYD | Business News | Financial | Business and Money

HEDGE DOUGH NO GO FUND $$ DRY UP -- NY Post

2007-07-23T22:32:00.001-04:00

I just loved that headline. Whatever happens to the NY Times, there will always be a Post. The margin terms, they-are-a-changing. From one extreme to the other, it seems. Is it possible that the market can sort of fix its' own problems, without the politicians riding in like the Texas Rangers?

HEDGE DOUGH NO GO FUND $$ DRY UP | By RODDY BOYD | Business News | Financial | Business and Money

Index Universe: Hedge Fund Index Debacle

2007-07-23T16:07:00.001-04:00

Good discussion of the problem of hedge fund indexes and their "numbers". Failures such as the most recent, not including the Bear Stearns funds' numbers, which were sort of, well, you know, hard to put together, is not the the only problem. The author, Matthew Hougan suggests that even when there is no gross breakdown in such an index, the performance numbers are not going to be exactly "real-time" in nature, but have something of a "serial correlation" issue. As my daughter might perhaps say, "Ewww".

Breaking News - Hedge Fund Index Debacle

'Barclays may sue to recover losses at Bear Stearns' -- MarketWatch

2007-07-21T14:08:00.001-04:00

Barclay's was an investor at the now-worthless Bear Stearns' High-Grade Structured Credit Strategies Enhanced Leverage Fund? Well, for Pete's sake. They were also a lender to the fund. A conflict of interest? And they are suing to get their investment back? As a lender, would you expect then to have had more or less information about the status of the fund than the retail investors? This will be interesting to watch.

Also, per a WSJ subscription-only article, Barclays Spars Over Its Losses at Bear Stearns it now seems that some of the investors were not happy with what turned out to be pretty radical levels of leverage employed at the fund, but were trying to juice the returns by borrowing part, perhaps half, of their investment in the fund from a bank. In essence, investing in a hedge fund on margin. I personally just have a hard time working up much sympathy for anyone who would treat their own money with such contempt. How could anybody do that?

Barclays considers options for recovering losses at Bear Stearns - MarketWatch

Here's What the Accounting Watchdog Keeps Hidden: Jonathan Weil / Bloomberg

2007-07-19T09:46:00.001-04:00

Not in the CPA realm, never have been. The conflicts which can come at those doing audits, who after all do wish to keep their clients, can be serious indeed. Many times investors have been stunned at things which come out after a company gets a "clean", unqualified auditor's opinion. Accounting firms have been sued by investors and others, and in well-known instances have been devastated by the outcome. As investors, whether you invest in stocks of single companies or in mutual funds, you need to know that decisions on direct holdings or underlying portfolio holdings are made based on fair presentations of the financial picture.

Hold that thought, and read this:
Bloomberg.com: Opinion

Bear Stearns Warns Hedge Fund Investors of Total Loss -- Bloomberg

2007-07-17T20:41:00.001-04:00

Yuck. Total. Loss. Well-hedged, all right. Let's see. SPY, which is about as "plain vanilla" a thing as there is in an investment, is up 27.56 percent over 1 year, according to MarketWatch. Well, I'm sure that the reps who sold these funds to the clients really feel for them. Perhaps they'll take up a collection out of their bonus checks to send out a card. Not to be too negative all the time, but something just stinks about stories like this.

Do not buy investment crap. Perhaps, if you are being pitched a hedge fund soon, you should just write the preceding sentence one hundred times.

Bloomberg.com: Worldwide

'Buyback Boondoggle?' -- Matthew Hougan's blog at Index Universe

2007-07-17T17:32:00.001-04:00

I've blogged on this a few times. See, I'm not nuts on this.

A quote: “The decline in dividend increases is disturbing, especially in light of continuing moderate earnings growth and the abundance of corporate cash,” [Howard] Silverblatt [senior analyst at Standard & Poor's] said in a statement. “We believe the present wave of corporate buybacks is contributing to the slower pace of dividend growth in 2007."

Hougan's take: "[They] strike me as tantamount to deferred pay raises for corporate employees. Whereas dividends are paid out to current shareholders, buybacks – by reducing the number of shares outstanding – represent payments to both current and future shareholders ... including the holders of vested and unvested stock options."

His bottom line on this: "It seems like a blatant conflict-of-interest for managers – who often hold large options positions – to make decisions about whether to buyback stock or boost dividend payments."

BLOG IU.COM - Buyback Boondoggle?

Stock buybacks are a good thing, right? -- USA Today

2007-07-11T23:17:00.001-04:00

Good article. I noted particularly the problem of "companies announcing stock buybacks from 1981 through 1995 averaged 24% more shares outstanding five years later, says Akhtar Siddique, economist at the Office of the Comptroller of the Currency." The ugliest possibility is that the buybacks were just "camouflage" for the dilution of shareholder value due to outsized stock option plans transferring the stockholders' company and its earnings into the hands of managers and favored employees. Cash dividends are a more honest way to reward stockholders. Of course, when the directors are management and management toadies, then that dilution can be seen as a very good thing. To get a simplistic approximation of the percentage of the annual earnings given away, you have to get into the annual report, find the number of shares reflected in the options grants, find the market value per share, calculate the total current value of that many shares, and compare that number to the company's earnings after tax. You may be shocked.

Stock buybacks are a good thing, right? - USATODAY.com

Wuffli's Exit Is Lesson for Banks, Hedge Funds: Matthew Lynn / Bloomberg Op-Ed piece

2007-07-11T11:35:00.001-04:00

So, you're the head of this big diversified financial services firm, see. Now it wasn't so long ago, a few years. And you had been reading and hearing about all your competitors setting up their very own internal hedge funds. You were hearing murmurs around the boardroom, 'where are we on this?' are we missing out on something here, again? so you took the chance, after all, that's what you're getting the very big bucks for, isn't it?

But those losses... man, this has gotten rather ugly. Where are all those guys on the board going to come down on this, now? How am I going to face the clients? The shareholders? The reporters?

Alone. And someone will be held very accountable for this....

Bloomberg.com: Opinion

Cheaters in CNBC's stock-picking game? What a Hoot!

2007-07-09T19:20:00.001-04:00

I think it is beautifully ironic. Sublime in its own way.

Just for fun, there was a stock-picking "paper portfolio" contest in my class in investments (the CFP curriculum class to prepare for the CFP comprehensive exam,) a few years ago. Being the serious fellow I am, I asked the instructor if the contest wasn't an exercise in bad investing, and would it encourage the class to engage in bad investing? He indulgently and patiently assured me that it was just for fun.

As it happens, my wife happened to see a promo for the recent contest on CNBC with its million-dollar prize, and asked me why I hadn't entered. My answer was the same as before. Even though it is all in fun (I thought,) it still, if I won, would send the wrong message about investing and about me. It is not about utterly disregarding risk in search of maximal short-term gains. Well, what it did was worse -- it lured in some (alleged) out-and-out stock manipulators.

CNBC Calls In a Judge

Siegel returns from Asia and has thoughts on its' future, and what that means for us

2007-07-09T09:47:00.001-04:00

One of the themes of Siegel's book The Future for Investors is international investing, and that US investors need to participate in foreign equity returns in the decades ahead. He has more to say:
Consequences of Asia Rising

Hedge Fund Manager, Fugitive Berger of Manhattan Investment Fund Caught in Austria

2007-07-09T09:27:00.001-04:00

Good! Now let justice be done.

Bloomberg.com: Worldwide

A few thoughts on Ben Stein's latest column.

2007-07-09T09:04:00.001-04:00

Ben is someone I would describe as a grand old man of personal finance, who usually retains his perspective when looking at things. You have to like the guy. So what's he saying?

"First, I'm not at all worried about the stock market despite the recurrent panic about subprime mortgage problems and resistance to some loans by lenders in private equity deals (which used to be called, appropriately, leveraged buyouts, or LBOs)." Neither am I. The economy is still just too good, and not looking like 2000 (for example).

Ben rather politely throws verbal ice-water on the hysterical financial media types for all the cat-fits they have had over the sub-prime lending industry's return to sanity: "Subprime is a small sector of the mortgage market...If all [distressed sub-prime loans go] into foreclosure (which is unlikely) ... the real loss might be about .9 percent, or less than 1 percent [of mortgage loans]." He provides enough detail to back this up. The financial media gets awfully lathered up over almost everything. It gets viewer attention but lessens their credibility.

He talks about how traders work, and how he sees their antics as not affecting the market in the longer run. Nicely done, Ben.

There's
more.

UBS axes Wuffli in surprise shake-up -- FT's Take

2007-07-06T09:32:00.001-04:00

Per FT, it was not the hedge fund collapses. but then, further down in the article, "One person close to the situation said that when traders were moved from UBS’s fixed income desk to its new hedge fund business, “we lost all the intellectual capital and the two [businesses] never connected and that caused us to have huge losses. 'We lost all our trading house and as a result the revenue gap between us and Goldman is now $6bn.'

Right.

FT.com / Companies / Financial services - UBS axes Wuffli in surprise shake-up

Almost missed this one: Long-term care insurance - the shortcomings (USA Today)

2007-07-06T01:18:00.001-04:00

Will they pay or won't they? Make certain you understand how the deductible period works; and look out for underpriced premiums which just keep going up, up, and up; heck, just read it. But do note that the chances are more than three times greater that a woman will require LTC for over two years, so if you can only afford LTC insurance for one spouse, consider getting it for the wife.

Long-term care insurance has its rewards but may not be for everyone - USATODAY.com

Bear Stearns Investors Await Tally on Losses -- WSJ

2007-07-02T01:12:00.001-04:00

This is ugly: "Investors in two Bear Stearns hedge funds will have to wait until as late as July 16 to learn how much money they have lost." That's to learn what the damage is so far. It did not say that is what they will receive back, or when that will be. As I noted last week, investors in these funds could be said to be locked in like steerage passengers on the Titanic.

Uglier: "Investors are watching the process closely because they believe that other hedge funds also are holding thinly traded mortgage-related securities, and they want to see how far Bear thinks their value has fallen."

And who is invested in all these funds? Pension funds, seeking juiced returns from the large-brained super-traders at the hedge funds. Accredited investors, who are soooo sophisticated. Right. They bought these things. Investors in hedge funds-of-funds, who may not necessarily be accredited investors. Caveat emptor.

Readers of John Mauldin's weekly e-letter got a good bit of detail on the attempted auction by Merrill Lynch of the some of the portfolio holdings of the Bear Stearns funds. No bids on much that was offered. Really ugly. Mauldin's e-letter is free, always good in that it's well written and he actually must be large-brained, not that I agree with all or even most of his conclusions, and viewable on his site, but you have to register. Here's the site.

Bear Stearns Investors Await Tally on Losses - WSJ.com

Order's important when tapping into assets -- USA Today

2007-06-29T12:42:00.001-04:00

A pretty good overview of this subject.

I'll throw out for you one idea not in the article, useful if you have built up your investments nicely, and are blessed with substantial money in taxable, tax-deferred, and even tax-free (Roth IRA) accounts. What follows is of course directed at US readers.

You can tweak where you take the money from to legally play the tax code like a violin, in other words, minimize your taxes. For example, you could take out money up to the top of the 15% tax bracket from your 401(k) or traditional IRA -- these distributions are taxed as ordinary income; than take additional money from the taxable account at long-term gains rates on the portion that is LT gains; finally, even a bit more from the Roth when you have to. All of this bearing in mind the relative amounts you have to work with, and avoiding depleting any one of the three types of sources unduly. Cool, huh? Not always very easy to execute, but the concept is powerful., and it beats a simple-minded "hit the taxable account until it's gone, then the IRA/401(k), then last, drain the Roth" approach. I am an IAR and have my own RIA firm, and am not a tax practitioner now, so before using this or anybody else's neat ideas, you be certain to check out what your own tax adviser says.

Investing: Order's important when tapping into assets - USATODAY.com

Do-Or-Die Time Nears for Old Investment Indicator -- Bloomberg

2007-06-29T12:04:00.001-04:00

Chet Currier has some interesting thoughts on how much cash mutual fund managers have, and other old 'market indicators'.

Pretty nifty one-liner from the article: "Fund managers are good stock pickers but poor market timers". I love it. If most actively managed mutual funds fail in the longer run to keep up with their index benchmarks through stock-picking, then how bad would they be when attempting market timing?

Bloomberg.com: Opinion

Mr. Buffett and the Unknown Advisor Differ on That!

2007-06-28T16:06:00.001-04:00

"Buffett blasts system that lets him pay less tax than secretary." He did not pay less than his secretary. He made $46 million and paid 17.7 percent, or $8,142,000 in tax. She is said to have made $60,000 and to have paid 30 percent in tax, or $18,000. Hmmm, now, eight million is more than eighteen thousand.

He apparently did pay a smaller percentage of his income in taxes than she did. So what. Presumably, he used every trick the tax code allows, and well, the cost of those things is typically lower investment performance. So he traded some investment performance away for lower taxes. I would too. So would you. Also, we are dealing here with capital, not wages. His salary, being greater, would indeed have been taxed at a higher rate. Buffet is being mendacious here. He knows all this, he just wants you to have higher taxes, to build a new age of big government, funded by big tax rates, under his favorite Presidential candidate, whose initials are HRC.

If taxes go up, investors will invest to have something left after taxes, rather than to maximize their long term gains. So our investment outcomes will suffer. Then we will all eat cat food and cut pills in half in our old age, excepting him, Hillary and Bill. He'll still be able to afford his cheeseburgers, and to buy theirs also.

Buffett blasts system that lets him pay less tax than secretary - Times Online

WSJ (subscription) "A Cool Million No Longer Buys You a Luxe Retirement"

2007-06-28T12:43:00.001-04:00

Yes it's old news, in a sense, but don't give up!

If you are young, a few simple actions will make your future much more comfortable. Use your opportunities for tax-deferred investing. Put enough into your 401(k) to get any available employer match. Contribute to your IRAs, both traditional and spousal.

Go beyond tax-deferred. If you can, put something, say, one hundred dollars a month away, for the very long haul, not to buy a flat-panel TV. To get started, put the money in a savings account. Then, when practical, in a taxable brokerage account. Learn how to invest the taxable account money for the long haul, not the fast buck, not as "mad money", and in a tax-efficient way.

Avoid becoming financial-services road-kill. Avoid load funds like the plague. Like the plague. No-load mutual fund accounts, at the fund, are one good way. Companies such as Vanguard and T. Rowe Price are known for low expenses and good investor-friendly values. That's not a commercial, just the truth. I'd suggest avoiding the mutual fund companies which advertise over and over all the day long on CNBC and Bloomberg. Big ad budgets are paid for in high expense ratios! You want financial service pros whose highest priority is good client outcomes, not ~~client-gathering~~ marketing. Never go to an investment "seminar" even to get the free meal. It will really, really cost you. Don't invest through variable life or variable annuities, they're usually heavily-commissioned, "fee and expense you to death", poorly-performing, all around sorry deals. As you might have guessed, I don't like them much. Stir well, wait patiently while it simmers for twenty-five or thirty years, and voila! Magnifique! If at some point along the way you want a financial advisor, find one with low fees who doesn't sell commissioned investment ~~junk~~ products, and emphazises good fiduciary standards.

Getting Going - WSJ.com

New Yorker: Hedge Clipping - get above-market returns on the cheap? "FundCreator"

2007-06-28T09:32:00.001-04:00

Remarkable article. A few good quotes:

"Funds of funds hold stakes in a variety of hedge funds, so they are somewhat safer. However, as the executive made clear to Kat, investing in them is costly."

"...people who invest in funds of funds are effectively paying a three-per-cent management fee plus a “success fee” of thirty per cent 'three and thirty.' ”

“ 'Who wants to pay that kind of money?' Kat asked the executive who was interviewing him. 'You can’t seriously expect there to be anything interesting left after somebody takes out three and thirty.' The executive was nonplussed. 'I don’t know,' he said. 'But they pay it.' ”

So Mr. Kat sets out to craft a program to replicate specific hedge funds, such as George Soros' Quantum Fund NV. This is where it gets interesting.

The World of Business: Hedge Clipping: Reporting & Essays: The New Yorker

China at 45 Times Earnings = Bubble

2007-06-28T09:15:00.001-04:00

Yes China's economy is growing. Its' financial markets may go on up higher for some time. But no, it cannot grow fast enough to justify such valuations. Period. Simple enough? For you and for me, um-hum. For all the speculators out there praying for greater fools to keep coming in, and for investing newbies, 'fraid not. We are living in interesting times.

Bloomberg.com: Exclusive

UBS Cited By Massachusetts for 'Dishonest, Unethical' Hedge Fund 'Quid Pro Quos'

2007-06-27T15:27:00.001-04:00

This sort of thing smells soooo bad.

Bloomberg.com: Worldwide

In today'a WSG: Brit Hedge Fund GLG Settles Short-Selling Accusations

2007-06-27T09:12:00.001-04:00

The SEC's claim is that GLG, which purely coincidentally is going public itself, made illegal short sales in connection with 14 public offerings.

You know, you could almost do a "Hedge Fund Scandal of the Day".

I have a modest little proposal ...

Might I suggest: Before anyone invested in a hedge fund, what if they asked for and require written statements by authorized persons that the fund has not and will not violate short selling rules, has not engaged in and will not engage in or collude with other hedge funds in attempts to manipulate the market, has not and will not falsify its reporting to clients, will not lose most of their money and abscond with whatever is left, or engage in any other illegal practices whatsoever, and that the fund will disclose upfront how much leverage it will use and will not exceed that amount of leverage. Perhaps the fund should also be required to produce objective proof of its claimed superior trading skills!

Just a modest proposal. We might also add sort of a scarlet letter concept, a simple English one page disclosure of every regulatory scrape the fund or its executives have ever been in, however they might have been resolved.

GLG Settles Short-Selling Accusations - WSJ.com

More on the Bear Stearns Mess -- Investors like Steerage Passengers on the Titanic?

2007-06-25T08:48:00.001-04:00

Do you remember reading how the steerage-class passengers on the Titanic were locked below decks and could not get up on deck until all the lifeboats were gone?

"The decline turned into a tailspin last month when Bear Stearns Asset Management, which had more than $29 billion of 'structured-credit assets' as of Dec. 31, suspended redemptions in the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund ...
Barring investors from withdrawing money from a hedge fund typically is the first sign of an impending collapse."

Bloomberg.com: Worldwide

Falkenstein/Mahalanobis takes apart Private Equity

2007-06-24T22:19:00.001-04:00

With the understanding that I don't think we are in a broad market bubble, this is a pretty good, succinct quick take on the problem with private equity. There is not much meat in that sandwich. The guys behind the counter are eating it up.

Mahalanobis

Lost money yesterday? Thank a hedge fund. In this case, Thank Bear Stearns.

2007-06-23T07:52:00.001-04:00

Is that over the top? Or is it fair?

When these guys roil up the markets, as a long-term investor, if you truly are a long term investor, you can just be above it all. And yet. Nine or ten-to-one leverage (in this instance). High fees. Unquantifiable risk. Illiquid underlying holdings. Falsely implied superior trading skills. Some folks have lost money here. Perhaps they were "qualified investors". That doesn't mean they are truly sophisticated investors. They just have (or had) more money than some folks. Which means it is OK with the regulators to sell them heavily-commissioned investment "stuff". This system needs work. The only problem is that the politicians are as bad or worse than the people who create and sell investment ~~junk~~ "products".

BBC NEWS | Business | US bank bails out mortgage fund

WSJ looks at fund-of-funds fees, gets a shock -- well, not exactly

2007-06-17T00:42:00.001-04:00

Don't you be the one getting a shock! Funds of funds are mutual funds which create a new product by using other funds in the same family as components. An innocuous example is Fidelity's Four-in-One Index Fund, FFNOX. Others are not innocuous. You pay one expense ratio for the fund of funds. But in some instances you could not easily tell what the underlying funds were charging you. It was deep, deep in the prospectus, in craftily worded statements, perhaps without a total, or it could even be changeable, if the fund of funds could reallocate its holdings among the underlying funds at different times. This is actually one area where the regulators have been working to good effect, as now it will be harder to obfuscate on just what the total expense ratio actually is.

I will suggest the Unknown Advisor's Law of Really Bad Disclosure: It is never an accident or oversight.

Green Thumb - WSJ.com

A little note on posting frequency

2007-06-16T23:16:00.001-04:00

Yes, I know that the blogging experts all say you must post regularly. I will when I can, but I'm busy now with the business. So I guess I'll just do it my way. So no posts doesn't mean I've quit the blog. Just working hard for the clients.

SEC allows short sales after down-tick, and vows to stop naked short selling

2007-06-16T23:13:00.001-04:00

I don't know what the effect of either will be! The old rule barring short selling after a down-tick was of limited effect, that's for sure. You just had to create an up-tick first. It's the naked short selling that's got to be shut down. Chairman Cox called it "a fraud that the commission is bound to prevent and to punish." The linked article discusses the ludicrous situation of Overstock.com, on the Regulation SHO list of stocks with heavy 'fails to deliver' for 538 days. Good grief.

SEC ends decades-old price limits on short selling - International Herald Tribune

Markets Made 'Unchanged' Into 20 Percent Gain: Chet Currier of Bloomberg

2007-06-05T11:48:00.001-04:00

"If this steady-as-you-go spell has been tough on traders, it has gone down just fine with buy-and-hold investors in the stock market and stock mutual funds." -- Mr. Currier. Pithy and true. If you have been trying to game the Fed, building some sort of trading approach around what will, you hope, go up when an interest rate cut comes, then you haven't made much, or maybe you've even lost ground. If you were just well-invested, well allocated, and so on, you've reason to be smiling as you read this.

Is there a lesson in this? You bet. What has worked in investing continues to work.

Bloomberg.com: Opinion

UBS Hedge Fund Loss -- Dillon Read Capital Management LLC

2007-06-04T19:19:00.001-04:00

This is a remarkable situation. It truly is. Earlier this year we were reading about the losses and resulting dissatisfaction at Goldman Sachs' hedge fund. If neither Goldman nor UBS can run their hedge funds with satisfactory results, then why should you consider one? It might be just that simple a question. What, after all, does a hedge fund have to give you to provide a rational basis for believing in its ability to make money for you? Its alleged superior trading skills? The larger, more highly-developed brains of its people?

As the linked Bloomberg article notes, UBS lost about $700 million back when Long-Term Capital Management collapsed in 1998, and the damage from this new iteration of 'good hedge funds gone bad' will approach that level. It, like all these stories, is a good read. I would guess that it lives worse than it reads, especially for the investors. One hopeful note in the story, is that investors balked at the fees, 3 percent of assets and 35 percent of investment gains. At least now we know at what point people will say "No thanks". They then "sweetened" the deal for all but UBS to 0 percent af assets and 40, yes forty percent of gains. Then they lost money for UBS' account in subprime mortgages. UBS acted.

Bloomberg.com: Exclusive

Stocks in S&P still reasonably valued, no bubble here.

2007-05-31T12:43:00.001-04:00

I have already read one "expert's" comment that the new S&P record 'makes him nervous'. Per the linked article, the S&P's stocks are 45 % cheaper than in 2000. No bubble here. Let's move forward.

Bloomberg.com: Exclusive

Now this is a problem! False refinery fire story sends nutty traders into frenzy

2007-05-30T22:51:00.001-04:00

How do you comment on this? The professional traders cannot not trade on news. Even incorrect news. Apparently it is not about real news, or even about rationality. It's about out-trading the other guys. So what's to stop some jerk of a stringer for a TV station from calling in stories to help his friend the speculator?

Web site error rocks global oil markets | Technology | Reuters

Back Again! Equity Index Annuities' Sold to Old People Generating Lawsuits

2007-05-21T00:11:00.001-04:00

The fact that these things have significant commissions has absolutely nothing to do with that salesman's desire to sell you one. Whether you will be happy with it several years from now -- well, he'll still have his commission, won't he? You need an investment advisor who is a good fiducuary. Hat tip to the always interesting Kirk Report.

Equity index annuity insurers are facing more lawsuits - InvestmentNews

"E-Gold charged with money laundering" -- from SecurityFocus blog

2007-04-30T22:13:00.001-04:00

This looks pretty bad. Interestingly, it is an example of how removed from big moneycenter towns (alleged) internet crime can be, in this case, those financial hotspots, Satellite Beach and Melbourne, Florida. And the (again,) alleged criminal mastermind, an oncologist? Well, it is Florida. If the charges are true, and the story looks pretty damning, this may take something of a bite out of money laundering. Be careful, very careful, when moving money online. There still is value in dealing with established, universally-known, trusted businesses.

E-Gold charged with money laundering

Grantham's 'All asset classes everywhere bubble'. It's Ridiculous!

2007-04-29T23:42:00.001-04:00

What's ridiculous about it? Well. let's start with a rather bizarre quote from TSC writer Brett Arends: "As Grantham points out, a bubble needs two things: excellent fundamentals and easy money." I am sorry, but bubbles involve extremes of valuation, not excellent fundamentals.

Arends again, describing Grantham's thinking: "Grantham concludes that every asset class is expensive today compared with historic averages...." US large-cap growth-oriented stocks are not so expensive.

There is a bit of discussion of whether high current earnings are good support for high stock prices, and Grantham just is not impressed. But those earnings are what they are. They are reflective of the current economy.

"The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds," Grantham warned. "Since no similar global event has occurred before, the stresses to the system are likely to be unexpected." Surely it is a risky world. And there is a part of all of us which strives to be prudent. But prudence is only truly so if it based upon reality. Grantham just has not made his case.

Jeremy Grantham: All the World's a Bubble

Morningstar: 12b-1 Fees Must Go

2007-04-20T10:19:00.001-04:00

Kudos to Morningstar for this! As they note, it really is this simple. Investors are very poorly served under the present 12b-1 fee situation.

Morningstar.com - Memo to SEC: 12b-1 Fees Must Go

Unease at Fidelity? - WSJ

2007-04-19T22:09:00.001-04:00

One thing which sort of quietly astonished me, several months ago, when I last looked, was the paucity of Fidelity funds coming up at Morningstar when I screened for "Fidelity" and "5 stars". After counting out the plethoras of share classes and marketing variations, there just were not as many as I would have expected. They do have some! But given the presence Fidelity has in the industry, and the huge number of funds Fidelity operates -- I refuse to count my way through all those share classes, etc. -- and the immense amounts of money they manage, where were the standout funds? Where are the category killers? When you review Morningstar's "Analyst Picks", at this date you see eleven Fidelity funds, six of which are bond funds. What does that say?

Fidelity obviously has the resources, commitment, decent people, and the brainpower to be a performance leader -- and they are indeed committed to active management, even though they have some good indexed funds and ETFs. But if they cannot make active fund management work, and I mean really work, for the investors, then can it work for any firm with mega-gazillions under management? And if it cannot work, then is active management, at least with monster mutual funds, a false premise, or even as one financial advisor has rather unkindly labeled it, "a hoax"? That is, not at all just speaking of Fidelity, but for any firm with such massive funds to invest?

Now just for the record, I am not the one who referred to active management as a "hoax". That's chutzpah, to put it politely!

"For the third time in two years, Fidelity Investments announced a major shift at the top of its core money-management unit, signaling what analysts see as continuing unease with the mutual-fund giant's investment and asset-gathering performance."

Fidelity Again Shifts Course In Fund Unit - WSJ.com - $subscription only

MarketWatch: "Hedge funds have lost 'alpha,' Merrill director says"

2007-04-18T12:39:00.001-04:00

Managing Director Heiko Ebens says, "Alpha has essentially disappeared", from hedge funds as an industry. Alpha is academic finance jargon for returns of a comparably risky investment beyond those of an appropriate market benchmark, or index. in other words, a manager with good results adds alpha, but a poor one generates "negative alpha".

"Ebens argued on Tuesday, in front of a stonily silent audience, [emphasis added] that most hedge fund returns come from the broader markets and can be replicated by indexes constructed, coincidentally, by Merrill...."

"Ebens touched on a sensitive subject for the hedge fund industry. As assets have ballooned and more managers have entered the business, some argue that increased competition for a finite number of trading opportunities has dented returns. If that's true, the high fees levied by hedge fund managers may no longer be worth paying."

Indeed! Read the article.

No 'alpha,' Merrill director tells hedge fund conference

What was Wrong about Imus' Downfall

2007-04-16T13:04:00.001-04:00

Everyone else has said a few words or more than a few, so I will also. Public communications, of every respectable kind, even including blogs like this one, can only prosper when people conduct themselves appropriately.

Imus should have left the airwaves, and the tube. But not because of a Soros-funded "media monitor", as discussed in the WSJ previously. That was reprehensible, and stupid to boot, even from their perspective.

Imus, and Stern for that matter, should never have even been marketable. His trashy, mean, just low style should have kept him on low-wattage AM stations, if even there. Our society has serious values and civility problems. I happened to tune in MSNBC for a few minutes on the day he verbally savaged Ms. Contessa Brewer on the air. If a single gentleman had been present, Imus should have been punched in the nose. He deserved a punch in the nose that day. On camera, just the way he insulted her. But there were apparently no gentlemen present, just his hangers-on. He'll do fine financially. There's no need to worry about him. There is small chance for him to become decent, however. So good riddance to him, at least for a time.

Finding a Replacement For Imus Won't Be Easy - WSJ.com

The Correction has been Corrected!

2007-04-16T12:29:00.001-04:00

So, if the market has made back the ground lost due to the "correction" -- I despise that word -- does that mean that the correction was incorrect? Mark Hulbert discusses it.

February-March correction now completely overcome - MarketWatch

SEC to 'Review' 12b-1 Fees -- MarketWatch's Robert Schroeder

2007-04-13T19:23:00.001-04:00

So, may I ask, once you've invested in a mutual fund, by what logic should you be made to pay toward the fund's ongoing marketing and 'distribution' costs? That's what a 12b-1 fee is supposed to be. And why aren't those costs just part of the business expenses of the fund company? Actually a 12b-1 fee is sort of a "trail", an ongoing, never-ending commission adding to your broker's profits, and reducing your account value. The SEC should stamp 12b-1 fees out of existence.

"Funds collected $11 billion in 12b-1 fees last year".

'High time' for fund-fee review: SEC's Cox - MarketWatch

MarketWatch: 'Pollyanna', 'Americans refuse to confront dark side of retirement'

2007-04-13T16:32:00.001-04:00

How about you?

A few of Mr. Powell's points:

"More than seven in 10 Americans are either 'very confident' or 'somewhat confident' " [regarding the adequacy of their retirement funding.]

"Yet almost half of workers have less than $25,000" [saved, excluding home or defined pensions]. This stinks. Your pension, if it comes in and stays reliably funded, may not be as much you think it will be. Are you married,and planning to get the 'pays as long as either of us is still alive' option, the amount you get will be reduced by perhaps a fourth. A fourth. the alternative is worse. Don't, please don't (guys) shaft the wife of your youth by taking the single-life option. (Individual circumstances might alter this. I'm talking about the normal case here.) If you do that, then die first, then she is without that ongoing money.

Your social security will only pay in full if you wait until you are 66 or even older. Take it earlier and they cut the payment. Work between then and your 66th birthday or whenever the magic date is for you and they take back a lot. And what you do get from Social Security likely will be "means-tested" at some point. That means you may get less. In other words, if you are not simply destitute, you might get to assist Uncle Sam to reduce his staggering budgetary pressures by getting even less.

The message for those of you in this situation is that you should get very, very serious now about providing for your retirement years. And watch out for the financial services pros who want to cure your apprehension by selling you some cure-all, heavily commissioned wonder annuity. Poor performance, excessive salesman compensation and wretchedly bad disclosure of ongoing costs will not make your situation better. The best solution is learning how to invest well, or, failing that, get some low-fee competent advice. And then you make the very best use of your remaining years in the workforce to get yourself back into the game.

Sunny Americans refuse to confront dark side of retirement - MarketWatch

Bloomberg: "GM Weighs Plans to Cut Union Health Costs...."

2007-04-13T13:42:00.001-04:00

Rarely will I blog on single-company issues, but GM is in a way representative of what is left of America's manufacturing industry, and by extension, our economy. If they can do this, perhaps there is hope for the company.

If not, if the unions will drag the company and their own pensions and their own healthcare down to a sad end, then I'd say recalculate the pension obligations and the state of their funding, using conservative investment performance assumptions, and the resulting unfunded liability with all the other baggage the company bears, ought to be a sufficient basis to place the company in a Chapter 11 reorganization. Dump the whole pension plan on the PBGC, like the airlines did, and renegotiate with the unions. If they won't get real, move the company to Tennessee and the rest of the South. Or put the plants in Mexico. Let Michigan finish rusting away, if they won't get real. Do like Honda and the rest of the Japanese. Or sell the dadgum company to Daimler Benz!

Bloomberg.com: Exclusive

Bloomberg: "Heebner Says Home Prices May Fall 20% Amid Bad Loans"

2007-04-12T15:23:00.001-04:00

Crucial words in the quote, missing from sensationalistic headline: "... in some markets, he said."

Big difference! Seriously, even if the prediction is correct, wouldn't it just be a case of reversion to the mean? Really now, home price shot up so much, so fast, well, wouldn't you expect some likelihood of this? Remember all the articles about the "real estate bubble"? Bubbles pop.

Bloomberg.com: Worldwide

And Trading Isn't Investing Either, Mr. Hoenig

2007-04-12T01:04:00.001-04:00

Whenever someone can articulate a rational basis for thinking you can come out ahead by trading, other than wishful thinking, I'll consider it something more than gambling. Technical analysis? Not acceptable, not rational, as there is no objective research support whatsoever.Did you get that, technical analysis is not rational. Fundamental analysis? For short-term trading? Market noise overwhelms whatever merit there might be. In the slightly longer run? Twenty thousand other guys got in before you. You're in danger of being the patsy, the mark, at the poker table. Careful investors win, as markets always have moved up over time. Market returns are good, very good, and available. Some turtles run rather well, it seems.

Investing Isn't Gambling, Though Both Carry Risk (McDonald's) | SmartMoney.com

How Not to Invest! "Econ Prof loses $134 million" & falsifies reports to clients....

2007-04-10T21:51:00.001-04:00

A timely loss of memory: "According to a suit filed by the Securities and Exchange Commission last week, the reports that investors received were false and the money invested — about $134 million — is almost all gone. As SEC investigators attempted to question Parish, he claimed to be suffering from amnesia and checked himself into a hospital".

Please, please, please, people, do not ever invest in as gullible a fashion as this man's poor clients. You want to see regular statements from a known third-party asset custodian, or maybe audited numbers in some very few cases. If it just seems too good to be true, it probably isn't. You want to know where the alleged trading is taking place.

From Inside Higher Ed, via Michael Stastny's Mahalanobis Alpha Omega blog

Long-Term Investing Keeps Its Old-Fashioned Shine: Chet Currier, of Bloomberg News

2007-04-10T18:37:00.001-04:00

One of the biggest problems with all of the financial media is the dysfunctional short-term fixation reflected in a huge percentage of the words written. This article is an exception. Kudos to Mr. Currier and Bloomberg for it.

Short-term thinking will get you taxed more heavily, subjected to huge risks that, remarkably, get smaller with a longer-term focus, and generally affected by numerous other problems such as performance-chasing, etc. Read the article. He's correct, as I see it. Don't know how to invest with a long term focus? Don't feel bad. CNBC and all the other financial MSM is just not about doing that. Exceptions exist, but you have to search them out. Like maybe this blog. At least that's my hope.

Bloomberg.com: Opinion

Bloomberg: "Merrill Rule Decision Will Force Key Disclosure" -- John F. Wasik

2007-04-09T15:03:00.001-04:00

More on the decision. Wasik writes: "When you venture into the murky waters of financial advisers, do you know who is a trained planner representing your best interest and who is a salesman?"

The one representing your best interest is, in other words, a fiduciary. The one who is a salesman is a broker.

Bloomberg.com: Opinion

Bloomberg's Mysak on the Lazard Scandal -- 'Fiduciary Duties Violated', 'kickback scheme'

2007-04-07T20:48:00.001-04:00

Mr. Mysak says this one will provide more reading in the days to come.

None of this kind of thing would happen if people could find a way to settle for a good honest profit. "We can get more..." the first step on the road to fiduciary disaster.

Bloomberg.com: Lazard Scandal of 1990s Tells Tale

Europe tops US in stock market value -- FT

2007-04-03T01:37:00.001-04:00

Whoa. Say what??

Fraid so. OK, well I have been saying that Americans should be investing more overseas. It's not a growth thing, it's a currency thing. The Euro's gains vs. the dollar have been responsible. That's a tailwind for the European portion of your portfolio, if the vehicle you use is unhedged. It's low-hanging fruit. A no-brainer. Enough cliches? If the large-cap growth portion of the US market does well, as may happen given its relative pricing, the US could pull ahead for a time, and beyond that, it's too murky for me to speculate further. Yet the thesis looks good, despite what you are about to read.

But.

You know, sometimes the last paragraph or two of a story turns the whole thing on its head. Here are the last two paragraphs from FT:

"Europe trails the US on the indices of market capitalisation compiled by FTSE and MSCI and which are used by fund managers as benchmarks."

"However, these have a reduced or no weighting to shares that cannot be freely traded such as holdings of governments or controlling family shareholders. Europe has more companies with such stakes."

Cute.

FT.com / Markets / UK - Europe tops US in stock market value

Appeals Court Strikes Down SEC’s ‘Broker-Dealer Rule’, aka 'The Merrill Rule'

2007-04-02T16:07:00.001-04:00

This is really, really important. Brokerage services, which may involve "incidental" advice, are the service of buying and selling. You can spin that, you can invent new names for the same old deal, you can work hard to keep the client willing to pay, but it still is buying and selling. Brokers are not, repeat, NOT fiduciaries. A fiduciary advisor places your interests ahead of getting a big commission or his own needs. He makes a good living because enough clients are wise enough to find him. The built-in conflicts of interest for a commission or "fee-in-lieu-of-commission" (wrap account) industry dictate that it is that way. Investment advisory services are a completely distinct thing. It's about time. The Financial Planning Association is happy. The big brokerages are going to have to change some things and perhaps change some thinking. it will be interesting to see how they spin it to the public. it's about the public, really, not the advisors and the brokers. People should be able to know what they are paying for: Trading, or advice. Of course, an appeal by the brokers to the US Supreme Court is possible, and would stave off implementation. Whether that would be well received by the investing public is open to question.

Quiz: Do you know what type of arrangement you have with your broker or investment advisor? Are you clear on the difference between paying for investment advisory services and say, a wrap account? a low-fee advisor will typically charge you less than the typical charge for a wrap account, or for a separately-managed account ("SMA") deal, two types of deals pitched often by brokers.

UPDATED BREAKING NEWS: Appeals Court Strikes Down SEC’s ‘Broker-Dealer Rule’: Financial Planning Association wins lawsuit to nix Merrill Rule and subject all fee-based accounts to regulation by the Advisers Act of 1940.

"Iran, The New South Africa"

2007-04-02T11:53:00.001-04:00

It is a little unusual for me to link to a post over at Captain's Quarters, as this is an investing blog, not a political one, and the intersection of the two realms is not an everyday occurrence, but this is an unusual story, and he's on it.

If large American institutional investors, like public pension funds, begin to divest themselves of investments in companies doing business with Iran, that could have interesting effects. In a few cases, it might lead some foreign companies to stop looking for new business with Iran. It could. it could ratchet up the pressure on Iran's economy, which is already in pretty bad shape. If that happens, and if that then leads to regime change in Iran, what's not to like about that? Usually, this sort of socially-conscious investing concept had been the province of liberal groups, such as those who pushed for divestment of South African companies and boycotts of diamonds, etc., before the end of apartheid. This is a bit of a new twist, it seems.

Captain's Quarters: Iran, the New South Africa

TCS: "Unearned Wealth"

2007-03-30T14:06:00.001-04:00

Great article over at TCS, linked below. It's a great discussion-starter.

One of the fascinating things (to me, at least,) is how, when people strive for great wealth, and get it, then often they just blow it, or it ruins lives. Frequently in financial planning circles, advisers, in looking to be maximally helpful, develop expertise in helping with benevolence. wealthy folks are big targets, and often have big hearts. Generational issues can be terribly worrisome. As the linked TCS article notes, money can kill you if you don't know how to handle it. How many pro athletes, celebrities, heirs to fortunes, have "had it made", and then lost it, or even become destitute? Too many. Short careers, no knowledge at all of how to manage the money, poverty in childhood, alcohol, drugs. Money, it can own you. People come at you from every direction. It's sometimes not like we might think. money is a fine servant, and a terrible boss. Life is not about money, though it is good to have some. It is an excellent thing to know "how to abound", and how to use wealth to make real differences in lives. Good counsel, not just legal, can make a difference in the experience of wealth.

TCS Daily - The Perils of Unearned Wealth

Remember that story about brokers selling inside info to hedge funds?

2007-03-28T14:45:00.001-04:00

One of the indicted persons shows up in the news again....

Why blog this? Investors need the cleanest possible financial markets. I didn't say perfect, I just said 'the cleanest possible' markets. When people know, it's better than if they don't.

Bloomberg.com: Worldwide

"Academics fail to find stock picking skills" -- in Hedge Fund Managers: Financial News Online US

2007-03-27T23:36:00.001-04:00

Via the always interesting (even for a non-trader like me,) Kirk Report.

Nope. No alpha there. Just appalling high fees. A suggested rule of thumb for you: High fees correlate inversely with your long-term results.

Financial News and Information from Financial News Online US

Very Interesting Bloomberg Piece on Dimensional Fund Advisors -- DFA

2007-03-27T12:26:00.001-04:00

Not enough is written about DFA. "D" does not stand for "different", but it really could. Nobody else is quite like them. Their approach is quite intriguing. Nope, I'm not a DFA advisor. To this point.

Bloomberg.com: Exclusive

IBD Op-Ed: "our tax code is massively redistributionist..."

2007-03-26T22:36:00.001-04:00

"...and it's becoming increasingly hard to have an honest discussion of it."

But are there any votes to be gained for politicians who speak truth about it?

IBD Editorials: Who Really Pays?

Bloomberg's Hauck & Xydias Discuss Low Global Correlations

2007-03-26T14:11:00.001-04:00

This is important to you because when many global financial markets seem to be moving more closely together, investors and speculators both take note. We respond, or at least are concerned, in somewhat different ways. The diversification of foreign investing is important to each, but globally-diversified investors don't necessarily need to respond in a short-term-focused way. There are times when correlations track along more closely, like now, and there are periods when markets in different places move up or down together, but in differing degrees, and there are times when the correlations even become negative for a time. This can continue for extended periods of time. No sweat, to a more strategically-oriented investor. More tactically-oriented folks, and the speculatively-inclined, like those described in the Bloomberg article, always on the lookout for a way to shorter-term gains, can get somewhat lathered up over this, but that is the way things are, for now, and perhaps for awhile.

Bloomberg.com: Exclusive

Welcome Polipundit Readers!

2007-03-24T11:23:00.000-04:00
I just wanted to say thank for coming over! If the content is helpful, that's what I want.

More on China's Banks, including comment by Mark Mobius -- Bloomberg

2007-03-22T14:14:00.000-04:00
I've blogged recently about banking in India, touching on China and Japan. Here's more. It's a good meaty article:

Bloomberg.com: Exclusive

It's business as you would expect in developing market economies. knowing what it's like should be part of how you allocate foreign investments, just about however you approach constructing your own portfolio. Generally, you should be careful. Hold down the amount of your money which you so invest to a reasonable level.

MarketWatch's Chuck Jaffe: "Hold everything - here's how your banker lives off the float even if you can't."

2007-03-22T13:53:00.001-04:00

Yes, it is rather outrageous. You've written the check, the money's gone from your account, but it's not there at your payee yet. Overnight interest rates being the way they are, don't look for much improvement. Funny how a pretty evenly balanced Congress gave relief to the financial intermediaries, and left us voters out twisting in the wind. It is typical behavior for a financial services industry which has a lot of clout. A lot of clout. On a similar note, how about the electronic, online bank payment you make, when the money is gone that day from your account, but the payee needs two business days (plus perhaps a weekend) to "process" the payment? Sweet, for them.

Your obligation is to know what's going on. You may not be able to do much about it, but you have a better chance to cope, if you stay tuned-in on the discussion. Time really is money.

Here's how your banker lives off the float even if you can't - MarketWatch

WSJ: Hedge Funds Vote (Often)

2007-03-22T10:16:00.000-04:00
I've linked to the intro, the full story is subscription-only. I blogged on this awhile back, and I hope that significant reform is achieved. In the print edition, the story is on page C1. The SEC is said to be in a "may act" mode. When hedge funds borrow shares for the purpose of voting on issues which can have short-term effects on share prices, be certain that they have no one's interests at heart but their own. "It's called "empty voting", and from here looks like a fundamentally corrupt practice. I'd say, "ban it." But then, I'd probably say "ban hedge funds" also. As has been said, they are not a new way to invest, they are a new way to enrich fund managers.

WSJ.com - Login

A Little Market Comment

2007-03-22T09:58:00.000-04:00
Well, by now it seems as if we've seen a little of everything this year. Quiet upward movement, large one-day drops, movement back up. What next? There are plenty of pundits who have been predicting everything from a "Very nice, very nice, fifteen percent gain in the broad market by the end of the year, so buy my mutual fund to get in on it!" to the guys who say, "The end is near! Buy my newsletter to save yourself!"

They don't know what the market will do. They really don't. And that's just fine.

You do well as an investor, and can reasonably hope to do fine over time, by ceasing to play the pundits' "loser's game". Educate yourself on what really has worked in investing, or get yourself a low-fee, trustworthy advisor. I've talked about evaluating advisers, to find the ones who are good fiduciaries, before.

Barry Barnitz' Financial Page blog: Hidden Fees in 401(k) Plans

2007-03-20T15:53:00.001-04:00
Barry tells you what the issue is succinctly. Follow the link to read, or at least skim the underlying paper. 'Gird up your loins' if you aren't into reading technical financial discussions. But if you have a 401(k), and if you need it to work well for you, it's a major part of your future financial well-being. Start now, by at least looking over the paper.

I've advised people on subfund choices and allocation for their 401(k)s, and from this advisor's perspective, some are so much better, and some are so "less better". It's your retirement, and good advisors and smart clients have to find ways to make these things work optimally, as imperfect as they are, in short, make them work as well for you as they have for the financial services industry.

So, what do you do right now, with your plan as it is now, whether good or not so good? You learn. Learn about the disclosed and the undisclosed fees, at least well enough to know what a 12b-1 fee is, and to get the concept that these things are not neatly itemized for you in anything your plan provider sends you. Shock your 401(k) contact person by asking for the prospectus(es) for your fund choices. Get it. Gird up your loins again and read the thing. Go to the notes if you have to, to get the specifics, and get them correctly. You could politely email the people in your company who make decisions about the 401(k) provider. You might politely let them know if you think the fund choices are not great. Ask them, 'What is a fiduciary doing paying out 12b-1 fees, anyway?' Not all plan providers work that way. If there are no low-cost index funds, ask 'why the heck not?' If there is an index fund or two, but the expense ratio is higher than any index fund you ever saw, ask (in a nicer way) why they gave you such a crappy choice. You also do not need six or seven essentially identical (say, US large-cap growth) funds. You need one excellent fund, with low expenses, in major asset classes. You don't need "bear market" funds, internet funds, technology funds, long-duration or high-yield (junk) bond funds (uncompensated risk, per the academics,) or annuity choices (high fees and crappy performance--read the paper Barry links to.)

If you don't want to do such things, you might get a low-fee advisor who knows what the word "fiduciary" means, and cares enough to try to be a good one! Ask how the advisor has structured his business to be a good fiduciary. It's hard to stump financial services types, but that might do it! If you find one, he or she can help some with that 401(k).

Good investing!

Financial page: Congressional Testimony on Hidden Fees in 401(K) Plans

An Banking Epiphany? Is Banking a Pan-Asian Weak Link?

2007-03-18T18:24:00.001-04:00

Well, it came to me as I looked at the linked article, below. No, I'm certain it is old knowledge among those who follow international banking news.

India's banks: nationalized, inefficient, molded by the government into agents of social change, holding back development, per this article.

Japan's banks, so notoriously "close" to their corporate customers (do you remember "Japan, Inc."), with low-or-no economic growth, so who knows how many bad loans there really are....

China's banks, same story, requiring multiple rounds of additional capitalization; again, who really knows how bad their loan portfolio really is....

The recurrent theme is not one of strength: it is of problems, problems, and more problems. Problems in Japan's banks, in China's banks, and in India's banking industry. They certainly can manufacture. And they can build. They believe in work. Can they run their banks? Will they allow non-performers to fail? They are not exactly awesome engines of economic growth. Whatever our problems, and we have plenty, that is not one of the biggies. I guess it comes with being a "developed" country with relatively less central planning. It is perhaps one of the starkest economic contrasts between East and West, and may have a great impact on how well the 21st century will play out for Asia. Will the promise of the East's most important countries be fulfilled? If it is fulfilled, how wild will the volatility be along the way?

That is why this is significant to investors. We are, as a group, putting more of our money into foreign developed and emerging markets than we have in the past. We are looking for diversification of returns, and for ways to hitch our wagons to high-growth economies. A bumpy ride is OK, even expected, but we watch intently for clues to how bumpy it will get.

An antiquated banking system holds back development in India - International Herald Tribune

What do You Think of the Dow Theory? What do the Researchers Think?

2007-03-18T13:29:00.001-04:00

For those who are into the Dow Theory version of technical analysis, Mark Hulbert at MarketWatch has a bit of a review, which I've linked to below, including the interesting note that the three Dow Theory newsletters do not agree on what it says about the present state of the market and the outlook. two are bullish, and the third is bearish. Now stop and think on that for a moment.

Hmmm. Academic researchers pretty much "busted" the Dow Theory decades and decades ago. Mark does refer to one Journal of Finance article all the way back in 1998 which argues for its validity. I don't know if anyone other than the authors was convinced! The Dow theory, like technical analysis generally, has pretty much been in the academic dumper for a generation now. When you test it, it consistently fails to succeed any more often than dart-throwing at the Wall Street Journal.

So, why do people cling to ideas after they are tried in the crucible of research and found to fail? Is it a matter of human nature? Of needing something on which to base decisions? Two things are definitely true. First, the folks who sell newsletters have a conflict of interest. They make a lot of money selling those newsletters. Second, Wall Street's brokerages like clients who trade a lot, be they big hedge funds or little guys investing on their own with newsletter in hand. They have a conflict also. Trading is money, commissions and/or spreads (discounts or premiums, technically,) on crossing transactions to them. Applying a technical analysis-based approach requires a lot of trading, generally. Being as gentle about this as possible, they are self-interested, and the consequences of conceding the failure of technical analysis would be somewhat difficult, particularly for the newsletter writers.

Also, what do you base investment decisions on, if this old, once-popular approach is not really any good? I have advocated in this blog a globally-diversified, multiple asset class approach, using indexed vehicles at least as the default choice. This approach has excellent research support. Well, you may ask, it this idea is so good, why isn't everybody doing it?

Mr. Roger Gibson wrote one of the most remarkable books on investing, primarily for financial advisors, Asset Allocation - Balancing Financial Risk. (3rd. ed., Mcgraw-Hill, 2000.) He writes of what he calls a "quadrant 4 worldview of investing", where the investor, after reviewing what is known about the realities of investing, concludes that neither market timing nor active security selection (stock-picking, for us,) will succeed over time in beating the market. The quadrant 4 worldview is in good accord with the consensus of a mountain of objective financial research. So he writes on the implications of a quadrant 4 view:

"First, a quadrant 4 worldview undercuts to a large degree the reason for the existence of the money management profession." It means that the billions and billions of dollars in fees and expenses investors pay to keep up the lifestyles of the cast of thousands employed in attempts to beat the market are largely wasted. Worse than wasted actually, as what you get for trying to beat the market these ways is that usually you do worse than the market, when all the costs are counted. So, who at your local wirehouse brokerage or online broker is going to tell you that!

They don't even typically talk about that to each other. What newsletter writer is going to want to face that, much less tell you?

The beauty of the "quadrant 4 worldview" is that it lets you, knowing the score, knowing the reality of risk, use market forces rather than fight them. it lets you invest in hope based on what is real! Market returns over time have been good enough to be really worth going after. And wouldn't you, when you think about it expect it to be that way when all is said and done?

What the Dow Theory has to say about current stock market - MarketWatch

MarketWatch: Working in Retirement

2007-03-15T11:38:00.001-04:00

Robert Powell has an article at MarketWatch offering some good thoughts in an interesting article. What if you are underfunded when retirement starts? He says that one in four Americans will not be able to work in retirement, due to health or other issues. Many may be planning to do so. And not enough employers are gearing up to hire or retain older workers.

Working during retirement, to bring in some extra money, to stay busy with your field, to stay interested in life, to feel useful: each is a valid reason for staying employed. Powell notes that there "is also a question as to how ready employers will be to hire and retain older workers." good point. Do you want a robust job market for seniors, like yourself, like your friends? I suggest that you spend your money where you see people who look like yourself! When senior start telling service providers and others you do business with, "I am sorry, but I do not patronize businesses who will not hire a qualified older person", then you will see change.

There are links to great resources in the article, including a study on retirement readiness, weight and retirement, older workers and the workplace. Go see. Think about this if you think you might need to work in retirement.

What do you love doing? Is there a job or self-employment doing what you love?

Working in retirement may not be your best backup plan - MarketWatch

Do I dare to disagree with an Investor's Business Daily Op-ed? "Backdating Bunkum"

2007-03-14T19:06:00.000-04:00
Boy, that would require some chutzpah. OK.

(link is below)

IBD: "Since Aug. 29, 2002, companies have been required to report new option grants within two days, which does not leave much opportunity for changing the date. So the alleged 'backdating scandal' — an artifact of capricious changes in tax and accounting regulations between 1992 and 2002 — is ancient history by now."

My reply: Not for the companies restating their earnings, unable to get their 10-Qs out on time, facing lawsuits, and definitely not for the individuals with adverse career consequences or even he prospect of having to defend themselves against criminal charges for falsification of corporate records.

IBD: "Another key myth is that there is something inherently unfair about receiving stock options 'in the money' (priced below some later market price)."

My reply: Priced below the then current price would be more correct! It is wrong. it is unfair. It is in a very real sense theft of corporate value from the other stockholders. For example, I cannot buy Apple or HP or Dell stock at the lowest price of the last month, quarter, or whatever. Neither can you. I couldn't if I was a stockholder either. Pay him his salary. Give him his benefits. Give him a bazillion options. But do it all honestly. Or are all these implicated big-shot executives too poor or inherently too devious to just do it right?

IBD Editorials: 'Backdating' Bunkum

Scott Adams' Dilbert: Wally visits a financial advisor

2007-03-14T13:50:00.001-04:00

(link is below.)

And he finds a guy you really should not even think of trusting with your money. I think I foresee some fun with this motif in upcoming days.

Preach it, Scott! Let's see what Wally is offered. First, we have a two percent advisory fee (some are about that high; there are brokers out there with wrap programs in that area. Some advisers are much more reasonable, starting under one percent for the smallest accounts accepted.

Next, "...things that sound good if you don't look into them too closely." Yep.

Next, (interpreting the advisor's spiel some, 'an actively-managed mutual fund which trades a lot.' So Wally gets insufficient diversification, lots of volatility, a wild ride, and probable overall poor performance over time.

Now skip almost to the end: "a big front load". On top of an advisory fee. Deplorable. A compliance issue? Don't think that this never happens. I have seen one advisor tacking on a one percent annual advisory fee on top of the big commission he got for selling limited partnerships to people. The same money. An ongoing advisory fee on a heavily-commissioned "investment product" that is illiquid, not even a marketable security.

The crowning glory of it all: Poor Wally is a clueless client. He's not stupid, and he is definitely self-interested. Dilbert readers know that! He just doesn't know. I want you to know. Your future is at stake. Do not be like Wally: Educate yourself. Great clients (for ethical practioners,) or great individual investors study, and read, read, read! You could start with anything you can find by Burton Malkiel, John Bogle, Andrew Tobias, William Bernstein, Charles Ellis, or Larry Swedroe.

dilbert2008145770314.gif (GIF Image, 600x208 pixels)

This is Really Good: AFP/Breitbart -- New [computer] techniques help fight old practice of insider trading

2007-03-11T20:40:00.001-04:00
Finally! What took so long? It would seem that the publicized application of computer technology to insider trading and the resulting fear of discovery would raise the bar for would-be insider traders. The good guys win when the bad guys are either put out of business or decide the gains might not be worth the risks.

Honest investors and honest reps alike should rejoice, not at the fall of some corrupt people, but that the rewards of investing well, and of helping people invest well both come with a clean conscience.

BREITBART.COM - New techniques help fight old practice of insider trading