Test post, 11-20-2012...

Stayin' Alive

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

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

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

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!

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!

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?

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

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)

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!

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"

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)

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

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

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

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

"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

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

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

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"

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...

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??

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

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?

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.

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

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

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

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

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

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

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

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

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