The Federal Reserve already has a full-time job, which it is doing poorly, despite kudos from political hangers-on. That job is primarily to maintain a sound currency. A minor political function is to keep an eye on “full employment” whatever that means out of the context of the Fed’s main function.
The Fed’s handling of the economy has gotten the country into the financial meltdown because of too-low interest rates early in the 21st century. The Fed’s ineptitude is being rewarded with added duties far beyond the original legislation that created the system..
I repeat: Keeping the currency sound, not chasing systemic risk, is the Fed’s main job. Regulating other institutions will further unfocus the Fed.
The upshot of the proposed new regulation:
The Treasury could be asked to seize any financial institution deemed to be posing a systemic risk. Mind you, the Treasury does this. It’s headed by a political appointee of the President. Politics thus raises its ugly head in the whole process of arbitrary regulation.
The government could then cancel company contracts with customers, lenders and employees. Or sell company assets, make loans. take equity and so on. Company shareholders would have nothing to say.
Have government takeovers and bailouts been successful? Should they become a feature of the regulation?
Friday, July 31, 2009
Thursday, July 30, 2009
Are Derivatives Bad?
Are derivatives that bad?
The politicians who love to point fingers have painted derivatives bad, and have designated it a major cause of the recent financial meltdown.
But silently, derivatives are back, as they ought to be, because they perform an important function as a financial instrument.
What people don’t know, by the way: Timothy Geithner, the Secretary of the Treasury, used to overlook meetings to see how the trading of derivatives were coming along, when he headed the New York Federal Reserve. So, the mysterious workings of derivatives should not have been so foreboding for him prior to the meltdown.
There is now a bill being introduced for derivatives trading to have tougher regulations. In effect, more collateral will be needed by traders. But they will be back, as they should be.
The politicians who love to point fingers have painted derivatives bad, and have designated it a major cause of the recent financial meltdown.
But silently, derivatives are back, as they ought to be, because they perform an important function as a financial instrument.
What people don’t know, by the way: Timothy Geithner, the Secretary of the Treasury, used to overlook meetings to see how the trading of derivatives were coming along, when he headed the New York Federal Reserve. So, the mysterious workings of derivatives should not have been so foreboding for him prior to the meltdown.
There is now a bill being introduced for derivatives trading to have tougher regulations. In effect, more collateral will be needed by traders. But they will be back, as they should be.
Wednesday, July 29, 2009
Disregard Media-Suggested Investment Portfolios
Disregard Media-Suggested Investment Portfolios
You constantly get suggestions in the financial media of portfolios, especially for various types of future economic possibilities. I just saw another. And it made me laugh. However, I guess it really is not a laughing matter, because you can get burned if you follow the advice.
I have a theory of how they appear. They usually come with an advisor mentioned, making the recommendations. That advisor has been singled out from among tens of thousands of such pros.
Financial advisors seeking publicity would give their eye teeth to have pet portfolio ideas published in public view. So why this mention in the column? Is it a friend or relative of the columnist? Who knows?
Secondly, the portfolios shown never, never identify objectives by investor age or risk capacity or psychological sensitivity. It makes the column more than useless. Laughable. And dangerous.
You constantly get suggestions in the financial media of portfolios, especially for various types of future economic possibilities. I just saw another. And it made me laugh. However, I guess it really is not a laughing matter, because you can get burned if you follow the advice.
I have a theory of how they appear. They usually come with an advisor mentioned, making the recommendations. That advisor has been singled out from among tens of thousands of such pros.
Financial advisors seeking publicity would give their eye teeth to have pet portfolio ideas published in public view. So why this mention in the column? Is it a friend or relative of the columnist? Who knows?
Secondly, the portfolios shown never, never identify objectives by investor age or risk capacity or psychological sensitivity. It makes the column more than useless. Laughable. And dangerous.
Tuesday, July 28, 2009
Fees on Risky Transactions
Transaction Fees on Risky Transactions
What is a risky transaction?
Soon our smart bureaucrats in Washington, who can’t seem to get us out of a recession, and in fact are getting us mired into a deeper depression, are going to tell us they will tax us more with possibly a fee on transactions on trades they think are risky.
But what is risk? Buying stocks in a depression? Going for broke with spending we won’t be able to pay back without cheapening the dollar? Has anyone truly decided what it is?
When the White House carries on about risky investments and it seems no one there is qualified to really understand the term, it’s time to hold on to your pocketbooks.
You cannot easily quantify the term, especially in the political vacuum of the White House and the halls of Congress. When securities transaction fees become a no man’s land, head for the hills for cover.
What is a risky transaction?
Soon our smart bureaucrats in Washington, who can’t seem to get us out of a recession, and in fact are getting us mired into a deeper depression, are going to tell us they will tax us more with possibly a fee on transactions on trades they think are risky.
But what is risk? Buying stocks in a depression? Going for broke with spending we won’t be able to pay back without cheapening the dollar? Has anyone truly decided what it is?
When the White House carries on about risky investments and it seems no one there is qualified to really understand the term, it’s time to hold on to your pocketbooks.
You cannot easily quantify the term, especially in the political vacuum of the White House and the halls of Congress. When securities transaction fees become a no man’s land, head for the hills for cover.
Monday, July 27, 2009
The Government’s Intended New Financial Rules
The Government’s Intended New Financial Rules
The Government’s new rules intend to give regulators unlimited powers to do what corporate experts themselves have always found difficult. Let alone political-oriented bureaucrats to attempt to undertake.
A Treasury committee would determine which financial entities pose systemic risk to our economic system. These companies would then be subjected to added regulation by the Federal Reserve.
This cannot be easily done in the real world. Determining potential systemic risk is 100% conjecture. What steps to take, and when to take them, in order to eliminate systemic risk is not a practical matter.
Few real experts in the business world have the foresight to make the decisions. Rarely do bureaucrats or politicos at the Fed or Treasury have the ability or objectivity.
Besides: The Fed and the Treasury already have done a rotten job with the financial meltdown and their bailout functions up to now. Why expect better of them in the future?
The Government’s new rules intend to give regulators unlimited powers to do what corporate experts themselves have always found difficult. Let alone political-oriented bureaucrats to attempt to undertake.
A Treasury committee would determine which financial entities pose systemic risk to our economic system. These companies would then be subjected to added regulation by the Federal Reserve.
This cannot be easily done in the real world. Determining potential systemic risk is 100% conjecture. What steps to take, and when to take them, in order to eliminate systemic risk is not a practical matter.
Few real experts in the business world have the foresight to make the decisions. Rarely do bureaucrats or politicos at the Fed or Treasury have the ability or objectivity.
Besides: The Fed and the Treasury already have done a rotten job with the financial meltdown and their bailout functions up to now. Why expect better of them in the future?
Sunday, July 26, 2009
Proposed Government Suggestions of Consumer Finance.
Proposed Government Suggestions of Consumer Finance.
The Administration feels they have a behavioral concept, to provide the consumer with what is best when shopping for complex financial products.
Such as shorter-term mortgages or those longer-term, or adjustable-rate versus standard term mortgages. Or whether to choose an option despite prepayment penalties. Or the question of which down payments on mortgages.
So the Administration is proposing that there be a simplified version of financial choices for simpleton consumers, that takes the burden away. It takes the term plain-vanilla to a new level, by suggesting a preferred option for all.
I can see having everything on one or two sheets of paper, in large print and in plain English for non-lawyers. The problem, however, is that such an standard option would soon become the only one available.
You can be sure that the threat of a lawsuit from an enterprising lawyer would drive away any other product from being sold by a provider or financial institution.
Remind you of the old Soviet Union type of shopping? You got what the government thought was good for you.
The Administration feels they have a behavioral concept, to provide the consumer with what is best when shopping for complex financial products.
Such as shorter-term mortgages or those longer-term, or adjustable-rate versus standard term mortgages. Or whether to choose an option despite prepayment penalties. Or the question of which down payments on mortgages.
So the Administration is proposing that there be a simplified version of financial choices for simpleton consumers, that takes the burden away. It takes the term plain-vanilla to a new level, by suggesting a preferred option for all.
I can see having everything on one or two sheets of paper, in large print and in plain English for non-lawyers. The problem, however, is that such an standard option would soon become the only one available.
You can be sure that the threat of a lawsuit from an enterprising lawyer would drive away any other product from being sold by a provider or financial institution.
Remind you of the old Soviet Union type of shopping? You got what the government thought was good for you.
Saturday, July 25, 2009
Big Government Approaches to Simple Money Problems- Financing Costs
Big Government Approaches to Simple Money Problems- Financing Costs
Those on the left in politics identify themselves principally by their tendency to rely on Big Government to remedy ills that beset a relatively small percentage of the population. With a sledge hammer.
To cure the ills of a small, sometimes tiny population percentage, they seek remedies that affect and often hurt the majority. The result is the same: Bigger Government. Often with no apparent assistance or aid to the objects of the original assistance.
That is why critics feel the sole original objectives is merely to create bigger and bigger government and not to offer practical help.
Example: Many borrowers who use credit cards, or take out mortgages and loans, make stupid decisions. The Big Government folks will tell you we need more regulations and financial product safety. Yet you cannot legislate or regulate against all stupidity without consequences. Those merely translate into more costly government bureaucracy.
Larger print in consumer contracts will surely help. Along with better schools we already are paying for, so the public can understand basic financial everyday contracts before them .
Those on the left in politics identify themselves principally by their tendency to rely on Big Government to remedy ills that beset a relatively small percentage of the population. With a sledge hammer.
To cure the ills of a small, sometimes tiny population percentage, they seek remedies that affect and often hurt the majority. The result is the same: Bigger Government. Often with no apparent assistance or aid to the objects of the original assistance.
That is why critics feel the sole original objectives is merely to create bigger and bigger government and not to offer practical help.
Example: Many borrowers who use credit cards, or take out mortgages and loans, make stupid decisions. The Big Government folks will tell you we need more regulations and financial product safety. Yet you cannot legislate or regulate against all stupidity without consequences. Those merely translate into more costly government bureaucracy.
Larger print in consumer contracts will surely help. Along with better schools we already are paying for, so the public can understand basic financial everyday contracts before them .
Friday, July 24, 2009
How Good is the Stress Test for Banks?
How Good is the Stress Test for Banks?
Just another example of how stupid the folks at Treasury and the Fed can be is the use of the term Stress Test to publicize the evaluation of a banks’ strength.
First, the public and only a few in the financial community fully know what each test is composed of. And secondly, the term, is a no-no because of its psychological implications with regard to the economy and the stock market.
The stress test is a poor one to start with because it is composed of too many arbitrary factors, each of which may have weightings with only indirect relativity to each other.
Of the several factors, not one by itself is of predominant importance. The ratio of doubtful residential mortgages to capital, for example, or commercial mortgages to capital, or the types of capital (what constitutes tier 1,) or loan defaults (and which types), and potential general unemployment; all add up to figures which can become too vague when experts seek decisive answers.
Some financial official or board must still make a subjective decision to act upon such stress tests. And they can be wrong, as they have been in the recent past in dealing with the financial meltdown.
Just another example of how stupid the folks at Treasury and the Fed can be is the use of the term Stress Test to publicize the evaluation of a banks’ strength.
First, the public and only a few in the financial community fully know what each test is composed of. And secondly, the term, is a no-no because of its psychological implications with regard to the economy and the stock market.
The stress test is a poor one to start with because it is composed of too many arbitrary factors, each of which may have weightings with only indirect relativity to each other.
Of the several factors, not one by itself is of predominant importance. The ratio of doubtful residential mortgages to capital, for example, or commercial mortgages to capital, or the types of capital (what constitutes tier 1,) or loan defaults (and which types), and potential general unemployment; all add up to figures which can become too vague when experts seek decisive answers.
Some financial official or board must still make a subjective decision to act upon such stress tests. And they can be wrong, as they have been in the recent past in dealing with the financial meltdown.
Thursday, July 23, 2009
Investment Education From Financial Ads and Headlines
Investment Education From Financial Ads and Headlines
Folks unfortunately get most of their financial and business education from ads and headlines.
Don’t expect high school or college classes to provide a decent underpinning of information for their students to adequately comprehend economics and finance for the real world. Once out of school, they cannot evaluate the bombardment of ads and the headlines that pertain to finance and business.
And they cannot expect further meaningful explanations from media.
They therefore get biased, one-sided opinions without any contrasting arguments or alternatives to what the ads promote, or headlines intimate.
An example: Purveyors of gold may be selling one type without discussing various forms that can be bought. Or whether they ought to be buying gold at all, even with inflation looming. They never get pros and cons in the ads or brief headlines.
And brokers and advisers are frequently not much better in promoting a particular point of view when discussing securities they offer.
The solution? As I always say in my expanded writings, stay alert to basics and avoid all tips from questionable sources.
Folks unfortunately get most of their financial and business education from ads and headlines.
Don’t expect high school or college classes to provide a decent underpinning of information for their students to adequately comprehend economics and finance for the real world. Once out of school, they cannot evaluate the bombardment of ads and the headlines that pertain to finance and business.
And they cannot expect further meaningful explanations from media.
They therefore get biased, one-sided opinions without any contrasting arguments or alternatives to what the ads promote, or headlines intimate.
An example: Purveyors of gold may be selling one type without discussing various forms that can be bought. Or whether they ought to be buying gold at all, even with inflation looming. They never get pros and cons in the ads or brief headlines.
And brokers and advisers are frequently not much better in promoting a particular point of view when discussing securities they offer.
The solution? As I always say in my expanded writings, stay alert to basics and avoid all tips from questionable sources.
Wednesday, July 22, 2009
Stock Brokers Will Also Change
Stock Brokers Will Also Change
New regulations on Wall Street will see to it that stock brokers will have to treat their clients differently. That, according to the politicians in Washington, will make everything fine once more.
Of course it won’t do much for your portfolios, but it will make the politicians feel better. And enhance their reelection chances.
In the good old days a broker had to be sure that an investment was ”suitable” for his or her client. Naturally, what was suitable was often debatable. But that is what makes the securities markets what they are. Debatable. The same way some politicians always appear to make promises when running for office. Results are something else.
Now the broker is supposed to have a “fiduciary duty” toward the client. according to some plans in store for brokers.
I agree with many on Wall Street that the main purpose of this is to give investors more ammunition to sue their brokers for real or imagined damages when investing.
More power to the lawyers. More political donations to the politicos who have come up with the suggestions.
New regulations on Wall Street will see to it that stock brokers will have to treat their clients differently. That, according to the politicians in Washington, will make everything fine once more.
Of course it won’t do much for your portfolios, but it will make the politicians feel better. And enhance their reelection chances.
In the good old days a broker had to be sure that an investment was ”suitable” for his or her client. Naturally, what was suitable was often debatable. But that is what makes the securities markets what they are. Debatable. The same way some politicians always appear to make promises when running for office. Results are something else.
Now the broker is supposed to have a “fiduciary duty” toward the client. according to some plans in store for brokers.
I agree with many on Wall Street that the main purpose of this is to give investors more ammunition to sue their brokers for real or imagined damages when investing.
More power to the lawyers. More political donations to the politicos who have come up with the suggestions.
Tuesday, July 21, 2009
There is a Cheaper Way to Get Health Care
There is a Cheaper Way to Get Health Care
Obesity costs about 216,000 lives annually, according to credible estimates.
It’s been also estimated that universal health coverage, with its enormous costs and drastic overhaul of the health system may save just another 18,000 lives. And that can cost trillions.
Something does not add up here. What is needed is education In schools, public forums, and media about general health habits.
And how attempting to fine tune our present health care system can bankrupt our entire economy for generations to come.
Obesity costs about 216,000 lives annually, according to credible estimates.
It’s been also estimated that universal health coverage, with its enormous costs and drastic overhaul of the health system may save just another 18,000 lives. And that can cost trillions.
Something does not add up here. What is needed is education In schools, public forums, and media about general health habits.
And how attempting to fine tune our present health care system can bankrupt our entire economy for generations to come.
Monday, July 20, 2009
Regulation of Mutual Fund Reports?
Mutual Fund Reports
Stockholders, particularly those who own shares in mutual funds, could profit greatly from the savings in printing costs and postage, if mandatory distributions and mailings of annual and quarterly reports and proxies were eliminated.
Most shareholders do not read them. Many because they can't understand the verbiage. But rigid regulatory rules mandate usage in their present form.
One suggestion: Why not simply give investors the option of getting just an outline of basic information for laymen? One or two pages should be sufficient. The detailed info can be online or copies for the professionals and lawyers who want them.
I assure you the bulk of what is now sent out immediately winds up in the garbage.
Stockholders, particularly those who own shares in mutual funds, could profit greatly from the savings in printing costs and postage, if mandatory distributions and mailings of annual and quarterly reports and proxies were eliminated.
Most shareholders do not read them. Many because they can't understand the verbiage. But rigid regulatory rules mandate usage in their present form.
One suggestion: Why not simply give investors the option of getting just an outline of basic information for laymen? One or two pages should be sufficient. The detailed info can be online or copies for the professionals and lawyers who want them.
I assure you the bulk of what is now sent out immediately winds up in the garbage.
Sunday, July 19, 2009
Investing in the Present Investment Market
Investing in the Present Investment Market
Investing in the present investment market is not simple, not that investing ever is.
But you can simplify it a bit by classifying your aims. Financial media reports and suggestions often fail to point this out.
Examples:
Are your goals short term or not? Are you taking proper consideration of your age? What are your feelings about taking risks?
Also consider the economy. We have more than a normal, ordinary recession today. It may not bounce back for a couple of years.
And inflation will be around, probably quite heavily, in a couple of years. So economic stagnation and high inflation could be the type of economy that can stifle corporate profits. It means bond purchases ought to be in bonds with relatively low duration.
Investing in the present investment market is not simple, not that investing ever is.
But you can simplify it a bit by classifying your aims. Financial media reports and suggestions often fail to point this out.
Examples:
Are your goals short term or not? Are you taking proper consideration of your age? What are your feelings about taking risks?
Also consider the economy. We have more than a normal, ordinary recession today. It may not bounce back for a couple of years.
And inflation will be around, probably quite heavily, in a couple of years. So economic stagnation and high inflation could be the type of economy that can stifle corporate profits. It means bond purchases ought to be in bonds with relatively low duration.
Saturday, July 18, 2009
The Financial Advisers Are At it Again
The Financial Advisers Are At it Again
Much has been said and written about the current financial meltdown and what the financial institutions are doing to help resolve its repetition.
What about the financial advisers working on behalf of individuals? It appears that they are doing what they have always done in the past? Which may be o.k., within limits and reason.
But they are still resorting to newer alternative investments, which are being designed to offset any weakness in stocks and bonds. These investments are suggested for clients in the form of currencies, commodity futures and private partnerships.
However, not only are these securities-type volatile, they are expensive (fine for the advisers).
And yes, larger accounts are getting the use of math models which don’t always work and so-called structured products which gets us back to Square One before the infamous meltdown.
But when big fees are involved. with many financial advisers it’s business as usual.
Much has been said and written about the current financial meltdown and what the financial institutions are doing to help resolve its repetition.
What about the financial advisers working on behalf of individuals? It appears that they are doing what they have always done in the past? Which may be o.k., within limits and reason.
But they are still resorting to newer alternative investments, which are being designed to offset any weakness in stocks and bonds. These investments are suggested for clients in the form of currencies, commodity futures and private partnerships.
However, not only are these securities-type volatile, they are expensive (fine for the advisers).
And yes, larger accounts are getting the use of math models which don’t always work and so-called structured products which gets us back to Square One before the infamous meltdown.
But when big fees are involved. with many financial advisers it’s business as usual.
Friday, July 17, 2009
The Inflation to Come
The Inflation to Come
With out-of-hand government spending and extraordinary budgetary deficits. It is only a matter of time before we see frightful inflation. It may take a year or two and it may happen by the time the next presidential term comes around, but as night follows day, it will come.
The Federal Reserve’s job is not to protect against systemic financial risk, as is being proposed by the Administration. It’s primarily to maintain the value of the currency. Incidentally, it can do a better job of that.
Also, since 1978. The Fed has to help enforce the Full Employment and Balanced Growth Act, otherwise known as Humphrey-Hawkins. That conflicts with the Fed’s Number One stated activity. That’s because the Act enforcement creates an inflating bias, and not one of dollar stability. So there is always a conflict of interest being overlooked by financial media comment.
With out-of-hand government spending and extraordinary budgetary deficits. It is only a matter of time before we see frightful inflation. It may take a year or two and it may happen by the time the next presidential term comes around, but as night follows day, it will come.
The Federal Reserve’s job is not to protect against systemic financial risk, as is being proposed by the Administration. It’s primarily to maintain the value of the currency. Incidentally, it can do a better job of that.
Also, since 1978. The Fed has to help enforce the Full Employment and Balanced Growth Act, otherwise known as Humphrey-Hawkins. That conflicts with the Fed’s Number One stated activity. That’s because the Act enforcement creates an inflating bias, and not one of dollar stability. So there is always a conflict of interest being overlooked by financial media comment.
Thursday, July 16, 2009
What do Stress Tests REALLY Mean for Banks?
What do Stress Tests REALLY Mean for Banks?
We have heard of the term. How important is it in the financial picture? After all, much of what comes from the regulators in Washington these days can be taken with a grain of salt.
Stress Tests are actually a combination of individual tests. They can entail for example, bank loss estimates measured as percentages of their holdings on first-lien mortgages, and second-lien mortgages, or credit cards and commercial real estate loans. Estimated bank earnings are also considered.
Then to this hodgepodge of risk percentages the reserve status of the banks are taken into account. The level of what is referred to as Tier 1 capital is important. This includes common and preferred shares, preferably equal to 4% of what is called risk-weighted assets. Sometimes that 4% may be considered too low.
To complicate matters, some unrealized losses on assets could become losses in the future, so the Tier 1 weightings may have to be adjusted with time. Obviously, Stress Tests are not fixed so their results can give varying interpretations.
And that is the basic fallacy behind the Stress Test talk you get out of Washington. It is far too much about subjective, theoretical nothingness. And it is the reason why the Big Regulatory Boys are running what has been a conventional economic recession into an economic depression.
We have heard of the term. How important is it in the financial picture? After all, much of what comes from the regulators in Washington these days can be taken with a grain of salt.
Stress Tests are actually a combination of individual tests. They can entail for example, bank loss estimates measured as percentages of their holdings on first-lien mortgages, and second-lien mortgages, or credit cards and commercial real estate loans. Estimated bank earnings are also considered.
Then to this hodgepodge of risk percentages the reserve status of the banks are taken into account. The level of what is referred to as Tier 1 capital is important. This includes common and preferred shares, preferably equal to 4% of what is called risk-weighted assets. Sometimes that 4% may be considered too low.
To complicate matters, some unrealized losses on assets could become losses in the future, so the Tier 1 weightings may have to be adjusted with time. Obviously, Stress Tests are not fixed so their results can give varying interpretations.
And that is the basic fallacy behind the Stress Test talk you get out of Washington. It is far too much about subjective, theoretical nothingness. And it is the reason why the Big Regulatory Boys are running what has been a conventional economic recession into an economic depression.
Wednesday, July 15, 2009
Its Hard To Play Follow-the-Leader in the Stock Market
Its Hard To Play Follow-the-Leader in the Stock Market
Can we learn anything from the spectacular Goldman Sachs Group second-quarter 2009 report?
How could they earn such money in up and down markets? And if so, can their method be copied by Main Street as well as Wall Street?
The Goldman Sachs Group has been specializing in high-frequency trading, and now accounts for about 24% of all computer-generated trading on the NYSE. Their mathematical model/code has worked for them. These math models generally do well… until you hear of an eventual foul-up.
Mathematical formulas are not for Main Street. They are not even for many on Wall Street for very long. Think of some that failed in 2008 and years earlier.
Can we learn anything from the spectacular Goldman Sachs Group second-quarter 2009 report?
How could they earn such money in up and down markets? And if so, can their method be copied by Main Street as well as Wall Street?
The Goldman Sachs Group has been specializing in high-frequency trading, and now accounts for about 24% of all computer-generated trading on the NYSE. Their mathematical model/code has worked for them. These math models generally do well… until you hear of an eventual foul-up.
Mathematical formulas are not for Main Street. They are not even for many on Wall Street for very long. Think of some that failed in 2008 and years earlier.
Tuesday, July 14, 2009
Analyzing Insurance Companies
Analyzing Insurance Companies
Beware of Wall Streets insurance analysts.
Want to test them? Ask if they can read what is called a Convention Blank. These are the annual filings the companies make with the state insurance departments. Very few, if any, current analysts can understand them. If they cannot, they are not capable insurance analysts.
As a former Wall Street insurance analyst, I rarely found anyone on the Street giving advice on insurance company securities who took the trouble to truly learn how to understand the policies the companies write, and the reserves behind them.
This is still true today, based on commentaries I see in the media.
Beware of Wall Streets insurance analysts.
Want to test them? Ask if they can read what is called a Convention Blank. These are the annual filings the companies make with the state insurance departments. Very few, if any, current analysts can understand them. If they cannot, they are not capable insurance analysts.
As a former Wall Street insurance analyst, I rarely found anyone on the Street giving advice on insurance company securities who took the trouble to truly learn how to understand the policies the companies write, and the reserves behind them.
This is still true today, based on commentaries I see in the media.
Monday, July 13, 2009
One suggestion for an MBA Financial Course
One suggestion for an MBA Financial Course
There have been many suggestions for those making up practical courses for graduate students seeking an MBA for a career on Wall Street.
One is the result of my observing the successes, failures and foibles that I have noted on Wall Street.
That has to do with the study of failures of the many mathematical models that have been devised to reduce risk. Simply, the models have not cut the investment risk that is their primary objective.
I am not talking about the well-discussed Black Swan concept of risk that happens once every fifty years or more, such as the current financial meltdown. But the constant use of financial models which don’t seem to work as they are intended to do..
There have been many suggestions for those making up practical courses for graduate students seeking an MBA for a career on Wall Street.
One is the result of my observing the successes, failures and foibles that I have noted on Wall Street.
That has to do with the study of failures of the many mathematical models that have been devised to reduce risk. Simply, the models have not cut the investment risk that is their primary objective.
I am not talking about the well-discussed Black Swan concept of risk that happens once every fifty years or more, such as the current financial meltdown. But the constant use of financial models which don’t seem to work as they are intended to do..
Sunday, July 12, 2009
Analyzing Banks
Analyzing Banks
Be extremely careful of Wall Street analysts telling you how good or bad a bank or insurance company is.
The current deep recession, like all recessions, is started when business people and consumers get pessimistic and stop spending or buying.
Rumors are often bandied about about banks, fomented by bank analysts who cannot possibly see a bank’s asset portfolio, and make for self-fulfilling events. Especially when bank holdings must then be marked to market. Fear frenzy takes hold as analysts persist in this self-fulfilling bearish sentiment. This occurred to help exaggerate and set off our current deep recession.
Bank analysts are never privy to actual derivative portfolio information. If they were, they could not understand the inherent complexities within each institution. Yet every negative word they utter can doom the soundest financial institution, to the point where that organization truly becomes insolvent.
Be extremely careful of Wall Street analysts telling you how good or bad a bank or insurance company is.
The current deep recession, like all recessions, is started when business people and consumers get pessimistic and stop spending or buying.
Rumors are often bandied about about banks, fomented by bank analysts who cannot possibly see a bank’s asset portfolio, and make for self-fulfilling events. Especially when bank holdings must then be marked to market. Fear frenzy takes hold as analysts persist in this self-fulfilling bearish sentiment. This occurred to help exaggerate and set off our current deep recession.
Bank analysts are never privy to actual derivative portfolio information. If they were, they could not understand the inherent complexities within each institution. Yet every negative word they utter can doom the soundest financial institution, to the point where that organization truly becomes insolvent.
Saturday, July 11, 2009
Get a Real Definition of the Word, “Stimulus”
Get a Real Definition of the Word, “Stimulus”
The word, “Stimulus” has evolved for alternative usage by politicians. It’s old meaning had been perfectly useful in economics and economic parlance.
It has become a cover for politicians who conveniently use it to describe or hide what other motives they may have in mind.
What the the bulk of the population here in America thinks of when their Masters in Washington attempt to stimulate the economy is spending that will get business wheels grinding again, employers hiring again and folks buying again. And as quickly as possible. I repeat: Quickly. Not next year or the year after.
Poor psychology is what makes economic recessions and depressions linger on and on. A true stimulus must promptly change that poor psychology and FAST.
But when only a small amount of stimulus money is actually designed to be spent within that all-important first year, another motive is apparent. When the vast bulk of stimulus money is designed to be a mere framework for the expansion of BIG Government and Big Government jobs only, the goal is primarily not the same.
It is obvious. Enormous amounts of money is being spent, more for the future socialization of a large percentage of the economy, and not economic stimulus today.
The public will eventually see that such spending is only a down payment on future costs, to be paid by heavy taxes and a more worthless dollar.
The word, “Stimulus” has evolved for alternative usage by politicians. It’s old meaning had been perfectly useful in economics and economic parlance.
It has become a cover for politicians who conveniently use it to describe or hide what other motives they may have in mind.
What the the bulk of the population here in America thinks of when their Masters in Washington attempt to stimulate the economy is spending that will get business wheels grinding again, employers hiring again and folks buying again. And as quickly as possible. I repeat: Quickly. Not next year or the year after.
Poor psychology is what makes economic recessions and depressions linger on and on. A true stimulus must promptly change that poor psychology and FAST.
But when only a small amount of stimulus money is actually designed to be spent within that all-important first year, another motive is apparent. When the vast bulk of stimulus money is designed to be a mere framework for the expansion of BIG Government and Big Government jobs only, the goal is primarily not the same.
It is obvious. Enormous amounts of money is being spent, more for the future socialization of a large percentage of the economy, and not economic stimulus today.
The public will eventually see that such spending is only a down payment on future costs, to be paid by heavy taxes and a more worthless dollar.
Friday, July 10, 2009
How to Protect Against Ponzi Fraud Schemes.
How to Protect Against Ponzi Fraud Schemes.
It’s not easy to protect against Ponzi and other fraud schemes despite what the media tells you, after they occur. But there are basics you can follow to reduce the odds of falling into the traps that produce frauds.
A major basic in avoiding investment frauds: Stick to plain vanilla investing vehicles from low-cost plain vanilla investment funds. They are the ones with the lowest-cost management fees who have been around for years.
Avoid Hotshots who consistently appear to pay off far better than the plain vanilla, low-cost investment funds. They get publicity from ignorant or complicit “friends” or from media public relations hypsters.
Another investment basic: Avoid money managers if you can. Why pay a fee of 1% to 2% of your assets? This will amount to about 20% or more of your earnings a year. In hedge funds you also pay a cut of 20% or more of earnings off the top, plus that percentage of management fee. And you will be in a gray area.
Only a tiny number of money managers or hedge funds prove to be Ponzi schemes, but you will sleep better by staying away from them all.
Hire an accountant, a CPA, and if you have considerable funds, you must have a tax attorney to advise you. Otherwise, avoid fraud by sticking to plain, low-management-cost funds.
It’s not easy to protect against Ponzi and other fraud schemes despite what the media tells you, after they occur. But there are basics you can follow to reduce the odds of falling into the traps that produce frauds.
A major basic in avoiding investment frauds: Stick to plain vanilla investing vehicles from low-cost plain vanilla investment funds. They are the ones with the lowest-cost management fees who have been around for years.
Avoid Hotshots who consistently appear to pay off far better than the plain vanilla, low-cost investment funds. They get publicity from ignorant or complicit “friends” or from media public relations hypsters.
Another investment basic: Avoid money managers if you can. Why pay a fee of 1% to 2% of your assets? This will amount to about 20% or more of your earnings a year. In hedge funds you also pay a cut of 20% or more of earnings off the top, plus that percentage of management fee. And you will be in a gray area.
Only a tiny number of money managers or hedge funds prove to be Ponzi schemes, but you will sleep better by staying away from them all.
Hire an accountant, a CPA, and if you have considerable funds, you must have a tax attorney to advise you. Otherwise, avoid fraud by sticking to plain, low-management-cost funds.
Thursday, July 9, 2009
Is Government Health Insurance Cheaper Than Private Insurance?
Is Government Health Insurance Cheaper Than Private Insurance?
This administration keeps repeating the argument that government health insurance will be cheaper than private health insurance. That is simply not true, and defies past experience.
To start with, look at Medicare and Medicaid if you want to see costs rising well beyond general health expense estimates. Many reasons account for this, but are conveniently overlooked when it’s politically necessary to do so.
One: Private insurance does a far, far better job of preventing outlandish fraud that generally envelops government programs.
Two: Private administration is much more efficient. When the government attempts to cuts its overhead costs, it does so by paying bills that it should not be paying. That is not efficiency.
Private insurers also create effective doctor and medical networks that government has heretofore not done to avoid errors, and probably will never accomplish. There are too many governmental agencies or quasi-agencies (such as the Post Office) to point to for examples.
Three: Government reduces operating costs by delaying or simply not paying for certain types of coverage. It may be done by age or what a consulting board says should be treatment standards. This is rationing that we know causes a loss of lives, by comparing American statistics with those of countries with socialized medicine such as the UK and Canada.
This administration keeps repeating the argument that government health insurance will be cheaper than private health insurance. That is simply not true, and defies past experience.
To start with, look at Medicare and Medicaid if you want to see costs rising well beyond general health expense estimates. Many reasons account for this, but are conveniently overlooked when it’s politically necessary to do so.
One: Private insurance does a far, far better job of preventing outlandish fraud that generally envelops government programs.
Two: Private administration is much more efficient. When the government attempts to cuts its overhead costs, it does so by paying bills that it should not be paying. That is not efficiency.
Private insurers also create effective doctor and medical networks that government has heretofore not done to avoid errors, and probably will never accomplish. There are too many governmental agencies or quasi-agencies (such as the Post Office) to point to for examples.
Three: Government reduces operating costs by delaying or simply not paying for certain types of coverage. It may be done by age or what a consulting board says should be treatment standards. This is rationing that we know causes a loss of lives, by comparing American statistics with those of countries with socialized medicine such as the UK and Canada.
Wednesday, July 8, 2009
Government Health Insurance Will Not Create New Doctors
Government Health Insurance Will Not Create New Doctors
The law of Supply and Demand applies to health as it does to commodities. Perhaps even more so. This is a dirty secret the politicians never mention.
You may tell the public you will increase their ability to get more medical care. But to do so, you must also increase the number of doctors, their facilities and their aides.
The last I checked, it took maybe ten years to educate and train a bright young man or woman willing to work 24/7 to become a doctor. At a cost of at least $100,000 tuition.
In addition, the government health care sponsors are compounding the health insurance finagle, in trying to cut health costs by reducing doctor income. This would make it tougher to reduce the investment or acquired debt of becoming a doctor.
Nobody mentions training new doctors at government expense and if it ever happened, why train so hard for so little compensation?
The law of Supply and Demand applies to health as it does to commodities. Perhaps even more so. This is a dirty secret the politicians never mention.
You may tell the public you will increase their ability to get more medical care. But to do so, you must also increase the number of doctors, their facilities and their aides.
The last I checked, it took maybe ten years to educate and train a bright young man or woman willing to work 24/7 to become a doctor. At a cost of at least $100,000 tuition.
In addition, the government health care sponsors are compounding the health insurance finagle, in trying to cut health costs by reducing doctor income. This would make it tougher to reduce the investment or acquired debt of becoming a doctor.
Nobody mentions training new doctors at government expense and if it ever happened, why train so hard for so little compensation?
Tuesday, July 7, 2009
Regulating Booms and Recessions
Regulating Booms and Recessions
The whole purpose of this Administration’s crusade to regulate the economy more than it already is, amounts to an attempt to smooth out the booms and the severe recessions of the past.
Unfortunately this country has repeatedly been through this recurring cycle over many, many years. Other economies around the world have been through the same.
The bottom line: Over-regulation or overly-strict regulation NEVER works, not for long. The effort always has a short term goal, but it is, nevertheless, used because it’s always a political measure that assuages public unrest.
Conventional regulation in the latest financial meltdown just didn’t help. There was the usual political factor that overrode all supervision that the regulation afforded. Easy money and the subprime crisis were the babies that Congress created, not the lack of supervision.
The whole purpose of this Administration’s crusade to regulate the economy more than it already is, amounts to an attempt to smooth out the booms and the severe recessions of the past.
Unfortunately this country has repeatedly been through this recurring cycle over many, many years. Other economies around the world have been through the same.
The bottom line: Over-regulation or overly-strict regulation NEVER works, not for long. The effort always has a short term goal, but it is, nevertheless, used because it’s always a political measure that assuages public unrest.
Conventional regulation in the latest financial meltdown just didn’t help. There was the usual political factor that overrode all supervision that the regulation afforded. Easy money and the subprime crisis were the babies that Congress created, not the lack of supervision.
Monday, July 6, 2009
Bank Bailouts and Your Money
Bank Bailouts and Your Money
The whole bank bailout idea is an academic and practical failure, done by academics, most of whom are not work-a-day bankers.
They have seen to it that banks have acquired more clean capital and reserves, having gotten rid of much of their questionable assets. So far so good for the economy.
The government honchos have seen to it that banks now earn interest kept on reserves over at the Federal Reserve. That adds to bank earnings. But the regulators cannot force the banks to make loans to their customers.
So banks are now sitting with loads of available cash for industry and consumers but relatively little of it is getting out because the banks are still afraid to lend it as they do in normal times. They can make more investing in securities.
So much for the smart guys in government with the TRILLIONS of inflationary bail out money
The whole bank bailout idea is an academic and practical failure, done by academics, most of whom are not work-a-day bankers.
They have seen to it that banks have acquired more clean capital and reserves, having gotten rid of much of their questionable assets. So far so good for the economy.
The government honchos have seen to it that banks now earn interest kept on reserves over at the Federal Reserve. That adds to bank earnings. But the regulators cannot force the banks to make loans to their customers.
So banks are now sitting with loads of available cash for industry and consumers but relatively little of it is getting out because the banks are still afraid to lend it as they do in normal times. They can make more investing in securities.
So much for the smart guys in government with the TRILLIONS of inflationary bail out money
Sunday, July 5, 2009
Regulating Investment Hedge Funds is Impractical for the Hedge Funds
Regulating Investment Hedge Funds is Impractical for the Hedge Funds
If you regulate investment hedge funds, they will no longer be hedge funds in the true sense of the term and by the definition of what a hedge fund does for an investor.
Hedge fund managers need secrecy in order to do their trading. If they tip off their intentions in advance as strict regulation will tend to promote, their efforts will be neutralized and their objectives overcome. Other investors will be able to parallel or counter management’s strategy to make any hedging worthless or dangerous.
If you regulate investment hedge funds, they will no longer be hedge funds in the true sense of the term and by the definition of what a hedge fund does for an investor.
Hedge fund managers need secrecy in order to do their trading. If they tip off their intentions in advance as strict regulation will tend to promote, their efforts will be neutralized and their objectives overcome. Other investors will be able to parallel or counter management’s strategy to make any hedging worthless or dangerous.
Saturday, July 4, 2009
Beware of Hanging Juries and Judges
Beware of Hanging Juries and Judges
Folks in business and entrepreneurs: American justice may be questionable.
The Fourth of July may be a good time to note a problem about a lack of civil rights for citizens who are involved in business. Whether as entrepreneurs, small business operators, merchants, or CEOS of small and large companies. Anyone who hires folks.
They’re to be protected as a minority, as compared to the majority who work for others.
To those unfortunates I issue a warning. Beware of Hanging Juries and Judges, in the event you wind up in court as a defendant. Whether in a civil or a criminal case. Whether you are innocent or guilty.
Because many members of the jury and possibly, even the judge will be inclined to consider you guilty before you can prove yourself innocent. Just because you are involved in business. Or as an entrepreneur, small business operator, merchant, or CEO of a small or large company.
This owes to the fact most Americans. as well as college graduates, lawyers and yes, judges, have little knowledge of business and finance.
Thus, they are inclined to be influenced by the media’s negative attitude towards business and finance and the propensity to harp on the “greed” of those involved in such industries.
Folks in business and entrepreneurs: American justice may be questionable.
The Fourth of July may be a good time to note a problem about a lack of civil rights for citizens who are involved in business. Whether as entrepreneurs, small business operators, merchants, or CEOS of small and large companies. Anyone who hires folks.
They’re to be protected as a minority, as compared to the majority who work for others.
To those unfortunates I issue a warning. Beware of Hanging Juries and Judges, in the event you wind up in court as a defendant. Whether in a civil or a criminal case. Whether you are innocent or guilty.
Because many members of the jury and possibly, even the judge will be inclined to consider you guilty before you can prove yourself innocent. Just because you are involved in business. Or as an entrepreneur, small business operator, merchant, or CEO of a small or large company.
This owes to the fact most Americans. as well as college graduates, lawyers and yes, judges, have little knowledge of business and finance.
Thus, they are inclined to be influenced by the media’s negative attitude towards business and finance and the propensity to harp on the “greed” of those involved in such industries.
Friday, July 3, 2009
Regulation Has Little to Do With It
Regulation Has Little to Do With It
The White House, along with dominant legislators and too many commentators, profess the need for even more regulatory supervision over banks and other financial entities.
They all miss the problem. There are now almost a dozen such regulatory federal agencies around. No one has taken the tack that, perhaps, the problem has been too much regulation that overlaps. Maybe someone else is to blame.
From the SEC and Federal Reserve on down the list, what is needed is transparency, not more regulation.
The biggest culprit in the subprime debacle was Fannie Mae and Freddie Mac, which were regulated. But nothing really was done about the obvious excesses except what went on publicly and politically in Congress, under the ignorance-radar of most of the media. The latter did not think it was important enough because populist political considerations at the time saw to it that proper remedies were never available.
“Progressive” politicians rolled the dice and we lost. Regulation had little to do with it.
The White House, along with dominant legislators and too many commentators, profess the need for even more regulatory supervision over banks and other financial entities.
They all miss the problem. There are now almost a dozen such regulatory federal agencies around. No one has taken the tack that, perhaps, the problem has been too much regulation that overlaps. Maybe someone else is to blame.
From the SEC and Federal Reserve on down the list, what is needed is transparency, not more regulation.
The biggest culprit in the subprime debacle was Fannie Mae and Freddie Mac, which were regulated. But nothing really was done about the obvious excesses except what went on publicly and politically in Congress, under the ignorance-radar of most of the media. The latter did not think it was important enough because populist political considerations at the time saw to it that proper remedies were never available.
“Progressive” politicians rolled the dice and we lost. Regulation had little to do with it.
Thursday, July 2, 2009
Investment Goals by Individual Age and Risk Limits
Investment Goals by Individual Age and Risk Limits
The characteristics of individual investors must be considered when they make investments. General media advice or suggestions can be totally misleading because of varying individual circumstances.
Risks entailed when investing follow the same rule. Investors must consider risk by taking into account their knowledge of the securities markets; and each. personal distinctive situation, such as age, number of dependents, financial status and investing-comfort.
Therefore, much of the advice and commentary is universally misused by ambitious gurus with whom we are beset in the media.
The characteristics of individual investors must be considered when they make investments. General media advice or suggestions can be totally misleading because of varying individual circumstances.
Risks entailed when investing follow the same rule. Investors must consider risk by taking into account their knowledge of the securities markets; and each. personal distinctive situation, such as age, number of dependents, financial status and investing-comfort.
Therefore, much of the advice and commentary is universally misused by ambitious gurus with whom we are beset in the media.
Wednesday, July 1, 2009
Does Investment Asset Allocation Work?
Does Investment Asset Allocation Work?
The bear-market in stocks has been accompanied by a massive sell-off in bonds. The domestic market’s experience has been paralleled overseas as well; in Europe, Asia, the underdeveloped and the emerging markets too.
That wasn’t supposed to happen. When stocks in the past were weak, bond prices have generally shown strength. In recent years this has not been the case.
Therefore asset allocation did not help in this bear market. Using different asset classes to get higher returns at lower risks was unattainable.
Alternatives are not sure-fire answers, but advisers love to recommend a variety with the aid of 20-20 hindsight, Collectibles are not the answer because of a lack of ready marketability and poor resale margin factors. Some use various combinations of gold holdings. Still others, questionable short-term commodity trading antics.
Over the long run, diversification among different asset classes has produced much higher returns, along with lower risk.
The bear-market in stocks has been accompanied by a massive sell-off in bonds. The domestic market’s experience has been paralleled overseas as well; in Europe, Asia, the underdeveloped and the emerging markets too.
That wasn’t supposed to happen. When stocks in the past were weak, bond prices have generally shown strength. In recent years this has not been the case.
Therefore asset allocation did not help in this bear market. Using different asset classes to get higher returns at lower risks was unattainable.
Alternatives are not sure-fire answers, but advisers love to recommend a variety with the aid of 20-20 hindsight, Collectibles are not the answer because of a lack of ready marketability and poor resale margin factors. Some use various combinations of gold holdings. Still others, questionable short-term commodity trading antics.
Over the long run, diversification among different asset classes has produced much higher returns, along with lower risk.
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