The Obama Administration’s Interpretation of Family Income

When the Obama Administration speaks about the top 1% of wage earners in this country and their domestic income, they make comparisons and interpretations of official family income statistics going back to the 1980s and beyond.

But in doing so, they make a major error.

The argument does not consider that families have changed. Twenty, thirty years ago, there may have been just one worker in a family, where today, husbands and wives more likely work. And perhaps kids. who are at least part-timers.

So families may have two and perhaps more small income providers. They could add to a sum of income that may class them as so-called “rich” by the Obama Administration.

And, therefore, members of the privileged group the Obama Administration is ready to heavily tax.

Buying Gold: Another View

I have commented before on buying gold as an inflation hedge, and why the idea is not a simple solution to a falling dollar.

For those who have decided to buy gold, however, an option that often is not fully understood is whether to buy gold mining shares, instead of gold coins or bullion.

There is dividend income in holding shares as well as potential capital growth. Gold coins and bullion do not offer income. And you have to store and safeguard the physical assets.

However, mining company shares run into occasional production problems and potentially negative management issues. That is a negative factor.

Remember, gold can be bought without physical possession, in the form of mutual funds or exchange traded funds (ETF)s

I feel there are many other ways to protect yourself against inflation. Gold is primarily a hedge against a weaker dollar, which waxes and wanes cyclically. Other investments I discuss from time to time are more directly attuned to inflationary factors.

More Federal Regulation Vs Better Transparency

XBRL or Extensible Business Reporting Language can permit data to be collected and analyzed. It can be used to assess risk on about 600 points with regard to mortgages. And then the data may be readily tracked.

There is a far better case for using such data resources for collection and review and more transparency on mortgages, with the consequent need for less federal regulation.

As compared to the layers of added regulation that we know from experience really does not work. And that further federal regulations will develop nothing truly positive.

But with Washington’s propensity for control what it is today, I guess more useless and irresponsible regulation will be what we get.

Risks of Investing

They say you can take more investing risks when you are young. But remember, If you lose a big chunk of capital, it still sets you back a good deal, no matter when.

Yes, it is better to lose chunks of capital at age 40 than when you are at 60, or when you are 60, than of at age 80.

Nevertheless, look at a compound interest table, and see what happens to any amount of principal, when you lose a large sum early on.

The lesson? Always be careful. If you have losses, the earlier they occur before you need the funds, the luckier you have been.

There is always the brighter side of youth. But discretion is important when investing.

Small Business Can Help Get Us Out of The Recession

Small business employs 50% of the U. S. work force. It makes up about 38% of the GDP. But small business cannot get sufficient credit from banks today. The latter are worried about strict regulators who appear over their shoulders to see that their books show little risk.

In fact, the easy money policy of the Federal Reserve makes it far easier for banks to borrow at little cost from the Fed and invest in government bonds. So why bother to make risky small business loans?

Small business has little access to public sources of borrowing. And they are usually in no position to sell stock to investors. Where will they get funds?

Credit cards are one solution. About 80% of small businesses pursue this arrangement, though rates are high. But this source is getting tougher, because of government meddling.

Left-leaning politicians believe that anyone who charges more than what a bank will charge is a usurer, even when there is no money available at bank rates. That’s because they cannot understand supply/demand economics. Even when a left-leaning government is responsible for keeping that supply askew.

The next time you hear the Obama Administration talk about real jobs, it will be mere talk. Nothing it is doing about available loans is being practiced.

Uncle Sam is Rolling the Dice Again

After denying they had anything to do with the financial meltdown, Congress is at it again. As one of their vaunted committee chairmen likes to put it, “rolling the dice” for the good of the public.

Once again seeing to it that folks who cannot afford to own a house are able to buy one. Getting tax credits up front and provisions to buy homes with practically nothing down. In no time, in 2010 and beyond, they will join the rest of the rising numbers of homeowners in default.

Will left-leaning, vote-seeking, politicos never learn? Why should they?

The media will repeat that the villains once more will be the “greedy” banks and mortgage brokers whose jobs depend on carrying out government edicts.

Many Hedge Funds Disappeared in 2009

The year 2009 was not good for many hedge funds. Some did well enough in the markets, though not as they did several years ago, during their Golden Age,

But about 2000 or 20% of hedge funds went out of business due to a loss of investor interest. Or so-so performance that failed to attract followers of the past.

The main peeve against them are their charges. In addition to their standard management fee which is usually set at 2% of assets managed, they still get about 20% of earnings they produce. That is far too much for funds doing conventional, non-rocket-science investing.

Still Buying a Home for Investment?

From 1890 to 1996, research shows that residential real estate values increased about 27%. I had always advised folks to treat a home as just that, not as a means of growing rich. The small increase in home values would attest to my reasoning over the years.

I got lots of flak in the late 1990s and early in the 21st century, however. That is because, from 1996 to 2008, residential real estate values rose sharply, about 72% on average.

That up-cycle has now come to a sudden demise and is in a down-spin. And I can repeat my old admonition. Buy a home to suit your budget and your family requirements.

If you want to invest in real estate there are other options. For example, commercial realty REIT mutual funds or exchange traded funds (ETFs).

Buy ADRs or American Stocks Directly?

Investors who wish to buy foreign securities as a means of diversification may do so in several ways.

One is to buy what is known as ADRs or American Depositary Receipts. These are dollar, Euro or other currency denominated participation in global issues.

I find them more expensive for those who want basic, non-technical investing. But why not use foreign mutual funds or exchange traded funds (ETFs)? The latter can be traded and are cheaper to transact.

Making Big Banks Secure Does Not Spell Business Recovery

As I have noted in my previous comment, the Obama Administration is hell bent on making sure that too-big-to-fail banks will not bring on another economic disaster. In doing so, they are strangling the economy with regulations.

They have also been overlooking a major fact.

Monetary policy has been set up merely to accommodate this “too-big-to-fail” doctrine at the expense of business who cannot access sufficient loans. Banks who have received government treatment get low interest rates and safe government bond investments to bolster earnings. Why would banks not play this spread rather than make risky loans to business? Especially with government agencies looking over their shoulder, suggesting that risky business loans are taboo?

Only government bureaucrats can think up such absurdities when rescuing banks, while supposedly attempting to get business out of a deep recession.

Banks Too Big to Fail

One of the driving reasons for the Obama Administration’s pursuit of super financial regulation is its fear of financial institutions failing. It has produced monumental bailouts, resulting in extraordinary budget deficits. Which, in turn, are dooming our economic prospects for generations to come.

And still the Obama Administration is ready to impose layer upon additional layer of stifling regulation. Unfortunately, with no possibility Big Banks will have eliminated systemic risk.

There is a simple, free market solution that has worked in the past, but left-leaning politicians have no clue about its implementation.

Separate commercial banking operations from investment banking, as they were for decades in the past. Banks would then be smaller, less risky and less apt to fail than the risk-taking and more leveraged investment entities.

And then let bankruptcy law resolve credit problems as it successfully had before, without danger of a catastrophic financial meltdown.

High Frequency Trading: Mutual Fund Investors vs.Individuals

This is the second part of my discussion on high-frequency trading that exclusively concerned mutual fund managers.

While I feel high-frequency trading benefits most market participants, there are hazards involved. In every trade. There may be a winner and a loser. The presumption is that high-frequency traders are the more efficient, at the expense of the less adept. What can happen to individuals who feel they cannot compete with mutual funds or other large investors, for example?

If profits are made on tiny price variations, unscrupulous players can profit in some manipulation, like that caused by rumors. However, the SEC has the ability to supervise this possibility.

The SEC must always protect small investors from active traders who could conceivably be hurt by high-frequency trading with their faster computers. At the same time, high-frequency trading benefits small investors who use mutual funds, as an example.

That is why I feel there is no problem that some may have envisioned.

High-Frequency Trading

I have commented on high-frequency trading before.

Those who defend it say high-frequency trading improves market liquidity. It assures a buyer or seller available whenever one wants to trade.

High-frequency trading benefits mutual fund investors and traders in that it reduces costs. It lets investors with fast computers take advantage of small price discrepancies and bring market liquidity.

Some mutual fund companies claim that the stock market has efficiently used middle men or “market-makers” for years. They complete sales by buying and selling in their own accounts, if they cannot immediately match buyers and sellers. Market makers profit on the difference between the bid prices buyers are willing to pay and the ask prices sellers accept.

High-frequency traders have changed this and not for the better, others say. Large mutual fund representatives have met with SEC officials to discuss such trading.

Thus, there is disagreement among fund companies, with ongoing worries about market manipulation, Their trade group, the Investment Company Institute, has urged the SEC to further study the matter further before issuing any new regulations.

Bank Lending and Government Efforts

There is an extreme shortage of bank credit and as long as there is, all the speeches from President Obama about jobs will amount to naught. There will be economic stagnation because business cannot accommodate hiring permanent workers.

I have commented about jobs for some time. They do not come from government hires in questionable projects. The worthwhile, stable variety generate within industry, not in a make-work program with no true productivity aim.

Always keep in mind what has made the U.S. different from socialist governments with all their perfect job-planning schemes. Fancy words and plans never succeed. They may fool and appease the public, at least for awhile. But never for long

Mutual Fund Total Costs

Mutual funds have to be shopped because the fundamental differences among funds, aside from their investment class and specialties, is their cost. The lower the cost of operation, the better they are fundamentally. Relative cost makes a lot of difference in accumulated investment value.

The average expense ratio for all mutual funds is 1.32% per year. Many charge more than 2% This covers only fixed costs, such as salaries, marketing and overhead.

Then, there are variable costs such as brokerage commissions and the cost of trading spreads. While funds pay lower commission rates than you, the more the fund trades, the more it spends on brokerage. And the less you earn. Those expenses are not included in the Expense Ratio or in the prospectus, but are in the fund’s Statement of Additional Information, not in the prospectuses

In 2007, an analysis by researchers at Virginia Tech, the University of Virginia, and Boston College, in a sample of 1,706 U.S. equity funds from 1995 to 2005, found the average fund had annual trading expenses of 1.44% per year Added to the 1.32% average expense ratio for funds, the average mutual fund expense ratio becomes a total cost of 2.76% per year.

What Does It Cost to Work With a Financial Advisor?

Ask advisers how they are being compensated. There may be a big difference between what they earn and what you pay them. I am not only referring to the fact that they may be getting referral fees for recommending you as a client. That would be a conflict of interest harmful to your interests.

I am calculating actual cost.

You will pay the advisor’s fee, on the management of your assets, It can be 1% to 3%, generally 1½%. But the asset-management fee may not be the only cost . You pay other charges, which include mutual fund and exchange-traded fund fees for management.

And if you use a hedge fund, you may also pay about 20% or so of fund earnings.

The problem is that these costs add up to a considerable chunk of your annual returns.

Insider Trading Rules

Despite the occasional media reports of Wall Street types who have been caught by authorities for insider trading, the rules are not as open and shut as headlines would make them appear.

Many of the rules are vague. It’s easy to get caught for what was done in good faith. Often, folks who are arrested and go to jail, are guilty merely of lying in one way or another in their testimony, but not for insider dealings, as such.

What has been firmly established about insider trading is this:

An employee has an obligation to an employer not to divulge information received while on the job. You cannot trade on company secrets.

There is nothing illegal about trying to get information about a company in which you wish to invest, provided you don’t have someone break a law or duty, in order to get that information.

You can act on gossip and what you overhear from general discussions of others, who are not restricted in the dissemination of such information.

Translating Public Debt Into Family Debt

We will soon have about $56 trillion in unfunded public debt obligations. That is over $480,000 for the average family household. And the figure mounts every day our legislators hang around Washington.

That sounds worse when you figure that it is about ten times the average income of each household. What is more, the amount grows because it is a debt that accrues interest. Plus, the value of the dollar to pay debt back gets to be worth less as our obligations mount.

Furthermore, that interest on the debt is not going to remain at a few percentage points. With inflation, it may well triple or quadruple or go even higher.

These are facts about which our politicians would rather you remain in the dark.

Trusting Federal Reserve Decisions.

If Federal Reserve bigwigs were held to the same standards as were doctors, malpractice claims would have been in banner headlines during the financial meltdown.

In truth, much of the responsibility of the financial bust rests with the easy-money policy of the Fed, apart from the politicos in Congress who wanted everyone in America to have a home of their own, whether they could afford one or not.

Unfortunately, the Federal Reserve today is creating a future world-wide bubble by continuing its easy money dogma.

Easy money policy is certainly not helping create loans for a recovery of this country’s Industry, particularly small business, which finds it very difficult to get credit.

Attempting to Sell Securities at Their High and Buying Them at their Low

Selling securities at their high and buying at their low are everyone’s objectives. Of the over 1500 strategies I evaluated along with their pros and cons, this strategy could be number one.

The problem: The strategy does not work in practice. Blame it on human psychology. Or the blur of constant financial news with new buying and selling suggestions. Or your need for occasional cash for urgent needs, and so on.

Research shows that very few professionals can time the market, except by accident.

Be especially careful with bonds because you are bound to get wrong information from “experts” about the risk of holding them during inflationary times. Investors generally get poor advice about the practical usage of duration principles, as a tool for bond profits. I often write about this.

So forget about your ability to time the markets.

Investment Adviser and Broker Regulations

Investment advisers are regulated by the Investment Advisers Act of 1940. Brokers are regulated by the Securities Act of 1934.

There is a fine line distinction in the way brokers and advisers deal with clients. Years ago, brokers were more likely to give advice than they do today. Commissions are much lower these days. And so much information is available about securities online. The line between brokerage and advice gets that much thinner.

Additionally, in theoretical terms, investment advisers are expected to have a broader view of the investment picture. After all, much of broker training has to do with securities law basics, rather than investment research. I find that in practical terms, investors ought to treat the differences academically, but also cynically.

Despite the regulations, you can get into trouble if the advice is corrupted or poor. Even when the advice is excellent, the charges for advisory services you can perform on your own, will be more costly than you may think.

Advisor charges can amount to 20% and more of your investment income each year when you pay fees of 1½% or so on assets managed.

Should You Use Dollar-Cost Averaging?

Dollar-cost averaging works best when securities prices are erratic. That is, they move about from one day or one week or one month to the next. Dollar averaging is not as practical when a security is in a long-term upward growth trend.

There is, therefore, conflicting research on the subject.

Problem: It is hard to know in advance when most securities will be in an upward growth pattern. Besides, most investors do not have a lump sum of funds to invest all at once. So they resort to dollar averaging as a practical strategy.

I would continue its use.

Popular Investment Success Stories and the Lottery

The investment public is often impressed by someone who invested in a particular sort of way, or in a security that paid off big. It makes good reading or listening.

The public then often attempts to emulate the same strategy. It’s like trying to get lightning to strike twice or winning a lottery by choosing the winning lottery number of the day before.

It does create momentum bubbles. And never works, unless you get out of the action fast enough.

And very few do.

Don’t Try to Outsmart the Next Investor

Some rules of thumb of investing are so logical, they are easy to forget. So easy, some investors never get to learn them thoroughly.

Here they are:

The next investor may be as smart or smarter than you. Chances are they have the same information about a company or security, or strategy you are looking at for buying. Which may be very little or a bit more.

Also remember, for every seller there has to be a buyer. Therefore, that dog of a security you are selling is being bought by someone who feels they are getting a bargain.

And when you feel it is time to desert the market, there is someone out there who feels it is time to get into it.

Do you still think you can really outsmart the next guy?

Does It Pay For You to Be a Day Trader?

Day trading is really for professionals and not for amateurs or those who want to imagine they are professionals when they are really not.

You must realize what the ground rules are for day trading. They are not as simple as those you get in the available classes for beginners.

To start with, you do not have sufficient volume with which to work odds tilted in your favor. Then, there are only small profits when gains do occur.

These days you are looking for gains of pennies at a time. And even if you have the complex models for trading programs and securities packages, there is no guarantee they will work. None ever work perfectly for long.

Remember, you are always competing with the professionals who have more powerful money with which to trade, and in faster computers and models.

So why try to beat those odds?

Shares Needed for Diversification

How many shares of a stock or how many bonds must you have for diversification? This question often arises and is even the subject of a recent study I have noted, and reported in a financial journal.

Most investors believe they acquire adequate diversification when they have mutual funds, the more the better. But evidence shows that holding more than one fund often duplicates holdings and does not actually add to diversification.

Then, too, there are studies about how many issues need to be in a portfolio for practical diversification. I find this attempt dubious because the very pursuit is a vague effort for most investors. Diversification risk varies by investor needs and characteristics.

The solution is simple for the average investor. Buy into an index, in the form of a mutual fund or an Exchange Traded Fund (ETF). That generally provides diversification while allowing for certain objectives, such as area of investment (domestic, overseas, etc.)

When Will That Multi-Trillion Dollar Debt Backfire?

That budget deficit in trillions may take a few years to cause severe problems but it certainly will. That is bound to happen, no matter what reassurances we get from the Obama administration or the Federal Reserve’s Ben Bernanke.

Example: Ten year Treasury bond rates may be relatively low today. Perhaps they truly reflect what interest rates may be ten years from now, Maybe not. But governments that spend so much today cannot unwind obligations drastically in the future. Despite what the White House says, or the Federal Reserve claims it can do manana.

And when economies get out of deep recessions, inflation does take hold. The budget deficit will provide the environment for inflation to get out of hand.

Be Careful Of Media Financial Opinions

I recently read an article in a financial publication about the commercial real estate industry. How bad it has been, and how badly an investment institution had been burnt by having had owned properties. This investment bank was disposing of its major real estate investments.

Very bearish sentiments indeed. That appears to have been the slant of the article.

However, at the very end of the column, it was reveled that another investor has been accumulating those shares.

Overlooked point: The report was slanted to be bearish. It could easily have been bullish for the future. The public already knew of the past commercial real estate meltdown. Would they be interested in the intentions of the individual buyer who had come into the picture?

That is where the public interest would truly be.

Have Faith in More Financial Regulation?

The next time a left-leaning government administration says we need more financial regulation or more government control, or another bailout, there is proof positive that the public must STOP and THINK. Then remember AIG. (My caps are used for emphasis.)

AIG was a must-do rescue plan, to bail out the giant insurance company. We were told of the dire national and worldwide consequences if we did not do something quickly. The company was simply too big to fail.

In the process, the American taxpayer got stuck with a HUGE bill and 80% of diminished-value stock.

However, we now learn, the insurance company had secured insurance business of many varieties, all with secured assets. Those assets were never in danger.

But AIG also insured credit default swaps (CDS) obligations. It was thought that these would not only bankrupt the company when payoff would become necessary, but would cause a financial collapse of their clients as a result.

The truth about this bailout came to light in late November, 2009, in a report by TARP Special Inspector General Neil Barofsky. The report said that Tim Geithner, now the Treasury Secretary of the U.S., and then the president of the New York Federal Reserve Bank, did not think that AIG’s failure would be devastating. Geithner had been closely watching CDS activity for some time up to then.

So why the rush for bailout by government?

I may add: In the bailout, those who held CDS obligations were paid off 100 cents on each dollar of debt. Normally, creditors of holdings in a bailout get just pennies on the dollar. This also raises many questions about how bad those AIG assets really were, if a bailout was so necessary and urgent.

There is much more to this story, but enough for the public to ask a lot of loaded questions of our government.

And serious doubts about politicians who constantly want bailouts and legislation, where the whole purpose is merely a device for government to get its hands and power deeply into our private business.

How Much Will Your Securities Earn Over the Long Term?

Stocks have returned about 7% above the rate of inflation for about two hundred years. And in twenty year periods, stocks have outperformed bonds about 90% of the time.

But these statistics conceal certain facts. Someone who had invested at the market peak in 1929 would have had to wait until 1998 to reach a return of 10% on their money. That would include dividends. This is an after-inflation yearly return of 7%. Your true returns will differ greatly, depending on the time you actually begin investing in the market.

An S & P 500 investor from 1929 through 1949 received an after-inflation return of about 4.5%. An S & P 500 investor starting in 1932, and holding on until 1951, received an after-inflation annual return of about 10.8%. That works out to over 6% more per year.

Obviously: Luck and chance with regard to time of market entry play a major role, so be mindful of the danger of relying on averages.

And, as I have said in earlier blogs, timing is more luck than a sign of investor ability.

Buy and Hold Securities Strategy

Those who believe or disagree with buy and hold investment philosophy must first answer the question: What is a long term investment outlook?

Ask fifty investors the question and you get fifty answers.

The long term definition varies. The time often ends when the undisciplined investor impetuously decides to sell a security that was bought to be held for a longer term, until something more appealing comes along to replace it. The rationale comes after the transaction is completed.

The truth is, you need strong nerves and discipline to hold on to securities amidst constant advice to sell. Also, many advisers do not believe in buy and hold. For any number of reasons, most of which I find to be poor.

The Dow Industrial Average contains some of the largest, soundest companies, and cannot be considered speculative. Yet, the market all the time will be highly volatile. So, added pressures exist for frequent buying and selling.

A solution? Once you have set your strategy, avoid the media and the advice of unknowing friends and family.