Derivatives are Side Bets

Everyone discusses them; few fully understand them. So politicians misuse them for their own purposes.

Derivatives are a financial necessity. They are a form of side bet that helps reduce the risk of a financial transaction. It is a device that has been in use by commodity merchants for at least a century and a half. It protects the investor, against the possibility the price trend of the original investment goes wrong. And it is perfectly legal AND ethical.

Some derivatives are easily listed on an exchange because they are simple. And they contain some collateral in case of a market downturn. But not all derivatives can be worded simply. Some say only bankruptcy courts can handle their settlement.

So forget the diatribes against firms who write derivatives and are on both the buy and sell side at the same time. It’s reasonable.

Politicians who are ignorant of the process and their media hand- maidens are deluding the public by carrying on about fraud.

Systemic Risk in Investments

The Obama administration and many members of Congress keep talking about how to prevent “systemic risk” from causing a financial meltdown. This is pure Left political talk for the masses and their vote.

They have absolutely no idea of systemic risk, though we have all just lived through a huge financial meltdown. No one was able to recognize such risk in the past. No one will be able to foresee it in the future, because of inept politicians in charge.

The question of what is risk simply has too many variables: The size of a financial institution under study is one. Other institutions involved with the first will add to the mix. Political implications are important because of the influence in Washington that financial institution may have, and so on.

There is a list of potential complications and considerations that make it difficult to estimate risk and mitigate it. Poor psychology that festers and attends such meddling just exaggerates the mess.

Much of the remedies of the past have been trial and error. The vast bulk have proven to be in error. Lehman Brothers and Bear Stearns are perfect examples of foul-ups by government.

Adding regulatory panels merely exaggerates the mess with more potential human error, reflective of the past.

Highly-Paid Athletes

Ball players, who play a kid’s game, can earn as much as $20 to $30 million a year, with multi-year contracts that guarantee income despite possible injury and incapacity, At the same time. top executives, with honed skills are criticized if they get $1 million or so in income or bonuses.

Keep this up and the U.S. will have changed its economic growth characteristics. It will have become a second-rate, European-like, look-alike. With a permanent high unemployment rate to match.

Execs are easily fired if they don’t produce. Ball player salaries are usually not cut if they choke up in the clutch. Or have a losing season. Their jobs are simply traded away.

The argument is made about exec pay in companies that got federal stimulus money. But athletes work for ball clubs that also received stimulus and taxpayer funds. Each time a new ball park is built, some government agency has helped in the financing; tax abatement or bond funding, or a form of long-time subsidy.

Federal stimulus funds backed local and state entities with aid. So, in effect, funds were indirectly but effectively made available to pay club athletes.

Risky Transactions

Our bureaucrats and legislators in Washington, who cannot truly get us out of a recession, and are in fact getting us mired into a deeper depression, are now advising us about reducing financial risk.

But what is risk? Not having enough federal watchdogs in Washington? Buying securities in a depression? Buying a hedge-type security, while selling short its derivative?

Or our government spending sums it won’t be able to pay back without cheapening the dollar?

Has anyone in Washington truly decided what true risk actually is? Apart from a politician having to tell the truth about legislation being proposed?

When the administration 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.

Buying Mutual Funds by Past Results

Buying managed mutual funds by past results is a fools’ game for any number of valid reasons.

Research has shown that past performance over previous years will have no effect on future results of a typical fund. Aside from these empirical performance findings, there are basic reasons why the past records are not helpful.

Managers of funds come and go, so that there are few who consistently are in charge of a fund’s direction. There are usually group efforts involved; the teams are always fluid in nature.

Managed funds invariably do not do as well as the indexes they tend to follow. Managers who outperform indexes in any one year are often inconsistent in their efforts in following years.

The only certainty you have of future mutual fund performance is to invest in those with lower costs, who invest in market indexes.

What Are Stress Tests For Banks?

How important are stress tests for banks? After all, much of what comes from the regulators in Washington these days can be taken with a grain of salt after the politics are removed.

Stress tests are actually a combination of individual financial evaluations. They can entail bank loss estimates, measured as percentages of holdings on first-lien mortgages, and second-lien mortgages, or credit cards, or commercial real estate loans. Estimated bank earnings are also considered.

Added to this hodgepodge of risk percentages is the reserve status of each bank. 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 4% may be considered too low.

To complicate matters more, some unrealized losses on assets could become losses in the future, so the Tier 1 weightings may have to be adjusted. Obviously, stress tests are not fixed so their results can give varying interpretations.

That is the basic fallacy behind stress test talk, or regulation upon regulation imposition from Washington. It is too much about subjective, theoretical nothingness.

And it is the reason why the administration is running what was a minor recession into a major depression. Bank assets were “marked to market” daily when asset values were hard to determine, during the Great Financial Meltdown.

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College Students Should Know Basic Economics

The more college students, the more stupidity seem to have been created among the public. At least when it comes to basic economics. College does not appear to educate its students to the dangers from politicians in office, and ensuing problems that will engulf them when the students leave school.

The Media will never adequately take up that educational function.

Because if youth were truly aware of the effects of the monetary inflation we are setting up for them and future generations, they would be shouting from roof tops at the government, to stop the economic mess.

Budget-busting at all government levels does have dire consequences.

The U.S. Money Supply

The average increase of our monetary base has gone up about 5% since 1961. For the Y2K anticipated emergency and the 9/11 catastrophe, it rose 10%. But today the increase is well over 100% and rapidly rising. Yet, we listen to administration officials who keep telling us all this will be taken care of.

The U. S. issues bonds to pay for its debts but those bonds will not easily be refunded. Also, there is little likelihood the economy will expand to soak up any of that paper the government is, in effect, printing through the Federal Reserve system. Inflation will eventually start to show up, Not immediately, but as soon as the economy starts to fully recover.

It may take some years. But then, watch out!

Investing Overseas

The financial media will often discuss investing at least some of your funds overseas. But nothing is definitive about what is global diversification of investment.

Many large American companies are doing business overseas. So investing in the S&P 500 will give you a measure of global diversification.

If you do buy overseas investments to broaden this strategic step, there are emerging or developing, as well as developed countries in which to participate. Using indexed funds or exchange traded funds (ETFs), you can invest around the globe with varying regional emphasis.

Use indexed funds which are not hedged against currency value changes. This also helps diversify against inflation in the U.S. and acts as a currency hedge.

A Future Financial Crisis

Leave it to left-leaning politicians to make a mess out of an ordinary economic cycle and blame it on others. What was a simple sub-prime mortgage problem, that normally would lead to a minor recession, has become a near Depression, comparable in many ways to that of the 1930’s.

All because of political meddling and bumbling.

Students of the Great Depression now see how Franklin D. Roosevelt overreacted with over-spending. Then he over-taxed and over-regulated business and created a Depression psychology that prevailed until World War II acted as a giant economic stimulus.

The same political meddling and bumbling is occurring today. The extraordinary spending will inevitably produce further crises, in the form of senseless regulation, business-stifling taxes, and eventual inflation.

But inflation is a slow starter. That’s because poor economies hold back prices, At the sign of a full recovery, however, prices will start to jump.

Unfortunately, the politicians responsible for the new, real financial crisis-to-come, may be out of office by then. And the blame will be placed on the shoulders of administrations who will be around to attempt to clean up the impossible mess.

Bankers’ Salary Caps and Athletes

Bank salary controls should cover athletes as well. Taxpayer money used to bail out banks gets public attention only when it goes into executive salaries and bonuses.

Politicians usually do not understand basic economics. Most never have to hire anyone within a free, supply-and-demand, employment market. Liberals, particularly, contribute nonsensical rules, opinions and regulations on the matter.

And neither does the brainwashed public, which stands for it. Especially the ardent sports followers.

Athletes probably get far too much salary for what they do. Yet the taxpayers never complain. Yes, taxpayers.

Ball parks and thus ball clubs are invariably subsidized by state and local taxpayers. Each time a new ball park is built, you can be sure some government entity helped in its financing, whether it be in cash, tax abatement or bond funding.

This is an ongoing subsidy over years. These days, Federal stimulus funds are actually backing up those local and state entities who received athletic subsidies.

The Left complains when a "rich" top executive gets more than a million or so a year of “taxpayer=protected” income. What about a ball player who hires no one, who makes ten million and more a year? And may actually be a loser?

Remember: Money is fungible. The payment does not have to be direct. Money can be substituted from one pocket of government or payer to the other, to hide the source of funding. It adds up to the same total outlay.

Still Buying “”Penny” Stocks?

So-called penny stocks are not available for pennies anymore, or sell for under a dollar a share. They can also be those priced for a few dollars a share. By definition, they are really any shares of nondescript companies whose values are often doubtful at best.

Their companies’ managements’ or promoters issue large numbers of shares, whose prices are low, but with actual values that are often minimal, if any.

Yet, folks who ought to know better buy them. The patsies think something priced low just has to be a bargain. That is the best way to get fleeced and securities tricksters know it.

Does it always make any difference when buying higher priced stocks? Not if you still cannot determine value. And most analysts on Wall Street cannot truly do this from outside the companies, looking in. Analysts really are often guessing at what goes on in the companies whose stocks they evaluate.

It’s the reason why I always suggest investment in low-cost, indexed mutual funds or exchange traded funds (ETFs). ( See the Earl J Weinreb NewsHole® comments.)

The Media and Its Scapegoats

The media is too politicized to educate the public. The financial as well as ordinary media are guilty of this. The non-financial media but, in addition, those involved with investing, are to blame for also not fully explaining their comments. That is, if they were truly conversant with what they daily pontificate about.

I have explained this before. One of the symptoms is the way they seek out scapegoats. Such as Wall Street or major companies on Wall Street. Or Banks. Or the bonuses they pay. Mind you, never athlete bonuses; just those evil top executives, especially those who work on Wall Street.

When someone shorts securities while also buying for the long term, that investor is automatically deemed to be a crook by observers and bureaucrats who are not steeped in legal, risk control financial strategies. ( See the Earl J Weinreb NewsHole® comments.)

The Financial Media Educational Failure

The general media is unable to educate or enlighten the public. The financial media as well.

You can say media is primarily to blame for not explaining what they report as blurbs. They talk about regulation without putting it in laymen’s terms. They do not really explain financial risk.

Risk was never overcome by regulation and the media can more fully explain this, if they tried to find facts out for themselves and report them.

Example: Fannie Mae and Freddie Mac were risky semi-government agencies who were instrumental in our subprime crisis. There was no lack of regulation. But the financial meltdown has resulted in a clamor for even more regulation.

Where are the explanations?

Buy Corporate Junk Bonds?

Securities analysts and media pundits often love to warn buyers of corporate bonds with lower grade or “junk” status, to beware of potential defaults, especially when times are bad. That can sometimes be investment nonsense.

Financial media love to go to extremes, whether optimistic or pessimistic. Yes, defaults are bad. But potential defaults are always priced into the bond prices.

So when default rates sometimes go as high as 10% in recessions, interest rates accommodate, and the investor may still be way ahead of the game. So, the adjusted return could still be well ahead of other investment returns available.

The trick is to be fully diversified in a low cost index mutual fund or ETF, where the investor is alert to duration principles. I have commented quite a bit on the subject of duration. ( See the Earl J Weinreb NewsHole® comments.)

Is Investing an Out-Smarter’s Game?

Investing is not a game where someone has to out-smart another investor in order to win. Where there is a loser for every winner. Yet, that is the way most would-be pundits operate today.

No one has a monopoly on smart strategies, or when to use them. For every seller, there is a buyer, probably just as smart, and informed.

The fact is, there is also no perfect investment strategy. Sticking to one’s disciplined strategy is the answer. Discipline is the solution because it logically helps tilt the odds for investment success in your favor.

I have done my research and checked that of independents with no axe to grind. It has taken me years to accomplish, but the evidence is clear.

Adjusting the odds for success favorably is the ultimate investment goal. Discipline of strategy, rather than constant changing of investment ideas does the trick over the long run. ( See the Earl J Weinreb NewsHole® comments.)

Media Stocks-to-Buy Lists

Stocks-to-buy lists are great for filling space in financial newspapers, magazines and blogs. They make for good reading for investors, flailing about for ideas from any direction, whether really informative or not.

Those lists often do little for investors who take the advice. Because those who devise such lists are usually off the mark.

It is very difficult to pick securities that are going to go up in a relatively short time. That’s what lists are about. Top executives in the companies themselves know little about how well their corporate securities will do in the marketplace, when conditions other than their company’s fortunes affect market value.

How can you depend upon a security analyst working from a perspective outside the company? That is why index funds so often outperform managed security portfolios. ( See the Earl J Weinreb NewsHole® comments.)

Buy, Sell. Or Hold Securities Strategy

Buy, sell, or hold securities strategy evaluation is not simple to make. It is often the general basis of media articles because it fills space. And they invariably get the explanations wrong.

The strategy an investor should use depends on the original investment intent when the securities are purchased. What is the purpose of the purchase? What is the context of the decision in terms of investor age, goals, risk accommodation, and psychology?

And, most importantly, the discipline the investor has decided to employ to keep to that strategy.

Provided, the investor is one of the few who can be really disciplined. ( See the Earl J Weinreb NewsHole® comments.)

Taking Investment Advisers Advice?

Even after getting burned in 2008, investors keep coming back to advisers who cost them as much as 25% or more of their investment income. (Calculate a fee of 1½% of your investment assets against total investment income and you get an approximate idea of what money advisers get from clients each year.)

The trend for using investment advisers appears to still be growing. Despite the fact these same folks were generally unable to prevent the damage from the recent market debacle.

You can easily invest in index vehicles using common sense, as I have often said and always recommended. Avoid advisers, except for necessary lawyers, accountants and tax experts you may need. ( See the Earl J Weinreb NewsHole® comments.)

State Budgets and Pension Costs

The media gets excited over Wall Street’s executive salaries and bonuses. Government is an area that gets only slight attention. We know about Uncle Sam’s spending habits these days. State outlays should get lots of commentary because the tendency to follow Washington is going to become a tremendous source of problems for all states and cities as well.

I am referring to the exorbitant pensions held by about 23 million active and retired state and local public employees. These include city managers, teachers, cops, garbage collectors, guards and others. They represent at least three quarters of public employees who have what is called defined-benefit retirement plans.

They have the ability to organize voters and thus control politicians who keep adding to taxpayer burdens until there are not enough taxpayer funds to go around for the feeding frenzy to persist.

New Stock Broker Regulations

Proposed Wall Street regulations will see to it that stock brokers will have to treat their clients differently than in the past, if they already do not. That, according to Washington bureaucrats, ought to make everything financial fine once more.

Of course it won’t do much for most investment portfolios, but it will make politicians feel better. And, they hope, will enhance their reelection chances.

In the old days a broker had to be sure that an investment was ”suitable” for a client. What was suitable was often debatable, but that is what makes securities markets what they are. Investment results are often disputed.

Now the broker is supposed to have a “fiduciary duty” toward the client. according to plans in store for brokers. That should open a hornet’s nest of endless legal problems

The main purpose of this is to give investors more ammunition to sue brokers for real or imagined damages. More power to the lawyers. More political donations to the politicos who come up with the suggestions.

Investment Analyst Capabilities?

I have often said and I repeat: The majority of securities analysts on Wall Street could not operate a pushcart. Yet, they constantly critique top business executives in the way they run multi-billion dollar companies.

Moreover, Wall Street analysts and other designated experts have an extremely limited time frame. While a business must look years ahead, those involved with Wall Street securities usually operate with much shorter perspectives.That can be dangerous for those longer-term investors who permit themselves to be impressed by the advice.

No Wall Street commentator or analyst has had to pass a genuine business-achievement test to determine expertise. The public assumes critics know what they are talking about when it comes to financial business operation punditry. ( See the Earl J Weinreb NewsHole® comments.)

Erratic Securities Markets

Securities markets are generally rash and erratic. But when you think about it, they really ought to be calmer than they are.

Institutional investors and their advisers are considered professionals. At least, that is what the media tells us about experts who frequent Wall Street.

They account for at least 80% and, some days more, of all trades and activity. Why then should the markets behave so erratically?

These pros ought to know what they are doing, unlike the other 20% or so of the public, amateur investors who blindly follow the pros.

However, Wall Street "wizards" invariably act in a mob-like manner and not as experts. I have always said, there is a lot of sour skim milk masquerading as sweet cream.

They may still make their millions, simply because they are ensconced as Wall Streeters. Aren’t there major league ball players whose averages are in the dumps, but who still make millions each year? ( See the Earl J Weinreb NewsHole® comments.)

Wall Street’s Analysts

Surprise; Little deep, independent, investment research and thought comes from the analytical professional ranks on Wall Street.

What goes for research on Wall Street is primarily in the form of public company reports. These have to do with reported earnings, without true understanding of the nature of those earnings. Moreover, much of what earnings companies announce could be the result of fanciful accounting. So all that earnings reportage may be meaningless, if not misleading.

Little is done to report on what is most important to the investor; the use of all-important strategy. Most analysts and money managers have no time for careful, insightful thought of the many, many hundreds of those, which, along with disciplined use of strategy, is essential.

Moreover, the investment community is incestuous, feeding on itself in a way which creates herd-like, impulsive instincts. This results in the inanities and gibberish that has become gospel, owing to repetition over the years. ( See the Earl J Weinreb NewsHole® comments.)

Future Costs of Medicare, Medicaid and Social Security

It’s estimated that by 2050, Social Security, Medicare and Medicaid, will take up nearly the entire federal budget. By 2080, Medicare alone will comprise the entire federal outlay.

This projection is impossible to sustain. So there will have to be patching done by our politicians along the way. But it does point up the path of stupidity by government today, set forth for us, our children and grandchildren.

They have created a bankrupt system for us and our descendants. Solutions can only involve less services, reduced benefits, rationing and higher taxes, as well as inflation we have never experienced before.

Yet, too many Americans consider this treatment “business as usual.”

The Biggest Ponzi Schemes of All

It should not be a surprise to observant citizens: The biggest Ponzi schemes of all are being sponsored by the U.S. Government

The Medicare and Social Security programs are estimated to be short by close to 110 trillion dollars. That makes them completely bankrupt were they genuine insurance enterprises.

The average American, for instance, has no idea how Social Security works. He or she will tell you it’s an insurance program, as advertised It’s not, because there is no trust and reserve fund. Though you often hear politicians mention such terms.

Benefits are paid today to retirees right from earnings of those still working, So, what makes this different from any other Ponzi scheme? Paying off some today with money directly taken from others, to whom benefits are promised tomorrow.

IF there is any money. And there won’t be, without picking the taxpayers’ pockets again. or reneging on obligations.

Social Security tax funds taken in, are never really invested. They are used to pay off Social Security obligations of today.

Government has already exhausted what is supposed to be the Medicare Trust Fund. Social Security will run out of money in a couple of decades, or much sooner, when there are not enough workers to pay off retirees.

I repeat again: What makes them different from other Ponzi schemes?

Future Costs of Social Security, Medicare and Medicaid

It’s estimated that by 2050, Social Security, Medicare and Medicaid, as now constituted, will take up nearly the entire federal budget. By about 2080, Medicare alone will comprise the entire federal budget.

This projection is obviously impossible to sustain. There will have to be some stretching and improvising done by politicians in office as problems ensue.

But the impending fiasco does point up the stupidity of those politicos in office today, who have set forth a path to disaster, for us, our children and grandchildren.

Congress and the administration are creating a bankrupt system for us and our descendants. Solutions will only involve far less services and benefits, with rationing and much higher taxes, as well as huge inflation.

We can expect an experience we have never encountered before.

Media Investment Portfolios

You frequently get suggestions of financial of portfolios in the media. Generally for various types of economic possibilities, but they are really an attempt to time the market.

They always make me laugh but, really, they are not a laughing matter, because you can get burned if you follow such advice.

The media suggestions usually come with some advisor mentioned, making the recommendations. That advisor has been singled out from among tens of thousands in the business.

Advisers seeking publicity constantly, energetically strive to have pet portfolio ideas published in public view. So why this mention in the media? Is it a friend or relative of the columnist or reporter or interviewer?

Secondly, the portfolios given never identify objectives by investor age or risk capacity or psychological sensitivity. It makes the reportage useless. And dangerous. ( See the Earl J Weinreb NewsHole® comments.)

Be Careful of Annuity Termination Costs

Despite sales pitches that may overlook them, costs to amortize start ups of annuity contracts can run up to seven years.

Salesmen commissions and administrative expenses must be met. Early termination requires their faster amortization. Also management fees are imposed each year on annuities that involve variable investment.

Furthermore, the annuity may have life insurance provisions that you may not need. You will pay for that feature.

So annuities involve costs and you simply cannot drop contracts willy-nilly. There will be penalties for early termination. ( See the Earl J Weinreb NewsHole® for further comments.)

Investment Education From Headlines

Apart from ads, folks unfortunately get most of their financial and business education from headlines.

Don’t expect schools to provide an adequate underpinning of information for students to comprehend economics and finance in the real world. As a result, the public cannot evaluate the bombardment of ads, nor the headlines that apply to finance and business topics.

And they cannot expect meaningful explanations from inept media sources.

They therefore get biased, one-sided opinions without any contrasting arguments or alternatives to what headlines or inadequate financial and business articles intimate.

Brokers and advisers cited in the media frequently promote a particular point of view, when discussing securities. The media often poorly screens content.

And remember the importance of investor age, family status, personal psychology, finances and risk status, have lots to do with investment choice, Media slants often neglect them.

The solution? As I always say in my expanded writings, stay alert to basics and avoid tips from questionable sources. ( See the Earl J Weinreb NewsHole® comments.)

Buying Investments From Ads

Ads give you only the pros, and not the cons of investments being proposed. So why take the advice? Yet, so many investors learn about investments they buy solely from ads, and salesmen.

I mention, from time to time, that I have now researched over 1,600 investment strategies, either occasionally or frequently used. I have also looked into the pros and cons of each. And I have not found one that has an exclusive advantage, without at least one disadvantage.

One example: Purveyors of gold investments may be selling one type without discussing various forms that can be bought. Or whether everyone ought to be buying gold, even with inflation looming. The public never gets full information, nor pros and cons.

And I haven’t as yet mentioned that investor age, family status, personal psychology, finances and risk status, have lots to do with investment choice,