Securities Fundamentalists Vs Chartists

There are two very broad classifications of analysts on Wall Street, fundamentalists and chartists.

Fundamentalists investigate the operations of companies. Their sales, earnings and future potential.

The chartists look at the technical market. The market-pricing highs, lows, trading patterns and the volume that accompanies these patterns. There are many types of chartists, and interpreters of each type.

When you hear someone saying a market for a stock is oversold or undersold or is ready to “break out,” chances are they are charting the market, and not talking about fundamentals.

Fundamentalists are more long term in their outlook than are chartists. And to complicate matters, some analysts use a combination of both approaches. Also, there are quants who look to the math of securities more than they do management evaluation.

I have spent decades studying well over 1,500 individual investment strategies. I find it important that you overlook individual analyst recommendations if you have little understanding of what they are about.

Always remember: The analyst advice you get may vary greatly, depending on the type of analysis they do.

Financial Institutions and Reform

Under the Obama administration’s just proposed financial reforms, the government can have what amounts to permanent bailout authority.

Government's Treasury Dept. can take over any financial institution that it deems at risk. This will be a political judgment call that reflects the classic state capitalistic, crony form of government, alien to what we have always referred to as the capitalism that made the U. S. different from Europe and similar societies.

With such politically-sensitive seizures, the government could actually affect existing contracts any financial company has, including those with employees and certainly its shareholders, who would have nothing to say about any takeovers.

Yes, much is probably unconstitutional taking of property, without due process or fair compensation. But then again, the administration and the present Congress hasn’t been overly stymied by such hindrances before.

Rebalancing an Investment Portfolio

You will constantly get advice regarding the need to rebalance your investment portfolio. Is it truly necessary?

There are a number of the usual suggested formulae: Keeping the ratio of stocks and bonds in your portfolio at 50%/50% or 60%/40%, and so on. I will not get into what is optimum because that’s variable, depending on many personal factors.

You hear about periodic rebalancing when that ratio changes due to market variations. Question: How does it improve your investment success?

The truth is, rebalancing of the ratio of stocks and bonds owned, is one of over 1500 investment strategies I have investigated. It has not always been a profitable strategy for all types of stock or bond markets. It can cause overall losses, as it did in the 2008 and early 2009 financial meltdown, as well as some past cycles.

My suggestion is to evaluate your common stock and bond securities holdings in a flexible manner and not as a set ratio, depending on your age, total assets and retirement outlook, AND your disciplined investment strategy plan. Furthermore, helter-skelter portfolio adjustments can cause serious tax charges in non-retirement accounts.

Gold as an Investment

Gold prices keep rising as Euro and dollar values continue to look suspect. But look at gold prices over the years. The price today is still close in purchasing power to what it was at the highs of the 1980’s. With simple compound interest, gold ought to be over twice what is today.

Most of the advertisement claims for buying gold sound good. What with inflation a certainty as a result of enormous budget deficits, gold is an apparent inflation hedge. You can be sure the political pressures on the Federal Reserve will make it hard for the Fed not to monetize the huge debt that will augment future inflation.

I said apparent inflation edge. I feel there are better.

But for those interested, gold comes in different forms; plain coins, rare coins, and bullion, all of which must be safely stored in bank vaults or at home. Costs are involved. And gold earns no interest. Gold can be bought as mining company shares but that entails securities’ risks.

Gold is a good holding in dire emergencies, in rare coin form, for example. But it can be erratic as a holding.

When the dollar (or Euro) weakens, gold goes up. When the dollar (or Euro) stabilizes in relation to other currencies, gold prices may possibly fall. Some times sharply. And often gold moves with market anxieties, or supply/demand, more than mere inflation.

So be careful holding gold, as with any other investment you may have. Never treat it as a panacea to offset brutal inflation. As I often say, there are alternatives.

Investment Enhancement by Lower Costs

Numerous studies prove that investment cost is one of the most important factors for investment performance. Mutual funds with high expenses usually provide poorer market performance. Therefore, select funds with the lowest management fees and attendant expenses.

Costs also include fund brokerage charges not included in your fund's expense ratio. The cost of buying and selling securities is passed on to you. It's advisable to stick with mutual funds that have low transaction volume.

A 2008 Lipper study discovered that buy-and-hold investors with mutual funds in taxable accounts lost to taxes between 1.3% to 2.2% of their annual returns over the previous 10 years. Minimizing the impact of taxes should therefore be an investor priority in fund selection.

One way to minimize a tax bill is to invest in tax-efficient funds that distribute little capital gains. Exchange traded funds, or ETFs, can help lower those distributions.

Anticipating the Financial Future

Predicting the financial picture is always difficult, if not impossible. Many complex factors and contingent possibilities arise. The picture of what may be ahead is bound to adjust from never contemplated or imagined events.

Only politicians are certain they can foresee the future. We know how successful they are at this.

Be flexible in your financial planning. Prepare for various possibilities. I know you get lots of advice, including charts and math models in color. They look good, But they’re not practical.

Flexibility enables you to make the necessary planning changes that will cover events as they occur. ( See the Earl J Weinreb NewsHole® comments.)

Portfolio Diversification

Diversification is a common investment objective. Going about it can be complicated.

Diversification is achieved only to an extent by the quantity of securities within the portfolio. It’s accomplished mostly by the asset classes in the mix, as well global geography.

Many investors buy several mutual funds and therefore believe they are adequately diversified. But they merely may have duplicated much of their portfolios by adding much of the same securities with each fund holding.

I find that indexed funds or exchange traded funds (ETFs) provide full diversification, and at lower cost.

Inflation Protection Without TIPS

TIPS are bonds issued by the federal government through a bank, broker, or the Treasury, for five, ten and twenty year maturities. Their value grows to the extent of inflation. TIPS also are bought in mutual funds and ETFs.

Investors seek inflation protection more than interest, which is low. With little current inflation, returns are insignificant. Potential inflation makes for their investor attraction.

State and local taxes do not apply on U.S. Treasury obligations. However, additional interest paid because of inflation will be subject to federal taxes.

But why buy them? I have never considered TIPS a valid bond inflation advantage, despite the publicity they receive in the financial media.

Moreover, TIPS have been bid up by public demand, in excess of their true value for that vaunted inflation protection. And you can get inflation protection elsewhere. Even with other bond funds, yielding much higher returns.

You get that protection in diversified low-cost bond funds with shorter duration, that reinvest their income. I constantly refer to duration, which the financial media unfortunately and ignorantly tends to overlook. ( See the Earl J Weinreb NewsHole® comments.)

Investment Risk and Stupidity

Risk evaluation goes beyond statistical numbers such as the term described as standard deviation. That is a fancy term used by financial analysts looking at investment portfolios. It’s a term that need not concern individual, everyday, non-professional investors. (If you want to know, it’s the return you get from gains and losses you may expect about two thirds of the time over a year.)

Who will be managing your portfolio? Investors should subject themselves to consideration of manager risk. They do this by choosing an investment portfolio that's fully and actively managed. But what happens if your investment manager leaves or fails to do as well as in the past? That is manager risk and it can't be measured by statistics alone.

A well designed portfolio will consider your acceptable risk. or 'risk tolerance.' Your investment time objective, age, personal psychology and investment goals are other considerations.

I personally recommend mutual funds or exchange traded funds (ETFs). Better still, I always suggest non-managed funds, those indexed to foreign and domestic standards you want to emulate, such as the S&P 500, as one example.

Paying 2% or so of your assets as a minimum charge to investment advisers can represent as much as 20% or more of you annual investment income. That’s stupidity; you will be receiving little practical advice in return.

I repeat what I often say: I never recommend advisers unless you need a tax accountant, lawyer, and/or an estate specialist.

Cash for Clunkers Theory

Here is a “I told you so” recap worth retelling. Because it teaches basic economics. Something left-leaning politicians ought to learn as well, but never do. If it worked for cars, we would have had more of it the past year.

The automobile cash for clunkers program was slated to fail for a multitude of reasons. I mentioned them early on.

The misconceived plan had disrupted the new car, the used car, and the scrap metal markets. As predicted here, it never added to the net amount of economic outlay. Plus, it cost taxpayers billions.

Furthermore, it set a bad example of government meddling. That accomplished lots of governmental mischief as a form of state capitalism.

All it did show was that politicians were “doing something” when they should have been sitting on their hands.

Buying Annuities: Not a Simple Decision

The majority who buy annuities are not totally familiar with them and their varieties. They know only what the sales people suggest. Despite the fact they call themselves “advisers” they are, after all, commissioned salesmen and not truly independent advisers.

To start with, buyers of such policies should know the varieties that are available. That begins with the conventional annuity guarantees; a fixed amount of income that returns both a return of principal as well as interest. Those “high returns” can be misleading.

Also, there is no hedge against inflation in a conventional annuity contract. You get fixed amounts, though the dollar’s value is constantly diminished.

Then there is the availability of a variable annuity or an equity-indexed annuity. Its returns are expected to be higher than that of a standard policy. The return is variable because it’s tied to the Standard & Poor’s 500 Stock Index. (Other methods may be used and can be controversial.)

Downsides of annuities that many investors overlook include steep early surrender costs and charges for insurance that buyers may not need.

Therefore, buying annuities may not be what the salesmen promises.

Psychology and Recessions

Amid all the discussions about the economy the media constantly overlook the role of psychology.

Poor psychology is primarily what gets us into recessions once the basic excesses take hold, and eventually, it is what gets us out. Certainly, psychology gets us into those excesses, which produce booms that cause busts. It helps foster those ever-downward economic spirals.

There was certainly a subprime mortgage mess. But that was only accentuated by a jittery market that affected the pricing of those assets.

At the time, we were in the midst of a heated presidential election campaign. Democrats wanting to get into office, painted an even bleaker economic picture. They had been hollering “Hoover Economy” even during the economic boom.

With the downturn, the political psychological efforts succeeded, especially aggravated when banking asset values dropped, by forced mark-to-market pricing. (I have often commented on this.)

Much of what ACTUALLY happens is our PERCEIVED outlook on the economy’s future. The lack of proper media explanation adds to this.

Investing Overseas As a Dollar Hedge

Here is way to bet against, or with the dollar, or for that matter, any other foreign currencies.

When the dollar is weak gains in stocks and bonds overseas are worth more in dollars. When the dollar strengthens, any gains overseas in stocks and bonds or currency holdings will be worth less in terms of dollars.

That said: I never recommend such investments, or more precisely, this method of trading. It’s speculative and often too much a market-timing strategy for me to suggest for the average investor.

Frequent Trading to Beat the Next Trader

Frequent trading is a tough business for small traders to be in. Heavier trading volume helps you compete, along with proper math models. Assuming you have the models, big-trader packaged securities help accomplish the job.

Furthermore, buying/selling spreads kill you. The average spread on the NYSE’s electronic Arca platform is about 3 cents for larger capitalized stocks and as much as 9 to 10 cents for the smaller caps. You are thus looking for gains in pennies.

This is no game for amateurs. Yet, they never stop trying to beat the odds.

Reading Your Way to Investment Success

You constantly get media suggestions on books that purport to be the ultimate solution for making millions in the stock market. Every few weeks or so, you get new best sellers on how authors made their millions. Much of the advice is impractical, if not downright nonsense.

I have commented on all this in the past, reflecting my research on this subject. I periodically remind my public of those findings.

If there is a securities bible. I would say it is the book, Intelligent Investor, by Benjamin Graham, along with his earlier works. However, very few who say they are Benjamin Graham investors, have really read or follow the tenets of Benjamin Graham.

For further information, I would suggest you read the Earl J Weinreb NewsHole® comments, along with material at www.newshole.com

High-Frequency Trading

Traders use powerful computers and special software to trade at great speed. This makes it possible to get ultra efficiency in pricing when buying and selling securities.

Advantages accrue to those who use the system, which can indirectly include small investors who have accounts with institutions such as mutual funds and pension funds.

Politicians often complain that such trading hurts small investors. Some traders complain about its effects on their conventional trading.

What high-frequency trading does is help competition among existing stock exchanges, some of whom may not have yet fully installed their versions of faster trading and computer software.

That is the extent of all the noise you hear, other than populist ignorance by politicians.

That Corporate Bond Bugaboo

This has to be constantly repeated whenever cycles appear in the corporate bond market or the economy, because the financial media NEVER gets it straight.

Yes, we all know that bond prices drop whenever interest rates go up or there is a specter of upcoming inflation.

But that does not mean you avoid or sell your bonds and run for the hills.

The financial media always takes these symptoms as a cue to get out of bonds or an excuse for buying I Treasury bonds or TIPS, the so-called protection against inflation.

I have constantly harped on this subject, advising how to wisely use DURATION as a tool for overcoming and actually profiting from inflation, using corporate bonds. ( See the Earl J Weinreb NewsHole® comments.)

The Blame Wall Street Game

The obligation of any investment manager, including those of hedge funds, is to get the best return they can for their investors. And to do so within federal and state securities regulations.

These managers have a fiduciary duty to look after their clients’ money, whether they be rich individuals, or pension funds, even members of private and public industry unions.

When the Obama administration, the media, and the public, often in ignorance, look for a suitable scapegoat for government shortcomings, they blame Wall Street for financial and business problems.

Hedge fund mangers are the principal targets. Though the very underpinnings of financial problems come from governmental missteps.

I find many villains on Wall Street, who may do stupid and sometimes venal acts. Not all on Wall Street are culprits, however, as painted by politicos or the majority of the media.

Varying Economist Opinions

In the midst of a deep global recession, almost as bad as that of the 1930s, we see government pump-priming and stimulus budget-busting that will eventually induce extraordinary inflation.

Despite this fact based on past experience, it is interesting to note that there are still economists who feel governments are not spending enough to get out of their economic miasmas.

There has to be some rationale for such thinking. Often it has to do with personal politics. Economists often weigh the pros and cons of their positions, and may never fear the consequences of what they suggest professionally. If it suits their current political status.

Investors Outwitting Each Other

Stop to think about it. Most investors are trying to outwit each other all the time. They buy stocks they feel will beat the market. To do so, they study information that hundreds of thousands, maybe millions of others read. So they are not getting genuine pearls of exclusive wisdom.

And they often pay advisers lots of money when those advisers are in the same situation, looking for scarce nuggets of securities wisdom that is being picked over by the public.

And when investors buy, they are getting what someone else is selling. Maybe someone just as smart an investor as the buyer, or his adviser.

As for knowing when to buy or sell, research shows that no one has ever been truly able to time the markets. Unless they have inside information. However, that is illegal.

The best solution? Invest in low cost index mutual funds or ETFs ( See the Earl J Weinreb NewsHole® comments.)

The Thrift Savings Plan (TSP)

The Thrift Savings Plan or TSP, administered by the Federal Retirement Thrift Investment Board, was created for U.S. civil service employees and uniformed members of armed services. Under the TSP program, individuals can make contributions to retirement savings.

The TSP is a part of the Federal Employees Retirement System, or FERS. Others include the FERS annuity and Social Security.

It’s designed to closely resemble whats available in the private sector, with tax deferred contributions to 401Ks. It is also open to employees covered under the older Civil Service Retirement System or CSRS.

There are five funds; all can be selected in varying amounts, including a diversified mix in the S&P 500; a mixture of corporate and treasury bonds; an index of developed foreign country markets. and a set share price of a money market fund, tied to intermediate treasury bonds.

Balancing Stocks With Bonds

It’s evident that most investment advisers are not really certain how much stocks and bonds go into what can be considered a “balanced” investment portfolio.

What had been a simple assumption prior to the 2008 financial meltdown is now subject to lots of conjecture. That’s due to the fact both stocks and bonds fell in unison at that time. And they may react differently during recoveries.

The past 60% stocks and 40% bonds balance formula may not be that standard. And changes in formulae adjustments as investors age, may no longer hold.

Some mutual funds are offering “absolute returns” where losses could result under past stock/bond arrangements.

The solution calls for more flexibility because there is no set formula an investor can use for holding stocks or bonds. Too many factors will affect choices.

Upcoming inflation, retirement age and the health of both investor and beneficiary relationships, all come into play. And the possibility that bonds may return more than stocks in coming years, are considerations.

Dollar-Cost Averaging

There have been studies in academic literature on the subject of dollar-cost averaging for buying securities.

There is some evidence against the use of that strategy. Still, dollar-cost averaging continues to be used by investors and is recommended by most financial advisers.

There is psychological appeal when an investor has to commit to a large purchase and prices are erratic from day to day.

Also, the popularity of dollar-cost averaging comes from examples that show its use results in greater stock holdings across the stock market cycle, compared to a one-time, lump-sum investment.

Whether it ought to be employed usually depends on the volatility of the markets. If the market for a security is trending up, dollar-cost averaging can prove more costly. If the market tends to be volatile, or erratic, dollar-cost averaging procedure will result in lower-cost.

Expecting a Stock Market Boom?

Wharton finance professor Jeremy J. Siegel said several months back that history provides evidence that stocks will remain a good long-term investments. Other observers have added to this optimism.

Studies do show that whenever stocks are off very much from their highs, future returns are usually better. That doesn't guarantee short term performance, but improvement can be expected over time.

However, this longer view can be suspect under present economic conditions.

The role of inflation due to our tremendous budget deficits, plus higher and higher taxes, and the crowding out of private capital investment, can easily hamper securities market projections.

Further securities market advances will depend on corporate earnings growth. They will be problematical with government spending and borrowing that will usurp the private supply of needed capital.

Moral Hazards in Finance

The Obama administration and the Democrats in Congress constantly are attempting to undertake measures to prevent future financial meltdowns. They feel they are expert in their attempts to regulate whatever is required to maintain financial stability.

However, suggested remedies are mostly bound to fail. All they will accomplish is the message that Washington is doing something. In that respect, the politicos are simply doing what is expected politically leftward. But financially, government will be making a mess of things.

By creating what is super regulation, all the bureaucrats are setting up are moral hazards. They give investors ill-conceived confidence that markets are mistakenly being well supervised and secure. So investors will take bigger risks.

Regulators give investors the impression the latter will be bailed out if the financial system runs into a debacle. The ever-bigger-risk cycle will continue.

Moral hazards are what helped the recent financial meltdown occur, with institutions “too big to fail.” So-called “bailouts” did not work as promised. The new regulations will simply augment problems.

Stock Manipulation Short Selling

When Bear Stearns collapsed in 2008, some said it was chiefly because of short sellers, and not so much the firm's mortgage-backed securities.

A short sale occurs when a trader borrows shares, which he then sells. The loan is repaid for less money if all goes well.

Share prices rise and fall as a firm's earnings move, but other influences move stock, including speculation about where the company is heading.

To intentionally manipulate security prices is illegal. But Wall Street pros believe short-selling raids do occur. Two experts have described their theory of how such manipulation may have worked with Bear Stearns.

Wharton finance professor Itay Goldstein. and Alexander Guembel of the Saïd Business School and Lincoln College at the University of Oxford described the procedure in their paper entitled, "Manipulation and the Allocational Role of Prices."

Their finding claimed traders purposely drove the Bear Stearns stock price down and undermined the corporation’s reputation and condition, and caused the share price to fall sharply. Goldstein and Guembel found that such intent works when the idea is to damage a firm; Ordinary traders do not have the same power.

Bear Stearns was finally sold out to the Chase Bank after corporate damage was accomplished by the poor market psychology of this short selling.

Inactive Credit Cards

Should you keep lots of unused credit cards in your wallet because you have simply no use for them? You may already use a number of cards, perhaps those that give special discounts or privileges.

A zero balance on your credit card won't hurt your FICO score. (The FICO is a copyrighted score that is used by about 90% of the largest banks for their credit decisions.)

Closing an account could hurt your credit standing. If you continue not to use the card, the bank may cancel it, or charge for it due to inactivity.

Your balance-to-limit ratio, may increase as a result of closing the account. That may also cause a decline in your credit score.

What to do? Try occasionally using little-used cards, even semi-annually, to prevent closure by banks. That could help your credit score. Use that card to make small purchases. Be sure to pay any balances off each month.

John Maynard Keynes and Democrats

The Democrat party in the United States has had a long love affair with John Maynard Keynes. Since Franklin Roosevelt and the New Deal, the economist’ s teachings have been their bible and guide.

But they do not always read Keynes correctly. Today’s Democrats merely refer to him to suit their political purposes.

They feel, for example, that you fight any recession by government spending money, pouring it into the economy to create jobs, by encouraging demand.

Experience shows otherwise. Mass spending does not produce jobs. It does produce deficits, but no incentives for business to expand job formation. Business expansion incentives require lower tax rates, not higher rates that over-spending eventually causes, that stifles business. Especially affecting smaller firms that account for the bulk of U.S. jobs.

The media ought to get into more detail and depth when it espouses the thinking of John Maynard Keynes. To disclose what Keynes really suggested, and not what liberals cherry-pick from his theories.

Proposed Consumer Financial Protection

Obama administration officials have speculated their intentions, in past opinions, about how they would set regulations on human nature. The way citizens ought to look at their best interests. Or at least, what these bureaucrats feel are in the public’s true interests.

That stand may make sense to a bureaucrat. But in my observations, it may not make sense to individuals. Folks make dumb financial errors all the time. Correcting them by fiat can be foolish by using regulation alone.

I feel that ought to be done by education. The subject is too complicated for bureaucrats because no one set of financial ideas and rules can accommodate every individual’s situation.

Once the government gets into the act, it will attempt simplification. That cannot be done, apart from insisting on the use of easier-to-read information or set law.

To create something for the masses, the bureaucrats dumb down the process where they hurt choice and outcome for too many individuals.

Independent Securities Research

The need for independent securities research came about because of both real and imagined problems about the work of in-house securities analysts.

A 2003 settlement imposed by then New York State Attorney General, Eliot Spitzer, provided for so-called independent securities evaluation, as a buffer to what was offered by major brokers, who also underwrote securities. It forced them to spend $460 million for such “independent” research, on behalf of non-institutional clients.

There is doubt, however, about how much such securities research was used. Certainly, some independence was achieved. But few investors made practical use of that source of information.

Yes, it was a political success at the time the settlement was imposed. But that had been the sum of it. And, as I recently noted, fewer analysts are being used now.