Avoid Financial Media Noise

I have often mentioned the pros and cons of investment strategy and why discipline is important in keeping to that strategy.

I have also berated many of the media pundits who create the gurus who expound much of the doubtful investment strategies you get. And how such advice should be avoided.

To discipline this goal, you have to learn how to eliminate media noise from your life. To do so, minimize the amount of investment comments you read or listen to, and take them all with a grain of salt.

Always keep you basics in mind when you hear guru chatter. ( See the Earl J Weinreb NewsHole® comments.)

The Dodd-Frank Financial Regulation Bill and Derivatives

Under the Dodd-Frank financial regulation bill, the SEC will now regulate to an extent the use of derivatives by mutual funds, exchange-traded funds and pension plans.

There is a major question whether this was needed. It may cut some risks. But there is no question that the regulation will definitely add to investor costs and performance.

Of course, this is a solution to something that had never before been a factor that resulted in any previous financial meltdown or problem. Still, Congress in its magisterial wisdom saw fit to fill up 2300 pages of superfluous diktat to satisfy its reason for political being.

You can be absolutely certain, and I will repeat this over and over: All the Dodd-Frank Financial Regulation Bill will ever do is create so much uncertainty, it will detract from American business, investment and consumer interests and jobs, while only benefiting the income of trial lawyers.

Could the Current Great Recession Have Been Avoided?

I have written on this before, starting over a year ago and I repeat it now, as I have on my business blog. My interpretation was right last year, I am even more correct now.

America has always had self-corrective economic cycles, but now we have more regulators than ever before, and they are doing their man-made damage, as never before.

Yes, we could have avoided the severity of the current Great Recession.

1) By avoiding the massive bailout by regulators offering the illusion of doing something. Probably, all that was needed was a federal agency guarantee of all bank assets, in return for a fee charged to the banks.

2) By avoiding “mark-to-market” accounting of mortgage assets, which had no market appraisal, and which wiped out assets of major banks almost overnight, aided by short selling that such “mark-to-market” accounting enticed.

3) By having a government agency buy up, at bankruptcy, empty tract homes, in over-speculative states such as Nevada, Florida and California.

The government has repeated the same errors made by Herbert Hoover and Franklin Roosevelt during the Great Depression. In the process we have accomplished little for the economy but have constructed a form of state capitalism, a nasty type of socialism.

Prediction. The Dodd-Frank Act, in further attempting to get us out of this mess, will be a disaster beyond anything America has ever had.

The Dodd-Frank Financial Regulation Bill and Corporate Proxies

Under the Dodd-Frank Financial Regulation Bill, the SEC will now give corporate and mutual fund shareholders more to say in boardrooms. There will be more access to proxies for nominations of board members.

Lots of theoretical platitudes, but little that shareholders are really interested in. Nothing bottom-line that shareholders are actually able to learn about or act upon, or even profit from in the real world.

Great for populist politicians who pass laws, and for plaintiff lawyers to wax rich on.

The Dodd-Frank Financial Regulation Bill and Brokers

The Dodd-Frank Financial Regulation Bill will have an immense, adverse impact on American society as well as its economy.

The SEC now has authority to impose a “fiduciary duty” standard on brokers, the same it applies to investment advisers, Brokers now will have to give advice in the client’s “best interest.” Whatever that vague phrase means. In the past brokers only had to provide ”suitable” investments.

It remains to be seen how Dodd-Frank will be enforced by the SEC. I am sure the tort lawyers and not investors will profit the most.

In fact, you can be absolutely certain, and I will keep repeating this over and over: All the Dodd-Frank Financial Regulation Bill will ever do is create so much uncertainty, it will detract from American business, investment and consumer interests, while only benefiting the income of trial lawyers.

Unemployment Benefits As Long As Needed?

Over-long unemployment benefits have been independently studied in the past and I have referred to the statistics before. Left-leaning politicians, seeking votes from the unemployed, love to use them. Those who want jobs are thereby being hoodwinked, and go along with the extended benefit ploy.

Statistics show the effects of the psychology involved. The program invites incentives not to work, Because extending benefits and then re-extending them creates what is called a “reservation” wage. People who ordinarily get relatively lower-scale income tend not to look for work until the unemployment wage runs out.

Moreover, the funds used by government generally come from additional taxes on the employed and industry, or from additional budget deficits.

All this adds to further unemployment.

Buying Life Insurance to Pay Estate Taxes

Assuming federal estate taxes will be reimposed in 2011, (which life insurance companies, lobbied for), folks have always bought life coverage lo pay the tab.

Other than for paying off estate taxes, some life salesmen are pushing big amounts of whole life coverage where the insured borrows against cash value that accrues tax free. Sounds good, provided you can borrow at a rate below what you earn at the insurance company.

Very iffy with regard to observing tax regulations: This is a matter for you and your CPA. There are cheaper types of life insurance protection. The cheapest is term, which offers protection only and no savings feature.

Would-Be Financial Gurus

Another problem I have with the financial media pundits: The persistence of the use of contests to see who can pick stock winners over a certain period of time.

There is no expertise required for this, just sheer luck because of several reasons:

One: Picking securities to measure performance over an arbitrary period, without having to designate how long you would hold your securities, does not indicate predictive power, as the contest is supposed to prove.

Two: The contest never gives you true ground rules, one of which is always risk. In a contest the assumption is that you throw caution to the winds and pick the riskiest for the maximum returns. This is not a real investment environment.

And three: Gurus usually sell you an expensive management service. Advisers who take 1½% of your assets a year when you earn 6%, at best over the years, are enormously expensive, They have thus taken 25% of your income. Every year.

I have often mentioned my study of the cons as well as pros of over 1500 strategies used by investors. My work is unique because it never recommends any particular strategy, unlike other recommendations you get. The truth is, each has its good and bad points,

Strategies must be tailored to individual preferences and needs. What tips the odds for each investor is the discipline employed in the use of strategy. Every investor has built into the purpose for the purchase of a security, the reason to sell it. Discipline guides that sale.

That is what tips the odds favorably. ( See the Earl J Weinreb NewsHole® comments.)

Finding a Financial Guru, Part 2

The media pundits have no problem in finding and profiling financial gurus. To begin with, they never have to work hard at it because, often, the items are public relations placements.

As for guru material, there are so many would-be experts, you are bound to find “wunderkinds.” You merely dispense with the many more losers.

One classic example: There are at least 100,000 individuals in the U.S. giving financial advice. If you had any100,000 folks instead flipping coins by groups of two, heads or tails, think of how many times someone in each group would win the toss, going on to the next round. With only a 50/50 chance of winning each round, each winner would go onto the next.

After 18 or 19 head or tail flips you will find a genius who had won the toss every time. He or she will write a book about it, no doubt. With a 50/50 chance to fail to guess the toss the next flip.

The same with the genius 100,000 or so giving securities advice. ( See the Earl J Weinreb NewsHole® comments.)

All Financial Experts Are Right, and Wrong

The financial media is replete with opinions on the securities markets. How do you instantly know they can be wrong?

Here is a tip unlike any you will get from them:

Be careful whenever you are told to buy a specific investment without you having to consider your personal risk conditions, your age, family situation, and finances, as they relate to that advice.

I don’t care how smart or how much of a guru he or she purports, or is considered by the masses to be. That advice is tainted.

Analysts and Bank Evaluation

Now we find out about repos by reports in the media of their use in the past. Repos are supposed to be very short term loans, even over-night. To get troublesome assets off the books they were treated as sales, and then taken right back, as loans, after the accounts were noted as sales.

We hear, for example, how they may have contributed to the financial problems at Lehman Brothers and the Citi Bank. We find out everything from media reportage after the so-called deluge has occurred.

Much of the bookkeeping info that would have tipped off repo use would have been helpful if picked up in time by bank analysts.

Why didn’t bank analysts at least have asked banks how repos were being reported?

Federal regulators certainly failed to do so, but bank analysts never asked either.

Currency Speculation

Currency investments are speculative and require special information and attention. They are not for the average investor. Yet many non-pro, small investors are titillated by the possibility of getting involved because of the profit potential. A potential because of the highly leveraged aspect of forms of commodity and option trading.

However, you often get benefits of currency trading and currency diversification by types of overseas equity investment. I have previously suggested ways of doing this. ( See the Earl J Weinreb NewsHole® comments.)

The Threat of Deflation?

Great recessions, such as ours at this time, and depressions always bring on the threat of deflation, That’s when economies melt down. Once they collapse they are hard to revive. Japan of the past two decades is a good example.

The question: What is the bigger threat? That deflation, or pump-priming, which the Federal Reserve is resorting to now? That is really setting the stage for another future financial bust of epic proportions.

Especially in the light of the ultra-trillion dollar budget deficits brought on by Obama administration programs on health care, to go with energy and other planning.

Yes, some economists worry more about immediate deflation than they do further off inflation. However, history tells us that deflation is a shorter-term problem.

Only a minority of economists look at the deflationary possibility. Pursuing that possibility, you do have an excuse to spend and spend, sometimes quite recklessly. Moreover, it is too often used by those who only have short-term political purposes. Long-term, many economists envision catastrophic inflation.

You might say, the American financial meltdown of 2008 and 2009 were sown in the early years of the 21^st century when the Fed worried a bit too much about deflation and then loosened funds too much as its remedy.

The Non-Existent Social Security Trust Fund

The Social Security trust fund will be exhausted, by the latest, 2037; probably much, much sooner.

But actually, there is no Social Security trust fund. It is a figment of a government politician’s imagination that the dutiful media repeat over and over again.

Money taken from present-day workers goes into general funds, in effect, to pay for current Social Security outlays.

It’s a Ponzi scheme, not a trust fund. It’s not comparable to a reserve-investment or a private insurance company program. The same private programs that politicians love to demonize to suit their populist purposes.

Computerized Investing Strategy

Every once in a while you come across it. The financial media comes up with a “new” idea that computerizes a strategy of when to buy and sell individual, (not packaged) securities.

But this is never new, just repetitious. It seems there have been young computer whizzes in every decade, who have attempted this strategy. That’s because it represents a challenge to the young.

Of course the are too young to know that their Wall Street fathers’ generation had been through the quest before, using faster and faster computers.

As fast as technology has become market psychology and corporate idiosyncrasies hinder their practical success.

As I have studied the pros and cons of over 1500 market strategies, including the computer approach, I can see no long-term panacea with this particular approach.

Avoid 12b-1 Mutual Fund Fees

Mutual funds with 12b-1 fees included can still call themselves “no fee” or “no load” which adds to investor confusion. The12b-1 mutual fund fees are charged for “distribution and/or services” and are so permitted by the SEC.

Fees are allowed up to 0.25%. That is no small amount when compared to what you can pay as total fund charges these days.

In addition to the charge being relatively high, it’s not necessary for any investor to incur. There are no actual benefits. The fee is usual when a fund is sold through brokers. You need not buy funds that way. Go directly to the source.

The Dodd-Frank Bill and Derivatives

Expect to see the dire consequences of the Dodd=Frank financial regulation lollapalooza bill.

Among its over 2300 pages is some disastrous legislation on derivatives, which our blessed Congress is still not quite familiar.

The tentacles of portions of this monstrous legislation alone will require American industry to come up with cash and/or credit as collateral that will siphon capital, from its other business operations, it can least afford.

All this helping to deepen the Great Recession.

Irony indeed: This stupid, unnecessary rush into the financial unknown, using a massive bill named for legislators who had much to do with the fomenting of the problems underlying the recession.

Is the Misery Index Coming Back Soon?

Remember the Misery Index? If you who were not around or were too young in the 1970s, you may not have heard of it.

The Misery Index combined the unemployment and inflation rates. reaching a high of 22 in 1980. It confronted Ronald Reagan when he got into office, replacing Jimmie Carter, during what was the worst recession since the Great Depression of the 1930s.

The media does a poor job of relating this bit of news. A few years from now when inflation takes hold because of our huge budget deficits, the Misery Index will no doubt be back in vogue.

The media then will no doubt fail to provide the basic reasons for its conception and rebirth.

Where to Invest For Income

Where do you find investment income when money market funds and bank deposits yield so little? When Federal Reserve policy sees to it that funds in the banking system are kept so artificially low?

We know this will eventually produce enormous inflation but what does it do for those who need investment income today and are trying to invest for tomorrow in an economy where corporate earnings are being stifled by anticipated higher corporate taxes and federal regulations.

The financial media does a poor job answering this because they fail to educate the public on the proper use of corporate bonds.

And in doing so, they never fully discuss the use of duration, which helps overcome the risks of upcoming inflation and future higher interest rates. ( See the Earl J Weinreb NewsHole® comments.)

The Great Recession and Hedge Funds

How has the hedge fund industry been affected by the Great Recession?

Aside from the fact that many funds have folded because of disastrous financial returns, the glamour of the industry has only somewhat faded. Hedge funds are still a major financial factor that is attracting big investors.

Invested funds are now a little easier to remove. Investors have more leeway with management and can be more particular with regard to investment withdrawal terms.

However, hedge fund charges are not much lower. Management fees generally are still set at 1½% of managed assets and 20% of the profits generated. Sought-after funds charge even more, as before.

Hedge funds operate in different ways with varying objectives. They have a tougher row to hoe in this economy and principals may face higher taxes. But they remain a factor because only they in the investment industry, have the speculative funds and freedom to operate these days, when political eyes are more focused on commercial and investment banks

Is Wall Street Too Close To Regulatory Agencies?

Is Wall Street too close to its regulatory officials and agencies? The question comes up when financial calamities occur.

Particularly because officials of major brokers and investment bankers in Wall Street are often recruited to become regulators.

But who, then, has the needed experience?

Unfortunately, we too often have bureaucrats and politicians in Washington who enact or supervise what affects mega-business operations. Despite the fact they have never successfully operated a business or financial entity on their own.

You have an example the way banks were pushed to accept subprime loans in order to have folks get homes they never could afford.

All because of populist political ideas.

Unusual Retirement Basics

Here are some retirement basics which need repetition because of the constant poor advice investors get from both the general and the financial media.

Much of that advice comes through public relations placements of articles and information by financial advisers in the media, or by ads.

Example: Articles you see or hear on retirement planning are primarily marketing tools, placed to influence would-be investors.

They attempt to satisfy normal fears investors may have of having insufficient funds for the education of children, of not having a comfortable retirement, or an attempt to overcome fear of outliving savings and investments.

But such normal fears are actually leading investors into a trap.

They are getting expensive advice for the most part. Most investors may never need extensive estate and tax planning, but only if the enormous size of their assets warrants it.

Otherwise, why pay 1 ½% or more for a financial adviser who will cost them as much as 20% or more of their annual investment income? That adds up to a huge chunk of total assets over the years. Furthermore, investors need only the lowest cost indexed mutual funds or exchange traded funds (ETFs) in which to invest.

Retirement basics can be quite simple for the average investor who can avoid the adviser hoopla. ( See the Earl J Weinreb NewsHole® comments.)

Questions to Ask Advisers

The financial media always seems to get it all wrong. As you know if you are a reader of my commentaries, I always suggest most investors avoid adviser fees because they take away up to 20% or more of securities earnings when they just charge an annual fee equal to 1 1/2% of your total assets.

The media bothers to get into the question you may ask your adviser whether he or she is compensated from the sale of any securities on which they advise. It should never get to that.

Of course there is a conflict of interest if the adviser’s compensation comes from the sale of any securities on which he or she makes a judgment. Avoid that entirely. But why require an adviser in the first place?

The only adviser you need is a lawyer when necessary or tax account or estate expert when needed.

It is simple enough to learn the rudiments of basic investment. Believe me, you can learn simple investing A B Cs., if you try. It’s your money and future. ( See the Earl J Weinreb NewsHole® comments.)

Liberal Solutions: Chasing Away Millionaires

Who will the politicians tax if millionaires disappear? Or are taxed out of existence, if those on the Left have their way?

New York State and California, which have always had the largest number of millionaires, report that their number have been falling. That is bad for politicians who love to tax them to solve state fiscal and budget problems.

Unfortunately for these high-tax states, millionaires, and those not as wealthy, are taking precautions. When taxes get onerous, they leave for other states.

Eventually, of course, the Federal government may well catch up with its millionaire citizens, with federal income and death taxes.

Liberal politicians who hear the lesson about the goose who laid the golden egg, think the goose is always in open season just for them.

The Obama Administration’s Hit on Small Banks

The new, ironically named Dodd-Frank legislation will help see to it that small banks in the U. S. will eventually wither and disappear as a financial factor. They simply will no longer be able to compete with the big banks. To the detriment of the banking consumer.

Leave it to this administration and the Democrat-led Congress to issue a bill that purportedly is designed to resolve the ills of a banking system, by naming it for the two politicians to helped foment those fundamental ills in the first place.

I will have more to say about this new legislation, a paean to crony or state capitalism. A form of government under the Obama administration. which has more characteristics with that of the economy of Benito Mussolini’s state capitalist Italy, than it ought to, in the U. S. today.

Government Debt and You

This will translate the Obama administration’s spending into simpler terms for the average taxpayer.

About 40% of the income tax now goes to pay just the interest on government debt. I am not talking about the debt’s principal amount; I am just referring to interest cost which is dirt cheap at the moment.

During the Jimmie Carter administration, interest rates were almost five times greater than now. With the outstanding debt expected to grow by at least $9 trillion in ten years, future total interest costs can grow to unknown extremes.

It will be impossible to easily pay the interest, least of all the principal, without dire consequences.

This will be absolutely impossible without tremendously inflating the currency. That is, adding paper to the money supply to cheapen it.

That will make the real debt less, and what the citizens own worthless.

Forced Securities Selling In a Bear Market

We know that over the long term, securities holdings can grow a substantial amount. Market downturns will be corrected, given time to recover.

There is a problem with this thinking, should a sale be necessary during a downturn. Unfortunately, there is little an investor can do about it, except keep one’s fingers’ crossed about forced selling in a down-cycle.

Should the market flop just when an investor needs a securities’ proceeds and has to sell, no planning in the world, no high-powered adviser, will help.

If you need funds, the long term advantage of holding stocks will not help in a down market. In an emergency, selling into a bad market will create losses, despite long-term growth potential.

Apart from keeping your fingers’ crossed, anticipate emergencies with some liquidity, such as short-term bond holdings.

Lottery and Betting Odds

A bit more than $90 Billion is spent each year on legalized gambling in the U.S. The illegal amount probably far surpasses this enormous figure.

You may wonder why lotteries flourish when odds are generally terrible, against the player. Lotteries often pay off as little as 60 cents on the dollar. Whether legal or not. So why bother playing?

As for betting: the odds are not much better. Where bookies pay off in tax-free cash and the better is illegally laundering money, poor odds are reduced in favor of the bettor. Then the gambler’s net is actually much higher.

But then such a gambler is also betting on a possible stiff fine or jail sentence if caught.

So, the odds continue to remain stupid.

Credit Scores

About one third of a personal credit score is composed of each of the following factors:

One: The amounts you owe to other loan companies.

Two: Your past payment history.

Three: Various miscellaneous but important credit related items.

The latter are composed of about an equal part each of the type of debt you may have, along with your credit history and the new accounts or queries about debt you now have.

Check your credit account often, to see about the accuracy of the information. If there are errors, get them corrected immediately.

Reduced Numbers of Public Companies

About 9,100 public companies filed proxy statements with the Securities and Exchange Commission ten years years ago. However, in 2009, only 6,450 did. Why the smaller number?

There can be many reasons. But as someone who has been a principal in several, and as an observer of the corporate scene for many years, I feel there is a major underlying reason. Foreign companies may be fleeing as regulations are getting more onerous.

Sarbanes Oxley compliance is an example. The federal requirements are too expensive and put down restrictions on management which only plaintive lawyers find equitable and just. Being publicly owned is simply too restrictive; operating a business in a governmental tax and spend environment is tough enough.

Managed Funds Vs Indexes

The public continues to buy substantial amounts of managed mutual funds that are usually outperformed by most securities index funds, year after year.

And in instances where a fund manager may do better than an unmanaged indexed fund or exchange traded fund (ETF), he or she often will not repeat that success in following years.

Also, managed funds have higher expense cost for fund stockholders. Indexed, unmanaged mutual funds thus have a decided advantage.

A research study done by Morningstar, Inc. points up another positive factor. When risk taken by an average fund manager to attempt to outperform an index is considered, that manager’s efforts were found to have accomplished even less for the investor.

Paying for mutual fund management simply does not pay off.