Bank Credit Shortages

Many smaller banks don’t have the sound loans on their books as bank examiners would like to see. They are, therefore, under constant pressure to clean up their financials and/or add to basic capital.

Unfortunately, politicians in their area are putting pressure on bank examiners to allow these banks with questionable standing to make loans which ordinarily should not be made.

Unfortunately, banks are not making sufficient loans to small business even if they have the ability to do so, The truth is, they make more money these days by borrowing cheaply from the Federal Reserve and investing in government bonds.

So, there is a constant small business credit shortage.

This unhealthy environment is perfect for the likes of meddling politicians in Washington whose influence is being made in the wrong place, in the wrong manner.

One solution: Supervise banks gingerly but independently of politics. Secondly, permit banks to make riskier small business loans and restrict their tendency to borrow cheaply and invest in government bonds.

It is also time to raise the cost of Fed money to banks, so the latter do what they are in business to do.

Financial Herd Instincts

Avoid the financial community’s herd instincts that override common sense and logic, Be aware of what is often referred to as the Bandwagon Effect, the propensity of professional and then following average investors to pursue the same line of investment thinking.

I would like to have my readers follow up the importance of the work done by the 19th century French economist Frederic Bastiat, who said people see benefits but never the hidden costs. It is one of his lessons that goes beyond politics into the realm of investing.

Buying Annuities

Annuity salesmen often compare the benefits of their product with investing risks of stocks and bonds. They mention the hazards of securities markets and possibilities of market loss. But annuity salesmen often overlook the downside of what they offer.

Annuities do have negatives. They are not for everyone. They have an insurance factor which may not be required. And if not required, why pay for it?

Then there are annuity management fees, contrary to some sales pitches and early termination charges. Moreover, the strength of the company is always important to consider.

The choice of fixed or variable annuities further complicates the picture. Fixed annuities have set returns which means the buyer has no protection from any future inflation. Variable annuities tie into securities markets but not as directly as you may want.

The Options Market

Options offer an investor the right but not the obligation to buy or sell a security at a set price.

Options are used for investments becoming more impervious to swings in the markets, Also, to protect shares from under-performing. And to make money when market conditions are extreme.

To invest in options, you must take time to learn fully about them. Know the difference between a call and a put, strike price and all applicable terms.

There is no real quick options course, Take your time learning because of the complex nature of the arcane aspect of this classification of the securities business.

Do not get involved unless you learn about options both academically and in practice. Therefore, run through some fantasy dry-runs with no real funds, just to see how you would have done with real money. Then use your own real capital.

Bankers, Athletes and Income

Do bankers make too much money?

They may if they earn commissions and options of hundreds of millions a year. But they do work at jobs that take years to perfect..

Do athletes earn too much money?

They certainly do, if they earn up to $30 million a year for playing a kid’s game. And which many amateurs do for nothing, but just a little less efficiently. The real difference in their capability is not learned but in their eyes or muscles, for the most part.

Do gymnasts deserve more than they earn?

They get practically no income despite all the incurred pain, and years of training and practice, and the need to overcome initial physical fear.

I have had personal experience with all three working practices. It’s difficult to see how bureaucrats and politicos in Washington are so ready to damn bankers as a group for making “too much” money while other genuinely overpaid groups are left to make their fortunes politically undisturbed.

Incidentally, high-priced athletes are indirectly being financed by bailout funds of their bosses’ subsidized ballparks.

Avoiding Mid-Stream Investing Changes

You know an adviser has no clue about strategy when he tells a mutual fund investor not to buy a fund that clings to a particular “style” of investment, such as small cap or large cap. But to instead choose what is right for the times.

That advice will let you know the adviser has no specific strategy. The adviser is willing to change strategy to suit whatever style may be popular at the time.

My experience has shown that such undisciplined investments with no set strategy will not do as well as it should. It’s a case of market timing with adverse odds.

The Obama Administration’s Idea of Family Income

When the Obama Administration speaks about the top 1% of wage earners in this country and their domestic income, they are wrong in making comparisons and interpretations of official family income statistics of the 1980s.

Their 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. Perhaps kids are also part-timers.

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

Buying Gold?

I have commented before on buying gold as an inflation hedge, and why the idea is not a simple solution to inflation, as advertised. Gold prices relate primarily to the rise and fall of the dollar, rather than inflation itself.

I feel there are many other ways to protect yourself against inflation. A weaker dollar waxes and wanes cyclically. Other investments I discuss from time to time are more directly attuned to inflationary factors.

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.

Need More Federal Regulation?

XBRL or Extensible Business Reporting Language can permit data to be collected and analyzed. It can be used to assess risk on about 600 mortgage points. And 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, than the need for extensive federal regulation, including Dodd-Frank.

Layers of added regulation we know from experience really does not work.

Investing Risks

You can take more investing risks when you are young because there’s more time to recoup your errors. But If you lose a big chunk of capital, it still sets you back a good deal.

Yes, it is better to lose chunks of capital at age 30 than when you’re 60, or older. Nevertheless, look at a compound interest table, and see what happens to any amount of principal, when you lose a large sum early on.

Therefore, it’s essential that investment risks always be a concern in your planning. ( See the Earl J Weinreb NewsHole® comments.)

Small Business and the Recession

Small business employs 50% of the U. S. work force. It makes up almost 40% of the GDP. But small business cannot get sufficient credit from banks who are worried about strict regulators who look over their shoulders to see that the books show little risk.

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?

Worse, small business cannot get meaningful relief from Washington in the form of lower taxes and less restrictive wage regulation.

Small Business Funding

I recently discussed how small business has had problems getting credit amidst restrictive Washington regulations.

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 increased government meddling.

Left-leaning politicians believe that anyone who charges more than what a bank does is a usurer, even when there is no money available at bank rates. That’s because such politicians never understand supply/demand economics.

The next time you hear talk about real jobs, it will be mere talk. Nothing practical is being done.

The Government is Rolling the Dice Again

After denying anything to do with the financial meltdown, the government is at it again, as Reresentative Barney Frank 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 to buy homes with practically nothing down. In no time, they will join the rest of the rising numbers of homeowners in default.

Will left-leaning, vote-seeking, politicos never learn?

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 Have Disappeared

The year 2009 was not good for many hedge funds. This year has been better but not as successful as the early 2000s. Some did well enough in the markets, though not as they did several years ago, during their Golden Age.

Many 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 is their cost. 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.

Buying a Home as an Investment

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

I got lots of flak in the late 1990s and early in the 21st century. That’s 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 REIT index mutual funds or 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.

High Frequency Trading and Mutual Fund Investors

While high-frequency trading benefits most market participants, there are some hazards involved. The presumption is that high-frequency traders are more efficient, at the expense of the less adept. Individuals who feel they cannot compete with mutual funds or other large investors, are just one example of those who view the subject negatively.

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 should 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.

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

High Frequency Trading Suspicions

Those who defend high frequency trading say such trading improves market liquidity, It assures a buyer or seller availability 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 brings market liquidity.

In the past, the stock market was efficiently operated by middle men or “market-makers.” They normally completed sales by buying and selling in their own accounts, if they could not immediately match buyers and sellers. Market makers profited on the difference between the bid prices buyers were willing to pay and the ask prices sellers accepted.

The SEC is tightening its controls of high frequency trading which it’s currently suspicious of, but it will further study the matter.

Making Big Banks “Secure” and Business Recovery

As I have noted in my previous comment,s, Dodd-Frank is attempting to make sure that too-big-to-fail banks will not bring on another economic disaster. In doing so, they are strangling the economy with regulations.

Dodd-Frank overlooked 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 or will not access 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 Dodd-Frank legislation was fear of financial institutions failing. That fear produced monumental bailouts, resulting in extraordinary budget deficits. Which, in turn, is dooming our economic prospects for decades to come.

And still Dodd-Frank is ready to impose layers upon additional layers 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 nor inclinations about its implementation.

They did separate commercial banking operations from proprietary trading, Banks, though, will not be smaller, less risky and less apt to fail than the risk-taking and more leveraged investment entities of the past.

Jobs and Government Efforts

Economic stagnation persists when business cannot risk 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

Buying Securities According to Supply/Demand Law

Never buy securities on the basis of a public recommendation. Many, perhaps thousands, or hundreds of thousands, are receiving the message at the same time or may have gotten it earlier than you. The same advice.

Remember the effect of everyone acting at once. And the law of supply and demand. That law will be working against you when everyone acts on the same news at the same time.

Media Financial Advertising

There always is a conflict of interest when an ad or public relations announcement gives financial advice.

Especially with the repetition of those ads and announcements.

Because all you get is one side of the story. You get one financial idea or strategy’s positive slant. But there is always a negative factor in every financial idea or strategy, Maybe more than one. Obviously, they’re never mentioned.

And media financial advertising provides so much "education" for the average investor.

Mutual Fund Total Costs

Mutual funds have to be shopped carefully. The fundamental differences among funds, aside from investment class and specialty, is cost. The lower the cost of operation, the better the fundamental choice. Relative cost makes a lot of difference in accumulated investment value over the years.

The average expense ratio for all mutual funds is about 1.3% 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 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 are they mentioned in the prospectus, They are in the fund’s Statement of Additional Information,)

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.

Financial Headlines Can be Misleading

Those reasons why markets go up or down are often pure fiction. There may be many reasons why the stock market has gone up or down but the financial headline writers manage to have an answer.

It is almost impossible to know after a trading day’s closing, the moods and sentiments that drove that day’s market, nor the supply and demand of securities over the global markets that would have had an impact.

Short of a major calamity or importantly market-impacting event, the media does not know. But is ready with answers, as if a market chrystal ball has somehow telegraphed some secrets to them.

Dodd-Frank Regulation and Hedge Funds

Hedge funds with assets over $150 million must now register with the Securities and Exchange Commission.

Hedge funds are actually a stabilizing factor in market trading, but a mostly inept media never gets this point across. Thus, politicians are able to pin blame for market problems on the hedgers.

Besides, the SEC has has had a rather poor record in checking out fraud in the past. They overlooked the Bernard Madoff fraud scandal until the damage was done.

Hedge funds tend to work off the extremes of the market. This keeps prices in line. Dodd-Frank however, did nothing but exaggerate the too-big-to-fail problem.

Financial Adviser Cost

Ask your 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.

No, I am calculating actual cost.

You will pay the advisor’s fee, on the management of your assets, It can be1% to 3%, generally 1½%. That’s $1500 for every $100,000 they manage.

(But the asset-management fee may not be the only cost. Remember: 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 1 1/2% management costs add up to a considerable chunk of your annual returns. After all, you’re lucky if you earn $6000, or 6% for each $100,000. The advisory fee, in other words, is 25%.

Insider Trading Rules

Despite occasional media reports of Wall Street types who have been caught for insider trading, the rules are not as simple 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, those 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.

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 a duty, to get at 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.

Public Debt as Family Debt

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

That sounds worse when you figure that it is about ten times the average income of each American household. What is more, the amount grows because it is a debt that accrues interest.

And interest costs are bound to eventually grow enormously. Plus, the value of the dollar to pay debt back gets to be worth less as our obligations mount. With inflation, it may well triple or quadruple or go even higher.

Timing to Buy and Sell Securities

Selling securities at their high and buying at their low are everyone’s investment goals. Of the over 1600 strategies I evaluated along with their pros and cons, this could be basic.

The problem: The idea 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.

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 during inflationary periods. ( See the Earl J Weinreb NewsHole® comments.)

So forget about any supposed ability to time the markets.

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 had been a fine line distinction in the way brokers and advisers dealt 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 online about securities.

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.

However, under Dodd-Frank, the Securities and Exchange Commission wants to make brokers more responsible for information they give, treating them as fiduciaries. That may dry up that source of information.

On the other hand, advisory charges can amount to 25% and more of your investment income each year when you pay fees of 1½% or so on assets managed.