What Do Investors Expect From IPOs?

When uninformed investors who prefer to remain uninformed speculate with the purchase of new securities issues, they assume it’s all a one-way street to quick riches.
And if they’re proven wrong, it’s someone's fault other than their own. They got the wrong information; they were lied to; anything but the fact they never bothered to get the facts beforehand. The company prospectus usually does a good job in its SEC filing, describing the risks involved. But dreamy-eyed speculators don’t bother to read or take the warnings seriously. (See the Earl J. Weinreb NewsHole® comments.)

Stop Fine-Tuning Bank Regulations

Politicians will never learn this lesson, but an informed public can: You can never fine-tune bank regulations. 

 
I was a senior bank analyst on Wall Street in the past, in addition to my other financial and business experience; I’ve learned what politicians and their bureaucratic minions overlook.
There is a very fine line between what major banks have to do to manage their asset investments or those given them by customers. And when the banks are always extremely alert to risks involved, they are on top of the asset-hedging requirements involved.
However, the very nature of varying assets and their maturity differences make the banks’ efforts extremely difficult despite all the computerized models used. The regulatory authorities’ ability is no better, if not inferior.

 
I have commented in these pages before with my suggestions. (See the Earl J. Weinreb NewsHole® comments.)

Venture Capitalists and Luck

Lots of attention is given to those who give funds to startup companies. It takes lots of faith in the capitalistic system to do it because much trial and error and a preponderance of the latter is always what you get.

There is lots of luck involved. And the fact that one winner out of fifty can be enough for a payoff.

Also, startups help eventually produce new jobs, real jobs, not the shovel-ready variety, non-productive, taxpayer-subsidized variety.(See the Earl J. Weinreb NewsHole® comments.)

Was the AIG Bailout Needed?

I have repeatedly said that human error was instrumental in the financial meltdown of 2008/2009.

There has been finger-pointing, usually by left-leaning, anti-business politicians and by bureaucrats whose immediate impulse is to blame big business and bankers; the litany of criminalization in left-wing lexicon.

I have always blamed human error. Whether loose monetary policy of the Federal Reserve’s inflating currency, or inappropriate mark-to-market accounting rules for bank securities evaluation.

In the case of AIG, the value of its derivative insurance coverage was also being determined on the basis of fictitious existing market value; not on possible claims in the future, at the maturing of company obligations, but at supposed current valuations.

That produced a condition that induced panic-laden premature bankruptcy; a rush to judgment when cool heads ought to have been the hallmarks of expertise.

Another incidence of rescuers acting in the AIG panic was evidenced by the paying of debts on the basis of 100 cents on the dollar to some bankers in this country and abroad. Especially after the government unfortunately decided to take over 79.9% of the business in its panic-driven haste. 

 

Would not a government guarantee have sufficed, instead of all this taxpayer outlay? (See the Earl J. Weinreb NewsHole® comments.)

The “Tough” Economic Recovery Cycle

Economic Fact: The deeper a recession, the faster and sharper and better the recovery. Any president coming into office ought to welcome this opportunity to look good.

In the post World War II period, there were 11 recoveries from economic recessions. What is currently known as the Great Recession is the worst.

In fact, there was a recovery in the early 1930s when the stock market bounced back from the 1929 debacle.

Note: Keynesian ultra-spending in each case has helped cause a delay in what would have been a natural bounce-back. (See the Earl J. Weinreb NewsHole® comments.)

Accounting Reasons Not to Invest in Individual Securities, Part 2

I frequently discuss my reasons for not recommending the purchase of individual securities; instead I suggest the used of indexed mutual funds or ETFs.
For instance, the question of enormous unfunded pension obligations which account for a major liability of corporations. In most companies, they are not on the  balance sheets but are still extraordinary, dangerous liabilities. (See the Earl J. WeinrebNewsHole® comments.)

One Accounting Reason Not to Invest in Individual Securities

I often discuss my reasons for not recommending the purchase of individual securities; instead I suggest the use of indexed mutual funds or ETFs.

Take, for example, the question of leases which account for a major liability of corporations, yet are treated differently on their balance sheets. In many instances, they are not on the balance sheets but are still major liabilities. (See the Earl J. Weinreb NewsHole® comments.)

Unwary Investors Often Sue When They Make Poor Investment Choices

Notice that when investors who should know better make bad investments, the first thing they do is think of suing? That’s like a child banging his head against the wall to show anger.
This action is, of course, aided and abetted by eager plaintiff lawyers, politicized attorneys general, and the misinformed, headline-seeking media.
Investors are always better off investing in indexed funds, not pie-in-the-sky, never- fail, roads-to-riches bonanzas The latter are usually a mirage.
(See the Earl J. Weinreb NewsHole® comments.)

Why Buy Individual Securities?

The public will continue to buy individual stocks and bonds, though the odds of success will be shown to be better with index mutual funds and ETFs. 

 

And many prefer to invest without wise asset allocation selection which I find is essentially a form of disciplined strategy. 

 

And most overlook the ability to reinvest dividends or interest in such funds, particularly to take advantage of the duration principle.

Perhaps basic financial ignorance has become human nature. Despite proof that managed funds cannot consistently beat indexes; diehards will still attempt to beat indexes, and mostly fail. While disregarding well-thought-out asset allocation and duration principles. (See the Earl J. Weinreb NewsHole® comments.)

Wall Street's Insider Advantage

Do Wall Streeters have an advantage that smaller investors don’t?

I often discuss who I call “inside players,” those in the financial community who may have an advantage of “being there” on the inside. And how any disadvantage of being an investor “on the outside” can be avoided.

The inside players often make the bulk of their earnings from fees, plus the important fact they can arrange deals and contracts; not because they are smarter or more astute investors.

Just one example: Wall Street pros are notoriously poor market timers. (See the Earl J. Weinreb NewsHole® comments.)

Before You Invest in a Hot IPO

Today’s hot IPOs are literally superheated, much like the dot coms of the late 1990s. Yet investors are falling for “this time it’s different” hype once again.
Why not? Wall Street is feasting on the fees the underwritings are generating. And the media has what to talk about. While the youngsters who created the companies have become billionaires without even creating viable business plans that can assure long-term, expansive profits.
This is a teaching moment for what can be taught in a practical M.B.A. financial course.  Businesses with no viable business plans that can make billionaires out of its creators. Only in America!!!

The best these billionaire entrepreneurs can do, if they remain in the business before bailing out, is to use the valuable stock to buy other companies who may be able to assure long-term, expansive profits. That is, if a gullible, really-profitable target can be found to accept an offer they can’t refuse. (See the Earl J. Weinreb NewsHole® comments.)

Questionable Financial Gurus

It's easy to become a financial guru. Look at the vast number of available books by experts; questionable analysts and costly advisers. Keep this in mind whenever you get gratuitous advice, or see or hear a financial ad, giving one salesman’s opinion for investing.

Sometimes advice may be in the form of a public relations release. Or you get a suggestion about how to find the next hot stock, or how to outwit inflation with risky alternatives.

You must also overlook the conflicts of interest if the commentators who rely on advertising and face a decision about criticizing would-be or current sponsors.

Too much advice from gurus are thus tainted. (See the Earl J. Weinreb NewsHole® comments.)

A Simpler Way to Make Banks Safer

Regulators have always failed to prevent scams of the past and the serious financial meltdowns we’ve experienced, as well. Piling on more regulation upon regulation amounts to political fig leaves which do nothing but make politicians and the media happy.

There are simpler ways to make banks safer. Forget about the stupidity and Volcker rules which are impossible to write because banks must constantly invest and hedge their own funds; it’s inherently part of their business.

One: Have the banks add more capital funds where needed.

Two: See to it that no “mark-to-market” accounting is ever imposed on them in illiquid markets.

Three: Put banks at risk if they fail. No bailouts for stockholders or bondholders in return for needed Government guarantees. (See the Earl J. Weinreb NewsHole® comments.)

Misleading Market Headlines

It is almost impossible to know after a trading day’s closing, the moods and sentiments that really 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 an important market-impacting event, the media does not know. But it’s ready with headline answers, as if a market crystal ball has somehow telegraphed some secrets to them.

It’s a shame a crystal ball doesn’t provide accurate information in advance.

(See the Earl J. Weinreb NewsHole® commentaries.)

Uncertainty Versus Risk When Investing

One of the major problems you as an investor will face, whether a professional or average in size, is that of uncertainty. Not being sure of the security you are dealing with. Not sure of the strategy. And doubtful of the prevailing economic conditions.

Moreover, that uncertainty cannot be measured. If you’re a professional, you have means to do so, to an extent. (Think in terms of the J P Morgan Chase loss in hedging during uncertain times.) But  risk can be dealt with to a manageable extent, despite that loss.

On the other hand, uncertainty causes fear,  which is always a problem when investing.(See the Earl J. Weinreb NewsHole® comments.)

Value of Securities Adviser Certification

Added to all its uses of arcane terms and jargon and acronyms that confuse most of the public, Wall Street's inside players, and its analysts and advisers, have to show you how truly bright they are at picking winners.

So they have come up with certification initials they post after their names, that are hard for the public to comprehend. The initials sound impressive but many are not as difficult to get as you may think. In fact, many are looked at askance by regulatory authorities.

But they help market advisory services. And they impose investor inferiority. The fear of not quite being up to the task of competing with “smarter” investors.

A test is needed to get some certifications. But who says that passing a test of routine questions makes someone a true expert at financial matters?

It does help someone understand the arcane terms and jargon and acronyms which mean nothing in tipping investment odds in your favor. (See the Earl J. Weinreb NewsHole® comments.)

Expensive and Unneeded Investment Advisers

Advisers come in different guises. They may call themselves a variety of comforting names; wealth advisers is one. They may be independent practitioners, or members of a special department set up by a conventional stock brokerage or investment banking firm or commercial bank.They may be actually specializing in the sale of life insurance and annuity products. To round out their sales portfolio, they may even sell mutual funds on the side.They make their earnings from sales commissions from what they sell you or from fees on your assets they manage. But they are selling something and therefore, their advice may not be truly independent. Aside from all that, they can be costly. ( See the Earl J. Weinreb NewsHole® comments.










   

J P Morgan Chase’s “Big” Loss and More Regulation Needs?

It’s inevitable: Now that the JP Morgan Chase bank has announced a loss that the media and the politicians have made into a giant fiasco.
It amounts to a tiny amount of the sums at risk, and it's amanageable capital loss.The public will be appeased by some firings. And you can be certain there will be calls for more government “ regulation.” Even though the so-called bureaucratic Volcker Rule cannot be put in writing as yet because no one knows exactly how to logically produce a viable standard.
Fact: J P Morgan Chase already had its own substantial staff of knowledgeable regulators behind the hedgers and traders who were always under at-risk scrutiny. Economic models go astray.
Government regulators are not known to be smarter or as efficient, for that matter. But they wield the whips of the politicians who are always right. Or at least they are as long as voters believe what the politicos are telling them. (See the Earl J. Weinreb NewsHole® comments.)












   

Are Thrift Savings Plans For You?

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 what’s 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. (See the Earl J. Weinreb NewsHole® commentaries.)

Is Investing Overseas Wise?

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

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. (See the Earl J. Weinreb NewsHole® commentaries.)

European GDP Bashers

If GDP growth isn’t working for your cause, bash it. That’s why Nicolas Sarkozy, when heading France, thought the basis for calculating his country’s lagging GDP did not include enough of France’s recreational benefits. That is, the early retirement and short working hours that has reduced productivity that invites unemployment and is ruining the country.

But there are now financial advisers whose purpose really is to give excuses for faulty government administration performance. they’ve become gurus or apologists for the Keynesian governments who wish to spend their way to prosperity. Such as the present-day Greeks and the rest of their European friends.

Their story is now contrived so that there should be a measurement of “happiness.” I’m not sure how you can truly measure that. But a job can make you desperately need it. And that shows up in GDP, not some contrivance these folks are attempting to contrive. (See the Earl J. Weinreb NewsHole® comments.)

Stock Broker Legal Status

Stock and bond brokers these days are expected to observe more fiduciary rules when discussing investments with clients. In the past, all they were obligated to do was see that investments were suitable for their clients.

Under fiduciary rules, brokers could be sued by tort lawyers for any imagined infraction and/or lack of explanation. This makes the broker’s job too scary for any practitioner to contemplate keeping.

It’s a possibility even for efficient stock brokers, that can drive them all out of business. They tend to drift instead into the advisory sector of the securities business.(See the Earl J. Weinreb NewsHole® comments.

Corporate Bonds, and The Inflation Myth

There is a possible solution to the quandary of bond ownership and inflation.

Most investors who look ahead many years, some as much as fifty, tend to overlook the principle of duration..

Overcoming inflation with the wise use of bonds concerns constant reinvestment in low-cost mutual funds or ETFs (Exchange Traded Funds).

The proper use of duration should suit the investor’s personal time horizon. That is, how long the bond fund will be held before the funds will be needed.

Corporate bonds can help overcome inflation and the dearth of income and potentially limited growth from stocks.

But be sure you invest in a low-cost bond mutual fund or ETF where interest earned is automatically reinvested in shares of the same fund each month. (See the Earl J. Weinreb NewsHole® comments.)

The Repurchase or Repo Market

The repurchase or repo market now averages about  $1.7 trillion. The risk is that it’s cleared by only two major banks, Bank of New York Mellon, and, to a somewhat lesser extent, J.P. Morgan Chase.
The banks manage the cash and securities involved and the temporary credit as clearing banks for short term transactions used by, for instance, money market funds, where daily transactions need liquidity.
But the activity is not regulated and the Federal Reserve bigwigs are musing about changing that. I do not find the lack of regulation a particular problem. There is a systemic risk here, of course, but any government-imposed risk would not be of any special help.
Usual, erratic emergency action would only make matters worse when time could probably heal matters. Students of 2008-09 take note. (See the Earl J. Weinreb NewsHole® comments.)

Future Stock Earnings

 

I find a major disconnect among investors on Main Street and Wall Street about what they expect to earn from their securities portfolio over the next ten, twenty, even fifty years, after tax and inflation.

Admittedly, that is a tough prediction because investors must take income taxes and inflation into account, along with projected securities’ yield and market returns. None of that is simple.

In one survey I noted net/net/net predicted return by a number of experts over the next fifty years. Those returns ranged between 2% and 3% annually.

That is unusual and shocking to many. Investors’ experience from the past would have had expectations of close to 6%.

In other words, many securities markets observers believe that potential, along with taxation and inflation bites, will reflect dismal future market returns. ( See the Earl J. Weinreb NewsHole® comments.

Why Use Financial Advisers?

Some financial and business insights that will make it easier to invest without having to hire an adviser whose fees will take 15%, 20% and more of your investment earnings every year, slice by slice. Without you feeling it until it’s too late.

Figure it out for yourself. That’s what it costs when you pay a 1½% management fee each year on your assets, and you’re getting earnings of 6% a year or less, on average.

The lessons result from my observing the successes, failures and foibles on Wall Street. You probably have seen my Earl J. Weinreb comments on this subject many times in the past. (See the Earl J. Weinreb NewsHole® comments.

Public Pension Earnings

The public pension deficit gaps are worse than what the mainstream media mention.

That’s because the projected income used for investments in them is still too high at 7% and 8% when actual earnings are more like 6% and less.

In reality, the estimated earnings on investments to pay future public employee pension payments ought to be equivalent to what the state. city or other local entity has to pay when it borrows to finance the pension money.

Therefore, the problem we see today has, unfortunately, been hidden by politicians kicking the proverbial can down the road.(See the Earl J. Weinreb NewsHole® comments.)

Dodd-Frank and the Volcker Rule

The Law of Unintended Consequences is alive and well because of politics. The Volcker Rule, named after a suggestion by the former Federal Reserve  head and then Obama administration adviser, was instituted into the Dodd-Frank Act of 2010 to see that banks not trade bonds on their own behalf. That was supposed to safeguard the banking industry from speculation that could undermine the system. As with similar politically-inspired legislation, it’s now clear that just the threat of imposing the Volcker Rule is drying up corporate bond liquidity and is becoming a potentially dangerous market concern,  So much so that private entities are getting involved in making a market for such bonds, Moreover, there was never a real problem that past bank trading was creating the risk the politicians thought were present.(See the Earl J. Weinreb NewsHole® comments.)

Securities Prospects

Independent analytical firms who are able to do a better job at securities research are hard-put to find clients among the financial professionals who are willing to buy a decent analytical product from them. Many are leaving the business.

The average analyst will correctly tell you that stocks have risen, on average, about 10% over the long-term. But that has been in the past. Unless interest rates in the future remain extremely low, chances are that the future stock market will not earn this past figure. Some researchers have projected an average return of only 6%, and much less for the future.True, some financial academics claim that price earnings ratios for stocks are relatively low and this bodes well for the future of the stock market. My investigations over the years have told me that price/earnings are a terrible measuring tool. What is a high or low P/E is simply too relative and too dependent on other important factors, including interest rates.And let’s not forget the specter of future inflation because of our extraordinary budget deficits. ( See the Earl J. Weinreb NewsHole® comments.

Your Retirement Path

Nowadays, employers contribute retirement funds each year, and the employee takes responsibility for investing. 

 

Employer contributions are in the form of 401(k)s. In the past, the employer would be responsible for the management of the funds. The employee can add personal investments to what the employer contributes.

The bottom line: The employee today has to bear the investment responsibility.

So, it’s important that you pay attention to a viable mix of possible low-cost, diversified investment tools. ( See the Earl J. Weinreb NewsHole® comments.

State Pension Traps

Most of the the nation's state pensions are underfunded, dangerously so. Most issued bonds over the years to finance pension contributions -borrowing money that eventually must be repaid,

California, Illinois and New York are prime examples of governments whose politicians were and still are willing to let political ambition rule their planning; to let future state administrations take on the ultimate burden of eventual bankruptcy, simply because they will not face up to unsustainable policies. A pending disaster brought on by past concessions to government union demands for pensions that are not economically feasible.

A way out is to raise the retirement age to 67 and later, from much lower levels, made to sweeten deals with influential unions. And to  cap pension cost-of- living payments in salary as well as pensions. Further, government workers will have to contribute more than they do to pension and health plans.

Moreover, the states have to be more realistic when planning for future pension earnings. They are not going to get 8% or so on investments, a figure that’s usually the minimum they count on in their planning. (See the Earl J. Weinreb NewsHole® comments.)