Your State and City Pension Facts

 

Finally there is talk about state and city government pension problems being severe enough to be a major factor how these entities are being rated by credit agencies. The higher the ratings, the lower the cost of running state and local governments.

We know that state and local pensions are underfunded. That is, there are not enough earnings to warrant the amount of pensions promised.

You cannot assume you will earn 8% or more on pension investments when you can safely get only 3% or 4% from those investments. So politicians will have to learn to promise less and even reduce pensions, or invite bankruptcy. The latter will perform the necessary reduction whether the pensioners like it or not, so why not have everyone come to a voluntary decision to get pension matters settled? (See the Earl J. Weinreb NewsHole® comments.)

Avoiding Heavy Bank Regulations to Safeguard Banks

Further to my previous comments about U.S. government regulation of banks with the Dodd-Frank Act of 2010, I have an observation that differs a good deal from much of media comments. (I speak as a former senion bank analyst for a major Wall Street firm.)

The banks have added substantially to capital in recent years, as advised by domestic and international banking regulators. All those strengthening actions will mean nothing if banks are forced to mark (or value) their assets to the market on a daily basis, as was the case during the 2008-09 financial debacle. You cannot price illiquid assets during a financial meltdown. (See the Earl J. Weinreb NewsHole® comments.)

Bank Rating Downgrades Despite Bank Regulations

I mentioned in a previous blog the Dodd-Frank Act of 2010, which was supposed to make banks stronger, among its other panacea provisions, and I noted the credit-rating agency downgrade despite the legislation.

There is yet another way to measure the fact that big banks are not deemed as secure by investors as they were before the Dodd-Frank Act. Simply look at the cost of insuring bank debt.

The cost of insuring $10 million of debt for five years is an excellent indicator that’s available with regard to the credit standing of major banks. And it’s been high, at least as an investors’ perception of that risk.(See the Earl J. Weinreb NewsHole® comments.)

More Bank Regulation -- Still Bank Rating Downgrades

The Dodd-Frank Act of 2010 was supposed to make banks stronger, among its other panacea provisions that have taken thousands of pages of explanation, still not fully complete.

Yet, the large U.S. banks, that Dodd-Frank was supposed to strengthen, apparently are more of a credit risk for investors today than they were two years ago, when without all that fresh governmental regulation. 

They have been sharply downgraded by an independent credit-rating agency. (See the Earl J. Weinreb NewsHole® comments.)

The Odds of Tossing Coins--Heads or Tails

It’s interesting to note observations and tests of folks who are asked to bet or choose heads or tails when tossing coins.

The odds of a coin toss being heads or tails is always 50-50. Yet, when for example, head comes up twice in a row, a large percentage of players will think that the odds will then favor tails as the next result.

True, over a total of as many as 1,000 coin flips, you may not get exactly 500 heads and 500 tails, but you can expect a figure extremely close. Still, many folks continue to believe that over the shorter-term, a following coin-toss will have a bearing on past results. (See the Earl J. Weinreb NewsHole® comments.)

The Volcker Rule's Impractical Regulation

Regulators in Washington have little idea of what they are doing. They are often wrong. And they are not penalized for their errors.

Under the so-called Volcker Rule, banks are not supposed to trade with their own money. That sounds good to politicians because it appears simplistic enough to sell to voters who haven’t a clue about banking.

But funds are intermingled and the extent of supervision depends on size and there are simply too many “ifs” in the picture. Political influence also rears its ugly head. (See the Earl J. Weinreb NewsHole® commentaries.)

Playing The Options Market?

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

Options also protect shares from under-performing. And

to make money when market conditions are extreme.

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

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

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

Then use your own capital. (See the Earl J. Weinreb NewsHole® commentaries.)

Federal Reserve and Treasury Dept Blindness

The role of the Federal Reserve has to do with monetary policy; that of the U.S. Treasury should be fiscal policy.

Both are supposed to be somewhat independent of each other by concept. However, they work hand-in-glove these days by political design.

Both are making basic errors to suit questionable short-term goals that have certain long-term danger.

One mostly hidden error both are guilty of, has to do with keeping reported governmental deficits artificially lower by stealth. In other words, the deficit picture is actually worse than is being shown. The Fed, by selling short-term bonds to hold longer-term bonds. The Treasury, by offering too large a percentage of short-term bonds when the longer-terms are now  so artificially cheap.  

In the future, the Treasury costs to manage the  deficit will therefore have to be far greater and the present deficit cost will prove even more humongous. (See the Earl J. Weinreb NewsHole® comments.

Bank Regulators Don’t Know What They’re Regulating

Amidst all the fanfare about bank regulating by government regulators, there is an assumption being made by the unknowing public that the supposed overseers know what to look for. That the regulators are fully qualified to do their work. That’s an easy assumption to make with all the noise from government that’s echoed by the media. Not true.
As just one example. Government regulators haven’t the foggiest idea of how much volume there exists in the so-called “repos” market which they have erroneously insisted was one of the major causes of the 2008-09 financial meltdown. 

It might be $10 trillion, or more. It cannot be measured, or the types of participation involved determined, so it certainly cannot be controlled. (See the Earl J. Weinreb NewsHole® comments.

You Have Unavoidable Investment Risk

The financial media keeps harping on investment risk and how to avoid it. Every investor wants to eliminate risk, even when foolish enough to buy a lottery ticket where the odds are as slim as being hit by lightning.
But the truth is, every investment and every savings plan has some measure of risk exposure. Placing all your funds in a mattress is perilous because of certain future inflation. There is thus always some measure of uncertainty in every investment,
You do have to consider speculative hazards in the context of family finances, commitments and responsibilities. (See the Earl J. Weinreb NewsHole® comments.)

The Purpose of Balancing Bonds With Stocks

From time to time you hear complaints from financial gurus that it makes little sense to balance stock holdings with bonds when both may move together in the securities markets. The idea is that one should go up when the other goes down as a means of balancing a securities portfolio.

But there is another factor involved if you attempt to time the markets to tell you how much bonds or stocks to hold. The matter of timing can be risky because it often fails. 

Moreover, asset allocation with set percentages of stocks and bonds is a form of market discipline and has value as such. (See the Earl J. Weinreb NewsHole® comments.)

Bank Regulators Quibble Over Banking Regulations

The public has little idea how unsure the regulators are about the rules they want to lay down for the banks they are to regulate. No one has a unqualified standard that makes common sense to all concerned.

What securities, for example, should make up a bank’s net assets? Are a government’s bonds really safe if that government is on the verge of bankruptcy? What should measure a bank’s liquidity during a financial emergency?
And my pet peeve with bank regulators: Allowing accounting such as mark-to-market during the 2008-09 financial meltdown, when daily bank net worth was marked down simply because there was no real market to determine those bank asset values. And securities market short-sellers were thus able to take advantage of the unreal lower values that resulted. (See the Earl J. Weinreb NewsHole® comments.)

Mathematical Financial Models

I would like to review again why vaunted mathematical models have done so poorly in preventing financial meltdowns.

I refer, as just two examples, to the LTCM (1998) and the subprime mortgage (2008) disasters.

The math models behind them failed.

These math models were made up by top researchers, mathematicians, and celebrated “quants,” who figured they had anticipated all cyclic contingencies.

Yet, bond markets eventually fell apart despite their calculations. Afterward, the ones responsible found they should have looked at contingencies even further back than they had.

But I see a bottom line weakness in math models, no matter how much research is done. It happened with the LTCM breakdown. It very definitely is what I feel was a factor in the subprime crisis, which haunts America and the world to this day.

There is a common thread between the two breakdowns which has to do with the fact that we react to problems with panic. That is because our “experts” who come to the rescue are unfortunately from the financial community, attuned only to the short term. They cannot see how caution and avoiding over-zealous, impulsive action can overcome the danger. So they act in haste.

There was a human error in these instances, other than in mathematical calculations. Often that error is enforced by government in the form of strict regulation that was actually a reaction to the very panic that such regulation supposedly had been developed to suppress.

The formulae probably would have worked over the longer term. These are never successful for short-term markets that regulation certainly overlooks. (See the Earl J. Weinreb NewsHole® commentaries.)

Politics Influences Bank Credit

Many smaller banks don’t have sound loans on their books. They are under constant pressure to clean up their financials and add to basic capital.

Politicians in their area are putting pressure on the 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.

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

Solution? Supervise banks gingerly but independently of politics. 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 for. (See the Earl J. Weinreb NewsHole® commentaries.)

Great Wall Street Analytical Advice?

Little independent thought comes from the analytical ranks. What goes for research on Wall Street is primarily corporate reports. Little is done on all-important strategy. Most analysts have no time for careful, insightful thought. 

Moreover, the investment community is incestuous, feeding on itself in a way which foments herd-like and impulsive instincts. 

 

Yet, we constantly hear about expert securities-pickers and newly-found, can’t-miss strategies. You may hear or read of it as if they have just found gold. I have heard of comparable new-strategies for decades and I have investigated them.There are no panaceas (See the Earl J. Weinreb NewsHole® comments.)

Investing Style Changes

Some advisers tell 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 pick and choose what is just right for the times.

That advice will tip you off that the adviser has no specific strategy because he or she is willing to change to suit whatever style may be popular at the time. That’s a form of market timing that doesn’t work and besides, it indicates a lack of required discipline.

My experience has shown that such undisciplined investments with no set strategy tend to not do well. (See the Earl J. Weinreb NewsHole® comments.)

Are TIPS Really a Good Investment?

Financial community gurus recommend TIPS with the first vestige of increasing interest rates. They’re bonds issued by the federal government through a bank, broker, or the Treasury, for five, ten and twenty year maturities. They also can be bought in the form of mutual funds and Exchange Traded Funds (ETFs).

TIPS’ values grow to the extent of inflation. They are not actually part of the investment essential tools I recommend.

For several reasons I have repeatedly explained in the past. Their function can be accomplished better with the use of proper "duration" principles and their implementation. Furthermore, they sell at a premium to value and their inflation advantages are taxable. ( See the Earl J. Weinreb NewsHole® comments.)

Who Actually Own U.S. Treasury Bonds?

When the U.S. has a trade deficit, that is, it buys more from overseas than it sells, it has to settle accounts. Foreigners don’t eat our dollars, but they can buy U.S. Treasury bonds with them. Fortunately, they have taken them though the bonds are not necessarily an investment bargain.

Foreign central banks now own about one-third of Treasury bonds. Only about one-quarter is held by individuals and investing institutions. Much will be employed in the future as margin backing for trading derivatives under new regulatory law.

Unfortunately, those bonds pay very little and keep losing purchasing power. Our problem is, there may be a time when foreigners no longer will accept what is referred to as dollar convertibility, or world recognition as a standard of value.

What keeps it whole? The Euro is in far worse trouble  and the Chinese yuan needs some time in its steady growth. (See the Earl J. Weinreb NewsHole® comments.)

Not All Life Insurance Is the Same

Not all life insurance you can buy is the same. The group type you get from a company program is generally term insurance; that’s the what pays off in death benefits only and has no cash value option.
The usual life insurance available on the market can be whole life (with  cash values included) or term. The cash value-included contracts have higher premium charges, so if protection against premature death of the insured is the primary aim, go for the term variety.
Whole life policies offer relatively small investment returns on the portion of the premium set aside for investment. unless a portion is placed in the general stock market in some fashion (universal or variable life.)
Before you decide on which policy to buy, go over all the ramifications of ownership. Whether you use a commissioned agent or buy direct from the company, remember: whole life policies pay more commissions than do term policies. They will have higher termination costs. Whole life policies do have interesting, useful options, once the contracts are in place, with positive possibilities for the insured that most policyholders are not aware of. (See the Earl J. Weinreb NewsHole® comments.)

The Glass-Steagall Act and Banking's Future?

The Dodd-Frank legislation of 2010 supposedly was enacted, among its hodge-podge of intentions, to prevent big banks from failing.To do so, it helped impose rules on banks against trading for their own accounts; so-called Volcker rules, after Paul Volcker, a former Chairman of the Federal Reserve.

The Glass-Steagall Act, preventing commercial banks from being in the investment banking business, had been around under the Banking Act of 1934 until it was terminated during the Clinton administration.

A similar law could probably have been passed, without all the talk that casts gloom over industry and finance and sees to it that we remain in a deep recession. Right now, commercial banks are spinning off trading activities for their own accounts but it’s difficult to distinguish activities done on behalf of clients.

The upshot? Confusion and bigger banks than ever because Dodd-Frank is murder on smaller banks. The bigger than ever banks will continue to be too big to fail. (See the Earl J. Weinreb NewsHole® commentaries.)

The World’s Central Bank Policy and Small Investors

The U.S. Federal Reserve has seen to it that its monetary policy has the cost of money within the banking system down to zero. And liquidity is the number one priority. The rest of the world’s central banks are on the same cheap money craze.
The bottom line for the U.S. and world economies: It’s hard to call the ongoing central bank objectives very successful.
But one fact is certain. The small U.S. investor is getting the short end of the stick. If he wants minimal risk, he is going to earn 1% or less for a reasonably, minimal-risk investment. This is well below the inflation rate reported by the U.S. government and far, far below the actual rate of inflation that’s never officially disclosed, except at the supermarket checkout counters.
The stock market is always iffy in a stagnating, inflation-prone atmosphere. More sophisticated investors can look to the corporate bond market, provided they are familiar with “duration” principles. (See the Earl J. Weinreb NewsHole® comments.)

Differing Economist Opinions

You may wonder how economists can voice opinions for two diametrically opposed political parties when they look at the same numbers for politicized arguments.
There are two reasons why this happens. One is that a broad classification can be made of Keynesian or government pump-primer economists, and those opposed to Keynesian principles.
The other reason is that these same economists may overlook certain stated numbers as being unimportant when it doesn’t suit their purpose.They may emphasize data that is actually meaningless.
If you have an economic theory  and it  hasn’t worked for fifty/sixty years, though employed around the world, as is the case with Keynesian theory, there will be omissions and commissions you may make to hold your politically-sponsored job. (See the Earl J. Weinreb NewsHole® comments.)

Learning Financial Facts

The reading public has had its financial basics poorly taught by the vast majority of book experts, in addition to Wall Street insiders and often inept financial media.

Everyone’s always looking for confirmation of investment facts they can use to advantage. But unfortunately with what I find has become dubious input.

And so the public continues to buy into pap. Garbage often sells like proverbial hot cakes. Gobbled up by the same unwary and gullible folks who believe gibberish and fantasy thrown at them every day. ( See the Earl J. Weinreb NewsHole® comments.)

Investment “Ulysses Contracts” For Needed Discipline

Shlomo Benartzi, a household behavioral-finance specialist and professor at the UCLA, Anderson School of Management has used the term “Ulysses Contract.” as a means of keeping investors focused.

As you may have learned, the Ulysses of ancient Greek literature had resisted the Sirens’ song to avoid shipwreck, by having himself tied to his ship. In the same way, individuals could be under some form of voluntary contract with their advisers, not to act unwisely under outside pressure, whenever volatile and erratic events occur.

I have been a researcher and student of the importance of investing discipline for several decades. I have found that discipline is far more essential to investment success than strategy itself. I have investigated about 1,600 strategies, along with their pros and cons. (See the Earl J. Weinreb NewsHole® comments.)

Beware Of Unsolicited Security Newsletter Recommendations

You may get a security recommended to you in the mail from time to time, as part of a newsletter offering, advising you of a company stock that’s “hot” along with the reasons why. You may get pages of data on reasons why what you see may be another Google or Apple or whatever stock is hot at the time.
Be careful and look for fine print somewhere in the material.
What you see is most likely a promotion piece. The outfit who has placed the release in the mail may well be getting paid for the report, in the form of cash and stock or stock options. (See the Earl J. Weinreb NewsHole® comments.)

Beware of Wall Street’s “Alternative” Investments.

Ever so often you read or hear about so-called alternative investments from the sharp-pencil boys on Wall Street. This occurs when investors’ interests begin to flag with the plain vanilla types they may understand.

The problem is that the alternates are usually too sophisticated for most investors and are generally too risky.They do generate interest and thus produce articles in the media and more business transactions for the Wall Street folks. (See the Earl J. Weinreb NewsHole® comments.)

The Gold Ownership Dilemma

As with other financial investments, folks learn from experience, often events that are costly to them.

Currently, gold investors are learning that the price of the commodity can drop even when there is inflation that promises to become rampant, and the U.S. dollar buys less at home. Even when the European economies are failing, and the American system is closely following a similar disastrous budget-deficit path.

Obviously, all those reasons for buying gold have not panned out for American investors since early 2012. Unless the actually clueless Federal Reserve goes on another useless loose money tear.

The truth is, gold has never been an inflation hedge, only a bulwark against a cheapening dollar. The latter can get stronger, however, compared to other currencies. Such as the Euro. Or the Indian Rupee. (India is a big factor in gold purchases.) At which time the dollar can get stronger and gold cheaper.
(See the Earl J. Weinreb NewsHole® comments.)

Government Pension Facts of Life

In the different states and cities of the U.S. the government unions have been able to get pensions and fringe benefits during good economic times at the expense of taxpayers, which the latter were not fully aware of.

When times got bad, the taxpayers soon learned government workers were being paid as much as twice they themselves were getting from pensions and benefits. Worse, the payments were unsustainable, despite ever-higher taxpayer loads.

One example why the burden is onerous: In Illinois, teachers who contribute nothing to their pensions can retire at age 60, at 65% of pay. And their retirement check is increased 3% a year for inflation.  Not bad when secure investments these days earn less than 3% to 4% a year, while such pensions assume earnings of 8% or so.

Think: $1 million at 4% yields only $40,000 income a year. How many millions have to be contributed by taxpayers to meet the capital and income shortages to meet annual pensions for the life of each teacher? (See the Earl J. Weinreb NewsHole® comments.)

Smarter Stock Brokers

There’s pressure around to find out the exam marks of stock brokers you deal with. But why are folks so worried about the subject?

Investors shouldn’t be relying on stock brokers for advice anyway. The education they get is essentially on back office procedure and not securities deep analysis. And even if it were, info would be useless. 

For instance, most more experienced fund managers do a bad job compared to indexed funds or ETFs.(See the Earl J. Weinreb NewsHole® comments.)

SEC Regulations and IPO Disclosures

We know when uninformed investors speculate with the purchase of new securities issues, they assume it’s all a one-way street to quick riches.

And when proven wrong, they got the wrong information or were lied to; anything but the fact they never bothered to get the facts beforehand.

The company prospectus as a rule does a good job in its SEC filing, describing the risks involved. However, misinformed speculators and the plaintiff lawyers seeking to profit, usually fulminate about insufficient or poor information or disclosure. Or they claim insiders have gotten information that retail customers did not receive.

The fact is, the SEC itself is very strict about the way a company and its underwriters can make disclosures during the period leading to the IPO. What is legal in the eyes of the SEC may be an uneven playing field in the eyes of the public.

Moreover, thanks to the efforts of a former attorney general of New York State, brokers and their analysts are now prevented from making comments on soon-to-be-issued securities. (See the Earl J. Weinreb NewsHole® comments.)