Psychological Investing Moods and Sentiments

Moods are relatively long-lasting emotions. Sentiments are shorter-term.

They both can affect how stock market cycles react and can precipitate booms and busts.

That’s because cycles can easily grow into fully grown varieties. It’s the way minor bear markets start and deeper recessions fester. Given enough impetus and human error, financial meltdowns will eventually occur, as I have outlined in my previous reports.

It’s the reason why astute, wise politicians seeking to prevent a deep recession, never make it a practice to single out industry as scapegoats when they want the economy to recover and produce jobs. (See the Earl J. Weinreb NewsHole® comments.)

Keeping Banks Safer and Mark-to-Market Bookkeeping, Part 2

I mentioned in an earlier blog how bank and investment company net worth figures had been daily devalued to so-called “toxic” levels. Those levels were actually a fiction, brought on by an illiquid market, where true fair value was impossible to determine.

There were defenders on Wall Street for this sham. Some insisted that rules were rules to be defended in emergencies as if they were cast in stone. The rules then became a boon for Wall Street short sellers and the avalanche of constant traders that make up the financial community, folks to which the media give far too much attention.

Ever-lower values were thereby being created for securities with little or no true market with which to establish real market values. And it produced volatility that made for tremendous trading profits among short-term traders who predominate the financial community.(See the Earl J. Weinreb NewsHole® comments.)

Keeping Banks Safe Despite “Mark-to-Market” Bookkeeping

U. S. financial breakdowns usually have to do with governmental “experts” in the past reacting to problems in a panic mode. I’m referring to the Great Depression and our current Great Recession.

The rescuers had come from the financial community, attuned only to the short term, and thus could not see how caution and avoiding panic would overcome problems. Nor did they truly envision the danger of acting in haste.

Example: The value of debt obligations, CDOs. or their derivatives, were “marked-to-market,” under so-called fair value accounting. The latter is part of the Generally Accepted Accounting Principles (GAAP) rule in place since the 1990s.

But that rule could have and should have been suspended for the emergency. CDOs were not some other product that accountants usually measure on balance sheets.

As a result, bank and investment company net worth figures were daily being devalued to so-called “toxic” levels. Those levels were actually a fiction, brought on by an illiquid market, where true fair value was impossible to determine. The rescuers were blinded by their own personal and business backgrounds.

The unintended consequences are slowly but surely unfolding day by day.

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

Update on Dodd-Frank Problems

You have heard how complicated, arcane deals undermined global finances? Because those “greedy” bankers, intent on “obscene” profit-making schemes used them to the detriment of all.

After lengthy investigations were made, and our politicians in Washington completed their pious speeches, the media contributed their remarks.

And then Congress made its conclusions. Some insights were finally gained on how derivatives really work and their purpose. The upshot of all the nattering? Draconian regulation in the form of the Dodd-Frank Act of 2010.

This piece of legislation is still a work in progress so the unintended consequences are slowly but surely unfolding day by day.

 I comment on them as they periodically occur. (See the Earl J. Weinreb NewsHole® comments.)

Trading ETFs

ETFs are different than mutual funds, in that they are traded on exchanges; they are indexes that are not managed by advisers.

From time to time, their securities may be lent for purposes of short selling, It’s a source of added income. The stock lending profits of such ETF funds can be substantial.

Do earnings go back to shareholders of the ETF, or to its managers?

In some funds, almost all go to the shareholders, while as little as half may be returned to other holders.

You should check your ETF investments, to see how your managers treat these earnings.(See the Earl J. Weinreb NewsHole® comments.)

Federal Reserve Independence is Lost

Central banks were set up for independent banking functions, on the premise it’s best for a country to keep its financial system from political influences.

Politicians have always had a tendency to produce financial and economic pressure to change any banking independence during stressful economic times.

How are major central banks doing with regard to their current national financial crises?

The Bank of England had been relatively independent but rather involved with its government bond market. The Bank of Japan had been somewhat independent since 1998 but it often has been politically directed.

Congress, which always loosely supervised the Fed now wants audits and more disclosure, which would exert pressure.

However, the Dodd-Frank Act now has the Fed go more deeply into the American economy than before, and the present Fed Chairrnan, Ben Bernanke, has had a major tendency to lean to administration policy. (See the Earl J. Weinreb NewsHole® comments.)

Psychological Investing Behavior

Research on human investment behavior indicates how personal psychology has  to do with the way securities markets operate.

I have mentioned in the past my studies and evaluations of over 1,600 investment strategies, and their pros and cons. In addition, I have always said there is no one that I have found to be better than any other. What makes for investment success is strict discipline of strategy use. 

Psychology controls discipline. Furthermore, discipline can be mastered, with proper personalized control over those psychological hazards.

I would suggest investors look at the work done by Kahneman and Tversky on investing behavior. It will provide a glimpse of how investors think, often to their disadvantage. (See the Earl J. Weinreb NewsHole® comments.)

Derivatives Necessarily Potential Economic Disasters?

Remember the hullabaloo about securities derivatives, such as interest rate swaps and credit default swaps? And their connection with subprime mortgages and collalteralized debt obligations? With their role in the financial meltdown?

The left rails against derivatives, that CDS (credit default swaps) caused the financial meltdown in the mortgage market.. But there was a much larger market in interest rate swaps, and there was no problem with fixed income assets.

And there was an even larger market In foreign exchange swaps, than in CDS. Moreover, there was no problem in the currency markets.

So derivatives were not the main cause of the financial meltdown. AIG lost $39B on derivatives but also $24B on mortgages with no derivatives. The counter parties on derivatives were paid off 100 cents on the dollar.

After all, government excesses, such as housing and poor monetary policy, produced economic problems, not bankers who become bystanders by necessity and happenstance. (See the Earl J. Weinreb NewsHole® comments.)

Setting Precious Metals Prices

There has been a big hullabaloo about alleged contriving of pricing of world-wide interest rates in the case of the Libor rate. I have discussed this fully in the past.

But the Libor interest rates are relatively hard to manipulate because of the way they are composed from many sources and are averaged with extremes omitted.
There are other important pricings, such as gold and precious metals, which must be arbitrarily set; that appears to be perfectly acceptable to the financial community.

The so-called London Gold Fix is set up by five members of the London Gold Pool twice a day. It’s a relatively thinner market where the heavy movers can be big countries such as China and India who deal heavily in gold.

Other precious metals markets are even thinner.(See the Earl J. Weinreb NewsHole® comments.)

Greedy Bankers? Really?

Listening to comments and opinions of those from all walks of life, most folks know little about finance and banking.

I place politicians on the left at the top of the list among this group of financially ignorant. If they knew more about finance, they would not be intellectually on the left.

So, it is entirely understandable that bashing bankers is always fashionable, especially during economic recessions. Finding scapegoats is handy. It makes up for any guilt politicians have in helping foment economic distress. (See the Earl J. Weinreb NewsHole® comments.).

Evaluating Gold as an Investment

Let me repeat again, and I will continue to do so: Never, never invest on advice from advertisements.

As for gold investing, there are constant ads telling you how the gold price advanced from about $250 a troy ounce to over $1,900 in 2011. Sounds great. But for current investors, that unusual boost means little. In fact, for 12 months, during 2012, the price had dropped to about $1,600. Investors who got in 12 months earlier experienced a $300 an ounce loss, at a time when other “paper” investments did far, far better.

The reasons for buying or not buying gold are not as simple as they are noted in the ads. (See the Earl J. Weinreb NewsHole® comments.)

The Psychology of the Stock Market

 I have written expansively on the psychology of the stock market; its moods and sentiments of varying lengths. They overcome rational evaluation of the markets too often to be overlooked.

In other words, inherent values of companies or bond issues may mean little if the  market psychology at the time is poor.

I have seen research of the effects of such psychological influences. I derived ongoing observations from my investigations, that discipline is an important means of overcoming these adverse psychological market effects.

In short: Despite all outside influences, you should buy securities with one distinct strategy and you then sell when that strategy’s goals are no longer applicable. (See the Earl J. Weinreb NewsHole® comments.)

The Poor Japanese Economy

The Japanese Nikkei Stock Average is about one quarter of its value at the end of1989; it’s still sharply off that peak..

Yes we know about Hitachi and Nissin Foods but the Japanese economy has been flat and practically dormant for over the past twenty-odd years. This has been the case despite huge Japanese government spending. Japanese public debt is over 200% of GDP.

The problem for the U.S. is that it has been on a wild tear to “stimulate” the American economy, much the same way the Japanese attempted two decades ago, to spend their way to prosperity. Which they have failed to do.

Remember: The Japanese do not have a global reserve currency to protect as the U.S. does, (See the Earl J. Weinreb NewsHole® comments.).

Media Portfolio Advice is Usually Poor

Giving advice on investment portfolios without regard to a client’s age, family condition, and needs, is ridiculous. Everyone has a different investing time horizon and current and future income needs.

Those factors affect the choice and percentages of securities.  And where bonds are chosen, the “duration” of the bonds and the practicality of low-cost fund automatic reinvestment of earnings are paramount. (See the Earl J. Weinreb NewsHole® comments.)

Reducing Your Credit Card Debt

When you hear a credit card balance reduction ad, two facts will probably never be mentioned, and will mislead you about that credit reduction purpose.

You pay income tax on any amount of debt you reduce. Therefore, cutting that balance is not as simple as it may appear. Reduce your balance by $4,000 and it’s as if you had a taxable gain.

  Also, you hurt your credit standing by resorting to credit reduction. This may eventually cost you.

And, how many who have so much credit card debt they have to resort to drastic measures, are actually permanently getting out of debt? You can be sure their spending habits will be getting them into the same situation again in a few years. (See the Earl J. Weinreb NewsHole® comments.)

Unnecessary 12b-1 Mutual Fund Marketing Fees

The 12b-1 mutual fund fees are still around. These were originally permitted by the SEC to allow mutual funds to market their product to new investors, so are actually a sales load that adds up over the years. Fortunately, most funds no longer use them.

The 12b-1 charges originally were used to pay fees for the distribution of funds by brokers. But they still persist, even when brokers are not involved.

My suggestion: Avoid any mutual funds that charge them. Those fees become significant deductions from your accumulated holding values over the years.

(See the Earl J. Weinreb NewsHole® comments.

High Frequency Trading in the News

We have been hearing much about the glitches with high frequency trading and their problems. There are assets to be gleaned from this subject.

Among costs, added to the "expense ratios" of mutual fund investors, is the bid-ask spread. A wide spread means the fund must pay significantly more to acquire a stock than it could sell it for.

High- frequency trading has reduced this cost by narrowing the spreads. Generally, wide spreads are seen as inefficiency, with buyers and sellers having difficulty agreeing on a price that accurately reflects what is known about a stock. Narrow spreads mean the market is working better.

Another transaction cost arises from the fact that a fund's huge trades can drive prices up or down by tipping the balance of supply and demand. High-frequency trading has helped reduce this "market-impact" cost by making it easier to break big trades into many little ones while still conducting them very quickly,

Trading costs from spreads and market impact have been cut in half over the past decade, From 0.5% of the trade amount for big company stocks to 0.25%. For small stocks, trading costs have dropped from 1% to 0.5%.

Therefore, high-frequency trading isn’t always the villain the financial media purports it to be. (See the Earl J. Weinreb NewsHole® commentaries.

Art for Small Collectors

I have always suggested original prints in limited editions for small collectors starting out as buyers of worthwhile art.

The art process ought to be original such as lithography and be supervised by the artist. It’s absolutely essential that the work be in limited quantities, and if done in modern times, be signed and numbered by the artist. I personally look for editions of no more than 50 copies in all.

I like conceptional art because it requires  thought and ideas, as befits any attempt at creating a work of art. (See the Earl J. Weinreb NewsHole® comments.)

Crony Capitalism, Mussolini and Today’s Postmodern “Truth”

I often give definitions of crony or state capitalism and advise folks to look into the career of Benito Mussolini, to see how he applied the principle in fascist Italy of the 1930s and 1940s.

However, many today will look at economic/political “isms” and reinterpret the significance of their observation. They look with postmodern-style “relative truth” and interpretation, which garbles historical fact in order to confirm their own political slants. 

They’re perfectly happy confirming what they continue to believe is acceptable, as it had been in the past U.S. system. (See the Earl J. Weinreb NewsHole® comments.)

Frequent Credit Card Balance Transfers

When you make too many credit card transfers it appears you may be applying for fresh credit each time. That hurts your credit card score. Therefore, when you get offers from credit card companies to transfer your current outstanding balance to another card account because of lower charges,think it over carefully. You may be hurting your credit score, should you take the bait. (See the Earl J. Weinreb NewsHole® commentaries.)

Currency Transactions With Overseas Investing

Investing overseas is not only for investment diversification, the benefits of growth opportunities are to be gained globally.

Currency moves are always involved. Will the dollar be getting stronger or weaker? If the dollar gets weaker, such investments become more valuable as translated currency will then work in favor of the U.S. investor.

However, should the dollar get stronger, the reverse will become true. The investments become less valuable when translated into dollars. (See the Earl J. Weinreb NewsHole® commentaries.)

Over-extended Credit Cards

It may sometimes be necessary to take down the maximum amount of credit your card permits, but it does not help your credit score.

Do so only in an emergency. It’s nice to know that your credit permits you spending liberties, but don’t let that take you to extreme spending binges.

Of course, if you don’t use your card at all, or only occasionally, you may be dropped or the maximum available credit line may be reduced. Credit card companies are getting more sensitive about account activity. So, use credit cards intelligently. (See the Earl J. Weinreb NewsHole® commentaries.)

Securities and Exchange Commission's Dubious Efforts

The Securities and Exchange Commission has now ruled,

if your company’s common stock is worth more than $75 million dollars, shareholders are allowed to vote once every three years on whether they like or dislike top management pay scales. But the company does not have to act on the voting results.

With all the problems the SEC has to face today, this has to be what they deem a big, worthwhile endeavor, worth their regulatory efforts.

Question: how many stockholders care? Few.

And Is this problem a valid buy and sell strategy for investors to follow? No.

(See the Earl J. Weinreb NewsHole® commentaries.

The Small Investor’s Fear of the Stock Market

Extremely fast computers have recently had glitches in the electronic handling of the stock market. The media’s handling of the problem has scared small investors even more than they have the pros, who now make up between 80% to 85% of the market.

As a result the small investor has been leaving the market. But small, average investors should not be in the market anyway. That is, where they buy and sell individual securities. I have written extensively on the subject.

Non-professional investors  have always been better off with low-cost, indexed mutual funds and ETFs, which adequately handle the fast computer markets. (See the Earl J. Weinreb NewsHole® comments.)

The Use of Daily Money Managers

Readers of my comments are fully aware of my consistent stand against the use of investment managers for investment tasks that can be easily mastered by the average Main Street investor.
The chief reason for this avoidance is the enormous bottom-line expense of the advisory service. That 1½% or so fee will work out to 25%, 30% and even more of annual income or returns.
However, some individuals who suffer poor health may not be able to attend to personal financial matters. This is a basic family matter that is only indirectly or slightly related to serious investing.
In such instances, family members are usually of help. Where such aid is available, daily money managers are on hand. But caution: They are not cheap.
Remember, do not use them as expensive investment advisers.
(See the Earl J. Weinreb NewsHole® comments.)

The Media and Politicians Forget Economic Cycle Lessons

Let me repeat a fact that the media generally fails to acknowledge for its own reasons and why politicians flub in order to fool the voting public.
Go all the way back to the inception of these United States: The sharper a recession, the faster and more energetic the rebound.
That was even true after the 1929 stock market crash and its economic effects. The depression took hold with New Deal taxation and regulation, despite the spending. Government meddling is hurting the same way now. (Look it up!)  (See the Earl J. Weinreb NewsHole® comments.)

Mutual Funds --With Management or With Indexes?

Experience and research show that the so-called “best” managed mutual funds in any year are achieved mostly by chance.

In any category of mutual funds, only a small percentage of active managers beat the performance of indexes or unmanaged funds. Furthermore, those who have distinguished performance in any one year, generally cannot repeat their performance the next, or on any consistent basis.

Few managers can outperform indexes over a few years time, and if they do, it is pure luck, not ability. (See the Earl J. Weinreb NewsHole® commentaries.

Lack of Financial Stimulus Success

Interest rates normally adjust to supply and demand forces and thereby adjust economic events. However, whenever the government imposes stimulus proposals to raise credit and lift the economy, the system is disturbed and thus distorted.

This unbalances the economy and does the exact opposite of what has been intended. It’s a lesson politicians wantonly overlook to suit their election goals.

Ludwig von Mises wrote fully about the phenomenon in the 1920s but the economist in fashion during the 1930s recession was, unfortunately, John Maynard Keynes. He became the political icon of that recovery movement.

The Keynes government pump-priming thesis used prolonged stimuli that actually deepened and helped induce the Great Depression. Nevertheless, it is the premise of failed current policy. (See the Earl J. Weinreb NewsHole® commentaries.

Expect to See More Wall Street Inside Trading Scandals

It’s tough to predict the securities markets or what is going to happen on Wall Street. But you can be sure there will be more inside trading prosecutions,whether the accused or innocent or guilty.

Because the law is so vague as to what constitutes insider information. Moreover, judges and juries are equally in the dark. I have written fully on the subject.

But another reason is the use of what is called “shadow” or “specialist research” by brokers, compared to general research. This is for specific large clients.

The problem, as I see it, is that the information may get too close to the companies involved. Remember: Lots of corporate data is proprietary and restricted for dissemination by corporate employees for outsiders seeking information. (See the Earl J. Weinreb NewsHole® comments.)

More Bank Regulators Are Needed?

The Federal Reserve has well over 1,800 operatives who work on the premises, while the Comptroller of the Currency has over 500. They have been on the job all the time the banks have been having heavy losses. Yet, the politicians complain we need bank regulation. What have the regulators been doing all along?

Remember too, that the major Ponzi artists we hear about were given passing grades by SEC audits. Obviously, regulation is not the panacea we hear about. (See the Earl J. Weinreb NewsHole® comments.)

Market Timing Is a Fool’s Tactic

Stock in-and-out traders always feel they can get out of stocks at highs and in at lows because of their gut feelings or expertise.

There are many reasons why they’re wrong and statistics attest to it. One example is how companies who buy back their own stock in the open market generally do a poor job at the procedure, buying at highs. And they have the benefit of genuine, legal inside information. (See the Earl J. Weinreb NewsHole® comments.)