Proprietary Trading Creates Bank Risk?

Paul Volker, a former head of the Federal Reserve Bank and now advisor to president Obama, has wanted to restrict proprietary trading among banks or bank holding companies. But when pressed he has had no idea as to what really describes proprietary trading activity.

There have already been regulatory restraint on the activity, much of which have been ridden off by banks to other entities. However, there is no real lessoning of risk as a result. It's difficult to delineate trading by banks for accounts and for themselves in many instances, as Mr, Volker knows from his experience.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

The Psychology For Regulations

Debacles happen when you get an over-regulated attempt to spend yourself out of a financial tangle while psychologically pushing citizens and business into an ever-deepening recessionary funk.

I have felt that most regulators and politicians fail to understand psychology that drives the way people affect everyday economics.

I have been asked: What would you do if you could, in practical terms, to get out of a recession?

Simple. Cut taxes permanently and watch how that creates jobs and spending because of the psychological uplift. Clear the doubts for business and the consumer, and natural instincts will resolve recessions before they fester into depressions. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Recap: Our Man-Made Financial Meltdown:

I frequently comment on aspects of the 2008/2009 financial meltdown, and how the severity of our Great Recession could have been prevented, had there been a “hands-off” attitude by government. Instead, we got heavy-handed, ultra-expensive attempts.

Those of you who have seen my Earl J. Weinreb Newshole® info will have insight on much of the situation.

I bring this up once more because the Federal Reserve’s easy money policy,

The Fed has allowed itself to become a tool of administration fiscal policy and shows little independent monetary policy for its intended purpose. It helps guarantee future financial upheaval for this country unless an effort is made politically to change matters. We cannot any  longer depend on the Fed. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Financial Reforms in Doubt?

 The government has given more power to the Federal Reserve but the agency has had perhaps too much power up to now. The big problem is the possibility of any banking institution failing and then dragging down another.

Unfortunately, the regulators have historically never been good at this, and I doubt they ever will. The 2010 Dodd-Frank legislation has merely made it more of a debacle for big banks to fail.

That spells out more senseless bailouts.Want more information? (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Regulating Pay of Top Execs

You receive a dependency that is difficult to get rid of when you accept government aid. The result becomes worse than an addiction. Even when you want to repay the debt, Uncle Sam makes it hard to comply.

For some of the larger banks who accepted funds from the U.S. the result was impractical and actually stupid.

Apart from the fact the bank management is controlled within a government straitjacket (a characteristic of a fascistic and not a capitalistic free government), banks who have accepted aid are restricted in how they pay bonuses and compensation to top executives. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Seeking An MBA or Equivalent?

A suggestion for students seeking an MBA .

You probably have seen Earl J. Weinreb comments on this subject many times in the past. They’re the result of my observing the successes, failures and foibles I have noted on Wall Street.

One has to do with the study of failures of the many mathematical models that have been devised to reduce risk. The models have not cut investment risk that is their primary objective.

I am not talking about the well-discussed Black Swan concept of risk that happens once every fifty years or so. Concerning events such as the recent financial meltdown. But they regard the constant use of financial models which don’t seem to work as they are intended to do.

The truth is, some complex models by MBAs work but they are destined to eventually fail, no matter the brain-power and effort applied. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Regulators Often Do a Poor Job

The current deep financial downturn, like all recessions, is started when business people and consumers get pessimistic and stop spending or buying.

The twelve regional Fed banks all have regulatory duties. But within them there are often disputes as to what exactly is to be done.

Many supervisors and regulators within the system have different functions, with varying answers from their observations. Always, a human element governs what they feel must be accomplished.

Errors inevitably turn up with individual decisions and action that would not happen when free markets determine outcome.. This fact has been established from years of experience.

Remember what I have said in the past about how better predictability futures markets anticipate events, as opposed to that of a small group of experts.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Investing With Bank Stock Advice

Bank analysts are never privy to inside banking operations. Example: complicated derivative portfolio information, or “repo” positions. In fact, they know so little of the plain-vanilla type; if they were, they could not understand the inherent complexities.

Yet every negative word analysts utter can doom the soundest financial institution, to the point where that organization sinks towards insolvency.

Rumors are often circulated, fomented by bank analysts who cannot possibly see a bank’s asset portfolio. That makes for self-fulfilling events. Especially when bank holdings must then be priced, "marked-to-market."

Fear-frenzy takes hold as analysts persist in this self-fulfilling, bearish sentiment.

There was a time when bank stocks were bought on the basis of book value, which can now be suspect, and dividends, which these days have been pressured by governmental regulation and oversight.

Then the question arises of how secure is each bank’s capital, in our fragile economy?

Another reason why I believe in index funds, even for banking equities. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Financial Services Consumers Can Be Smarter

  You can easily be a smarter financial services consumer without government assistance.

Always look at the fine print. It’s basic and not complicated when you bother to read carefully.

Another tip is remembering that there is no such thing as a free lunch. You pay for what you get in one way or another.

Figure out what you are getting. Consider comparable costs and what you pay for, in return for something you could receive that’s better. Take time and use a calculator when necessary. Most often you don’t have to be a math whiz.

Anything the government gives you is your money, either in the form of direct or hidden taxes, or worthless currency down the road. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Life insurance is a Questionable Investment

This insurance combines life protection and savings at a fixed return. It’s an expensive form of both. Sales pitches about tax deferred benefits behind whole life insurance can be misleading.

Other secure investment options are available. Whole life is not a true investment vehicle, despite any sales talk. Were you to buy term insurance separately for protection, and invest the difference in a secure, low-cost, income-based mutual fund, where dividends are reinvested, you would earn far better returns. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Consumer Finance Protection

The Administration feels a new behavioral concept can provide the consumer with what is best when shopping for complex financial products.

Especially when looking for mortgages. Or whether to choose a prepayment option despite penalties. Or the question of which down payment to place on mortgages.

So the Administration has been thinking of simplified versions of financial choices for consumers, that takes the burden away. It takes the term plain-vanilla to a new level, by suggesting a preferred option for all.

I can see having all choices spelled out on two sheets of paper, in large print and in plain English. The problem, however, is that such a standard option would soon become the only one available.

You will then get what only the government thinks is good for you.

You can be certain that the threat of a lawsuit from an enterprising lawyer would drive away any other product from a financial institution. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Cheap Life Insurance For Protection, Not Investment

Term insurance is the cheapest form of protection per premium dollar, as it contains no savings function.

As for the cheapest protection you can get, policies today can be quickly-acquired, over the internet or by phone. No physicals are often required for plans up to certain dollar limits. How do you get the best protection for your money?

Even though screening is currently computerized, bigger-dollar plans with no mandatory medical screening may be more expensive. If you’re healthy, why not pay less with more scrutiny for your coverage?

Shop around also for pricing on comparable terms; direct-writing companies are generally cheaper. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Use Bonds To Fight Inflation?

 

Most “experts” automatically tell you to avoid bonds when there’s a threat of inflation.

They are wrong because they never get into the whole story, owing to ignorance or indifference. That whole story involves discussion of duration principles and how long the bonds are to be held.

Paradoxically, inflation could be an opportunity for potential purchases of low-cost bond mutual funds, or ETFs, with low duration, and with dividends that are periodically reinvested.

I have commented a good deal about bonds and inflation in the past and will in the future. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Only Average Future Investment Returns?

 Investors are lulled into complacency about “average” returns. They hear what securities have earned on average going back years, and they then project earnings figures into the future.

These prospective averages are wrong. Indexes on which they are based are skewed. In years past, companies that failed may not have been included in statistics that are now used; therefore past results are overly positive.

In addition, there are steep investment-experience cycles which affect average results at any time. You may need to cash in funds just when your portfolio is in a down trend, or has recently been in one, and hasn’t had time to recover.

Thus, whenever you hear securities will bring you average returns, think again about what that number really is. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Public Pension Plan Fantasies

The assumed rate of return on pension funds of almost 60% of unionized American public workers is at 8.0%. This is currently almost impossible to get within any investment portfolio. Still their fund managers undertake fiduciary responsibility in the face of budget deficits. Moreover, future economic growth is unlikely, so the assumed return figure is even more unattainable.

Yet, the fantasy continues; the public employee budget fiasco goes on. In fact, almost 20% of such public pensions blindly plan on average annual earnings well over 8% per year.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Securities Market Questions

Investing in the securities market is never simple. But you can simplify the process somewhat by specifying your aims. Financial media reports and suggestions often fail to make this point.

Are your goals short term or not? Are you taking proper consideration of age? What are your feelings about risks?

Consider the economy. We have been in more than an ordinary recession. It may not bounce back for several years.

And inflation will be a distinct prospect, probably quite heavily, within a couple of years. Economic stagnation and high inflation could stifle corporate profits and stock pricing. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Brokers' Responsibilities

Be careful that some of the brokerage transactions you make are simple. In many instances, the broker may be acting as a principal, selling you a security from his inventory, or perhaps buying the security into his inventory. 

 

That could represent a very short period, an in-and-out transaction with another party. Nevertheless, the broker is technically not a broker but a dealer.

That is legal provided his markup is reasonable. In many instances a 5% markup is not acceptable when the security is traded in a liquid market.

The Financial Industry Regulatory Authority or FINRA has been attempting to fine tune the activity. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Bankrupt Public-Employee Retirement Funds

State and local public employee retirement programs have unfunded liabilities of about one Trillion dollars. according to Pew Center on the States. Despite the current publicity the subject gets, most folks have no concept of the real problem, nor the solution.

Unlike the federal government in Washington, states and local entities cannot print money. They cannot continue to keep borrowing either.

Talk of fed-enabling legislation for states to go bankrupt is not a practical solution. The public employees’ unions will not like the losses and shaving bond prices will starve the source of future financing, as well as decimate smaller savers in those bonds.

But there is no reason to panic if public employee pensions are negotiated to realistic levels, along with state and local budgets.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Odds of Financial Success

Most of us are not familiar with the odds of finance and it affects our outlook on financial matters.
 

Example: Flip 100 coins, heads or tails; there is a 75% chance of a streak of 6 or more straight guesses . And a 10% chance of a streak of 10 or more

Look what this does when we observe analysts and securities’ markets. You hear comments after market closings about events which really reflect randomness. But the comments attribute specific causes that occur only in the minds of the commentators. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Inexpert Government “Experts”

An idea of how unsure and inexpert the “experts” can be: The Federal Reserve Bank is still on its path of buying $ billions of government bonds. This inflates the economy by, in effect, printing fresh currency. The Fed intention is to rouse the economy, at which it's failing.

But at the same time, the Fed is allowing some big banks to raise their dividends, which soaks up capital and their lending funds. The Fed, after all, wants to rouse the unemployment problem.

While some banks, instead, use excess cash to buy up shares. All this adds to a mix which makes the Fed’s actions very imprecise, to go along with the rest of their their seat-of-the-pants decisions. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Retirement Planning Fantasies

Retirement planners use dubious assumed models. They take into account investments, forms of diversification, along with outlay plans, and a number of probabilities. One may be Monte Carlo simulation, a well-known model used by investment advisers for this purpose.

But such investment planning fails to work for many reasons.

A major financial market meltdown is one. And other unforeseen events happen; illness, a job loss, business failure, unexpected educational expenses. The result of a lifetime of retirement planning is often failure.

The solution is to be realistic. Be prepared to work at least part-time, past what you had originally thought would have been retirement age. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Trading Currency Difficulties

When trading the dollar overseas, a variety of international problems can make that currency stronger, situations that also affect the value of the Euro and foreign currencies in different ways.

And then other factors come into play. Such as rising oil and energy prices, with their effect on the American economy. The impact on the dollar can be opposite what it would ordinarily have been with respect to the other currencies.

We import oil. Were we producing our own energy, our dollar would be much stronger than it internationally is. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Understand Economics Opinions

When you listen to economic opinion find out what the politics of the economists are before taking their advice.

Political slants color their opinions. Economics is not a true science, so comments can diverge along those lines.

Look into track records; many of those lauded by the media have been consistently wrong for decades or merely misinterpreted. John Maynard Keynes' thoughts are an example.

Also, do not be impressed by awards, especially Nobel prizes, as some have been awarded primarily on the basis of politics.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Over-Regulation With Dodd-Frank

Not a day passes without a new adverse revelation about the Dodd-Frank Act, which had been cooked up by Congress to cure everything that hinted at financial malaise.

The actually unfinished result still has more than 530 regulations, with 60 studies and about 90 reports and we haven’t seen the end of them. Sarbanes-Oxley legislation, whose negative impact outweighs the positive, had 16 regulations that have helped the exodus of major corporations to flee overseas.

The Law of Unintended Consequences is always overlooked by politicians because it’s inconvenient when campaigning for office. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Can Irrational Securities Traders Achieve Consistent Success?

I have seen research on investment strategy with which even irrational investors may achieve success. This irrationality may have to do with various investing activities. Such as selling when others are selling or using their irrational behavior to help influence corporate management to their points of view.

No matter the strategy being used, irrational or not, I see flaws based on decades of observations. One is the short-term nature of investor thinking.

Secondly and more important, there is no discipline. Strategy employed is usually not decisive, nor is it kept as policy in the face of inevitable market pressures. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Best Way to Buy Real Estate

Well before the residential real estate boom up to 2008, I had always said that a home purchase was never to be considered a family investment. Though that boom had boosted values to great heights.

I have always suggested that you buy a home only to suit family needs and comfort; there are always better investment alternatives.

During the home real estate boom, it was hard to maintain this position while a bubble was being created by a too-loose Federal Reserve monetary  policy and politicians intent on giving cheap mortgages to those who could not afford buying homes.

Now that the real estate picture is approaching normal again, what does the average investor do when attempting real estate ownership? The answer: Observe the same precautions.

Speculation in raw land and farm acreage offer possibilities only for those with suitable background. Rental properties require management that can be costly to hire or personally time-consuming,

The best method for the average investor is to have funds in an REIT, in the form of a low-cost mutual fund or ETF. It offers diversification with minimal risks. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Institutional Management of Portfolios

Large investors such as pension funds, foundations and major mutual funds, often critique the management of companies in which they invest.

There are two schools of thought about the solution. The main idea has always been that you do not buy or retain ownership of securities in firms whose management you do not like.

Investors who actively promote their influence in making managerial changes often have another motive. They often are more interested in takeovers and active management.

Furthermore, it takes a lot of nerve and arrogance on the part of outside investors who think they can micromanage because they have a large stake in a company. They may make better use of their time elsewhere.

Sure, they may want to look for over=zealous salaries and bonuses and for fraud, but that should be all. Good corporate performance is what they should seek.(See the Earl J Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Deep Recessions Are Due To Government Mismanagement

In years before modern regulatory controls, free financial markets regulated themselves. Severe bubbles were rare, though economic cycles were common, as they still are.

But recessions were self-correcting, because they were market-oriented. Every economic downturn was brief, self-repaired by inherent market instincts.

There were no strict regulatory powers around, with no artificial tinkering and meddling by use of economic theories or any correcting stimulus. Yet, the steeper the downturn, the faster and sharper the recovery in every instance.

The problem with a stimulus is that most are political and have no real economic function. Moreover, they are usually the wrong kind. That is, they are made to act too far into the future. They begin to work after the actual economic recovery. Natural market repairs are much faster than a political stimulus, which as we know it, is merely a misnamed bait and switch device.

It should instead be called what it actually often is, a political slush fund. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Closed-End Versus Open-Ended or Mutual Funds

Mutual funds offer new shares or buy them back from investors each day at the net asset value of their holdings.
The closed-end funds are different; though they also invest in common stocks or bonds. Once their own stock is issued, they trade daily on the market. However, closed-ends are not comparable to exchange-traded funds or ETFs.
The closed-end funds do not issue new shares. The investor buys those already on the market. They are not bought and sold at net asset value. The market prices are either above or below their net asset value or NAV, depending on each fund’s situation, holdings and market conditions.
The clesed-end appeal is usually because of earnings leverage, with the inclusion in their portfolios of debt, sometimes short-term.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Where Are Your Securities Being Traded?

 

When you buy and sell stock through your broker, you never give a second thought to where the securities are being traded. Unless you’re a professional or an institution such as a mutual fund management company. Ordinarily it makes little difference where trading orders are completed.
Actually, there are now 13 trading marts where trades are made, which have all been approved by U.S. securities regulators The marts include the major entities at NYSE Euronext and those at the Nasdaq OMX Group. There may soon be more. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)