The Costly Waste of Sending Printed SEC Reports

The Securities and Exchange Commission requires sending complicated literature that small investors do not read and cannot understand.

It is unwarranted.

I am referring to costly prospectuses, financial notices and material which ought to be filed, but which should be made available only for those who really are interested in reading them.

All the general public requires are outlines of important information, forwarded in a manner the average investor can easily understand.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Power of Credit Agencies

Many question the power of credit rating agencies since the sub-prime crisis when the mortgage bond AAA status proved erroneous, and when U.S. bonds lost AAA ratings..

The federal government gives the raters a monopoly and then has criticized their work.

Some solutions make little sense, Such as making rating agencies liable for any errors in judgment. Which is great for lawyers and is bound to get those companies out of the business.

Actually, banks and large investment companies already do their own investigations of credit risks they deal with.

What about more competition as a solution? Allowing any company with qualified analysts to practice would help. Right now, the government has permitted only a few to operate in this area. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Should the SEC Regulate Mutual Fund Fees?

The government has from time to time questioned fees charged by mutual funds. Should the U.S. advise how high fees ought to be?

Investors themselves ought to know how to compare funds’ expenses and why to choose those with the lowest. Funds already give this information.

Managing mutual funds often has little to do with success. Lower-cost funds which follow market indexes often perform better than managed funds. The overall success factor for choosing them is low cost.

However, that should not be government’s function. Politics have a nasty habit of interfering with choice, and politicians are not the wisest advisers.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

How Do You Pick a Securities Adviser?

I do not recommend securities advisers because of their cost, that greatly detracts from investment performance over the years.

Example: When advisers take 1 1/2% of your assets as a fee and you earn 5% on those assets each year, you figure the enormous cost yourself. On each $100,000 you have your earn $5,000 and you pay your adviser $1,500. That’s a big cut of your earnings each and every year.

But if you insist you must have an adviser because you listen to what the media foolishly advise, check out and verify that adviser’s past performance. And check for any federal and state citations and list of current clients and referrals. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Federal Reserve’s Major Conflict

Independent-minded economists have always come to the Fed’s defense, in its attempt to keep the Federal Reserve as free from politics as possible.

The Dodd-Frank Act has made the Fed less independent of the executive branch of government.

Despite the logic for the Fed’s independence, Congress itself always has wanted to impose some influence. It has to a major extent. Since 1978 the Fed has had to enforce the Full Employment and Balanced Growth Act, known as Humphrey-Hawkins. That conflicts with the Fed’s stated currency/inflation activity.

Humphrey-Hawkins enforcement creates an inflating bias, and not one of dollar stability; so there is always a conflict of interest. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Federal Reserve Bias

How truly independent is the Federal Reserve system?

There always has been anger against the Federal Reserve. The idea of a quasi-government agency, the head of which is appointed by the president, independent of real congressional influence, has been often suspect.

The role of the twelve regional Fed banks has also been questioned. They are overseen by private-sector boards of directors, composed mainly of commercial bankers. That never pleases the political Left.

Financial regulation law has tilted the influence of the Fed in many ways, giving the executive branch of government much more power over the Fed that it had.

There’s now a bias toward  easy money policies that foster inflation that the Fed is supposed to help counter. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Financial Media Yellow Journalism

The media exaggerate with high-tech distribution of news, as they did when they sold only newspapers in what we still refer to as the days of “yellow journalism.”

That’s not just when it comes to politics. It includes  financial news.

One example: When Bernard Madoff said he made off with $65 billion and was subsequently convicted of fraud, his case pointed out a problem in the financial media, as it does elsewhere.

Investigators believe the total sum involved was actually closer to $17 Billion. The sensationalist media continues to pick up the $65 billion number because it suits their exaggeration needs. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Indexes Instead of Managed Mutual Funds

This adds to my previous comments on managed mutual funds.

I have always commented that indexed mutual funds or ETFs, are better than managed funds. They usually outperform them, and at lower cost.

Moreover, I always say the lower the fund cost, the more return an investor will get over the years.

This question also will come up when a managed mutual fund you may have gets merged into another. These mergers are usually done for either or both of two reasons. To get economy of scale. Or to hide losing records.

In most instances, index funds are always a better choice. So, don’t attempt to trade managed funds on relatively short term performance. Besides, their internal managements generally change constantly. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Selling Your Managed Mutual Fund?

I never recommend managed funds for a variety of reasons, including high cost and their too-often inability to emulate indexes. Moreover, managements change and you never know who really is managing your assets.

What if the fund is not doing well? That does not mean an automatic sale. Market conditions may be the cause and not management inability.

The major consideration should be fund cost because that is the only factor you can truly control. All other considerations are well beyond your possible knowledge. Cost is a huge factor in fund success. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Importance of Credit Rating Agencies

Credit rating agencies are generally accurate but the divisions that rated sub-prime mortgages were certainly not up to par at the major agencies.

One way to solve the lack of any problems we may have had with credit ratings in the past, is to allow competition among such services.

Why not allow any company who feels qualified,to register as a ratings analyst? Today, a small handful has a government monopoly.

If a company can show the Securities and Exchange Commission that it has qualified analysts and capability to evaluate bonds and other securities, why not award a license?

Also: Do credit rating companies have First Amendment free speech immunity? Courts have ruled they have but plaintiff lawyers are always on the prowl. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Importance of Credit-Default Swaps ( CDS)

Credit-default swaps got a bad reputation for a faulty political-scapegoating reason during the 2008 financial debacle. Yet, they are still used, because they serve a useful, legitimate purpose.

The problem with credit-default swaps is that the market is little understood. It provides a form of insurance that bonds will pay off, particularly when the bonds are being issued by governments whose credits are very shaky

Without them, countries on the brink of bankruptcy such as Greece and Portugal, Spain and Italy, would have problems selling their bonds at any price. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Duration Principle For Bond Investors

My further comments on how professionals in the financial industry constantly get the bond market wrong.

Take high yield corporate bonds, called “junk” for an unfortunate reason having to do with lower ratings. The fact they have lower ratings is compensated by higher yields. If you buy them in a fully diversified, low-cost mutual fund or ETF, and you reinvest dividends, you have factored in risk.

If the default rates of the holdings were to rise to an unusual high from a lower level, the higher yield will more than make up for the risk. Yet, all the media will discuss is that risk of default and not the built-in compensation.

I have previously commented how the media hardly discuss how you can avoid default  loss, along with any inflation hit, with the proper use of bond duration. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Errors by Experts With Corporate Bonds

Professionals in the financial industry constantly get the bond market wrong. Note that  I’m referring to professionals, not amateurs.

They make up well over 80% of the market so they should know better. And the media are usually also in error, when reporting about bonds.

At the first sign of economic problems, there is talk about corporate defaults and their effect on the bond market. How bond prices are bound to fall because of the risk of possible defaults. And with that talk, the bond market weakens and prices do fall.

But remember: The possibility of default is very quickly factored into bond prices. And  the higher the yield, as a direct relationship.

Furthermore, the media hardly ever discuss how you can avoid loss, along with any inflation hit, with proper use of bond duration. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Heads-or-Tails-Calling Odds

It’s interesting to note 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 1000 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 and @BusinessNewshole at Twitter.)

   

The Risky Options Market

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

Options thus can protect share ownership from under-performing and can

make money when market conditions are extreme.

To invest in options, you must, however, 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® comments and @BusinessNewshole at Twitter.)

   

Timing the Balancing of Bonds With Stocks

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

At times, however, bonds and stocks move in the same direction.

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

However, 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 and @BusinessNewshole at Twitter.)

Inefficient Financial Models

Vaunted mathematical models have done poorly in preventing financial meltdowns. I refer, as just two examples, to the LTCM (1998) and the subprime mortgage (2008) disasters.

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  further back than they had.

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 such breakdowns which has to do with the fact that we react to problems with panic. That’s 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  danger. So they act in haste.

There was 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 with 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 oversees. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Wall Street’s Poor Analytical Advice

    Little independent thought comes from Wall Street’s analytical ranks. What goes for research 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 analysts have just found gold. I have heard of and investigated comparable new-strategies for decades.There are no panaceas (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Changing Your Investing Styles?

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 tells you that the adviser has no specific strategy; 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 as well as they should. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

   

Financial-Trading Taxes are a Poor Regulating Tool

Liberal politicians and powerful unions try to tax financial transactions whenever they can and thus discourage what they call “excess speculation.” The estimated tax revenue this would bring the government is about $200 billion over about five years.

A similar move is always thought of in Great Britain and Europe from time to time.

However, securities trading is integral to economics. Such taxes would therefore be indirectly, adversely felt by everyone.

Speculation in a capitalistic society does not cause problems. It merely reflects pricing, something politicians of the left never comprehend. Capitalism’s presence may appear to help boost rising prices, but works the other way just as easily, when prices fall. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

TIPS Aren’t That Good an Investment

Financial gurus often 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. However, they aren’t investment  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  implementation. Furthermore, they too often sell at a premium to value and their inflation advantages are taxable. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twittet.)

Liberalism Has Become a Financial Religion

Experience and common sense has always proven that left-oriented financial thinkers have almost always been wrong. Their actions usually have unintended consequences that are damaging in the long term, even to their own interests, and to their political constituents.

They are ingrained in liberal minds and no further education will dissuade that thinking. Sometimes they may be merely a political device for getting votes when running for office, or organizing workers on behalf of unions.

For many it has become a secular religion.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Financial Media Noise Hurts Your Finances

One of the problems with constant TV, radio and other media chatter, is looping stock market reports. Salesmen selling financial ads make matters worse.

One of my investment rules is to avoid what I call media noise. Once you have an investment strategy in place, why let incessant media chatter and nonsense dissuade you from your original goals?

It becomes almost impossible to be disciplined when you have both ad salesmen and an avalanche of “experts” of all stripes and objectives throwing investing ideas at you all the time. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Ignorance About Markets

There is a  general ignorance among many members of Congress and the public, including the media, about financial market operations.

When a financial company on Wall Street creates a form of security and places it up for sale, it is technically a market-maker, not an adviser and, therefore, has no fiduciary responsibility. Neither is it a broker, unless it sells the security.

Up to fairly recent SEC admonitions, brokers have had no fiduciary responsibility. They do have to sell what is deemed ”suitable” for the customer. Therefore, a broker cannot sell risky securities, for example, to widows and orphans without their express knowledge. They can sell suitable risks to highly sophisticated investors.

Market-makers deal with seasoned institutions who know risks.  Market makers frequently sell short, in the event markets fall, often with both selling and buying positions at the same time, as a hedge.

Advisers, on the other hand, generally give advice and suggestions only. They are not market-makers, nor are they brokers.

Something for politicians to learn, while they point fingers at “double-dealing.”(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Real Investment Banker Ability and Interests

Why do many investment bankers in the business for years, have entered ranks of chefs, gardeners, nutritionists, and other endeavors other than financial, in their later years?

They often show their true interests when terminated or when they have accumulated sufficient funds. Perhaps they were not interested in finance after all. Thus, they end up doing work outside finance.

You would think they knew enough about finance to have it in their bones to write, talk or teach about investments. To remain with finance in some way. But seemingly they do not. Finance to many is a job that pays more than it ought to, to many who are ill-prepared for the job, other than the right school and connections.

And it shows frequently in Wall Street’s insider efforts. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Fantasy U.S. Budget Savings

What if you really don’t need a new car but you pass a new car showroom and look at some  models?

You look at one for $100,000 that suddenly catches your fancy, and you decide, why not, I’ll buy it.

But you get a pang of conscience when you look at the payments needed, so you buy another car in the showroom for only $25,000.

Do you boast at home to your spouse you just cut the household budget by $75,000, having spent just $25,000 instead of $100,000, all of which you probably cannot afford?

Well, that’s how politicians boast about cutting their budgets. Their attempt is to cut the INCREASED spending they can’t afford

Note: Federal budgets are automatically increased by every year. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Result of Government Bailouts

Bailouts have usually been failures but politicians still consider them as solutions.

The 2008 financial disaster was a bailout attempt through a whole assortment of action: The takeover of banks. The takeover of Fannie Mae and Freddie Mac. The takeover of AIG.The Troubled Asset Relief Program (TARP) to buy bad mortgages from banks.The Public-Private Investment Program to buy the same troubled assets. And the takeover of GM and Chrysler. All were never needed when worthwhile alternatives were at hand.

The government pumped out money. Federal Reserve funds were priced down to practically nothing in the banking system.

Example: We had perfectly good operating car companies in the US to pick up business and relocate jobs. Still, the administration had to bail out General Motors and Chrysler. That helped their powerful union but did little else for the economy. Ford and others in the industry operating in the U.S. were able to carry on without bailout help.

All this outlay cost trillions upon trillions and with little success to show for it, compared to what would have happened if the politicians sat on their hands. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The SEC’s Hedge Fund Meddling

The SEC’s regulatory function is protecting those who are not fully aware of conventional investment information or knowledge.

Investors in hedge funds ordinarily are not the usual mutual fund investors. It’s strange, therefore, why SEC watchdogs have taken time to look into such questions as “side-pocket” arrangements” that hedge funds made with their more sophisticated investors. Using them, funds may, for instance, limit the ability for hedge investors to prematurely cash in their stakes.

Or for that matter, regulate them as tightly as they are under the Dodd-Frank Act.

Hedge funds are not mutual funds. That is why some investors choose to use them. Hedge fund managers do not want to tip their investing hand as new SEC regulations require, unless the hedge funds are “family-owned. I have commented on this before. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Separately Managed Investment Accounts or SMAs

Wall Street advisers, with their usual marketing diligence, have been doing relatively well, marketing yet another way to make money.

Assets held in investor’s name. Called: Separately Managed Accounts or SMAs

I repeat again my comments about SMAs: They’re expensive. They represent the same advisory problem, of high cost for a service already available from mutual funds and ETFs. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Private Investing in Home Mortgages

Because it is getting difficult to get a decent return on savings these days, ordinary folks are making some extraordinary risky decisions, when attempting to increase returns on investments.

One example: It’s absolutely stupid for a layman to give private mortgages to homeowners when banks have already turned the requests down.

If banking or lending is not your trade or business, but merely a side hobby that appears to offer a return better than conventional investments, forget about that enticement. The relatively few extra dollars will never be worth the risk. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)