The Fed Is Cheating Small Investors

Ordinary, average, Main Street savers and investors, who normally are seeking safe havens for their savings and funds, have been ripped off by Federal Reserve policies over the past few years.

Unfortunately, when they see how little they can earn on their money, if risk avoidance is their concern, these investors place the blame on everyone but the guilty. It’s the Fed that’s primarily responsible.

And this will continue with the mistaken notion that Fed policy, that in effect is inflating the currency while attempting to stimulate the economy, will actually produce financial disaster.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Avoid Ponzi Schemes

 

                       

Sometimes it’s not easy to protect against Ponzi frauds. Despite what the media tells you.  The SEC often fails to discover them in time.

                       

But there are basics you can follow to reduce odds of falling into traps that entice scams.

                                       

A basic way to avoid investment frauds: Stick to plain investing vehicles from low-cost, investment funds. They are the ones with the lowest-cost management fees, who have been in business for years.

                       

Avoid those who appear to pay off far better than the plain low-cost investment funds. And steer clear of hotshots who get publicity from ignorant or complicit “friends” and from media public relations. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Hedge Fund Regulation

  

More hedge funds are now subject to SEC regulations. However, regulate them too severely, and they will no longer be considered hedge funds in the true sense. Not by the definition of what an investment hedge fund does for an investor.

Hedge fund managers need secrecy in order to trade. If they divulge their intentions in advance, as stricter regulations promote, their efforts and objectives will be neutralized. Other investors will be able to counter strategy, to make any proposed hedging worthless or even dangerous.

Moreover, hedge fund activity had little to do with the financial downturn of 2008.

Over-regulation is another instance of jousting at windmills for no real purpose, other than catering to an anti-business, anti-finance industry constituency. (See the Earl J. Weinreb NewsHole® comments and @BusinessNew

Misunderstood Derivatives

Politicians love to point fingers at derivatives as bad, and a major cause of our past financial distress. But derivatives perform an important function as a financial instrument.

Timothy Geithner, the former Secretary of the Treasury, overlooked meetings, monitoring trading of derivatives, when he headed the New York Federal Reserve. So, the mysterious workings of derivatives should not have been so foreboding, dangerous, and deadly with regard to the 2008 financial meltdown.

Derivatives trading now have tougher regulations. I can see having more transparency, but derivatives make financing cheaper in the long run. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Life Insurance For Estate Planning

Be careful abut buying life insurance from estate planners. It is their job to sell life insurance. They usually sell other financial products as well; various types of annuities and mutual funds. But their options are limited and yours become restricted too.

Planners may know their products, but they may present a conflict of interest. If they are tied to one life insurance company, you are not shopping prices and terms.

When they are selling mutual funds, you are probably not getting the lowest cost selections. The latter have to be higher cost to warrant compensation for salesmen. Lower cost mutual funds are to your benefit, no matter what the sales pitch may be on past or future “performance.”

If you need substantial estate advice, see a non-salesman accountant or lawyer, specializing in the field. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Effects of Longer-Term Unemployment Insurance

                       

About one third of the unemployed on benefits get jobs once those benefits expire. However, the longer the benefit term, the longer many unemployed take to start looking.

                       

The difference between the U. S. and Europe has been that the latter has better unemployment benefits. Europe also has chronically higher unemployment. (See the Earl J Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Financial Predicament of Many States

Most of this country’s states are having financial trouble. Pension and other poorly undertaken contracts are making it impossible for most to balance their budgets. Tax revenues are down from past levels, while spending cuts have not kept up with demand for state services and outlays.

Yet, legislators keep handing out promises and largess as if prosperity still reigned. School costs keep growing. Public service and government-worker union pressures are destructive for officials seeking budget solutions.

Unionized employees often get 70% or more of their income for retirement each year, after only thirty years or so of work.

Chicanery is also at work. Many government pensions are permitted to be ‘spiked’ upward with overtime pay and raises, before retirement.

Remember: It takes $1 million in capital funds at 5% to get only one $50,000 annual pension per worker per year. And that 5% is not being achieved these days.

Bankruptcy to break pension contracts is not an option for states, without federal law changes, but maybe for cities and towns.

(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Gold Prospects

The market for gold as coins and bullion has been rising, thanks to the weakening dollar. I have frequently commented on this because I feel gold can be too speculative for most folks who have no idea about its downside.

It can fall sharply, with any attempts to balance the U. S. budget, which will have to be eventually done. And gold does not earn income or revenues upon which to establish intrinsic value.

It’s a psychological defensive weapon in many ways; yet psychology can change from time to time..(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

How Smart Are Securities Analysts?

     

Securities analysts give you investment advice. They suggest what securities to buy and sell.

Analysts constantly critique management of publicly owned companies. They claim to know what products and services companies ought to produce and what they should charge. Analysts propose when to hire and fire top executives.

Yet very few analysts have hands-on ability to understand how any business operates from the inside. They are not even that proficient concerning Wall Street inner activity.

They generally haven’t the business experience to successfully run a pushcart. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Hidden Income Tax Costs

There is a hidden personal tax cost the government never mentions. The media hardly ever brings it up, even at tax payment time.

We shall leave the question of how much business taxes cost individuals who are not in business, but instead look at direct hits to everyone’s pocketbook.

Some facts: Personal tax has additional expense composed of two parts: One is the effort that goes into the preparation, even when done by an outside preparer.

And the second is the actual cost of preparations. Time is important because it is spent with enormous aggravation. Then, estimates of out of pocket costs are at least 30% that of the actual payments made by average individuals.

That approximate 30% tax increase is on everyone, small incomers, middle classes and not just the favorite liberal scapegoat “rich.” (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

The Corporate Auditor’s Report

I often sat most investors never bother to read a corporate  prospectus. If they did, I suggest they attempt to be sure to understand the Auditor's Report  in the 10-K form that is filed with the SEC.

Look for this key sentence: "In our opinion, the financial statements present fairly...the financial position of the company." That means the company has honestly described its finances over the past year to the best knowledge of the accounting firm that is auditing the 10-K. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Use Media Investment Strategies?

Whenever the financial media discusses investment strategies, it’s about a favorite of someone being interviewed or reviewed. Perhaps the strategy is actually a public relations release, disguised as financial news.

The purpose of investigations I have done of  thousands of independent strategy studies and investing techniques, have helped me delve into the investment strategy phenomenon.

My conclusions often differ with that of the media.

They are not up to the task, and most reports are not objective. So such strategies get short shrift. Yet, proper strategy use increases the odds of investing success. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Commercial Credit Ratings

The bulk of commercial credit ratings are done by Moody’s, McGraw-Hill’s S&P, and Fitch Ratings, the three largest of just a handful of government-approved services.

Critics say they did poor evaluations of credit-default swaps and subprime debt issues. And in this way contributed, to a great extent, to the 2008-2009  financial downturn. There were also charges of conflicts of interest.

Payments for ratings are made by firms who sponsor the evaluations.That is, those who issue the debt obligations.

What is needed is more competition. That means more credit evaluation services being recognized by our regulators.

And more diligence by borrowers. That would be the ideal way to prevent serious credit rating problems from developing again. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets

Derivatives That Help Ease Government Problems

A government can hide its long-term, poor fiscal position with short swap, or credit default derivatives. This paper manipulation made things look what they were not with Greek’s financial deficit spending over recent years. Using derivatives for deception was wrong.

However, derivatives have a legitimate function in government financing, as they do in normal business and financial transactions.

Eliminating derivatives or making them tougher to write, will dry up the supply of conventional debt financing, That will simply make it tougher for governments such as Greece to get credit. They will then sell their bonds only at much higher interest cost. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets

Important Corporate Notes in The 10-K Report

     

                 

Investors usually don’t  bother to read a corporate  prospectus. Among  reasons why I suggest they don’t  buy individual stocks, but that they use low-cost mutual funds that invest in securities indexes.

                           

It does make lots of sense to individual securities investors  to review the. corporate Notes in financial statements. The 10-K is essential in understanding the statements because Notes  describe the accounting methods used to prepare such financial statements. Any change in methodology from  previous years can skew the figures.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Questionable “Alternative” Investments

You read or hear about 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 but 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 and @BusinessNewshole tweets.)

Recessions Should Usually be of Short Duration

Throughout U.S. history we have had economic cycles, booms and busts. The Federal Reserve System was legislated about a hundred years ago to even them out

But human-handed regulation has never succeeded at that function.

Experience has taught us that natural cycles very quickly correct themselves. And that the deeper the downturn, the sharper the economy will bounce back.

Except when government meddled in the 1930’s as it has in recent years. Along with multi-trillion dollar budget deficits that are confusing and scaring, large and smaller, job-creating business owners.

By now the economy should be thriving again, and isn’t.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Disciplined Investments

   I have documented over 1,600 investment strategies used by professionals, and have looked at their pros and cons.

    While there is no perfect strategy, the chief pitfall in their usage is usually the lack of discipline employed to follow through, not the strategy itself.

   Additionally: I discovered why markets can be so rash and erratic. When institutional investors account for well over  80% of trades, why should the markets behave so erratically? Wall Street "wizards" invariably act in an undisciplined, mob-like manner; not as true experts. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets

Political Corporate Bailouts

Corporations such as those in the automobile industry and in financial trouble, can always use the bankruptcy courts for an orderly means to reorganize debts.

This has unfortunately been forgotten by the administration, at enormous cost to our national budget and constitutional framework.

Bailouts in the auto industry were done, in effect, to salvage outrageous union contracts, which bankruptcy courts would have dissolved equitably. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Why Bother With Individual Securities?

As I often say, most investors don’t  bother to read a corporate  prospectus. That’s one of the reasons why I suggest they don’t invest in individual stocks, but that they instead buy low-cost mutual funds that hold securities indexes.

But if they do, they ought to review, among other suggestions, the company. Balance Sheet. This shows the company's assets (cash and inventory) and its liabilities ( outstanding debt). at a stated closing date of the books. Also, they should view  long-term debt. And see how much earnings the firm reinvests in its business. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Repos Financial Transactions

Repeat: The financial media does a poor job of commenting on financial matters, by scapegoating big business and Wall Street, repeating populist political comments.

Another example is the subject of repos. The elimination of repos sales off the books of defunct Lehman Brothers  had relatively little to do with the use of bank guarantees by the government, or eliminating mark-to-market accounting, for all banks. The latter, and not repos, were the villains in the financial meltdown of 2008/2009.

In fact, every entity that has been in trouble in the past is tossed in the same basket; AIG, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Bear Stearns, and so on. Each had its own peculiar problems and could have been rescued in its own way, probably without heavy-handed government assistance.

The media has done a poor job of sorting this out for the average citizen to understand.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Media Slants of Financial Problems

 

The media usually has no idea whom to blame for financial problems. They usually blame big business or Wall Street, as they are the popular scapegoats.

All problems regarding current financial troubles are treated as if they have had a similar cause. Prevention techniques would have varied for each, but are treated alike by the media.

Results: Leftist, populist politician demagogy is picked up by the media because it’s handy and it’s what many among the media have learned in school.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Few, Real Insurance Company Analysts

Beware of Wall Street’s insurance advice. Companies make annual filings with their various home-state insurance departments. Very few, if any, analysts can understand these intricate documents. Therefore, few are not capable insurance analysts.

I rarely have found anyone on the Street giving advice on insurance company securities who has taken the trouble to truly learn how to understand the policies the companies write, and the reserves behind them. Unfortunately, this lack of Wall Street insurance knowledge persists, based on commentaries I see in the media.

The earnings and book values they spout must, therefore, always be suspect.  (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Reading Corporate Income Statements

I repeat what I often say: Most investors never bother to read a corporate  prospectus. That’s one of the reasons why I suggest they don’t  buy individual stocks, but that they instead employ low-cost mutual funds that invest in indexes.

But in the event that they do, another of the items to review on a 10-K would be the  Income Statement;  a report of sales, expenses and profits.

Ideally, you want to see a trend of rising sales and earnings. The 10-K  shows three years of results, and a a five-year summary.  Look for the trend in net earnings.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Reading a Corporate Prospectus’ 10-K

Most investors never bother to read a corporate  prospectus. That’s one of the reasons why I suggest they don’t  buy individual stocks, but that they instead use low-cost mutual funds that invest in securities indexes.

In the event that they do read a prospectus--few are able to understand  what’s inside.   

                       

In that case, they ought to try to review the first part of the 10-K. The latter  provides a review of  what the company does or makes,and where. It also goes info a discussion of its customers and competitors.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Stock Market Potential

           

The Congressional Budget Office has indicated from its studies that U.S. economic growth will average a little more than 2% a year over the next 70 years. It had been about 3,5%, from the 1950s on.

           

There are many reasons why estimates for future economic growth are dismal, including our enormous debt which must be serviced. Moreover, it’s highly likely future interest costs will be very much higher than they are today.

           

The specter of inflation all this imposes makes stock market growth difficult. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Use of Short Selling

 

                               

In a previous report I mentioned the usefulness of short selling; selling borrowed securities, in the hope of buying back the borrowed security at a lower price in the future.

           

Without short selling, markets would become overvalued and would not be priced as rationally as they generally are.

           

However, during financial meltdowns or other emergencies which may affect markets from properly functioning, it may be necessary to temporarily stop such trading.

           

The SEC has placed restrictions on the use of short selling after a security is off 10% on the day.  (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Securities Advice Can Be Costly

                       

I always comment on the high cost of financial advisory services, as much as 25%, 30% and more of actual earnings from an investment portfolio, though the fee looks harmless when set at 1% or 1 1⁄2% of total assets. (Calculate the simple math and see for yourself.)

                       

But the Wall Street folks keep piling on layers of advisers, even advisers who select overseers of advisers. Each layer of costs adds up, while the victim (the supposedly hapless client) thinks he or she is being well-advised. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

       

Financial Advisers’ Ability

                       

Want a quick test of someone who considers himself a financial guru? Ask them about buying bonds with the threat of inflation.

                       

When he starts talking TIPS, (for inflation-protected Treasury bonds) without asking how long you intend to hold the bonds, he has flunked the first step.

                       

Then ask him to explain the duration principle behind the purchase of bonds. And how the usage of duration can overcome the effects of inflation. Chances are he will flub that too. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Bad Habits and Financial Prejudices

                       

Many investors get to learn that much of what they do is wrong. Example: That in-and-out timing the market works less than 5% of the time. That discipline is important, though they’re usually impulsive investors. That constant securities trading can be costly, and so on.

                       

But they do it out of habit, or whatever drives them along these psychological debacle-resulting paths. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Are Securities Analysts Always Instructive?

                       

I have noted financial media discussions about the recruiting and training of Wall Street securities analysts. Having graduated in my role as a senior analyst on the Street, I have a few cogent opinions of my own.

                       

I learned how to become an analyst all by myself as my undergraduate degree was PreMed. But I attended graduate school for over three years, evenings, to see what they could further teach me, while working as a senior analyst for a major Wall Street firm.

                                       

The upshot? I feel a good analyst cannot be taught by rote in a classroom, nor at a fancy Ivy League school. I have been in contact with graduate analysts of all types of degrees and backgrounds; the needed ability is ingrained. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)