Useful but Sometimes Deceptive Derivatives

                                              

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)

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

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 alternatives are usually too sophisticated for most investors, and are generally too risky.They do attract 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.)

Usual Recessions-- 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.

                       

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

Essential Discipline for 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)

Corporate Bailouts by Politicians

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.)

Buying Individual Securities?

                     

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.)

Repo and Other Media Finances

                    

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 by the media; 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 Helps Foster Financial Problems

                 

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

                       

All problems regarding 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: 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.)

Insurance Company Analysts-- Rare on Wall Street

                 

Beware of Wall Street’s insurance advice. Companies make annual filings with their various home-state insurance departments. Very few, if any, securities analysts can understand these intricate documents. Therefore, few are 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.)

Understanding Corporate Income Statements

                  

I repeat: 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 buy individual issues, another of the items to review on a 10-K would be the come 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.)

Read the Corporate Prospectus

  

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 into a discussion of customers and competitors.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Stock Market Future Prospects

                

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.)

Usefulness 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 a stipulated amount on the day. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

           

Costly Securities Advice

                     

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.)

A Financial Adviser’s Test

               

Want a quick test of someone who considers himself a financial guru? Ask 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 fully 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.)