Technical Market Analysts

As you know from my blog and other comments, I always recommend the use of index mutual funds and ETFs (Exchange Traded Funds).

As I have often mentioned before, I have made a unique mini-career of looking at almost 1,600 investment strategies used by investors over the years. I have investigated the advantages and disadvantages of each.

And I can tell you there are some worthwhile concepts as well as gibberish in all. But no panacea exists among them.

I know there are analysts constantly looking for stock market winners. My comments hold for efforts of the so-called fundamentalist analysts who evaluate individual companies, seeking investment opportunities.

This certainly holds for market technicians as well. They have a whole panoply of theories about market direction that have little to do with corporate earnings and mostly to do with market swings, “heads”, ”shoulders” and similar exotic terms. I have found no panaceas either in their use.

Gold As An Investment

Gold value generally goes up when the dollar goes down, when compared to other currencies. It goes down when the dollar rises. When the economy becomes sounder, gold will not fare as well, Its attraction is primarily related to a weaker economy where the dollar is being further hurt by government action.

But caution: At times gold does move in unison with stocks,following the rise and fall of common shares.

Gold produces no earnings in the form of interest or dividends. It also costs you money for insurance or storage if you buy bullion or coins, and you want it stored or insured as a safeguard.

Buying Gold in a More Practical Way

As your know from reading my financial blogs, I am not an outright gold enthusiast. And if I choose gold investments, I would choose an ETF (exchange traded fund) and not gold coins or bullion form. The latter have to be stored and insured against theft, and undue expense for an investment which earns no income.

Gold investment market prices can easily be gauged in ETFs. I’ll have more to say in a later blog about gold as an investment.

Corporate Stockholder Rights

There are some corporations with two types of common shares, voting and non voting. The New York Times family, for instance, has special voting stock that controls ownership. Other non-voting New York Times company shareholders cannot vote that class of stock.

There has been a constant clamor for change. For example, talk that shareholders who hold their common stock for a longer period should have more voting power than those who buy shares for shorter, trading periods.

Or restrictions on those who buy them to exercise control for company takeovers. Conventional wisdom in the past was, that if you did not like management you sold your stock, instead of trying to take the company over.

Government Regulation Over Venture Capital Funds

The U.S. government would like to regulate venture capital funds because VCs advise the startup companies they finance, The Securities and Exchange Commission would supervise the regulation.

Naturally, bureaucrats feel venture capitalists “advise” their clients when they lend funds or invest in them. But that makes the slippery slope even more slippery. That would also make every member of a company’s board of directors an “adviser.” Or place every major bank lender into this category.

There could be no end to such regulation. It would open up the job market for all those civil servants who never operated a pushcart, but know how to run any business assigned to them for meddling. Every bureaucrat would be able to evaluate and parse the meaning of financial and managerial advice that lenders and investors suggest.

An example of state capitalism!!

“Dark Investor Pools”

Multi-millions of shares are traded each day in what are called “Dark Pools.” Quotes are listed after the trades are done. The pools are automated and enable institutional investors such as pension and mutual funds to quietly buy and sell holdings. This helps them transact very large contracts without divulging intentions.

Pension and mutual funds and their small investor clients, benefit from lower cost transactions and lower prices.

The Securities and Exchange Commission has come down on the side of more disclosure, for disclosure’s sake.

Again populist politics for the masses, without truly benefiting the masses.

Leveraged Secured Debt and a New Imposed Bubble

In the past the SEC and other regulatory authorities had no experience in the models that created the leverage that subsidized collateralized loans. So they permitted leverage to get higher and higher. Leverage went up from 10% to well over 30%, which made the loan values more volatile.

Today we still employ leveraged secured, collateralized debt in heavy volume. It’s an integral part of our commercial system despite the notoriety it received during the financial meltdown.

What can make us now believe that more regulation will help prevent any future financial mess from miscalculation? While we are still unsure of the type of loans we are currently permitting?

And we still permit homeowners to have special low down payment deals in our weak economy. All we are building is yet another bubble.

Government Meddling with Banks

The Obama administration is attempting to get banks to make loans to consumers and industry. It’s not working as intended on two fronts.

Banks appear to continue to hold back where risks look great in an uncertain economy. In its widely publicized effort to “clean up the books” of so-called “toxic waste,” the government has made bank executives gun shy. A hesitant bank executive does not tend to make risky loans.

The government helps this timidity along by making the spread of government investments (cost of borrowing from the government and return from investing in government bonds) a sure thing. So why should bankers make risky loans?

Yet loans to consumers and business are the recipe, the stimulus, the means, of getting us out of the deep recession.

Secondly, consumers have to want to spend and borrow, and business should want to expand and thus borrow. They have not been doing this as much as they would in a flourishing economy. Fear of government-imposed uncertainties and future taxation are the culprits.

America’s Financial Status

We take it for granted that America will always be the world’s financial standard and leader. With our Constitution and its Bill of Rights and our expansive economy, we have been truly Number One world-wide and it has financially helped others as well.

We forget that the British once held this vaunted position. They relinquished it when they became a debtor nation. The U.S. today is well on its way to become such a monetary-debased country.

And we know at least one creditor nation in the Far East, ready to take over our past role. So we ought to mend our ways, quickly.

Insider Trading Liability

It is important to clarify what insider trading actually is. Much we get from the media is actually misinformation that feeds on the anti-Wall Street sentiment the media spews.

It is difficult to accuse individuals of being guilty of insider abuse unless you get basic distinctions. First distinguish what is abuse of proprietary information, and what information is being ferreted out by legal securities analysis.

A way of investigating the insider trading concept: If you get the information from someone who is under a contract from his or her employer not to divulge information received while on the job, it is stolen insider information. If you do your own analysis to get the information, your information is legal.

Federal Reserve Decisions

I have always said that if Federal Reserve heads were held to the same standards as were doctors, malpractice claims would have made headlines during the recent financial meltdown.

Much of the responsibility of the financial mess, in addition to that of the Congressional liberal handouts of Fannie Mae and Freddie Mac largess, rests with the easy-money policy of the Fed. Congress wanted everyone in America to have a home of their own, whether they could afford one or not. The Federal Reserve made money available.

The Federal Reserve thus created the world-wide bubble by continuing its easy money dogma.

Easy money policy today is certainly not helping a recovery of this country’s Industry, particularly small business. But it’s developing the next bubble and collapse right now. And assuring future super-inflation.

Corporate Transparency and Regulation

Thanks to populist politicians ruling the halls of official Washington, there is constant pressure to regulate business. The only result of all this are dampers on an economy in dire need of more productive jobs that only these targeted businesses can produce.

More legislation such as the Sarbanes-Oxley Act of several years ago is not the answer either. The latter legislation has been an expensive failure because it has not done what the politicians wanted, apart from keeping many foreign businesses away from American shores.

The Dodd-Frank legislation will prove to be a classic example of over-regulation meddling disaster.

There is a better way for achieving corporate transparency without oppressive regulation. Example: A better independent look by financial analysts of the balance sheets of public companies. ( See the Earl J Weinreb NewsHole® comments.)

The Regulation Of Derivatives

More regulation of derivatives is covered by the Dodd-Frank recent legislation. whereby trades will have some form of collateral and will include margin.

What was transacted in the past obviously did not work satisfactorily for Washington. But then, there was little regulation, nor collateral required.

Derivatives are essential to trading of securities for any orderly financial securities market. Derivatives are financial instruments derived from other assets. instead of trading that asset itself. One basic example is a futures contract, an agreement to exchange an underlying asset at a future date.

Derivatives are leveraged, so that a small movement in the underlying value can cause a large difference in the value of the derivative.

They can be used to speculate for profit or to hedge in order to reduce risk in that underlying asset.

I always wonder how practical these bureaucratic regulatory efforts are, as the nature of derivatives may make such restrictions too binding to be effective.

Currency Speculation

Some advisers and reporters make currency speculation and trading sound easy.

Currency trading is not for the faint-hearted. And it can be dangerous to your pocket book unless you have the capital and know-how.

Moreover, currency trading success depends on trends that can be suddenly reversed by events beyond your control. Quick changes can blip out your equity, when down payment margins are so small in commodity contracts.

Also, the value in a currency is not easily discerned, even by experts. A currency is valued in relation to another. Examples: The dollar, in relation to the British pound, the Euro, the Chinese yuan and the Japanese yen. And they can be temporarily overvalued or undervalued by volatile markets.

I would suggest any investor, who would like to trade currency, first become an expert in the intrigues of this highly complicated game. That means that one must first read all that he can about the subject’s mechanics.

That also requires knowledge of the futures markets and its intricacies. And once you feel you know the technicalities, do sessions of what I refer to as “dry-runs.” Make fantasy trades without real money just to see approximately how well or poorly you would have fared with actual investments.

Then trade with your fingers crossed.

Life Insurance Proceeds and Left-Leaning Politicians

Leave it to vote seeking politicians on the left to create a problem that never exited. Especially when a financial institution is the target.

For years life insurance companies have placed life insurance proceeds into a money market type account at interest if the beneficiary did not ask for a lump sum right away. Many folks do not want large sums right away. They haven’t fully decided their investment options.

For another reason, these days of “easy money” the insurance companies pay a little more interest on such accounts, more than banks do.

But politicians on the Left always need a scapegoat and a financial institution always suits the purpose. After all, why should life insurance companies profit by holding insurance proceeds?

Left-leaning politicians prefer bailing out bankrupt private companies or having them thereby lose private workers.

But they do want more employment They love to hire government employees.

Financial Idiocy: Blaming Bush for Deep Recession

All economists seem to agree. A sharp economic downturn usually produces a very brisk economic upturn. So it is stupid, and a blatant demagogic ploy for an American president to blame his predecessor for any economic recession he may have inherited, yet cannot handle.

Fact: The worse an inherited downturn may have been, the better it makes a new president look, as the inevitable, impressive rebound occurs. All without government-changing and budget-busting stimuli.

However, we now have an incoming, bumbling, fumbling and meddling administration that has, by itself, created a deep, deep recession out of what should have been a normal, quick recovery.

They are thus looking for a convenient, political scapegoat. Certainly it’s not a classy effort, and it’s plain dumb.

Who do I really blame for all this ignorance getting continued economic play in America? The financial and general media who should know better and who has economic facts on hand.

Many members are stupid or often lean too leftward to report the basic economic historical facts. Good media reportage would refute the Obama administration’s whining about any inherited “Bush recession.”

(Note: Bush never mentioned the downturn he “inherited” from Clinton, nor did Reagan harp on the mess he got from Carter.)

Professional Investors Use Too Much Back Data

Wall Street financial models often resort to what is known as data mining. Information for various investing strategies of the past. They are collected and tested on a “what if’ basis.

This is also called back-testing when the strategies of the past are used to see what would happen, hypothetically, when projected into the future.

All this is based on many assumptions that the mathematical models are supposed to predict.

I have made a unique mini-career of looking at well over 1,500 investment strategies used by investors over the years. I have investigated advantages and disadvantages of each.

And I can tell you this: There are some worthwhile concepts as well as gibberish in all. But no panacea exists. I would say that most of the data mining is therefore useless, except for their marketing of investment management services.

Indexed CDs and Similar Complicated Financials

Certificates of deposit, with returns tied to the stock market, are always some form of investment option. They can be offered by banks or in forms of variable life insurance.

A reminder: Investment instruments of this kind really are too complicated for the average investor. They serve a purpose primarily for those who market them and are not in the true interest of investors.

If you want simplicity without headaches, you are always better off with plain-vanilla investments. Forget about the sharp-pencil boys who come up with the complicated stuff. If you want stocks or bonds buy them. If you prefer CDs, choose them. Avoid indexed CDs and other convoluted financial instruments unless you really understand them

Severe Financial Problems of State Governments

State governments have severe budget problems of their own making. Unlike the federal government, states cannot print money, so they cannot kick their financial problem cans down the road too far.

Yet, their political overseers have the same bad habits; continuing to spend too much and not correcting the addiction.

One major example: Expensive public employee pensions, especially when not properly funded, if funded at all.

These recession days, states’ tax revenues are lower which make financial burdens even more onerous. As taxes cannot be easily raised. It is becoming more difficult to keep looking for this source of easy state revenue.

States will simply have to cut back on much of what they are now offering, and begin tightening their belts. They will simply have to restructure public union salary, fringe and retirement contracts.

This includes resisting federal mandates that force state spending by edict from Washington.

The Financial Media and Deflation Talk

The financial media has picked up on deflation as the topic of the week or month.

Remember, in the media facts are often rewarded with obscurity or superseded by public relations article placements that need not have too much factual content.

Therefore, some of the deflation information has to do with off-hand economist comment, or technical aspects of Treasury bond price history, or the Japanese bond markets of the past two decades, none of which are fundamental analysis of current U.S. inflationary/deflationary factors.

They fill up media space and content. But they confuse and never enlighten the public. Deep recessions don’t necessarily produce deflation. Most often, it can be stagflation or runaway inflation.

Trying to Stop Financial Bubbles

Listen to left-leaning politicians talk about financial bubbles and you get sharp scape-goating of anyone appointed by a member of the opposite political party, or denizens working on Wall Street.

Then you get their political solution. More regulation, to see to it that the regulators catch the next bubble before it starts. Nip it in the bud, so to speak.

It cannot be done, except in fantasy political circles. Bubbles are hard to recognize in advance. That’s only easy in retrospect.

Example: The residential housing bubble. Then, Congress went out of its way to actually exacerbate, not salve a future problem.

There was legislation introduced years ago to reduce Fannie Mae and Freddie Mac leverage. That would have reduced the fuel that fed the fire under the housing financial bubble. And it was turned down by politicos who did not want to squelch the boom that gave lower classes an opportunity to own homes they could hardly afford.

So all talk about regulating bubbles is merely political. It has followed each bubble we have ever had.

Investment Banker Marriage/Divorce Earnings

Investment bankers can make money either way the market goes, with acquisitions and divestments.

As I have mentioned with regard to some hedge funds, money will continue to be made by a decided minority over the shorter term, from aberrations in the economy, and not corporate growth.

In addition, investment bankers make money with corporate marriages and divorces.

Example: On the AIG breakup, nearly $1 Billion for IPOs or underwritings, and consulting for breaking up AIG eventually is BIG money in any economy. Managing so-called toxic assets and handling other financial meltdown arrangements are huge sources of capital under any financial conditions.

Then there are other pending fiascos to be attended to.

What other business pays so well for those who give poor initial advice and are asked to tidy up their mess?

Hedge Fund Management Fees

Some past, conventional hedge fund fees, 2% of assets under management and 20% to 25% of profits generated, are being trimmed down.

Also, it’s getting tougher for hedge funds to find as many clients as before. Many are taking smaller-sized investment amounts.

But considering the 2008/2009 financial meltdown, hedge fund fees have been more stable than expected. Some hedge funds continue to make big money. But they are a decided minority, compared to the past.

As for the future, money over the shorter term will be made from aberrations in the economy, not corporate earnings growth.

So hedge fund fees will remain competitive.

Do the Chinese Believe in Capitalism More Than Does the Obama Administration?

The Chinese government, run by its Communist party, constantly reminds the U.S. that we have a too big budget deficit. The Chinese are troubled because they own over$800 billion (and growing) in U.S.Treasury obligations. And they see what has become a poor investment.

Especially with the U.S. going further and further into debt. They realize that this cheapens the value of the bonds they own.

Also, look at how the Chinese micro manage their budgets, along more capitalistic lines. compared to the Obama administration.

This is more than can be said about how present White House treats the subject of sound money according to capitalist principles.

Our Super Regulatory Agencies

Strict government regulations by themselves never work. The problem: There are too many agencies working with conflicting objectives.

Under the new-fangled Dodd-Frank regulatory fiasco, with the Treasury and the Federal Reserve in charge of all the banks and other financial companies and institutions, we have an addition to the miasma.

Also, SEC duties are expanding to a point where their whole administration has to be revamped. They did a poor job before their duties were broadened.

Transparency with less heavy-handed regulation always works better. However, that is also a matter of political talk more than practice. Transparency is what politicians mention only in their campaign banter.

Japan’s Deficit Spending

Japan has been priming its economic pump for decades, trying to get out of its economic stagflation. They use government spending to get out of a deep recession that began years ago.

They are able to do this because they are not as dependent as the U.S. on foreign countries to buy and keep owning their debt. The U.S. bond market depends to a much greater extent on other countries holding U.S. Treasury bonds. And the U. S. dollar has historically been more of a reserve instrument than the Japanese yen.

Still, prices in Japan are high, and consumer and business conditions are dismal. You cannot say Japan is getting away with deficit spending. Reality will catch up with them as it will with the U.S. eventually.

Buying Individual Corporate Bonds

Despite any media-directed suggestions, if you are an individual investor, any advice to buy individual corporate bonds is foolish. Use a low-cost mutual fund or exchange traded fund (ETF) instead.

For the following reasons:

One: You would have to purchase at least thirty to fifty different bonds to get some semblance of diversification in the event of possible future defaults.

Two: You could never buy bonds as cheaply as a fund does. And a low cost fund’s fees would be far cheaper in the long run than your efforts.

Three: Buy your bond funds by their duration. The duration period you choose ought to be about the same or less as your intended holding horizon. (If you are not aware of the term, duration, learn about it before you take any advice on bonds. Also see Earl J Weinreb NewsHole® comments on them.)

Four: The dividends paid by the fund or ETF should be automatically reinvested. Periodic interest reinvestments would be very impractical with direct bond purchases.

I have looked at the research, and am convinced that individual purchases of corporate bonds are a misstep for both large and small individual investors.

Economic Illiterates in Government

Politicians seeking the highest offices in Washington, and particularly the Presidency, do not have to take a test to see if they understand basic economics. It shows, in their comments and action.

Many are simply economic illiterates. Whether they speak off-the-cuff, or from a teleprompter. They may get words from some staffer who is literate on the subject. But when comments on business are extemporaneous, the gaffs are more evident.

It would help if more politicians came with business and entrepreneurial experience. They would not generally lean leftward. Being a lawyer, as many are, is of little help, especially if that background involved fighting business and industry.

Politicians on the job exaggerate as if they are campaigning for office whenever they orate. The problem is that they must get serious once in office. Words can have consequences, particularly because of psychological effects.

Politicians can profess free market economics but they cannot have policies that spell unfettered socialism. It might appeal to groups that helped get them nominated and elected, but it often won’t keep them in office. And it will have created immense damage while in office.

Socialism has never worked where tried. Except in the classrooms of colleges, even the fancy ivy-covered types.

Overlooked When Helping Banks

The Federal Deposit Insurance Corporation, or FDIC, which insures bank deposits, had been making it tougher for private investors to invest in weak banks and thus solve our current financial problems.

It’s about time to permit private sources to resolve banking problems instead of relying on the intervention of the government with takeovers. The latter ploy has not worked well, despite the rationale that only such bailouts are the solution to get us out of financial meltdowns.

Government solutions come with a steep price. Permanent government meddling and unspeakable debt. Plus future inflation.

Making it easier for private investors would help. But having the government influence banks is the Left’s politically preferred route.

Professionals and Timing Securities Markets

Professionals constantly time the securities market. Yet research shows consistent data: Market timing does not work. They make their money because of their inside positions, which entail profit factors other than market timing.

Just one example: Some of the largest investment bankers and commercial banks invested very heavily in commercial real estate at their highs. Property values then fell in value in 2008. The bankers have since sold at lows to private equity firms and hedge funds at bargain prices. The latter will profit, because values have risen and will no doubt greatly increase more.

The reason? It is not only that the banks need the cash.The smart traders there tend to make money because of their inside positions, not because of their assumed timing instincts.

Do Not Completely Trust Financial Media Pundits

There are a number of reasons why I don’t trust most financial media pundits.

Very often they copy others. Thus, their ideas and facts may well be stale and overused. As well as biased. The bias can be attributed to the fact that their slants may owe to contrived commercial implications of the advice.

Remember, pundits have gone to the same poor schools and colleges and gotten the same education including the same business courses and resultant MBAs. It can be an incestuous field.

Moreover, much of their suggestions come from sales efforts to sell particular products or services. This provides an illusion of punditry.

Examples include gold or commodity purchases as cure-alls for future inflation.

One-sided views of any investment strategy takes on an aura of truth if repeated often enough.

Also, media pundits tend to look over each other’s shoulders, so they do not stand out too much if they are wrong, or so they do not offend their editors,

Then there is the use of public relations release placements, because they are easier than original writing. In depth articles often are practically written for many reporters and analysts.

Above all: Avoid media noise. That chatter will ruin whatever investment discipline you try to maintain.