Dodd-Frank and Political Influence

These days especially, it’s nice to have friends in the right places in the government.

Hedge funds of any consequence, under the Dodd-Frank Act, have to register with the Securities and Exchange Commission. Unless they are considered “family office.” That is, they have no outside investors. No matter their size in multi-billions of investments at play.

The whole idea of registration with the SEC was that the size and presence of such market players, with their lack of market transparency, could make the markets risky with their actions.

Hedge funds had little to do with the 2008/2009 financial meltdown but Washington liberals still castigated them. Until now. Political influence does help. ( See the Earl J. Weinreb NewsHole® comments.)

Proof That Spending Cuts Produce Jobs

Liberal politicians insist that they cannot cut spending in order to create jobs during a recession or depression. They cite Keynesian economics for their reasoning; the theory of the early 20^th century English economist John Maynard Keynes.

However, they have been –over simplifying Keynes’ short term ideas with a religious-like permanent philosophy and are overlooking some pertinent comments and critiques Keynes had made about his ideas.

Need proof? President Reagan years and Canada today show that spending cuts do work. ( See the Earl J. Weinreb NewsHole® comments.)

The Sales to Price Strategy

One of the strategies I have investigated is one at times recommended by financial observers, having to do with sales/price ratios, rather than the usual earnings/price ratios.

You can find many instances where companies which excel in the sales category do better than most. But when you look at the pros and cons, in too many instances, the inability to convert sales into earnings is an overwhelming problem, not an asset to be sought when investing.

Caution! Of all the strategies I have studied, price/earnings are the least favorable despite their wide use; they cannot be disciplined, as I have often explained in detail. ( See the Earl J. Weinreb NewsHole® comments.)

The Obama Administration and Bailing Out Banks

The Obama administration says it wants to help business. One way is to loosen credit. At the same time, however, the Obama administration is creating regulations which will overhaul big bank credit.

This means many bigger banks will receive lower credit ratings. Should they do, they will have to borrow at higher cost in the bond markets. Moreover, the regulations will not have any practical effect in making banks more secure.

The administration cannot have it both ways. The media go along with the charade, and give the administration a free pass.

So far, surprisingly, the markets allow big banks to borrow more cheaply than smaller banks. This means that the market feels that big banks will be bailed out once again by Uncle Sam, no matter what the Obama administration has been saying. ( See the Earl J. Weinreb NewsHole® comments.)

Credit Default Swaps (CDS are Real Credit Ratings

Credit Default Swaps are insurance on U.S. Treasury bonds and notes and on other global government bonds,

Right now, for instance, the cost of such a so-called CDS on a five year U.S. bond is about 0.5%. The insurance, in other words, is that additional cost over the market level. Incidentally, early in 2009, the CDS was about 1% over prevailing rates for the five-year Treasury bond.

In practical ways, Credit Default Swaps are actually credit ratings and are useful in the current debt emergency.( See the Earl J. Weinreb NewsHole® comments.)

Investing Wisely Rules Recap: Part 2

Further to my previous thoughts for investing. Some additional rules:

1) If you are starting out you may want to use a minimum amount with which to invest in a corporate bond index ETF and also a minimum amount in a total market securities ETF. If you have sufficient funds, do the same in an REIT ETF. In all cases, reinvest your dividends.

2) In dealing with bonds, keep your duration factor below the term of your holdings. If you will be holding the securities for more than 7 years, for example, the duration can be 7 years or less. If you will be holding the securities for more than 10 years, the duration can be 10 years, etc.

3) Avoid media noise at all times. Once you have an investment strategy in place, and you are set in your strategy, why let incessant, daily media chatter and sheer nonsense dissuade you from your original goals?

4) The only adviser you need is an accountant for taxes or a lawyer for your estate? And see the Earl J Weinreb NewsHole® comments.

Expensive Advisers

Further to my previous comments on conventional advisers and hedge funds, and their steep costs that make it tough for investors to succeed.

I advise against taking investment advice from salesmen and sales ads. You get only one story they want you to hear. It’s the other side or comment that would probably be the correct one for you.

And be wary of stock brokers who have to sell you to make a living or who simply do not have the time or expertise to be of real help. Their training is mostly brokerage back-office and to conform to extremely broad “suitability” standards. ( See the Earl J. Weinreb NewsHole® comments.)

How About a Gold Dollar Standard?

We ought to use gold as a standard of currency measure. We made a major mistake when we allowed Ivy League professors advise President Nixon into going off all vestiges of a gold standard in 1973, when the dollar became the world’s reserve currency.

Paper with no intrinsic value has since been accepted as having value but has been constantly devalued by American politicians with spend-and-spend and tax-and-tax philosophy.

Unfortunately, the limit of the world’s patience about our budget discipline has been reached.

Individual holding of gold is no solution for ensuing inflation. Gold provides no income. There are better ways to overcome inflation. But the cheapening dollar is a major domestic and global problem. Particularly, if it no longer will serve as the world’s reserve currency, and no one accepts it as having global value

We need gold as the standard of dollar value. Liberals won’t like such backing because they will not be able to play games in order to entice ignorant voters. Wall Street insiders may not like gold backing because of the absence of easy money.

But it will save the economy. ( See the Earl J. Weinreb NewsHole® comments.)

Investing Wisely Rules Recap: Part 2

Further to my previous thoughts for investing. Some additional rules:

1) If you are starting out you may want to use a minimum amount with which to invest in a corporate bond index ETF and also a minimum amount in a total market securities ETF. If you have sufficient funds do the same in an REIT ETF. In all cases, reinvest your dividends.

2) In dealing with bonds, keep your duration factor below the term of your holdings. If you will be holding the securities for more than 7 years, for example, the duration can be 7 years or less. If you will be holding the securities for more than 10 years, the duration can be 10 years, etc.

3) Avoid media noise at all times. Once you have an investment strategy in place, and you are set in your strategy, why let incessant, daily media chatter and sheer nonsense dissuade you from your original goals?

The only adviser you need is an accountant for taxes or a lawyer for your estate. And see the Earl J Weinreb NewsHole® comments.

Investing Wisely Rules Recap

How do you go about investing if you are just starting or are not a professional investor?

You can start doing what the most experienced never do, and avoid many of the pitfalls they may stumble into.

1) Do not trade securities for this basic reason: Research invariably shows that you cannot time the market. So avoid any web sites that entice you with stock trading tips.

2) Open an account with a very low cost mutual fund family of funds.

3) Do not make a habit of buying individual securities.The analysts who claim they know all about them know very little for two reasons. First: Analysts are not really versed in business. Secondly: They really cannot get close enough to understand a business that even the CEO often finds difficult to comprehend. (See the Earl J. Weinreb NewsHole® comments.)

Expensive Advisers

I always advise against the use of expensive advisers who take, on

average, 1 1/2% or more of your assets each year. That can represent as much as 20% and up of your annual investment earnings.

For those who invest in hedge funds, be prepared to part with about another 20% of any investment earnings, on top of that management fee.

You have lots of catching up to do just for all that advice that is often wrong or merely not worth it.

Look at any compound interest table and see what that chunk of your wealth this will add up to over just short years. ( See the Earl J. Weinreb NewsHole® comments.)

The “Worst Recession”

Politicians describe past recessions to suit their views. It comes in handy when they are running for office, when they need to paint a suitable economic picture.

In 2000, with unemployment about 4.0%, we were told by Democrats out of office, that we had the worst depression since the 1930s. We actually were in the midst of a booming economy.

In the mid 1970s, when President Reagan took office. We were experiencing a severe downturn, as bad, if not worse, than what we have today. The fall in GDP was 4.9%. Compared to a drop of 18.2% in 1937-38. That truly was the worst economic cycle since the 1930s.

What we can therefore correctly say is that today’s is the worst recession since 1973-75. ( See the Earl J. Weinreb NewsHole® comments.)

Incidentally, President Reagan never blamed the previous president, Jimmie Carter, for the job Reagan had in making the prodigious economic recovery.

How Financial Bubbles Occur

I see where our past experiences on financial bubbles are going to waste.

In my studies as a market analyst and businessman, I have seen how bubbles originate, and then cause damage. I would like to make suggestions.

Bubbles are not stopped by Federal Reserve action on interest rates, as is usually suggested by pundits. That is because politicians always take over, and often influence any dampening of interest rates by the Fed.

Not in a manner that can have an effect on a bubble. It would, for example, have had done absolutely nothing with the internet bubble. Or even the mortgage bubble because interest rate adjustments then would have been applied too late. The Fed’s miscues were too early to have been recognized.

Interest rates today are too low to start with, so the Fed inflates with bond purchases;

Action or inaction by the Securities and Exchange Commission would have been effective. Just sitting on obviously useless and dangerous financings, instead of open-handed approvals of questionable underwritings created the internet bubble.

By merely slowing down the underwriting of questionable deals, the SEC would have dampened many such past debacles.

So the Fed had little to do with the bubble solution all the time. In fact, it has aided and abetted the problem. ( See the Earl J. Weinreb NewsHole® comments.)

Commodities to Offset Inflation?

Is investing in oil, gas, mining shares, gold, silver and other precious metals, the means to overcome inflation?

It is not simple as often presented by the media.

Many commodities can only be held in the form of futures contracts of less than a year. They are speculative and have to be continually renewed for the long term. It takes trading experience, with no assurances of lasting success.

Mining corporation investments have all the complications of securities investing that involve conventional strategy. The ability to master discipline is essential. Few investors, professionals or amateur, are adept at this aspect of successful investing.

Buying gold or silver coins or bullion presents other problems including that of storage and insurance.

My comments on other investments to offset inflation appear here from time to time. (See the Earl J Weinreb NewsHole® comments.)

Currency (Forex) Trading

Currency trading is the biggest financial market, dominated by banks, funds, investment companies and commercial corporations. About $4 trillion are traded every day; the amount is growing by double digits.

Currency trading involves buying one currency while selling another at the same time. Americans now prefer the Dollar/Euro relationship.

However, such trading is not truly suitable for small investors, for whom it’s more like gambling.The lure is the small entry amounts and considerable leverage, as much as 50 to 1, much more than is possible with securities and other commodity trading.

The basic downside is risk: Only about 30% of currency accounts are profitable

If you insist, you have to have a set strategy. There are automated programs that help but are no guarantees for success. No matter how much research you do, so many constant influences beyond a trader’s control, domestically and globally, affect currency prices ( See the Earl J. Weinreb NewsHole® comments.)

Credit Rating Agency Importance

Another Education 101 For Liberals:

Credit rating agency importance cannot be overlooked in the discussion whether the U.S. keeps spending beyond its means today, or sometimes in the distant future when today’s politicians are dead or retired.

Liberal politicians cavalierly seem to think it’s o.k to have budget deficits as long as you keep raising the debt ceiling. The reality: No one in the rest of the world will consider the dollar convertible, thus an investment.The cost of U.S. borrowing will go sky-high. The budget deficit will be truly unmanageable.

Credit agency downgrading is the timely warning.

The debt ceiling is the key that permits liberals to go on spending because taxation always restricts business expansion and total government revenue. ( See the Earl J. Weinreb NewsHole® comments.)

The FDIC, Dodd-Frank and Too-Big-to-Fail Institutions

The one member of the Obama administration involved with financial regulation, who better handled financial institution problems was Sheila Bair, the recently retired head of the Federal Deposit Insurance Corporation.

The FDIC, which insures bank member deposits, takes over institutions when in trouble. This often involves takeovers by other, sounder institutions.

The principle can be applied to the problems that perplex so many in Washington. Too many feel the recent Dodd-Frank regulation must entail new government agencies and meddling with unexplored ideas and ventures. ( See the Earl J. Weinreb NewsHole® comments.)

ETFs Vary

ETFs, or exchange traded funds, vary a good deal.

They may differ when they track an index set by securities earnings rather than by securities market weightings. That will make a difference. Index make-ups may also vary within group types. The number of shares in an index is also important, as the size and trading value of those shares will then vary.

Trading volume is important as liquidity helps traders using ETFs. And there are many who periodically want their dividends reinvested. It’s important they get better pricing on small purchases.

Even if the ETFs use the same stock indexes, underlying costs of operation may differ. Lower-cost is a better choice. ( See the Earl J. Weinreb NewsHole® comments.)

Avoid Trading Temptations

I leave frequent trading to the very heavy volume pros on Wall Street who can profit from their insider position.

It’s that insider position, along with expensive software, that gives temporary assistance until it no longer works for them. And all that ample capital, plus the extensive credit leverage that offers these insiders an odds advantage for awhile.

But average traders should avoid the temptation. ( See the Earl J. Weinreb NewsHole® comments.)

Investing in Risk

Left-leaning politicians and the media, mistakenly, negatively criticize the risk of derivatives, losing sight of the fundamentals of the subject.

The truth is, many investors seek risk, the riskier the better. They weigh risk against the added return they get from that risk. Sometimes the added return comes from short selling, or betting prices will fall.

In every transaction there is a buyer who wants in and a seller who wants out. Particularly when sophisticated buyers and sellers are available, as in derivatives, why is the government the arbiter of risk?

As far as the non-sophisticated are concerned, the media’s job is to explain the basics, so the masses keep away from what they are not familiar. (See the Earl J Weinreb NewsHole® comments.)

The Repos Transaction

A repo transaction involves a firm selling assets to another company, while agreeing to buy them back at a slightly higher price after a short period.

This can take as little as overnight, so the transaction becomes a short-term loan with the assets the collateral.

Because the term is short, there is little risk the collateral will lose its value. The lender or firm making the purchase thus takes a low interest rate.

With repo transactions, a borrower can get funds more cheaply than it could with one long-term loan that would put the lender at greater risk.

Under standard accounting rules, ordinary repos are considered loans, and the assets remain on the firm's books, But if a borrower could find a way that removed the assets from its books, often just before the end of the quarterly financial reporting period, the move temporarily made the firm's debt levels appear lower than they really were.

That is where investment banking bookkeeping disputes arose during the 2008/2009 financial debacle. ( See the Earl J. Weinreb NewsHole® comments.)

The Value of Indexed Mutual Funds and (ETFs)

Investors buy managed mutual funds though most fund managers rarely beat securities averages. That is why more and more are turning to the use of indexed mutual funds and related Exchange Traded Funds( ETFs).

Index mutual funds and ETFs are generally much lower-cost than managed funds. Low cost is the most important investment factor you can rely upon for long-term results.

And when some managers do better than indexes in a particular type of fund, they sometimes get nervous. Then, they play it safe and merely attempt to emulate the averages the rest of the year. They may be afraid to defy odds of being successful, compared to indexes.

I have always suggested the use of index funds. Especially because large mutual fund portfolio managers tend to find it so difficult to outperform indexes. (See the Earl J. Weinreb NewsHole® comments.)

Securities Analyst Earnings Estimates

My research on securities analysts has given me insights that have taught me much about them.

Wall Street gets excited about how companies and analysts estimate earnings and whether analysts can manage to hit their estimates closely, or not at all. In fact, there are strategies based on the percentages of closeness-to-estimates that analysts get.

The sharp pencil folks in the financial community can come up with anything that will attract believers. Their machinations add up to little in the real world. ( See the Earl J. Weinreb NewsHole® comments.)

Derivatives Made Simple

Few fully understand derivatives. So politicians misuse them for their purposes.

Derivatives are a financial necessity as a a form of side bet that helps reduce the risk of a financial transaction. It’s a device that has been in use by commodity merchants for over a century and a half. It protects investors against the possibility the price trend of an original investment goes wrong. It’s perfectly legal and ethical.

Some simple derivatives are easily listed on an exchange. And they contain collateral in case of a market downturn. But not all derivatives can be worded simply. Some say, only bankruptcy courts can handle their settlement.

So forget the diatribes against investment firms who write derivatives and are on both the buy and sell side at the same time. It’s reasonable.

Politicians and media who are ignorant of the process are deluding the public by carrying on about derivative fraud. ( See the Earl J. Weinreb NewsHole® comments.)

Another Dodd-Frank Failure

Since the Reserve Prime money market fund was unable to keep its price at $1 a share in 2008 because it had invested too much in Lehman Brothers commercial paper, regulators have been on the lookout for similar occurrences.

Now, with a year’s worth of added, stifling regulation, in the form of the Dodd-Frank Act, there are added reports that the Greek financial fiasco may have impaired certain European banks, especially French commercial paper, in which some, not all, money market funds invest.

As is the case with all these inept regulations, they stifle business activity more than they minimize risk.

Investment Risk and Dodd-Frank

The Obama administration and many liberals keep talking about preventing “systemic risk” from causing another financial meltdown. This is pure political talk for the mass vote.

They have absolutely no idea of systemic risk, though we have all just lived through a huge financial crises. No one was able to recognize such risk in the past. No one will be able to foresee one in the future, because of inept politicians.

The question of what is risk simply has too many variables: The size of a financial institution under study is one. Other institutions involved with the first will add to the mix. Political implications are important because of the influence in Washington that financial institutions may have, and so on.

There is a list of potential complications and considerations that make it difficult to estimate risk and mitigate it. Poor psychology that festers and attends such meddling just exaggerates the mess.

Much of the remedies of the past have been trial and error. The vast bulk have proven to be in error. Lehman Brothers and Bear Stearns were examples of foul-ups by government.

The Dodd-Frank Act has exaggerated the problem with more potential human error. ( See the Earl J. Weinreb NewsHole® comments.)

Automatic Buy Low/Sell High Strategy

The automatic buy low/sell high strategy is one of over 1,600 I have studied. It has its advantage if it can be disciplined. The disadvantage is that many of the strategy’s followers aren’t disciplined.

Moreover, it’s not simple to use, particularly when applied by average investors, who usually have difficulty in its implementation.

Studies show that buy low/sell high strategy may return more than haphazard, in-and-out market trading, but only if it can be disciplined. That effort, however, can be a questionable undertaking.

The natural tendency for any trader is to stay attuned to the market. Few investors, even professionals, can master that discipline, in an attempt to determine highs and lows, amidst constant market chatter.

The main disadvantage: Many of this strategy’s adherents are not disciplined. They wind up mistakenly attempting to time what they feel are appropriate buying and selling points. ( See the Earl J. Weinreb NewsHole® comments.)

Over-Paid Ball Players a Symptom

Federal stimulus funds had backed local and state entities with aid. Therefore, funds were indirectly but effectively made available to pay club athletes.

Ball players play a kid’s game, yet can earn as much as $20 to $30 million a year, with multi-year contracts that guarantee income despite possible injury and incapacity and failure, At the same time. top executives, with honed skills are criticized if they get $1 million or so in income or bonuses.

Execs are easily fired if they don’t produce. Ball player salaries are usually not cut if they choke up in the clutch. Or have a losing season. Their jobs are simply traded away.

And athletes work for ball clubs that also received stimulus and taxpayer funds. Each time a new ballpark is built, some government agency has helped in the financing; tax abatement or bond funding, or a form of long-time subsidy.

Keep this trend up and the U.S. will change its economic growth characteristics. It will become a second-rate, European look-alike. With a permanent high unemployment rate to match.

SEC Toughness When Recession Requires Sensitivity

The SEC is still seeking fraud charges against credit agencies on ratings for collateralized debt obligations or CDOs that turned bad.

Moody’s, Standard & Poor’s and several rating agencies already have had a court ruling in their favor. The court has ruled that the agencies, as analysts, cannot be generally held liable for errors in judgment when making honest investment opinions.

The Securities and Exchange Commission’s ongoing recrimination mission is on a slippery slope. The SEC purpose will help plaintiff lawyers and others to whom the Obama administration leans politically.

But the effect on the economy because of the poor business psychology it induces, will be extremely harmful.

Risk in Financial Transactions

Our left-leaning politicos in Washington cannot get us out of a recession, and are actually getting us mired into a deeper rut.

They and their bureaucrats keep advising about reducing financial risk.

What is risk? Not having enough federal watchdogs in Washington? Buying securities in a depression? Buying a hedge-type security, while selling short its derivative?

Or our government spending sums it won’t be able to pay back without cheapening the dollar and creating another Greece here in the U.S.?

Has anyone on the Washington Left truly decided what true risk actually is? Apart from a politician having to tell the truth about legislation?

When the Obama administration’s regulation in the form of Dodd-Frank carries on about risky investments and it seems no one there is qualified to really understand the term, it’s time to hold on to your pocketbooks. ( See the Earl J. Weinreb NewsHole® comments.)

Never Buy Mutual Funds Using Past Data

Research has shown that past performance over previous years will have no effect on future results of a typical mutual fund. Apart from these historical performance findings, there are basic reasons why past records are not helpful.

Managers of funds come and go; there are few who consistently are in charge of a fund’s direction. There are usually group efforts involved; the teams are always fluid.

Managed funds invariably never perform as well as the indexes they usually follow. Managers who outperform indexes in any one year are often inconsistent in following year efforts.

The only certainty you have of future mutual fund performance is to invest in those with lower costs, who invest in market indexes. ( See the Earl J. Weinreb NewsHole® comments.)