Less Securities Analysts at Work

A year ago, about one quarter of securities research departments announced they were dropping coverage of small=cap stocks, while about one sixth no longer covered mid-cap stocks. A large percentage of large cap stocks were no longer reviewed because less analysts were employed. The situation remains about the same today.

This backs up my position that it does not pay for an investor to evaluate securities. Whether they are professionally analyzed or not.

It’s extremely difficult to know what is going on in any business. Even insiders in a corporation don’t know how outside events will affect their business. So why should investors bother to buy individual securities after a so-called analysis?

Their best bet is to invest in low-cost mutual funds or ETFs, matched to indexes. ( See the Earl J Weinreb NewsHole® comments.)

Unknown Income Tax Possibilities

Very few of the public know much about the tax consequences of much of the financially-oriented news they see or hear. Some examples:

That foreclosed mortgages and any reductions in credit card loans and other loan forgiveness, result in an income tax bite. Amounts saved are considered income.

Prize money won in a TV contest by a lucky contestant is taxable as income.

And that free vacation trip or new car gift is probably going to be taxed at the retail value, not at the discount you could have gotten, had you bought it directly.

So, the contestants may be getting non-cash items for cash outlays they may not even possess.

Separate Regulation For Small and Sophisticated Investors

The need to send out complicated literature that small investors do not read and cannot even understand is unwarranted. Yet, the Securities and Exchange Commission requires them.

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

All that is required are outlines of important information, put forward in a manner the average investor can easily understand.

Government Regulation of Mutual Fund Fees

The government has been questioning whether fees charged by mutual funds for management may be a regulatory matter. Should Uncle Sam be the one to advise how high they ought to be?

Investors should know enough to compare funds’ expenses and to choose to buy those with the lowest expense of operation. The funds give this information very clearly.

In fact, management of 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 the right fund is low cost.

However, that should not be the government’s function. Politics have a nasty habit of interfering with choice, and politicians are not the wisest advisers around.

The Federal Reserve’s Conflict of Interest

I recently commented on the new financial regulation law which, in effect. has tilted the effect of the Fed in many ways, giving the executive branch of government much more power that it ever had.

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

Despite the logic for the Fed’s independence, Congress always has wanted to impose some influence. It has to an 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.

The Humphrey-Hawkins Full Employment Act enforcement creates an inflating bias. Certainly not one of dollar stability. So there is always a conflict of interest.

Congress would want the Government Accountability Office, their investigative arm, to audit Fed monetary policy. And the Obama administration constantly wants to add fresh responsibilities, which are bound to sap the Fed’s objectivity and main focus.

The Assault on the Independent Federal Reserve System

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

Congress in the past, especially when dominated by the Democrat party, has never been happy with the Fed.

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 Left.

The proposed financial regulation law has, in effect. tilted the influence on the Fed in many ways, giving the executive branch of government much more power that it ever had.

I will comment on how it does in the future.

Media Exaggeration

The media love to exaggerate, and that includes members of the financial fraternity.

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

Investigators now believe the total sum involved was actually closer to about $12 Billion. The sensationalist media continues to pick up the $65 billion number because it suits their purpose.

Or they are just Ignorant, or merely lazy?