The Smartest People You’ll Ever Meet

 

A lot of professionals are arrogant know- it- alls who are not bashful at all about letting people know it. I’m in the investment business which has more than its share of smarty pants boys and girls. What I’ve found in my lifetime is that the more money some people make or higher up the corporate totem pole they are the more knowledgeable they think they are and are willing to tell you how to invest, where the economy is going and all the reasons why they are God’s gift to the human race. If the Pontiff asks you kiss his ring these folks ask you to bend a bit lower to press your lips.

In the book The Smartest Guys In The Room’, about ill fated Enron headed by Lay-Skilling and Gang these were people who knew they were the smartest people and aimed to prove it by getting paid for their brilliance. They  did this by creating opportunities that cheated others in order to enrich themselves. They believed they were worth more that what they could earn from honest labor. Or, put another way, they couldn’t justify their egos by just doing things the right way.

Today we have Goldman Sachs, an investment bank known for grooming future Secretary’s of Treasury like Hamburger U churns out fast food franchise owners. I have to assume that if Machiavelli ever came back it would have to be as a GS banker. Even the 31 year old youngster that is about to be thrown under the bus. Fabrice Tourre, referred to himself as the fabulous Fab as the economic world was collapsing about our ears. I don’t know of anyone in the normal world of business that refers to him or herself as fabulous this or that, but only in investment banking world where money is handed out by the truckload are egos allowed to soar with such grandeur, or is it impudence.

Ask anyone on the Street and the majority of Wall Streeters still genuflect when Goldman Sachs is mentioned.  That day may be ending. It is an investment bank that takes no prisoners, is unbelievably profitable and hires what are the best and brightest. It is known not only for its prosperity but also for the intelligence and business savvy. There is a reason why Secretary’s of Treasury come from this firm.

The SEC now says that Goldman committed fraud and Goldman says it did not. On that we know there is more than a difference of opinion. One or the other is terribly wrong and Goldman is preparing to fight to the end, which usually means judge and jury. Here is where Goldman will have less the advantage since they will present their case to average men and women, some who have difficulty balancing a checkbook, and couldn’t define a derivative from a dangling participle. These average people will be expected to understand collateralized debt obligations, collateralized mortgage obligations, mortgage backed securities and how synthetic investment products are created and sold. The smartest people in the room don’t have a clue as to how these products work. Don’t expect Jim and Jane Next Door Neighbor to grasp the intricate creative investment theory. The fight will be contentious and without a doubt Goldman will lose. The one thing Jim and Jane Next Door Neighbor will understand is lying. You may be able to fool them with the shell game but looking them in the eye and trying to say Goldman did nothing wrong with a straight face just isn’t going to fly. From my perspective Goldman Sachs needs this fight like I need another hole in my head.

Chucky Schwab recently settled for over $200 million, just before going to court, after being accused of misleading investors on the amount of mortgage-backed securities held in its Schwab YieldPlus Fund. If Chucky had to cough up $200 million clams can you imagine how many billions it’ll cost GS plus its reputation?

Warren Buffett is saving his Goldman response for his stockholder meeting this coming week. He is expected to fire at will, according to the WSJ. Warren’s partner, Charlie Munger, thinks GS did nothing illegal but believes that the ‘whole industry has lost its moral moorings’.

Finally, Michael Lewis, writer of the Big Short and Liars Poker, in his op-ed for Bloomberg Businessweek, ‘ Just as there was a time when people could smoke on airplanes or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe a ratings agencies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done. That just changed.’

If you have questions about this blog call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com. Share this with someone who cares about their money.

 

 

Tuesday Musings- April 4th Week

• Shopping for quality foreign bonds can be found across the border in Canada. Canadian banks did not participate in the mortgage foolishness and are attracting record foreign investment. Canada is being viewed as a store of value and most foreign bond buyers are Americans.
• In case you ever wondered - Best markets day Monday, worst market days Friday. Someone had spare time and analyzed this. Playing the odds I would guess you buy Friday late and sell at the close on Thursday. Of course now you have to figure out what to buy and sell.
• Monday opened lower but ended mixed after SEC charges of GS fraud settle in. Big Blue hoists big numbers and drives the Dow higher. Gold off again and oil keeps falling.
• Tuesday saw gold and oil trade higher. Apple posted big numbers. Big Blue (IBM)gave back gains from the day before. Still the big news is Goldman taking the fight to the SEC, hiring hot shot Dem insider lawyer. So far no denial of allowing the wolf (Paulson) into the chicken house to design bad product, Markets ended up nicely for the day.
• Wednesday saw markets mix. Apple moved higher on huge iPhone sales. Something’s not right with fertilizer and certain commodity stocks as they languish with little investor interest. Technical's suggest a sell off on the horizon. Gold flat, oil down.
• Americans suddenly favor American manufactured cars over Asian and European. (Does anyone else get nervous seeing a Toyota in their rearview mirror?)
• Thursday saw the President giving it to Wall Street and the markets were sluggish to the end.  He scolded traders and execs and said if their business was bilking customers he could understand their reluctance to not change current law. After being taken to the woodshed it was ‘I don’t care what happens’ type of day until AmEx popped up with double the profit and news of card spending up. Glory, good news on that turned the markets around but the party ended after the 4 o’clock bell as both Amazon and Microsoft crashed and will open substantially lower Friday. Oil made a major move and closed up. Could have been a knee jerk reaction to the oil rig, but I doubt that. Gold was off.
• Busy-busy IPO day Thursday but nothing to get excited about. Only one issue closed higher Codexis, Inc., a renewable energy firm. And that was a slight increase. Too many deals and too many with low to moderate investor interest to make anything worth writing home about.  All those waiting for GM & Facebook IPO raise your hands?
• Apple now #2 on S&P 500 behind Exxon in market cap. (That can’t be right!? They make dandy products but #2 ? Folks, you will be seeing some traders shorting Apple. Still others see it unstoppable.
• If you haven’t shopped Amazon you haven’t shopped. Cheap and quick. It’s like you click the mouse and the UPS truck is ringing your door. You still need to do your homework on certain items but for books, games, toys, cds, the site is great. No wonder I like and so do millions as profits rose 46%. Stock gave up some on Friday as it gave cautious guidance for the current quarter.
• Friday new home sales racked up sales up 27% as new home buyers started snapping up bargains. Oil surged as a huge rally to over 85 a barrel caused the markets to move late in the day. Positive comments from Schlumberger fed the positive move. AmEx up on carryover from Thursday. For the week markets up. Worries continue into the new week but it is the nature of the beast.
• Warren Buffett’s Berkshire lobbied for grandfather rule on derivatives. Seems Warren doesn’t follow his own fatherly advice has a $63 billion derivative portfolio. Warren once said of derivatives, ‘financial weapons of mass destruction.’ Say it ain’t so, Warren.
• If you like last week’s markets you should love the coming week, according to many traders. This looks to be the best quarter in more than two decades.
• Finally, FDIC shuttered 7 Illinois banks bringing the total year to date 57.

If you have questions on this blog call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com and share this with anyone who cares about their money.

Is It Time To Start Buying Commodities?

The Federal Reserve raised the discount rate, which is the rate it charges to make loans to member banks, and investment strategists are all a lather that this is ‘the’ signal to start adding commodities to investment portfolios.

If you don’t think the markets are not made of people who are emotional you just have not been paying attention. Think Jimmie ‘The Sky Is Falling Cramer’ in case you had a lapse in memory. Investment professionals are kissing cousins to back seat drivers and just about anything that happens from volcano eruptions to TMZ interviewing Ice-T’s Nicole Austin makes them nervous. “Turn left- Sell this!’ Lately some investment professionals have been hyperventilating because of a tick in interest rates. This they see this as the beginning of the Fed tightening cycle.

Robert Johnson of the CFA Institute said, ‘Commodities perform much better in a rising interest rate environment.’ He pointed to a 37 year study where the Fed changed the discount rate 113 times but only 18 of those moves meant that investors would need to get in or out of commodities.

The study went on to find which percentage of commodities added to a portfolio optimized the best results. Five percent was found to do little to increase return or reduce risk but fifteen percent of assets seemed like the perfect addition to maximize returns during an inflationary cycle.

The problem is which commodities to use. This year we’ve seen sugar tank by 38% and nickel gain 35% due to an increased demand from steelmakers. Agricultural ETFs are still off for the year while gold hasn’t broken through last year’s high. Pimco, Blackrock and American Century have ETFs that track a broad based commodity index.

Some experts contend that these ETF investments are too generalized to do any real good and recommend a more narrow focus of targeting on specific commodities. Howard Simons with Chicago based Bianco Research suggests that copper, zinc and other base metals have the ‘best’ outlook.

The problem is loading up on a specific sector that Simons suggests and not taking a generalized overview of the entire commodity sector. In that case investors need to be extra cautious in case this proves to be a premature signal. And we all know what happens when we listen to those that think they know what they are talking about. Right, Jimmy?

If you have questions on this blog call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

Making Money The Old Fashioned Way

Over the years investors have been bombarded with asset allocation, rebalancing, tactical allocation and the use of commodities and other exotic investments. It has gotten so confusing and so sophisticated that the average investor often gives up or tries to emulate a complicated allocation utilized by governments or hedge funds. It’s time to revisit and understand that simple works and is often all anyone really needs to make money.

When I was teaching investment management at the Adult Ed one point I would make was that a lump sum investment over a significant length of time always outperformed investments made monthly over the same period of time. The last 10 years with two major market meltdowns proved that statement wrong.

In fact, using a mutual fund that matches fairly well with the S&P 500 index someone who invested a lump sum in January 2000 versus someone who invested that same amount spread out monthly over the following 120 months found a significant difference in return. The lump sum investor earned a paltry .33% per year while the monthly investor averaged a staggering 3% per year. Yes, dear reader, the lump sum investor earned about a third of a percentage point a year!

The old joke on how to get to Carnegie Hall, practice, practice, practice. Let’s use that on how you can make money with your 401k, IRA or 403b. The answer is invest, invest and invest consistently.

The folks who made it through the latest depression, as scary and deep as it was, were those  who kept on doing the very same things that they were doing before the crisis came knocking on our door.

I am willing to bet that everyone out there knows at least one person that said that he or she was never going to invest in the stock market again and stopped their 401k or IRA, or whatever it was that they were consistently investing in and is sorry about it today.

The winners were those folks that kept on buying shares with the same amount of money that they had earmarked before the depression hit. This consistent method of investing is as old as I am, which makes it an ancient and simple method of wealth  building. The people who followed that principal are either even or close to it or in some cases (depending on the account size), ahead of where they were eighteen months ago.

Dollar cost averaging is what professionals call systematic investment. You choose a singular amount, a particular investment and allow it to buy each and every month. In most cases, for the first few years, the investor contribution will probably buy the same number of shares per investment but as time goes on something interesting happens and the amount of shares per same dollar investment decreases. There are even peculiar moments where for a month or two the systematic investments happen to buy an extraordinary amount of shares for the same amount of money. These are explained as market dips, much like we had when GS was accused of cheating customers.

Over an extended period of time and as long as you are investing in a mutual fund and not a singular stock there is a significant gain, although it never really matches the actual fund’s annual performance. And this is because the dollars invested have different ages, 12 months, 11 months, 10 months, etc.

One writer tried to explain that dollar cost averaging would gain an investor a consistent 10% per year but that’s impossible. The actual average is far less because of how the money is being invested. It is a time and money thing and if I had a chart I’d show but you’re there and I’m here so just take my word for it.

What dollar cost averaging does is buy at all price ranges, catch good and bad share prices and has a remarkable ability of reducing the cost of shares over an extended period of time. What it does not do is have an ability of making someone rich. It’s very design of buying systematically prevents that.

In down years dollar cost averaging works better for investors than lump sum simply because of catching different and lower share prices and not committing dollars at the higher share price. Over greater time periods this disadvantage reduces considerably.

And, as we discovered by doing some basic math the last 10 years favored the systematic investor. The next 10 may not but no matter, investors may have finally learned that to stay the course is the best advice of all.

If you have questions call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com Share this blog with someone who cares about money.

Tuesday Musings – April 3rd Week

• Dow 11,000 barely squeaked out and held last Monday as nervous traders did little except look ahead to earnings. Little action was also due in part, according to Nick Kalivas, VP of financial research at MF Global, a wariness of round-number levels. (I do not make this stuff up.) Losers outnumbered winners. Both oil and gold fell. And – China reported its first monthly trade deficit in 6 years.
• Avon suspends 4 execs for possible bribery in their China market. Latin America accounts for 40% of Avon’s biz.
• Tweet adds ads. It’ll go public when it gets firmly googalized. Watch for IPO. Alcoa downgraded.
• FDIC extends unlimited deposit insurance to business accounts at small banks that earn little or no interest.
• Internat’l Energy Agency revised forecast for global oil demand up 30,000 barrels a day. Higher than expected.
• FYI- the great recession has not been officially declared over. The Nat’l Bureau of Economic Research is the umpire for declaring beginning and ending of economic events.
• Cheapest value stock in the Dow- Microsoft, including its $4 cash per share hoard.
• Tuesday markets unsure -investors strong demand for Greek debt with EU guarantees. Barrons and others recommend to stay away from bad debt.
• Consumer Reports gave Lexus SUV a rare ‘Don’t Buy’ rating. Toyota pulls car from market.
• Morgan Stanley’s real estate fund losses wipe out 2/3’rds value of $8.8 billion making it largest loss ever.
• Tuesday another earthquake this time China.
• Intel scores big! Profits up 44% from year ago.
• Mark Coffelt of Empiric Core Equity Fund believes US market has a ‘long way to go’ before rally finished. (I never heard of him either.)
• U.S. will need 150,000 more doctors for for the millions of new patients.
• Wednesday was one day you just didn’t want to miss. Bernanke spoke and ‘surprise’ instead of tanking when the Chairman opens his mouth a triple digit day. JPM 55% profit coupled with Intel’s Tuesday move stoked all sectors. 52 week highs. Financials and Techs were the duo that moved everything.
• More than whispers saying we are in the middle of a V recovery. Meaning it went down fast and it’ll come back fast. Retail strong- ‘scuse I’m on the way to Target…the store that K Mart could have been if it didn’t lose its way. Does anyone believe we’ll see a K Mart in a decade?
• I get a strong sense that someone will do something to punish Big Banks simply for retribution and because they can.
• Thursday seemed markets were pooped from their run earlier. But still there was plenty of momentum leftover with tech and banks leading for a small gain. Google crushed with 37%+ profit surge. UPS reported better numbers. (Delivery stuff!)Manufacturing got in the way as Ford was up with better than expected European numbers. Across the board everything was up ‘cept oil.
• Friday the markets fell triple digits as the SEC charged Goldman Sachs with fraud.
• Markets still up for the week. Gold off as is oil.

The New-New Recovery

Jimmy ‘Ze Big Mouth-The Sky Is Falling’ Cramer sings many tunes. Some 15 months ago he frightened investors world-wide with his ‘fire in the theater’ antic on NBC’s Today show. He told listeners that if they needed any investment money over the coming five years they should sell immediately what they owned in stock and put it in cash.

Less than a year later, with no mea culpa,  Le Grande’ Mouth pops up again  on the same show and tells people to buy-buy and buy everything of what they just sold-sold-sold. So what happened to waiting 60 months? Why did so many people create tax burdens when they didn’t have to? It simply proves that even people who have experience (Jimmy ran a hedge fund successfully for years) don’t have a clue as to what is going on. Professional money managers learn at an early age to talk out of both sides of their mouth to keep out of trouble. Jimbo forgot that simple rule. Hedge your comments.

Lately the stock market has made significant moves to the upside and more people are paying attention. So what is stoking this new confidence in the economy and especially the American spender?

First a little history lesson. Peter Lynch who took a small cap mutual fund called Fidelity Magellan and built it into one of the nation’s largest asset based open ended managed fund used to do his walk down Main Street to find new investment opportunities. He talked to consumers and business people. He liked the retail sector and was one of the first who discovered the Gap as a place to put investor’s money which was just about the same time millions of teen age girls were squeezing themselves into the Gap jeans and tops.  The point is that retail is a leading indicator of how the economy is growing. Lynch was an advocate of this simple research tool, talk to people. And he also understood as goes the consumer so goes the economy.

You can use this same investment technique when you go to Macy’s, the corner butcher shop or trendy cafe ask the wait staff how’s business. You’d be surprised how people who work at these stores are willing to talk about their business. You will learn by simply asking if the store is seeing more people than they did a year ago or even since the holidays. You can also discover if people are spending more by simply asking. You’ll get a better handle on the economy by doing this than if you ever listen to Cramer. A client of mine used this simple technique years ago and discovered Panera Bread. The money she made off that observation has paid forever her visits to Panera, her fav cafe.

Now to the present- Officially the Big Box stores are reporting better than expected earnings. More people are spending more money even though we are still officially in a depression and unemployment is as close to double digits as Kid Rock is to Pamela Anderson. However, the retail stocks are suddenly seriously outperforming the Dow Jones Industrials and this is telling us that we are on the road to recovery. There should not be a double dip recession the way people are spending and as investors we should be looking for entry points to commit even more money.

The American consumer may be more debt adverse than ever before but it can do what no other nation of peoples can do and that is move global economies with its spending. Jim and Mary Next Door Neighbor can make global happy faces with their charge and debit cards. No other country can boast of that.

If you have questions about this blog call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com. Share this blog with someone who cares about money.

 

To Convert To Roth or Not To Convert To Roth

As  my CPA and I  were wrapping up my taxes the question of converting a traditional IRA to a Roth IRA happened to come up in the conversation. I was surprised to discover my accountant agreed with me and said he thought it was one of the worst ideas he’s come across since someone decided to bake raisins into perfectly good plain bagels.

When it comes to investment concepts usually accountants and investment people mix about as well as the Village People mingling at the Republican Convention.  This time my CPA and I were on the same page.

This is the year of the Roth where really rich people are now able to convert their traditional IRAs because there are and have been income restrictions that prevented the wealthy to take advantage of tax-free Roth IRAs. It also is the one year where there is a window that allows people to pay taxes on the conversion over two years rather than in the year of the conversion.

Of course there is always the spillover where news of what the uber-rich are doing filters down to the more than comfortable folk. And what we get is the syndrome if- it’s- good- for- them- why- not- us-too.  Now lots of people across all income spectrums consider conversion to the Roth.

Just so you know -its always been that as long as your income qualifies you can convert some of the regular IRA each year until everything is in the Roth from the regular IRA, or do it all at once. It is also possible to use the assets in the regular IRA to pay the income taxes on the conversion but if under the age of 59 1/2 there is a 10% penalty for the amount used to pay taxes. There is no penalty on the conversion assets if under the age of 59 1/2.

The reasons that people do this foolishness of paying taxes on perfectly good tax deferred money is the assumption that taxes will be higher later because of income at retirement so they figure to pay the tax now and allow the money to grow tax-free. Secondly, investment growth, it is guessed, will create a pile of money over the years that the tax man has depleted.

Both these thoughts belong on Myth Busters. A tax reduction of 35% will need a 70% increase in the investment portfolio just to get back to even. If retired this may never happen. If working this may never happen before retirement. As far as higher taxes later no one knows for sure so why gamble on something we do not know?

The best thing most of us, including the really really rich, can do is leave things alone, pay taxes on the withdrawals as they are due and at death there are planning devises that allow spouses and children to take advantage of to minimize the impact of the regular IRA income tax.

If you have questions on this blog call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com. share this blog with someone who cares about money.

 

Paying for College

Students, parents and grandparents find paying for a college education as ‘the’ most expensive investment they will ever face. Education costs have escalated at a higher rate than health care. Eventually, unless something isn’t done to reign in the madness, higher education will only be available to the children of the wealthy.

It is around this time of year I get a few calls from clients asking how they can pay for their child’s or grandchild’s college and then they mention that we need to get creative finding the money.

This is what I recommended for my grandson. If you start early enough I’ve always favored the Michigan Education Trust, MET, as the only real guaranteed way of paying for a college education. The MET is sponsored by the state of Michigan and information can be found on the state’s web site. Basically you pay for the college education at a discount, almost like buying a zero coupon bond that matures in the future. If the college costs are $40,000 it may cost someone when the child’s in knee pants $10,000 paid into the plan over a few years. It’s a neat, no fuss way to get a paid in full college education. The problem is folks don’t start thinking of funding a college plan until their child is a few years away from the Ivy Halls. I think a great many parents, who start college savings late, are of the mind that their kid is either going to prison or college and they just want to make sure which way he or she is heading before they commit any dollars. Trust me, the MET is the best you’re going to get if you start early. It gets pricier as the kid gets closer to college; but it never gets where you need 100 cents on the dollar.

On the other side of the street stock brokers, mutual fund salespeople and insurance agents favor the 529 Plan where an account is established for the kid and investments are managed by the parent or broker through mutual funds. The problem with the 529 Plan is that, as everyone found out too late a year ago, markets collapse without warning and so goes the college fund. The reality is that college costs increase at a 10% annualized rate and historically no one I know has been able to consistently match that cost increase each and every year with matching investment results. Broker and their ilk still love the 529 ‘cause it pays them a commission when they sell it to someone and they have kids of their own, you know.

Other places for college money, outside of grants and loans, are to borrow on the equity of the home but few families today have sufficient equity to borrow against. If you have a retirement plan at work you may borrow against a 401k, the maximum loan is $50k or 50% of the account value and interest is paid back to the owner’s own account over a five year period of time.

Cashing in a portion or all of an IRA also works and if the owner is under  59 1/2 and uses the funds for college education there is no penalty but there are income taxes to be paid. There is an IRS form you need to complete and attach as part of your income tax to show what the money was used for so you do not pay the penalty.

Still there are other ways of paying for college if you start early enough. The most prudent has always been the joint account investment plan that allows the parents to save money and use the assets if they child or children decide to go to college. If the kids decide not to go to college the money is available for retirement, a child’s wedding or a future college plan for a grandchild.

There are tax credits and benefits available but you have to call your accountant to get that information. The one thing you can do if starting late is make a plan, commit a fixed amount of dollars and at the worst demand the child pay for some of the cost along the way.

If you have questions call Paul at 877 783 7080 or write to him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about money.

Hello, Inflation

Some investors are licking their chops waiting for the Fed to cut loose with higher interest rates to contain inflation. Some remember the high interest rates from the Carter days and can’t wait to lock in those double digit safe yields. But what happens if inflation does arrive but double digit safe CD returns do not?

Why there is always gold, some talking heads say. The problem is gold like someone you meet on an internet dating site may not be all that it claims to be. The nasty little problem with gold is that it doesn’t offer any income. You may buy it and find it out later it’s a couch potato – it just lays there and doesn’t do much at all. Because gold doesn’t work like other investments it may be less attractive as interest rates rise.

Okay, you say, but the last time out agricultural commodities did extremely well. Yes, they did but remember there were less commodity players in the sandbox the last time inflation hit than there are today. Today’s commodity investors resemble hit squads who take no prisoners. It’s a far different game then buying a mutual fund.

While commodity funds do increase in value when inflation arrives there is a certain situation that can quash the profits called contango. Because agricultural commodities are perishable the funds buy derivative investments such as futures contracts instead of buying the actual railroad cars of soybeans or corn. Contango happens when the futures price is higher than the current spot price for a certain commodity. When that happens fund managers are stuck selling expiring contracts at lower prices and buying forward contracts at higher prices. The fund effectively, according to Bradley Kay, an ETF analyst at Morningstar, is always selling low and buying high.

Sometimes investors confuse an ETN, exchange traded note, for a Exchange Traded Fund, which pose different risks altogether. ETNs own nothing. They are promissory notes issued by the organizer supposedly backed by hard assets. If the fund or bank that issues the ETNs fails, which may have nothing to do with the investment. investors are out of luck. ETFs, on the other hand, generally own the security or assets.

There you go, dear reader, some of the really bad things that can happen when you think that you can make a bucket of dough when inflation hits and there are a thousand different and new ways you can lose money.

If you have questions about this blog call Paul at 877 783 080 or write him at pstanley@westminsterfinancial.com. Refer this blog to someone who cares about money.

Tuesday Musings- April 2nd Week

• Webinar last Saturday had a few glitches but otherwise was up and over in about 40 minutes. Some people missed it or had technical problems so repeat performance on Inflation will be May 8th, Saturday at 10 AM.  Go to my web site and register. Or, send a friend. 
• MarketWatch reports this is the year of the angry investor. More corporate boards will be coming under fire. It’ll be interesting to see how boards handle this uprising and I’ll report it here.
• Three auctions of two, five and seven year Treasuries flopped a week ago – Foreign investors sat on the sidelines. Not that they don’t like us- they just want more bang for their buck. This could be the beginning of rate increases without inflation.
• Nasty- Bond Buyers demand premium if company downgraded by ratings firms. The brewer of Bud and other brews agreed to 25 basis point increase to existing bonds if company downgraded one notch up to a max of 200 (or 2%!) basis points. Ouch!
• Ahh, anyone tell me how these rating firms are still being taken seriously after their most recent muck-up? Anyone? Hello?
• I love gadgets but trying to figure out what I’d do with an iPad. You, too? 
• Seems when Barron’s gives a stock a thumbs-up it goes up.
• Kelly Evans’ essay in the WSJ exposed the awful truth: The markets are always assuming the Fed will raise rates today while the Fed won’t until late 2011 and even then it’ll only be to 1%. (There, now you know.)
• You had to love Monday’s action. It was across the board a little bit here and there and nothing exciting just a good day to be in the market.
• No buying opp on home builder stocks quite yet.  Industry hard pressed, according to Barron’s, to outperform market.
• Gold breakout for short-term trade? MKM Partners in Greenwich, Conn advising clients there is a likely rally. Wednesday down, but what wasn’t?
• Is it my imagination or does it seem like there is a serious earthquake somewhere almost every week?
• Best team in any sport? Congrats to women’s BB UConn winner of NCAA last Tuesday.
• Bernanke speaks and the markets dive 75 points on Wednesday. 10-year auction a success. Monsanto profits off 19%. Bernanke said as a nation we must demonstrate a strong commitment to fiscal responsibility (As I write this I have tears in my eye- lol- surely the man is speaking of another peoples!)
• Bernanke wound up talking about the choices we face: raising taxes, cutting entitlements such as Social Security and Medicare, or less spending on everything from education to defense. (I thought of that, too. Didn’t you think of that?)
• Greek bonds and the euro under pressure all week by hedge funds and ‘traditional banks’, along with businesses such as Dole Foods, protecting their interests. Just ugly how everyone is piling on.
• SEC has charged Morgan Keegan & Co and their star manager of inflating value of subprime securities in order to hide losses. 2009 Wells Fargo’s Evergreen Investment Management was accused of overstating same & did ‘No Mas’, paid $40 million-basically said, Go away- with no admission. (We’ll see more as SEC works its way through). More than two funds did this, you betchum.
• Thursday- worries about Greece, jobs and finally someone said the heck with it and bought something and the markets ended up- barely.
• A new crop of IPOs is on the horizon: Toys ‘R’ Us, HCA, Inc., a hospital chain and Dutch semi-conductor NXP. I like 2 of the 3.
• Banks hid debt levels from investors to prevent stock losses. The previous five quarters saw most of the majors reduce debt by over 40% at the close of the quarter and then subsequently release true numbers simply to prevent runs on their stock. (There is something so wrong with this.)
• If you followed Fast Money on CNBC the following bet they offered several weeks ago, short gold-long oil, was a loser. Gold had a rally and while oil moved some it finally gave up some Friday. Like the Sarge on Hill Street Blues would admonish, ‘Be careful out there.’
• Aloca downgraded, Ambac Financial one day increase 70%.
• EU over the weekend bailed out Greece. This coming week earnings with worries over profit taking as the numbers prove better than expected.
• Finally, last week ended with the Dow closing a tad under 11,000 for the first time since the markets collapsed. This only added another wound to those investors who went into cash 13 months past and have stood on the sideline as the markets continued their march upward.

Bond King Turns Bear

According to Bill Gross, manager of the $214 billion Pimco Total Return Fund, the bond market rally, that has been going on for 3 decades, may be drawing to a close.

Gross, on Bloomberg radio, said, ‘Bonds best days are behind us.’

What we all know if we own a bond and interest rates rise the bond principal decreases. It decreases only if we want to sell it. It does not decrease at maturity. The reason the bond principal decreases on an existing bond when interest rates go up is that the decrease reflects the current interest rate. A small decrease plus the current coupon will equal the current higher interest rate.

That is without a doubt confusing and I just wrote and read it back. Take my word, interest up current bond principal down. Write it on your medicine cabinet mirror so you’ll remember. And that is why Gross is kvetching the end of a three decade bond run. A run that saw bonds overtake stocks in the last decade as the best performing asset class.

Gross, who is a mighty fine poker player, just ask the folks at Treasury or at GMAC, who had to deal with him over the years, suggests that higher inflation will strike the U.S., U.K. and Japan. The reason is that governments will sell record amounts of debt to finance surging deficits.

He suggests that investors avoid U.K. debt and buy shorter term U.S. and Brazilian debt as well as longer maturity German and ‘core’ European bonds.

Putting his money where his mouth is Gross said Pimco filed to start a stock fund that can invest in bank loans, junk bonds distressed securities. The fund will buy securities and financial instruments economically tied to at least three countries and one of them ‘may’ be the U.S,

Gross’ final word to investors, ‘Don’t trust any government and verify before you invest.’

If you have any questions call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com. Share this blog with someone who has an interest.

Markets Up-Your Not-Why Not?

Happy days sing the CNBC funsters, the markets are up and experts are talking how the domestic market is fully valued, no dip in sight and the only thing we have to fear is rising rates. So why are so many investor accounts not responding like the indices? Why are these accounts even or slightly down year to date? Is it Voodoo?

It’s the math, dear reader. One stock can push the entire index into positive territory. We’ve seen it time and again where the overall market  indices were up and individual stocks and/or funds were down and we wondered how that could be. We measure our performance against the DJIA or the S&P 500 index. The question is how is the index calculated.

Its not as simple as taking 30 stocks, as in the DJIA, totaling their value and dividing by 30 each and every day. There is a formula using a divisor which takes into account stocks splits and dividends. I am not going to go into detail here but you can learn more how this calculation works by going to Investopedia.com. Let’s assume GE is up $5 one day when the DOW is up 100 points. Using the present divisor used for the DJIA GE would account for about 35 of those 100 points.

Let’s also examine the broader market indexes. The Vanguard Total Stock Market Index Fund is off so far this year by a fraction. In other words the real market with 5000 stocks is losing money. While not off dramatically it is indeed not representing returns consistent with what the DJIA and the S&P 500 are printing. Looking at a chart of individual funds and ETFs also shows us that while many funds are off their lows dramatically they are not nearly where they were before the markets implosion.

One fund, that is my favorite, traded at an all time high of $50 is now at $34, and that is up 70% from the March 2, 2009 bottom. This fund in particular beat the indices on a regular basis. Today it lags it. While that doesn’t explain the current investment malaise there are other events that may.

Fund managers are getting defensive in their portfolios. Call them fraidy cats if you want but once bitten twice shy these boys and girls are not about to get loosy-goosy with investor’s money. They figure let the stock price come to them. They seem to refuse to trade for gain and instead buy and hold what they feel will reward shareholders down the road. This is fine when investors are relaxed and tossing more money into their accounts but today’s investor is wondering what can you do for me now. They are looking to make back what they lost and do it in a hurry.

Even some bond funds are not performing as well as one would like. The TIPs bond funds are getting killed so far this year. The long term interest rates are slowly rising but inflation isn’t so the TIPs are languishing. Investors put billions into TIPS and so far nothing in 2010 but disappointment. Sure the TIPS will reward the investor eventually, but again we have those that want a bit more for their money than they are getting.

Finally, this market may just be taking a well deserved rest. There are a host of problems from jobs to jobs to interest rate increases that we have to deal with. It is not uncommon in a year where huge returns or volatility was present in the previous year for the market to take a one-year sabbatical. A good many experts predicted single digit gains for 2010 and that may well be where we end up.

Let’s not throw stones at portfolio managers for not doing their jobs and keeping up with the Dow Joneses at the end of one quarter. Yes, so far its been disappointing but not enough to make us run for cash. Patience, as in poker, works equally well investing.

Remember if you have questions call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com

Tuesday Musings 1st Week April

• Short market week with a good start. Google spreading the cheer with new iPhone. AT&T loses monopoly. Uncle Sam bails out of Citi selling 7.7 million shares diluting existing shareholder equity. Ford sells Volvo to the Chinese for 1.8 billion dollars- paying down debt as shareholders worry about economic downside and shares fell 1% Monday. Markets mixed on Holiday week trading.
• The worm turns on good news. Home prices rise (hurray!) and consumer confidence improves. Sounds good? Stock gains again erased Tuesday as debt concerns and strengthening of the dollar. Commodities firmed. On sovereign debt - Greek bonds were down sharply on concerns the Greek problem was not resolved.
• China wants to be taken seriously and sick of being considered an emerging market. Beijing wants country to be known for quality and not cheap labor. Look for the party to be over sooner than later. 
• Junk bonds are the rage, darling. $31.5 billion of high yield debt hit the market and buyers scooped it all up. What no one wanted and we grabbed all we could is now a scarce commodity. Healthy?
• Toyota stock still climbs higher no matter how bad the news. Go figure.
• The Medicare tax will hit the rich first and slowly, like the AMT, creep up and bite the middle class. Remember AMT was created because a few rich families paid no income tax. Today 4 million Americans get stuck paying higher taxes because of that ‘even-out’ tax.  Medicare tax on investment income is a first!
• Best stock for the quarter Boeing- worst Alcoa.
• Citi prepares Primerica IPO, prices it at $15 share. Primerica the Tupperware-like financial life and mutual fund sales firm populated by part-timers is still alive and attempting to go it alone.  Stock soars as investors climb aboard. I don’t get it.
• MOO hits a wall- the ETF specializing in agribusiness has barely budged in 2010, lost money for 2 previous years, and a major player thinks things too volatile going forward or backward.
• Thursday 70 point gain along with pluses for oil and gold wrapped up the week. Ford, GM and Toyota had big gains but little for Ford stock price. Stocks gain primarily on good manufacturing news. U.K. manufacturing strongest since 1994. Treasuries declined with 10-year at 3.874%
• Bonds may be at tipping point. Buyers of our domestic risk may be in mood for demanding higher interest rates for perceived higher risk. Questions or comments call Paul Stanley @877 783 7080 or write pstanley@westminsterfinancial.com Share the blog with someone you think will appreciate it.