Beating On The Banks

Who out there loves their bank and banker? Let's see a show of hands. Not many, I see. Which shouldn't surprise anyone. It's a different world from when I was a kid and the neighborhood banker was someone who was active in the community, knew everyone in town, sponsored the Little League team and loaned money because of someones character as much as how much collateral they had. If he wasn't Jimmy Stewart at least Jimmy would have played him in the movies.

Today's bankers are vilified because they were one of the greedy cogs in the economic mess and because they still have not stepped up and said their Mea Culpa. We don't like people who don't fess up to their faults and ask for forgiveness. Just ask Tiger Woods.

The public and government sentiment on the extreme lack of gratitude by today's bankers is understandable. We saved their miserable skins by loaning them tens of billions of dollars and expected them to be appreciative of that magnanimous generosity. Many of the CEOs and executives would today be wandering the streets, unemployable, begging for scraps and enduring horrible economic times if it were not for our largess,

We expected them to change when we loaned them the money. I think we wanted them to drop to their knees and hug us and proclaim their undying gratitude. We thought that if we saved them from extinction they would loan money to those that needed it, re-worked the awful mortgages they saddled people with and cleaned out those that were individually responsible for creating the mess in the first place. Instead what the banks did was tighten their monetary policy at a time that people needed it the most, increased credit card rates, foreclosed on the home mortgages rather than reworking them, paid back the government loans without sending a bread and butter note and gave themselves huge bonuses as a way of congratulating themselves that they were fine fellows all.

To say that the public wouldn't mind taking the TARP repayment and building a new prison to hold these people in perpetuity is probably an understatement.

The government, who loaned our money with little restriction except for repayment, is so angry at the lack of contrition and business as usual that they have threatened bankers with a soggy noodle slap against the wrist as punishment by meting out a bank tax. This tax, which would be passed onto the consumer, is expected to be about $90 billion, or what these banks earn per quarter. It is obvious that the banks will only turn around and pass whatever penalty onto their customers. Bankers will not miss a bonus, paycheck or perk because the government hands out a retribution tax. Our government doesn't get it.

If our government, which isn't very bright when it tries to do something good, wanted to put restrictions on the loans to the banks they should have written them into the contracts in the beginning just as the banks do when someone borrows from them. And what banks do when someone defaults on one of their loans? They take the customer to court, add interest penalties and other egregious charges, and finally send the sheriff or hired goons to take whatever someone owns to satisfy the debt. Plus they make a mark in their credit file so everyone can see making it more difficult to get credit. That's how big banks treat their bad customers. They don't bail them out they punish them.

Still we do business with these people instead of going to our neighborhood credit unions, shopping for best rate credit cards and treating big banks in the same manner as they have become accustomed to treating us. But, because I understand people will continue to go to big banks and do business no matter how badly they are treated I still like certain big bank stocks at certain levels.

It is the old fable of the frog and the scorpion and when the frog does the scorpion a favor the scorpion rewards the frog by stinging it to death. When asked why the scorpion simply says it is what it does. And so it is with big banks.

If you want more information on what banks I am buying or anything contained in this blog e mail me at pstanley@westminsterfinancial.com or call 877 783 7080.

Transaction Tax Around the Corner

Inflation is creeping around the house but sooner or later our proud baby will be on its two hind legs, stumbling along, knocking us for a loop as food and crude take more of our earnings. Right now we're in a small comfort zone where we look in the crib and see baby inflation and think 'how cute', but it won't be long before the little darling will be keeping us up at night demanding to be fed more and more. Yes, we have that to look forward to but on the good side we're starting to get a little economic traction with a more confident stock market. Just as that's happening a few politicians are contemplating greasing the recovery flagpole. Certain Capitol Hill bandits have proposed plans to tax all mutual fund transactions.

Just to bring you up to speed, active managed mutual funds, as their name implies, buy and sell stocks and bonds along with other more complicated financial trades. Unless the fund is an index fund, where there is little trading, most active funds have a turnover of assets of around 30% per year (as a rough estimate). Every time there would be a sale and or a purchase of a stock or bond by the mutual fund managers it would create a tax according to the proposal being floated around by certain Democratic politicians.

If at any time in economic history people need help to get back on their feet the last thing they need is to have their mutual funds burdened with a tax that will do nothing but reduce total returns. It is estimated that if the government gets away with this scheme the average annual rate of return to investors will decrease by approximately 25%.

Treasury Secretary Geithner, who should know of what he speaks, criticized this Democratic initiative while Speaker Pelosi said the plan 'has a great deal of merit'. Not content to potentially destroy retirement plans of the average United States citizen the Speaker suggested that the U.S. coordinate with other developed countries to impose a similar tax. (Nothing like exporting American misery)

To illustrate how much an investor would lose assume an investment of $50,000 in a mythical mutual fund that earns a consistent 10% per year for 15 years (this does not exist, by the way), and you would have a total gross of $208,862 versus $158,608 at an 8% return over the same period. In addition, deduct the normal tax on cap gains and dividends and bingo, your savings are virtually destroyed by taxation. Many developed countries provide incentives for their citizens to save. The United States is not bashful in doing everything it can to make it as difficult as possible for the average person to accumulate wealth.

And, don't think you can run to an insurance annuity variable account because it would be taxed the same way on their managed sub accounts.

Damon Silver, policy director at the AFL-CIO, was quoted in the January 4-8 2010 Investment News as saying, 'the tax would encourage long-term investment while discouraging what he calls churning of stock trades.'

Damon, sounding like a recent graduate of the Jethro Bodine School of Finance, should know that churning is an illegal activity and not something any mutual fund uses as a money management technique. Perhaps Silvers was referring to rapid fire computer trades employed by some hedge funds. Churning is a criminal activity whereby a broker buys and sells securities simply to create commissions

Slashing total returns with an additional tax would cause retirees to face recalculating and reducing their income.

The total cost of this proposed tax to the mutual funds is estimated to be $70 billion per year. After reading what certain elected officials in this administration plan I thought why not just have them petition to have the United States merge with Canada and be done with it.

If you want to calculate how much the proposed tax would cost you go to my calculators at www.primaryplanner.com and run numbers based on the decrease in returns, print it and call your elected official.

If you need additional information on anything in this blog e mail me at pstanley@westminsterfinancial.com or call 877 783 7080.

His Daddy's A Lion

Lesson one for the new year is to know your investments and if you're working with an investment planner to know who he or she is. The reason I'm bringing this up is a WSJ article reported on how there are approximately 20 billion dollars of auction rate securities, or ARS, of investor's money that cannot be liquidated because brokers sold them as being 'just like money markets' except with a higher yield, and then the market collapsed leaving this extraordinary amount of money hanging in limbo. It begs the questions if they were just like money markets why are they called auction rate securities and not money markets and why did they suddenly become illiquid?

In order to take a complicated subject and make it understood some brokers define one product being just like another even though there is little or no correlation between the two. Those serving up rattlesnake often say it tastes just like chicken.

You have to ask a lot of the right questions if you want to get a straight answer. Unfortunately, even if you ask the right questions there are people that lie to get at your money.

Which brings me to the story of the new year and what happened to one of my clients just last week. It was about him and his wife doing business with someone they thought they could trust.

It started off by them deciding to take the money they had invested with me and moving it somewhere else. These were people who had been with me for years and yes they got caught in the 08-09 meltdown. They bailed into cash at the mid-point of the crisis because they were losing sleep and every day they awoke to more and more bad news. Yes, from their point of view the sky was falling and nothing I could say could convince them to stick it through. Thew threw in the towel and decided to never invest in equities again, even though they had made significant amounts of money they made a decision that only fixed and guaranteed were words they wanted associated with their savings.

These are retired people who live about two hours north of me in a suburb of Flint but in a town where traditional investment firms are as rare as Starbucks franchises. That alone should tell you that they live in unspoiled country. Us city folk call it the sticks. There are trees, deer and loads of open land. The financial advisers in their neck of the woods are mainly tax preparers and insurance agents; and there is a growing group of newly minted adviser's who only a few years ago were installing seats in Buick's at those factories in Flint before the auto industry collapse.

I got a call from my back office that informed me that these folks were leaving and transferring their assets somewhere else.

Normally when a client decides to leave I say to myself, 'Vaya con dios.' I figured these clients were moving to a local bank or credit union but later that day I wondered exactly where they were moving their money to. I was told by my back office the money was going to an insurance company, and when I checked the company out I found they had a history of being sued by clients and state regulators because of their product line. I knew at the very least I had to call and tell the client.

Let's call the company ArmPit Life of ArmPit, Texas and their primary product an equity-indexed bonus annuity that they specifically market to seniors.

EIA are fixed annuities and the only thing they have to do with equities is that the word 'equities' is in their name. They have been sold as they best thing since low-fat cottage cheese with no risk and huge equity returns. To understand an EIA you need a doctorate in mathematics as the creators use hedges and a variety of esoteric formulas for matching investment returns to a specific index. The insurance annuity does not really invest in the index but buys certain products to mimic an index.

To further hedge their bets the insurance company does not credit what an index actually returns to the client but uses another formula to provide a percentage of that index to the client. If, for example, the index was up 20% a client may only be credited with 30% of that 20% or 6% return in their annuity. In addition, if it wasn't mind-boggling enough, there is a cap on earnings and this number changes every year on the anniversary of the account. The company may also offer sweeteners which include a guaranteed one year fixed return and/or a onetime bonus. In order to get that bonus a client may have to hold the contract forever or annuitize the entire amount. The only fixed long term rate is a minimal guarantee of 1-2% per year that the client receives no matter what happens to the marketplace or interest rates.

If you're confused don't feel bad. Almost all agents selling this product don't understand how it works except for the fact that it pays a huge commission. Usually agents will receive 10-15% of the deposit made by the client. If someone hands over $100,000 to invest in an EIA the agent earns $15,000 for doing little more than filing out paperwork. In addition there are overrides and other commissions paid to people above the humble agent. Putting it simply the $100,000 gets carved up in fees and expenses rather quickly. Pity the poor but uniformed client who truly believes that they are getting a wonderful opportunity but in reality something more akin to a high colonic. They could be sitting, excuse me, facing a redemption period of 15-20 years.

I could have turned my back on these folks and let them do it to themselves and get a satisfaction that they got what they deserved for leaving me, but I didn't feel that way and they very least I wanted to know if my soon to be ex-clients knew what they were getting into. This, I know, is a little like calling your soon to be ex-wife who is running off with the pool boy, and asking her if she knows if Juan has a green card. Usually the answer is, What business is it of yours?, followed by an expletive and the sound of a phone being slammed.

When I called Mr. Jones wasn't home so I spoke with his wife, also a client, and explained why I was calling and asked if they knew how the product they were buying worked. There was silence at the other end of the line that told me the agent had been less than forthwith. I shared a few of the highlights with Mrs. Jones, who finally asked when Mr. Jones could get back to me and I told her. Sure enough the next morning before the sun crawled over the transom, Mr. Jones was saying to me, 'Guess I screwed up, huh?'

I will summarize our conversation because it was rather long. Basically my client was told by the insurance agent that when he invested all his savings he would get market returns, no downside risk, a 10% bonus on his money (no strings attached), a 5% fixed guaranteed rate if the markets were down and no cost to him. When I asked how the agent got paid the insurance agent said he was paid by the insurance company and not by the client. There was no mention of redemption fees, expenses, how returns were credited, what happened if the client needed money the next day, and how much he would have in his account the day after he gave his money to the agent. In fact, the information was so sketchy my client did not even know the name of the company he was moving all his money into. Anyone with any common sense would have screamed at this agent, 'Liar, liar, pants on fire.'

When we finally sorted out what to do next my client said to me, I know this guy's family, why would he do something like this?' I answered, with tongue firmly in cheek, that I didn't really know but it was a huge commission and maybe that had something to do with it.

As we were hanging up I asked Mr. Jones where he met the insurance agent. He answered, with a note of sadness, 'He gave a talk a few weeks ago at the local Lions Club. His daddy's a Lion, for crying out loud. If you can't trust a brother Lion who can you trust?'

If something sounds too good to be true, dear reader, let that be your first warning and investigate only at your peril. Remember the old adage, if you sit down at a poker game with strangers and can't figure out who's the sucker, it's probably you.

If you want additional information on anything mentioned in this blog call Paul Stanley @ 877 783 7080 or e mail at pstanley@westminsterfinancial.com

Looking Forward

It's that time of year when every economist, pundit and college bowl junkie starts making predictions for the new year, or at the very least figuring the over and under. I spent the week swirling saucers of soggy tea leaves so I could get a glimpse into the future and report back to you what's in store for investors next year. After the decade we've had everyone is anxious about what to expect. Should we pull the bed cover over our head when the clock strikes midnight or jump up and greet the new year like an old friend from the 90s we've sorely missed?

First let's look at employment. Everyone is making a big deal about how the government counts people that are out of work and accuses the politicians of making numbers look better than they really are. The government gives us one number and talking heads another. The NY Times reported that unemployment is not a tad over 10% as officially reported but more in line with 17%.

Employment is the last thing that recovers in any depression. The worst is over. If you have a job today you'll probably have a job next December too. If you don't have a job but are looking you may get a job by the end of 2010. This depression like half the marriages in America is not going to last forever and neither is the double digit unemployment numbers. Better numbers in 10 but nothing to get truly excited about.

Manufacturing - this sector had already swept out most of the excesses. A lot of people didn't think the government should have bailed out the auto industry but since approximately one out of every ten jobs is somewhat related to making cars they really had to. Things are and will be different. In the Detroit area I don't think anyone believes the car companies are dumb enough to go back to the old ways of doing business and building cars simply to keep plants open and people working. Those days are gone. Manufacturers should see the beginning of profitability starting late in 2010. One car company has already brought back some economic benefits for it white collar workers such as a 401k match. More and more rust-belters will be smiling in 2010.

Hyper inflation. The way the wonks talk on cable you'd think we were on the brink of becoming the twin of post WW ll Germany trundling wheelbarrows of Deautsche marks to buy a loaf of bread. Hyper inflation is defined as prices increasing at 10-50% per month. We are a far cry from hyper inflation. In fact in 2010 we may not experience a huge run-up in prices at all. After a decade of very little inflation you can expect a slight increase in 2010 starting in the second half, but more coming in 2011.

Unfortunately government spending will continue. Nothing stops our elected officials from standing at the urinal of public waste. It's not their money, they don't care, get used to it.

Real estate - new home building should see a very modest increase, which is good news and existing home values may have a slight pop before the summer break when folks start serious shopping. At worst we're looking at stabilization. Some areas of the country have already experienced increases for their markets. More residential real estate will be bought as consumers will finally figure out that prices are as good as they will get. Commercial real estate, on the other hand, has lots of excesses and there are serious issues in this sector.

Interest rates, according to the new Time Magazine Man of The Year, will hold firm for an extended period of time. I say until midway 2010 and then rates will start their systematic increases. When rates start moving up hang on because it will be a bumpy ride. Lock in your fixed rates now and eliminate all your variable rate credit cards asap.

The dollar could strengthen or just muddle along until a firm economic policy on dealing with how much money we've printed and shoveled in the world's economies is handled. The one thing to remember is that in a global crisis everyone loves the dollar. A weak dollar is still good for most of the S&P 500 companies as they do business here, there and everywhere. It's not so good for retirees shuffling for one last hurrah around the Piazza San Marco and slurping pasta e faioli, washing it down with Kaopectate shooters while on a fixed income.

The biggest thing that will happen in 2010 is the one thing that no one has yet thought about or prepared for. Most everything we do think, worry to death and prepare for never happens. The markets should do well into mid-year and then take a break, consolidate and resume for a decent 2010. If you're out of the market you should start to move back in. This depression was a global event seen only once every hundred years. We should not retrace to previous market lows, if that gives you some comfort. If you're invested you should review and bring your portfolio up to date. Too many investors stick with an allocation that they established when they were in their 40s and 5os and conveniently forget that they need to upgrade to reflect their current age and risk level.

Hopefully my insights will help you sleep a bit better. Nothing ever is as bad as it seems unless it happens to you. Wishing you all, dear readers, a wonderful New Year.

Racing To Win

Some money management firms view investing the same way they would a horse race. You read and hear their advertisements and they brag that their mutual funds outperformed their indexed averages over one, three and ten years, as if it were something that would make their product more attractive to investors. Yet, those same ads contain the warning that past history is no guarantee of future results. Confused? Me, too.

Matching fund to index is not an apples to apples comparison even though some would have you believe. Results are slightly different when comparing the S&P 500 index against mutual funds that invest in the same stocks for that index. A few of the indices have performed so poorly over the past one, three and ten years that a grade school investment club could beat them so let's not get giddy about beating indices.

Then there is the 'star' rating. Ever since independent analytical investment firm Morningstar emerged with its star rating system for mutual funds, stocks and now exchange traded funds investors buy only those four and five star rated investments. Morningstar has consistently written that the star rating is not something that an investor should base their entire due diligence on. Management, risk, history, total return and expenses are the other basics that investors should concentrate on.

Still fund companies advertise that many of their mutual funds have achieved star quality, much like a well-earned Michelin award. The problem is that the star is fleeting like the Michelin, and can be downgraded or upgraded by Morningstar at any time. But, many investors believe it is a star etched in stone like a Hollywood Walk of Fame hand print.

Do your fund company managers eat their own cooking? Nothing is more disconcerting to sit down at your local family restaurant, look out the window and see your chef enjoying his lunch at a competitor across the street. The same is true with investments. It has been proven that money managers who have their own savings and retirement assets invested in the funds they manage have a better investment track record than those that don't.

So maybe the fund companies would be better off advertising that more of their money managers have more of their money invested in their funds than any other fund company. Now that would impress me.

Buy & Hold Dead?

You've heard this and probably wondered if it was true since a lot of so-called financial experts have been saying it, buy and hold is no longer a valid investment strategy.

Buying and holding any investment for an exceptional length of time is certainly not a wise strategy except in certain instances such as art, rare coins, stamps, vintage autos, rare books and those painted 'collectible' dinner plates of dead Presidents advertised on late night cable. Okay, I'm kidding about those china dinner plates; but buy and hold being dead for mutual funds, stocks and exchange traded funds, which is what the new age market soothsayers are talking about, is something of a misdirection.

The hidden issue is not that buy and hold is dead it is that the so-called experts want you to sell your mutual funds, move all your assets to their side of the fence and buy ETF and index funds while they charge you a fee for this service.

In order to do that they need to convince and scare people to move money around. If this wasn't so sad it would be funny. They are telling investors to cash out active managed mutual funds to buy index funds. The fact is that the plain vanilla mutual fund that the self-crowned experts are telling you to sell is an active managed investment vehicle while the majority of ETFs and all index funds that they are telling you to buy are static. How can you confirm this? Simply check a Morningstar report by either going on-line, visit your local library or calling your fund company for a report and check the 'turnover' percentage. You'll be stunned to discover that some active mutual funds have a 100% turnover, meaning the total assets of the fund are bought and sold over the course of a year's time. You have to ask yourself how anyone of reason label active managed mutual funds with a turnover like that a buy and hold investment? The answer is to scare the uneducated.

The index and ETF funds change holding very little over the course of a year or two. These are the true buy and hold vehicles. They will only vary as some stocks are added and others deleted by definition of the index or sector but these are small modifications and do not make these active managed funds.

Buying and holding individual stocks for 10-20 years or a lifetime can be a smart move or financial suicide depending on what you bought, what you paid and why you bought it. Let's say you bought an automotive company stock and over the years the stock rewarded you with dividends and splits and you made a very tidy paper profit. At some point the stock either starts to stagnate or drops in value, perhaps the company even stops paying a dividend. Holding this stock and watching your gains go swirling down the drain is not a smart option. Why lose all your gains? Depending on where you hold the stock (price paid) and what account either retirement or individual, the time may be ripe to take some if not all of your profits, Buy and hold for some individual stocks for a lifetime may never make sense.

Let's put things in perspective. There is nothing wrong owning ETFs, index funds and mutual funds along with individual stocks. There is no rule that says you shouldn't. You'll get active management on one side plus indexing in specific sectors to round off your portfolio. Not taking advantage of all the tools to grow and keep your savings is just silly.

The next time someone in the investment business tells you that buy and hold is dead ask to see their portfolio and what they own. You may be surprised that what they own is exactly what they're telling you to sell.

Fibonacci

If you think baseball fans are freakish over numbers you haven't been locked in a room with an investment analyst. We've all seen the stock charts with colored lines tracing up, down and sideways patterns and an investment analyst is a person who deciphers what this means to an investor and whether or not they should buy or sell a particular stock or index. Charting involves using a significant history of past patterns and making sense of that history to project forward where the analyst thinks the individual stock or the markets will go next. Chartists go as far back in a stock's or index's history to trace a pattern as they are able. There are many books detailing basic charting that the novice can read and learn the basics, but there are so many complex derivatives of charting that only the most experienced chartists is given credibility and that's because he or she also has had a history of being right more times than not.

Getting it right is what it is all about when charting. Making even one small mistake and a chartists can cost a firm millions. if not billions of dollars.

One of the mathematical formulas used by today's investment specialists is something discovered almost 1000 years ago by Leonardo Pisano or Leonardo of Pisa, an Italian mathematician that brought the Arabic disovery of the decimal system to Europeans. He also wrote a book entitles, 'Libar Abaci', and in that title he used filus Bonacci, translated to mean, son of Bonaccio and over time students of his simply morphed his name into Fibonacci.

The basic Fibonacci numbers are a series where the next number is the sum of the previous two: 1,1,2,3,5,8,13 and so on. From this series scientist and mathematicians have derived what they call the Fibonacci Sequence and the amazing quotient of proportions which is known as the Golden Ratio or 1.618. This ratio of 1.618 is natures building block. For example if you divide the number of female honey bees in a hive by the male bees you get 1.618, if you measure your arm from shoulder to finger tips and then divide by the length from your elbow to fingertips you get 1.618. Need more, measure your height and divide by the number from belly button to the floor. If you examine sea shells you'll see the 1.618 relationship between swirls. But more importantly Fibonacci brought to modern technical analysis the golden ration translated into three percentages: 38.2%, 50% and 61.8%. There are other numbers in the sequence but for this discussion we are only interested in the above as they are the significant numbers in an investment market retracement.

And here is why today some chartists are alarmed that the markets are indeed readying themselves for a retracement. The chartists proclaim that historically the markets will retrace down to the next level of support.

This is how it works, if you take any chart of an index or stock and apply the following numbers to it you can see what worries the technicians. The high value is marked at 100, the low at zero and in-between lines of support are drawn illustrating 61.8%, 50% and 48.2%. Fibonacci decrees that retracement is at the next lower level unless that level should fail to hold and then the markets will continue to retrace to the following level. The stock price or index will continue its descent until it finds a level of support for its price or value. The economic tailspin of 08-09 followed the Fibonacci formula exactly, from high to low the numbers and ratios were spot on.

Before you start liquidating all your holdings the analysts are not saying that the markets will falter if they should reach a certain significant number. On the contrary the technicians are not close to calling a Bear market, but when and if it happens, chart from where we are at that moment to the next point on the Golden Ratio and you will see that nature works even in investment markets.