We need an Investor Bill of Rights

There is no question that investing these days is very tricky business. In fact, any dealing with Wall Street is quite treacherous these days. It is caveat emptor, let the buyer beware, every step of the way. Sure, it has always been that way, to some extent, and us diehard investors are quite used to it and have all sorts or tricks to navigate through the investment minefields, but it is plain and simply dysfunctional and  unacceptable for the average investor. What we need is an Investor Bill of Rights that makes it once and for all relatively safe for the average American to invest in anything other than a simple bank savings account or CD. Even money market funds are far more risky and tricky (and less profitable) these days than once thought.

 

I don't have even a preliminary draft for an Investor Bill of Rights yet, but it is something to start thinking about.

 

The point is not to eliminate all risk or guarantee a high rate of return, but simply to assure that average investors are protected from severe predatory behavior on the part of the denizens of Wall Street. Once it was only a bunch of hedge funds and due to their limited size they could be tolerated, but now every big bank is trying to run itself like a hedge fund, so what in the past was marginally tolerable is now definitively intolerable.

 

The goal will not be to eliminate all conflicts of interest, but to render them manageable, to assure that there are very clear limits to how far banks are allowed to go in acting against the interests of their customers. We need to restore the meaning and value of the term fiduciary duty.

 

The goal will not be to eliminate speculation and short-term trading, but simply to assure that speculators and traders cannot attack the assets of average investors. In the past, speculation and trading was simply "noise" and little concern to serious investors, but now it is the speculation and trading "tail" that is wagging the once-mighty investment "dog." Put simply, we need a solid firewall between investments and the casino betting of speculators and traders.

-- Jack Krupansky

Wall Street DOES have an interest in your future!

I was reading Harry Newton's blog post today where he says "Wall Street is a product machine. It creates what it can sell you. It has NO interest in the future of what it sold you" and while I superficially agree with that, after a little thought I realized that something was missing from Harry's formulation, something very important. I realized that "It has NO interest in the future of what it sold you" is not an accurate assessment of Wall Street's mentality at all. The rest of this post is a near replica of an email that I sent to Harry.

 

There is plenty of evidence in the financial media since the financial crisis that Wall Street all too frequently DOES have a very deep and passionate interest in your future and the future of what it sold you – namely, to profit handsomely from your downside. So, for example, they will sell you stocks, and then short them, profiting from your loss. Or sell you "dogs" of bonds and then buy them back at a steep discount when you want to dump them. Or, one of the big GS scandals where they sold customers mortgage securities that they intended to short or bet against or had hedge fund clients intending to do so. The list goes on. They have a very intense "interest" in how things go for the future of what they sell you. Maybe the particular salesman/broker doesn't because he just wants his commissions, but I can assure you that there are plenty of others at the firm who do have an interest.

 

The real point is that the primary interest of Wall Street is collecting fees, commissions, and other payments based on the flow of transactions. You say cash is king, but on Wall Street transaction flow is king.

 

The secondary point is that as long as transaction flow is maintained, Wall Street is more than happy to profit from any downside you the customer experience.

 

The "prop trade" desks on Wall Street have two functions: 1) to "support" the flow of transactions – that is what they were doing with ARS, until they stopped, and 2) to bet against the customer and profit from the downside.

 

The real point of ARS was to provide a steady flow of Muni underwriting transaction flow, unlike the situation we saw later with the mortgage market.

 

Wall Street firms have something called "inventory" which is a combination of the stocks and bonds that they are selling as a result of underwriting "support" and "cheap" stocks and bonds they speculate on when you dump them in bear markets or due to other fear-based emotion (you can be sure that they were big buyers of BP while the oil spill was in progress.) They buy the stuff cheap, and then sell it back to you (or your neighbor or friend) at a nice profit on balmy days when the sun comes out again. In any case, this "inventory" is a very clear interest in the future of what they sell you, either to continue selling it to you in a rising market or to buy it up cheap in a down market. Note: There is currently a lot of Wall Street interest in buying up "distressed" mortgage securities, proving that Wall Street does have an "interest" in anything and everything that they sell you.

 

Wall Street caters to a lot of different types of interests, ranging from hard-core value investors to hot-tip casino speculators and twitchy day traders. Just like Vegas, they have a very deep and passionate interest not just in taking as much of your money as possible, but just as much interest in having you return again, again, and again – as you yourself do! So, it is rather misleading to say that they have "NO" interest in the future of what they sell. It's much more complex that that. Half of the time they have a "NEGATIVE" interest (selling you crappy offerings like ARS or overpriced IPOs or other so-called "products"), but just as importantly they, like Vegas, offer a implied promise that if you are willing to gamble and take on enough risk, that sometimes you can "beat the house", at least for a short period or maybe only for a single transaction. And, most importantly to us "true" investors, if you are willing to do your homework and be much more dispassionately calm and prudent in how you choose risk and extremely patient in your outlook, you can identify bargains and opportunities that slip by under the radar of Wall Street since they have so many bigger (and more gullible) fish to go after.

 

On the muni front, the sad thing is that all too often Wall Street sells local governments exactly what they ask for, a little lower cost (which government officials and bureaucrats are FORCED to ask and beg for due to the intense pressure to keep expenses and hence local taxes down), even if in exchange for confusing fine print that can have serious downside. If the local governments weren't so desperate to save "just a few shekels" to hold taxpayer activists at bay, Wall Street wouldn't have such a slam-dunk, shooting fish in the barrel market for complicated munis, the likes of which brought you and your friends the "innovation" of ARS.

 

I wouldn't for one moment let Wall Street off the hook for any of the many egregious practices that they do engage in, but accuracy in how we characterize their FULL activities is still important. I think you just got a little sloppy with this point. A decent correction is in order.

 

The guidance for investors should not be "Wall Street has NO interest", but for us to ask the question "What are the particular interests of Wall Street in this specific offering and how do they mesh or conflict with my own interests?"

 

I learned the hard way to stay away from convertible debentures – they seem appealing, but Wall Street's interest besides the upfront fees is that they collect commissions from the hedge funds that immediately turn around and short the stock on the expectation that any company feeling desperate for a convertible debenture is "headed down." Or maybe more to the point, the stock is likely to be a rollercoaster leading to repeated shorting and covering that just fills the pipeline with a commission revenue stream. And once the stock goes down, the debenture goes down and then they can buy them back at a steep discount and earn a huge yield on them. My personal example involved... yes, you guessed it – Goldman Sachs. That's another example of how Wall Street does have an "interest" in the future of what they sell you.

 

There are no "perfect" investments; it is all a matter of identifying, managing, and balancing potential upsides with potential downsides, and, as importantly, understanding that both upsides and downsides will evolve over time in unpredictable ways.

 

-- Jack Krupansky

Waiting for Q4 GDP report - Macroeconomic Advisers forecast is 3.1%

The initial estimate for Q4 2011 GDP is due out in about an hour. Meanwhile, I just checked and the forecast from Macroeconomic Advisers (MA) from yesterday was for annualized real GDP growth of +3.1%. That was up slightly from their reduced forecast of +3.0% from last week. Usually, MA comes in within 0.2% of the headline official number, but this is just the initial, "advance" report and will be revised next month and again in March.

 

MA is forecasting Q1 2012 GDP growth of +1.9%. That is up slightly from their reduced forecast from last week, but that "1" handle is still a bit concerting. There is still no sign or hint of an imminent recession, but one has to wonder if that "1" handle will simply be a short-term bump or a more persistent deceleration that could lead to recession.

-- Jack Krupansky

Planning for annual retirement contributions

Although I am still not ready to make my annual retirement contributions since I haven't yet done (or even started) my taxes to know how much I can contribute, I am at least starting the planning process. My default, and most likely path, is to continue with my autopilot strategy and simply invest once again in the appropriate target date fund. In my case, I expect to retire at age 70 or so in another 13 years or so, so a 2025 target-date fund is most appropriate.

 

In recent years I have been using the Fidelity Freedom 2025 Fund (FFTWWX). I have been thinking about switching to Vanguard's equivalent fund, Vangard Target Retirement 2025 Fund (VTTVX) since its expenses and return are better, but the total size of my account is still too small to warrant the hassle of moving the account, especially since I already have several Fidelity accounts. Although, I could open a Vanguard account for this year and see how it goes before making the decision to move.

 

My other thought is that I'm not so keen on bonds and all the other stuff that goes into a target date fund, so I may decide to go simply with straight stocks or a more aggressive stock mutual fund. That would somewhat defeat the purpose of my autopilot strategy, but at least considering it as a viable alternative and would help me better evaluate whether the target-date approach is best, for me.

 

Overall, I am moderately happy with my Fidelity target-date fund, although not thrilled with its performance over the past year, I just have this concern that it is somewhat inefficient in terms of fees and complexity, and may be a little too high a price to pay for the convenience of being on autopilot. OTOH, my portfolio is still too small to warrant a significant investment of my time.

-- Jack Krupansky

Get those annual free credit reports

I do like to get my free annual credit reports, but it is sort of a pain to get each one, paw through them entry by entry, and then save them locally for future reference, and heaven help you if you need to make corrections, but this week I will endeavor to bite the bullet and pull the trigger and do the deed(s). I do want to get my credit score as well, but that doesn't come for free as the actual reports do.

 

Warning: There are lots of sites that purport to offer "free" credit reports, but the only official one is the FTC web site, at AnnualCreditReport.com, as described on the FTC web page.

 

For my FICO credit score I usually just buy it, one-time only, not subscription service, from Experian.

-- Jack Krupansky

Q4 GDP estimate lowered to +3.0%

Macroeconomic Advisors (MA) has lowered their forecast for Q4 annualized real GDP growth to +3.0% from +3.3%, and is also lowering their Q1 forecast to +1.9% from +2.0%. Although it is probably still too early to raise alarm, it is clearly disconcerting that Q4 now just barely has a "3" handle and Q1 has now lost its "2" handle. Growth below 2% is not exactly a sign of a healthy economy.

 

The bottom line is that the forecast trend has been pointing towards a decelerating economy over the past month. That by itself is not a cause for alarm per se, but unless we see a reversal of that trend over the next one to two months, Q2 could be dicey. None of this in any way tells us what Q2 will be like, but simply that all bets are off.

 

The weekly unemployment insurance initial claims report was disappointing, but one weekly data point doesn't indicate a trend. That will be something else to keep a close eye on. Overall, initial claims have been trending well over the past couple of months.

 

The ECRI Weekly Leading Index was mixed this week, with the weekly data rising nicely, but the smoothed growth rate declining modestly, telling us only that the outlook is still unclear, but with a somewhat negative bias since the smoothed growth rate is still well below zero. Meanwhile, ECRI is still sticking with their call that the U.S. is tipping into a recession.

 

We will definitely keep an eye on the GDP forecast trend over the next six weeks, as well as weekly unemployment insurance initial claims, as we transition from the tail of the holiday sales season and move back into the more normal part of the real economy.

-- Jack Krupansky

Q4 GDP estimate lowered to +3.3%

Macroeconomic Advisors (MA) has lowered their forecast for Q4 annualized real GDP growth to +3.3% from +3.4%, but is maintaining their Q1 forecast of +2.0%.

 

The bottom line is that they are essentially planting a stake in the ground and implying that there will not be a recession in Q1.

-- Jack Krupansky

Q4 GDP estimate lowered to +3.4%

Macroeconomic Advisors (MA) has lowered their forecast for Q4 annualized real GDP growth to +3.4% from +3.6%, but is maintaining their Q1 forecast of +2.0%.

The bottom line is that they are essentially planting a stake in the ground and implying that there will not be a recession in Q1.

-- Jack Krupansky

Q1 GDP running at +2.0%

Macroeconomic Advisors (MA) has finally come out with their initial forecast for Q1 annualized real GDP growth of +2.0%. They are sticking with their forecast of +3.6% for Q4 of 2011.

 

They are essentially planting a stake in the ground and implying that there will not be a recession in Q1.

-- Jack Krupansky

Prospects for the Occupy movement in 2012

I can't speak to the prospects of the Occupy movement in other countries since the United States is such a completely different case, but as we start the new year I would like to summarize my perception of where the movement is (in the U.S. only) and what prospects the movement has for the rest of this new year. Basically, the movement started and persists as a "protest" movement. They seek "change" if not "revolution" (whatever that means), but to date they have only managed a number of half-hearted protests of limited size. Sometimes they manage to stage larger rallies with the cooperation of (some) labor unions and students, but other than relatively minor disruptions, they continue to come up empty on the "change" and "revolution" fronts."

 

Although the movement grew dramatically in October, they seemed to taper off and stagnate in November and December. Who knows, maybe that was the weather, but if that is true then the movement is even less potent than they seem.

 

The big, open, make-or-break question for the whole Occupy movement (in the U.S., at least), is the degree of support and actual participation that will come from average Americans, who although they appear to offer some sympathy for the demands of the movement, seem determined to remain on the sidelines.

 

It appears to me that although the movement can easily attract the unemployed, the students without jobs and large student loans, and the otherwise disaffected of society, they stand little chance of actively engaging the vast majority of average Americans with jobs and families and otherwise busy with their daily jobs. Sure, plenty of those people will honk their horns in support or maybe even donate a few bucks or maybe one of their kids will join the movement, that's about as far as they themselves will go.

 

One of the reasons that the Occupy movement will not make deeper inroads into the American psyche is that the unity of the movement is only at the level of vague aims, like fairness, political corruption, and social justice, but when you drill down and listen to what individuals in the movement are actually saying and promoting, things like commitment only to direct democracy and opposition to representative democracy and opposition to capitalism itself, it is difficult to imagine that such specific goals are going to be very appealing to many average Americans. In other words, as the movement starts to clarify and detail its goals, their level of support among the general public will wither rather quickly.

 

I suggest that you evaluate the movement at three levels: 1) sympathy, 2) support, and 3) commitment. Yes, their has been and will continue to be a significant degree of sympathy for the movement in terms of the issues they raise. There will even be some degree of support, although financial donations have already dropped off dramatically. Commitment is the really tough nut to crack. Sure, the movement appears to have a diehard core that really is truly committed, but that base doesn't appear to be growing and shows little prospect for dramatic growth in the months ahead, and without such growth the movement has little prospect of achieving the degree of "change" and "revolution" they seek.

 

Another factor impacting the movement in the U.S. is that America is very diverse and geographically distributed. Egypt, Cairo, Tahrir Square, and the Egyptian people were all relatively synonymous. But in the U.S., New York and Wall Street are geographically separated from our political capital of Washington, D.C. And we have quite a number of major business centers all over the country. That means that Occupy has to try to be everywhere, which means that it has to divide itself, its people, its resources, and its attention, and not have the kind of central focus it had in any of the countries of the Middle East. Even with a more lax and permissive attitude, the D.C. occupation has been only very modest in size. Despite the difficulties caused by the financial crisis, recession, and weak recovery, Americans overall are still in much better shape and have a much brighter outlook on the future, and have a much more diverse range of life styles, aims, and interests than the average crowd outside the U.S. or in the Middle East specifically. Occupy Wall Street has been and remains the central focus of the movement in the U.S., but our social and political diversity and geographic distribution have been severe impediments to the movement.

 

In summary, yes, the Occupy movement will remain with us for the coming year, but only as a shadow of their grand vision of last summer and fall. Yes, we will see a number of protests, rallies, and popup disruptions and flash mobs, but overall the level of disruption will be no worse than your garden variety of urban traffic jams and the like. Crowds will number in the dozens and hundreds and only occasionally in the thousands, but not consistently grow into the tens or hundreds of thousands that an effective movement would need on a sustained and regular basis to succeed as a force of change. Yes, the police will remain a constant, vigilant presence, but their response will become more measured as the protests fall into more predictable patterns. Yes, there will be a few protests that get out of hand and become near or actual riots, but overall the protests will be more at the level of minor annoyance and mere street theater spectacle than true "revolution" ala the protests in the Middle East. To put it simply, the United States, for all of its problems, is simply not the Middle East. Besides, the results from Tahrir Square are not looking so appealing of late.

-- Jack Krupansky

Is rail-freight suggesting that a recession is now unlikely next year?

An interesting story on Bloomberg entitled "Rail-Freight Surge Shows U.S. Skirting Recession" is about the first indication that I have seen that the economy is likely to see some strength in the early part of the coming year. That's good news, but not yet good enough to put the last nail in the coffin for a possible recession in 2012.

 

The fact that unemployment insurance initial claims are still trending down is also good news and although it is not an indicator of economic strength per se, it is an indication that economic weakness is not yet upon us.

 

The Chicago ISM Business Barometer report today was decent, but not strong enough to indicate any true strength going into the new year. Basically, it was suggesting more of the same. That will be great if it really means more of the expected +3.6% GDP growth in Q4, but that remains to be seen. My interpretation of the report is that a recession is unlikely in Q1, but we are not facing enough evidence of economic strength (yet) to be overly optimistic beyond Q1, yet. The report showed that more businesses were still seeing increases of new orders than seeing decreases, but it was still a minority of firms seeing increases, 39% vs. 43% seeing the same level and 18% seeing decreases.

 

Overall, this latest data does indicate to me that a recession remains less likely than likely even though ECRI does make a decent case that we may be facing deceleration that would leave the economy vulnerable to a recession if we run into even a moderate shock in the new year.

 

What we really need to see is whether businesses ramp their spending up or down over the next few months. The rail-freight report at least suggested that businesses were not (yet) ramping down.

-- Jack Krupansky

Investment wisdom

I can't tell you what investments will do great this coming year, but here are a few things I'm fairly confident of:

• I don't care what "worked" this past year, or any other year; I only care about what will work going forward.
• Past performance does not guarantee future performance.
• Things work, until they stop working.
• Things are hot, until they're not.
• Jumping around (e.g., through "timing") can work well if you have the right combination of skill and luck, but usually is the surest way to increase your losses, even in a bull market.
• "Steady and sure" and "stay the course" generally work, over time but not necessarily in any given year or two or three, if you pick solid investments, but "holding" is doomed to fail if you pick the "wrong" investments or if the overall market is down.

My retirement investments are down for the year (so far), by a few percent. I'll be making my 2011 retirement contributions sometime over the next four months (as soon as my taxes are done.) Unless I come up with some brilliant insight/discovery, I'll continue to buy a retirement target date fund, such as the Fidelity Freedom Fund that I currently have (and lost money on this year.) I currently have another 12 or so years until retirement.

-- Jack Krupansky

Stock market finally rises above its October peak

The stock market may have finished the week with merely a so-called "whimper", but the Dow did reach two milestones on Friday, breaking out above both the psychological 12,200 level and above the October peak. Both are good news. But, a one-day "whimper" does not indicate a trend, especially when it occurs on a slow, pre-holiday, pre-weekend trading session.

 

This coming week will be another slow period where volatility could be high and "fake", temporary trends might appear and then disappear as quickly as they arise.

 

This new peak may fall as quickly as it rose, or maybe we will see a modest rally into the end of the year, but at least the good news is that we have the positive combination of "higher highs" and "higher lows" which is the hallmark of a bull market even if there are lots of intervening down days.

 

We still have quite a few psychological and technical hurdles ("resistance") to overcome before the Dow exceeds its July and April peaks, so technically the stock market will remain in a trading range for awhile longer. Traders and short-term speculators will have plenty of volatility to trade off of as market participants struggle to cope with conflicting incoming information about the state of the economy and various fiscal authorities in the coming months and year.

 

Ultimately, we are waiting for the stock market to pass judgment on the economy and start telling us where the economy is likely to be in nine months.

 

The bottom line is: 1) the stock market isn't in such bad shape, all things considered, but 2) stay tuned, since anything could happen.

-- Jack Krupansky

Macroeconomic Advisers still forecasting growth of +3.6% for Q4 GDP

Macroeconomic Advisers (MA) is still forecasting annualized real GDP growth of +3.6% for Q4. They had been forecasting +3.7% growth as of last week. This is still very good news.

 

Unfortunately, this doesn't tell us anything about what Q1 or the rest of 2012 might be like.

-- Jack Krupansky

ECRI Weekly Leading Index declines, still holding our breath on potential recession for 2012

The ECRI Weekly Leading Index (WLI) declined sharply this week, and although not directly indicating a recession, it does at least highlight weakness that could easily deteriorate into recession in the coming months. ECRI is still forecasting that we are "tipping into recession", although they are still vague on when exactly such as recession did or will start and how long and how bad it might be. ECRI uses additional, longer leading indexes than only their own "short" leading Weekly Leading Index. In other words, the WLI is simply a "teaser" for the full ECRI story, which is available by subscription only.

 

There is significant weekly volatility in the WLI weekly changes, but the smoothed growth rate which dampens that volatility did decline modestly this week, although it had risen the previous two weeks.

 

So, this one report was a negative report, but doesn't yet (by itself) indicate that a recession in 2012 is a slam dunk.

 

The real risk is that the WLI shows that the overall economy is relatively weak (despite a decent Q4) and that a weak economy tends to be prone to falling into recession if even a modest economic shock (e.g., problems in Europe getting worse) comes along.

-- Jack Krupansky

Unemployment insurance initial claims continue to improve

The latest weekly unemployment insurance report was one of the best in quite some time, with initial claims continuing to fall further below the traditional recession threshold, at 364K vs. the 400K recession threshold. The more stable 4-week moving average of initial claims also continues to decline, at 380,250. This is indeed good news, but we need to see that number consistently below 350K for an extended period of time before we can take much comfort in it as far as indicating whether the economy is "healthy" again.

 

Continuing claims were also down, but unfortunately that number is rather useless at this stage since it is unable to tell us how much of the decline was due to people finding work versus people exhausting their unemployment insurance.

 

A recession is still a significant risk for 2012, but at least the unemployment insurance data is not pointing to a recession, as of this time.

 

January and February will be critical months as we see how many of the current jobs were primarily seasonal and go away in January after the post-holiday retail sales season runs its course. The February data will tell us where we really are, whether we see a recessionary jump in initial claims or something more mild and indicative of at least a marginally healthy economy.

-- Jack Krupansky

Back to work

Just when I was starting to get into my finance blogging on a more frequent basis, now I have a lead on some "real" work, so I'll need to suspend a lot of my blogging until further notice while I pursue this work lead. Sorry about that.

-- Jack Krupansky

Extending the payroll tax holiday for only two months is a good thing

Although all manner of pundits, commentators, and politicians are lamenting that Congress was only able to extend the payroll tax holiday for two months, I actually think this is a good deal since there is a lot of uncertainty about the economic outlook for 2012. Q4 has been shaping up quite nicely, so it is actually unclear whether the U.S. economy will need the payroll tax cut in 2012 at all. On the flip side, Q4 may be a "last hurrah" before we slip into a recession, in which case the economy will need a lot more financial medicine than the limited palliatives that Congress was considering this past week.

 

In the former scenario, the expiration of the payroll tax holiday will be just fine. And if the economy continues to improve, the fiscal health of the Social Security program will be enhanced by letting the holiday expire ASAP.

 

In the latter scenario, extending the payroll tax holiday will become a no-brainer, if not as part of an expanded stimulus package.

 

What's not to like with either outcome?

 

Okay, sure, from a purely political perspective, somebody "wins" and nobody wants to be the "loser", but from an economic perspective, it will be a win-win.

 

And even from a purely political perspective, it allows both sides to re-make their political points early in the election season. Another win-win for both sides, although each side will attempt to spin it as a loss for the other side.

-- Jack Krupansky

Slightly disappointing industrial production report

The Industrial Production report for November this morning was slightly disappointing, showing a modest decline when a flat report was expected. Yes, this was a disappointing report, but one data point in a data series never indicates a change in trend. Besides, the ISM Manufacturing report for November did show a production gain. Their reporting periods and sampling may not be closely aligned. Which one is more "right" remains to be seen.

 

Incidentally, industrial production is roughly at the level it was in January and February of 2005, so we still have quite a ways to go to get back to a "trend" level of production. Capacity utilization is 2.6% below its long-term average.

-- Jack Krupansky

Another decent unemployment insurance claims report

We got another decent unemployment insurance claims report this morning, continuing a downwards trend, in both the initial claims and the 4-week moving average of initial claims. Continuing claims were up very slightly, but the 4-week moving average was down slightly and claims were half a million lower than a year ago, although it is not clear how many of those people found work versus saw their benefits expire.

 

Initial claims continue to inch down further below the traditional recession threshold, but are still too close to that threshold for any serious comfort (388K vs. 400K.) Local and state governments continue to shed jobs even as the private sectors is adding jobs, but at a rather meager pace.

 

This was definitely a decent report, but still doesn't tell us very much about what is happening on the net employment front which has been showing modest but sluggish growth for quite some time.

-- Jack Krupansky