Reinvested my Lending Club cash flow in a new investment loan at 18.67%

Cash flow from my portfolio of Lending Club investment loans ("notes") over the past two weeks has given me enough cash to invest in yet another consumer loan. My current Net Annualized Return is now at 15.57%, which is finally above my goal of 15.5%, but only by a little, so on Monday afternoon I picked a pre-approved loan at 18.67% that was already 68% funded but with only 22 hours left in the two-week funding period. I was concerned that it might not get fully funded in less than a day, but by Tuesday morning I got the email message from Lending Club confirming that it had in fact gotten fully funded and was issued.

The loan grade for this loan is F2 (on an "A" to "G" scale), which is moderately risky. Lending club turns down 90% of loan applications, which eliminates all of the truly risky loans, so even a "risky" Lending Club loan is not necessarily all that risky. Lending Club says that the historical default rate for loans such as this one is about 6.56%, so that my projected return is about 11.39%. That includes Lending Club taking 0.72% as a servicing fee. My goal of 15.5% should factor in a default rate of about 3.5% or so, giving an expected return of about 12%. That is still quite respectable, especially in this economic and financial environment.

My Net Annualized Return of 15.57% puts me at the 91% percentile, so only 9% of Lending Club investors are earning more than me. I'd like to get that to 95%.

My goal is really a 15% return, but I figure I need a little buffer so that repayments (and maybe even defaults) don't push me below my goal too frequently. I may in fact keep pushing upwards with loans in the 16% to 18% range until I get my return up to 16% and then gradually work the average back to 15.5%.

So far, my Lending Club portfolio has been perfect, with no delinquencies or even late payments. I started investing with Lending Club back in June 2009.

This is still just an experiment for me since I have no prior experience with this type of investment, but so far in has been very encouraging. I intend to double the size of the experiment in July (assuming my work income continues.) I was going to try to double it in June, but I just ordered a new notebook computer (and am currently getting all of my work moved over to it.)

-- Jack Krupansky

Have we reached the bottom of a trading range?

As harrowing and seemingly significant as the recent stock market decline has seemed, the simple reality is that this has simply been classic Wall Street market manipulation by traders and short-term speculators seeking to push for as wide as possible a trading range. Sure, there was all sorts of talk about Europe and Greece and contagion and all of that, but the reality was simply that the so-called "professionals" of Wall Street were trying to sucker a lot of innocent retail investors into dumping their stocks, not for anything to do with longer-term economic and business fundamentals, but out of a raw desire to artificially push the stock market down in a trading range so that these "pros" could profit from short-term short bets against the market. But, now, that short-term push by Wall Street may all be over or nearing an end. Soon, the "professionals" on Wall Street will be "banging the table" about how cheap stocks are and how bright the economic outlook is for U.S. companies. Greece, European Banks, fiscal difficulties, et al will be once again pushed to the back burner and Wall Street will be "bullish" again. Did anything really change with the long-term fundamentals for stocks over the past month? No, not really. This was just Wall Street "business as usual."

The bottom line is that true investors can continue to ignore all of these short-term market movements. They are not based on the longer-term outlooks for the economy, businesses, and stocks, but simply a bunch of traders and short-term speculators artificially manipulating the financial markets. It should be illegal, but unfortunately it is not.

I don't mind traders and speculators playing natural market swings, but artificially creating unnatural market swings by engaging in fear-mongering (aided by an overly-eager and compliant media prone to yellow journalism) should be illegal, but for some reason is not.

Superficially, it might seem enticing to try to "time" the markets and play these short-term market swings for extra profit, but that's a game for traders and short-term speculators, not true investors.

For my own part, I am perfectly happy to simply ride out the storm, never selling in a panic nor buying in over-zealous euphoria. Simply stay the course.

-- Jack Krupansky

In praise of Goldman Sachs: Goldman Sachs Hands Clients Losses in 'Top Trades'

There was a great article on Bloomberg entitled "Goldman Sachs Hands Clients Losses in 'Top Trades'" about how the trading ideas that Goldman Sachs gives to clients are so crappy while they themselves make billions on trading. The article starts out:

Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm's investment advice fared far worse.

...

Seven of the investment bank's nine "recommended top trades for 2010" have been money losers for investors who adopted the New York-based firm's advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar.

In an interesting twist, the article then goes on to downplay the role of so-called prop trading (proprietary trading using house money):

Goldman Sachs's trading profits come from capturing bid- offer spreads when its traders act as intermediaries for clients, Gary Cohn, the firm's president and chief operating officer, said last week in New York. Proprietary trading isn't a main driver of earnings, he said.

...

Cohn told investors at a May 11 conference in New York that the firm lost money on only 11 days in the last 12 months. He said that uncanny streak of success refutes suspicions that the bank depends on proprietary bets with its own money.

"It is implausible that a proprietary-driven business model could be right 96 percent of the time," Cohn said. Instead, he said the "simple answer" is that the firm makes money by capturing bid-offer spreads when acting as an intermediary for client trades.

My hunch is that there is a little bit more to it that that.

The article also tells us that:

Goldman Sachs executives have grappled before with questions about whether they're better at making money for the firm than for their clients, according to an internal e-mail dated Sept. 26, 2007, that was released by a U.S. Senate subcommittee last month.

U.S. Lawsuit

The e-mail to Chief Executive Officer Lloyd Blankfein from Peter Kraus, who was then co-head of the company's investment- management division, explains that individual investors, unlike institutional clients, occasionally make "comments like ur good at making money for urself but not us."

What the article does not say is how much of Goldman's trading activity is proprietary. I am willing to believe that they do in fact make a lot of bad proprietary trades (maybe even following the advice they give their customers). It may net out to not being a big addition to profits, but the issue for the financial crisis is whether a lot of that proprietary activity adds to market volatility and sharp declines in values of financial assets.

The article also does not say how many of their prop trades that do add to net profits are taken opposite their advice to clients.

Personally, I think that short-term trading is a corrosive force in our society and adds little in the way of productive value, so anything that Goldman does to "stick it" to traders is actually a good thing. The problem is that Goldman is encouraging trading since they do make so much money just from taking a "cut" from every transaction.

We should have regulations that forbid market makers from offering advice and having an active sales force that is effectively doing the same. In other words, separate true investment banking (which can be a positive force in society if not corroded by trading and the motive to profit from trading) from both market making and prop trading. Do that and there won't be any problem combining commercial banking and investment banking.

-- Jack Krupansky

My latest Lending Club cashflow reinvestment has been fully funded and issued

Sometime yesterday evening my latest Lending Club investment loan, using money from only cash flow over the past two weeks, was fully funded and issued. This was for a pre-approved 3-year loan at 19.04%.

I'll probably have enough cash flow in my Lending Club account over the next two weeks or so to fund yet another loan.

-- Jack Krupansky

Reinvested my Lending Club cashflow in a new investment loan at 19.04%

Cashflow from my portfolio of Lending Club investment loans ("notes") over the past two weeks has given me enough cash to invest in yet another consumer loan. My current Net Annualized Return is now at 15.36%, which is still a bit short of my goal of 15.5%, so I picked a pre-approved loan at 19.04% that is already 94% funded with five days left in the two-week funding period. I expect that this loan is likely to reach full funding today or overnight.

The loan grade for this loan is F3 (on an "A" to "G" scale), which is moderately risky. Lending club turns down 90% of loan applications, which eliminates all of the truly risky loans, so even a "risky" Lending Club loan is not necessarily all that risky. Lending Club says that the historical default rate for loans such as this one is about 6.83%, so that my projected return is about 11.48%. That includes Lending Club taking 0.73% as a servicing fee. My goal of 15.5% should factor in a default rate of about 3.5% or so, giving an expected return of about 12%. That is still quite respectable, especially in this economic and financial environment.

My goal is really a 15% return, but I figure I need a little buffer so that repayments (and maybe even defaults) don't push me below my goal too frequently. I may in fact keep pushing upwards with loans in the 16% to 18% range until I get my return up to 16% and then gradually work the average back to 15.5%.

So far, my Lending Club portfolio has been perfect, with no delinquencies or even late payments. I started investing with Lending Club back in June.

This is still just an experiment for me since I have no prior experience with this type of investment, but so far in has been very encouraging. I intend to double the size of the experiment in July (assuming my work income continues.) I was going to try to double it in June, but I just ordered a new notebook computer.

-- Jack Krupansky

The bailout of Greece remains on course

I am reaffirming everything that I wrote on April 28, 2010 in my post entitled "Will Greece default on its sovereign debt?", summarized as:

... ultimately, somehow, someway, Greece (and the rest of the PIIGS) will, with absolute certainty, be bailed out in some way, shape, or form by the European financial authorities. The specific details and terms and timing of any bailout may be up in the air, but there is simply too much at stake and too much self-interest in preventing a sovereign default in Europe for the relevant financial authorities to do anything other than do as many bailouts as are needed.

... In short, It is exceedingly unlikely that Greece will default on its sovereign debt...

In other words: No.

There is plenty of gnashing of teeth and wringing of hands and beating of drums by pundits, traders, and short-term speculators who throw temper tantrums when the authorities don't do exactly what they want right when they want it, but the European financial authorities remain on course to bail out Greece and whoever else who may need be bailed out.

Sure, the exact timing, path of that course, and composition of the bailout remains up in the air, but that is as it should be to avoid the moral hazard of people gaming the system based on expectations of the specific form of  the outcome.

True investors need not lose any sleep over Greece and the so-called sovereign debt crisis and should simply continue to ignore the shenanigans of traders, short-term speculators, and economic idealists who seek to manipulate market psychology for their own short-term gain.

-- Jack Krupansky

Made my fifth payment to pay down the public debt of the U.S. government

I just made my fifth monthly payment to pay down the public debt of the U.S. government. Not much, just another $25, but it is a matter of principle, albeit mostly symbolic. It may take me another 502 billion years to pay it all down all by myself at this rate, but, as I said, it is matter of principle.

According to the U.S. Treasury web site, the total public debt outstanding was $12,853,100,126,888.44, as of April 29, 2010. It was $12,826,031,306,447.93 a month ago, for an increase of about $27 billion (over a three-week period.)

What I wrote back in January when I made my first donation/gift/contribution/payment:

Everybody is whining and complaining about the ballooning debt of the U.S. government, but who is actually doing anything about it? Well, for starters, ME! Yes, that's right, I, Jack Krupansky, just did something to reduce the U.S. government debt. Really. No kidding. I actually paid down a small slice of this debt. Granted, it was a rather small slice, but a slice nonetheless. Okay, sure, it was only $20, but the point is that at least I am one of the very few people willing to stand up and DO something about the problem, rather than be one of the whiners and complainers who refuse to acknowledge that it is their debt and their problem, not just the fault of mindless politicians in Washington, D.C. After all, every politician ultimately answers to voters and most of the so-called wasteful spending of the U.S. government is simply politicians responding to the demands of their consistituents (voters.) Maybe my one small contribution to paying down the debt won't really make any difference to any of those whiners and complainers, but for me it is a matter of principle. I consciously choose action rather than the inaction and lack of responsibility of the whiners and complainers.

If you have any sense of principle, you too can pay down a slice of the U.S. government debt yourself at Pay.gov. You can pay via credit card or debit transfer from a bank account.

So do the right thing and show all those whiners and complainers (including so-called "tax protesters") how mindless and spineless they really are. PAY DOWN THE DEBT! And that has to start at the grass roots with us individuals before politicians will ever pick up the lead.

For the record, the only real way out of the deficit is not to merely cut expenditures or raise taxes or some combination of the two, but through economic growth, which includes a healthy amount of immigration. Sure, we need to manage the federal budget more carefully as well, but the big focus has to be on achieving economic growth.

-- Jack Krupansky