Greenlight’s Einhorn holds gold, says U.S. policies poor

Mon Oct 19, 2009 2:25pm EDT

By Jennifer Ablan and Joseph A. Giannone

NEW YORK (Reuters) – Hedge-fund manager David Einhorn, who warned about Lehman Brothers’ (LEH) precarious finances before it collapsed, said on Monday he’s betting on rising interest rates and holding gold as a hedge for what he described as unsound U.S. policies.

“If monetary and fiscal policies go awry” investors should buy physical gold and gold stocks, Einhorn said at the fifth Annual Value Investing Congress in New York. “Gold does well when monetary and fiscal policies are poor and does poorly when they are sensible.”

Einhorn is president of Greenlight Capital, with more than $5 billion in assets under management.

“Over the last couple of years, we have adopted a policy of private profits and socialized risks — you are transferring many private obligations onto the national ledger,” he said.

Einhorn said, “Although our leaders ought to be making some serious choices, they appear too trapped in the short term and special interests to make them.”

According to a joint analysis by the Center on Budget and Policy Priorities, the Committee for Economic Development and the Concord Coalition, the projected U.S. budget deficit between 2004 and 2013 could grow from $1.4 trillion to $5 trillion.

Last week when Federal Reserve Chairman Ben Bernanke, U.S. Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers spoke in interviews and on panel discussions, Einhorn said, “my instinct was to want to short the dollar but then I looked at other major currencies — euro, yen and British pound — and they might be worse.”

Einhorn added, “Picking these currencies is like choosing my favorite dental procedure. And I decided holding gold is better than holding cash, especially now that both offer no yield.”

(Reporting by Jennifer Ablan and Joseph A. Giannone; Editing by Kenneth Barry)

Wall Street’s Math Wizards Forgot a Few Variables

by Steve Lohr
Monday, September 14, 2009
The New York Times

In the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.

But the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe.

The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.

That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.

“What wasn’t recognized was the importance of a different species of risk — liquidity risk,” said Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.”

In the future, experts say, models need to be opened up to accommodate more variables and more dimensions of uncertainty.

The drive to measure, model and perhaps even predict waves of group behavior is an emerging field of research that can be applied in fields well beyond finance.

Much of the early work has been done tracking online behavior. The Web provides researchers with vast data sets for tracking the spread of all manner of things — news stories, ideas, videos, music, slang and popular fads — through social networks. That research has potential applications in politics, public health, online advertising and Internet commerce. And it is being done by academics and researchers at Google, Microsoft, Yahoo and Facebook.

Investors trading 3 stocks that may be doomed

Investors still trading Fannie, Freddie, AIG shares, even though prices are likely to hit zero

Daniel Wagner, AP Business Writer
Thursday August 27, 2009, 5:36 pm EDT

WASHINGTON (AP) — Investors are still trading common shares of Fannie Mae (FNM), Freddie Mac (FRE) and American International Group Inc. (AIG) by the billions, even though analysts say their prices are almost certain to go to zero.

All three are majority-owned by the government and are losing huge sums of money. The Securities and Exchange Commission and other regulators lack authority to end trading of stocks in such “zombie” companies that technically are alive — until the government takes them off life support.

Shares of the two mortgage giants and the insurer have been swept up in a summer rally in financial stocks. Investors have been trading their shares at abnormally high volumes, despite analysts’ warnings that they’re destined to lose their money.

“People have done well by trading them (in the short term), but when it gets to the end of the road, these stocks are going to be worth zero,” said Bose George, an analyst with the investment bank Keefe, Bruyette & Woods Inc.

Some of the activity involves day traders aiming to profit from short-term price swings, George said. But he said inexperienced investors might have the mis-impression that the companies may recover or be rescued.

“That would be kind of unfortunate,” he said. “There could be a lot of improvement in the economy, and these companies would still be worth zero.”

The government continues to support the companies with billions in taxpayer money, saying they still play a crucial role in the financial system.

Fannie and Freddie buy loans from banks and sell them to investors — a role critical to the mortgage market. They have tapped about $96 billion out of a potential $400 billion in aid from the Treasury Department.

Officials have said AIG’s failure would be disastrous for the financial markets. Treasury and the Federal Reserve have spent about $175 billion on AIG and AIG-related securities. The company also has access to $28 billion from the $700 billion financial industry bailout.

But analysts say the wind-down strategies for the companies are almost sure to wipe out any common equity, making their shares worthless.

CFTC moves to rein in small ETF investors: report

Sat Aug 22, 2009 12:18pm EDT

CHICAGO (Reuters) – Exchange-traded funds or ETFs have become a top target in U.S. regulators’ efforts to rein in excessive speculation in oil and other commodity markets, The Wall Street Journal reported on Saturday.

Commodity ETFs, which came into existence in 2003, offer one of the few avenues for small investors to gain direct exposure to commodity markets. The funds pool money from investors to make one-way bets, usually on rising prices.

Some say this causes excessive buying that artificially inflates prices for oil, natural gas and gold.

Commodity ETFs have ballooned to hold $59.3 billion in assets as of July, according to the National Stock Exchange, which tracks ETF data.

The Commodity Futures Trading Commission has said it seeks to protect end users of commodities, and that cutting out individual investors is not the goal.

“The Commission has never said, ‘You aren’t tall enough to ride,'” CFTC Commissioner Bart Chilton was quoted as saying in the WSJ article. “I don’t want to limit liquidity, but above all else, I want to ensure that prices for consumers are fair and that there is no manipulation — intentional or otherwise.”

Limiting the size of ETFs will result in higher costs for investors, the WSJ reported, because legal and operational costs have to be spread out over a fewer number of shares. Investors range from individuals to banks and hedge funds with multimillion-dollar positions.

The CFTC is currently considering a host of measures to curb excessive speculation, including position limits in U.S. futures markets. Many U.S. lawmakers called for greater regulation of some commodity markets after a price surge last year sent crude oil to a record high of $147 a barrel in July 2008.

(Reporting by Matthew Lewis; Editing by Toni Reinhold)

SEC makes emergency rule targeting ‘naked’ short-selling permanent

By Marcy Gordon, AP Business Writer
Monday July 27, 2009, 8:03 pm EDT

WASHINGTON (AP) — Federal regulators on Monday made permanent an emergency rule put in at the height of last fall’s market turmoil that aims to reduce abusive short-selling.

The Securities and Exchange Commission announced that it took the action on the rule targeting so-called “naked” short-selling, which was due to expire Friday.

Short-sellers bet against a stock. They generally borrow a company’s shares, sell them, and then buy them when the stock falls and return them to the lender — pocketing the difference in price.

“Naked” short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions sometime after the sale.

The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

Brokers acting for short sellers must find a party believed to be able to deliver the shares within three days after the short-sale trade. If the shares aren’t delivered within that time, there is deemed to be a “failure to deliver.” Brokers can be subject to penalties if the failure to deliver isn’t resolved by the start of trading on the following day.

At the same time, the SEC has been considering several new approaches to reining in rushes of regular short-selling that also can cause dramatic plunges in stock prices.

Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market’s downturn starting last fall. SEC Chairman Mary Schapiro has said she is making the issue a priority.

Some securities industry officials, however, have maintained that the SEC’s emergency order on “naked” short-selling brought unintended negative consequences, such as wilder price swings and turbulence in the market.

The five SEC commissioners voted in April to put forward for public comment five alternative short-selling plans. One option is restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price. The goal of the so-called uptick rule is to prevent selling sprees that feed upon themselves — actions that battered the stocks of banks and other companies over the last year.

Another approach would ban short-selling for the rest of the trading session in a stock that declines by 10 percent or more.

Schapiro said last week the SEC could decide on a final course of action in “the next several weeks or several months.”

Investors dump brokers to go it alone online

Fri Jul 24, 2009 12:31pm EDT

By Rachel Chang

NEW YORK, July 24 (Reuters) – The collapse of Lehman Brothers (LEH) last September marked the start of a downward spiral for big investment banks. For a smaller fraternity of Internet brokerages, it has set off a dramatic spurt of growth.

Since the start of the financial crisis, $32.2 billion has flowed into the two largest online outfits, TD Ameritrade Holding Corp (AMTD) and Charles Schwab Corp (SCHW), company records show.

By contrast, investors have pulled more than $100 billion from traditional full-service brokerages like Citigroup Inc’s Smith Barney (C) and Bank of America-Merrill Lynch (BAC).

Of course, Americans still keep more of their wealth with established brokerages. According to research firm Gartner, 43 percent of individual investors were with full-service brokers last year, compared with 24 percent with online outfits.

And while figures for 2009 are not yet available, the flow of investors in the past 10 months has clearly been in the direction of the online brokerages, according to analysts both at Gartner and research consultancy Celent.

Joining the exodus is Ben Mallah, who says he lost $3 million in a Smith Barney account in St. Petersburg, Florida, as the markets crashed last year.

“I will never again trust anyone who is commission-driven to manage my portfolio,” said Mallah. “If they’re not making money off you, they have no use for you.”

This trend, a product of both the financial crisis and the emergence of a new generation of tech-savvy, cost-conscious young investors, is positioning online outfits as increasingly important in the wealth management field.

The numbers reflect a loss of faith in professional money managers as small investors dress their wounds from the hammering they took over the last year, the Internet brokerages say.

“There has been an awakening,” said Don Montanaro, chief executive of TradeKing, which reported a post-Lehman spike in new accounts of 121 percent. Investors now realize they alone are responsible for their money, he said.

6 Millionaire Traits That You Can Adopt

by Stephanie Powers
Investopedia
Tuesday, June 23, 2009

Millionaires have more in common with each other than just their bank accounts — for some millionaires, striking it rich took courage, salesmanship, vision and passion. Find out which traits are most common to the seven-figure bank account set, and what you can do to hone some of these skills in your own life.

1. Independent Thinking

Millionaires think differently. Not just about money, about everything. The time and energy everybody else spends attempting to conform, millionaires spend creating their own path. Since thoughts impact actions, people who want to be wealthy should think in a way that will get them to that goal. Independent thinking doesn’t mean doing the opposite of what the rest of the world is doing; it means having the courage to follow what is important to you. So, the lesson here is to forge your own way, and let your success drive you to financial spoils – rather than doing it the other way around and trying to chase the money.

Just look at David Geffen. A self-made millionaire with $4.5 billion to his name in 2009, this American record executive and film producer was college dropout, but made millions founding record agencies and signed some of the most prominent musicians of the 1970s and ’80s. Although he didn’t take what many assume to be the usual path to success, his tireless work ethic and sense of personal conviction about artists’ potential allowed him to rack up a sizable fortune.

2. Vision

Millionaires are creative visionaries with a positive attitude. In other words, wealthy people not only have big dreams, they also believe they will come true. As such, wealth seekers should set lofty goals and not be afraid of uncharted territories.

Bill Gates, the world’s richest person in 2009, did just that. The American chairman of Microsoft (MSFT) is one of the founding entrepreneurs who brought personal computers to the masses. Gates jumped into the personal computers business in 1975 and held on tight, creating Microsoft Windows in 1985. When consumers began to bring computers into their homes, Gates was ready to profit from this new age.

3. Skills

Writer Dennis Kimbro interviewed successful people to determine the traits they had in common for his book, “Think and Grow Rich” (1992). He found that they concentrated on their area of excellence. Millionaires also tend to partner with others to supplement their weaker skills. If you don’t know what you are good at, poll friends and family. Use training and mentors to refine your strong skills.

4. Passion

Billionaire investing guru Warren Buffett says “Money is a by-product of something I like to do very much.” Enjoying your work allows you to have the discipline to work hard at it every day. People who interact with money for a living, bankers for example, often love creating new deals and persuading others to complete a transaction. But finding your dream job may take time. The average millionaire doesn’t find it until age 45, and tends to be 54 (on average) before becoming a millionaire. Kimbro found that millionaires tried an average of 17 ventures before they were successful. So, if you want to be rich, stop doing things you don’t enjoy and do what you love. If you don’t know what you love, try a few things and keep trying until you hit on the right thing.

5. Investment

Millionaires are willing to sacrifice time and money to achieve their goals. They are willing to take a risk now for the opportunity of achieving something greater in the future. Investing may include securities or starting a business – either way, it is a step toward achieving great financial rewards. Start investing now.

6. Salesmanship

Millionaires are constantly presenting their ideas and persuading others to buy into them. Good salesmen are oblivious to critics and naysayers. In other words, they don’t take “no” for an answer. Millionaires also have good social skills. In fact, when writer T. Harv Eker analyzed the results of a survey of 753 millionaires for his book, “Secrets of the Millionaire Mind” (2005), he found social skills were more important than IQ. Just look at Donald Trump. His fortune has fluctuated over the years, but his ability to sell himself – whether as a TV personality or as the force behind a line of neckties – has always brought him back among the ranks of celebrity millionaires.

The ability to communicate with people is essential to selling your idea. Contrary to the traditional view of salesmen, millionaires cite honesty as an important factor in their success. If you want to be a millionaire, be an honest salesman and polish your social skills.

***

Becoming a millionaire is not a goal that can be achieved overnight for most people. In fact, many of the world’s richest people built their wealth over many years (sometimes even generations) by making smart but often bold decisions, putting their skills to the best use possible and doggedly pursuing their vision. If you can learn anything about millionaires, it’s that for many of them, their riches are not necessarily what most sets them apart from the rest of the world – it’s what they did to earn those millions that really stands out.

GM details plans to wipe out current shareholders

Tue May 5, 2009 8:01pm EDT

By Kevin Krolicki

DETROIT (Reuters) – General Motors Corp (GM) on Tuesday detailed plans to all but wipe out the holdings of remaining shareholders by issuing up to 60 billion new shares in a bid to pay off debt to the U.S. government, bondholders and the United Auto Workers union.

The unusual plan, which was detailed in a filing with U.S. securities regulators, would only need the approval of the U.S. Treasury to proceed since the U.S. government would be the majority shareholder of a new GM, the company said.

The flood of new stock issuance that could be unleashed has been widely expected by analysts who have long warned that GM’s shares could be worthless whether the company restructures out of court or in bankruptcy.

The debt-for-equity exchanges detailed in the filing with the Securities and Exchange Commission would leave GM’s stock investors with just 1 percent of the equity in a restructured automaker, ending a long run when the Dow component was seen as a bellwether for the strength of the broader U.S. economy.

GM shares closed on Tuesday at $1.85 on the New York Stock Exchange. The stock would be worth just over 1 cent if the first phase of GM’s restructuring moves forward as described.

Once GM has issued new shares to pay off its debt to the U.S. government, bondholders and its major union, it said it would then undertake a 1-for-100 reverse stock split.

Such a move would take the nominal value of the stock back to near where it had been before the flood of new shares. But in the process, GM’s existing shareholders would see their stake in the 100-year-old automaker all but wiped out.

Bonds’ 30-Year Hot Streak Begins to Cool

by Brett Arends
Monday, May 4, 2009
WSJ.com

Bonds for the long run, anyone?

In the latest issue of the Journal of Indexes, investment manager Rob Arnott, chairman of Research Affiliates (read article here) says that long-term bonds have beaten stocks for decades.

“Starting any time we choose from 1979 through 2008,” Mr Arnott writes, “the investor in 20-year Treasuries (consistently rolling to the nearest 20-year bond and reinvesting income) beats the S&P 500 investor.” He argues the figures are even true going back to the late 1960s.

Mr. Arnott’s article has generated quite a stir in the investment world, where he has, in theory, turned a lot of received wisdom on its head.

But American mutual fund investors, responding to last year’s turmoil, are already voting this way with their wallets. So far this year they’ve withdrawn $45 billion from mutual funds that invest in the stock market, and put $68 billion into bond funds, reports the Investment Company Institute.

Should you follow suit? Not so fast.

Obviously bonds, especially Treasurys, held up well during last year’s crisis. And they can make an important part of a portfolio, especially at the right price. But anyone hoping for a repeat of the last thirty years is probably dreaming.

Treasurys don’t look appealing. Short term bonds yield a miserable 1.9%. And long-term bonds, far from offering “security,” are actually at serious risk from rising inflation.

The past is the past. Those who bought long-term Treasury bonds in the late 1970s and early 1980s simply pocketed an enormous one-off windfall when inflation collapsed. It neared 15% in 1980. Latest figure: -0.4%.

Consider what that means for investors.

In 1979, 20-year Treasurys yielded 9.3%. So over its life the bond paid out $180 in interest for each $100 invested. At one point in 1981, 30-year Treasurys yielded an incredible 15%, thanks to runaway inflation in the 1970s. Investors demanded high interest rates to offset the expected loss of purchasing power on their money.

But when inflation collapsed after 1982, those coupon payments turned golden because the purchasing power stayed high. Bond prices soared in response.

Today, bond investors get no such deal. Ten-year Treasurys pay just 3%. And the 30-year 3.96%.

The Fight Over Who Will Guard Your Nest Egg

By JASON ZWEIG
wsj.com

A power struggle in Washington will shape how investors get the advice they need.

On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.

Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra’s rules, brokers must recommend only investments that are “suitable” for clients.

Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of “fiduciary duty,” or the obligation to put their clients’ interests first.

Most investors don’t understand this key distinction. A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest. Advisers always have those duties, but brokers often don’t. The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.

Brokers can sell you any investment they have “reasonable grounds for believing” is suitable for you. Only since 1990 have they been required to base that suitability judgment on your risk tolerance, investing objectives, tax status and financial position.

A key factor still is missing from Finra’s suitability requirements: cost. Let’s say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is “suitable’ for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.

If brokers had to take cost and conflicts of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before producing the kind of garbage that has blighted the portfolios of investors over the years.

Richard G. Ketchum, chairman of Finra, has begun openly using the F-word: fiduciary. “It’s time to get to one standard, a fiduciary standard that works for both broker-dealers and advisers,” he told me. “Both should have a fundamental first responsibility to their customers.”

Phases of fear and elation in the VIX

Here we show a nice relationship between the VIX and the SPX.  While this is a commonly referenced pairing, many still challenge the value of using the VIX as a market indicator.  There are numerous ways too use the VIX and almost everyone has their own tweaks.  This chart shows a very clear inverse relationship with several distinct “phases” discernible in the value of the VIX.  These “phases” correlate well with the action in the SPX.  We have labled these phases “euphoria”, “fear” and “panic”.  We also included the 400 day moving average (equivalent to the 80 week) which we discussed previously in The Significance of the 400 day (80 week) moving average.  This bull/bear market reference point matches up very well with the action in the VIX, as the VIX moves into the “fear phase” just as the 400 day is coming under assault, before eventually breaking.  A final test of the 400 day from below, which we highlighted in late April 2008, was accompanied by one last dip into the “euphoria” zone for the VIX.  That was the “last chance” to get out before the drop gathered steam as the SPX then dropped over 50% in less than 12 months.

We added the notes on Bear Stearns and Citigroup for a consensus of the “expert” opinion at the time.

Obama lifts Bush restrictions on stem cell research

Mon Mar 9, 2009 6:24pm EDT

By David Alexander

WASHINGTON (Reuters) – President Barack Obama lifted restrictions on federal funding of human embryonic stem cell research on Monday, angering abortion opponents but cheering those who believe the study could produce treatments for many diseases.

“We will lift the ban on federal funding for promising embryonic stem cell research,” Obama said to vigorous applause at a White House gathering.

“We will also vigorously support scientists who pursue this research. And we will aim for America to lead the world in the discoveries it one day may yield.”

Shares of companies specializing in stem cell research burst upward on the news, with Geron Corp (GERN) up by as much as much as 35 percent and StemCells Inc (STEM) up 73 percent at one point. Other related company shares rose, too.

The decision was a clear repudiation of the approach taken by Obama’s predecessor, George W. Bush. U.S. law limits the use of federal money to make human stem cells, but Bush tightened the restrictions even further to include work using such cells.
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Congratulations to members of Security Growth Alert for catching amazing gains on both of these stocks for a second time in six months!

ETFs: A Better Bet in a Bear Market

Amid the financial crisis, tax advantages are but one benefit of exchange-traded funds. Their transparency, liquidity, and lower fees also appeal to investors

By David Bogoslaw
BusinessWeek.com

Imagine having invested in the DWS Commodity Securities A Fund (SKNRX) in 2008. The mutual fund had an annual return of -45.9% and also distributed nearly two-thirds of its net asset value as capital gains, incurring a substantial tax bill for investors on top of the losses they suffered. Unfortunately, this wasn’t the only mutual fund to do so: More than three dozen funds with negative returns of at least 21% paid out over 30% of their net asset value as capital gains last year, according to Morningstar (MORN). Ouch and double ouch.

Making capital gains even higher than usual was the fact that most traditional mutual funds were forced to sell legacy holdings that had dramatically appreciated in value since being purchased in order to fund redemptions as nervous investors fled the market.

That may have prompted more people to switch to the mutual funds’ chief rival for the affections of diversification-minded retail investors, exchange-traded funds. Unlike mutual funds, ETFs incur zero capital gains until an investor actually sells his shares. While turnover in an ETF’s holdings can be high, it is done through in-kind exchanges of one security for another rather than through selling and buying.

But since the deepening of the financial crisis last September, the tax advantages of ETFs are just the icing on the cake.
Transparency, Liquidity, Lower Fees

The primary reason ETFs are more popular than ever is they give financial advisers the ability to better control their clients’ investment portfolios. First, there’s the transparency of knowing exactly what’s in an ETF on any given day, which matches advisers’ need for real-time management of investments in order to minimize wealth destruction. In this regard, ETFs have a clear advantage over mutual funds, which are required to disclose their holdings only four times a year. Of course, there are plenty of traditional index funds that are just as transparent as ETFs by virtue of the ability to see the contents of the underlying index on any chosen day, says Russ Kinnel, director of fund research at Morningstar.

ETFs’ inherent liquidity is also more valuable than ever in view of the continuing high volatility in stock and bond markets. Then there are the lower fees typically charged by ETF sponsors, which make a big difference in the current environment, where returns are mostly underwater.

Most Profitable Mutual Funds Ever

Friday February 20, 10:55 am ET
By Max Rottersman

HANOVER, NH (ETFguide.com) – The highest mutual fund advisory fee, of all time, was collected from the Fidelity Magellan Fund (FMAGX).  In 2001 it took in $792 million.  Magellan has earned the top three, all-time records, grossing $1.8 billion between 2000 and 2002.  Much of that is profit, from future retirees who don’t read their statements.   Most can’t believe such large sums go directly into one manager’s pocket.   After all, if they did, wouldn’t we read about it in the press?  No.  Mutual fund companies provide a steady stream of advertising dollars.  It isn’t a conspiracy.  It’s natural self-interest for all involved, from The New York Times to the Wall Street Journal.

Ironically, American mutual fund regulation is the finest in the world.  I’m not joking.  There’s no secret to the numbers I’m pointing out.  They’re sent to every shareholder once a year.   Sadly, few journalist read fund financial statements either.  And any Fidelity shareholder who doesn’t like the fees is free to leave.

Mutual funds are corporations run on the behalf of their shareholders, represented by a board of trustees.  It’s a legal structure that makes for some confusing language; for example, fund fees are often called expenses (which legally they are), rather than fees (which functionally, you pay).  For example, Fidelity never charges you, the shareholder, directly. Rather, the fund trust pays a fee, from the fund’s assets, to various Fidelity companies (which are separate from the fund corporation) for various services.  Your board of trustees enters into contracts, on the shareholder’s behalf, with the advisor (like Fidelity) and other service providers.  Ironically, mutual funds were born during a ‘socialistic’ time in American history.   Again, I kid you not.  Should shareholders revolt, trustees can easily fire the portfolio management companies which serve the funds.   Interestingly, that has seldom happened.

If you have any question about the profitability of the fund business, consider this.  Last year, these five funds alone earned over $2 billion in advisory fees. Fidelity Contrafund: $522 Million (FCNTX), PIMCO Total Return Fund: $506 Million (PTTAX), Growth Fund Of America: $450 Million (AGTHX), Europacific Growth Fund: $439 Million (AEPGX), Fidelity Diversified International Fund: $374 Million (FDIVX). Again, believe it or not, these are the fees the manager charges for a few people to pick stocks for the fund.  The operational costs are separate.

Flying under the radar, because they don’t offer shares directly to the public, the CREF Stock Account Fund paid $586 million in advisory and administrative fees, the largest amount of any fund in my database.  TIAA-CREF says it’s ‘at cost’.  We have to assume it’s true, that the teachers did their own homework and thought for themselves.

Every shareholder should understand that all mutual funds have two basic costs.  The first is the cost to manage the portfolio; that is, buy and sell stocks and bonds.  A single person with a brokerage account can do this.   In mutual funds, the fee for this ‘portfolio management’ work is called the advisory fee.  The second basic cost is operational.  This work is often done by hundreds of people: administrators, call center workers, accountants, IT professionals, custodians, printers and lawyers.  The operational work is what shareholders ‘see and touch’ when they deal with their mutual fund.  Shareholders seldom, if ever, have any contact with the portfolio manager (advisor).

In 2001 Fidelity charged shareholders $162 million for operational costs (on top of the $792 million).  Fidelity probably makes some money on these costs too, since Fidelity subsidiaries handle shareholder servicing, administration and other ‘touch’ services.  Yet most people don’t believe me when I say most of the advisory fee is profit.  They just can’t believe it’s legal for Fidelity to collect $792 million for a few people picking stocks (which they pay a handsome salary in the millions, but it’s a fraction of what they charge). Here’s a list of 58 Fund Managers Who Took in Over $100 Million in Advisory Fees Last Year.

Obama signs $787 billion stimulus into law

Ceremony setting highlights investment in ‘green’ technology

By Robert Schroeder, MarketWatch
3:39 p.m. EST Feb. 17, 2009

WASHINGTON (MarketWatch) — President Barack Obama signed the sprawling $787 billion economic stimulus package into law on Tuesday, saying it will help the struggling U.S. economy but warning that the recovery process will be challenging.

“Today does not mark the end of our economic troubles,” Obama said before signing the bill in Denver, Colo. “Nor does it constitute all of what we must do to turn our economy around.”

But, said Obama “it does mark the beginning of the end” of what the U.S. needs to do to create jobs, provide relief to families and pave the way for long-term growth.

Obama signed the bill on Tuesday afternoon in a ceremony in Denver after touring a solar panel installation project at the Denver Museum of Nature and Science. Among other things, the bill funnels money to alternative energy projects, provides tax cuts for individuals and businesses and gives aid to states.

Congress approved the bill on Feb. 13. Democrats voted overwhelmingly in the House and Senate to back the bill, but no Republicans voted for it in the House and only three voted for it in the Senate.

Obama has repeatedly described the stimulus as the first in a multi-part strategy to hasten an economic recovery. Read a summary of the stimulus.

On Wednesday, the administration plans to announce details about a $50 billion program to modify mortgages for troubled homeowners. The Treasury Department plans to use $50 billion of the remaining $350 billion in a bank-bailout fund for a program to help troubled homeowners avoid defaulting on their loans by subsidizing mortgage payments.

Bloggers Will Catch the Next Madoff

by Mick Weinstein
Posted on Friday, February 13, 2009, 12:00AM

Independent investigator Harry Markopolos knew something fishy was going on with Bernie Madoff years before the fund manager confessed to his massive Ponzi scheme. But Markopolos couldn’t get the SEC or ‘The Wall Street Journal’ to properly investigate the matter, so his information failed to reach the public — while dozens of new and existing victims poured their life savings into Madoff’s black hole.

Ray Pellecchia, vice president of Corporate Communications at NYSE Euronext, asked an interesting question on his blog last week: “What would have happened if Mr. Markopolos had blogged his analysis? That is, what if he had posted the entire piece on a blog, under his name or a pseudonym?… I believe that blogging’s fast, viral distribution would have been highly effective in this case, and brought down the alleged Ponzi scheme in a hurry. I wonder if future whistle blowers will use blogs if they believe their information is not getting through on official channels.”

Ray made a great point, and I think the answer is clear: Blogs, microblogs (such as Twitter), and other social media tools are simultaneously pulling down communication barriers and establishing quality/truth filters in ways that will enable far more effective early recognition of financial fraud than the limited channels we previously relied upon.

We may — repeat, MAY — have a case in point already.

Financial analyst Alex Dalmady started asking pointed questions about Houston-based Stanford Financial and its affiliate Stanford International Bank of Antigua — which claims over $6 billion in depositors’ assets — when a friend of his asked him to review his portfolio, heavily weighted in remarkably high-yield Stanford CDs.

As Dalmady dug deeper, he found lots of problems with Stanford’s products, documented them in a report called “Duck Tales” (if it looks like a duck, walks like a duck, and quacks like a duck…), then uploaded that report to the ‘net for public consumption. Dalmady published the report in a Venezuelan econo-mag, but noticed that his work on Stanford only “really exploded once it hit the blogs. Miguel Octavio’s The Devil’s Excrement [at Salon.com] took up the story on Monday the 9th, as did Caracas Gringo.”

Deal struck on economic stimulus package

Congressional sources say lawmakers have resolved key differences over school construction spending that had threatened to derail an earlier compromise.

WASHINGTON (CNN) — Democratic leadership sources say they have worked out a way around the disagreement between the Senate and House over education funding in the economic stimulus bill.

Details on how they worked it out are not yet available, but a Democratic source said they have come up with an agreement now that everyone – House Democrats and moderate Senate Republicans – can live with.

Senators had slashed direct funding for school construction – a top priority for Democrats – and instead set aside money for governors to use on school modernization and rehabilitation. House Democrats did not believe that would ultimately be targeted enough to school districts in need.

“I want to thank the Democrats and Republicans in Congress who came together around a hard-fought compromise,” said President Barack Obama in a statement.

Obama said the plan will save or create more than 3.5 million jobs and will provide immediate tax relief to families and businesses.

“I’m grateful to the House Democrats for starting this process, and for members in the House and Senate for moving it along with the urgency that this moment demands,” said President Obama.

The deal comes after a drawn-out debate on Capitol Hill that culminated in a last-minute holdup related to the school construction issue.

Senate Majority Leader Harry Reid announced that a deal had been struck earlier Wednesday afternoon. But House Speaker Nancy Pelosi was not on hand when Reid said that the differences between the House and Senate versions of the bill had been resolved.

Aides to both Pelosi, D-Calif., and Reid, D-Nev., told CNN she had given Reid the green light to make the announcement, but she apparently then heard complaints from some rank-and-file Democrats.

After Reid announced the compromise bill, Sen. Max Baucus of Montana, a fellow Democrat, said it could be taken up by the two houses as early as Friday, meeting President Barack Obama’s timetable of having the bill on his desk by Presidents Day, which is Monday.

The Kondratieff Cycle

Graphic compliments of The Long Wave Analyst.

Professor Nickolai Kondratieff (pronounced “Kon-DRA-tee-eff”)

Shortly after the Russian Revolution of 1917, he helped develop the first Soviet Five-Year Plan, for which he analyzed factors that would stimulate Soviet economic growth.  In 1926, Kondratieff published his findings in a report entitled, “Long Waves in Economic Life”.  Based upon Kondratieff’s conclusions, his report was viewed as a criticism of Joseph Stalin’s stated intentions for the total collectivization of agriculture.  Soon after, he was dismissed from his post as director of the Institute for the Study of Business Activity in 1928.  He was arrested in 1930 and sentenced to the Russian Gulag (prison); his sentence was reviewed in 1938, and he received the death penalty, which it is speculated was carried out that same year.  Kondratieff’s major premise was that capitalist economies displayed long wave cycles of boom and bust ranging between 40-60 years in duration.  Kondratieff’s study covered the period 1789 to 1926 and was centered on prices and interest rates.

Kondratiev waves — also called Supercycles, surges, long waves or K-waves — are described as regular, sinusoidal cycles in the modern (capitalist) world economy.  Averaging fifty and ranging from approximately forty to sixty years in length, the cycles consist of alternating periods between high sectoral growth and periods of slower growth.  The Kondratieff wave cycle goes through four distinct phases of beneficial inflation (spring), stagflation (summer), beneficial deflation (autumn), and deflation (winter).

The phases of Kondratieff’s waves also carry with them social shifts and changes in the public mood.  The first stage of expansion and growth, the “Spring” stage, encompasses a social shift in which the wealth, accumulation, and innovation that are present in this first period of the cycle create upheavals and displacements in society.  The economic changes result in redefining work and the role of participants in society.  In the next phase, the “Summer” stagflation, there is a mood of affluence from the previous growth stage that changes the attitude towards work in society, creating inefficiencies.  After this stage comes the season of deflationary growth, or the plateau period. The popular mood changes during this period as well.  It shifts toward stability, normalcy, and isolationism after the policies and economics during unpopular excesses of war.  Finally, the “Winter” stage, that of severe depression, includes the integration of previous social shifts and changes into the social fabric of society, supported by the shifts in innovation and technology.

Huge stimulus bill passes House

WASHINGTON (AP) — In a swift victory for President Barack Obama, the Democratic-controlled House approved a historically huge $819 billion stimulus bill Wednesday night with spending increases and tax cuts at the heart of the young administration’s plan to revive a badly ailing economy.

The vote was 244-188, with Republicans unanimous in opposition despite Obama’s frequent pleas for bipartisan support.

“This recovery plan will save or create more than three million new jobs over the next few years,” the president said in a written statement released moments after the House voted.

The vote sent the bill to the Senate, where debate could begin as early as Monday on a companion measure already taking shape. Democratic leaders have pledged to have legislation ready for Obama’s signature by mid-February.

With unemployment at its highest level in a quarter-century, the banking industry wobbling despite the infusion of staggering sums of bailout money and states struggling with budget crises, Democrats said the legislation was desperately needed.

Republicans said the bill was short on tax cuts and contained too much spending, much of it wasteful, and would fall far short of administration’s predictions of job creation.

On the final vote, the legislation drew the support of all but 11 Democrats, while all Republicans opposed it.

The White House-backed legislation includes an estimated $544 billion in federal spending and $275 billion in tax cuts for individuals and businesses. The totals remained in flux nearly until the final vote, due to official re-estimates and a last-minute addition of $3 billion for mass transit.

Obama aide promotes job plan, warns automakers

Monday November 24, 12:16 am ET
By Jim Kuhnhenn, Associated Press Writers

Obama adviser promotes economic aid plan, seeks swift congressional action; automakers warned

WASHINGTON (AP) — President-elect Barack Obama signaled Sunday he will move urgently and aggressively to rescue the plunging economy, demanding swift passage by Congress of a massive two-year spending and tax-cutting recovery program. “We’re out with the dithering, we’re in with a bang,” a top Obama aide said.

Obama’s plans, outlined by his transition team on television talk shows, could put aside his campaign pledge to repeal a Bush tax cut for the wealthy. With the downturn in the economy, those tax cuts may remain in place until they are scheduled to die in 2011, said William M. Daley, an economic adviser. “That looks more likely than not,” he said.

Obama aides called on lawmakers to pass, by the Jan. 20 inauguration, legislation that meets Obama’s two-year goal of saving or creating 2.5 million jobs. Democratic congressional leaders said they would get to work when Congress convenes Jan. 6.

Though Obama aides declined to discuss a total cost, it probably would far exceed the $175 billion he proposed during the campaign. Some economists and lawmakers have argued for a two-year plan as large as $700 billion, equal to the Wall Street bailout Congress approved last month.

“I don’t know what the exact number is, but it’s going to be a big number. It has to be,” said Obama economic adviser Austan Goolsbee.

With the wounded economy worsening, the Obama team’s new assertiveness was a recognition he needed to soothe financial markets with signs of leadership. It also foreshadowed a more hands-on role by Obama to influence congressional action during the final weeks of the transition.

Obama will introduce his economic team on Monday, including Timothy Geithner as treasury secretary and Lawrence Summers as head of the National Economic Council. Obama also has settled on New Mexico Gov. Bill Richardson as his commerce secretary.

Hope and Dreams Portfolio

The stocks in this group fall under the green/conservation/water umbrella. They are generally solving problems by doing good for society. Oh, and they make some money in the process.

Think positive and your dollars will respond in kind.

AMSC – supplies electrical systems used in wind turbines; sells power electronic products that regulate wind farm voltage to enable their interconnection to the power grid; licenses wind energy system designs to manufacturers of such systems, and provides consulting services to the wind industry.

BMI – is a manufacturer of flow measurement and control products, serving water utilities, municipalities and industrial customers worldwide. Measuring a variety of liquids, from potable water to oil and lubricants, to industrial processes, the Company’s products provide timely measurement information to its customers.

CCC – is a provider of products, and solutions for purifying water and air.

CDZI – is primarily engaged in acquiring and developing land and water resources. Its primary assets consist of 45,000 acres of land in three areas of eastern San Bernardino County, California. The Company’s portfolio of water resources are located in proximity to the Colorado River and the Colorado River Aqueduct, the principal source of imported water for Southern California, and provides the Company with the opportunity to participate in a variety of water storage and supply programs, exchanges and conservation programs with public agencies and other partners.

CLHB – is a provider of environmental services and an operator of non-nuclear hazardous waste treatment facilities in North America. The Company performs environmental services for over 45,000 customers, including more than 325 Fortune 500 companies.

CREE – focuses its expertise in SiC and GaN on light emitting diodes (LEDs), which consist of LED chips, LED components and LED lighting solutions. It also develops power and radio frequency (RF) products, including power switching and RF devices.

CWCO – develops and operates seawater desalination plants and water distribution systems in areas where naturally occurring supplies of potable water are scarce or nonexistent.

ELON – develops, markets, and sells system and network infrastructure products that enable various devices such as air conditioners, appliances, electricity meters, light switches, thermostats, and valves to be made smart and inter-connected. The Company’s products and services are offered to the principal markets, which include electric utilities, building automation, industrial automation, demand response, street lighting, home control and transportation.

FSYS – designs, manufactures and supplies alternative fuel components and systems for use in the transportation, industrial and power generation industries on a global basis.

FTEK – is an integrated company that uses a suite of technologies to provide boiler optimization, efficiency improvement and air pollution reduction and control solutions to utility and industrial customers worldwide. Fuel Tech’s special focus is the worldwide marketing of its nitrogen oxide (NOx) reduction and FUEL CHEM processes.

GRC – designs, manufactures and sells pumps and related equipment (pump and motor controls) for use in water, wastewater, construction, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications.

HAIN – is engaged in manufacturing, marketing, distributing and selling natural and organic food products, and natural and organic personal care products under brand names, which are sold as better-for-you products.

HEV – has developed a working prototype of its hybrid electric vehicle (HEV) battery pack and is producing sample cells for testing for an electric vehicle (EV) battery pack.

ITRI – provides a portfolio of products and services to utilities for the energy and water markets throughout the world. The Company is a provider of metering, data collection and software.

LNN – is a designer and manufacturer of self-propelled center pivot and lateral move irrigation systems, which are used in the agricultural industry to stabilize crop production while conserving water, energy, and labor.

PNR – is a global player in providing products and systems used worldwide in the movement, storage, treatment and enjoyment of water.

SWWC – is engaged in providing a range of services, including water production, treatment and distribution; wastewater collection and treatment; utility operations and maintenance services; and utility infrastructure construction.

TTEK – provides consulting, engineering, construction, and technical services for resource management and infrastructure in the United States and internationally. Its services include research and development, applied science and technology, engineering design, program management, construction management, construction, and operations and maintenance.

WGOV – engages in the design and manufacture of energy control and optimization solutions for reciprocating engine, aircraft and industrial turbines, and electrical power system equipment used in various industries worldwide. The company primarily provides integrated control systems and control components, such as electronics, actuators, valves, fuel systems, and combustion systems to OEMs of gas turbines for use in aerospace and industrial power markets; to OEMs of diesel engines, gas engines, steam turbines, and distributors for use in power generation, marine, transportation, and process applications; and to OEMs of electrical power generation, distribution, conversion, and quality equipment using digital controls and inverter technologies.

WTS – is a supplier of products for use in the water quality, water safety, water flow control and water conservation markets.

Key tax pieces of Senate bailout bill

Wed Oct 1, 2008 3:56pm EDT

(Reuters) – To improve chances of passing a $700 billion financial industry bailout package, Senate leaders have agreed to combine it with a package of tax breaks for renewable energy, businesses and middle class workers.

The roughly $150 billion cost of the tax package is partially offset by some revenue raising measures including one that would change the tax treatment of deferred compensation paid through offshore tax haven accounts.

Major tax provisions in the bill include the following:

* Extends Alternative Minimum Tax relief for some 24 million middle class taxpayers through 2008. Includes some additional AMT relief for people who exercised company incentive stock options.

* Extends provision allowing homeowners who do not itemize their taxes to take a deduction up to $1,000 for state and local property taxes.

* Extends through 2009 a provision allowing some taxpayers to take a deduction for state and local sales taxes.