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)

Dow closes above 10,000 for 1st time in a year

DJ comeback: Stock market’s best-known barometer closes above 10,000 for 1st time in a year

By Sara Lepro and Tim Paradis, AP Business Writers
5:08 pm EDT, Wednesday October 14, 2009

NEW YORK (AP) — When the Dow Jones industrial average first passed 10,000, traders tossed commemorative caps and uncorked champagne. This time around, the feeling was more like relief.

The best-known barometer of the stock market entered five-figure territory again Wednesday, the most visible sign yet that investors believe the economy is clawing its way back from the worst downturn since the Depression.

The milestone caps a stunning 53 percent comeback for the Dow since early March, when stocks were at their lowest levels in more than a decade.

“It’s almost like an announcement that the bear market is over,” said Arthur Hogan, chief market analyst at Jefferies & Co. (JEF) in Boston. “That is an eye-opener — ‘Hey, you know what, things must be getting better because the Dow is over 10,000.'”

Cheers went up briefly when the Dow eclipsed the milestone in the early afternoon, during a daylong rally driven by encouraging earnings reports from Intel Corp. and JPMorgan Chase & Co. (JPM) The average closed at 10,015.86, up 144.80 points.

It was the first time the Dow had touched 10,000 since October 2008, that time on the way down.

“I think there were times when we were in the deep part of the trough there back in the springtime when it felt like we’d never get back to this level,” said Bernie McSherry, senior vice president of strategic initiatives at Cuttone & Co.

Ethan Harris, head of North America economics at Bank of America Merrill Lynch (BAC), described it as a “relief rally that the world is not coming to an end.”

The mood was far from the euphoria of March 1999, when the Dow surpassed 10,000 for the first time. The Internet then was driving extraordinary gains in productivity, and serious people debated whether there was such a thing as a boom without end.

“If this is a bubble,” The Wall Street Journal marveled on its front page, “it sure is hard to pop.”

It did pop, of course. And then came the lost decade.

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.

How Do I Know You’re Not Bernie Madoff?

by Paul Sullivan
The New York Times
Monday, June 15, 2009

Tony Guernsey has been in the wealth management business for four decades. But clients have started asking him a question that at first caught him off guard: How do I know I own what you tell me I own?

This is the existential crisis rippling through wealth management right now, in the wake of the unraveling of Bernard L. Madoff’s long-running Ponzi scheme. Mr. Guernsey, the head of national wealth management at Wilmington Trust, says he understands why investors are asking the question, but it still unnerves him. “They got their statements from Madoff, and now they get their statement from XYZ Corporation. And they say, ‘How do I know they exist?’ ”

When he is asked this, Mr. Guernsey says he walks clients through the checks and balances that a 106-year-old firm like Wilmington has. Still, this is the ultimate reverberation from the Madoff scandal: trust, the foundation between wealth manager and client, has been called into question, if not destroyed.

“It used to be that if you owned I.B.M., you could pull the certificate out of your sock drawer,” said Dan Rauchle, president of Wells Fargo Alternative Asset Management. “Once we moved away from that, we got into this world of trusting others to know what we owned.”

The process of restoring that trust may take time. But in the meantime, investors may be putting their faith in misguided ways of ensuring trust. Mr. Madoff, after all, was not charged after an investigation by the Securities and Exchange Commission a year before his firm collapsed. Here are some considerations:

CUT THROUGH THE CLUTTER Financial disclosure rules compel money managers to send out statements. The problem is that the statements and trade confirmations arrive so frequently, they fail to help investors understand what they own.

To mitigate this, many wealth management firms have developed their own systems to track and present client assets. HSBC Private Bank has had WealthTrack for nearly five years, while Barclays Wealth is introducing Wealth Management Reporting. But there are many more, including a popular one from Advent Software.

These systems consolidate the values of securities, partnerships and, in some cases, assets like homes and jewelry. HSBC’s program takes into account the different ways firms value assets by finding a common trading date. It also breaks out the impact of currency fluctuation..

These systems have limits, though. “Our reporting is only as good as the data we receive,” said Mary Duke, head of global wealth solutions for the Americas at HSBC Private Bank. “A hedge fund’s value depends on when the hedge fund reports — if it reports a month-end value, but we get it a month late.”

In other words, no consolidation program is foolproof.

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.”

Contrarian Quotes

“Follow the path of the unsafe, independent thinker. Expose your ideas to the dangers of controversy. Speak your mind and fear less the label of ‘crackpot’ than the stigma of conformity. And on issues that seem important to you, stand up and be counted at any cost.”
– Thomas Watson

“Whenever you find yourself on the side of the majority, it’s time to pause and reflect.”
– Mark Twain

“The ‘crowd’ is most enthusiastic and optimistic when it should be cautious and prudent; and is most fearful when it should be bold.”
– Humphrey Neill

How many bears could a bear trap bury, if a bear trap began to bury bears?

A shovel is not enough longs, we may have hit rock.  The question is, did we hit rock bottom?

The 50 day moving average is in play once again.  Can we remove this huge stone in time for Easter?  The resurrection of the market depends on it.

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.

A Generational Opportunity

by Jim O’Shaughnessy
Tuesday, March 17, 2009

“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger – but recognize the opportunity.” -John F. Kennedy

I recently had dinner with a client who told me that stocks had not performed well over the last 40 years. At first I suspected that she was generalizing from the recent pummeling equity markets have experienced — after all, this is a time frame that included two of the biggest bull markets in history! Yet, when I went to the data, I found out that she was absolutely right. The 40 years ending February 2009 were the second worst 40-year period for equities since 1900, with only the 40 years ending December 1941 doing worse!

Let’s put this into perspective. The 40 years ending in 1941 included the stock market panic of 1907, which drove down the Dow Jones Industrial Average nearly 38 percent; the World War I Era, where the period between 1910 and 1919 was one of the worst ever for stocks; AND, oh yes, the Great Depression. Finally, icing on the 40-year cake, the Japanese bombed Pearl Harbor on December 7, 1941. How could these last 40 years even begin to match that? Alas, they did.

The chart on the left is a histogram of the average annual real returns for U.S. equities (large stocks) for all 40-year holding periods, with annual data starting in 1900 and monthly data beginning in 1926. There were only three 40-year periods where U.S. stocks returned less than four percent annually — the 40 years ending December 1941, where they earned a real rate of return of 3.80 percent annually for the previous 40 years; the 40 years ending February 2009 where they earned 3.86 percent annually; and the 40 years ending December 1942, where stocks returned 3.92 percent a year. Keep in mind that’s just 0.55 percent of the 545 periods analyzed. We are talking about an event so rare, that most of us alive today will never see such an opportunity again.

The histogram also shows the norm — stocks returned between 6 and 8 percent a year for 353 periods, or nearly 65 percent of all of the 40-year periods analyzed. Looked at closely, you see that 99.45 percent of all  observed 40-year periods, U.S. stocks enjoyed a real rate of return between 4 and 12 percent a year, and that we are now presented with a huge generational opportunity.

Reversion to the Mean: Short, Medium and Long Term

Let’s look at what happened with U.S. stocks the first time they earned less than 4 percent a year for a 40-year period. For the five-, ten-, and twenty-year periods following the nadir reached in 1941, here are the real average annual compound returns for a variety of U.S. stock categories:

Everybody hurts…sometimes

The World’s Billionaires

03.11.09, 06:00 PM EDT
Luisa Kroll, Matthew Miller and Tatiana Serafin
Forbes.com

It’s been a tough year for the richest people in the world. Last year there were 1,125 billionaires. This year there are just 793 people rich enough to make our list.

The world has become a wealth wasteland. Like the rest of us, the richest people in the world have endured a financial disaster over the past year. Today there are 793 people on our list of the World’s Billionaires, a 30% decline from a year ago.

Of the 1,125 billionaires who made last year’s ranking, 373 fell off the list–355 from declining fortunes and 18 who died. There are 38 newcomers, plus three moguls who returned to the list after regaining their 10-figure fortunes. It is the first time since 2003 that the world has had a net loss in the number of billionaires.

The world’s richest are also a lot poorer. Their collective net worth is $2.4 trillion, down $2 trillion from a year ago. Their average net worth fell 23% to $3 billion. The last time the average was that low was in 2003.

Bill Gates lost $18 billion but regained his title as the world’s richest man. Warren Buffett, last year’s No. 1, saw his fortune decline $25 billion as shares of Berkshire Hathaway (BRK.A) fell nearly 50% in 12 months, but he still managed to slip just one spot to No. 2. Mexican telecom titan Carlos Slim Helú also lost $25 billion and dropped one spot to No. 3.

It was hard to avoid the carnage, whether you were in stocks, commodities, real estate or technology. Even people running profitable businesses were hammered by frozen credit markets, weak consumer spending or declining currencies.

The biggest loser in the world this year, by dollars, was last year’s biggest gainer. India’s Anil Ambani lost $32 billion–76% of his fortune–as shares of his Reliance Communications, Reliance Power and Reliance Capital all collapsed.

Ambani is one of 24 Indian billionaires, all but one of whom are poorer than a year ago. Another 29 Indians lost their billionaire status entirely as India’s stock market tumbled 44% in the past year and the Indian rupee depreciated 18% against the dollar. It is no longer the top spot in Asia for billionaires, ceding that title to China, which has 28.

How About a Stimulus for Financial Advice?

By ROBERT J. SHILLER
Published: January 17, 2009

In evaluating the causes of the financial crisis, don’t forget the countless fundamental mistakes made by millions of people who were caught up in the excitement of the real estate bubble, taking on debt they could ill afford.

Many errors in personal finance can be prevented. But first, people need to understand what they ought to do. The government’s various bailout plans need to take this into account — by starting a major program to subsidize personal financial advice for everyone.

A number of government agencies already have begun small-scale financial literacy programs. For example, the Treasury announced the creation of an Office of Financial Education in 2002, and President Bush started an Advisory Council on Financial Literacy a year ago. These initiatives are involved in outreach to schools with suggested curriculums, and online financial tips. But a much more ambitious effort is needed.

The government programs that are already under way are akin to distributing computer manuals. But when something goes wrong with a computer, most people need to talk to a real person who can zero in on the problem. They need an expert to guide them through the repair process, in a way that conveys patience and confidence that the problem can be solved. The same is certainly true for issues of personal finance.

The significance of this was clear at the annual meeting of the American Economic Association this month in San Francisco, where several new research papers showed the seriousness of consumer financial errors and the exploitation of them by sophisticated financial service providers.

A paper by Kris Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Geneva and Stephan Meier of Columbia University asked a battery of simple financial literacy questions of recent homebuyers. Many of the respondents could not correctly answer even simple questions, like this one: What will a $300 item cost after it goes on a “50 percent off” sale? (The answer is $150.) They found that people who scored poorly on the financial literacy test also tended to make serious investment mistakes, like borrowing too much, and failing to collect information and shop for a mortgage.

A paper by Liran Einav and Jonathan Levin, both of Stanford, reporting on work with William Adams of Citigroup, shows how sophisticated automobile lenders can be in their loan technology. They use complicated statistical models not only to approve people for credit, but also to fine-tune the down payment and even to suggest what kind of car individuals can buy. This suggests to me that many borrowers can’t match the expertise of lenders.

And another paper, by Paige Marta Skiba of Vanderbilt University and Jeremy Tobacman of the University of Pennsylvania, showed that payday loans — advanced to people who run out of cash before their next paycheck — exploit people’s overoptimism and typically succeed in charging annual rates of interest that may amount to more than 7,000 percent.

One wishes that all this financial cleverness could be focused a bit more on improving the customers’ welfare!

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.

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.”

Low rates defuse ‘exploding’ ARMs

Thanks to low interest rates, resetting ARMs are no longer posing the dire threat to homeowners that many thought they would.

By Les Christie, CNNMoney.com staff writer
Last Updated: February 6, 2009: 4:28 PM ET

NEW YORK (CNNMoney.com) — A wave of resetting adjustable rate mortgages had been poised to add to the flood of foreclosures as their rates jumped.

Some 420,000 hybrid ARMs are scheduled to reset in 2009, according to the Treasury Department. A year or so ago, it seemed that many of these loans were going to see their interest rates reset to as high as 12% or more.

But then interest rates started falling, hitting lows they hadn’t seen in 37 years.

“Many people are actually seeing their adjustable rates fall,” said Barry Glassman, a financial adviser with Cassady & Company. “Some loans are resetting even lower than some fixed-rate loans.”

A ticking time bomb. Adjustable rate mortgages start out with a two or three year period of low introductory rates, sometimes called “teaser rates.” After that, the interest rates start to adjust according to a set schedule – sometimes as often as monthly or as little as once a year – until the mortgage is paid off.

For the most part, this was a recipe for disaster. Many homeowners took out ARMs because they couldn’t afford the monthly payments that came with a 30 year fixed-rate loan. They were counting on having the value of their homes appreciate and then refinancing. Instead, home prices have plunged a record 18.2% according to the S&P/Case-Shiller index.

But as the economy soured, interest rates dipped.

“We thought that the 8% interest loans would reset to about 12%,” said Alan White, a law professor at Valparaiso University who has studied the lending industry’s mortgage modification efforts, “but they only went to 9% or less.”

The adjustments are calculated by adding what’s called a margin, which is a number of percentage points agreed to when the mortgage is first issued, to an index.

The index that most hybrid ARMs are tied to is the London Interbank Offered Rate (Libor). So, homeowners whose loans are resetting will get new interest rates equal to their margins, which range from about three percentage points for the lowest risk borrowers to six percentage points for those who at higher risk, plus the current Libor rate.

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.

Merrill paid bonuses early as BofA deal closed: report

Wed Jan 21, 2009 10:43pm EST

NEW YORK (Reuters) – Merrill Lynch (MER) paid billions of dollars of bonuses to its employees, three days before completing its life-saving sale to Bank of America Corp (BAC), the Financial Times reported on its website on Wednesday.

The money was paid as Merrill’s losses were mounting, forcing Bank of America Chief Executive Kenneth Lewis last month to seek additional government support for the deal. Merrill’s compensation committee agreed to pay bonuses on December 29, at least one month earlier than usual, the paper said.

Yet within days of that committee meeting, the FT said, BofA officials became aware Merrill’s fourth-quarter losses would be much greater than expected.

Bank of America, in a statement, told the paper, “Merrill Lynch was an independent company until Jan 1. (Merrill CEO) John Thain decided to pay year-end incentives in December as opposed to their normal date in January. BofA was informed of his decision.”

Last week, Bank of America said it would receive $20 billion in U.S. Treasury investment on top of $25 billion earmarked last fall for a combined BofA-Merrill.

Bank of America said Merrill had a $21.5 billion operating loss in the fourth quarter.

Despite the massive losses, Merrill set aside $15 billion for 2008 compensation, 6 percent lower than a year earlier.

A person familiar with the matter told the FT about $3 billion to $4 billion of that compensation were annual bonuses. The bulk is comprised by salaries and benefits.

(Reporting by Joseph A. Giannone; Editing by Anshuman Daga)

Joe Investor, the Markets Are All Yours Now

Jason Zweig
Wednesday, November 19, 2008

The tables have turned.

For the past couple of decades, the markets have been dominated by institutional investors who devoured bargains so fast and in such bulk that individual investors were usually left, at best, with a few scraps.

But pension funds, hedge funds, mutual funds and other institutions are under siege as their portfolios implode and investors redeem their shares, forcing the fund managers to raise cash.

Virtually every investment that carries any risk is on sale. Stocks and bonds, at home and abroad, have had their prices slashed by up to 45% this year. Yet at the very moment when bargains abound, many of the giants who normally would buy can do nothing but sell.

Welcome to a buyer’s market without buyers.

This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: “The question that hardly anyone ever thinks about is: Who’s on the other side of my trade, and why are they willing to be losers if I’m going to be a winner?” Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, “You can — and probably do — have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price.”

You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing. Sooner rather than later, institutions will no longer need to beg for cash, they will regain the upper hand over individuals, and the tables will turn again.

While blue-chip stocks are still cheap, as I’ve said many times lately, there are some areas where the liquidity drought borders on desperation.

Got advice?

Commentary: This is a great time to take a hard look at your financial adviser

By Bob Clark
Last update: 6:28 p.m. EST Nov. 18, 2008

SANTA FE, N.M. (MarketWatch) — A silver lining of the recent Wall Street/economic meltdown is a chance to assess your relationship with your financial adviser. Sure, you could do this anytime, but the best indication of whether you’re getting what you need is when you need it most.

Chances are this is probably one of those times. This is so true, in fact, that the best financial advisers get the majority of their new clients during times like these — folks who have become dissatisfied with their old advisers. In most of these cases, the need to make a change is obvious. To paraphrase an old saying: If you have to ask, you probably need a new adviser.

What if you’re just not sure? Most people like their adviser — it’s usually one of the main reasons why he or she is your adviser. So you’re inclined to give them the benefit of the doubt, especially during tough times when their business is undoubtedly hurting as much or more than your portfolio.

But we are talking about your financial future here. You really can’t afford to stick with any professional who isn’t getting the job done. This is one of those rare times when it really is all about you.

The problem that most people have with evaluating their financial adviser is they don’t have much experience with other advisers. How do they know whether their service is good or bad? Compared to what? Sure, if you’re really unhappy, the decision is clear. But what if you’re just mildly annoyed?

One excellent independent adviser I know won’t even take new clients who haven’t had at least a couple of other advisers first — he doesn’t feel they can fully appreciate his level of service and expertise if they don’t have other experiences to compare.

Ultimately, only you can make the call whether it’s time to look for another financial adviser. But it can help to get some sense of what good advisers do. For some perspective, here are some important issues in an adviser/client relationship, together with how they best handle them: