Monday, November 30, 2009

An Actual Case of the “Pot Calling the Kettle Black”

Seldom, from Wall Street, do investors ever get the plain truth. Wall Street is in the business of selling “free lunches” of which there is always a waiting line of investors unfortunately fighting for their place in line for the lunch.

The quote below is from Hedge Fund manager, Hatteras Group:

“Hedge Funds and Mutual Funds invest in the same ‘space,’
they just have different legal structures, and Hedge Funds are illiquid.”
Minneapolis Luncheon to RIAs, 9-30-09

Investing Lesson:

Based upon the above admission, why would you as an investor want to invest in the same thing as a mutual fund with the following negatives?

1. 3-4% annual fees vs. 0.5-2% for mutual funds
2. Limited SEC regulation vs. tight SEC review of mutual funds
3. Limited and inaccurate performance reporting
4. Limited liquidity

Said another way, Bernie Madoff sold Hedge Funds.

One of the primary benefits of working with a reputable, fee-only financial advisor is we are skilled at knowing what a trap looks like and adept at steering our clients away

Wednesday, November 25, 2009

GDP Revised Down-Now There’s a Surprise (Not)

The nation's economy didn't grow as fast as first believed, hinting that the economic recovery still has a ways to go.

Go figure.

I think a recent blog post of mine was suspicious of the GDP number. GDP = Gross Deception Picture

The Commerce Department said third-quarter U.S. gross domestic product grew at an annual rate of 2.8% in the third quarter. That compares to its initial GDP reading of 3.5% growth offered at the end of October.

Consumer spending grew at a 2.9% rate. Still, that's softer than the 3.4% rise estimated in the advance report.

Investing Lesson:

Things are not always as they appear.

Monday, November 16, 2009

Ignorance Is Bliss (Not Really)

The message from the markets and market pontificators and the like over the past few weeks has been, with increased confidence, that investors are getting “nice and comfy.” With a growing consensus forecast for a smooth and self-fulfilling recovery from the current recession in 2010 and beyond, they feel we are headed for smooth sailing ahead.
I am troubled that the herd has adopted the view that we are now at the start of a normal multiyear expansion that should resemble average expansionary phases in past business cycles.
Here is the sobering truth: In very short order, the experts that failed to see the recession coming then projected certain unrecoverable doom, then failed to see the coming +50% stock market blast off from the market bottom in March, now have a new forecast.
Next year's S&P 500 earnings forecasts are now moving toward $80 a share (as UBS estimated last week), a level that was unimaginable three to five months ago.
Also, while we are on the topic of forecasts you cannot trust, the latest craziness is the prediction that the Federal Reserve will not begin increasing interest rates until the fall of 2010. Forecasters can’t get what will happen next week right, let alone a year from now. I would put the odds of this forecast being correct at about 2%!
I don’t know about you, but I am not of the persuasion at this time to trust ANY of the consensus forecasts.
I have argued that a number of head winds coupled with a weakened consumer may likely result in a high degree of uncertainty and the potential for economic outcomes moving forward which are not market-friendly. I believe that market and economic challenges will rise as we enter 2010. Couple this with the eventual withdrawal of government stimulus and the threat of higher taxes and it “could get ugly.”
In bull markets, there is often no clear dividing line between fantasy and reality. Markets usually continue to advance, as “the crowd” and cash on the sidelines finally decides they are missing the party. Their confidence for entering is the fact that the market has rallied +50% so things must have turned around.
In a recent blog, I used the current example of how billion-dollar pension funds are now adding high yield bonds to their portfolios-AFTER high yield bonds have already advanced over 50%!
I believe that the market's potential to disappointment increases with each week that the world stock markets keep hitting new highs. There are many warning signs, for instance:
  1. A 17.5% (the real) underemployment rate,
  2. A steadily declining U.S. dollar,
  3. A weak consumer,
  4. Hurting small business owners,
  5. The continued increase in the price of gold and so forth.
These facts are simply being ignored as “likely to get better” as we enter 2010.
I will continue to monitor the economic landscape daily and make necessary and prudent adjustments to the portfolios managed by Wade Financial Group, Inc.

Wednesday, November 11, 2009

Did You Know You Not Only Own GM, GMAC, AIG, etc., But You Are Also Now A Landlord?

Last week’s Wall Street Journal had an article about how we, as U.S. taxpayers are now in the rental real estate business via Fannie Mae.
Fannie is now allowing homeowners facing foreclosure to stay in their homes and rent from you and me for a year. Fannie has already indicated that you and I will be willing to extend the leases. Problem is, you and I are not getting the rent checks.
This is yet another band-aid being applied to the U.S. housing decline that our government is not allowing to succumb to its final bottom. Stimulus and band-aids are keeping the “economic patient” alive but not treating the condition. The deficit for our heirs just keeps going up. Yes, George Bush never met a spending bill he did not sign either.
Fannie refused to disclose how many homeowners we will be renting to. Nice. Wow. #$%#%^#%^$.
Real estate industry insiders call this the “shadow inventory” of homes that will likely have to be foreclosed upon, thus, at that time, adding more pain to the very slow recovery out of this recession that this author expects.
At least we do not have to fix the toilets!
Investing lesson (Charles Ponzi pictured below)

Ponzi schemes, in the end, never work. How will all the shuffling of money by our government from one hand to another eventually end? In grade school, it was called musical chairs. I fear our offspring will be the ones left standing when the music stops. This is not political commentary; it is agnostic, economic reality. As grandma always told us, “Kids, there is no such thing as a free lunch.” Never has been, never will be.

Fire The Economists

A bedazzling 80% of economists now believe the worst economic recession of our generation is over. And around 100% of them never saw the recession coming!

By nature, economists are herd-following lemmings.

Cyber Threats Are Real And Increasing

SAO PAULO (AFP) – On Wednesday, Brazil sought to uncover the cause of a massive and mysterious blackout overnight amid concerns of energy supply stability for the 2016 Olympics host nation.
The outage lasted around four hours and plunged nearly half the country into darkness after the country's biggest power plant experienced supply problems.
An estimated 70 million people -- more than a third of Brazil's 190-million-strong population -- were affected, according to the energy ministry, mainly in the major southern cities, including Sao Paulo and Rio de Janeiro.
The blackout occurred two nights after the U.S. television network CBS broadcast a report in which unidentified former U.S. national security officials claimed massive power outages in Brazil in 2005 and 2007 were caused by cyber hackers attacking control systems.
Although Brazilian media were skeptical of that assessment, the U.S. channel said those incidents should serve as a wake-up call to the United States, which could see its own power supplies hit by computer sabotage.

Tuesday, November 10, 2009

What Asset Class Correlations Meant Last Year and What They Mean Today

Traditional “diversification theory” is based upon past history, where owning U.S. stocks, foreign stocks, REITs and commodities, etc., allowed for a reduction of downside risk in bear markets. That all fell apart in the autumn of 2008 when everything was collapsing; all asset class correlations essentially went to one. The only asset classes that held up were: Cash, U.S. Government Bonds and Managed Futures.
Since the market bottom in March of 2009, traditional asset class correlations have gone to one again. Since early March, when the rally began, the correlation between equities and high yield bonds, real estate investment trusts, industrial metals and oil are all 0.94 or higher. In other words, all those markets are moving in sync. Even gold has a remarkably high correlation of 0.76 with equities. Basically, an asset allocator could have thrown darts in March and found things that went up.
We do not throw darts. We rigorously evaluate asset classes and individual securities, looking for opportunities to reduce portfolio risk every day. Based upon the massive rally in the majority of asset classes, most investors and professionally managed portfolios are at high risk for another massive stumble, if and when it happens. We have significant allocations to the following, all of which have NOT been highly correlated with the stampede and should hold up well in the event of another turn down into a bear market:
  • Cash
  • Managed Commodity Futures
  • Managed Financial Futures
  • Gold
  • Merger Arbitrage fund
  • A Long/Short fund
  • Short Term, High Yield bonds in GMAC and Ford Motor Credit

Friday, November 06, 2009

Extending Unemployment Benefits and New Home Tax Credit: More Signs That This Will Be No Normal Recession

President Barack Obama is set to sign a $24 billion economic stimulus bill Friday, providing tax incentives to prospective homebuyers and extending unemployment benefits to the long-time jobless.

Monday, November 02, 2009

GDP = Gross Deception Picture

The band, Styx, had an album in 1980 called the “Grand Illusion."
Wall Street and the news media went hog wild with euphoria last week when the GDP (Gross Domestic Product) grew at 3.5% annualized rate. This is a grand deception. In reality, the majority of the 3.5% came not from consumer spending or increased factory production but from government spending. If you remove the government stimulus, you end up close to zero or even negative. Thus GDP = Gross Deception Picture.
Making matters worse, millions of dollars of the stimulus have ended up in the hands of fraudulent citizens. An example would be the “first time home buyer credit” of $8,000. The inspector general for the U.S. Treasury recently testified before Congress that 19,000 filers had NOT purchased a home that filed for the credit. Another 74,000 filers were not first-time homebuyers. This totals over $600 million going to fraud. Five hundred people under the age of 18, most notably a four-year-old, have also claimed the credit. To add further insult to injury, 53 employees of the IRS have been found to file illegal claims.
Investing lesson:
Our government is running a Ponzi scheme by artificially propping up the U.S. economy via racking up trillions in debt. When the patient is taken off of stimulus life support, it may get very ugly again. This is why I believe that this will not be a normal recession recovery and that we are likely entering a phase of low economic growth for the next 5-10 years.

Sunday, November 01, 2009

Why Invest With A Mutual Fund When The Manager Refuses To Invest With You?

Morningstar: 51% of mutual fund managers have ZERO invested in their fund. Just 9% of managers have more than $1M invested. If you do not eat your own cooking, the stew must not be very good. I have in excess of $1M invested in our mutual fund.
Investing lesson:
NEVER, EVER, invest with a mutual fund, company or financial advisor where they do not believe enough in the investment to invest in it themselves.