Tuesday, December 22, 2009

Christmas on Wall Street

This is an enjoyable time of the year. It's when families gather together to share a wonderful holiday meal and exchange presents. After all, who doesn't love to tear the wrapping off their presents to see what's inside? It is especially nice to see the excitement of small children as they open their presents.

I can only imagine the excitement as little Ben Bernanke unwraps his present from his uncle, Lloyd Blankfein, CEO of Goldman Sachs. It can only bring a tear to everyone's eye as they see the sheer joy on little Ben's face as he gazes at his present - a shiny brand-new helicopter!

Little Ben Bernanke will yell out, "Mommy, mommy, look at my new helicopter!" Now I can dump all the money I want out of my new helicopter and make everyone on Wall Street happy!"

His uncle, Lloyd Blankfein, will be smiling broadly as he tells little Ben "You see the nice things that happen when you do God's work, like fleecing Main Street?"

And he added, "Now just make sure, Ben, that NONE of that money you dump out of your helicopter falls onto Main Street - it must ALL go to the people on Wall Street who are doing God's work."

I wanted to leave everyone with some holiday cheer - a poem. And my apologies to the original author, who most believe is Clement Clarke Moore.

Twas the night before Christmas, when all through Wall Street
Not a creature was stirring, not even a greedy rat;
The stockings were hung by the chimney with care,
In hopes that Santa Ben with sacks full of money would soon be there;
The bankers were nestled all snug in their beds,
While visions of perks and bonuses danced in their head;
When out on the lawn there arose such a clatter,
The bankers sprang from their beds to see what was the matter.
When, what to their wandering eyes should appear,
But a miniature limo with eight cyclinders under the hood,
With a bald, bearded driver, so lively and quick,
The bankers knew in a moment that it must Santa Ben.
Down the chimney came Santa Ben with a bound.
A bundle of money he had flung on his back,
And he looked like a peddler just opening his pack.
He spoke not a word, but went straight to his work,
And filled all the bankers' stockings with billions of dollars;
And, giving a nod, up the chimney the person of the year rose;
He sprang to his limo, and away he flew.
As he drove out of sight, he was heard to exclaim,
"Merry Christmas to all, and to all a good night!"

Happy Holidays to everyone!


Saturday, December 19, 2009

Ben Bernanke - Person of the Year?

This past week we saw the chairman of the Federal Reserve, Ben Bernanke, chosen as the Time magazine "Person of the Year." By the way, is it me or does the bearded Mr. Bernanke looks a lot like Vladimir Lenin?

No matter...I think that the selection of Mr. Bernanke says a lot about the state of our country.

It seems that our society has turned into a culture which rewards 'bad' behavior which feels good in the short term.

No other Federal Reserve chairman has received accolades such as the Time "Person of the Year".

Yet Mr. Bernanke, who first supported and then implemented policies that inflated the largest housing bubble in US history - which caused a major global financial disaster - is given Time's nomination?

And he has continued his reckless policies - instituting quantitative easing, i.e. printing money out of thin air.

And yes, the stock market is up since Mr. Bernanke began this policy but the US dollar is also down substanially since then and for perhaps the first time in history, nations globally are talking about the "end" of the US dollar.

So why is Mr. Bernanke pursuing this reckless policy of money printing?

The answer is simple - to help his two 'masters' - Washington and Wall Street.

By printing money out of thin air and giving it to Wall Street basically for free, he is helping both bankers and politicians.

First, Wall Street gets "free" money which they can invest into anything and get a return on it. Thus you see most asset markets - stocks, commodities and bonds - all up nicely this year.

But the biggest beneficiary of Bernanke's policies has been the US Treasury. There has been a "wink-wink" silent agreement that much of the 'free' money given to the banks would be plowed into buying US Treasuries to keep interest rates ultra low.

Sounds good...what's wrong with that?

The problem is that you can only go so far in printing money before you run the risk of turning into the modern-day version of Weimar Germany and having a currency which is "just paper."

As I mentioned earlier, foreigners are growing more concerned with US monetary policy each day and are buying only the shortest-term Treasuries.

Most of the longer-term Treasuries are being bought by banks with the Fed's 'free' money. In fact, there is even talk that banks will be "required" to have much of their capital tied up in "safe" long-term US Treasuries!

I can tell you from my decades of experience in the financial markets that the US Treasury market is already in a "bubble." It is perhaps the biggest bubble in financial markets history.

And we have Ben Bernanke to thank for that - trying to fix a broken housing bubble by inflating another bubble in the Treasury market.

If that bubble bursts (and it will eventually), the prices of US Treasuries will drop steeply in value.....

And look who will be left holding the bag (again) with "bad" assets - Wall Street banks, which will be in worse shape than they were in late 2008. And they will again have their hands out for help from US taxpayers.

Bernanke's Time magazine cover will rank up there with the February 15, 1999 Time cover which showed Alan Greenspan, Robert Rubin and Larry Summers - the blowers of the 'tech bubble' among other financial bubbles - as "The Committee to Save the World" and who saved the world from an economic meltdown - temporarily.

Bernanke will be remembered (badly) by the next generation as a man mesmerized by the memory of the Fed's mistakes at a single point in history - 1930-1932 - for whom printing more money was the right answer in every economic situation.

Saturday, December 12, 2009

ETFs Are a Great Tool for Asset Allocation

Here is a question investors should be asking themselves more often.....

Why pay expensive fund managers if they cannot protect your money when it most needs protecting?

One way to avoid paying high fees to managers that do NOT perform is through the use of index funds, which passively follow an index. But until recently index funds were pretty much limited to ones which track the performance of the major stock market indices, such as the S&P 500 index.

However, the growth of exchange traded funds (ETFs) has radically changed the face of index investing, giving investors low-cost access to a wide range of investment opportunities across a suite of asset classes. These asset classes include: equities, fixed income, international stocks and bonds, real estate, currencies, commodities and gold.

Investors should bear in mind, however, that investing in an ETF does not remove the risk of losing money, as an ETF will simply follow whichever index it tracks up and down. But ETFs do remove the risk of paying high fees for terrible performance.

The low cost of ETFs is one of their biggest attractions. In the United States, investors pay an average of 0.17 per cent of assets under management a year for an ETF following a broad equity market index.

Other advantages that ETFs have include transparency, simplicity, flexibility and liquidity. ETFs can be bought and sold at a specific price (very near the net asset value) on a stock exchange at any time the exchange is open, much like a stock. This is sharp contrast to a mutual fund, which is only priced at day's end and investors can't be sure what price they paid for the shares.

ETFs are therefore a very useful tool for investors, as ETFs allow investors to easily gain exposure to a sector or asset class with the purchase of a specific ETF. However, ETFs are just a tool – the key to positive investment performance still remains the decision by investors as to which asset classes should be in their portfolio.

I have discussed in prior articles some of the asset classes that should be a part of every investor's portfolio. Of course, there will be varying percentages allocated to each asset class due to differences between each investor – age, risk tolerance, goals, etc.

In my humble opinion, the problem with many investors' portfolios has been too many 'eggs' in one basket – that is, far too much money devoted solely to the US assets denominated in US dollars.

I firmly believe that most investors should have at least some exposure to the following:

1) International stocks, particularly the emerging markets such as China and Brazil

2) International bonds, to diversify out of the US dollar for your fixed income holdings

3) Commodities – in other words, real assets as opposed to paper assets, either through commodities themselves (ETFs) or stocks in commodity firms

4) Currencies (again with ETFs) – the US dollar is in long-term decline, having lost nearly 70% of its value since it was taken off the gold standard

5) Real estate, but real estate like farm land or timber – again real assets

6) Gold – this is a whole separate category – gold should be treated as financial insurance, to protect against financial calamities, much as you use your health or homeowners insurance

Please feel free to contact me directly at investing@bellaonline.com with any questions you may have.

Friday, December 4, 2009

Wall Street Leopard

There was hope that after last year's near collapse in the financial markets that perhaps Wall Street had learned its lesson. But as the old saying goes, a leopard doesn't change its spots.

Wall Street's tendency toward reckless myopia, reinforced by the bull market which ran from the early 80s until the tech bubble burst, returned full force at the first signs of even temporary stability.

The temporary stability was brought about both by Uncle Sam 'giving' Wall Street trillions of taxpayers' dollars and also the temporary lull in the mortgage reset schedule between March 2009 and November 2009.

The eagerness of investors, large and small, to chase prevailing trends (momentum investing) and their unwillingness to concern themselves with very PREDICTABLE longer-term risks shows that nothing was learned from last year's near meltdown.

This myopic behavior, along with encouragement from the Federal Reserve, drove a series of speculative bubbles and crashes during the past decade - the tech bubble, the mortgage bubble, the private equity bubble, etc.

And here we are again in bubble land - with stocks dependent on an "expected" record rebound not only in the economy as a whole, but in corporate revenues and profits. In other words, we are right back into dangerously over-valued territory for stocks once again.

According to one of the analysts who actually foresaw the implosion of the credit markets and who turned bullish in March, Andrew Smithers, the stock market is right now overvalued by 40%! Needless to say, he has turned bearish.

A rare economist who got things right over the past few years is Gluskin Sheff chief economist, David Roseberg. He recently said, "The historical record shows that downturns induced by asset deflation and credit contraction (like now) are different than a garden-variety recession."

He waxes eloquently about how the credit deflation induced downturns typically induce a secular shift in behavior and attitudes toward debt, savings, asset allocation, spending and home ownership. We have yet to see any of these secular changes.

Mr. Rosenberg went on, "That is why people didn't figure out it was the Great Depression until two years after the worst point in the crisis in the 1930s, and why it took decades, not months, quarters or even years, for the complete transition to the next sustainable economic expansion and bull market."

There are many bumps in the road ahead for the US economy, such as unemployment - which is of NO concern to Wall Street. Do not be blindsided by all of the Wall Street optimism!