Direct Deposit Is a Point of Issue for Payday Loans

By Mr. Clarity | February 27, 2015

Payday loans without direct deposit is like using public-telephone: you have to find a coin to make things work. Do you actually need to make things complicated? (more…)

Rating 3.00 out of 5

Borrow Online Payday Loan from Different Lenders, but with Little Difference

By Mr. Clarity | February 19, 2015

Online payday loans from direct lenders appeared my only option to get rid of the cash issue that was about to ruin my life. In brief, I would have lost my apartment, my job and my girlfriend if I hadn’t covered my debt by the due date. (more…)

Rating 3.00 out of 5

It’s Not All Doom and Gloom: No Job Doesn’t Mean No Access to Fast Cash

By Mr. Clarity | February 09, 2015

“Fast cash loans is not your actual target, whatever financial troubles you’ve brought yourself to. This is the fact you should keep in mind in order not to lose hope,” – I said to myself once I received another refusal form my bank. I did lose some optimism, though, when I clearly understood I have to decide (more…)

Rating 3.00 out of 5

Try an Old Skool Style of Fast Payday Loan Service over the Phone

By Mr. Clarity | February 06, 2015

Instant payday loan over the phone is not your service if you decide you can put on hold your spending and cope with your emergencies by own efforts. You don’t even need to read further, so scroll down. On the other hand, if you ever happened to get into any small-dollar deal like a payday loan, it might be interesting for you to find out more. (more…)

Rating 3.00 out of 5

Dare to trust payday loan offers with no tracking

By Mr. Clarity | January 28, 2015

Guaranteed payday loans with no TeleTrack? Would you dare? I dare. Of course, there’s no such thing as a free lunch, they say. What about breakfast? Second breakfast? Brunch, may be?  The point is, the demand can make even the most unbelievable options believable, and even viable. No-fee service and guaranteed loans are real. Can they exist simultaneously? That is the question. (more…)

Rating 3.00 out of 5

Unemployment rate hits 9% and pigs fly

By admin | February 04, 2011

Written by Vass – political commentary

The unemplyment rate for January 2011 has come in and it was astounding. Though all analysts projected an increase of unemployment, from 9.4% to 9.5%, the actual numbers came in vastly different. The latest figure is now 9%.

Such a huge and dramatic drop should be wonderful news. It should have sent the stock market soaring several hundred points. Economists should be lauding the Obama Administration, with pundits on the Left declaring a definitive success of the Obama Stimulus. Yet that isn’t happening.

You can’t blame the lack of attention on the events in Egypt. Even though the world is focused squarely on the uprisings in Tunisa, Yemen, Egypt and seemingly the entire Middle East that is not enough to detract from the #1 issue in America for the past 3 years. Jobs remain the priority among Americans, and the American economy is the key to a worldwide recovery. Were this report to be good news, it would be in the headlines right behind Egypt.

The fact is that the latest unemployment numbers are not good.

“A separate Labor Department survey of company payrolls showed 36,000 net jobs created — barely a quarter of the number needed to keep pace with population growth.”

In the past three months, the economy generated an average of 83,000 net jobs per month. That’s not enough to keep up with population growth.”

The actual number of jobs created can’t even keep up with the growth of the population. In fact the situation is worse than it sounds.

“…the government said that 36,000 new jobs were created last month, the fewest in four months. The slow job growth left some analysts doubting that the economic recovery is gathering momentum.”

With such bleak news, how did the number of unemployed drop? With such a widespread failure to create jobs (restaraunts and hotels lost 2,200 jobs, temporary agencies cut 11,000 jobs, financial services dropped 10,000, and even the Government eliminated 14,000 positions. Construction lost 32,000 but the big loser was transportation with 38,000 people becoming unemployed) the only logical question is where did the better unemployment number come from?

49,000 jobs were added to manufacturing. 28,000 jobs were created in retail. Huge increases not seen in a year of high unemployment rates. But not nearly enough to account for the chage in national figures. For the unemployment rate to drop this quickly, the largest drop in unemploment for 2 months since 1958, something big had to happen. Something big did indeed happen.

200,000 stopped being counted by the Government. They aren’t getting a check from the Government and therefore do not count as unemplyed anymore. Add to that another stat that hadn’t been broken in a quarter century,

“And the participation rate, which is the percentage of the working-age population working or looking for work, fell to a 26-year low of 64.2 percent.”

The fewest number of people who can work are doing so since 1985.

Put it all together and you get a clear message. Unemployment in the nation is rampant, no matter what the official unemployment rate is shown as. In fact the number of people employed in 2010 has been revised, with 200,00 fewer people employed than originally thoght – for a total of 950,000 jobs created for the year. Given these facts it’s a surpriuse that the Dow Jones Index was able to eek out a 29 point increase on the day.

There is no doubt that as we approach the 2012 Presidential election season the drop in unemployment will be seized upon as a positive. That the figure will be taken out-of-context as an example of the Obama Stimulus and Obama Administration policies working. The use of soundbite politics and polispeak will spin the facts, creating rainbows and launching pigs to the sky.

But the public need only look at the dire situation of New York State, among dozens of States across ther country, to see the reality. 9,800 State jobs are proposed to be cut. Widespread service cuts are being undertaken. Spending freezes and total removal of pay for certain positions are being mandated. All of which still cannot match the loss to the budget for the fiscal year. None of which indicate an improving economy.

The unemployment rate is now 9%, the lowest since April 2009 (when it stood at 9.4%). Yet the only way this could be a positive is if you were to wear rose colored glasses.

Only your support allows us to provide mid-term election coverage, political event coverage, and our political commentary. Visit Alchemy at World of VASS, and/or World of Vass, – help keep us going. We appreciate your support.

Rating 3.00 out of 5

Investment challenge: Alcoa vs. GM

By admin | November 18, 2010

Written by VASS – political commentary

Let’s take a trip through time. Back in February 2009 I purchased Alcoa (symbol AA) at $5.55. It was an investment that I bought with a 2 year timeframe. And I further used this purchase to provide an example of the benefit of investing versus trading.

Today, Alcoa closed at $12.94, down from the pre-election surge. The benefit of Republicans winning the election has given way to the reality that a stalemate in Government is coming. That stalemate will NOT result in a repeal of Health Care Reform, with the taxes and increased regulations it requires. The stalemate will NOT lower the deficit, and may only marginally slow the growth of the Government – according to the resistence to ban earmarks that Democrats are currently proposing. At this point it cannot even be clear that the Bush Tax Cuts will continue, causing a tax hike to small business owners and further damaging investor returns.

Given these facts, I continue to hold my investment of Alcoa. My target continues to be a 2 year objective. I still expect to reach a $18/share or better exit (though I did have 1 opportunity to exit the position in this range already).

But let’s compare that investment to something else. The “investment” America made into GM, via the $49.5 billion bailout. An investment that was made with our tax dollars with a promise of not only repayment but also profit.

To date $9.5 billion of the bailout has been repaid. The bailout provided the Government 61% ownership, with unions being paid at the expense of bondholders. A violation of law, and the principle of bond ownership.

GM will be introducing a new IPO potentially at $33/share as soon as tomorrow. The Government will wind up with 412 million shares (reducing ownership to 26%), unions will have over 100 million shares. Foreign investors will gain 16% of the new stock (China will own some 5% alone). A dozen major brokerage firms will make tens of millions off the offering. The American public will receive… nothing.

Which investment (both occured within months of each other) seems the most beneficial? Which might help encourage job growth or pump critical spending into the still failing economy?

Why is the Government holding the shares of GM? Why not give this “investment” to the public (maybe 1 or 2 shares to each person that has filed an income tax since 2009) to spur potential investment and allow individual taxpayers the opportunity to determine when they have made enough of a profit? Why wouldn’t the Government want to let tax payers invest – with the potential to gain increased tax revenue from the sale of that investment while providing a critical institution the potential of tens of millions of new investors?

Lets look forward. GM still has problems that have not been resolved. Unions still cost too much, the retirement funds are still too expensive. The cost of a GM car still has a built in expense of $2,000 just because of union costs. Which says nothing of the impact the Health Care Reform will have on this company.

Add to this the fact that the Government has required the creation of electric cars. The Volt, an electric car from GM built on the chasis of an existing $16,000 car will cost $41,000. There is no market for this vehicle. It is so expensive and unwanted that the Government will provide a subsidy for its creation. Senate Majority Leader Harry Reid is about to propose $4 billion to supplement the creation of this car.

If GM is required to make cars that have no market, at a cost that is too expensive to own, how successful will the company be? How long will GM remain at or above the potential $33 IPO price?

But there is more. Remember that Democrat leadership and President Obama want to pass Cap & Trade. The Bill will mandate an increase of some 150% or more on the average energy bill of individuals. To force people to conserve energy. To be more “green”.

If the Government is successful in “necessarily skyrocketing” [President Obama quote from January 17, 2008 – see Cap & Trade link above for video] energy costs, while mandating electric cars in an auto industry the Government holds sway over, how many people do you believe will want to buy electric cars? Electric cars that are so expensivce they require Government funding to make. Cars that will require an increase in the electricity that the Government does not want individuals to use?

And exactly what might happen to the share price of GM in this scenario? How likely do you think it will be for GM to repay the bailout, or to pay a profit on that bailout? How long might that take?

Returning to the original thought. When investors are allowed to make decisions on their own, profit can be made. That profit will eventually benefit the Government in taxes – assuming that the taxes do not absorb the profit. That profit allows for consumer purchases and job growth, which benefit the economy.

When the Government interferes, as in the case of GM, there is a mess. The company is not better off. The investors are potentially at significant risk. The product is impared and unwanted. No one wins, except foreign governments and selected special interest groups (like unions).

Is GM a good investment? Will the IPO make money for individual investors, or for the American taxpayer? Will GM be worth more or less in 2 quarters, in a year? All good questions. I would say the prospect, based on Government interference is no. I would say that I won’t sell my profit in Alcoa to buy GM. I would say that in 5 years I think that GM will be in as bad a shape as it was 2 years ago.

So here is my challenge, my thought experiment. Taking the closing price of Alcoa vs. GM after the IPO, I will compare the profit/loss in 6 months and 1 year. Let’s see if Government intervention and mandates are a benefit or loss to investors and taxpayers.

What do you think will happen?

Only your support allows us to provide mid-term election coverage, political event coverage, and our political commentary. Visit Alchemy at World of VASS, and/or World of Vass, and/or our store on eBay – help keep us going. We appreciate your support.

Rating 3.00 out of 5

Climategate

By admin |

Submitted by CARPE DIEM

Recently leaked emails and documents from the Climate Research Unit at the University of East Anglia in the United Kingdom expose deceit, duplicity and collusion between climate researchers to maintain the fraud of the manmade global warming theory. These emails reveal stunning behind-the-scenes details about how this fraud has been developed and perpetuated. In this video historical climatologist and retired university professor Dr. Timothy F. Ball shares his insights on what they show.

 

 

Here are several more links on Climategate:

CLIMATE BOMBSHELL: Hacker leaks thousands of emails showing conspiracy to “hide” the real data on manmade climate change

The Death Blow to Climate Science

And of course, Wikipedia already has a webpage: Climatic Research Unit e-mail Hacking Incident

Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

Does the Dow at 11,000 mean the economy is improving?

By admin | October 08, 2010

Written by VASS – political commentary

Recently we were asked by an associate

“If the economy is so bad, if the Stimulus is to blame, why is the stock market running higher?”

It’s a good question. Here is our answer.

The economy is in a bad place. The unemployment rate has yet to decrease below 9.5%, the underemployment rate is increasing, and tax hikes are looming. None of these factors bode well for the economy going forward either.

In 2010 the number of mortgages in trouble has increased, over the increases throughout 2009. Roughly 1 million homes are expected to be foreclosed on this year – likely even with the current hold on foreclosures. The housing market has yet to rebound in the face of this, and financial comapnies are still suffering as they try to absorb all the bad loans made.

The pressure on banks and other fiancial companies is restricting further loans. Given the outlook for continued unemployment in a range of 9.5 – 10.5% or greater until 2012, the fact that higher taxes means higher prices and thus lower consumer spending, and higher levels of foreclosures. Money is not flowing to the most needed area – smal businesses. This is true no matter how many Government loan stimuli are proposed or enacted or for whatever amount of billions, as most small businesses do not qualify especially in this environment.

That summary, which is given as very general, highlights the core of the problem. It is a problem that will not reverse overnight no matter what political party controls Congress. But it is a situation that can begin to improve depending on who is in Congress.

This is where the stock market comes into play.

Stocks do not move on news or fact. They move on the emotion created by news, facts, and rumor. That emotion often has little to do with anything but perception. And it is almost always a perception of the future.

Thus a company provides earnings that beat the street expectation and it moves higher based on the thought that it will continue to create bigger earnings. The counter is that if they miss the fear is that there is trouble and the company will not make estimates going forward.

An example is best seen in drug companies. The expectation of a drug being FDA approved can catapult a stock by hundreds of percent. Gaining FDA approval can rocket a stock based on the perception that enormous revenues will be earned. Neither is often true to the extent of emotion moving the stock. The counter is also true. AMLN missed FDA approval for the first drug in its pipeline, and the stock fell from about $12 to $6 in 3 minutes on the news. The company then eventually went to $.25 as the emotion was that the company would never get approval. Today the stock is at $21.41 a share after having gotten an FDA approval.

Looked at another way, the market has been in love with the earnings reports of many companies for several quarters now. Companies of every sort have outperformed expectations, and year over year results. This has moved many companies higher based on the outperformance. What is not being addressed is that the year over year comparisons are against some of the worst of quarters due to the mortgage/financial crisis and its aftermath. The reality is that a company just staying in business is highly likely to have shown better numbers just because they are still around. This is becoming less of a factor as business stabilizes a bit, though the emotion has yet to fizzle completely.

In addition to the above there is another factor. Politics.

The stock market tends to view politics in a very distinct manner. Historically it views elections as an indicator of how well they will do. Democrats tend to mean higher taxes and more regulation – thus restricting growth and depleting profits. Republicans are seen as the reverse.

So in looking at the overly simplified summary, the result is that the economy hasn’t gotten better. Companies have only improved the emotion that is felt about their stocks and future. Added to that is the emotional benefit from the growing consensus that a record-breaking return to a Republican-led Congress is impending. Emotions are running high, when that is positive the market runs, when it is not bears rake in cash.

Lastly, look at gold. As a barometer it tends to indicate how secure investors feel about the future. Low gold spot prices mean a positive economic outlook, stable is more of the same, and high means trouble on the horizon – as a general rule. Gold is currently $1348, and probably going to go higher near-term. At least until the issue of the Bush tax cuts and court questions on the Health Care Reform are resolved.

Taken in total, the Dow Jones Index is running because Democrats are about to lose power massively, and the expectation that there will be less tax and regulation in the future. The results for quarterly earnings is less a factor for now.

If all the outcomes are not exactly what is expected, investors will sell. If taxes are not lowered, if future earnings reports compared to non-devastation reports are flat to down, if Republicans do not control virtually every seat available in the election, if Health Care Reform is upheld by courts, and if further restrictive regulation is passed, the markets will reverse quickly.

As I have said back when I was a broker, don’t look at the market as a reflection of the health of the nation’s economy. Look to it as an indication of the emotion about the issues facing the nation next week.

Only your support allows us to provide mid-term election coverage, political event coverage, and our political commentary. Visit Alchemy at World of VASS, and/or World of Vass, and/or our store on eBay – help keep us going. We appreciate your support.

Rating 3.00 out of 5

WHAT’S THE CRITICAL FACTOR IN PORTFOLIO RETURN?

By admin | February 23, 2010

Submitted by The Capital Spectator

If you could only make one decision in your investment strategy, what would it be? Would you concentrate on picking the best securities? The best ETFs or mutual funds? Would you focus exclusively on trying to time your asset allocation/rebalancing choices? Or maybe you’d spend a lot of time deciding if Asian stocks would beat European equities in the foreseeable future. Or how about managing the risk, however defined, like a hawk? In any case, the question is simply this: Which variable in the money game is likely to have the most influence on the end result of performance?

Depending on the investor, answers are likely to be all over the map. And perhaps that’s reasonable, since we left out a critical piece of information for answering intelligently: time horizon.

What’s the single-most important investment decision driving return? We can’t respond shrewdly unless we know the length of time we’ll be investing. If we’re managing money with an end point of, say, next year, or even a few years down the road, the critical variable may be different (is likely to be different) than if you’re investing for results 20 years on.

This isn’t terribly surprising, although the time horizon distinction is often minimized, if not ignored in discussions of everything from security selection to asset allocation. Part of the problem is that in theory we’re all long-term investors but we’re destined to make the journey on a tick-by-tick, daily basis. Even the self-proclaimed day trader has a horizon beyond the next 24 hours. A 35-year-old who trades furiously during the day still wants a comfortable retirement 40 years hence. Perhaps the only investors with truly short, or shorter time horizons are older folks, although even that’s debatable, depending on your estimate for longevity.

In any case, back to our question: What’s the single-most important variable that influences portfolio return? If we’re investing with an eye on maximizing return 20 years from now, the answer is one of basic asset allocation: stocks vs. bonds vs. cash. Assuming some reasonable level of diversification in stocks and bonds, choosing individual securities will have a minimal impact, if any. And it probably won’t matter much if you overweight U.S. stocks vs. foreign stocks, or vice versa.

Consider, for instance, a few statistics. For the period 1970-2008, the annualized total return for domestic stocks (S&P 500) was 9.5% vs. 9.7% for foreign stocks (MSCI EAFE), according to the Ibbotson SBBI Classic Yearbook. Not a huge difference for that 38-year stretch. The future’s always uncertain, of course, but generally over long periods it’s likely that regional differences in equity beta will be minimal relative to the global stock market beta.

In the shorter term, however, it’s a different story. Looking at returns by decade for the S&P 500 and MSCI EAFE shows a wider array of results. For the 10 years through 2008, EAFE gained an annualized 1.2% vs. a 1.4% annualized loss for the S&P 500. In the 1990s, the relative performance tables were turned, with a much bigger divergence. U.S. stocks earned an annualized 18.2% for the decade through the end of 1999, more than double the annualized rise for MSCI EAFE, which gained 7.3% during the 1990s on an annual basis. (For a slightly more technical analysis of this trend, see William Bernstein’s 1997 treatment of this topic.)

Meantime, we can also show that bond returns over time tend to be quite modest relative to stocks. Again, no big surprise. What’s more, assuming reasonable diversification, your choices on short vs. long term bonds, or domestic vs. foreign, probably isn’t going to matter so much. Yes, there’s the foreign currency factor to consider, particularly when it comes to bonds. But over time, the capacity for forex to add or subtract from equity and bond returns tends to be a wash (i.e., the expected return for currencies proper is zero). In the short run, however, lots of forex volatility, and therefore lots of risk, which may or may not be helpful, depending on the investor and the strategy.

What’s the lesson in all of this? Your overall stock/bond/cash allocation is where the action will be over the long haul. But there’s a glitch. Although we’re all long-term investors, at least in theory, the long-run future arrives one day at a time. In fact, almost no one builds a portfolio today and lets it roll on, unattended, over the next 20 years. That’s true even for foundations, which theoretically have an infinite time horizon. Actually, a passive strategy that’s broadly diversified would probably fare quite well over time, assuming we chose a reasonable mix of stocks and bonds, such as 60% equities/40% fixed income.

But the set-it-and-forget mentality is hard to do. We’re all constantly buffeted by the daily barrage of headlines and other mental matters that compel us to act. For those with discipline and an above-average level of financial analytical abilities, short-term trading can be productive. But adding value over the long haul is rare by way of short term trading, especially after deducting for taxes, commissions and other frictions. In other words, most of us will end up with middling results. The problem is that everyone thinks they’re above average when it comes to money.

So what’s the big-picture message here? First, don’t lose sight of the fact that in the long run, your overall stock/bond/cash mix will perform the heavy lifting for generating performance results, for good or ill. (We might add in REITs and commodities, if we’re inclined to embrace a bit more nuance for matters of portfolio design). But getting from here to there is complicated, which is to say that you’ll be faced with numerous tactical decisions. There’ll be opportunities to add as well as subtract value from your end result, and so we must proceed cautiously on a day-to-day basis.

The good news is that there are some things to do that are likely to add some value, even if you’re no financial wizard, starting with rebalancing and owning multiple asset classes. Beyond these two factors, however, things get messy, at least for most investors, and that includes the issue of time horizon. In effect, we’re all short term traders with a long-term horizon. This is the original sin that comes prepackaged with investing. We can’t escape it, but neither can we fully solve for it.

Balancing the short and long term is a key element in the art of investing—the intertemporal risk for asset allocation, as it’s known in the literature. Robert Merton formally identified this risk in the early 1970s in a series of seminal papers and financial economists have been grappling with the related challenges ever since. So, too, have investors, for that matter, even if they don’t recognize the risk on those terms.

Yes, we’ve picked up a few clues in the game of managing money for the long run while juggling short-term risk. We know, for instance, that expected returns vary, and so reversion to the mean is likely, even though the reasons are hotly debated (i.e., market efficiency vs. irrational investing decisions). But there’s still no hard and fast solution beyond some general rules of thumb, such as own a broad mix of stocks and bonds, perhaps with some cash and so-called alternative betas. There’s also compelling evidence that active management won’t help much over the long sweep of time.

The debate, however, is a Wild West show for the short term. Or, as J.P. Morgan, once said, prices fluctuate, proving, if nothing else, that there’s at least one concept in finance that’s universally accepted.

Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

Quote of the Day: “My Heart, My Choice”

By admin |

Submitted by CARPE DIEM

“I did not sign away my right to get the best possible health care for myself when I entered politics.”

~Canadian Premier of Newfoundland and Labrador Danny Williams

HT: John Goodman
Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

Real Wage Decline Ended the 1981-82 Recession?

By admin |

Submitted by Econbrowser

David Henderson writes in his “Reply to DeLong”:

In the 1981-82 recession, the fall in real wages helped end the recession.

I don’t see it in BLS series Nonfarm Business Sector: Real Compensation Per Hour.

comprnfb0.gif
Figure 1: Log nonfarm business sector compensation, deflated using nonfarm business sector deflated. NBER defined recession shaded gray; assumes last recession ends 09Q2. Source: BLS via St. Louis Fed FREDII and NBER.


Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

Treasury Supplementary Financing Program (SFP)

By admin |

Submitted by Econbrowser

The SFP, the U.S. Treasury’s program for assisting with the balance sheet of the Federal Reserve, is making a sudden and dramatic comeback.

First a little background. Whenever the Federal Reserve buys an asset or makes a loan, it simply credits new reserve deposits to the account that the receiving bank maintains with the Fed. The bank would then be entitled to convert those deposits into physical dollar bills that it could ask the Fed to deliver in armored trucks. Banks currently hold $1.2 trillion in such reserves, or more than a hundred times the average level of these balances in 2006, and more than the total cash the Fed has delivered since its inception a century ago. The traditional way the Fed would bring those reserves back in (and thus prevent them from ending up as circulating cash) would be to sell off some of its assets.

The Treasury’s Supplementary Financing Program was introduced in the fall of 2008 to assist the Fed in its massive operations to prop up the financial system at the time. The SFP represents an alternative device by which the Fed could reabsorb the reserves it created. Essentially the Treasury borrows on behalf of the Federal Reserve, and simply holds the funds in the Treasury’s account with the Fed. When a bank delivers funds to the Treasury for purchase of a T-bill sold through the SFP, those reserve deposits move from the bank’s account with the Fed to the Treasury’s account with the Fed, where they now simply sit idle, and aren’t going to be withdrawn as cash. In a traditional open market sale, the Fed would sell a T-bill out of its own portfolio, whereas with the SFP, the Fed is asking the Treasury to create a new T-bill expressly for the purpose. But in either case, the sale of the T-bill by the Fed or by the Treasury through the SFP results in reabsorbing previously created reserve deposits.

The Treasury’s press release says only this:

Treasury anticipates that the balance in the Treasury’s Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009.

This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills. Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted.

So this is going to be implemented immediately and on a large scale. But why? If the goal were indeed to drain reserves, the Fed could do this by selling some T-bills out of its own holdings, currently some 3/4 trillion, or could do this with reverse repos or the Term Deposit Facility, not to mention selling some of its trillion dollars worth of MBS. And just two weeks ago Fed Chair Ben Bernanke seemed to be saying that such steps were still far in the future, and did not even mention the possibility of a surge in the SFP.

You want more information? We’ve got this:

“We’re committed to working with the Federal Reserve to ensure they have the flexibility to manage their balance sheet,” a Treasury official said on background.

Anonymous and on background in order to say nothing at all? What’s the big secret?

An alternative hypothesis is that the Fed intends not to retire reserves but instead to expand its balance sheet without increasing reserves, that is, use the funds to make new asset purchases or loans with the SFP sterilizing the operations. But what loan is the Fed about to make or asset is it about to purchase? WSJ Real Time speculates:

The practical effect of this move is that the Fed will be able to finish $1.25 trillion of purchases of mortgage backed securities by the end of March without printing more money. Instead, it will have the cash on hand from the Treasury deposits to fund the purchases. As of February 17, the Fed’s portfolio of mortgage backed securities had reached $1.025 trillion, roughly $200 billion short of the objective.

But I’m puzzled with how that reconciles with this statement from the Federal Reserve Bank of Atlanta on February 10 (hat tip: Calculated Risk):

The Fed purchased a net total of $12 billion of agency-backed MBS through the week of February 3, bringing its total purchases up to $1.177 trillion, and by the end of the first quarter 2010 the Fed will have purchased $1.25 trillion (thus, it is 94% complete)…. the Fed needs to purchase only about $9.2 billion per week through March 2010 to reach its goal.

The discrepancy seems to arise from the fact that the Fed’s February 18 H41 release listed its MBS holdings on Feb 17 as $1,025 billion, or $152 billion less than the $1,177 billion that the Federal Reserve Bank of Atlanta claimed the Fed had purchased as of Feb 3. The Atlanta numbers seem to be the accumulation of weekly net MBS purchases (that is, gross purchases minus gross sales) reported by the Federal Reserve Bank of New York. Perhaps it takes a while between the time the NY Fed executes the purchases and the time they are settled and show up on the Fed’s H41 balance sheet, or perhaps there is some separate device for accounting for maturation and prepayment on the MBS. If the latter, then at a minimum the WSJ and FRB Atlanta had a different understanding of how far the Fed intended to go with its MBS program. And under either interpretation, if the $200 billion in new funding is just for something that was already etched in stone weeks ago, the sudden announcement that it is going to be implemented with an immediate resurrection of the SFP seems all the more mysterious.

WSJ Real Time offers this perspective from Lou Crandall:

The intention always was to resume SFP issuance when the debt ceiling was increased on a permanent basis, which finally happened earlier this month.

So maybe this has been in the cards for a while, with the apparent suddenness and clunkiness from the perspective of an outsider like me having an explanation in the fact that the political negotations behind such a move may in fact force a certain suddenness and clunkiness on steps that the Federal Reserve on its own might wish to see implemented with more transparency and predictability.

Still, one is led to wonder whether there might be a connection between today’s announcement about the SFP and last week’s announcement of an increase in the Fed’s discount rate. Numerous Fed officials encouraged us to interpret the latter as a routine and technical management tool. Are the discount hike and SFP renewal separate and purely technical developments, or is something more involved?

Perhaps Bernanke’s remarks tomorrow will give us more to go on.

Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

WHAT’S THE CRITICAL FACTOR IN PORTFOLIO RETURN?

By admin |

Submitted by The Capital Spectator

If you could only make one decision in your investment strategy, what would it be? Would you concentrate on picking the best securities? The best ETFs or mutual funds? Would you focus exclusively on trying to time your asset allocation/rebalancing choices? Or maybe you’d spend a lot of time deciding if Asian stocks would beat European equities in the foreseeable future. Or how about managing the risk, however defined, like a hawk? In any case, the question is simply this: Which variable in the money game is likely to have the most influence on the end result of performance?

Depending on the investor, answers are likely to be all over the map. And perhaps that’s reasonable, since we left out a critical piece of information for answering intelligently: time horizon.

What’s the single-most important investment decision driving return? We can’t respond shrewdly unless we know the length of time we’ll be investing. If we’re managing money with an end point of, say, next year, or even a few years down the road, the critical variable may be different (is likely to be different) than if you’re investing for results 20 years on.

This isn’t terribly surprising, although the time horizon distinction is often minimized, if not ignored in discussions of everything from security selection to asset allocation. Part of the problem is that in theory we’re all long-term investors but we’re destined to make the journey on a tick-by-tick, daily basis. Even the self-proclaimed day trader has a horizon beyond the next 24 hours. A 35-year-old who trades furiously during the day still wants a comfortable retirement 40 years hence. Perhaps the only investors with truly short, or shorter time horizons are older folks, although even that’s debatable, depending on your estimate for longevity.

In any case, back to our question: What’s the single-most important variable that influences portfolio return? If we’re investing with an eye on maximizing return 20 years from now, the answer is one of basic asset allocation: stocks vs. bonds vs. cash. Assuming some reasonable level of diversification in stocks and bonds, choosing individual securities will have a minimal impact, if any. And it probably won’t matter much if you overweight U.S. stocks vs. foreign stocks, or vice versa.

Consider, for instance, a few statistics. For the period 1970-2008, the annualized total return for domestic stocks (S&P 500) was 9.5% vs. 9.7% for foreign stocks (MSCI EAFE), according to the Ibbotson SBBI Classic Yearbook. Not a huge difference for that 38-year stretch. The future’s always uncertain, of course, but generally over long periods it’s likely that regional differences in equity beta will be minimal relative to the global stock market beta.

In the shorter term, however, it’s a different story. Looking at returns by decade for the S&P 500 and MSCI EAFE shows a wider array of results. For the 10 years through 2008, EAFE gained an annualized 1.2% vs. a 1.4% annualized loss for the S&P 500. In the 1990s, the relative performance tables were turned, with a much bigger divergence. U.S. stocks earned an annualized 18.2% for the decade through the end of 1999, more than double the annualized rise for MSCI EAFE, which gained 7.3% during the 1990s on an annual basis. (For a slightly more technical analysis of this trend, see William Bernstein’s 1997 treatment of this topic.)

Meantime, we can also show that bond returns over time tend to be quite modest relative to stocks. Again, no big surprise. What’s more, assuming reasonable diversification, your choices on short vs. long term bonds, or domestic vs. foreign, probably isn’t going to matter so much. Yes, there’s the foreign currency factor to consider, particularly when it comes to bonds. But over time, the capacity for forex to add or subtract from equity and bond returns tends to be a wash (i.e., the expected return for currencies proper is zero). In the short run, however, lots of forex volatility, and therefore lots of risk, which may or may not be helpful, depending on the investor and the strategy.

What’s the lesson in all of this? Your overall stock/bond/cash allocation is where the action will be over the long haul. But there’s a glitch. Although we’re all long-term investors, at least in theory, the long-run future arrives one day at a time. In fact, almost no one builds a portfolio today and lets it roll on, unattended, over the next 20 years. That’s true even for foundations, which theoretically have an infinite time horizon. Actually, a passive strategy that’s broadly diversified would probably fare quite well over time, assuming we chose a reasonable mix of stocks and bonds, such as 60% equities/40% fixed income.

But the set-it-and-forget mentality is hard to do. We’re all constantly buffeted by the daily barrage of headlines and other mental matters that compel us to act. For those with discipline and an above-average level of financial analytical abilities, short-term trading can be productive. But adding value over the long haul is rare by way of short term trading, especially after deducting for taxes, commissions and other frictions. In other words, most of us will end up with middling results. The problem is that everyone thinks they’re above average when it comes to money.

So what’s the big-picture message here? First, don’t lose sight of the fact that in the long run, your overall stock/bond/cash mix will perform the heavy lifting for generating performance results, for good or ill. (We might add in REITs and commodities, if we’re inclined to embrace a bit more nuance for matters of portfolio design). But getting from here to there is complicated, which is to say that you’ll be faced with numerous tactical decisions. There’ll be opportunities to add as well as subtract value from your end result, and so we must proceed cautiously on a day-to-day basis.

The good news is that there are some things to do that are likely to add some value, even if you’re no financial wizard, starting with rebalancing and owning multiple asset classes. Beyond these two factors, however, things get messy, at least for most investors, and that includes the issue of time horizon. In effect, we’re all short term traders with a long-term horizon. This is the original sin that comes prepackaged with investing. We can’t escape it, but neither can we fully solve for it.

Balancing the short and long term is a key element in the art of investing—the intertemporal risk for asset allocation, as it’s known in the literature. Robert Merton formally identified this risk in the early 1970s in a series of seminal papers and financial economists have been grappling with the related challenges ever since. So, too, have investors, for that matter, even if they don’t recognize the risk on those terms.

Yes, we’ve picked up a few clues in the game of managing money for the long run while juggling short-term risk. We know, for instance, that expected returns vary, and so reversion to the mean is likely, even though the reasons are hotly debated (i.e., market efficiency vs. irrational investing decisions). But there’s still no hard and fast solution beyond some general rules of thumb, such as own a broad mix of stocks and bonds, perhaps with some cash and so-called alternative betas. There’s also compelling evidence that active management won’t help much over the long sweep of time.

The debate, however, is a Wild West show for the short term. Or, as J.P. Morgan, once said, prices fluctuate, proving, if nothing else, that there’s at least one concept in finance that’s universally accepted.

Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

The Value of an Economic Consultant: The Lagging Division

By admin |

Submitted by Businomics Blog

Coming out of a recession (not the most recent, but another recession), a company had one line of business with flat sales.  The company’s other divisions were hitting double-digit growth rates, but this one division had no growth at all.

 

In the meeting to report my results, I could tell that the CEO doubted the division manager’s ability.  I was tempted to sit as far away from that guy as I could, to avoid becoming collateral damage when the CEO fired him.  But first I had a story to tell.

 

I had gone back into every past recession-recovery episode to look at how that market segment performed.  It turns out that the problem division was in a part of the economy that always lagged in the recovery.  Although other economic sectors would take off early, this one division was in an industry that didn’t get moving until 12 to 24 months after the recession was over.  I had my charts.  More importantly, I think, I had confidence that I knew what I was talking about.

 

The CEO accepted my recommendation that they simply wait a while.  He didn’t appear fully convinced, but he respected my judgment and decided to wait.

 

Six months later, the problem division blossomed.  Sales shot up and profitability soared.  Pretty much right on schedule.  I said to the division manager, “Who would have thunk it?”  He smiled and pointed at me, and said, “You thunk it.”

 

One part of the success: the division had stable, mature management in place.  If a new division manager had been brought in, he or she would have shaken up the sales team, instituted new programs, and generally disrupted what was really a decent group.  The division’s sales were probably several million dollars higher thanks to stable leadership.  Sometimes management needs to be changed, no doubt about it.  Before firing someone, though, make sure it’s poor performance that is the problem, rather than common economic patterns.

Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

Women Earn Almost 50% of College Math Degrees

By admin |

Submitted by CARPE DIEM

We hear a lot about how women are underrepresented in STEM (science, technology, engineering and mathematics) fields and careers, and “Nationwide, there is a push for more women to choose STEM fields.” There is a special National Science Foundation program called ADVANCE, whose goal is to:

“Increase the representation and advancement of women in academic science and engineering careers, thereby contributing to the development of a more diverse science and engineering workforce. ADVANCE encourages institutions of higher education and the broader science, technology, engineering and mathematics (STEM) community, including professional societies and other STEM-related not-for-profit organizations, to address various aspects of STEM academic culture and institutional structure that may differentially affect women faculty and academic administrators. As such, ADVANCE is an integral part of the NSF’s multifaceted strategy to broaden participation in the STEM workforce, and supports the critical role of the Foundation in advancing the status of women in academic science and engineering.”

Although it did not specifically address the STEM issue, an editorial in Sunday’s Washington Post talked about the “epidemic of sexism” in the U.S., and how “for women in America, equality is still an illusion.”

Rating 3.00 out of 5

Case-Shiller Home Index Improves for 12th Month

By admin |

Submitted by CARPE DIEM

“In December, the 10-City and 20-City S&P/Case-Shiller Home Price Indices recorded annual declines of 2.4% and 3.1%, respectively. These two indices, which are reported at a monthly frequency, have seen improvements in their annual rates of return every month since the beginning of the year (see chart above).”
Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

Quote of the Day: “My Heart, My Choice”

By admin |

Submitted by CARPE DIEM

“I did not sign away my right to get the best possible health care for myself when I entered politics.”

~Canadian Premier of Newfoundland and Labrador Danny Williams

HT: John Goodman
Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

In Search of…Crowding Out

By admin | February 22, 2010

Submitted by Econbrowser

There are various definitions of crowding out. There’s crowding out in the financial markets, and crowding out of actual economic activity. In order for crowding out in the financial markets to translate into a reduction of the interest sensitive components of aggregate demand, one needs to see an impact on interest rates. So, what is happening to real (inflation adjusted) interest rates?

First, let’s take a look at the nominal interest rates, both the risk free and risky.

crowd1.gif
Figure 1: Ten year constant maturity yields (blue) and AAA corporate debt yields (red). Observation for February is 2/17. NBER defined recession dates shaded gray; assumes last recession ends 09M06. Source: FRED II, and NBER.Second, we can adjust these nominal interest rates by expected inflation rates over a ten year horizon. Here we use the Survey of Professional Forecasters predictions, which apply to the second month of each quarter.

crowd2.gif
Figure 2: Ten year constant maturity yields (blue) and AAA corporate debt yields (red), adjusted by ten year expected inflation. Observation for February is 2/17. NBER defined recession dates shaded gray; assumes last recession ends 09M06. Source: FRED II, Survey of Professional Forecasters via Philadelphia Fed, and NBER.Real interest rates appear to be relatively low, lower than in the previous recession. Since these estimates of the ex ante real interest rate rely upon survey based measures of inflationary expectations, one could criticize them as being mismeasured.

crowd3.gif
Figure 3: Ten year constant maturity yields adjusted by ten year ahead expected inflation (blue squares) and ten year constant maturity TIPS (red). Observation for February is 2/17. NBER defined recession dates shaded gray; assumes last recession ends 09M06. Source: FRED II, Survey of Professional Forecasters via Philadelphia Fed, and NBER.However, the Treasury inflation protected securities (TIPS) yields suggest a similar pattern for real rates, excepting the period right after the Lehman bankruptcy, during which time TIPS and other yields behaved erratically).

So, what is one to make of these data? In a standard model of portfolio crowding out (see derivation here), budget deficits should induce higher interest rates, and hence lower investment. Of course, not all else is held constant. In particular, the Fed has aggresively purchased Treasurys and other longer term assets, including mortgage backed securities. This manifests itself in continuous shifts rightward in the LM curve.

Chapter 5 of the Economic Report of the President, 2010, notes:

…In the current situation, as discussed in Chapter 2, monetary policymakers are constrained because nominal interest rates cannot be lowered below zero, and so they are unlikely to raise interest rates quickly in response to fiscal expansion. As a result, the fiscal expansion attributable to the Recovery Act is likely to increase private investment as well as private consumption and government purchases. …

A relevant question, is what happens when the Fed exits from quantitative easing (and relatedly, as slack in the economy declines). That being said, extreme upward pressure on interest rates, and reduction in investment expenditures, is not a foregone conclusion.

Crowding out has a strong hold on many people’s imagination. Some equate crowding out in the financial market with crowding out in the real side of the economy. Let me make a couple observations on why this simplistic equation need not hold.

First, the empirical magnitude of investment crowding out depends critically on the interest sensitivity of investment expenditures.

Second, if investment depends upon the change in GDP, as in a simple accelerator model (see a discussion of competing investment models here), then government spending that induces an increase in GDP can result in higher investment, despite an increase in interest rates.

Third, when one assumes three (or more) outside assets instead of two, then money and bonds are not necessarily substitutes. Benjamin Friedman laid out a model with money, bonds and equities/capital. Depending upon whether bonds are closer substitutes with capital or money, one can obtain crowding out or crowding in (see this powerpoint presentation).

I teach crowding out in the context of the IS-LM model. For those who want to work in the loanable funds framework, see DeLong, and Krugman.

Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

3X Inc. in Charge-Off Rate for Credit Cards Since ‘06 to Record High; Don’t Issuers Deserve Protection?

By admin |

Submitted by CARPE DIEM

The Credit Card Act of 2009 provides a lot of protection for cardholders:

Cardholders Deserve Protections against Arbitrary Interest Rate Increases
Cardholders Should Be Protected from Due Date Gimmicks
Cardholders Who Pay on Time Should Not Be Penalized
Cardholders Should Be Protected from Misleading Terms
Cardholders Deserve the Right to Set Limits on Their Credit
Card Companies Should Fairly Credit and Allocate Payments
Card Companies Should Not Impose Excessive Fees on Cardholders
Vulnerable Consumers Should Be Protected From Fee-Heavy Subprime Credit Cards

But given the fact that the charge-off rates for credit card loans (data here) have more than tripled from about 3% in early 2006 to 10.24% in the third quarter of 2009 to a record high 10.24% (see graph above), don’t the banks and credit card issuers deserve some protection against reckless, irresponsible cardholders and record-high delinquencies, defaults and charge-off rates?
Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

Another V-Sign of Economic Recovery: Chicago Fed National Activity Index Reaches 30-Month High

By admin |

Submitted by CARPE DIEM

“Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index in January was slightly positive for the second time in the past three months. From June 2007 through October 2009, the index had been consistently negative. The index increased to +0.02 in January from –0.58 in December, with all four categories of indicators having improved.

The index’s three-month moving average, CFNAI-MA3, increased to –0.16 in January from –0.47 in December, reaching its highest level since July 2007 (see chart above). January’s CFNAI-MA3 suggests that, consistent with the early stages of a recovery following a recession, growth in national economic activity is beginning to near its historical trend.”

Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

Distortionary Effects of Regulations and the Law of Unintended Consequences: Annual Fees Are Back

By admin |

Submitted by CARPE DIEM

WASH POST — “A law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.

It wasn’t supposed to be this way. The law that President Barack Obama signed last May shields card users from sudden interest rate hikes, excessive fees and other gimmicks that card companies have used to drive up profits. Consumers will save at least $10 billion a year from curbs on interest rate increases alone, according to the Pew Charitable Trust, which tracks credit card issues.

But there was a catch. Card companies had nine months to prepare while certain rules were clarified by the Federal Reserve. They used that time to take actions that ended up hurting the same customers who were supposed to be helped.”

Exhibit A: “Annual fees, common until about 10 years ago, have made a comeback. During the final three months of last year, 43% of new offers for credit cards contained annual fees, versus 25% in the same period a year earlier, according to Mintel International, which tracks marketing data. Several banks also added these fees to existing accounts. One example: Many Citigroup customers will start paying a $60 annual fee on April 1.”

 

MP: This story clearly illustrates the Law of Unintended Consequences (”Any intervention in a complex system may or may not have the intended result, but will inevitably create unanticipated and often undesirable outcomes.”) and why regulations are distortionary – because companies can change their behavior to avoid or circumvent them.

Other examples include free food on airlines to circumvent ticket price-fixing by the government in the old days, employer-sponsored health insurance to circumvent price/wage controls during WWII, free “stuff” (toasters, etc.) at banks in the 1960s and 1970s to avoid interest rate controls on savings accounts, charging points on a mortgage to circumvent interest rate maximums on mortgage loans, or in this current case a resurrection of annual fees, etc.

HT: Lee Coppock

Update: Reason article on this topic (thanks to Colin).
Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

GDP VS. MARKET CAP FOR EQUITY MARKET ASSET ALLOCATION

By admin |

Submitted by The Capital Spectator

In the hierarchy of investment decisions, asset allocation is at or near the top of the list of variables that are strategically relevant for diversified portfolios. There are a number of studies telling us so, starting with the influential Brinson study from 1986—“Determinants of Portfolio Performance”—and its 1991 update. The basic message: asset allocation matters.

Deciding how much it matters, why it matters, and under what conditions has spawned a fierce debate over the years, along with a small library of research analyzing the details. A paper a few years back from Ibbotson Associates (now a part of Morningstar) captured the spirit of the discussion with this title: “Does Asset Allocation Policy Explain 40, 90 or 100 Percent of Performance?” The answer? All three accurately summarize asset allocation’s influence, but it very much depends on how you define the question.

As the Ibbotson paper explains, “asset allocation explains about 90 percent of the variability of a fund’s return over time but it explains only about 40 percent of the variation of returns among funds. Furthermore, on average across funds, asset allocation policy explains a little more than 100 percent of the level of returns.”

Although the Ibbotson research helps clarify the dispute over how and why asset matters, it’s hardly the last word on the subject. Indeed, navigating the nuances of asset allocation research, and drawing practical conclusions, has is almost a full-time job in the 21st century. Clearly, this has become a broad and deep discipline in its own right, with the no shortage of reference material to consider. Skeptical? Type in “asset allocation” at Social Science Research Network’s home page and behold the result.

Asset allocation as a formal topic of inquiry has come a long way since the 1986 Brinson study launched the discipline, and it’s still evolving. Rapidly, in many directions. There are no easy answers, but at least we know where to start. Among the standard works that deserve a spot on every strategic-minded investor’s bookshelf:

Asset Allocation: Balancing Financial Risk
The Art of Asset Allocation: Principles and Investment Strategies for Any Market, Second Edition
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
All About Asset Allocation

As valuable as these books are, they only scratch the surface. Indeed, a number of niches in asset allocation are worth exploring, such as tactical interpretations. Mebane Faber’s The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets is a recent contribution to this niche. And yours truly reviews some of academic literature in Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor.

Meanwhile, the discussion over GDP vs. market-cap weighting systems is another aspect of the debate over what constitutes an effective passive definition of structuring a portfolio. A new research briefing from MSCIBarra revisits the subject by considering the differences in weighting an international equity portfolio by the size of each country’s economy vs. the market capitalization of its stock market. This is a familiar topic for MSCI, which has long published a series of equity indices weighted by GDP. How have the two methodologies fared? The GDP methodology has recently posted a considerable edge over its market-cap equivalent on a broad basis that targets all the world’s stock markets, including the U.S. For the five years through February 19, 2009, the MSCI ACWI GDP Weighted Index earned a 2.8% annualized total return–comfortably above the slight 0.3% annualized rise for the conventional MSCI ACWI, which is market-cap weighted.

It’s tempting to declare GDP weighting as the winner, now and forever more. But investors should be wary of assuming the past will repeat. It may, but we need something more than blind extrapolation of the past as a compelling argument. Indeed, one of the reasons for the GDP weighting’s edge is that the strategy holds larger portions of emerging market stocks, which grab a bigger slice of assets in GDP-oriented indices vs. market-cap benchmarks. As such, one’s views on emerging markets are critical to assessing GDP weighting.

Notably, China’s large and growing economy is under represented in a market-cap index because its stock market is relatively small compared with its GDP footprint. At the opposite end of the extreme, the U.S. market is over represented via market cap because American stocks are highly valued relative to the economy. As our chart below shows, China’s stock market capitalization represents less than 10% of its GDP value. By that standard, the U.S. is over represented because its stock market capitalization trades at a premium to the dollar value of the economy.

Presumably, such gaps will close in the years ahead. If so, the trend implies a bullish tailwind for China equities and a headwind for U.S. stocks.

But GDP is but one alternative weighting scheme, as a recent article by Rob Arnott and two co-authors reminds. It’s not always clear that an investor should assume that any one methodology will be superior in the years and decades ahead. “Our research shows that a combination of cap weight, economic scale and minimum variance creates a compelling risk/return profile,” Arnott and company write.

But there are several issues to consider. One is that passive indexes based on something other than market cap may incur higher management costs vs. a standard market cap indexing strategy. There are other details to review as well if we’re to understand why expected risk premiums might be higher for one weighting system vs. another. Overall, one can persuasively argue that higher expected returns come only by assuming different risks relative to the market cap portfolio, which is arguably the true passive definition for equities. Becoming comfortable with those risks in terms of their economic interpretation is essential before diving into alternative indexing systems.

It’s no surprise to learn that different portfolio construction techniques provide different return expectations. But these expectations, after adjusting for risk, may not be so surprising (or enticing) after all. Indeed, modern finance has identified an array of betas to consider, such as small-cap value. Is this a free lunch? No, absolutely not. Does small-cap value offer a higher expected return vs. the standard equity beta? Yes, or so it seems. But understanding why it offers a higher expected return is critical before overweighting the beta. No less is true for GDP weighting, or any other strategy that claims to capture a higher risk premium.

There are no short cuts to minting risk premiums in the money game, but there are lots of betas to consider. Choose wisely, but do your homework first.

Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5

CAN INVESTMENT MISTAKES BE RATIONAL DECISIONS?

By admin |

Submitted by The Capital Spectator

There’s a furious debate these days over the efficient market hypothesis and whether recent events support or spurn its implications. Among the criticisms: investors are irrational, meaning that they’re prone to chase trends mindlessly. In turn, this leads to speculative manias and crushing selloffs.

It all sounds reasonable on the surface, but the details are tangled. Suffice to say, definitive, all-or-nothing explanations, one way or the other, are far more elusive than a casual discussion on the matter suggests. That includes the issue of distinguishing irrational behavior from genuine but otherwise rational mistakes and miscalculation. Even proponents of EMH concede that the market isn’t perfect, at least on an ex-post basis. All’s clear in hindsight; it’s the ex-ante challenge that’s slippery.

Or as Warren Buffett likes to say, it’s only obvious who’s swimming naked after the tide goes out. Speaking of Buffett—widely hailed as the uber-investor par excellence—Investopedia’s Financial Edge published a story last week that reviews “Buffett’s Biggest Mistakes.” It comes as no shock to learn that the master is fallible. He may be the world’s greatest investor, but he’s only human.

That brings up the subject of irrational behavior, or what appears to be so. No one would call Buffett an irrational investor. That implies that he’s making rational investment decisions. Perhaps he’s an anomaly in an otherwise irrational world. But here’s the thing. If a rational investor can make mistakes when it comes to valuing securities (e.g., paying too much, selling too early), how does one distinguish that from similarly flawed decisions by so-called irrational investors?

Yes, it’s easy to say, Well, he’s Warren Buffett, ergo, his investment decisions are rational. But what about the average mutual fund manager? Or the guy down the street trading from his bedroom? Could you tell if one’s irrational and the other’s rational? Clearly, it’s no quick clue to simply declare that someone paid too much, or sold too early. We need something more than that. But what?

Alas, there are no easy answers, if any. There are no econometric tools that separate rational investors who make mistakes from irrational types who stumble. On the other hand, there’s no shortage of subjective opinion, rules of thumb, and a truckload of hyperbole.

Meanwhile, the market may collectively be irrational at times, if not continually. Or maybe not. Could the market (and individual investors) be making rational decisions that are sometimes wrong? Or is it a matter of degree? Does irrational behavior equate with making really big mistakes, vs. relatively modest ones? Okay, how do we define big and modest? Is that determined solely by, say, price relative to earnings? Is a 15 p/e too high? Or is it 16? And do we need to adjust that for inflation, interest rates, the outlook for economic growth, the possibility of war, etc.? Or does the mere presence of mistakes (defined after the fact, of course) constitute irrational investing, regardless of valuation?

As you can see, deciding if the EMH is reasonable or not isn’t quite so easy. At least not if you have to write down the rules. Then again, there are those pesky index funds, which generally perform as EMH predicts. But even that’s debatable, as we’ll discuss in a future post. It’s not an entirely persuasive argument, but that doesn’t slow the debate.

If you’re looking for quick, definitive answers, debating EMH isn’t likely to offer satisfaction. By comparison, you’ll probably have better luck with religion or politics.

Visit 1800blogger to see all of our industry leading blogs.

Rating 3.00 out of 5