rdd

Why a Market Crash Doesn’t Matter

Actually, they were a genius product. They filled a valuable niche. Unfortunately, like most financial sector innovations, greed took over and the underwriting requirements for mortgages plunged, the Fed left short-term interest rates too low for too long allowing exotic ARMs etc to explode, and they elected to not spend any money on proper documentation and actual official recording of mortgage assignments because it would slow things down and decrease profits.

Similarly, the stock market fills a valuable role raising capital for firms that need it, but every now and then it goes stark raving mad like the dot.com bubble.

All of these "genius products" are great, but they need much better regulation and management.


On Nov 23 08:38 AM quaoar wrote:

> I find it interesting when people tout Peter Lynch in the current
> market. Just finished reading some stories about P.Lynch and one
> of the things I took notice of was one of the stocks P.Lynch mentioned
> as his best pick - with a genius product. Know which company? <br/>finance.yahoo.com/echa...;range=my;indicator=vo...
>
> That's Fannie Mae. And the genius product was mortgage backed structured
> investment vehicles.

Why a Market Crash Doesn’t Matter

I track the 10-year real PE of the S&P 500 that Robert Shiller publishes. I do two things with it.

First, I evaluate the actual net worth of my overall stock portfolio normalized to the long-term mean of about 16. That is what I use when I make extrapolations using the long-term ttoal return of about 8% or so for the market. I think this gives a decent perspective on what the long-term value will be.

The second thing is to modify the percentage committed to stocks based on the 10-yr PE. I drop my percentage and reallocate to cash and bonds when it starts to hit extremes (like now) and increase my allocation when it drops significantly below the norm. If the PE drops to the 6-8 range, like 1982, I will be "all-in" within reason.

Meanwhile, I just keep dollar-cost averaging purchases in my 401k.

This means that my portfolio is usually in a buy low and sell high scenario which has been helpful. My portfolio increased significantly in value from 2000-2003 and 2007-2009 because of this disciplined process.

I do something similar to bonds, where I assume a typical, reasonable long-term interest rate for a generic bond portfolio of about 6%.

Understanding the AIG Decision

This was a back door method to shovel money into the Too big To Fail institutions. That was obvious at the time.

The problem is that Wall Street and Washington are acting as if the financial crisis in 2008 never occurred but we need to leave TARP and Fed floodgates wide open to prevent the non-event from recurring.

OK, we saved their butts. Now lets increase the retained earnings they need to hold as capital - keeping their bonuses in-house as capital would be a good start so that TARP can be closed out and the Fed can raise interest rates to a nominal 1%-2% so that there can be something resembling a normal financial system.

Then, let's get a three-year plan in place to dismantle these Too Big To Fail (TBTF) companies and turn them into Small Enough To Implode (SETI) entities. Then maybe we can use the other SETI project that Sagan started to try to find somebody who can run financial systems that don't collapse periodically.

Does Anyone Actually Believe in Market Efficiency?

I think a lot of Wall Street people do truly believe in market efficiency which is why they rely on getting inside information before anybody else in order to get their edge. It appears that they don't believe that they can get an edge in the efficient markets otherwise.

On the other hand, the traditional Graham & Dodd value investing model believes that the market will underprice securities that have short-term problems but long-term good prospects. Value investing wouldn't exist in a truly efficient market, yet it seems to be able to pull off a long-term (multi-decade) additional 1% or so of annual returns with some bumps and bruises along the way.

So, all of these people currently getting indicted for insider trading are effectively announcing to the world that they do not have the brains or fortitude to uncover the hidden inefficiencies in the market while the Warren Buffets quietly go about their business making money in the inefficient markets.

Forget BRIC: Your Portfolio Needs TICK

You can get partly there with a FTSE RAFI Emerging Markets ETF or mutual fund. They currently overweight Korea and Taiwan compared to the regular benchmarks like MSCI while underweighting China, India, and Brazil. They have a small amount of Israel and Chile.

Rajaratnam Indictment: Wall Street Wrongdoing Remains Pervasive

Apparently the Goldman Sachws board met with Hank Paulson during the crisis where he provided information to them on the government's thinking and strategy.

If they then traded on any of this information, should they all be indicted for insider trading?

Harvard and Yale 2009 Returns

I have read a few articles about Harvard/Yale as well as other endowments and pension funds.

As far as I can tell, Harvard/Yale made a lot of money during the good times but forgot to set aside enough cash to cover a one to two year drought without having to sell assets.

Personally, I plan to have my portfolio include a 5%-10% cash & ST bond position as I approach retirement so that I will be able to make the decisions on when to sell assets instead of being driven to sell into dropping markets due to a lack of cash. Ideally, stock/bond dividends and mutual fund/ETF short-term capital gains should be close to the amount needed to continuously replenish that cash position.

Criticizing TARP

I think the Fed's quantitative easing programs in 2008 as well as TARP were necessary at the time. I don't think that they had too many alternatives to simply throwing money at the problem quickly.

However, it is almost criminal that there has been little reassessment of what should happen moving forward. There needs to be a concrete plan put into place to remove virtually all guarantees except for basic ones like the FDIC $100,000 account guarantees that are very effective at preventing small account holders from making runs on the bank. All of the Federal guarantees should be removed within the next 6 months unless there are significant penalties and strings attached.

The financial institutions should also be informed that many of these wells of money will be permanently closed and they need to take appropriate risk management practices or lose effective control of the business.

Tier 1 Capital Ratios Comparison: U.S. vs. European Banks

I find it interesting that a bank that has not taken government money (HSBC) and another that was forced to but may not have needed it (JPM Chase) have relatively low ratios while known basket cases such as Citigroup appear to be doing much better.

Is there something we are not being told about the quality of these ratios?

The CFTC Is Needlessly Breaking Good Products

I own DBA and other similar commodity ETFs. They make up a small part of my portfolio but I view it as an important hedge against commodity-based inflation in the future, especially in a stagflation scenario.

I can't rely entirely on CPI-based hedges since the government has been gaming them for the past couple of decades. How could the CPI possibly have completely missed a massive housing bubble if it wasn't gamed?

The government needs to be regulating the use of leverage in buying these funds and other commodity vehicles. Buying a share of an ETF with cash is not speculation. Buying $30 worth for $1 using borrowed money is speculation. However, the government is allowing the books of the speculators to be gamed by waiving mark to market rules and providing government funding to them as well. Instead they are punishing small investors.

The Battle of the Bears: California vs. Russia

Russia is sitting on huge oil, natural gas, timber, and mines. California is sitting on movie stars, public employees, over-priced real estate, and tech firms that could relocate.

I know which set of assets I would prefer to have backing a bond, even if it is Putin holding them.

The Case for Depression, Part 3: Demographics

Are these Harry Dent demographic charts available for Europe, Japan, and China? My suspicion is that they will look very similar to the one for the US.

Forget Goldman, Start Worrying About the Government

I am so fed up with Congress, state legislatures, and local politicians constantly handing gifts to any lobbyist who swings by their office, that I am moving into a mode of voting against incumbents. The system appears to be so broken that it is becoming clear that we need wholesale change at a scale that happened in 1933 and 1974.

Supporting the Financial System by Bleeding the 'Real' Economy

I supported most of the financial moves in 2008 as necessary to prevent an uncontrolled implosion of the financial sector. However, I viewed them as stop-gap measures to be unravelled after the system is restructured following something like the Pecora Commission in the Great Depression.

I think the big collapse has been the unwillingness of the political class to investigate the system, which could include themselves. Barring some clear disclosure over the next year or so of what happened from 2005-2008, it will be impossible to put a stable structure back together.

It appears that the powers in Washington and NYC want to punt and pray that there won't be another financial sector implosion. I fear that this will make it more likely that another one will occur within a decade than 70 years later like what happened after the Great Depression.

Madoff's Investors Don't Deserve Compensation or Sympathy

Great column.

Our portfolio is largely in retirement funds spread among several entities (IRAs, 401ks, 403bs etc.).

Down the road, if we get an annuity for retirement, I plan on getting them from at least two providers to give a better chance of surviving a provider insolvency.

I only started investing in ETFs late last year after the markets imploded because I wanted to see how they would function in a major downturn before investing in them instead of mututal funds (low expense ratios with long-term managers or index funds from major providers).

These are the types of measures that ll investors should be doing to be able to address the Will Roger's comment "I am more concerned about the return OF my money than the return ON my money."

I don't expect to ask the government for any assistance with this other than basic enforcement of the legal and accounting requirements for major brokerages and mutual fund providers. I look for funds with separate custodians from managers and major accounting firms doing audits. Most of my investments are in index funds which are very difficult to commit fraud in because of the low turnover.