February 28, 2008

ETF Locater

Trying to find the correct ETF can be frustrating and time consuming. I have created a easy-to-follow chart to assist in this process. This covers most domestic ETFs and if the cases where there is more than one ETF in a particular category or sub-category, the ETF listed first is generally the most common. Another presentation slide which includes international securities and currencies will be forthcoming. To download a Power Point slide with this information that will print out more legibly, click on the title "ETF Locater" to be redirected.

February 18, 2008

How Subprime Really Works

This is the best and simplest explanation that I have seen on how the Subprime issue got started and how it became a problem:

click on Post Title to launch slide show

This "cartoon" has been floating around Wall St. for a few days and does the very best job of explaining how the subprime mess got started. Read it and get rightfully indignant. Not to beat the dead horse (right before I start beating the thing again), but in the whole course of events, as a financial person, I expect every bit of questionable activity in that slide show to take place UNTIL the Rating Agency part. They are the "protectors" of the investors. They are to be beyond reproach (hell, that's how they market themselves and their ratings have been a mainstay for the integrity of the entire credit market of the United States). One expects a certain amount of "used car salesmanship" from mortgage brokers and investment bankers and even the lenders. But the Rating Agencies are supposed to step in at the end and bring some sanity into a bond deal by rating crap as ... well, crap. I have seen the slow deterioration of the Rating Agencies during my 25 years in the private sector. Unlike, say a FASB which has always maintained an almost adversarial (too adversarial at times) relationship with private business, the Rating Agencies have gradually cozied up more and more with private business, especially the investment bankers. When an entity has a new debt issue, the issuing company PAYS Moodys and S&P to rate the thing. How much pressure does this cozy relationship that they've established with the investment banking firm that's underwriting the bond issue come into play, now? Don't answer - that was a trick question.

I'm afraid the Rating Agencies failure has set us up to have the government regulating bond ratings - one of the only ways to make a bad situation worse. Just imagine in this environment ratings being determined based upon totally subjective criteria - geographic location, gender, age, religion, and other demographics, etc... - in addition to also being sold like the current system apparently allows (don't forget to slip your Congress critter something to get your investment grade rating and to get the deal streamlined!). A thorough investigation of the Rating Agencies need to take place immediately and those analysts/managers/directors/executives who ultimately signed off on the investment grade ratings need to spend a few years in the jail, getting remedial math tutoring, in between dates with Bubba and shower-time fun and hijinx. (It would be poetic justice that those that did the screwing get on the receiving end of some of the same treatment that they meted out).

I'm also afraid that until the culpability of the relevant parties (i.e., the Rating Agencies) has been ferreted out and the total extent of the damage has been exposed,and a minimum course of action proposed to fix the current problem, that the performance of the US stock market is going to be mediocre at best. The integrity of the US capital markets has been seriously damaged. And if nothing more happens, we may eventually get lifted out of this current down-trending market - when investors feel that all of the bad news has been fully discounted by bond and equity prices. And this will last just as long until the next bomb goes off - which will definitely happen until there is some systematic change in the process.

February 14, 2008

Follow-Up Investment Advice Letter sent January 18, 2008


I have been asked several times if the worst is over and, if so, what actions to take and offer the following take on the market.

I hope that you all were able to lighten positions since my e-mail on November 12, 2007. The S&P 500 Index closed around 1,439 that day and today it is down to about 1,320 for a loss of around 9%. Most other broad market indices have suffered more damage – the NASDAQ composite is down over 10% and the Russell 2000 Index is down 14%. It’s not been very pretty. What’s done is done, though and several commentators are prodding people that it’s time to get back in the market now. I’d like to at least present a counter argument to that for you to consider before committing your hard-earned retirement and investment funds to this market.

Bear markets are insidious creatures – and the evidence is becoming clearer that a bear market is exactly what we are in right now. Bear markets “invite” investors back in by providing tantalizing bounces up – only to cut the investors off at the knees. Bear markets aren’t that easy for shorts to play, either. Those sharp bounces up can shake people out of their “shorts” really quick. Besides, it’s outside of the norm for most people to be short in the stock market so this is just a bad position for almost everyone to be in. So, one of the biggest danger in a market like this is to be too trusting when we do bounce. Many, if not most, market players are anxiously hoping that this very ugly recent action is just some sort of temporary blip that is going to be quickly forgotten as people realize that things really aren't that bad. The thinking is that with the Fed ready to make big rate cuts and Congress working with the president on fiscal stimulus, we should be right back on track very soon. While that is possible, it isn't the smart bet. This market is broken and we're now in a downtrend as almost EVERY indicator that I’ve looked at supports. Trends are stubborn things that don't come to an end easily. All you have to do is consider the move we made since the fall of 2006. Despite growing worries and concerns during that period, the market just kept on going straight up -- until this past fall. Despite a few blips along the way, the trend was steadily to the upside and was not derailed even by the first major subprime news back in August.

The stock market’s fall since around November 12, 2007 is historically unusual in its quickness and severity – but not as unusual when you look at how corrections have happened in the last couple of years. And that means we are likely to see some relief bounces -- especially as news of fiscal and monetary policy hits. It is very important to have a game plan in mind as to how you are going to deal with the action. Without a doubt, there are going to be those who will declare that the worst is over and that it is time to buy. They will be the most convinced right around the time the bounce starts to fade. Your No. 1 concern should be to avoid being sucked into that. Be ready to unload some longs (if you have not already done so) and to put on some shorts (if that is your style). In my e-mail, I presented a hypothesis about what will be one, if not the primary cause, of the market being so risky – the permeation of non-investment grade mortgage-securities into investment grade money market accounts and the resultant reclassification issues in 4th quarter corporate financial reporting, which will shock the market and depress corporate earnings. The most disconcerting thing to me at this point, is that I have heard nothing about this issue or how the market that trades those mortgage-security “bundles” is going to get re-started. At a certain point, all bad news, known or not known is factored into the market. The market has exhausted itself going down and all sellers have sold regardless of any more news to come out. I don’t think we are there yet and so news like that I alluded to in my November 12th e-mail can still shock this market down – down a lot.

One of the easiest things to do in a difficult market like this is let hope that things will improve, driving you to be too optimistic when we do have a bounce, especially a big one. Stay skeptical about the health of the market even if do enjoy a few good days. Those who were in the market during the bear market of 2001-2002 will recall how frustrating and dispiriting it can be to be hopeful every time we have some brief flurry of positive action. Those of you old enough to remember the bear market of the 70’s should really be in tune to what can happen.

I don't want, and I hate to sound too negative -- there will be good opportunities, in the future, to make money in this market -- but you have to be very careful to keep our emotions in check and not to be too positive until there is very good reason for it. If you do not have the luxury of having instant access to the stock market and business information, your best course of action is to continue to wait before you commit any additional money to this market. We are in a downtrend, and that needs to be respected. Don't start thinking that the worst is over. One of the things that really has been killing this market lately has been the incessant talk by government officials and Fed members. They all want to show how concerned they are and how ready they are to jump into action, but nothing happens. We end up with a lot of talk that is immediately discounted and renders the actions that they plan to make impotent. There is no real appreciation of the psychology that is at work. This is a market and economy that need reassurance, and that will only come when there is some real action – some extended POSITIVE action in the market.

The US stock market is a wonderful thing. Several companies and industries have stronger Balance Sheets than they’ve ever had, and have sufficient cash balances and capital structures to ride out any recession. Other countries still flock to the US markets in times of turmoil. There is still a decreasing supply of US stocks due to fewer IPOs, stock buy-backs and stock buy-outs. This market will always provide you opportunities to make money – provided you are patient in times like these and preserve your capital to take advantage of the better times to come.

I’d like to mention that several thoughts on this market that I’ve mentioned above are also espoused by James “RevShark” DePorre who has just published a book - Invest Like A Shark (How A Deaf Guy With No Job And Limited Capital Made A Fortune Investing In The Stock Market). I would highly recommend this book to anyone.

Best of luck to you all,


Investment Advise Letter sent out November 12, 2007


I wanted to let some of my friends know that I have taken a rather radical investment stance for the time being and explain why. I have put almost all of my money in the basic money market accounts/cash accounts offered at the various brokerages. This decision is a difficult one, but one that I feel is warranted because of some of the fall-out from the sub-prime/CMO/CDO mess. Let me elaborate: Mortgage originators (the companies that finance house purchases) sell mortgages individually and in bunches to various other companies. If the mortgage has not been bundled together in a security yet, it is now bundled by these buyers. These are then sold to other entities, including money market account managers and they can either exist as one big mortgage security or be a part of a security with mortgages, bonds, other fixed income securities and other debt securities which are then available for individual consumers like you and me or corporations to purchase to earn interest income on available cash balances. These mortgage securities allowed the money market funds to pay a little more interest which everyone has been seeking in this relatively low interest rate environment.

The huge potential problem that I see right now stems not from the fact that these mortgage securities are worthless, because in reality they're not. But there is absolutely no one out there that wants to buy these securities at ANY price because they just don't know what the proper valuation is for them. And if private industry won't buy the CMOs and CDOs, the only one left to do something is the government. Maybe someone smarter than me will come up with a different line of thinking than this, but this is not unprecedented – this is kind of what happened in the S&L crisis from the 1980’s and more recently, albeit on a much smaller scale, from a few years ago with an investment called Auction Rate Securities. I just don't know what else can happen the problem is distributed so widely right now. This problem should never have gotten this big, but this is what happens when a normal market which buys and sells investments just evaporates. In this whole mess, I find the greatest fault in 2 places: 1) the demagogues in government who made it sound like every person had the right to live in a nice expensive house, regardless of their ability to actually PAY the monthly mortgage payment and all of the other costs that go with owning real property; and 2) the rating agencies (Standard & Poors, Moody's, and Fitch) who get paid to properly rate the creditworthiness of securities but who have NEVER been out in front to alert investors on ANY really bad investments. If private industry had any faith in the rating agencies, they would accept the CMO and CDO's ratings as being truly indicative of their risk and there would still be a viable trading market for those securities. But since private industry has no faith in the rating agencies, the ratings on the CDOs and CMOs aren't worth a plugged nickel.

I found an interesting web site that has a lot of articles that are saying the same thing (although much more eloquently) that I am saying along with a lot of other information on this subject: http://www.financialsense.com/fsu/editorials/nystrom/2007/1107.html This article was dated last Wednesday. I hope you read some of the articles and get a better appreciation of my concerns right now.

I always evaluate the risk and return equation for any investment that I make. Right now, I’m not so sure that the stock market is adequately compensating investors for the risk that is out there right now. At the end of the year, if there is still no market for these mortgage securities, lots and lots of companies are going to have to write them down to zero and take a hit to their the P&L Statement. Even if those companies later manage to sell those investments and not realize any real loss, they can never offset the loss they had to previously show at the end of the year because of some weird Accounting Rules. Additionally, at the end of the year when these companies are forced to dig into their investments and see if they may be holding any of these mortgage securities, they may be in technical default of their Credit Agreements and other debt agreements because they will no longer be considered a “Cash Equivalent” which is another Accounting Rule.

I really hope that I am wrong about all of this. However, if I’m not, the situation could get really ugly really fast. The market is already weak and if this would happen and maybe some other unforeseen situation like another terrorist attack, there could be a mad rush for the exits. I am willing right now to forego missing out on any potential end-of-the-year or other rally to remove my exposure to this mess. I wanted to plant this seed in my friend’s minds so that you can also evaluate your level of risk tolerance and exposure and talk to another financial advisor if you so deem. I also urge everyone to read some of the articles on this situation. This is very unusual and I think merits some serious attention in order to protect your financial assets.

A good thing to come out, if this worst case comes to pass, is that there will be some EXCELLENT investment opportunities in the future that we will have the capital to take advantage of. Also, as soon as I hear something that lets me think that this temporary disruption in the market caused by the sub-prime mortgage mess is over, I’ll let you know. Like I said earlier, I hate doing something like this and I don’t recommend this action lightly, but this is a very unique and unusual situation that I don’t want to blow up in our faces.

Let me know if you have any questions.


Response to a blogger about Moodys now coming out to downgrade mortgage security debt

Moodys is not a dog that's been let off its leash.

It is a mangy cur that has been hiding in the shadows because it has soiled the entire house. They have not been doing much of anything for as long as they can to avoid the scrutiny over why bundles of crap were given the highest bond ratings available. Especially Moodys, moreso than S&P, because they tout themselves as having a more holistic approach to their ratings methodology - encompassing macro and micro economic events, decision trees of probabilities and other academic exercises which all seem like so much hogwash now. Plain and simple - S&P and Moody's engaged in organized crime where they SOLD those high investment grade ratings to their friends, business acquaintances and cohorts in the investment banking industry . And along with selling those ratings, they sold the American economy and consumers down sh** creek with no paddle. And NOW they want to come out like a watch dog? You're about 4 years too late, chumps.