Both the Stanford and Madoff scams have something in common. These advisors used simple techniques to separate investors from their money by promising high returns and no risk (greed). If something is too good to be true - Well It Is!!!!!!!
So here are the warning signs:
If you receive statements from only your Advisor's firm you could be in trouble. An Advisor should custodian your funds at a separate and independent company. I custodian my client's portfolios at Charles Schwab & Co. The client receives a separate statement directly from Schwab verifying their holdings. Madoff would never have been able to steal his client's money if custody of the funds had been held at another firm. Many advisers avoided the Madoff ponzi scheme because when they asked simple questions. When they found out that Madoff managed funds were not held by an independent third party brokerage firm they didn't invest. Never hand over custodian ship of your portfolio to your advisor.
If your advisor has you write a check or transfer your assets to them, you are probably never going to see your money again. I know I said it before but Never hand over custodianship to your advisor. The check should be made out to your custodian (i.e. Schwab, Vanguard, Fidelity).
Be wary of the promise of unreasonably high return with virtually no risk. There is no such thing as a free ride. This tripped up both the Madoff and Stanford investors. Stanford promised huge returns on risk less CDs. In addition, most investors assume that all CDs are FDIC insured up to $250,000. They are not. An advisor may say or promise that their CDs are insured or guaranteed but by whom? If ii is not FDIC insured don't invest. Be sure to ask alot of questions.
Do Not Invest in Anything You Do Not Understand. If your advisor can't explain it to you simply then they do not understand it or they are trying to take your money. Bottom line, it is your money so there is no such thing as a simple or stupid question. If your advisor becomes annoyed then find a new one. Do not invest in a fancy catch phrases (Stanford Investment Model or SIM) or a black box (Madoff's supposedly winner options trading strategy).
Finally, Listen to your gut. If you are uncomfortable and feel under pressure to sign with an advisor, then leave. It is alright to look foolish. In fact, it might be the smartest thing you have ever done. If after additional research and thought you change your mind, I guarantee that the advisor will still be happy to help you with your portfolio.
A smooth talking con artist is always happy to separate you from your money so stay alert!
Tuesday, February 17, 2009
Thursday, February 12, 2009
The Economy Ain’t Hummin’ Along
Banks, consumers and businesses are rapidly deleveraging. The process was so abrupt that it was though someone slammed the brakes on the global economy. (Please note if you cannot read a graph or insert double click on it and it will appear larger and less fuzzy on your computer). First, the housing market began to deleverage in 2006 
sparking the financial sector to begin to deleverage in 2007 causing the consumer to deleverage in 2008 and in September the rest of the world followed. When so much liquidity is pulled from the markets and economy so rapidly the dislocations and shock waves are massive. Now only one entity is large enough to get the economy moving again, the U.S. government. The government is now moving forward rapidly to stimulate the economy as unemployment soars and economic growth stalls.
The unemployment rate is approaching the levels reached in the early 1980s. Given the recent severe declines in retail sales, business spending and employment, it is highly unlikely that the economy will improve anytime soon. It is clear that the job market will continue to deteriorate for most of 2009. It is entirely possible that we will reach the levels of unemployment experienced in 1982. Even if the much-needed stimulus bill passes soon, the economy is likely to end 2009 in roughly as bad a shape as 1982.
sparking the financial sector to begin to deleverage in 2007 causing the consumer to deleverage in 2008 and in September the rest of the world followed. When so much liquidity is pulled from the markets and economy so rapidly the dislocations and shock waves are massive. Now only one entity is large enough to get the economy moving again, the U.S. government. The government is now moving forward rapidly to stimulate the economy as unemployment soars and economic growth stalls.The unemployment rate is approaching the levels reached in the early 1980s. Given the recent severe declines in retail sales, business spending and employment, it is highly unlikely that the economy will improve anytime soon. It is clear that the job market will continue to deteriorate for most of 2009. It is entirely possible that we will reach the levels of unemployment experienced in 1982. Even if the much-needed stimulus bill passes soon, the economy is likely to end 2009 in roughly as bad a shape as 1982.
Currently, the unemployment rate was 7.6% in December 2008 if you include discouraged workers. In addition, another 5.2% of the labor force was involuntarily working part time. Combined the rate approaches 13%. 
However, this still understates the unemployment rate, because the Labor Department’s definition of discouraged workers is too narrow. If everyone looking for a full time job were counted, the rate could reach over 14%. It is estimated that unemployment reached over 30% during the Great Depression and it is doubtful we would approach this level given the size of the government’s proposed stimulus package. It is possible that we could come close to the 1982 peak rate of unemployment of 16%. .png)
Almost half of the current work force is too young to have any real memory of how tough it was to navigate through the early 1980s recession. They only remember the mild recessions of 1990-91 and 2001. Many are unprepared for layoffs and tough times. It is a generation that spends and does not save, a generation that has systematically borrowed from future income to finance today’s wants. Now the bill has just come due and the delinquency rates on Consumer Loans and Residential mortgages are climbing rapidly. Consumers are leveraged to the hilt, and as they lose their jobs they begin to default on their car, home and credit card debt. There is no buffer, no savings since they have not prepared for the end of the leveraging party.
However, this still understates the unemployment rate, because the Labor Department’s definition of discouraged workers is too narrow. If everyone looking for a full time job were counted, the rate could reach over 14%. It is estimated that unemployment reached over 30% during the Great Depression and it is doubtful we would approach this level given the size of the government’s proposed stimulus package. It is possible that we could come close to the 1982 peak rate of unemployment of 16%. .png){kind=link}
Almost half of the current work force is too young to have any real memory of how tough it was to navigate through the early 1980s recession. They only remember the mild recessions of 1990-91 and 2001. Many are unprepared for layoffs and tough times. It is a generation that spends and does not save, a generation that has systematically borrowed from future income to finance today’s wants. Now the bill has just come due and the delinquency rates on Consumer Loans and Residential mortgages are climbing rapidly. Consumers are leveraged to the hilt, and as they lose their jobs they begin to default on their car, home and credit card debt. There is no buffer, no savings since they have not prepared for the end of the leveraging party.
Monday, February 9, 2009
How to Read Your Federal Tax Return
Your Federal tax return is difficult to understand. The first two pages called Form 1040 summarizes all your information. The New York Times has put together a great interactive version of this form together. It is worth a few minutes of your time to run through your tax return. Afterall, it is one of the largest bills you pay!
NYT Interactive: Walk Through your Federal Tax Return
NYT Interactive: Walk Through your Federal Tax Return
Saturday, February 7, 2009
The Economy is Still Deteriorating, But What Will the Markets Do?
It is official; government economists have declared that we have been in a recession for over a year. Of course anyone living in the real world knew we were in a recession long before economists and the government officials. What started off as a housing market crisis morphed into a credit crisis morphed into a global market meltdown and finally caused the demise of the banking system as we knew it.
So we now have been through two bubbles (dot com and housing). I call them the twin peaks, or the Grand Tetons of the stock market (see chart below). Bubbles are always obvious in hindsight, after they burst. If you look at the stock market before the twin bubbles (pre-1995) and extrapolate forward at a more reasonable growth rate, maybe the current level of the market is not far from where it would have been if we had just experienced reasonable consistent growth.
The market and economy tend to swing like a pendulum. If the market swings go too far up then it must over-correct with equal force in the opposite direction. Corrections are usually just as severe as bubbles were frothy. So the recovery from the twin peaks bubble will not be a quick V-shaped one as many are hoping. This is going to take a long time and is not a normal cyclical recession. This recovery will necessitate the complete restructuring of our financial system.
It will take years to resuscitate the U.S. economy and 2009 will be terrible from an economic perspective. It is also clear that when we do recover our economy and banking system will be transformed. It has already begun with a string of bank consolidations and some bankruptcies. In order to keep the banks solvent, the U.S. government is being forced into taking large equity stakes in all the major money center banks just to keep them afloat. It is obvious that the banks need to find a new business model and ominously it will not be as profitable as it was before.
The government will insist on new regulations that will keep the financial institutions from assuming such substantial risk. In fact, the government will want the banks to adopt a business model not unlike that of a utility company because it has become clear that the economy cannot accommodate the failure of our largest financial institutions. The impact on our economy will be immense. Since the 1980s, the financial sector has driven the economy. It called the shots and became larger than the manufacturing sector. In fact it, told manufacturing and every other sector of the economy what to do. Our whole economy will now have to restructure and our growth rate will be lower as a result.
Our government’s response to the crisis has been to throw money at our financial institutions in the hopes of dousing the fire. As with any emergency action there will be unintended consequences. Instead of water and foam being dispersed everywhere to douse the fire, the Federal Reserve and Treasury are using cash. Some institutions will survive that should have been left to wither and others will fail though they deserved to survive. Government support is always inefficient, but in this case there was no alternative. To not have acted would have led to the complete failure of the banking system and our economy.
The government is now shifting its response to the credit crunch. The banking system is too damaged to recover quickly. So the Treasury will change gears and begin to purchase broad asset classes and in some instances extend further guarantees. The Federal Reserve and Treasury will also have to implement additional strategies to inject the needed liquidity to businesses and consumers and bypass the banking system. These actions change the investment landscape and shift our near term investment strategy to focus on assets the government is supporting. In this environment bonds are preferable to equities (stocks). So unlike most recessions, equities will not lead the way out of this morass. So unlike almost every bear market of the past 50 years, buying stocks after more than a 20% decline might not be the best move this time around.
At current levels stocks may look like a bargain, but are they? It depends on which metrics you use and a stock’s promise. The promise of a stock is its ability to meet or exceed its current projected earnings. The measure frequently quoted is Price to Earnings ratio, which compares the price of a stock to its trailing (last period’s) or forecasted (estimated future) earnings per share. Investors focus on future performance and therefore use forward earnings to calculate the price to earnings ratio. Trailing earnings are used to assess the reasonableness of future earnings. Unfortunately, it is tough to assess value or estimate future earnings in a volatile market. Using trailing earnings (earnings from last year) causes the Price to Earnings ratio of stocks to seem cheap (see chart). However, earnings are falling, rendering trailing earnings an un-realistic gauge of current value.
So we now have been through two bubbles (dot com and housing). I call them the twin peaks, or the Grand Tetons of the stock market (see chart below). Bubbles are always obvious in hindsight, after they burst. If you look at the stock market before the twin bubbles (pre-1995) and extrapolate forward at a more reasonable growth rate, maybe the current level of the market is not far from where it would have been if we had just experienced reasonable consistent growth.
The market and economy tend to swing like a pendulum. If the market swings go too far up then it must over-correct with equal force in the opposite direction. Corrections are usually just as severe as bubbles were frothy. So the recovery from the twin peaks bubble will not be a quick V-shaped one as many are hoping. This is going to take a long time and is not a normal cyclical recession. This recovery will necessitate the complete restructuring of our financial system.
It will take years to resuscitate the U.S. economy and 2009 will be terrible from an economic perspective. It is also clear that when we do recover our economy and banking system will be transformed. It has already begun with a string of bank consolidations and some bankruptcies. In order to keep the banks solvent, the U.S. government is being forced into taking large equity stakes in all the major money center banks just to keep them afloat. It is obvious that the banks need to find a new business model and ominously it will not be as profitable as it was before.
The government will insist on new regulations that will keep the financial institutions from assuming such substantial risk. In fact, the government will want the banks to adopt a business model not unlike that of a utility company because it has become clear that the economy cannot accommodate the failure of our largest financial institutions. The impact on our economy will be immense. Since the 1980s, the financial sector has driven the economy. It called the shots and became larger than the manufacturing sector. In fact it, told manufacturing and every other sector of the economy what to do. Our whole economy will now have to restructure and our growth rate will be lower as a result.
Our government’s response to the crisis has been to throw money at our financial institutions in the hopes of dousing the fire. As with any emergency action there will be unintended consequences. Instead of water and foam being dispersed everywhere to douse the fire, the Federal Reserve and Treasury are using cash. Some institutions will survive that should have been left to wither and others will fail though they deserved to survive. Government support is always inefficient, but in this case there was no alternative. To not have acted would have led to the complete failure of the banking system and our economy.
The government is now shifting its response to the credit crunch. The banking system is too damaged to recover quickly. So the Treasury will change gears and begin to purchase broad asset classes and in some instances extend further guarantees. The Federal Reserve and Treasury will also have to implement additional strategies to inject the needed liquidity to businesses and consumers and bypass the banking system. These actions change the investment landscape and shift our near term investment strategy to focus on assets the government is supporting. In this environment bonds are preferable to equities (stocks). So unlike most recessions, equities will not lead the way out of this morass. So unlike almost every bear market of the past 50 years, buying stocks after more than a 20% decline might not be the best move this time around.
At current levels stocks may look like a bargain, but are they? It depends on which metrics you use and a stock’s promise. The promise of a stock is its ability to meet or exceed its current projected earnings. The measure frequently quoted is Price to Earnings ratio, which compares the price of a stock to its trailing (last period’s) or forecasted (estimated future) earnings per share. Investors focus on future performance and therefore use forward earnings to calculate the price to earnings ratio. Trailing earnings are used to assess the reasonableness of future earnings. Unfortunately, it is tough to assess value or estimate future earnings in a volatile market. Using trailing earnings (earnings from last year) causes the Price to Earnings ratio of stocks to seem cheap (see chart). However, earnings are falling, rendering trailing earnings an un-realistic gauge of current value.
The problem is that Wall Street is still too optimistic about earnings even though expectations for the future quarters have eroded quickly. On Oct. 1, according to Thomson Financial, the Wall Street consensus was that S&P 500 earnings would rise a whopping 47% from the fourth quarter of 2007. Now, analysts think earnings actually fell 23% from a year ago. If their new forecast is correct, earnings will have fallen for six quarters in a row, the worst stretch on record. But analysts are still gung-ho about the future. Analysts expect S&P 500 earnings to be roughly flat this year, according to Thomson
, but post a 33% year-over-year rebound in the fourth quarter. These forecasts depend on a quick economic recovery, which is unlikely to occur. Most economists expect something more sluggish at best.
Equity analysts tend to always be too bullish about the economy. Since the earnings slump began in 2007, analysts have consistently held high hopes for profits a year out, while busily cutting forecasts for the quarters immediately at hand. The pattern seems to be continuing in 2009. The bottom line is that at current levels the stock market has already priced in a 30% decline in earnings. So even though analysts can’t face the truth, the market already has. Are stocks cheap? Many metrics suggest that stocks should at least provide satisfactory returns going forward and possibly something better, but owning the stocks that can deliver on their future earnings promise is the key.
, but post a 33% year-over-year rebound in the fourth quarter. These forecasts depend on a quick economic recovery, which is unlikely to occur. Most economists expect something more sluggish at best.Equity analysts tend to always be too bullish about the economy. Since the earnings slump began in 2007, analysts have consistently held high hopes for profits a year out, while busily cutting forecasts for the quarters immediately at hand. The pattern seems to be continuing in 2009. The bottom line is that at current levels the stock market has already priced in a 30% decline in earnings. So even though analysts can’t face the truth, the market already has. Are stocks cheap? Many metrics suggest that stocks should at least provide satisfactory returns going forward and possibly something better, but owning the stocks that can deliver on their future earnings promise is the key.
Friday, February 6, 2009
What You Need to Know About the New Credit Score Calculation
Here is a great article by the New York Times regarding your credit scores. After you have read this article please hit the second link below and check your FICO score.
NYT Article Regarding Credit Scores
Check Your Credit Score
NYT Article Regarding Credit Scores
Check Your Credit Score
Thursday, January 29, 2009
Fighting Recessions
Since the Great Depression, presidents have tried many methods to fight recessions. Three economists explain what worked and what didn’t.
http://www.nytimes.com/interactive/2009/01/26/business/economy/20090126-recessions-graphic.html
http://www.nytimes.com/interactive/2009/01/26/business/economy/20090126-recessions-graphic.html
Monday, January 12, 2009
Risk Management
Here is an excellent NYT article that describes how Wall Street failed to adequately mange risk. It's a prime example of how models and statistics can be mis-used. It was human folly. The article shows how investment banking and insurance company managers ignored the coming storm signals and blindly followed a quantitative model and how this led to the financial meltdown. It was the equivalent of flying an airplane looking at only two instrument panels on the dash board and never scanning the horizon or factoring the short comings of instruments that you are using. In short a model is only as good as the person using it.
http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?scp=1&sq=risk%20management&st=cse
Happy reading!
http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?scp=1&sq=risk%20management&st=cse
Happy reading!
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