Recent Posts

Categories

Archives

Time Out

Posted: November 30th, 2009, by Richard

timeout.jpgFaithful subscribers…I need to take a break.

After nearly two years of posting every business day, the problem is not a lack of topics.

Just the opposite.

Instead, I have decided to take on additional responsibilities, working with a group of real estate investors, that will place a premium on the time I was once able to carve out to post to our blog.

I’d like to leave the door open, in the event that circumstances once again would permit me the privilege of expressing my views.

Special thanks to those of you who have responded to our plea for sanity and the restoration of market discipline in a world that has temporarily gone mad for statism and redistributionist policies that threaten our once unshakable role as a global leader.

Two outcomes remain.

  1. This declinism continues…perhaps accelerating.
  2. Or we return to our entrepreneurial roots, once we can clearly gauge what he have lost.

I’m confident it will be the latter….but not until considerable collateral damage has been inflicted on our economy.

For my children’s sake…and yours…I hope that our cultural DNA  still favors freedom more than it does mindless egalitarianism.

Time will tell.

Titan

Posted: November 17th, 2009, by Richard

That’s the title of the masterful biography of John D. Rockefeller, Sr., written by Ron Chernow, who had earlier authored The House of Morgan and The Warburgs.

I highly recommend it for your consideration.

I used to enjoy reading and writing fiction, but after the political, economic and financial upheavals of the past quarter century, it’s easy to imagine that we have stumbled into some kind of fictional construct…one that would have been impossible to have imagined if we had not experienced it at first hand.

That’s why I’ve started mining historical and biographical sources…to try to get grounded and make sense of the changed landscape.

The inescapable conclusion is that America’s emergence as a global power was rooted in the no-holds-barred, capitalist free-for-all that took hold in the nineteenth century, greatly accelerated by the material demands of the Civil War.

This at a time when the federal government was minuscule in scope and ambition compared to the Imperium we now have in Washington.

Imagine…no corporate or personal income tax.  No regulatory agencies.  No constituent group other than stockholders to dictate policy.

Of course it got very ugly when examined closely.

The practices used to build the Standard Oil Colossus would not survive in our time.  The most outrageous example was the notorious “drawback” that Rockefeller forced on the railroads.

This was a rebate on oil shipments…not by Standard Oil affiliates…but by the weaker competitors.  Every shipment they made further enriched Rockefeller’s fortune, while serving to impoverish the smaller and weaker competition.  It was diabolically inspired…and served to hasten the demise of the smaller firms.

What most surprised me was the portrait of Rockefeller that emerged…as a superb judge of talent, and one who delegated widely and deeply to nurture the talent required to operate the world’s first multinational corporation.

This is all the more amazing, when one realizes that he was but an average student, whose passion was bookkeeping.

His lodestone was his absolute devotion to the enterprise of becoming the world’s wealthiest man.

You may not agree with or admire his methods.

But Rockefeller and the other Robber Barons brought forth the framework for the superpower economy that we are now in the process of dismantling…in the name of fairness and redistribution of wealth.

Without their rapacious drive for dominance, there would be scant pickings for today’s Lilliputian levelers to divvy up.

Another Mouth to Feed

Posted: November 16th, 2009, by Richard

news_stacks.jpgThe gravy train of mindless stimulus spending now has the nation’s newspaper industry lining up for their share of the swag.

I just finished watching the Journal Editorial Report (JER) broadcast twice daily every Saturday on the Fox News Network.  You need to add this to your information mix in order to watch intelligent discussion of complex issues by members of the Wall St. Journal Editorial Page.

As if there was not enough misapplication of scarce resources,  we now learn that the old print media is howling for rescue, as their old advertiser supported business model is being ground into dust by the universal game changer…the Internet.

This is thick with irony.

In order to burnish their first amendment credentials, newspapers have always trumpeted their independence from government influence as the requisite principle that guaranteed free speech.

Now they want to go on the dole, rather than trying to compete in the wired age.

There is no better argument against this dishonest and feckless movement than the Wall Street Journal.

The Wall Street Journal (WSJ), both print and online, has learned how to prosper under the new market realities.

While USA today, and the New York Times continue to bleed paid readership, they nevertheless give away their online content for free.  Today, the WSJ is the clear national leader in readership, with over 2 million paid print subscriptions.

And they did not cheapen their online product by giving it away.  Instead, they smartly bifurcated their product into a core, teaser version that is free…and an excellent bit of chum to draw readers to their paid online version.

The reader has three choices.  Print, online, or both at a reduced combination price.

So the issue is not that everyone has been equally devastated by the disruptive power of the Internet…rather that some firms are more adept and adroit when adapting to the greatly expanded opportunities that exist when media can be accessed on so many distinct and discrete platforms.

By point of comparison, think of England and how government control of media has evolved.

Television owners must pay a national subscription fee…whether they want to watch BBC broadcasts or not.  And the BBC, far from being an impartial interpreter of the news, is a lopsidedly left-wing enterprise, intoxicated with political correctness, and dangerously, dogmatically, anti-Semitic in their worldview.

My sense is that compassion and bailout fatigue is at a critical level…and still rising.

And this time, it will be the Gen X and Millennial Generation who will first scoff at government aid to newspapers….

…because this segment of the population would sooner be caught dead than found out to be reading a dead tree, ink-all-over-your-fingers, archival piece of news.

They want their information online, on-demand, for free.

And they get it from every old line newspaper that got caught on the wrong side of the digital divide.

Bank of America’s Shotgun Marriage to Merrill Lynch

Posted: November 13th, 2009, by Richard

ken_lewis.jpgYou can’t blame Ken Lewis, the beleaguered CEO of Bank of America, for wanting to quit early.

It’s tough enough trying to manage a universal mega bank, without getting sniped at by the feds and the newly installed board of directors.

The proximate cause of his departure is the hasty decision to acquire Merrill Lynch.

This happened back on black Monday, Sept. 15, 2008, when the financial world teetered at the edge of the abyss…remember, this is the day Lehman Bros went into Bankruptcy, and the taxpayers bought AIG.

The SEC and the courts will work to untangle the issues of inadequate disclosure and the external pressures placed on the bank to close on the deal…after they discovered how rotten the corpse had become.

But no one seems to be focusing on the big picture…which is the attempt to recreate the  so-called financial supermarket.

This was the pell mell acquisition of disparate, but supposedly synergistic financial services under one roof, to offer one stop shopping for clients.

This is also the strategy that made Citigroup both unmanageable and unprofitable.

Just what we need…the forced growth of financial institutions already too big to fail.

Proving that no one is paying attention to the failure of this grand strategy is the latest announcement from Merrill…known as “My Retirement Income”.  You might think this is some unique and proprietary formula to restore the wealth that melted down in the savage bear market.

But it’s just old wine in new bottles.

The cornerstone of the program is the automatic transfer of assets from Merrill’s cash management account into a Bank of America account for spend down.

This “enhancement” is perceived to add value, due to the 6,000 retail banking offices globally, as well as access to more than 18,000 ATMs.

Which would be innovative, if not for the inconvenient fact that anyone with internet access can link brokerage accounts to any depository outlet they wish, with just a few keystrokes.

They just don’t get it.  Years ago, Dean Witter, a once prominent brokerage firm, was acquired by Sears, Roebuck, leading to the derisive tag line of “stocks and socks”. …Not to mention that BofA had already acquired Charles Schwab years earlier, and then disgorged it when they could not successfully meld the two organizations.

The trend now is for investment houses to divest themselves of proprietary funds, which are tainted by the charge that they are flogged on to clients by the mercenary sales force.

Knowledge has shifted to the consumer…

…who now has access to virtually every financial tool and product once exclusively offered by the big wire houses.

The scandal of Merrill’s acquisition by BofA is not that they closed on a deal that they should have walked away from….

…the scandal is that they were still intoxicated by the growth-at-any price ethos that has brought so much grief and damage to our financial systems.

These big bad boys should be divesting and slimming down…not continuing to gorge at the buffet line.

Schwab Brings a Game Changer to the Market, Part III

Posted: November 12th, 2009, by Richard

schwab_etf.jpg

Now that Schwab has dipped their toe in the water….take a look at the next four proprietary ETFs (Exchange Traded Funds) that will be rolled out in December, bringing their total exposure to eight funds:

SCHG:  Schwab U.S. Large-Cap Growth ETF

This index represents half (375) of the 750 stocks that make up the Dow Jones U.S. Large Cap Total Stock Market Index.  Think of this growth oriented index as the flip side of value investing.  This will be the faster growing companies, with the higher price earnings ratio, selling often for several multiples of book value.

If you seek exposure limited to large cap growth stocks…this will be your pick.

SCHV:  Schwab U.S. Large-Cap Value ETF

This is the yin to the yang of the previously mentioned fund.  The other half of the Dow Jones U.S. Large  Cap Total Stock Market Index.  Value investors in the stock market are the equivalent of those consumers who clip coupons and buy in bulk at the warehouse stores.  Price and value are paramount concerns.

These will be the stocks typically that sell at or even below book value, that have fallen out of favor with investors or encountered business setbacks.

Long-term studies of the market going back to 1926 tend to tilt to Value as the more successful investment strategy, just as the results also trend more favorably for small cap vs. large cap stocks.

SCHC:  Schwab International Small-Cap Equity

This fund will track the FTSE Developed Small Cap ex U.S. Liquid Index, consisting of some 1,800  international small cap stocks spread among some 20 plus developed international markets.

This one caught my attention immediately.  During the market meltdown of 2007-2009, the large cap foreign and domestic stocks tanked in virtual tandem, not offering the supposed diversification from non-correlating assets…proving that one multinational is much like another, whatever its domicile may be.

For true international diversification, the small cap sector offers distinct advantages, since there is little or no overlap with their domestic counterparts.

SCHE:  Schwab Emerging Markets Equity ETF

The final fund will track the 740 stock FTSE All Emerging Index, derived from both large and mid cap companies in over 20 emerging markets.  Just as with the international small cap fund, exposure to emerging markets as an asset class provides more pure diversification than investing in large company international developed markets.

Of course, one should expect more volatility in this arena as well.  The ride will be bumpier and the swings much wider than with their developed markets counterparts.

Taken as a whole, these eight funds allow an equity oriented investor to diversify by market cap asset class, as well as geographically.  I also wouldn’t be surprised to see additional offerings in the commodity and real estate sectors going forward, as inflation concerns are addressed.

There is so much fat in mutual fund expense ratios, that this movement to a commission free, rock bottom expense fund family is long overdue.

Schwab is to be commended for stepping up to the plate and delivering the goods.

Cutting expenses worked like a charm for Vanguard.  It could do the same for Schwab.

Schwab Brings a Game Changer to the Market, Part II

Posted: November 10th, 2009, by Richard

schwab_etf.jpgSchwab had me already at “no commission”, on their new family of Exchange Traded Funds.

Then I took a closer look, and was astonished to see that their expense ratio was not only well below the fees charged by I-Shares and SPDRs—but also matching Vanguard on three of their offerings.

In fact, Schwab is the second lowest cost provider on only one fund (Emerging Markets) while actually besting Vanguard and the other two on four of their eight new funds.

Clearly, the goal was not to maximize profits, but to capture market share.

They need to get up to scale quickly so that they can sustain volume and liquidity to keep the spreads as narrow as the competition.

The first four funds hit the market the first week in November, so results are premature at this early juncture.

They include:

SCHB:  Schwab U.S. Broad Market

This is Schwab’s version of a total U.S. Market, all cap index.  Their bogey is the 2,500 stock Dow Jones U.S. Broad Market Index.  The other firms use either the Wilshire 5000 index or the Russell 3000 index, but there is not a significant variation in coverage.

SCHX:  Schwab U.S. Large-Cap

The index tracked is the Dow Jones U.S. Large-Cap total Stock Market Index, made up of the largest 750 U.S. Stocks.  Both SPY and IVV, the dominant offerings for this category, track the S&P 500, each charging a slim 0.09% expense ratio.

Schwab cuts the rate to 0.08%, and it will be interesting to see if the big boys lower their rate to try to snuff out the upstart contender.

SCHA:  Schwab U.S. Small-Cap

The index used is the Dow Jones U.S. Small-Cap Total Stock Market Index, which consists of the 1,750 U.S. small cap stocks (arrived at when you subtract the 750 large cap stocks from the 2,500 Total Stock Market index)

SCHF:  Schwab International Equity

The sole international ETF (until December, at least) tracks the FTSE (Financial Times of London) Developed ex-U.S. Index, consisting of approximately 1,400 Large and Mid-Cap companies domiciled in over 20 developed international markets.   This is similar to the EAFE (Europe, Austral-Asia, Far East) index used by competitor ETFs.

Again, there is nothing unique about the coverage.  The distinction is in the lack of trading commissions and rock bottom expense ratios.

Absolute heaven for tightwad investors like me.

Schwab Brings a Game Changer to the Market, Part I

Posted: November 9th, 2009, by Richard

spider.jpgCharles Schwab and Co has dropped a bombshell into the crowded ETF (Exchange Traded Fund) marketplace.

So, it looks like the price war that started with books and DVDs this fall has now, finally, come to Wall Street.

First, some background.

State Street brought the first ETF to market in 1993.  SPY.  The “spider”, so-called, allowed investors to plunk down their money into an index fund, much like the legendary Vanguard 500 index fund that started the movement away from managed money in 1976.

But unlike the Vanguard fund, SPY could be bought and sold just like a stock, with no mandatory holding period or minimum purchase requirement, unlike traditional mutual funds.  Further, this hybrid security could be purchased on margin, and sold short….again, just like any other stock.

For long term investors, this is a mixed blessing at best.

Anything that allows a skittish investor to pull the trigger whenever the mood strikes can work against the long term trend towards higher valuations and regular compounding.

But it was a godsend to day traders and the new generation of high speed trading hedge funds…not to mention the brokers who get their ticket punched on every buy and sell order.

The other clear advantage of the ETF concept is the clarity that comes from transparency.

You can play your hunch regarding either broad market indexes, or finely sliced, and sometimes exotically esoteric, and micro granular sub-markets.

You go into the trade with your eyes wide open, and know exactly the mix and composition of stocks that comprise the index.

This way, you don’t bet the ranch on a specific stock.  Even in high flying sectors, there are always going to be one or two laggards,  sitting out there, exposed, two or three standard deviations from the bulge in the bell shaped curve of normal distributions.

This market is pretty much owned by I-Shares, State Street, and Vanguard.

Vanguard was late to the party, but quickly gained share due to their rock bottom management fees.

The advantage of investing in the larger and more liquid ETFs is that the spreads between bid and ask prices are narrower—-i.e. the pricing is much more efficient and fair.

Since the eight funds that Schwab is bringing to the market are broad based, me-too indexes that have ready, virtually identical,  counterparts offered by the three dominant  providers, they had to do something radically different to stand apart in the crowd.

This they accomplished by eliminating the commission on all trades in their new, proprietary ETF family…

…so long as the purchase is made online from a Schwab account.

This may not sound like such a big deal, when commissions now go as low as $7 per trade…but you’d be amazed at how fast these small sums pile up…especially among the hair trigger investors who consider the stretch between the opening and closing bell to be their long term investment horizon.

In our next posts,we will take a closer look at the new funds, which span both domestic and international broad market indices.

Dad’s take on Amanda’s Wedding

Posted: November 6th, 2009, by Richard

wedding_dance.jpgIf there is a uniquely American character trait it might be this….

…our aspirations are focused on having our children routinely and comfortably exceed their parent’s level of attainment and achievement.

We commonly expect them to receive a better education…and to pursue career opportunities that were unheard of in their parent’s prime…and then to enjoy the harvest of a long, and productive life…expanding the dimensions of health and longevity.

Which might help to explain why weddings are such an emotional milestone for the parents.   It’s tangible proof that all the hard work and preparation of both generations is amply rewarded.

Due to many traits, including family history, Amanda has proven to be an excellent manager and steward of her money and her future…as she has amply demonstrated in her four-part exposition.

And truth be told, I might have held my thumb on the scale to steer her in the direction she ultimately took…but the choice was always hers as to how she wanted to plan and organize her big day.

Flash back to ten years ago…

…when she was a teenager working her first W-2 type job, as a checker at the local Kroger Store.  This was the opening for her Mom and I to start funding her Roth IRA, just as we had done the previous year for her older sister.

The law requires earned income to be eligible for a Roth.  But the law does not require that the account be funded by the wage earner.  It can be gifted by the parents (or grandparents), and this turned out to be ultimately the wedding gift that will keep on giving for generations to come.

It’s not easy for our children, working at low paying jobs, to fund a retirement savings account like a Roth.  But we found it to be a relatively painless way to salt away $30,000 for each child, by making the maximum contribution until they were working in career jobs and could shoulder this burden themselves.

The money was there for a big wedding…if that is what she wanted.

But by opting for the more intimate ceremony, Amanda was able to keep the Roth IRA fully intact.

At the current account value, assuming not one more dime of contribution,  and allowing for compounding at 10% over the next forty years…when she becomes eligible for retirement…the account will reach $1.7 million.

To reverse the equation, the present discounted value of a future sum of $1.7 million over forty years at 10%, is a sum just under $40,000.

A sum that many a proud father would pay for his daughter’s wedding.

I’m so proud of my daughter…for taking the road less traveled.