Yesterday, Major League Baseball released “The Mitchell Report”, which culminated a 20-month investigation by former Senate Majority Leader George Mitchell, who was hired by Commissioner Bud Selig to examine the Steroids Era. The scathing 409-page treatise linked some of the game’s most famous players to illegal steroid and other performance-enhancing drug use, including Roger Clemens, Miguel Tejada, Barry Bonds, Gary Sheffield and Andy Pettitte. Scanning the report was a perfect activity for a snowy day!
Mr. Mitchell noted that "Everyone involved in baseball over the past two decades -- commissioners, club officials, the players' association and players -- shares to some extent the responsibility for the steroids era…There was a collective failure to recognize the problem as it emerged and to deal with it early on." As I read these words, I started to think about other excesses that occur under the nose of regulators.
Earlier this week, the Wall Street Journal reported that “In 2005, the Securities and Exchange Commission and New York state's attorney general's office launched separate investigations into whether Bear Stearns (the firm whose original disclosure sparked the subprime crisis) harmed investors by improperly valuing complex mortgage securities.” (Did Authorities Miss a Chance To Ease Crunch? December 10, 2007) In other words, like MLB officials who suspected steroid use in the past, there were problems that were percolating with the pricing of subprime fixed income securities that needed attention, but did not progress.
Both the SEC and the NY attorney general's office, headed at the time by Eliot Spitzer, identified the problem--that is, how to determine the value of securities backed by risky mortgages--but each regulatory body dropped the enforcement cases. Given the ensuing mess, I guess it would be naïve to expect that a regulator might admit “gee, we missed that one.” This is especially true of Eliot Spitzer, who many believe was better suited to building his case, publicizing “the most egregious allegations in the media, which put unbearable public pressure on the targets to settle.” (“The Humbling of Eliot Spitzer” The New Yorker, 12/10/07)
It is impossible to go back and hold Mr. Spitzer responsible for his inaction, just like it is difficult for MLB to figure out how to correct the past. In both cases, we fans would like to see more level-headed, proactive thinking, rather than the reactive sort that plagues the landscape in both industries.
Friday, December 14, 2007
Thursday, December 13, 2007
Vegas Baby
With all of the hoopla surrounding the Fed’s rate cut decision, I nearly forgot to write about my weekend in Las Vegas. I know it may sound crazy that a financial professional would celebrate her birthday in “sin city”, but I considered it research for human behavior and as an extension, investor decision-making.
I had not been to Las Vegas in over ten years and it sure has changed—at least superficially. The hotels are beautiful, the strip has been sanitized, but thankfully, things were pretty much the same in the casinos, where irrational exuberance was on parade. There is probably only one other industry where greed stomps on common sense and forces normally sane people to make terrible decisions—can you guess which one?
Before continuing, let me fully disclose one important fact: I am a terrible loser, which means that I am not a great candidate to enter a casino in the first place. But there I was, with half an hour to kill before dinner and a $10 minimum blackjack table a mere ten feet away. I joined two other guys and bought a whopping $60 worth of chips. We played a couple of hands and I was even, but then something magical occurred: the pit boss hovered over the dealer and asked him, “How have you allocated your 401(k)?” I burst out laughing, noting the irony.
Here is what the dealer said to the pit boss: “You need to diversify---I have some stock funds and also some bonds, which are safer. You know, I don’t need to be a pig with all of this. I just need to make a decent return, not beat the house.” At the same time this conversation was transpiring, the three people at the table, including yours truly, were losing six hands in a row. My $60 vanished in about twenty minutes, while the two other gents were in the hole for far more. One guy looked at me and said, “You know, I was up $600 before they started talking about their retirement accounts! Talk about a buzz kill---I’m out of here!”
Then I thought who better than the gaming industry professionals to understand the concept of long term investing? After all, they are forced to watch people learn the painful lessons of greed every day. The dealer must laugh as we dopes walk up to the table, thinking that we can actually beat the house. Only a sucker believes that the odds are in his favor---that’s why the folks, who actually work for the house, are talking about their retirement accounts, not the latest method of card counting. Vegas baby---you just gotta’ love it!
I had not been to Las Vegas in over ten years and it sure has changed—at least superficially. The hotels are beautiful, the strip has been sanitized, but thankfully, things were pretty much the same in the casinos, where irrational exuberance was on parade. There is probably only one other industry where greed stomps on common sense and forces normally sane people to make terrible decisions—can you guess which one?
Before continuing, let me fully disclose one important fact: I am a terrible loser, which means that I am not a great candidate to enter a casino in the first place. But there I was, with half an hour to kill before dinner and a $10 minimum blackjack table a mere ten feet away. I joined two other guys and bought a whopping $60 worth of chips. We played a couple of hands and I was even, but then something magical occurred: the pit boss hovered over the dealer and asked him, “How have you allocated your 401(k)?” I burst out laughing, noting the irony.
Here is what the dealer said to the pit boss: “You need to diversify---I have some stock funds and also some bonds, which are safer. You know, I don’t need to be a pig with all of this. I just need to make a decent return, not beat the house.” At the same time this conversation was transpiring, the three people at the table, including yours truly, were losing six hands in a row. My $60 vanished in about twenty minutes, while the two other gents were in the hole for far more. One guy looked at me and said, “You know, I was up $600 before they started talking about their retirement accounts! Talk about a buzz kill---I’m out of here!”
Then I thought who better than the gaming industry professionals to understand the concept of long term investing? After all, they are forced to watch people learn the painful lessons of greed every day. The dealer must laugh as we dopes walk up to the table, thinking that we can actually beat the house. Only a sucker believes that the odds are in his favor---that’s why the folks, who actually work for the house, are talking about their retirement accounts, not the latest method of card counting. Vegas baby---you just gotta’ love it!
Wednesday, December 12, 2007
Shred the Fed
The Fed cut the federal-funds rate by 1/4 point to 4.25% for the third consecutive meeting yesterday, citing increased "uncertainty" about growth and inflation. (The central bank also reduced the discount rate it charges banks for direct loans by a 1/4 point to 4.75%). The central bank dropped its previous assertion that growth and inflation risks were balanced and pledged to "act as needed" to keep the economy growing and inflation in check.
Within moments, the question shifted to: did the central bank do enough? Investors voted a resounding “no” and sold stocks broadly. The issue at hand is that without significant Fed intervention, many believe that tight financial conditions faced by corporate and individual borrowers will be exacerbated and as a result, the economy will tip into recession. That fear put a halt to the December rally, which prior to yesterday’s action, saw the Dow rise by 2.7%. The Dow Jones Industrial Average plunged 294.26, or 2.1%, to 13,432.77%; the S&P 500 sank 38.31, or 2.5%, to 1,477.65; and the Nasdaq Composite Index sagged 66.6, or 2.5%, to 2,652.35.
Within moments, the talking heads were bashing the bankers, but interestingly, the anti-Fed diatribes were flying even before the decision. Superstar investor/financier George Soros told the Wall Street Journal that “There’s no question that the Fed was remiss in the way they handled this [the sub-prime/credit crisis]. They are guided by a theory of the market which I think is false. The idea is that markets actually reflect reality and so you should really rely on the markets. And in fact, with all these new instruments it’s very difficult to calculate risk.”
I think that Soros probably is right in that the Fed needs to kick up its rate cuts, but before the decision, the expectation for a ½ point was running at only 38%, so what explains the big sell-off? Let’s back up and remember where we came from three weeks ago. On November 26th, stocks dropped to a level that qualified for a classic 10% correction from the top. Since that time, stocks started to rally as a couple of Fed officials, including the chairman himself, put December rate cuts back on the table. Once the decision was official, some investors worried that they had gotten a little ahead of themselves.
What now? Investors will likely continue to vacillate between excitement over future rate cuts (after yesterday’s decision, futures markets were pricing in a 94% probability of a ¼ point cut at the January meeting) and panic over a looming recession. The result will likely fall somewhere between the two, but getting there is sure going to be bumpy.
Within moments, the question shifted to: did the central bank do enough? Investors voted a resounding “no” and sold stocks broadly. The issue at hand is that without significant Fed intervention, many believe that tight financial conditions faced by corporate and individual borrowers will be exacerbated and as a result, the economy will tip into recession. That fear put a halt to the December rally, which prior to yesterday’s action, saw the Dow rise by 2.7%. The Dow Jones Industrial Average plunged 294.26, or 2.1%, to 13,432.77%; the S&P 500 sank 38.31, or 2.5%, to 1,477.65; and the Nasdaq Composite Index sagged 66.6, or 2.5%, to 2,652.35.
Within moments, the talking heads were bashing the bankers, but interestingly, the anti-Fed diatribes were flying even before the decision. Superstar investor/financier George Soros told the Wall Street Journal that “There’s no question that the Fed was remiss in the way they handled this [the sub-prime/credit crisis]. They are guided by a theory of the market which I think is false. The idea is that markets actually reflect reality and so you should really rely on the markets. And in fact, with all these new instruments it’s very difficult to calculate risk.”
I think that Soros probably is right in that the Fed needs to kick up its rate cuts, but before the decision, the expectation for a ½ point was running at only 38%, so what explains the big sell-off? Let’s back up and remember where we came from three weeks ago. On November 26th, stocks dropped to a level that qualified for a classic 10% correction from the top. Since that time, stocks started to rally as a couple of Fed officials, including the chairman himself, put December rate cuts back on the table. Once the decision was official, some investors worried that they had gotten a little ahead of themselves.
What now? Investors will likely continue to vacillate between excitement over future rate cuts (after yesterday’s decision, futures markets were pricing in a 94% probability of a ¼ point cut at the January meeting) and panic over a looming recession. The result will likely fall somewhere between the two, but getting there is sure going to be bumpy.
Tuesday, December 11, 2007
Holiday Cheer Part 2
Last week we began to identify ways to save or make money before the year-end. We started with taxable portfolio maneuvers that might help minimize capital gains distributions and that could help you take advantage of losing positions that are hanging around. Today it’s time to use Uncle Sam to help with retirement planning.
You have probably read all of the horrible statistics about how woefully underfunded retirement accounts are. While that is true, I am starting to see quite a bit of progress. Now when people call the radio show or come into our offices, I notice that they usually start by talking about their retirement accounts. That’s a good thing because the statistics about how long we will be retired are staggering. According to the National Center for Health Statistics, the average American who reaches 65 can expect to live nearly 19 more years, which is up about 35% since 1950! But the really wild thing to consider is that 19 years is an average, which means that many of us will live far longer.
Clearly longevity is the major issue facing folks who are planning for retirement, which means that contributing to your retirement account is becoming not just “something you ought to do” but an absolute necessity. Because many of the rules around retirement contributions are based on the calendar, you may only have these few weeks to get going—so let’s start with the basics.
You should try to contribute the maximum to your employer-sponsored plans. Some employers will allow you to alter your contribution in order to max-out by year-end. The limits for 2007 are as follows;
-401(k)/403(b)/457: $15,500 (if you are over age 50, you can make a $5,000 catch-up contribution)
-SIMPLE-IRA: $10,500 (if you are over age 50, you can make a $2,500 catch-up contribution)
Profit Sharing/Money Purchase/Keogh: $45,000
-IRA/Roth IRA: $4,000 (if you are over age 50, you can make a $1,000 catch-up contribution).
Remember, you do not need to make the IRA or Roth contribution until tax-filing time, but you might as well do it now, while you are thinking about it!
If you are self-employed and do not yet have a retirement plan, you need to establish one by December 31, 2007. Note: unlike IRA’s, these plans must be established by calendar year-end, not by tax filing deadline. Finally, if you are going to get a raise for 2008 and are not yet maxing out your plan, you should immediately change your contribution level.
With all of this found money, next week, we’re going to discuss how to give it away—a little more in keeping with the holiday spirit!
You have probably read all of the horrible statistics about how woefully underfunded retirement accounts are. While that is true, I am starting to see quite a bit of progress. Now when people call the radio show or come into our offices, I notice that they usually start by talking about their retirement accounts. That’s a good thing because the statistics about how long we will be retired are staggering. According to the National Center for Health Statistics, the average American who reaches 65 can expect to live nearly 19 more years, which is up about 35% since 1950! But the really wild thing to consider is that 19 years is an average, which means that many of us will live far longer.
Clearly longevity is the major issue facing folks who are planning for retirement, which means that contributing to your retirement account is becoming not just “something you ought to do” but an absolute necessity. Because many of the rules around retirement contributions are based on the calendar, you may only have these few weeks to get going—so let’s start with the basics.
You should try to contribute the maximum to your employer-sponsored plans. Some employers will allow you to alter your contribution in order to max-out by year-end. The limits for 2007 are as follows;
-401(k)/403(b)/457: $15,500 (if you are over age 50, you can make a $5,000 catch-up contribution)
-SIMPLE-IRA: $10,500 (if you are over age 50, you can make a $2,500 catch-up contribution)
Profit Sharing/Money Purchase/Keogh: $45,000
-IRA/Roth IRA: $4,000 (if you are over age 50, you can make a $1,000 catch-up contribution).
Remember, you do not need to make the IRA or Roth contribution until tax-filing time, but you might as well do it now, while you are thinking about it!
If you are self-employed and do not yet have a retirement plan, you need to establish one by December 31, 2007. Note: unlike IRA’s, these plans must be established by calendar year-end, not by tax filing deadline. Finally, if you are going to get a raise for 2008 and are not yet maxing out your plan, you should immediately change your contribution level.
With all of this found money, next week, we’re going to discuss how to give it away—a little more in keeping with the holiday spirit!
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