March 5, 2010 The New York Times ran a must-read article this week on the important differences between brokers and investment advisors. As I have written in the past, the difference between brokers, or self-labeled “financial advisors” who work for big brokerage houses, and registered investment advisors is stark. Brokers are held to a suitability standard whereas investment advisors are held to a fiduciary standard. The suitability standard is the great enabler of Wall Street. Securities distribution is the primary motivation of the brokerage industry. Brokers don’t get paid for … [Read more...]
The Recovery’s Winners
The Young Research Affluence Index has outperformed the Young Research Discount Goods Index by 100% since the economic recovery began. Our chart indicates that the economic recovery has still not reached low and middle income consumers. Quite shocking considering the populist majorities in both branches of government. … [Read more...]
A Must Own Asset Class
If the last decade has taught investors anything, it is that taking greater risk does not always result in greater return. An investor who put his entire portfolio in a basket of developed-world equity markets at year-end 1999 would have earned all of 2.34% over 10 years. And to earn that 2%, this investor would have endured two of the worst bear markets in history, with peak-to-trough declines of 45% and 53%. What's more, an investment in conservative full-faith-and-credit-pledge short-term U.S. Treasuries was up 55% over the last 10 years. The 2000s were without a doubt a dismal decade … [Read more...]
Avoid These Securities
February 26, 2010 One sector of the financial markets that is greatly underpricing risk today is municipal bonds. State and local governments are facing extraordinary budget pressure. The recession has eviscerated tax revenues, but spending requirements have not dropped. During the last fiscal year, some state and local governments relied on federal stimulus money to balance their budgets. But federal handouts cannot be relied upon indefinitely. The federal government has funding problems of its own. And tax increases aren’t always an option. To deal with extraordinary budget pressure, … [Read more...]
The Real POP in Investment Returns
Putnam Investments’ full-page colored advertisement in this week’s WSJ was hard to miss—the Putnam marketing team made sure of that. In the ad, they tout their suite of Absolute Return Funds, which seek to do well in any type of market environment, up or down. As is often the case, and certainly is here, if it sounds too good to be true, it is. The funds have outperformed their laughable benchmarks, but have failed every one of mine. It used to be a well-known fact at Proctor & Gamble that the smart people worked in engineering and the really smart ones worked in marketing. I’ve been … [Read more...]
Bad News for Small Business
In 2009, the number of problem banks increased nearly 200%. Problem banks now hold $400 billion in bank assets. Most of these problem institutions are regional and community lenders. The same banks that dominate in small business and commercial real estate lending. A continued rise in problem banks is likely to hinder a recovery in these sectors of the economy. … [Read more...]
A Snapshot of the Economy
February 19, 2010The Conference Board Leading Economic Index (LEI) came out this week. The LEI increased 0.3% from December. Each month when the Conference Board releases the leading, coincident, and lagging indicators, my staff sends me an updated table of the numbers (see below). I use the table to spot changes in trend and momentum in the economy. I grade each indicator individually and as a group. This monthly exercise gives me a good snapshot of the health and strength of the economy. What are my indicators signaling this month? The leaders continue to increase, but momentum is losing … [Read more...]
The U-Shaped Recovery?
Historically, housing recoveries follow a V-shaped trajectory. Even with significant government support, the current housing recovery, appears to be taking more of a U-shaped path. A healthy skepticism on the pace of a housing recovery remains warranted. … [Read more...]
Commodities Demand
Did you know that China accounts for close to 40% of the consumption of aluminum, copper, lead, tin, zinc, and nickel? China is by far the most important consumer of industrial metals. China is also a large consumer of energy and agricultural commodities. If you want to know what the outlook for commodities demand looks like over the coming decade, look to China. If the Chinese economy is growing, it is safe to assume that demand for commodities is on the rise. In the fourth quarter, China’s GDP growth was over 10%. So commodities demand is likely on the rise, but what about supply? You can't … [Read more...]
A Grave Threat
February 12, 2010 Olivier Blanchard, the IMF’s top economist, is calling for a doubling or tripling in the rate of inflation. He wants central bankers to raise their inflation targets to 4%-6% from an average of 2% today. What would possess anyone to recommend more inflation? Mr. Blanchard thinks a higher inflation rate would allow for greater flexibility in times of financial crisis. You can’t make this stuff up. The beneficiaries of Mr. Blanchard’s inflation scheme would, of course, be spendthrift governments. The burden of government debt falls sharply in inflationary environments. … [Read more...]
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