Crowd Funding vs. Fat Cats

We regularly get questions from people wanting to invest in “hot” new companies. Lately all the media buzz about a looming public offering of shares from Facebook has more people than ever wondering how they can get in on the action.

The answer usually is: they can’t.

Think about it: people are interested because they expect that an investment in something like Facebook could make them some quick cash, maybe a lot of it, and there’s a good chance they could be right.  So ask yourself this – would the big Wall Street underwriters who bring such firms to market really let the average investor make some easy money, or would they share the bounty with their favored fat cats? Remember who we’re talking about. These are many of the same firms who brought us the financial crisis, took huge bailouts, then paid millions in bonuses to retain their “best” people. They don’t exist for the average investor.

That’s where “crowd funding” comes in. The theory is that small startups can go to the public – the average investor – and get investment capital to start and grow businesses.  NPR’s Morning Edition did a story about crowd funding this week.  Sounds like a fine idea, but lurking behind it s the ever-present specter of securities fraud. Stock scammers are not new, and a hallmark of their crooked trade is to prey on the unwary, often in modest amounts. It’s not hard to imagine a website touting plausible-sounding “up-and-coming” companies and encouraging the unwary to make a small investment.  Plenty of people might “invest” $5, $100, $1000 hoping for a long-shot win. After all, people throw away money on lottery tickets every day. Experience suggests that such sites would pop up, collect money, and disappear, leaving investors with nothing and regulators hunting a thin trail.

Crowd funding sounds like a good idea, but without adequate safeguards for the investing public, it won’t be a path to Fat Cat status.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

$1,600,000,000 (that’s billion with a ‘b’)!!!

Oh, it’s still missing!?  The $1.6 billion dollars that “vaporized” from MF Global!?  Let me refresh everyone’s memory as, apparently, a fairly significant “vaporization of capital” warrants only brief news coverage because we have much more urgent things to cover like “The Situation,” whoever that is,  heading to rehab.  MF Global mixed its clients’ money with its own and, now that MF Global is in bankruptcy, a bunch of that client money has disappeared.  Important and newsworthy idea?  Of course it… wait, nevermind, the Kardashians just came on.

So now what is proposed is a new “Corzine Rule.”   Mr. Corzine, the former governor of New Jersey, former Goldman Sachs head and more terrifying,  potential FOMC Chairman, was the president of MF Global when said funds were “vaporized”.  The proposal would make it mandatory for a futures firm’s principal to sign off on any money moved from client  segregated funds if it is more than 25% of the firms excess segregated funds. Now, call me crazy here, but I think that the first person to approve the funds being moved should be the client.  In  the MF Global case this didn’t happen.  I am also of the understanding that at a future’s fund, much like at a brokerage firm, comingling client funds and firm funds is illegal!  So, in the case of MF Global, what the firm did was already illegal?  But we’re considering a new law to make it doubly illegal!? Really??

Let me get this straight.  Jon Corzine is still not in jail nor is he charged with anything, the $1.6 billion is nowhere to be found and we are proposing a new rule which at its core addresses something that is already illegal.  Wow.  Anyone think a new law enforced as weakly as the old laws will change anything!?

Is it any wonder that average people look at what is going on in the financial industry and just shake their heads in disbelief?  It’s my industry and that’s precisely what I have been doing for 4 years now.  Where has the idea of client service gone?  Where has the idea gone that our single purpose as professional financial advisors is to serve our clients?   Actually enforcing the laws we have would go a long way toward pushing people like Corzine, whose self-interest trumped his committment to his clients, out of the business.

We don’t need a new law; we need to return to the idea that we work for our clients. 

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Doug Hendee, CFP^®

Related articles

• MF Global Workers Expected to Be Called to Testify Before Congress (dealbook.nytimes.com)
• Jon Corzine Sued by Farmers over Missing Millions (blippitt.com)
• Execs at bankrupt MF Global may get bonuses (bottomline.msnbc.msn.com)

Political Risk: United States

As investors, we usually think of political risk relative to international investing – e.g. will Brazil honor contracts or will China steal our technology?  But there are more dimensions to political risk these days. 

Today, House Republicans released their 2013 budget.  Now, I don’t know what Vegas would say, but I’m confident that the chances of the budget becoming law are akin to flying pigs.  However, this budget proposal does remind me of the political battle that is likely to take place later on this year. 

If you think the gridlock over the payroll tax extension was frustrating, just wait until the much larger Bush tax cuts are about to expire again.  If you thought the Joint Select Committee on Deficit Reduction’s results were embarrassing, just wait until the harsh medicine of its failure is on our doorstep.  If you thought these debates were poisonous and only resulted in kicking the can down the road, just wait until we do it all again, all at once, during a Presidential election year.

In August of 2011 Standard & Poor’s downgraded the U.S. credit rating not because our national credit card was maxed out quite yet, but rather because of S&P’s lack of faith in our policymaker’s ability to constructively work together to find solutions for our long-term debt trajectory.   Whether or not that credit rating mattered is up for debate, but it’s hard to disagree with S&P’s conclusions about Congress. 

We could, and should, be leaders in the world with regard to fiscal responsibility in government, but that is unlikely with our current crop of representatives.  Now that the congressional pipeline is full of critical and controversial fiscal matters, it’s advisable to consider the political risk in our own country – something we’re neither used to nor likely to be happy about doing.

Brennan R. Redmond, CFA
Vice President
Brighton Securities

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Magic Numbers?

What happened to the “news” story that was Dow 13,000?  Over the last few weeks as US stock markets rose and the Dow Jones Industrial Average flirted with 13,000 stories filled the financial media.  Their content was a typically breathless “will it or won’t it” close above that magical mark. Experts opined on the “psychological importance” of this and other market measures.

And then what? US financial markets have been up for 7 straight trading days, the Dow is solidly over 13,000 (13,200 as I write this) and it’s not a topic anymore. Why not? My view: it was never a legitimate topic in the first place.

I started in the investment business when the Dow was at 1,000 and can remember when some people predicted that the Dow would reach 5,000, or 7,000, or even 10,000 – some day.  I also remember the “experts” who denounced those predictions as crazy, impossible fantasies.  Marks don’t move based on the level of some arbitrary index. Markets move, in the long run, based on dollars and cents: sales, earnings, dividends. The rest is noise. I’m bullish on the US economy, and I’m bullish on our stock market. Ignore the noise; enjoy the ride.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Related articles

• Did I Miss Something? (brightonsecurities.wordpress.com)

Cycles

Recently, my colleague Brennan published a post relating our current economic climate to that of the 1970’s.  This concept of a cyclical economy is something that has been studied in great detail for many years.  As Brennan posed, history never repeats itself exactly, but there are often many measurable similarities. I will refrain from discussing the statistics, historical and mathematical studies on cycles (believe me, there are thousands).

What I believe to be more important are the emotional effects on investors.  No matter how many economic crises we have, or periods of time where it is near almost impossible to lose money in the markets, we seldom consider anything but the present.  This is why it’s so important to have an evenhanded, unbiased plan for reaching your financial goals. When you’re down on your luck it seems as if things will never get better and when you’re flush you convince yourself that this will go on forever.  The same is true with investing, where mother market will always find a way to surprise you.

Sam DiNorma

 (This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

History Repeats (or at least rhymes)

Investors often use historical comparisons to help gauge expectations on their investments.  While this is a useful practice, history is full of time periods that have little in common with one another.  If we look at the returns of a balanced portfolio (60% stocks / 40% bonds) from the years 1900 through 2010, the inflation adjusted returns were roughly 4%.  However, there were long periods of booms and busts.  There were the post war booms in the 1920’s and 1950’s, as well as the deregulation / declining interest rate boom in the 1980’s and 1990’s.  On the other hand there were painfully long bust periods such as the war decades and the Great Depression.  My point is that some time periods were better than others.  So it helps to focus on the time periods during which the overall economic environment is similar to what we are experiencing today to get a better understanding of what we might expect.  Consider the following features of today’s economic environment:

• High misery index
• High unemployment
• Rising energy and commodity prices
• Low inflation adjusted yields on government bonds
• Rising government regulation and involvement in the economy
• Decelerating productivity growth

It was Mark Twain who famously said that “History does not repeat itself, but it does rhyme.”  And so it is true today as the points above were also uniquely prevalent during the 1970’s.  Unfortunately the 70’s were one of the long bust periods.  But there were investments that did relatively well.  So, when you are looking to the past to help inform your current decisions and expectations, pay extra special attention the 1970’s.  It may help you navigate today’s stormy seas.

Brennan R. Redmond, CFA
Vice President
Brighton Securities

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Did I Miss Something?

Apparently I did. Last week, while I was going about the business of business – analyzing & advising, mainly – the Dow Jones Industrial Average closed over 13,000 for the first time since before the financial crisis gripped the global economy back in early 2008. I was informed of the Dow crossing this “psychologically important level” by a radio broadcast in the evening.  That made me think: I’m up to my neck in the stock markets every day, have been for nearly 30 years, and hadn’t even noticed. 

Even when I finally did notice, my reaction was simply, “Great.” Since starting in the investment business when the Dow was around 1,000 I have seen many milestones reached.  In some cases, they’ve been reached again and again as the Dow would flirt with a level, over and back a few times before breaching it and moving to higher ground, in some cases permanently. But the fact that I didn’t know we were at Dow 13,000 isn’t the story. The fact is that the market doesn’t know what 13,000 means. Neither do individual stocks. It’s only a “psychologically important level” for people who consider it so, and those people are in the minority worldwide.

Long-term investors needn’t concern themselves with the level of an index like the Dow Jones Industrial or the S&P 500. Of genuine importance are the financial strength of your investments, prospects for growth, and let’s not forget: cash flow. Interest and dividends are tangible, meaningful results that come from investing your capital. An index is a good way to gauge the level of the broad market, but it’s easy to miss a market move. Cash flow is good way to enjoy life, and it’s hard to miss.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Apple As An Income Stock

Yesterday, Apple held its annual shareholder meeting. One of the hot topics discussed in this meeting was Apple’s massive, almost $100 billion, cash reserve. Chief Executive Officer Tim Cook reiterated that the tech giant is still exploring its options for putting this cash to work and that paying a regular dividend is not out of the question.

Apple hasn’t paid a dividend since 1995 when Steve Jobs returned to the company and transformed it into one of the largest companies in the world. Jobs was adamant about retaining profits rather than returning them to shareholders in the form of a cash dividend. Cook, however, is not opposed to the idea, though no decision has been made as of yet.

The implications of an Apple dividend are substantial. The change would attract private investors who typically accumulate shares in dividend paying companies. An even larger implication is the effect it would have on mutual fund managers. Most mutual fund managers operate under a stringent investment policy. While they may find Apple to be an attractive investment, they may not be allowed to hold it within their fund if, for instance, the fund’s goal is to invest in income generating stocks. The inclusion of a dividend could cause a very large amount of accumulation as certain fund managers might finally be able to put Apple on their allowable list.    

Sam DiNorma

 (This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

And This, My Friends, Sums Up The Disaster of a Solution in Greece

Investors presumably choose fixed-income strategies in an effort to help guarantee safety in exchange for upside gains.  If that safety is deemed arbitrary—if a central bank is able to subordinate other investors of that very same security—then that, my friends, is a default regardless of snazzy semantics or promises that it’s an isolated situation. You don’t need a law degree to understand this; you only need to have an unbiased lens.

The concern in the marketplace has never been Greece; it has been the ramifications of a Greek default on an interconnected maze of global derivatives tying together financial institutions that, until a few years ago, viewed sovereign debt as one of the safest investments in the world.  The underlying issue — and the fate of the free market world — boils down to two very simple, yet difficult questions: Who wrote the Credit Default Swap contracts, and what collateral/counter-party risk sits on the other side of that bet?

The answer, as it stands, is “I don’t know.” 

“Nobody does, and that’s the problem.” –Todd Harrison, Minyanvillle

It seems that the central banks around the globe do not understand the unintended consequences of the things they do or even more frightening …they don’t care

Doug Hendee
Vice-President

Related articles

• Todd Harrison: Is the European crisis over or just beginning? (marketwatch.com)

The Fed – Minutes From FOMC

Last week the Federal Open Market Committee, the part of The Fed that acts in investment markets to execute monetary policy, released the minutes of their most recent meeting. According to Bloomberg, the participants were divided on key issues. While the Fed noted improved economic data, they are in debate regarding the pace and sustainability of this economic recovery. Some members are open to expanding the balance sheet, which translates into another round of “Quantitative Easing”. In my opinion, this only serves to goose equity markets and may lead to widespread inflation later down the road.

This would put more pressure on the consumer and eventually would lead to a slowdown in economic growth. The Fed has stated and Bernanke repeated that they intend to keep interest rates near zero into the end of 2014 (rather than 2013). This means it will continue to be a challenge for our clients who are seeking stable sources of income.  With interest rates at historic lows, it is difficult to earn a meaningful yield without taking on an abundance of risk. This may be one of the Fed’s intention, as abnormally low yields in bonds and money market instruments force cash to flow into equities (stocks) in order to achieve the investor’s desired return. This is not to say that stock ownership is a bad idea, but simply that you can no longer earn 7% from a CD and, now, in order to seek that same return, you have to venture into riskier markets.

Sam DiNorma

 (This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).