Bob Carlson

November 25, 2014

Do Big-Name Brokers Need to Change?

Filed under: Investing — Bob @ 6:20 pm

Here’s an interesting post of a email that supposed was sent by a manager at MorganStanley to others at the firm, arguing for change in the way the firm’s brokers/financial advisors do business. I’m not convinced the email really was sent by an insider calling for a change of culture. But it does highlight the issues involved and states starkly what investors need to know before doing business with a big-name brokerage firm.

“Stop – having the research department represent the retail broker any where. They are in a different business than us. Even using the strategists and global committees are dangerous. They rightly represent the views of the shop and have a bias for influencing sales and trading volumes in an upward direction.  Take Merrill Lynch’s chief investment strategist Richard Bernstein’s May 2009 quote in the Atlantic monthly as an example of this bias: “Bernstein, the chief strategist, has actually been bearish for much of the past decade. Given his recent disposition toward market pessimism, I asked him why he didn’t tell Merrill’s clients to dump their equities seven months ago. “I said it as best as I could within reasonable professional standards,” he said. “I’m not going to yell ‘Sell, sell, sell!’ I’m not going to go out and be irresponsible.”}”. I vote for less professionalism here.”

“The message: indecipherable corporate speak equates to “reasonable professional standards”. Stop putting these analysts in front of retail clients. The clients deserve better.”

“Stop – seeing the real value of a brokerage arm as being a powerful distribution channel for product. The product distribution model is fraught with conflict of interests that we can not manage to the clients benefit. View it for what it is the advice is the value.”

Blogs and Stocks

Filed under: Investing — Bob @ 1:20 pm

Here’s an interesting academic paper. The authors studied blogs that discussed stocks over the period 2006-2011. Their conclusion is that the blogs have pluses and minuses for investors. The idea behind blogs is that the writers have incentives to process information better or find unique, better sources of information. The authors found evidence of that. But they also found evidence that competition among blogs gave bloggers incentives to be either unduly negative or extreme in their opinions.

We document that blog coverage is positively related to informed trading and negatively related to uninformed
liquidity trading. These results shed initial light on the possibility that blog coverage is correlated with informed rather than uninformed trading.


We find that the part of blog tone that is driven by competition does not have any predictive power in terms of future stock returns. By contrast, the part of blog tone that is unrelated to competition still exhibits significant predictive power for future returns, in terms of both tone difference and negative tone. These results suggest that competition, far from increasing the informativeness of blogs, raises the negative bias in blogs, which supports the information distortion hypothesis as opposed to the information enhancement hypothesis.

A Dark View of Europe

Filed under: Economy,Financial crisis — Bob @ 9:20 am

For some time, the biggest risk to the U.S. and global economies has been from Europe. Policymakers managed to halt the downward spiral in 2011 and 2012, but they haven’t generated anything close to the growth needed to restore employment to decent levels. Recent data indicate the continent is at risk of losing what growth it has and slide back into negative growth.

People became more optimistic recently after European Central Bank President Mario Draghi indicated the ECB would begin a QE-like program in coming months. But significant actions haven’t been taken, and there are those who doubt they will be, at least as long as Germany is part of the ECB. Here’s a very pessimistic report on the situation that’s probably very accurate. The political situation in Europe is very difficult. The most likely scenario is that Germany leaves the ECB or the weaker economies (Greece, Italy, and others) leave and establish their own monetary policies. And here’s a report of fresh German opposition to Draghi’s plans.

Although the Bundesbank has been careful not to close the door to QE, it is very hard to imagine the circumstances under which it would ever give its consent—and what makes the Bundesbank such a formidable opponent for Mr. Draghi isn’t the formal power that it possesses, which is limited, but the extent to which it shapes and reflects German public opinion.

By the same token, German officials have made it abundantly clear to me that if Mr. Draghi ever tries to buy government bonds, the ECB should be under no illusions that it will face multiple legal challenges from Germany and that the finance ministry will come under intense pressure to mount a challenge itself. If Mr. Draghi didn’t know it before, he must now realize that the political firestorm that would surround any decision to launch QE would be so destabilizing and do such damage to the ECB’s credibility that it would undermine whatever good he hoped to achieve.

November 24, 2014

Commercial Real Estate Update

Filed under: Economy — Bob @ 6:15 pm

Real estate investment trusts have been kind to our portfolios the last year or so. Commercial real estate doesn’t receive as much attention as residential real estate. Here’s a good overview of where things are. Overall, commercial real estate prices are above their pre-crash highs. But the recovery isn’t uniform. Certain types of properties still are well below their peaks. That’s why it’s important to navigate this market with professionals who know what they’re doing.

The rebounding real estate market isn’t treating all commercial property owners equally.

Properties like apartment buildings and downtown office buildings have recovered all the value they lost during the bust and then some. But other types of properties, like suburban office buildings, are still worth a lot less than they were before the crash.

That’s the conclusion of a Morgan Stanley analysis of commercial real estate prices as measured by the Moody’s/RCA CPPI, a closely followed index based on repeat sales.

The Late-Life Career Change

Filed under: Retirement - General — Bob @ 1:20 pm

It’s never too late to try to switch careers, according to this post. Actually, she says 107 is too late. The keys are that you have to be sold on the career change and you can’t rely on submitting resumes to get you a job. You have to go about it the right way.

Employers only pay recruiters to find candidates whose resumes match the job spec exactly. Your best channels will be networking and the direct approach, called the Whole Person Job Search.

How does that channel work?

You’ll write a Human-Voiced Resume that makes it clear not only how your therapy background meshes beautifully with the jobs you’re pursuing, but also makes clear why you want to get into Sales, or HR, or whatever you decide to focus on. Then you’ll write a Pain Letter, which is a bit like a cover letter but much more focused on the specific manager you’re writing to, and his or her pain — the reason to hire you.

The Fed’s Worst Week?

Filed under: Economy — Bob @ 1:08 pm

Several reports on how the Federal Reserve does business were made public in the last week or so, and they were so harsh they led to an announcement by the Fed that it would re-examine some of its long-established practices. Here’s a compilation of it all from The New York Times.

The Senate Banking Committee, meanwhile, heard testimony on Friday about the New York Fed and whether it was unduly influenced by the banks it is supposed to oversee — a phenomenon known as “regulatory capture.”

Senator Sherrod Brown, the Ohio Democrat who oversaw those hearings, said in an interview that he was concerned about regulatory capture at the Fed because it could imperil bank examiners’ ability to monitor the safety and soundness of major financial institutions. “It’s clear that the Fed historically has cared way more about monetary policy than they do about supervision,” Mr. Brown said. “That’s why we’re shining a light on what they’re doing and their inadequacies.”

Here Comes the Cadillac Tax on Employer Plans

Filed under: Health,Medical Insurance — Bob @ 12:08 pm

One of the last parts of the Affordable Care Act to be phased in is known generally as the “Cadillac tax.” The provision imposes a tax on employer-provided medical insurance plans that are considered to be too rich or generous. Such plans encourage overuse of medical care, pushing prices higher. When it kicks in, the tax is expected to affect a small percentage of plans, and those are thought to be mostly union-negotiated plans. But there are other aspects of the Cadillac tax to consider, according to this post. Give it a read.

To be sure, the Cadillac tax is aimed at the highest cost plans, but only initially. But as Gruber himself states (2:53 in this clip assembled by Jake Tapper): ”What that means is a tax that starts by only taxing about the top eight percent of health insurance plans, essentially amounts over the next 20 years to basically getting rid of the employer exclusion-provided health insurance. This was the only political way we were ever going to take on what is one of the worst public policies in America” (emphasis added). More concretely:

  • Tevi Troy and Mark Wilson estimate that “by 2031 the cost of the average family health-care plan is expected to hit the excise-tax threshold.”
  • But the adverse impact could play out much more rapidly than that 2031 figure might imply. Bradley Herring, a health economist at Johns Hopkins Bloomberg School of Public Health, estimates that as many as 75 percent of plans could be affected by the tax just in the next decade.
  • A recent Towers Watson survey of employers had an even more bleak forecast, with 82% of employers expecting to hit the Cadillac tax threshold by 2023.

November 21, 2014

Long-Term Effects of Severe Downturns

Filed under: Economy,Financial crisis — Bob @ 1:13 pm

There was a lot of debate in 2009 after some economists published research concluding that economic growth always is slower after a financial crisis and that it takes a long time for the economy to return to its old high. Some people disputed the data and conclusions. Now, the Federal Reserve has published new research concluding that indeed growth is much slower after a severe recession and that the economy isn’t capable of higher growth for some time. But the surprise conclusion is that perhaps the Fed shouldn’t keep interest rates low for a long time. It’s possible that inflation could spike up despite all the unused capacity if the Fed stimulates for a long time after the recovery begins.

Fed officials have held their short-term interest rate near zero for nearly six years, in part because they believe the difference between the economy’s output and its potential—the so-called output gap—is large, and should therefore hold down inflation pressures. But if the economy’s potential rate of growth is lower than they thought, that would mean the output gap is smaller than estimated and inflation price increases could start picking up sooner than expected. That would argue for raising interest rates sooner than currently envisioned.

Interpreting the Data

Filed under: Asset Allocation,Investing — Bob @ 9:20 am

I frequently remind people that they should examine the data before making investment and personal finance decisions. Don’t invest on rules of thumb or short cuts. But that’s not the end of the story. Data often says different things to different people. And the data often doesn’t tell a compelling story everyone can agree on. Here’s a good post listing guidelines for using and interpreting data.

It’s never going to be easy. Even if we had 5,000 years of data it still wouldn’t be a large enough sample size because investors would continue to make their own biased judgments of what that past data means to them. Every cycle is unique, so using historical market data works better as a way of defining risks, not as a way of knowing exactly what’s going to happen next.

November 20, 2014

Fading Capital Spending

Filed under: Economy,Investing — Bob @ 6:30 pm

One reason economic growth has been so slow in the post-2008 recovery is that businesses aren’t investing. They aren’t putting a lot of money into equipment and new employees. Instead, they’re using profits from their historic profit margins to eight buy back stock or pay dividends. Management isn’t comfortable about higher demand and isn’t going to invest in anticipation of demand. It’s also not stockpiling as much cash as many reports indicate. has all the details.

Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300 percent since March 2009. Now, with returns slowing, investors say executives risk snuffing out the bull market unless they start plowing money into their businesses.

“You can only go so far with financial engineering before you actually have to have a business with real growth,” Chris Bouffard, chief investment officer who oversees $9 billion at Mutual Fund Store in Overland Park, Kansas, said by phone on Oct. 2. “Companies have done about all that they can in terms of maximizing the ability to do those buybacks.”

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