Thursday, May 29, 2008

Vote Now: Gas Survey

Over the recent holiday weekend, millions of U.S. drivers fretted about the price of gasoline. There are two days left in the poll about gas. Take the survey now.

Where will Gas at the pump be on Aug 1st?

Found at the top left corner of the blog.

Wednesday, May 28, 2008

Phishing risk rises

Banks and brokerage firms continue to have problems with sophisticated phishing schemes targeting their customers. Many brokerage firms have released records on the amounts that they had to pay back to account holders who have been cleared out electronically. The numbers persistently grow at a staggering rate each year.

Recently a large international cybercrime ring was taken down. These crooks used the internet to facilitate the theft and misuse of credit and bank card numbers. Spam that sent account holders to fraudulent websites was the common starting point in clearing out the victims accounts.

Two recent articles discussed the situation. The Information week article provides a list of impacted institutions; if you have credit cards or accounts with these firms then you should be on alert. The SC Magazine article focuses on technical measures such as SPF, and DomainKeys which can be used by the industry to reduce the problem.

International Cybercrime Ring Busted

Hot or Not: Winning against the phishing assault

Tuesday, May 27, 2008

Dividends: Selecting the best instruments

In an environment where the market is tanking, dividends have returned to the mindset of many investors.

As outlined in earlier HingeFire material, the best place to find straight out dividend yield with some degree of safety is within Master Limited Partnerships (MLPs), Trust Preferred Securities (TruPS), and Royalty Trusts.

A number of recent articles point to Bond ETFs, REITS, common stocks with dividends, and bank stocks as a source of possible dividends. One recent article from Ben Stein pushes investors in these directions. This advice is faulty for many reasons; this is not the time to over-weight these instruments in your portfolio. There are better dividend yield opportunities with less risk.

Bond ETFs normally do not outperform actively managed bond mutual funds. In an environment where the credit risk of bonds is increasing, and spreads increasing while base interest rates are falling; simply bolding a basket of bonds in an index ETF is a recipe for under-performance.

The yields on REITs are dropping as well as their price. Shortly the payouts on many REITS will be on par with safe bank CDs. Investors in REITs are likely to suffer the continued double whammy of falling yields and an equity price drop.

As the economy further deteriorates, the dividends on many stocks will be cut. The most at risk are bank stocks; the earning results due to the subprime crisis have been dismal. Most banks have already cut their dividend payouts; giants like Bank of America (BAC) are likely to still cut their dividends by close to 50%. This would bring the yield to 3.5% rather than the cheery 7.1% gleefully outlined in the article.

From a risk versus yield perspective, the best situations in the market are Master Limited Partnerships (MLPs), Trust Preferred Securities (TruPS), and Royalty Trusts. Investors in search of yield should focus on these instruments over the upcoming 24 months. As always, it is best to hold these types of dividend securities in a tax-free account such as an IRA. Keep in mind that dividend-bearing securities are simply one component of a properly diversified portfolio.

Get Coupons on the Web

With the prices of food and basic necessities rising weekly, the importance of saving money has risen to a new urgency in many families. Coupons – a normally ignored component of Sunday’s newspaper have now become an important part of the family budget.

Even so last year only 1% of coupons were redeemed. This rate is expected to rise this year. One issue with the low redemption rate is that many paper coupons are for articles not normally purchased by families. One bit of good news for consumers is that manufacturers are offering more coupons this year for commonly purchased items, even as they raise prices.

One resource for coupons is the web; there are a number of free and paid sites that offer coupons. It is no longer necessary to limit your search to the Sunday paper. A recent Wall Street Journal online article provides an overview of the “The Best Sites for Coupon Clipping”.

Thursday, May 22, 2008

Countrywide Chairman tells Homeowners they are Disgusting

Countrywide Financial Corp. Chairman Angelo Mozilo reaped $132 million as the mortgage lender got hammered in 2007. It appears this wad of cash has not made him appreciative of his customers; he views homeowners as “disgusting”.

Apparently Mozilo does not know the difference between the reply and forward buttons, setting the stage to send an absurd email response to a homeowner. It does reveal the contempt that the executive holds for homeowners seeking help with unaffordable adjustable-rate mortgages, loans that were pressed on them due to Countrywide’s inappropriate business practices.

As outlined by the government and consumer groups, the mortgage giant has a history of focusing on loans that generate the maximum fees even if they were totally unsuitable for the homeowners, while not properly explaining the terms of the loan. Furthermore many loan agents, as shown in this case once again, made “promises” about refinancing and other loan attributes that would defined in most courts as fraud.

Despite these mortgage companies claiming in Washington that they are taking steps to alleviate the pain of homeowners; the email exchange underlines the stark reality that the mortgage giants actually could give less than two hoots about these mortgage-holders.

Mozilo on distressed borrower's appeal for help: "disgusting"

Countrywide Financial Chairman Angelo Mozilo's e-mail sets off a furor

Wednesday, May 21, 2008

Nuveen finds a way out

Investment firms such as Nuveen that offer leveraged Muni Closed End Funds have been suffering an inordinate amount of stress over the past few months. The auctions of preferred securities issued by the companys' municipal closed-end funds continues to fail; leaving most of the firms in a situation where they need to either forced to redeem their preferreds or make other financing arrangements.

Earlier HingeFire articles outlined the issues in the market (see Auction Rate Stress Continues: Muni Bond Funds Impacted and Revisiting: Muni Bond Fund shorts).

Nuveen has obtained a commitment of up to $1.75 Billion to refinance the struggling auction rate preferred securities. This enables the company issue variable-rate demand-preferred instruments to replace the current ARPS. This effectively alleviates the pain be endured by Nuveen and places the firm’s Closed End Fund (CEF) products back into a liquid situation. The company has also taken steps to remarket the new shares with another financial firm.

These measures are excellent news for the holders of the Nuveen muni CEFs – most whom are common investors looking for tax-free income with minimal risk.

Nuveen gets infusion for auction rate securities

Tuesday, May 20, 2008

Your Tax Dollars at work: Housing Bailout

Want to know where $1.7 Billion of your tax dollars are going? Thanks to Congress your money is going directly to bail out speculators and irresponsible lenders.

The Senate leaders moved closer today to passing a bill that would provide $300 billion in direct mortgages to homeowners; requiring a reduction in principal and cost basis so these homeowners will not be under-water. The majority of these homeowners would never have received loans under traditional lending criteria. Many will still go into foreclosure eventually even under a government financing program, leaving taxpayers holding the bag.

This Senate bill will be merged with an earlier bill passed in the House, Congressional analysts have estimated the House version of the bill would cost taxpayers $1.7 billion. It is an open question of how much the Senate measure would tack on to this.

Despite the twisting of words from politicians that Fannie Mae and Freddie Mac are actually “funding” the mortgage measure, the reality is that every last dime of this measure is backed by your tax dollars. So much for moral hazard, the only lesson learned in the housing fiasco will be that it pays to speculate in the housing market for both gamblers and financial institutions. Washington will always be happy to bail you out of your mistakes.

Dodd, Shelby Agree on $300 Billion Mortgage-Insurance Measure

Venezuela: The slide continues

Hugo Chavez is still running amok in Venezuela. Despite voters rejecting a referendum giving the president sweeping power over the economy a mere few months ago, Chavez has taken steps over the past weeks to seize more businesses.

Chavez is driving the take-over of Sidor, a large, Argentine-controlled steel maker; cement companies owned by Mexican, Swiss and French investors; more than 30 sugar plantations; a large dairy products company; and a sprawling cattle estate on the southern plains…and these firms are just a component of overall list.

As expected these moves have spooked foreign investors and infuriated neighboring countries (whose public companies own many of the assets). The compensation offered by the Venezuelan for these companies is under 20 cents on the dollar. Foreign investment in Venezuela has hit record lows, with only $500 million investing in 2007 as Chavez nationalized electric, telephone, and oil companies.

All this socialist exploitation has tanked the Venezuelan economy, which is now beset with foot shortages, building supply problems, and a lack of many other staples. At a time where many other South American economies are booming, the Venezuelan bolivar currency is in free-fall with the black-market rate climbing over 20% in the past couple of months to 3.4 per dollar. The government moves to prop up the currency have failed miserably. One can only expect that the name-sake of the currency, Simon Bolivar would have been shocked at government policies that are so destructive to the people, if he was alive today.

Only high oil prices are propping up the centralized economy of the nation. Of course this is only a short-term situation because oil production is drastically declining at the oil wells seized by the government. The entire government house of cards will fold as oil prices or production fall, further illuminating the reality of why centralized economies do not work. It is one thing to have social programs in countries that aid the poor, homeless, aged, and disadvantaged; it is another thing entirely to seize companies that your entire productive economy is built upon.

Looking ahead one can only expect further unrest and economic turmoil in Venezuela. This situation is unfortunate since the country is rich in natural resources and formerly endowed with a rising economy prior Mr. Chavez’s administration.

Chávez Seizes Greater Economic Power

Thursday, May 15, 2008

Four Out of Five Wrong

Morningstar touts its own services in a recent How to Find Bargains in Today's Market that outlines “5 Ways to Spot Cheap Securities”. So what is the problem? Four of the five points are absolutely wrong and will only help investors under-perform the market. Let’s take a closer look at the five assertions and why investors should never “follow these points to the letter”.

1) Home in on cheap stocks

“Find those companies that are trading at well below the prices that our equity analyst team thinks they're worth.” The majority of these companies are trading at a discount for a reason; the firms are suffering from industry challenges, mismanagement, or other significant headwinds. Statistically 70% of these companies under-perform over the upcoming 2 and 5 year periods. Just because a company trades at a discount to theoretical value does not mean it is a good investment, in fact many are absolutely horrible.

2) Identify index mutual funds and exchange-traded funds that hold cheap stocks

Remember how well this strategy worked from 1997 to 2001. There are many other time periods where “value” under-performed. Many times an index mutual fund or ETF holding stocks that are selected simply because of their cheap valuation are merely holding a basket of market under-performers. While it is important to consider low expenses in your fund selection, any focus on “cheap” underlying stocks over the potential of the holdings is misguided.

To the second sub-point, many times ETFs and mutual funds trade at a discount to their associated index. Many times this situation continues for years. Knowledgeable investors look for changes from the historical statistical mean of the standard discount as a signal to buy or sell; they do not simply purchase an ETF or fund because it is selling at a discount.

3) Check out newly reopened funds

Usually the reason that funds are re-opened is because they have horribly under-performed and thousands of investors have fled with their cash. Usually these funds are also sizeable meaning it will be hard to correct their course moving forward.

The concept that investors should hunt for reopened funds is dreadful advice. Generally only actively managed funds which do not have a large amount of assets outperform the market. Investors would be better searching for funds with good managers that are not large in size (in terms of total assets).

4) Investigate target-date funds

Target-date funds are designed to allow large mutual fund families to double dip. First they get fees from the under-lying fund and then from the “target-date” fund. Multiple write-ups have called these funds a “pyramid of fees” that are bad for investors.

Investors are better off to understand basic portfolio diversification, and select a set of low-expense funds that meet their needs. Utilizing target-date funds is just asking to be socked with higher expenses.

5) Consider tax-managed funds

There is some benefit to tax-managed funds so this point is not entirely off-course. However many would argue that it is more important to focus on performance over tax-savings in your investing; coupled with the reality that many holdings are kept in tax-free accounts such as 401Ks and IRAs.


Morningstar comes across as trying to create an article that is merely designed to tout their service offerings. Not that the information services that Morningstar provides are bad, I use them myself for both stock and mutual fund research. Unfortunately most of this pitch is laced with advice that should not be heeded by investors. This serves as a typical example that many articles in the financial press are just simply veiled marketing ploys for services or financial products, and the advice given is not always in your best interest. As always, buyer beware.

Social Security: Some basic points

While my teenagers may think that I am ancient. I am still more than 20 years away from retirement age. Despite this I still get queries from people close to retirement about social security benefits, so I have an active interest in this government program.

Social Security is a “pay-as-you-go” system. Money paid in by current taxpayers is spent to pay benefits to current retirees. The system is not a “trust fund” in which portions of your paycheck goes earning interest until you retire and are ready to withdraw the funds. This demonstrates why the Social Security system is under stress. As the number of baby boomers retire while at the same time the number of current workers drop, there will be less people paying into the system as a larger number make withdrawals. This, of course, is a recipe for disaster. If I ran a private retirement fund like this, the government would label it as a “pyramid scheme” and promptly toss me in prison. For some reason in the public sector, managing retirement funds in this manner appears to be acceptable.

While politicians in Washington often debate the matter, no concrete reform steps have been taken. Most other leading nations, including Britain and the “socialist” Scandinavian countries have privatized their social security systems. Workers manage their own funds, similar to a 401K, and select from an allowed list of bond and equity instuments offered by the administration.

This is the best path for the U.S., a complete and immediate conversion to a privatized system. Existing retires would have to be paid out via borrowing from the U.S Treasury each year, something the government is already fond of doing. The reality is this type of radical proposal would not make it through Washington and most retiree groups such as the AARP would oppose it. Or oppose it until they woke up one day and found no checks arriving as the current system flounders.

Investopedia touches on these subjects and some Social Security basics in a recent article that is worth reading - 10 Common Questions About Social Security.

Wednesday, May 14, 2008

What Stocks could potentially rise 100% in price?

Once in a while an article about picking stocks floats by that contains enough practical information to be useful – despite the rare occurrence of this type of event. Today’s news stream brought forward an article by BusinessWeek - Stocks: The Double-Your-Money Club

The article does touch on several truths which HingeFire has outlined in the past including:

  • The best opportunities are in small cap stocks for explosive growth. Purchasing mega-cap stocks will not enable your portfolio to quickly grow.
  • Simply shifting through stocks looking for “cheap” is like “catching a falling knife”. It is important to use technical analysis in conjunction with fundamental valuation to find winning candidates.
  • Looking for strong future revenue and earnings growth compared to current valuation is helpful. However relying on this form of bargain hunting can lead to failure when the expectations don’t play out, which is a very common scenario.

Tuesday, May 13, 2008

Recession Proof Cities: Raleigh makes the list

With over 40,000 people moving to the RTP area each year, the Raleigh area has made another list - America's Recession-Proof Cities. Charlotte (NC) also made the top 10 list, as well as many cities in Texas.

Surprising many, San Jose (CA) is also on the recession proof city list due to the strength of the Silicon Valley economy. However Forbes offered the following note of caution regarding San Jose.

And in the San Jose area, the median home sale price is over $830,000. That's 11% higher than it was in the fourth quarter of 2006, helping to land the area at No. 4 on our list. Problem is, that growth has since cooled, and it remains to be seen whether pricey homes coupled with a 5.3% unemployment rate will cause trouble for homeowners this year.

Monday, May 12, 2008

Screening to Win: The Value Trap

One of the issues with trading the “Value Trap” many traditional fundamental investors fall into. Many investors buy into a stock because it appears cheap, only to watch it decline in value. At the stock drops further it looks cheaper, and the investor attempts to average in and buy even more shares because it now looks even cheaper. “If you liked it at $30 then you are going to love it $20,” goes the old expression.

Many investors screen simply on valuation criteria attempting to find stocks that look “cheap”. If the P/E, P/B, and other factors look good compared to other companies in the same industry then the stock is “on sale”; which is an invitation to hit the “buy” button. Warren Buffet and others talk about value, and many small investors attempt to imitate their “style”. However most of the institutional big boys are normally selling their portfolio about the same time smaller valuation investors are looking to buy in.

The problem with most value driven purchases for individual investors is that 70% of them do not pan out; the bulk of these failures incur significant losses. Most investors do not mine gems in their fundamental searches, instead they are digging up the debris from the discard heap. Many of these stocks are cheap for a reason, the reality is that they are either declining industries, are poorly managed, or are facing business challenges. The stocks hyped in the financial press as value plays are often the worst examples. Despite screening for both forward and backward fundamental ratios; many times the underlying problems are not apparent to value investors.

What are these investors missing?

The primary attribute the investor is forgetting about is price action when screening the universe of stocks. Simply scanning for “cheap” leads to a pile of probable losers. There is normally a reason a stock is a “value play”; in the same way there is a justification of why a used Yugo costs less than a Mercedes.

Investors need to take a firm look at price action as part of their valuation analysis; this means having a compete understanding of charting, technical analysis, and relative strength. In the example above, any basic analysis of moving averages, relative strength of Citi compared to other financial stocks, or evaluation of the chart would have quickly revealed that Citi was doomed during this time period – despite an “appealing valuation” at multiple points.

In order to avoid the 70% of the stocks in the scrap heap, value investors need to screen for more than just fundamental factors as part of their overall evaluation of candidates. The Hingefire stock screener provides a tool that supports evaluation on multiple fundamental and technical criteria which helps put the market edge in the corner of investors.

Friday, May 9, 2008

Worried About Recession?

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Find the cheapest Gas Prices online

Gasoline prices are rising several cents each week - very much socking it to everyone who drives an automobile.

A number of resources have popped up online that enable you to find the cheapest gas prices in your community. A recent article in the Wall Street Journal online (Services Help Drivers Find Cheapest Gas) outlines some of the best resources.

Thursday, May 8, 2008

Quick Takes: Is the Financial Crunch over? More heads rolling

A slew of articles have appeared recently that the housing-driven credit crunch is over. Merrill Lynch’s Thain is the latest executive to make this claim. Are the financials about to recover or are these characters simply “talking their book” – to state it in Wall Street terms? Thain states that the upcoming losses at banks will be reduced moving forward even though the consumer will exert a drag on the U.S. economy over the next 6-12 months.

Coupled with the Wall Street Journal headline “The Housing Crisis Is Over” – it provides investors with hope that the worst may be in the rear view mirror. Housing may have hit the bottom according to some analysts. “A bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.”

Of course there are pundits who take the other side of the coin, presenting an outlook for housing that shows another 20-30% drop in prices nationwide. This will be coupled with a drop in consumer spending that drives the next wave of the credit crunch further causing chaos at the banks.

Most likely the reality over the next couple years will be situated between the two extremes of rosy forecasts and dismal down-siders. Despite the recent recovery of financial stocks, most investors do not feel confident buying into this sector – most believing that the bounce-back is temporary.

Heads Rolling

The boxes continue to be dropped off in corner offices. The president of bond-rating firm, Moodys, has been sent packing. Brian Clarkson, is viewed as a casualty in the complicity of credit-rating firms in the sub-prime meltdown.

“The resignation comes amid heightened scrutiny by investors, regulators and lawmakers into the role of Moody's and its rivals in the meltdown of complex mortgage-related securities, many of which received top triple-A ratings from the credit raters, only to be downgraded sharply in the past 12 months when the housing downturn worsened.”

Tuesday, May 6, 2008

Quote of the Week

"Capitalism without failure is like Christianity without hell" – Warren Buffett

Once again Warren and Charles provided some zingers at their annual meeting news conference. One theme this year focused on the irresponsibility of banks in the continuing credit crunch. From their perspective, “the pain many financial institutions are feeling because of the credit crunch is well deserved”.

The chairman and vice chairman of Berkshire Hathaway Inc. said Sunday that the financial companies that engineered sub-prime mortgages and the investment funds that bought securities backed by those mortgages didn't deserve much sympathy for their subsequent losses.

The two billionaires emphasized that investment banks should not be rescued by the government. Failure and its associated lessons are an important part of capitalism. Continuing to rescue institutions that are “too large to fail” sends the wrong message about risky business behavior in the financial sector.

Buffett did state that “the Federal Reserve's bailout of Bear Stearns Cos. probably prevented a crisis among investment banks”.

Another section of the commentary focused on the “R” word. Buffett outlined that the country is obviously in a recession even if the conditions do not meet the classical definition of two quarters of negative growth.

Conflicts entangle Auction Rate Market

“Safe as cash,” proclaimed the brokers as they sold billions of auction rate securities to investors. Now the market is locked up. Both investors and issuers have taken a big hit.

Have the investment bankers felt any pain? No! In fact they still make out like bandits even as the market refuses to thaw. Any way you slice it, the end game in the auction rate market for Wall Street firms is “heads I win, tails you lose.”

The entire market is rife with conflicts of interest. First the investment bankers marketed the securities as safe as cash in their own internal auction market and refuse to step in to keep the market liquid as over 70% of the weekly auctions fail. The Wall Street firms are still paid for their “services”, even though no securities are sold. Furthermore the bankers make big money when issuers directly redeem the auction rate notes.

To pour more pain on the fire, the investment bankers for the most part refuse to allow the notes to trade on a secondary market and demand that the auction rate securities be marked to face value. The places issuers in a situation where they can not buy back their own securities at a discount, at a time no investors will purchase them for face value. Of course, a wholesale discounted market would force the Wall Street firms to mark down similar securities on their own books; leading to billions more in losses.

At some point, local and state governments are going to demand action to fix this situation, and refuse to be held hostage by the Wall Street firms. The first step is to demand a transparent auction market where these securities can be sold for a discount or premium from face value. This is the only way to unfreeze the auction rate market and restore investor confidence.

Monday, May 5, 2008

Brokers to reduce Technology Spending

According to market researcher Celent, brokerage firms plan to cut spending on technology. The spending on technology will be reduced to an annual growth rate of merely 1.3% from 2008 to 2011, compared to a growth rate of 8.5% from 2004 to 2007.

Many new projects are going to be scrapped, and existing projects placed on hold. One area where spending will still remain strong is security as the financial industry struggles to stay ahead of online attacks.

This reduction in technology spending in the brokerage industry is reflective of the overall turmoil in the financial sector. More importantly it does not spell good news for technology providers. This dims the outlook for firms providing network equipment such as Cisco, as well as companies like Sun, HP, and Dell that provide workstations to the financial industry.

CSCO: Rising Expectations

Cisco stock has risen over the past days in expectation of the upcoming earnings announcement on Tuesday (May 6th). CSCO has a habit of rising into the quarterly report then sinking in after-hours trading during the middle of the call when forward guidance is provided. One can only hope that in midst of a fairly dismal earnings season that the guidance provided by CEO John Chambers outlines an expected rebound in U.S. IT spending for the remainder of 2008. Otherwise history may once again repeat itself.

Cisco is expected to report earnings of 36 cents on revenue of $9.74 billion, compared with 34 cents a share on revenue of $8.9 billion for the year-earlier period. Guidance has been provided for a 10% growth in revenue for the quarter in an uncertain macro environment. Analysts will look to the company’s comments as a barometer on the tech industry. [note: corrected]

CSCO stock has been showing strength over the past few weeks. Any type of quantitative analysis now shows that the probability of the stock going to $30 is greater than sinking to $20. This is positive news for Cisco bulls. However many are left wondering if the current price action is reflective of the traditional pre-earnings rise or if the stock is building a base for significant increases over the coming year.

The charts of CSCO provided below reflect the support floor at $22.80, and improving technicals. The stock has risen above its 50 day moving average and is approaching the 200 day moving average with increasing volume over the past days. RSI has increased from under 30 in mid-January to nearly 70 today reflecting the relative strength of the stock. The MACD indicator is above both the zero line and signal line, and appears bullish as the gap above the signal line is accelerating. Chaikin Money Flow (CMF) has turned positive as more money as flowed into CSCO stock over the past few weeks.

Of course, the quarterly earning report at Cisco always tends to throw a wrench into the technical evaluation of CSCO stock.

Fundamentally Cisco is still a cash generation machine. However institutional investors want to see the cash put to work in the form of large sized acquisitions or a dividend. Don’t hold your breath waiting for a dividend, but further sizable acquisitions that drive growth are likely given the history of the company. Investors hope for some meaningful insight about the company’s growth plans.

Investors are looking for something new to spark their enthusiasm for Cisco stock, otherwise most will simply hold their existing shares while listening to CNBC commentators muttering the now traditional quote, “Love the company, hate the stock” – and praying that the next quarter will bring some new magic.

Disclosure: Author holds CSCO long.

Saturday, May 3, 2008

A proper stand: Canada will not bail out Investment Banks

The governor of the Bank of Canada says he will take a tough stand with financial institutions that wind up near bankruptcy because of poor decisions.

Maybe it is time that the United States adopted this policy. Mark Carney says the central bank won't bail out Canadian financial institutions like the U.S. government did when the Bear Stearns brokerage, one of the giants of Wall Street, ran afoul of the subprime mortgage mess.

The absurdity of the U.S. Federal Reserve bailing out Bear Stearns simply to avoid a short term financial panic in the credit market is becoming more apparent as further details are being revealed about the situation. The action will only drive more bail-out calls. It teaches a lesson to Wall Street that firms can privatize the gains, and socialize the losses. There is no reason to adopt any type of reasonable risk control if the government will be available to bail out the investment banks every time the bad decisions come home to roost. This will only drive the investment banks to maximize revenue by taking more risk.

The most current variant of the Fed’s flawed policy is opening the discount window to the investment banks in the past few weeks; in the past this lending facility was reserved for commercial banks. The Wall Street banks have been hitting up window for over $38 billion per day far more than all the commercial banks in the U.S. combined. To think that some congressmen squawked and demanded an investigation when Countrywide Financial was provided with $50 billion over several months; these legislators are strangely silent on Wall Street hitting up the Fed for nearly the same amount each day.

Even more shocking is what the Wall Street is doing with the borrowed money. The intent of the Fed action is to inject liquidity into the system in order to ease the credit markets. The Investment Banks have been happily utilizing the low cost Federal loans as capital to fund large scale gambling. The major Wall Street institutions have used the Fed cash to implement international interest-rate “carry trades” with the intent of squeezing profit out of the market. This naturally will lead to hefty bonuses for the Wall Street staff; assuming the positions don’t implode over the coming months. No concern is given to loosening the stranglehold of tightening U.S. loan conditions or unwinding the derivatives that sparked the credit crisis.

If Wall Street is not using the discount window cash for its intended purpose of easing the credit markets then the spigot should firmly be shut off. The Bank of Canada has the right mind-set when it comes to dealing with investment banks – these risk-driven firms should be responsible for their own calamities.

Friday, May 2, 2008

Investools hit with SEC inquiry

Most people regularly see Investools commercials on television parading a string of allegedly successful investors across the tube singing praises of how they made globs of money from the program. These commercials seem to magically appear on every cable channel right before the company sponsors one of its sessions at a local hotel.

In a regulatory filing, the company said it was cooperating with an "informal inquiry" by the Securities and Exchange Commission. The regulators are looking at "representations by certain presenters in certain portions of their presentations at some of the company's seminars," the filing said.

The announcement of the SEC inquiry was made at the same time as an earnings miss. Shares of Investools (SWIM) fell sharply to below $9 on the news as numerous analysts downgraded the stock.

Investools combined with the brokerage ThinkorSwim in February 2007. The company was not profitable for the 10 years prior this integration (except in 1999). Since the combination the company has been profitable during 2007. In the new model, the company educates people at its seminars and then funnels them over to the online brokerage to set up new accounts. Certainly this is an improvement in business model.

You also have to give credit to Investools for its marketing muscle. The company’s logo and advertising is pervasive on the web, in print, and on the airwaves.

The concern of most detractors is if there is anything beneficial behind the hype. Many of the resources pushed as the “Investools method” can easily be found for free on the web. A number of websites including MSN Money, Yahoo, and HingeFire provide outstanding fundamental and technical analytical software for free that enables investors to successfully put the market edge in their corner.

According to David Phillips at 10Q Detective the problems with Investools includes using independent contractors who aren't licensed advisors, being an unaccredited educational institution, and providing coaches with less than 10 years investing experience. He also sites cite numerous accounting red flags in a 10Q Detective blog post in December. According to 10Q Detective, Investools is a Seminar Selling company, with no magic under the hood.

A recent summary states that it is Too Late to Cry “Wolf” at Investools. Only time will tell the end result of the SEC inquiry. Investools may need to reform its seminar tactics, which will break the revenue model of the company. Certainly the stock price is not likely to climb significantly until the situation is resolved.

I regularly urge investors to read and learn about investing on their own. There is a lot of high-priced snake oil promoted in the financial industry. No magic system with green and red arrows is going to suddenly make an investor rich, only hard work and a deep personal understanding of how the market operates will enable you to excel.

Most investors are best off focusing on the long term using low-cost mutual funds & ETFs; only active investors with profound grasp about the dynamics of the market beat the indexes over the long term. These active investors did not obtain their edge by attending high-cost seminars.

Thursday, May 1, 2008

New Survey: Gas at the Pump

A new survey is out - Where will regular-grade Gas at the pump be on August 1st? Will the recent price increases keep accelerating, or will the gas prices drop during the peak driving season. Make your voice heard - Take the new survey at the top left of the blog.

The recent survey revealed that 70% of participants expected gold to be priced over $900 on July 1st - despite the current price being only $850. It appears that the investment community is bullish on gold.

New Stock Trading Contest: Join Now

The new Wall Street Survivor stock trading contest starts today! Join now for a shot at winning $50,000. Entering is FREE!

The WSS contest is an excellent way of learning to trade the market. Challenge your friends in the rankings. See who is the top investor!

Play to Win $50,000 - Fantasy Stock Trading Game