HingeFire

Moving - See the new GregBoop blog

2010-08-28T19:42:00.005-04:00

I would like to thank my dedicated readers. I am moving my blog over to: http://gregboop.blogspot.com

The folks (about 1000) who have subscribed via email will continue to get the blog via email. Those who have subscribed via RSS will need to sign up for RSS at the new blog.

The Greg Boop blog will continue to cover your favorite financial information and throw in some engineering and operations topics.

Once again I thank everyone for their support as I transition away from HingeFire.

The Future of the Euro

2010-05-21T14:21:00.004-04:00

The fire and brimstone clouding the European sky is not the volcanic ash from Iceland but rather the bleak outlook for a unified currency. To put it mildly the Euro is doomed, it is just a just a question of how the entire scenario unfolds.

Currencies only work for a nation when their own central government has control over the money. A country using a currency while ceding control of the exchange mechanism simply makes the nation a victim of all the other entities using the notes. Germany and other northern European nations recently learned this harsh lesson. The Euro worked while all the economies across the continent were rising, but quickly imploded when a recession occurred. The southern European nations with poor financial controls that that have historically defaulted multiple times are now in a position to collectively drag down the entire collection of economies due to the common currency. Prior the Euro these countries would default and their individual currencies would be devalued.

It is true that the more people that use a currency then the stronger the value. Witness the strength of the deutschemark after the inclusion of East Germany. However a country must have sole control over their currency and not yield power to a central authority in order to be successful. I found that the Germans were very supportive of the merger of East and West Germany despite concerns over the poverty in the East at the time. Today, Germans are outright furious that the country is bailing out Greece and other nations. Most of the people on the street recognize what is going to happen next which is why they are lining up at banks to demand Euro notes with X’s in the serial numbers that are associated with Germany and not other countries.

While the entire situation can play out in multiple scenarios; there are two obvious ones. The first is that the Euro will divide into two segments, the stronger northern European nations with one version of the Euro and the southern European nations with a version of the Euro which is next to worthless. This explains why German citizens are lined up demanding “their national Euro notes”. It is likely that outside notes will soon be devalued.

The second possible scenario involves individual countries withdrawing from the Euro exchange mechanism and reinstituting their own national currencies. A good number of barriers and political negotiations will have to be overcome to allow this type of withdrawal. On the other hand people rioting in the streets generally has the tendency to make central union decision making to move with more haste.

Another likely scenario involving individual nations withdrawing from the Euro focuses on the central union giving countries with debt problems the boot and demanding that they withdraw from the Euro. As the size and scope of the debt issues become more apparent there will be a greater howl across the continent for the offending nations to withdraw.

In the long term where will this leave the Euro? It would be best if it was used as a basket of currencies for international trade as it was originally intended – 23% franc, 34% deutschemark, etc. rather than being used as a universal note in retail trade across the entire EU block. The disbanding of the common Euro is the best solution and the obvious path for continent.

Humor: The Story of the Banks in Iceland

2010-05-21T13:41:00.003-04:00

It started with bankers in the U.K. asking 'Where can we find some pansies to sell this CDO crap to?"

UK "We are going to make ourselves rich by selling wothless CDOs dressed up as jewels to your fishermen banks"
Iceland "Yeah we are getting rich.... Big Party."
UK "We will even sell short and bet against the crap we sold you"
Iceland "Hey, this stuff melted down and is worthless."
UK "By the way we expect you to tax all your citizens 3 million dollars each to make up for our 'losses'".
Iceland "FU - stuff it. We voted and ain't paying."
UK "We'll start seizing your international assets till you pay."
Iceland "FU. Enjoy some volcanic ash."
UK "Stop.... you're sinking our economy!"
Iceland "Maybe you should of thought about that before you demanded repayment on the worthless crap you sold us."
UK "Choke....cough.... choke...."

Today's Cartoon

2010-04-29T18:10:00.002-04:00

Analysis: SEC vs. Goldman

2010-04-17T15:18:00.006-04:00

The civil fraud charges filed by the Securities and Exchange Commission Friday accused Goldman Sachs of "defrauding investors by misstating and omitting key facts". These financial charges also mark a new era of government regulatory enforcement of Wall Street. No longer will the SEC simply come to consent decrees with financial firms where they do not admit guilt and in most cases pay a small fine viewed as a cost of doing illegal business.

One immediate question is how do the SEC charges filed against Goldman Sachs change the playing field? Do these charges even mean anything in a broader regulatory context? In my opinion, the actions from the SEC on Friday defines a new playing field by Washington marked with the following game-changing alterations:

a) A broader effort to get the derivatives market properly regulated to minimize the possibility of future meltdowns.
b) The Goldman Sachs charges are expected to be the first of a lengthy string of government actions against multiple firms that contributed to the financial meltdown. The lack of accountability by firms which accepted bailouts is no longer acceptable to main street and their representatives in Washington.
c) A dismantling by regulation of firms that are "too big to fail"; including the scaling back of previous government legislation that allowed the merger of commercial and investment banks.
d) The teeth of the SEC are back in place. For the last twenty years the SEC has been a toothless enforcement entity; forcing state AGs to take a leading prosecution role in financial malfeasance. This is likely to be the start of a change where the federal government will have deep roots in the policing of problems involving large financial firms.

The roll out of these regulatory reforms are expected to take years; however as noted by an AFP news article "We suspect that after Friday, others on Wall Street may have a harder time sleeping."

Another good clip is Ratigan on MSNBC where he compares Goldman Sachs to an automobile manufacturing company that deliberately took critical component from the inside of cars (CDOs) and then sold the cars as being great investments while betting on the side that the cars they created would all blow up spectacularly. An apt analogy - watch it here.

WaMu Execs dragged before Congress today

2010-04-13T09:32:00.003-04:00

There will be excitement in Washington today as former WaMu Execs are dragged before Congress kicking and screaming. Now that a Senate panel has had over 18 months to gather information, hopefully some sharp questions will be asked about Washington Mutual's abusive and illegal practices.

Allow me to urge the Congressional panel headed by Senator Carl Levin to refer the entire situation to the Justice Department for criminal prosecution.

'Washington Mutual "was one of the worst," Levin told reporters Monday. "This was a Main Street bank that got taken in by these Wall Street profits that were offered to it."'

Top ex-WaMu executives come before Congress
http://news.yahoo.com/s/ap/20100413/ap_on_bi_ge/us_washington_mutual_investigation

Worst Management Practices

2010-02-12T17:24:00.002-05:00

One interesting point about the recession is that it has generated plenty of articles about bad management practices... right at a time where many managers are telling employees that they are lucky to have a job.

An article from Business Week placed "Forced Ranking" as number 1 on the list of "brainless and injurious" management practices. I have written about failures of forced ranking in the past, it is interesting to see that it is coming in regularly as one of the worst practices. Hopefully it is a practice whose time has come and is now disappearing from the corporate landscape.

10 Management Practices to Axe
http://finance.yahoo.com/career-work/article/108815/ten-management-practices-to-axe

Progress vs. the government

2010-01-22T10:19:00.003-05:00

For centuries civilization made progress in the evolution of indoor plumbing, it only took a government act to cause an immediate setback in advancement. In 1992, the clowns in Washington mandated that every toilet in the U.S. use no more than 1.6 gallons per flush rather than the traditional 3.5 to 6 gallons. Of course the average citizen compensated for this by flushing 3 or 4 times when needed. Along with the tragedy of low flow shower heads (which simply forced everyone to take longer showers under a slim trickle of water) and low water washing machines (which increased damage to clothes and failed to clean the outfits of children who were out in the yard); the nonsensical federal acts have simply raised the average number of gallons of water used per person in each household since 1994.

A recent article from Mises spells out the failure of these government acts poignantly...

The Relentless Misery of 1.6 Gallons
http://mises.org/daily/3997

Now on Twitter

2009-12-14T18:46:00.001-05:00

I am now on Twitter. I primarily will be posting links to good business and economic articles.

http://twitter.com/GregBoop

Investment Pyramid: Just Wrong

2009-11-17T11:02:00.007-05:00

For many years the personal financial industry has pushed an investment pyramid as a model. This pyramid is very similar to the food pyramid that many investors are familiar except that the sections deal with size of your risk-associated investments rather than healthy eating.

The investment pyramid has primarily served as sales tool for investment firms. One promoter is Edward Jones which wraps the pyramid into a pitch for their products. The common pyramid model has several levels with the most risky at the peak and the least risky at the base. The model is supposed to reflect the size of your investments in these type of assets.

It is becoming more apparent that this standard investment pyramid may be hazardous for your financial health. The pyramid does not take into account investment horizons and objectives very well; nor does it account for significant market draw-downs.

A better model effectively turns the investment pyramid on its right side and uses the bottom axis as time horizon. This places the most risky investments further out in time and least risky up close. However there needs to be more refinement to make this model successful than just tipping the pyramid over. Each slice needs to reflect a time period and a mix of investments; furthermore the size (or height) of the slice is driven by dollar amount of the need in the particular period. This means that the pyramid may possibly no longer get narrower in time depending on an individuals need later time periods may be larger.

Take a look at a typical family living in their first home with a couple of children. Their future needs are focused on buying a larger house in five years, saving for their kids' college education in 12 years, and their retirement in 25 years. Each of these time periods represent a slice, and each should be looked at from a perspective of the worst case draw-down and consequences based on the portfolio.

The down payment for the house in five years is probably a lot smaller than the college education bill. The down payment can not afford a large draw-down without the consequence of wiping out the families ability to move to a larger home. This investment slice may be small in size but needs to be placed in an investment portfolio with minimal risk. While the college investment slice is much larger but can support an allocation with increased risk.

A better name for this new model is Time Slice Investing or the TSI model. Each time slice needs to have a size, objective, separate portfolio, and risk modeling for an investor to be successful in the long term.

Even a year later - WaMu failure still in the headlines

2009-09-08T19:01:00.002-04:00

Washington Mutual was a bank that desperately deserved to fail. Even a year after its demise, WaMu is still making the headlines. One example is is the CNN Money article below...

WaMu: The Forgotten Bank Failure

The biggest-ever bank collapse didn't lead to chaos, but Americans will pay the price for its unsound lending for years to come.

Washington Mutual is long gone, but its lax lending could haunt us for years.

The Seattle-based institution collapsed in the largest-ever U.S. bank failure last September. WaMu ran out of cash after business customers, unnerved by the implosion of Lehman Brothers, withdrew their uninsured deposits.

After the chaos surrounding Lehman's demise, WaMu was put to rest with little fuss. Regulators seized the nation's sixth-biggest bank on a Thursday night — a departure from the customary Friday — and sold it to JPMorgan Chase for $1.9 billion.

The move wiped out WaMu's 56,000 shareholders of record and left bondholders nursing billions of dollars in losses. But the WaMu deal spared the federal deposit insurance fund and thus was, unlike so many federal actions over the past year, an unalloyed positive for taxpayers.

http://finance.yahoo.com/loans/article/107676/wamu-the-forgotten-bank-failure.html?mod=loans-home >

Interesting Commentary from Andrew Lo

2009-09-05T12:03:00.002-04:00

The link below goes to a video with Andrew Lo with some interesting commentary about how the current financial crisis altered the underpinnings of investment diversification. Andrew LO is an award winning MIT economist.

http://www.investmentnews.com/apps/pbcs.dll/section?category=wealthtrack

A Tale of Two Depressions

2009-06-19T10:45:00.003-04:00

Finally, an article complete with charts that compares the economic decline in 1929 to the situation today. After reading the information, it leaves little doubt the the current scenario in terms of industrial output decline and other factors is worse than the 1930s. It only leaves the question if the government policy reponse of massive stimulus and bailouts will actually improve the economic recovery this time around.

A Tale of Two Depressions
http://www.voxeu.org/index.php?q=node/3421

Today's must read article

2009-03-20T11:29:00.003-04:00

One article showed up in my inbox today which is an excellent read. It has some solid information describing the differences between a Recession and a Depression mixed into the overview. Ray Dalio, founder of Bridgewater Associates and manager of what is now the world's biggest hedge fund, believes we are in the middle of a global depression.... or a 'D-process' as he calls it.

Inside the world's biggest hedge fund
http://biz.yahoo.com/hftn/090319/031809_okeefe_bridgewater_fortune.html?&.pf=retirement

"Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both."

Trillion Dollar Bailout

2009-03-01T12:50:00.006-05:00

Come play the game: Trillion Dollar Bailout

"Punish greedy fat cats and save honest peoples! Hand out moneys to homeowners. Put the hurt on dudes in suits! Do it right and save the world!"

Drag the slap symbol to deny a bailout and drag the cash bag to provide assistance to the various characters that pop-up.

Here are some hints - don't give the money to banks & only give to homeowners who are not in foreclosure. Go to the Addicting Games site to play.

The Math that Destroyed Wall Street...... and Main Street

2009-02-24T09:48:00.003-05:00

Wired magazine recently presented a good article about the underlying math which destroyed Wall Street.

Recipe for Disaster: The Formula That Killed Wall Street

Page 3 actually outlines the basic math of the Copula Function approach which underlies the CDO market.

The Ascent of Money

2009-01-16T17:48:00.002-05:00

Earlier this week, PBS ran a special two hour program "The Ascent of Money". The program is an excellent overview of current financial crisis placed in context of other historical events. The show includes some excellent commentary and interview clips.

It can be watched online at:
http://www.pbs.org/wnet/ascentofmoney/

Still holds true

2008-10-07T17:01:00.002-04:00

Now that the world economic markets are mired in a global banking crisis, this skit about the mortgage crisis created about a year ago is even more pertinent.

Financial Bingo

2008-10-07T16:46:00.001-04:00

Something to do while watching the news....

Note to HingeFire Screener Users

2008-10-01T21:11:00.002-04:00

HingeFire Inc. stopped offering screening service on September 26th. The company was not able to obtain the financing necessary to continue forward. I would like to thank the many users who supported our vision for the past year.

Thank you,

- Greg Boop

WaMu becomes biggest bank to fail in US history

2008-09-26T08:26:00.002-04:00

This is my "I told you so moment". I have warned people about WaMu for over 2 years. Urging them to get their funds over the FDIC limit out recently. Now the bank has failed....

WaMu becomes biggest bank to fail in US history

Fannie and Freddie

2008-09-09T10:44:00.001-04:00

Obviously the biggest news on Wall Street this week was the Federal Government seizing Fannie Mae and Freddie Mac before both of these mortgage giants failed in a catastrophic manner. These companies have been faltering for many months while looking for lines of credit to bail them out, the government went one step further and completely took over the firms while giving top executives the boot.

The entire situation is also another example of intervention not allowing proper capitalism to play out in the market. The term “moral hazard” comes to mind in which businesses do not take responsibility for their risky behavior; this only entices other businesses to take poor risks. Especially in an environment where it appears that “gains for privatized and losses are socialized”.

While the government takeover may have buffered the mortgage market in the short term and cheered up Wall Street on Monday, the long term picture is much less clear. The U.S. tax payer is going to be stuck with the tab. The question remains on just how big the tab will be – estimates range from $250 billion to $5 trillion. The actual cost is very dependent on how the housing market and associated credit recovers. One recent article outlined how the seizure of these mortgage giant is the taxpayer’s risk (If takeover tanks, we're holding bag).

Similar too many previous government interventions, this action with Freddie and Fannie may help alleviate the short term crisis, but the toll down the road will be much greater and more painful.

WaMu CEO given the Boot

2008-09-08T12:02:00.001-04:00

Past HingeFire articles have outlined in detail the issues at Washington Mutual and urged banking customers to pull out funds over the FDIC limit. News today shows that Washington Mutual has ousted CEO Kerry Killinger. WM stock is down over 15% in mid-day trading.

It is also interesting that Washington Mutual agreed to further oversight by the Office of Thrift Supervision concerning aspects of its operations. This demonstrates the high level of concern regarding the solvency of the institution from a regulatory perspective.

Are Banks at a bottom?

2008-09-02T10:44:00.000-04:00

A recent Motley Fool article asks if it “Is It Time to Buy the Banks?” The KBW banking index is down over 40% from the year before levels. The constant stream of news from the banking sector appears to be negative; more FDIC takeovers, increasing write-downs, and larger banks as take-over targets.

One point of view says the entire banking industry will be in trouble for the next 12 months with increasing failures and negative headline press. The other side of the coin outlined by Motley Fool states that banks offer a compelling value purchase situation and the KBW index may have seen its trough.

Investors can look at yield, P/E, book value, Justified P/BV, or other ratios. Using the math, it appears that banks may be near a historic valuation low and are due for rebound. At minimum, it is time to start investigating stronger individual stocks in this sector for purchase.

Bank Safety Ratings on the Web

2008-08-17T21:54:00.004-04:00

Bankrate now offers bank safety ratings for free on the web. See the Safe and Sound page of the Bankrate website - http://www.bankrate.com/brm/safesound/ss_home.asp

You can search using many different criteria to find the banks you are interested in. Bankrate provides the following summary to describe the service.

"Bankrate.com's Safe & Sound® service is a proprietary system designed to provide information on the relative financial strength and stability of U.S. commercial banks, savings institutions and credit unions. The system employs a series of twenty-two tests to measure the capital adequacy, asset quality, profitability, and liquidity (CAEL) of each rated financial institution. Individual performance levels are determined from publicly available regulatory filings and are compared to asset-size peer norms, industry standards and key absolute benchmarks. Combined results form the basis for our Composite CAEL and Star Ratings, which are described below. When possible, the system also produces a report that provides a detailed explanation of our findings, for each rated financial institution."

Earlier we had warned everyone to get their money over the FDIC limit out of Washington Mutual. It is interesting to note that WaMu recieved the lowest possible ratings, for both the Bankrate star rating and CAEL rating. - http://www.bankrate.com/brm/safesound/thrftmm.asp?fedid=1000508551

The Socionomics of the Russia Georgia conflict

2008-08-12T14:19:00.002-04:00

Socionomist and EWI Analyst who predicted Russia-Georgia conflict to appear on Bloomberg TV today at 5:30 p.m. ET.

In November 2007, the Socionomics Institute’s Alan Hall issued the 20-page research report, "Sizing Up A Superpower." It assessed the relationship between Russia's turbulent history and its then-current social mood.

More specifically, he spoke of "Georgia's desire to bring its pro-Russian separatist regions under control, but Russia has military plans to stop any move by Georgia to secure these regions."

Mr. Hall will discuss the developing situation in the region today, Tuesday, August 12 at 5:30 p.m. ET on Bloomberg television. Be sure to tune in! You can stream Bloomberg TV live online here.

See http://pages.tvunetworks.com/ to download their player.

Gas at the Pump

2008-08-11T10:38:00.004-04:00

A HingeFire survey early this summer asked readers about the projected price of gas at the pump on August 1st. The results showed the following:

Over $4.50 23%
Between $4.00 and $4.50 43%
Between $3.50 and $4.00 17%
Between $3.00 and $3.50 13%
Below $3.00 2%

The actual nationwide average price was $3.84 at the beginning of August. Congrats to the 17% who selected the $3.50 to $4.00 price range (I actually believed it would be above $4.00).

The good news for consumers at the pump is that it appears that the short term speculative bubble associated with oil has burst over the past couple of weeks. This will help both the market and your wallet when filling up the tank. As a note, 68% of readers in the most recent HingeFire survey believed that oil was in a speculative bubble. At this point, many analysts would say this perspective is correct.

How to Screen for Strong Banks

2008-08-02T16:49:00.006-04:00

Amidst all the carnage in the financial sector, how can you screen for the stronger banks and financial institutions that are likely go come out of the credit crunch as leaders.

The best starting point is creating a screen that searches for potential candidates. The key question is what criteria should be in this screen. Basically you need to hunt for financial institutions that display the following characteristics.

The earnings are still positive.
The yield is above 0.5%.
The bank stocks trades at reasonable volume above a price of $2
The bank stock price performance is exhibiting strength against both the S&P 500 and the bank stock index over the past 3 and 6 month periods.
Technical the bank is exhibiting positive moving average trends in the short term and the rate of change is positive.

A basic bank screen that meets the points above can be created within HingeScreen. A user can go to create mode and add the following criteria. In this case, we are searching for financial institutions priced above $2 with volumes over 10K that have outperformed the S&P 500 and KBW bank index. The trailing dividend yield must be above 0.5% (forward yield can also be considered). Technically the rate of change (ROC) must be positive, while the recent 20 day moving average must be above the 50 day. These technical points will show a recent positive trend in stock pricing.

The screen is saved as BankScanOne.

The next step is to jump to Execute Mode and run the screen. The results align with expectations; it is a mix of stronger regional banks, REITs (primarily with a healthcare focus), and some financial service organizations.

The stronger banks in the results such Valley National Bancorp NJ (VLY), and Wilshire Bancorp (WIBC) are examples of regional institutions that avoided obscene mortgage lending and maintained their balance sheets in good order over the past few years.

The majority of the REITS that show up in the results such as Health Care Property (HCP), Health Care REIT (HCN), and Healthcare Realty Trust (HR) are examples of REITS that are focused on stronger market segments and have easily avoided the worse aspects of the real estate downturn.

A few financial service organizations such as Northern Trust (NTRS) and PNC Financial Serv. (PNC) also show up in the results. A number of players providing financial services have used the downturn to strengthen their offerings and market position.

Using HingeScreen it is easy to save the results to a spreadsheet for further evaluation. Simply press the button on the right that looks like a floppy disk and the results are saved to a spreadsheet format file that can be opened using Excel. By default the saved result files are placed in the C:\Program Files\HingeFire\Results directory.

HingeScreen is a powerful tool to find stocks that meet the performance and diversification needs for your portfolio. It is useful for identifying candidates that are likely to come out of a downturn as leaders in a sector. HingeFire provides an excellent video library outlining how to use the tool at: http://www.hingefire.com/Education/KnowledgeBase/HingeVideos.aspx

Fear grips banking customers in Venezuela

2008-08-02T14:37:00.000-04:00

The march towards nationalization continues unabated. Over the past year the oil, telecommunications, electric, and steel-making sectors have been impacted in President Chávez’s ceaseless drive towards a socialist paradise.

Now the crisis has spilled over to the financial sector as the government seized control of a large Spanish-owned bank, Banco de Venezuela. Nervous depositors lined up seeking reassurance, and many fear a run on the bank in the coming week. Not helping matters, the central Venezuelan bank has been vague in attempting to reassure depositors that the banking system was solid.

Nearly all the companies seized by the government have been run into the ground over a short period of time; productivity has dropped and the feeble earnings have not been reinvested back into the companies.

Venezuelan bonds fell Friday for a second day reflecting “fears over the possible collapse of several banks because of rules forcing them to sell $5 billion of complex securities called structured notes. Banks bought the notes last year at values tied to high black-market rates of the dollar, exposing some of them to huge losses after the local currency, the bolívar, strengthened this year.”

Attempts of individual banks to negotiate their way out of the crisis has not paid returns as the IMF and World Bank have effectively shut off the spigot after being threatened with expulsion by Mr. Chávez.

Even the high price of oil can not cover the cost of large scale programs in Venezuela beyond the next couple of years. Any significant drop in the price of oil will cause an immediate fiscal crisis. At 32%, Venezuela also is experiencing the highest inflation in Latin America. Food-based inflation is above 52%, a crushing level for most of the population. The fiscal crisis and high inflation levels can be directly linked to government policies. This has left the poorest portion of the population, which Chavez claimed would be helped by the government’s policies, in even greater despair.

Is your online bank account safe?

2008-07-29T10:39:00.001-04:00

A recent report by researchers at the University of Michigan demonstrates that bank & brokerage websites are plagued by security flaws. These widespread design flaws make it easier for accounts to be compromised. According to Finextra, an examination of 214 bank websites revealed that more than 75% have cracks in security that hackers could exploit to access customer information and accounts.

‘Says Atul Prakash, professor in the department of electrical engineering and computer science: "To our surprise, design flaws that could compromise security were widespread and included some of the largest banks in the country. Our focus was on users who try to be careful, but unfortunately some bank sites make it hard for customers to make the right security decisions when doing online banking."’

This should be a cause for concern for all banking customers, the prospect of going online and finding your account cleared out is a nightmare. Security remains the top concern for banking institutions, and regular steps have been taken to improve the situation. The state of affairs is not as dire as outlined by researchers because many of the security flaws are difficult to exploit.

The real issue with the banking industry is the lack of a systematic defined approach to security testing their websites. There needs to be a single standard that all online financial institutions are tested against.

Cisco has some excellent initiatives such as SAFE that improve the security of customer deployments by defining configurations and testing steps that reduce vulnerabilities. The company also has service-focused teams of specialists that aid customers in securing their networks.

During my time at Cisco, I drove an initiative called SITE (Security Integration, Test and Evaluation) which defined a structured process for evaluating potential vulnerabilities, performing boundary & penetration testing, and evaluating the results in a logical matter. This approach was incorporated as part of the quality system and utilized across the company in testing multiple product lines. The process could be scaled from “light” to “heavy” based on the needs of the team performing the evaluation. The use of automation tools for “fuzzing” (sending in deliberately mal-formed packets) and other security testing was crucial for meeting tight deliverable schedules within the framework of SITE. Over the years, the original SITE initiative has evolved and now is included within the scope of other security enhancement programs (run by some real sharp engineers) that raise the standards to even a higher level.

What does the banking industry lack? Basically the online financial industry needs to define a SITE type of initiative and a set of common standards for securing their websites. The problem is not the inclusion of vulnerabilities (which will always pop-up), but the lack of screening for vulnerabilities in a structured manner. Banks do not have a methodical approach to find the vulnerabilities, nor a structured system for ranking and resolving the issues. Most banks are flying blind to what potential vulnerabilities currently exist on their websites because testing has only been performed piecemeal over time.

Banks and brokerages have a lot at stake; losses from compromised accounts continue to mount. It is time to raise the bar in the financial industry and reduce the exposure faced by customers. This requires a change in direction for security practices, and includes a need for information services cooperation between competing institutions. The best approach would be to create a focused team with IT representatives from multiple banks to define a central testing standard utilizing a structured approach for evaluating the security of online banking websites. After adoption, the methodology would need to be driven as a requirement across the industry.

Important: Funds over the FDIC limit at WaMu

2008-07-25T09:00:00.004-04:00

If there is one post to sit up and pay attention to this month - This is the post.

Get your funds over the FDIC limit out of WaMu now! There appears to be a run on the bank forming and one likely end-game will be the FDIC seizing the bank; similar to the situation with another large bank, IndyMac, recently.

Knowledgeable investors have been removing funds for several weeks and now the situation has caught the attention of the mainstream press. A recent report by Gimme Credit cited liquidity concerns with Washington Mutual.

"We won't use the phrase `run on the bank,' but we would be remiss if we did not observe that many creditors have quietly been pulling funds,'' wrote Shanley, based in Chicago. Their actions are "presenting an increasing funding challenge,'' she wrote.'

The bank disputes the findings stating that 7 billion cash infusion led by TPG Inc, cost reduction plans, and a lack of need for commercial paper will help Washington Mutual ride out the storm. Many analysts are skeptical. These restructuring actions are helpful but will not enable the bank to survive a crush of depositors withdrawing funds from an institution that is increasingly looking like a house of cards. Standard depositors are likely to follow the lead of savvy unsecured creditors over the upcoming weeks as more bad press continues.

The second day of WM stock in free-fall is a more telling sign about the challenges facing the institution. While some would state that withdrawing your funds over the FDIC limit does not help the stability of the bank, the other side of the coin states that why should your be out of your funds from a personal finance perspective because you did not take action in the early stages while the crisis was unfolding.

Ignore the Press, Hedge Funds are still a Viable Investment

2008-07-23T12:05:00.002-04:00

The hue and cry from the press regarding Hedge Funds continues unabated. Obviously a good number of funds have blown up over the past year, causing a sizeable investor headache.

One recent article “4 Reasons Why Investors Should Avoid Hedge Funds at All Costs” outlines issues with oversight, managerial churn, investment concentration, and short life spans. These aspects should be concerns for many individual investors, but should not serve to rule out hedge funds as appropriate portfolio component for qualified investors. Despite the recent turmoil, Hedge Funds have a long history of serving the needs of qualified investors; one excellent summary of Hedge Funds can be found in the Knowledge Base section on the HingeFire website.

One financial industry issue is that everyone and their brother opened a Hedge Fund in the past few years. Most chased similar strategies involving credit spreads that all fell apart at the exact same time as the black swan came for a visit.

Most of these funds did not have a long track record and a number of the managers simply marched down the street and opened a new fund after the wheels fell off their previous effort. Investors need to differentiate between hedge funds with long track records, some spanning decades, and those opened within the past few years.

Hedge Funds should only be used by investors who understand the risks and expectations. During the past few years, the sales of Hedge Funds have gone down-market as the funds were sold to people who were marginally qualified, many times wrapped up by major brokerage firms as fund-of-funds (or a pyramid of fees). Certainly the unscrupulous account representatives made plenty on commissions but they were not selling a product that was appropriate for the customer. Many investors were convinced to place nearly their entire portfolios into Hedge Funds will the promise of huge returns, a good number of these individuals are now crying foul to regulators.

Hedge Funds are only appropriate for institutions and qualified investors who understand finance. These customers recognize the investment is long term and are using the funds as a diversification mechanism in context of a larger portfolio. Hedge Funds do have an appropriate place in the market. It would remain best that they are not regulated except for stronger restrictions on the qualifications of investors who can utilize these vehicles.

Before advent commodity ETFs and mutual funds, many well-heeled investors used funds requiring investor qualification for exposure to the commodity markets. Most of the funds were CTA/CPO run by individuals with Series 3 licensing. This was a very appropriate diversification method for investors with sizeable portfolios.

Hedge Funds are also in the forefront of offering products that are difficult to obtain exposure from using standard retail financial products; some examples include currency, private equity, and credit spreads. For qualified investors the Hedge Fund products serve as an important diversification tool.

Investors who meet the qualification requirements of Hedge Funds should not automatically rule out these investment vehicles due to all the recent bad press. An investor should evaluate the needs of their portfolio in regards to diversification, returns, and timeframe in order to make an informed decision about Hedge Fund investment. It is important to use on-line resources to properly investigate the returns, longevity, and track record of Hedge Funds rather than simply investing in a fund-of-funds pushed by major brokerage firms. Hedge Funds can serve an important role in your portfolio, and investors should approach these vehicles with an open mind, and more importantly with open eyes.

Wachovia Earnings Call

2008-07-23T08:44:00.000-04:00

Wachovia held its earnings call Tuesday. As expected the news was bleak; headlined by an $8.9 Billion loss, a steep dividend cut, and 10,750 job cuts. However, the stock rallied on the news and earnings call. While the loss and job cuts are painful, it appears that Wachovia has a plan to turn its operations around and deal with the bank’s mortgage exposure.

The stock rally demonstrates the confidence that Wall Street has in new CEO Robert Steel. Some of the points in the turn-around plan were outlined in the conference call transcript. Wachovia will not be raising more capital or selling additional stock that would dilute current shareholders stake. The dividend cut to 5 cents per share will save $700 million per quarter, while the wholesale mortgage operation will be shut down. Analysts expect that the bank will remain an independent operation.

Wachovia: Turning the corner

2008-07-20T13:37:00.003-04:00

The recent press headlines for Wachovia have been bleak recently; auction-rate security investigation raids, analyst downgrades, and sliding share prices. It seems that the bank can't catch a break from the negative media coverage. This is on top of all the earlier problems that led many to question the underlying integrity of the entire institution which in the past has joined telemarketers to scam it's own customers, and was fined $145 million from the Feds.

Despite all the difficult news there is a bright spot -- and his name is new CEO Robert Steel . Right from the initial conference call it appears that he is on the right track. He is going to first evaluate the "challenges" faced by the bank with particular focus on the residential mortgage portfolio and exposure to commercial real estate. Steel promises to outline his strategy on July 22, when the bank is slated to report its second quarter earnings. In a couple days we will be able to see how Wall Street reacts to the earnings and the vision of the new leadership.

Based on his reputation in both capital markets and government; Steel is likely to restore what is most important to Wachovia - a reputation for integrity.

FREE forecasts for all the major commodity markets

2008-07-17T14:49:00.002-04:00

We're excited to announce that our friends at Elliott Wave International are offering a FreeWeek of expert commodity forecasting services from noon Wednesday, July 16 to noon Wednesday, July 23.

FreeWeek is always exciting, but we're especially excited to share this one with you, as EWI opens its new Futures Junctures video portal to you. The new portal combines all of EWI's world-class commodities analysis onto one easy-to-navigate webpage. It allows you to easily toggle between near-, intermediate- and long-term forecasts and analysis, plus the hottest commodity opportunities presented in both video and text. And, only during FreeWeek, you get totally free access with no obligation to buy – ever!

Having an independent forecasting and opportunity-spotting service on your side is more important now than ever. FreeWeek lets you see for yourself, giving you top-level access and FREE forecasts for all the major commodity markets. This is an opportunity you don't want to pass up.

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Crushing the American Family

2008-07-15T15:11:00.004-04:00

Once in a while a cartoon comes along which really drives home a point. Despite political pundits waving their arms and claiming that we are not technically in a recession, the circumstances facing American families are so dire these proclamations are nearly meaningless.

The credit crunch, housing market, gas prices, job losses, and rising food costs have left consumers in a tough position. Families are having to cut back many activities and purchases simply to cover necessities - this is not good news for the two-thirds of the economy dependent on consumer spending.

Well for the good news - At least we are not technically in a recession!

Is Your Bank Next?

2008-07-14T16:32:00.004-04:00

A slew of mainsteam press articles a month back stated that the credit crunch was over. Not so fast! As outlined in articles on HingeFire in May (see Is the Financial Crunch over?) the financial sector is ripe for continued turmoil.

The top headline news today outlined the shares of U.S. banks plummeting amid stability fears. Sizeable regional banks such as Wachovia, WaMu, and National City are near the top of the list that investors believe have the likelihood to fail.

‘"It's the cockroach theory. You don't just have one bank failure -- when you have a big bank go under, there's always more than one," said James Ellman, president of hedge fund Seacliff Capital, who is short some financial stocks.’

The failure of IndyMac in many ways was a standard run on a bank. Panicked depositors lined up outside the doors pulling out $100 million a day causing what regulators called the second-largest bank failure in U.S. history. It was clear to regulators, politicians, and investors that IndyMac was in trouble, leaving only the question of degree. This type on depositor driven panic could easily happen to other struggling regional-type banks.

'One woman leaned on the locked doors, pleading with an employee inside: "Please, please, I want to take out a portion." All she could do was read a two-page notice taped to the door.'

At some point the FDIC will not be able to handle the level of defaults. While the FDIC has staffed up expecting more failures, the federally sponsored insurance agency is primarily focused on merging banks in trouble. The FDIC does not have deep pockets to bail out a chain of sizeable cascading failures.

Regional banks are not the only concern. Fannie Mae and Freddie Mac are in deep trouble. To avoid total financial market panic, the White House administration has ask Congress this past weekend to approve a plan that would provide a credit line of some $300 billion to the troubled GSEs and buy their stock. The Fed passed measures to allow both Freddie Mac and Fannie Mae to borrow at its discount window. Clearly, the government's hand was forced by a $3 billion Freddie auction scheduled for today that would have revealed the extent of the disaster without government intervention.

Is your bank next?

Will you be lined up at the door of your local institution begging to get your money out while the door is slammed in your face?

This is a time to carefully evaluate the safety rating of your local bank where you have deposited your money. If the bank looks the least bit shaky then your should get your funds out before a wide-spread panic develops.

Hitting Top Returns in midst of Market Turmoil

2008-07-13T10:19:00.004-04:00

What does it take to hit solid market returns even when market conditions are leaving the most experienced investors fearful? It comes down to proper stock selection and having the appropriate tools to find the best investments on both the long and short side of the market.

The FREE HingeFire stock screener is a powerful product that merges fundamental and technical indicators in a single tool. This helps put the market edge in the corner of investors.

GregB is now ranked 267 out of 18824 players in the Wall Street Survivor Contest (Traders Wanted - Play $50,000 Stock Trading Game). The evening before the contest, I ran the HingeBuy and HingeSell screens in the HingeScreen 1.5 product. These screens normally produce 30 to 50 results. HingeBuy provides a list of stocks that have the potential to out-perform the market; while HingeSell produces a list of stocks that are likely to under-perform.

It comes down to proper stock selection enabled by the HingeScreen product. I only had to pick a set of stocks once, at the very beginning of the contest to be successful. No need to churn the portfolio or trade.

A summary of the results to date are provided below. Note that all of the longs are still above water despite the violent downtrend in the market over the past few weeks. The balanced long and short portfolio is an excellent example of how to squeeze excess alpha out of the market. The overall return of the portfolio was +14.74% over a few weeks (72.68% on a yearly basis).

Longs
Symbol Return
------------------------
MOS +15.92%
XEC +0.86%
AXYS +0.46%
DAR +10.36%
BMI +0.06%

Shorts
Symbol Return
------------------------
FSNM +53.83%
GSAT +31.12%
CIX +22.65%
LYTS +19.54%
MEDX -5.19%

Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

The Gold prediction

2008-07-10T11:46:00.002-04:00

A few months back we held a survey regarding the expected price of Gold on July 1st. The results were as follows:

Above $1100 24%
Between $1000 and $1100 24%
Between $900 and $1000 22%
Between $800 and $900 15%
Below $800 15%

The actual price of gold on July 1st was around $937. Congrats to the 22% of poll takers that correctly predicted the $900 to $1000 price range.

Since the start of July, gold has been looking bit toppy as if the momentum has disappeared in the market for this precious metal. It sunk to near $916 before staging a rebound in the past couple of days. This may be setting the stage for the next leg of the run up, however it is more likely a small bounce before further downward action. The next few weeks will be interesting to watch in this market.

Cisco dashes 2008 recovery hopes but there is light

2008-07-09T14:36:00.003-04:00

Earlier commentary associated Cisco outlined hopes of a tech sector recovery in 2008. Recent comments on Tuesday by CEO John Chambers dashed those hopes. He stated "I think most of us realize that it's probably going to be a little bit longer than the one to two quarters that some people had hoped for.”

In reaction most analysts cut their forecasts for CSCO citing that both the remainder of 2008 and 2009 could be challenging for the company.

Cisco stock dropped to $21.76 late Wednesday afternoon. Despite the bearish trend of CSCO and the overall market recently; a basic predictive analysis spreadsheet that utilizes volatility, mean return, standard deviation, trend, and other factors indicates the future is not so gloomy. A quick run of the spreadsheet shows that CSCO has a 5% chance of hitting $30 in the next 90 days and only a 1% chance of hitting $16.

This shows that a basic short-term analysis is leaning towards a more bullish case for Cisco stock – hopefully the market follows through and provides shareholders with some type of short-term rebound. However the long term price is always driven by the fundamentals, which in this case is dependent on an overall tech sector recovery.

At minimum a soft economic patch will provide the 800lb gorilla Cisco the opportunity to shake some of the smaller competing monkeys out of the trees. Cisco has tradition of leaving competitors in the dust; especially taking advantage of downturns to enhance their position in both existing and newly emerging markets.

Screening for the Top 2%

2008-07-06T23:21:00.004-04:00

How does an investor land up ranked in the top 2%? It takes a serious approach to screening the universe of stocks to sort out the wheat from the chaff. Screening a list of potential candidate stocks is just the first step.

GregB is now ranked 284 out of 17989 players in the Wall Street Survivor Contest (Traders Wanted - Play $50,000 Stock Trading Game). The evening before the contest, I ran the HingeBuy and HingeSell screens in the HingeScreen 1.5 product. These screens normally produce 30 to 50 results. HingeBuy provides a list of stocks that have the potential to out-perform the market; while HingeSell produces a list of stocks that are likely to under-perform.

The next immediate question is how did I narrow these lists down to 5 stocks as longs and 5 stocks as short to use in the Wall Street Survivor contest.

In terms of the five stocks I selected from the HingeBuy list for the contest. I pulled up each stock on the list at the time (there were about 30 to 40) and took a detailed look at the charts, industries, fundamental info, and technical indicators to narrow down the selection. For the HingeSell (short) candidates I basically look for the inverse of the outline below.

Basically the following were evaluated for each potential long stock:

1) Strength of the chart over the past year. Look for a chart where the stock is continually rising with some minor pull-backs. Look for strong increases in the past six months. Do not want a stock where the stock price had a one time big bump due to a news event; nor a stock where the chart is basically flat but still outperformed the associated indexes.

2) Evaluate the industry that the company is in and the industry performance over the last six months compared to other others.

3) Rank the stock within the Industry from a relative performance perspective.

4) Fundamental information evaluation with a focus on earnings growth, revenue growth, cash flow, debt and their associated ratios. Do not focus on forward P/E etc. because many times the projections are nonsense.

5) Technical evaluation of the price chart looking for divergence between the price action and technical indicators (MACD, RSI, etc.). Divergence may indicate an impending change in price action. Also look for extreme readings in oscillator-based indicators which may show that a bounce-back is overdue. Keep in mind that technical indicators are good for evaluating short term action; long term price is driven by fundamentals.

6) Take a look at news from corporate press releases. Look for management churn, re-orgs, layoffs, product cancellations, guidance (vs. price reaction), and regulatory action. These are generally not positive developments.

Basically rank all the stocks on the HingeBuy candidate list from 1 to 5 using the criteria above. Five being the strongest. Select the five stocks with the highest rating.

For HingeSell and shorts - look for the inverse.

Note in my terms, the outline above is my light-weight starting point evaluation. I normally dig into the 10Q / 10K reports when selecting stocks for my actual portfolio. I would urge everyone else to do the same. A stock screener is a tool to find stocks that meet your basic criteria - a more detailed follow-up analysis is needed to find the best stocks for your portfolio that meet your diversification and risk-tolerance needs.

Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

Global Inflation: The New Crisis

2008-07-03T16:02:00.003-04:00

A new monster has raised its ugly head to spook investors. Inflation is accelerating at a rapid pace providing policy makers with a new set of ulcers. Unfortunately basic antacid tablets will not cure the unsettled guts of national regulators.

The spike in inflation gives flashbacks to the dreaded 1970s with stagflation era. Many older investors do not enjoy reminiscing about interest rates above 14%, food rising in price each week, investors hoarding gold coins, and long gas lines. The dilemma is that all the statistics indicate that we are heading towards a scenario with run-away rising inflation worldwide.

Regulators have commented on rising inflation, raised interest rates in hopes of moderation, and are shocked to see the numbers running upward like an out-of-control train down the tracks. With rising commodity costs, pent up wage increase requirements, and tightening credit; there is not very much the regulators will be able to do to apply the brakes.

Certainly the news flow has not been encouraging, the ECB raised lending rates today amid record inflation, while U.S. Treasury Secretary Henry Paulson said inflation was becoming the top economic focus of many countries.

Inflation is a global phenomenon; impacting countries as diverse as Iran (with 26% inflation), the Philippines, Brazil, India, Russia, South Korea, Mexico, and Indonesia. No country is immune and no market is safe. Rapidly increasing inflation is the top concern in most nations, and the situation rapidly appears to be heading towards stagflation.

The immediate question becomes how should an investor prepare for this situation? The first emphasis is that a greater portion of your portfolio needs to be placed in commodities and precious metals, or in stocks focused on these industries. There is also a need to have your income oriented investments placed in vehicles which are inflation indexed in regards to interest rates. The other alternative is the keep cash in shorter term CDs as inflation and interest rates rise, allowing an investor to ride the rising curve.

Successful investing in a rising inflationary environment is difficult. Usually the stock market returns are dismal and many other investments are also victims of an inflationary spiral. Still it is best to keep your focus on the long term, and maintain a diversified portfolio of stocks that have wide economic moats. These companies invariably become stronger in downturns as competitors fall by the wayside.

Investors should pay close attention to news about inflation during the remainder of 2008 and start making appropriate adjustments to their portfolio to ride out the storm.

Dark Pools going strong

2008-07-03T13:55:00.000-04:00

Despite regulatory concerns and consolidation worries, the Dark Pool business is still showing enormous strength. New dark pools venues are implemented regularly and the profits are looking solid.

Reflecting this strength, LiquidNet has now filed for a $500 million IPO. Goldman Sachs and Credit Suisse Securities are overseeing the transaction. Despite the generally weak IPO markets, there is the expectation that this will be one of the strongest public offerings of the year.

Circuit City: So Toxic that Nobody Wants It

2008-07-02T09:56:00.002-04:00

Is there such a thing as a bride so ugly that no one will marry her? Apparently there is such a thing as a business so toxic that everyone steps away from buying it.

One of the great fears of any party seeking to close a deal to purchase Circuit City (CC) is that the due diligence would reveal information so negative that potential acquirers would drop their bids. Apparently this scenario is playing out.

Blockbuster (BBI) dropping its bid may be due to other bidders pushing up the price; more likely it is that further disclosure revealed that Circuit City is already deeply entangled in its death throes. Blockbuster's Chief Executive Jim Keyes cited "market conditions" as a reason for withdrawing its offer, valued at up to $1.3 billion, and said the deal was not in the best interests of its shareholders.

Circuit City dropped over 16% on the open on Wednesday after this news. Blockbuster climbed over 12%, the shareholders gleeful that this proposed merger has been dropped. It is interesting to note that Blockbuster had offered at lest $6 per share for Circuit City. CC stock now sits at $2.19; effectively the proposed deal was at triple the price of Circuit City stock. The failure of Circuit City management to grease the skids on this deal will probably go down in financial history as one of the worst executive decisions ever; unless some other suitor actively closes on a transaction.

Philip J. Schoonover, the CEO of Circuit City, kept hope alive for a deal by commenting, "Our exploration of strategic alternatives is intended to serve the interests of our shareholders by considering every possible alternative to enhance shareholder value. The board's review was not dependent on Blockbuster's (BBI) participation. We are diligently working with the parties involved in the process, and intend to continue our thorough approach until such point as the board determines upon a particular strategic course of action. The board has not established a deadline for completing the review."

Loosely translated this means, “We are trying to find a deal that will leave the existing management team employed with large compensation packages despite our ruinous track record. The board is hoping some magical deal materializes shortly with a private equity fund. If something does not pop up soon; the company will be dead as we complete the review of the bankruptcy paperwork.”

The only constant is that the long suffering Circuit City stockholders will continue to be disappointed.

Are You in the Top 5% of Investors

2008-06-29T10:30:00.002-04:00

GregB is currently ranked 350 out of 15872 investors in the current Wall Street Survivor contest - Traders Wanted - Play $50,000 Stock Trading Game

This is the third time I have selected 5 stocks from the HingeBuy list as longs and 5 stocks from the HingeSell list as shorts the night before a contest opened and held the picks with no trades. The outcome has been the same in all three contests, the results are in the top 5%.

Isn’t time that you used information that could power top-ranked investing results? This is the power of the automated HingeBull and HingeBear selection process that is integrated in the FREE HingeScreen product.

One of the primary beliefs of the founders of HingeFire is that investors do not need $3000 seminars to be successful in the market. Investors simply need the tools to provide an edge in the market and a community of like-minded investors to work with. The objective of HingeFire is to build the tools and community to enable the success of investors at all levels.

I will confess that my results when I try to simply pick stocks that are “hot” or I got a “tip from a friend on" – are dismal. This is why it is important to use tools that can objectively screen the universe of stocks to define the stocks with the most potential. Start using the HingeFire stock screener today and get the information that will give you this type of edge on the market.

Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

The Independent Trader Crash Course

2008-06-27T17:08:00.001-04:00

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These five reports and supplemental videos will reveal to you several key techniques of analysis, forecasting and risk-management that are tailored to fulfill one purpose: make you a better trader.

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Introducing the Hinge Awards for inferior financial reporting

2008-06-27T14:15:00.001-04:00

Every week brings its own set of inane articles in the financial press. The time has arrived to start awarding prizes for the worst examples of mainstream financial articles. Maybe in some small way this will help enable the improvement in business reporting, however unlikely the probability.

To kick this off, a set of three Hinge Awards have been created that will be presented quarterly. Naturally none of these awards are for excellence in financial reporting; in fact they are to outline examples of inferior business press.

The three categories for the Hinge Awards are provided below:

HingePitch – an article which is really a disguised pitch for a company, product, or service while pretending to give useful information. These pitches are common in the industry. Nearly 20% of the articles read in the mainstream financial media are effectively "paid-for" placement pieces. However some of these articles perform such a commendable pitch for a product while pretending to be an unbiased neutral resource that they are worthy of an award - especially if the product or service is really not in the best interest of most consumers.

HingeDuh – awarded for personal finance article where the information is obvious even to the most dimwitted consumer. The majority of these articles of fluff pieces containing meaningless quotes from selected "subject matter experts" with the simple objective of enabling the article to be at least an entire page long. Leading to the immediate question - don't the editors have something more meaningful for these business mavens to be writing about.

HingeCrock – the underlying facts are absolutely wrong in the article or the conclusions make no economic sense. Many of these articles use the selectable parsing of "facts" to slant the conclusions towards a designated point of view. A vast majority are politically oriented and have a pre-selected bias. Most turn plausible financial ingredients into inedible economic gruel.

Send your nominations to gregb@hingefire.com
Please list the award category in the subject header.

This week’s trite “that’s obvious” personal finance article

2008-06-26T18:04:00.002-04:00

Every week a slew of personal finance articles appear in the mainstream press across the county. Many of these articles don’t go beyond what should be obvious to even what a consumer with a very low IQ should intuitively understand. You would hope that the “hard-hitting” financial news media would be able to provide useful information with some depth instead of the junk that is put out as meaningful financial reporting in this era.

In a world ruled by 30 second sound bites, it is easy to understand why not all articles are lengthy. At least consumers could hope that they could make points that are not obvious even to the most dimwitted.

With the continual pile of trite articles put out each week, maybe there is a need to establish an award for the most useless personal finance article of the week – sort of an Ig Nobel prize for personal finance. As long as they don’t name the trophy after me I would be quite content to see this happen.

This week’s winner would be a gem from U.S.News & World Report titled “Tips on Selling an Unloved SUV”. The article makes the obvious points of:

Sell to individuals, not dealers.
Don’t strip the bells and whistles from the SUV.
Lower your price.
Wait for winter to sell.

Where is Captain Obvious when we need him?

Sticking it to investors: SEC does not want to hold Credit Rating agencies accountable for their ratings

2008-06-25T15:43:00.001-04:00

So what does a regulator do went they find out that the credit ratings applied to money market accounts are basically meaningless? Do they:

A) Get tough with the credit rating agencies and demand that they properly evaluate and grade interest bearing instruments.

B) Open the credit rating market up to new companies, hoping that the competition fosters an improvement in credit ratings.

C) Propose reducing reliance on credit ratings, including proposing to eliminate a requirement that money market funds hold highly-rated securities.

If you selected C then congratulations - you are a winner. The SEC is moving forward with a policy of weaning investors and Wall Street institutions from over-reliance on credit ratings, instead of fixing the credit rating firms. While the proposal does require that fund managers assess a security's liquidity and inform investors, we have seen quickly a formerly-liquid credit market can lock up. The major focus is to deemphasize credit rating agencies and effectively get them off-the-hook for the terrible job they have done in terms of properly rating securities. There is no need for the agencies to reform their processes.

Worst yet, investors are now basically being told that they are on their own when if comes to evaluating the safety of money market funds and interest-bearing funds. This is setting the table for a future crisis. At some point in the future there will be a large number of grandmothers spread across the nation who will be quite unhappy with this change in regulatory mindset.

SEC proposes reduced reliance on credit raters

Who wants to buy Circuit City?

2008-06-24T18:14:00.001-04:00

An earlier summary regarding Circuit City outlined how all of the vultures that have been sitting on the sideline would be drawn out once Blockbuster started bidding. It is time to either fish or cut bait for all other potential suitors.

An article from Reuters today stated that Circuit City has received buyout interest from several strategic and financial bidders. A sale is expected to be announced over the next month.

The only question at this point is how much the carcass of this poorly managed electronics retailer will go for? I believe that many long suffering stockholders will be sadly disappointed at the price.

Wall Street Survivor Update

2008-06-21T13:06:00.003-04:00

Is anyone else earning 88.57% returns on a yearly basis?

HingeBuy and HingeSell can help you achieve this type of return.

At the beginning of May, I entered the latest Wall Street Survivor contest. I selected 5 stocks from the HingeBuy list as longs and 5 stocks from the HingeSell list as shorts the night before the contest opened. Wall Street Survivor provides each player with $100,000 in “cash” for investing in the contest. I placed $10,000 into each stock on the first day of the contest and have not made any trades whatsoever since this time.

The longs were:
Symbol Return
------------------------
MOS +24.84%
XEC +11.49%
AXYS +6.16%
DAR +12.72%
BMI -7.92%

The shorts were:
Symbol Return
------------------------
FSNM +33.44%
GSAT +7.25%
CIX +21.57%
LYTS +17.25%
MEDX +1.37%

I did not use leverage (i.e. excess margin) in the contest. The portfolio is currently worth $112,617.93; this is a 12.62% return over a few weeks (or 88.57% on a yearly basis). Player GregB is currently ranked 326 out of 14762 players. Most other players in the contest trade regularly. My result is not bad for simply picking ten stocks, not trading them, and not using leverage.

This demonstrates the power of the HingeBuy and HingeSell automated selection process. Start using the HingeFire stock screener and get the information that will give you this type of edge on the market.

Traders Wanted - Play $50,000 Stock Trading Game

Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

See the HingeFire Videos

2008-06-20T12:50:00.002-04:00

Want to lean how to use HingeScreen to improve your investing? See the excellent videos at the HingeFire website that explain how to use the tool.

The website also contains a wealth of other educational material. Explanations of all the indicators can be found within the Knowledge Base. A full set of documentation for HingeScreen can be found under Support.

HingeFire provides the tools and information that enables investors to improve their understanding of the market. So heat up your investing today, check out the HingeFire resources!

New Wind ETF

2008-06-19T17:39:00.001-04:00

The First Trust ISE Global Wind Energy Index Fund launched this week. The ETF is trading under the symbol FAN – in another example of gimmicky ETF naming.

If oil prices remain high, companies involved in the wind turbine industry may gain significant traction. Wind turbines are common in Europe. The U.S. and Asian markets have huge potential, assuming people don’t get all NIMBY about seeing wind turbines from their backyards.

A couple of recent articles discuss the introduction of this new wind energy ETF:

Should You Buy an Alternative-Energy ETF?

Is Electricity From Wind Just A Lot Of Hot Air?

FreeWeek is Back!

2008-06-18T17:41:00.002-04:00

We’re excited to announce that our friends at Elliott Wave International have announced a FreeWeek of expert financial forecasting for U.S. Stocks, Bonds, Gold, Silver and the U.S. Dollar from noon Wednesday, June 18 to noon Wednesday, June 25.

FreeWeek is always exciting, but we’re especially excited to share this one with you, as EWI has opened its new Financial Forecast Service delivery portal to you. The new portal combines all of EWI’s world-class analysis onto one easy-to-navigate webpage. It allows you to toggle between near, intermediate and long-term forecasts and analysis with ease, including recent archives. And, only during FreeWeek, will you get totally free access with no obligation to buy – ever!

You’ll get analysis and commentary from EWI’s top three analysts, including Robert Prechter himself, who’s latest Elliott Wave Theorist is interestingly titled Stocks and Oil; Barack and Hillary.

In today’s markets, having an independent market forecasting and analysis service on your side is more important now than ever. FreeWeek lets you test drive EWI’s U.S. forecasting service, giving you top-level access and FREE forecasts for U.S. Stocks, Bonds, Gold, Silver and the U.S. Dollar. This is not an opportunity you’ll want to pass up.

Dive into EWI’s FreeWeek Now!

How come Mutual Fund Managers don’t invest in their own funds?

2008-06-17T12:49:00.000-04:00

Once again, an article highlights that the majority of mutual fund managers avoid their own funds. Why would a customer want to buy fund when the manager won’t touch it?

Maybe the manager knows that the expense fees in most mutual funds eat you alive over time, and most knowledgeable investors are better off investing directly in stocks. John Bogle, the former chairman of Vanguard group, talks about this trend in his discussion about the “The Battle for the Soul of Capitalism”.

Morningstar reported that 47% of the managers of U.S. stock funds reported no ownership in their own funds. 61% of the managers of foreign stock funds and 66% of taxable bond funds do not own their funds. Similarly 71% of the managers of balanced funds will not include the funds in their holdings.

Do they know the funds are so toxic or poorly run that these managers will not even pick up a small number of fund shares – maybe this would be a good display of confidence.

Once again this is a dismal reflection of the mutual fund industry, and demonstrates that many managers do not believe their “gimmicky market-driven funds” are designed for the long haul. Investors should focus on low fees when investing in mutual funds and take a look if the manager actually holds shares.

Does HingeBuy and HingeSell really work?

2008-06-15T11:16:00.003-04:00

Yes, you better believe it!

At the beginning of May, I entered the latest Wall Street Survivor contest.

I selected 5 stocks from the HingeBuy list as longs and 5 stocks from the HingeSell list as shorts the night before the contest opened. Wall Street Survivor provides each player with $100,000 in “cash” for investing in the contest. I placed $10,000 into each stock on the first day of the contest and have not made any trades whatsoever since this time.

The longs were:
Symbol Return
------------------------
MOS +24.77%
XEC +11.44%
AXYS +6.47%
DAR +5.11%
BMI -7.16%

The shorts were:
Symbol Return
------------------------
FSNM +25.89%
GSAT +13.29%
CIX +12.48%
LYTS +9.82%
MEDX -2.73%

I did not use leverage (i.e. excess margin) in the contest. The portfolio is currently worth $109,847.18; this is a 9.85% return over a few weeks (or 79.78% on a yearly basis).

Player GregB is currently ranked 373 out of 13850 players. Most other players in the contest trade regularly. My result is not bad for simply picking ten stocks, not trading them, and not using leverage. This shows the power of the HingeBuy and HingeSell automated selection process.

FREE TO PLAY - Fantasy Stock Trading Game

Get the Free Asian & Indian Market Report

2008-06-14T00:49:00.001-04:00

We’d like to announce a new 12-page complimentary special report on Asian and Indian stocks, courtesy of our friends at Elliott Wave International.

Investment Opportunities for Asia’s Big 6 Markets will give you specific forecasts and valuable commentary and observations for the following markets:

India’s SENSEX
Japan’s Nikkei 225
Hong Kong’s Hang Seng & MSCI
China’s Shanghai & Shenzen
Singapore’s Straights Times
Australia’s ASX 200 & All Ordinaries

This FREE 12-Page Report was written by an analyst who lived in Asia for most of the 1990s and knows the region's economy first hand. He digs deeply into today's investment potential for Asia to show you what's changed and what hasn't. He also presents the important socio-economic trends now shaping the Asian markets.

Click Here to Get the FREE Report Now

Go to My Broker Feature

2008-06-13T18:08:00.004-04:00

One of the additions to the new HingeScreen 1.5 release is a “Go to My Broker” feature. This functionality in the Execute Mode pane allows you to go to your stock broker’s website with the click of a single button. This is a very useful feature at times when you are screening the market for new opportunities.

The image of the gentleman at the top of the screen is the link to your selected default brokerage website.

Under the Options menu at the top, there is a My Broker item. Pulling up this menu shows an Edit Brokers item at the top of the list. The remainder of the list consists of direct website links to major online brokers.

Pressing on the Edit Broker item pulls up a pop up that allows you to add, delete, and edit brokers in the list. Three buttons are at the top, Create New Broker Entry, Save Broker Details, and Delete this Active Broker. A drop down box below this contains a list of brokers, selecting an item displays the broker’s url in the text box below.

The user can select a broker and press the Default button at the bottom to have the broker set as the default (when you press on the image in the Execute Mode pane). Remember to hit the Apply button at the bottom left after all transactions to make them permanent.

The Go to My Broker website feature is a very useful function in the HingeScreen 1.5 release. Users can perform screens and easily pull up their broker’s website to perform trades or get more information.

Is the Housing Crisis at its apex?

2008-06-13T08:24:00.002-04:00

The news cycle continues a downward cycle on housing. Homeowners can not open a newspaper, turn on the news, or browse online without immediately getting hit with the latest negative housing commentary.

On the front page today, US foreclosure filings surge 48 percent in May. The continuous stream of downbeat real estate news may be a sign that the housing market has finally hit the bottom. In the same way, that the endless stream of news on how to get rich speculating on real estate in 2005 marked the real estate market peak. Interestingly, the spin today is how to get wealthy buying real estate foreclosures.

There is continuing statistical evidence that indicates that housing has turned the corner. In many markets, the number of days on the market is falling, along with the amount of unsold inventory. Coupled with the rate of price decreases slowing as buyers and sellers come into alignment of the new expectations regarding the proper value for a house now that the speculative bubble has burst.

The mortgage situation is also easing, as banks have returned to traditional lending standards. Financial institutions now have an improved comfort level for underwriting and re-selling proper quality loans – the credit crunch is slowly moderating.

The summer of 2008 may mark the actual bottom of the real estate plunge on a national level; some markets will face further price correction. However the path out of the crisis across the country will still be lengthy and painful, extending well into 2009.

How to use Market News at HingeFire

2008-06-12T19:57:00.001-04:00

One of the innovative community features offered at the HingeFire website is Market News. Users can submit financial news story links, and allow other members to discuss & comment on the articles.

It is easy to submit a link, simply go to Market News à Submit News at the top after you are logged into the site. A form appears asking you to provide a Title, Summary, url, and category before hitting “publish” at the bottom to post the news.

A direct link to submission is here (need to be logged in).

Market News is a great community feature and I would urge users to try it out!

Great News! HingeScreen 1.5 Now Available

2008-06-11T15:51:00.003-04:00

The new HingeScreen 1.5 software client includes many features asked for by the user community; more fundamental indicators, additional technical indicators, and new candlestick & chart pattern indicators. The 1.5 software client contains links to many community features at the new website including a Forum, Market News, Broker Ratings, and the Blog.

There is a wealth of educational information at the new HingeFire Site. Some of the best information to see on using the new HingeScreen 1.5 release includes:

Take a Tour
http://www.hingefire.com/Education/TakeaTour.aspx

Videos on usingHingeScreen
http://www.hingefire.com/Education/KnowledgeBase/HingeVideos.aspx

User Documents
http://www.hingefire.com/Support/Documentation.aspx

Information on Indicators
http://www.hingefire.com/Education/KnowledgeBase/Indicators.aspx

One of the primary beliefs of the founders of HingeFire is that investors do not need $3000 seminars to be successful in the market. Investors simply need the tools to provide an edge in the market and a community of like-minded investors to work with. The objective of HingeFire is to build the tools and community to enable the success of investors at all levels.

Coming Wednesday: HingeScreen Release 1.5

2008-06-10T16:44:00.003-04:00

Great News! HingeScreen 1.5 has arrived.

The new software release 1.5, and the totally updated website will become available during the day on Wednesday June 11th.

This does have a couple of important ramifications for the user community.

1) Users will have to download the new HingeScreen 1.5 software client at the new site in order to keep using the tool. The earlier 1.2 client is no longer supported. All of your existing screens, and results will automatically transfer on your PC when you upgrade to the same directory, so you will not lose any information.

2) All users' passwords have been reset to your username plus 123. For example an account with the username "paul" will have a default password of "paul123". Users will be able to immediately change their default passwords at their profiles on the new site.

The new HingeScreen 1.5 software client is still FREE, and includes many features asked for by the user community: more fundamental indicators, additional technical indicators, and new candlestick & chart pattern indicators. The 1.5 software client contains links to many community features at the new website including a forum, market news, broker ratings, and the blog. For a full list of the exciting new features in release 1.5, please see the Products section in the new website. A wealth of educational material and training videos are also provided on the new website.

I would like to thank the beta testers who gave feedback over the past couple of months. Our team is working to have a smooth transition tomorrow, and get the full-featured website and software release available to the entire community.

Dark Pools: A Regulatory Tangle

2008-06-09T15:49:00.004-04:00

An increasing vocal chorus is asking when regulators are going to step into Dark Pools. The Dark Pool market represents the wild frontier in equity trading. Dark pools now represent over 10% of stock market volume and over 20% of all trades in NYSE stocks.

In years past, ECNs represented the upstarts that were edging in on the business of the exchanges. The proliferation of electronic exchange networks fractured the market and siphoned trades off the major markets. ECNs were seen as a threat to the orderly operation of the market according to many older-schoolers. Over the past years the ruckus died down as many ECNs were merged out of existence; many being acquired by the very exchanges that squealed about the menace they posed. One glaring example is the Archipelago ECN, famous for making fun of Wall Street exchange floor market makers, being acquired by the NYSE.

In comparison the major exchanges seem to be awfully quiet today about all the trading volume appearing on Dark Pool networks. These exchange mechanisms were created by major brokerage firms to move large blocks of stock.

One primary concern is the lack of transparency in the market. Exchanges and ECNs provide details of every trade. These venues allow all the participants in the market to discover pricing and be fully included in the overall market. The hidden fractioning of price information with Dark Pools has led to gaming of the market within Dark Pool networks, as traders utilize the mechanism as a profit driving instrument rather than simply as a tool to execute large orders without moving price.

Regulators appear to be absolutely confused in regards to the proper way to address the Dark Pool phenomenon. At most they mention the subject in speeches without outlining any policy or actions. The lack of action is disturbing considering the requirement for proper transparency in the markets in order to maintain the confidence of the investing public.

With the increasing number of Dark Pools, there is the expectation that consolidation is coming. The proliferation of dark pool networks has led brokerages to offer interfaces that link dark pool and “light pool” networks, or offer access to multiple dark pools. These offerings have simply increased the gaming of the system and the utilization of algorithmic trading over the networks.

At some point the news media will start focusing on the abuse of Dark Networks causing regulators angst, and leading Congress to demand more transparency for the investing public. This day may not be far off --- as the Dark Networks continue to quickly grow in market share and an increasing number of trades are hidden from investors.

Legal Nirvana

2008-06-09T11:16:00.002-04:00

Nothing warms the hearts of corporate executives at public companies like the vision of class action lawyers being locked up in a cell. Especially when the visualization includes the lawyers responsible for 50% of the class action suits in the United States over a decade period.

Even more amusing is having one of the lawyers derided in the front page of a major newspaper for declaring that he is innocent, despite all the obvious evidence to the contrary. I expect that lawyer jokes will be at the top of the list in the executive happy-hour circuit during the month of June.

Serving Time, but Lacking Remorse

Q: What's wrong with lawyer jokes?
A: Lawyers don't think they're funny and other people don't think they're jokes.

Saving on Food: Avoiding the checkout coronary

2008-06-06T16:19:00.003-04:00

The cost of food keeps going up. Most customers cringe when going through the checkout line at their local grocery store these days. Coupons are back in vogue, and many people are comparison shopping between brands and stores to save money.

One problem is that the most standard items like milk, eggs, and bread that have risen in price significantly don’t normally have coupon discounts. One way our family is saving is by going to big wholesale discount centers such as Sam’s to buy these items. Milk at Sam’s is cheaper than any of the local groceries. Until recently we were not focused on using discount centers for food purchased; when I used to think of Sam’s it was for cheap electronics, office supplies, and other stuff. Times have changed – thanks to the rapid inflation in food prices.

On an interesting financial note, regulators are proposing to increase the margins for agricultural products in the commodities markets to curb speculation. This step was recently enacted for energy futures to reduce volatility, apparently it has not worked out very well – Oil jumped $10 today.

One recent article outlined “How to Save $400 a Month on Groceries”. The piece outlines some of the websites and strategies for finding coupons that will help you save in the checkout line.

Is Oil in a speculative bubble?

2008-06-05T18:30:00.005-04:00

Oil continues to trend upward with some pull-backs. It is an open question if the increases merely reflect a speculative bubble, or is indicative of real supply and demand.

Take the new survey at the top left of the blog to voice your opinion.

One interesting regulatory change over the past couple of weeks is the tripling of margin requirements at the energy exchanges. The New York Mercantile Exchange (Nymex) and ICE Futures Europe in London have boosted the margin required by speculators to make trades. The exchanges are hoping that the margin calls will reduce volatility and keep the lid on speculative price increases in the energy markets. On the day the changes were implemented, oil dropped by more than $7. Since this time however, the price has recovered to near $130.

A number of officials such as U.S. Treasury Secretary Henry Paulson have stated that high oil prices are here to stay, and are reflective of the world supply and demand situation. Jim Rogers agrees, stating that the oil bull market has years to go.

Other sources state that oil is in a classic bubble. No different than houses, dotcoms or tulips. The article in The Times makes the case that the oil price increases are not attached to reality, and outlines the case with some compelling numbers.

This leaves the question. Is oil in a speculative bubble that will pop before the end of 2008? Or do the price increases have years to go?

One truth is that bubbles always tend to go on longer than any pessimist ever believes it can; and eventually crashes harder than any optimist ever believed was possible.

The last survey – Gas at the Pump

The last survey on the price of gas at the pump showed that 43% of the poll takers expected gasoline to be between $4 and $4.50 per gallon on August 1st. 67% of the responders expected gas to be above $4 per gallon.

Is Lehman Next?

2008-06-04T15:04:00.002-04:00

Lehman Brothers has plunged over the past few days as Wall Street is speculating if it is the next Bear Stearns. The bank has fought these allegations with a string of press releases and appearances stating that it is properly capitalized and reducing debt. (Wait a minute, this sounds familiar – didn’t Bear do the same thing).

A string of major articles outlining Lehman’s woes has not helped the situation. The Wall Street Journal stating that the bank’s “balance-sheet troubles threaten to harm the wider financial system unless the bank takes decisive action”. The paper went on to say the firm will be forced to sell all or parts of itself to stay above water. Naturally this news has LEH stock targeting 52 week lows.

Lehman’s has not taken the press sitting down; it has come out swinging at parties that portray the bank in a negative light. At the top of the list is head fund chief, David Einhorn, who runs a $6 billion hedge fund called Greenlight Capital. (Lehman Battles an Insurgent Investor). He has been a vocal critic of Lehman’s and has profited on their pain by shorting the stock. According to most market watchers, “Mr. Einhorn instigated the latest dive in Lehman’s stock price two weeks ago when he encouraged other investors to short the stock at a large conference in New York”. He followed this up by agitating for a reduction in debt ratings for Lehman Brothers.

The firm is trying to portray Mr. Einhorn as a short-seller who is simply trying to pad is pocket by spreading negative news about Lehmans. Many on Wall Street simply point to the many times he has been correct in the past. In any account, the situation will play itself out over the next few weeks. It is unwise to underestimate the headwinds facing Lehman Brothers, their eroding mortgage portfolio represents a systemic risk not only to themselves but other Wall Street firms. The media is most likely right on target when stating that a merger is needed and the bank is at serious risk.

The question remains of how much LEH will sink below $31 in the next couple of months. Will the firm regain investor confidence or is it doomed for a big fall?

Wall Street’s Graveyard

2008-06-04T10:19:00.001-04:00

Bear Stearns was not the first firm to implode and float belly up on Wall Street. Portfolio.com takes us through the colorful history of other firms that have gone kaput since 1970.

Greed and lack of risk control is not a new story. However the danger in the modern era is that many of the firms are built on a mountain of derivatives and the collapse of one can lead to a cascading failure of others. Increased regulation of the derivatives market is needed to prevent this type of event.

Is Quantitative Trading alive or dead?

2008-06-02T11:27:00.003-04:00

Scores of quantitative hedge funds have taken hits over past year that make NFL hits in Sunday football games appear to be minor league. Many have questioned if there is a future to the quantitative approach to trading the market, all the current models appear to be completely discredited. Yet to entire industry continues to drive forward, new algorithms are being created, however most are still focused on wringing raw profit out of the market based on differences in data input.

Similar to the movie Groundhog Day, repeating the same mistakes will only lead to a cycle of the same results. The continuing flawed premise is the over-optimization of models to focus on profit while ignoring risk.

A recent study by the CFA Institute outlines many of the issues with quantitative models used by Hedge Funds. Many factors have led to a complete decay in performance, leaving funds scrambling to unwind exposed positions. The information reveals that profits opportunities for quants are harder to find and exploit, while the updated strategies expose firms to increasing risk. The concept that firms will trade strategies that increase risk while possible gains are minimized bodes poorly for the industry.

A couple of HingeFire briefs have touched on this subject in the past (see Is there a future for Quant Funds and Quants search for new math). The complete 100+ page study from the CFA Institute is available for free in PDF format and is very educational. It can be downloaded here - http://www.cfapubs.org/doi/pdf/10.2470/rf.v2008.n2

Wachovia CEO given the Boot

2008-06-02T10:08:00.001-04:00

The dirty laundry list appears to be almost endless, aiding telemarketers to steal money from account holders, money laundering investigations, selling customer lists, and a host of other activities that have Wachovia in trouble with regulators. Now all the problems have caught up with America’s most ethically challenged bank, CEO Ken Thompson of Wachovia has been shoved out the door.

Certainly the very poor acquisitions of mortgage companies such as Golden West also played into the decision. The resulting financial fallout has left Wachovia in state where it may need to further cut dividends and re-structuring.

"No single precipitating event caused the board to reach this decision, but a series of previously disclosed disappointments and setbacks cumulatively have negatively impacted the company and its performance," Smith said. It would be better to hear commentary on how Wachovia will in the future stay out of trouble with regulators and customers.

An earlier Hingefire article asked when the CEO would walk the plank (see Wachovia: Take Three Steps), now the board has taken steps to right the ship. The question remains if the directors can find a CEO candidate that has the moral backbone to place the bank back on course.

Vote Now: Gas Survey

2008-05-29T09:32:00.002-04:00

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.

Phishing risk rises

2008-05-28T14:32:00.002-04:00

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

Dividends: Selecting the best instruments

2008-05-27T14:09:00.002-04:00

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

2008-05-27T09:51:00.000-04:00

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”.

Countrywide Chairman tells Homeowners they are Disgusting

2008-05-22T10:38:00.002-04:00

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

Nuveen finds a way out

2008-05-21T17:14:00.003-04:00

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

Your Tax Dollars at work: Housing Bailout

2008-05-20T15:25:00.002-04:00

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

2008-05-20T13:12:00.002-04:00

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

Four Out of Five Wrong

2008-05-15T14:45:00.002-04:00

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.

Summary

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

2008-05-15T10:42:00.002-04:00

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.

What Stocks could potentially rise 100% in price?

2008-05-14T19:50:00.002-04:00

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.

Recession Proof Cities: Raleigh makes the list

2008-05-13T18:36:00.002-04:00

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.

Screening to Win: The Value Trap

2008-05-12T11:50:00.002-04:00

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.

Worried About Recession?

2008-05-09T15:26:00.001-04:00

World-renowned market forecaster, Bob Prechter, presents 3 FREE videos and a FREE report that will show you how staying cool and calm will give you a major advantage over others. These free resources will tell you what to do during a recession, including how to survive a recession, how to make money in a recession and whether or not gold is the best investment strategy in recession.

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Find the cheapest Gas Prices online

2008-05-09T10:39:00.003-04:00

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.

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

2008-05-08T15:22:00.002-04:00

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.”

Quote of the Week

2008-05-06T16:02:00.001-04:00

"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

2008-05-06T15:38:00.001-04:00

“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.

Brokers to reduce Technology Spending

2008-05-05T17:39:00.000-04:00

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

2008-05-05T09:48:00.005-04:00

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.

A proper stand: Canada will not bail out Investment Banks

2008-05-03T18:13:00.005-04:00

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.

Investools hit with SEC inquiry

2008-05-02T19:03:00.005-04:00

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.

New Survey: Gas at the Pump

2008-05-01T13:27:00.002-04:00

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

2008-05-01T09:45:00.003-04:00

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

Bring back Glass Steagall

2008-04-30T14:33:00.004-04:00

The Great Depression brought about many needed regulatory reforms. These acts served to curb excess speculation, and to keep the funds of bank depositors safe. One of the primary reasons for the insolvency of many commercial banks in the 1930s was the loaning of money for stock market speculation in a market that allowed absurd levels of leverage. Many of these banks owned brokerage security operations, and found an easy path to executive riches by pressing these loans on depositors prior the 1929 crash.

The Glass-Steagall Act tamed this circus by prohibiting banks from owning financial companies. This created a wall that stopped the ridiculous activities of banks that were not in the best interest of customers. Coupled with the creation of the FDIC and other reforms included in the act, the Glass-Steagall legislation protected both bank account customers and investors. The act prohibited a commercial bank from offering investment and insurance services while maintaining better regulatory scrutiny on capital ratios.

Unfortunately, the provisions that separated cross-ownership were over-turned by the Gramm-Leach-Bliley Act of 1999. Financial companies spent more than $300 million in lobbying over 20 years in their attempts to repeal Glass-Steagall.

Not merely content to simply mine the riches offered by the combination of insurance underwriting, securities underwriting, and commercial banking; Wall Street championed unregulated derivatives. The securities industry claimed that these contracts would distribute risk and regulating derivatives would impede economic development. Supported by the Federal Reserve the merged financial industry drove the wide-scale introduction of derivatives into traditional commercial banking markets such as mortgages.

Since 1999, the derivatives have grown on a parabolic curve. There are now over $516 trillion in derivatives outstanding.

In a short eight years, the rapid proliferation of derivative contracts has become the Trojan horse that is likely to undermine the entire modern banking system. The collapse of Bear Stearns should act as a warning for the entire financial market. It is time for regulators to step in and properly unwind the most troubled instruments, while providing concrete oversight to the entire derivatives industry. Obviously the lunatics have been found unfit to run the derivative financial asylum. Deregulation has run amok, and financial checks and balances must be restored to protect the economies of major nations.

Investment banks’ culture of risk is diametrically opposed to the purpose of commercial savings banks which is the preservation of customers’ assets. The introduction of derivatives as the primary under-pinning for the mortgage industry with little regulatory oversight was an event that was obviously going to end in a calamity; similar to giving liquor and a car to a chronic drunk.

The continuous reduction of the protections of Glass-Steagall, by politicians in Washington driven by banking PAC money, is the root cause of the current painful credit crunch which is undermining the entire U.S. economy. In order to fix the core problems, the protections created by Glass-Steagall after the harsh lessons of the Great Depression must be restored by Congress. A clear separation of commercial and investment banking must be reestablished.

A recent PBS Frontline outlined The Long Demise of Glass-Steagall.

Schwab YieldPlus Funds Tank

2008-04-29T09:12:00.003-04:00

For years, Charles Schwab marketed the YieldPlus funds as "a safe alternative to money market funds that preserve principal while being designed with your income needs in mind." Charles Schwab also represented that its YieldPlus funds were designed to provide "high current income with minimal changes in share price."

The Schwab YieldPlus Fund Investor Shares (SWYPX), and Schwab YieldPlus Fund Select Shares (SWYSX) have declined over 30% since July of 2007. Unfortunately for investors these funds had large investments in risky mortgage-backed securities. Morningstar now ranks these two funds as last among ultra-short-term bond funds. So much for the Schwab claim in the marketing literature, “The [YieldPlus] funds provide higher yields on your cash with only marginally higher risk [and therefore] could be a smart alternative.”

An earlier HingeFire article from October (see Grandma’s Money Market Fund feels the SIV pinch) outlined the risks of brokerage money market funds, and why investors should be wary of these instruments.

Now Schwab is offering investors a mere 5 to 12 cents on the dollar of their losses, and demanding that the account holders quickly take the offer. This, of course, drove investors to contact law firms to launch class action suits on their behalf.

Riots in the Streets: Food

2008-04-29T08:41:00.000-04:00

Well not quite yet… however a number of media pundits are urging people to stockpile food in order to get the best return on their money. According the CNBC, the price of eggs has risen 45% in the past few months; milk is up 33%, and cheese up over 15%. Coupled with the rising cost of fuel at the pump, most families are facing a double wammy.

The trends in food pricing are not going to change, but are likely to get worse. Most analysts are expecting even steeper price increases over the remainder of 2008. Economists would classify the situation as stagflation despite the government claiming the official inflation rate is below 3%. The situation is reminiscent of some of the previous Western economic calamities where inflation spun out of control.

Obviously the Fed policy is focused on propping up the markets instead of controlling inflation. As the money supply is increased by billions of dollars per week, the door is left open to out-of-control inflationary pressure.

The average bank account is yielding under a 4% return. As food prices climb weekly, the obvious better return is to hold food instead of cash. This has created a situation where many smart consumers are stockpiling food from their local wholesale club (Sam’s etc.) to get ahead of the curve.

The Wall Street Journal outlines how consumers are stocking up the pantry.

Is there a future for Quant Funds

2008-04-28T12:30:00.002-04:00

It appears the Quantitative Funds have been stranded on the lee shore, and a crowd is desperately trying to find a way to shove the ship off the beach. Even if re-floated the quantitative industry is mired in a cross-wind about its future direction; not knowing whether to tack or jibe in order to catch air in the sails.

The recent draw-downs during the credit crunch have raised the question if the mathematical wizards can navigate the waters; or if the conjurers would be better off safely ashore teaching theory at a university. Is there even a future afloat for these funds? The trends of lower cost IT, more powerful computers, mountains of instant data, and new modeling techniques can play both for and against these funds. The bottom line is that a proper definition of risk still haunts the players.

Earlier HingeFire articles (see Quants search for new math) discussed the confusion as these funds search for a new formula that will pull alpha out of the market while not leaving the funds sunk every few years. The current methods have proven to be more akin to gambling than investing.

Advanced Trading recently addressed the fund dilemma - Quants Searching for Alpha: Do the Pros Outweigh the Cons?

Two Days Left: Take the Gold Survey

2008-04-28T12:05:00.002-04:00

Make your voice heard. Two days left to vote.

Where will Gold be on July 1st?

Gold has recently been reaching new heights while also taking dips in a very volatile market. Where will this precious metal be priced in two months. Many wonder if the technical or fundamentals are driving this market. Is gold merely in a inflationary dollar-induced bubble, or does it have long term holding power at these levels.

Take the survey at the top left of the HingeFire blog.

The Feds take Wachovia to the woodshed

2008-04-26T11:03:00.007-04:00

In punishment for scheming with telemarketers to steal vast amounts of money from the accounts of thousands of victims, Wachovia will be paying nearly $145 million in fines and restitution. The bank supported the plundering in order to earn a substantial amount in fees, amounting into millions of dollars.

An earlier HingeFire article (see Banks Behaving Badly: Wachovia) outlines the scam perpetuated by the bank and telemarketers. Wachovia (WB) did not admit or deny wrongdoing as part of the settlement. In a statement, the bank said this "situation was unacceptable and we regret it happened."

The size of the penalties does not align with the obscene profits made by the bank in this telemarketer partnership scheme, which was fully supported by executives at Wachovia. The bank's actions were "part of a pattern of misconduct that resulted in" Wachovia collecting millions of dollars in fees, regulators wrote. Once again, a banking institution’s executives were not held criminally liable for their actions, and the penalties are a pittance when compared to the profits.

The settlement is disappointing because the victims do not automatically receive their money back. The duped, many of them elderly, will be required to file complex paperwork in order to claim their money. Many critics in Congress are demanding that the Office of the Comptroller of the Currency (OCC) directly mail checks to the victims, which was done in the past instead of requiring the account holders to file claims. The impacted account holders will have to submit forms through a complex bureaucracy. “Because many of the victims are elderly or poorly educated, it is likely many of them will stymied by these obstacles”, according to Rep. Edward J. Markey. This makes it likely that full compensation from Wachovia will never be paid.

While clearly this “settlement” takes Wachovia to the woodshed, the sting of the Federal switch will only last for a short period of time. After which the bank can romp, play, and continue to eat the candy it has stolen, while conniving its next scheme to slip a hand into the customers’ cookie jars.