Personal Finance – Page 19

An Advanced Penny Stock Scam

Posted on 15 March 201215 March 2012 by David Merkel

Don’t buy what someone wants to sell you.? Buy what you have researched, and know that it is what you want to buy, because it is valuable.

I have an irregular series on penny stocks, largely off of advertisements mailed to me, or things found on the web.? Every promoted penny stock I have run into has done badly.

Now for all of my prior penny stocks that I have been written about, all have done horribly.

Today’s gem is iTrackr [IRYS], which the advertiser says is the “Groupon Killer,” complete with a cover page that has a dinosaur labeled “Groupon,” being hit by meteors labeled “iTrackr” and “IRYS.”? Now, this time I got a full 16-page shiny brochure, which had quotes on iTrackr from two notable publications, but in 2006 & 2007, long before Groupon was prominent… and iTrackr did not gain in profitability since then, rather, it had larger and larger losses.

In five-point (or so) type, near the back of the brochure, there is the disclaimer.? I scan it with OCR so that you can read it at a normal size:

Disclaimer:

The xxx Newsletter and/or its publisher, Author Inc., dba blablabla.com did not receive any direct compensation (other than future subscription revenues, the amount of which is not known at this time) with respect to the publication of this Advertisement. Author Inc. has received ten thousand dollars in cash compensation to assist in the writing of this advertisement. BHB Marketing paid eight hundred thousand dollars to marketing vendors to pay for all the costs of creating and distributing this report, including printing and postage, in an effort to build investor awareness. BHB Marketing was paid by non- affiliate shareholders who intend to sell their shares.

?This publication does not provide an analysis of a company’s financial position. iTrackr Systems, Inc.’s financial position and all other information regarding iTrackr Systems, Inc. should be verified with the company. Information about many publicly traded companies and other investor resources can be found at the Securities and Exchange Commission’s website at www.sec.gov. Investing in securities is speculative and carries risk. It is recommended that any investment in any security should be made only after consulting with your investment advisor and only after reviewing all publicly available information, including the financial statements of the company. This mailing piece is not intended to be, nor should it be construed as, an offer to sell or a solicitation of an offer to buy securities, nor should it be construed as the provision of any investment-related advice or services tailored to any particular individual’s financial situation or investment objective(s). The xxx Newsletter is a bona fide publication of general and regular circulation offering impersonalized investment-related research to readers and/or prospective readers and is not an investment adviser. As such, it relies upon the “publisher’s exclusion” as provided under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. The xxx Newsletter is not a registered broker dealer. Staff members of The xxx Newsletter and its affiliates may hold positions in investments mentioned herein, and may buy or sell their interests on the open market at anytime. The xxx Newsletter presents information in this report believed to be reliable, but its accuracy cannot be guaranteed. Additionally, it includes forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding expected growth of the featured company. Any statements that express or involve discussions with respect to predictions, expectation, beliefs, plans, projections, objectives, goods, assumptions or future events or performance may be forward-looking statements. The forward-looking statements contained herein (which include all statements other than historical information) involve significant uncertainties. Factors that could cause actual results to differ from the results or implied in forward-looking statements include the size and growth of the market for the Company’s products, the Company’s ability to fund its capital requirements in the near term and in the long term, pricing pressures for the Company’s products and services, the Company’s ability to obtain needed resources, and the local, regional and global markets. Forward-looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties that could cause actual results or events to differ materially from those presently anticipated. Past performance does not guarantee future results.

Emphasis mine. I wanted to split and highlight the juicy stuff.

Now, let’s think about the math of the scam: they pay the author $10,000 to sell his limited credibility to pump a penny stock.? They put $800,000 into the production and mailing of the glossy brochure.? But the market cap of the company is only $6.7 million.? They think the advertisement will create a lasting 12%+ rise in the stock that they can sell into.? Pump-and-dump.? Proclaim a biased story in big print; offer retractions in small print.

No surprise to me, this company has negative earnings (which are getting worse) and a growing negative tangible net worth.? For fun let’s look at the risk disclosures from the 10-K:

Because there is doubt about our ability to continue as a going concern, an investor may lose all of his investment in our company.? [Oh yeah, the auditors don’t believe in us.]

iTrackr has a history of losses and may not be able to generate sufficient net revenue from its business in the future to achieve or sustain profitability.

iTrackr?s cash on hand and anticipated near term sales may be insufficient to fund operations for the next 12 months.

If iTrackr is unable to fund its operations and capital expenditures, iTrackr may not be able to continue to develop and market its products and services which would have a material adverse effect on its business.

iTrackr is dependent upon key personnel whose loss may adversely impact iTrackr?s business.

iTrackr?s management systems and personnel may not be sufficient to effectively manage its growth.

If we are not competitive in the market for online sales, marketing and customer service solutions, or online consumer services our business could be harmed.

We are dependent on technology systems and third-party content that are beyond our control.

Our services are subject to payment-related risks.

We may be liable if third parties misappropriate personal information belonging to our clients? Internet users.

Our products and services may infringe upon intellectual property rights of third parties and any infringement could require us to incur substantial costs and may distract our management.

Technological or other defects could disrupt or negatively impact our services, which could harm our business and reputation.

Our promotion and marketing of our websites may not result in generation of significant revenue which may cause our business to fail.

Unauthorized disclosure of sensitive or confidential client and customer data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation and cause us to lose clients which may result in our going out of business and for you to lose your investment.

Competition in the social networking, online marketing and e-commerce industry is intense and our competitors have greater financial resources and development capabilities than we have, and we may not have the resources necessary to successfully compete with them.

Our services may become obsolete and unmarketable if we are unable to respond adequately to rapidly changing technology and customer demands.

The loss of our executive officers or directors, could adversely affect our business.

Our Controls and Procedures may not prevent misstatements.

Our Financial Statements for the year ended December 31, 2009 and the quarterly periods ended March 31, 2010 and June 30, 2010 were Restated as a Result of a Re-Audit by our New Independent Accountant Which was Necessitated Due to Revocation of our Former Auditor?s Public Company Accounting Oversight Board (?PCAOB?) Registration.

There will be a substantial number of shares of iTrackr?s common stock available for sale in the future that may be dilutive to its current stockholders and may cause a decrease in the market price of its common stock.

Our common stock is considered ?a penny stock? and may be difficult to sell.

iTrackr may be unable to receive a listing of its securities on NASDAQ or another national securities exchange, and this may make it more difficult for its stockholders to sell their securities.

One stockholder owns a majority of our common stock and may act, or prevent certain types of corporate actions, to the detriment of other stockholders.

If we issue additional shares of common stock in the future this may result in dilution to our existing stockholders.

There is currently no market for trading our common stock, and when such a market does develop, the trading price of our common stock may be volatile, with the result that an investor may not be able to sell any shares acquired at a price equal to or greater than the price paid by the investor.

The trading price of iTrackr?s common stock is likely to be volatile, and you might not be able to sell your shares at or above the public offering price.

The concentration of iTrackr?s capital stock ownership with insiders will likely limit your ability to influence corporate matters.

The Company does not expect to pay any cash dividends for the foreseeable future.

Not too optimistic, as you can see, and one looking through the financials would note that they are running out of cash.

Do the large holders think that they will dupe enough people to buy their shares from them, and at advantageous prices?? Hmm… maybe any price above zero is an advantageous price.? As with many promoted penny stocks, it usually looks like a future zero.

Even if the scam is legal, I don’t get how the math works.? They really think they will get a sustained 12%+ rise in the stock, adequate to turn over the entire capitalization of the company into the hand of suckers?

Which makes this double-dumb.? When even the scammers don’t make money, it is one really dumb scam.

Main lesson: don’t buy promoted stocks, and particularly not penny stocks.

PS — Why did the advisor decide to write this?? Was he that desperate for money?? If I were one who bought newsletters, I would not be impressed with the lousy analysis here.

Dishonest Annuity Advertisement

Posted on 13 March 2012 by David Merkel

Those that have read me for a long time know that I am a proponent of immediate annuities.? Though they pay a fixed stream of income, they are more useful than bonds, because they provide longevity insurance; they can be tailored to prove an income that you can’t outlive, for you and your spouse.

But I got really annoyed when I saw an ad that said the following:

7% Income Guaranteed
No RISK of Principal

And if you click on it, it takes you here, where they talk about 8%+ returns.? Total garbage.

Yes, if you are old enough, when you buy an immediate annuity, the annual payment may be 7% or more than the amount that you gave to the insurance company.? But with the yield on long low-investment grade bonds? hovering above 5%, I can tell you with certainty as a life actuary that the life companies are not providing a 7% return to retirees — it is far, far less, more like 4%, or maybe less.

So why the difference?? Immediate annuities work off of the idea that a lot of people will die, and money from their annuities is reallocated to the living (minus a profit for the insurer, on average).? The insurer earns 4.5% on its investments, and additional money of 3.5-5.0% from deaths of annuitants supports the payments of those living, with 1% to cover commissions, administration, and profits.

So, they advertise that they are paying you 7-8%+, when they are really paying you 4.0-4.5%, and exposing you to the risk of inflation, because that payment will never rise.? Ask them for payout levels on inflation-adjusted immediate annuities, and watch your jaw drop as you see how relatively low the payments are.

This is dishonest advertising, because not only are they not giving you the true level of returns, but they tell you there is no risk of principal.? Guess what, though I like immediate annuities, the only reason there is no risk of principal with them is that you surrender your principal when you buy one.? Your principal is gone, and you have a payment stream that will disappear at death (or death of you and your spouse).

This advertisement was probably put together by an independent agency, but blame still goes to the insurers that allowed themselves to be involved in such a scam:

Allianz
Aviva
Fidelity Investments
Genworth Financial
ING
Metlife
Midland National
New York Life
Pacific Life
Prudential (US)

Shame on all of you.? This is deceptive advertising that defrauds those who trust the representations of your agent.? State Insurance Commissioners, please take note.

If something seems too good to be true, it usually is, and this is another example of that.

Buy-and-Hold Can?t Die, Redux

Posted on 7 March 2012 by David Merkel

When I wrote my piece last night, I did not write it to say one ought to buy and never sell.? In investing, I encourage the concept that one must look to relative valuations and trade assets that are worth less for those that are worth more.? In doing so, one maintains exposure to the overall risk of the markets, but shifts to more promising areas.

But what if valuations get so strained that future returns from most risk assets are tepid?? At that point, buy-and-hold turns into sell-and-wait.? It’s like being a bond manager — if the excess returns are small from taking additional risk, you don’t take additional risk.

I tend to turn over my portfolio once every three years.? That to me is a good tradeoff between holding for a long time and recognizing that opportunity changes over time.? But my trading is driven by analyzing relative opportunity, selling what I think are lower future cash flow streams for larger cash flow streams.? Do I have a crystal ball to tell me which is better?? No, just business judgment.? As Buffett says, “I am a better businessman because I am an investor, and I am a better investor because I am a businessman.”

My business judgment has done well for me over my career, but I don’t pretend that it is infallible, because I make significant mistakes.? Humility is an asset to the investor, because we don’t always know the right course.? That said, let diversification handle uncertainty, and within risky assets trade away less promising assets for those with more promise.

A reader wrote me, one who works for a prestigious university and he said:

Since 1926, the minimum inflation-adjusted total return of the S&P 500 (or its predecessor index) has been over 4%, annualized, over every 40-year rolling period.? For 20-year periods, the returns are typically either high (say 9%) or low (say 2%).? Thus, the buy-and-hold investor is best off with the 4-decade hold time.? Fortunately, 40 years matches the typical work life of a person, so workers ought to be shoveling retirement money into equities, and leaving there when they retire, if history is any guide.

?Your thoughts?

Yes, so long as your government holds together, over longer periods of time we do better.? But the tough part for retirees is “What is my situation like when I retire?? Yes, I built up a pot of assets, but what will that buy in terms of continuing income, and will that do well against declining purchasing power?”

There is no magic bullet.? I try to solve this by shifting industries over time, aiming at the most promising current opportunities, but not leaving the market in entire.? I limit cash to 20% of the portfolio when valuations are strained for he market as a whole.

Back to the question, yes, I think most people should buy-and-hold, if they can’t analyze the asset markets.? That’s like the Biblical proverb that a fool is counted wise if he is silent.? But for businessmen/investors there are often relative opportunities to do better.? Analyze those opportunities and take the best of them.

Yes, have some exposure to risky assets for your career, but vary the amount of exposure, and where it goes relative to likely opportunity.

I appreciated Jonathan Burton’s piece Speed kills, but so does complacency.? Like me, he is trying to strike a balance between hyper-trading and permafrost.

My mother is a good example here, though she does things differently than I do.? She holds stocks for a decade or so on average, and analyzes to see whether they have long-term prospects.?? She buys, holds, and occasionally adjusts.? She spends more time painting, for which she has a degree of reputation.? She beats average asset mangers regularly.

The main idea should be one of relative value: trade to improve.? Look at the underlying cash flow streams if you can, and trade smaller for larger.

Here’s one more tool to help you.? When the amount of money into an asset goes parabolic, it time to leave.? It is rare that large amounts of additional money will yield excess returns.? This simply admits that there are times when it is wise to reduce exposure to risky assets.? just as bond managers look at yield spreads to commit capital, so should investors in risky assets aim for a margin of safety in what they invest.

As a final note, buy-and-hold is a fundamental strategy in investing.? It presumes that you spent the time analyzing whether this asset was undervalued.? If it becomes overvalued, it does not mean you should hold it.? Always look for better relative value.? In the end that leads to better portfolio performance.

Sorted Weekly Tweets

Posted on 3 March 20123 March 2012 by David Merkel

I am considering making this an end-of-the-week feature as a news recap.? Comments?

Financials

BofA?s Clash With Fannie Intensifies as Insurers Reject More Loan Claims http://t.co/fKgxwcVO Originators need to bear UW error results $$ Mar 03, 2012
Life as Libor Traders Knew It Seen as Abusive http://t.co/H5o5cH3G An inside look at the problems of LIBOR. Collusion & marketless numbers Mar 03, 2012
$AIG Earnings an Illusion of a Bend in US Tax Laws http://t.co/GCZHUKsu IRS gives AIG special treatment by allowing it to use NOLs post-BK Mar 03, 2012
You have a good point, and I may reference it when I write this evening, but valuations have compressed for all insur? http://t.co/BRTuHnvf Mar 01, 2012
Fannie, Freddie and the $180 billion hole http://t.co/Lnoh7VPH F&F transferred wealth to early investors from taxpayers & late investors $$ Feb 25, 2012
Make losses and prosper, AIG edition http://t.co/EYykmbmZ Hey Q: how much $$ will $AIG make in the future in order to not pay taxes? $$ Feb 25, 2012

Berkshire Hathaway

Contra: Warren Buffett on Investing http://t.co/OH0dQxXP Buffett has not been a deep value investor for 30 years; this article misses it $$ Mar 02, 2012
+1 RT @valueprax: Thoughts On Mergers, Acquisitions And Conglomeration From Rothbard And Buffett (@AlephBlog, $BRK) http://t.co/khZH5Uiq Mar 01, 2012
The Truthiness of Berkshire’s Performance http://t.co/5iSsrAHL Don’t think Buffett anticipated the P/B squeeze in insurance stocks. $$ Mar 01, 2012
Buffett Plans More Solar Bonds After Topaz Deal http://t.co/pjrAKQub Buffett doesn’t give suckers an even break, no guarantees on solar $$ Mar 01, 2012
RE: @TheStreet_News When I wrote for RealMoney, I was often critical of Buffett, but I have shifted.? He is a great e? http://t.co/r4z14uUC Feb 29, 2012
When you think you made a great purchase (Warren Buffett edition) http://t.co/ME9RwqFf I was surprised to learn about this $BRKa sub also $$ Feb 28, 2012

Home Schooling

Question of priorities, could conserve RT @ReformedBroker: “How am I supposed to live on $350,000 a year?” – you’re right, kill yourself $$ Mar 01, 2012
@ReformedBroker Have his wife call my wife; can save lots of $$ if u go from private school 2 homeschool, & it is easier than 1 would expect Mar 01, 2012
@ReformedBroker The downside is that it is a lot of work, but not hard work, and the challenge is controlling your children frequently $$ Mar 01, 2012
@merrillmatter I know you’re kidding, but the mothers I know who homeschool would be fearsome in the business world were they redirected $$ Mar 01, 2012

Municipal Finance, or lack thereof

If Stockton Is Broke, Then Why Isn?t San Diego? http://t.co/dzCE9FjX Govt Unions fight to keep benefits govts shouldn’t have granted $$ Mar 03, 2012
Pension Pain Mounts, Low Rates Boost Liabilities http://t.co/NZndpR5g More evil results of Fed policy substituting debt 4 organic growth $$ Mar 01, 2012
To Pay New York Pension Fund, Cities Borrow From It First http://t.co/feOXK8E3 Shell game at best; net contributions needed to DB plans $$ Feb 29, 2012
Raiding the coffers http://t.co/5h2Fx5ZL State pension plans r borrowing from their pension plans 2 fund their own pension contributions Feb 29, 2012

North Korea

@LSilverspar You made me laugh, yes, all of these have impacts on us… but given their counterfeiting, some action should be taken $$ Feb 29, 2012
@dpinsen And access of the Dear Leader to his favorite Scotch… hitting him where it hurts. 😉 $$ Feb 29, 2012
@dpinsen Agree, bigtime. We got them to the bargaining table last time by cutting off their financial access to the rest of the world. $$ Feb 29, 2012
Then once NK starts to counterfeit it, go back to new $50s & $100s; make their life tough. Feb 29, 2012
How the U.S. Could Pressure North Korea Tomorrow: Quit the $100 Bill http://t.co/DkXUZsy7 This is worth doing, and create a $75 bill $$ Feb 29, 2012

Eurozone

Greek PSI exchange summary – an offer you can’t refuse http://t.co/K4OUOqm3 Yes, we all voluntarily give up 70% of the value of r claims $$ Mar 03, 2012
Greek Crisis May Test the Value of Swaps http://t.co/hG27iIak ISDA wimps out and does not declare a credit event; will destroy Sov CDS mkt Mar 03, 2012
A Primer on the Euro Breakup http://t.co/OB2sdwzB Explains why the Euro will break up, at least at the fringe &y this should not surprise $$ Mar 02, 2012
ECB Free Money May Carry a Cost http://t.co/g1bNl281 Makes governments relax & ignore structural problems, & banks arb the ECB $$ Mar 01, 2012
ECB Allots ?529.5 Billion in Long-Term Refinancing Operation http://t.co/8o0OE7XO Higher than anticipated takeup of cheap funding $$ Feb 29, 2012
More signs of Draghi’s “stabilization” http://t.co/zdFol9Vj euro area banks show material tightening conditions in the banking system $$ Feb 28, 2012
On PIGS on Drugs http://t.co/VtOZYdwt European states owe ?12-15 billion to the pharma industry; they stop paying suppliers b4 cutting staff Feb 28, 2012
http://t.co/wQYFVFWH “Amused – Italian banks figured it out. An hour before LTRO results, 5 Italian banks issued & bought their own bonds.” Feb 28, 2012
Europe Gets Ready for Round 2 of Bank Loans http://t.co/N0rpX9O7 Heightening the dependence of stressed banks and govts on the ECB. $$ Feb 28, 2012
You may want to hold off on buying that Italian villa http://t.co/EP92Zd4m 66.5% of agents report a fall in housing prices during 4Q $$ Feb 28, 2012
@japhychron Can’t think of anyone, btw, there is a theory that a decent # of stressed banks used LTRO 2 buy in their own debt… $$ Feb 28, 2012
LTRO programs’ impact on sovereign bond purchases by banks (past and present) http://t.co/ffbNfY3B Indirect way of financing fringe govts $$ Feb 28, 2012
Mario Draghi reveals the Grand Plan http://t.co/Dal4wEDo & http://t.co/KNj9mhgx Good austerity results in freer mkts, more growth $$ Feb 28, 2012
Merkel torn by conflicting pressures in Greek vote http://t.co/0iCZV4kQ Any other Firefox users noticing that Reuters pages format badly? $$ Feb 27, 2012
@moorehn Good piece, I think many will benefit @soberlook has been writing some good stuff also http://t.co/tAlkFpXR & http://t.co/jcLBc04c Feb 24, 2012

China

China?s Billionaire Lawmakers Make US Peers Look Like Paupers http://t.co/d2haqyDc China’s lawmakers r absolutely more wealthy than US peers Mar 01, 2012
China May Double Rare Earth Exports as Demand Rebounds http://t.co/MaDQX4rc Quite a change from prior, makes u wonder why they change… $$ Mar 01, 2012
Why China Will Have an Economic Crisis http://t.co/xn3W2Wxa This is getting very mainstream, makes me think I could be wrong. $$ Feb 29, 2012
Fortress? Michael Novagratz on Lessons from OWS, and China http://t.co/yTSqXqYR Cronyism raises the odds of domestic violence in China $$ Feb 25, 2012
Evil Overlords or Lucky Devils: The Men Who Rule Hong Kong http://t.co/BEqw7Z0Z Long but interesting, re the influential wealthy in HK $$ Feb 25, 2012

Credit

Junk Isn?t http://t.co/olYEeOGe Spreads are down and investor interest is up; this is my biggest intermediate-term concern at present. $$ Mar 02, 2012
Junk vs. Loans http://t.co/JbIHAFtt & http://t.co/tccF8pML Loan participation funds cheap compared 2 junk, but downside still there. Feb 29, 2012
The rating agencies are the farm teams for credit analysts, in the same way that Value Line is for stock analysts.? A? http://t.co/Qfj1lYhu Feb 29, 2012

Upcoming Book of Josh Brown

I invite you to read his website http://t.co/Qom9t2Zy .? He writes a lot of clever stuff there.? One of ? http://t.co/r34pi1pR Feb 29, 2012
Confessions of a Reformed Stockbroker http://t.co/B4dkJ5XI Another preview article 4 @reformedbroker ‘s forthcoming book $$ Feb 29, 2012

Personal Investing

Dividends Rise Again http://t.co/gT6AcZXq Their coffers bulging with cash, companies are increasing the once out-of-favor common dividend $$ Mar 03, 2012
IRAs Get Sexier http://t.co/XVG5u56g All manner of illiquid assets can b crammed in2 an IRA if you have a friendly custodian $$ #beware Mar 03, 2012
Treasury yields and credit spreads divergence is not sustainable http://t.co/LvfHNU4t Ordinary times credit spreads r inverse 2 Tsy yields Mar 02, 2012
The Myth of Commodity Diversification http://t.co/ZoMhgv7M A defense of why gold is a true diversifier of portfolios versus commodities $$ Feb 29, 2012
Conflict of All Conflicts http://t.co/RgZmO3nv from @reformedbroker I rarely get angry, but this one annoyed me; skewed incentives $$ Feb 29, 2012

Accounting rules (yes)

Standard Setters Strain 2 Avert More Revenue-Recognition Angst http://t.co/jRlnmLPa Industry-specific revenue policies r better; reject IFRS Mar 03, 2012
Another “Case” of Terrible Decisions Borne of Terrible Accounting Rules http://t.co/wb2PB5BF Don’t compromise on revenue recognition. $$ Feb 29, 2012
Mark-to-Market Pensions Show Brutal Year http://t.co/NhwMePZG Some companies are biting the bullet and moving pension acctg to mark2mkt $$ Feb 25, 2012

Corporate News

Natural Gas Renaissance Sparks Favorable Chemical Reaction http://t.co/G0QHxkVu Petrochemicals benefit from cheap fracking feedstock $$ Mar 02, 2012
Apple Dividend May Return Part of $98B Cash http://t.co/FzFTTr2X If $AAPL can’t use all of its cash then give it to shareholders $$ Feb 29, 2012
@PlanMaestro Operating profitability is poor, and given their business mix, their P/B is fair for a company with a 5% anticipated ROE. Feb 29, 2012
@ToddSullivan Now if they can achieve a decent ROE, and not have weak reserving… I was wrong regarding Maiden Lane when I wrote about it. Feb 29, 2012
CNA: A P&C Insurance Turnaround Story http://t.co/WRwhf5sV A fair analysis of $CNA, worthy for insurance investors 2 read. O, he cites me $$ Feb 29, 2012
One thing that is not mentioned frequently is that shale gas production profiles tend to peak and decline rapidly. Th? http://t.co/flnQvRwt Feb 28, 2012
?Hope Phase? for Stocks May End in Tears Again http://t.co/z6Sbfu7n Markets anticipate sustained US growth & soft landing for China $$ Feb 28, 2012
Confronting a Law Of Limits http://t.co/kIFgxwk8 How does $AAPL grow into its valuation? Especially where obsolescence moves rapidly? $$ Feb 25, 2012

Miscellaneous

FDA Warns on Statins http://t.co/7K37iJVe Every drug has side effects, w/statins it may be diabetes. Be wary, & avoid all drugs if u can $$ Mar 01, 2012
Seriously? Any reason to avoid it? RT @kasie: Days since Mitt Romney has taken questions from the national traveling press corps: 17. Feb 25, 2012
Slavery should be an issue where liberals and conservatives could agree for policy, and maybe apply the Palantir technology 2 root it out $$ Feb 25, 2012
Fishing as Slaves on the High Seas http://t.co/0Bakkir5 Another place where slavery still exists; sex trade, Dubai construction & more $$ Feb 25, 2012
Why Doctors Die Differently http://t.co/e3rnOTz8 Careers in medicine taught them the limits of treatment & the need to plan for the end Feb 25, 2012
‘Japanese Madoff’ Flagged http://t.co/U7vgrOap Industry Newsletter Warned in 2009 About Firm’s ‘Unnaturally Stable Returns’ $$ #ponzi Feb 25, 2012
Killer App http://t.co/kUT8X9Ji Have a bunch of Silicon Valley geeks at Palantir Technologies figured out how to stop terrorists? Palantir. Feb 25, 2012
At 35, I was a devoted Husband and Dad of 5 children, with the oldest being 7 years old.? Nominally, I was the invest? http://t.co/AYUuRMsi Feb 25, 2012
War with Iran:Would you go bankrupt for your country? http://t.co/d5rVA9Ww War does not stimulate the economy, contrary 2 popular belief $$ Feb 25, 2012

Economy

Is Japan Doomed? http://t.co/qZev2jSA What? There’s a free lunch where the Govt can borrow indefinitely? NO! Cash flows about 2 shift b wary Mar 02, 2012
Core inflation is once again above expectations http://t.co/uxjbXofE There is inflation coming; stagflation even; bad policy begins to bite Mar 02, 2012
A Wake-Up Call for Japanese Watchdogs http://t.co/r1JMhnM2 Bigger than MF Global, smaller than Madoff; how do you say Ponzi in Japanese? Feb 28, 2012
Oil denominated in EU currencies is at record highs; demand destruction likely http://t.co/KwWkFvJM Wonder where breaking point is? $$ Feb 28, 2012
Gundlach warns U.S. stock market vulnerable http://t.co/g8hKrNSJ Investors concede rally almost over; still expect to earn coupon-> danger Feb 28, 2012
Architecture Billings Index indicated expansion in January http://t.co/nZV1OCdw leading indicator 4 new Commercial Real Estate investment $$ Feb 28, 2012

Difficult Decision

Posted on 2 March 2012 by David Merkel

We would all like our practical decisions to go easily, and bear quick positive results.? That’s not reality.? As for me, I needed to decide whether I would:

borrow against my home at 3% for 15 years.
liquidate a portion of my taxable brokerage account
liquidate shares in best private manufacturer of commercial lawn mowers in the world.

I decided on the flexible and probably low-cost solution, selling some of the taxable brokerage account.? I have two accounts, an IRA and the taxable account.? They were invested differently, but my investors get a blend of the two accounts.? I used to put the higher income names into the IRA, while the taxable account would take the lower income names.

That has been changed. Both portfolios have the same proportion of names (companies). In the process, gains have been realized, but not so much as overwhelm the deferred losses of the past.

But for this exercise, one salient result was that both portfolios, which are the model portfolio in aggregate, would become like the model portfolio.?? They are now clones of each other, as is true of all client portfolios that I manage.? My promise to clients is that they get what I get, so I create a clone of my portfolio for each client.? It certainly aligns my incentives with theirs.? Even after today, my next-largest client is 20% of my aggregate portfolio.? So, yes, I eat my own cooking, and in general, my cooking has been tasty over the last twelve years, even though the last year has been less than inspiring.

On the bright side, with the market up, it has allowed me to harvest an amount that will take care of my family for a year, while leaving my portfolio up considerably from one year ago.? That helps a lot when revenues from managing money are still light.

Hopefully, within a year, I will have enough clients that my revenues support my family.?? We’ll see; but if that doesn’t happen I know there are a number of firms that would like to employ me, so my downside is limited.

One final note: one reason why this was a difficult decision was that the low rates for mortgaging my home were more difficult to obtain while self-employed.? Aside from my investments, I am not earning as much as I used to.? The fixed costs of liquidating part of my portfolio were 6% of the fixed costs of obtaining the mortgage.? Beyond that the question remains as to how well equities will do in the future, a question for which I have no good answer.

I think I made the right move here; I usually do, generally, but we will see whether this was the right decision over the next few years.

Individual Investing Can Be Tough, Redux

Posted on 21 February 2012 by David Merkel

I have many software robots that scan for responses to what I write.? Most come directly to me.? Some do not like this one at Seeking Alpha:

Merkel’s reasons are, to be blunt, stupid.

1: Its too crowded and there is too much competition: While his goals may be to outperform many of us just want to build wealth.
2: Too much information: Just ignore the stuff that is unimportant. More information the better it certainly beats how things were decades ago.
3: “We are in a macroeconomic environment where we are delevering. That is not the best environment for making money”
For someone claiming 20 years of experience that is incredible naive.

First, we build wealth in competition with others, and the competition has grown, not shrunk.? The anomalies the allowed smaller investors to prosper are for the most part well-known.? Whether they are over-fished is another matter.? I think that previously profitable strategies still have value to the degree that they are ignored as no longer valuable.

Second, yes there is way too much noise, and I even create some of it.? Yes, I try to filter the information I receive, but I receive a ton of it, and filters are not perfect.? Please tell me how to construct a perfect filter, because mine are imperfect.? If we could create perfect filters we would be very, very rich, unlike me and the commenter.

Third, I don’t get the last comment, except that the person does not understand that periods where lending is expanding usually offers the highest returns for risk assets.? Presently we are contracting.

If I am naive, it is that I am an idealist.? I want better economic policy, and see lousy governance at the Fed, Treasury, and State levels.? As a result, on average, I see low real returns for assets over the next 5-10 years, unless policy changes dramatically.

Should I Invest or Save?

Posted on 19 January 201220 June 2017 by David Merkel

“Should I Invest or Save?”

An easy question, not.? First, I need to know your time horizon.? If it is short, save.? The bank will invest your money, and you will get a little back from it.? Second, I need to know who you are?

Is it possible that you will need the money in six months?? Do you have three months of expenses saved?? If not, save, don’t take the chance on investing.

Investing is for those that can take losses.? Even if your goal is long term, I would have to ask how important it is to achieve your goals.? The higher the importance, the greater the funding need.? Fund assuming that returns in the market will be positive, but poor.? If the goal isn’t that important, contribute less, and assume a higher return on assets.

The main idea here is that you should invest more for goals that you care a lot about, because those goals will be achieved, most likely.? Goals that rely on high asset returns are not likely to be achieved.

Two Reasons for Life Insurance

Posted on 10 January 201210 January 2012 by David Merkel

A reader wrote to me:

I periodically read your blog and it seems like you have a strong grasp of the insurance industry. ?As well, given your background as a life actuary I imagine you might have some valuable insights on whole-life products. ?I am having a baby in the late spring and have been considering the right composition of my life insurance coverage (term vs. whole life), and have thus far had a lot of trouble making sense of the whole life math and why it is a compelling option for me. ?I have received quite a lot of data from an insurance broker with the IRR’s, cash surrender values at different periods, etc., but unfortunately can only get this data in PDF form without really understanding the assumptions behind how the cash surrender value grows, or how the dividends get calculated. ?In short, I have been unable to come to a more developed thesis than the idea that whole life is just a way to lock yourself in to a middling return while the insurance company benefits from your float and makes a spread off you, while taking insurance company credit risk for decades, with some benefit in the ability to pass down a decent amount of money tax free to one’s kids when they die. ?

How do you view whole life, do you own any yourself? ?If so, I’d love to understand your logic. ?I recently re-read part of Buffett’s 94 letter in which he states how he buys whole life policies from people about to stop paying premiums for more than the cash surrender value and can only surmise that somehow at the point he is buying them there is probably a higher IRR than in the beginning of the policy (which makes sense given the math I have seen.) ??

I am skeptical because I can’t figure out the answer, which makes me not inclined to lock myself in to a life-long financial commitment with an institution that might not be around in 70 years.

For most of my life, I have had term insurance.? It was cheap, and protected my wife against an untimely death of me when we were less-than-well-off.? At present, we are uninsured on my life because my wife has enough assets that if I die, she can fund the educations of the remaining kids, and live thereafter, with perhaps some work on her part.? She’s really bright, but who would be smart enough to hire her?

In general, I think it is smart for young people to buy 20 or 30-year term insurance.? It takes care of the period where your family is most vulnerable.? You get coverage when you are young and healthy, because you don’t know what tomorrow will bring.? Then save and invest to build up assets to meet the needs you may have when the term policy runs out.? If you still need insurance at that point, and are healthy, get underwritten again for a new policy.

There is one place where a whole life policy can make sense. Sometimes mutual insurers use a portfolio method for interest rate crediting. In an environment like this, where interest rates have fallen so much, that means they are crediting to new money the same rate that they are getting old money. That is quite a bonus, so if you can find that, it may prove to be cheaper than getting a long term insurance policy.

As for the second reason to buy life insurance, it is one of the most enduring ways to scam the taxman.? Death benefits are not taxed by the states or the federal government, and unless the person dying was the policy?s owner it is immune from estate tax.

This creates a wide number of vehicles that wealthy people use together with annuities and trusts to transfer wealth out of their estate, and into death benefit proceeds that will pass to their heirs outside their estate.

This is one reason why I believe the estate tax has to go. It does not accomplish its stated ends. The wealthy find all manner of clever ways to escape it. It would be far better to eliminate the ability to shelter income from taxation while they are living. Besides, the government needs the money now.

Closing Points

?First, don’t worry about the credit risk, within limits, the state guarantee funds stand behind the insurance companies. For most people that should be enough.

Second, as for Buffett buying life policies, this is done only when an investor buys a policy from someone who is expected to live less long than the actuarial tables would’ve predicted at the time of policy issuance. The policy is more valuable than the cash surrender value; the investor attempts to make money off the difference.

This is a controversial area, and I am generally against the practice. It should not be legal; it endangers the tax favored status of life insurance, because it allows people without an insurable interest to benefit from the proceeds of life policy. That said, the market would go away if insurers were willing to deal more favorably with those who have impaired lives, and want to cash out their insurance policy.

Third, I have run into really advanced methods for scamming the taxman that involve asset-backed securities, trusts, and what else? Life insurance. In general, I think the U.S. Treasury should use their anti-abuse rules in order to invalidate these transactions, because they lack true economic purpose. That is, even if they are structured in such a way as to give the appearance of economic purpose, there is no reason that a businessman in his right mind would structure the business in that way, except to avoid taxes.

Finally, remember that the agent has a different motive than you. He wants to earn a commission. Commissions are low, and prices are easily comparable on term policies. There are services that will even do the comparison for you. The only way that an insurance agent will earn high commission is by selling a policy that is complex, not comparable to other policies, and builds up assets. The insurance company pays a high commission on such policies because they can earn investment returns off of the excess premiums that you pay in relative to a term policy.

Life With Wife

Posted on 24 December 201125 December 2011 by David Merkel

My wife has only given me financial advice twice in my life.? She was totally right both times.? Now, she doesn’t have a financial bone in her body.? She was raised in a household where she never lacked anything, with non-materialistic parents where the father earned a lot as a nuclear physicist.? She was a princess,never having to worry, and married a prince, me, where she never had to worry.

As an aside, the father recently died, and he was quite a guy, but humble.? If you ever get therapy in a hospital that requires a cyclotron or any delivery device that allows positrons or any anti-particle to be used in surgery, my father-in-law was the brains behind it.? He was an amazing man, and though my wife is astounding, one benefit of marrying her was getting to know her father, who was an amazing man.? (Did I tell you he was amazing? 😉 )

Anyway, the first time my wife gave me investment advice was when I worked for the St. Paul.? My boss invited me to his officein early 2000, and handed me an envelope.? He said, “This is your bonus, invest it wisely.”? At that point in time, St. Paul was in the tank, and no one liked it much at all.? I took the wad, and put it all on The Saint Paul.? (My wife was amazed at the size of the bonus, but the bonus was given for keeping the company safe, not for making a ton.)

Eventually, it leaked out that I had invested so much in the parent company.? Members of my investment team told me I was a dope, and that the St. Paul was a lousy company to invest in. One told me, “No that’s not value investing, value investing requires a catalyst, and there is no catalyst here.”? (Note: catalysts do not always appear, and they can be expensive.)

Me, a value investor thought that buying a company at 55% of liquidation value, and a single digit multiple of forward earnings would do fine.? After one month, several P&C insurance CEOs announced that they were seeing pricing power, and the stock of the St. Paul rose 30%.? I could not sell, because I was constructively an insider, though I had no insider information.

After another 3 months, the cycle was in full swing, and the St. Paul’s common stock was up 80% from where I bought it.? At that point, my wife came to me and said, “You’ve been talking a lot about the St. Paul over the last few weeks, how important is it to our family?”? I told her, “It is half of our net worth.”? She said, echoing things she had heard me say previously, “Shouldn’t you take something off the table?”? I told her that I would.? I liquidated the whole position at my first opportunity, given my restrictions.? My gain was 95%, over six months.

As it was, after I did this, that many people at the St. Paul came to me saying, “You sly dog, you are a genius, but now we are doing it too; we are in this with you.”? I told them, “Aack, no.? Don’t do this.? You are buying? the top.”? And, wrong again, the price rose for a few more months, only to fall dramatically.

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A few years later, my wife said to me, “You keep talking about Wright Manufacturing, and how well it is doing, but how much do we own of the company?? I said, “You see our house?”

She said, “Of course.”

I said “Well, our holdings are worth a little more than our house.”

Beyond her ordinary ability, she asked, “Okay, David, but would you invest in this company to the degree that you have if it were publicly traded?”

I told her “No.”

She then asked, “then why don’t you take something off the table?”

I was cut to the heart, and I told her I would do so.? I sold half of my shares to the second largest shareholder.He told me that he would meet me at my office at Hovde.? After he got there he was amazed at me and said, “Wait, you are a smart guy, what am I missing here?”? I told him that I needed the money for the college educations of my children, so I needed more liquidity.

That mollified him, and allowed me to sell before the price cratered in 2008-9, as the company nearly failed.

But that’s another story, one where I bought amid distress, but not enough….

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I love my wife.? We just celebrated our silver (25th) anniversary.? She is wonderful in so many ways that I cannot describe here, and her children (and mine), biological and adopted would agree.

Though a princess, she absorbed enough of my ideas to counsel me at two particularly important turning points for the good of our home.? With the St. Paul, I probably would have done the right thing but with Wright Manufacturing, probably not.

So I praise her here for absorbing my wisdom, and applying it to me, when I could not do so myself.

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To bright people in finance I would say pay attention to those near you who don’t have your acumen, if they have been around you long enough.? They may give you cues that you could not ordinarily get, and it might just save your hide.

For me, this gives me an opportunity to praise the second most important person in my life, my wife, who typically has no impact on financial decisions, but at a few critical points did very well for me and the family.? She learned from me.

As for the one most important, that would be Jesus Christ, who many imagine they are honoring at this time of year, even though he never asked that his nativity be celebrated.? Just saying.

The Gold Medal Gold Model

Posted on 13 December 201113 December 2011 by David Merkel

Eddy Elfenbein is a clever guy; he put together a model of gold prices that fits the data very well.? Tonight, I will share my own variation on the model, and try to give an intuitive explanation of why it works.

Ask yourself this: where does investor put his money if he wants to stay safe?? Most people are savers not investors, so ideally they would want to put their money on deposit and earn a real return with the ability to access their money at any time.? Then there is the alternative asset, gold.? Gold is a hedge against inflation, but it throws off no interest.? But at some level of real return, savers begin to conclude that they aren’t earning all that much, so they may as well hold gold.? Vice versa when real rates rise.

One more thing: gold doesn’t benefit from productivity increases, as stocks do.? Rapidly increasing productivity makes gold less attractive than stocks.

Eddy’s model boils down to this (in my implementation):

Percentage change in gold price = Multiplier * Percentage change in (Deflator Index / Real return Index)

where the Real Return index compounds three month T-bill yields less inflation via the 12-month CPI-U in arrears.

Here is how well the mode works, since 1970:

The first model attempts to minimize absolute dollar price differences between actual and model.? The second attempts to minimize the ratio between actual and model prices.? Both have R-squareds over 90%.

The deflator return is constant in percentage terms.? For the two models it is around 2.3%/yr, which is not far from productivity gains.

As for the multiplier, it is near six.? The multiplier is like a duration figure with bonds.? What this means is that the percentage change in real interest rates, three-month T-bills less CPI-U inflation, is projected to persist for six years.? Six years is a reasonable figure, because monetary policy changes slowly, but not glacially.

Now, at present levels of real interest rates, with T-bill yields near zero, and the CPI above 3%, it implies a gold price rising at 3% per month.? If inflation stays where it is and the Fed holds good on its promises, that means a gold price in the $3000s in mid-2013.

Do I believe this?? Partially.? I own lots of oil stocks, but nothing in metals at all.

Eddy’s model helps to clarify the value of gold.? It is a store of value, as its price anticipates the degradation and strengthening of the dollar, because changes in real rates will persist on average for six years.