Keep Calm: Reasons To Stay Invested…And A Few Reasons To Think Twice

Market VolitilityA major service Financial Advisors provide their clients is to help them stick with their financial plan when fear and natural human instinct tell them to abandon ship.

Here are a few good reasons to stay invested.

  • Between 80% and 90% of the returns realized on stocks occur in less than 10% of trading days. The small number of days responsible for a large portion of market gains often coincide with periods of market volatility.
  • According to a study published by SEI Investments and reported in the Wall Street Journal, since World War II stocks increased an average of 32.5% in the 12 months following a “bear market” bottom. If you missed being in the market at the bottom by just one week, that return falls to 24.3%,. Waiting three months after the market bottom cut the gains to less than 15%.
  • From 1990 to 2005 a $10,000 investment would have grown to $51,354 had you remained fully invested beginning to end. However, if you had missed the best 10 days in that 15-year period, your returns would have dwindled to $31,994; if you had missed the best 30 days, you’d be looking at a mere $15,730.
  • Nobel laureate William Sharpe found that market timers must be right an incredible 82% of the time just to match the returns realized by buy-and-hold investors.
  • Between 1986 and 2005, the S&P 500 compounded at an annual rate of return of 11.9%.  Due to market timing, the average investor’s return during that time was only 3.9%.
  • If an investor missed just 40 of the biggest up days in the market from 1987 to 2007, their return would have totaled 3.98% versus remaining fully invested and achieving an average annualized return of 11.82%.
  • The market research firm DALBAR went looked at the returns of mutual fund investors over the 20-year period, 1986-2006, and reported the average market timer return was – 2%. During this same time period, the S&P 500 Index returned 12%.
  • Since the financial crash of 2008 Central Banks have shown their willingness, and their effectiveness, to “do whatever it takes” in support of the financial system. We can expect more intervention and presumably QE4 if there is another financial collapse.

A few other things to consider:

  • After the crash of 1929 it took the stock market 23 years to return to the levels reached in 1929 (based on the DOW Jones Industrial Average).
  • Despite all that has changed since 2008, financial markets (most notably debt markets) have grown larger and more complex than ever before. It remains to be seen whether this creates a more stable system or greater fragility, but we are seeing evidence of fragility.


Although it is almost impossible to remain comfortable during market volatility and even less so during a financial crisis, human instincts and fear often lead to the wrong decisions.

If an investor has thoughtfully diversified a portfolio based on a desired level of risk and time horizon it is likely that investors will do best by  staying invested.





Posted in Blog | Leave a comment

How Not To Catch A Thief: The SEC And Your Money

This is the last in a series of posts explaining how your money is being “skimmed” on Wall Street and why nothing is being done about it (see previous posts Is “Honest Broker” and Oxymoron? and On Wall Street: If You Are Not Sitting at The Table…You Are On the Menu).


To understand how blatant crimes go unpunished on Wall Street, first recognize the balance of power has shifted decidedly from Washington to Wall Street. In the case of the Securities and Exchange Commission (SEC), the government agency who polices Wall Street, the regulator is underfunded and has been co-opted by a cozy revolving door relationship with Wall Street.

After a stint at the SEC, where a salary tops out around $280,000, a prosecutor can earn $5,000,000 annually representing firms they prosecuted while at the SEC. This does not lend itself to aggressive prosecution (see recent NY Times Article on how the revolving door derails regulation).

The SEC, lacking the technology to monitor High Frequency Trading (HFT), hired one of the biggest proponents of HFT, TradeWorx, to provide the SEC a system to monitor and evaluate trading practices.  Not surprisingly, data from the SEC’s new MIDAS system apparently indicates that HFTs are the angels of the market providing essential liquidity and lowering trading cost to the general public.

Here is what the system does not show the SEC.

Imagine buying stock was like buying a ticket from StubHub (ticket resale site). StubHub charges buyer and seller a surcharge for their service and to make a profit. On Wall Street the surcharge is called the spread and spreads have indeed come down with the advent of electronic trading. Now let’s imagine you try to buy a ticket that originally sold for $80 that is now offered for $100. The $100 price you see on your computer screen, just when you press the button to submit your order, inexplicably changes from $100 to $110.  The SEC’s system will not only record that you bought the ticket at $110 with no recognition of the change in price but it will also magically change the face price on the ticket to $90 and ignore the extra $10 cost.  The problem is the SEC captures transactions when completed but they can not see if that price was illegally moved higher or lower by a HFT firm. So to say costs have come down when you can not measure the true costs is disingenuous.

It is not that the SEC is necessarily stupid (although you have to wonder why they would invite the fox (TradeWorx) into the hen house). The manner in which stock prices change is extremely complex and is happening in mille, micro, and nano seconds. Humans can not think or act at these speeds, but computer trading can.  The crooks are out ahead of the police.

The SEC is left to either say that the HFT that dominates trading volume is a good thing, based on data from a system provided by a HFT firm, or they have to say we cannot see what is going on.  The truth?  They cannot see what is going on.

Why You Should Care

Whether you trade stocks or not, you are likely affected. If you have a pension, 401(k), or mutual fund, or give to a charity your money is exposed to this.  Most importantly, maintaining integrity in our markets and rule by law is critical to the long-term health of our economy and our society. It is your money and not theirs to steal!

Posted in Blog | Leave a comment

PIMCO Total Return: “Should You Stay or Should You Go Now?”

“PIMCO has tremendous depth of talent beyond Bill Gross, however, that talent will do little good to protect investors if there is a true “run on the bank” and a mass exodus from the PIMCO Total Return Fund.” 

Bond King

Bond King Bill Gross Leaves PIMCO

There has been much written about the recent departure of Bill Gross from PIMCO so I will keep this short and to the point.

While many large institutions are taking a “wait and see approach”, if it is your money, don’t.

Not surprisingly, the judgment of some may be clouded by other considerations such as business relationships and what is viewed as good for business.

Strictly from a risk and return standpoint, in our opinion, the upside potential in the short term is heavily outweighed by the downside risk.

A disorderly liquidation of assets at PIMCO may in fact be an unlikely “tail risk” but the risk appears to be PIMCO specific and therefore easily avoided.

Right now we believe it is in the best interest of investors to move out of the PIMCO Total Return Fund and consider an alternative.  

We like Metropolitan West Total Return I (MWTIX), or Federated Total Return I (FTRBX).  Discuss any investment decisions with your financial advisor prior to investing.

PIMCO has tremendous depth of talent beyond Bill Gross, however, that talent will do little good to protect investors if there is a true “run on the bank” and a mass exodus from the PIMCO Total Return Fund. 

The Financial Times reported this week that traders believe PIMCO is responsible for an unprecedented sell off in derivative contracts measured in hundreds of billion of dollars.

We rarely recommend quick moves and are generally deliberate and slow with changes to portfolios, but believe in this instance a quick move makes sense.

Posted in Blog | Leave a comment

On Wall Street: If You Are Not Sitting At The Table…You Are On The Menu

High Frequency Traders Are Feeding On Unsuspecting Investors

High Frequency Traders Are Feeding On Unsuspecting Investors

In our last post we described how the largest brokerage firms in our country, Fidelity, TD Ameritrade, Scott Trade, Schwab, etc. are illegally selling their customer’s orders to the highest bidder in violation of the SEC’s  “Best Execution” regulation. Now lets see the next step in the process and how these “clients” get fead to the sharks.

Blatant Crime #2 -Front Running

Why would a Stock Exchange actually outbid its competitors for the privilege of filling trades?  The exchange that pays the most for trade volume is making up the difference by serving up huge numbers of unsuspecting clients to a small number of predatory clients called High Frequency Traders.

It turns out that in US stock brokerages and exchanges, if you are not sitting at the table, you are on the menu.

It will be hard to believe what I describe next, but the stock exchanges bring retail and institutional trades onto their exchange by paying to receive them and then invite, for a fee, predatory “High Frequency Traders” to feed on them.

Yes, of course you want the proof.  This is an outrageous claim.  However, the beauty  of this crime is that it is virtually undetectable. The SEC does not have the ability to see in milli and nano seconds but that is the speed at which we trade and the speed at which this crime takes place.

But we can find ample evidence without actually seeing the crime….something like the first video of Ray Rice dragging his unconscious fiancé from an elevator.  We did not really need to see the second video to know what happened.

The HFTs, with the assistance of the exchanges, determine trading patterns and then front run the trades. “Front Running” is a crime.

As a service to the HFTs, exchanges allow them to place their trading computers directly next to the exchange’s computers to increase the HFT’s speed.  The exchange then sells the HFT’s data feeds that give them an advanced glimpse of trades just before they happen.  One company, as described in Michael Lewis’s book “Flash Boys” spent $400 million dollars to lay fiber optic cables in a direct line from Chicago to NY in order to beat existing speed by seven milliseconds.

Once completed, the new cable was offered to HFTs with a five year contract of $10 million each. If you want proof, similar to the evidence provided by the first Ray Rice video, look at the law against “Front Running” and then ask yourself why any trader would pay $10 million to obtain a seven millisecond advantage and why a company would pay $400 million to provide that advantage. Ask why HFTs would want, or be allowed to have, data feeds that give them an advantage over the general public. Do we really need to see the front running as it happens to know what is going on?

In my next post I will explain why, despite all this blatant evidence the SEC is largely ignoring it.  In fact, they believe that the HFT’s are good for the markets.


Posted in Blog | Leave a comment

Is “Honest Broker” an Oxymoron?

Brokerage Executives Testifying on Capital Hill

Brokerage Executives Testifying on Capital Hill


The Three Stooges







Which group of the above “gentlemen” would you like to route your stock trades? The answer might surprise you.

This is the first in a series of post that will cover activities that appear to be blatant unpunished crimes.

Blatant Crime #1 The following is the Security and Exchange Commission (SEC) regulation concerning “Best Execution” of investor trades:

“Brokers are legally required to seek the best execution reasonably available for their customers’ orders.  To comply with this requirement, brokers evaluate the orders they receive from all customers in the aggregate and periodically assess which competing markets, market makers, or electronic communications networks (ECNs) offer the most favorable terms of execution.”

Here is the crime:

Data from the fourth quarter of 2012 showed that TD Ameritrade directed all non-marketable customer orders — meaning, orders that could not immediately be filled — to one single trading venue, Direct Edge. It so happens Direct Edge paid TD Ameritrade the most among numerous alternative venues.

It appears TD Ameritrade’s client orders are offered to the highest bidder without evaluation of best execution.

Possibly TD Ameritrade misunderstood “Best Execution” to mean execution that was best for them.

Steven Quirk, and Executive of TD Ameritrade, at a Senate hearing stated “virtually all” of this kind of order are sent to the exchange that pays TD Ameritrade the most. Apparently this is a standard practice in the industry.

An incredulous Senator Carl Levin responded to Mr. Quirk “Your subjective judgment as to which market provided best execution for tens of millions of customer orders a year allowed you to route all of the orders to the market that paid you the most…. I find that to be a frankly pretty incredible coincidence.”

Reportedly, the payola received by TD Ameritrade for this deal flow was $80 million in 2013.  Presumably Mr. Quirk and Senator Levin have returned to their respective duties with no action taken to address the admission of what appears to be a blatant crime.

In my next post I will explain how this system of payola know as “Maker-Taker” and ironically originated by Bernie Madoff himself (you could not make this stuff up) is part of the process that allows investors to be robbed blind.

Posted in Blog | Leave a comment

High Frequency Trading Abuses Exposed-Video Release




Posted in Blog | Leave a comment

JDA & Associates- Trusted Advisor VIDEO JUST RELEASED





Posted in Blog | Leave a comment

$1.8 Billion “Get Out Of Jail Free” Card Bought By Hedge Fund Manager Steven A. Cohen At SAC


Out of Jail ImageHedge fund manager, Steven A. Cohen and his firm SAC will be punished for their role in insider trading activities and pay a record $1.8 billion fine and close shop.  Who knows if the fine represents more or less than the ill-gotten gains that SAC netted, but we can speculate that the payment will keep Mr. Cohen out of jail.

Mr. Cohen will now be forced to live off his reported $9 billion personal fortune.

It remains a mystery whether his fortune is the result of making money the old fashion way and “earning it” or if Mr. Cohen is a crook, but the $1.8 billion settlement certainly reflects serious criminal activity at SAC. We may never know the full extent of the crimes or exactly who is involved.

What we do know is Mr. Cohen is known for overseeing the trading floor at SAC with an iron fist. It is, to some, incredible that when traders saved the firm hundreds of millions of dollars with what proved to be insider information, Mr. Cohen was kept in the dark. Maybe he wanted it that way and employed a “don’t ask, don’t tell” management style, but in the securities industry that kind of management style is a crime in itself.

Regardless of whether Mr. Cohen is a crook or an honest man, he walks free with a huge sum of money and no jail time.  I can only imagine that this settlement was made with Mr. Cohen’s eyes on fellow hedge fund manager Raj Rajaratnam who sits in jail after losing at trial. Better to buy a “get out of jail free card” even if the price tag is $1.8 billion.

Posted in Blog | Leave a comment

What Can Germany, Russia and China Teach us About Gold?

Americans do not take their cues from China, Germany, Russia or anyone else for that matter, but what can we make of what these countries are doing with their gold reserves?

On Wednesday, January 16, 2013 the German Central Bank (i.e., Bundesbank) announced that it was going to repatriate some of its gold reserves currently being held at the New York Fed and all of its gold reserves held by the Banque de France. It had previously repatriated 940 of the 1385 tons of its gold reserves held at the Bank of England, citing high storage fees as the reason (the New York Fed and the Banque of France charge no such fees). Three-hundred-and-seventy-four metric tons will be trucked from Paris to Frankfurt, representing 11 percent of its reserves, and 300 metric tons will be shipped from New York. By 2020, the plan is to have 50 percent of its reserves held in Frankfurt. Germany has the second largest stock of gold next to the US and has not bought or sold gold since 1973.

According to Bloomberg News Russia has become the biggest gold buyer in the World. Under Vladimir Putin’s direction, the Russian central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg.

Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, is quoted as saying, “The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency.” While Putin himself complains the U.S. is endangering the global economy by abusing its dollar monopoly.

First, let’s state the obvious. There is a huge trade imbalance with China that was created over the past thirty years as Chinese manufactured and sold, while Americans borrowed and bought. See the chart below.

China Reserves

The Chinese have become increasingly uncomfortable holding the vast majority of their surplus reserves in U.S. Treasuries, but they are somewhat stuck. They cannot bail out of Treasuries without crushing the value of U.S. Treasuries (“cutting their nose off to spite their face”).

In 2011, China was recognized as the No. 1 importer of gold (now number 2 behind Russia). For many people in the gold market, this was a big shock – India had always been the world’s leading gold buyer. In India, people traditionally save and display their wealth in gold. Their entire financial culture is based on gold. Historically, silver has played the same role in China… but not anymore.

In fact, not only has China become the world’s leading importer of gold, it was already the world’s leading producer… by far. According to the most recent figures from the World Gold Council, China produces nearly 50% more gold (about 300 tons per year) than the second-place country… Australia. In China, every single ounce produced – whether it’s dug out of the ground by the government or a foreign company – must, by law, be sold directly back to the government.

In 2009, China suddenly announced that its gold holdings had risen by 75% because of secret purchases that took place over six years. These purchases moved China into sixth position on the list of countries with the most foreign gold reserves. However, China’s gold holdings still account for less than 2% of its foreign reserves. That leaves a lot of room for more buying when you compare it to places like the U.S. and Germany, which hold more than 70% of their reserves in gold.

What these actions (taken by China, Russia and Germany) mean are open to debate and differing explanations, but we view them as one more indication that holding a position in gold makes sense.

In the interest of full disclosure, we have been advocates of gold ownership since 2008 and continue to believe, regardless of the future price of gold,  that gold is an asset to build into your portfolio.

Posted in Blog | Leave a comment

They Will Do the Crime If They Do No “Time” – Wall Street Banksters Walk Free

We have all been witnesses to massive, blatant and unpunished crimes.

Nobody has gone to jail and instead bankers just pay fines with the shareholder’s money. There is ZERO disincentive if all you have to do for a huge crime that lines your pockets with ill-gotten gains is pay a fine with someone else’s money. Unfortunately that is the  “punishment” for Wall Street “banksters”.

Approximately five years after the fact, the Department of Justice announced this week that they will pursue $5 Billion in claims against Standard & Poors (S&P) for their role in the massive fraud we call the mortgage market melt down. S&P, and other rating agencies, routinely gave their highest ratings (AAA) to securities that they knew were trash. At least that is what the Department of Justice has claimed.

Meanwhile, numerous banks are arranging very large settlements for their role in rigging LIBOR.  LIBOR is an interest rate affecting trillions of dollars worth of assets owned by institutions and people like you and me all over the world.  The rigging (apparently with approval of management) was a way for traders to unfairly make money for themselves or to hide weakness at the banks. The traders who did the rigging belong in jail and so do those who condoned it, but instead they will pay a fine.

Last year almost every large U.S. bank was part of a multi million-dollar settlement for systematic forgery of mortgage documents. Banks hired people whose job it was to forge, fabricate and file with courts bogus mortgage documents. They all belong in jail.


Angelo Mozilo

This man, Angelo Mozilo, co-founded home loan giant Countrywide Financial in 1969. In January of 2008, Countrywide collapsed and was forced into a “fire-sale” to Bank of America. Countrywide engaged in widespread fraudulent and predatory lending activities. Mr. Mozilo personally approved loans that were fraudulent and even went in front of Congress, and after 30 years in the mortgage business, said he did not know the difference between “stated income” and “verifiable income”.  Countrywide remains the largest cause of Bank of America’s problems. Mr. Mozilo, accused of selling $140 million of shares in Countrywide shortly before its collapse, while at the same time telling investors the firm was sound, ultimately was fined $67.5 million by the SEC for his actions. Bank of America paid the bulk of Mr. Mozilo’s fine. Mr. Mozilo reportedly earned compensation totaling $470 million during his tenure at Countrywide.



Jon Corzine

Then there is Jon Corzine, the ex-CEO of Goldman Sachs, ex-Governor of New Jersey and ex-U.S. Senator who ran MF Global, a large broker dealer, into bankruptcy. It was the fith largest bankruptcy in U.S. history.  MF Global was a ‘broker dealer”, the same kind of company where people hold money like Fidelity or Schwab. Mr. Corzine’s massive bets on European debt, made over the objections of his top Risk Officer, caused the company to collapse when those bets went sour.  The auditors discovered that MF Global breached the most sacred trust when breaking into client accounts and taking a reported $1.2 Billion of client funds. A congressional investigation placed the blame firmly at Corzine’s feet. There is no debate that taking client funds is a blatant crime but no one has gone to jail. 

We can not expect financial crimes to stop when there are millions of ill-gotten gains to be had and no jail time if caught.


Posted in Blog | Leave a comment