Your Money: Two finance books for the rest of us
ERIN E. ARVEDLUND
Published Thursday, November 28, 2013 (Inquirer.com sub required)
“No one on Wall Street has learned a lesson,” notes Sheila Bair in the new paperback edition of her gutsy book, which details white-collar crime during the Great Financial Crisis and the banksters who got away with it.Bair spoke at the Federal Reserve Bank of Philadelphia recently, and gave us an interview to discuss Bull by the Horns (Simon & Schuster, 2012) and her children’s book, due out in 2014, about money and investing.
Bair butted heads with some other powerful regulators when she was head of the Federal Deposit Insurance Corp., particularly Treasury Secretaries Hank Paulson and Timothy Geithner. They were regulators who, she wrote, confused “what is best for large financial institutions with what is best for the broader public.” She was against the bailout of American International Group Inc., for instance, which Paulson orchestrated.
She praised other regulators such as Commodity Futures Trading Commission chief Gary Gensler, who “did a terrific job leading the investigation of derivatives” and the Libor interest rate rigging (Libor stands for “London interbank offered rate”). On the other hand, “the Volcker rule still has not been finalized, and the pace of Dodd-Frank is slow and enactment weak.” The Volcker rule would split off risky proprietary trading from commercial and deposit banks so customers’ money wouldn’t be put at stake.
A smaller tome, The Investor’s Paradox by Brian Portnoy (Palgrave Macmillan, 2014), demystifies the opaque world of hedge funds. Portnoy offers practical advice on the limits of mass-market mutual funds and the false dichotomy between “traditional” – long-only mutual funds – and “alternative” investments such as hedge funds.
“Over the past 14 years I have conducted roughly 4,000 interviews with portfolio managers and other investment professionals,” he writes. “If your expectation is that a fund manager should never lose you money, then it’s fair to be disappointed when they do. But is it fair to hold that expectation in the first place?”
Instead, Portnoy takes the reader through his methodical thought process of picking winners and, most important, avoiding losers. He starts with the four basic questions of due diligence: “Can I trust you? What do you do? Are you good at your job? Are you the right fit for me?”
In Bankers’ Stead
By ERIN E. ARVEDLUND | Barron’s
Hedge-fund Seer Capital has seized on the retreat of banks’ proprietary desks to carve out a profitable niche in mortgage-backed securities.
- One of Seer Capital Management’s best-timed bets was its founding in 2008, anticipating both the bottom in bond prices and big banks’ departure from proprietary trading.
After several years of strong returns, the hedge fund now manages $2.1 billion, mostly in the securitized-credit and bond markets. These markets were at the heart of the financial crisis, which not only raised banks’ fears of risk, but resulted in tougher regulatory standards. Among the new restrictions are the pending Volcker rule forbidding certain sorts of in-house trading by banks, and U.S. and international accounting measures that raise the amount of money lenders have to put aside if they want to hold many of the types of securities that Seer buys and sells.
Sensing there would be an opportunity, Philip Weingord left Deutsche Bank more than five years ago and over time brought along colleagues Richard d’Albert, Karen Weaver, and Michael Lamont. Before founding Seer, Weingord, now 52, had been a trader, both at Deutsche and before that at the former Credit Suisse First Boston.
Jennifer S. Altman for Barron’sSeer Capital’s Weingord has made money in J.C. Penney, Fannie Mae and Punch Taverns. He’s not a fan of Sallie Mae.
“In the old days, hedge funds would compete with banks for attractive investment opportunities,” he notes. “Now the banks are retreating to more of an agent role,” relying on the funds as partners.
SEER CAPITAL FOCUSES on distressed and special situations in residential and commercial mortgage-backed bonds, which make up about 60% of its portfolio. It also buys asset-backed securities, and other debt. The New York-based firm’s mortgage and credit research skills have pointed it toward companies that have been in the news lately, such as J.C. Penney, Fannie Mae, and Freddie Mac . Its approach has also given it a negative view of student loans and the lenders that specialize in them, such as SLM, better known as Sallie Mae.
Weingord and his group have been especially active traders in debt issues affected by the troubled department-store giant. Earlier in the year it bought commercial-mortgage-backed securities (CMBS) that included J.C. Penney (ticker: JCP) loans because it expected the issues to gain as the commercial market recovered. It took profits in the J.C. Penney-related CMBS after the company reported disappointing earnings in August and the debt markets began to research the effect J.C. Penney store closings would have on these issues. (CMBS include loans from a variety of sources like hotels, office buildings, and shopping malls.)
Whether J.C. Penney goes bankrupt or not, it will have to close more stores, which affects both its and other borrowers’ debt because the retailer is often an anchor tenant in a mall, notes Weingord. Seer Capital analyzes the effect on cash flows from “not only lease expirations, but also the likelihood of a store closing, based on its per- square-foot sales, regional economic outlook, and the asset’s competitive position in the area,” he says. “We also assess scenarios that include secondary impact of an anchor store’s departure, whereby other tenants may be entitled to rent concessions if the anchor goes dark.” More-senior J.C. Penney debt is so well protected that it will be fine in almost any scenario.
ALTHOUGH NOT SO well known in this country, Punch Taverns, a special-situation debt holding, has been a mainstay for the London financial media for years. The company (PUB.U.K.) was formed from the Bass beer family of British pubs, and now owns about 4,000 drinking-and-eating establishments.
Punch, which has gone through a dizzying succession of buying and selling properties since it was created in 1997, today has 2.5 billion British pounds ($4 billion) worth of mortgage-like borrowings, secured by real estate, which are now in restructuring. The company took on the debt to make acquisitions, but cash flows have dropped as competition has increased, and restrictions on smoking have limited the bars’ appeal for some.
When Seer Capital began buying the senior notes in the second quarter, they were yielding 7%. Recent gains in price have brought the yield down to 6.25%, providing the firm with a 7% total return in just a few months. Post-restructuring, “we believe over the next six months these bonds could rise much further in price. This would be a fantastic return for a senior, well-protected, well-collateralized investment,” says Weingord. Punch is expected to propose a revised restructuring in early December.
Punch represents the kind of opportunity that once would have gone to proprietary trading desks. “Pre-[financial]-crisis, Wall Street trading desks acted both as market-makers and proprietary traders,” he says. “If still the case, it would have been difficult for Seer to build a large position at an attractive price.”
The firm has done well exploiting its opportunity. Seer Capital Partners Offshore Fund returned 25.9% in 2012, 2.1% in 2011, 24.9% in 2010, and about 14% annually since inception. Year to date through October, Seer gained 9.5% net of fees, which are 1.5% management and 20% of performance annually.
AVOIDING PROBLEMS ALSO improves returns. “We’ve sold out of deals backed by student loans,” says d’Albert, Seer’s co-chief investment officer. “They have performed well. But the thing to consider is they’re long-duration bonds, and you have a credit story where borrowers continue to pile on debt,” he says.
U.S. borrowers owe $1.2 trillion in student-loan debt–from the government and private lenders such as Sallie Mae (SLM). That surpasses all other kinds of consumer borrowing except mortgages. The overall three-year default rate on federal government student loans is 14.7%, up from 13.4% a year ago, according to U.S. Department of Education figures released at the end of September. That includes students at for-profit institutions, private nonprofits, and public nonprofits. The highest three-year rate, 21.9%, was for students at for-profit schools.
Making school more affordable has become a matter of public debate, so there’s uncertainty about the future terms and conditions of the loans. If more of them can be forgiven in personal bankruptcy, default rates could rise. And in the case of high default rates in a student-loan-backed security, “it’s only institutional investors who lose out,” notes d’Albert.
Weingord expects default rates could go as high as 35%, so this is one area he’s happy to leave to the banks.
Pew urges payday-loan reform, cites Colo. changes
ERIN E. ARVEDLUND
Published Monday, November 25, 2013 (Inquirer.com)
The Pew Charitable Trusts issued a report recommending changes to payday loans nationwide – and showcased Colorado as the way to reform payday lending.
State regulators in 2010 updated laws so borrowers in Colorado now pay an average of just 4 percent of their paychecks to service the loans – down from 36 percent under conventional lump-sum payday loans.
Payday loans in Colorado remain costly. With fees and interest, the average annual percentage rate is 129 percent, and that is down from 319 percent, according to the Pew report, issued Oct. 30.
Under the old law, Colorado borrowers were charged 319 percent annually in interest – meaning someone who got a $500 loan paid back $1,950 after a year. Under the new law, the average annual rate is 129 percent, for a final amount paid back of $580 on a $500 loan.
Twelve million Americans use payday loans every year. On average, a borrower takes out eight loans of $375 each per year and spends $520 on interest. Most borrowers use payday loans to cover ordinary living expenses, not emergencies. So the average borrower is indebted for about five months of the year, the report said.
Calling for action by the Consumer Financial Protection Bureau and policymakers, Pew recommended that lenders allow borrowers at least six months to repay loans via installment.
Payday lenders have come under scrutiny at the state level, too. Benjamin Lawsky, New York’s banking superintendent, is asking banks in his state to “choke off” access, claiming that payday lenders illegally charge annual interest rates above New York’s 16 percent civil usury cap.
Some payday lenders include companies claiming affiliation with Native American tribes, exempting the lenders from state laws and complicating the already vast disagreement over licensing requirements.
The confusion has revived calls for an interest cap. According to the Online Lenders Association, a lobbying group, Nathalie Martin, professor at the University of New Mexico School of Law, says a federal usury cap “would clarify everything.”
The Pew final report is available here:http://www.pewstates.org/research/reports/payday-lending-in-america-policy-solutions-85899513326
Virtual currencies like Bitcoin legal – and will stay that way
ERIN E. ARVEDLUND
Published Thursday, November 21, 2013 (Inquirer.com)
Virtual currencies like Bitcoin, Ripple and others are perfectly legal – and there is little Congress can do to change that. But are they good investments?Mercedes Tunstall, a partner at the Philadelphia law firm Ballard Spahr L.L.P., testified Tuesday before federal lawmakers that until the 1870s, virtual currencies circulated in America, as individual states issued their own notes.
“The Supreme Court then established the dollar as the money of the land. So virtual currencies are legal,” Tunstall said, “but dollars have to be accepted.”
For a full list of all virtual currencies, we got this link from Coindesk.com.
That is why Congress has difficulty banning Bitcoin. Even today, some U.S. merchants on the Mexican and Canadian borders accept pesos and loonies.
Some firms such as Silk Road, which used Bitcoin as virtual currency, have shut down, “but that doesn’t mean Bitcoin is dead in the water,” Tunstall said. In October, federal criminal charges were unsealed against Silk Road, an online market that allowed users to buy and sell drugs and other illegal goods using Bitcoin.
The virtual money has “significant challenges, like failure to comply with anti-money- laundering and the volatility of the currency,” Tunstall said. “A week ago, Bitcoin traded at $400 per unit, and it rose to $900 per unit during the hearings. You can’t have those kinds of swings and still be useful to consumers.”
Instead, virtual currencies could become mainstream – if they embrace U.S. banking and compliance regulations. Bitcoin investment funds, however, would likely fade out.
Each day in London, traders at five banks set the price of gold in what is known as a “fixing” – a measure of the spot price for the physical yellow metal.
Turns out, the five banks – Barclays P.L.C. (BARC), Bank of Nova Scotia (BNS), Deutsche Bank (DBK), HSBC Holdings, and Societe Generale (GLE) – might have been using the London gold fixing to help their bottom lines.
British regulators have opened a preliminary review, not a formal investigation yet, into how the gold benchmark is set, and, according to Bloomberg News, the Commodity Futures Trading Commission met this year to discuss it as well.
It is yet another example of how old-fashioned traditions in the markets haven’t kept up with modern technology and trading. The London gold fixing started in 1919 and was conducted in person for 84 years at N.M. Rothschild & Sons’ offices in London. In 2004, it started taking place over the telephone.
Watch this space on whether the gold inquiries could affect widely traded gold exchange-traded funds, such as SPDR Gold Shares (GLD and iShares Gold Trust (IAU)
Having the ‘big talk’ with aging parents
ERIN E. ARVEDLUND
Published Tuesday, November 19, 2013 (Inquirer.com sub required)
It’s important to converse with your aging parents about their personal finances. So we put together the following list of questions to help facilitate the “big talk.”
These are long-term questions. We will get to the short-term (or crisis) questions in a moment. Here is what to ask your mom, dad, grandparent, or other elderly family member:
- Do you have health-care directives. (For example, what would you like to do if you are on life support? And who can make that decision on your behalf?)
- Do you have powers of attorney?
- Do you have wills?
- Do you have trusts, and are they funded?
- When was the last time you reviewed all those documents?
- Where are the documents located? Does someone other than you know the location?
- Do you have life insurance, annuities, 401(k), 403(b) pension or IRA accounts? Do you have long-term care insurance?
- Who are the primary beneficiaries of your investments?
- Do you have online accounts? Does someone other than you know the user names and passwords?
Next, here are priorities in an emergency.
“We all fear ‘the call,’ the one that tells you your out-of-town parents are in crisis,” says insurance and financial planner William Borton of W.R. Borton in Marlton. “Do you know what to do on short notice?”
Here are some of his guidelines:
- If they don’t have health care directives or power of attorney documents, prepare these with your parents’ lawyer.
- Arrange for at least one doctor’s appointment and get medical decision-making authority. Make a list of medications and prescribed dosages, Social Security and Medicare numbers, as well as supplemental medical insurance account numbers.
- If your parents are strong enough, take them to their bank and have them give you power of attorney on the accounts, so you can pay bills and monitor transactions.
- Delete and/or disable online shopping accounts.
- Look for the previous year’s income tax returns (and 1099s). On the federal return, look for Schedule B (interest/dividends) and Schedule D (capital gains and losses.)
- Make a list of neighbors and friends and their telephone numbers.
- Get rid of throw rugs! (They are often responsible for falls.)
Your Money: What to know about medical ID theft and tax savings
Erin E. Arvedlund
Published Friday, November 15, 2013, Inquirer.com
Ever wonder why the doctor’s office asks for your identification? Because health care is so expensive, criminals often try to steal your identity and use it to get care fraudulently.
It is called medical ID theft: Scammers use your name and identity to fraudulently receive medical benefits, prescription drugs, even undergo surgery.
When the Affordable Care Act website – www.healthcare.gov – malfunctioned, that posed serious risks for those applying for themselves and family members, says Leon LaRosa, an expert on fraud.
“This unstable website often provides criminals the opportunity to exploit glitches to gain unauthorized access and read data,” said LaRosa, certified fraud examiner and chair at LaRosa & Associates, an accounting firm in Exton. It could pose a risk of having your medical identity stolen, he added.
Some things to consider to protect yourself from medical-identity theft:
Register for insurance by phone and avoid using healthcare.gov until it is certified as a secure website. Get more information about the Health Insurance Marketplace via phone at 1-800-318-2596 (TTY: 1-855-889-4325).
Examine your insurer’s explanation of benefits, received after you pay for medical services. The document can reveal red flags of medical-identity theft, such as types of procedures and exams for which you are billed but that you did not receive.
Do not share your personal identification with family members or someone you know so they can obtain treatment, health-care products, or pharmaceuticals.
That warning aside, if you decide to pay for a family member’s medical expenses, you can get a tax break.
Medical expenses you pay on behalf of a dependent, such as a parent or grandparent, can be added to your own itemized medical-expense deductions.
For a person to be your dependent, you must pay more than half of that person’s support for the year, says Martin Abo of Abo & Co., certified public accountants in Mount Laurel and Morrisville. “While the taxpayer must still clear the applicable income threshold to claim an itemized medical-expense deduction, including a supported person’s expenses in the pot can really help,” Abo said.
Caveat: Medical expenses are deductible only by the person who actually pays them. Additionally, you must pay the health-care providers (doctors, hospitals, etc.) directly to avoid a gift tax.
Your Money: One research firm says: Get ready to sell stocks
ERIN E. ARVEDLUND
Published Wednesday, November 13, 2013 (inquirer.com)
At least one investment research firm is calling for a correction in the stock market, and advising us to get ready to sell stocks.
That gives us a chance to explain the difference between a “correction” and a “bear market” in equities.
Corrections come in three sizes: small (3 percent to 5 percent), medium (5 percent to 10 percent), and bear market (more than 20 percent).
“Small ones are hard to predict and rebound quickly,” said Jean-Yves Dumont, of GaveKal Research, headquartered in New York.
Bear markets are typically characterized by a deteriorating market. Also, a number of indicators signal a transition from bull market to bear market.
We’re not there yet, Dumont said. “The good news is that the usual suspects of a bear market are not present,” he added.
The bad news is that GaveKal’s technical indicators point to a medium-term correction of 5 percent to 10 percent in stocks. Technical indicators are a lot like baseball statistics: Investors use them to measure the health and performance of different markets or stocks, to see which have done well, which are tired, and which might be entering a slump.
Currently, Dumont says, the stocks in the S&P 500 Index, which he watches closely, are exhibiting signals warranting a correction:
“The market is showing signs of exhaustion of the upward trend,” Dumont said. “Upside is limited on a short- to medium-term basis, and a correction is likely.”
When it comes to sentiment, investors are “overconfident,” a sign of market euphoria, Dumont explained.
There is no one formula to predict the top of a market. But in Dumont’s view, “the probability of a medium correction has significantly increased. Stocks could tumble 5 percent to 10 percent in the immediate future. My finger is on the sell button.”
Your Money: Mark Cuban’s prosecutor
ERIN E. ARVEDLUND
When she prosecuted billionaire entrepreneur Mark Cuban in court last month for alleged insider trading, government attorney Jan Folena drew on many tough lessons she learned in Philadelphia.
Folena worked as an assistant district attorney under Lynne M. Abraham, Philadelphia’s longest-serving district attorney. Now Folena is a supervisor and litigation counsel in the Securities and Exchange Commission’s Division of Enforcement here.She joined Abraham’s office in 1993, fresh out of law school at Syracuse University.
“I had ties to Philly, since I rowed high school crew on the Schuylkill,” said Folena, a Nutley, N.J., native. “I knew the city, it had a cool feel, personality, and attitude.”
After law school, where Beau Biden, now Delaware attorney general, was her classmate, Folena moved here, knowing Philadelphia had “big crime and big problems,” she said.
“The mayor was Ed Rendell, who had also been D.A., and Arlen Specter also had been D.A. So they had a fine tradition of folks who ran that office,” Folena said. “The [assistant district attorneys] in that office were some of the best lawyers I have ever worked with. They were fighters.” She spent four years as an assistant district attorney.
In 2007, after a stint at the Commodity Futures Trading Commission in Washington, she went to the SEC’s trial unit, working big, high-level cases. Her first assignment was prosecuting two inhouse lawyers for Enron.
“My main witness was supposed to be [chief financial officer] Andrew Fastow,” who was already in jail, Folena said. She drove to his prison camp to meet him. “Luckily, there was not much I hadn’t seen in Philly already,” she said.
The Enron experience prepared her for the Cuban case, one of her “most complex and unique cases,” she said. “Not many defendants are as high-profile. Celebrity cases change a lot of things. But I tried the case as if he were just an ordinary person.”
An added challenge was that Cuban was being tried in his hometown of Dallas, where he is a local hero and philanthropist and colorful owner of the Mavericks of the NBA.
“We had to be aware people in Dallas like this guy,” Folena said. “But this case was about keeping the markets fair. That’s the message in every insider-trading case. Investors don’t want to participate in a market where certain investors benefit from information that ordinary investors do not have.
“The insider-trading laws apply to everyone – including Mark Cuban.”
Folena was supervisor of the Cuban case for a year before the trial.
“I just believed in the case. That’s very important. I learned that in Philly,” she said. “If you don’t believe in the case, nobody else will.”
Folena and the SEC lost the case against Cuban. A seven-woman, two-man panel decided Cuban did not sell stock in a search-engine company because he had inside information from its CEO. But Folena will keep trying cases.
“I’m good at it and I like being in the courtroom,” she said.
Folena’s dream job? Possibly NFL commissioner, she joked.
She will have to hope Cuban doesn’t buy a football team.
Your Money: A guide to the right asset mix
ERIN E. ARVEDLUND
How much of your portfolio should you invest in each asset class?
Debates have raged on this topic for decades, but one local money manager makes the case for roughly 40 percent in fixed income, 57.5 percent in what are called “risk” assets, and the remainder in cash – a conservative starting place, given where the markets are currently.Here is the explanation from Jonathan Smith, partner at DT Investment Partners L.L.C., of Chadds Ford:
When the stock market is progressing well, as in 2013, investors don’t appreciate the importance of splitting their eggs among different baskets. They may even feel that asset allocation is a hindrance and instead just ride the stock market rally.
But it usually takes a sharp fall in stocks – as a result of, say, the recession of 2008, the European Union debt crisis, or the debt-ceiling debates – to demonstrate that a diversified portfolio can prevent losses in a downturn. A decline in any one asset class is offset by another, Smith says.
But how much? DT Investments has a few different asset allocation models, but a conservative model allocates 57.5 percent to what are known as “risk-based” assets, stocks, commodities, real estate, high-yield debt, and 40 percent to fixed income, such as municipal and corporate bonds. The rest can be held as cash.
Within the “risky” assets, DT Investments allocates 20 percent to large-cap stocks, 10 percent to mid-cap stocks, 4.5 percent to small cap, 4.5 percent to international stocks, and 3.5 percent to emerging market stocks; 6.5 percent is allocated to high-yield debt, 5 percent to real estate and the remainder in, say, gold.
“We use a lot of low-cost ETFs (exchange-traded funds) like SPY (the Standard and Poor’s 500 fund ETFS) and iShares to get exposure,” Smith said.
Smith was formerly the chief investment officer for fixed income at Haverford Trust, and he and three partners started DT Investments five years ago to service the $250,000 and up crowd of investors, whom he says aren’t properly served by the brokerage community. Currently DT manages about $600 million in assets.
“ETFs are low-cost, tax-efficient, and they track the asset classes closely,” he explained, adding that they try to buy individual municipal bonds rather than bond funds when appropriate. “Individual bonds enable the investor to better control against the risk of rising interest rates and falling bond prices.”
Your Money: Twitter prepares to go public without full financial disclosure
Erin E. Arvedlund Published Friday, November 1, 2013 (Philly Inquirer: sub wall)
Twitter is the new IPO on the block, but it isn’t yet profitable like its social-networking rivals Facebook and LinkedIn were before their initial public offerings.
Twitter is different in one other aspect as well: Under the new JOBS Act provisions, the soon-to-be-public company doesn’t have to disclose key financials. Twitter is not something retail investors should buy until after its IPO comes to market and they get a more transparent look at its finances.
The JOBS Act’s Title II allows companies with less than $1 billion in revenue not to disclose some important data. And Jenny Kassan, an attorney who initially helped petition for the JOBS Act, notes that the maximum allowable investment under the new law (generally 5 percent of net worth or annual income) is much higher than the original proposed cap of $100.
“Without income or net worth verification, investors stand to lose more than they can afford,” Kassan says of the new provisions.
Watch out for hot IPOs with no profits and crowd-funded investments. They are ripe for manipulation of financials.
By no means are we saying that Twitter is playing around with its numbers. Just that, as Leon LaRosa, CPA at LaRosa & Associates in Exton and a certified fraud examiner, says, bigger companies than Twitter have tried “creative accounting practices, ranging from benign tricks to outright fraud.”
He gave examples of companies where regulators frowned upon the following practices:
Recording revenues too soon, for example, when services have yet to be provided (Xerox).
Recording bogus revenues such as supplier rebates (L.A. Gear and Sunrise Medical).
Boosting income with one-time gains such as the sales of undervalued assets (Boston Market).
Shifting expenses to a later period; capitalizing marketing and promotional costs (AOL).
Postscript on Puerto Rico. Alan Schankel, municipal-bond guru at Janney Montgomery Scott, says the firm’s clients understand the significant risk involved with Puerto Rico bond investments.
The bonds “are not for the faint of heart. That being said, we note that the commonwealth has made significant progress towards bringing balance to their precarious financial situation through meaningful tax and fee increases for the current fiscal year.”
Unlike entities such as Detroit and a few California cities, Puerto Rico and its current leadership demonstrate “willingness to undertake politically and socially difficult steps to improve the financial situation and investor confidence,” Schankel said.
“Although no date or size is set, Puerto Rico has plans to issue bonds through its sales tax entity, COFINA, in the near future. This will be an important test of market access and will be closely watched.”
Your Money: Note of caution on Puerto Rico muni bonds
Erin E. Arvedlund Philly Inquirer, October 31, 2013, 2:01 AM
Attention, municipal bond investors. You may love tax-free bonds, but Cumberland Advisors, of Vineland, N.J., is veering away from the troubled muni bonds of Puerto Rico – even though some in the hedge-fund community are embracing this high-risk trade.
“We certainly hope that the Commonwealth of Puerto Rico finds a way to avoid any defaults. We are not cheering for the demise of this beautiful island,” Cumberland noted.
But 45 percent of its 3.5 million inhabitants live below the poverty line, Cumberland said, and the debt-to-gross-national-product ratio is estimated at 140 percent, if the pension liability is included.
Cumberland’s chief investment officer, David Kotok, says his firm does not own Puerto Rico bonds for clients, arguing there is additional risk of trouble in paradise: risk of a debt-service payment problem in the event that Puerto Rico finds itself with insufficient cash flow, and risk if the commonwealth fails to obtain sufficient market access so that it can refinance its debt.
“At Cumberland, we are not holding Puerto Rico debt – we do not own it, and we would not buy it today,” Kotok said in a strongly worded note to investors. “The same is true for any mutual fund with exposure to Puerto Rico.”
Maury Fertig, chief investment officer at Relative Value Partners, trades in closed-end funds, a quirky part of the market in which the funds can trade at a discount to their value. That’s a buying opportunity, until the fund’s price closes that gap.
Closed-end funds sometimes trade under 100 percent of their value, say, at 90 cents on the dollar, equal to a 10 percent discount. Investors make money by buying when the fund trades at that discount and waiting for the price to come back to full value.
Fertig is located in Chicago, but we thought his data and ideas are informative. He expects numerous closed-end funds to trade at discounts through the end of the year, specifically fixed-income closed-end funds. He highlights the following:
MFS Charter Income Trust (NYSE: MCR). This fund owns mortgages, corporate bonds, and Treasuries, and trades at a discount of 12 percent.
Putnam Premier Income Trust (NYSE: PPT). This is a “short-duration” fund, meaning bonds that don’t have as much sensitivity to interest rates. Putnam Premier Income Trust currently trades at a discount of 12.13 percent.
BlackRock Credit Allocation Income Trust (NYSE: BTZ). This fund trades at a multiyear discount of nearly 15 percent.
Normally I don’t post personal stuff, but my dad is celebrating his Class of ’63 50th reunion at the U.S. Naval Academy this weekend…so here goes.
Bloomberg has a great video of the USS Forrestal, which the Navy revealed will be sold for scrap — at the price of 1 penny.
My dad was serving on deck of the accompanying destroyer when USS Forrestal burst into flames in 1967. Dad was the officer of the deck on the USS Rupertus at the time of the explosion and was the one who ordered his ship to start maneuvering to assist in fighting the fire. He was a lieutenant at the time, so I don’t believe that he was the XO of that vessel.
I’m glad he came home, otherwise I wouldn’t be here. Thanks Dad! p.s. wish the Forrestal wasn’t being sold for 1-cent to a scrap metal company. See the Philly Inquirer’s story below:
The Navy has paid 1 cent to have the USS Forrestal, the first of the United States’ supercarriers, towed from its berth in Philadelphia to Texas to be scrapped.
The Navy said Tuesday it awarded what is called a procurement contract to All Star Metals of Brownsville.
All Star Metals is expected to tow the 1,067-foot carrier from its berth at the Navy’s Inactive Ship Facility in Philadelphia to Brownsville before the end of the year, the Navy said.
Christopher Johnson, a spokesman for the Naval Sea Systems Command (NAVSEA), said 1-cent “is the lowest price the Navy could possibly have paid the contractor for the towing and dismantling of ex-Forrestal.”
Pat Dolan, a NAVSEA spokeswoman, said All Star Metals will assume all the risks and costs of towing and dismantling the carrier and will sell the scrap with the aim of recovering its costs and making a profit.
In its prime, the behemoth with the four-acre flight deck displaced 60,000 tons and its voids and compartments held more food, fuel, and stores than any other naval vessel. With its air wing embarked, the Forrestal operated with an average crew size of 5,000.
The Forrestal was decommissioned Sept. 11, 1993, after more than 38 years of service.
The Navy offered the ship for use as a museum or memorial, but no viable applications were received, the Navy said.
Built by Newport News (Va.) Shipbuilding, the Forrestal was seriously damaged in a fire that claimed the lives of 134 men on July 29, 1967, off the coast of Vietnam.
The fire broke out after stray voltage triggered a rocket to launch from an F-4 Phantom on deck, the military news site Stars and Stripes recounted Wednesday.
The rocket struck an armed A-4 Skyhawk, rupturing the fuel tanks and sparking a chain reaction of fires and explosions on the deck, Stars and Stripes said.
The A-4 was piloted by Lt. Cmdr. John S. McCain, now the senior U.S. senator from Arizona who months after the fire was shot down and taken prisoner of war in Hanoi.
The three other Forrestal class of aircraft carriers – USS Saratoga, USS Ranger and USS Independence – also have been decommissioned and are expected to be scrapped.
Your Money: Fired Fed worker seeks to reveal bank practices
Erin E. Arvedlund Published Thursday, October 17, 2013 (Philadelphia Inquirer sub required)
If you have ever wondered what it would be like to take on one of the world’s most powerful banks – all by yourself – meet Carmen Segarra.
Segarra, 41, filed a wrongful termination lawsuit against the New York Federal Reserve Bank this month, alleging she was fired last year after she determined that Goldman Sachs Group Inc., a Fed member bank, did not have adequate conflict-of-interest policies.
The New York Fed last week tried to have the case and some of Segarra’s exhibits sealed, including e-mails, to keep the matter under wraps.
Segarra’s lawyer, Linda Stengle, is based in Boyertown, Berks County, specializing in whistleblower cases. This week, Stengle successfully argued in front of a federal judge to keep her client’s case unsealed and transparent for public view.
“They tried to redact my complaint,” Segarra said in an interview. “It was not a move toward truth and transparency. The Fed is trying to protect the banks and not execute their mandate of appropriate supervision.”
Since she has filed her suit, Segarra has received “overwhelmingly positive” responses from colleagues and others too afraid to blow the whistle themselves, she said.
The man on the street likely doesn’t realize that the Federal Reserve is a corporation, more like Fannie Mae or Freddie Mac than the Environmental Protection Agency.
The Fed is not a government agency – not even close – and Segarra’s lawsuit reveals it is a private system of banks that close ranks to protect powerful members.
The New York Fed, where she worked, is so closely entwined with its member banks on Wall Street, such as Goldman Sachs, that the Fed was willing to fire her rather than allow her doubts about Goldman’s policies to be revealed, she alleged.
Federal Reserve banks are not government agencies; they have been open during the government shutdown. They have private boards of directors, appointed by member banks in each Fed district.
And they are not happy that Segarra is unveiling the way they do business.
“I wouldn’t do it unless I thought I had more than enough evidence. My lawsuit speaks for itself,” Segarra contended.
The suit is here: Segarra Complaint with Civil Cover Sheet. Stengle expects the New York Fed to file its response within a few weeks. We’ll keep you updated.
IRS is still awaiting late ’12 taxes
Erin E. Arvedlund Published Thursday, October 3, 2013 (Philly Inquirer sub wall)
Even though much of the federal government shut down Tuesday, will individual taxpayers filing late returns for 2012 still need to file by Oct. 15? The answer, sadly, is yes.
We checked in with the American Institute of Certified Public Accountants and found some scary answers to your questions. Taxpayers and accountants should assume that the extended due date for individual returns is Oct. 15 until the IRS otherwise provides guidance, according to the AICPA.Question: Will the IRS provide an expedited or automatic abatement of penalties for late-filed tax returns?
Answer: No. The IRS has no plans to grant expedited or automatic abatements of penalties for late-filed returns due to a government shutdown.
Q: For e-filers, will the Electronic Federal Tax Payment System continue to operate as normal during the government shutdown?
A: Yes, the IRS will take your filing and your money online. It has indicated that the Electronic Federal Tax Payment System (EFTPS) will continue to operate as normal during the government shutdown. As a precaution, the AICPA recommends that you print the confirmation page for any payments you make through the system.
Q: Will the practitioner hotline remain open during the government shutdown?
A: No, according to the IRS’s contingency plan, services such as responding to taxpayer questions will cease during any shutdown. Once government operations resume, the IRS may consider extended hours and additional staff to assist tax practitioners through Oct. 15.
Q: Will taxpayer assistance centers be open during the government shutdown?
A: No, they will be closed.
Q: How will the shutdown affect the timing of taxpayer refunds?
A: The IRS will not issue any refunds during a government shutdown. In addition, the “Where’s my refund” service will cease during the shutdown.
Your Money: How health law affects tax law
Erin E. Arvedlund Published Tuesday, October 1, 2013 (philly Inquirer paywall)
Tax law has changed as a result of the Affordable Care Act – Obamacare – and you may either receive a tax refund or pay a penalty as a result.
As of Oct. 1, uninsured individuals can start shopping for health insurance through online marketplaces, also called exchanges.
If you have employer-sponsored insurance, an individual plan, and Medicaid or Medicare, you do not need to purchase anything. If you don’t have insurance and instead purchase through a state marketplace, you may qualify for a tax credit.
It’s complicated, but important to know the rules.
If you purchase insurance through an exchange, you can offset part of your premium with a tax credit, which is paid directly to your insurance company. To qualify for the tax credit, you must meet these conditions:
You purchase coverage through a marketplace.
You don’t have access to affordable employer-sponsored insurance, which means your employer-provided insurance covers less than 60 percent of available benefits, or your premium is more than 9.5 percent of your annual household income.
You don’t qualify for such government programs as Medicare and Medicaid.
Your annual household income is between one and four times the federal poverty level, depending on your state.
You can also pay your entire premium yourself and receive the credit as a refund when you file your return. This might be a good idea if your income is unpredictable.
Starting in 2014, you must have health insurance, or pay a tax penalty.
The penalty in 2014, which will be paid on your 2014 tax return, equals 1 percent of your annual 2014 income or $95 per person, whichever is higher. You pay a penalty for yourself, a spouse, and each dependent. The penalty for an uninsured dependent under the age of 18 is $47.50 per child.
Don’t worry if you’re still working on getting coverage when Jan. 1, 2014, arrives. There’s no penalty if you are without coverage for less than three consecutive months of the year.
To see if you may qualify for a tax credit, visit TaxACT’s Health Care Tax Penalty Calculator (https://www.taxact.com/affordable-care-act/aca-whitepaper.asp ) or TurboTax (http://americantaxandfinancialcenter.com/2013/02/06/the-affordable-care-act-and-taxes-what-you-need-to-know ).
Your Money: Even savvy Wall St. funds need to be vigilant
Erin E. Arvedlund Philadelphia Inquirer Friday, September 27, 2013, 2:01 AM
Don’t feel too stupid if you lose money to a financial fraudster. Even the smartest Wall Street hedge funds get taken sometimes.
A West Conshohocken businessman, Richard Shusterman, and three others were indicted this month for allegedly committing wire fraud and swindling millions from Wall Street hedge funds.
Specifically, the indictment alleges that between July 2008 and March 2010, Shusterman and his accomplices lied to investors and inflated prices of medical and hospital debts they purchased, then used the phantom profits to raise money from new investors.
In one instance, Shusterman and his firm, International Portfolio Inc. (IPI), allegedly said they had collected $56 million in “direct payments” during the liquidation of IPI debt portfolios, in order to deceive hedge funds such as Platinum Partners and Eton Park Capital Management, both based in New York; Roundstone Healthcare Partners, Acton, Mass.; and other investors. In fact, IPI had collected just a fraction of the money it claimed to have accrued.
The indictment, filed in Baltimore by U.S. Attorney Rod Rosenstein, alleges that Shusterman tried to induce Eton Park to invest by portraying four portfolios financed by Platinum as receiving approximately $28.7 million in collections. In fact, the total net collections were approximately $2 million.
The indictment seeks the forfeiture of more than $278 million and Shusterman’s condominium in the Parc Rittenhouse at 225 S. 18th St.
“It was a Ponzi investment scheme,” Rosenstein said in an interview. “A lot of people fall for these, and the fraudsters were sophisticated.” Authorities say Shusterman and three coconspirators created phantom profits on the debt, misrepresenting the value and scope of the investment.
“This is another example of Ponzi-scheme fraudsters making claims of great returns that are ‘too good to be true,’ ” explained Leon LaRosa, a certified fraud examiner at LaRosa & Associates in Exton. “Such claims were in the form of inflated collection results and resale values in an industry in which the health-care providers are consistently receiving lower percentages from their fees.”
Calls to IPI’s offices in West Conshohocken were not returned. If convicted, Shusterman faces a maximum sentence of 20 years in prison for the conspiracy and for each of nine counts of wire fraud. A copy of the indictment can be found here: ecf.mdd.uscourts.gov USA v shusterman.
Your Money: Analysts: Fed successor likely to keep rates low
Erin E. Arvedlund (Inquirer) Wednesday, September 25, 2013, 2:01 AM
When Ben Bernanke steps down as chairman of the Federal Reserve on Jan. 31, 2014, he will have built up a balance sheet that has ballooned to about $4 trillion, nearly double what he inherited.
What will his expected successor, the current Fed vice chair, Janet Yellen, do to unwind all of the bond purchases?
Very likely not much, says Randall Kroszner, professor at the University of Chicago Booth School of Business and a former governor of the Federal Reserve System. He says the new Fed chair “will confront a monetary situation unlike anything since the 1930s.”
As for Yellen’s approach: “The cliché is she’s dovish,” Kroszner said, meaning the Fed will keep rates lower longer. However, Kroszner also says of Yellen that she “really looks at data, so the dove-hawk thing suggests an ideology. To say she’s a knee-jerk dove is incorrect.
“Janet is more swayed by data and analysis. She sees more efficacy in quantitative easing and lower costs associated with it” than other members of the Federal Reserve, he told a Bloomberg conference Tuesday.
Kroszner said to look for changes in wording out of the Fed such as “sustainable recovery” or “substantial recovery,” which investors see as terms that the central bank believes the U.S. economy is improving.
Meanwhile, a Levittown native has put together a leading economic indicator that could help investors and their economic forecasts.
Arthur A. Ferri, an advanced analytics consultant for Billtrust, has put together an index correlating strongly to change in nominal GDP, or gross domestic product. Billtrust, a provider of outsourced billing and payments systems based in Hamilton, N.J., in November received a $25 million investment from Bain Capital Ventures. Billtrust competes with Kubra and publicly traded CSG Systems International, and counts Kraft Foods Group, Whirlpool Corp., and Under Armour as clients.
The B2B Sales Index from Billtrust, an indicator of current and trending U.S. economic conditions based on a sampling of B2B invoice activity, shows a seasonally adjusted monthly growth rate in August vs. July, but indicates continued lackluster performance for the U.S. economy over the near term.
“Based on the most recent results, the forecast for December 2013 through February 2014 would be flat” economic growth, Ferri said in an interview.
Takeaway? No rate increases any time soon.
Think you are a fraud victim? Get to work like Ingrid Robinson
Erin E. Arvedlund Published Friday, September 20, 2013 (Inquirer.com … sub required)
If you think you have been scammed in a fraudulent investment, Ingrid Robinson has advice for you.
Start building your case right away, and don’t give up.
The U.S. Attorney’s Office in Philadelphia in May indicted Matthew McManus, of Glenside, and Andrew Bogdanoff, and his son, Aaron, on federal fraud charges connected with their Remington Financial Group loan brokerage.
The Bogdanoffs have pleaded guilty. McManus has pleaded not guilty and is scheduled for trial Oct. 28.
Robinson, 67, who resides in California, invested with Remington in 2007 and didn’t realize the outfit was a fraud until she arranged for a loan. She provided Remington $10,000 as an advance fee on a much larger loan she sought, but the company gave her no loan and kept her money.
Remington’s average investor lost $25,000, and Robinson found 800 more victims in the United States and other countries. Prosecutors so far have tallied $26 million in losses.
These days, Robinson is pursuing legislation to regulate commercial brokers, the way mortgage brokers and securities brokers are regulated.
Such schemes proliferate on smaller scales.
“Here in the Philadelphia area, the likes of Robert Brennan, Joe Forte, and Tony Young have pleaded guilty to stealing millions from friends, families, social acquaintances, pension funds, churches, schools, nonprofit organizations,” says Leon LaRosa Jr., director of La Salle University’s Fraud and Forensic Accounting Institute.
How to proceed, if you believe you are a victim?
Do your homework. “You need evidence. Prove there’s more than one victim. I got online and found blogs where people were complaining about Remington,” Robinson said, websites such as RipoffReport.com, Scambook.com, and MortgageGrapevine.com.
Enlist other victims. “I found investors in every state,” Robinson said. “That’s when I got the attention of the authorities. Remington thought the government would never connect the dots with individuals.”
Start with local law enforcement, a state attorney general, or a U.S. Attorney’s Office, and then the FBI. “Remington didn’t fall under [the U.S. Securities and Exchange Commission] jurisdiction. It was not a securities fraud and yet there were victims all over the nation,” Robinson said.
Little people can beat the bad guys. “The nobodies like me are the ones who do it,” she said. “The government works for me and I knew about a crime. I needed to find the agency that would do their job.”
Your Money: Turning point for fixed-income investors
Erin E. Arvedlund Published Wednesday, September 18, 2013 (Inquirer.com Sub required)
The Federal Reserve meetings this week could represent a turning point in American monetary policy, say professional fixed-income advisers. So for fixed-income investors, it’s time to re-examine your holdings.
It is possible the Fed will choose to wait until November, after the October Federal Open Market Committee meeting, to begin reducing the current pace of purchases at $40 billion in mortgage-backed securities and $45 billion in Treasuries per month.
Fixed-income strategist Guy LeBas, of Janney Montgomery Scott, believes the committee “will use this opportunity to codify the plans laid out on June 19, meaning the statement will reference the goal of finishing its asset purchases by mid-2014.”
UBS wealth advisor John Garvey is encouraging clients to stick with liquid, single-A-rated munis that can offer yields of 3 to 3.5 percent, tax free, compared with roughly the same yield on 10-year Treasuries.
“There’s a greater than 50 percent probability on Wednesday that the Fed starts withdrawing its bond-buying of [Treasuries] by $10 billion to $15 billion a month as a start,” and probably won’t finish drawing down the stimulus program until mid-2014, Garvey said in an interview at UBS in Center City.
Garvey says he advises clients to avoid riskier issuers such as Puerto Rico and Illinois, and has been selling shorter-term municipals in the one- to three-year maturity range and swapping into 10- to 15-year maturities.
UBS also invested for clients in corporate issuers like the Verizon/Vodafone bonds that recently came to market (with the caveat that UBS has had a longtime relationship with Vodafone), as well as municipal bonds.
The meetings this week don’t guarantee the Fed will immediately start raising interest rates. UBS’s house view is that the Fed won’t raise rates until 2015.
LeBas agrees that the Fed’s Open Market Committee meetings could represent the fulcrum for a change in monetary policy, just as Fed Chairman Ben Bernanke is set to step down at the end of the year.
“The two-day September FOMC meeting will be . . . the likely inflection point in current monetary policy,” LeBas wrote in a note to clients. “Given the mixed summer economic data, the committee is apt to codify the plans announced on June 19 and remind the market that the 6.5 percent unemployment rate threshold for the Fed funds target rate is a guide, not a trigger, while waiting until November to alter the pace of purchases.”
Your Money: Fed’s call means little for equities
ERIN E. ARVEDLUND
Published Tuesday, September 10, 2013 (By subscription to Inquirer)
The world will be watching next Tuesday when the Federal Reserve meets to decide if – and how much – to “taper” the bond-buying program it began two years ago. And no, the stock market won’t fall apart, says one market strategist.
Seth Masters, chief investment officer at Bernstein Global Wealth Management, predicted in 2012 that the Dow Jones industrial average could hit 20,000. He has not backed away, either, predicting now that it could happen by 2018.
Moreover, the Fed’s decision should mean virtually nothing for equities. “Will higher interest rates affect stocks?” he said on the sidelines of a conference Monday at the Rittenhouse Hotel. “In fact, that’s not going to be a problem. When interest rates increase from a low base, it’s actually slightly good for stocks. It means the economy is improving, therefore ownership in companies is worth more.”
The 10-year Treasury, for instance, has risen sharply from around 1.5 percent to 3 percent today – in percentage terms a huge jump. But in real terms, “that’s still low,” Masters adds.
President Obama’s pick for a new Fed chair also shouldn’t hurt equities. “Concerns that a new Fed chair will lead to changes in policy in the short term are extremely unlikely,” Masters said, “regardless of who the chair is.”
The S&P 500 is trading at a forward price-to-earnings ratio of 13.9, vs. 15 times earnings in October 2007 and 25.5 times earnings in March 2000, the apex of the last two bubbles.
Masters advises staying away from overpriced high-dividend-yielding stocks, which investors have piled into and bid up dearly.
“We agree [those stocks] are safe, but it’s all about what you pay for that safety.” Bernstein still predicts a 7.5 percent total return for the stock market. Others disagree. Boston-based Grantham, Mayo, Van Otterloo & Co. L.L.C. lowered its return forecasts based on eroding corporate profit margins.
As for bonds: “The second quarter of 2013 may have marked the bottom of the cycle in rates,” Masters said. He explained that the bond market has cycled back to where interest rates were in 1955 – roughly 3 percent – down from rates in the high teens in the 1970s and 1980s.
Your Money: Using technicals, fund manager sees stocks going higher
Published Wednesday, September 4, 2013, (Inquirer.com) Subscription…
Eugene Peroni Jr. believes the stock market is headed even higher – perhaps after a breather or short-term correction related to uncertainty in the Middle East.
Peroni uses a method of technical analysis, developed by his father more than 50 years ago. Peroni contends his indicators show the market could actually make another move higher.
Technical analysis differs from fundamental analysis, researching each company’s earnings, cash flows, debt, and other balance-sheet data. Technical work instead looks at the history of a stock or commodity’s moves up and down to determine what happens next. If the prices reach certain historical highs or lows within past ranges, sometimes that’s a sign of what’s to come.
Peroni says the 1,000 or so stocks he follows show few signs of taking a breather, other than a short-term correction. “It’s a broad-based advance, including chemicals, cyclicals, manufacturers,” he said in an interview. “We see a very balanced leadership in this rally. We haven’t hit our cycle peaks yet.”
So far this year, the Dow has gained roughly 16 percent, the S&P 500 index roughly 18 percent. “There’s some room for a pullback,” he conceded. “But in my opinion, that’s certainly acceptable.”
On the other hand, agriculture, metals, and coal stocks are starting to bottom, he said, signaling they may rebound soon. He’s also bullish on consumer staples companies, energy, and health care.
“Copper, steel, and coal-related stocks have begun to establish base formations that could be signaling an important bottom for commodities. I am not expecting dramatic short-term reversals for commodities,” he said, but relative strength trends in the commodity-related stocks could be constructive for the general market as the potential for increased demand bodes well for the economic outlook.
Peroni wrote in a recent letter to investors that he sees a path for the Dow Jones industrial average to reach 16,000 points: “A gradual recovery among depressed commodities could pave the way for higher stock market levels with corrections held to relatively modest 3 percent to 5 percent retreats before reaching DJIA 16,000, or higher.”
Naturally, investors are following oil prices closely amid the turmoil in Syria and President Obama’s arguments for military intervention. Peroni generally holds about 25 stocks at any one time, but through Advisors Asset Management, where he is a portfolio manager, some of the funds have a hefty up-front sales fee – up to 2.95 percent. Make sure to check with your broker before purchase about what the returns would be after fees. Peroni also runs separate accounts with a minimum $100,000 investment.
Peroni has other Philadelphia ties. Prior to AAM he was managing director, equity research, for Nuveen Investments in Radnor, and director of technical research for the Philadelphia-based brokerage firm Janney Montgomery Scott. As of June 30, the brokerage and advised business at AAM represents approximately $12.2 billion in assets. Peroni Jr. currently oversees $25 million.