Archive for March, 2008
March 25, 2008 -
Dark pools are pools of stocks listed on private or proprietary electronic exchanges that allow a buyer or seller to move large blocks of stocks anonymously without causing the bumps in the price of a particular stock as would happen if an investor were to buy or sell a large position of a stock in a publicly followed exchange. For example, if an individual or an institution wanted to offload a block of 2 million shares in a dark pool, this transaction could be executed without affecting the stock’s trading price that day whereas normally such action by an influential individual or institution would cause the stock’s shareprice to fall. Erik Sirri, Head of the Division of Market Regulation for the U.S. Securities Exchange Commission, stated that “while the increasing use of hidden orders may be troubling,” the SEC plans to do nothing until it is clear that the use of hidden orders in dark pools is damaging the individual retail investor’s ability to buy and sell stocks at a fair price.
In 2007, an estimated 17% to 25% percent of shares listed in the NYSE exchanged hands via dark pools, a significant percentage of the total market. In today’s environment, Sirri’s comments do not bode well for the retail investor. The trading activity of large institutions and influential individuals, and along with it, their real feelings about the U.S. economy, often remain hidden from public view via trades executed within the secretive confines of dark pools. As none of the problems of systemic risk in the financial system have been solved by any of the U.S. Federal Reserve’s actions within the past two weeks, it may very well be that the activity reflected in these dark pools as of late directly contradicts the story being spun to the public. The problems with these dark pools is succinctly summarized by NYSE President Catherine Kinney, who stated that every single share traded in the dark was a share that would not assist the market in determining a fair price for that share. In other words, without the benefit of knowing the extent of buying and selling volume occurring in these dark pools, retail investors would indeed be purchasing and selling the same shares without critical market information, aka, “in the dark”. Read more …
March 25th, 2008
March 9. 2008 -
Diversification: The World’s Worst Investment Strategy
Diversification, cash and AAA-rated instruments with exposure to Mortgage Backed Securities – If you’re deep into all three, these are three definite signs that it is time to let your advisor go. Many “professional” advisors today argue that diversification is a reason to stay fully invested through bear markets. After all, if your advisor had diversified your portfolio into a bunch of housing and financial stocks that are all sitting on 40% to 70% losses right now, he or she would probably tell you that the bottom is certain to be near and that the worst performers of your portfolio this year will be the best performers of your portfolio in the years to come. Well, here’s a news flash. The time to sell out of these stocks was 9 months ago, and if you’re still holding on, the odds are that you will be hurt even more.
Here’s the reality. Diversification is the world’s worst investment strategy and has only served to erode a great deal of net worth and purchasing power for both Americans and Europeans alike. During the past 8 years, many of the major indexes in these regions are negative on an inflation adjusted basis. Thus, for 8 years of buying and holding, if your money was invested in funds pegged to the S&P 500 or the FTSE 100 (and 98% of money managers peg their portfolios to the major indexes of their home country), your net worth has been significantly eroded.
The Warren Buffet Argument is a Sham
Financial advisors often praise the benefits of diversification to advocate a buy and hold strategy so that they can continue to earn fees on depreciating portfolios during bear markets. To convince you that doing this very wrong thing is the right thing to do, they utilize the Warren Buffet argument. They argue, “Look at Warren Buffet. He’s a buy and hold guy and he’s one of the richest men in the world”. In a rational world, such an argument would be called a selective reconstruction of reality. What these same money managers fail to tell you is that Warren Buffet built his wealth by concentrating his exposure, not through diversification. At times, Mr. Buffet has held a mere five positions in his entire Berkshire Hathaway equity portfolio. Mr. Buffet did not diversify, because with his level of expertise, there was no need to do so. Mr. Buffet can buy and hold because he is concentrated in positions that will continue to do well whether markets are bear or bull markets.
That’s what anyone that knows what they are doing will do. In bull markets, financial advisors that truly are on top of their game will concentrate to outperform the markets significantly. In this case, since a rising tide lifts all boats, those that choose to diversify can conceal their incompetence as they earn money simply through luck. However, in a bear market, incompetence is much more difficult to hide. Read more …
March 9th, 2008
March 3, 2008 -
Out of Omaha, Nebraska, this story was picked up by the major global news services today:
“OMAHA, Neb. (AP) — Billionaire Warren Buffett said Monday that the U.S. economy is essentially in a recession even if it hasn’t met the technical definition of one yet. Buffett said in an interview with cable network CNBC the reports he gets from the retail businesses his holding company owns show a significant slowdown in purchases. The chairman and CEO of Omaha-based Berkshire Hathaway Inc. said millions of people have also lost equity in their homes because home prices have dropped.
The technical definition of a recession most economists use is two consecutive quarters of negative growth in the nation’s gross domestic product. “I would say, by any commonsense definition, we are in a recession,” Buffett said on CNBC.
Four weeks earlier, I wrote an article on this very blog called, “Is Recession in the U.S. Coming? We’re Already in One”, that received almost zero attention even though, in essence, I said exactly the same thing Warren Buffet said. And thus, this is just another example of people needing someone famous to say something to consider it newsworthy or more importantly, trustworthy. I’ve already given you a plethora of reasons on this blog as to why you can never trust the commercial investment industry, yet when Goldman Sachs declared shorting gold as one of their top 10 trades at the end of last year and gave price targets of $600 to $650 an ounce, thousands and thousands of the sheep herd worldwide undoubtedly sold out of their positions in gold upon this stark pronouncement regarding the doomed future of gold by such a huge investment “authority”
As I only have about 10 free minutes today, this will unfortunately be an extremely abbreviated entry; however, there’s plenty more online at this blog to read about the truth of the underlying economy and premium, information here for our subscribers only about how to make a fortune from this coming global economic crisis.
Technorati Tags: economic crisis, U.S. recession, U.S. bear market
March 3rd, 2008
