Posted on 08/26/2010 11:04:20 PM PDT by Freedom_Is_Not_Free
My understanding is that the larger banks have taken TARP infusion funds and purchased Treasuries, don’t know anything more specific than that.
TARP funds cost 5% for the first 3 years. Treasuries are paying much less than that.
don’t know anything more specific than that.
That's what I figured.
Well. please correct me or give me what insights you may have.
If you heard that they were, your source was mistaken.
Thanks for the correction, I’ll dig deeper.
Let me know if you find something that makes more sense.
OK, on MLP’s and taxes:
Obviously, MLP’s are partnerships, hence the ‘P’ in MLP. You are a limited partner when you buy their listed shares, and as a partner you receive a K-1 for the tax reporting. NB that if you like to do your 1040 early, you’re going to be confounded by the K-1’s, because they don’t have to issue a K-1 much before March.
Let’s talk first about the IRA issue: Owning MLP’s in an IRA is an issue even without the ETF issue, because of how MLP’s already receive favorable tax treatment and have a partnership organization instead of a corporate entity organization.
In a corporation, if they take on debt, your liability is limited to what equity you have in the company. So you can’t deduct interest expenses, etc just because you own stock in the corporation. In a partnership, the tax situation is distributed proportionally to the partners, both master and limited. They can pass debt interest deductions through to their members, as well as capital losses and other tax reported items on the K-1. IRA’s have limitations on such investment(s).
There are other tax issues as well; the partnership might make money from lending money, or they might make money that is pretty much unrelated to the stated purpose of the partnership that is being given favorable tax treatment. These become additional complications that can run afoul of IRA limitations.
For these reasons, I wouldn’t hold a MLP in a IRA. I mechanically can do it (ie, a self-directed IRA broker probably won’t prevent you from buying the shares in your IRA), but I would not want to be in a position of having to deal with the IRA should they decide to tell me “Uh, listen, you need to address some issues with that partnership you held in your IRA.” I would now need to fully understand the MLP’s books and accounting and the IRA *and* MLP tax law to contest any IRA assertion that you had generated a tax liability from owning a MLP in your IRA.
I have enough work to do understanding my books and taxes. I’m not signing up to do that work on someone else’s books because the IRS decided that they don’t like their accounting or my tax treatment. So I simply don’t own MLP’s in our IRA’s. I just don’t do it. Into the IRA’s, I’ll put other dividend-yielding stocks or bonds, or preferred stocks, but I won’t put MLP’s. For me, the easiest rule of thumb on what to put into IRA’s goes like this: “Was this security (stock, bond or preferred stock) issued by a C corporation? If yes, then continue evaluation. If no, then no further consideration is necessary.”
OK, now on to the ETN issue, which you understand, but I’m going to elaborate for others:
I don’t like ETN’s, in or out of IRA’s. ETN’s (Exchange Traded Notes) actually are NOT backed by anything other than the credit and guile of the investment bank that is issuing them. They hold none of the “underlying” instruments - the ETN is priced to return according to an index or basket of underlying instruments, but the ETN doesn’t fundamentally have anything in it (ie, it doesn’t own shares of the MLP’s in this case).
Given the mendacity and duplicity of the banks of the west in the last three years, I want something a tad more substantial than a wooden nickel with “Trust Us” embossed on one side, and “Sucker!” on the other, inside the “black box.”
OK, I’m going to take a wild guess that you are, as I am, an engineer. You’re accustomed to the nice, clear, unequivocal natural laws under which we must operate, and their harsh (deadly) penalties for violations (or attempts thereupon) of said laws, right?
Either that, or you a physics jock.
So which is it? Because I have to give you a pep talk, and I want to know how I should slant it.
I wish I would have written that, because your last paragraph really should be understood by people now. There are people like Gross who can talk his book and get the President of the US (regardless of who he is or what party he is from) on the phone, no matter where the POTUS is in the world. A guy like Gross can move markets - bond, stock and financial derivative markets - with his words.
We can’t. We’re just flotsam in the system here.
The guys who pound on gold as “THE” investment are tedious to me largely because I just cannot get over the “OK, so you own pounds of gold.... NOW what? What are you going to do with it?” There are some people who are just fixated on gold (or silver) when these financial disruptions happen, and they ignore a whole lot of host of other things on which they could be investing their wealth with a positive outcome, not the least of which could be isolating the buyer from further financial mischief on the part of the Ivy League Idiotic Elites.
The other thing that really annoys me about the goldbugs is that their investment analysis seems constrained to “buy gold... then go to sleep on your pile of gold.” Almost no one is invested in nothing but gold, (and woe unto those who are), yet the goldbugs never want to address anything about how people should be dealing with the rest of their investments or cycling in/out of other investments into/out of gold.
eg, I own a bunch of bonds. Not bond ETF’s or funds, but actual bonds. Some of these bonds are now very nicely appreciated (with gains of over 25%). Interest rates continue to head downwards as people are buying anything with yield... but there’s a lower limit: 0. I’m pretty damn certain that no one is going to lend money to a muni sovereign, state, corporation, etc for a ZERO return on the lending. I sure as heck won’t.
But when the yields get close to zero, I’ve got a conundrum: Should I sell the bonds and take the gains? They’re good bonds, and I like the income. If I sell them to capture the gain, I will give up that income and won’t easily be able to replace it in today’s market. But make no mistake - there will come a point at which I will be sorry if I don’t sell those bonds before they mature, because rates will be going back up (probably rapidly). When bond yields start going back up, that *might* be an indication of inflation starting (even from a depressed level), and that *might* be a time to own gold (or other hard commodities).
The goldbugs never address this type of situation - at all - their entire worldview consists of “own gold!” and “buy more!” They rarely, if ever, seem to want to address any other asset class as it relates to gold, nor do they EVER make a call to sell gold. The poor people who follow their clarion call are left to do that on their own.
I’m a Civil Engineer. I see everything in black and white. No gray area.
I see the stock market in fundamental terms, and while I clearly understand that the market can trade technically based on human psychology, I always fail to account for that and only look at the fundamentals.
A perfect example is the housing bubble. I expected a collapse in 2004 because the fundamentals just didn’t support the prices - way out of line from incomes and rents. As usual, I failed to understand the psychological aspect of people’s greed during a bubble - that very few of them study and learn the underlying reality like I do.
One of my GREAT weaknesses is thinking everybody is as analytical as I am. As a result, I end up being an outlier, saying that we are heading for a depression two years ago, while most here were listening to TV talking heads and parroting the V-shaped recession. Just as now most people here mistakenly think that Obama is the reason for the depression and Republican governance would magically buoy the economy back to the good old days.
I am studying and getting more sophisticated, but in the end, I still can’t shake my engineering mind-set. You remember that we were taught that all problems were solvable. 2+2=4, and there was no interpretation or spin.
I would say the biggest difference I find between the engineering mind and others is that where most people will ask “can this be done”, an engineer will ask “how can this be done.”
“Can we put a man on the moon”, vs “how can we put a man on the moon.”
“Can cars get 100 mpg”, vs “how can cars get 100 mpg”.
“Can we fix the economy,” vs “how can we fix the economy.”
You are an engineer so you know how I approach things. Very analytical. Very black and white. There is no gray area. We are either inflating or deflating. The depression will either be inflationary or deflationary.
I’m not mentally equipped to handle subjects dealing with human psychology, which is a critical aspect of economy, finance, bubbles, booms, crashes, etc.
I could use your help.
Retired EE. I went through what you’re going through right now. Been there, done that, paid my dues.
Dude, I’m here to help. Get a beer, this is a long posting.
The market isn’t black and white. It is nothing more that a faceless, seething mob of opinions, where some opinions are weighted more heavily than others according to the money behind them. Many of these opinions are wrong, some are mis-informed, some are fraudulent and some have no business being expressed. But there they are, all moving the markets in some way or other. Opinions are like buttholes: Everyone has one. They all stink.
Many of the clowns who inhabit and make the markets are aliens as far as engineers are concerned. They have no shame, they have no scruples, the economists who babble ceaselessly about the economy are mathematical frauds, many financial firms are hucksters without shame or remorse.
So quit looking for absolutes, cease trying to make sense of it. The market can (and often does) remain irrational for extended periods of time. There’s a need by some to ascribe every market move to something that happened today. You see it constantly on CNBC or Bloomberg: “Markets went {up,down} today, as traders saw a cow with two heads squirt milk out three of four nostrils. Some traders are taking the lack of milk from the fourth nostril as a sign the cow will die tomorrow, and they’re shorting milk futures.”
It is as if you and I were spectators at some collection of “Hold muh beer” idiots who blew themselves up. We saw that Bad Things were going to happen. We could do that back-of-the-envelope math on how much dynamite they packed under that Yugo in the neighbor’s fencerow on concrete blocks. We quickly reckoned that at about one megajoule per stick, the Yugo was going to launch off the ground, the prevailing wind was going to have its way and the car, upon regaining the earth it would crush the single wide where their wife and baby were.
We told them. They did it anyway and got people dead. You’re now wondering “Why didn’t they listen?”
Dude, really; some people are just too stupid to listen. It is no more complicated than that. The economy is just a larger version of that right now. Ben Bernanke is just playing with money instead of dynamite he found in an old barn.
A great deal of market movements don’t make that much sense. For example, when I see a market that is up three days in a row, I start taking profits. When I see that it has been up four days in a row, I start to really flatten my long positions or tighten any remaining stop-loss orders. When I see a market that has been up five to seven days in a row, I start setting up short positions. Why? Because I know that markets can’t remain that one-sided for that long. Is there a fundamental reason behind it? Nah. I just know that traders become restless and nervous after too much market movement in one direction, just the same way we get bored of a houseguest after three to four days. It need not make any more sense than that. But the pretty little things on CNBC and Bloomberg, with their perky little hair-do’s and plunge necklines, have to Make Sense Of It All, Every Day... so they turn to something that happened that day and connect the two. The truth could be as simple as “the market ran out of buyers today, so it went down.”
Markets and fundamentals? Pfah! Since the late 90’s, the equities markets have not been really connected to fundamentals much at all. There’s been times the markets have come close to “fundamental” valuations (ala Ben Graham valuation models), but not very often. The last time the markets really made fundamental sense was in the early 80’s. Then the markets got hold of cheap computing power and PhD’s and the markets haven’t made a whole lot of sense since.
However, the market (and indeed, the entire economy) cannot hide from the truth forever. Sooner or later, fraudsters run out of money, or new suckers, to run their games. How long can it run? Consider this: Social Security is structured just about the same way that Bernie Madoff’s scheme was structured. It will be about 100 years before that crashes and burns. Madoff went for, oh, 15 years before he went bust and was discovered (because he turned himself in), whereas Uncle Sugar is only now starting to be discovered. 15 years, 50+ billion dollars - much of it from feeder funds and rich Jews in NY/NJ/FL, who are supposedly the highest IQ racial group in the world. Didn’t save them much money when they thought “Oh, Madoff is Jewish, he wouldn’t rip off fellow Jews...”
There are several recent instances of the markets running off a cliff like Wile E. Coyote when he’s run out of mesa. You know that point in the Wile E. cartoons... he’s got up a hell of a head of speed, he’s so focused on the bird that he runs off the cliff and it takes him several moments to realize that he’s in the middle of the air, with the terra firma about 2,000 feet below him...
1. The dot-com bubble. Anyone doing “fundamental” analysis of a whole lot of dot-bomb companies could see that they were burning cash in an unsustainable way. Barrons published a piece in March of 2000 noting this - they got a truckload of hate mail in response. That’s when you know there’s a bubble, BTW. This idiocy went on for two to three years - it started in ‘97, and really accelerated in October, 1998, when the Fed responded to LTCM. PE’s went up to lunatic levels on the companies that had any profit to speak of.
2. The housing bubble - when the mortgage on a house exceeds the median household income for the area in which the house in located by more than 3 to 1, the house is over-valued. Actually, there is a historical range of supportable mortgage valuations - 2.6:1 to 3.0:1. In some areas in California, the ratio of mortgage balance to household income was over 9.0:1. There was NO WAY those mortgages were going to be paid. This really got going in 2004, after the Fed had kept interest rates too low for too long, and the Chair (Greenspan) was praising these cockamamie mortgage instruments that allowed wild leverage on housing.
3. The commodities spike of 2007, and the natural gas run-up prior to that. There’s no way that fundamental commodities use was climbing that fast. The answer why oil went up to $140/bbl? Leverage and speculation. Period. The energy futures markets can be (and have been) rigged since the Commodities Futures Modernization Act of 2000, a gift from Republican Senator Phil Gramm and President Bubba Clinton. Google the story of Amaranth, the Canadian hedge fund that imploded over trying to corner natural gas futures. They eventually blew up, but in the mean time, a whole lot of people had their utility bills jacked up by ONE hedge fund trader using wild techniques to obfuscate his trades in the markets. Eventually, tho, the truth caught up with them, and they couldn’t get out of their trade fast enough - all those obscure off-shore transactions proved very slow to unwind. This game took about two years to run its course.
4. The Auction Rate Securities scam of the large i-banks. “As safe as cash” they said. “Like a money market fund, but with higher yields.” Yea, right. What they weren’t telling you is that the market for ARS notes was propped up by the banks themselves, and the ARS paper was liquid for ONLY such time as the banks could continue propping up this market. At the time the short-term bond market started cratering, the ARS market literally disappeared - you couldn’t get your money back out of ARS, so you have money in your checking account (which was invested in ARS), but the bank refused to give you any of your own money, because it was invested in ARS, and they couldn’t sell your ARS because to do so would require that they buy your ARS, and their cash was tied up trying to keep their banks from imploding. But they were able to hawk these products to both investors and municipalities for years until they were busted. Were they “the same as cash.” No. Anything that isn’t made of that neat linen paper and that doesn’t have “Federal Reserve Note” across the top is not cash. Nothing is like cash but cash. Cash has no liquidity risk. Everything else does. This took about five years to run its course.
All of these instances share one common thread: They didn’t obey or reflect “fundamentals.” The markets didn’t care. The markets went to levels that were unsupported by “fundamentals” and stayed there for quite a little while.
Almost no one in the market is ‘analytical’ as we engineers, and the few who pretend to be (ie, the “financial engineers”) we should drag out by their heels and horsewhip in public because they’re part of the greatest sham in the universe: the idea that one can peddle away risk in a world-wide game of “pass the parcel” (ask if you’re not familiar with this Scottish game) and not get burned.
We engineers get infused with a great deal of math, and our reputations and livelihoods depend on getting honest answers out of our computations and application. Thinking that traders, “financial engineers” and economists are going to do the same because they’re applying the same levels of math is a HUGE mistake. As I said, most of these clowns are frauds and farces. They’re willing to make fraudulent assumptions at the very base of their models - such as “the price movements of securities follow a Gaussian distribution.” Complete and utter BS, but they all make it. Even after it was proven wildly false in the autumn of 2008, they *continue* to make this assumption. Get a CDO offering prospectus some time and read it. Really read the math therein. Complete and utter BS. Go check out the “Gaussian Copula function” upon which many CDO assumptions rested. More BS.
All of the field of modern economics is one huge farce, with their over-application of mathematics to try to plump up some very minor patterns of human behavior into grand unified theories. They talk of “laws” in economics in the same way engineers talk of “the laws of thermodynamics” or “Newton’s Laws of Motion” and so on. This they do to in an attempt to bring credibility from the hard sciences and engineering into their field of fiscal astrology. In truth, there are no “laws” in economics the way we have natural laws of science and the universe. eg, throughout this recession, you can read a great deal about “Okun’s Law” and other such nonsense.
Go ahead: google “Okun’s Law.” And do try to keep a straight face while you’re reading about it. Just remember, that the public hears these shamans debating on the topic of unemployment and they don’t know that the “law” part of “Okun’s Law” is a complete farce. It is nothing more than a loose statistical relationship, and certainly nothing self-enforcing like the laws of the universe.
In short, a majority of the people involved in making and trading markets, rules for markets, fiscal, monetary and economic policy have been educated well beyond the limits of their own common sense, or they’ve had all their common sense supplanted by overwrought doctrine and theory. They can’t recognize actual facts if they’re bitten on the face by same.
How to overcome this problem? I’m sorry to say, you’re going to have to become a cynic or get out. That’s how I overcame the *exact* same weakness I had. When I started trading seriously in 2003, after firing financial “advisors” who were costing us a huge sum of money with their idiotic nostrums of “portfolio theory” and “efficient market hypothesis” nonsense, I tried to “make sense” of the markets. They don’t make sense. They don’t have to. The market is populated by idiots, fools and frauds, from top to bottom, from the Fed on down to the guy you call at your brokerage to change your account’s mailing address. These clowns get their bailouts because they’re all part of a milieu of Ivy League graduates - they’re all connected: the financial press, the clowns working for the banks, the lawyers and accountants who do their books, the clowns in Congress, the White House and the SCOTUS, and much of the top tier of management at large companies across the US. They’re predominately from the same crowd who went to a small group of schools and live/operate in/occupy the same social circle.
The good news is that I believe engineers are better equipped to plan for risk in finance than many others, because we come from a field where failure to account for risk usually means someone gets dead in a gruesome manner. So carry that same thinking into financial management for yourself and your family. You’re used to asking “What if XYZ fails... what happens to the overall structure?” Well, apply that to your investing. Don’t worry about predicting what will happen in the markets tomorrow, next week/month/year. Predictions are for people who like stirring their fingers in chicken guts. Worry instead about “OK, what if XYZ happens in the market(s), what happens to MY money?” Sooner or later, XYZ is liable to happen. Have a plan before you *need* a plan. If you have an understanding of “OK, if XYZ happens, markets usually react like 123” then you can formulate a plan what to do, rather than wonder “What should I do?”
Example: I thought deflation could happen. I bought bonds. The bonds went up. I know bonds can’t go up forever, so now I’m working on a plan of “OK, what do I do when bonds *can’t* go up any more?” That point is probably six to nine months away, but I’m planning for that turn in the market all the way back here. Sooner or later, that inflection point will come in the market, and bonds will go out of favor.
Did I put all my cookies into the bond jar? Heck no. I could have been wrong. I had plenty of money in equities too. I pulled out of most equities prior to the “Flash Crash” because I didn’t like the way the market was acting. If you stop worrying about “why?” and start looking for patterns of “what?”, you can see patterns of market behavior that indicate the markets are going to shift one way or the other. Let others worry about the “Why?” I don’t give much of a rat’s rear end any more why markets move. I just watch price and volume - or price and very little volume. When prices move without much volume, that’s a warning too. eg, a market or individual stock that works its way higher and higher on lower and lower volume is getting set for a fall. A market that is selling off on less and less volume is running out of panic to the downside, and so on.
Any time I buy any security, I have a plan of “OK, X happens, what do I do with THIS security?” I’d recommend writing it down - it makes adhering to it easier and more consistent later on.
What to not do:
THE number one way that people go broke in the markets is to pile on leverage. Bar none. Leverage in housing is one of the reasons why the housing market has imploded so heavily - and leverage comes about in “no down” loans or “low down” loans in a period of house price depreciation. Leverage by the big i-banks on illiquid bespoke derivatives is why they went bust. Don’t use leverage to try to increase your gains unless you’re there to watch the position like a hawk. Don’t let anyone talk you into levering up on ANYTHING. Take on only that debt you believe necessary and prudent for anything in your life.
Don’t bother looking for tips and recommendations. Most people hawking their “theory” of what is going and recommendations on what to buy on are peddling something. eg, the piece you posted way up thread from the gold bug. He’s hawking gold, ergo, he’s talking his book.
Lots of people like to ask “Should I buy XYZ?” I dunno. Or, the most annoying types of people are those who say “Shut up about all this general stuff and tell me what to buy and when to sell it.” As Jesse Livermore liked to say “People are always looking for tips.” People looking for stock (or other) tips are lazy, they don’t want to do thinking, they want a get rich quick scheme. Little wonder that so many people get ripped off.
All I can tell you is this:
Stop trying to ascribe rationality to market participants. Use YOUR rationality and math to manage YOUR risk, and then assume that, oh, half of the market participants are morons, and other half are frauds (who are scamming the first half) and you’ll be pleasantly surprised by the few honest people in between.
There’s no point in worrying about whether the market is rigged. It is. There’s no such thing as a “free market.” That’s for academics and more idiot economists to debate. The evidence is clear and unequivocal: the market is rigged and you’re the mark. The economy is hollowing out. The investment bankers are frauds. The ratings agencies are both corrupt and incompetent. The Fed stands ready to burn your savings to ash to bail out bankers and a spendthrift Congress.
Don’t worry about why they’re doing it, or why they don’t see this is a danger. These clowns believe that they can’t be wrong - they’re the “Best and Brightest” after all. They went to the Right Schools, associated with the Right People, therefore they are Right (or so they think).
Your job is to a) preserve the money you have made from fraud and b) hopefully make it grow over the years to provide for your retirement. To do this in this environment, you cannot worry about what makes sense. You can worry only whether a) you’ve planned for market events or movements, and b) your plan involves how to preserve your capital first and grow it second.
Because if you lose your capital, you’re out of the game. Your job is to remain in the game and provide for you and yours. As such, you should quit trying to rationalize it and just manage your risk prudently.
Here’s more reading for you. It is as dry as three-day-old toast, but it is required reading these days:
http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471389455
You’ll see how populations get caught up in these things, time and time again. About every third generation, in fact.
Want to see how scams haven’t changed a bit? Well, here’s one about mining scams in Nevada in the late 19th century and early 20th:
http://www.archive.org/details/myadventureswith00riceuoft
You’ll see from “Rice’s” book that NOTHING about scams has changed in their psychology or perpetration except the size of the fraud. You can draw many parallels from mining stocks in Nevada over 100 years ago to dot-bomb stocks and see that only the names have changed. The psychology is exactly the same. You’ll see that while “Rice” went to prison, the fraudsters and accomplices on Wall Street skated away scot-free, same as today. I found that book whilst walking through Virginia City when we were visiting there while traveling from our farm to Reno on one trip; you won’t find it mentioned much in lists of financial books. But it is wonderful reading, because it gives you an insight into the mind of a fraudster.
And if you haven’t already, read Harry Markopolos’ book “No One Would Listen” - it gives a great account of how the SEC, the press and others refused to believe that there was a huge fraud right under their noses.
Maybe it's the various funds broadcasting that "it's not so hard" to get the MLP into an IRA, but I am seeing more of those pseudo-articles out there. As you noted, why add more layers of complication to an investment (or retirement acct)? I think there's a place for MLPs in my portfolio...but I'll stick with normal investment method.
And thanks for spelling out the other details (ETNs, EFTs). For anyone interested, MLPs can offer a lot of upside, but they are complicated.
Here’s something to NB as well:
If your broker gives you the stats, check out the “institutional ownership” of MLP’s when you bring them up on your research screen. You’ll see that it is very low. Lemme pull one up:
KMP, Kinder-Morgan. One of the biggest mid-stream MLP’s out there.... has 11% institutional ownership.
Another one, SPH, Suburban Propane, has only 15%.
Both have been around a long time, both have really solid yields, both of them would be great to hold in a IRA/401(k) but for that tax issue.
Where is most of the “institutional” money? IRA’s, 401(k)’s and other retirement plans. Most mutual funds who want to be owned/bought by this money will not buy these shares because of the tax complications for the fund and the buyers of the fund.
Thanks Dave...your insight has really helped me out with these MLPs.
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