Market Musings: The Reformed Broker

I worked in the mutual fund industry for over seven years and I’ve spent almost my whole career in Financial Services. My first year on the job was in 2008, right in the heart of of the Great Recession, and a few months before Bear Sterns closed it’s doors. If you’ve read any of my earlier Market Musings then you probably know my story. Many things about the mutual fund industry and financial advice is stacked against you. Though I still like the markets because I enjoy the psychological battle which takes place every single day.

I believe the majority of people should not pay attention to the daily swings in the market. Less people should watch CNBC because it’s basically a stock market hype machine with almost no incite into what people should really be doing with their money. Both of these things, swings in the market and CNBC, only help people make bad decisions.

I’m bringing back my weekly Market Musings to talk about what’s going on in the markets. I’ll try to talk about what you should pay attention to and what you should probably avoid. In the end I hope someone finds this helpful but there is a selfish confession. I hope this weekly post helps improve my knowledge and thought process about markets. I’ll also spend sometime complaining about what is bogus or corrupt. Instead of doing that today. I’d rather you read the following blog post. It’s Josh Brown’s post, “I Dare You,” on his blog, The Reformed Broker.

If you’re interested in the financial markets and not following Josh than you’re missing out. I think him, and his associate Barry Ritholtz, are two of the best market commentators in the game. I check both of their websites almost daily for their fresh takes on what’s happening in the markets.

Go read Josh’s post about the Fiduciary Rule now.

Market Musings: Let’s talk about the basics

Today, I’m bringing back another series I haven’t written about in six months.  Every Wednesday at 6am, I’ll be posting my weekly, Market Musings blog post.  For about seven years I worked as a performance and risk analyst for a local mutual fund company.  When I was in college, and early in my career, I was obsessed with the financial markets.  Then I took, and failed the CFA, and the Great Recession occurred.  Both events got me a little jaded about the stock market and the professionals that were supposed to know what was happening.  The one positive of the Great Recession is that it should have made people realize that almost nobody knows what’s really going to happen and that markets are not efficient.  That doesn’t mean it was worth it. It wasn’t.  The Great Recession was horrible, many people lost their jobs, and even more people don’t realize how close we were to a complete collapse of our financial markets.

Sadly, it will all happen again someday.  Why? People are arrogant and think they’re smarter than everyone else.  Plus the fact that there is money to be made and the people who figure out how to screw the rest of us tend to made huge profits without any form of punishment. It should be common sense but when you incentivize people to take risks, bad things tend to happen.

Now, I’m out of the mutual fund business but I still work for a company involved in the financial markets though my roles doesn’t require me to follow it’s movement.  Market Musings is my excuse to stay up to date on the markets.  Why? Because I miss it and I still enjoy them. It’s a different type of enjoyment. I’ve been through one of the worst financial collapses of the past fifty years. I will also always enjoy the fact that there is always something happening, or about the happen, and new to learn. It’s constantly evolving.  It’s still frustrating and much of the information, especially on TV, can leave regular people, people whose jobs don’t require them to follow the markets, and really even most of the professionals completely confused.

My last iteration of Market Musings was used as my way to complain about the financial markets.  I’m sure I’ll still do my fair share of complaining again.  In these new Market Musings posts, I hope to explain common financial terms to average people who’s day job doesn’t include  following the markets.  I’ll be writing about common terms like bid, ask, spread, or even weird events like Triple Witching Hour.

My goal is to answer some of the following questions:

  • Why are these terms important?
  • What do they mean?
  • Who uses this information or term?
  • When will you encounter them?
  • How did this term originate?

I want to write a series of posts on the financial markets, that isn’t a bunch of bull shit explanations that are meant to confuse you, that are meant for everyday people so know the terms the financial media throws around like there common sense. Hopefully, these posts will allow them to learn what to listen to and what to completely tune out. I tune out the majority of what I hear and I’ve given up watching financial television. I’ll talk about this more in a later post.

Come back next Wednesday to take a deeper dive into some of the common terms you’ll hear people use on TV,or in print, when they’re talking about the markets.  My hope is to make this fun and engaging without patronizing you. Plus, I hope we both learn something that helps us become better investors.

 

 

Free financial advice

Free financial advice

I did it. I did what I kept telling myself I wasn’t going to do. Yesterday, I joined my group’s Powerball pool.  This is the last time.

Instead of playing the Powerball. I should transfer $5 into an investment account and put that money into an index fund.

At $5 twice a week, you’ll invest $40 a month and $480 a year. Even if the market goes down, you’ll still have more than you would from not winning the Powerball.

In the long run, a 7% average stock market return is better than nothing.

Also read this: Powerball Isn’t Investing and Vice Versa from Barry Ritholtz. You need to  follow Barry if your interested in financial markets. The guy drops a ton of knowledge every day.

Market Musings: Remembering the Financial Crisis in Tweet Form

This morning I went on to StreetEye to get an idea for today’s Market Musings. One of the top articles was surprisingly about a Marc Andreessen‘s tweetstorm on Business Insider.Here is the article: If you’re too young to remember the financial crisis, then read Marc Andreessen’s tweetstorm.  I think it’s the first time I’ve seen a tweet storm used as the basis of an article but it surely won’t be the last.

Marc’s tweetstorm was set off by a junior partner at his Venture Capital firm, who asked a question about the financial crisis. Marc began explaining the financial crisis in a 140 character chunks.

For someone who worked through the financial crisis, I think Marc did a good job explaining and providing information about why people are still scared by the event. In 2008, I was eight months into my first full-time job in a quantitative fixed income group at a mutual fund company, and I remember that September date like it was yesterday. For some reason, about a month later I ended up buying my first house which was a real indicator about how naive I was at that moment.  There were a few moments during that next year where I really thought I was going to lose my job and our house. In those days while my coworkers and I were sitting in a conference room watching people at Bear Sterns, Lehman Brothers, and Merrill Lynch packing up their boxes or being bought by other firms.  That’s when I started thinking that if Bear Sterns, one of the main investment banks in the country, wasn’t going to survive than who would?  It was the closest time we’ve ever seen the financial circus almost come to a stop.  It wasn’t a fun time for someone who recently bought or owned a home.

I was lucky to work at a pretty conservative firm and they never cut any jobs throughout the crisis.  I ended up making it through.  There were a lot of people at much larger firms that weren’t so lucky.  On the flip side, I never benefited from the preceding positive movements in the market since then.

I can see why many professionals who entered the markets after 2008, especially if they only started their jobs in the past year or two, would not understand why many people are still concerned with risk and talk about the crisis.

Here’s the simply explanation:

It’s because everyone thought they were going to lose their jobs and all their money.

Market Musings: Investing in the Stock Market or the Market of Stocks

On Wednesday, Barry Ritholtz’s Big Picture blog published his daily morning reads and i found the article, Inside the Market of Stocks, which is about the lack of outperformance in the past five and ten years of large-cap managers against their benchmark.

As the article states, on average stocks beat the market by a very small margin. On certain years this percentage of stocks beating the market can go as high as 66.5%, in 2001, and as low as 29%, in 1998.

What this article tell us, and it’s the same statement the author leaves us with at the end of the article, is that it’s difficult to predict when stocks will outperform. I like how the author ends the article:

The tricky thing of course is that we’ll never know in real time whether we’re investing in the stock market or the market of stocks.

– Michael Batnick

Some years it pays to be a stock picker and other years it will not, but the majority of years will bring a nearly break even. Not many professionals, if any, are skilled enough to predict these occurrences. That means nonprofessionals should try to pick stocks until after they’ve maxed out their retirement contributions into well diversified index or life-cycle funds.

After completing you retirement goals, then I still wouldn’t recommend investing in stocks for the majority of people. Most people will earn a better return by investing in mutual fund. If you want to invest in individual stocks then I recommend the homework that Jim Cramer recommends, which is an hour a week on each stock you choose to buy with a minimum of 5 stocks from different industries.

I don’t believe most people have the time an inclination to commit to this type of homework. So make life easier and less frustrating, and don’t stress yourself out about the day-to-day movement of the markets. Focus on your long-term goals and stay the course.

Market Musings: Consumer Confidence

Market Musings: Consumer Confidence

Market Musings is my weekly post about either the current state of the financial markets, which I’ll usually just call “markets,” or an explanation about a markets related topic for people who don’t have a job that deals with the markets on a daily basis.


Yesterday, I was reading MarketWatch’s Market Snapshot and I saw they were mentioned that consumer confidence had risen to its highest level since 2007. The one downside to this was that the future expectations for six months from now were expected to be lower.

I thought consumer confidence is probably a great topic to write about on Market Musings. I think some people have probably heard of it before but they may not know who produces it each month, how many different groups produce a similar indicator, what it means, and why we should or shouldn’t care.

What Indicator was being Referenced?

MarketWatch was referencing the, Consumer Confidence Index (CCI), which is produced by a non-profit group with the most nondescript name, The Conference Board. The CCI headline figures are released on a monthly basis along with the groups Present Situation Index and Expectations Index.

What Does the Indicator Mean?

CCI is meant to report on the overall confidence and financial situation of the average U.S. consumer.

What Does it Tell Us?

Based on whether the indicator is increasing or decreasing, it should give us an idea on what consumers are planning to do in the near future. If the indicator is on the rise then consumers are more likely to continue spending money like buying a home or car, buying new products, or taking a vacation. Rising indicators would typically mean consumers believe the economy is going to continue to get better in the near future, they aren’t worried about the status of their job, and job prospects look positive.

A falling indicator would tell us the opposite is happening in the economy. U.S. consumers are worried about the economy and their financial situation in the near future, maybe their job doesn’t look like it’s going to last or is already gone and job prospects have dried up. Falling indicators would lead us to believe that consumers will start to restrict their spending and start saving money.

Sorry to disappoint any of you who started to think that this indicator would allow you to predict the markets. Similar to most things in life there is no silver bullet to predicting where the market will go. This indicator is believed to be, and I believe it to be, a lagging indicator.

Right now, this indicator is telling us that consumers are more positive on their current economy and financial situation than they were the last month. The downside MarketWatch stated was that the Expectations Index fell to 91.0 from 91.6, which tells us that consumers are more concerned about the next six months.

Who Else Produces a Similar Indicator?

University of Michigan Consumer Sentiment Index, Bloomberg Consumer Comfort Index, Consumer Confidence Average Index, & Gallup Economic Confidence Index are all slightly different from CCI but they are all essentially trying assess the same thing, consumer confidence.

Should You Care?

I follow Barry Ritholtz’s basket of metrics method.

Do I think this indicator gives us enough information to make an informed investment decision on its own?

Absolutely not.

Could we use this when considering the overall direction of the market along with a number of other indicators?

Yes.

Think of the market as a puzzle and all of the indicators as pieces to the puzzle. Then imagine that you get a new puzzle every day or month. That’s what your investment decisions could look like depending on your investment outlook.  There is never going to be one indicator that gives you the solution for the puzzle but by looking at number of different indicators not the handful that already confirm your idea of where the market is going.  For almost all of you who are reading and are not in a financial related job than you should really ignore most of the indicators your hear about on a regular basis.  The only thing they’ll do is confuse you or make you panic.  I only talk about them hear because it’s helpful to understand their meaning.

If you’re only investment is your retirement account then don’t be stupid. Find a good index or life cycle fund and setup a reoccurring investment.


SOURCES:
https://en.wikipedia.org/wiki/Consumer_confidence
http://www.marketwatch.com/story/americans-more-confident-in-economy-despite-global-woes-stock-market-losses-2015-09-29
http://www.marketwatch.com/story/us-stocks-set-to-rebound-ahead-of-confidence-home-data-2015-09-29

Market Musings: Yellen Expects Interest Rate Increase in 2015 and a Movie

Source: http://media.streeteye.com/media/2015/09/24/orig/1199113.jpg
Source: http://media.streeteye.com/media/2015/09/24/orig/1199113.jpg

In yesterday’s Wall Street Journal article, Janet Yellen expects rates to increase this year.

Last week, I was talking with a colleague about the most recent Fed announcement to not raise interest rates. When the actually announcement occurred, I was in a training with a number of sales people who we’re all shocked by the Fed’s choice not to increase rates. I wasn’t surprised maybe it’s because I feel like I’ve lived in a never-ending state of Groundhog Day since I started working at a mutual fund company in 2008. For almost the past eight years, I’ve heard too many people tell me that rates were going to rise in the next quarter or two but there has always been an event or lack of growth that’s knocked it off whether it’s the Debt Ceiling, European Debt Crisis, or a slow down in China.

The Fed has two more meetings until the end of the year, towards the end of October and the middle of December. I think the only meeting the Fed would raise rates at would be the October meeting. If nothing major happens in the market then they will probably raise them at that time. If not, then I think they’ll wait to raise rates until their first meeting of 2016 which is towards the end of January. I doubt the Fed will raise rates in December, right before the holiday season, when the whole industry usually takes the rest of the year off.

If I had to put a percentage of whether the Fed raises rates, then I’d hedge my bets and select 49%. Before yesterday’s article, I would have said they won’t raise them this year because the Fed is too skittish about the negative global macro economic issues in places like China, but Yellen seems focused on raising them so yesterday’s article raises my opinion to almost 50% either way. If they don’t raise rates in Oct then I’d put the percentage at 30% in December.

A big reason I don’t think the Fed will raise rates is because they really haven’t given us an idea on what would cause them to raise rates. Many people thought, including this Bloomberg article, it was the natural rate of unemployment but the US has achieved that goal. It’s left many people in the dark, including myself.

I guess I’ll be crossing my fingers along with anyone else that rates will rise.

Random Side Thought

I’ve doing a lot of research in data science and machine learning. I should build a machine learning algorithm to predict Fed rate increases. Ha! If I do that I’ll be writing this blog on my own private island next to Larry Ellison’s.

Movie Rec

Also, check out this movie trailer for the adaptation of Micheal Lewis’ book, The Big Short, about the Great Recession. It’s starring a ton of big actors and comes out around Christmas. Just in time for a surprise Fed rate hike.

Christmas came early!