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Extreme Volatility

Extreme Volatility

Why is the stock market falling or rising 5% and 10% in a day over and over? Is it panic selling?

Yes and no. Some people are selling because they believe the economy is going into free fall and corporate profits will fall a lot. Others are selling because it is now just about certain that we will have some sort of recession. Still others are wanting to sit on the sidelines because there is so much uncertainty as to severity and time. Some are selling because they are trying to protect what they have.

Computer Selling

But others are selling because computer algorithms tell them to sell when selling is heavy and to buy when buying is heavy. These sellers have lots of money to work with and they are making volatility worse, much worse.

Now, computer-generated heavy selling is as old as the 1987 drop in the market. Back then, they called it portfolio insurance and it didn’t protect anyone, just the opposite. But today, an incredible amount of the volume on the stock exchange is computer-driven.

Consider this. Trading volume on Black Monday, 1987 was 604 million shares, a record-shattering number. In 2018, the average daily trading volume was 547 billion shares, nearly 1,000 times the volume. Meanwhile, the U.S. population is 33% higher. You tell me how much computers dominate Wall St. Just remember, computers don’t write their own programs, and what the traders behind these programs are often trying to is profit very, very short-term, sometimes even in milliseconds.

Opportunistic Buying

Thank God, there are still sizable investors like mutual funds that still invest long-term. Warren Buffet is still making money and not by the millisecond, and you can place a high-odds bet that he is buying now because that’s been his strategy – buy when the market is down. Good strategy.

If you’re already fully invested, consider replacing some positions with others that might have more potential because they’ve been oversold. Think about oil companies, home builders, airlines, cruise lines, REITS, health care, banks and various other industries that have some quality stocks on sale for 50-80% off. Be careful to buy high quality businesses with solid financials. Some that had so-so dividends have terrific dividend yields now that their stocks have dropped. I make no specific recommendations online, just my thoughts as someone who’s been around awhile.

This entry was posted on Sunday, March 22nd, 2020 at 12:32 am

Privacy & Control

Ever posted a picture of yourself online? Chances are your face is now in the files of Clearview Facial Recognition, a  company that has software that allows police to track down criminals. That’s a good thing, but it is built using a database of many millions of pictures from Facebook and all sorts of websites where people innocently posted pics as a way to share their life with “friends.” That software and database means any subscribing institution can track you wherever you go, whether you have a criminal history or not.

The central banks of numerous countries from Sweden to China are testing national digital currencies and the idea has also been floated for our Federal Reserve. It would speed up payments and give the Fed more control over the effectiveness of its monetary policy. Another upside is the possible shrinking of black market currency exchange used by criminals. The downside? Every dollar you spend and where you spent it would be in a government database. No wonder the Wall St. Journal ran an article recently about how governments all over the world are scratching their heads over why so much paper money has disappeared from circulation in recent years.

You are already known in amazing detail because of the advertising revolution created by Google in which all your searches, website visits and purchases are tracked in order give a great deal of insight into who and where you are, something advertisers covet, hence Google’s tremendous success. But, it also means that digital privacy has virtually become an oxymoron.

There is a lot of talk about socialism in America today and its egalitarian promise necessarily means increased government control, which has been the trend for several decades now. Whether or not you support that is not the issue, the issue is that political correctness is being increasingly and more harshly enforced as government extends its reach.

The Bible very clearly predicts that there will come a time when it will not be possible to buy or sell without proof that you support a certain world government that will be overtly hostile toward biblical Christianity. I can very easily foresee a time when Christians could be shut out of the public marketplace, even tracked down and imprisoned. That may not be as far off as most assume, especially given that as the divide between liberal and conservative has swiftly widened, public attitudes toward evangelicals have been rapidly worsening and the price of holding those beliefs rapidly increasing.

There are measures you can take to minimize your digital footprint, but it is probably too late now. Technology can be a wonderful thing but its effectiveness is agnostic toward the purposes for which it is used. That will at some point in the not very distant future mean big trouble for some law-abiding citizens, and many will be surprised at the speed at which it arrived.

This entry was posted on Monday, February 24th, 2020 at 9:14 am

DOL – Meeting Your Fiduciary Responsibilities

The Dept of Labor, which oversees retirement plans, publishes a brochure entitled Meeting Your Fiduciary Responsibilities, i.e. those that come along with oversight of a retirement plan. While the DOL has published a lot and there is a lot to keep up with, this is a pretty simple and straightforward introductory brochure that I highly recommend as a starter.

You’ll see that anyone that has a say in how the plan is managed or who is hired is a fiduciary with attendant responsibilities and liabilities. It matters not who signs the 5500 form or who does the research, everyone with a vote is a fiduciary, so all who do should read this.

Pay particular attention to:

pg. 3 – Limiting Liability
pg. 5 – Hiring a Service Provider
pg. 6  – Monitoring a Service Provider

You’ll notice that the DOL, like all government agencies and auditors is big on documentation. In the DOL’s case, special emphasis is put on the oversight process and reasonable fees.

If you’d like help on understanding your responsibilities, how best to go about that and how to properly document it in order to stay on DOL’s good side (a good idea), let me know.
daveh@cornerstoneinvestment.com
This entry was posted on Tuesday, January 21st, 2020 at 2:10 pm

Student Loan Debt – The Latest Financial Bubble in a Series

More facts from a WSJ article on student debt. The average student loan balance for a graduate with a degree in Dance from New York University is $96,000. About 30% of student loans are in income-based repayment plans with another 20% in forbearance and another 10% past due.
 
The rate at which student loan debt is being paid off is 1%/year. Most will be defaulted on, written off under various programs or forgiven. About 12% of those in income-based repayment programs are seeing their loan balance grow even as they pay based on their income.
 
When people choose what to default on – a house, a car or a student loan – they choose not to lose the house or car, instead they go into an income-based repayment plan on their student loans.
 
Student loan debt is a burden to many adults, a huge drag on the economy, and a large and growing cost to the government whose involvement has largely enabled the explosion in debt. For any other consumer product, basic economics would have put an end to this long ago.
 
That a college degree has contributed to the economic betterment of many is beyond dispute. Should we make college free? We could. I guess it depends on how big you want government to be.
 
For nearly 20 years now the federal government has borrowed between a trillion dollars and half a trillion dollars every year, one of the many distortions tied to super-low interest rates. At some point it will become a very serious problem, especially if we opt for another national good by providing health coverage for everyone.
 
In a series of financial bubbles, government debt will be the last and biggest, but that is another story. Meanwhile, there are people running for office and more promises to be made.
This entry was posted on Wednesday, August 21st, 2019 at 10:27 am

Facebook’s New Cryptocurrency Could Work

Bitcoin was an experiment that didn’t quite work, mainly because the value fluctuated so that no one knew quite what they were really getting paid. But Facebook’s recently announced Libra may have solved that problem with tying it to a basket of popular international currencies.
 
Facebook and its partners, some of the biggest financial companies in the world have clearly done a good job of thinking through how to make a digital currency work and it really does have a chance of succeeding as a ubiquitous international currency that saves merchants a lot of credit card fees and does the same for many of the world’s citizens without a bank account who pay high fees to send money via Western Union or other means.
 
Here’s a video that does a good job of explaining how Libra works and why it may be the future of money. How Libra Works (see link on the CIS FB page)
Here’s a link for those not on Facebook. https://www.youtube.com/watch?v=v8yKNmeU30U&feature=youtu.be
This entry was posted on Friday, June 21st, 2019 at 3:48 pm

SEC Drops the Ball on “Regulation Best Interest”

Advisers working for registered investment advisory firms like mine have long been held to a higher standard of care for clients than those that work for brokerage firms, banks and insurance companies and are paid by commissions. I am proud of the higher standard and have had it written explicitly into my client agreements for years on all client accounts, not just retirement plans or retirement accounts.

After the Fiduciary Rule put out by the DOL a few years ago that applied only to retirement accounts was struck down in court, the SEC had a chance to do what Dodd-Frank instructed it to do nearly 10 years ago – investigate conflicts of interest and their costs and come up with a better set of requirements to protect clients. You may know that the DOL rule was really crafted because the SEC failed to put anything together within a reasonable time.

So now the SEC is finally out with its best interest rule. Alas, “Regulation Best Interest” requiring compliance by June 2020, is a weak effort, ground down by continued intense pressure from brokerage and insurance firms (hopefully, you learned a long time ago not to be fooled by the titles of legislation and regulations).

Brokerage firms will have to shelve the sales contests that have been a staple for so long and can no longer require their brokers to sell only the firm’s proprietary products. And, they must provide clients with a “relationship description” including conflicts of interest. But, I’ll tell you in advance what that will look like – another boring disclosure document that the client won’t read – “Just sign here.”

And, while the SEC proudly announced that all advisers will have to put the client’s interests ahead of their own, it then proceeded to essentially say that if the financial person sells products for commissions and only incidentally provides investment advice, they are not advisers and are not held to the best interest standard. There’s the loophole through which you can drive just about the whole commissioned financial services industry. Victory! for Wall St. and the insurance industry, or so it is said.

Ask yourself why it is so hard for many of the big financial companies to agree to act in the clients’ best interest. Then ask yourself why aside from lots of expensive advertising and mainly intelligent and winsome salespeople anyone would choose to deal with them instead of an independent investment adviser that does put client interests first, not only because it is the law for registered investment advisers, but because most of us believe it is the right way to do business.

It’s a shame the SEC, who had the mandate and the ability, caved again to money and power and fell short of the protection it could and should have given investors.

This entry was posted on Thursday, June 6th, 2019 at 4:12 pm

Best Practices for Plan Sponsors – Fred Reish #2

I am going to start posting a series of short articles by other writers whom I follow that I think would be beneficial to my readers. The first of these is from Fred Reish, an ERISA attorney with Drinker Biddle who is a frequent speaker at retirement plan conferences. This is part of his series on best practices for plan sponsors.

Best Practices for Plan Sponsors #2

Posted on October 3, 2018, by Fred Reish in 401(k), 403(b), best practices, fiduciary. Comments Off on Best Practices for Plan Sponsors #2

What is the Baseline for A Committee to Act in the Best Interest of Its Participants? (Part 1)

I am writing two series of articles that together are called “The Bests.” One is about Best Practices for plan sponsors, while the other is about the Best Interest Standard of Care for advisors. Each series is numbered separately to make it easier to identify the subject that is most relevant to you.

This is the second of the series about Best Practices for Plan Sponsors.

The recent decision in the case of Sacerdote v. New York University is a classic story of the good and bad of plan committees. Let’s start with the bad.

Five current and former committee members testified at the trial. But not all of the testimony was helpful.

In the opinion, the Court said that the testimony of one of the co-chairs “was concerning.” The court went on to say:

She made it clear that she viewed her role as primarily concerned with scheduling, paper movement, and logistics; she displayed a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion-dollar pension portfolio and a lack of true appreciation for the significance of her role as a fiduciary. In a number of instances, she appeared to believe it was sufficient for her to have relied rather blindly on [the investment advisor’s] expertise. As a matter of law, blind reliance is inappropriate.

The court further noted that:

She bluntly testified that “[i]t’s not my job to determine whether the fees are appropriate” for the Plans.

With regard to another committee member, the court said that she “was similarly unfamiliar with the basic concepts relating to the Plan, such as who fulfilled the role of administrator for the Faculty Plan. When asked about her inability to remember Plan details, [the committee member] responded that she has a ‘big job’ (referring to her human resources role, not her Committee membership) and her role on the Committee is one of many responsibilities she has. This suggested that [the committee member] does not view herself as having adequate time to serve effectively on the Committee.”

The court also said, about another committee member, “that he did not even know whether he was, at the time of the trial (in April 2018), still a member of the Committee—and thus whether he bore a fiduciary responsibility to thousands of NYU participants.”

And, finally, the court said “Several Committee members stated that they did not independently seek to verify the quality of ‘investment advisors’ advice; rather, they simply relied on it.”

If this were the end of the story, this article would be about bad practices, rather than best practices. However, there is more.

The court went on to say: “While the Court finds the level of involvement and seriousness with which several Committee members treated their fiduciary duty troubling, it does not find that this rose to a level of failure to fulfill fiduciary obligations.”

How is that possible?

Sadly, I will leave you hanging for a week, until I post Part 2 of this article. However, I don’t want you to be disappointed. So, let me give you a preview. There were other committee members, some of whom were fairly sophisticated and very engaged. However, there is even more than that. The court noted two or three other steps taken by the committee that saved NYU and the committee members from a litigation disaster. My next article will cover that.

POSTSCRIPT: One lesson from this case, independent of the committee actions that saved the day for NYU, is that committees should have formal programs for fiduciary education. The fiduciary education should cover, at the least: Who is a fiduciary and what are the fiduciary responsibilities? How do fiduciaries fulfill those duties in the real world? How do fiduciaries review and examine the advice that they receive? And, how do fiduciaries monitor the costs and compensation related to their service providers and plan investments? That education should be reinforced at least annually, together with updates on current developments. Finally, new committee members should be educated about their roles and responsibilities when they start serving.

To automatically receive these articles in your in box, you can sign up on my blog at http://fredreish.com/insight/. Just enter your name and email address under the “sign up for our e-newsletter” option, and click on the button to subscribe.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

This entry was posted on Tuesday, June 4th, 2019 at 10:11 am

DOL to Come Up With New Fiduciary Rule

The DOL Fiduciary Rule that was so controversial was in its intention very good. There is no excuse for anyone in the financial services industry to put their interests above their own. The problems were in the paperwork it required and that it was not coordinated with the SEC and only covered retirement accounts. Now that the two agencies are working together, I am hopeful that the new rule will be better.
REGULATORY COMPLIANCE

Under questioning at a May 1 hearing on Capitol Hill, Secretary of Labor Alexander Acosta appeared to confirm that the Department of Labor will issue a new fiduciary rule.

Acosta appeared before the House Education and Labor Committee for a hearing to examine the policies and priorities of the DOL. While Acosta’s written testimony did not address the DOL issuing a new rule, under questioning by Rep. Marcia Fudge (D-OH), he indicated that DOL is in discussions with the SEC as it works on its proposed investment advice rule.

Fudge grilled Acosta on what his plans are to protect workers from retirement advisors who “put their interest above their clients.” Acosta responded that the DOL is communicating with the SEC and that “based on our collaborative work, we will be issuing new rules in this area.”

When pressed further by Fudge as to timing, Acosta didn’t say specifically when the DOL would issue a rule, other than to say that the “SEC is in the process of producing those rules” and that his agency is “working with an independent agency.”

After the 5th U.S. Circuit Court of Appeals struck down the DOL’s previous fiduciary rule and the SEC moved forward with its own package, indications were that the SEC would take the lead and the DOL would issue guidance based on the SEC’s final rules. For example, at the April 7 opening general session of the 2019 NAPA 401(k) Summit in Las Vegas, Preston Rutledge, head of the DOL’s Employee Benefit Security Administration, commented that the SEC’s proposed rule was “a very welcome development,” adding that the DOL’s goal “is to align our rule with the SEC’s rule.”

In his May 1 testimony, Acosta touted the DOL’s October 2018 proposed regulation clarifying the circumstances under which a group or association of employers, or a professional employer organization (PEO) can act as an employer and sponsor workplace retirement plans under ERISA. He noted that the DOL is currently reviewing the public comments on that proposed rule.

From: https://www.napa-net.org/news-info/daily-news/acosta-indicates-dol-will-issue-new-fiduciary-rule?utm_source=MagnetMail&utm_medium=email&utm_term=daveh@cornerstoneinvestment.com&utm_content=NAPA_05_02_19_Thu&utm_campaign=Mutual%20Fund%20Fees%20Drop%20Again%20as%20%27Fee%20War%27%20Continues

This entry was posted on Thursday, May 2nd, 2019 at 11:47 am

Failing One’s Duty to Monitor

Any employer offering a qualified retirement plan like a 401(k) has a duty to monitor the plan, including the plan fees and the performance of the funds in the plan lineup.

That does not mean that those who oversee the plan can be sued for underperformance as such. But, when funds remain in the lineup that consistently underperform relevant indexes and similar funds it can be viewed by regulators and judges as a sign that proper monitoring is not being done. That can cost money, embarrassment, employee morale and time spent with attorneys.

I just read about another lawsuit getting sent along for trial for just that reason.

When I look at fund lineups I routinely find funds with poor track records. I also find index funds that have cheaper alternatives. These are good ways to get into trouble.

Often I find that no meeting minutes are being taken, maybe no meetings even being held, or that the minutes don’t document a process of recognizing a fund’s underperformance, discussing it and giving solid reasons why it should remain in the plan or not. Why would a judge or regulator conclude that the employer had done a good job of oversight? There’s no evidence of it. This is serious business.

I also talk to CFOs and CEOs, doctors and dentists and such that don’t know what their fees are or how they compare with similar plans. This is negligence that can cost them. Plan participants are relying on them to fulfill their fiduciary duties to keep expenses reasonable and to provide good investment options that are at least competitive. But, those duties are being neglected. Don’t think that a judge won’t take that seriously because you don’t have a mega-size plan.

Please make sure you do regular benchmarking of your costs and keep meeting minutes that detail a solid oversight process. If you don’t have a formal oversight process, you are really asking for trouble, whether your plan is $1 million or $100 million.

This is part of what I do for plans. Don’t get yourself in trouble. Have me talk with you about how to get on track and stay out of serious trouble.

This entry was posted on Thursday, April 18th, 2019 at 12:16 pm