Safe Investments?

Said a strategist, airing his views
On central bank rumors and news:
"You've booked every gain
And best not retain
Your bonds, which are certain to lose."

The Investment Pitch Before Christmas

'Twas the month before Christmas, and all through the land,
Marketers hoped for consumer demand.
Investment promoters accordingly yearned
For a Holiday boost to the fees that they earned.

"At this time of year, there exists such a clutter,
We'll never break through!" the marketers mutter.
But the folks at Fidelity had a bright flash:
"Use verses to gather new customers' cash!"

"It's a Yuletide maneuver whose fire is sure:
A poem in the style of old Clement C. Moore."
So what in my e-mail inbox should appear
But Fidelity's version of Holiday cheer.

Inside was a message, official and sleek,
From a 529 plan entitled "UNIQUE"
(It's the school savings plan of the State of New Hampshire).
They started their pitch like an eager, young Prancer:

"Dear Dr. Goose," I was greeted by name,
But I didn't much care for what thereafter came.
The language - how trite! How the rhyming would wobble,
With emphasis placed on the awkward syl-LA-ble.

The sentiment - fulsome!  The meter - how sloppy!
Did interns get wasted and scribble some copy?
Even eight tiny reindeer could easily see
That "Fidelity" isn't a rhyme for "tax-free."

As I drew back my gaze, and was turning around,
I wondered: what more on UNIQUE could be found?
Investment expenses constrain NAVs;
How would this plan compare in expenses and fees?

I went to the internet, flush with designs
To evaluate all of the 529s.
I googled a website and rapidly came
To a listing of plans, by expenses and name.

On Michigan, Iowa, Carolina(*), New York!
Your plans are not laden with very much pork.
Now DC, Nebraska! Now Kansas, New Hampshire!
Your costs are consuming returns like a cancer.

In Fidelity's plans, up to 16%
Is charged in a decade - a ruinous rent.
More moderate plans may only charge you
Just 5% (maybe as little as 2).

This confirms the suspicion right under my nose:
Fidelity's poets are plumly paid pros.
In college investments, keep fees in your sight;
Happy Christmas you'll have, and sleep soundly at night!

The foregoing liberties taken with The Night Before Christmas (with apologies to the descendants of Clement Moore) were inspired by the following, actual e-mail sent by Fidelity Investments to current and potential clients:

   'Tis the holiday season, a great time for cheer,
   When special traditions bring loved ones near.

   A time to give gifts that can give on and on,
   Gifts that can give after the season is gone.

   For your daughter, your grandson, your niece or your neighbor,
   A special child in your life that deserves such a favor.

   Give the gift of an education while there's time on their side,
   They can later use the savings toward accredited schools nationwide.

   Qualified withdrawals are federal income tax free,
   Open a UNIQUE account today with Fidelity.

Fidelity manages the 529 college savings plans of several states, including New Hampshire, whose UNIQUE College Investing Plan is among the costliest of all fifty states.  That's according to SavingforCollege.com, which ranks the Fidelity-managed 529 plans of Arizona, Delaware, Massachusetts and New Hampshire as tied for the distinction of 4th most expensive in the nation.  For more information, see the Journal's guide to How to Find a 529 Plan.
(*) Note: SavingforCollege.com ranks the North and South Carolina 529 plans as 7th and 2nd least expensive, respectively; top (or bottom) honors go to New York.

The poem in this post was originally published in the Wall Street Journal's Total Return Blog.

No Security in Book Value

Said a banker: "The Crisis revealed,
In investments we carried for yield,
How extreme fluctuations
Affect valuations,
So better to keep them concealed."

Said investors: "It's better to trust
In the price you could fetch if you must,
And the equity value
Which, hopefully, now you'll,
Accordingly, have to adjust."

Bankers, regulators, lobbyists and the US Congress have all turned their attention to the US implementation of the Basel III regulatory framework, which appears to have very few friends in high places. One always-controversial element of Basel III is the requirement to mark to market those securities that a bank has as "available for sale." Bankers hate this idea because it increases the reported volatility of earnings and capital. At a Senate Banking Committee last week, Michael S. Gibson, director of the Division of Banking Supervision and Regulation at the Fed, appeared prepared to give a little in the face of industry pushback, saying that regulators are "considering changes to the treatment" of such securities.

However, if bankers hate mark-to-market, investors should love and defend it. As the Journal's Heard on the Street columnist David Reilly writes: "the only thing worse than a loss at a big bank is pretending it doesn't exist." Reilly points out that available-for-sale securities comprised $2.6 trillion, or 19% of bank assets, on June 30, up from 14% in 2008. Like it or not, such investments do fluctuate in value, and pretending that they could be disposed of at cost only leads to investor distrust during financially difficult times. Unlike bank loans, liquid securities are not reserved against, so marking them to market is the only way to assure that, at least in this one respect, investors can place some credibility in the reported book value of financial institutions.

Constructive Solutions

What should we have done if we craved
That America's middle be saved?
Researched and retooled,
Retrained and reschooled,
Reinvested, rebuilt and repaved.

Financial Times' Washington correspondent Edward Luce has written a book that nobody wants to hear, but everyone needs to read: Time to Start Thinking: America in the Age of Descent. In it, Mr. Luce discusses the causes, and some solutions, to the declining state of American affairs. One of the difficulties in winning public investment in the renewal of American competitiveness, as in the verse above, is that neither party is willing to admit the state of decline. Thus, where the government has addressed our problems, it has generally made them worse. The solutions, however, are fairly clear, once we acknowledge the issue.

Cold Water on Lotto Fever

The lotto's a game of slim chances,
Though the jackpot immense at first glance is;
Of the fortunate few
Whose numbers come through,
Most end up in bankrupt finances.

With a record-setting $540 million jackpot up for grabs on Friday night, the Mega Millions game has given the country lotto fever. However, the cold fact is that nine out of ten lotto winners squander their prize in five years or less. CBS Moneywatch editor Jill Schlesinger has advice for those who feel lucky tonight: if, against impossible odds, you actually win, keep the news to yourself while you carefully hire an accountant, lawyer and financial advisor to help you work out a sustainable plan for your incredible windfall. Remember, the prize is always less than it sounds; the after-tax, lump-sum value will likely work out to half of the stated jackpot amount. Moreover, if you want it to last, you've got to leave most of it invested and live on the earnings. The bottom line is, if you can live on the $10 million or so annual earnings that the $540 million nest egg might throw off after taxes, then you, your new-found friends and your long-lost cousins will live happily ever after.
Hat tip to Tess Vigeland of Marketplace Money.

The Ideal Rate

"The taxation of capital gains,"
Said a student of John Maynard Keynes,
"Would ideally fall
Between 'nothing at all'
And the rate at which Buffett complains."

Writing in the Wall Street Journal on the "Three Policies That Gave Us the [Steve] Jobs Economy," Amity Shlaes cites the slashing of the capital gains rate from a confiscatory 49% to 25% in 1978. Building on this evidence, she reaches the silly conclusion that "taxes on capital should always be lowered, and dramatically." One might just as easily conclude that, because a diet improved one's physique, that mealtime portions should always be dramatically lowered, too. But what is the correct capital gains rate? Undoubtedly, it lies between encouragement of wild speculation and discouragement of capital formation.

The Tao of Mutual Fund Timing

In mutual funds, one could win
By reversing the yang and the yin;
To cast aside doubt
When investment flows out,
And to sell when investors want in.  

Brett Arends of The Wall Street Journal's ROI column has a fascinating study of the thesis that investors can optimize returns simply by observing the weekly flows in and out of mutual funds, and then doing the opposite.

It's All Relative

The US isn't having its best year,
But the world hasn't ceased to invest here;
Since Europe is weaker,
A typical seeker
Of safety may feel not as stressed here.

Ratings Week V: the Finale

Though one may have felt left in the lurch
When "triple-A" bonds lost their perch,
The best self-defense
Is still common sense,
And one's own, independent research.

Ratings Week IV

Barney Frank made a stern ultimatum:
"Bond arrangers and the analysts who rate 'em
Should sever relations
That involve compensation
Since the agencies serve those who pay them."

Ratings Week III

"I admit," said an analyst from Fitch, 
"We've enabled some banks to grow rich, 
But a hard-line position 
In this competition 
Would only induce them to switch."

Ratings Week II

Said the banker: "My friend, It occurs to me
That you seem just like Standard and Poor's to me;
Though your scruples are real,
In pursuit of a deal
You would give up a wee bit of yours to me."

Ratings Week I

A CDO analyst from Moody's
Confessed: "I've neglected my duties.
We'll soon be downgrading
Some triple-A ratings
When everyone sees that we blew these."  

Post Mortem on the Dow's 1000-Point Drop

Said CFTC Chairman Gensler
To Geithner, "Are we among friends, sir?
(I'd like to say how
They whipsawed the Dow,
But I really don't think that I can, sir.)"

Diagnosing the Dow's Dizzy Drop

While coaxing the PIGS from the trough,
Some bankers developed a cough,
Which an I.T. snafu
Turned into swine flu,
And a feverish market sold off.

(Acronym alert: PIGS = Portugal, Italy/Ireland, GREECE and Spain)

Questions, Fundamental & Technical

"Dad," asked the girl with a frown,  
"Why are bond prices up, and yields down?"
"In a bull market trend,  

One will likely expend  

More pence for that guaranteed Pound."    


"Mom," asked the boy with a frown,
"What makes equities hop up and down?"
"Earnings releases,  
And stock-picking theses  
With words from wise men of renown."

Overheard at the Desk of "Fabulous Fab"

"This CDO's fit, if you please,
For a carry trade like IKB's,
With a mortgage portfolio
Hand-picked, as I told you,
By investors with deep expertise."

No Interest

Said a thrifty young fellow named Dave, 
Who brought cash to the bank for to save:
"With rates nearly zero,
I'll keep my dinero
To paper the walls of my cave."

Happy Birthday

On this day, when the century was new,
The internet stock bubble blew;
And just one year ago
The Dow Jones hit a low,
So happy birthday, Bull Market - who knew?

Overheard on a CDO Desk

"When wall street was frothy and cheery, 
We practiced the greater fool theory:
We bundled the crap
To sell to some sap, 

But now buyers are wiser and weary."

(Thanks to guest contributor Andy Golub)