The CFA Institute’s Jim Allen, says this today:

The JPMorgan mess highlights another problem, as well: the difficulty in distinguishing prop trading from other legitimate and permitted activities. In this case it was hedging, but there also are concerns with market making. When CFA Institute wrote its letter to U.S. regulators otherwise supporting the idea of the Volcker Rule, we expressed concern about its implementation, due to difficulties distinguishing prop trading from legitimate market making, particularly in the fixed-income markets. Rather than ban market making, we suggested moving such activities to a separately structured and capitalized broker/dealer affiliate, and insulate (ring-fence in the parlance of the Vickers Report) the bank — and taxpayers — from such trading activities.”

“If you have a working telephone and an affluent zip code, you have likely been getting all kinds of calls from brokers over the years, but none so insidious as the one I’m about to reveal.

“The bucket shops in lower Manhattan, northern New Jersey and Long Island simply couldn’t watch the Facebook & social media IPO desperation blood orgy from the sidelines without springing into action.

“Brokers have a NASA-calibrated schmuck-seeking radar and it hasn’t set off this many schmuck alarms since the aftermath of the Netscape deal in the mid-90’s.

“The frenzy for the Facebook debut is a target to fire at the size of Mike and Molly’s haunches laid end to end and believe me, the brokers want to hit that target hard. ‘It’s a fuckin’ layup,’ I’ve been told by a few of my former colleagues, “as soon as they hear the word Facebook it’s a done deal, I’m getting their social security numbers.”

“So here’s how it’s going down…

“For the past 9 months, low-rent broker-dealers have been accumulating shares of Facebook and Twitter from the fringes of the employee pool of these companies. Some are free-trading but most are 144 insider shares (which cannot be sold right away). They’ve created private funds to hold these shares, named them, packaged them and set them up as Reg D vehicles. They’ve exhaustively beaten the story into their sales forces, gotten the brokers all hopped up on promises of large inside commissions (the kind the clients don’t see) and the potential to ‘become monster producers’ as a result of what these IPOs will do upon launch – ‘your clients are going to make MULTIPLES on their money!’

“What they’ve not explained in great detail to the ‘kids in suits’ who are being mobilized to sell this shit is that their clients aren’t actually getting pre-IPO shares. What they’re getting instead is shares in a fund that may or may not hold a good amount of these shares. The funds are loaded with all kinds of contingencies and miscellaneous fees and caveats. They are also able to do whatever they want with the money raised, including taking shots on other venture deals that sound social media-y enough to qualify. The PPMs (private placement memorandums) are written so as to protect the firm from everything and anything that could go wrong (and it will all go wrong). The money is being held in escrow and the clients are signing their lives away.

“Making a deal with the devil is child’s play compared to doing principle business off-exchange with a third-tier boiler room brokerage firm.”

For the complete blog post, go to Brown’s blog. He also recommends these sources.

Are You Being Scammed By Your Broker? (Benzinga)
Every Lie Told By “Gryphon Financial” Better Than The Last (Dealbreaker)
If I Were a Broker, Here’s How I’d Sell Facebook (TRB)

Pay your fair share.

Bear in mind this has been going on for a two decades, with the biggest gap occuring in 2000, when the government took 19 percent more from its citizens then its citizens spent on these essential expenditures.

To be fair, if you add in healthcare and transportation, Americans spend more on thes basics than on taxes. Also, there is some double counting. Money is taxed, redistributed and then consumed by other in federal programs on these basic items. Still, the statistic is alarming. The tax burden, its complexity and the desire for people to control their own property (i.e. to pass their money on to their heirs) is one reason why our sister publication, Trusts & Estates, exists! And has been published for more than 100 years!

That said, we reported recently, “But studies by Morningstar and the Investment Company Institute (ICI) suggest that fund shareholders may not be so dumb after all. According to the latest data, investors gravitate to low-cost funds with strong track records. ‘People make reasonably intelligent choices when they pick active funds,’ says John Rekenthaler, Morningstar’s vice president of research.”

Buy high, sell low.

Here is what the ICI says: “Equity funds had estimated inflows of $927 million for the week, compared to estimated inflows of $44 million in the previous week. Domestic equity funds had estimated outflows of $1.60 billion, while estimated inflows to world equity funds were $2.53 billion.

“Hybrid funds, which can invest in stocks and fixed income securities, had estimated inflows of $995 million for the week, compared to estimated inflows of $1.21 billion in the previous week.

Bond funds had estimated inflows of $5.68 billion, compared to estimated inflows of $4.85 billion during the previous week. Taxable bond funds saw estimated inflows of $4.85 billion, while municipal bond funds had estimated inflows of $825 million.”

On the other hand one could argue that Americans are too invested in the U.S. and not enough world wide. After all, the U.S. market cap is less than half of the world’s total. Of course, in some European countries, investors are very parochial in their asset allocations.

A real steal, this fixer-upper.

We predicted the bust back in 2005, just bragging! Here is the note from Bove:

Housing Has Likely Bottomed
Since 1971, I have been using a simple formula to determine housing affordability. It includes: Median family income; Median existing single family home price; Mortgage interest rate on a 30-year fixed loan, and An assumption that 25% of family income can be allocated to principal and interest costs.
In the present environment a family need only earn $29,536 to qualify to buy a $157,100 home. Present median family incomes are $60,974. Thus, the present family median income is 2.064 times the amount needed to buy a new home.

If I had started this index today, I might not use family income, but rather household incomes since less than 50% of today’s households are families. However, it is not likely that the results would be meaningfully different.

Affordability is at record levels well above any past peak. This would suggest that the declines in housing prices are about to end and that the industry is likely to bottom. This would obviously be a good sign for banks.

Stan told me, “Plenty of young people have soured on stocks. After suffering the dotcom meltdown and the financial crisis, they have been favoring bonds. Some pundits worry that an entire generation may stay away from stocks. But the outlook is not all bleak. Sweeping changes in 401(k) plans are leading many people in their 20s to load up on stocks. According to a study by Vanguard, plan participants in their 20s are now allocating 85% of their assets into equities. That is up from 41% in 2003. Have the young people become bullish on stocks? Hardly. The big shift can be attributed to the rise of target-date funds and automatic enrollment plans. Many target date portfolios designed for young people keep 90% of assets in stocks. Young people are automatically defaulted to the target funds. The heavy use of stocks is good for the markets and should help the young people get better long-term returns.”

Consider this: “I get my financial guidance from the Bible,” says Peter Grandich, author of Confessions of a Wall Street Whiz Kid . “Money and possessions are the second most referenced topic in the Bible – money is mentioned more than 800 times – and the message is clear: Nowhere in Scripture is debt viewed in a positive way.”

There are eternal truths in religious books, to be sure, and in fact wonderful lessons about human nature that transcend the ages. And there are plenty of faith-based investing managers and advisors out there. Good for them. (We’ve even featured talented FAs who practice asset management shaped by their religious beliefs, such as the Ryan Group from Merrill.) And every May we publish a list of 10 outstanding advisors who “do good” for others, often driven by religious beliefs. But this strikes me as a craven publicity stunt. And, besides, as we wrote a while ago, SRI investing and faith-based investing can get out of hand; we called it, What-I-Believe-In-Investing. And there are “sin” funds out there too. Oh, and when I worked (briefly) for an asset manager who ran money for a Catholic institution, (I am Roman Catholic so I can say this), its definition of “sin” or immoral stocks was in the eye of the beholder. For example, we could not invest in companies whose products were used in weapons (there goes Intel!), but booze and tobacco companies were fine. True story.

“But the best news was MSSB. Retail brokerage performance improved. Revenues were $3.4 billion versus $3.2 billion in Q4. Half of the increase can be attributed to investment banking allocations and credit spread changes impacting trading, but asset management fees were up $100 million sequentially.

“That is good news indeed. Pre-tax margins in MSSB rose to 11%. Management announced that the delayed technology integration would at last be in place by Q3 2012.”

Brad Continues:

• Morgan Stanley booked a loss of $0.05 per share from continuing operations in Q1 2012. But adjusted for a $2.0 billion DVA charge in the quarter the EPS is $0.71 per share compared to Bernstein’s ex-DVA estimate of $0.45 per share.
• We expect a Moody’s downgrade of Morgan Stanley to BAA2 in May 2012. The most severe impact of Moody’s potential action will be a decline in the market’s appetite for Morgan Stanley’s longer dated derivatives and limitations on trading lines.
• We reduce our 2012 EPS estimate to $1.44 from $1.82, reflecting the Q1′12 GAAP EPS underage, partially offset by a slightly better run rate for the remaining quarters. Our 2013 estimate is unchanged at $2.27. We rate MS Outperform, $24 price target.

Always seem to be naked when the investing tide rolls out.

Neither of this is news, really, but it is worth reporting on—again—because the habit of the retail investor is so predictable. Buy the hot dot when the market is hot. Sell after it crashes. BankRate.com published a study in late April showing that despite the equity market’s bumping up against 4-year-highs, many retail investors (your clients and potential clients) remained on the sideline. Essentially, individual investors have been selling domestic equity fun for five years and so have missed or partially missed the recent rally. Of course, now S&P 500 valuations are approaching historical averages when the bullishness ends.

BankRate.com says although 29 percent of respondents said they reported being richer compared to 23 percent saying they were poorer. About 76 percent of respondents said they were not inclined to invest in stocks. The report says that in fact respondents feel insecure financially. I guess the wipeout that was the “oughts” left a real mark.

And my old employer, SmartMoney magazine, reports that size does matter. Funds that swell up with assets tend to perform less well than they did when they were smaller. Nothing succeeds like success, and investors chase the fund manager with the hot hand—even if his hands are not so hot any more.

Another thing that makes me crazy is how people believed until recently that real estate, domestic real estate prices always went up. I hear people say, “My parents bought their house for $26,000 in 1967 in suburban New York and now it’s worth $2 million!” As a store of value, fiat currency is a lousy one, as we all know. That $26,000 in 1967, inflation adjusted, is worth $178,568.62, in today’s dollars. That is still a wonderful return, obviously, but you still had to be rich to have purchased the house back in 1967, especially when you are talking after-tax dollars for saved up for the downpayment. Basically, home values rise a little ahead of inflation since the War, according to Robert Shiller, the Yale professor who called the housing price collapse (as did many others; including this magazine in a June 2005 cover story, “Duck and Cover”) way before it happened. In fact, Shiller points out that housing prices have actually fallen an average of 3.6 percent percent over the last eight years. During the height of the boom, the public expected rapid price increases of over 10 percent a year, Shiller says in the April 22 and 23 weekend edition of the Financial Times.

During the Great Buying Panic of the 1990s, I asked one FA what is single biggest problem was. His answer? “Managing my clients’ expectations.” And that goes both ways, from being overly frightened to being too risk loving.