2/5/16…my introduction to ETF’s

(Note: I originally wrote this for a post on seekingalpha.com, but it wasn’t submitted and it is probably better suited to this venue. The follow-ups hopefully will be posted there.)

In the beginning, there were no ETF’s…there was no indexing. Then along came the Efficient Markets Hypothesis, aka the Random Walk, and modern portfolio theory was on its way. That led to many events both good and bad due to faulty constraints and conditions, and misinterpreting the theory.
The worst case of it and most public was by a Nobel Laureate of all things who played a major role in the development of the theory, Myron Scholes. That involved the formation and collapse of Long Term Capital Management (LTCM). LTCM was headed by John Merriwether, who had been a professor and left to run the risk-arbitrage desk at Salomon Brothers. After being involved in a scandal of fixing ‘non-competitive’ bids in U.S. treasury auctions, he decided to use his options theory and start what at the time became the biggest trading company of all time. The firm had a load of PhD’s, including Merriwether, two Nobel Laureates, Robert C. Merton and Myron Scholes, who were the experts in options theory. It’s collapse in September 1998, was the biggest in history and threatened the entire financial system . In the long lead up to the collapse, Fed Chairman Alan Greenspan, the ‘maestro’ took a laissez faire approach as he did with a total of three crises on his watch. However, just after he was appointed in 1987, came the dotcom bust, which he handled brilliantly. His explanation for doing nothing in the others was that you don’t know you are in a bubble until it busts. That from the Fed Chairman. Myron Scholes was dumbfounded at what went wrong, and reportedly Merton said to him, “Myron, it’s just a theory.” That is exactly what the Efficient Markets Hypotheses is.
Among the faulty assumptions in the Random Walk Hypothesis are: 1. All information on a stock is known by all market participants, therefore the price of a stock at any time is the equilibrium price; 2. There are no short trades; why did it take so long for ‘geniuses’ to realize there are faulty assumptions?
It is the very assumptions in the Random Walk Hypothesis that gave an impetus to portfolio indexing and ultimately to ETF’s. Professor William F. Sharpe, PhD, and now emeritus at Stanford University, began consulting with Wells Fargo Investment Advisors in the 1980’s. In 1986, the management was hired away by a New York bank setting up an investment operation in San Francisco. Wells hired a colleague of mine Frederick Grauer, PhD (and only one of two Phi Beta Kappa’s I have ever run across int the investment business), at Merrill Lynch. He was promised a significant bonus if he could simply maintain the assets at their current level plus more if he could grow the assets, which he did. Grauer was the most brilliant person I have ever met in 43 years of investment experience. At Merrill, we figured he would be there for a year and then come back to mother Merrill. How wrong we were.
The first thing he did was to create what I believe was the first index fund in a bank (the prior management had done a lot with beta’s). I know this because I set up the first account for him at Merrill Lynch to use U.S. Treasury Bills as a way to ‘park ‘ funds until securities were purchased. Rather than a sales force, he made the heads of five different divisions the sales force and with his knowledge of how to present a case they were all very successful. He pioneered the use of this method as a way of adding value during the month, but always back in the market by month-end, something many indexers do today (a perfect example is what happened on last Friday’s month-end which culminated in a sharp rally in the final half hour of trading with large volume on the close).
Grauer hired an executive secretary, Patricia Dunn, who he mentored and who would eventually head up WFIA when Grauer retired. She was college educated and a quick study (not just a secretary as Carly Fiorina would say who started the same way and who Dunn would eventually replace as CEO at Hewlett-Packard).
When WFC sold the fund management group to Barclays Global, Dunn became CEO and came up with the idea of the ETF. Products similar to ETF’s had been attempted in the early 1990’s but were eventually abandoned, but Dunn came up with a way to resurrect them in the form of an ETF which she developed (I verified this with Grauer, who said the idea was all hers). Using sales techniques that had been designed by Grauer, a force of institutional salesmen was formed in 2000 to educate investment managers on the use of ETF as a tool in portfolio management. ETf’s were off and running!
As head of the fixed income department at a San Francisco investment advisor, one of my colleagues handed me a notice he had received on the new fixed income ETF’s which I was unaware of but called them. They were under the name iShares and I arranged a meeting with a representative and was sold on it right then. Later, I was invited to participate in a focus group on them and found that already some managers were using them for 100% ETF portfolios.
The attraction for small advisors was cost. Less money and resources spent on research and much lower transaction costs to develop a portfolio. Larger advisors, like mine, balked at the idea as they felt they were paid to ‘manage the assets’. While I tried to convince them otherwise, it was futile. I finally gave up and started my own company…one man, and made good use of ETF’s.

Part Two will cover how ETF’s work and what caused the rapid growth of them and eventually resulted in such broad acceptance that roboadvisors came into being many of them making use of them. Of course with every new product, abuses occur and funds are created which are not suitable for investment accounts.

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2/2/16…what are the markets telling us?

Markets don’t lie…unlike politicians, especially those seeking the presidency. Since November 3rd, the market has struggled to hold its ground and then fell going into yearend. From their it has been down and downer. Both the indices and many individual stocks (mainly financials), have seen repeated opening gaps…almost all to the downside and with no meaningful bounce…not even a dead cat bounce (a 50% retracement).

Ah, but last Friday was different you say…no it was not, it just appeared that way. Virtually every index and most well-traded stocks rallied with a big burst in the final half hour of trading, both in volume and price, with huge volume and price jumps at the closing bell.

What does TB attribute it too? Nothing…absolutely nothing…fundamental that is! What it was was monthend following a disastrous start to the year (as January goes, so goes the market is the old saw and it pretty much happened that way last year. I was making comments to articles on Seeking Alpha, where I have penned four so far and have submitted another one on ETF’s. I warned to not put in any orders at the open on Monday or to even trade on Monday, and was proven correct. This downtrend is not over yet.

It is too early to call as to whether we are going from a bull market in a secular bear market that goes back to 2008, and is one of the longest running bulls ever. P/E’s weren’t sending out warning signals but they were at pretty high historic levels…and still are.

Stay away until the smoke clears…go have coffee, a glass of wine, or a shot right out of the Makers Mark bottle…it’s your call.

Good luck, all!


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1/11/16…have you been to Seeking Alpha?

TB has had three articles published on Seeking Alpha (www.seekingalpha.com). They are all under his name and include reader comments. I suggest you take a look at it is an excellent website.

The three articles are:

12/7/15: Bank Of America: A By-The-Numbers Performance Analysis

12/14/15: U.S. Banks: How Will The Banks Perform With A Rate Increase …

12/19/15: Fannie And Freddie Both Need To Stay ‘In’, Or The Housing Market Will be Out…

1/6/16: Bank Of America – A Numbers Comparison To Other Banks Part II…

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10/30/15 …God Bless America – PLEASE!

Years ago, TB was fed up with Congress (think it was about the time they shut down the government the first time, when The Newt was Speaker of House). He noted that in some states the legislature only meets every other year but the Governor can call a special session in the off year but only for specifically named issues.

Thinking about it, TB wondered if a state can have government every other year, perhaps we should try that with Congress, AND if that worked out maybe eliminate Congress altogether. Silly thought, no? NO!!! But TB now wants to add the presidency to the proposal…and don’t forget the Supreme Court that brought us the Citizens United decision…splendid!

Speaking of Citizens United, which fully empowered the Koch brothers, who own more Congressmen…not to mention local politicians thanks to the Superpac that spreads crap and prevents those running for office from getting their pitch on TV. Before you say that the decision was strongly for, note that former Justice Sandra Day O’Conner (you do recall she was a Reagan appointee), was appalled by it. Imagine a corporation as an individual…you can’t send a corporation to jail, and if youi fine them as AG Eric Holder did (recall he said he couldn’t sleep at night considering what would happen to those poor investors if their senior officers went to jail?), putting shareholders in double jeopardy after seeing share prices fall and then having to pay the miscreants fines!

But guess who is scared now? Besides you and me! The Koch’s because The Donald is a loose cannon who has stated he wants to raise taxes on the wealthy…never mind that he doesn’t know what he is talking about, and makes you wonder about the people who admire him for saying what he thinks, which he does…but that isn’t necessarily what the ‘thought’ in the past, or even yesterday. Frankly, Trump is a narcissist and egocentrist. He avoided the draft, and brags that the money he is spending is all his…good, Donald…keep spending because you still won’t be president. You’re fired!

Don’t know what to think about Ben Carson except his concept of economics has no resemblance to reality…and you nearly fall asleep when he speaks; then there is Sen. Ted Cruz…what a guy…even after Boehner got the debt ceiling raised in the House, he pledged he would filibuster…guess his kidneys are weak because the Senate also passed it…along with a budget resolution. Note to Hillary: it doesn’t take a village…just for the House Speaker to resign…his last task was his best. Sen. Mark Rubio comes across well but again…what does he stand for…Jeb Bush likewise. Whose left? Ah, Carly. master at keeping the lie alive.

Ms. Fiorina says that Tom Perkins who was on her board and called for her ouster at HP, now says she was the greatest CEO. Huh? About that she is right: Perkins took out a full page ad in the WSJ? or the NYT, whatever saying just that. Now let’s dig deeper: Tom also contributed $25,000 to her campaign which to him is about the same as a Starbucks Coffee. Wait a minute, didn’t JPMorgan, and Goldman Sachs, contribute to Obama?…and Romney? You betcha, just a matter of amounts. Carly also has an inability to admit when she is wrong…like the ‘film’ that only she saw a fetus squirming in after an abortion while the docs decided where the brain should go..so even when the mother came out and said it was still-born. Now that’s Chuzpah – the same thing the destroyed her in her ill-advised run against Sen. Boxer.

But here’s the worst thing about Carly: first she said that as soon as she is elected she will “scrap the tax code”. Please remember that only Congress can do that and who do you think keeps making the tax code longer? Special interest groups, duh! Then she said she wanted it so you could file your return on a postcard…hey, didn’t the Gipper say that 35 years ago and in the meantime the returns have become more complex. There is only one phrase that describes this: pandering to the people. It is an insult. By the way, a friends ex-boss was appointed by Reagan to head the IRS. He was excited about all the changes he wanted to make, and he was a partner in a Big 8 CPA firm. He quit in disgust a year later failing to get any changes made…and he isn’t the first.

Huckabee…not unless you are a born-again. This leaves John Kasich…who does understand government budgets and spending…yes he does…but when he punctuates every statement jabbing his forefinger at you, it gets tiring and offends a lot of his potential voters. Wonder if that is how he would do a SOTU speech? Hopefully not.

Ok, to the Dems…Bernie Sanders can sure stir up the pot but he isn’t election material…scratch him. Hillary is OWNED by Wall Street so we will get more of the same…TB says this because while Obama said he respected Volcker he listened instead to Clinton cronies, Summers, Emanuel, and Daley…what a guy! If TB was Volcker he would have sued to have his name removed from the ‘Volcker Rule’ – make it the Obama Rule instead. it is a sham.

Now let’s go back to the 2000 election…Bush, aka Dubya was the pick of the GOP…but they needed someone with experience…so who did they choose to add ‘gravitas’? Dick Cheney, who along with Rumsfeld convinced Bush to go to war against Saddam in something only Don Quixote could appreciate. By they way, Bush 41 tried to advise his son to stay away from the neo-cons having dealt them in the Reagan administration. His son hung up on him! On the ruse of getting Osama Bin Laden we went into Afghanistan…we were going to be out as soon as we caught him…but he had already fled and we’re still there in what along with Iraq are the two longest wars in U.S. history. We succeeded in destroying the balance of power for the first time since the Brits did it a hundred years earlier, and now WE, the people and the world are paying for it.

That little (?) segue brings us to Hillary who the GOP is doing their best to get elected to the Oval Office by harping on Benghazi even when they and we know, ad nauseum, that the Ambassador went to Benghazi despite being warned not to go…got it? Now forget it! If the GOP looses to Hillary this will be the root cause…and it won’t help the American people.

Hillary is smart and fully competent for the job, it’s just that the Clinton’s believe everything can be fudged when it comes to them. That is why I was so disappointed to see Biden decide not to run. Because if he had, and if he chose Elizabeth Warren as his running mate, we might actually get something done against Wall Street. He isn’t a genius but he has gravitas and common sense and an ability to work with Congress while Warren cut her teeth on Jamie Dimon and the rest of Wall Street and is hurting them so bad in the Senate that I bet Dimon wishes he had let her head up the consumer protection commission.

America is supposed to be for the people and when we are told that the Constitution is a sacred document that must be upheld, they just don’t get it. It was written for the mind of fifth grade education and made to be FLEXIBLE. Imagine if we had made the changes that would have prevented anchor babies, and so many other things that we squabble about today but nobody does anything about.

You know why TB admires Abraham Lincoln? Because he said if keeping slavery would hold the nation together he would be for it, and if abolishing it would he would do that. THEN, after the war he showed his brilliance even more by the Emancapation Proclamation that shouldn’t have even been necessary if we had done what we said in the Declaration of Independence: that ALL men are created equal …and that should have extended to women.

We are a nation in decline, we don’t respect others – or ourselves. People died for this country…for this? Tom Brokaw was right: our parents and grandparents were the greatest generation…hang your heads in shame with me…we are a part of the problem. Why? Because OUR parents didn’t want us to suffer the hardships that they did…now what have we got.

A disgruntled American,


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10/13/15 …how big should a brewery be?

Certainly, not so big that it dwarfs all competitors! SABMiller and AmBev are already the two largest in the world. SAB’s portfolio includes Miller, Stella Artois, Peroni and more…they recently bought a 50% interest in Lagunitas…will it go the way of Sam Adams? Probably, if they do the same and boost production…Lagunitas isn’t even a micro brewery anymore, and it shows.

Lots of talk about a monopoly…DUH!!! It will be left up to the EU to decide…and since SAB is paying $106 BILLION for AmBev, and get this…if it is deemed a monopoly, AmBev will collect a $3 billion termination fee. To TB, this implies that the fix is in! Either that or SAB is downright stupid! Most likely, they will be fined and on their way. Is this a great world, or what?



Note: TB is writing this at the request of a reader who noted it has been more than six months (9 actually!), since a blog was written here. He requested that I not do all the daily research and just write when something interests me. Sounds like a splendid idea. My new vocation…writing http://www.traderbillonwine.com is more fun and hopefully will turn into a book, and TB will be famous and rich!!! Hey, if Roxie Hart in Chicago, but without the murder!

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4/20/15…the future of America and how we got to this juncture…

This is a letter in response to a friends email to TB on Paul Volcker’s attempt to tighten regulation of  banks:

Thanks, I hadn’t seen that. It is tragic that Obama said that Volcker was his idol, yet acted on advice of his ‘trusted’ allies (Emanuel and Bill Daley – who came from Citi and got a $900k kiss from them). Volcker said he was too old to lead a committee but would have been glad (eager?) to have been kept in the loop.

The most disgusting and degrading act Congress did with Dodd-Frank was the ‘Volcker Rule’ which he should have threatened to sue them for defamation over!

Jamie Dimon, the ‘much-loved’ CEO of JPM led the charge, not only against the legislation but against Elizabeth Warren who has come back to be his worst nightmare. She is who should be the Dem nominee for President. I am disgusted with the media for all but handing the nomination to Hillary Clinton, a horrible choice as he proved in the Senate changing her stance on equal pay for women (as Warren made clear), to do the bidding of her Wall Street donors.

Sadly, I believe were are where the Venetian and Roman Senate were just before the downfall. We don’t even have an oligarchy, we have a handful of people owning the Congress and the President (the two biggest donors to Obama’s campaign were Goldman, and JPMorgan).

Next, we come to Jon Corzine who was effectively kicked out of Goldman, then spent millions to become governor and then a senator. He then had the backing of two exclusive clubs. He was asked to be CEO of MF-Global to find a buyer. Instead, he practiced the same risk-taking he did at Goldman, only they didn’t have the capital to do it, so, at his direction, they ‘borrowed’ money from customer accounts, yet he tried to blame it on an underling. It was investigated but before charges were filed it was dropped. Why? Answer is above.

More on MF-Global: I was at L.F. Rothschild when they were becoming a primary government dealer. We had to jump through hoops for this privilege. Only when MF went down did I learn that they were a primary dealer! How could this happen? The NY Fed said they are not responsible for the financial condition of its dealers! Really!!! Since when? This leads back to Volcker’s recommendations. One of the ‘evil’ things the banks did by diversifying was to come under the control of several regulators. They then chose the weakest one to supervise them. That should have been the Federal regulators for any financial organization operating in multiple states. This is also why the GOP is dead wrong on ‘states rights’ and why insurance companies should be able to be national. Had this happened AIG would not have gotten into the mess they were in (oddly it was the Texas regulators who blew the whistle, but AIG solved that by cleaning up their act in the Texas subsidiary, and putting it in other states who did not do their due diligence.

I got to know Bill Dudley when he was government economist at Goldman. Met and had lunch with him on two occasions at their SF institutional bond buyers conference (about 20 people at each!). So I wrote him as President of the NY Fed. I told him how saddened I was to see what had happened to the Fed and this only added fuel to the fire that Goldman controls the Fed (he was NOT a GS insider and did not fit the mold). The letter went unanswered, as I expected.

It is the banking lobby that is pushing to have the Fed brought under control of Congress – they have already proven in their grilling of Fed Chairman that that would be the worst thing they can do.

How did we get here? In the Reid interview by Bill Moyers (which thankfully you brought to my attention), he laid out exactly how Glass-Steagall was brought down: thanks to Rubin (who was later well-rewarded for his blessing), Summers (the academic dictator and fool), and Greenspan (the true believer in Ayn Rand – how in hell did we get a Fed Chairman that was anti-regulation?).

William Donaldson, SEC Chairman in 2000, at the time of the demise of Glass-Stegall, came up with a plan to monitor the big five banks, which were to be exempted from regulation, by performing ‘random audits’ on the banks to keep them in line. He was, however, replaced shortly thereafter by former GOP Congressman Christopher Cox, who abandoned the idea, which had to contribute to the problem, as well as naked shorts of financial institutions, which he saw as no problem.

Now back to the beloved Gipper, who did four things:
1. destroyed labor unions and federal unions while municipal unions became virtual dictators);
2. by bailing out Continental over the objection of my former boss, Don Regan, created TBTF;
3. deregulated the S&L industry causing two crises and allowing Keating to cause the biggest S&L debacle – with the help of FOUR congressional members – no one had ever controlled more than one before;
4. appointed Greenspan as Fed Chairman in 1987, by Reagan, then re-appointed by three successive presidents

This is the idol of the GOP, who, by the way is not conservative enough to get elected – or even nominated today.

Now that I have vented – have a nice day!

Trader Bill

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3/31/15 …is the GOP in self-destruct mode?

…or does it simply not care about anyone but its big-bucks supporters (a poor term since they are more the controllers of the party than supporting it and will only do so as long as the duly-elected people they pushed for do as they say)?

Look at what they have done since gaining the majority in both houses:

1. right after the election they acted the same way as the Dems did when they gained control: pure hubris. The leaders, Boehner and McConnell showed no willingness to work across the aisle – except for a ‘few’ things they agreed upon. For example: fixing the infrastructure…oh yes, they said we want to do that. Ah, then they are in favor of raising the gasoline tax. Both paused, then said they had no intention of doing that but would fix the infrastructure ‘as funds became available’.

2. Harry Reid may not have been the best Senate Majority Leader but he never showed the mean-spirited side of Mitch McConnell – the poster grumpy old man.

3. The House invited Netanyahu to address both house of Congress – while he was losing support and in the middle of an election, thus not only violating protocol, but assisting him in a re-election bid. This solidified his power and he was re-elected: just what we need…another example of the U.S. meddling in elections. Foul! But it gets worse: right after that the GOP sent a letter to Iranian President Rouhani saying he should not agree to the treaty as the U.S. would not have to abide by it. This act was atrocious as it is not a treaty and not subject to Congressional approval and goes along with Netanyahu’s desire to not have any agreement with them and make demands (which the GOP wants too) that have no chance of being implemented. A bad agreement is better than no agreement as the only solution then is to put boots on the ground alienating most Iranians. Something that the American people don’t want but gives the GOP a better argument to increase defense spending (which benefits the private contractors since our army is not of sufficient size to take on an enemy on yet another front). Remember, G.W. Bush & Co. cut taxes (mainly benefiting the wealthy), three times while fighting two wars – Iraq and Afghanistan – the latter a country we ‘entered” for the express purpose of getting Bin Laden with a promise that we would then leave: we didn’t and still are there in another expensive and fruitless action. It seems the GOP learned nothing from Lyndon Johnson’s ‘guns and butter’ Viet Nam war,or from the result which along with the current two (three if the Israeli’s and GOP have their way) wars, have been costly and detrimental to our image abroad. We seem to never learn, but hey, there’s big money in war.

4. Why do they support Netanyahu, who has declared there is no room for both Israel and Palestine? Because he is an American turned Israeli, and that is why Sheldon Adelson wants it and what Adelson wants, he gets…it is also likely that he was behind the Iran letter. Another force that even the GOP can’t control is the Koch brothers who do their own thing to push for what they want and don’t give a whit about the party…they just buy the candidates. Look at the examples of what this has done for us in the past. We supported: Trujillo in the Dominican Republic, Batista in Cuba, Nguen Thu in Viet Nam, to name a few. What has that done for the image of America?

5. The GOP is proud of the number of Republican governors, but should they be? Scott Walker is not all good; Texas has a history of bad decisions; and now Indiana Governor Mike Pence who just lowered himself to signing into law a bill that would make it legal to refuse service to gays and lesbians ‘on religious grounds’. A legislature can do stupid things but a governor is supposed to be the adult, a voice of reason. Now Indiana is paying for it…in spades. Several corporations have written that they will not do business in Indiana, and conferences are being cancelled. Think about this: isn’t this going back to the ‘white’s only’ signs in the South? The KKK must be licking their chops. Indiana will pay for this and hopefully its elected Republicans in the 2016 elections. TB would say the Supreme Court would overturn this but given the composition of the court…

Is TB anti-Republican? Pro-Democrat? None of these. He is an American who is disgusted with the path we are on: a downward spiral like the ones that have doomed previous great nations. The Roman Empire seems to be a ‘good’ example. Awww…what’s that got to do with us? Nothing…absolutely nothing. Got that?

Wake up, America…neither party gives a wit about you…only your vote…and if projections for the 2016 elections topping the $2 billion spent in the last election…estimate is FIVE billion…even your vote won’t count, because either candidate may have been (likely?) picked by a few wealthy people. Wall Street will contribute to both parties as they did when Obama was first elected (more to him then McCain), and again they will be in control. One has to blame Obama for not standing up to them. He had the support of Main Street, and had the chance to ‘make a difference’ as he said, the only thing he has to show for it is the ACA, which the GOP continues to bash despite having the approval of a majority of Americans (true, they don’t like parts of it, like having to pay and some young folks say it is more costly, BUT it is portable and your insurance can’t be cancelled, a truly important rule). If you think it is costly, try paying the COBRA from your former employer after you leave or are laid off or fired.

America is in a sad state, and the apathy of the people is truly shocking…perhaps they have PTS, from all of the freedom’s we have lost since 9/11. It’s time for us to wake up, and get involved.



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