1. Fidelity Prohibits Purchase of Exchange Traded Principal Protected Notes: I was informed by a reader over the weekend that Fidelity now prohibits the purchase of exchange traded special investment products, sometimes referred to as principal protected notes. QuantumOnline has a three page listing of these products, around 256 securities that are now off limits to Fidelity customers. This policy became effective last Thursday.
I confirmed this information by attempting to enter a buy order for one of them and I received the message in red above.
For positions already held, Fidelity has graciously allowed its customers to sell positions. It appears to me that the decision is based primarily on the picayune cost savings to Fidelity, though the firm may attempt to justify the decision based on other factors to make it sound like it is in the best interest of their customers to deny them the opportunity to purchase any of these 256 securities. I viewed the recently enacted severe restraints on online bond trading to have the same purpose (see, Item # 3, More on Fidelity Investments & Online Bond Trading)
If anyone uses a broker that allows their customers to trade these securities, please send me an email or leave a comment to this post.
I currently own several of these notes including MYP, MOU, MDC, IFO, MKZ, MKN, PGEB, SDA, SFH and SJV.
2. Gold: Gold is unquestionably in a bull market that started in retrospect in 2002 and is now in a parabolic phase (see 10 year chart at Spot Gold ). I am a long term holder of gold and bought my first gold coin when I was thirteen with my "profit" from mowing lawns with a push mower at $2 per lawn which dates me. I say profit in parenthesis since my father paid for the gas and furnished the mower. Back then, it was illegal for Americans to buy gold bullion, but we could buy gold with numismatic value. I paid just a few bucks over the spot price, then $35 per ounce ($5 gold piece is 1/4 of an ounce), for an U.S. Liberty Head five dollar gold piece minted in the 1880s which had little numismatic value due to its high mintage.
In the late 1970s, I became tempted to sell all of the meager gold and silver coins that I had collected due to a parabolic move in prices in both precious metals. Some of the older folks will remember that silver crossed over $40 per ounce when the Hunt brothers were trying to corner the market and gold crossed $800 in January 1980. The gold move in January 1980, when the price move from around the mid 500s to the mid-800s in a few days, turned out in retrospect to be a selling opportunity. (under Yearly Gold Charts, check 1980: Historical Gold Charts and Data - London Fix ) The price subsequently corrected back to around $350 in 1982 and then entered a twenty year period of meandering mostly in a $250 to $350 channel with short term movements above and below that range.
I gradually cam to the realization that I had missed the opportunity to sell my precious metals and that gold had entered into a long term secular bear market. It was easy to see the formation of the channel. I then started to buy at below $300 periodically, and below $6 per ounce for silver, and just deposited the purchases into a lock box. Fortunately, I could buy more since my earnings were no longer tied to mowing lawns. Then, after making the purchase, I would just forget about it, and wait until the spirit moved me to buy more at less than my upper limit price. The general idea was that those purchases was a form of insurance policy against financial Armageddon. I was never a gold nut, primarily based on my belief that gold really only has a value that frequently whimsical humans place on it. I understand why. When I bought that $5 gold piece in 1960s, I had a lot of hair, a thin fit body capable of running a mile. While I have changed, though the profile picture suggests otherwise, that gold coin has not aged at all. It still has the same luster. And, as many are fond of saying, governments can not print gold to finance their inability to say no to their citizens.
I understand all of the hoopla about gold now. It seems reminiscent to me of the ubiquitous prognostications being made in the 1970s. Over the long term, the arguments for gold as a store of value may very well play out as argued by the gold bulls. But by long term, I mean time traveling into the 2030s. The western countries have not yet come to grips with their systemic inability to sustain economic growth, due in part to a lack of population growth. Yet, to maintain a high standard of living, it has become necessary for the developed nations to borrow and spend ever increasing sums of money, and to print more of it. The end game is not hard to predict when looked at over a long period of time. Eventually, those nations who have the money to lend will simply refuse to provide additional funds, which is what happened recently when the Greek government hit the brick wall going 100 miles per hour, peddle to the meddle. Or, the rates demanded will sap the economic strength of the profligate borrower.
I suspect the gold bulls have their timing wrong. They see the future correctly, but have moved it too far into the present. What happens to their arguments with a continued economic recovery, some austerity in countries running into financing problems now, and a continued modest inflation rate of around 2% (breakeven on the 10 TIP has fallen below 2%)? As long as that trend persists for just a few more months, then their arguments may continue to hold sway. But if economic growth with low inflation continues into 2011, it would not be surprising to see the current demand for gold evaporate and replaced with some new speculative group think buying frenzy.
As with any parabolic move, it is impossible to predict the precise time of its demise, only that death to a parabolic move is certain. Once the worm turns, history has shown that the counter move down for asset prices after a parabola will be severe and fast. This has been seen over and over again in a variety of asset classes. Just within the past thirty years, major parabolas included Japanese stocks and real estate prior to 1989 (NIKKEI 225 Index Chart), stocks in 1999 (NASDAQ Composite Index Chart), U.S. homes prices from 2002-2007 (see chart at page 2 www.standardandpoors.com .pdf), gold and silver prices up to January 1980 (check multi-year gold chart 1975-2010: Historical), and oil in 2008 (Barclays Bank Plc iPath Exchang Share Price Chart) In the last analysis, these kind of charts tell you more about the human psyche than the true value of the asset class. Humans will tell themselves all kinds of stories to justify the parabola.
The current spot price of gold is substantially less on an inflation adjusted basis than the high reached in January 1980. An article in Sunday's NYT has a graph of the inflation adjusted price. It looks like the price would have to rise to around $2250 or so per ounce to equal the high hit in 1980 during that previous parabola. In that article, a number of hedge fund managers discuss their large holdings of gold. How long do you think that herd will hold the metal when the worm turns?
I certainly do not intend to buy gold at the current levels. I would add that is due, at least in part, to owning all that I want to own already. I am tempted to sell some but I am in a state of perpetual inertia, possibly due to the reason for buying it during my adult years. Normally I will sell into a parabola, the exception-apparently- is my holdings in gold and silver.
3. Barron's Roundtable Mid-Year: Several of the Barron's panelists continue to recommend gold. This is a common sentiment among those who always believe the sky is falling, the worst is just around the corner or already upon us, the glass is never half full or empty but perpetually over flowing with untreated sewage. Alan Abelson is their guru and Barron's is where they congregate to dispense their tells of woe, death and destruction, doom and gloom as far as the eye can see or the worrywart mind can conjure up. In short, they are stock haters, possibly willing to rent a few from time to time, but only for a short period. For this crowd they never bother to explain that the S & P 500 was around 17 in 1950 and close to 1100 now after a brutal decade. S&P 500 INDEX,RTH Index Chart
Zulauf argues that the developed nations have been living in an illusion for twenty years in order to enjoy a higher standard of living beyond their means. "Hard times" are ahead as governments have only started to take the necessary steps to cut spending and to raise taxes. This will lead to stagnation and increase deflationary pressures according to Zulauf. He favors TLT, the ETF for the 20 year treasury, and gold after a correction. I would not disagree with Zulauf's long term prognosis. His view is probably close to the current consensus opinion among the movers and shakers. A predicate of this view is a pessimistic view of worldwide economic growth which would relieve the most current sovereign debt crisis, along with some fiscal restraint and monetary support such as the trillion dollar package recently adopted by the EU members.
I suspect that the opinions expressed by Abby Cohen and Oscar Schafer will turn out to be better near term forecasts. If Goldman's forecast of an S & P 500 in the 1250 to 1300 range for the next 6 to 12 month comes to pass, however, I will be a seller of stocks, most likely one or more stock mutual funds, since I currently believe this will be the top of the range bound movement for the next 2 to 3 years. When the time comes to make that decision, new information, which I always try to assimilate without bias, may change my mind. In this blog I frequently note economic information from a variety of sources, both in the U.S. and elsewhere. This is not idle, meaningless work, but part of the process of creating a macro view of worldwide economic conditions which will influence my investment decisions.
This does involve a certain amount of market timing based in part on my characterization of the long term pattern. Many financial planners will argue against tactical asset allocation, which involves some market timing. An example of the arguments made by financial planners is in this recent article in Forbes.com.
I believe that their opinions are based primarily on their inability to do it effectively for clients, and consequently view their recommendations to stay the course in stocks since 1997 to be the right choice. It is the same reason that they avoid picking stocks and concentrate on funds in their static asset allocation plans. Why would anyone pay for a recommendation to buy BND and IYY?
Even when confronted with strong historical evidence that both bonds and stocks fail as asset class over extended periods of time, frequently for as long as 15 years for the buy and hold investor, this does not change their opinion. And, those same "experts" would be baffled by a long period when both stocks and bonds fail as an asset class, which occurred by the way between 1965 to 1982. Their mantra would be to just stay the course as both the bond and stock asset classes go into the crapper big time.
4. German and French Banks Exposure to the PIIGS: Without identifying the banks, the Bank for International Settlements released a report stating that French banks had lent 493 billion to Spain, Greece, Portugal and Ireland, whereas the German banks had lent 465 million. NYT The press release summarizing this report can be found at Latest BIS Quarterly Review discusses financial turbulence. Of the total of 958 billion, it is estimated that 174 billion is sovereign debt. WSJ
5. Japanese Government Ad to Sell Its Bonds: In an article at CNBC, I found this advertisement placed by the Japanese government in their effort to sell government bonds to their population: msnbcmedia.msn.com/CNBC Japan_govtbond_ad.pdf Maybe this is a sign to double short the Yen. The new Prime Minister of Japan has made some noise recently about Japan possibly facing a Greek style sovereign debt crisis unless it starts to addressing its burgeoning debt load. NYT
I read your blog every day and have followed your discussions of principal protected notes. My personal opinion is that they are too complex for the average investor to understand (myself included!) You are far ahead of the average investor in your ability to understand and evaluate these products.
ReplyDeleteMy general impression is that SIPs are structured in ways that resemble derivatives, which I believe are ticking time bombs in the global financial edifice. "Weapons of mass destruction," as Buffet called them.
Of course every market player has their own objectives and risk tolerance, and should act accordingly. Probably Fidelity is protecting themselves from the many who are unwilling to take responsibility for their actions, a constituency you have bemoaned on many occasions in your blog.
Cathie: Many investors do not understand these products.
ReplyDeleteI do recall that many brokerages firms allowed Lehman to directly market their "principal protected notes" to customers. I have a vague memory of Fidelity being one of them. Judging from subsequent news stories, many investors apparently did not realize that these notes were not like CDs, insured by the FDIC, and were in fact subject to the credit risk of the issuer. Anyone who bought Lehman "principal protected" notes found out the hard way that the notes were not principal protected in the even of Lehman's bankruptcy.
Once the investor realizes that the notes are subject to the credit risk of the issuer, many investors will opt to avoid them for that reason. I can certainly understand why a conservative investor would just prefer to avoid a senior note from Citigroup funding. But, assuming the investor is willing to take on the credit risk of the issuer, as with any bond purchase, these kind of notes can play a role in a conservative investor's portfolio.
I would not buy one that is not exchange traded however, because I want the option of having the ability to sell the security quickly in the event I because too queasy about the credit risk of the issuer.
I believe that Fidelity's decision was based solely on cost. These issues are not known to most investors and subsequently have little volume.
Fidelity has a way to handle the blowback from customers. To trade double shorts, I had to sign an agreement with them. The same could be done with these products. They chose not to do that which indicates to me at least their motive is cost based to them.
I hold MYP in a Schwab account. Other than being non-marginable, there are no restrictions. I just got off the phone w/ a Schwab rep to confirm that there are no trading restrictions with principal protected notes.
ReplyDeleteThanks Bruno. I may move some funds to Schwab which I have been thinking about doing anyway.
ReplyDelete