Cranbrook, Romney and Bullying

Creds: Cranbrook class of 1964. Full scholarship student. Williams College BA, Harvard Business School MBA. U.S Army 3 years-First Lieutenant, Airborne, citation with V device.

 

The recent article in the Complainer states that Mitt betrayed the honor, trust and opportunity offered him as a son of Cranbrook. The Cranbrook Song is then quoted in full.

As I thumbed through my old copy of the Brook (yearbook), I was struck by the fact that we all had short hair, were almost exclusively white, and with students of faiths other than Christianity few and far between. Admittedly Cranbrook was nominally Episcopalian and we were required to attend Chapel three times a week but aside from the Chaplain and assistant Chaplain being Episcopal clergy, there was little connection to the church. Bloomfield Hills at the time was almost exclusively white and waspish.

Typical of many prep schools at the time, the students most looked up to were the athletes. Fortunately for many of us, there were only around 60 boys per year and as a result those who showed effort and desire could find there way onto some interscholastic team. Generally pure brain power was not a path to leadership or recognition. Many of the athletes were in fact quite smart with many members of the class of ’64 attending most competitive schools. Mitt ’65 initially attended Stanford. 

The yearbook has Mitt pictured in three clubs. These were Glee Club, Pre-Med Club and The Forum (a club thats mission was to connect the Cranbrook student with events in the real /outside world). From recollections from several friends-all class of ’64, Mitt was remembered as a young man who often tried a little too hard to be funny. While his later success is impressive, our collective memories were of a young man who did not excel at the things that mattered to the majority of the Cranbrook student body.

The incident with John Lauber seems out of character with the Cranbrook at the time which is what makes it more troubling. There was always sarcasm and verbal jousts but I know of no other incident of a similiar nature. There was in fact another student in Mitt’s class who in the spring of 1964 bleached the front part of his hair. He was an athlete and nobody was offended or gave him any grief. Also, to my recollection, there was little or no gay bashing at the time. This was before the time when high school students came out. In fact I never suspected any students of being gay-even some who came out when they were older. 

I was reminded by one of my friends that he had been “different” and as a result had a more difficult time at Cranbrook that the more main stream students. Different in his case was non athlete and a year older than the rest of us. From my part, there were some differences between those students with parents with money and those of us whose parents had little. The 99% drove new cars to school and vacationed in Aspen, the 1% of the student body who had less, walked to school, or came by bus and worked at menial jobs during the summers. This gap could be narrowed somewhat if a poorer student excelled on the playing fields.

To the reported act of cruelty to the blind teacher, troubling. The teacher was certainly visually impaired but I know of no other incident or prank where he might have been injured. The usual prank occurred in his honors english class. At the back of the classroom, there was a large window which opened into the next classroom. On several occasions students in his class would take seats on the far side of the window and raise their hands. Due to his lack of depth perception he evidently thought they were in the same room.

Do the actions of an entitled teenager besmirch the reputation of Cranbrook? I don’t think so. This is a school that also gave us Ivan Boesky and Bob Woodruff, one who went away for a while and one who has done more for wounded veterans than anyone of our generation. Cranbrook has produced those who served and those who thought they were too smart to serve. All institutions produce both the good and the less good. 

Kudos to Flip Maxwell and all for the guts to talk and to those who remember Mitt in a better light. I wish Mitt had remembered the events-some remorse would have helped.

Cranbrook today has evolved with the times. Thanks to Ben Snyder and others the school is well integrated with students of all shades, cultures and religions. Heck there are even girls now and being openly gay is accepted as a normal part of the world. We even have a President who is in favor of gays being able to marry-progress from 1965.

I am finally reminded of another Cranbrook graduation hymn/song.

“Forty years on when afar and asunder

Parted are those who are singing today

When we look back and forgetfully wonder

What we were like in our work and our play”

 

 

 

 

 

ETNs versus ETFs

They are not the same animal. ETFs are backed by underlying portfolios made up of the securities that make up whatever Index the ETF is based on. When shares are bought, the Market Makers deliver to the Issuer the required portfolio of stocks, bonds or commodity futures. When investors sell shares, the Market Makers turn in those shares and the ETF portfolio delivers out the underlying securities. 

With ETNs, the fund is guaranteed either by the Issuer of by a third party-generally a bank. When investors buy shares from Market Makers, the Market Makers generally send cash to the Issuer in return for shares. The Issuer then hedges the risk in many different ways but there is not a portfolio of securities that is owned by the shareholders. The ultimate guarantee to the shareholders is the viability of the guarantor-the shareholder has no claim on the underlying portfolio.

 

I don’t believe that ETFs and ETNs should be lumped together as it confuses less well educated investors.

Seed Money 3

The problem  of Issuers  ETFs  finding seed money from Market Makers seems to have faded. With most new issues being seeded at between $2.5  and $5.0 million the amounts have helped solve the situation with these numbers being down from the $15 to $35 million per issue of several years ago.

Equally important is the fairly recent entrance into the seeding space of third party seeders who put up the initial seed in return for various incentives given back by the Issuers. These incentives can be in various forms including reciprocal business, Basis Points in the funds or straight interest on the amount invested in the initial seed.  There generally seems to be an agreed upon tie up period on the seed shares to avoid the Lead Market Maker being in competition with the party holding the seed shares. Of particular benefit to the new arrangement is that the party holding the seed shares is often willing to lend out the shares to the LMM who historically attempt to short shares to the public at a premium to the NAV. Our experience has been that the ability to borrow shares at very decent rates enables the LMM to offer Shares of the ETF at tighter spreads to the NAV. This benefits the public, enables the Issuer to grow its assets more quickly than when shares are difficult or impossible to borrow and therefor expensive to the LMM. This also provides further income to the party doing the seeding. In all a great improvement over the early years of ETF issuance.

Age Bias

My wife turned 65 in December of 2011 and I turned 66 in March of 2012. A number of events occurred which we had not expected.

My wife’s company dropped her from their Health Care coverage-evidently required as they have less than 15 employees. At the same time her life insurance policy though the company was reduced from $50,000 due on her death to $35,000, also due to age. She was encouraged to go on Medicare A and B as the alternative to the company health care policy. The cost naturally jumped essentially cutting her take home pay by roughly $7000 per year.

During the past four months, I was downsized and had to pick up both of our health insurance coverages through Cobra (United Health Care. For a variety of reasons we are currently paying roughly $15,000 per year for health care. After many years of neglect, I have been going through various tests to measure my health. Having had cancer twice and having worked in a high tension job, it was time. Much to my chagrin I found that several of my doctors would not accept United Health Care. In retrospect I shouldn’t have been surprised. A year ago I had a lipoma removed from my back. Had it pre-approved by UHC, only to have them reject the claim several times before eventually paying. Fortunately I had arranged a fixed price for the surgeon (who doesn’t accept UHC) and actually came out a winner when the surgery took almost three hours instead of the expected one hour.

What do I take away from these events? Our health care system is inadequate-punishes the generation that hits 65 and shows little sign of getting better. Maybe there is something to be said about a system similar to Canada or Great Britain.

Yorkville High Income MLP YMLP

Nice launch on this first product from Yorkville. Bloomberg volume was 93,333 shares while Yahoo showed 98,633. Range was suspect as explained in the previous post.

With an expense ratio of .82 and an expected yield in excess of 8% this product should attract investors looking for yield when there is little available in the fixed income market. I count 10 MLP based products with AMJ having the largest AUM at just over $4 billion. AMLP is second with $1.8 billion and MLPI, MLPN and MLPL all with $100 million or more. In terms of daily volume, the new entry YMLP came in 4th of the 10-outstanding for an early day. If the volume can be sustained or grow, this looks like a possibility for a real winner. Will be watching this as to share volume and AUM growth-the yield is attractive.

ETF Warning

First the warning. Watching a new product I noticed that the range for the day was $19.85 the low to $30.12 the high. The product (discussed below) is an ETF of Master Limited Partnerships-basically a yield play.

The only way the high/low range could be this wide is if an unsuspecting investor entered a market order at or before the open of the market. Market makers (on a new issue the source of shares to buy) typically enter wide to very wide quotes to satisfy exchange requirements. Once the market opens and the underlying components of the ETF open, the Market Maker will tighten up the bid and the offer to more accurately bracket/reflect the NAV of the ETF. Frequently the market order that has been entered before the spread has been tightened will be executed at a disadvantageous price. If the price is really poor, there is a mechanism available to either break the trade (cancel) or adjust the price. The unfortunate part of this effort to change a trade is that there is a fairly small time window during which the investor must inform the firm holding his account.

Key defense-DO NOT ENTER MARKET ORDERS PRIOR TO THE MARKET OPEN ON NEW OR ILLIQUID 

ETFS. I personally never use market orders.

Mutual Funds versus Exchange Traded Funds

I was recently asked by a neighbor to comment on the suitability of a portfolio recommended by a financial advisor. The neighbors are in their early 60’s and relatively unsophisticated when it comes to investments. I never asked the size of their savings.

The couple are most concerned with preservation of capital with some income.

The recommendations consisted of 12 funds. Eleven were mutual funds with a concentration in the fixed income area. One was an ETF (VWO from Vanguard). As I researched the funds, I was surprised to find that three of them carried considerable front end loads-as high as 4.75%. The rationale given was that they were buying active management. An in depth look into the 11 mutual funds showed that they carried fees of between 80 and 190 BP annually. 100 BP on a $100,000 investment equates to $1,000 per year. I looked to find similar ETFs with close to the same risk exposure. In every case there was a comparable ETF (though not actively managed) that carried fees in the range of 15 to 60 BP annually. In addition to the fund fees, the RIA is charging 125 Basis Points to manage the account and more if he had discretion to make trades.

I recommended that the couple ask the Rep to try and find ETFs that fit the same criterion as the Mutual funds chosen. 

There are few active managed ETFs currently in the marketplace. PIMCO and Wisdom Tree having several. Charles Schwab recently announced a suite of actively managed ETFs and several more fund managers have plans. 

Key questions to ask your investment advisor:

Have actively managed funds out performed index funds over the short and long term?

Is there an ETF that matches the mutual fund being recommended, that has a dramatically lower fee structure?

What are you getting for a front end load?

 

Observations/Perspectives on Occupy Wall Street.

Credentials:

• 39 years on Wall Street
• Not a member of the 1%
• Past member of the United Steel Workers
• ex First Lieutenant US Army Infantry/Paratrooper
• awarded the CIB (Combat Infantry Badge)
• Decorated for Valor
• MBA

Have walked by the Zuccotti twice a day since day one. First impression was that the protestors were orderly, generally young but had too many messages with little binding them together. Anti war protestors (several Viet Nam vets) Communists,  anti Wall Street, and on and on. Some just seemed to be protesting for the sake of protesting, witness a young lady holding up a sign saying “Reagan sucks balls.”The main message has been that there is a growing discrepancy between the haves, the 1% and the rest, the 99%. Whether one is Republican, Democrat, Tea Party, Communist or Anarchist, it is difficult to rationally argue this fact. I absolutely support the right of all Americans to protest any issue that troubles them. My generation marched and protested Civil Rights, the Viet Nam War, Women;s Rights, Gay rights and other issues. My children”s generation have protested almost nothing. We have been involved in two lengthy wars, one lasting 10 years now, and there has been no significant protest. Why? Mostly because it doesn’t affect us directly. Casualties are relatively low, we don’t know many who are directly involved and probably most importantly there is no draft to threaten our military age population. What does affect us all is the present state of the economy and our Government’s inability to deal with the issues. The current situation should not be blamed on either political party. Both contributed to the problem. The failure to find a quick solution and to place the blame on the sitting President also makes no sense. The ebbs and flows of an economy as large as ours cannot be changed/turned quickly. The simple fact is that an inordinately large number of those between the age of 16 and 24 are unemployed and cannot find work. Bureau of Labor Statistics show that 23.9% of those between 16 and 19 are unemployed., 23.6% of those 16 and 17 fall into the same category. 18-19 year olds show 24% unemployed, 13.4% of the 20-24 year olds and 10.3% of the 25-29 year olds. Pretty depressing numbers-its no wonder they are protesting. What the stats do not show but what I am reminded daily, is the number of older workers currently out of work and looking desperately. This includes Wall Street workers who are part of the 99%. I get daily requests from close friends and names I barely know, all asking for help in gaining a job. Several acquaintances who are 99 percenters with 20 years Wall Street experience are in various phases of having their homes foreclosed. Most troubling to me is the reactions of so many to the protest and the protestors. The tourists who come to gawk and make it difficult for the 99 percenters who work on Wall Street by blocking the sidewalks. Some of the 99 percenters who are working on wall Street who are so dismissive of the plight of the unemployed. Several fellow office workers were commenting on the Thursday arrests.”They should get jobs, Shoot them. One wore a t-shirt proudly displaying 1%. Mr. Gingrich declaring in Iowa that the protestors should get jobs but first should take a shower. Is the Protest having an effect? Yes. On Thursday some Wall Street workers were told to stay home. Many came in but were scared. Many more came in but were subjected to much longer commutes. A police officer received 20 stitches in his hand cause by a piece of thrown glass. Are the protestors and the 99% entitled to the same pay as the Wall Streeters/ No.  From watching the newscasts of the protestors and their soundbites some seem to think they are entitled to high pay. In a Communist society that might be true. In America, some are born to more privilege, some with more brain power, some receive better education, some work harder and some are just plain lucky. Wall Streeters fall into all of these possible categories but luck is near the top. Looking back on the Civil Rights movement with many killed over the years, the Anti Viet Nam War movement with 4 killed at Kent State and 2 at Jackson State, at the Student Strike in the early 70’s protesting the invasiion of Cambodia, when 450 Universities, Colleges and High Schools went on strike, when 100,000 gathered in Washington Dc, 150,000 in San Francisco, where 30 ROTC Buildings were burned, it seems we are getting off easily to date. As a member of the Army reserve, I was put on alert to move to Yale University to quell possible riots. Our orders were to use live ammunition. As a protest I transferred to the NAtional Guard- I applaud the protestors basic goals. Deplore the violence. I am pleased that the unions are in support. Believe that most Wall Street workers are not guilty and do not deserve the grief. Finally would be much more enthused if the angst would be directed at our Government in Washington-both sides of the aisle. Its time to put the welfare of the country ahead of party politics.. The lobbies need to be castrated. Politicians need to have their feet put to the fire to serve us. Congress should be made to play by the same rules as most of us on Wall Street-NO Insider Trading. Keep protesting but in a more Ghandi like way. Prosecute the policeman at UC San Diego who indiscriminately used pepper spray. Prosecute the Wall Streeters who cheat and steal. eliminate the lobbies or at least cool their influence Thinking back to the period right after 9/11 I was struck by how well we treated each other. Were all pulling together. Lastly, though a veteran, I am not  in support of either of our current wars. The one good thing that has come from them as opposed to the Viet Nam War is that there is almost universal support for those serving. When I mustered out and went to see my wife on a college campus, I was spat upon because I wore a uniform. Today we thank our returning veterans. That is a major step forward. Lets redirect our anger at Washington where it surely belongs. Things will get better, they always do. Problem is after they get better they always get worse again. The cycles are different but they are the same. remember 9/11 and lets support each other and all pull in the same direction otherwise we are no better than our government.

ETF Seed Capital Revisited May 2009

There has been an increasing incidence of new ETF issues being unable to come to market because no Market Maker sees to fit to put in for the allocation of the product.
The question is whether the lack of an interested Market Maker occurs because the prospective product has little or new merit or is there another possible explanation.
A quick analysis of the roughly 30 products that have launched in 2009 indicated that most have been fairly successful. The lack of interest in new products therefor would appear to be for other reasons.
Historically, Market Makers have provided the initial seed money to bring shares to market, much like an equity IPO. The reward for becoming the Lead Market Maker, or Designated Market Maker was a slightly larger liquidity payment on an electronic platform(ARCA or NASDAQ). If listed on the AMEX, prior to its sale, the advantage was that fewer Market Makers could easily trade no Specialist(LMM) products if the MM was also a Specialist on the AMEX.
With the demise of the AMEX floor, all ETFs are now traded totally electronically with the volume split between NASDAQ, ARCA and DirectEdge in descending order of volume. The net result is that there is little advantage to being a Lead Market Maker other than the 10 cent additional liquidity payment an LMM receives from ARCA. The risk is that the new issue will sell slowly resulting in the LMM having money tied up in seed with its consequent cost.
The result is that many Market Makers are telling Issuers that they will gladly trade their products if they sell quickly and show good daily trading volume but have little or know interest in tying up capital in seed.
The result is that good potential products may not make it to market hurting both Issuers and investors.
This situation has become compounded by the enforcement of an ARCA rule which requires an LMM to maintain certain levels of participation or losing the product and the additional liquidity payment. If the product is a slow grower the LMM gets to keep it with the consequent seed commitment. If after a short or long period of time the product becomes active and successful, the LMM who made the initial commitment runs the risk of losing the LMM designation and the liquidity payment kicker.
The response of the Market Maker-why provide seed? Just trade the ones that are successful with high volumes.

Post Cards from Our Youth

While visiting my mother this Easter Sunday, my siblings and I came upon a box of postcards which various family members had written and/or received while we lived in Switzerland between 1955 and 1961.

The first is from my brother Jeff, written to my parents. My brother and I were Swiss Boy Scouts(Eclaireurs Suisse). The program was run entirely by the scouts-no parental involvement. On longer camping trips we were accompanied by a young man in his early twenties-who also served in the Swiss Army.
Jeff was 12 or 13 at the time and I was 2 years younger.
Dear Family,
Yesterday we climbed a mountain which took about 6 hours round trip.We walked on snow and almost everybody got their

feet wet but me. We went swimming in a

shallow mountain pool full of freezing water. I swam naked. I stood naked in some snow. It was neat. I got your cards. Love Jeff.

Untold in the card was the fact that climbing the mountain(11,000 feet high) we had to climb down a snow cliff on ropes. The ropes didn’t quite reach the bottom of the precipice so we had to let go and slide the last 50 feet and were hopefully snagged by two of the older scouts who had climbing expertise and and descended a steep rock face.
When we read the various postcards even my practically mute mother laughed.