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Happy Guy Fawkes Day

guy-fawkes-maskRemember, remember the Fifth of November,
The Gunpowder Treason and Plot,
I know of no reason
Why the Gunpowder Treason
Should ever be forgot.
Guy Fawkes, Guy Fawkes, ’twas his intent
To blow up the King and Parli’ment.
Three-score barrels of powder below
To prove old England’s overthrow;
By God’s mercy he was catch’d
With a dark lantern and burning match.
Hulloa boys, Hulloa boys, let the bells ring.
Hulloa boys, hulloa boys, God save the King!

–Traditional English nursery rhyme

It doesn’t get much press on this side of the Atlantic, but it should.  Today, November 5, is Guy Fawkes Day, the day that the English remember one of their most notorious villains or one of their most celebrated heroes, depending on their mood or ideological leaning.

On this day in 1605 Fawkes, a disgruntled religious minority tired of official abuse, attempted to take down the entire English government—king, ministers, parliament and all—by blowing up the House of Lords with a large cache of gunpowder during the State Opening of Parliament.

Fawkes was discovered and promptly executed, but he is remembered—in typically dry English humor—as the last man to enter parliament with honest intentions.

Today in America, we’re getting ready to enter a year of heavy campaigning for the presidency. As things are shaping up, we may have our choice between two very unlikeable people: Mr. Donald Trump—an obnoxious reality-show-loving narcissist with bad hair—and Mrs. Hillary Clinton—a frumpy ice queen tainted by decades of political scandal and questionable decisions.

The thought of either of these people occupying the Oval Office makes me wonder if absolute monarchy might actually be the better form of government after all. If this is what democracy gets us…

Sigh…

Tonight, pour yourself a drink and offer a toast across the Atlantic. Wear a Guy Fawkes mask if you feel like it, or burn a Guy effigy or the effigy of whatever politician irritates you the most. But tomorrow, tune out the political noise, roll up your sleeves, and focus on your investing.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Though It Pains Me To Say It, Obama’s Recommendations For The Brokerage Industry Are Surprisingly Sensible

Prepare yourself, for the end of days must be nigh: I actually agree with President Obama on something regarding financial regulation.

Now, I say this fully understanding that the President, if he had his way, would probably round up everyone in my line of work and lock us away in Guantanamo for the rest of time. Mr. Obama is no fan of Wall Street…or bankers…or brokers…or money managers…or for that matter, their high-income clientele. But for once, we find ourselves on the same side of an argument.

In a speech to the AARP this week, the President proposed that brokers who manage retirement savings account be required to disclose how they get paid…and by whom.

All I can say is, it’s about time.

In his speech, Obama said “These payments [that brokers receive for selling products], these inducements incentivize the brokers to make recommendations that generate the best returns for them but not necessarily the best return for you.”

Obama went on to suggest holding brokers to the same fidiciary standards currently required of investment advisers. Rather than just determine “suitability” based on age, income and wealth and risk tolerance, brokers would have to–gasp!–act in their clients’ best interests when managing their retirement accounts.

On both counts, I agree completely.

Most investors do not know the difference between a stockbroker and an investment advisor representative. Without bogging you down in industry jargon, I’ll spell it out for you as simply as possible: A broker sits across the table and sells to you; an advisor sits on your side of the table and buys for you.

In one arrangement, the client is a target for short-term gain. In the other, the client is more akin to a patient you’re trying to help. It’s not semantics; it’s a very different mindset.

The old stockbroker model is what gave Wall Street its (much deserved) bad name. You saw the movie The Wolf of Wall Street?

Yeah, Jordan Belfort was a stockbroker, not an investment adviser representative. He made millions by selling low quality stocks that generated the highest commissions. The “best interests of the client” was a concept that would have been completely foreign to him. It would have literally never crossed his mind.

Are all brokers the degenerate trash portrayed in Wolf? No, of course not. But the brokerage model does incentivize a wanton disregard for the client. And it’s not just stocks. In fact, the commission model for stocks went out of fashion years ago, but unfortunately, it is alive and well in products like variable annuities (see “Why I Hate Annuities”).

I can’t tell you how many clients have come to me with variable annuities they wanted to dump. Nearly every time, I’ve had to explain to them that doing so would result in surrender charges equal to 7%-10% of their investment. That 7%-10% represents the fat commission that went to the broker that sold them the annuity, something that probably wasn’t disclosed or was buried so far into the small print that no one ever sees it.

President Obama is absolutely right in proposing that investors be made aware of how their broker or advisor is compensated and by forcing a higher fiduciary standard on brokers.

In fact, I would argue that his proposals didn’t go far enough. If he wanted to be truly revolutionary—and really get under Wall Street’s skin—he would have proposed outlawing the commission-based model altogether.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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This is Why Politicians Should Never Use Twitter

The citizens of the United Kingdom should rest easy knowing that Her Majesty’s government is in serious discussions with the U.S. President on how to confront Russia over its actions in Ukraine:

Cameron, what were you thinking? Posting a photo of yourself “looking like a tough guy” on social media was asking for this kind of ridicule:

 

And my personal favorite:


 

David Cameron should resign for making a buffoon out of himself like this.  And let us learn a lesson from this: national leaders have no business conducting diplomacy over Twitter.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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3 Key Points in President Obama’s New myRA Plan

State of the Union speeches are generally pretty heavy on talk and light on practical action, and President Barack Obama’s 2014 was no exception. There was the usual backslapping and finger-pointing we’ve all grown to expect over the years from any sitting president. But there was one proposal made by Obama that got Wall Street’s attention: a new retirement savings vehicle for low- and middle-income Americans dubbed “myRA.”

From Obama’s State of the Union speech:

“Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA. It’s a new savings bond that encourages folks to build a nest egg.”

President Obama went on to say that savers would have “no risk” of losing what they put in, which will make the plan palatable for Americans who lack the stomach for equity investment.

The plans for myRA are still somewhat nebulous, but here are three key points you should take away:

#1: myRA is essentially a Roth IRA invested in long-term bonds

According to the White House’s fact sheet, the myRA accounts will be offered within a Roth IRA vehicle, though unlike current Roth IRAs, this product will be offered via employers, and employees will be given the ability to have a portion of their checks automatically deducted and deposited. Currently, Roth IRAs are offered by banks, brokerage houses and other financial institutions.

The assets on offer will be “like savings bonds,” backed by the U.S. government. There is no indication at this time whether equities or other riskier assets will be allowed, though given the explicit government guarantees, it’s unlikely.

#2: myRA appears to be largely riskless for employers

Offering a 401k plan is expensive, cumbersome and carries certain fiduciary risks for employers — this is why most small businesses don’t offer them. Only 68% of American workers have access to a retirement plan, and only 54% actually participate.

The Obama administration has been accused of being hostile to business and of being insensitive to regulatory burden. From what is available so far, it does not appear that myRA will be a burden for employers.

#3: myRA is not exactly “riskless.”

If the account is essentially a bond ladder within a Roth IRA, then it is safe to say that there is no principal risk. But remember, as with all bond investments, there is the risk of lost purchasing power due to inflation. It remains to be seen what kinds of yields are offered, but it is hard to imagine the federal government paying more to American savers than it does to its existing bondholders.

At time of writing, the 10-year Treasury yields 3.62%. The current rate of inflation is 1.2%, though the Fed would like to see it closer to 2%. Subtracting the Fed’s policy objective inflation rate from the current yield gets you a real, inflation-adjusted yield of 1.62%. And over the course of a lifetime, inflation might prove to be a lot higher than that.

It certainly has during the past 100 years; the average inflation rate has been about 3.2%.

Bottom Line

A cynic might say that the U.S. government is trying to fleece its citizens into financing its chronic budget deficits. Hey, what can I say, there is probably some truth to that sentiment … but I believe that President Obama is sincere in wanting to help Americans save for their golden years.

Any savings, even at a low rate of return, are better than no savings at all. And given the long-term funding needs of Social Security, every little bit helps.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich. This article first appeared on InvestorPlace.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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I Hate ObamaCare

I hate ObamaCare—but probably not for the reasons you might think.

I’m not an Obama basher, and I consider the latest republican threats to shut down the government unless ObamaCare is defunded to be a carnival sideshow.  But nonetheless, I hate the program and I’d love to see it scrapped.

Why?

Because it is a façade of reform that does nothing to actually fix our broken health system.  Rather than the radical change it is billed as by both its supporters and its detractors, ObamaCare is an incremental reform at best and one that does nothing to address the real reasons for soaring health costs: a system in which the user of health care—the patient—is generally not the payer and in which doctors are compensated for the amount of care provided, regardless of benefit, rather than for actual results.

All of this is made worse by the peculiar American notion that it is the employer’s job to provide health insurance.  Most other Western countries have socialized medicine paid for by the taxpayer.  But don’t think that the American taxpayer gets off easy.   The American taxpayer foots the bill too, albeit indirectly through corporate tax breaks.  The end result is a quasi-socialized model that effectively funnels public money to private insurance companies.  It also makes American labor more expensive than its foreign competitors and wastes company resources that would be better spent maximizing profit on providing social services.

There are other negatives that are underappreciated.  America is rightly proud of its dynamic, flexible labor market, and Americans are unique among Westerners in their willingness to uproot and move halfway across the continent for the right job.   Yet tying insurance to employment locks many Americans into less-than-optimal jobs, and worse, it discourages risk taking.  Given that most small businesses are run on a shoestring budget, losing employer-provided insurance is a major disincentive to the aspiring entrepreneur.  We’ll never know how many small businesses fail or are never even attempted due to the prohibitively high cost of health insurance.

To be fair, ObamaCare didn’t cause these problems, but it does makes this worse with its individual mandate.  Today, an entrepreneur can take his or her chances and choose to go uninsured  in the early stages of a new business when the shekels are tight.  And for a young person without a family to support, that is a sensible option.  But under ObamaCare, that will no longer be possible.  “Self insuring” is not allowed.

I actually believe that President Obama had good intentions when he created the tax subsidies for low-income purchasers of health insurance.  But good intentions often have unintended consequences.  Subsidizing insurance for low income earners does nothing to address the reasons for it being expensive in the first place, and it actually exacerbates the problem by shielding patients from the true cost of the services they receive.  If there were not a deep-pocketed insurance company or government program to bilk, patients would push back against unnecessary or extravagant costs, and doctors and hospitals would be forced to run their operations more efficiently.

You want real reform?  Outlaw health insurance for everything but catastrophic injuries or illnesses.

Think about it.  You have homeowners insurance for major damage; think fires and tornados.  But you don’t use it every time you need to pay someone to re-caulk your bathtub.  Why should health insurance be any different?  It should be there in the event you need chemotherapy or brain surgery.  But do you really need your insurance to cover a round of antibiotics for strep throat?

Yes, there are some people who cannot afford even basic health care.  But provisions can be made for them.  And in any event, offering free basic care to low-income patients  is still cheaper than the status quo, which sees the uninsured clogging up hospital emergency rooms with non-emergency cases.

The other option, of course, is to go the direction of Canada and the UK and offer fully socialized medicine.  That’s not my preferred solution, but it’s not quite the horror story it’s made out to be in the American press.  I used the National Health Service while a student at the London School of Economics, and I had no complaints.  The UK’s medical services are roughly on par with those of the United States yet cost only half as much as a percentage of GDP. The difference in cost is shocking and indefensible.

And this brings us back to ObamaCare.  I still hate it.  Mr. Obama didn’t create the health care cost crisis, but his attempt at fixing it does nothing to address its root causes.  Until patients are aware of the costs and benefits of services they receive and doctors are incentivized to heal rather than perform a series of reimbursable procedures, there can be no real reform.

This article first appeared on InvestorPlace.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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