I Will Give a Guide to ETF Investing on Monday

I will be giving a lecture called “Guide to ETF Investing” this Monday, January 28, 2013, to the New York Investing Meetup group.

This is a prepaid event and the in-person class costs $20. You must register and pay through PayPal (you can use a credit card) at: https://www.paypal.com/cgi-bi/webscr?cmd=_s-xclick&hosted_button_id=ZHARD4QPF4P94 (this URL is good for in-person attendance and not the webinar).

Space is limited and all of this group’s previous classes have sold out. Please register early.

There is a webinar available for the class (you hear the presentation and see the slides, there is no video) and the cost is only $15. You can register for the webinar at: https://www.paypal.com/cgi-bin/webscr?cmd=_s-xclick&hosted_button_id=55SXFKTV644C6.

The class will be held at the group’s meeting hall at 5th Avenue and 21st Street in Manhattan. You will receive directions and at least one reminder after you have paid and registered.

The New York Investing Meetup group offers a profitable alternative to Wall Street hype. It provides unbiased, practical stock market education and economic analysis from independent traders and successful investors. You can view their videos on You Tube at:http://www.youtube.com/watch?v=BnSltpGcKNM.

CLASS LEVEL: Beginner/Intermediate Investor

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Cartoon About Creation and Redemption.

I found this neat video “The ‘Aha’ Moment – Understanding ETF Liquidity” on the iShares blog. This colorful little cartoon attempts to explain the creation/redemption process of ETFs with the analogy of flower bouquets.

The flowers are the shares of the individual stocks and the bouquets are the ETF shares. Overall, it’s not bad, but when it actually gets to the creation/redemption process the “Aha” moment left me a little confused, with a little bit too much on the flowers and not enough translation on what this means to stock shares.

Basically, an ETF share (bouquets) is like a share of the index it follows. It represents the value of all the underlying stocks (flowers) in the index. However, when the demand rises for ETF shares, they need to create more ETF shares. It sorta glides over the most important part. If the investor wants 500 shares of an ETF (500 bouquets) with 100 stocks (flowers) in the index, then the authorized participant needs to go the market himself to get, in this case, 50,000 flowers, 500 of each of the 100 individual stock (flowers) in the index. He can get them either from the market maker, the AP’s inventory, or others in the market. The AP takes this basket of securities (flowers) and trades them with the ETF (bouquet) maker, who in turn gives him 500 shares of the fund (bouquets), each holding 100 stocks (flowers). Because the 50,000 flowers are equal 500 bouquets it’s an even trade.

Was the video perfectly clear to you?

Europe Must Act Now to Avoid a Default, Buiter Says

Willem Buiter, chief economist at Citigroup Inc., discusses Europe’s sovereign-debt crisis, the exposure of banks to the region and the role of the European Central Bank in resolution of the crisis. He speaks with Tom Keene on Bloomberg Television’s

Buiter says what everyone inherently knows, but can’t say outloud, that “time is running out… I think we have maybe a few months — it could be weeks, it could be days — before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now.”

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Europe Must Act Now to Avoid a Default, Buiter …, posted with vodpod

5 Factors to Consider When Buying an ETF

The people at iShares have created a series of five attractive videos to help you look at the five main variables to consider when buying an ETF.

Yeah, it’s a commercial. But it’s very well done, very informative and not very long.

Shilling Sees Paradigm Shift From Spending

If you’re anything like me, you’re thinking this market has gone too high too fast to last. It has to fall. But what if I’m wrong? Will I totally miss out on the biggest recovery since WWII?

The Tech Ticker at Yahoo! Finance has had a very bearish bent for at least two months, maybe more. Almost all the experts they have on say we in for a serious correction. Well, all the experts I listen to. But I think the boys at Tech Ticker feel they don’t want to be cheerleaders in this rally and are trying to do their best as journalists to warn people about the dangers ahead.

Today they interview a guy named Gary Shilling who appears to own his own firm. They don’t say who he is or what he does and Aaron Task should be punished for not properly identifying this guy or why he’s a credible analyst. That said, he sounds smart.

And he is smart. He’s an economics consultant with a doctorate from Stanford University. According to his Web site he “set up” the economics department at Merrill Lynch at age 29 and served as the firm’s first economist. He’s also worked at the Federal Reserve Bank in San Francisco. And Schilling has a pretty impressive resume of making correct forecasts before major market turns.

Shilling says after “a 25-year borrowing and spending binge the ability of the U.S. consumer to borrow, especially against their house, is severely constrained.”

He adds with baby boomers needing to feather their nest eggs, savings not spending will be the order of the day for the next few years. On top of that, when people are unemployed they don’t spend a lot of money.

Check out the clip.

How does this tie into ETFs? I think for anyone worried about the state of the market but wants to be invested the smart thing to do is do what professionals do when they don’t know what to do. Buy the SPDR (SPY)

Are ETFs Too Powerful?

Mark Haines of CNBC asks Tom Lydon of ETF Trends whether ETFs are too powerful.

Most of this asks will ETFs take over for mutual funds. But then says some ETFs don’t do what they say. Again, this is a case of investors not knowing what they are buying. So, who’s fault is that?

Dow Kicks Out GM; S&P Still Holds It

Former GM CEO Rick Wagoner upon realizing what just hit the fan.

4 pm.

Late night I sent my story about General Motors and the indexes out to a few people, including some people at Dow Jones. This morning General Motors is pulled from the Dow Jones Industrial Average. Coincidence? I’ll let you decide.

Today, Dow Jones pulls GM and Citigroup out of the DJIA. The two companies will leave June 8 to give index fund investors time to adapt to the deletion and addition of two new components, Cisco Systems and Travelers. Since GM is getting knocked off the New York Stock Exchange tomorrow, GM will be going to an over-the-counter market, representatives for Dow Jones Indexes said they will use “the best available price source” for the next week. Can you imagine, the Dow being priced off the Pink Sheets. That’s the true Wild West of Wall Street. Oh, the humanity!

Since the DJIA is created by the editors of the Wall Street Journal, there’s no requirement for them to remove GM before today.

One thing to remember is that an index isn’t a portfolio. A fund or ETF is a portfolio. It lives in the real world and costs money to maintain. An index is just a construct that measures the market.

A Dow component since 1925, GM has been a significant part of measuring the stock market through the 1920s bubble, the crash of 1929, the Depression and every up and down of the American economy since. It’s only fitting that the index itself should suffer and be brought down by this once mighty component. If the index is the market and GM has been a huge part of the market and the American economy for so long, it’s appropriate that the Dow should hold it until today to give a proper measurement of the U.S. stock market and economy. But, that’s not good for funds that follow the Dow, such as the Dow Diamonds (DIA). They will probably suffer the loss even though they would have liked to get rid of the stock months ago.

However, the S&P 500 is rules based and a company needs to have $3 billion of market capitalization to remain in this “Large-cap index.” GM hasn’t had $3 billion since December. At the close on Monday, it was still in the index.

Here’s a great video from The New York Times: The Decline of G.M..

Meanwhile back at the other automobile bankruptcy in America, it appears Tommy Lasorda has been brought in as Chrysler’s vice chairman to make the Chrysler bankruptcy work. I wonder if they will bring in Joe Torre to fix GM.

Stewart Pummels Cramer and It’s My Fault

Cramer, I’m sorry, man. I didn’t mean to bring a whole media circus upon your head. And now some guy named Stewart is involved and making a mockery of what you do and your network’s credibility. This has really gotten out of hand.

The whole thing started a month ago when I pretty much said Jim Cramer, the host of CNBC’s Mad Money program, didn’t know what the hell he was talking about with respect to ETFs. In particular, Cramer was calling for the SEC to ban the ProShares UltraShort Financials ETF (SKF). He said this was a dangerous vehicle for investors. I said Cramer was out of line and that people should read the prospectus before buying something like this. Then I, well, I wasn’t very nice and pointed out he told people to hold Bear Stearns just days before it went out of business.

IndexUniverse.com picked up on this and decided to interview me about my views on Cramer and SKF. I tried to be nice, but basically said Cramer was wrong. Well, from there it just picked up steam. I was watching The Daily Show with Jon Stewart on Monday, which is my wont to do, and lo and behold, he has CNBC’s financial news commentary in his crosshairs of satire. Stewart pretty much lambasted the entire CNBC network for not telling the American people we were heading into a crisis and for sucking up to the CEOs that caused this crisis. Cramer took offense and started biting back. Originally started as an attack on CNBC commentator Rick Santelli, Cramer became the face of the debate as he became more vocal about Stewart’s attack. Stewart continued for the next three days, culminating with Cramer coming onto the Daily Show. The interview nearly lasted for the whole show. Stewart pulled the cartoon trick of ripping out Cramer’s heart and eating it in front of him before letting him die.

It wasn’t very funny and it wasn’t really satire. But it was intense and vicious. Stewart was unrelenting in his criticism of CNBC. He blamed the network for failing to inform investors and instead acting as cheerleaders for Wall Street. All the country’s anger at Wall Street came through Stewart in an accusation that was compelling the way a big car accident is compelling. And Jon was right, the media, with a few notable exceptions, did cheer this on.

The problem Stewart said was the “gap between what CNBC advertises itself as and what it is.” The sad thing is most people know that CNBC is a cheerleader for the market. One just needs to look at the way they chastised Congress for not passing the TARP fast enough in September and their refusal to look deeper at, let alone attack, Treasury Secretary Henry Paulson’s blatant attempt at a power grab with now government oversight.

Stewart was brilliant. The upsetting thing for me was that he, a satirist, commentator and comedian, was asking harder hitting questions than most of the mainstream media, of which I am a member, has over the past 10 years. Essentially, is showed that most of the financial media hadn’t learned anything from the cheerleading that led to the Internet bubble of 1999.

“I know you want to make finance entertaining, but finance isn’t a … game,” said Steward. “You think it’s a sin of omission, but it’s a sin of commission. … You knew what the banks were doing and you touted it for months. So to say it’s a crazy once in a lifetime tsunami is disingenuous at best and criminal at best.”

Surprisingly, unlike many of the commentators out there on both the left and right, Stewart is very polite with those he doesn’t agree with. He never screams at guests he doesn’t agree with and never interrupts them. Still, he can be brutal and vicious.
I give Cramer a lot of credit for taking on Stewart on Jon’s home court. Stewart is like a football team that never loses at home. And he uses the old “60 Minutes” trick of pulling out videos of people contradicting themselves. Tim Russert was a master of this and one of the few in the mainstream media to use it.

I can’t decide what I think of Cramer’s performance. A lot of people say he should have been as stubborn and feisty as he is on his show and defended CNBC more. Maybe he realized it was indefensible and maybe CNBC realized this was a way for the network to acknowledge they screwed up and to make a mea culpa to the public. Since Cramer has no problem apologizing for his mistakes, and since he is one of the network’s biggest personalities, he seemed a perfect choice to become the point man on this.

Cause in the end, as Stewart asked, “Whose side are you on?”

All in all it was incredible television, compelling, entertaining, enlightening, educational and as bloody as a talk show can get from two men sitting at a desk wearing ties.

This is only the pinnacle of why many people get their news from The Daily Show. While a lot of the show can be sophomoric, it is also one of the most intelligent shows on TV. Especially because it is one of the only shows on TV that talks to authors of serious books on topics of national and international importance. It’s a comedy show? Who else on TV talks about books besides Oprah and Brian Lamb on Cspan? And Oprah doesn’t deal with nonfiction too much. Sure plenty of people interview authors, but hardly ever for 8 minutes about the subject of the book.

So, Jon, or whoever on your staff who reads this blog, thanks. And if you are looking for another book, check out ETFs for the Long Run.

Cramer Wants SEC to Ban SKF

James Cramer, the host of CNBC’s Mad Money and my former boss at TheStreet.com, was ranting and raving about the UltraShort Financials ProShares ETF (SKF). He says it doesn’t work, doesn’t help shareholders and hurts the market as a whole. He says the ETF only helps the brokers and hurts the market.

SKF is a highly risky investment and isn’t a long-term bet. It isn’t necessarily living up to its hype. But what’s wrong with having a product for traders? No one who reads the prospectus see ProShares recommending this for long-term investors.

Cramer hasn’t been doing very well by his viewers over the past year. As the market continued to crash he kept telling people to buy stocks instead of telling people to sell and go to cash or recommending bear funds. He also told people to hold Bear Stearns the week before it went under. He quotes a guy from Goldman who says it sucks. Well, let’s see, maybe that’s because every time people buy SKF it forces shares of Goldman lower.

Cramer says the SEC has to listen to him. You mean like the people who listened to him when he told them to hold Bear Stearns? I’m not putting to much faith into his opinion.

Spreading the ETF Gospel to India

Meghna Pant, the principal correspondent at ABC News for Indian network UTVi asks me what to expect in the stock market before year-end, whether the U.S. car industry is out of the woods, will the Madoff scandal affect funds, and why are people flocking to ETFs. Click the link. If I’m not the top video, scroll down until you see my headshot.

With 200 million viewers, my Indian book sales should go through the roof. LOL. Funny, I’m now in the mood for some Lamb Vindaloo.