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Mebane Faber, the portfolio manager at Cambria Investment Management, has published a white paper which addresses the current underfunding of pension funds and the possibility of pension funds underperforming not only targeted returns of 8% but also the risk-free rate of 4%.  The reason for this underperformance is that pension funds are decreasing their exposure to bonds and increasing their exposure to equities and other illiquid assets.  While this new asset weighting has the potential to generate targeted returns of 8%, it also has the potential to generate negative returns due to increased return volatility.

The New York Times reported on its website that lawsuits filed in Colorado and Minnesota over the reduction in the cost-of-living adjustments (COLA) for public pension payments have been dismissed.  These court rulings may encourage other states to reduce COLA adjustments to assist in balancing their respective state budgets.  Previously, California and West Virginia tried to reduce COLA but appellate courts ruled against the ability to do so.

Kristina Fausti of Fiduciary360 makes an argument that providing suitable advice is a part of being a fiduciary but providing suitable advice does not make you a fiduciary. Earlier this year, the Securities and Exchange Commission approved FINRA’s Suitability Rule, or Rule 2111.  The rule requires that a member or an associated person make recommendations that are appropriate for their clients based on obtained information which includes risk tolerance and liquidity needs.  The rule goes into effect on July 9, 2012.

American Public Media’s Marketplace reported that state and local pensions will be earning returns of 4 or 5 percent as opposed to forecasted returns of 8 percent.  However, Dean Baker the co-director of the Center for Economic and Policy Research believes that the forecasted returns of 8 percent are accurate “given the mix of assets held by these funds, current stock market valuations, and projected economic growth”.  With states such as California looking to cut back on pension contributions to narrow their deficits requiring employees to contribute more funds than previously required and the possibility of lower than expected returns, fund managers need to protect assets to ensure pension payments in the long-term.

According to a recent study by Dow Jones, affluent investors (U.S. investors who are at least 25 years old with a minimum of $500,000 of assets to invest) prefer to use self-directed investment strategies through online and discount brokerages rather than full-service firms.  A majority of affluent investors are satisfied with their current advisor or wealth manager but are lacking advice on topics such as tax strategies, estate planning, and emerging markets.  Financial advisors need to be knowledgeable in these areas to provide value-added services to their clients and lure them back from their online counterparts.

When markets get hammered, you see a lot of ponzi schemes undone. That’s because when the market craps out, no one puts new money into the market and the schemer can’t maintain his lifestyle and meet client redemptions at the same time.

Scott Rothstein, who swindled $1 billion from his clients was sentenced to 50 years today. He committed his crimes while licensed as an attorney. That’s a new take on attorney – client privilege.

But Rothstein isn’t the only dirtbag to get press.

Kenneth I. Starr, a Manhattan business manager and investment adviser, was found hiding – creatively – in a closet and was arrested for conning some of Hollywood’s best known stars out of millions. According to the NYT, “he was arrested on May 27. He remains behind bars at the Metropolitan Correctional Center in downtown Manhattan, after prosecutors argued that he might flee if released on bail.”

Dana Giacchetto and his Casandra Group Investment firm advised Mike Ovitz, Rick Yorn, and Leonardo. Giacchetto was in jail for stealing some $20 million from his star clients.

No one is safe people. You have to do your homework, even if you get referred to someone. You need to get their DNA code.

Here are some helpful links:

FINRA Brokercheck for people who work at brokerage firms.

Investment Advisor Public Disclosure for firms that claim to be Investment Advisors or Independent Advisors. You can also check if their asset under management claims are correct with this site.

National Futures Association’s Background Affiliation Status Information Center (BASIC) is to check the compliance history of those who are in the commodity futures business.

As you read this you might conclude that I am a contrarian, but the fact is I am not, I am a confusitrarian. You will see how I came to coin this word. What better place to start then with the sage of sages, Warren Buffet. At a May 1, 2010 shareholders’ meeting Mr. Buffett told his shareholders that “U.S. is recovering. He also said he was worried about “significant inflation” in the United States and elsewhere and that the Greek debt crisis has the potential for “high drama.” He went on to say that a large share of Berkshire’s fortunes was tied to the euro through investments in European companies. You will note that Euro has not been doing too well recently.

Mr. Buffett went on to say that very low interest rates in the United States cannot continue indefinitely, a statement I totally agree with, which I’m sure will excite Mr. Buffett.

But I go on to ask what impact will increased interest rates have on the economy of the United States, and especially on the economy of Los Angeles and California? California is the alleged 10th largest economy in the world and I recall reading that Los Angeles County is the 18th largest economy in the world and certainly West Los Angeles makes up a great portion of that economic engine.

Mr. Buffett says if huge budget deficits and easy money causes problems, Congress rather than the Federal Reserve should get the blame. I go one step further, I don’t want either to get the blame, I want the problem eliminated. Our investments are all in jeopardy due to the financial programs being driven by the U.S. Government.

Every day I read financial news reports that report happy news and not so happy news, all of which leads to my confusion. Let me share some of these with you. Certainly May 6th was a day that left many investors scratching their head and many very angry, such as a certain commentator on TV who said his stop loss orders kicked in when the market dropped 1,000 points in a few minutes, he lost a small fortune and then the market kicked back up but he no longer owned those shares. He questioned the wisdom of investing in the stock market, but then where else can you go to hedge against inflation?

Sellers of Gold are having a field day but I recall that Gold value stayed flat for some 15 years (that is a guess from memory) in the $300 to $400 range. It may have been longer than 15 years, but the Gold is irrelevant other than the fact that everyone should have a portion of their accumulated wealth allocated to gold you can hold in your hands as insurance against a worldwide financial crisis and runaway inflation. I have always considered Gold to be an insurance policy and not an investment.

Looking at a May 6, 2010 WSJ Evening Wrap, I find the following news: U.S. Productivity Gains Slow at a more modest 3.6% rate as the recovery continued to take hold. Separately, the number of U.S. Workers filing new claims for jobless benefits fell slightly, but they didn’t give the number. When only 300,000+ new people file for jobless benefits that is considered progress and a good sign. To me that is a big number, annualized that is 3.6 million new workers looking for work. And what about those that have given up.

This leads us to a 9.9 % unemployment (do you sometimes think the numbers received a close shave to keep them from hitting 10 % ?). Then people in the know, say the number of unemployed is really closer to 17 % when you include those that have given up looking for a job and those that are underemployed. This leads me to one of my favorite expressions as uttered by others; we are going through a “JOBLESS RECOVERY.”

You must excuse my doubtful nature, but I don’t consider a “jobless recovery” a recovery at all. I consider it a disaster in the making as millions of American’s cannot find a job. This means they can’t make their rent or mortgage payments, they can’t make their car payments and they certainly can’t make their credit card minimum payment that shoots them into interest rates that remind me of the bandits that used to rob the stage coaches as they traveled from city to city in the west. What happens to the lenders on these people’s homes, their cars and their credit cards? Will we once again be asked to bail out the banks/investment banks/ insurance companies?

We recently made a job offer to an administrative assistant, they used to be called file clerks, who had been unemployed for about a year. He had worked for a CPA firm that he said had gone from 140 people to 40 people. On the subject I have talked to fellow CPAs that have all undergone significant layoffs of personnel. Fortunately that doesn’t apply to our firm who finds itself as busy as ever, though collections have slowed as clients deal with their own financial problems.

Coming back to the Evening Wrap, it states that Retailers hit speed bump as U.S. consumers pulled back in April. Target and Gap were among retailer posting sales declines. Yet this Sunday my wife and I visited Bloomingdale’s in Century City and the store appeared very busy and the women were all carrying Bloomingdale’s signature bag, the little brown bag, a great piece of creative marketing.

Let us now jump to an Editorial by Cliff Smith of the Beverly Hills Courier, if you don’t read him you should. While I’m recommending reading material, I must recommend one of the finest business newspapers in the United States, The Los Angeles Business Journal and its editor Charlie Crumpley. If you want to know what is going on in the business world in Los Angeles, the Business Journal is the only place to get that news and it has a great Editorial section in the back of the Newspaper.

On April 9th Mr. Smith offered a number of interesting tidbits of information. There are 36 million people living in California. The state’s adult workforce is approximately 18 million, which means 50% of the population are either students or senior citizens. Of the 18 million people more than 2 million are out of work. Of the 16 million who have jobs, about 1.9 million works for the government, including schools and colleges, that is one out of every eight workers. If you step back and look at these statistics, it paints an interesting picture regarding your investment portfolio.

Continuing with Mr. Smith’s musings, he reports that a Stanford University study reported $535 BILLION in unfunded public employee pension funds or five full years of 100% of state tax revenue. This does not include the LA County and City Retirement System. This must be considered in the allocation of your investment portfolio. These are not just numbers on paper; we are headed for the day when payouts will exceed the total cash available. Where do you think it will come from? What impact will that have on our general economy? What about your investment portfolio?

Mr. Smith goes on to say, and I have written similar words, Go look at Beverly Drive, Pico , Beverly Blvd., Rodeo Drive, North Robertson or South Robertson and see the empty store fronts. I would add Melrose and Montana Avenue. I know a number of retailers in Brentwood that are suffering from downturns in business unlike anything they have experienced in the last 30 years, so yes I wonder about all the talking heads talking about the fact that the U.S. has turned the corner and is on the road to recovery.

Going back to the WSJ Evening Wrap, they report the MGM Mirage Swings to Loss, amid write downs at the casino company’s City Center. Yet I’m told that Maestros in the City Center is booming as is their entire chain, including the Beverly Hills location which my wife and I love to go to, we love to listen to Gary Shearer make music and we dance between the tables. We also love the food. Lest you think all is doom and gloom there is plenty of good news. The WSJ reports that the sales of luxury goods are on the rebound as Hermes quarterly sales jumped 19% (note the reference to sales but not to profits?).

The Evening Wrap also informs us that NY plans to cut 11,000 of its 300,000 workers, including hundreds of firefighters and thousands of teachers. I wrote a piece for CityWatch.com an Internet Newspaper focused on the city of Los Angeles, and it was entitled “LA Fiscal Crisis could Kill You” and I was serious. If you should have a medical condition that requires you to call 911 you might find that your local fire station is out on a call and one of its engines are moth balled due to financial problems, so the call rolls to the next closest station, but they too are out on a call so it rolls to the next station where again an engine is moth balled due to financial problems so it rolls one more time and you get lucky and they respond. By the time they reach you, you may have suffered irreparable damage or you might be dead. So much for the local financial crisis’ that you haven’t given to much thought to. Did you keep that life insurance policy up to date or did you let it lapse due to tight financial restraints?

On May 7th it was announced that the U.S. economy added 290,000 jobs in April. No further details were given in the news release I received. A week later it was reported that U.S. retail sales rise 0.4 percent in April, lower than March surge but lifted by surprise gain in motor vehicle purchases.

The next day, May 15, the Bank of England Governor, Mervyn King announced that the United States is facing the same fiscal problems as Greece.
Going back a month, on April 13, David Weidners column in Market Watch stated “the good news is that the bailouts worked. The bad news is the bailouts worked.” I think he may be in my group, a confuisitrarian.

I still have a half a dozen documents I have gathered as resource material for this article but I have already written too much. I close with the fact that I consider myself a pessimistic optimist. I think America has untold numbers of brilliant business people and inventors and we will continue to lead the world in innovations. How we overcome the problems our governments face is truly beyond my comprehension.

For the benefit of my children and grandchildren I hope the optimistic side of me comes out the winner, but I am very concerned about the pessimistic side of me.

All of this has to be considered when you are accumulating wealth and investing it for the future.

I had the great pleasure of seeing and hearing Dave Morton on a panel at the Milken Global Conference a few weeks ago called The Road Ahead For ETFs.

Morton is the Chief Research Officer and Co-Chief Investment Officer of Foxhall Capital Management, a firm with $800 MM in assets.

In this interview, Morton discusses how you can achieve a higher fiduciary standard by implementing ETFs in your investment process whether you’re an RIA or plan sponsor. We also talked about how granular one can be in diversifying their clients portfolios using ETFs.

One thing you don’t want to miss, is discussion on the reality of what the public sees liquidity-wise, versus what Foxhall can accomplish utilizing specific market players in the ETF space.

Podcast: Play in new window | Download

How public employees became members of the elite class in a declining California offers a cautionary tale to the rest of the country, where the same process is happening in slower motion. The story starts half a century ago, when California public workers won bargaining rights and quickly learned how to elect their own bosses—that is, sympathetic politicians who would grant them outsize pay and benefits in exchange for their support.

Over time, the unions have turned the state’s politics completely in their favor. The result: unaffordable benefits for civil servants; fiscal chaos in Sacramento and in cities and towns across the state; and angry taxpayers finally confronting the unionized masters of California’s unsustainable government.

From The Beholden State, by Steven Malanga

Plenty written and spoken about Goldman Sachs since the SEC has come forward with charges. Now, CNBC has learned that Paolo Pellegrini has insight that contradicts what the SEC has alleged.

Paolo Pellegrini told the government that he informed ACA Management that Paulson intended to bet against, or short, a portfolio of mortgages ACA was assembling.

CNBC has examined documents in which a government official asked Pellegrini whether he informed ACA CDO manager Laura Schwartz about Paulson’s position.

“Did you tell her that you were interested in taking a short position in Abacus?” a government official asked Pellegrini, referring to the name of the CDO portfolio.

“Yes, that was the purpose of the meeting,” Pellegrini responded.

Here is the full article at Yahoo! Finance.