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What We Read Today 24 July 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • EU to weigh far-reaching sanctions on Russia (Peter Spiegel, Financial Times) After the Foreign Ministers' meeting Tuesday which seemed to have the EU in disarray, there will be discussions of sweeping financial sanctions today. The Financial Times has seen a copy of the 10-page sanctions options memo.

  • Ukraine crisis: Fears rise of Russia-fueled arms race (Sam Jones, Financial Times) A heavy anti-aircraft campaign continues in eastern Ukraine where two more government fighter planes have been shot down, bringing the total to 14, not including Malaysia Air H17 shot down last week. Russia denies any involvement with weapons supplies and military personnel. When Putin was asked where the insurgents got their weapons recently, he is reported to have replied "shops".
  • CFTC’s O’Malia Resigns to Head Derivatives Industry Lobby (Silla Brush, Bloomberg) Hat tip to Roger Erickson. The regulatory revolving door has never swung faster in Washington than for Scott O'Malia, Commissioner of the Commodities Futures Trading Commission (CFTC). After almost five years in his present position, he announced Monday (21 July) that he was resigning from the CFTC effective August 8. Yesterday (Wednesday) he was announced as the next CEO of ISDA (The International Swaps and Derivatives Association), a leading industry lobby group which opposes eforts by the CFTC to set limits on speculation in commodity markets.

From Bloomberg:

The ISDA post is one of the top paid industry advocacy jobs. Robert Pickel, who is stepping down as the group's chief, made about $1.8 million in 2012, according to public records.

According to Reuters, O'Malia received $155,500 a year at the CFTC.

Dennis Kelleher, president and CEO of Better Markets, a group advocating stricter government regulation in financial markets, was quoted by Bloomberg:

"O'Malia's spin through the revolving door is a record setter for influence peddling. This is why Americans are so disgusted with so many high government officials and believe that Washington is in cahoots with Wall Street."

Federal ethics rules will bar O'Malia for two years from trying to influence, communicate or appear before the CFTC seeking official action. But, as CEO, O'Malia will have a great deal of direct influence and control over much of what ISDA does in interacting with the CFTC.

While on the CFTC O'Malia criticized his agency's efforts to regulate the global swaps trading that totals $700 trillion annually. This included public speeches. He also tried to slow implementation of Dodd-Frank regulations, arguing that all changes should be subjected to cost-benefit analysis.

  • S&P faces securities fraud charges over mortgage ratings (Kara Scannell, Financial Times) The SEC (Securities and Exchange Commission) has delivered a "Wells notice"to Standard & Poor's related to six securities that S&P withdrew ratings for in 2011 after discovering "inconsistencies" in how they applied their rating methodology. A Wells notice is formal notification that an enforcement by the SEC is underway and it has been determined that the SEC may bring civil action. This follows another civil action filed by the U.S. Department of Justice last year which seeks $5 billion in damages.
  • SEC's long path to money market fund reform ends in compromise (Sarah N. Lynch, Reuters) The final new regulations will (1) require money market funds to float the value of principal (no longer fixed at exactly $1 and (2) allow funds the discretion to charge redemption fees on withdrawals in times of low liquidity. In short-form: Money Markets are no longer cash equivalents. Read a comprehensive report at GEI News.

There are 10 articles discussed today 'behind the wall'.

The final discussion is a short article on (1) the effects of portfolio rebalancing and (2) the benefits of small amounts invested early in life if the investments are held until late in life.

Please support all that we do at Global Economic Intersection with a subscription to our premium content 'behind the wall'.

There are between 75 and 100 articles reviewed most weeks. That is in addition to the 140-160 articles of free content we provide.

You get a full year for only $25.


  • Returning to high school, investment style (Humble Student of the Markets) Has the risk appetite of the market turned? The relative return of high yield bonds to comparable maturity Treasuries might be indicating that is the case.

Click on chart for large image.
HYG-IEI-2014-jul-600x300

  • Beijing closes coal-fired power plant to cut pollution (xinhua) Beijing closed a large coal-fired power plant yesterday, replacing it with a gas-fired one to cut pollution. There are four major coal-fired power plants in Beijing and the other three are expected to be closed by the end of 2016 when power will be wholly generated by clean energy.
  • A Change of Narrative (Michael Batnick, The Irrelevant Investor, Yahoo Finance) The iShares Emerging Market ETF (NYSE:EEM) has hit a, 18 month high. Yes, the New York market has done better (see chart) but shouldn't a beaten down asset class be given some consideration when it gets into a sustained rally?

eem-spy-2014-jul

  • New Space Race? US Eyes Asteroids as Other Nations Shoot for the Moon (Elizabeth Howell, Space.com) While Japan, China and Russia are considering sending humans to the moon, the U.S. is focused on retrieving asteroids. For the moon missions the goal is national prestige. But the U.S. hopes to expand the resource horizon with material from asteroids.
  • The Daily Slot (email, no url) This is what happens when production is booming and consumption doesn't keep up. That's a decline of almost 25% in about one month.

nat-gas-futures-2014-jul-23

  • Here's A Simple Strategy That Guarantees Good Investing Decisions (Sam Ro, Business Insider) The analysis is good. The rebalancing process does good things for returns. But the +60% displayed on the graph is unfortunate. It comes from the total return from 1998 to 27 February 2014 being 930% with rebalancing and 870% without (that's buy-and-hold). Yes the difference is 60. But the total return over the 15 years and 2 months is 6.9% more with rebalancing than without. For an initial $10,000 in 1998, rebalancing produced $93,000 while buy-and-hold resulted in $87,000.

And one other note: This result is only valid in tax deferred or tax exempt accounts. Taxes paid on gains realized during the rebalancing transactions would be taxed; as a first approximation using a long terms capital gains rate of 20% the advantage is reduced to 5.5% and in a state with a 5% personal income tax rate on capital gains the advantage for rebalancing would be reduced to 5.2%.

So is rebalancing worth it? Extrapolating these results over a lifetime, for $1,000 invested at age 20 the value in a tax deferred on untaxed account with rebalancing at age 70 would be $2,566,215 . Without rebalancing, $2,036,288. The rebalancing would produce approximately 26.5% more in the account at age 70.

If this were a traditional IRA $2,565,215 would be taxable as ordinary income if all was distributed at age 70. Of course if only RMD (required minimum distributions) were taken ($94,657.38 the first year) the account balance would continue to grow for many years and the taxable income would eventually total much more than the account balance at age 70.

But if this were a Roth IRA and was held until age 80 the rebalancing would produce an account balance of $12,335,356, which is 32%% more than buy-and-hold ($9,345,599). And distributions from the Roth would be entirely tax-free!

The average annual returns for the fourteen year period in this example have been much higher than the longer term averages. Instead of the 16.46% average annual return here, long-term returns (over the past 40, 50 and 60 years) have been in the 10%-12% range for buy-and-hold for a diversified portfolio like the one here. The return on $1,000 invested in a Roth compounding at 12% per annum for 60 years would total $897,597 and for 10%, $304,482. These numbers are much more realistic targets for the 20-year old investor to consider.

So, what advice would you give a 20-year old who wants to be a multimillionaire in his dotage? Here is one scenario to lay out for him/her. Invest $1,000 in a diversified portfolio and held in a Roth IRA every year from age 20 through age 29. If the average annual return is 10% the investor will have $2,057,999 at age 80. If the return averages 12% the total will be $5,680,218.

But if the returns average 8% the $1,000 a year will only produce $733,799 at age 80. To get over $1 million, the annual investment would have to be at least $1,362.

And if the annual returns averaged only 6% a year the $1,000 a year for ten years (age 20-29) produces $257,360 at age 80. To get a million at least $3,885 would be required each year.

Caveat: The modeling has been done with an assumed uniform average annual gain. The distribution of returns will affect the final total. Many irregular patterns of returns over time will change the final results negatively. For example, late in life losses can be especially damaging to the final total.

rebalancing-sam-ro-2014-jul-23


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